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11 Section 37(1) – Business expenditure – Capital or revenue – A. Ys. 2008-09 and 2009-10 – Assessee obtaining mining lease from Government – Writ petitions to quash lease – Legal expenditure to defend and protect lease – Is revenue expenditure

Dy. CIT vs. B. Kumara Gowda; 396 ITR 386
(Karn):

The assessee was in the business of mining
iron ore in lands taken on lease from the State Government. In the year 2006,
the Department of Geology had leased out certain lands to the assessee for the
purpose of mining iron ore. The assessee was working on the lease as a lessee
of the State Government. The grant of lease to the assessee was challenged by
third parties in writ petitions. In the A. Ys. 2008-09 and 2009-10, the
assessee incurred expenditure by way of legal fees to defend and sustain the
lease. The assessee claimed deduction of the expenditure as revenue
expenditure. The Assessing Officer disallowed the claim. The Tribunal allowed
the assessee’s claim.

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

“i) The test to decide whether
a particular expenditure is capital or revenue in nature, is to see whether the
expenditure in question was incurred to create any new asset or was incurred
for maintaining the business of the company. If it is former, it is capital
expenditure; if it is later, it is revenue expenditure.

ii) The legal expenditure
incurred by the assessee to defend the writ petitions filed to quash the
Government notification and lease deed was not a capital expenditure and
deduction was allowable.”

shailesh.kwebmaker

Applicability of Section 68 to Cash Credits in Absence of Books of Account

Issue for Consideration

Section 68 of the Income-tax Act, 1961 deems
unexplained cash credits to be the income of the assessee under certain
circumstances. Section 68 reads as under:

“Where any sum
is found credited in the books of assessee maintained for any previous year,
and the assessee offers no explanation about the nature and source thereof or
the explanation offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the sum so credited may be charged to income tax as the income of
the assessee of that previous year.”

The section, for its application, apparently
requires that a sum is found credited in the books of account of the assessee. An
issue has arisen before the courts as to whether unexplained receipts or
credits can be deemed to be the income of the assessee u/s. 68, even in a
situation where books of account are not maintained or the sum is not credited
in the books of account of the assessee. In an earlier decision, the Bombay
High Court (followed by the Gauhati High Court and the Madras High Court) has
taken the view that such amounts, not found credited in the books of account,
cannot be treated as cash credits taxable u/s. 68. Recently, the Bombay High
Court has however, taken a contrary view that such amounts can be taxed under
section 68.

Bhaichand N. Gandhi’s case

The issue first arose before the Bombay High
Court in the case of CIT vs. Bhaichand N. Gandhi 141 ITR 67.

In this case, pertaining to assessment year
1962-63, where the previous year was Samvat year 2017, the assessing officer was
not satisfied with the explanations offered by the assessee regarding the
genuineness of certain cash credits totalling to Rs. 30,000 found recorded in
certain books, which, according to the assessing officer, were the books of
account of the assessee. He, therefore, treated the amount of such credits as
income from undisclosed sources. The Appellate Assistant Commissioner confirmed
the addition of such credits as income of the assessee.

Before the Tribunal, an argument was put
forward on behalf of the assessee that in respect of one of the deposits of Rs.
10,000 included in the amount of Rs. 30,000, that it was not an amount credited
in the books of the assessee maintained by the assessee for the previous year,
but was only a deposit in the bank account of the assessee. It was contended
that the bank passbook was not a book maintained by the assessee, and that
therefore, even if such amount was treated as undisclosed income of the
assessee, it could only be assessed in
the financial year of the deposit (as applicable to unexplained
investments/money u/s. 69/69A), and not in the previous year.

The Tribunal accepted the assessee’s
argument holding that the bank passbook could not be treated as a book of the
assessee, and that it was not a book maintained by the assessee for any
previous year as referred to in section 68.

On an appeal by the Revenue, the Bombay High
Court analysed the provisions of section 68. It took note of the decision of
the Supreme Court in the case of Baladin Ram vs. CIT 71 ITR 427, where
the court had held that it was only when an amount was found credited in the
books of an assessee that the new section would be attracted. It further
observed that it was well settled that the only possible way in which income
from an undisclosed source could be assessed or reassessed, was to make an
assessment during the ordinary financial year. The Supreme Court had noted that
even under the provisions embodied in section 68, it was only when any amount
was found credited in the books of the assessee for any previous year that the
section would apply, and the amount so credited might be charged to tax as the
income of that previous year, if the assessee offered no explanation or the
explanation offered by him was not satisfactory.

The Bombay High Court noted with approval
the observations of the Tribunal that it was fairly well settled that when
monies were deposited in a bank, the relationship that was constituted between
the bank and the customer was one of debtor and creditor and not of trustee and
beneficiary. Applying this principle, the passbook supplied by the bank to its
constituent was only a copy of the constituent’s account in the books
maintained by the bank. The passbook was not maintained by the bank as the
agent of the constituent, nor could it be said that the passbook was maintained
by the bank under the instructions of the constituent. The Bombay High
Court, therefore, held that the Tribunal was justified in holding that the
passbook supplied with the bank to the assessee could not be regarded as a book
of the assessee, i.e. a book maintained by the assessee or under his
instructions.

The Bombay High Court, therefore,
confirmed the conclusions of the Tribunal, holding that the provisions of
section 68 did not apply to the credit in the passbook, which was not recorded
in the books of account of the assessee.

In the case of Anand Ram Raitani vs. CIT
223 ITR 544, the Gauhati High Court took a view that existence of books of
account was a condition precedent for the invocation of power by the assessing
officer u/s. 68. Since a partnership firm was a separate entity, books of
account of a partnership could not be treated as those of individual partners.
Therefore, addition to an assessee’s income on account of unexplained cash
credit u/s. 68, on the basis of cash credit found in books of accounts of a
firm in which the assessee was a partner was not justified. The court in
deciding the case followed the decision in the case of Smt. Shanta Devi vs.
CIT, 171 ITR 532(P& H).

Similarly, in the case of CIT vs. Taj
Borewells 291 ITR 232, the Madras High Court, considered a case of the
first year of assessment of a partnership firm, where no books of account were
maintained, but accounts were presented in the form of profit and loss account
and balance sheet. The Madras High Court held that the profit and loss
account and balance sheet were not books of account as contemplated u/s. 68. It
held that since there were no books of account, there could be no credits in
such books, and therefore the provisions of section 68 could not be invoked to
tax capital contributions of partners in the hands of the firm.

Arunkumar J. Muchhala’s case

Recently, the issue again came up before the
Bombay High Court in the case of Arunkumar J. Muchhala vs CIT 85 taxmann.com
306.

In this case,
the assessee had income from rent, share of profit from a partnership firm,
salary income and income from other sources. The assessee had taken loans from
various parties totalling to Rs. 79.06 lakh. Since no loan confirmations were
provided in respect of these amounts, the assessing officer treated them as
unexplained cash credits and added them to the total income of the assessee.

In appeal before the Commissioner (Appeals),
explanations were given in respect of some of the loan amounts, for which
additions were deleted. However, no relief was given in respect of the other
amounts for which no further explanations or details were filed. The further
appeal of the assessee was dismissed by the tribunal.

Before the Bombay High Court, on behalf of
the assessee, it was argued that books of account had not been maintained by
the assessee, and therefore the provisions of section 68 would not apply. It
was claimed that though it was a fact that certain amounts had been taken by
the assessee from those persons, yet, when entries of these amounts were not
taken in the books of account, they could not be added to the income of the
assessee. These entries were only found by the assessing officer in the bank
statement, and no other document was considered by him while passing the
assessment order.

Reliance was placed on behalf of the
assessee on the decisions of the Supreme Court in the case of Baladin Ram
(supra), of the Bombay High Court in the case of Bhaichand H Gandhi
(supra), of the Gauhati High Court in the case of Anand Ram Raitani(supra)
and of the Delhi High Court in the case of CIT vs. Usha Jain 182 ITR 487. It
was argued that section 68 was a charging section and was also a deeming
provision. Further reliance was placed on the decision of the Madras High Court
in the case of Taj Borewells (supra). It was further argued that the
amounts were received by cheques, and that some of them were in respect of flat
bookings, which did not materialise, and therefore, cheques were returned and
there was no credit at the end of the year.

On behalf of the Revenue, it was argued that
many opportunities were given to the assessee to produce relevant documents in
order to substantiate and prove his version, but that the assessee had failed
to give the further details of the persons from whom the loans were allegedly
taken. It was argued that it was the bounden duty of the assessee to explain
the nature and source of cash deposits, and that it had therefore rightly been
held that the assessee could not take advantage of the fact that he had not
kept any books of account.

Reliance was placed on behalf of the Revenue
on the decision of the Punjab & Haryana High Court in the case of Sudhir
Kumar Sharma (HUF) vs. CIT 224 Taxman 178, the special leave petition
against which decision had been rejected by the Supreme Court.239 Taxman
264(SC).

The Bombay High Court observed that the
assessee had not denied that he had received the loan amounts/cash deposits
from those persons whose names had been given in the assessment order and that
those names had been taken from the bank account of the assessee. The High Court
observed that the assessee’s case was that since he had not maintained books of
account, those amounts could not be considered. The Bombay High Court observed
that when the assessee was doing business, it was incumbent on him to maintain
proper books of account. Such books could be in any form. According to the
Bombay High Court, if he had not maintained the books which he was required to,
then he could not be allowed to take advantage of his own wrong. The Bombay
High Court observed that the burden lay on the assessee to show from where he
had received the amounts, and what was their nature and the onus was on the
assessee to explain those facts.

The Bombay High Court noted that huge
amounts had been credited in the account of the assessee, and he had not
explained the nature of those credits. The fact of those amounts was discovered
by the assessing officer from the bank passbook. When the source and nature had
been held to have been explained, certain amounts had been deleted by the
appellate forums. In respect of the balance amounts of Rs. 58 lakh, no document
was produced in respect of those transactions, nor amounts had been confirmed
from those persons who were shown to have lent them. Therefore, according to
the Bombay High Court, the authorities below had rightly held that the nature
of the transaction had not been properly shown by the assessee.

According to the Bombay High Court, the
ratio of the decisions relied upon on behalf of the assessee were not
applicable to the case before it. In those cases, either the entries were
confirmed by the parties in whose name they were standing, or books of account
were showing the cash credits.

The court observed that in the case before
it, at no earlier point of time had a firm stand been taken by the assessee
that he had not maintained the books of account. Whenever a direction had been
given to produce the same in any form, the assessee had replied that he wanted
time to prepare. Many opportunities were given by the assessing officer for the
production of relevant documents, including books of account. However, such
documents were never produced. The assessee had raised the point of books of
accounts not being maintained for the first time before the Bombay High Court.
The Bombay High Court observed that non-production of documents was different
from non-maintenance of books of account. The Bombay High Court observed that
the facts in Sudhir Kumar Sharma’s case (supra) were almost similar, and
that case was, therefore, binding. It also noted that the special leave
petition of the assessee in that case to the Supreme court was dismissed by the
court.

The Bombay High Court, therefore, upheld the
addition made by the assessing officer of such amounts as unexplained cash
credits u/s. 68.

Observations

Section 68 while referring to the books
of account requires that (i) such books of account are ‘maintained’ (ii) by the
‘assessee’ and (iii) the assessee is ‘found’ (iv) to have ‘credited’ any sum
therein and (v) such finding, needless to say, is by the assessing officer.
Each of these requirements, are to be fulfilled for a valid charge u/s. 68. The terms referred to have their own meanings and their import
cannot be wished away in applying the provisions. The onus is heavy on the
assessing officer to establish strict compliance of each of the conditions
stated herein, before invoking and applying section 68 for an addition of the
deemed income. In a few cases, the courts have concurred that a pass book of a
bank cannot be construed to be maintained by the assessee and the bank cannot
be held to be an agent of the assessee.

There has been a special significance
attached to the books of account in the Act and the requirement for recording a
transaction or a write off with reference to the books of account has been
subjected to the examination by the courts, which have held that a deduction
based on the condition of an entry in the books of account would be conferred
only where the assessee has recorded the entry in the books and not otherwise;
a debit in the profit and loss account without supporting books would
disentitle an assessee from claiming the deduction. Please see National
Syndicate, 41 ITr 225(SC), S. Rajagopala Vandayar, 184 ITR 450(Mad.) and P.
Appuvath Pillai,58 ITR 622(Mad.), as a few examples.

Section 2(12) of the Income-tax Act defines
the term ‘books or books of account’ as including ledgers, day-books, cash
books, account-books and other books, whether kept in the written form or as
print-outs of data stored in a floppy, disc, tape or any other form of
electro-magnetic data storage device. Accordingly, a reference in section 68 to
books of account has to be given a meaning that is due to it keeping in mind
the definition of the term contained in the provisions of section 2(12)of the
Act. There is nothing in section 2(12) that indicates that a recording outside
the books would be construed to be the books of account.

The Bombay High Court in Bhaichand H.
Gandhi’s case, has said and confirmed what has been said above in so many words
and we do not think that there is any reason to differ from the ratio of the
said decision. Importantly, the court in Arunkumar J. Muchala’s case has
not expressly dissented from its earlier decision; it has rather chosen to
highlight the following distinguishing facts in the latter case;

u The
assessee was a businessman and was required to maintain the books of account,

u The
assessee had not maintained the books of account which he was required to
maintain,

u The
assesee was claiming the benefit of his own action which was not permissible in
law,

u The
assessee had at times pleaded that he was in the course of preparing the books
of account and would produce the same when ready, indicating that he was
otherwise required to maintain the books of account,

u The
assessee had for the first time taken a fresh plea before the high court that
the provisions of section 68 were not applicable, as he was not maintaining the
books of account and as a result, the lower authorities were deprive of
examining the facts and the merits of a fresh plea.

In Arunkumar J. Muchhala’s case, the
Bombay High Court has not entertained or has ignored the contention raised by
the assessee that he had not maintained the books of account. The Bombay High
Court’s decision seems to have been based on its disbelief of the assessee’s
arguments as on this aspect, and there was no fact-finding by the lower
authorities.

The main basis of the decision of the Bombay
High Court in Arunkumar J. Muchhala’s case, was that an assessee had
committed a wrong by not maintaining the books when he was required by law and
hence, cannot take advantage of his own wrong. The Bombay High Court has
observed that it was incumbent on the assessee to maintain proper books of
account when he was doing business. From the facts as stated earlier, it
appears that the assessee was not carrying on business himself, but was a
partner of a partnership firm. In that event, there was no statutory obligation
for the assessee to maintain his books of account. That being the position, it
cannot be said that the assessee was wrong in not maintaining books of account.
This aspect could have been explained to the court by the assessee with a
little more precision.

The Bombay High Court, while rejecting the
cases cited in support of inapplicability of section 68 including its own
decision before it in Arunkumar J. Muchhala’s case, has observed that in
those cases, either the entries were confirmed by the parties in whose name
they were standing, or books of account were showing the cash credits. It is
very respectfully pointed out that in all those cases, when one reads the
facts, no books of account were maintained by the assessee, nor were
confirmations available, and therefore, those decisions were delivered purely
on the principle that, where, admittedly books of account were not maintained
by the assessee, the provisions of section 68 would not apply.

The Bombay High Court in Arunkumar J.
Muchhala’s case, has decided the issue largely based on the decision of the
Punjab & Haryana High Court in the case of Sudhir Kumar Sharma (HUF)
(supra). If one examines the facts of that case, it is gathered that it was
not the case where books of accounts were not maintained. In response to
various questions by the assessing officer, the assessee’s representative had
replied that records were as per books of account, that details would be
checked with the books of accounts and provided, etc. The assessing
officer had observed that books of account were not produced. According to the
Commissioner (Appeals), the answer by the assessee to these questions of
assessing officer clearly showed that the assessee had maintained books of
accounts. Though the assessing officer made the additions on the basis of
deposits in the bank account, the Commissioner (Appeals) had held that this
would be tantamount to additions made on the basis of entries in the books of
account, since such deposits/credits would also appear in the books of account
of the assessee, which were not produced before the assessing officer. Accordingly,
the provisions of section 68 were held to be applicable in that case, on a
clear cut finding by the authorities that the assessee had maintained the books
of account. In the circumstances, the exclusive reliance on a decision with
contrary facts by the court in Arun Muchala’s case seems to be a case of
misunderstanding of the facts which understanding of facts could have been
provided by the assessee with a little
application in his own interest.

It is therefore appropriate to hold that
the decision of the court in Arunkumar J. Muchala’s case, should be
considered as one of its kind, delivered on the facts of the case, and not
laying down the rule of law.

In Baladin Ram vs. CIT (supra), a case decided under the Income-tax Act, 1922, but delivered after
the Income-tax Act, 1961, was enacted, the Supreme Court in the context of
section 68 observed:

“Even under the
provisions embodied under the new Act, it is only when any amount is found
credited in the books of an assessee that the section will apply. On the other
hand, if the undisclosed income was found to be from some unknown source or the
amount represents some concealed income which is not credited in his books, the
position would probably not be different from what was laid down in the various
cases decided when the Act was in force.”

In Taj Borewell’s case (supra), the
Madras High Court held as under:

“Unless the following circumstances
exist, the revenue cannot rely on section 68 of the Act:

(a) credit in the books of an
assessee maintained for the year;

(b) the assessee offers no
explanation or if the assessee offers explanation and if the assessing officer
is of the opinion that the same is not satisfactory, the sum so credited is
chargeable to tax as “Income from Other Sources”.

From these decisions as well as the language
of the section, it is clear that in the absence of books of account, section 68
would not apply.

The applicability of section 68 vis-à-vis
books of account was examined in the cases of Smt. Shanta Devi Jain, 171 ITR
532(P&H), Smt.Usha Jain, 182 ITR
487(Delhi) and Sundar Lal Jain, 117 ITR 316(All), in favour of
assessee besides the above referred and discussed cases. The Third Member of
the Tribunal in the case of Smt. Madhu Raitani, 45 SOT 23(Gau.) also
held that the provisions of section 68 were applicable in cases where the
assessee had maintained the books of account.

Therefore, the view appearing from the two
apparently conflicting decisions of the Bombay High Court is that in a case
where, admittedly, books of account are not maintained or the entry is not
appearing in the books of account, the provisions of section 68 would not
apply; however, in a case where the facts indicate that books of accounts are
maintained, but are not produced before the authorities, the provisions of
section 68 can be invoked on the assumption that entries in the bank statements
must have been recorded in the books of account.

Therefore, the principle laid down by the
Bombay High Court in Bhaichand H. Gandhi’s case would still continue to
be applicable. _

shailesh.kwebmaker

Public Trusts in Maharashtra : The Changing Legal landscape Recent Amendments to the Maharashtra Public Trusts Act, 1950

The Maharashtra Public Trusts Act, 1950 (‘MPT
Act’) was recently amended by the Maharashtra Public Trusts (Second
Amendment) Act, 2017 (‘Amendment Act’), which came into force on October
10, 2017. In this article, we discuss some of the key conceptual changes that
the Amendment Act has made to the MPT Act.

Background

The MPT Act was first enacted with the
objective of regulation and administration of public religious and charitable
trusts in, what was then, the State of Bombay. ¹Originally called
the Bombay Public Trusts Act, 1950, its title was changed with retrospective
effect in 2012 to the Maharashtra Public Trusts Act, 1950. Today, the MPT Act
applies to the whole of Maharashtra and regulates more than eight lakh public
religious and charitable organisations registered under it². There
are only a few states in India that have enacted legislation to regulate public
trusts, with Maharashtra being prominent on account of the MPT Act.

In recent years, the focus on regulating the
non-profit space in India has increased as governments are becoming
increasingly wary that non-governmental organisations (‘NGOs’) are being
misused for undesirable activities that range from tax evasion to funding of
terrorism. With a view to regulating such NGOs, the Central Government is even
considering (with some helpful prompting from the Supreme Court) the framing of
a central legislation for this purpose³.

It is in this environment that the
Maharashtra Government constituted a committee on January 13, 2016, under the
chairmanship of Mr. A. J. Dholakiya, former Charity Commissioner and comprising
Mr. S. B. Savle, the Charity Commissioner and other officers, to review the MPT
Act and propose amendments to it. The Dholakiya Committee’s report suggested
comprehensive amendments to the MPT Act, leading to the enactment of the
Amendment Act⁴.

_____________________________________________________

1 Preamble
to the MPT Act.

2 Statement
of Objects and Reasons in the Maharashtra Public Trusts (Second Amendment)
Bill, 2017.

3
Economic Times, August 17, 2017: http://economictimes.indiatimes.com/articleshow/60100358.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

4 Statement
of Objects and Reasons in the Maharashtra Public Trusts (Second Amendment)
Bill, 2017.

Key Amendments

From a reading of the provisions of the
Amendment Act, it appears that the purpose of its enactment is mainly
three-fold: preventing misuse of the MPT Act, reducing delays in proceedings
which impact the functioning of NGOs, and streamlining processes to improve
effectiveness. The key conceptual changes which give effect to this purpose are
discussed below.

(i) Introduction of definition
of ‘beneficiary’

Background

The term ‘beneficiary’, although used in the
MPT Act, was not defined earlier. A definition has now been inserted in section
2 of the MPT Act, which is as follows: ““beneficiary” means any person
entitled to any of the benefit as per the objects of the trust explained in the
trust deed or the scheme made as per this Act and constitution of the trust and
no other person.”

The term ‘beneficiary’ acquires significance
because, in the case of a public charitable trust (not a society)⁵ ,
a beneficiary is regarded as a ‘person having interest’ in such trust (refer
section 2(10)). Consequently, a beneficiary can apply for certain significant
reliefs in respect of such trusts such as seeking institution of an inquiry,
applying for appropriate orders for protection of trust property, institution
of suits in relation to the public trust, and applying for framing of a scheme
for the trust. This definition is not relevant for a society because in the
case of a society, its members are regarded as ‘person having interest’.

The likely objective behind insertion of the
definition of ‘beneficiary’ appears to be to aid the Charity Commissioner’s
office in determination of whether the person seeking the above reliefs was
indeed a beneficiary/person having interest in the trust who had locus to make
the application. Unfortunately the definition may not serve the desired
purpose.

_____________________________________________________________________

5 Unless specified otherwise, the term ‘public
trust’ as used in this article includes a ‘society’ registered under the
Societies Registration Act, 1860 and the MPT Act

Analysis

The primary challenge in determining
beneficiaries of a public trust stems from the inherent limitation in identifying
and segregating them – as one of the essential characteristics of a public
trust (and which distinguishes it from a private trust) is that its
beneficiaries are the general public or a class thereof, and constitute a body
which is incapable of ascertainment (as observed by the Supreme Court in Deoki
Nandan vs. Murlidhar, AIR 1957 SC 133).

The second challenge is that the language of
the definition is ambiguous – although this can be said to be a consequence of
the inherent limitation discussed above. Any person who is ‘entitled’ to any of
the benefits as per the objects of the trust is regarded as a beneficiary. This
encompasses not only those who have received some benefits from the public
trust, but also those who are ‘entitled’ to them.

The term ‘entitle’ means to give a claim,
right, or title to; to give a right to demand or receive, to furnish with
grounds for claiming. The term ‘entitled to’ means ‘having a title to’ (both as
defined in The Law Lexicon, P. Ramanatha Aiyar, 3^rd Edition).

Thus, it can be said that any person who has
a potential or theoretical ‘claim’ or‘right’ to any of the benefits as per the
objects of the trust is regarded as a beneficiary. However, this interpretation
is not without doubt:

– Firstly,
can it be said that any person has the ‘claim’ or ‘right’ to receive any
benefit from a public trust – or conversely, the trust is duty bound to benefit
such person?

– Even
if the response is in the affirmative, given that the definition uses the term
‘objects’ and not ‘activities’, can a person claim as of right that he is a
beneficiary of the trust even if the trust has not commenced activities in
relation to a particular object?

Therefore, although the language of the
definition presumes that the phrase ‘a person who is entitled to any of the
benefits as per the objects of the trust’ constitutes an objective and
limited criterion on the basis of which it can be determined with certainty
whether a person is or is not a beneficiary, in our view, this is not the case.

Example

The above difficulties can be explained with
the aid of an example. A public charitable trust set up with the objects of
‘medical relief for the poor’ and ‘promoting primary education’, operates a
hospital for treatment of the poor, without any restriction as to religion,
community, etc. Therefore, all poor persons in India are free to seek treatment
from this hospital.

The first difficulty arises in determining
whether such poor persons are ‘entitled’ to benefits as per the objects of the
trust. Can it be said that all poor persons have the ‘right’ to seek treatment
from this hospital –would it not be within the hospital’s right to refuse to
treat someone, for instance if there is no vacancy?

Assuming this view can be taken, an odd
situation arises wherein all poor persons in India could be regarded as
entitled to benefits as per the objects of the trust, and therefore, be
classified as beneficiaries of the trust – even though they may not actually
have sought treatment from the hospital.

Moreover, the trust may not have started any
primary school in furtherance of its object of ‘promoting primary education’.
Yet, it could be argued that all children in the country who are aged between 4
and 14 years would be persons who are entitled to benefits as per the ‘objects’
of the trust – thus, as noted above, entirely defeating the purpose for
insertion of the definition of ‘beneficiary’ in the MPT Act.

(ii) Amendments to ‘change report’
provisions

(a) Extension
of time for filing change report

Background

Under section 22 of the MPT Act, any change
in the particulars (such as in respect of the trustees or the properties) of a
public trust as set out in the Register of Public Trusts under the MPT Act is
required to be reported by the trustees to the Deputy or Assistant Charity
Commissioner in charge of the Public Trusts Registration Office where such
register is kept. Such report is commonly known as the ‘change report’.

A change report is required to be filed
within 90 days from the date of the occurrence of the change required to be
reported. A trustee who fails to file a change report is, on conviction,
punishable with a fine of up to Rs. 10,000, u/s. 66 of the MPT Act.

Previously, the MPT Act did not expressly
provide for an extension of time for filing change report or condonation of
delay in filing it. Pursuant to the Amendment Act, a proviso has been inserted
in section 22(1) which empowers the Deputy or Assistant Charity Commissioner to
extend the period of 90 days for filing change report on being satisfied that
there was sufficient cause for delay in filing, subject to payment of costs by
the reporting trustee, which are to be credited to the Public Trust
Administration Fund.

Interestingly, even prior to insertion of
the proviso, trustees were known to apply for condonation of delay for late
filing of change report – in some cases after many years – to the relevant
Deputy or Assistant Charity Commissioner. In fact, the Bombay High Court had
validated the permissibility of such applications under the general provisions
of section 5 of the Limitation Act, 1963 (Rajkumar s/o Pundlikrao Zape &
Ors. vs. Shantaram Amrutrao Waghmare & Ors., 2008 (3) MhLJ 209).
Therefore, the benefits of insertion of the new proviso appear to be that it
might help eliminate wasteful litigation and the Deputy or Assistant Charity
Commissioner will be able to seek costs from errant trustees for late filing of
change reports.

Analysis

Similar to section 5 of the Limitation Act,
1963, the new proviso to section 22(1) permits extension of time if ‘sufficient
cause’ is shown. This scope and purport of this expression has been extensively
considered by the Courts which have laid down the following broad principles:

– It
is not possible to lay down precisely what facts or matters would constitute
‘sufficient cause’ u/s. 5 of the Limitation Act, 1963;

– That said, delay in filing an appeal should not
have been for reasons which indicate the party’s negligence in not taking
necessary steps, which it could have or should have taken (State of West
Bengal vs. Administrator, Howrah Municipality, AIR 1972 SC 749);

– The
words ‘sufficient cause’ should receive a liberal construction so as to advance
substantial justice (State of Karnataka vs. Y. Moideen Kunhi (dead) by Lrs.
and Ors.,AIR 2009 SC 2577);

– Length
of delay is irrelevant and acceptability of the explanation is the only
criterion for extension of time (N. Balakrishnan vs. M. Krishnamurthy,
AIR 1998 SC 3222).

Thus, each application for extension of time
will have to be considered by the Deputy or Assistant Charity Commissioner on the facts and circumstances of the case.

There are also some other aspects relevant
for consideration in relation to this proviso. First, it does not set out a
formula or cap for computation of costs for late filing, which could lead to a
situation where determination of costs is at the discretion of each individual
Deputy or Assistant Charity Commissioner. Secondly, the costs are to be borne
‘by the reporting trustee’– this position differs from that set out in sections
79A and 79B under which certain costs, charges and expenses are payable out of
the ‘property or funds of the public trust’.

(b)
Provisional acceptance of change reports

Background

Once a change report is filed, the Deputy or
Assistant Charity Commissioner may⁶ hold an inquiry in the
prescribed manner to verify whether the change which is reported has occurred.
After completion of the inquiry, he must record his findings as to whether or
not he is satisfied that the change has occurred. If he is satisfied and
records the same in the Register of Public Trusts, he is said to accept the
change report.

Although this process is useful as, in
theory, it helps ensure transparency and honesty in the functioning of public
trusts, in practice it is time consuming and results in a huge pendency of
matters. It is believed that there are some change reports which are pending
for several years, although efforts have been made recently to dispose of old
reports at the earliest.

Such delay could obstruct the functioning of
trusts – in particular where the change which has occurred pertains to the
constitution of trustees. In such cases, the Charity Commissioner’s office may
be wary to permit applications under other provisions of the MPT Act (such as
for alienation of trust property) by the new trustees whose report is pending.
Although the Bombay High Court has held that a change of trustees becomes
effective from the date when it was brought into effect in accordance with law,
and not from the date of acceptance of the change report (Chembur Trombay
Education Society vs. D.K. Marathe and Ors., 2002 (3) BomCR 161), in
practice, the Charity Commissioner’s office may be hesitant to permit
applications by such trustees regarding whose appointment change reports are
pending.

____________________________________________________

6 Although
section 22 uses the term ‘may’ for holding an inquiry, the Bombay High Court
has held that a change report, whether contested or not, has to be decided
after holding an inquiry – refer Rajabhau Damodar Raikar vs. The Assistant
Charity Commissioner and Ors. (2016(1)BomCR233).

The fact that the pendency in change report
cases is of concern, and has prompted the enactment of the Amendment Act, has
been recognised Statement of Objects and Reasons in the Bill pertaining to the
Amendment Act as under:

“The State Government is concerned with
the huge pendency of cases before the authorities under the Act, especially the
change reports, more particularly the uncontested change reports, to make
entries in the registers kept u/s. 17 of the said Act.

… to promote swift disposal and arrest
the pendency of the change reports u/s. 22, certain provisos are proposed to be
added to s/s. (2) to mandate the decision on the change reports within the
stipulated period, and also provide for a mechanism for provisional acceptance
of change reports and attach finality to
the orders of provisional acceptance of change in uncontested matters.”

Summary

Thus, in order to facilitate the functioning
of public trusts, the Amendment Act has inserted three provisos to section
22(2) of the MPT Act, which introduce the concept of provisional acceptance of
change reports in case of change in the names or addresses of trustees and
managers or the mode of succession to their office. The process is summarised
as follows:

– When
such a change report is filed, the Deputy or Assistant Charity Commissioner may
pass an order provisionally accepting the change within period of 15 working
days and issue a notice inviting objections to such change within 30 days from
the date of publication of such notice;

– If no
objections are received within the said period of 30 days, the provisional
acceptance shall become final;

– If
objections are received within the said period, then he may hold an inquiry and
record his findings within 3 months from the date of filing objections, as to
whether the changes have occurred or not;

– If
he is satisfied that the changes have occurred, then he must make the
corresponding changes in the Register of Public Trusts.

(iii) Ex-post facto
sanction

Background

Under section 36 of the MPT Act, sanction of
the Charity Commissioner is required for the sale, exchange or gift of any
immovable property of a public trust, as well as for a lease for a period
exceeding ten years in the case of agricultural land and for a period exceeding
three years in the case of non-agricultural land or a building.

Although the Charity Commissioner had, in
circular no. 169 dated February 1, 1973, indicated that ex-post facto sanction
could be granted u/s. 36, the Bombay High Court has taken the view that only
prior sanction could be granted u/s. 36 and post facto sanction of the
Charity Commissioner is not permitted (Central Hindu Military Social
Education Society vs. Joint Charity Commissioner and Anr., 2009 (2) BomCR
499).

This dichotomy has now been settled by the
Amendment Act which has introduced sub-section (5) to section 36 to permit ex-post
facto sanction of the Charity Commissioner. As per this provision, the
Charity Commissioner may grant ex-post facto sanction to the transfer of
the trust property by the trustees in exceptional and extraordinary situations
where the absence of previous sanction results in hardship to the trust, a
large body of persons or a bona fide purchaser for value, if he is
satisfied that the following conditions are met,—

(a) there was an emergent
situation which warranted such transfer,

(b) there was compelling
necessity for the said transfer,

(d) the property was
transferred for consideration which was not less than prevalent market value of
the property so transferred, to be certified by the expert,

(e) there was reasonable
effort on the part of trustees to secure the best price,

(f) the trustees’ actions,
during the course of the entire transaction, were bonafide and they have
not derived any benefit, either pecuniary or otherwise, out of the said
transaction, and

(g) the transfer was effected
by executing a registered instrument, if a document is required to be
registered under the law for the time being in force.

The said
section has been further amended by the Maharashtra Public Trusts (Amendment)
Ordinance, 2017 (‘Ordinance’) promulgated on October 10, 2017, to
provide that ex-post facto sanction may only be granted in respect of
trust property transferred after the commencement of the Amendment Act (i.e.
October 10, 2017).

Analysis

The presence of the term ‘and’ after clause
(f) above indicates that the criteria are cumulative. Further, this power is
not to be exercised routinely but only in ‘exceptional and extraordinary
situations’. Very few transfers are, therefore, likely to satisfy the
requirements of this provision for granting ex-post facto sanction.
Moreover, as per the Ordinance, only those transfers which have been effected
on or after October 10, 2017 will be eligible for such sanction.

This provision may lead to a problematic
situation in cases where a transfer of trust property is effected by trustees
on the bona fide assumption that it is a fit case for grant of post
facto sanction, but the sanction is not thereafter granted by the Charity
Commissioner because he is not satisfied that the necessary criteria are met.
As no time limit has been specified for the Charity Commissioner to dispose of
an application for ex-post facto sanction, it may even take years for an
acceptance or rejection. Unwinding the transfer after a long period of time,
particularly if there has been construction on the property post the transfer,
will not only be practically difficult but could also lead to an anomalous
legal situation if the transfer was effected under a registered instrument.

Given these risks, this provision may be
reduced to a paper provision as every diligent buyer of property is likely to
insist on prior approval to eliminate threat to title.

Apart from section 36, the concept of ex-post
facto sanction has been introduced in section 36A which requires trustees
to obtain the sanction of the Charity Commissioner to borrow money (whether by
way of mortgage or otherwise) for the purpose of or on behalf of the trust.
Sub-section (3A) has been introduced in this section to permit the Charity
Commissioner to grant ex-post facto sanction to the trustees to borrow
money from any nationalised bank or scheduled bank, in exceptional and
extraordinary situations where the absence of previous sanction results in
hardship to the trust, beneficiary or bona fide third party.

(iv) Streamlining
processes

Background

The MPT Act, before the amendment, had
created a hierarchy of authorities and courts to hear various
applications/matters, with different processes for each application/matter. The
Amendment Act has sought to streamline some of these processes and also reduce
the number of appeals permitted so that cases may be disposed of more
efficiently.

The Statement of Objects and Reasons in the
Bill pertaining to the Amendment Act summarises the rationale for these changes
as under:

“It was further noticed that the said Act
has created a hierarchy of authorities and courts, with a series of appeals,
applications or revisions. Orders of the Charity Commissioner, for instance,
have been made subject to challenge before the District Court, the Maharashtra
Revenue Tribunal and Divisional Commissioner. This multiplicity of proceedings
and forums under the Act, when a substantial number of judicial officers of the
rank of District Judge, discharge the functions of Charity Commissioner and
Joint Charity Commissioner has been found to be unwarranted and even
anomalous.”

In this regard,
a number of amendments have been carried out in the MPT Act, some of which are
explained below:

– Under
erstwhile section 50A of the MPT Act, schemes were framed and modified by the
Charity Commissioner, against which order an application could be made to the
City Civil Court in Mumbai and District Court elsewhere in Maharashtra. Now,
the power to frame and modify schemes has been granted to the Deputy Charity
Commissioner and Assistant Charity Commissioner, and such order may be appealed
before the Charity Commissioner;

– Under
section 51, if the Charity Commissioner refuses his consent to the institution of
a suit, then the appeal will lie before the High Court instead of the
Divisional Commissioner;

– In
the Cy pres provisions under sections 55 and 56, the power conferred on
the court originally has now been conferred on the Charity Commissioner. Thus,
earlier if inter alia a trust had failed, the Charity Commissioner could
require the trustees to apply for directions to the court, and if they failed
to apply, he could himself apply. The court could then give necessary
directions to give effect to the original intention of the author of the public
trust or object for which the public trust was created – and if the same was
not expedient, practicable, desirable, necessary or proper in public interest,
then the court could direct the property or income of the trust to be applied cy
pres to any other charitable object.

Now, the power has been conferred on the
Assistant Charity Commissioner and Deputy Charity Commissioner to pass
appropriate orders after making an inquiry and to make a report to the Charity
Commissioner; the Charity Commissioner may suo motu or on the report of
Assistant or Deputy Charity Commissioner, give the necessary directions;

– The
High Court replaces the City Civil Court in Mumbai and District Court elsewhere
as the first appellate court under the MPT Act;

– Accordingly,
the language of the definition of “Court” has been replaced by “High Court
of Judicature at Bombay” from “in the Greater Bombay, the City Civil Court and
elsewhere, the District Court”.

Tabular
summary

The following table sets out the changes to
the processes in respect of key provisions:

Key:

D
or ACC = Deputy or Assistant Charity Commissioner

CC
= Charity Commissioner

District
Court = City Civil Court in Mumbai, District Court elsewhere in Maharashtra

HC
= High Court

District
Court / HC = Application to District Court from whose decision an appeal lies
before HC

Old

New

Section

Application

Authority/Court

Appellate authority

Authority/Court

Appellate authority

18-20

Registration
of public trust

D
or ACC

u CC

u Then District Court / HC

No
change

Filing
change report / deregistration of trust

D
or ACC

u CC

u Then District Court / HC

No
change

Order
of surcharge

District
Court / HC

No
change

—

41D

Suspension,
removal and dismissal of trustees

District
Court / HC

No
change

41E

Order
for protection of charities

District
Court

No
change

50A

Power
to frame schemes

District
Court / HC

D
or ACC

Consent
for suit

Divisional
Commissioner

No
change

55,
56

Cypres

CC
directs that an application be made to District Court, or will make the
application himself. Thereafter, the said court will hear the application

HC
against order of District Court

D
or ACC will report to CC who will give directions

Decision
of property as public trust property

D
or ACC

u CC

u Then District Court / HC

No
change

Other amendments

The Amendment Act has also carried out a
number of other modifications to the MPT Act – some of these are briefly
summarised below:

(i) Conditions on
alienation: As noted above, u/s. 36 of the MPT Act, sanction of the Charity
Commissioner is required for alienation of immovable property of the public
trust. Such sanction may be accorded subject to such condition as the Charity
Commissioner may think fit considering the interest, benefit or protection of
the trust.

Pursuant to the Amendment
Act, the Charity Commissioner has been empowered to modify the
conditions imposed by him prior to the transaction for which sanction is given
is completed. Further, although he can revoke a sanction in specified
circumstances, he cannot do so after the execution of the conveyance in respect
of the immovable property except on the ground that such sanction was obtained
by fraud before the grant of such sanction.

Further, the Charity Commissioner has been
prohibited from sanctioning any lease of immovable property of a public trust
for a period exceeding 30 years.

(ii) Fixed timelines: To
reduce delays by the Charity Commissioner in processing of applications such as
for (a) granting trustees permission for investing trust funds in any manner
other than that permitted under the MPT Act (section 35); and (b) issuing
directions for the proper administration of the trust (section 41A), the
Charity Commissioner has been enjoined to decide such application within three
months from the date of receipt of such application and if it is not
practicable to do so, to record the reasons for the same.

(iii) Revised process for suspension of trustees etc.: The process for suspension, removal or dismissal
of trustees u/s. 41D of the MPT Act has been revised for the benefit of
incumbent trustees. Earlier, upon receipt of an application for this purpose,
the Charity Commissioner could frame charges and take appropriate action as set
out in the provision. Post the amendment, the Charity Commissioner must notify
such trustee and give him an opportunity to be heard before framing such
charges. Further, he can only issue such notice only when he finds that there is
‘prima facie material’ to proceed against the said person.

(iv) Advice
or direction of the Court: The Amendment Act has deleted section 56A of the
MPT Act under which any trustee of a public trust could apply to the court for
the opinion, advice or direction of the Court on any question affecting the
management or administration of the trust property or income. However, deletion
of this section 56A will not preclude trustees or beneficiaries from applying
for the issue of an Originating Summons in the Bombay High Court for such
advice or direction, in accordance with Chapter XVII of the Bombay High Court
(Original Side) Rules.

In conclusion

In conclusion, the amendments to the MPT Act
are a positive development and are likely to assist the earnest efforts made by
the Charity Commissioner’s office recently to improve the implementation of the
MPT Act and reduce backlog of matters.

On a separate note, we find that NGOs in
India are increasing in scale and stature, and are exploring more sophisticated
structures and arrangements for their functioning, dealings and holding of
assets. They are also seeking to professionalise their operations by adopting
corporate best practices.

When the MPT Act is next reviewed, we
suggest that some amendments which assist with this evolution, but also
maintain adequate checks and balances, be considered. These include
introduction of stricter governance standards, express inclusion of section 8
companies within the ambit of the MPT Act, facilitation of appointment of professional
trustee companies, easing of mergers of public trusts with societies,
regulating related party transactions, permitting investments in safe market
securities, and so on. _

shailesh.kwebmaker

Artificial Intelligence Embracing Technology – New Age Audit Approach

With technology becoming a disruptor across
businesses, the issues facing the auditors in the current environment are:

Are we setting ourselves up for
redundancy with cognitive technology driving audits in future?

Would the proliferation of technology
push the auditor to innovate and augment the value accreted through audit?

Cutting across the ‘black box’

Not so long ago, audits were performed
manually scouring reams of financial information. Data and records back then
were less complex, generated and maintained mostly in physical form, which
facilitated the traditional approach of vouching to deliver a robust audit.
Over time, growth of business operations both in terms of volume and across
geographies compelled organisations to embrace technology and automation as a
means to reduce cost and introduce operational efficiencies. The introduction
of ERP systems and straight through transaction processing application systems
ushered in a change in the way business was run, accounts were maintained and
audits were executed. The audit approach primarily entailed ‘audit around’
the proverbial ‘black box’. With the ever changing business dynamics,
steadily increasing operational complexities including the wave of centralised
operations and the consequential shift in the epicenter of audit from branches/
factories to ‘shared service centres’, the sheer expansiveness of data
generated and the rapid changes in the IT landscape, it has become
imperative for the auditor to execute an ever more scrupulous audit which is
only possible by auditing ‘through’ the proverbial ‘black box’.
Artificial intelligence based programmes aids in auditing through the black
box.

The changing regulatory and governance
landscape

It is pertinent to note that, much of the
above transition has happened against the backdrop of a continually changing
business and regulatory environment, where stakeholders have become more
empowered by stepped up laws and regulations and the heightened standards of
governance, resulting in increased expectations from auditors. As an example,
the Board of Directors, under the Companies Act, 2013, are responsible not only
for the preparation of financial statements that provide a true and fair view
of the financial position and performance of a Company, but also safeguarding
the assets of the company, implementing effective internal controls for
ensuring the propriety of business and looking after the interests of all
stakeholders. Audit committees, as a result, are far more involved in their
interaction and engagement with auditors. Moreover, the game changer, mandatory
auditor rotation, has increased the degree of competitiveness and left the
auditor with no choice but to deliver not only a highly effective and efficient
audit but also a value accretive audit. Auditors’ effectiveness is often
measured by the value they bring to the table, their ability to partner in the
progress of companies they audit, help management see around the bend, identify
risks and provide incisive business insights and do all of this whilst
upholding the highest ethical and professional standards. Further, with the
quarterly reporting and ever-crashing deadlines every quarter, the time at the
disposal of the auditor is ever-reducing.

Very little of the above may realistically
be achieved by merely deploying additional resources in an audit. The logical
and sustainable (and perhaps the only) solution is through increased
integration of technology into the audit approach. Embedding technology into
audit can help enhance productivity and reduce response time to clients.
Digital innovations in audit will help rebalance and redirect resources to more complex and higher risk areas e.g. areas
entailing judgement and use of management estimates.

Auditing with technology

Technology enables an auditor in:

– Risk
assessment

– Control
testing

– Performance
of substantive analytical procedures;

– Substantive
audit procedures;

And offer benefits as more fully explained
below:

Greater assurance- Moving away from
samples to testing the entire population

Under the traditional method, the auditor
would more often than not, select samples to test, based on a quantitative
materiality threshold, for example, vouching ‘top 20 instances’ of operating
expenditure incurred during the period under audit, representing a defined
coverage of the general ledger account or vouching all individual instances
above a specific threshold by value. Such samples were then tested as per
planned audit procedures and conclusions reached based upon these tested
samples. One of the potential areas of redundancy linked with increased use
of technology in audit is that of using a sample-based method in audit testing.

The new age technology tools subject
the entire population of the selected general ledger account to testing. These
tools are capable of analysing (literally scrubbing) the entire population and
highlighting outliers or exceptions e.g., a routine could highlight all
instances of breaks in a ‘three-way match’ (i.e. relationship between purchase
order, goods inward note and supplier’s invoice) in respect of purchases. With
a 100% test of the population, the level of assurance an auditor obtains is far
greater than that achieved through the traditional method of sample testing.

Deeper insights: There’s more to it than
meets the eye

Cognitive technology embedded in audit tools
and routines are capable of correlating data and in identifying patterns,
trends and outliers that may otherwise go unnoticed in a traditional auditing
technique (including those entailing 100% sample testing manually or through
vouching). For example, an unusual spike in orders from a particular geography
or during a particular time of the year, transactions recorded by seldom users
and/ or transactions recorded not in conformity with normal procedure, could
potentially raise a red flag for the auditor to investigate. Such insights may
often go undetected through implementation of traditional methods of vouching,
which primarily focus on agreeing the vouchers to the general ledger entries
and the underlying supporting documents.

The ability to correlate and analyse varied
data points within the population helps the auditor to have deeper insight into
business operations, which enables him to provide greater assurance to the
management and the audit committees. It also provides direction to the auditor
in terms of focus areas and indicates where effort should be focused.

Cognitive abilities in new age technology
tools enable assimilation of data and help provide value accretive insights to
management e.g., we as auditors examine ‘goods returned’ and ‘issue of credit
notes’ for return of goods or defects in a product. With technology, the
auditor could catalogue reasons for return of goods, which could be a useful
insight for management and form the basis for either an internal review or an
external specialist to be consulted so as to improve the product, reduce costs
or enhance employee productivity.

Efficient audits: Delivering more with
less

The auditor often faces a conundrum in
testing manual journal entries for the risk of override of controls. It
is almost impossible to scrutinise ?manual journal entities,’ recorded through
an audit period, due to inherent time and resource constraints. Technology
tools can instead slice and dice the population and highlight manual
journal entries which seem more vulnerable to fraud risk e.g., journal
entries posted on a public holiday or directly by the CXOs or by super users in
the IT department, or journal entries in an accounting caption where one would
normally expect only automated entries etc.

Further, with the expansive data available
at one’s fingertips and capable of being combed through cognitive technology
tools, the auditor could even reduce the frequency of branch or factory visits.

With technology tools doing much of the
‘heavy lifting’ of planned audit procedures, auditors may be able to redirect
their time and focus on areas that entail judgement, or contain high level of
management estimation and assumptions based on unobservable inputs.
Technology at times makes unobservable – observable.

All of the above, lends itself to a more
effective and efficient audit.

The ask

Auditing ‘with’ technology seems to be an
imperative and not an option. The transition needs to be meticulously planned
and seamlessly implemented through timely involvement of all constituents. What
will it take to embrace this change? The answer is:

u Investment-
of both time and money;

u Extensive
training and adapting new skillsets; and

u Educating
all constituencies including regulators.

The cost of initial investment, including
the time taken for careful selection or development of relevant technology
tools and the continual availability of resources for upgradation of such tools
should not be overlooked.

The effectiveness of the output generated by
the technology tools is determined by the relevance and appropriateness of data
that is input into the tools and the management assertions that it helps
address. The old adage persists `garbage in – garbage out’. Hence, selection of
inputs is imperative.

The tools may have to be tailored to
auditee’s ERP systems, so as to render them capable of ‘talking to IT systems’
at the client. Developing a bespoke tool so as to efficiently extract data, on
a timely basis, from the client organisation could be an option.

The rising popularity of cyber currency and
block chain technology in consummating transactions and sharing information
amongst peers will leave auditors with no choice, but to embrace the change,
update their business understanding and risks associated with it. For example:
accepting the risk of cybercrime in designing audit procedures will be an
imperative and auditors will have to be more receptive towards accepting
contemporary basis of audit evidence. Auditors will need to upgrade their
skillsets through focused trainings. They would also need to develop the
ability to read, analyse and interpret the results produced by `technology
tools’. Similarly, regulators may need to be educated, so as to embrace audit
procedures driven by technology tools and routines as acceptable in reaching
audit conclusions.

Whilst the benefits of using technology in
an audit far outnumber the challenges associated with it, the pitfalls should
be identified and catalogued and not be overlooked.

Today’s students and the future professionals
are more tech-savvy than their predecessors. They take easily to a
technology-based audit. The audit fraternity needs to embrace technology also
to attract and retain talent. However, that said, over-dependency on
technology in an audit has its own perils. Whilst cognitive technology may
shore up an audit, its use should not lead to complacency and preclude an
auditor from applying his mind and questioning e.g., instead of relying
completely on the output from audit tests performed by automated routines, an intuitive
auditor would always question, for example, the existence of coffee
plantations in the State of Punjab! The auditor should always guard and not
become a victim of technology where we are susceptible to miss the ‘woods for
the trees’. Technology is a tool – it is not a substitute for human
intelligence.

Embracing technology as a proponent to
differentiate

The changing role of a CFO from someone who
whips out timely financial and regulatory reports, to someone who lends a
perspective and participates in active decision making in the Boardroom, casts
an increased expectation upon the auditor to remain in-step and transform into
a value accretive and trusted business advisor.

We’re witnessing CFOs convincing Boards to
embrace digitisation and use innovative technology in enhancing customer
experience and as a cost efficient means to propel business growth. It goes
without a doubt that this expectation of using more of technology to deliver
results, is also extended to all those constituents for whom the CFO is a
stakeholder. The key lies in how quickly the auditor accepts, adapts and
embraces technology to enhance the audit experience and leverage upon it as a
differentiator to deliver a value accretive audit.

technology enabled Audit: will there be a human touch, after all?

Machines can at best only mimic the human
mind, however, they cannot entirely replace it. What will not be taken away
by proliferation of technology tools in audit is the application of
professional skepticism and the use of professional judgment in areas such
as:

– In
critically evaluating purchase price allocation in a business combination;

– In
reviewing underlying assumptions in respect of valuation of an unlisted
subsidiary and testing the same
for impairment;

– In
reviewing reasonableness of cash flows and assumptions while testing impairment
of Goodwill, etc.

In short, learnings from cumulative
experience, understanding varying perspectives and nuances, application of
rationale and reasoning whilst making decisions based qualitative, quantitative
and subjective determinants, the human mind, no doubt, is supported and
supplemented by the technology tool.

Technology tools will take away the
monotony from audit, facilitate efficiency and bring the focus onto
analytics by highlighting outliers such as:

u Debit
entries in revenue accounts such as interest income;

u Credit/Negative
balances in expenditure accounts;

u Entries
inconsistent with an organisation’s authority matrix, etc.

Undoubtedly, the future of audit seems much
different than what it is today as technology will become central to the
planning, execution and delivery of an effective audit. Those who try to
obviate technology and resist change may risk their relevance in the commercial
arena. In the future, an auditor will have to be a combination of an
Accountant, an investigator(forensic skills) and a Data Scientist!! _

shailesh.kwebmaker

Antim Namaskar

In the first week of January 2017, I came across a quotation:

“If this was the last year of your life what would you
be doing different”

It got me thinking. I realised deep within me that this was
perhaps the last year of my life. I wrote this quote down on the first page of
my BCAS Diary in early January 2017 and thus began a new journey of
introspection, expression, sharing, caring and doing.

I remembered that in Mahabharata there is an interesting
conversation between Yaksha and Yudhishthir, where Yaksha asks a series of
questions and each one is answered by Yudhishthir most eloquently. One of these
questions and answers that comes to my mind is:

Yaksha: What is the greatest wonder?

Yudhishthir:
Every man knows that death is
the ultimate truth of life. However, he wishes otherwise.”

I would add to this, that not only
most of us wish otherwise, but we also go on living our lives as if we are
going to live forever.

In early July 2017, I was diagnosed with a terminal illness –
an illness that left me no treatment options and a short remaining life span.
When my daughter, with a quivering voice, broke this news to me, it took me but
an instance to decide what I would do. I decided to accept my condition with
utmost grace. I resolved that I will continue to be happy and spread happiness.

This article for the “Namaskaar’ feature is likely to be my
last communication with my readers. Writing Namaskaar articles, sharing them
with people who are not BCAJ subscribers, receiving feedback, knowing that
something in the article has touched someone deeply and thinking of the next
topic and next article have been a very satisfying part of my life in the past
decade. It is this engagement with the ‘Namaskaar’ column that made me see good
in everything around me, made me understand what is important in life, and most
of all helped me communicate with a large number of readers on a regular basis.
As part of my last journey, I wish to express my gratitude to the readers of
‘Namaskaar’ articles and share my parting thoughts.

For several months, before I fell ill, I was trying to reach
my good friend Chandravadan Shah, but with no success. When I was admitted to
Bhatia Hospital, a common friend who came to meet me asked me “Pradeepbhai, do
you know Chandravadanbhai is admitted to this very hospital in the room right
across yours?” And instantly came a great realisation – that which we search
for far and wide, is always very close to us, often within us. The beautiful
lines of a song directed by Pankaj Mallick and sung by Dhananjay Bhattacharya
capture this ultimate truth:

I implore you to search within, and you will find answers to
the questions that have eluded you for years. Many of your quests that have
taken you on a wild goose chase may also end within you.

As I embark on my final journey,
several beautiful verses fill my entire being. The melodious song of Farida
Khanum has these beautiful lines:

In the day-to-day demands of your life, you will find a few
moments of freedom, a few moments that you can do what your heart truly wants.
Don’t suppress these moments, don’t let these moments fritter away. There will
always be deadlines and commitments, opportunities to be chased and lectures to
be delivered, new laws to be studied and bills to be raised…. amidst this,
don’t let the beautiful sunset escape your eyes and don’t let the opportunity
to lift someone’s spirit with your smile slip away. At the end of your journey
you will realise that these few moments of freedom were the most meaningful
part of your life’s journey.

At the end of our life, when
one becomes old and weak, one wonders, why did we tire ourselves? After all, we
had a simple journey to make – from the cradle to the grave. As beautifully
captured in this Gujarati couplet by poet ‘Befam’ Barkat Virani

As I lie on my hospital bed reflecting on my life and that of
many others, I am realising that a lot of our struggles are meaningless and not
necessary. There is so much beauty and goodness to experience, and life, in its
essence is effortless. We make it a struggle by our expectations, our greed,
our outer appearances, our inability to appreciate what we have and most of
all, believing that there will be time later to enjoy all that has to be
enjoyed.

Time is precious. Time is ticking away. And, one day there
will be no tomorrow.

Friends, I came across this beautiful quotation “If
this was the last year of your life what would you be doing different” on
what was to be the last year of my life. How I wish I had come across this
earlier and lived several years as if each of them was the last year of my
life.

I wish all of you a long life, but I also wish that you can
live each year of your remaining life as if it is your last one…. living it
fully, resolving conflicts, clearing misgivings, saying the unspoken words of
appreciation and gratitude, experiencing the joy of giving and loving with abundance.

As I bid farewell, I end with these lines from “Gitanjali” of
Rabindranath Tagore:

“I have got my leave.

Bid me farewell, my brothers!

I bow to you all and take my
departure.

Here I give back the keys of my door – and I give up all
claims to my house.

I only ask for last kind words
from you.

We were neighbours for long, but I have received more than
I could give.

Now the day has dawned and the lamp that lit my dark
corner is out.

A summons has come and I am ready for my journey.

At this time of parting, wish me good luck my friends!

The sky is flushed with the dawn and my path lies
beautiful.

Ask not what I Have with me to take there.

I start my journey with empty
hands and expectant heart.”

Editorial Note:

Late Shri Pradeep Shah contributed 57 Namaskaar
write-ups since its inception in 2003. The above piece was conceived by him
after he was suddenly diagnosed with a terminal illness. Although his body was
failing, he wanted to write for this monthly column, which he served with
unfailing dedication for fourteen years. We accept his Antim Namaskar
with folded hands.

shailesh.kwebmaker

3 Section 50C – Non-compliance of provisions of section 50C(2) cannot be held valid and justified even if no request was made by the assessee before the authorities below to refer the matter to the DVO for valuation u/s. 50C(2) of the Act.

Smt. Y. Hameeda Banu vs. ACIT (Bangalore)

Member : A. K.
Garodia

ITA No.
1681/Bang./2016

A.Y.: 2008-09. Date of Order: 24^th
August, 2017.

Counsel for
assessee / revenue: K. Mallaharao / Padma Meenakshi

FACTS

The
assessee, in her return of income, computed capital gains by adopting actual
consideration received / receivable to be the full value of consideration. The
stamp duty value of the property transferred was greater than the consideration
accrued / arising to the assessee. The assessee, in the course of assessment
proceedings, did not request for a reference to be made to DVO. The Assessing
Officer (AO) completed the assessment and computed capital gains by adopting
stamp duty value to be the full value of consideration.

Aggrieved,
the assessee preferred an appeal to the CIT(A) and in the course of appellate
proceedings filed an affidavit requesting a reference to be made to DVO. The
CIT(A) without considering the affidavit and without making a reference to DVO
decided the appeal against the assessee.

Aggrieved,
the assessee preferred an appeal to the Tribunal where, on behalf of the
assessee, it was submitted that in view of the ratio of the decision of Delhi
Bench of the Tribunal in the case of ITO vs. Aditya Narain Verma (HUF)
(ITA No. 4166/Del/2013 dated 7.6.2017), non-compliance of provisions of section
50C(2) cannot be held to be valid and justified. It was also mentioned that the
Delhi Bench of the Tribunal had followed the judgement of the Allahabad High
Court in the case of Dr. Shashi Kant Garg vs. CIT (285 ITR 158), wherein
it is held that it is well settled that if under the provisions of the Act, an
authority is required to exercise powers or to do an act in a particular
manner, then that power has to be exercised and the act has to be performed in
that manner alone and not in any other manner. It was submitted that the issue
should go back to the file of the AO for a fresh decision after obtaining
report from DVO as required u/s. 50C(2) of the Act.

HELD

The
Tribunal following the ratio of the Delhi Bench of Tribunal in the case of ITO
vs. Aditya Narain Verma (HUF) (supra) set aside the order of CIT(A) and
restored the matter back to the file of the AO for fresh decision with the
direction that he should obtain valuation report from DVO u/s. 50C(2) and then
decide the issue afresh after affording adequate opportunity of being heard to
the assessee.

The
appeal filed by the assessee was allowed.

shailesh.kwebmaker

Payments To non-residents law and procedure (Withholding Tax provisions under section 195 of the act)

The
subject of “withholding tax provisions (TDS) from payments made to
non-residents” is always mired in controversies. Being
part of the
International Tax Law, the
subject is dynamic. It is a complex subject as it involves computation of
income in the hands of non- residents. Provisions are very harsh and fraught
with severe penalties. Therefore, an attempt has been made in this write-up to
explain the law and procedure of various aspects of withholding taxes from the
payments made to non-residents, in brief, in the simple format of questions and
answers.

1.0 Introduction

Section
195 of the income-tax act, 1961 (the “act”) contains the provisions to deduct
tax at source (worldwide it is popularly known as “Withholding tax”) from any payment made to a
non-resident.

Section
195(1) provides that, “any person responsible for paying to a non-resident not
being a company, or to a foreign company, any interest (not being interest
referred to in section 194LB or section
194LC) or section 194LD or any other sum chargeable under the provisions of the
act (not being income chargeable under the head “salaries”) shall, at the time
of credit of such income to the account of the payee or at the time of payment
thereof in cash or by the issue of a cheque or draft or by any other mode,
whichever is earlier, deduct income-tax thereon at the rates in force. ….”

The
dissection of the above provision reveals that—

(i) The obligation to deduct tax at source is
cast on every person making payment, be it individual, company, partnership
firm, government or a public sector bank etc. The term ’person’ as defined in
section 2(31) of the act is relevant here.

(ii)
The payee may be any type of entity (i.e. individual, company etc.).

(iii) The payee must be a non-resident under the
act.

(iv) The payment may be for interest other than
following types of interest:

(a)
Section 194LB – interest from infrastructure debt fund; or

(b)
Section 194LC –
interest income from
Indian company before 1st July 2017;

[In
all above types of interest payments the rate of TDS is 5 %.]

(v) Payment of salaries is not covered by
section 195 of the act.

(vi) Tax deduction has to be made at the time of
credit or payment of the sum to the non-resident, whichever is earlier.

(vii)
There is no threshold for deduction of tax at source. It therefore means
payment of even one rupee to a non-resident would attract TDS provisions.

In
the backdrop of above basic provisions, let us proceed to understand in detail
the law and procedure to comply with the provisions of withholding tax at
source u/s 195 of the act.

2.0 Questions and
answers

2.1 What kind of
payments to non-residents would attract withholding tax provisions under the
act? Is there any threshold exemption for deduction of tax at source?

Ans: Section 195 casts an obligation on the person
who is making any payment to a non-resident to deduct tax at source. The
sweeping language of the section brings almost every payment, made to a
non-resident, which is chargeable to tax, within its ambit. The exclusions here
are in respect of payment of certain types of interest on borrowings (refer
para 1 herein above) and salaries. Section 192 of the act deals with TDS
provisions relating to salary paid to a non-resident, which is chargeable to
tax in India.

There
is no threshold exemption from obligation to deduct tax u/s 195. However, tax
is deductible only if income is chargeable to tax in the hands of a non-resident and not otherwise.

The
crux of the provisions of section 195 is that the income in the hands of the
recipient must be chargeable to tax. Thus,
if any income is exempt in the hands of the non-resident, the resident
making payment to such a non-resident need not deduct tax at source u/s 195.
(CBDT Circular no. 786 dated 7th
February, 2000 has clarified this issue).

The hon’ble Supreme Court in the case of
Transmission Corporation of A.P. Ltd and Another vs. CIT (1999) 239 ITR 587
(SC) has held that the scheme of sub-sections (1), (2) and (3) of section 195
and section 197 leaves no doubt that the expression “any other sum chargeable
under the provisions of this act” would mean “sum” on which income-tax is
leviable. In other words, the said sum is chargeable to tax and could be
assessed to tax under the act. The consideration would be whether payment of
the sum to the non-resident is chargeable to tax under the provisions of the
act or not. That sum may be income or income hidden or otherwise embedded
therein. the scheme of tax deduction at
source applies not only to the amount paid which wholly bears “income”
character such as salaries, dividend, interest on securities, etc., but also to
gross sums, the whole of which may not be income or profits of the recipient.”

in
this regard, it is important to note that in the subsequent decision in the
case of Ge India technology (P) ltd (327
itr 456)(SC), the SC has dealt with the above aspect and other aspects relating
to section 195 in detail and has made important observations as follows:

“7. ……. The most important expression in
section 195(1) consists of the words “chargeable under the provisions of the
act”. A person paying interest or any other sum to a non-resident is not liable
to deduct tax if such sum is not chargeable to tax under the income-tax act.
For instance, where there is no obligation on the part of the payer and no
right to receive the sum by the recipient and that the payment does not arise
out of any contract or obligation between the payer and the recipient but is
made voluntarily, such payments cannot be regarded as
income under the income-tax
act. It may be noted that section 195 contemplates not merely
amounts, the whole
of which are pure income payments, it also covers
composite payments which has an element of income embedded or incorporated in
them. Thus, where an amount is payable
to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The
obligation to deduct TAS is, however, limited to the appropriate proportion of
income chargeable under the act forming part of the gross sum of money payable
to the non-resident. This obligation being limited to the appropriate
proportion of income flows from the words used in section 195(1), namely,
“chargeable under the provisions of the act”. It is for this reason that vide
Circular no. 728
dated 30-10-1995 that the CBDT
has clarified that the tax deductor can take into consideration the effect of
DTAA in respect of payment of royalties and technical fees while deducting
TAS….

….
While deciding the scope of section 195(2) it is important to note that the tax
which is required to be deducted at source is deductible only out of the
chargeable sum. this is the underlying
principle of section 195. hence, apart from section 9(1), sections 4, 5, 9, 90
and 91 as well as the provisions of DTAA are also relevant, while applying tax
deduction at source provisions. reference to ito(tdS) u/s. 195(2) or 195(3)
either by the non resident or by the resident payer is to avoid any future
hassles for both resident as well as non resident. in our view, section 195(2)
and 195(3) are safeguards. the said
provisions are of practical importance. this
reasoning of ours is based on the decision of this Court in transmission
Corpn. of A.P. ltd.’s case (supra) in
which this Court has observed that the provision of section 195(2) is a
Safeguard. from this it follows that
where a person responsible for deduction is fairly certain then he can make his
own determination as to whether the tax was deductible at source and, if so,
what should be the amount thereof.”

8.
If the contention of the department that the moment there is remittance the
obligation to deduct TAS arises is to be accepted then we are obliterating the
words “chargeable under the provisions of the act” in section 195(1). The said expression
in section 195(1) shows that the remittance has got to be of a trading receipt,
the whole or part of which is liable to tax in India. The payer is bound to
deduct TAS only if the tax is assessable in India. If tax is not so assessable,
there is no question of TAS being deducted. [See : Vijay Ship Breaking Corpn.
vs. CIT [2009] 314 ITR 309 (SC)].

Applicability
of   the   judgment
in   the   case
of Transmission Corporation (supra)

10.
In transmission Corpn. of A.P. ltd.’s case (supra) ‘a non-resident had entered
into a composite contract with the resident party making the payments. The said
composite contract not only comprised supply of plant, machinery and equipment
in India, but also comprised the installation and commissioning of the same in
India. It was admitted that the erection and
commissioning of plant
and machinery in India gave rise to income-taxable in
India. it was, therefore, clear even to the payer that payments required to be
made by him to the non-resident included an element of income which was
exigible to tax in India. The only issue raised in that case was whetherTDS was
applicable only to pure income payments and not to composite payments which had
an element of income embedded or incorporated in them. The controversy before
us in this batch of cases is, therefore, quite different. In transmission
Corpn. of A.P. ltd.’s case (supra) it
was held that TAS was liable to be deducted by the payer on the gross amount if
such payment included in it an amount which was exigible to tax in India. it
was held that if the payer wanted to deduct TAS
not on the gross amount but on the lesser amount, on the footing that
only a portion of the payment made represented “income chargeable to tax in
India”, then it was necessary for him to make an application u/s. 195(2) of the
act to the ito(tdS) and obtain his permission for deducting TAS at lesser
amount. Thus, it was held by this Court
that if the payer had a doubt as to the amount to be deducted as TAS he could
approach the ito(tdS) to compute the amount which was liable to be deducted at
source. In our view, section 195(2) is based on the “principle of
proportionality”. The said sub-section gets attracted only in cases where the
payment made is a composite payment in which a certain proportion of payment
has an element of “income” chargeable to tax in India. it is in this context
that the Supreme Court stated, “if no such application is filed, income-tax on
such sum is to be deducted and it is the statutory obligation of the person responsible
for paying such ‘sum’ to deduct tax thereon before making payment. He has to
discharge the obligation to tdS”. if one reads the observation of the Supreme
Court, the words “such sum” clearly indicate that the observation refers to a
case of composite payment where the payer has a doubt regarding the inclusion
of an amount in such payment which is exigible to tax in India. in our view,
the above observations of this Court in transmission Corpn. of A.P. ltd.’s case (supra) which is put in italics has been
completely, with respect, misunderstood
by the Karnataka high Court to mean that it is not open for the
payer to contend that if the amount paid by him to the non-resident is not at
all “chargeable to tax in India”, then no TAS is required to be deducted from
such payment. This interpretation of the high Court completely loses sight of
the plain words of section 195(1) which in clear terms lays down that tax at
source is deductible only from “sums chargeable” under the provisions of the income-
tax act, i.e., chargeable under sections 4, 5 and 9 of the income-tax act.”

Thus, there is no need to deduct tax at source in
respect of all incomes, which are exempt and/or not taxable under the act.

An
illustrative list of income under the act, which is exempt in the hands of
non-residents, is as follows:

(i) Section 10(4) – interest on NRE account and
notified securities;

(ii) Section
10(6BB) tax paid
on behalf of the
non-resident by an Indian Company which is engaged in the business of operation
of aircraft;

(iii)
Section 10(6C) – income by way of royalty or fees arising to a foreign company
in respect of projects connected with security of India;

(iv)
Section 10(8a) and
(8B) — income
of a consultant/individual out
of funds made available to an international
organization under a technical assistance grant between the agency and the
government of a foreign State/ Government of India;

(v)
Section 10(15)(iv) etc. – income by way of interest and

(vi)
Section 10(15a) – any payment made by an Indian company engaged in the business
of operation of aircraft, to acquire aircraft or an aircraft engine on lease
from the Government of a foreign State or a foreign enterprise.

(vii)
amounts not liable to tax as per the provisions of the respective DTAAs.

Besides
the above income, if any other income of a non-resident is exempt from tax in
India, then there is no necessity to deduct tax at source by the payer.

2.2 Who has to
deduct tax at source u/s. 195 of the act?

Ans: Section 195 casts an obligation on the person
who is making any payment to a non-resident to deduct tax at source. The only
condition is that the sum payable must be chargeable to tax in the hands of the
non-resident. The only exception is payment of salaries and specified interest
income.

2.3 Can a payer
obtain a “lower” or “nil” deduction certificate from the income tax
authorities? if yes, what is the procedure for the same?

Ans: yes, the
payer can make an application to the Assessing Officer to obtain a certificate
for “lower” or “nil” deduction of tax u/s. 195 (2) of the act. No particular
form has been prescribed for making an application and therefore, the payer can
apply on a plain paper or a letterhead giving all facts and supporting
documents justifying its claim for lower deduction or nil deduction of tax.

Alternatively, the payer or the payee can make an
application for an advance ruling u/s. 245n of the act. The decision given by
the AAR would be binding on the applicant for the transaction for which the
ruling is sought and on the Commissioner and other income tax authorities
subordinate to him in respect of the applicant and the said transaction.

2.4 Can a payee
obtain a “lower” or “nil” deduction certificate from the income tax
authorities? if yes, what is the procedure for the same?

Ans: a payee can apply to the AO for lower
deduction or NIL deduction certificates if the income received by him is either
not chargeable to tax or chargeable at the lower rate than what is prescribed
for withholding. Such an application can be made either u/s. 195 (3) or 197 of
the act.

Section
195(3) read with rule 29B provides for application by payee only in a case
where the income in the hands of the non-resident is not chargeable to tax in
Indian and therefore the payment is to be made without deduction of tax at
source i.e. nil tax. Whereas, the application is to be made u/s. 197 r.w. rule
28AA where the deduction is to be made at a lower rate or nil rate. Section197
covers provisions for application of certificate for lower or nil deduction for
host of other sections (e.g. from section 192 to 194 lBC) along with section 195 of the Act.

Rule
28AA and rule 29B prescribes various conditions that a payee must fulfill in
order to be eligible to get a certificate.

2.5 At what rate tax is required to be deducted u/s. 195 of
the act?

2.5.1
income-tax act vs. double taxation avoidance agreement (DTAA)

Clause
(iii) of the section 2 (37A) of the Act specifies the rates in force for the
purposes of deduction of tax at source u/s. 195. Accordingly, one has to apply the rate/s prescribed in the
finance act of the relevant year or the
rates specified in a DTAA entered into by the Central Government, whichever is
applicable by virtue
of provisions of section 90 of
the act. In view of provisions of section 90(2) of the act, in case of a
remittance to a country with which a DTAA is in force, the tax should be
deducted at the rate provided in the finance
act of the relevant year or at the rate provided in the DTAA, whichever
is more beneficial to the assessee. This position has been clarified by the
CBDT vide Circular no. 728, dated 30^th
October, 1995. However, the provisions of section 90(4) provide that the relief
or benefit from any agreements or DTAA shall be available to a non resident assessee
only on obtaining
from him, a certificate of his
being a resident in a country outside India (TRC), issued by the government of
that country or specified territory.

2.5.2
CBDT Circular no. 333 dated 2-4-1982

Even
before insertion of section 90(2) reproduced above by the finance (no. 2) act, 1991, with retrospective effect
from 1-4-1972, the CBDT had clarified vide Circular No. 333 dated 2- 4-1982
that where a specific provision is made in the DTAA, the provisions of the DTAA
will prevail over the general provisions contained in the income-tax act and
where there is no specific provision in the DTAA, it is the basic law i.e. the
provisions of the income-tax act, that will govern the taxation of such income.

The
said circular has been accepted and explained by various judicial authorities.
Hence, if a particular payment to non-resident is subject to deduction of tax
at source under the act, but under the relevant DTAA the same is not chargeable
to tax or taxable at a lower rate in India, then such lower/nil rate shall be
applicable.

2.5.3
Levy of Surcharge and the education Cess

The
rates prescribed under the act are to be increased by the Surcharge @ 2 or 5
per cent for foreign companies (as the case may be) and @ 15 per cent for non-residents
other than a company [12% in case of a co-operative society or firm]. Also,
there will be a further levy of the education Cess (@ 3 per cent on the tax and
surcharge amount.

However, wherever theTDS rate is applied as prescribed
under a DTAA, then the same would be final and the Surcharge and the Education
Cess would not be applicable. Since DTAAs are agreements between the two
sovereign States, the rate prescribed therein is the maximum rate (i.e. the
upper ceiling), regardless of subsequent imposition of surcharge or cess, etc.

In
CIT vs. Srinivasan (K.) [1972] 83 ITR 346 the Supreme Court held that
income-tax includes surcharge. Therefore,
the term “income tax” as included in tax treaties include surcharge as
well.

In
the following decisions it has been held that in cases where DTAA benefit
applies,TDS cannot be made at a higher rate in terms of section 206AA of the
act:

—
[2015] Serum Institute of India Ltd (68 Sot 254) (ITAT Pune)

—
[2015] Infosys BPO ltd (154 itd 816)(ITAT
Bang)

—
[2016] Wipro ltd
(ITA Nos. 1544 to 1547/ Bang/2013)(ITAT Bang)

—
[2016] Bharti Airtel Ltd (67 taxmann.com 223) (ITAT del)

A
contrary decision was earlier rendered in the case of [2012]
Bosch ltd. (141
ITD 38)(ITAT Bang).

2.5.4 Specific Rates prescribed in certain
Sections of the act

2.5.4.1
Section 115A of the act

The
CBDT has, in the context of section 115A [which prescribes special rates of tax
on dividends, interest, income from mutual funds, royalty and fees for
technical services payable to a non-resident (not being a company) or a foreign
company] clarified vide Circular no. 740 dated 17th April, 1996 that if the DTAA provides for a
lower rate of taxation, the same would be applicable.

2.5.4.2
Presumptive rates of taxes

The ratio of the above Circular would equally
apply to other special provisions applicable to non-resident such as provisions
contained in sections 44B (Special provisions for computing profits and gains
of shipping business in case of non-residents), 44BBA (Special provisions for
computing profits and gains in connection with the business of operation of
aircraft in case of non-residents), 44BBB (Special provisions for computing
profits and gains of foreign companies engaged
in the business
of civil construction, etc., in certain turnkey power
projects), etc.

Section
44BB prescribes a presumptive rate of 10% in respect of profits and gains in
connection with the business of exploration etc., of mineral oils.
However, such presumptive rate would not
be applicable, if such income is otherwise covered by section 44D (i.e. Payment
of royalty and FTS prior to 1-04-2003)
or section 115A (Payment of interest, dividends, royalties or FTS ). [ABC, in
re 234 ITR 37 (AAR)].

Following
the ratio of SC decision in the case of GE India Technology Centre (P.)
Ltd. (supra), the ITAT in the case of Frontier Offshore Exploration
(India) Ltd. vs.
DCIT [2011] 10
taxmann.com 250 (Chennai) relating to payment to a non resident engaged
in the business of prospecting / exploration etc. of mineral oil, covered u/s
44BB of the act, held that obligation to deductTDS is limited to the
appropriate portion of income chargeable to tax.

2.5.4.3 Section 206AA of the act

This
section provides for furnishing of Permanent account number (Pan) by any person who is entitled to receive any
sum/ income/amount on which tax is to be deducted under Chapter XVII-B of the income tax act (includes section 195)
to the person responsible for deducting such tax, failing which tax shall be
deducted at higher of any of the following rates;

a) The rate specified in the relevant provision
of the act,

b) The rate or rates in force,

c) The rate of twenty Five Percent.

However,
CBDT has notified a new Rule 37BC in the Income Tax Rules, 1962 vide
Notification no. 53/2016 dated 24th June,
2016 providing a relaxation from deduction of tax at a higher rate u/s.
206AA in respect of certain payments. The provisions of section 206AA shall not
apply in cases where the deductee does not have a Pan and the payment made to him
is in the nature of interest, royalty, fees for technical services or payments
on transfer of any capital asset and the deductee furnishes the following
details and documents to the deductor:

(i) Name, E-mail id, contact number;

(ii)
Address in the country or
specified territory outside India
of which the deductee is a resident;

(iii)
A certificate of his being resident in any country or specified territory
outside India from the Government of that country or specified territory if the
law of that country or specified territory provides for issuance of such
certificate;

(iv)
Tax Identification Number of the deductee in the country or specified territory
of his residence and in case no such number is available, then a unique number
on the basis of which the deductee is identified by the Government of that
country or the specified territory of which he claims to be a resident.

2.5.5 No TDS from
payments to foreign shipping companies or agents

The CBDT, vide Circular no. 723 dated 19th September,
1995 had clarified that there would be no overlapping of section 172 which
provides for recovery of tax from foreign shipping companies and section 194C
& section 195, where payments are made to shipping agents of non-resident
ship owners or charterers of carriage of passengers, etc. shipped at a port in
India. The agent acts on behalf of the non resident ship owner or charterers
and therefore he steps into shoes of the principal and accordingly, the
provisions of section 172 shall apply and those of section 194C & 195 will
not apply. Therefore, a resident making
payment of freight to the foreign shipping companies or their agents will not
be required to deduct TDS u/s. 195 or 194C.

2.6 What is the procedure of claiming tax treaty
benefit while remitting
sum u/s. 195 of
the act?

Ans: Sections 90(4) and 90(5) were inserted by
the Finance Act 2012 and
2013 respectively to provide that any non-resident assessee who
seeks to obtain the benefit of the relevant DTAA applicable, shall avail so
only if he presents a Tax Residency Certificate (TRC) of the country of which
he is a resident for tax purposes as well
as any other
prescribed particulars as may be notified. Further, by Notification
No. 39/ f.no.142 /13/2012, rule 21AB was inserted which prescribes the
necessary particulars to be submitted along with the TRC u/s. 90(5) for claiming
treaty benefits. This
includes a self declaration by
the assessee in form 10F and it shall contain the Status, nationality, tax
Identification Number of the assessee in the country of which he claims to be a
resident, address of the assessee in that country and the period of residential
status of the assessee as mentioned in the TRC. however, the Non resident shall not be required to
submit form 10F if the
TRC already contains all
such information as specified in form 10F.

2.7 What is the procedure to comply with the provisions of
WHT u/s. 195 of the act?

Section
195(6) of the income-tax act, 1961 provides that a person responsible for paying
any sum to a non-resident shall furnish such information as may be prescribed
under rule 37BB. The said rule 37BB provides that form no. 15CA and/or
form no. 15CB shall be furnished for the
purpose of payment to a non-resident. Form No. 15CA is to be filed and
submitted online by the deductor
i.e. payer and
form 15CB is to be issued by the practicing Chartered accountant (C.A).
However, form 15CA is required to be filed only when the transaction falls
under reportable category irrespective of chargeability of tax. Form 15CA
contains four parts, A, B, C and D. When a transaction does fall into
reportable category and amount chargeable to tax does not exceed Rs. five lakh,
then part A of the form needs to be filed. But if it is taxable, one needs to
check the amount of the transaction.

If
the transaction value
(payment to non resident) exceeds Rs. 5 lakh,

(a)
Part B of Form No.15CA needs to be filed after obtaining,

(i) A
certificate from the
Assessing Officer u/s. 197; or

(ii)
An order from the Assessing Officer under sub-section (2) or sub-section (3) of
section 195;

(b)
Part C
of form no.15CA
after obtaining a certificate in Form No. 15CB from a
Chartered accountant.

Whereas,
if the transaction is below Rs. 5 lakh, only Part A of form 15CA needs to be
filed. The limit of Rs. 5 lakh is, however, not a threshold limit for
chargeability of tax or deduction of tax at source. In other words, even if
there is an exemption from submission of form
15CB, the payer needs to deduct tax at source and deposit it with the
Government.

2.8 What are the consequences of failure to deduct tax at
source u/s. 195 of the act?

Ans: There
are severe consequences for failure
to deduct tax at source while making payment to a non-resident. Besides
attracting levy of interest and penalty, such payments will not be allowed as
deduction in the hands of the payer while computing the profits and gains from
business and profession under the act [refer provisions of section 40(a)(i)].
Moreover, the payer may be regarded as an ‘agent’ of the non-resident u/s.163
of the act and the tax may be recovered from him. Thus, one needs to be extremely careful in applying
provisions of the act for deduction of tax at source, from payments made to
non-residents.

Looking
at the serious repercussions of non- deduction of tax at source as a payer one
must always take a conservative view and deduct tax at source.

3.0 Some typical payments to non-residents which attracts
TDS provisions

In
following table some typical payments which are of practical importance are
covered. The idea is to give a bird’s eye view only and not a detailed or
reasoned analysis of provisions or taxability.

Some
Typical Payments to Non-Residents

Relevant
sections under the IT act

Relevant
Articles of a DTAA

Taxability
under the Act (TDS)

Withholding
Tax rate under a DTAA

Remarks

Interest from government or an
Indian concern on moneys borrowed or debt incurred by them in foreign
currency.

Sec. 115A

Article 11

20%

10%/15%

WTH rate differs from treaty to treaty.

Interest on bonds of an Indian
company issued in accordance with such scheme as the Central
Government notifies

Sec. 115AC

Article 11

10%

10%/15&

Interest on Infrastructure Debt Fund

Sec. 115A & 194LB

Article 11

10%/15%

It is better to take shelter under the
domestic tax laws rather than DTAAs.

Certain income from units of a business
trust to non-resident

Sec. 194LBA

Article 11

10%/15%

Interest by an Indian Company or a
business trust in respect of money borrowed in foreign currency under a loan
agreement or by way of issue of long-term bonds

Sec. 115A & 194LC

Article 11

10%/15%

Interest on rupee denominated bond of
an Indian Company or Government securities to a FII or a QFI

Sec. 115A & 194LD

Article 11

10%/15%

Dividend u/s 115-O

Sec. 9(1)(iv) & 115A

Article 10

NIL

10%/15%

Dividend (other than u/s 115-O)

Sec. 9(1)(iv) & 115A

Article 10

20%

10%/15%

WTH rate differs from treaty-to-treaty

Purchase Consideration for immovable property (LTCG)

Sec. 45 & 195

Article 13

20%

No rates are prescribed as normally
taxed as per the domestic tax laws of both the countries.

Taxed per the domestic tax laws of both
countries.

Rent

Sec. 22 to

Sec. 27

Article 6

30%

Taxed in the country of source. No rate
is prescribed.

Taxed per the domestic tax laws of
country of source.

Commission on Imports

Sec. 9(1)(i)

Article 12

30%

10%/15%

WTH rate differs from treaty-to-treaty

Commission on exports

Sec. 9(1)(i)

N.A

Not taxable as Indian Income

N.A

Income does not accrue or arise in
India

4.0 Conclusion

The
subject of withholding tax from payments to non resident is faced with many challenges.
The Government’s intention is to protect the tax base of India and collect
revenue from the non-residents at source as it is difficult to catch them once
they are gone or money is transferred to them. As a payer one has to take
conservative view and deduct tax at source as far as possible. Failure to do so
may not only make him an assessee in default, but could also make him a
representative assessee u/s. 164 of the act and the tax may be recovered from
him. Other penal provisions may also follow. Therefore, it is always advisable to obtain a lower
deduction certificate from the Assessing Officer or go for an advance ruling.

shailesh.kwebmaker

Notification No. FEMA 5(R)/2016-RB dated September 8, 2016

CORRIGENDUM – G.S.R. 389(E) –
dated September 8, 2016

Foreign Exchange management
(deposit) Regulations, 2016

By a Corrigendum dated September
8, 2016 published in the Gazette of india, extraordinary, Part-ii, Section 3,
Sub-section (i), the following changes have been made to Notification No. FEMA
5(R)/2016-RB relating to Foreign exchange management (deposit) regulations,
2016:

Paragraph 6(3) of Schedule i has
been substituted as under:

“loans outside india – authorised dealers may allow
their branches/correspondents outside india to grant loans to or in favour of
non-resident depositor or to third parties at the request of depositor for bona
fide purpose against the security of funds held in the NRE accounts in india
and also agree for remittance of the funds from india, if necessary, for
liquidation of the outstanding.”

Previously, third party loans
could be given for bona fide purpose except for the purpose of relending or
carrying on agricultural / plantation activities or for investment in real
estate business. With this amendment restriction on user of funds has been
removed.

shailesh.kwebmaker

Impact of Ind AS on Demerger Transactions

Demerger
is a business reorganisation where one or more business unit is hived off into
a separate entity. There could be a number of reasons why a demerger is done;
for example, to unlock the value in a business, to focus on a particular
business or to seek external participation in the transferor or resulting
company. It involves separation of business, unlike an amalgamation, which
entails consolidation or merger of businesses.

Demerger
is generally achieved through a scheme of compromise or arrangement in a court
process u/s. 391 to 394 of the Companies act, 1956. The demerged company
(transfer or company, referred to as TCO in this article) transfers a business
unit on a going concern basis to a resulting company (transferee company
referred to as RCO in this article).

In
order to become a tax neutral or tax compliant scheme, the demerger should be
compliant with section 2(19AA) of the income-tax act, which, inter alia,
requires that the demerger should be pursuant to a scheme u/s. 391 to 394 of
the Companies act, 1956 and that the
transfer of assets and liabilities should take place at the book values of the
transferor company by ignoring revaluation, if
any. The tax neutrality provisions
provide neutrality to all parties
concerned, viz., the transferor company, the transferee company and the
shareholders of the transferor and transferee company. From the transferor
company perspective, there will be no capital gains on the transfer. Further
there will be no deemed divided nor dividend distribution tax with respect to
the distribution to the shareholders. The shareholders of the transferor
company too will not have to bear the incidence of capital gains tax.

Appendix
a Distribution of Non-cash Assets to Owners of Ind AS 10 Events after the
Reporting Period deals with accounting for distribution of assets other than
cash (non cash assets) as dividends to its owners (shareholders) acting in
their capacity as owners. The appendix applies to the non-reciprocal
distributions of non-cash assets (e.g. items of property, plant and equipment,
intangible assets, businesses as defined in Ind AS 103, ownership interests in
another entity or disposal groups as defined in Ind AS 105) by an entity to its
owners acting in their capacity as owners. The appendix addresses only the
accounting by the entity that makes a non-cash asset distribution, not the
accounting by recipients.

The appendix
does not apply
to a distribution
of a non-cash asset
that is ultimately
controlled by the same party or parties before and after
the distribution. This exclusion applies to the separate, individual and
consolidated financial statements of an entity that makes the distribution. A
group of individuals shall be regarded as controlling an entity when, as a
result of contractual arrangements, they collectively have the power to govern
its financial and operating policies so as to obtain benefits from its
activities, and that ultimate collective power is not transitory.
therefore, for a distribution to be
outside the scope of this appendix on the basis that the same parties control
the asset both before and after the distribution, a group of individual
shareholders receiving the distribution must
have, as a
result of contractual
arrangements, such ultimate collective power over the entity making the
distribution.

The
Appendix does not apply when an entity distributes some of its ownership
interests in a subsidiary but retains control of the subsidiary. The entity
making a distribution that results in the entity recognising a non-controlling
interest in its subsidiary accounts for the distribution in accordance with Ind
AS 110.

When
an entity declares a distribution and has an obligation to distribute the
assets concerned to its owners, it must recognise a liability for the dividend
payable. Consequently, this appendix addresses the following issues:

(a)
When should the entity recognise the dividend payable?

(b)
How should an entity measure the dividend payable?

(c)
When an entity settles the dividend payable, how should it account for any
difference between the carrying amount of the assets distributed and the
carrying amount of the dividend payable?

When to Recognise a Dividend Payable

The
liability to pay a dividend shall be recognised when the dividend is
appropriately authorised and is no longer at the discretion of the entity,
which is the date:

(a) When declaration of the dividend, e.g. by
management or the board of directors, is approved by the relevant authority,
e.g. the shareholders, if the jurisdiction requires such approval, or

(b) When the dividend is declared, e.g. by
management or the board of directors, if the jurisdiction does not require
further approval.

Since
the demerger is to be approved by the court, a question may emerge as to
whether the dividend liability is accounted when the demerger is approved by
the shareholders or when finally approved by the court. If the court approval
is substantive and not a mere formality, then the dividend liability shall be
recorded when the final court approval is received. If the court approval is
treated as a mere formality, then dividend liability should be recognized on
approval from shareholders. Under the indian jurisdiction, the court order
would generally be treated as substantive and determine the acquisition date.
However, this issue is not very relevant for the purposes of this article.

Measurement
of a Dividend Payable

An
entity shall measure a liability to distribute non-cash assets as a dividend to
its owners at the fair value of the assets to be distributed. At the end of
each reporting period and at the date of settlement, the entity shall review
and adjust the carrying amount of the dividend payable, with any changes in the
carrying amount of the dividend payable recognised in equity as adjustments to
the amount of the distribution.

Accounting For Any Difference between the Carrying Amount of
the Assets Distributed and the Carrying Amount of the Dividend Payable when an
Entity Settles the Dividend Payable

When
an entity settles the dividend payable, it shall recognise the difference, if
any, between the carrying amount of the assets distributed and the carrying
amount of the dividend payable in profit or loss.

Example: Non – Cash Asset Distributed To Shareholders

TCO
is an Ind-AS and a listed company. TCO has two divisions, hardware
manufacturing and software. TCO is professionally managed and has a widely
dispersed shareholding. There is no group of shareholders that controls TCO.
TCO’s accounting period ends at 31st march 2017. On 29th march 2017, the
shareholders of TCO approve a non-cash dividend in the form of demerger of the
hardware division. The hardware division will be hived off into a resultant
company (RCO). The shareholders of TCO shall become the shareholders of RCO in
the same proportion. The court approves the demerger scheme on 20th July 2017,
and the demerger is executed.

In
TCO’s separate financial statements at 29th march 2017 and 31st march
2017, the net assets of the hardware division, is carried
at INR 250. The fair value of the hardware division
at 29th march and 31st march 2017
is INR 350. The fair value increases to INR 400 when the non-cash asset is distributed
on 20th July 2017. For simplicity, it is
assumed that there is no change in the carrying amount of the net assets of the
hardware division from 29th march 2017 to 20th july 2017.

In
this example, for illustration purposes only, we have assumed that the court
order is a mere formality1 and hence the dividend liability is recognised on
approval of the demerger by the shareholders. On that basis, the dividend is a
liability in the books of TCO when the annual financial statements are prepared
as at 31st march 2017. At 31st march 2017 TCO would record a dividend liability
of INR 350 with a corresponding debit to its equity. In TCO’s separate
financial statements, the net assets in hardware division of INR 250 are
classified as held for distribution to owners. When the non-cash asset is
distributed on 20th July 2017, the fair value has increased by INR 50. At that
date, TCO shall record an additional dividend liability of INR 50 with a
corresponding debit to equity.

The
non-cash asset is distributed on 20th July 2017 at which point the fair value
of the division is INR 400. The difference between the carrying amount of the
net assets distributed (INR 250) and the liability (INR 400) which is INR 150,
is recognised as a gain in profit or loss of TCO.

———————————————————————————————-

1 Under the Indian Jurisdiction, the court
order would generally be treated as substantive and determine the acquisition
date.

The
above example included the following assumptions:

1. TCO is an Ind-AS and a listed company. TCO
needs to provide an auditor’s certificate of compliance with Ind AS, in order
for the court to approve the demerger scheme. Effectively, this means that TCO needs to comply with
Ind-AS standards. RCO is the resulting
company.

2. TCO and RCO are not controlled by the same
party or parties before and after the demerger.

TCO
needs to address the following challenges from an income-tax angle
arising from the above demerger scheme:

1. TCO is a listed company and hence should
comply with the accounting standards in a court scheme, as per SEBI
requirements. If TCO was a non-listed entity, to which Ind AS was applicable,
SEBI requirements for providing an
auditor’s certificate with respect to Ind AS compliance would not apply.
Therefore, if TCO is a non-listed entity, there is a possibility, not to comply
with Ind AS to account for the demerger. However, additional consequence may
have to be examined, such as, the registrar of Companies, enforcing compliance
with Ind AS or auditors providing a matter of emphasis in the audit report.

2.
Under Ind AS the transfer of the non-cash asset is recorded at
fair value and
the resultant gain/loss is taken to the P&l. Would this be considered as a revaluation and
hence not meet the condition of section 2(19AA)? one
view is that TCO records a gain/loss on distribution of the assets,
which is not the same as revaluation of assets in the books of TCO. Therefore
with respect to this matter it may be argued that section 2(19AA) is not
violated.

3. On the other hand, if it is concluded that
the scheme is not in compliance with section 2(19AA), there could be an issue
of dividend distribution tax (DDT) on the distribution of non-cash assets.
arguments against this possibility would
be (a) Companies act 2013, prohibits any dividend distribution in kind – hence
the demerger cannot be treated as dividend for income- tax purposes also (b)
the legal form of the transaction as a ‘demerger’ cannot be disregarded.

4. Fair valuation is at the core of Ind AS. TCO
may have used the fair value option to determine the deemed cost at the
transition date to Ind AS for certain assets such as PPE or investments.
Alternatively, TCO may have used fair value option as a regular basis of
accounting for certain assets, where such a basis is allowed/ required. Fair
valuation may have resulted in an upwards or downwards adjustment. When TCO has
used such fair valuation under Ind AS, compliance with the condition u/s. 2(19AA)
to consummate the demerger transaction at book value will become challenging.

5. In our example, TCO records a profit of INR
150 on the distribution of non-cash assets. Whilst this would not be taxable
from a normal income tax computation perspective, if TCO is under mat, this credit would be counted
for the purposes of determining the profits for MAT purposes.

From
the perspective of RCO, the following aspects need to be considered:

1. Under Ind AS, from an RCO perspective, this
would be treated as a business restructuring transaction. RCO will have to
account for the assets and liabilities at book value, because under Ind AS, a
change in the geography of assets, arising from the restructuring, does not on
its own result in accounting for the exchange at fair value. The difference
between the fair value of shares issued by RCO to the shareholders and the book
value of assets and liabilities received from TCO will be debited to equity.
Assuming the fair value of shares issued by RCO to the shareholders is INR 445;
the amount to be debited to equity would be INR 195 (INR 445 – INR 250).

2. In other words, RCO will not be able to
create a goodwill for INR 195, and hence will not be able to derive any tax
benefits from goodwill.

Conclusion

It does
not appear fair
that Ind AS
should result in an unintended consequence for TCO with
respect to demerger schemes under
the income-tax act.
At the same time, it is not appropriate to try and meddle with Ind AS
and create more differences between IASB IFRS and Ind AS. The finance ministry and the Income-tax authorities
should move into swift action to resolve these issues by making suitable
changes in the income-tax act. If this is not done, the restructuring of
businesses will be hampered. Consequently, all this will have a negative impact
on the indian economy in the long run.

shailesh.kwebmaker

Accounting and ‘Brexit’ the World’s Most Complex Divorce

Introduction

The
UK voters’ decision to exit the EU came
as a surprise to many observers, as well as the markets, and the vote has
triggered political, economic and financial uncertainty which is likely to
impact Indian entities having operations in the UK . There has been an
immediate impact on the financial markets, both in the UK and across the world, with the pound
significantly weakening against other currencies and share prices fluctuating
as the market reacts to the decision. The decision is expected to risk upto
75,000 jobs in EUROpe and a loss upto 10 billion pounds in tax revenue as per a
recent article in the financial express.

From
the time of announcement of Brexit till current date, the exchange rates in relation
to the pound have been volatile as given below:

– The pound to EURO rate has moved from
1.31099 in June 2016 to 1.10846 in October 2016.

– The pound to dollar rate has moved from
1.46079 in June 2016 to 1.22144 in October 2016.

– The pound to INR rate has moved from 98.07
in June 2016 to 81.40 in October 2016.

In
fact, the pound to EURO rate post June 2016 has never touched such lower levels
in the past two and half years. Further,
the Bank of England has cut the interest rate to a historic low of 0.25%
post the Brexit announcement.

In
view of this volatility, let us see the possible impact on some of the key
captions in the financial statements from an Ind-AS perspective for Indian
entities having operations in the UK :

Foreign Currency Transactions

Ind-AS
21, the effects of Changes in
foreign exchange rates allows, for
practical reasons, entities to use an appropriately average exchange rate for a
reporting period if it approximates the actual rate. In case of entities who
have operations in the UK which use a
weighted average rate, a sudden and significant change in foreign currency
exchange rates, may
affect the way
the average is calculated.

As
per Ind-AS 21, foreign currency monetary items shall be translated using the
closing exchange rate i.e assets and liabilities to be received or paid in a
fixed or determinable number of units of currency. e.g., entities in India will
have to restate their debtors, creditors, borrowings etc. held in GBP and this
could have volatility in the profit and loss account due to the exchange rate
movement.

Ind-AS
21 defines the concept of functional currency as the currency of the primary
economic environment in which the entity operates. An entity would record all
transactions in its books of accounts in the functional currency. Some factors
which determine the functional currency of an entity include:

Currency
in which sales prices for its goods and services are denominated and settled;
and

Currency
of the country whose competitive forces and regulations mainly determine the
sale prices of its goods and services.

For
Indian entities, with functional currency as INR, the same is not expected to
change. however, if such an entity has a
subsidiary in the UK , it may have to monitor and reassess the UK subsidiary functional currency in light of
the BreXit. this
is because, going
forward, entities may adjust their trading relationships with entities
in the EU and the rest of the world, as
a result of trade negotiation and trade agreements between the UK and other
countries. In these circumstances, entities
need to monitor the primary economic environment in which they operated,
and assess if there is a change in the functional currency.

Investment in Subsidiaries, Associates and Joint Ventures

Entities
in India may have investments in subsidiaries, associates and joint ventures in
the UK. Under Ind-AS, these investments will be carried at cost or at fair
value as per Ind-AS 109.
The volatility in
exchange rates and interest rates
could have a possible impact on the separate financial statements of the Indian
entity from an impairment perspective. e.g., the entity may have to re-build
the underlying cash flow projections for the UK
business considering any change expected in the business outcomes due to
the Brexit. These cash flow projections will have to be further adjusted for
the exchange rate/ discount rate assumptions. Accordingly, this may trigger an
impairment provision in the separate financial statements of the Indian entity.

In
case of consolidated financial statements, the impact of the translation from
the functional currency of the UK
subsidiary (e.g. GBP) to the reporting currency of the parent Indian
entity (e.g. INR) is recognised in other comprehensive income and accumulated
as a separate component of the equity. This is reclassified from equity to the
profit and loss on disposal of the subsidiary investment. As per the standard,
a write-down of the carrying amount either because of losses / impairment does
not trigger any reclass from equity. However,
there could be a possible impairment to the goodwill on consolidation of
the subsidiary/net investment in the associate or the joint venture in the
consolidated financial statements of the Indian entity.

Impairment of assets with indefinite/ finite useful life

Entities
are expected to have at least a high-level overview on what the effects of
Brexit might be on the key financial assumptions used
to determine recoverable
amounts and other potential consequences for the entity. Cash flow
projections used in impairment assessment should be adjusted for changes in
possible business outcomes due to Brexit. Further, discount rates used should also be reassessed
to reflect the current market assessment of the time value of money considering
the change in the interest rates. Accordingly, recoverable amounts may undergo
a change, resulting in impairment provisions in certain cases.

Similarly,
property, plant and equipment and intangible assets with a finite useful life are
tested for impairment when factors are
present that indicate
the recorded value of a
non-current asset (or asset group) may not be recoverable. This may require
appropriate re-assessment.

Defined benefit plans

Market
volatility could have implications for the measurement of the pension asset or
liability under defined benefit schemes. For example, decline in equity markets
and potential changes
in interest rates
as explained above could have a
significant effect on the fair value of plan assets and the funded status of
plans, as well as the defined benefit obligation. This would have an impact
especially in case of Indian entities having subsidiaries / plan assets for its
branches located in the UK.

Entities/Groups
operating cross border pension schemes within the EU will also need to closely
watch the changes, if any, that could make such schemes no longer operational
e.g., an entity may have UK -based cross-border pension schemes for employees
across the EU may find that those schemes can no longer operate in EU member
states. Conversely, it may be that a cross-border pension scheme that is based
in an EU member state can no longer be used for UK employees. The replacement or relocation of
these pension arrangements will then become necessary and may bring about
change in the pension liabilities recorded.

Income Taxes

Determining
whether deferred tax assets qualify for recognition under Ind-AS12 income taxes
often requires an extensive analysis of the positive and negative evidence for
the realisation of the related deductible temporary differences and an
assessment of the likelihood of sufficient future taxable
income. Volatile economic
conditions add complexity to this analysis and may be a source of
negative evidence.

Provisions

Ind-AS37
Provisions, Contingent liabilities and Contingent assets requires the discount
rate that is used to calculate the present value of expected expenditures to
reflect current market assessments of the time value of money and risks
specific to the liability. Changes in interest rates and other economic
indicators following the outcome of the referendum may well affect the
estimates of future cash flows inherent in the provision. Accordingly,
provisions may be required to be restated.

Due
to stability in exchange rates in the past, entities in the UK may have entered into long term purchase and
sales contracts which may now become onerous due to the significant fall in the
exchange rates. Consequently, losses on such contracts will be required to be
provided for.

Business Combination

Para
45 – 49 of Ind-AS103 deals with the concept of measurement period which states
that, post the acquisition date, if there is any change in the fair value of
assets and liabilities, the
same can be adjusted
back to the purchase price allocation on the
acquisition date only if the adjustment / change takes place during the
measurement period. However, the measurement period shall not exceed one year
from the acquisition date. In case of business combinations which have taken
place in the pre-vote period and where measurement period is over, any further
change in the fair value of assets and liabilities may have an impact in the
profit or loss in the period of change.

Financial Reporting Considerations

As
per Ind-AS1 (para 125) – ‘an entity should disclose information about
the assumptions it makes
about the future, and other major sources of estimation uncertainty at
the end of the reporting period, that have a significant risk of resulting in a
material adjustment to the carrying amounts of assets and liabilities within
the next financial year.’

Entities
should consider whether
the potential effects of Brexit materially change their
previously disclosed judgements and sources of estimation uncertainty, or
whether an entity is exposed to any new factors resulting from the vote. These
disclosures should be tailored to an entity’s facts and circumstances,
including a discussion of the entity’s affected operations and the specific
effects on its operations, liquidity and financial condition.

E.g.,
Changes in the sensitivity of reasonably possible outcomes related to goodwill
impairment assumptions.

Ensuring
valuation methodologies are adequately explained due to market volatility, key
assumptions are disclosed and appropriate consideration is given to the use of
sensitivity analysis e.g. impact due to change in exchange rate by 1%, change
in interest rate by 1% etc.

Reassessment
of going concern assumption for entities exporting significantly to the UK or UK
entities with a high level of import from the EU who do not have
adequate risk management processes in place.

Entities
in India will need to consider some of the above accounting and
financial reporting implications
of this exit and monitor and
assess how subsequent events / government decisions in the UK and the EU may possibly bring a change to
their own operations and/or investment strategies.

shailesh.kwebmaker

Capital Subsidies and Accounting

It is well settled for the last
many years, that the question as to whether subsidies are income receipts or
capital receipts depends upon whether they are intended to supplement
the trade receipts or received otherwise {see Seaham harbour dock Co.
Crook 16 tC 333 (hl) and CIT vs. Poona Electric Supply 14 ITR 622 (Bom).} it
would depend upon the nature and content of the subsidy, the scheme, its
objective and the purpose for which subsidy is given. In other words, the ‘purpose’
test is decisive and not the mode or manner or time or source of payment.

In Sadichha Chitra vs. CIT 189 ITR
774, the Bombay high Court referred to the decision in CIT vs. Ruby Rubber
Works 178 ITR 181 and held that nature of the subsidy depends on the purpose
for which it is granted. In that case, the subsidy was in the form of refund of
entertainment tax already collected
as income. It agreed
with the opinion of the M.P. high
Court in CIT vs. Dusad Industrial 162 ITR 784.

Following observations by the
Bombay high Court are apposite. “In a given case, subsidy may be granted with
the object of supplementing trade receipts and profits of the recipient.
In another case, the scheme of subsidy may have been formulated by the
authority concerned to assist the assessee in acquiring a capital asset or for
the growth of the industry generally in public interest without any objective
of supplementing trade receipts or recoupment of revenue expenses. Whether the
receipt of subsidy amount is a capital receipt or revenue receipt would depend
upon the nature and content of the subsidy the scheme, its objective and the
purpose for which subsidy is given.”

In CIT vs. Chaphalkar Brot. 351 ITR
309, the Bombay high Court held that subsidy granted to encourage setting up of
multiplexes (a capital asset) was a capital receipt.

The following observations of the
Supreme Court in Ponni Sugars case 306 ITR 392 at page 401 are extremely
relevant.

“The judgement of the house of
lords shows that the source of payment or the form in which the subsidy
is paid, or the mechanism through which it is paid is immaterial and
that what is relevant is the purpose for payment of assistance. Ordinarily,
such payments would have been on revenue account, but since the purpose of the
payment was to curtail obliterate unemployment and since the purpose was dock
extension, the house of lords held that payment was of capital nature.

In the above case 306 ITR 392,
the Supreme Court reviewed the entire case law on the subject and reiterated
that the character of the receipt of the subsidy under a scheme has to be
determined with respect to the purpose for which the subsidy is granted. In
other words, one has to apply the purpose test. The point of time at which the
subsidy is paid is not relevant. The source is not material. If the object of
the subsidy is to enable the assessee to run the business more profitably, then
the receipt is on revenue account. On the other hand, if the object of the
assistance under the subsidy scheme is to enable the assessee to set up a new
unit or to expand an existing unit, the receipt of subsidy would be on capital
account. See also CIT vs. Reliance Industries Ltd. 339 ITR 632 (Bom.)

Same view was taken by CBDT in
its Circular no.142 dated 1st august,
1974 in respect of 10% Central outright Grant Subsidy Scheme. In the said
circular, it is stated that since the scheme is framed by the Govt. for the
growth of industries and not for supplementing the trade profits, it is a
capital receipt.

The following parapraphs from
different chapters of a report on industrial dispersal by Planning Commission
in the year 1980 for a similar Central Government subsidy introduced in the
fourth five year plan for backward areas, where the
quantum of subsidy was linked to capital investment is relevant and confirm
that such Government subsidies are not for acquiring fixed assets but for
locating projects in backward areas and level of capital investment is merely
used for calculating the quantum of subsidy.

Para 3.15 and 3.16 of the Report
……………..

“3.15 The approach to industrial
dispersal followed in the first three plans had some effect, but the results
achieved were not considered
satisfactory. Thus the
fourth Plan states:

“In terms of regional development, there has
been a natural tendency for new enterprises and investments to gravitate
towards the already overcrowded metropolitan areas because they are better
endowed with economic and social infrastructure. Not enough has been done to
restrain this process. While a certain measure of dispersal has been achieved,
a much larger-effort is necessary to bring about greater dispersal of
industrial activity.

(fourth five year Plan, page 11,
para 1.23)”

3.16 In its approach to industrial
development, the fourth Plan lays great stress on the need for industrial
dispersal:

“The requirement of non-farm
employment is so large and so widely spread throughout the country that a
greater dispersal of industrial development is a matter of necessity. Even from
the narrow and immediate economic view point, the society stands to gain by
dispersed development.

The cost of providing necessary
infrastructure for further expansion of existing large urban and industrial
centres is often much larger than what it might be if development was
purposefully directed to occur in smaller towns and rural areas.”

Thus, it is certain that the primary condition for
this Government subsidy is not acquisition
of fixed assets and hence, this is not a grant related
to assets in terms of Ind AS 20.

Since, as mentioned above, the
Grant is not supposed to compensate any particular cost of any particular asset
and is a capital receipt which when invested in business generates income to
compensate for higher costs of operations in backward region, in accordance
with Ind AS 10, no amount of Government Grant can be taken to profit and loss
account of any year.

In the following paragraph, the Ind
AS 20 seems to suggest that Government Grant results in a benefit for an entity
when compared to other entries which do not get the grant while the fact for
this Grant is exactly the opposite. The Government Grant, in this case, is
given to compensate for the benefits which other entities enjoy by virtue of
operating in developed regions.

“5. the receipt of government assistance by an entity
may be significant for the preparation of the financial statement for two
reasons. Firstly, if resources have been
transferred, an appropriate method of accounting for the transfer must be
found. Secondly, it is desirable to give an indication of the extent to which
the entity has benefited from such assistance during the reporting period. This
facilitates comparison of an entity’s financial statements with those of prior
periods and with those of other entities.”

Guidance note under Indian GAAP
states that it is generally considered appropriate that accounting for Govt.
grants should be based on the nature of the relevant grant. Grants which have
the characteristics similar to those of promoters’ contribution should be
treated as part of shareholders’ funds. Income approach may be more appropriate
in cases of other grants. (as.12-Para 5-4).

This paragraph which supports the
view that when subsidy granted is for capital purposes, it should be treated as
shareholder funds i.e. part of reserves. But this para is not there in ind. AS/IFRS. Para 12 of Ind AS-20”. (Accounting for Government grants and
disclosures of Govt. assistance) clearly states that. “Govt. grants shall be
recognized in profit and loss a/c. on a systematic basis over the periods in
which the entity recognises as expenses the related costs for which the grants
are intended to compensate. (Emphasis Supplied). Thus matching
concept/principle is adopted and it can apply to grants of a revenue nature
which seek to compensate revenue expenses incurred over a period.

Ind AS-20, however suddenly takes
a U-turn. Definition of Govt. grant says that grants related to assets are
Govt. grants whose primary condition is that an entity qualifying
for them should purchase, construct or otherwise acquire long term assets.
Subsidiary conditions may be attached restricting the type or location of the
asset. This makes it amply clear that the definition is merely talking of
qualifying or eligibility condition. It is significant to note that it uses the
expression ‘primary or subsidiary conditions for eligibility’ and not primary
purpose of giving the grant. then it
talks of transfer of
resources, but recognises
in para 4 that
Govt. grants take many forms varying both in the nature of the assistance and
in the conditions attached to it. (Emphasis supplied).

Then after citing capital
approach and income approach in para 14 and 15, para 19 states that “Grants are
sometimes received as part of a package of financial or fiscal aids to which
number of conditions may be attached. In such cases, care is needed in
identifying conditions giving rise to costs and expenses which determine
period over which, the grant will be earned. It may be appropriate to
allocate a part of a grant on one basis and part on another? (emphasis
supplied).

There can be no dispute that
revenue grants given to compensate for costs and expenses (such as employee
expenses, interest, waiver of taxes) can be treated as on revenue account.

However, it appears that para 20
takes a complete u-turn from the established principles and says that “a Govt.
grant that becomes receivable as compensation for expenses or losses already incurred or for
the purpose and giving immediate financial
support with no further related costs (?) (without defining or
specifying the purpose or nature of the financial support) shall be recognised
in profit and loss of the period in which it becomes receivable. the expression
‘giving immediate financial support’ is too vague and cannot be read in
derogation to the basic principles laid down by the Supreme Court and old
accounting standards and CBDT‘s own view held earlier. It will be against the
principles of commercial accounting adopted by the accounting community so far.

Para 21, surprisingly still
recognises this doctrine of making distinction between grants awarded for the
purpose of giving immediate financial support rather than as an incentive to
undertake specific expenditure. Para 22 again speaks of expenses or
losses.

By para 34 read with appendix –
i, confusion is worst confounded. it talks of “grants related to costs” being
deferred income and appendix –a which really deals with Govt. assistance which
are not to be related to specific operating activity, quietly takes them into
account as ‘transfer of resources’ to start or continue to run their business
in underdeveloped area.

It is respectfully submitted that
there is an urgent need to clarify this confusion and make it clear whether the
accounting standards advocate or support the view of treating all subsidies as
revenue receipts to be treated as income–immediate or deferred in derogation
with established principles laid down by the S.C. or reason for departure, if
any, which means that the distinction between capital receipts and revenue
receipts are no longer relevant in accounting. Also whether article 265 of the
constitution of india is no longer relevant or valid. it may be noted that
income computation and disclosure standards, which have to be now mandatorily
followed u/s.145 also make an exception in the preamble to the effect that if
the legal position is different from that adopted in the ICDS, legal position
is to be followed. Some view is taken in Accounting Standards for SMC notified
on 7^th December 2006 by ministry of Corporate affairs. Para 4.1.1 of
the preface to the accounting Standards issued by ICAI States as under:

“However, if a particular
accounting standard is found to be not in accordance with law, the provision of
the said law will prevail and the financial statements should be prepared in
conformity with such law.

Para 4.2 says

“The accounting Standards
by their very nature cannot and do not override the local regulation
which govern the preparation and presentation of financial statements in the
country.

Before parting with the subject,
it is necessary to deal with one important aspect. The finance act, 2015 has inserted sub cl.(xviii) in
s.2(24) defining ‘income’ inclusive–wise to include within its sweep
‘assistance in the form of a subsidy or grant. But it also excludes those
subsidies and grants which are deducted while calculating actual cost under
explanation10 to section 43(1), thus indirectly recognising the distinction
between capital subsidy and income subsidy. But it may be argued that this is
the later law and hence, even otherwise, there is no conflict between AS 20 and
legal provision.

But the words “assistance”
clearly supports the reasoning of the Supreme Court cited above. The word
‘assistance’ means the provision of money, resources or information to help
someone. Thus the word ‘assistance’ seems to have been used in the sense of
supplement (the trade receipts). At least, it is capable of being interpreted
so. if two interpretations are possible, the courts have always adopted that
interpretation which is in favour of the taxpayer and which will uphold the
constitutional validity of the taxing provision (see 131 ITR 597 S.C).

If the amendment in section
(24(xviii) is taken to mean that it includes each and every kind of subsidy –
whether capital or revenue – it will be clearly violative of the constitution –
both article 265 and entry 82 and 86 – leave alone the Supreme Court decisions.
Thus, the provision will have to be read down to cover only income subsidies.
object of Govt. assistance can never be to take away something given by the
Govt. by one hand and taken away by the other hand.

Thus, both in equity and law, capital subsidies can
in no sense and no manner be treated as income liable to tax. Equity and law or
accounting may be strangers, but they need not be sworn enemies!

shailesh.kwebmaker

Power of Attorney holder – Authorised for signing various documents – Suit filed by Power of Attorney holder – Power of Attorney holder deposing in court on his personal knowledge of each and every detail of transaction – Evidence of Power of Attorney holder of Plaintiff readiness and willingness admissible [Code of Civil Procedure, 1908, Order VI Rule 14, Order XLI Rule 27].

Santosh
Vaidya vs. Namdeo Budde and Ors AIR 2016 (NOC) 584 (BOM.)

Respondents-plaintiffs,
through their power of attorney holder by name Dhairyasheel, instituted Special
Civil Suit for specific performance of contract against the Appellant defendant
no. 1 and defendant no. 2.

The
case was that defendant no. 1 was the owner of field HR at Mouza
Hudkeshwar and he entered into an agreement in favour of the Plaintiff and
defendant no. 2 for the sale thereof. It
was also agreed that defendant no. 1 will execute the sale-deed within 1 1/2
years from the date of the agreement and remaining consideration would be paid
accordingly. It was further agreed that in case there was any legal impediment
in getting the sale- deed registered, further time of 1 1/2 years would be
extended. The defendant no. 1 having not complied with the obtaining of
permissions and no objections from the authorities, was not entitled to cancel
the agreement nor could he do so since the agreement itself provided for
extension by another 1 1/2 year. Plaintiffs and defendant no. 2 again informed
defendant no. 1 that they were ready and willing to get the sale-deed
registered and then defendant no. 1 also realised his mistake of not obtaining
the necessary documents of no objections etc. and agreed to make compliance.
however, defendant no. 1 still did not produce no objections from the competent
authority and therefore, Plaintiff had no alternative but to file suit for
specific performance of contract thereafter.

It
was held by the high Court that rule 14 of the Code of Civil Procedure
categorically shows that a person authorised is entitled to file and prosecute
the suit till its disposal. In the light of the above provision, it is not
possible to accept the submissions about the incompetence of the power of attorney
holder to file the suit.

The
counsel for the appellant then argued that the power of attorney holder had no
personal knowledge about the execution of agreement and, therefore, his
evidence is worthless and should not have been relied upon by the appellate
judge.

On perusal of the evidence of two witnesses of
the defen dant namely; appellant nos. 1 and 2, does not even show a semblance
of evidence that there was no readiness and willingness on the part of the
Plaintiff and defendant no. 2. It was clear from the entire record that the
power of attorney holder had full personal knowledge about the entire
transaction and that Plaintiff and defendant no. 2 were ready and willing to
perform their part of contract. In the wake of the above factual position in
this case, the power of attorney holder could validly depose about the
readiness and willingness. Accordingly, the appeal was dismissed.

shailesh.kwebmaker

Protected Tenant’s right to property – Landholder cannot sell the land without first offering the same to the ‘Protected Tenant’ – Land can be sold only if the ‘Protected Tenant’ does not exercise his right to purchase the said land. [Hyderabad Tenancy and Agricultural Lands Act (21 of 1950), Sections 40, 32; Andhra Pradesh (Telangana Area) Tenancy and Agricultural Lands Act, 1950 – Section 40]

B.
Bal Reddy vs. Teegala Narayana Reddy and Ors.. AIR 2016 SUPREME COURT 3810

One
teegala Shivaiah was a Protected tenant in respect of agricultural lands. The
respondents were the heirs and successors of said teegala Shivaiah who died
sometime in the year 1964. The land holders who were recorded as owners of the
said land sold the said land to various buyers who in turn further effected
sales.

Respondents, after
obtaining succession certificates from Dy. Collector and Mandal
Revenue Officer, filed an application u/s. 32 of the act for restoration of possession
of the said land. The deputy Collector mandal revenue Officer directed
restoration of the physical possession the Respondents. The succession
certificate as well as the order of restoration was set aside by the joint Collector. The high Court reversed the order
of the joint Collector on the point of
restoration of possession.

The
Supreme Court held that section 38-d of the act prescribes the procedure to be
followed when the land holder intends to sell the land held by a Protected
tenant. Accordingly, the land must first be offered by issuing a notice in
writing to the Protected tenant and it is only when the Protected tenant does
not exercise the right of purchase in accordance with the procedure, that the
land holder can sell such land to any other person. The court further held, it
is well settled that the interest of a Protected tenant continues to be
operative and subsisting so long as ‘protected tenancy’ is not validly
terminated. Even if such Protected tenant
has lost possession of the land in question, that by itself does not
terminate the ‘protected tenancy’.

Hence,
the appeals were dismissed.

shailesh.kwebmaker

Insurance claim– Cannot be denied on the ground that no premium had been paid – Notice to insured before the policy lapses, must be issued. [Insurance Act (4 of 1938)]

Jammu
and Kashmir Bank Ltd., Jammu vs. Tania Jamwal and Others. AIR 2016 JAMMU AND
KASHMIR 114

The
Claimants-respondents had an insurance
policy named, “jeevan Saral Policy”. As
per the arrangement/ authorisation of the deceased policy holder, the premium
amount was to be debited by the insurance company from the account of the
deceased policy holder through electronic clearing system, provided there were
sufficient funds in the bank account, which was being maintained by j & K
Bank ltd. This was an inter-se
arrangement between the Policy holder’s bank and the insurance company.

The
deceased policy holder passed away and the claimants claimed the amount of
insurance policy. the insurance company
rejected the claim on the ground that the policy had already lapsed due
to non-payment of premium.

The
high Court held that if for any reason the amount in question could not be
debited in time, it was the sole duty of the insurance company to appraise the
deceased policy holder. But in the present case, the insurance company did not
bring it to the notice of the deceased policy holder, moreover, the bank, while
rejecting the requisition of the insurance
company mentioned “miscellaneous” in its
reasons memo as a result of which the insurance company suffered a confusion.
if there was any procedural lapse/ wrong, the same was between the insurance
company and the bank
for which the
policy holder cannot
be held responsible.

shailesh.kwebmaker

TS-489-AAR-2016 MERO Asia Pacific Pte Ltd Date of Order: 17th August, 2016

On Facts, a single contract for offshore supply and onshore
services was to be treated as composite and indivisible contract – if goods
were delivered in India with the seller bearing the risk, insurance and customs
duty till the point of completion of project work in India, supply was
to be regarded
as completed in India.

Facts

The
taxpayer was a resident of Singapore and was engaged in
the business of
executing contracts in relation to structural glazing and wall
cladding works. The Taxpayer had set up project offices (PO) in India for the
purpose of executing the work subcontracted to it by one of the Indian
contractor.

In
terms of sub-contract, taxpayer was required to design the curtain wall and
façade, supply materials and carry out installation and other works in India.
Taxpayer was also responsible for delivering goods at construction site in India.

The
taxpayer contended that the supply of goods outside India was to be considered
as a separate contract from the installation work contract. Further as title to
the goods passed outside India and the payment for offshore supply was also
received outside India, income from offshore supply of goods did not accrue or
arise in India. Even if the PO created a business connection or Permanent
establishment (PE) in India, income from offshore supply was not directly or
indirectly attributable to the PO in India. Hence, such income was not taxable
in India.

The
issues before the AAR were: (i) whether the amount received by the taxpayer for
offshore supply of goods was taxable in India; and (ii) if yes, what was the
extent of profit that could be attributed to the business connection and/or PE
in India.

AAR Ruling

Held 1: on the issue of whether contract was divisible

a.
A single contract was entered into by the taxpayer for all the activities of
designing, supply and installation work. the
contract did not provide any bifurcation between supply
of goods and
erection/installation in the contract
either in the
context of taxpayer’s work and responsibilities or with
respect to the payment schedule.

b. Further, payment schedule of the contract
was linked to different milestones of the work, viz., designing, drawing,
supply and commissioning
of the entire work. Major milestones were not linked
to supply/sale of plant and materials.

c.
Merely picking up one portion of contract, selectively to show that it
represents independent scope of work is incorrect. Hence, in the present
situation, division is imaginary and artificial.

d.
Even though the invoices
showed that sale
of materials was in Singapore, taxpayer was responsible for delivering
and steering materials at site and was responsible for the risk and insurance
until completion of the project in India. The customs duty for clearance of
goods at Indian port was also paid by the taxpayer. All these factors indicate
that the offshore supply was completed in India and not in Singapore.

e.
The Sale of Goods act makes it clear that property in goods passes when the
parties intend it to pass. in the present case, having regard to the conduct of
the parties as narrated above, the
intention of the parties was that the property in goods was to pass only when
the installation and erection of entire works was completed in India.

Held 2: On role of PO in offshore supply of Goods and profit
attribution

a.
PO had come into existence much before the design of material and offshore
supply. PO had its own designing team and was working on the contract much
before supply of goods and material started.

b.
PO was also actively involved in designing, selecting and procuring supplies. The
PO cleared the goods from customs in India and
paid customs duty.
In these circumstances, taxpayer’s contention that the PO had no role in
supply of goods and materials or that no profit was attributable to the PO in India
was incorrect.

Held 3: Attribution of profits

Since the contract was a composite
one, entire amount was taxable in India.

shailesh.kwebmaker

TS-545-ITAT-2016(Del) International Management Group (UK) Ltd. vs. ACIT (IT) A.Y.: 2010-11, Date of Order: 4th October, 2016

Article 13 of the india-uK DTAA, S. 9(1)(vii) of the act – (i) profits
to the extent of the activities carried on through Service PE should be taxable
as business profits under the DTAA; (ii) additional income satisfying make
available condition which is not attributable to PE in india should be taxed as
FTS under the DTAA; (iii) Source rule exclusion applicable to FTS under the act
does not apply as services are utilised for business or earning income from a
source in india

Facts

Taxpayer, a UK tax
resident, was engaged
in the business of event
management and talent representation activities in sports events. The taxpayer
entered into a memorandum of understanding (mou) with Board of Control for
Cricket in india (indian entity) for assistance in establishment,
commercialisation and operation of indian Premier league (‘event’). The services under the MoU, inter
alia, included advising and assisting indian entity in connection with the following aspects.

Structure of the league.

League rules and regulations.

Franchisee agreements.

Legal implementation budget.

Media rights agreements.

Trading and auction of the
players.

Hospitality guidelines in
relation to the league.

Provision of legal handbooks.

On the basis of the mou, a
service agreement was entered into between taxpayer and the indian entity for
holding the cricket event in india. For this purpose, the taxpayer had deputed
its employees and other third party freelancers for undertaking on-ground
implementation, event management and supervision activities in india. However,
due to some reasons, the venue for the event was shifted from india to South
africa and the remaining services were rendered outside india. During the year under
consideration, the length of stay of taxpayer’s employees and freelancers
exceeded 90 days in india. Accordingly,
Service Permanent establishment (Pe)
of the taxpayer was established in india.

The taxpayer contended that:

–
Amount attributable to the services rendered in South africa were not
taxable in india as they were not attributable to PE in india;

–
Once income was attributable to Service Pe, it cannot be taxed under
fee for technical Services (FTS) as both
are mutually exclusive;

–
Even if FTS article is applied, the services do not make available any
technical knowledge or skill, etc.; and

– Income attributable to such
services is not taxable in india under the DTAA.

Taxpayer argued that even u/s.
9(1)(vii) of the act, the amount was protected by source rule exclusion as the
services were utilised by indian entity for the business outside india.

However, the ao Held that even
the amount received by the taxpayer,
which was not attributable to the service Pe, was also taxable in india
as FTS under the act, as well as under the DTAA.

Upon filing of objections against
order of AO, the Dispute resolution Panel (DRP) directed that the balance
consideration be taxed as FTS on a protective basis and regarded as business
income to be attributed to the PE on substantive basis. Aggrieved, the
taxpayer, as well as the AO, preferred an appeal before ITAT.

Held 1: Attribution to PE

– As per article 7, income which
is attributable to a PE is taxable in the state in which PE is situated. Further, as per FTS article, income which is
effectively connected with a PE is taxable as business income and FTS article
ceases to apply.

– For income from services which
are in the nature of FTS, to be regarded as “effectively connected” with the
Pe, one of the following conditions should be established:

i. PE should be engaged in the performance of
such services or it should be involved in actual rendering of such services, or

ii. PE should arise as a result of its own
activities, or

iii. PE should,
at least, facilitate, assist or aid in the performance of such services,
irrespective of the other activities that the PE performs.

– Also, the
term “effectively connected”
should not be understood to mean
the opposite of “legally connected” but something in the sense of “really
connected”. Therefore, the activities
mentioned in the contract should be connected to the PE not only in the form
but also in substance.

– In the contract under
consideration, activities carried by the taxpayer outside india were not
concerned with the functioning of the PE but were carried out by the head
office of the Taxpayer itself. Thus the activities carried on outside india
cannot be treated as being effectively connected with the PE in india and hence
will be taxable as FTS under the DTAA.

–
The contention of the taxpayer
that the contract with indian
entity itself was
effectively connected with the PE in india and hence, the whole of
the revenue involved in the contract should be considered as effectively
connected is incorrect.

Held 2: Make available condition

– Technology is considered “made
available” only when the service recipient is enabled to absorb and apply the
technology contained therein. In order
to satisfy the make available test, the technical knowledge, experience, skill
etc. must remain with the service recipient even after the rendering of the
services has come to an end and the service receiver is at liberty to use the
acquired technical knowledge, skill, know-how and processes in his own right.

–
In the present case, indian entity is enabled to absorb and apply the
information and advice provided by the taxpayer for conducting sporting events.
The documentation and material provided enables indian entity to use the
know-how and documentation independent of the services of the taxpayer in the
future. Furthermore, it may not be
appropriate to say that in the absence of the taxpayer, the indian entity, on
its own, cannot hold/organise the event.

–
Thus, the services provided by
the taxpayer to indian entity satisfy the ‘make available’ condition. Hence,
income from such services was taxable as FTS under the DTAA.

Held 3: source rule exclusion

– In this case, it was an
established fact that indian entity was carrying on business in india and not
outside india.

–
The source of income of the indian entity was in india, and not outside
india.

– The source of income of indian
entity could not be regarded as being outside india merely because performance
of the event was outside india. Thus,
the consideration for services outside india is taxable as FTS even
under the act.

shailesh.kwebmaker

The Payment of Bonus Act, 1965

Editor’s
note: According to the Payment of Bonus
Act, eligible employees are to be paid bonus within a period of 8 months from
the close of the financial year i.e. on or before 30th November. The purpose of
this article is to make readers aware of the basic provisions of this welfare
legislation.

Introduction

The
Payment of Bonus act, 1965 gives to the employees a statutory right to a share
in the profits of his employer. Prior to the enactment of the act some
employees used to get bonus, but that was so if their employers were pleased to
pay the same. The payment was voluntary, with no vested right in the employee.
With the passing of the act, employees covered by the act had a right to Bonus.

Object

The
object of the act is to maintain peace and harmony between labour and capital
(i.e. employees & employers), by allowing the employees to share the
prosperity of the establishment reflected by the profits earned by the
contributions made by capital, management and labour.

Applicability

The
act applies to

a) Every factory

b) Every other establishment employing 20
(twenty) or more persons.

A
state government can, however, apply the act to any establishment employing
less than 20 but not less than 10 persons.

c) The Government of Maharashtra by notification
dt:- 11th April 1984 has expanded the
scope by making the same applicable, where 10 or more persons are employed in
any establishment or factory.

Once
the act applies, it shall continuously remain in force, irrespective of number
of employees falling in number i.e. once covered always covered.

Applicability to Public Sector

A
Public sector establishment which sells any goods produced or manufactured by
it or renders any services in competition with the private sector and earns
income from such sale or services shall be covered by the act.

Eligibility

Every
employee who is drawing a salary or wages up to Rs.21,000/- per month and has
worked for a minimum period of 30 days in a particular year is entitled to get
Bonus. as per the above ceiling, all employees drawing wages up
to Rs.21,000/- per month
shall be eligible for Bonus irrespective of their
grade/designation i.e. manager/part-time/casual/seasonal employee etc.(w.e.f.
01/04/2014 by Gazette Notification Dated : 1st jan, 2016)

Sum with Reference to Which Bonus is Payable

For
the purpose of calculation of Bonus Salary or Wages includes Basic Salary,
dearness allowance / Special allowance only, but does not include other
allowances such as overtime, house rent allowance, Conveyance, travelling
allowance, monthly Bonus, Contribution to Provident fund, retrenchment compensation, Gratuity or
commission.

Amount of Bonus

An
employee who is drawing salary or wages not exceeding Rs.7,000/- per month, is
entitled to get bonus on entire salary/wages or minimum Wages, whichever is
higher.

An
employee who is drawing salary or wages between Rs.7,000/- per month and
Rs.21,000/- per month, the Bonus payable to him is to be calculated as, if his
salary or wages were Rs.7,000/- per month. An employee drawing a salary or wage
exceeding Rs.21, 000/- per month is not entitled to get Bonus as per payment of
Bonus act.

Minimum & Maximum Bonus (Limits)

The
quantum of bonus depends on allocable surplus, which is explained in the
following paragraph. An employer is bound to pay his employees every year a
minimum Bonus of @ 8.33% of the yearly salary or wage or Rs.100/- whichever is
higher, whether he has allocable surplus or not. if in any year the allocable
surplus exceeds the amount of minimum Bonus payable to the employees, the
maximum Bonus payable by the employer to his employee in that particular year
is @ 20% of the yearly salary or wages. Hence,
Bonus is payable
to the employee
between 8.33% & 20% as per availability of allocable surplus. An
employer is not required to pay bonus in excess of 20% even if bonus is linked
with production or productivity.

Available
surplus & allocable surplus

The
Bonus payable under the Act is linked with profits of the company. The employer
has to calculate “Gross Profit” of his establishment in the manner specified in
section 4. Then from Gross Profit so calculated, he has to deduct the sums
referred to in section 6 as prior charges. The balance amount is the “available
surplus”. A percentage of available surplus calculated in accordance with the
provisions of sub-section (4) of section 2 is described as “allocable surplus”.

Where
allocable surplus exceeds the amount of minimum Bonus payable
to the employee,
the employer must pay to every employee in respect of that
year Bonus in proportion to the salary or wages earned by the employee during
the year subject to a maximum of 20% of such salary or wage.

What is set on & Set Off Of Allocable Surplus

Set on :-

Where
for any year the allocable surplus exceeds the amount of maximum Bonus payable
to the employees, then the excess shall (subject to limit of 20% Bonus of total
salary/wages) be carried forward for being set on in the succeeding year and so
on to be utilised for the purpose of payment of Bonus.

Set off:-

Where
for any year there is no surplus or the surplus in respect of that year falls
short of the amount of minimum Bonus payable i.e. 8.33% to employees and there
is no amount or sufficient amount carried forward and Set On which can be
utilised for the purpose of minimum Bonus, then
such minimum amount
or the deficiency
as the case may be shall be
carried forward for being Set off in succeeding year and so on.

Deductions from bonus:-

Where
in any year the employer has paid any amount to an employee as customary/pooja
bonus, then he can deduct such amount from Bonus payable to the employee for
that year.

If
any employee is found guilty of misconduct causing financial loss to the
employer, the employer can deduct the amount of loss from the amount of Bonus
payable to the employee for the year in which he was found guilty of misconduct.

Time limit for payment of bonus:-

Bonus
must be paid within a period of 8 months from the close of accounting year as
per income-tax act i.e. April to March.

If
any dispute about the payment of Bonus is pending before any authority, then
Bonus must be paid within one month from the date of award by any such
authority.

Remedy for recovery of bonus:-

If
any employer fails to pay Bonus to the employee, he can make an application for
recovery of Bonus to the competent Authority. The authority may issue a
certificate to the collector to recover the same as arrears of land revenue
i.e. by way of attachment of Property and assets. However, the time limit for application to the
authority is one year from the date on which Bonus amount became due.

Productivity bonus :-

Bonus
paid on production or productivity or under a formula different from that under
the act can be allowed, but subject to the Provisions of the act in respect of
the payment of minimum or maximum Bonus. However, attendance bonus or any other
allowances are outside the purview of payment of Bonus act.

If an entity has a number of departments, under takings or
branches, should they be treated as separate establishments or as one composite
establishment?

If
an establishment consists of different departments or undertakings or has
branches, whether situated in the same place or in different places, unless a
separate balance-sheet and profit and loss account are prepared and maintained
by such or branches,
they should be same
establishment for the departments/undertakings treated as
parts of the purpose
of computation formula different
from that under
the act, i.e.
bonus linked with production or productivity; but subject to the
provisions of the act in respect of payment of minimum of bonus,
and once they
are treated as part
of the and maximum bonus. Same
establishment, they should continue to be treated as such.

Is bonus payable to contractors employees

Section
32 provides that the act shall not apply to certain classes of employees.
Clause (vi) of the said section refers to “employees employed through
contractors on building operation”. This clause has been deleted by the Payment
of Bonus amendment ordinance, 2007 with retrospective effect from 1st April 2006.
The said class of employees is therefore, entitled to get april 2006. bonus
with effect from 1st April 2006.

Excluded
categories :-

Following
establishments / entities are excluded from application of the Bonus Act:

L.I.C. of India

Reserve Bank of India

Unit Trust of India

Universities & other Educational
Institutions

Any other establishments permitted by
Government for a specified period and subject to specified conditions.

Newly
set-up establishment :-

A newly set-up establishment is
exempted from paying Bonus to its employees in the first 5 (Five) years, if it
does not make any profit. If however, employer derives profit in any of the
first five years, it loses the exemption under the Act and he has to pay Bonus
for that year. The provisions of Set-On & Set-Off are not applicable in
such cases.

Employee
disqualified from receiving Bonus :-

Employee is disqualified from receiving
Bonus if he is dismissed from the service for (A) Fraud (B) Riotous or Violent
behavior while on the premises of the establishment (C) Theft, misappropriation or sabotage of
any property of Establishment.

Agreement
or Settlement of Bonus:-

Employees can enter into an agreement
or a settlement with their employer for granting them bonus under a formula
different from that under the Act, i.e. bonus linked with production or
productivity; but subject to the provisions of the Act in respect of payment of
minimum and maximum bonus.

Attendance
Bonus:-

As attendance bonus which was being
paid by the establishment was outside the purview of the Payment of Bonus Act,
1965. Workmen / employees of the establishment can claim the bonus payable
under the act over and above the attendance bonus

Is
a Seasonal Worker entitled to get Bonus?

Section 8, relates to the eligibility
for Bonus. The only requirement of that section is that the employee should
have worked in an establishment for not less than thirty working days in an
accounting year. Therefore, if a seasonal worker has worked in an establishment
for more than thirty working days, he shall be entitled to get bonus.

Manner of payment of
Bonus in State of Maharashtra.

If
Bonus amount is more than Rs.3,000/- then it has to be paid by Account Payee
Cheque or by Bank transfer.

Records
to be Maintained:-

A register in “Form No. A” showing
Computation of Allocable Surplus.

A register in “Form No. B” showing
Set-On & Set-Off of the allocable surplus.

A register in “Form
No. C” showing details of the Bonus due to each of the employee & deductions under Section 17
& 18 and the amount actually disbursed.

Submission of annual Return:-

Purpose

When to Submit

Form/ Return

By Whom

To Whom

Relevant Section / Rule

Submission of
Annual Return

Within 30 days
after the expiry of time limit specified under the act

Form – D

Every employer

Labour Officer of
the concerned area

Section 26 read
with rules 5.

Offences
/ Punishments:-

If any persons contravenes the
provision of the Act or any rule made there under or fails to comply with any
directions given to him he would be punished with imprisonment up to six (6)
months or with fine up to Rs.1,000/- or both.

THE PAYMENT OF BONUS (AMENDMENT)
ACT, 2015 w.e.f 1st APRIL, 2014

(Gazette Notification Dated 1st Jan., 2016)

Theamendment
in The Payment of Bonus Act received the assent of the President on the 31st
December, 2015, and isdeemed to have come into force on 1st April 2014.

Key provisions of Amendment Act
– Eligibility of employees:

The Act
provides for enhancing Bonus calculation ceiling from the existing Rs 3,500 to
Rs7,000 per month or the Minimum wages for the Scheduled Employment whichever
is higher .

It also
enhances the eligibility limit for payment of bonus from Rs 10,000 per month to
Rs 21,000 per month.

Calculation of bonus: In regard to employees drawing
salary more than Rs. 3,500/-p.m. as per Section 12 of the Act, the bonus was
computed on a maximum salary of Rs. 3,500/=p.m.
only. Now the Amendment Act has raised
this calculation ceiling of bonus to Rs.
7,000 per month from present from
Rs 3,500/- per
month ceiling. Accordingly,
the Maximum Bonus
payable to an employee
under the Payment
of Bonus Act (20%
of Rs. 3,500X12)
worked out to Rs.8,400/=pa. Because of the salary
ceiling being raise to Rs 7,000/= p.m. the Bonus of 20%would now become Rs. 16,800/= for the year or more if
minimum wages are more than Rs.7000/- pm.

The Act has been amended
retrospectively from 1st April 2014. In respect of the Financial Year, April 1, 2014
to 31st March 2015 Bonus was due to be paid with the close of 8 months of the
Accounting Year i.e. November 30, 2015.

Retrospective applicability
stayed

Courts in at least 8 States have already stayed the retrospective
applicability of the Amendment act referred to above.

Conclusion

The aim of this article is to make readers aware of The Payment of Bonus
Act, a welfare legislation. The same should be followed in letter and
spirit.

shailesh.kwebmaker

Section A: Adverse Conclusion on Interim Ind AS Results

Surana industries Ltd. (results for quarter ended 30^th
June 2016 as filed with the Bombay Stock Exchange)

From Auditors’ Review report

Basis
of adverse conclusion

3. i. We
refer to note no.6 relating to investment in its subsidiary Surana Power
limited (SPL). The carrying value of the investment in
SPL as at 30th June, 2016 was Rs.41,850 lakh. In addition, the
Company has also issued a financial guarantee of Rs.10,000 lakh to the lenders
against the loans taken by SPL.
The net worth of this subsidiary
had fully eroded and its current liabilities exceed its current assets. The
independent auditor of the subsidiary had given an adverse audit opinion on its
financial statements for the year ended 31st march, 2016 stating that the going
concern assumption is not appropriate and the carrying value of the assets of
the subsidiary may also be impaired.

No
provision has been considered by the management for the diminution in the value
of the investments in this subsidiary and for the likelihood of the devolvement
of the guarantee on the Company.

ii.
Attention is invited to note no 5 regarding certain investments in subsidiaries
(having a carrying value aggregating to Rs.11,463.62 lakh) that were approved
for divestment due to continuing adverse market scenario which was impacting
the survival of the parent company. These investments are carried at cost and
have not been assessed for any impairment to the carrying values.

iii.
Inventory as at 30th June, 2016 aggregated to Rs.16,428.37 1akh, for
which the quantity, quality and
realisable value were
not assessed and determined by the management. in the
absence of evidence for
physical existence of
inventory as at 30th June,
2016 and net realisable value of inventory, we are
unable to comment on the adjustments that may be required to the carrying
values of the inventory.

iv.
The Company has not recognised recompense interest expense amounting to rs,
1,396 lakh for the quarter ended 30th June,
2016. Further, during the year
ended 31st March, 2016, the Company had
not recognised recompense interest expense amounting to Rs.5,148.36 lakh for
the year then ended and had reversed recompense interest expense amounting to
Rs.7,630.28 lakh recognised in earlier years.

v.
We refer to note no 4 relating to the non compliance with the repayment of the
loans as per the debt covenants agreed in the CDR package and paragraph (iv)
above relating to the non recognition of recompense interest for the quarter
ended 30th June, 2016 and the period then ended.

The
financial results for the quarter ended 30th June, 2016 have been prepared on a going
concern basis in
spite of negative
net worth after considering the
impact of the modifications mentioned in paragraphs (i) and (iv) above.

The
ability of the Company to continue as a going concern is significantly
dependent on the bringing in of new investor to revive the operations of the Company
and successful outcome of the ongoing negotiations with the lenders and
therefore, we are unable to comment if the going concern assumption is
appropriate and any effect it may have on the financial results for the quarter
ended 30th June, 2016.

vi.
We refer to note 7 of the results wherein it is stated that the Company has
adopted Indian accounting Standards (Ind AS) notified under the Companies (Indian
accounting Standards) rules, 2015 as amended by the Companies (Indian
accounting Standards) (amendment) rules, 2016 and is implementing the same in a
phased manner and that in the opinion of the Company, the presentation of the
results under Ind AS will not have any material impact on the recorded amounts
of income and expenditure for the quarters ended june 30, 2016 and 30th june, 2015. In the absence of adequate information
and completion of transition to Ind AS, we are unable to determine if these
results comply with the recognition and measurement principles of Ind AS 34
(“interim financial reporting”)

Paragraph
3(i) to 3(v) were matters of adverse opinion in the Audit Report issued by us
for the year ended 31st march, 2016
under the previous GAAP (in accordance with the accounting Standards specified
in the Annexure to the Companies (Accounting Standards Rules, 2006).

Adverse Conclusion

4. Based
on our review
conducted as stated
above, due to the significance and the possible effects of the matters
described in paragraph 3 above, the accompanying Statement
has not been
prepared in accordance with Ind AS and other accounting principles
generally accepted in India and has not disclosed the information required to
be disclosed in terms of regulation 33 of the SEBI (listing obligations and
disclosure requirements) regulations, 2015, as modified by Circular No.
CIR/CFD/FAC/62/2016 dated 5th July, 2016, including the manner in which it is
to be disclosed and the Statement may contain material misstatements.

From Notes below Unaudited Financial Results

The
auditors have modified their limited review report on the above results. The
management responses are as under:

i. Observation

As
above

Our Submission:

Based
on the preliminary negotiations with prospective buyers, the company currently
is of the opinion that actual realisable value of the current assets of the
subsidiary company will be sufficient to discharge its current liabilities. The
company is also in discussions with some financial institutions who have
evinced interest in restarting the project by pumping in additional equity and
debt required for completing the project. These
discussions are being held at tripartite level between the prospective
financial institution, leader of the
Consortium and the Company. Consequently, the company does not envisage any
prospective devolvement of liability on account of revocation of guarantee.
Accordingly, the company has not made any provision in this regard.

In
view of the ongoing negotiations with the prospective buyers and the lenders
and also considering the expected realisable value of the assets the Company
will be able to realise the carrying value of the said investment.

The
audit report for the year ended
31st march, 2016 was also modified in
respect of the above matter under the previous GAAP (in accordance with the accounting Standards
specified in the Annexure to the Companies (Accounting Standards) Rules, 2006).

ii. Observation

As
above

Our Submission:

In
view of the ongoing negotiations with the prospective buyers and the lenders
and also considering the expected realizable value of the assets the Company
will be able to realize the carrying value of the said investments in SGPL and
SMML.

The
Audit Report for the year ended
31st march, 2016 was also modified in
respect of the above matter under the previous GAAP (in accordance with the accounting Standards
specified in the Annexure to the Companies (Accounting Standards) Rules, 2006).

iii. Observation

As
above

Our Submission

During
the previous year the physical verification of stock has been carried out by
the stock auditors appointed by the lenders based on which the stocks have been
provided to the extent of deterioration identified on a scientific basis.

With
regard to the balance stock, the same shall be assessed at the time of
resumption of production and appropriate adjustments as required shall be done.
We are of the opinion that any such adjustment so arising will not be material.

iv. Observation:

As
above

Our Submission

The Company has not provided for recompense
interest of Rs. 14,174.64 lakh (including Rs. 1,396 lakh for the quarter ended
30th June 30, 2016) because as per master circular of RBI on CDR and also as
per the MRA occurs only when the company has generated cash surplus after
paying out all its obligations.

Further, as
per the master
restructuring agreement under
article viii para 8.1

“Right
to Recompense

If
in the opinion of the lenders, the profitability and the cash flows of the
Borrower so warrant, the Lenders shall be entitled to receive recompense for
the reliefs and sacrifices extended by them within the CDR parameters with the
approval of the CDR-Empowered Group.”

Accordingly,
as the lenders have not formed any opinion about the profitability and cash
flows of the company to service the recompense interest as on date, the need to
recognize the recompense interest does not arise.

Also
considering the factors stated in note
(2) above, the Company is of the opinion that the going concern
assumption is appropriate.

The
Audit Report for the year ended 31st
march, 2016 was also modified in respect of the above matter under the
previous GAAP” (in accordance with
the Accounting Standards Specified in the Annexure to the Companies (Accounting
Standards) Rules, 2006)

v. Observation:

As
above

Our Submission:

Company
could not comply with debt repayment schedule as embedded in the CDR package
for want of non release of sufficient working capital funding by the lenders as
per the package. Consequently, the company was not in a position to restart its
operations in Raichur in time and could not adhere to the debt repayment
schedule.

As
mentioned in response to observation (v), there is no non-compliance of debt
covenants as per the CDR package and the need to recognize recompense interest
does not arise.

The
negotiations with the concerned parties, including the consortium of lenders,
are on for restarting the operations of the Raichur Plant and further the
operational capabilities of the Gummidipoondi Plant have been improving over
the past years. Accordingly, the company is of the opinion that the assumption
of going concern is appropriate.

The
Audit Report for the year ended 31st March, 2016 was also modified in respect
of the above matter under the previous GAAP
(in Accordance with the Accounting Standards specified in the Annexure
to the Companies (Accounting Standards) Rules, 2006).

vi. Observation:

As
above

Our Submission:

Covered
by note 7 above and the responses to the individual items as mentioned above.

vii. Observation:

As
above

Our Submission

Covered
by responses to the individual items as mentioned above.

shailesh.kwebmaker

TS-752-ITAT-2016(DEL)-TP Aithent Technologies Pvt Ltd vs. DCIT A.Y.: 2008-09, Date of Order: 21st September, 2016

Sections 92B, 92F of the act – Transaction between indian HO
and foreign BO – is not subject to transfer pricing provisions

Facts

An
Indian company (‘Taxpayer’ or ‘HO’) had a branch office (BO) in Canada. The taxpayer had entered into
certain transactions with its BO. The
TPO/AO considered such transactions as ‘international transaction’ and determined
the arm’s length price (ALP) of the transactions.

The
issue before ITAT was whether the TPO/AO
was justified in treating the transactions between the HO and BO as an
international transaction.

Held

–
According to principle of mutuality, no person can earn income nor suffer
losses from dealings with self. There cannot be a valid transaction of sale
between BO and HO. Hence, profit on such sales is not includible while
computing total income of ho. reliance in this regard was placed
on Calcutta tribunal’s
decision in the case of Betts Hartley Huett & Co.
Ltd. vs. CIT (1979) (116 ITR 425).

–
A transaction can be treated as an international transaction, only if it is a
transaction between two or more associated enterprises (AEs). Since BO
is not a separate enterprise, one cannot treat a transaction between HO and
BO as an international transaction.

–
“Enterprise” has been defined u/s. 92F(iii), to include a permanent
establishment. Thus, a
BO can be treated as an enterprise. Nevertheless,
the definition of ‘international transaction’ when considered in juxtaposition
to the definition of ‘enterprise’, give prima facie impression that all the
transactions between a BO and its HO are
to be subjected to the transfer pricing provisions.

–
However, this prima facie impression loses its substance, when the HO
in question is an indian entity. This is for the reason that the indian entity
is taxable in india on its worldwide income, including the income earned
outside india through its branch.

–
When the accounts of the indian HO and BO
are aggregated, income of the HO would be set off with an equal amount
of expense of the BO, leaving thereby no
separately identifiable income on account of transactions between HO and BO.

– Thus,
over or under invoicing between the HO and BO will always be tax neutral
in the case of an indian entity having a PE outside india. ALP adjustment for
such transactions will result in charging tax on income which is more than the
amount legitimately due to the exchequer and hence, impermissible.

– The aforesaid rationale is restricted only to
transactions between the indian HO and its foreign Bo. In case where HO is a foreign entity, it is
taxable in india only on its indian income and hence, there may be an allurement
to such foreign entities to resort to over invoicing, to mitigate tax burden in
india. Hence, the above discussion does not apply to a case where the
transaction is between a foreign entity and its BO in india.

– In
the present case as the HO is an indian
entity which offered the income earned from india as well as that earned
by its BO to tax in india, transactions
between such indian HO and BO are not subject to TP provisions

P.S.:

i. The ruling does not provide any clarity
about the nature of the transaction between indian HO and BO and the basis on
which ALP adjustment was suggested by the AO

ii. PE of indian Company is considered as
resident in india. Hence, transactions
between HO and BO are unlikely to be
regarded as within the ambit of Indian Transfer Pricing Provisions.

shailesh.kwebmaker

TS-528-ITAT-2016(Mum) Kotak Mahindra Bank Limited vs. ITO A.Y.: 2012-13, Date of Order: 25th August, 2016

Article 13,15 of India-UK
DTAA, S. 9(1)(vii) of the act – Fees
paid to UK LLP for legal services in relation to acquisition of banking company
and setting up of USA branch qualifies as payment made for the purpose of
earning income from a source outside india. article 15, being a specific
provision dealing with legal services, overrides the general provisions of
article 13 dealing with technical and consultancy services – fees paid to UK
LLP is not taxable in india under the act
as also DTAA

Facts

The
taxpayer, an indian company, was engaged in the business of banking. The
taxpayer was contemplating the option of
acquiring banking company and/or setting up of a branch in US. For this purpose, the taxpayer entered into
an agreement with a UK LLP to obtain certain legal services.

During
the relevant year, the employees of the taxpayer travelled to the USA. During their visit, UK LLP made presentations
and discussed various legal or regulatory requirements in the USA in relation
to setting up of branch and acquisition of banking company in the USA.

The taxpayer
contended that the
services rendered by the UK LLP
were utilised for the purpose of earning income from a source outside india.
Hence, it cannot be deemed to accrue or arise in india by virtue of the source
rule exclusion u/s 9(1)(vii) of the act. Further, under the India-UK DTAA (DTAA), such income is covered under
article 15 on independent Personal Services (IPS) and in absence of
satisfaction of conditions specified therein, the payment made to UK LLP is not
taxable in india even in terms of DTAA.

However,
ao contended that in absence of actual creation of a new source of income, the
source rule exclusion under the act is not applicable in respect of payments
made to UK LLP which is taxable as royalty/FTS under the act. Further, as
services rendered by the UK LLP had made available technical knowledge, skill
and experience to the employees of the taxpayer, the payment made to the UK LLP
qualifies as FTS under the DTAA.

Held

Taxability under the Act

–
The payment was made by the taxpayer to the UK LLP on account of the first
phase of the agreement. Under the first phase, the UK LLP was required to
educate the Taxpayer’s officials on various legal/regulatory requirements of
USA in relation to setting up of a bank branch and acquisition of banking
company.

–
The nature of services indicated that
the payments were made with a view to carry on business and to create a new
source of income outside india, by way of establishment of new branch or
acquisition of a banking company.

–
The source rule exclusion is not restricted only to a case where there is an
existing source of income. As long as the payment is made for creation of a new
source of income, it is covered by the source rule exclusion.

Taxability under DTAA

– Article 15, being a specific provision
dealing with independent professional services of lawyers, overrides the general provisions
of article 13 dealing with a broader category of technical or consultancy
services1.

–
As Held by the Special bench of the tribunal
in the case of Clifford Chance2, article 15 applies not only to
individuals but also to firms3. As the services were rendered outside india and
none of the employee of the UK LLP was present in india for more than 90 days,
such income is not taxable in india under article 15 of the DTAA.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 5 dated October 6, 2016

Import data Processing
and monitoring System (IDPMS)

This
circular states that IDPMS will go live from October 10, 2016 and all Banks
must use IDPMS for reporting and
monitoring of the import transactions. Operational directions / guidelines with
respect to IDPMS are mentioned in this
circular and are also available in the help menu on EDPMS Portal under “import
process” tag.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 4 dated September30, 2016

Investment by
Foreign Portfolio investors (FPI) in government Securities

This
circular has increased the limit for investments in Government Securities by
FPI in two tranches each of Rs. 100 billion from October 3, 2016 and January 2,
2017 as under, in the table below:

INR Billion

Central Government Securities

State Development Loans

Aggregate

For All FPIs

Additional for Long Term FPIs

Total

For all FPIs (including Long Term FPIs)

Existing Limits

1440

560

2000

140

2140

Revised limits with effect from
October 3, 2016

1480

620

2100

175

2275

Revised limits with effect from
January 2, 2017

1520

680

2200

210

2410

The operational guidelines relating to allocation
and monitoring of limits will be issued by the Securities and exchange Board of
india (SEBI).

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 3 dated September 29, 2016

Exim Bank’s GoI supported line of Credit of USD 87.00 million to the
government of the Republic of zimbabwe

Exim
Bank has made available, subject to certain terms and conditions, to the
Government of the republic of Zim babwe, a Line of Credit of US $ 87 million
for financing renovation / up-gradation of Bulawayo thermal Power Plant in republic of Zimbabwe. Eligible
goods and servic es including consultancy services of the value of at least
75% of the contract price must be supplied by the sellers from india, while the
remaining 25% of the goods and ser vices can be procured by the sellers from
outside india.

The
last date for opening letters of credit and disbursement is 60 months from the
scheduled completion date of the project.

shailesh.kwebmaker

Notification No. FEMA 375/2016-RB dated September 9, 2016

Foreign Exchange management (Transfer or issue of Security
by a Person Resident out- side india) (Thirteenth amendment) Regulations, 2016

This
Notification states that Schedule 1, in Annex B, Para graph F.8 Notification
No. FEMA. 20/2000-RB dated 3rd may 2000 will be substituted as under:

F.8

Other Financial Services

Financial Services activities
regulated by financial sector regulators, viz., RBI, SEBI, IRDA, PFRDA, NHB
or any other financial sector regulator as may be notified by the Government
of India.

100%

Automatic

F.8.1

Other Conditions

i. Foreign investment in ‘Other
Financial Services’ activities shall be subject to conditionalities,
including minimum capitalization norms, as specified by the concerned
Regulator/Government Agency.

ii. ‘Other Financial Services’ activities need to be
regulated by one of the Financial Sector Regulators. In all such financial
services activity which are not regulated by any Financial Sector Regulator
or where only part of the financial services activity is regulated or where
there is doubt regarding the regulatory oversight, foreign investment up to
100% will be allowed under Government approval route subject to conditions
including minimum capitalization requirement, as may be decided by the
Government.

iii. Any activity which is specifically regulated by an
Act, the foreign investment limits will be restricted to those
levels/limit that may be specified in that Act, if so mentioned.

iv. Downstream investments by any of these entities engaged in “Other
Financial Services” will be subject to the extant sectoral regulations
and provisions of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident outside India) Regulations, 2000, as amended
from time to time.”

shailesh.kwebmaker

Twitter Fun of the Month

This month, one of the most talked about topics on twitter
was the advertisement of a pan masala brand where one of the actors who played
the role of James Bond in the past
featured. This set the twitterati abuzz. Here are some of the tweets that we
found worth sharing with our readers.

@KyaukhaadLega –
Bond is now famous Pan-india

@rameshsrivats

Pierce Brosnan.

Played James Bond.

Endorses Pan Bahar.

Licensed to kill.

@NSDahiya – Pierce Brosnan has got supari to kill now.

@ajith27 – Pierce Brosnan says the outrage has given
him much to chew on, Paan unintended

@Vineet_Nag -I used to think #money is not everything but
then i saw #PierceBrosnan doing an ad film for Pan Parag paan masala !!

@navalmalpani – We know india is getting ahead in class
when SrK endorses tag heur, and Pierce Brosnan endorses Gutkha . #PanBahar #PierceBrosnan

@Burman_amit – Pierce Brosnan: “Wy wvem ih von, aemz
von” me:”What??” Pierce Brosnan:Spits Pan Bahar “my name is
Bond, james Bond” #PanBahar #Pierce- Brosnan

And after the concerned actor feigned ignorance about the
true nature of the product that he had endorsed, the world of twitter had yet
another bout of laughter:

@jujvijay – Pierce Brosnan says he didn’t know what he
was selling. Guess things didn’t *’paan’*
out as expected #paanbahar #piercebrosnan #Punintended

@iamranjandhar –
Pierce Brosnan: ek Pan Bahar dena. Paan Wala: yeh lo. *Pierce Brosnan Gives 5 Rs*
Paan wala: Sahab 7.50 Rs. Ka hai. PB: dhai another day!

@news24tvchannel
– James breaks Bond with Paan Ba har: Pierce Brosnan accuses company of trappi
#Pierce- Brosnan #PaanBahar #Contract #ad

@askThePankazzzz
– Honestly, deeply hurt to know that Pierce Brosnan doesn’t actually eat Paan
Bahar. tired of these people breaking my trust again & again.

@ind_mnk – A
friend looking for job was not getting one, Pierce Brosnan (Bond 007) in indian
Paan Bahar ad only shows it’s a worldwide recession.!!

And here are some tweets where people are talking about the
controversial US elections where Mr. donald trump and Ms. Hillary Clinton are
engaged in an ugly battle.

@Elizasoul80 – I
wouldn’t vote for a woman just because i’m a woman, just like people shouldn’t
vote for trump just because they’re idiots.

@PetrickSara –
Someone said my kid would probably grow up to be president, and i’m not sure if
it was meant as a compliment or an insult.

@WilliamAder – Remember
when we thought “any kid can grow up to be President” was a good thing?

@ericsshadow – I
hear all these trump supporters say ing they support him because he speaks his
mind. Well you know who else speaks his mind? My 4 year old.

@marlebean – They
say ignorance is bliss, but trump supporters don’t seem very happy.

On another note, here are a few that are probably from tired
young mothers:

@mommyshorts – Asked
to switch seats on the plane because i was sitting next to a crying baby. Apparently,
that’s not allowed if the baby is yours.

@LurkatHomeMom – Hell
hath no fury like a 4 year old whose sandwich has been cut into squares
when he wanted triangles.

@cheeseboy22 –
Kids everywhere are fighting global warming by leaving doors open and air
conditioning the outside.

And none of our compilations can be complete without quoting
the irrepressible Ramesh Srivats of Bangalore:

@rameshsrivats – Board of Control for Cricket in india

– if you remove their Control, they’ll remove our Cricket.
and india will be Board.

And here are this month’s recommendations of twitter handles
that you can follow. This time, we thought of shar ing the handles of a few
global accounting networks.

TMF – @tmforumorg

Nexia International –
@Nexia_intnl

PwC LLP – @PwC_LLP

Deloitte – @Deloitte

MGK Consulting – @MGK_Consulting

Mazars – @MazarsGroup

PKF international – @PKFI

Prime Global –
@PrimeGlobalAcct

RSM US LLP – @RSMUSLLP

Baker Tilly International
– @BakerTillyint

Moore Stephens
international – @MooreStephens

shailesh.kwebmaker

Still Afraid Of Disclosures

On October 1, finance minister
Arun Jaitley announced that the government was pleased with the windfall from
the four-month black money disclosure scheme that ended on September 30. Indians
have declared hidden assets worth Rs 65,250 crore ($10 billion). The tax
collection, at Rs 30,000 crore ($4.5 billion), will help build many a road and
school. But, by global standards, the haul is small. Could a lighter price have
earned more revenues?

Amnesty schemes being offered in
countries such as indonesia and argentina
are yielding huge
revenues due to low tax and penalty rates. In indonesia, those with
hidden assets abroad need to only pay a flat fee of 1-6 per cent of the value
of the assets depending on how quickly they declare their stash and whether they
repatriate it. There is also no prosecution or penalty. These countries are
clear about maximising revenues, having decided to pardon those who have broken
the law.

India does not fall in that
league. The just-concluded income declaration Scheme (IDS) allowed people to
pay tax, surcharge and penalty adding up to 45 per cent on their past
undisclosed income. The design was better than the earlier scheme that fared
miserably due to the heavy price — 30 per cent tax and an equivalent amount as
penalty — and the lack of trust as to whether there would be penalties even
after coming clean.

Should the government offer a
second chance to those with hidden wealth overseas to come clean? Paring the
tax rate will make it work. Some would argue against india offering frequent
amnesties the way they do in, say, italy. But the US offers an open-ended
offshore voluntary disclosure Program.

One model could be the sort of
permanent amnesty scheme offered by Scandinavian countries and South africa. A person
is allowed to declare her past undeclared income before the case is picked up
for audit. As the government cannot possibly cover a wide range of taxpayers in
audits, such a scheme allows taxpayers to regularise their tax affairs and
start afresh.

Jeffrey owens, former director of the OECD Centre for
tax Policy and
administration, says people
must be given enough time to
unwind their past tax affairs before governments move to the new world of tax
transparency. That’s a valid point. India
will join other countries to follow common reporting standards from next year. This
means exchange of information on account holders across jurisdictions will be
automatic, making it tough for tax dodgers to hide their wealth.

Also, there is no stigma attached
now to offshore voluntary compliance schemes. The OECD has endorsed these
schemes that have been introduced in many countries. India is only rolling with
the tide, and when businesses bring money on to their books, they can repay
loans, avoid bankruptcies and secure fresh credit. Leveraging on higher equity
capital will also make them expand, and help the economy grow.

David Bradbury, head of the OECD
tax Policy and Statistics division, however, reckons that governments should
weigh the benefits and costs, as it can create a perception that voluntary
disclosure schemes are par for the course.

The problem in india is very few
are convinced that non disclosure would lead to punitive action. That must
change. Egregious offenders must pay. The US department of justice puts the information on prosecutions launched
in public domain. Britain’s revenue and customs department too has made it
clear that people can’t get away saying ‘don’t tax me, tax the man behind’.

India will have game-changing
data with automatic information exchange to pursue tax evaders. Having joined
the global war against tax evasion, it should follow Britain and create a
Unique Legal Entity Identifier to trace the real, beneficial owners of companies.
Here, effective sharing of information will help.

Amine of data is already
available with the income-tax department through the annual information returns
that identify potential taxpayers by examining their spending patterns. To
check for evasion, it has been matching the data provided by various agencies
with an individual’s income-tax returns.

What we really need is
intelligent data mining to create rock solid proof of tax evasion. Why not
consider data not filed, but gathered using data-mining techniques, using big
data analytics?

India should also reform its
direct tax regime to lower tax rates, and widen the ridiculously low base. it
also partly explains why
tax as a proportion of GDP has been stagnating at about 16.5 per cent
for the last three decades. The goal must be to at least double india’s tax- GDP
ratio to meet spending commitments. Moving to the goods and services tax (GST) will certainly provide an opportunity to
reform direct taxes. We can then forget amnesty schemes.

(Source: Article by Hema
Ramakrishnan in the Economic times dated 05.10.2016)

shailesh.kwebmaker

Side Incentives to Promoters and Management by PE Investors – SEBI Seeks to Address Conundrum

Background

Perhaps
a never-ending conflict in listed companies is the one between interests of
Promoters/management on one hand and the public shareholders on the other.
Promoters and members of the public are both shareholders and hence,
effectively have equal rights and benefits. However, Promoters are in charge of
company and would need oversight to ensure
that they do
not take any
undue benefit of such control. The key top executives who run the
company are also particularly relevant in professionally managed companies. The
conflict of interest here is that they may keep their interests above that of
shareholders. Thus, for example, they should not pay themselves excessive
remuneration. these are two of the
important of challenges in listed companies that are partly sought to be
addressed by good corporate governance measures. The Companies act, 2013, does
contain certain statutory provisions in this regard. A parallel set of
provisions with some differences are provided by SEBI in the SEBI (listing obligations and disclosure requirements)
regulations, 2015. Generally, it is expected that, in comparison with
parliament, SEBI would act as a more dynamic watchdog for protection in
particular of public shareholders. Hence, it is not surprising that SEBI has
sought to address a peculiar arrangement that is being adopted in connection
with investment in several companies by Private equity investors (“PE
investors”).

Nature of Concern Sought to be Addressed

PE
investors have a special role in listed companies. They usually are not such
substantial shareholders so as to be able to control the listed company.
However, their holding is sufficiently
big whereby they often have agreements with the
management/Promoters (“the management”) such that certain special rights are
given to them. What has now become an issue of concern is a side arrangement
many of such PE investors have entered into with the Promoters/ management of
listed companies. Essentially, what is provided in such arrangement is that the
PE investor will pay a share of profits made by it on its investment in the
listed company to the management. Usually, this share is from the excess
profits made by the PE Investor over and above a certain benchmark return.
Thus, for example, the PE investor may
agree to pay to the management 20% of the excess of profits over an internal
rate of return of 36% per annum. To take an example in figures, say, the PE
Investor had invested at a cost of Rs. 100 per share and sells the shares at
Rs. 500 after four years. The cost of Rs. 100 would require a sale price of Rs.
342 to give it an internal rate of return of 36% per annum. Thus, it would have an excess of Rs. 158. The
management would thus be given about Rs. 31.60 per share as 20% share of such
excess.

The
concern that has been raised is whether such arrangements are fair and whether
they require any regulation in terms of ensuring transparency, obtaining
approvals, etc.

SEBI has issued a consultation paper dated
4th October 2016 seeking views. While
one will have to wait for the outcome of this consultation and in what form the
regulatory requirements will be issued, the consultation paper is specific
enough to merit a study. The paper gives the specific clauses that SEBI
proposes to insert in the regulations. As will be seen later herein, the Scope
of the requirements are wider than the arrangements between management and the
PE Investor for sharing of excess profits.

Nature of Issues/Problems

There
can be several issues raised in respect of such agreements, some of which have
been highlighted in the consultation paper. One of course is, lack of
transparency – the public shareholders would not even be aware of such side
arrangements. There is a potential conflict of interest between the
management and the
public shareholders on account of
such arrangements. It is possible that the PE
investor may get
special treatment over the public
shareholders, though it may not be in violation of the law.

Another concern is that the management may
become focussed on short term goals which lead to price appreciation of the
shares, since this would help them get a share of the profits under such
arrangements.

In
a sense, the management would be able to get more compensation than otherwise
permissible to them under law. for example, Promoters are not entitled to
employees stock options. Further, there
are limits to remuneration that can be paid to managerial personnel under the
Companies act, 2013. Of course, the share is not paid out of the funds of the
company. Yet, the concern may be whether the spirit of such provisions is
defeated.

Analysis of the Proposed Amendments

In
regulation 26 of the SEBI (listing obligations and disclosure requirements)
regulations, 2015 (“the regulations”), a new sub-clause 6 is proposed to be
inserted as follows (emphasis provided):

“No
employee, including key managerial personnel, director or promoter of a
listed entity shall enter into any agreement with any individual shareholder(s)
or any other third party with regard to compensation or profit sharing unless
prior approval has been obtained from the
Board as well as shareholders by
way of an ordinary resolution”.

“Provided
that all such existing agreements
entered into prior to the date of notification and which may continue beyond
such date shall be
informed to the stock exchanges
for public dissemination and approval
obtained from shareholders
by way of an ordinary resolution in the forthcoming
general meeting. Provided further that in case approval from shareholders
is not received, all such agreements shall be discontinued “.

Thus, the proposed clause divides the requirements in two parts – one
for new agreements providing for such arrangements and the other for existing
agreements. It requires that such agreements shall require prior approval of
Board of directors and the shareholders by way of ordinary resolution. In case
of existing agreements that would continue in the future, the requirements will
be slightly different. The approval of Board of directors is not required.
However, disclosure to stock exchanges would have to be made. Further, approval of the shareholders by way of
ordinary resolution would have to be obtained in the forthcoming general
meeting of the company. If such approval is not received, then the agreement
for such arrangement would have to be discontinued.

The
requirement applies to such agreements as are described therein. Such agreement
would have to be with “employee, including key managerial personnel, director
or promoter of a listed entity” with “any individual shareholder or any other
third party”. The agreement should relate to “compensation or profit sharing”.
The term “key managerial personnel” would be as per the definition under the
Companies act, 2013.

Thus, on one hand, the type of agreement as well
the persons between whom the agreement may be made have been widely defined. On
the other hand, the definition is specific and hence would apply only to such
matters and between such persons as specified therein.

Non-Transparent Arrangements till now

As
stated above, there is presently no statutory requirement to disclose such
agreements to the public. hence, such arrangements may not be known even to the
Board of directors, much less to the
shareholders generally or the stock exchanges/public.

Requirements of Approval

The
requirements of approval are dual. One is from the Board of directors the second is from the shareholders by way of an
ordinary resolution. For agreements that are to come into force in the future,
such approvals would have to be prior to entering into such agreements and not
after they are entered into.

Covers Agreements for Compensation As Well As Share of
Profits

The
payment to the management may be in the form of compensation or share of
profits. These terms have not been defined and hence may have wide meaning.
This also widens the scope of the requirements from what appears to be the
intent.

Covers Agreements with Share- Holders As Well As Third
Parties

The
agreements may be with individual shareholders of the company or even with
third parties. This may once again result in a scope that is wider than may be
otherwise expected from a requirement that appears to be intended for
agreements with PE investors. For example, would any compensation by a
group/holding/associate company to any person in management be also covered?

Retrospective effect

Of
particular concern is the fact
that the requirements will effectively have a
retrospective effect. All existing agreements would be required to be disclosed
to the stock exchanges and also approved by shareholders. Failure to receive
such approval would result in a requirement to discontinue such agreement.

Comments

There
are valid objections raised for and against the requirements.

A
preliminary objection is as to whether such matters should be at all regulated.
Even if regulated, whether disclosures would be adequate to achieve the
objective. Even more, whether the approval of the shareholders serves any real
purpose and whether a group that should not have any say in such matters is
being given a right to veto such arrangements. The compensation/profits do not
go out of the pocket of the company or the shareholders. Indeed, the public
shareholders would also be benefitting in typical cases where the profit is out
of appreciation in the price of the shares.

On
the other hand, there may be a view that even such restrictions are not
sufficient. For one, there is no absolute bar on such agreements. There may be
a view that the conflict of interest that can result is substantial. Moreover,
such arrangements can be a subterfuge for payments for other consideration.

Further, it is often likely that the
Board/shareholders may be dominated by the Promoters. Unlike related party
transactions, where there are certain restrictions on voting on certain
shareholders, there are no such restrictions here.

Finally, of course, the new requirements may hit
existing arrangements hard. It is possible that existing agreements may have to
be shelved halfway if they do not receive approval and thus parties may be deprived
of the benefit particularly in respect of benefits that would have already
accrued to an extent.

All
in all, however, initiation of the debate is a step in the right direction and
at the very least, such arrangements would come to the knowledge of parties
concerned. One will have to see how the final draft of the requirements is
issued and then examine their impact.

shailesh.kwebmaker

Nomination in a Flat

Introduction

Nomination is increasingly used
in co-operative housing societies, depository/demat accounts, mutual funds,
Government bonds/securities, shares, bank accounts, etc. a nomination means
that the owner of the asset has designated another person in his place after
his death.

Once a person dies, his interest
stands transmitted to the person nominated by him. Thus, a nomination is a facility to provide the
society, company, depository, etc., with a face with whom it can deal with on
the death of a person. On the death of the person and up to the execution of
the estate, a legal vacuum is created. Nomination aims to plug this legal
vacuum. A nomination is only a legal relationship created between the society,
company, depository, bank, etc. and the nominee.

A nomination seeks to avoid any
confusion in cases where the will has not been executed or where there are
disputes between the heirs. It is only an interregnum between the death and the
full administration of the estate of the deceased.

While there have been several
Supreme Court decisions on the question of the role of a nomination, recently,
the Supreme Court had an occasion to consider the issue in the context of a
flat in a co-operative society.

Which is superior?

A nomination continues only up to
and until such time as the will is executed. No sooner the will is executed, it
takes precedence over the nomination. A nomination does not confer any
permanent right upon the nominee nor does it create any legal right in his
favour. Nomination transfers no beneficial interest to the nominee. A nominee
is for all purposes a trustee of the property. He cannot claim precedence over
the legatees mentioned in the will and take the bequests which the legatees are
entitled to under the will.

The Supreme Court’s in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases
214 (SC), in the context of a nomination under a life insurance policy
under the insurance act, 1938 has held that it does not have an effect of
conferring on the nominee any beneficial interest in the amount payable under
the life insurance policy on the death of the assured. It only indicates the
hand which is authorised to receive the amount on the death of the insured.

Again in Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR
306 (SC),the Supreme
Court examined the effect of a nomination in respect of a
national Savings Certificates and held
that nominee is only an administrative holder. any amount paid to the nominee
is part of the estate of the deceased which devolves upon all persons as per
the succession law and the nominee must return the payment to those in whose
favour the law creates a beneficial interest.

Flat In A Co-Operative Housing Society

Let us now consider the position
in the context of a flat in a co-operative society. Section 30 of the
maharashtra Co-operative Societies act,
1960 (‘the act”) provides as
follows:

“Section 30 – Transfer of interest on death of member

(1) On the death of a
member of a
society, the society shall
transfer the share or interest of the deceased member to a person or persons
nominated in accordance with the rules, or, if no person has been so nominated
to such person as may appear to the committee to be the heir or legal
representative of the deceased member.

Provided that, such nominee, heir
or legal representative, as the case may be, is duly admitted as a member of
the society:

Provided further that, nothing in
this sub-section or in section 22 shall prevent a minor or a person of unsound
mind from acquiring by inheritance or otherwise, any share or interest of a
deceased member in a society.

(2) Notwithstanding anything
contained in sub-section (1), any such nominee, heir or legal representative,
as the case may be, may require the society to pay to him the value of the
share or interest of the deceased members, ascertained in accordance with the
rules.

(3) A society may pay all other moneys due to the
deceased member from the society to such nominee, heir or legal representative,
as the case may be.

(4) All transfers and payments duly made by a
society in accordance with the provisions of this section shall be valid and
effectual against any demand made upon the society by any other person.”

Thus, in the event of the death
of a member of a Society, the Society is required to transfer the member’s
interest to such person as may appear to the Committee to be the heir or legal
representative of the deceased member. The Act does not define the term “heir”.
The Supreme Court in the case of N. Krishnammal vs. R. Ekambaram, 1979 AIR SC
1298, has defined the term as follows:

“…The word “heirs”, as
pointed out by this Court in Angurbala Mullick v. Debabrata Mullick (1) cannot
normally be limited to “issues” only. It must mean all persons who
are entitled to the property of another under the law of inheritance.”

The Act also does not define who
is a “Legal representative”. Hence, one may refer to the Civil Procedure Code.
Section 2(11) of the Code of Civil Procedure, 1908defines a “Legal
Representative” as follows:

“(11) ” legal representative
” means a person who in law represents the estate of a deceased person,
and includes any person who intermeddles with the estate of the deceased and
where a party sues or is sued in a representative character the person on whom
the estate devolves on the death of the party so suing or sued;”

High Court Rulings

The Bombay high Court in another case of Om Siddharaj Co-operative
Housing Society Limited vs. The State of Maharashtra & Others, 1998 (4)
Bombay Cases, 506, has observed as follows in the context of a nomination
made in respect of a flat in a co-operative housing society:

“…….If a person is nominated in
accordance with rules, the Society is obliged to transfer ‘the share and
interest of the deceased member to such nominee. It is no part of the business
of the Society in that case to find out the relation of the nominee with the
deceased member or to ascertain and find out the heir or legal representatives
of the deceased member. It is only if there is no nomination in favour of any
person, that the share and interest of the deceased member has to be transferred
to such person as may appear to the committee or the Society to be the heir or
legal representative of the deceased member….”

Again in the Gopal
Vishnu Ghatnekar vs. Madhukar Vishnu Ghatnekar, 1981 BCR, 1010 case, the
Bombay high Court has observed, in the context of a nomination made in respect
of a flat in a co-operative housing society, as follows:

“………It is
very clear on
the plain reading
of the Section that the intention of the Section is to provide for who
has to deal with the Society on the death of a member and not to create a new
rule of succession. the purpose of the
nomination is to make certain the person with whom the Society has to deal and
not to create interest in the nominee to the exclusion of those who in law will
be entitled to the estate. The purpose is to avoid confusion in case there are
disputes between the heirs and legal representatives and to obviate the
necessity of obtaining legal representation and to avoid uncertainties as to
with whom the Society should deal to get proper discharge. though, in law, the Society has no power to determine
as to who are the heirs or legal representatives, with a view to obviate
similar difficulty and confusion, the Section confers on the Society the right
to determine who is the heir or legal representative of a deceased member and
provides for transfer of the shares and interest of the deceased member’s
property to such heir or legal representative. Nevertheless, the persons
entitled to the estate of the deceased do not lose their right to the same. …….
once a person is nominated and the Society transfers the share or interest of
the deceased to him, he becomes the owner. If that is to be accepted it will
follow that if a Society accepts a person as the heir or legal representative
and transfers the share or interest to him, that person will become the owner. That
obviously, cannot he the intention of the legislature. Society has no power,
except provisionally and for a limited purpose to determine the disputes about
who is the heir or legal representative, therefore, follows that the provision
for transferring a share and interest to a nominee or to the heir or legal
representative as will be decided by the Society is only meant to provide for
interregnum between the death and the full administration of the estate and not
for the purpose of conferring any permanent right on such a person to a
property forming part of the estate of the deceased. The idea of having this
section is to provide for a proper discharge to the Society without involving
the Society into unnecessary litigation which may take place as a result of
dispute between the heirs’ uncertainty as to who are the heirs or legal
representatives. ….. it is only as between the Society and the nominee or heir
or legal representative that the relationship of the Society and its member are
created and this relationship continues and subsists only till the estate is
administered either by the person entitled to administer the same or by the
Court or the rights of the heirs or persons entitled to the estate are decided
in the Court of law. Thereafter the Society will be bound to follow such
decision.

……………. To repeat, a Society has a
right to admit a nominee of a deceased member or an heir or legal
representative of a deceased member as chosen by the Society as the member.”

A Single judge in Ramdas Shivram Sattur vs. Rameshchandra
Popatlal Shah 2009(4)Mh LJ 551 has held that a nominee has no right of
disposition of property since he is not an absolute owner. It held that section
30 does not provide for a special rule of Succession altering the rule of
Succession laid down under the personal law.

Supreme Court’s Decision

The position of a nominee in a
flat in a co-operative housing society was recently analysed by the Supreme
Court in Indrani Wahi vs. Registrar of
Co-operative Societies, CA NO. 4646 of 2006(SC). This decision was rendered
under the context of the West Bengal Co operative Societies act, 1983. In the
impugned case, a father died leaving a nomination in favour of his married
daughter. His widow and son challenged the same on various grounds. The matter
traveled from the deputy registrar of Cooperative Societies up to the high
Court and ultimately to the Supreme Court.

The Supreme Court held that there
can be no doubt that the holding of a valid nomination does not ipso facto
result in the transfer of title in the flat in favour of the nominee. However,
consequent upon a valid nomination having been made, the nominee would be
entitled to possession of the flat. Further, the issue of title had to be left
open to be adjudicated upon between the contesting parties.it further held that
there can be no doubt, that where a member of a cooperative society nominates a
person, the cooperative society is mandated to transfer all the share or
interest of such member in the name of the nominee. It is also essential to
notice, that the rights of others on account of an inheritance or succession is
a subservient right. Only if a member had not exercised the right of
nomination, then and then alone, the existing share or interest of the member
would devolve by way of succession or
inheritance. It clarified
that transfer of share or interest,
based on a nomination in favour of the nominee, was with reference to the
concerned cooperative society, and was binding on the said society. The
cooperative society had no option whatsoever, except to transfer the membership
in the name of the nominee but that, would have no relevance to the issue of
title between the inheritors or successors to the property of the deceased. The
Court finally concluded, that it was open to the other members of the family of
the deceased, to pursue their case of succession or inheritance, in consonance
with the law.

Conclusion

Thus, the legal position in this respect is very
clear. A nomination is only a legal relationship and not a permanent transfer
of interest in favour of the nominee. If the nominee claims ownership of an
asset, the beneficiary under the will can bring a suit against him and reclaim
his rightful ownership. However, the
possession of the flat must be handed over by the society immediately to the
nominee till such time as the succession issue is legally settled.

shailesh.kwebmaker

Knowledge Updation

Arjun (A) — Govind Bolo Hari Gopala
Bolo Radharaman Hari Gopala Bolo Shrikrishna ! Shrikrishna !

Shrikrishna (S) — Arey arjun, today
you are chanting my bhajan! What is the matter?

A — I am in a good mood today; for a
change !

S — Oh, i see. But what makes you so
happy?

A — This time, 30th
September date was extended
without our asking for it. All of us were anticipating no such extra time. So
it was a bonus!

S — How complacent you people are!
You become happy even by such small things. In a way, it is a good quality.

A — Bhagwan, we
are otherwise slogging
day and night – literally reeling
under the pressure. So even small reliefs mean a big thing for us.

S —
So   this   time,
you   could   complete
it   quite comfortably, you mean.

A — Not exactly. But yes. The
nightmare was a little less frightful!

S — and then you enjoyed Diwali!

A — Well, to some extent yes. Still, the
pressure of time-barring assessments continued. But by and large, there was
relaxation.

S — That means, now you will wake up directly in next
September !

A — ha ! ha
!! ha !!! not really. now
i will have to manage my CPE hours.

S — ‘Manage’? What do you mean? Why
always at the last moment?

A — That is the real fun. We need to
simply enrol for some seminar, relax there; and get CPE credit.

S — But how will you manage the new
things that are coming?

A — what are they?

S — GST; and that ICDS which was postponed last
year. And many other regulations that are continuously coming.

A — See, it will keep on happening. There are
experts available. They will study and guide us. Why break our head?

S —That’s the pity, Arjun. Most of you have almost
given up
self-study. Even CPE hours
you are ‘managing’. not taking it
seriously.

A —So far, lack of self-study has
not been declared as a misconduct!

S —Great thought, Arjun ! are you the same Arjun who was so inquisitive
about knowledge even on the battlefield? are you the same Arjun who had a quest
for knowledge?

A —Bhagwan, in
those days, knowledge
was respected. It had value. Now, no one cares for it. everything can be
managed.

S — Alas! What a downfall !

Not studying in itself may not be a
misconduct; but all misconducts arise out of ignorance and lethargy, why don’t
you understand this? not following the institute’s guidelines also is a
misconduct.

A — What you say is right. That
reminds me, i have just uploaded the returns. But many hard copies of financial
statements are yet to be signed ! and they are also to be uploaded to ROC.

S — you mean, balance sheets are
still to be signed?

A —Yes.   that’s
usual.   We   sign
it   backdated. Sometimes, even
the checking continues after the returns are filed.

S —Oh! you may be aware, there were
instances of audit being signed; and email queries continuing even after the
signing date !

A — Yes. My friend was held guilty
of that. But i am very careful about it.

S — Anyway ! you people
won’t improve. But right since
ancient time, you are my favourite Shishya.

I cannot see you not pursuing
knowledge.

A — Lord, i am your true follower. Whatever i said just
now was the general attitude of CAs. i do my study quite religiously.

S —
In fact, this
is the right
time for knowledge updation. For GST, you must get
geared up. Not only yourself; but see that your staff, articles, clients and
also their accountants get educated. It will be a team-effort. You should
encourage clients to attend the seminars.

A — I agree. One will get the
benefit of early start, i will tell my other CA
friends also to be a little more serious about studies. Without updated
knowledge, we can’t survive.

S — You said it ! you need to be
constantly awake. Your motto is ‘Ya esha Supteshu Jagarti !’

A —But Bhagwan, too much of
knowledge often leads to a dilemma – one becomes indecisive. Same dilemma i
faced in Mahabharat war.

S —True. But then the knowledge
alone cleared your dilemma. moreover, mere error of professional judgment is
not a misconduct?

A —Then what
is misconduct? We may commit mistakes even when we know all
interpretations.

S — The misconduct lies in lack of application of
mind.

By your working papers, you should
be able to show that you studied the issue, applied your mind and adopted a
plausible interpretation. it may not be 100% correct.

Others may perceive it differently.

A — I followed. Good that you
mentioned about working papers. i will get them also properly organised. After
one year, we can’t remember anything; and can’t locate anything.

S — Shabbash ! that’s like a
good Ca. that is why you are always
blessed, my dear !

A — Please continue to enlighten me
and motivate me.

Bhagwan, Aapko hamara pranam !

Om Shanti.

Note:

This dialogue
seeks to highlight
the importance of continuous updating of knowledge.

shailesh.kwebmaker

Family Court Proceedings – Admissibility of Electronic Records – Privileged Communication – Video clippings recorded through pin hole camera with hard disk memory is primary evidence – Section 65B compliance not required. [Indian Evidence Act, 1872 – Sections 122, 14, 62,65B; Family Courts Act, 1984 – Section 13, 14]

Preeti Jain vs. Kunal Jain and
Ors. AIR 2016 RAJASTHAN 153

A husband filed for dissolution
of the marriage u/s. 13 of the family
Courts act, 1984 against his wife on the grounds of cruelty and
adultery. It was alleged that the applicant had in his possession a video
clipping recorded through a pin hole camera establishing his wife’s extra
marital relationship.

Counsel for the wife submitted
that the electronic record placed before the family court did not satisfy the
mandate of section 65B (4) of the indian evidence act, 1872, which requires a
certificate (signed by a person occupying a responsible official position in
relation to the operation of the relevant device or the management of the
relevant activities, whichever was
appropriate, through which the material was electronically
recorded) stating that the contents of the electronic recordings were true to
the best of his knowledge and belief. The prayer of the wife was dismissed.

It was held by the high Court
that it is the discretion of the family court to receive or not to receive the
evidence, report, statement, documents, information etc. placed before it on
the test, whether it does or does not facilitate an effective adjudication of the
disputes before it. Section 65B of the act of 1872 only deals with the
secondary evidence qua electronic records. It does not at all deal with the
original electronic records, as in the instant case, where the pinhole camera,
with a hard disk memory on which the recording was done has been submitted
before the family Court. Reliance was placed in the case of Anvar P.V. vs. P.K.
Basheer (2014)10 SCC 473:

“If an electronic record is
produced as a primary evidence u/s. 62 of the evidence act, the same is
admissible in evidence without compliance with the conditions of Section 65B of
the act of 1872.”

Hence, petition was dismissed.

shailesh.kwebmaker

Deductibility of Brokerage from Rent u/S. 23

The annual value of a house property is chargeable to income tax u/s. 22 of the Income-tax Act, 1961, under the head “Income from House Property”. Section 23 provides for a deeming fiction where under “the annual value of any property shall be deemed to be:

(a) The sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year, and owing to such vacancy, the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable.”

The proviso to section 23 allows a deduction from the annual value, of the municipal taxes actually paid during the year. Two other deductions are also permitted by section 24 – standard deduction @ 30% of the annual value, and a deduction for the interest payable on borrowed capital, where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital.

In a case where a property has been let out, the actual rent receivable during the year would be the annual value of the property in accordance with section 23, which value will be further reduced by the deductions specified in section 24 of the Act. In many cases where a property is let out, a broker is appointed to identify a tenant, and brokerage is paid to the broker for finding the tenant. The question has arisen before the Tribunal as to whether such brokerage paid to a broker for letting of the property on rent is an allowable deduction from the actual rent receivable in computing the annual value of the property or not?

While a bench of the Mumbai Tribunal has taken the view that such brokerage is an allowable deduction, another bench of the Mumbai Tribunal has taken a contrary view that brokerage is not an allowable deduction in computing the income from house property .

Govind S. Singhania’s case
The issue came up before the Mumbai bench of the Tribunal in the case of Govind S. Singhania vs. ITO in ITA No. 4581/Mum/2005 dated 3 April 2008 (reported in July 2008 40-A BCA Journal 449).

In that case, relating to assessment year 2002-03, the assessee gave his office premises at Mittal Towers on lease to a company, and incurred expenses of Rs.30,000 for stamp duty and Rs.85,000 for brokerage on account of renewal of lease agreement. The assessing officer held that these expenses were not allowable in computing the income under the head Income from house property, because they did not fall within the category of allowable expenses that were specified by the legislature. The Commissioner (Appeals) confirmed the order of the assessing officer.

Before the Income Tax Appellate Tribunal, it was contended by the assessee that it could not have earned the rental income without incurring these expenses. The stamp duty had to be paid as per the provisions of the Stamp Act on the lease agreement, as a mandatory requirement and since the assessee had let out the premises to the company through a broker, the payment of brokerage was also an obligation on the part of the assessee, which he had to incurr in order to earn the rent. It was further argued that the assessee could have asked the tenant to pay the stamp duty and brokerage, and could have adjusted such expenditures by reducing the amount of rent, in which case the assessee would have got a lower rent equivalent to the net rent. Therefore, such expenses were overriding in nature in relation to the rent receivable and were claimed to be allowable in computing the annual value. It was further argued that it was not the actual gross rent, which was to be treated as annual letting value, but the rent (net of these expenses), which was to be treated as actual rent received by the assessee and as annual letting value.

Reliance was also placed on various decisions of the Mumbai bench of the Tribunal in the context of deductibility of the society maintenance and non-occupancy charges paid to the Society, where it had been held by the tribunal that it was the rent net of such charges, which was to be taken as the annual letting value.

The Tribunal observed that it was not in dispute that without incurring those expenses, the assessee would not have earned the rental income. Further, in computing the annual value u/s. 23(1)(b), rental income received or receivable by the owner had to be taken into consideration and such rent had to be taken net of the expenses on stamp duty and brokerage, and that the said expenses had to be deducted from the very beginning, since whatever came into the hands of the assessee was only the net amount.

The Tribunal also found substantial force in the argument of the assessee that had these expenses been borne by the tenant, and only the net rent paid by the tenant, then the amount of such net rent only would have been taken to be the annual letting value u/s. 23(1)(b). Accordingly, the tribunal held that the annual letting value should be taken net of stamp duty and brokerage paid by the assessee.

Radiant Premises’ case
The issue again recently came up before the Mumbai bench of the Tribunal in the case of Radiant Premises (P) Ltd. vs. ACIT 61 taxmann.com 204.

In this case, relating to the assessment year 2010-11, the assessee had earned a gross rental income of Rs. 1.29 crore in respect of its office premises. It had paid a brokerage of Rs.1.12 crore for sourcing and securing a suitable licensee for the office premises, being 2 months of the rent and 2% of the security deposit. After reducing 30% of the annual value amounting to Rs.0.05 crore, the assessee offered the net rental income of Rs.0.12 crore to tax under the head “Income from House Property”.

The assessing officer did not allow the deduction of Rs. 1.12 crore paid towards the brokerage, holding that the computation had to be done only in accordance with the provisions of section 23, and only standard reduction was allowable u/s. 24. According to the assessing officer, there was no express provision regarding allowance of any expenditure such as brokerage, commission, etc. for determination of the annual value of the property, except the taxes levied by the local authority on payment basis in respect of the property. Relying upon the decisions of the tribunal in the cases of Tube Rose Estates (P) Ltd. vs. ACT 123 ITD 498 (Del) and ACIT vs. Piccadilly Hotels (P) Ltd .97 ITD 564, the assessing officer disallowed the claim of brokerage paid by the assessee.

The Commissioner (Appeals) confirmed the disallowance of brokerage on the ground that such deduction of brokerage was nowhere specified either in section 23 or in section 24.

Before the Income Tax Appellate Tribunal, it was argued that the payment of brokerage was directly related to the earning of rental income, and had therefore to be deducted from the gross rent, since section 23(1)(b) contemplated the actual rent received/receivable. It was argued that in various decisions, the Tribunal had held that stamp duty charges on license agreement, maintenance charges paid to the Housing Society, etc. were allowable u/s. 23 itself, and on the same analogy, brokerage also had to be allowed.

On behalf of the Department, it was argued that no expenditure could be allowed other than those deductions or expenses as specified in sections 23 and 24. It was further argued that most of the decisions cited by the assessee were in respect of maintenance charges paid to the society, which stood on a different footing, because such charges were for the maintenance of the property itself so that rights in the property could be enjoyed.

The Tribunal negatived the plea of the assessee that the phrase “actual rent received or receivable” meant the rent, net of deductions, actually received in the hands of the assessee. According to the tribunal, what was contemplated u/s. 23 was that the annual value of the property, which was let out should be the amount of rent received or receivable by the owner from the tenant/licensee. The first and foremost condition was that the amount should be in the nature of rent as previously agreed upon between the 2 parties for the enjoyment of rights in the property let out against payment of rent. The deductions envisaged in sections 23 and 24 were only in respect of municipal taxes, 30% of the actual value and interest payable on capital borrowed for acquisition, construction, repair, etc.

According to the Tribunal, the word “rent” connoted a return given by the tenant or occupant of the land or structure to the owner for the possession and use thereof. The rent was a sum agreed between the tenant and the owner to be paid at fixed intervals for the usage of such property. The phrase “rent received” and “rent receivable” contemplated the amount received for the enjoyment of the property and certain rights in the property by the tenant. According to the Tribunal, if there was a charge directly related to the rental income or for the property without which the rights in the property could not be enjoyed by the tenant, then it could be construed as part and parcel of enjoyment of the property from where it was received, and then such charges could be held to be allowable from the rent received or receivable. However, in the Tribunal’s view, the brokerage paid to the third party had nothing to do with the rental income paid by the tenant to the owner for enjoying the property. It could therefore not be said to be a charge that had been created in the property for enjoying the rights, and at best, it was only an application of income received/receivable from the rent.

The Tribunal referred to the decision of the Delhi Tribunal in the case of Tube Rose Estates (supra), for the proposition that where services had been provided by a third party to whom the brokerage was payable, the value of such services was not included in the rent. In that case the Tribunal had also distinguished a situation where part of the rent might have become payable to a third party before it accrued to the assessee in terms of an overriding charge, in which case there was diversion of rent at source, and to that extent, could be claimed as deduction while computing the income from house property. In case of payment of brokerage, the Tribunal had held that there was no charge created on the property, much less an involuntary charge enforceable by law, which could be claimed as a deduction.

The Mumbai Tribunal expressed a view that if expenses such as brokerage, professional fees, etc. were held to be allowable, then numerous other expenses like salary or commission to an employee/agent who collected the rent may also be held to be allowable, which was not the mandate of the law. It noted that the decisions cited before it mainly pertained to maintenance charges paid to a society, which was held to be an allowable deduction u/s. 23 itself. It distinguished between maintenance charges and brokerage paid, on the basis that maintenance charges were paid for the very maintenance of the property so as to enjoy the property itself, whereas brokerage had nothing to do with the property or the rent, and was given to a third party, who had facilitated the agreement between the landlord and the tenant to rent the property. It also distinguished the case where stamp duty had been held to be allowable, on the ground that stamp duty was directly related and was in connection with the lease agreement for renting of the property.

The Mumbai bench of the Tribunal therefore held that payment of brokerage could not be allowed as deduction either u/s. 23 or u/s. 24, and confirmed the disallowance of the brokerage paid while computing the income from house property.

A similar view had also been taken by the Mumbai bench of the Tribunal in the case of Township Real Estate Developers (India) (P) Ltd. vs. ACIT 51 SOT 411.

Observations
The issue, as far as section 23 is concerned, revolves around the true meaning of the term ‘actual rent received or receivable’. This term is interpreted in a manner that leaves a room for deducting such expenditure from rent where the expenditure is found to be directly related or in connection with the agreement for letting or receipt of rent. This part even Mumbai Tribunal records with approval in the Radiant Premises’ case. Brokerage is an expenditure that is incurred for earning rent. It is also an expenditure connected to the agreement of lease. It is also not in dispute that a broker, on payment of the brokerage, fetches you the best possible rent. There are no two views about it. In fact, brokerage is more directly related to the earning of better rent than the stamp duty and maintenance charges.

Once it is admitted that the said term used in section 23 is capable of inclusion, it is fair to not limit its scope in an arbitrary manner by selecting a few expenditures in preference to the other few. The interpretation that encourages the deduction is preferable, more so when the facts suggest that the brokerage paid has the effect of fetching a better rent and perhaps a better lessee. If society charges are found to be diverted under an overriding title, there does not appear to be logic in leaving the brokerage behind.

In Radiant Premises’ case (supra), the Tribunal took the view that the brokerage was not a diversion of the rent by overriding title, whereas the society charges was a case of diversion of rent by overriding title. While doing so, the Tribunal failed to appreciate that the brokerage preceded the earning of the rent, and that had it not been for the payment of the brokerage, there may have been no earning of rent. Further, society charges are payable as a consequence of letting out on rent, and arise subsequent and consequent to the accrual of rent. Therefore, if society charges are a diversion of income by overriding title, brokerage is all the more so. Both are inextricably linked with the rental income, and paid to third parties, other than the landlord and the tenant.

It is improper to deny deduction of an expenditure on brokerage simply on the ground that the payment was made to a third party. Payment of stamp duty or maintenance charges are always made to the third party and not to a lessee. In any case, the lessor in rare cases makes a payment to the lessee and therefore the condition that the expenditure should qualify for deduction on the basis of the status of the payee is not tenable. In Tube Rose’s case (supra), the Tribunal held that brokerage was not deductible, as it was paid to a third party. That logic does not appear to be correct, since society charges, which are also paid to a third party, have been held to be deductible.

A separate deduction was provided for collection charges vide section 24(1)(vii), till assessment year 1992-93,. Thereafter the scope of deduction u/s. 24(1)(i) for repairs was enhanced to include collection charges, and the quantum of deduction thereunder was raised to 1/5th of the annual value. Subsequently, with effect from assessment year 2002-03, various other deductions allowable till then, u/s. 24, such as insurance premium, annual charge, land revenue tax, etc. along with the deduction for repairs and collection charges, were replaced by a standard deduction u/s. 24(1)(a) at 30% of the annual value.

It does not appear to be appropriate to hold that substitution of new section 24 for its older version eliminated any possibility altogether for claim of any deduction even u/s. 23 of the Act. One cannot conclude that the standard deduction of 30% is meant to cover even collection charges as well, as was done by the Tribunal in Township Real Estate Developers’ case.

The Tribunal, in the case of Banwari Lal Anand vs. ITO 62 ITD 301 (Del), for assessment year 1989-90, in the context of section 24, held that “any sum spent to collect rent”, referred to in section 24(1)(vii), should be interpreted to mean “any amount spent with an aim to collect rent” and in that view of the matter, brokerage was held allowable as an amount spent to collect rent, being an amount spent with an aim to collect rent. Does this mean that after the amendment, brokerage would now not be allowable?

It is true that in computing the income under each head, only such expenses are allowed that are specifically allowed under the specified chapters that deal with the respective head of income. Admitting this position does not rule out the fundamental understanding that only such an income can be subjected to tax which is the real income. Taxing the gross rent without deduction of the brokerage paid is a case of taxing an unreal income.

Lastly, the logic that, had the parties provided for lower rent, with brokerage payable by the tenant, the annual value would have been such lower rent, is an extremely compelling argument to support deduction of brokerage and the logic is approved in Govind Singhania’s case (supra). Can a mere change of form, without change in substance, change the annual value?

No doubt two views may be possible on the subject, the better view appears to be that, just as society charges and stamp duty are held to be allowable deductions in computing the annual value u/s. 23 itself, brokerage paid for obtaining a tenant too shall also be allowable as a deduction in computing the annual value u/s. 23. It is suggested that the law should be amended to put the issue beyond doubt by providing for a specific deduction, as doing so would make the taxation more realistic.

shailesh.kwebmaker

Independence, transparency, accountability

The judiciary has been the saviour of the Indian public on a number of occasions. It has stepped in when the bureaucracy, politicians and yes occasionally even the media have failed to protect public interest. While the role of the independent judiciary can hardly be forgotten, with utmost respect it is difficult to agree with the decision of the apex court in regard to the procedure for appointment of judges in the higher judiciary.

In a majority judgement, the Supreme Court struck down the validity of the National judicial appointments commission (NJAC), and held that the old collegium system should continue. One would certainly agree that the independence of the judiciary must be protected at all costs, but one wonders whether replacing the Collegium system, with something which was far more transparent would affect such independence. It is possible that the NJAC methodology may have had problems but it could have possibly been fine-tuned rather than rejecting it.

Under the current system a Collegium of the senior most judges headed by the Chief Justice of India (CJI), appoint judges of higher courts. The appointing authority is the President of India who makes these appointments in consultation with the Chief Justice. However, the concurrence of the CJI is absolutely necessary.

While hailing the role of the judiciary, one must appreciate that it is an institution run by human beings. In such a situation if only judges appoint judges without any input from other sections of society, can it be said to be the best system? It is true that in judicial appointments, there must be no interference particularly of politicians and bureaucrats and the line of control must be defended at all costs. Having said this, if the appointments are left to only those within the judicial system without any other stakeholder having a say in such appointments, it is likely that some degree of prejudice might creep in. Further, such a system does not appear to be even transparent.

In regard to appointments to the highest offices of institutions, be it business, industry or public offices the appointing process has inputs from others whose interests are affected. The stakeholders are consulted either directly or indirectly. One entirely appreciates that if there is political influence in appointments of judges the result would be disastrous, and probably this is one factor that may have crossed the minds of the judges when they rejected the NJAC. If that is so, it really reflects on the current quality of politicians.

The people have placed their faith in the judiciary. If that faith is to be maintained, then again with the utmost respect some changes in the process of appointment is essential. As some lawyers have suggested in articles appearing in the press there could be members from the Rajya Sabha and Lok Sabha reflecting the entire political spectrum, eminent lawyers, included in the committee which makes recommendations for these appointments. These recommendations could then be considered by the President. There could be a large number of variations possible. Instead of having a closed door system where persons from only one fraternity decide as to who should be appointed/promoted to more responsible positions, the system should be such that there is accountability to the public whose interest the judiciary protects.

It is however necessary to tread very carefully so that any change that is made does not impinge on the independence which is of paramount importance. Our country has witnessed scenarios where the concept of a “committed judiciary” was mooted. In the recent past, we have seen some battles between the two pillars of democracy namely the legislature and the judiciary to determine as to which one is supreme. The people of India hope that both these, understand their respective roles and respect. The people directly elect the members to the Lok Sabha, and indirectly through their representatives in the state legislatures, members to the Rajya Sabha. If these honourable members so elected go astray in discharging their responsibility, the people look up to the judiciary to crack the whip and rein them in. That is why those appointed to hold these high offices must be appointed in a manner that cannot be faulted. The judges know the saying that justice is not only to be done but must be seen to be done.

It is heartening to note that while the NJAC has been rejected, there is recognition of the fact that there is need to have a relook at the collegium system of appointments. It is possibly for this reason that a hearing has been fixed in November.

One hopes that as we celebrate the festival of lights, this confrontation between the legislature and judiciary will cease and a system that is independent, accountable and transparent will evolve. If and when that happens, there will be real cause for celebration.

I take this opportunity to wish all readers, their families and friends, a happy Diwali and a prosperous New Year.

levitra

shailesh.kwebmaker

How much of Enough is Enough?

Have you heard the oft made statement “Enough is enough?” Having heard it on various occasions and in various contexts, I have wondered – How much of something is enough?

If you normally have two slices of bread and a soup, is it enough when you had that much on any particular day?

If you have waited until half an hour past the time that your client had scheduled an appointment with you, is it waiting enough?

If your staffer at office keeps giving you excuses for nonperformance and he gives you yet another reason for nonperformance, have you had enough?

If your boss cribs and this is one more evening when he expects you to continue working late in the office, have you had enough?

If you completed the 100 metres dash in just over a minute when the rest of them were languishing way behind, have you done enough?

If you rose from a boy selling newspapers to becoming one of the scientists at a local research centre, is it achievement enough?

If you .were a nobody who has now become a millionaire, was it enough to call it enough?

If you enjoyed good health, a reasonably affluent life style and a loving family, is it life lived well enough?

Is enough a limit which you or the world around you sets for you? Is it a mental construct? Is it a limiting belief which you have placed upon yourself to either console yourself or become complacent with yourself?

Does any of these have a potential which when reached, you declare that you have achieved one hundred percent? Is that potential a myth?

Is it a sagely advice or a venting out of frustration? Is it a reflection of the end of patience or is it a glass ceiling? Is it an imaginary line to tell yourself that now you need to STOP?

Have I said MORE THAN ENOUGH to ignite your mind?

levitra

shailesh.kwebmaker

Deduction of tax at source – Rent – Definition – Landing and parking charges paid by Airlines to Airports Authority of India are not for the use of the land but are charges for services and facilities offered in connection with the aircraft operation at the airport and hence could not be treated as “rent” within the meaning of section 194-I

Japan Airlines Co. Ltd. vs. CIT (Civil Appeal No.9875 of 2013) CIT vs. Singapore Airlines Ltd. (Civil Appeal No.9876 – 9881 of 2013) [2015] 377 ITR 372 (SC)

The International Civil Aviation Organization (“ICAO”) to which India is also a Contracting State has framed certain guidelines and rules which are contained in the Airports Economic Manual and ICAO’s Policies on Charges for Airports and Air Navigation Services. All member States abide by the guidelines and rules prescribed for various charges to be levied for facilities and services provided including landing/parking charges.

The Airports Authority of India (AAI) under the provisions of the Airport Authority of India Act, 1994, has been authorised to fix and collect charges for landing, parking of aircrafts and any other services and facilities offered in connection with aircraft operations at airport and for providing air traffic services such as ground safety services, aeronautical communications and navigational aides, meteorological services and others at the airport.

Japan Airlines Ltd. (JAL), a foreign company incorporated in Japan is engaged in the business of international air traffic. It transports passengers and cargo by air across the globe and provides other related services. JAL is a member of the International Air Transport Agreement (“IATA”) and during the financial year 1997- 98 (assessment year 1998-99) it serviced inward and outbound air traffic to and from New Delhi, India. The AAI levied certain charges on the JAL for landing and also for parking its aircrafts. JAL paid the charges after deducting tax at source u/s. 194C of the Act. The JAL received letter dated 2nd August, 1996, from the AAI informing it that the AAI had applied to the income-tax authorities for exemption from the tax deduction and were awaiting the clearance. It was further stated in the said letter that in the meanwhile JAL should deduct the tax on landing and parking charges at 2 % u/s. 194C. JAL, accordingly started making TDS at 2 %. In the relevant assessment year, it paid the AAI a sum of Rs.61,60,486 towards landing and parking charges. On this amount, TDS comes to Rs.1,57,082 when calculated at 2 % which was deducted from the payments made to the AAI and deposited with the Revenue. The JAL thereafter filed its annual return in Form 26C for the financial year 1997-98.

The Assessing Officer passed an order under section 201(1) of the Act on 4th June, 1999, holding the JAL as an assessee-in-default for short deduction of tax of Rs.11,59,695 at source. He took the view that payments during landing and parking charges were covered by the provisions of section 194-I and not under section 194C of the Act and, therefore, the JAL ought to have deducted tax at 20 % instead of at 2 %. The JAL filed the appeal against this order before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) accepted the contention of the JAL and allowed the appeal, vide order dated 31st January, 2001, holding that landing and parking charges were inclusive of number of services in compliance with the International Protocol of the ICAO. The Revenue challenged the order of the Commissioner of Income-tax (Appeals) by filing an appeal before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal dismissed this appeal on 25th October, 2004, confirming the order of the Commissioner of Income-tax (Appeals).

The Revenue persisted with its view that the matter was covered by section 194-I and therefore, it went to the High Court by way of further appeal u/s. 260A of the Act. Two questions were raised (i) whether the Tribunal was correct in holding that the landing/parking charges paid by the JAL to the AAI were payments for a contract of work u/s. 194C and not in the nature of “rent” as defined in section 194-I; and (ii) whether the Tribunal was correct in law in holding that the JAL was not an assessee-indefault. The High Court allowed the appeal by answering the questions in favour of the respondent following its earlier decision in the case of United Airlines vs. CIT. In that case, the High Court had taken the view that the term “rent” as defined in section 194-I had a wider meaning than “rent” in the common parlance as it included any agreement or arrangement for use of land. The High Court further observed that the use of land began when the wheels of an aircraft touched the surface of the airfield and similarly, there was use of land when the aircraft was parked at the airport.

A Special Leave Petition was filed against the aforesaid judgment of the High Court in which leave was granted.

In another appeal which involved Singapore Airlines Ltd., the Commissioner of Income-tax/Revenue had filed the appeals before Supreme Court as the High Court of Madras in its judgment dated 13th July, 2012, had taken a contrary view holding that the case was covered u/s. 194C of the Act and not u/s. 194-I of the Act thereof. The Madras High Court had taken the note of the judgment of the Delhi High Court but had differed with its view.

The Supreme Court observed that the two judgements were in conflict with each other and it had to determine as to which judgment should be treated in consonance with the legal position and be allowed to hold the field. According to the Supreme Court since the main discussion in the impugned judgment rendered by the High Court of Delhi and also the High Court of Madras centered around the interpretation that is to be accorded to section 194-I of the Act, it would first discuss as to whether the case is covered by this provision or not.

The Supreme Court held that from the reading of section 194 I, it became clear that TDS is to be made on the “rent”. The expression “rent” is given much wider meaning under this provision than what is normally known in common parlance. In the first instance, it means any payments which are made under any lease, sub-lease, tenancy. Once the payment is made under lease, sublease or tenancy, the nomenclature which is given is inconsequential. Such payment under lease, sub-lease and/or tenancy would be treated as “rent”. In the second place, such a payment made even under any other “agreement or arrangement for the use of any land or any building” would also be treated as “rent”. Whether or not such building is owned by the payee is not relevant. The expressions “any payment”, by whatever name called and “any other agreement or arrangement” have the widest import. Likewise, payment made for the “use of any land or any building” widens the scope of the proviso.

The Supreme Court noted that in the present case, the airlines are allowed to land and take-off their aircrafts at IGIA for which landing fee is charged. Likewise, they are allowed to park their aircrafts at IGIA for which parking fee is charged. It is done under an agreement and/or arrangement with the AAI. The moot question therefore was as to whether landing and take-off facilities on the one hand and parking facility on the other hand, would mean “use of the land”.

The Supreme Court observed that in United Airlines’ case [287 ITR 281 (Del)], the High Court held that the word “rent” as defined in the provision has a wider meaning than “rent” in common parlance. It includes any agreement or arrangement for use of the land. In the opinion of the High Court, “when the wheels of an aircraft coming into an airport touch the surface of the airfield, use of the land of the airport immediately begins”. Similarly, for parking the aircraft in that airport, there is use of the land. This was the basic, nay, the only reason given by the High Court in support of its conclusion.

The Madras High Court, on the other hand, had a much bigger canvass before it needed to paint a clearer picture with all necessary hues and colours. Instead of taking a myopic view taken by the Delhi High Court by only considering use of the land per se, the Madras High Court examined the matter keeping wider perspective in mind thereby encompassing the utilisation of the airport providing the facility of landing and take-off of the airplanes and also the parking facility. After taking into consideration these aspects, the Madras High Court came to the conclusion that the facility was not of “use of land” per se, but the charges on landing and take-off by the AAI from these airlines were in respect of number of facilities provided by the AAI which was to be necessarily provided in compliance with the various international protocol. The charges therefore, were not for the land usage or area allotted simpliciter. These were the charges for various services provided. The substance of these charges was ingrained in the various facilities offered to meet the requirement of passengers’ safety and on safe landing and parking of the aircraft and these were the consideration that, in reality, governed by the fixation of the charges. According to the Supreme Court, the aforesaid conclusion of the High Court of Madras was justified which was based on sound rationale and reasoning.

The Supreme Court after noting the technological aspects of the runways in some detail held that the charges which were fixed by the AAI for landing and take-off services as well as for parking of aircrafts were not for the “use of the land”. That would be too simplistic an approach, ignoring other relevant details which would amply demonstrate that these charges are for services and facilities offered in connection with the aircraft operation at the airport. These services include providing of air traffic services, ground safety services, aeronautical communication facilities, installation and maintenance of navigational aids and meteorological services at the airport.

The Supreme Court concluded that the charges were not for the use of land per se, and therefore, it would not be treated as “rent” within the meaning of section 194-I of the Act.

Note: The Supreme Court, however, disagreed with the interpretation of the expression “any other agreement or arrangement for the use of land or any building” made by the Madras High Court limiting the ambit of the words “any other agreement or arrangement” by reading it ejusdem generis from the expression “lease, sub-lease or tenancy”. According to the Supreme Court, the second part was independent of the first part which gives much wider scope to the term “rent” and to that extent it agreed with the Delhi High Court that the scope of the definition of rent is very wide and not limited to what is understood as rent in common parlance.

shailesh.kwebmaker

Submission of Annual Financial Statements and Annual Return by Private Limited Companies under the Companies Act 2013

The following questions deal with provisions of the Companies Act 2013 pertaining to submission of Annual Financial Statements and Annual Return as applicable to Private Limited Companies. While experienced readers will be well aware of the legal provisions and the procedural aspects, this piece is intended for those who are relatively new to Company law compliances.

1. Which are the relevant sections pertaining to disclosures’ to be made in Annual Financial Statements and Report of Directors and Annexure thereto?

(i) Section 129, read with Rule 5-6 of the Companies (Accounts) Rules 2014 and schedule-III, for Financial Statements;
(ii) Section 134 read with Rule 8 of the Companies (Accounts) Rules 2014 for contents of Directors Report;
(iii) Section 1351 read with Rule 8 of Companies (Corporate Social Responsibility Policy) Rules 2014 for disclosure by the Companies about CSR activites;
(iv) Section 186 (4) for disclosure about loans, guarantees and investments to Members in the Annual Financial Statement;
(v) Section 188 (2) pertaining to disclosure of every Related Party Transaction in Board’s Report in Form AOC-2;
(vi) D isclosure under the proviso to sub-section (3) of section 67 pertaining to exercise of voting rights arising out of shares purchased by the employee out of funds provided by the Company;
(vii) Compliance with respect to provisions of section 73 read with Companies (Acceptance of Deposit) Rules 2014;
(viii) Section 92 pertaining to extract of Annual Return to be attached with Board Report;
(ix) Confirmation about eligibility and willingness of Statutory Auditors and their proposed appointment and ratification by Members in respect of existing tenure u/s. 139 (1) and Provisos thereto.

2. What are the contents of Annual Return?

In terms of section 92, Annual Return completed upto the close of financial year should be prepared containing therein following information:

(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
(c) its indebtedness;
(d) its members and debenture-holders along with changes therein since the close of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year;
(f) meetings of members or a class thereof, Board and its various committees along with attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment;
(i) matters relating to certification of compliances, disclosures as may be prescribed; (j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses, countries of incorporation, registration and percentage of shareholding held by them;

3. In which format Annual Financial Statements and Report of Directors and Annexure thereto and Annual Return should be filed with the Registrar?

Clear scanned copies of the following documents, digitally signed by One Director holding valid digital signature and further certified by Practicing Professional shall be filed with the Registrar of Companies having jurisdiction over the Registered Office of the Company in the following Formats:

(a) E -Form AOC-4 for Copies of Financial Statements, Report of the Auditors and Report of the Board;
(b) E -Form AOC-4-CFS for submission of consolidated financial statements pertaining to subsidiary companies and associate companies2 ;
(c) E -Form AOC-4 XBRL in respect of Private Companies having turnover of Rs.100 crore or more or Companies with paid up capital of Rs.5 crore or more, Annual Financial Statements, including Report of Auditors, Directors Report, Annexure thereto should be filed electronically3 within 30 days of date of Annual General Meeting4
(d) A nnual Return in E-Form MGT-7 completed upto close of Financial Year should be filed within 60 days of the date of the Annual General Meeting.

4. What is the signing and certification requirements pertaining to Annual Return?

Annual Return should be signed by a Director and a Company Secretary, where there is no Company Secretary; the same should be signed by Company Secretary in practice.

Except in case of One-Person Company and Small Company the Annual Return should be signed by the Company Secretary or Director.

Every Company filing Annual Return, having a paid up share capital of Rs.10 crore or more or turnover of Rs. 50 crore or more shall get the Annual Return certified by Company Secretary in practice and the Certificate shall be in Form MGT-8.

5. What are the penal provisions in respect of failure on the part of the Company to file Annual Financial Statement and Annual Return applicable to the Company and its Directors?

(a) Failure to file Financial Statements:-

Penalty for Company:

If a Company fails to file within the time period provided u/s. 403 of the Act, it shall be punishable with a fine of Rs.1,000 per day till the default continues and aggregate of such fine cannot exceed Rs.10 lakh.

Penalty for Managing Director, CFO or Other Director:

The Managing Director and the Chief Financial Officer of the Company,( if any), and, in the absence of the MD and the CFO, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than Rs.1 lakh but which may extend to Rs.5 lakh, or with both.

(b) Failure to file Annual Return:-

Penalty for Company:

Failure on the part of the Company to file Annual Return within time limit provided u/s. 403 even with additional fees would attract a fine minimum of Rs.50,000/- but which may extend upto Rs.5,00,000/-.

Punishment for Officer in Default:

Every Officer of a Company in default shall be subject to imprisonment extending upto 6 months or a fine minimum of Rs.50,000/- but which may extend upto Rs.5,00,000/- or both.

levitra

shailesh.kwebmaker

SEBI levies highest ever Rs.7,269 cr ore pena lty – but order creates certain concerns

Introduction
SEBI has recently levied the highest penalty in its history – a penalty of Rs.7,269 crore (more than $1 billion, to put it in a different way). The order is noteworthy not just for the fact that the maximum possible penalty under law has been levied, but for several other reasons. These include whether, even in the aggravated circumstances, does such a penalty make sense or is it arbitrary. This order is also noteworthy because the penalty has been levied jointly and severally on all the directors of the company, whether executive or non-executive, apart from the company itself.

The matter was of course serious. While more facts as laid down in the SEBI order will be discussed later, this case concerned Collective Investment Schemes (“CISs”) that have generally become the bane in India. Tens of thousands of crores have been collected from the public, either in blatant violation of the law or through regulatory arbitrage. The stated purpose of such schemes is rarely the actual purpose. The amounts are often collected with the help of well-paid commission agents who promise high returns to investors, the monies collected are usually squandered and when the ponzi schemes, which they usually are, come to a dead end, nothing much is left for the investors/depositors. Thus, the violators need to be punished strictly. Let us examine the facts of this case as stated by SEBI, the contentions of the parties and also the reasoning that SEBI has been given to levy the huge and maximum penalty.

Background and facts of the case
CISs have been in existence for a number of decades. For some reason, though there are several existing laws and though the law makers and SEBI made further specific laws to regulate / prohibit them, CISs seem to proliferate and collect monies in ever increasing amounts. Perhaps the promoters were emboldened by the relatively ambiguous laws and poor enforcement/punishment, which was prevalent till very recently. To regulate what CISs usually do, that is collecting monies in various forms by promising high returns, there are several and strict laws framed by SEBI, Reserve Bank of India, state governments, etc. However, multiple laws have resulted not only in multiple regulators but sector specific laws that enable, for determined persons, to find regulatory gaps.

Thus, a large number of “CISs” operating in India rarely accept deposits openly or investments which would straightaway fall foul of the laws framed by the Reserve Bank of India/Securities and Exchange Board of India. They, instead, create a camouflage of an apparently bonafide activity for which monies are raised. The earliest of examples were of so-called plantation companies. While some of the early ones did carry out plantation activity and linked the investments made with the planation, they were followed by companies that engaged in such activities only by appearance. Many of these latter companies claimed that they were collecting monies for sale of plants, which, when they grow, would result in high appreciation. They provided farming and similar services. Thus, on paper at least, they sold (or rented) plots to investors and also plants. They claimed to provide services to manage these plants and eventually cut and sell them at a profit. On paper, the plants and returns thereon, high or low (or even negative) belonged to the investors, after paying the service charges. In reality, it was usually found that fixed returns were promised. What is more, there did not exist plants/land corresponding to the amount paid by the “investors”. Thus, while the “investors” paid for specific/ earmarked plants, no such specific/earmarked plants existed. Usually, even in aggregate, the number of total actual plants with the companies were far smaller than the number of plants “bought” by investors. Thus, once the camouflage of plants was removed, the business was more or less of collecting deposits. SEBI has been recently passing orders in large numbers against such companies on the ground that they violated the various provisions of Securities Laws relating to CISs.

The present case, as per the SEBI order, is also of a similar type, though the amount collected is huge. It was claimed by PACL it was in the business of selling and developing plots of land. A person interested may buy a specific plot at a particular amount. PACL would then develop it and then transfer it to the buyer or sell it and pay the proceeds to the buyer. On paper, this would sound like an ordinary case of investment in property. However, on inquiry into facts, SEBI found that this was not so. The cumulative finding and conclusion was that the whole scheme was not of sale/development of land but a CIS.

The background of the litigation and the developments in law are also worth a review. The proceedings against PACL were going on since almost two decades. Securities Laws were first amended specifically relating to CISs in 1995. There have been progressive developments including framing of regulations relating to CISs, which required, inter alia, existing and new CISs to register with SEBI and comply with various stringent requirements. Action has been taken against various CISs that were in contravention of the regulations. Generally, the vires of these laws/amendments have also been upheld by the Supreme Court.

The amendment specifically relevant for the present case were made as late as in 2013 and these are the provisions that have formed the basis for levy of penalty. Regulations 4(2) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“the FUTP Regulations) was amended to include the following clause making illegal mobilisation of funds by CISs to be deemed to be a fraudulent/unfair trade practice.

“4. Prohibition of manipulative, fraudulent and unfair trade practices
(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:—
…
(t) illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any collective investment scheme by any person.” The result was that various forms of action, including levy of penalty, could be taken against persons who indulged in such activity.

Interestingly, the amendment was made with effect from 6th September 2013. In the present case, thus, SEBI investigated into and made a finding of the amount collected from 6th September 2013 to June 15, 2014 (since SEBI did not have exact figures for the broken period in September 2013, it took the proportionate amount from 1st October 2013). It thus concluded that the amount collected during this period was Rs.2,423 crore.

Section 15HA of the SEBI Act, 1992, deals with violations of the FUTP Regulations. It reads as under:-
“Penalty for fraudulent and unfair trade practices. 15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.”

This provision is the basis for levy of the penalty in the present case.

SEBI’s Order
SEBI made several findings pursuant to which it conclud-ed that PACL was engaged in the business of a collective investment scheme and not dealing in and development of land as it claimed. Thus, it held that the company had committed fraudulent/unfair trade practices as specified in Regulation 4(2)(t) of the FUTP Regulations. SEBI also took a view that a case of this type deserved the high-est amount of penalty. Thus, it levied the maximum pos-sible penalty permissible u/s. 15HA, viz., three times the amount of profits made or Rs.25 crore, whichever is high-er. Since the amount collected was Rs.2,423 crore, SEBI levied a penalty of Rs.7,269 crore.

The penalty was levied jointly and severally on the com-pany and all its directors. Individual directors had given reasons why, for various reasons, penalty should not be levied on them. SEBI rejected these submissions.

Some observations

Considering that huge losses are made by the common man in such schemes, stringent action is needed and is inevitable. A large penalty would act, amongst other things, as a strong deterrent for others too.

Curious, however, is the manner in which the penalty was determined. SEBI has stated that the amount of Rs.2,423 crore represents the gross amount collected by PACL. In other words, this represents the amount “invested” or deposited by the public. Section 15HA, however, provides for penalty of “three times of profits made”. There is no finding as to what were the costs and what were the net profits made. There does not appear to be any finding on whether any amount was been refunded and whether the amount represents gross or net collections.

Levying penalty on the basis of gross collection sounds arbitrary for another reason. The company has collected Rs.2,423 crore. Thus, though the underlying facts are not on record, this would be the total and maximum funds available with the company as assets. In reality, considering also that the SEBI order refers to commission paid to agents out of such collection, and considering other costs, the net amount actually available with the company would be much less. To levy a penalty of three times this amount thus sounds arbitrary and unrealistic since there is no possibility of a company which has available a fraction of the gross amount collected, to pay an amount three times the gross amount collected.

Interestingly, as is evident from other orders of SEBI/SAT on the company, the amount collected by the company in earlier years and the assets available with them have been referred to. It appears that the assets available are a small fraction of the amount totally collected. Hence, it appears, even if one were to add the fresh collections made, the company does not have any net assets. In any case, SEBI has already directed that these earlier collections should be promptly refunded.

All the directors too are made jointly and severally liable to the penalty. No finding or distinction has been made on the role of individual director including the special role, if any, by the non-executive directors.

It will have to be seen whether such penalty is at all recovered or it just remains on paper. It will also have to be seen whether such order is upheld, for reasons as stated above, in appeal. If it is reversed, it would do injustice not only to the investors in PACL but investors in other CISs too.

In any case, the order will have to be welcomed at least as a deterring example to would be CISs and generally other entities that commit such frauds/unfair trade practices.

shailesh.kwebmaker

To Market , to Market to Save Stamp Duty

Introduction
Stamp duty is often considered to be a major cost in modern-day trade and commerce. Added to this is the fact that the dual-model of Central and State Stamp Acts offer a unique stamp duty arbitrage opportunity. All of this makes for a heady cocktail of innovative stamp duty planning, counter responses by the State revenue authorities and equally novel judgments by the Courts.

Through this article, let us examine one such issue, that of stamp duty on mortgage deeds, and some recent interesting developments in this field.

History Lessons
Before understanding the present-day developments, let us first brush up our basics on stamp duty which are relevant for setting the ground for this issue.

Stamp Duty is a subject of both the Central and the State Government. This dichotomy exists because of a provision in the Constitution of India. Often a question arises, which Act applies – the Indian Stamp Act, 1899 or the Maharashtra Stamp Act, 1958.

Stamp Duty is leviable in Maharashtra on every instrument mentioned in Schedule I to the Maharashtra Stamp Act, 1958 (“the Act”) at rates mentioned in that Schedule, provided the instrument is executed in Maharashtra. A copy of an instrument whether by way of a fax or otherwise of the original instrument shall also be charged with full duty in Maharashtra in all cases where the original though chargeable with duty, has not been stamped. However, if the original has been duly stamped, then the Maharashtra Stamp Act provides that a duplicate or a counterpart will be stamped with a maximum duty of Rs. 100.

Duty is only levied on an instrument and that too provided the Schedule mentions rates for it. The definition of the term instrument has been amended to incorporate an electronic record as defined under the Information Technology Act, 2000. This definition defines an electronic record to mean data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated microfiche. Thus, even a document in the form of an electronic record is liable to be stamped. Hence, even a scanned copy of the original would be liable. What happens if a scanned copy is saved on a cloud storage is an interesting question – can it be said that the image has entered the State if the cloud server is not physically present in the State? Would mere viewing of the image be treated as an entry? These are issues which present posers similar to taxation of e-commerce transactions.

U/s. 18 of the Act, every instrument mentioned in Schedule I is liable to duty in Maharashtra if it is executed at any other place but it relates to property situated in Maharashtra and such instrument is received in the State. The Act further provides that if any instrument is chargeable with duty but it is executed outside Maharashtra then it may be stamped within 3 months of the instrument entering the State of Maharashtra.

U/s. 19 of the Act, if an instrument pertaining to property located within the State is executed outside the State but a copy of the same is received in Maharashtra, then the differential duty would be payable on the copy whenever it is received in Maharashtra.

At first, both sections 18 and 19 appear to be overlapping and dealing with the same issue. Moreover, while section 18 states that the instrument would be chargeable with the entire duty once received in Maharashtra, section 19 states that the differential would be paid once it enters the State. Is there some inconsistency? The position would be clear if one reads section 18 as applying to a case where the instrument is executed abroad, i.e., outside both Maharashtra and India, but section 19 as applying where the instrument is executed outside Maharashtra but within India. Hence, in the first case, where the instrument is executed abroad, there is no credit for any duty paid abroad since no duty was paid in India. However, in the second case, where the instrument has been executed within India but outside Maharashtra, then a credit for the duty paid in any other State of India is available. Thus, section 18 is the larger provision while section 19 may be considered to be a sub-set of section 18 of the Act.

If one instrument covers several instruments or several distinct matters then the duty would be the aggregate of all the duties chargeable on each separate instrument. However, if for executing one transaction, several instruments are executed, then only the principal instrument would be liable to duty and the other instruments would be chargeable with a duty of Rs. 100 only. This is a very important distinction which needs to be kept in mind ~ if one transaction is covered in several instruments, the duty is only once at the highest duty which would be chargeable in respect of any of the instruments employed, but if one instrument comprises more than one transaction within itself, then the duty on that one instrument would be then aggregate of all instruments.

Stamp Duty on Mortgage Deed – Duty Shopping!
The Supreme Court in Union of India vs. Azadi Bachao Andolan, 263 ITR 706 (SC) has upheld the concept of Treaty Shopping in the context of income-tax. Could such a view also be taken in the context of stamp duty? Can a company incorporated in one State decide to execute a deed in another State in order to save on precious stamp duty?

This question is put in sharper perspective when viewed in the context of say, a mortgage deed. Several Indian companies have borrowed heavily. This is all the more true for certain sectors, such as, infrastructure, realty, steel, etc. It is trite that alongwith debt comes creation of a security in favour of the lenders such as banks, financial institutions etc. Creation of a security involves execution of a mortgage deed. Executing a Mortgage entails payment of stamp duty and herein lies the possible tax saving!

A mortgage deed by way of deposit of title deeds attracts a stamp duty under the Maharashtra Stamp Act @ 0.2% of the amount secured subject to a maximum of Rs. 10 lakh. This is one of the most popular ways of creating a mortgage, especially in the real estate and infrastructure sector. Alternatively, a mortgage deed under which possession of property is not given attracts duty @ 0.5% of the amount secured again subject to a maximum of Rs. 10 lakh. .

The corresponding stamp duty figures for these two mortgage instruments, if executed in the State of Delhi would be 0.5% subject to a cap of Rs. 50,000 and 0.2% subject to a ceiling of Rs. 2 lakh, respectively.

Thus, for a single mortgage document, the savings for a company based in Mumbai executing a mortgage deed in Delhi, could range between Rs. 8 lakh to 9.50 lakh. Multiply this amount by several mortgage deeds for multiple lenders (more on that later) and there could be a substantial saving!

However, as discussed above, the moment a copy of such a mortgage deed executed in Delhi by a Mumbaibased company pertaining to property located in Mumbai enters Mumbai, the copy itself would be liable to the differential duty.

The decision of the Bombay High Court in M/s. Win-NQuiz Company Limited vs. The Authorized Officer, Bank of Baroda, 2011 (5) Bom. CR 69 is apposite on this issue. Here a mortgage deed was executed in Kolkata for a flat in South Mumbai. The instrument was impounded when presented as evidence in Mumbai since it was under stamped as per the Maharashtra Stamp Act. The Division Bench of the Bombay High Court held that where an instrument relating to property situated in the State is executed outside Maharashtra and it is subsequently received in Maharashtra, then the amount of duty chargeable on the instrument is to be the duty chargeable under Schedule I on a document of like description executed in Maharashtra less the amount of duty, if any, already paid under any other law in force in India.

Further, in L&T Finance Ltd vs. M/s. Saumya Mining Ltd, ARBP/290/2014, the Bombay High Court by its Order dated 8th July, 2014, has held that the stage of paying differential stamp duty gets triggered only when the instrument or a copy is brought into the State and not until then. Once the Act gets triggered the parties have a maximum of 3 months to set the defect right.

One for All?
Remember the motto of Alexandre Dumas’ 3 Musketeers – One for All! What if there is one deed for all lenders? Say in a mortgage deed a security is created in favour of one trustee for a consortium of lenders, would stamp duty be payable as if it is only one instrument or is it duty as on one instrument multiplied by the number of lenders in the consortium? At first blush, one may be tempted to say that duty is never on a transaction and always on an instrument and hence, since there is only one mortgage deed executed in favour of one trustee by one borrower, albeit for the benefit of several lenders, the duty should only be once. Well if you thought as this Author did, then you too were wrong according to a decision of the Supreme Court!

The decision of the Supreme Court in Chief Controlling Revenue Authority vs. Coastal Gujarat Power Ltd., Civil Appeal No. 6054 of 2015, Order dated 11th August, 2015 is very singular. To better appreciate the ratio it is necessary to first indulge a bit in the brief facts of this important judgment. A company needed financial assistance for setting up a Power Project and for that purpose it secured assistance from 13 lenders. The 13 lenders all financial institutions formed a consortium as a trust and executed a security trustee agreement appointing one banker as the lead trustee, called the security trustee. The company executed a mortgage deed with the security trustee mortgaging its immovable property assets as mentioned in the deed. The document was stamped with duty as applicable to one mortgage deed. However, the Revenue Authority claimed that the duty should have been paid 13 times over on the same instrument since there were 13 separate lenders.

The Supreme Court held that the company had formed the consortium and had executed the present mortgage instead of several distinct instruments of mortgage with the sole purpose of evading stamp duty and that the company had availed financial assistance from 13 lenders for its project and consequently, the company was required to execute mortgage deed in favour of the 13 lenders. However, in order to avoid payment of stamp duty on each mortgage deed, the company got the lenders to form a consortium and appointed one security trustee. Thus, in substance, the mortgage deed between the trustee on behalf of the lenders and the company was actually a combination of 13 mortgages dealing with the company and such lenders.

Hence, the Court held that the company could not be allowed to evade payment of stamp duty by forming a consortium. Further, the instrument in question relates to several distinct matters or distinct transactions inasmuch as the company availed distinct loans from 13 different lenders. Hence, it was manifest that the instrument of mortgage came into existence only after separate loan agreements were executed by the borrower with the lenders with regard to separate loan advanced by those lenders to the company borrower. The mortgage deed recited at length as to how and under what circumstances the property was mortgaged with the security trustee for and on behalf of lender banks. Altogether 13 banks lent money to the mortgagor, details of which were described in the deed and for the repayment of that money, the borrower entered into separate loan agreements with 13 financial institutions. Had this borrower entered into a separate mortgage deed with these financial institutions in order to secure the loan, there would have been a separate document for distinct transactions. Accordingly, it could safely be regarded as 13 distinct transactions, each liable to stamp duty even though the instrument was only one. Thus, the Apex Court upheld the stand of the revenue that the correct amount of duty was the duty payable on one mortgage deed multiplied by 13!

This decision substantially pushes up the duty liability for companies. Now, in the example discussed above, if a Mumbai-based company were to try to select Delhi as a jurisdiction, the savings could be as high as Rs. 8.5 lakh * 13 (assuming there are 13 lenders) = Rs. 1.10 crore.

Enhanced Powers
The 2015 Amendment Act has amended the Maharashtra Stamp Act, 1958 giving more powers of inspection to the Collector. If he has reason to believe that there is an evasion of duty by fraud or omission, then he may call for any registers, books, records, electronic device, electronic record, CD, disk, papers, etc. He can also enter any premises and impound any documents. Further, the maximum penalty for evasion of duty has been doubled to four times the duty evaded. Thus, an inspection for suspected evasion could lead to severe consequences.

Conclusion
The constant see-saw between companies on the one hand and the revenue department on the other hand to save valuable stamp duty reminds one of the famous nursery rhyme (albeit with a little tweak):

“To Market, to Market, to save Stamp Duty,
Home Again, Home Again, sans any Booty!!”

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General Principles

Arjun (A) — Hey Bhagwan, today I was very eager to meet you.

Shrikrishna (S) —Why? You seem to be relaxed after the nightmare of 30th September.

A — Indeed, it was a nightmare. Fortunately the due date was extended by one month. But about the situation at that time, the less said the better! And what is the use of extension granted after the due date?

S — True. An eye-opener for you people. You need to be more proactive and disciplined.

A — I agree.

S — But why were you so eager to meet me?

A — I read a nice story on ethics.

S — Oh, I see. So you have also started taking the topic seriously.

A — Yes. I was earlier shaken by listening to so many stories about our Code of Ethics. But now I have woken up!

S — Tell me the story.

A — You might have heard of a very renowned surgeon – Dr. V. N. Shrikhande.

S — Of course, yes! Who would not know him? He performed a difficult surgery on the President of India.

A — Yes. An internationally acclaimed surgeon. Literally a God on the earth!

S — Not only excellent as a professional but a saintly person. What of him?

A — His book ‘Reflections of a Surgeon’ was recently published. He has narrated a beautiful experience. He performed an almost impossible, complex surgery on a patient very successfully while he was in UK.

S — Oh! Then what happened?

A — Naturally, all the family members of that patient treated him like a God. They revered him like anything.

S — Naturally!

A — Once the doctor went for his driving test. And by coincidence, the same patient’s very close relative was the officer there.

S — Then the doctor’s task would be very easy!

A — No, it is worth listening. That officer welcomed him with great respect and affection.

S — That goes without saying.

A — But intriguingly, the officer failed the doctor in the test! You know why?

S — No, Tell me.

A — Merely because the doctor did not adjust the mirror while sitting!!

S — Great Lesson! Thank you for this great story, Arjun. That is real duty consciousness. Real ethics!

A — Yes. He rightly thought that issuing a wrong licence could be fatal to somebody.

S — That is ethics. That is the real value-based behaviour; and the same holds good in your profession.

A — Yes. We sign the wrong accounts – or certificates – often knowing them to be wrong. We take things lightly.

S — One wrong balance-sheet may lead to loss of revenue to the country. And if based on such financials, if loans are given, the unit would soon become an NPA! It is a waste of public money.

A — True. Many people may suffer as a result of one NPA. If that unit is closed, its employees become jobless. Bank’s soundness is weakened.

S — Moreover, there is unproductive litigation. Public confidence is shaken. If the borrowers are large corporates, the loss is really grave. The whole society suffers.

A — Once credibility is lost, it is difficult to regain it. That is why, of late, I have become extra careful. A few of my clients in fact left me since I started asking questions.

S — Incidentally, one of your colleagues was arguing with me on the scope of your Code of Ethics. Actually he had taken a personal loan from his client.

A — But an auditor cannot be a debtor to the auditee! You yourself told me once.

S — Actually, the CA was not the auditor; but only taxconsultant.

A — Okay! Then what happened?

S — The CA defaulted in the repayment of loan. So the client, after tolerating for long, filed a complaint with ICAI.

A — But you said it was a personal loan; nothing to do with the profession. Isn’t it?

S — That’s the stand he is taking. But then, your Code covers not only professional misconduct; but also ‘other’ misconduct. It means a behavior unbecoming of a professional.

A — I agree. It may affect the credibility of the CA profession as a whole. It brings disrepute to the profession.

S — For example, if a cheque issued by a CA bounces, it may also attract a disciplinary action if there is negligence. It may include misbehavior even in social or family context.

A — So the irresponsible manner of driving a car is also unethical!

S — Of course, yes!

A — So the doctor’s story is very relevant. And we must commend the act of that officer. What would have happened in our country?

S — The doctor would have received a driving licence even without giving a test!

A — Just as a few CAs certify the balance sheets even without the books of account! This is inviting trouble for all of us. We need to mend our ways ! Om shanti !!!!!

Note:
The provisions of the Code of Ethics are equally applicable to the advisory work undertaken by us professionals. The above dialogue tries to explain the same.

The C.A. can also be charged under the Consumer Protection law.

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Reference to larger Bench: Right of Reference – Chief Justice in his administrative capacity cannot constitute a larger bench for the purpose of deciding a pure question of law: Gujarat High Court Rules, 1993.

Suo Moto vs. Gujarat High Court Advocate’s Association; 2015 (320) E.L.T. 564 (Guj.)(HC)

A
preliminary objection as to the maintainability of certain References
at the instance of the then Chief Justice of the Court was raised.

According
to the learned Counsel, a reference to a Larger Bench can be initiated
only at the instance of a Judge sitting singly or the Judges of a
Division Bench or even the Judges of a Larger Bench, provided the said
Court while dealing with a judicial matter proposes to disagree with the
view earlier taken by any other Bench of this Court on the self same
point. According to the learned Counsel, in these cases, the
subject-matter of dispute is the proposition of law laid down by a
Division Bench of this Court consisting of Justice Shethna and Justice
Patel and, thus, unless another Judge of this Court sitting singly or
another Division Bench, in judicial side, disagrees with the above view,
there is no scope of referring the matter to the Chief Justice for
constitution of a Larger Bench. The decision given by the said Division
Bench while laying down the proposition of law has not been appealed
against by the aggrieved party and has attained finality and the said
decision is binding upon a Division Bench or a learned Single Judge of
this Court as a precedent, while deciding any subsequent judicial
matter. In such circumstances, the Chief Justice of this Court, sitting
in administrative capacity, is not authorised by law to make a Reference
to a Larger Bench for the purpose of deciding the correctness of the
said decision of the Division Bench. In other words, according to the
learned Counsel, the initiation of Reference is not permissible under
law, unless there exists a pending judicial matter where the Judges of
the Bench or a learned Single Judge has referred the matter on judicial
side before the Chief Justice. The learned Counsel, therefore, prayed
for dismissal of these References as not maintainable.

The
Hon’ble Court referred to Rules 5 and 6 of the Gujarat High Court Rules,
1993, and observed that Rule 5 authorises either a learned Single Judge
or a Division Bench to refer the matter pending before them or any
question arising in such matter to a Division Bench of two-Judges or a
larger Bench respectively. On such Reference being made, it is the duty
of the Chief Justice to constitute either a Division Bench or a larger
bench for the decision on the question referred or for decision of the
matter referred.

Rule 6 of the Gujarat High Court Rules, on the
other hand, authorises the Chief Justice of the High Court to direct
either by a special or a general order that any matter or class of
matters should be placed before a Division Bench or a Special Bench of
two or more Judges.

Thus, Rule 6 of the Rules of 1993 merely
authorises the Chief Justice to place any pending matter or any type of
pending matters to a Division Bench or a Larger Bench notwithstanding
the fact that according to the Rules of 1993, those matters are required
to be decided by any learned Single Judge or a Division Bench fixed by
the Chief Justice in exercise of his power of fixation of roster. The
aforesaid Rule also authorises the Chief Justice to place the matter,
which is otherwise required to be heard by a Division Bench, for hearing
before a Larger Bench.

In the matter of References, the source
of Reference must be a judicial order passed by either a learned Single
Judge or any Bench while deciding a judicial matter. The Chief Justice,
in his administrative capacity, cannot constitute a Larger Bench for the
purpose of deciding a pure question of law simply because the Chief
Justice is of the view that such question, notwithstanding a decision of
a Division Bench of this Court in one way or other, is required to be
heard by a Larger Bench. Even if on any important question, there is no
decision of this Court, such fact cannot enable the learned Chief
Justice to constitute a Larger Bench suo motu in exercise of
administrative power.

The Court also considered the inherent power of the Chief Justice as the “muster of roster”.

A
right of Reference, like the one of appeal, review or revision, is a
substantive right and is a creature of statute and should be exercised
strictly in the manner as provided for in the statute which creates such
right.

Thus, it was held that there is no scope of referring
any question at the instance of the Chief Justice in his administrative
capacity to a Larger Bench which is not preceded by a Reference at the
instance of a Court sitting in judicial capacity and relating to any
matter pending in such Court.

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Public authority – Co-operative Societies – is not public authority – Right to information Act 2005 section 2(h)

Public Information officer, Illayankudi Co-op. Urban Bank Ltd; Sivagangai District vs. Registrar, Tamil Nadu Information Commission, Chennai & Ors.; AIR 2015 Madras 169 (HC)

The question which fell for consideration before the Hon’ble Court was whether a co-operative registered under the Tamil Nadu Co-operative Societies Act, 1983, is a “public authority” within the meaning of section 2(h) of the Right to Information Act, 2005 ( “RT I Act”).

It was contended that the co-operative society is not a body, which is controlled by the Government and hence, does not fall within the definition of section 2(h) of the RTI Act. Further, it is contended that the word “control” in section 2(h) of the RT I Act relates to administrative control and not a regulatory control and the, provisions relied on by the Writ Court and the judgments referred pertain to a regulatory control and are not applicable to the facts and circumstances of the case. It was further contended that though the co-operative societies are manned by Special Officer appointed by the Government, it would not become a “public authority” to be covered under the provisions of RT I Act.

In the case of Thalappalam Ser. Coop., Bank Ltd., and Others, (AIR 2013 SC (Supp) 437), appeals were filed by co-operative societies and the question which fell for consideration before the Hon’ble Supreme Court was whether a co-operative society registered under the Kerala Cooperative Societies Act, 1969, will fall within the definition of “public authority” u/s. 2(h) of the RT I Act and be bound by the obligation to provide information sought for by a citizen under the RTI Act. On the first issue with regard to co-operative societies and Article 12 of the Constitution, the Hon’ble Supreme Court pointed out that a clear distinction can be drawn between a body which is created by a statute and a body much after having come into existence is governed in accordance with the provisions of a statute and the societies which were subject matter of the appeals were held to fall under the later category, i.e., governed by the Kerala Societies Act and not statutory bodies, but only body corporate within the meaning of section 9 of the Kerala Co-operative Societies Act. The Hon’ble Supreme Court, held that the said societies which were the subject matter of those appeals will not fall within the expression ‘State’ or ‘instrumentality of the State’ within the meaning of Article 12 of the Construction.

On the next issue relating to Constitutional provisions and Co-operative autonomy, it was held that co-operative societies are not treated as a unit of Self Government like Panchayat and Municipalities. The Hon’ble Supreme Court then proceeded to examine the provisions of the Right to Information Act, the effect of words “substantially financed” and the restrictions and limitations, which could be imposed in the larger public interest and held that the co-operative societies registered under the Kerala Co-operative Societies Act will not fall within the definition of “public authority” as defined u/s. 2(h) of the RTI Act.

In the present matter, the Hon’ble Court held that the legal issue arising in the appeals are squarely covered by the decision of the Hon’ble Supreme Court in the case of Thalappalam Ser. Co-op. Bank (supra). Further, the distinction sought to be drawn by the learned counsel for the respondent stating that the provisions of the RT I Act would be applicable to cases where the Government Officers are appointed to function as Special Officers of the society, when there is no elected Board of Directors, could hardly make any difference. Thus, the appeals were allowed holding that societies will not fall within the definition of “Public Authority” as defined u/s. 2(h) of the RTI Act.

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Probate – Revocation – Notice not served on daughter and wife of testator before grant of probate – Probate liable for revocation: Succession Act, 1925 section 263

Kalyani Maite (Smt.) & Anr vs. Shridam Maite; AIR 2015 (NOC) 1008 (Cal.) (HC)

The appellants are the wife and daughter of one Rabindra Nath Mite who died on 05.03.1994. Rabindra Nath Maite had three brothers by full blood. The appellants/petitioners have pleaded that the Will dated 08.01.1990 alleged to have been executed by Rabindra Nath Maite is fake and fabricated. It is alleged that Rabindra Nath Maite had no intention to give the property described in the said Will to his nephews-Samir Maite and Somnath Maite by appointing the respondent, Shridam Maite (brother) as the executor of the said Will. The appellants have specifically stated that the deceased Rabindra Nath Maite was not in good terms with his brothers including the respondent.

The appellants have also pleaded that necessary notices were not served on the appellants in the probate proceeding, though the appellants have interest in the estate of the deceased Rabindra Nath Maite as his legal heirs.

The Hon’ble Court observed that section 263 of the Indian Succession Act, 1925 lays down that the grant of probate or letters of administration may be revoked or annulled for just cause. It is laid down in the Explanation to the said section 263 that just cause shall be deemed to exist where (a) the proceedings to obtain the grant were defective in substance; or (b) the grant was obtained fraudulently by making a false suggestion, or by concealing from the Court something material to the case; or (c) the grant was obtained by means of an untrue allegation of a fact essential in point of law to justify the grant, though such allegation was made in ignorance or inadvertently; or (d) the grant has become useless and inoperative through circumstances; or (e) the person to whom the grant was made has willfully and without reasonable cause omitted to exhibit an inventory or account in accordance with the provisions of Chapter VII of this Part, or has exhibited under that Chapter an inventory or account which is untrue in a material respect.

In the present case, the appellants had specifically pleaded in the application before the Trial Court that no notice from the Court was served upon the appellants in respect of the probate proceeding and no notice was received by the appellants. The respondent Shridam Maite had stated in his evidence that the notice of probate proceeding was served on the appellants

The Court observed that the appellant Mithu Biswas has specifically denied her signature on the notice alleged to have been served on the appellants in connection with the probate proceeding. As the appellant Mithu Biswas has denied her signature on oath on the notice of the probate proceeding, the onus is shifted on the respondent to prove that that notice was duly served on the appellants by the Court bailiff. The respondent could have discharged this onus by examining the bailiff as witness who is alleged to have served the notice of the probate proceeding on the appellants. In the absence of the examination of the bailiff as witness by the respondent, it was held that the respondent has failed to establish that the citations of the probate proceeding were served on the appellants before grant of probate. The non-service of citations upon the appellants who have interest in the estate of the deceased Rabindra Nath Maite as his legal heirs is the just cause for revocation of grant of probate.

Since the citations of the probate proceeding was not served upon the appellants who have interest in the estate of the deceased as legal heirs, the grant of probate is liable to be revoked.

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Natural Justice – Right of cross examination – Is integral part of natural justice principles – Affidavit – Not evidence: Evidence Act, 1872 section 3:

Ayaaubkhan Noorkhan Pathan vs. State of Maharashtra & Ors. AIR 2013 SC 58

The Hon’ble Court observed that not only should the opportunity of cross examination be made available, but it should be one of effective cross examination, so as to meet the requirement of the principles of natural justice. In the absence of such an opportunity, it cannot be held that the matter has been decided in accordance with law, as cross examination is an integral part and parcel of the principles of natural justice.

The Hon’ble Court observed that affidavits are not included within the purview of the definition of “evidence” in section 3 of the Evidence Act, and the same can be used as “evidence” only if, for sufficient reasons, the Court passes an order under Order XIX of the Code of Civil Procedure, 1908 (CPC). Thus, the filing of an affidavit of one’s own statement, in one’s own favour, cannot be regarded as sufficient evidence for any court or Tribunal, on the basis of which it can come to a conclusion as regards a particular fact or situation. However, in a case where the deponent is available for cross-examination, and opportunity is given to the other side to cross-examine him, the same can be relied upon. Such view stands fully affirmed, particularly in view of the amended provisions of Order XVIII, Rules 4 and 5 of the CPC.

When a document is produced in a court or a Tribunal, the question that naturally arises is: is it a genuine document, what are its contents and are the statements contained therein true. If a letter or other document is produced to establish some fact which is relevant to the inquiry, the writer must be produced or his affidavit in respect thereof be filed and opportunity afforded to the opposite party who challenges this fact. This is both in accordance with the principles of natural justice as also according to the procedure under Order 19 of the CPC and the Evidence Act, both of which incorporate the general principles.

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Application for restoration – Dismissal on ground that petition and affidavit were signed by counsel and not by party: CPC 1908 Order 9, Rule, 9

Balkrishnan vs. Geetha N.G. ; AIR 2015 Kerala 223 (HC)

Cases were filed by spouses against each other before the Family court. Husband filed petition for joint trial of all the cases. On the date of hearing, counsel for the husband was not present and the petitions filed by the husband were dismissed for default. The counsel filed a petition to restore the cases and the affidavit in support of the petition was sworn by the counsel. The Family Court dismissed the petition on the ground that the petition and the affidavit were signed by the counsel and not by the party. Appeal was filed by the petitioner contending that the counsel was authorised to swear the affidavit and file the petition for restoration.

The Court held that a lawyer could file a petition, on behalf of the party he represents, under Order IX, Rule 9 of Code of Civil procedure duly signed by him on behalf of the party he represents, even though the vakalatnama did not expressly authorise an advocate to file an application for restoration. If the court is satisfied that there was no express prohibition in doing so, it has to assume that the counsel had implied authority to file such application. Thus, it was held that there was sufficient cause for the petitioner’s counsel for presenting the above petition in the Family Court and it cannot be said that the petition, filed by a lawyer is not in accordance with the law. Therefore, the order dismissing petition to restore the cases passed by the Family Court was set aside.

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Section A: Disclosure as per section 186(4) of the Companies Act , 2013

Section A: Disclosure as per section 186(4) of the Companies Act , 2013

Compilers’ Note
Section 186(4) of the Companies Act, 2013 requires disclosure in the financial statements regarding “full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security”. This disclosure is in addition to the disclosures required for ‘loans and advances’ as per Schedule III to the Companies Act, 2013 as well as related disclosures required as per the notified accounting standards.

The disclosures u/s. 186(4) apply to all companies – including private limited companies.

Given below are some illustrative disclosures given by companies for the above.

Hindalco Industries Ltd . (31-3-2015)
From Notes to Financial Statements
Fixed Assets

53. (a) D etails of Loans given, Investments made and Guarantees given covered u/s. 186(4) of the Companies Act, 2013:
(i) D etails of Investments made given as part of Note No. 14 (Non-Current Investments) and Note No. 17 (Current Investments).

(ii) Loans and Corporate Guarantees given below: (Rs. Crore)

Gillette India Ltd. (30-6-2015)
From Notes to Financial Statements

1. Disclosure required under 186(4) of the Companies Act, 2013 for loans given:

Above intercorporate loans have been given for general business purposes for meeting their working capital requirements.

Reliance Industries Ltd . (31-3-2015)
From Notes to Financial Statements

37. Details of loans given, investments made and guarantee given covered u/s 186(4) of THE COMPANIES ACT, 2013 Loans given and Investments made are given under the respective heads.

Sobha Ltd . (31-3-2015) From Notes to Financial Statements Disclosure required u/s.186(4) of the Companies Act 2013: For details of loans, advances and guarantees given and securities provided to related parties refer note 26. Note: Note 26 gives disclosures regarding names of related parties and transaction details. The same are not reproduced here.

Tata Global Beverages Ltd .
(31-3-2015)
From Directors’ Report
Particulars of Loans, Guarantees or Investments by the Company

Details of Loans, Guarantees and Investments covered under the provisions of Section 186 of the Companies Act, 2013 are provided in Annexure 3 attached to this report.

Annexure 3
Particulars of investment made and guarantee/loan given during the year

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Unabsorbed losses and depreciation – Difference in treatment

Difference between Accounting Standards (AS) and Ind–AS in regard to recognition of Deferred Asset (DTA ) in regard to unabsorbed losses and carry forward depreciation.

There is a difference in the virtual Certainty Principles in AS 22 and Ind AS 12 for recognition of DTA on unabsorbed losses and carry forward depreciation.

Accounting Standard – 22
AS 22 Accounting for Taxes on Income lays down the general criterion of “reasonable certainty” for the recognition of a deferred tax asset (DTA ). However, if an entity has unabsorbed depreciation or carry forward of tax losses, it needed to satisfy a much higher threshold of “virtual certainty supported by convincing evidence” to recognise DTA . Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a matter of perception and is to be supported by convincing evidence. Evidence is a matter of fact. To be convincing, the evidence should be available at the reporting date in a concrete form, for example, a profitable binding export order, cancellation of which will result in payment of heavy damages by the defaulting party. On the other hand, a projection of the future profits made by an enterprise based on the future capital expenditures or future restructuring etc., submitted even to an outside agency, e.g., to a credit agency for obtaining loans and accepted by that agency cannot, in isolation, be considered as convincing evidence. Even subsequent opinions from the Expert Advisory Committee have emphasised the need for profitable binding orders for recognition of DTA .

Apparently, the “virtual certainty” criteria laid down in AS 22 for the recognition of DTA was difficult to implement because it required the existence of profitable binding orders. In many industries, the requirement for orders does not exist, and hence, it was difficult to demonstrate virtual certainty in those cases, despite the existence of other convincing evidence.

Ind AS – 12
The requirement in Ind AS 12 is somewhat relaxed when compared to the requirements in AS 22. Under Ind AS 12, when an entity has a history of recent losses, the entity recognises a deferred tax asset arising from unused tax losses or tax credits only to the extent that the entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available against which the unused tax losses or unused tax credits can be utilised by the entity. An entity considers the following criteria in assessing the probability that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised:

a) whether the entity has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits can be utilised before they expire;
b) whether it is probable that the entity will have taxable profits before the unused tax losses or unused tax credits expire;
c) whether the unused tax losses result from identifiable causes which are unlikely to recur; and
d) whether tax planning opportunities are available to the entity that will create taxable profit in the period in which the unused tax losses or unused tax credits can be utilised.

A deferred tax asset shall be recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. To the extent that it is not probable that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised, the deferred tax asset is not recognised.

Differences
Whilst the requirement in Ind AS 12 are somewhat relaxed; it does not necessarily mean that it has become absolutely easy to recognise DTA on unabsorbed losses and carry forward depreciation. Nonetheless, there could be many situations where a DTA can be recognised under Ind AS 12 but not under AS 22. For example, in the scenarios below, DTA is not recognised under AS 22, but may be recognised under Ind AS 12.

a) A newly set-up entity (New Co.) incurred significant losses in the first three years of operations due to reasons such as advertising and initial setup related costs, significant borrowing costs and lower level of activity in the first two years of operations. Over the years, there has been a significant increase in the operations of New Co. and its advertisement cost has stabilised to a normal level. Further, it has raised new capital during the year and repaid its major borrowing. The cumulative effect of all the events is that the New Co. has started earning profits from the fourth year. It is expected to make substantial profits in the next three years that may absorb the entire accumulated tax loss of the entity. However, the nature of the business is such that it does not have any binding orders.

b) A battery manufacturer (Battery Co.), who had incurred tax losses in the past, enters into an exclusive sales agreement with a car manufacturer (Car Co.). According to the agreement, all the cars manufactured by Car Co. will only use batteries manufactured by Battery Co. Though Car Co. has not guaranteed any minimum off-take, there is significant demand for its cars in the market.

c) An oil exploration company may have discovered proven oil reserves, whose extraction will result in significant profits based on current and forward prices of oil.

The virtual certainty principle has a fatal flaw; since nothing in this world is virtually certain. Even profitable binding orders could be cancelled without receiving any penalty or the buyer/seller could end up getting bankrupt. The principle of convincing evidence under Ind-AS12 is not only fair, but is also practical to apply, compared to the “virtual certainty” principle under AS 22. The standard setters should immediately revise AS 22 and bring it in line with Ind-AS 12.

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TS-568-ITAT-2015(Del) Cincom System Inc vs. DDIT A.Ys: 2002-07. Order dated: 30.09.2015

Section 9(1)(vi) of the Act, Article 12(3) of India- USA DTAA – Payment for access to networking facilities involving use of embedded software, is ‘royalty’ under the Act as well as India-US DTAA .

Facts
The Taxpayer, the US Company, was engaged in the business of providing software solutions including creating personalised document, management of solutions, managing complex manufacturing operations and building and maintaining personalised e-business software, development and solutions.

The Taxpayer entered into an agreement with its Indian Group Company (ICo), as per which the Taxpayer was required to provide ICo with an access to its internet and other email and networking facilities. For these services, ICo paid certain amounts to the Taxpayer. While for the first year under consideration, ICo claimed the payment was ‘fees for included services’, for subsequent years, it claimed they were not taxable in India. The Tax Authority, however, concluded that the payments were in the nature of royalty. However, the Taxpayer contended that such income is not taxable in India.

Held:
In the facts of the case, the Taxpayer provided ICo with access to its embedded software or Gateway for the purpose of enabling the customer from India to call the residents of USA or vice-versa. Therefore, the payment made by ICo to the Taxpayer would amount to payment for use of software and hence, would qualify as royalty u/s. 9(1)(vi) of the Act as well as under Article 12(3) of the India-US DTAA .

The Tribunal relied on the ratio of AAR decision in P. No. 30 of 1999, In re (1999) (238 ITR 296)(AAR), wherein it was held that payments made for access to US based global central processing unit would amount to royalty as such access allowed use of embedded secret software developed by Taxpayer.

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TS-342-ITAT-2015(Mum)-TP Aegis Ltd vs. ACIT A.Y. 2009-10. Date of Order: 27.07.2015

Subscription of shares cannot be recharacterised as a transaction of
loan without any material exceptional circumstance highlighting that the
real transaction has been concealed.

Facts
The
Taxpayer, an Indian Company, was engaged in the business of providing IT
enabled business processing outsourcing services to its associated
enterprises (AE) for the third party contracts and in-house receivable
management services.

The Taxpayer subscribed to the redeemable
preference shares of its subsidiary outside India. Subsequently,
Taxpayer redeemed some of the preference shares at par.

The Tax
Authority observed that preference shares issued by subsidiary were
non-cumulative and redeemable at par without any dividend. Thus. the Tax
Authority recharacterized the transaction of subscription of preference
shares into a transaction of advancing of unsecured loan and imputed
interest thereon.

The Taxpayer contended that subscription of
preference shares represents an investment transaction for acquiring
participation interest in subsidiaries and hence, it should not be
characterised as a transaction of loan.

Held
The Tax
Authority is incorrect in recharacterising the transaction of
subscription of shares into a transaction of loan. One cannot disregard
any apparent transaction and substitute it, without any material of
exceptional circumstance highlighting that the real transaction has been
concealed or the transaction was a sham.

In absence of
evidences and circumstances to doubt facts of the case, The Tax
Authority cannot question the commercial expediency of any transaction
entered into by a Taxpayer. Thus, the transaction of investment in
shares cannot be given different colour so as to expand the scope of
transfer pricing adjustments by recharacterising it as interest-free
loan.

Since recharacterisation of share subscription into loan
cannot be done even in case of an independent enterprise, such
recharacterisation is not warranted even in the facts of the case.
Therefore, no interest should be imputed on such transaction. Reliance
in this regard was placed on Mumbai HC decision in the case of Dexiskier
Dhboal SA (ITA No. 776 of 2011).

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TS-588-ITAT-2015(RJT) GAC Shipping India Pvt. Ltd. as agents for Alabra Shipping Pte Ltd. vs. ITO (IT) A.Y: 2011-12. Date of Order: 09.10.2015

Article 24 of the India-Singapore DTAA – Since income was taxable in Singapore on accrual basis, LOB Article could not be applied even though income was not repatriated to Singapore

Facts
The Taxpayer, a Singapore Co (FCo) owned a ship. FCo filed a tax return in India, through its representative assessee in India, in respect of freight earned from ship. Freight income of FCo was remitted to FCo’s bank account in UK.

In terms of Article 24 of India-Singapore DTAA provides that where an income is exempt from tax in a contracting state or where it is subject to beneficial rate of tax in a contracting state in terms of the DTAA and such income is subject to tax in that contracting state with reference to amount remitted to or received in the said contracting state, then the DTAA benefits would be available only with respect to amount remitted or received.

The Tax Authority contended that remittance to Singapore is a sine qua non for availing the benefits of the India- Singapore DTAA . Since the freight was remitted to UK, Tax Authority denied the benefits of DTAA.

FCo contended, freight income was taxable in Singapore on accrual basis by virtue of residence therein. This was confirmed by Singapore Tax Authority. Hence, the DTAA benefits should not be denied on freight income.

Held
Plain reading of Article 24 of the India-Singapore DTAA , indicates that provisions of Article 24 would apply only to the income which satisfies of the following two conditions
• Income should be exempt or taxed at reduced rate in source jurisdiction (i.e., India),
• Income should be taxed in residence jurisdiction (i.e., Singapore) only on receipt basis.

Scope of LOB Article should be appreciated in the background of a tax jurisdiction following territorial method of taxation. In such a case, the DTAA benefit must be confined to the amount which is actually subjected to tax in the home jurisdiction. The decision in Abacus International Pvt Ltd vs. DDIT (2013) 34 taxmann.com 21 (Mumbai – Trib.) can be distinguished since the onus is on the Taxpayer to show that income is taxable in Singapore on accrual basis, which the Taxpayer had not established in that case.

In this case, there is no dispute that the Taxpayer has offered its global income to tax in Singapore, on accrual basis, which is also confirmed by Singapore Tax Authority. Hence, Tax Authority cannot rely on the decision in case of Abacus. Accordingly, the LOB Article does not apply to the facts of the present case and DTAA benefit should be available in respect of freight income.

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TS-580-AAR-2015 Guangzhou Usha International Ltd. Date of Order: 28.09.2015

Article 12 of India-China DTAA – Procurement services involving market research and providing technical advice on product or process upgradation, rendered from outside India, falls within the ambit of Fee for Technical Services (FTS) under Article 12 of India-China DTAA

Facts
The Taxpayer, a Chinese Company, entered into an agreement with its Indian Parent (ICo) for provision of services in relation to procurement of goods from vendors in China. Such procurement services were rendered by the Taxpayer from China. ICo considered the payment as FTS and while paying the fee, suo motu withheld tax @10% from the fee.

The Taxpayer argued that the payment received for procurement services does not accrue or arise in India nor can it be treated as deemed to accrue or arise in India. Further, since the fee for such services is not received in India, income is not taxable in India under the Act. Under Article 12(4) of India-China DTAA , such payment for procurement services does not qualify as managerial, technical or consultancy services. Additionally, since the services are performed in China and not in India, such services would not fall under the definition of FTS under the DTAA .

The issue before the AAR was whether fee paid by ICo to The Taxpayer is taxable in India in terms of Article 12 of India-China DTAA .

Held
FTS is defined in Article 12(4) of India-China DTAA to mean any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State.

Procurement services rendered by The Taxpayer included not only identification of the products but also generating new ideas for ICo post conducting market research. It also involved evaluating the credit, organisation, finance, production facility, etc. and giving advice in the form of a report to ICo. The Taxpayer also provided information on new developments in China with regard to technology/ product/process upgrade. These are specialised services requiring special skill, acumen and knowledge.

Further, in GVK Industries vs. ITO [(2015) TIOL-10(SCIT) l-10(SC-IT)], SC had noted that “Consultant” is a person who gives professional advice or services in a specialised field. Services rendered by Taxpayer clearly indicate that the Taxpayer has the skill, acumen and knowledge in the specialised field of evaluation of credit, organisation, finance and production facility, in conducting market research and in giving expert advice with regard to technology/product/process upgradation. Such specialised service clearly falls within the ambit of consultancy services. Accordingly, the payment was FTS in terms of the Act as also the DTAA .

The China-Pakistan DTAA uses the phrase “provision of rendering of services”, whereas the India-China DTAA uses the phrase ‘provision of service’. The present case relates to the India-China DTAA . Any other DTAA cannot influence the scope of India-China DTAA. It is not correct to suggest that income is not sourced from India.

It is not correct to suggest that source rule of the treaty is limited to services rendered in India. The treaty refers to, the phrase ‘provision of service’ which has not been defined anywhere in the DTAA. The phrase “provision of services” has a very broad meaning when compared to the phrase “provision of rendering of services” and it covers services even when they are not rendered in a contracting state (India in this case). As long as services are used in India, they would be included in the phrase “provision of service”. Reliance in this regard was placed on decision of AAR in the case of Inspectorate (Shanghai) Limited (AAR No 1005 of 2010) and Mumbai ITAT decision in the case of Ashapura Minichem (ITA No.2508/Mum/08).

Since the services rendered by the Taxpayer were consultancy services, fee paid by ICo was FTS under Article 12 of the India-China DTAA and was chargeable to tax in India @10%.

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Digest of recent important foreign Supreme Court decisions on cross border taxation

In this article, some of the recent important foreign Supreme Court decisions on cross border taxation are covered. In view of increasing globalisation, movement of Capital, Technology and Personnel, various issues arising in taxation of Cross Border Transactions are increasingly becoming similar. The various issues discussed in these Foreign Supreme Courts’ decisions have a global resonance due to common terminology used in Model Tax Conventions and various Double Tax Avoidance Agreements. These decisions represent useful accretion to the jurisprudence on the respective topics/issues. The compilers hope that these decisions would be useful in guiding taxpayers, tax advisors, Revenue Officials and the Judiciary when similar issues come up for consideration in the Indian context.

1. France – Treaty between France and India – French Administrative Supreme Court rules on tax sparing/ matching credit provisions

In a decision (No. 366680, SA Natixis) given on 25th February 2015, the French Administrative Supreme Court (Conseil d’Etat) ruled on the tax sparing/matching credit provisions of the France – India Income and Capital Tax Treaty (1992) (the Treaty). The Court ruled that, for a French resident receiving interest from India to benefit from a tax sparing/matching credit, such interest must either have been subject to taxation in India or exempted by virtue of the laws of India referred to in article 25(3)(c)(i) or article 25(3)(c)(ii) of the Treaty.

(a) Facts. The French-resident bank SA Natixis (formerly SA Natexis Banques Populaires) received interest income from residents of India in 1998 and 1999. This interest income was exempt from tax in India. The tax authorities granted a tax credit for this income. However, considering that the tax credit was not calculated in accordance with the Treaty provisions, the French bank filed a claim. The first-instance Tribunal (Tribunal administratif) rejected its claim.

Confirming the judgment from the first-instance Tribunal, the administrative court of appeal (Cour administrative d’appel) ruled that the tax sparing/matching credit provided for by the Treaty regarding interest shall be granted only where such interest income was subject to tax in India. Where the interest income was not subject to any tax in India, it shall not entitle the French resident to a tax sparing/ matching credit, except where an Indian tax might have been payable but was not levied on the basis of one of the laws of India referred to in article 25(3)(c)(i) or article 25(3) (c)(ii) of the Treaty.

Thus, the administrative court of appeal found that the French bank was not entitled to any tax sparing/matching credit as the French bank:
– neither proved that the Indian-source interest income was subject to Indian tax;
– nor proved that the Indian-source interest income was exempt from Indian tax by virtue of one of the laws of India referred to in the Treaty.

Thus, the court first applied the interpretation given by the French Administrative Supreme Court regarding matching credit provisions contained in the Brazil-France Tax Treaty and then took into account the exception provided for in the Treaty.

(b) Issue. Whether interest income that was fully exempt from tax in India entitle its French recipient to a tax sparing/ matching credit under article 25 of the Treaty?

(c) Decision. The French Administrative Supreme Court ruled that:
– in general, a French resident receiving interest from India may benefit from a tax credit only where such interest was subject to taxation in India; and
– as an exception, a French resident receiving interest from India that was exempt from Indian tax may still benefit from a tax credit where a Indian tax would have been payable but for a full exemption granted under one of the laws of India referred to in article 25 of the Treaty.

The French Administrative Supreme Court then noted that the French bank:
– neither proved that the Indian-source interest income was subject to Indian tax;
– nor proved that the Indian-source interest income was exempt from Indian tax under one of the laws of India referred to in article 25 of the Treaty, and specify the law in question.

The French Administrative Supreme Court therefore concluded that the bank, which bore the burden of proof, was not entitled to any tax sparing/matching credit, and dismissed its claim.

2. Japanese Supreme Court decision – Bermuda LPS is not a corporation

On 17th July 2015, the Japanese Supreme Court disallowed an application by the tax authorities to appeal a Tokyo High Court decision, in which a limited partnership (LPS) registered in Bermuda was held not to be a corporation for Japanese tax law purposes.

(a) Facts. The taxpayer (Tokyo Star Holdings LP) is an LPS based on Bermuda law (Partnership Act 1902 and Limited Partnership Act 1883). The taxpayer is also an exempted partnership (EPS) based on Bermuda law (Exempted Partnerships Act 1992), which is not subject to tax on income in Bermuda.

A Delaware LLC and two Cayman corporations entered into several silent/sleeping partnership agreements with the former as silent/sleeping partners (tokumei kumiaiin) and the latter as business operators (eigyousha). The Cayman corporations as eigyousha had branches in Japan and were in the business of collecting claims.

The Delaware LLC then sold the interests in the silent/ sleeping partnerships to an Irish corporation. The taxpayer and the Irish corporation (as tokumei kumiaiin) subsequently entered into a swap contract under which the business profits of the eigyousha were distributed to the tokumei kumiaiin and, in turn, to the taxpayer.

The Japanese tax authorities argued that the distribution received by the taxpayer from the tokumei kumiai constituted domestic source income under article 138(11) of the Japanese Corporate Tax Act (CTA ). The taxpayer argued that since, as a Bermuda LPS, it was not a corporation within the meaning of the CTA , it was not a taxable entity.

(b) Issue. The first issue was whether the taxpayer was a corporation for Japanese tax law purposes. If not, the second issue was whether the taxpayer was a “non-judicial association, etc.” (jinkaku no nai shadan tou) within the meaning of article 3 of the CTA , which provides that such an association is treated as a corporation.

(c) Decision. The Tokyo District Court, in its decision of 30th August 2012, case number Heisei 23 (2011) gyou-u No. 123, reported in Kinyû Shôji Hanrei 1405-30, ruled that the taxpayer was neither a corporation nor a “non-judicial association, etc.”, and that taxation of the taxpayer was not void but illegal.

The tax authorities appealed, but the Tokyo High Court, in its decision of 5th February 2014, case number Heisei 24 (2012) gyou-ko No. 345, reported in Kinyû Shôji Hanrei 1450-10, upheld the Tokyo District Court’s decision.

The Supreme Court did not allow the tax authorities’ further appeal of the respondent, whereupon the matter was finalised.

With respect to the first issue, article 36(1) of the Japanese Civil Code provides that “…, no establishment of a foreign juridical person shall be approved; provided, however, that, this shall not apply to any foreign juridical person which is approved pursuant to the provisions of a law or treaty.” The courts held that whether a business entity is considered a “foreign corporation” (a foreign judicial person under the Civil Code) is determined with reference to the relevant foreign law governing the corporate legal personality of the business entity in question. In this case, the courts held that Bermuda law did not provide the taxpayer with a corporate legal personality, so that the taxpayer was not a “foreign judicial person” under civil law; therefore, the taxpayer was also not a “foreign corporation” under the CTA.

For the second issue, the courts held that a “non-judicial association, etc.” (jinkaku no nai shadan tou) under the CTA was equivalent to an “association without capacity to hold rights” (kenri nouryoku naki shadan) under civil law, which had been defined by the Supreme Court decision of 15th October 1964, case number Shouwa 35 (1960) o No. 1029, reported in Minshû 18-8-1671. In the 1964 Supreme Court case, it was stated that an “association without capacity to hold rights” must have (1) an organisation as a body, (2) a decision by majority, (3) continuation of the body despite the change of the members, and (4) a defined rule concerning representation, operation of a general meeting, management of properties, etc. In this case, the courts held that the requirements of (1), (2) and (4) were not satisfied; therefore, the taxpayer was not a “non-judicial association, etc.” and was not subject to Japanese corporate tax.

In conclusion, the tax authorities erred in taxing the Bermuda LPS; instead, the partners of the LPS (being corporate entities) should have been subject to tax.

Note: The Supreme Court, in its decision of 17th July 2015 ruled that a Delaware LPS was a corporation. In that case, the Supreme Court applied a “second stage of determination” where the attribution of rights and duties was concerned. Although the attribution of rights and duties was argued by the tax authorities in this Bermuda LPS case, the Tokyo District Court and High Court explicitly rejected this in arriving at their decisions on 30th August 2012 and 5th February 2014, respectively. Since the Supreme Court, in disallowing the appeal, did not mention the second stage of determination, it is reasonable to assume that the Supreme Court would have found that the Bermuda LPS was not a corporation, even if the second stage of determination in the Delaware LPS case had been applied.

3. Argentina – Supreme Court decision on application of substance-over-form principle and CFC rules

On 24th February 2015, the Supreme Court gave its decision in the case Malteria Pampa S.A. concerning the application of the substance-over-form principle (realidad económica) and controlled foreign company (CFC) rules. Specifically, the Court dealt with the difference between a foreign subsidiary and foreign permanent establishment (PE) of a resident company, and the timing of income taxation. Details of the case are summarised below:

(a) Facts. Malteria Pampa, a resident company, had a wholly-owned subsidiary based in Uruguay. The tax authority reassessed the company’s tax returns for 2000 and 2001 to include the profits derived by the non-resident subsidiary. The subsidiary had not paid any dividend; however, the tax administration applied the substance-over-form principle in order to disregard its legal form and to treat it as a foreign PE of the resident company. The tax authority based its position on the resident company’s control of the non-resident subsidiary in the form of capital ownership, voting power and company board appointment power.

(b) Legal Background. The CFC regime generally applies when a foreign subsidiary is a resident of a blacklisted jurisdiction and the passive income derived by that subsidiary is more than 50% of its total income.

The Income Tax Law (Ley de Impuesto a las Ganancias, LIG) contains detailed provisions distinguishing between a subsidiary and a PE by providing for a different tax treatment, i.e. article 69 of the LIG lists different taxable entities, explicitly stating PEs as taxable entities different from the subsidiaries. Articles 18, 128, 133, 148 of the LIG set out the timing for taxation of income accrued by PEs and subsidiaries, regulating situations where CFC rules apply.

(c) Decision. The Court upheld the taxpayer’s position based on the application of the provisions of the LIG, rejecting the application of the substance-over-form principle. In particular, it underlined the relevance of the legal form and confirmed that income derived by a foreign subsidiary may be taxed in the hands of a resident only when dividends are paid, unless CFC rules are applicable.

4 Finland Supreme Administrative Court – Profits of foreign PEs included when calculating FTC although no tax was actually paid abroad

The Supreme Administrative Court of Finland (Korkein hallinto-oikeus, KHO) gave its decision on 31st October 2014 in the case of KHO:2014:159.

(a) Facts. A company resident in Finland (FI Co) exercised its business activities in Finland and through permanent establishments (PEs) abroad, including PEs in Estonia (EE

PE) and the United Kingdom (UK PE). The PE profits, in general, were included in the taxable income of FI Co.
In addition, the PE profits were taxed in the country where they were located. However, UK PE did not have any taxable profits due to the losses from previous tax years which were set off against the profits. EE PE, on the other hand, did not pay any tax due to the Estonian tax system which does not tax undistributed profits.

(b) Legal Background. Under Law on Elimination of International Double Taxation (Laki kansainvälisen kaksinkertaisen verotuksen poistamisesta), double taxation is eliminated by crediting the tax paid on the foreign income in the source country. The foreign tax credit (FTC) is limited to the amount of Finnish tax payable on the foreign-source income.

EE PE and UK PE should be taken into account when calculating the maximum credit for the tax paid abroad.
(d) Decision. The Supreme Administrative Court held that the PE profits of EE PE and UK PE are to be included in the profits of FI Co when calculating the maximum credit for the taxes paid abroad. The Court pointed out that, when calculating the base for the FTC, it is not required that tax has actually been paid for such income. What is essential is that the income is taxable in Finland and in its source country. The fact that the moment of taxation has been deferred, as in the case of EE PE, has no relevance.

5. Norway – Supreme Court allows use of “secret comparables” in TP assessment

The Supreme Court of Norway (Norges Høyesterett) gave its decision on 27 March 2015 in the case of Total E&P Norge AS vs. Petroleum Tax Office (case 2014/498, reference number HR-2015-00699-A)

(a) Facts. Between 2002 and 2007, the taxpayer Total E&P Norge AS (NO Parent) sold gas to 3 foreign related companies. The tax authorities regarded that the sales prices were not at arm’s length based on a comparison between the sales by NO Parent and similar transactions executed by third-party taxpayers (the Third-party Sales). The tax authorities refused to disclose details of the

Third-party Sales due to confidentiality rules. NO Parent appealed on the assessment.

(b) Issue. The issue was whether the tax authorities could base their assessment on comparables which are not fully disclosed to the taxpayer.

(c) Decision. The Court rejected the appeal and ruled that the tax assessment could be based on “secret comparables”. The use of secret comparables was deemed necessary to ensure an effective control of the transactions. Even though NO Parent was not given access to all the Third-party Sales used as comparables, NO Parent obtained enough information to have an adequate opportunity to defend its own position and to safeguard effective judicial control by the courts, as stated in the OECD Transfer Pricing Guidelines.

6. France – Administrative Supreme Court rules that individual with French income only is resident of France

In a decision given on 17th June 2015 (No. 371412), the Administrative Supreme Court (Conseil d’Etat) ruled that an individual living outside France, but whose only income is a French-source pension has the centre of his economic interests in France. Such an individual is thus a resident of France under domestic law.

(a) Facts. Mr. Georges B. is a French pensioner who lived in Cambodia from 1996 to 2007, working there as a volunteer for non-governmental organisations. His only income during these years was a French pension paid to a French bank account.

The pension was subject to withholding tax applicable to pensions paid to non-resident individuals. As the withholding tax was higher than the income tax that he would have paid as a resident, Mr. Georges B. claimed a tax refund. The tax authorities, however, considered that Mr. Georges B. could not be regarded as a resident of France and that the withholding tax was applicable to his case. The Court of First Instance (tribunal administratif) as well as the Administrative Court of Appeals (cour administrative d’appel) confirmed the tax authorities’ position. The Administrative Court of Appeals considered that the mere payment of a French pension to Mr Georges B. was not sufficient to retain the centre of his economic interests in France insofar as:

– the payment of the pension to a French bank account was merely a technical method chosen by the taxpayer himself;

– parts of the pension were transferred to Cambodia to cover the needs of Mr. Georges B. and his new family there;

– Mr. Georges B. administered his French bank account from Cambodia; and
– the pension was not a remuneration derived from an economic activity carried out in France.

(b) Issue. Under article 4 B(1) of the General Tax Code (Code général des impôts, CGI), resident individuals are persons who:

– have their home or principal abode in France; or

– perform employment or independent services in France (unless such activity is only ancillary); or
– have the centre of their economic interests in France.

In this case, the issue was whether an individual living and working outside France but whose only income is a French-source pension has the centre of his economic interests in France.

(c) Decision. The Administrative Supreme Court ruled that the elements on which the lower courts based their judgments did not prove that the centre of the economic interests of Mr. Georges B. shifted out of France. As his only income was French-sourced, Mr. Georges B. still had the centre of his economic interests in France between 1996 and 2007. Thus, Mr. Georges B. was a resident of France under domestic law.

The French Administrative Supreme Court thus confirmed that the centre of the economic interests of an individual must be assessed mainly with regard to his income, irrespective of the exercise of an economic activity.

Note: Cambodia and France did not conclude a tax treaty.

Consequently, only domestic law was applicable.

7. Netherlands Supreme Court – business motive test also applies to external acquisitions

On 5th June 2015, the Netherlands Supreme Court (Hoge Raad der Nederlanden) (the Court) gave its decision in the case of X1 BV and X2 BV v. the tax administration.

(a) Facts. Two Dutch resident companies (X1 BV and X2 BV) were part of a South African Media group. In 2007, the listed parent company of the group issued shares. Thereafter, the parent company lent part of the proceeds from the share issue to its subsidiary, which was a South African resident holding company. This holding company subsequently contributed the funds to a holding company located in Mauritius. The Mauritius-based holding company then lent the funds to the financing company of the group, which was also resident in Mauritius.

In 2007, the two Dutch resident companies acquired several participations. Those acquisitions were partially financed by funds received from the Mauritian finance company. Those funds originated from the issue of shares by the parent company of the group.

Due to the financing structure, the Dutch resident companies took on a related party debt for financing the acquisition of the participations.

Reasoning that both the acquisitions and the loans were based on commercial reasons, the companies claimed a deduction of interest paid to the Mauritius finance company.

(b) Issue. The issue was whether the interest on the related party debt was deductible.

(c) Decision. The Court began by observing that article 10a of the Corporate Income Tax Act (CITA) limits the deduction of interest on funds borrowed from another group company. This restriction, inter alia, applies in the case of funds borrowed for the acquisition of shares in a company. Thereafter, the Court emphasised that it is for the taxpayer to prove that a decision to borrow funds from a related party to finance acquisitions of participations is predominantly motivated by commercial reasons.

However, in this context the Court decided that not only the taxpayer’s motives are decisive, but that the reasons of all parties involved in a transaction must be taken into account for the determination of whether the business purpose test is met.

Consequently, an interest deduction cannot be justified with the argument that there was no alternative than to accept a loan offer from a related party.

Thereafter, the Court repeated its consistent case law that a parent company can freely decide to fund its subsidiaries with debt or equity. This rule implies that the Dutch legislator has to accept a direct funding through a low-taxed group finance company.

The Court rejected the taxpayer’s argument that both the loan and the acquisitions were predominantly based on commercial reasons. In this context, the Court held that a reference to case law based on the abuse of law doctrine was irrelevant in the case at hand, because this case law is not relevant for the application of the Dutch base erosion rules.

The Court also rejected the reasoning of the taxpayers which was based on legislative history. The taxpayers indicated that the obtaining of a related party debt was based on commercial reasons because debt arose from the issuance of shares. Furthermore, the proceeds from the share issue were not received from the finance company to obtain a specific acquisition but only to obtain acquisitions in general. The Court judged that the moment when a taxpayer decides to purchase a specific acquisition is not decisive for the determination of whether a borrowed loan from a third party is based on commercial reasons.

Due to the fact that it was not shown that all transactions involved in the transaction were based on commercial reasons, the Court denied the interest deduction. In addition, the case was referred to another lower court to determine if funds provided by the Mauritius company to the financing company of the group determined whether the construction was based on commercial reasons.

Note: The importance of the case is that the Court has clarified that a re-routing outside the Netherlands must be based on business motives to claim an interest deduction. In addition, the Court, however, decided that the interest deduction restriction of article 10a CITA does not always apply when an acquisition is financed with an intra-group loan based on tax motives, if the taxpayer shows that business motives exist.

8. Japanese Supreme Court decision – Delaware LPS is a corporation

The Japanese Supreme Court held in its decision dated 17th July 2015, case number Heisei 25 (2013) gyou-hi No.166, that a Delaware limited partnership (LPS) is, for Japanese tax purposes, a corporation.

(a) Facts. The plaintiffs (Japanese resident individuals) participated in a LPS pursuant to the Delaware Revised Uniform Limited Partnership Act (hereafter, DRULPA). The LPS invested in the leasing of used collective housing in the US states of California and Florida, which incurred losses. The plaintiffs filed their individual income tax returns treating the LPS as transparent and taking the losses arising into account when reporting their taxable income as per article 26 of the Income-tax Act (ITA).

The Japanese tax authorities, however, argued that the LPS was in fact a corporation (and opaque) and therefore the losses did not belong to partners, but to the corporation.

(b) Issue. The issue was whether the Delaware LPS was a corporation.

(c) Decision. The Supreme Court overturned the Nagoya High Court’s decision on 24th January 2013 (case number Heisei 24 (2012) No. 8) which had ruled in favour of the taxpayers.

Instead, the Supreme Court held that article 2(1)(7) of the ITA defines a “foreign corporation” as “a corporation that is not a domestic corporation”, but does not go on to define a “corporation”. Therefore, whether or not a foreign entity is a “corporation” (houjin) is based on whether it would be considered a “corporation” in Japanese law.

There are two stages to this. Firstly, it is scrutinised whether the wordings or mechanics of the incorporating law explicitly (meihakuni) gives, without question, legal status to the entity as a corporation or explicitly does not give it. If it is neither, then, at the second stage, it is scrutinised whether the entity is a subject to which rights and duties attribute.

In this case, at the first stage, DRULPA uses the wordings of “separate legal entity”, but it is not clear whether a “legal entity” in Delaware constitutes a “corporation” in Japan.

Additionally, the General Corporation Law of the State of Delaware uses “a body corporate” to mean a “corporation” in Delaware. Therefore it is not explicitly clear whether a “separate legal entity” in Delaware has the same legal status as a “corporation” in Japan.

At the second stage of determination, it is clear that the LPS is a subject to which rights and duties attribute. The partners of the LPS only have abstract rights on whole assets of the LPS, they do not have concrete interests on the respective goods or rights belonging to the LPS.

Therefore, the losses in the leasing business did not belong to Japanese partners. Stating that an LPS in the USA was generally treated as transparent, it remains to be seen by the Nagoya High Court if the taxpayers had “justifiable grounds” in understating their income. Article 65(4) of the Act on General Rules for National Taxes provides that additional tax for understatement will not be charged if a taxpayer has justifiably understated his taxable income.

9. Italy – Supreme Court rules on application of transfer pricing rules to interest-free loans between related companies

The Italian Supreme Court (Corte di Cassazione) gave its Decision No. 27087 of 19 December 2014 (recently published) on the application of transfer pricing rules to interest-free loans between related companies.

An Italian company granted an interest-free loan to its Luxembourg and US subsidiaries in order to optimise the available resources and maintain the market share. The Italian Tax Authorities (ITA) reassessed and included in the corporate income tax basis of the Italian company interest income calculated at the normal value, on the basis of article 110(7) of Presidential Decree No. 917 of 22nd December 1986. Precisely, the ITA defined the Italian company’s choice to grant an interest-free loan as “abnormal” and claimed that, by obtaining the interest–free loan, the non-resident subsidiaries were in a more favourable position compared to other companies operating in the open market.

The Supreme Court noted that the Italian company’s choice to grant an interest-free loan to its non-resident subsidiaries was aimed at addressing their temporary economic needs and, therefore, it did not constitute an unlawful or elusive conduct. Furthermore, the Supreme Court held that article 110(7) of Presidential Decree No. 917 of 22nd December 1986 does not provide for the absolute presumption that any cross-border transaction with related parties must be onerous, but only provides for the valuation of components of income deriving from onerous cross-border transactions, on the basis of the normal value (article 9(3) of Presidential Decree No. 917 of 22nd December 1986) of the goods transferred, services rendered, and services and goods received.

10. Brazil Supreme Federal Court confirms income tax on accumulated income calculated on accrual basis

On 23rd October 2014, the Supreme Federal Court (Supremo Tribunal Federal, STF) confirmed that the income tax levied on accumulated income received at a later stage as a lump-sum payment (rendimento recebidos acumuladamente) must be calculated on an accrual basis (regime de competência) and not on a cash basis (regime de caixa). The STF gave its position in Appeal 614406 (Recurso Extraordinário 614406), lodged by the tax authorities against a decision given by the lower court in favour of the taxpayer.

Since the STF recognised the “general repercussion” (repercussão geral) of the case (see Note), the decision will have an impact on more than 9,000 similar cases currently examined in lower courts.

(a) Background. The National Institute of Social Security (Instituto Nacional de Seguridade Social, INSS) paid a debt it owed to a taxpayer as a lump-sum payment. Tax authorities calculated the income tax due on a cash basis, i.e. on the basis of the accumulated income (i.e. the lump-sum payment) and according to tax brackets and rates applicable at the moment of the payment. The taxpayer requested the calculation he would have been entitled to if the amounts had been correctly paid by the INSS, that is, on an accrual basis. Accordingly, the income tax due would be calculated on the basis of monthly instalments and according to the tax brackets and rates applicable at each month.

(b) Decision. The STF stated that the income tax must be calculated according to the rules existing at the time the income should have been paid. As a result, income tax must be levied on the amount that was due per month and according to the tax brackets and rates applicable at each respective month. The Court stated that the levy of the income tax on the accumulated income would be contrary to the ability to pay and proportionality principles.

Note: The STF may recognise the “general repercussion” (repercussão geral) in cases of high legal, political, social or economic relevance. Once “general repercussion” is recognized in a case, the decision given by the STF on the matter must be subsequently applied by lower courts in similar cases. The purpose of the “general repercussion” procedure is to reduce the number of appeals lodged at the STF.

11. Belgium – Supreme Court – Principles of good governance and fair trial govern admissibility in court of illegally obtained evidence

On 22nd May 2015, the Supreme Court (Hof van Cassatie/ Cour de Cassation) rendered a decision (No. F.13.0077N) in respect of the Issue whether and under which circumstances illegally obtained evidence in matters of taxation is admissible in court.

(a) Facts. The Special Tax Inspectorate requested from the Portuguese VAT authorities information concerning certain intra-Community supplies of goods to Portugal and Luxembourg. The information was used to levy VAT, penalties and late interest payments because the information revealed that the goods were not transported to and thus delivered in Portugal and Luxembourg.

The tax payers challenged the levies and argued that the information was obtained illegally.

(b) Legal Background. The information request was based on article 81bis of the Belgian VAT Code and the Mutual Assistance Directive [for the exchange of information] (77/799) (now Mutual Assistance Directive

[on administrative cooperation in the field of taxation]

(2011/16)). Both Directives deal with the mutual assistance by the competent authorities of the Member States in the field of direct taxation and taxation of insurance premiums.

In Belgium, however, the expression “competent authority” means the Minister of Finance or an authorised representative, which is the Central Unit for international administrative cooperation, and not the Special Tax Inspectorate, merely acting in this case on the basis of an internal circular concerning the Netherlands.

Before the Court of Appeal, the taxpayers repeated their argument that illegally obtained information cannot be used. Any unlawful action by the tax authorities should be considered a breach of the principles of good governance and fair trial, leading to the nullification of the assessment.

(c) Decision. The Supreme Court confirmed the decision of the Court of Appeal. Belgian tax legislation does not contain any specific provision prohibiting the use of illegally obtained evidence in determining a tax debt, a tax increase or a penalty.

The principles of good governance and the right to a fair trial indeed govern the question whether illegally obtained evidence should be disallowed or is admissible in court. Unless the legislator has provided for specific sanctions, illegally obtained evidence in tax matters can, however, only be disallowed if the evidence is obtained in a manner contrary to what may be expected from a properly acting government. As a result, the use of such evidence is in all circumstances deemed unacceptable, particularly if it jeopardises a taxpayer’s right to fair trial.

While assessing this issue, the Court may take into account one or more of the following circumstances: the purely formal nature of the irregularity, its impact on the right or freedom protected by the norm, whether the committed irregularity was intentional by nature and whether the gravity of the infringement by the taxpayer far exceeds the illegality committed by the tax authorities.

Note: This decision, which has received some strong criticism from tax lawyers and advisers, is fully in line with the “prosecution-friendly” Antigoon case law in criminal matters since the decision of the Supreme Court of 14th October 2003, as converted into law on 24th October 2013. Since then, the inadmissibility of illegally obtained evidence has no longer been an automatic sanction in criminal matters. Neither the Belgian Constitutional Court nor the European Court on Human Rights (ECHR) has considered the case law of the Supreme Court in criminal matters to be in conflict with the European Convention on Human Rights.

Some commentators state that, notwithstanding the fact that there are certain limits the tax authorities must respect, it is clear that this judgment will give them less incentive to follow the rules and procedures, thereby decreasing legal certainty. Others, however, feel that, on the contrary, pursuant to this decision, lower courts must determine whether the principles of good governance and the right to fair trial were respected by the tax authorities while collecting the evidence, providing the taxpayer with additional defences.

12. Canada – United Kingdom Treaty – Supreme Court of Canada denies Conrad Black’s leave to appeal

Conrad Black made an application for leave to appeal the decision of the Federal Court of Appeal upholding an earlier decision of the Tax Court of Canada. No reasons were given. The earlier Tax Court decision held that Black was deemed to be a resident of the United Kingdom under the Canada-United Kingdom Income Tax Treaty (1978) but was also a Canadian resident subject to tax.

Treaty between Canada and UK – Tax Court of Canada decides that individual resident in Canada and the United Kingdom, but not liable to UK tax, is subject to tax in Canada

The Applicant, Conrad Black, made an application for the determination of a question of law u/s. 58 of the Tax Court of Canada Rules (General Procedure) prior to the hearing of his case.

(a) Issue. The issue was:

– whether or not article 4(2) of the Canada – United Kingdom Income Tax Treaty (1978) (the Treaty), which deemed Black (according to the tie-breaker rule) to be a resident of the United Kingdom for the purposes of the Treaty overrides the provisions of the Canadian Income-tax Act so as to prevent the applicant from being assessed under the Canadian Income-tax Act on certain amounts as a resident of Canada; and

– whether or not article 27(2) of the Treaty allows for the assessment of such tax as a resident of Canada on any assessed items.

(b) Facts. Black was assessed tax, as a resident of Canada, on certain items of income received by virtue of an office or employment. From 1992 onwards, he was also a resident of the United Kingdom. By virtue of article 4(2) of the Treaty, he was a deemed resident of the United Kingdom, however, he was not domiciled in the United Kingdom and, therefore, was only subject to tax in the United Kingdom on a remittance basis. The amounts at issue were never remitted and, therefore, not subject to tax in the United Kingdom. If Canada were not able to tax him on the income at issue, a situation of double non-taxation would arise.

(c) Decision. The Tax Court adopted a liberal and purposive approach to interpreting the Treaty. Based on this approach, it found that there is no inconsistency between finding that a taxpayer is a resident of the United Kingdom for the purpose of the Treaty and a resident of Canada for the purpose of the Canadian Income Tax Act. Whether someone is a resident of Canada for the purposes of the Income-tax Act is a question of fact. Further, the Commentaries on the OECD Model provide that treaties do not normally concern themselves with the domestic laws of the contracting states that determine residency. Where a treaty gives preference to one state, deeming the taxpayer to be a non-resident of the second state, it is only for the purpose of the distributive rules in the treaty and thus the taxpayer continues to be generally subject to the taxation and procedural provisions of his state of secondary residence that apply to all other taxpayers who are residents thereof. The Court noted that there is no objective provision of the Treaty that being a resident of Canada would contravene, as the assessment of tax in Canada would not give rise to double taxation, which the purpose of treaties is to prevent, given that the amounts were never remitted to the United Kingdom or taxed therein. Therefore, the Court found that Black could be taxed as a resident of Canada on the income at issue.

Further, under article 27(2) of the Treaty, when a person is relieved from tax in Canada on income and, under UK law, that person is subject to tax on a remittance basis only, Canada will relieve that person from tax only in respect of income that is remitted to or received in the United Kingdom. The tax authorities argued that since no income was remitted to the United Kingdom, Canada is not required to relieve the Applicant from taxation in Canada. The Applicant, however, argued, inter alia, that this provision only relates to income that is sourced in Canada. Some of the income was sourced in third countries. The Court found that there was no basis to read words such as “arising in Canada” into the provision and, therefore, even if the Court was incorrect on the first issue, Black would still be taxable on the income at issue under article 27(2) of the Treaty.

[Acknowledgment/Source: We have compiled the above summary of decisions from the Tax News Service of the IBFD for the period August, 2014 to September, 2015]

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Transfer Pricing – Use of Range and Multiple Year Data for Determining Arm’s Length Price

Background:
Presently, over 60 jurisdictions the world over have transfer pricing provisions in place, to curb the erosion of their tax bases by potential mispricing of intra-group transactions. While India has had limited generic provisions in place to check price manipulations, the formal “transfer pricing regulations”, as we have today, are also fifteen years old now. Right from the time of introduction, these provisions were built upon the international experience and yet, were relatively more restrictive than most of their counterparts.

Two of the areas where Indian transfer pricing regulations (‘TPR’) glaringly deviated from international best practices were use of inter-quartile range and multiple year data for benchmarking. Till less than a year ago, the TPR suggested the use of arithmetic mean of multiple comparable prices with a deviation of a small percentage (a mere 5%, further brought down to 1% in case of wholesalers and 3% for other assessees) for calculation of the arm’s length price (‘ALP’). It also did not permit the use of multiple year data, unless such data was shown to have a bearing on the determination of the transfer prices.

These provisions were challenged time and again in practice and before the appellate authorities, but in vain. While the learning curve of the Indian legislature and the tax authorities in transfer pricing has been quite steep, the need for use of range of arm’s length prices and multiple year data was acknowledged only in the finance minister’s budget speech in 2014, followed by necessary amendments to the law, applicable to transactions undertaken on or after 1st April 2014, i.e., from A.Y. 2015- 16 onwards. The enabling rules for the same, however, were notified only on 19th October 2015.

Need for the amendment:

Multiple year data –
Although broadly comparable companies are identified based on the functions, assets and risks (‘FAR ’) analysis, their profits will be a result of the returns normally commensurate with such FAR , coupled with any factors affecting the returns of the industry as a whole, as well as the returns of the individual company. The company specific factors, say merger, demerger or any other corporate action, which are normally restricted to a single year, will result in the rejection of an otherwise comparable company. Alternatively, these factors will distort the profits of that particular comparable, impacting the overall ALP calculation.

Assuming no material variation in the FAR of the comparable companies, the use of multiple year data helps to eliminate or “iron out” the impact, if any, of the extraordinary factors occurring in any of the years, yielding the normal profit margins of the industry and thereby, producing more reliable results.

Range concept –
While the transfer pricing methods try to objectively compute the ALP, it will seldom be the case that the actual price of the transaction will exactly match a single ALP. Deriving arithmetic mean in case of multiple comparable prices, with a small range of deviation, implies that the transaction price must nearly match with the mean, often leading to inequitable results. On the contrary, as per the international practice of adopting the inter-quartile range, the transaction price has to be compared to a range of prices between the start of the second quarter and the end of the third quarter of the comparable prices, when arranged in an ascending order.

For instance, say eight comparable prices – P1 to P8 are obtained as a part of the benchmarking exercise. As per the arithmetic mean concept, the simple average of P1 to P8 will be considered to be the ALP, with an allowable deviation of 1/3%, as the case maybe. However, as per the concept of inter-quartile range, these eight prices will be divided into 4 quarters and the entire range of second and third quarter (i.e., P3 to P6) will be considered to be arm’s length. Evidently, a range of prices is a better measure of the ALP than the arithmetic mean.

Draft Rules:
The draft scheme for applying the range concept and use of multiple year data, inviting comments, was released on 21st May 2015. Its highlights were as under –

Multiple year data –
Applicable only if, and mandatory if, the most appropriate method (‘MAM’) used for computation of ALP is Resale Price Method (‘RPM’) or Cost Plus Method (‘CPM’) or Transactional Net Margin Method (‘TNMM’).

Data for three years, including the year of transaction or current year should be considered.

Data for two out of the three years shall be used in case the data for the current year is not available at the time of filing of return of income, or a comparable does not clear the quantitative filter in any one year, or data is available only for two years on account of commencement or closing down of operations.

If the data for current year becomes subsequently available, the same can be used at the time of the assessment by the assessee as well as the department.

Applies irrespective of whether range concept or arithmetic mean is used.

Range concept –

Applicable only if the MAM used for computation of ALP is RPM or CPM or TNMM.

At least nine comparable companies, based on FAR analysis, should be available.

Weighted average margins of last three years (or two years in certain circumstances), shall be calculated using the denominators of the Profit Level Indicator (‘PLI’) as the weights.

Arranging the above margins in an ascending order, the values between 40th and 60th percentile of such margins shall be considered as the arm’s length range.

If the transaction price is within such range, then no adjustment shall be made. However, if the transaction price is outside the range, then the entire difference between the transaction price and the median or central value of the range shall be adjusted in the income.
In cases where the range concept does not apply, i.e., in case of benchmarking as per Comparable Uncontrolled Price (‘CUP’) Method or Profit Split Method (‘PSM’) or any other method as per Rule 10AB, or where number of comparable companies is less than nine, the earlier computation as per arithmetic mean and the tolerance range shall continue to apply.

Final Rules:
The final rules on the subject have been notified vide Notification No. 83/2015 dated 19th October 2015. The implications of these rules are as under –

Multiple year data –
A second proviso has been added to sub-rule (4) of Rule 10B to provide that the first proviso, dealing with the use of earlier years’ data where it has a bearing on the determination of the transfer prices, shall not apply in case of transactions entered into on or after 1st April 2014.

Also, sub-rule (5) has been inserted to provide that where, in respect of transactions entered into on or after 1st April 2014, the MAM selected is either RPM or CPM or TNMM, then, the comparability of an uncontrolled transaction with the controlled transaction shall be analysed based on the data pertaining to the current year (i.e. the year in which the transaction was entered into, say F.Y. 2014-15) or the immediately preceding financial year (F.Y. 2013-14) if the data for the current year is not available at the time of furnishing the return of income for that year.
Further, the proviso to sub-rule (5) states that if the data relating to the current year (F.Y. 2014-15) becomes subsequently available at the time of assessment of the said year, then, such data shall be used for computation of ALP, even though it was not available at the time of furnishing the return of income. This proviso intends to settle the persisting issue of inappropriateness of the use of that data at the time of assessment, which was not available to the assessee at the time of filing of return of income.

Rule 10CA, inserted by the above notification, deals with the application of range concept as well as multiple year data, in detail along with illustrations. The provisos to sub-rule (2) of Rule 10CA lay down the following mechanism for use of multiple year data –

i) Where the comparable uncontrolled transaction has been identified using current year (F.Y. 2014-
15) data as per Rule 10B(5), and the comparable entity (and not the assessee) has entered into same or similar uncontrolled transaction in either or both of the immediately preceding financial years (F.Y. 2012-13 and F.Y. 2013-14), then,

• the price of the uncontrolled transactions for the preceding financial years (F.Y. 2012-13 and F.Y. 2013-14) shall be computed using the same method as is applied for the current year (F.Y. 2014-15), and

• weighted average price shall be computed by assigning weights to the sales/costs/assets employed or the respective denominator, used in computing the margins as per the MAM.

ii) Due to non-availability of current year data (F.Y. 2014-15) at the time of filing of return of income, if the comparable uncontrolled transaction has been identified using the data for the immediately preceding financial year (F.Y. 2013-14) as per Rule 10B(5), and the comparable entity (and not the assessee) has entered into same or similar uncontrolled transaction in the immediately preceding financial year of that year (F.Y. 2012-13), then,

• the price of the uncontrolled transactions for that preceding financial year (F.Y. 2012-13) shall be computed using the same method as is applied for the financial year immediately preceding the current year (F.Y. 2013-14), and

• weighted average price shall be computed in the same manner as above.

iii) Further, where data for current year was not available at the time of filing the return of income but was subsequently available at the time of assessment, and it is found that the uncontrolled transaction of the current year (F.Y. 2014-15) is not same or similar or comparable to the controlled transaction, then, that entity shall be excluded from the set of comparables, even if it had carried out comparable uncontrolled transaction in any of the preceding two financial years (F.Y. 2012-13 and F.Y. 2013-14).

In other words, an entity selected as comparable on the basis of comparable uncontrolled transaction entered into in the year preceding the current year (F.Y. 2013-14), shall be outright rejected if it is later found out that it does not have comparable uncontrolled transaction during the current year (F.Y. 2014-15).

The above calculation of weighted average prices of multiple year data will apply in all cases where RPM, CPM or TNMM have been selected as the MAM and comparable uncontrolled transactions are available in the current year as well as any or both of the immediately preceding two financial years, irrespective of whether the range concept or the arithmetic mean is applicable.

Range concept –

As per sub-rule (4) of Rule 10CA, the concept of range shall apply in case of transactions where the MAM selected is not PSM or any other method and where the dataset of prices of comparable uncontrolled transactions consists of at least six entries. The entries in the dataset will be the weighted average prices of the comparable uncontrolled transactions where RPM, CPM or TNMM was selected as the MAM and comparable uncontrolled transactions were also entered into during the preceding financial years. In other cases, i.e., where CUP is selected as the MAM or where no comparable uncontrolled transactions are available in the preceding financial years, the prices calculated using the MAM for the current year will form part of the dataset.

To apply the range concept, the dataset has to be first arranged in an ascending order and the prices starting from the thirty-fifth percentile and ending with the sixty-fifth percentile shall be considered to be the arm’s length range. If the transaction price is within the above arm’s length range, it shall be considered to be at arm’s length. However, if the transaction price is outside the range, then, the median or central value or fiftieth percentile of the dataset will be considered to be the ALP and the difference between the transaction price and such ALP shall be the amount of adjustment.

As a corollary to sub-rule (4), the range concept shall not apply where the dataset has less than six entries or where PSM or any other method is selected as the MAM. In such cases, sub-rule (7) states that the existing computation of arithmetical mean of the values in the dataset and tolerance range of 1/3%, as the case may be, will apply.

The chart on the next page, summarises the provisions relating to range concept and use of multiple year data – (In the chart, Year 3 refers to the current year)

At the end of Rule 10CA, three illustrations have been provided to explain the calculation of weighted average price, selection and rejection of comparable where current year data is not available and calculation of percentile. These are self-explanatory and hence, are not covered in this article.

Issues:

Some of the issues that arise from the rules are as set out below the chart .

Chart: Use of Range concept and Multiple year data

i) Use of earlier years’ data in cases not covered under Rule 10B(5):

Rule 10B(4), prior to the amendment, provided that only data pertaining to the year, in which the transaction has been entered into, should be used for the purposes of benchmarking, unless earlier years’ data has a bearing on the determination of transfer prices. As per the second proviso to Rule 10B(4) now inserted, the provision relating to use of earlier years’ data shall not apply to transactions entered into after 31st March 2014. Further, sub-rule (5) provides for use of data of current year or immediately preceding financial year in case of transactions entered into after 31st March 2014, where RPM, CPM or TNMM is selected as the MAM. Thus, it appears that earlier years’ data cannot be used for transactions entered into after 31st March 2014, where CUP, PSM or Rule 10AB has been selected as the MAM, even though earlier years’ data is shown to have a bearing on the transfer prices.

ii) Chaos during assessments:

The use of data relating to immediately preceding financial year at the time of filing return of income and use of current year data at the time of assessments will invariably lead to changes in comparables. Consequently, if the number of comparables reduces below six, or a different MAM is adopted during the course of the assessment, the ALP computation may show wild variations, especially due to parallel usage of range concept and arithmetic mean. This will only increase the uncertainty surrounding transfer pricing.

iii) Acceptance of consistent loss making companies: It is nearly a settled principle that companies that are consistently loss making cannot be accepted as comparable companies since it indicates improper functioning or inefficiencies or discrepancies, etc.

Similarly, several tribunals have held that high profit making companies should also be rejected. With the use of multiple year data, the year on year aberrations are meant to even out. Would it then imply that loss making or high profit making companies can be accepted? It is worth noting that an entity with losses in two out of three years has been accepted as a comparable illustration 1. Logically, consistently loss making or high profit making companies will still need to be excluded, as these entities will have operational differences that cause the substantial deviations, which in turn will translate into differences in FAR.

Conclusion:

The attempt to align the Indian TPR with international practices by introducing provisions for use of the long debated range concept and multiple year data is a welcome move. The final rules are even slightly more liberal as compared to the draft scheme released a few months ago. However, it appears that the complicated drafting of the rules and possibility of re-doing the entire benchmarking process during assessment may end up doing more harm than good.

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Secretary of Tamil Nadu vs. M/S. Chitra Timber Traders, [2013] 62 VST 277

Central Sales Tax – Inter-State Stock Transfer to Agent – Agent Supplying Goods Directly to His Customer for Sale in Other State – After Making Payment for Lorry Freight, Octroi, etc.- Is Consignment Sale and Not Inter-State Sale, section 3(a) of The Central Sales Tax Act, 1956.

FACTS
Respondent a dealer in Timber had supplied goods to his agent outside the State and claimed inter-state stock transfer against form F and was assessed accordingly under the CST Act. Thereafter, the Deputy Commissioner of sales tax, based on verification report received from the enforcement department, revised the assessment order under the CST Act and disallowed the claim of consignment sales on the ground that the goods were supplied directly to the buyer and goods were never reached to the agent. Therefore, the revising authority treated it as inter-state sales and levied tax under the CST Act. The Tribunal allowed the appeal filed by the respondent dealer against which State filed writ petition before the Madras High Court.

Held
It is very clear that the delivery note itself contains the name of the agent and it is also very clear that the payment made to the respondent by the agent was only a net amount after deducting commission amount from total sales. If it was not consignment where was the question of payment of commission? Further, the agent had paid lorry freight, octroi, unloading charges and measurement charges for the goods transported to another buyer. This fact was verified by the assessing authority while allowing exemption which was not considered by the first appellate authority. Hence, the Tribunal had rightly considered this matter and categorically came to the conclusion that it was a clear cut sale outside the State and rightly the exemption was granted. Accordingly, the High Court dismissed the writ petition filed by the Sate and confirmed the order of Tribunal allowing the appeal of the respondent dealer.

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M/S. Mahabaleswarappa & Sons vs. Assistant Commissioner, [2013] 62 VST 241 (AP)

Central Sales Tax – Claim of Deemed Export – Form H – Need Not to be Submitted Quarterly, R.12(10)(a) of The Central Sales Tax (Turnover and Registration) Rules, 1957.

Facts
The petitioner filed Form H covering sales made to exporter for entire year of 2006-07 and claimed exemption from payment of tax as deemed export u/s. 5(3) of the act which was accepted in assessment. Later on, revising authority disallowed the claim of exemption from payment of tax against form H on the ground that H form for quarterly period was not submitted. The petitioner’s appeal was dismissed by appellate authority including tribunal. The dealer filed writ petition before the Andhra Pradesh High Court against the order of the Tribunal.

Held
The Rule 12(10(a) of The Central Sales Tax (Turnover and Registration) Rules, 1957 mandates dealer to file declaration in form H duly signed by the exporter. Plain and literal reading of this rule would not admit to any such interpretation that a dealer should submit declaration in H form quarterly. Accordingly, the High Court allowed writ petition filed by the dealer and directed the revisional authority to consider the revision taking in to consideration all the material filed by the petitioner including declarations in H form.

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M/S. Aspick Engineering (P) Ltd. vs. State of Tamilnadu, [2013] 62 VST 216 (Mad),

Central Sales Tax Act – Local or Inter-State Sale – No written Agreement – Goods Delivered to Buyer Within State – That the Buyer Moved Goods At His Own Cost Not Decisive – Transaction is Inter-State Sale, section 3 of The Central Sales Tax Act, 1956.

FACTS
The petitioner company effected sale to the M/S. Vijayshree Colata Ltd., Warora, claimed it an inter-state sale. The assessing authority treated it as local sale as there was no written agreement, the goods were delivered locally, the price was ex-godown and the goods were moved out of the State by the buyer. The appellate authority including the Tribunal confirmed the assessment order. The appellant filed appeal before the Madras High Court against the order of the Tribunal upholding the assessment order treating it as local sale.

HELD
The terms of the agreement between parties are evidenced only by the dispatch details, indicative of the understanding between the parties. Given the fact that an agreement need not be in writing, the one and only ground on which the claim of inter-state sale could be considered is the factum of movement of goods pursuant to the contract of sale. If the sale effected by the assessee and the movement thereon are inextricably and intimately connected with each other, then the one and only interference that would flow from the same is that it is an inter-state sale. The fact that the purchaser has borne the insurance charges or the seller had born the insurance charges or that the purchaser had moved the goods at their own cost would not be a decisive factor for the purpose of determining the nature of sale as inter-State sale or not. The criteria for considering the transaction as an inter-state sale or not is the movement of goods intimately connected with the sale. The High Court further held that the Tribunal and the other authorities had misdirected themselves in placing emphasis on the transport and insurance made by the purchaser as indicators of the sale being local sale. With the movement and the sale inextricably connected, the High Court allowed the appeal and treated it as an interstate sale.

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M/S. Katuri Medical College and Hospital vs. CTO, [2013] 62 VST 185 (AP).

Value Added Tax – Recovery Of Tax – Garnishee Proceedings – Issue of Notice Directing Bank to Remit the Tax – During the Pendency of Revision Petition – Against Order Rejecting Stay Application – Set Aside – Directed to Remit Back the Amount Recovered – Cost Awarded, section 29 of The Andhra Pradesh Value Added Tax Act, 2005.

FACTS
The Petitioner is a charitable trust and also registered under the AP VAT Act had filed appeal against the assessment order passed by the assessing authority and also file application for stay. The appellate authority rejected the application for stay by passing non speaking order. The Petitioner filed revision petition before the higher revisional authority. During the pendency of the revision petition, the assessing authority invoking power u/s. 29 of the Act issued notice directing the Bank, where the petitioner had account, to remit the disputed amount. The Bank remitted the amount to the assessing authority. The Petitioner filed writ petition before the AP High Court against the Garnishee order issued by the assessing authority directing the bank to remit the amount to the department.

HELD
If recoveries of disputed tax or penalty are made, where stay application is pending before the appellate authority, the appeal itself would be rendered infructous and that the assessee who is aggrieved by an order of assessment is given a statutory right of appeal which cannot be rendered infructous by being forced to pay the disputed amount pending the appeal. This will apply to a situation where the first appellate authority rejects the stay application and a revision is preferred by the assessee before the revisional authority seeking stay of the disputed amount. Therefore it would be just and proper for the assessing authority to await the disposal of the revision petition by the revisional authority. The High Court strongly deprecated the conduct of the assessing authority and held it to be arbitrary and high handed and awarded cost to the department of Rs. 10000/- payable to the petitioner. Accordingly, the High Court allowed the writ petition filed by the Trust and directed the department to remit back the amount recovered forcefully to the Bank account of the Petitioner and set aside the non speaking order passed for rejecting stay petition and remanded back for fresh hearing.

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Deflation – The new dread-word

The new dread-word is deflation. Google the term and you find it occurring several times in The Economist, Wall Street Journal, Forbes and elsewhere. Lawrence Summers has contributed to the growing chorus with a powerful article this week in Financial Times. Deflation is the opposite of inflation, and we have seen it over the past year in oil, metals, agricultural commodities and many other products. This has given India relief because it is a net importer of oil and metals, but it has knocked down the economies of commodity-exporting nations like Russia and Brazil, while West Asian oil exporters like Saudi Arabia are sweating it out. Those are the early victims.

The fear that has grown is that Europe is slipping into Japanese-style deflation – long years of little or no growth, along with prices continuing to fall. In nominal dollar terms, Japan’s GDP now is smaller than it was in the mid- 1990s, despite marginal growth in real terms. Europe got the shivers this past week when German exports were reported to have plunged suddenly in August. Already, most European economies have lower GDP (in dollar terms) than they did before the financial crisis of 2008. So: two lost decades for Japan, and one for Europe. China is still growing at a good clip, but it is slowing and beset by troubles. Among the giant economies, that leaves the United States, and its economists are ringing alarm bells.

Sustained deflation causes reduced economic activity. As the world slows down, the International Monetary Fund has been steadily reducing its growth forecasts. India’s exports have already seen a fall through 2015. The textbook response to deflation is for central banks to push for economic expansion by reducing interest rates, while governments use the lower interest rates to borrow more and turn on the spending tap. That raises government debt, but if growth is kick-started the increased debt stays affordable. This may not work if interest rates are already close to zero (10-year government bonds are at 0.5 per cent in Japan and 0.6 per cent in Germany, compared to 7.5 per cent in India), so that no monetary stimulus can work. And since government debt has grown sharply since 2008, countries worry about future vulnerabilities if they pile up yet more government debt – but there may be no other option. These dilemmas and difficulties have stirred the fevered debate by leading western economists in leading publications.

What does this mean for India? Consumers have enjoyed cheaper petrol, diesel and cooking gas, so they aren’t complaining. But exports have been falling, and it might be difficult to reverse that in a slowing world economy. Farmers who produce agricultural goods for export (cotton and sugar, tobacco and tea) will earn less, and some will be in distress. The makers of cars, garments, engineering goods, polished diamonds and leather goods, not to mention handicrafts like hand-made carpets will face the same trouble – and see jobs at risk. Global deflation also means cheaper and therefore more imports of items like steel, which could threaten domestic producers. The government can respond by raising protective tariffs, but then we move away from an open, competitive economy. Meanwhile, domestic producers of oil and gas have less incentive to explore and develop new oil and gas fields – thereby increasing import dependence for energy. Troubled industries translate into bank loans not getting repaid, and therefore more trouble for banks: the hit in the steel sector is yet to fully show up on bank balance sheets. In other words, sustained deflation is not good news for India either. There is little that the country can do about the global situation, but it can get ready to cope better with what may be coming. That is by improving efficiency and competitiveness through more serious economic reform than has been attempted over the past year.

(Source: Weekend Ruminations by T. N. Ninan in the Business Standard dated 10-10-2015.)

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Going beyond quick fixes – RBI governor’s reminder appropriate and timely

In delivering the Fourth C. K. Prahalad Memorial Lecture in Mumbai last week, Reserve Bank of India Governor Raghuram Rajan made a substantial case for a deliberate, cautious and integrated approach to sustainable growth. He referred to the need to put a number of building blocks in place before a robust take-off could occur. This approach requires patience, persistence and, most importantly, a holistic view of the large number of fronts on which constraints to growth had to be tackled. He concluded his lecture by expressing concerns about the widespread use of jugaad by Indian businesses, which by providing shortterm and quick-fix solutions to problems, took attention and focus away from more robust and durable solutions. He felt that, instead of relying on jugaad, the business environment had to be improved through better policies, regulatory frameworks and implementation.

Not surprisingly, the media coverage of this speech pushed much of its substance into the background and gave headlines and column centimetres to the point about jugaad. Over the past several years, this term has transformed from a pejorative expression to one which connotes praise and appreciation for the people and businesses practising it successfully. Rather than paying attention to long-term viability, businesses seem to be getting attention for patchwork solutions and workarounds. Case studies and books have been written on jugaad innovation and these are presumably finding their way into business school curricula as an essential requirement for business success in India. Against this backdrop, Dr Rajan’s speech comes as a significant and timely warning that the road to economic greatness is paved not with jugaad but with solid institutions that are both durable and flexible. It is only such institutions that will create a business environment, which rewards long-term strategic approaches by companies rather than quick fixes.

This reminder also serves as a fitting tribute to Prahalad’s intellectual legacy. His analysis and dissemination of businesses that profitably serve the “bottom of the pyramid”, a phrase that he entrenched into the emerging market business lexicon, are actually a validation of the need to build strong organisational structures regardless of the nature of the product or service or the economic status of the clientele. The common message from all of his cases was that a robust business model emerged from putting the right mix of resources into a system characterised by formal and inviolate processes. Entrepreneurship certainly had a role in discovering the connection between a product and a client group, but after that, institutionalisation had to take over for the venture to have any chance of lasting success.

Dr Rajan’s lecture extends this fundamental point to the public sphere by suggesting that the government needs to focus on putting exactly these attributes in place into the policy and regulatory framework. Jugaad in business, however entertaining it might be, doesn’t do much for sustained productivity enhancement. Jugaad in government, however expedient, cannot substitute for building and nurturing institutions that will work towards creating the kind of environment in which businesses, whether they cater to the classes or the masses. He argues that growth acceleration on a weak and flimsy institutional foundation simply cannot be sustained. There are umpteen examples from recent history to support his point. But, then, jugaad is a response to extreme impatience.

(Source: Editorial in the Business Standard dated 21-09-2015.)

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Demographic transition-economic effects

Background
In the 19th century, though the longevity of human beings was low, the world population was growing due to a high birth rate, inadequacy of birth control measures and family planning awareness. Inadequate development of life sciences and life saving drugs kept the death rate also high. Due to malnutrition and insufficient child care, infant mortality was high too. Diseases and epidemics were common and treatment thereof was not adequately effective. As a result, population growth remained under control and nature was keeping its balance. Then emerged an era of inventions across various science streams; and medical science developed rapidly. Research could conquer many of the dreaded diseases such as cholera, plague, small pox, leprosy, tuberculosis etc; which were some of the major causes of shortening of human life expectancy. They were the causes of mass scale deaths. Due to invention of various vaccines, the diseases could be immunized. Many of them could be cured by advanced medicines invented. Quality of healthcare improved and even medical infrastructure advanced significantly. This reduced the large scale human life destruction and life expectancy increased sharply. Currently, the highest life expectancy of 84 years is in Japan.

India and other countries
Similar phenomenon prevailed in India as well though the numbers were poor. The steady rise in the life expectancy rates in India can be visualised by the table below:-

Over the last few decades, some new epidemics/ contagious diseases such as swine flu, bird flu, dengue etc. have emerged causing danger to human life. Death tolls have also increased due to cancer and AIDS. However, modern research has substantially reduced their rigour and it is expected that soon some solutions will be invented to manage them, if not fully overcome them. Even after the emergence of new types of diseases, the life expectancy has increased decade after decade across the world and it is at the highest level as of now. Further, due to consumption of better quality food and water, supported by inventions in medical science, there is every possibility that life expectancy will continue to climb up. Many developed countries have a life expectancy of more than 80 years and even many developing countries have a life expectancy of more than 70 years.

Economic effect of longevity of life
The modern medicines and methods of treatment have increased the life expectancy but the working life of a human being has not increased proportionately. In many countries, on an average, a person starts working at the age of around 20 and retires at the age of around 60. In many developed countries, the working life is longer, and people work till the average age of 65 years. This is on account of shortage of labour and better health conditions due to less polluted environment and better quality food. The life of a human being after retirement, which is generally less productive, is becoming longer due to better life expectancy. Many retired senior citizens, though generally wealthier than others, especially in the developed countries; cannot meaningfully contribute to the GDP of their nation. However, many nations have to incur substantial costs for them by way of provision of social security, pension, free or subsidised medical facilities etc. A human being in a developed nation works and actively contributes to the GDP for about 45 years in his lifetime. With life expectancy advancing above 80 and the retirement age not advancing beyond 65 years, the proportionate working years in the life cycle of a person has reduced. In a country, certain people are not able to work because either they are handicapped or unwell. In many societies, women do not work for commercial consideration and many of them are off work due to pregnancy, child care or family issues. The longer life span of human beings is increasing the percentage of non-working population in many countries and especially in developed countries, which is becoming a matter of concern.

Working Population ratio
The following statistical data can be an eye opener as to what percentage of the population in a country is working to contribute to its GDP. The working population percentage is more in the developed countries, which has less young population as compared to the developing countries.

Developed countries are facing one more problem mainly due to the change in lifestyle emerging from economic development. In the modern developed society, the age for getting married is increasing. The educated new generation is getting married at a much later age than earlier. Many of them even prefer not to get married and stay single. While this is happening, human anatomy has not changed.

The fertile age of females has remained the same and therefore the reproductive years available after late marriage are getting reduced. Further, work related stress is causing frigidity and disorders. This is resulting in birth of less than two children per couple in many developed countries. As a result, the population of developed countries has started reducing. To make the position worse, a larger part of the population is ageing and is not able to contribute to the GDP of their country. The social welfare expenses are on the rise and have become a significant cost in developed economies. The young citizens need to bear a larger portion of the economic burden of the society. This is resulting in increase in taxes and tax rates, increase in borrowings of the nations and slowing down of their economic growth.

Stagnating GDP of developed countries
Japan is one of the major examples of this phenomenon in the world. Over the past 20 years, the population of Japan is not growing much. The life expectancy as well as average age of the Japanese population has increased year after year. The working population in that country is gradually shrinking. In spite of innovation, technology growth and other facilitators; the GDP of the country has stagnated and possibilities of its turnaround are nowhere in sight. A number of economic stimulants have been applied by that country but they are not able to provide the desired results. Inflation has remained very low as the domestic demand is not increasing adequately due to stagnation. Spending capacity of the population remains high but the overall spending is not growing much. Its currency has been gradually strengthening, reducing the competitiveness of its exports. As a result, the economy has stagnated and China has overtaken this economy pushing it to the third place.

Since the last recession in Europe, the developed countries therein are facing problems in gaining growth momentum. Their economies are stagnating and in spite of efforts by the European Central Bank, the required traction is not materialising. Quantitative Easing, which has been successful in reviving the US economy, is being applied in a larger dose in Europe and only time will tell how far can it be effective. The population in the European Union is also aging. The birth rates are low and they are much less than two children per couple. A birth rate of 2.1 per couple is needed to keep the population level intact and the European growth rate of 1.6 per couple can result in substantial reduction of population, unless sizable immigration from other countries is encouraged.

Migration
Due to added longevity, the percentage of working population in many countries in Europe is getting reduced. Though, of late, there is migration from Eastern Europe to the Western European countries, the overall effect is not very significant. Europe is not systematically adding population from countries across the world as is being done by the US, Australia, Canada and New Zealand. For an economy, which has a low or negative population growth, it is desirable to add on young population from other countries, who can keep the demographic balance in the current era of high life expectancy. In the absence of such an induction, the economy can stagnate as has happened in Japan. In this connection, the following tabulated data of various countries in 2013 can be an eye-opener.

After the last recession, the US has performed reasonably well and its turnaround has been one of the fastest amongst the developed countries. One of the reasons for the same is that the country is constantly taking in immigrants from all over the world. The immigrants accepted are mostly highly educated intellectuals. This has kept the country ahead of the rest of the world in research, technology, education and even entrepreneurship. Though the original population is aging, newly added immigrants are keeping the overall demographic balance and therefore the country is expected to remain on the growth path for the years to come.

Chinese Situation

The single child policy per couple, which was adopted in China since 1980, had initially given good dividends. The population pressure on the country has eased over a period of time. The economy grew well for a number of decades and the per capita income kept on rising. The affluence in the Chinese middle class increased substantially and the standard of living improved. However, the Government could have eased the policy atleast after 25 years of its implementation. The continuation of the policy longer has started showing its negative effects. As the birth rates dropped, the working population could not keep pace in the country. If the policy would not have been changed in 2013, it could have resulted in social and economic imbalance. Still, over the years, the low population growth has depleted the potential labour force of the country. It has started increasing the labour cost in China. This can disturb the manufacturing advantage of the country over the rest of the world and can further slowdown its growth rate. This demographic imbalance cannot be cured overnight and the Chinese Government realised the same probably a bit late. Easing of the one child policy will not yield any immediate results. The well educated and rich Chinese population is very likely to have negative growth due to the same syndrome as prevalent in many developed countries of the west. This may cause a serious threat to the Chinese dominance on global mass manufacturing. If balanced corrective actions are not taken by the country, it may even face economic stagnation like Japan after a couple of decades.

The Chinese population is developing one more peculiar problem. The working couples born in the one child policy regime need to take care of four of their aging parents. The Chinese culture being traditional, parents are actively looked after by their children to the best possible extent. The couples are ending up spending their considerable personal time with doctors, in hospitals and at homes of their parents to take care of their health issues. Each of these couples has only one child. The child has four grandparents. Their affection to the child is in a way pampering the child to undesirable levels, spoiling his habits. These children are quite likely to inherit considerable wealth from their parents and four grandparents. This fact makes their future secured but the initiative for hard work is being lost. The new generation in China is more educated and savvy. They are more competitive and ambitious. This has resulted in late marriages and a resultant large number of single population, which may further disturb the demographic balance. The one child policy and the social structure in China have also skewed the demography resulting in a higher male to female ratio, which is not a healthy sign. These developments are likely to affect the Chinese economy and its growth rate in the years to come. The great era of sustained growth may be over for that country mainly due to this demographic imbalance. The economy may continue to slow down causing concerns to it as well as to the overall global growth for the years to come.

Demographic dividend for India

Contrary to most of the other countries of the world, the demography of the Indian population is very much favourable. The current age group of population in India is as under:

It can be observed that India harbours a large young population, which will join the workforce in the next 20 years. India is spending a substantial amount on education and skill development and the allocation is expected to increase in the years to come. Therefore, more and more population joining the workforce will be skilled. India has already acquired a reputation for its ability to deliver high skill services. The Government is stressing on the importance of increase in export-oriented manufacturing in the country. If right types of reforms are carried out, this dream has a potential of materialising into a reality especially as China may be losing its edge. Availability of a large young population, which is undergoing various types of education and skill development, will complement this goal. The young and educated Indians can make the country grow at a faster rate than most of the other countries in the world. The country can even achieve double digit growth in the years to come. Though India had taken a lenient approach over population control which had a negative impact on per capita income and welfare of its subjects, its current demography can pay a rich dividend to the country, over the next couple of decades. That does not mean or imply that India should remain lax about population control. Overpopulation can create lot of negatives for an economy and imbalances which can take a long time to correct. However, the current population status and mix in India, appears to be favourable, as most of the developed world is facing problems of ageing population.

In the next twenty years, the skilled and semi-skilled population joining the workforce will make the GDP of India grow faster and her per capita income can soar. There is a considerable unsatiated demand in the country for goods and services. More money in the hands of the population will boost the demand and result in a robust domestic market. The opportunity is great and it can make India the third largest economy in the world over the next couple of decades. Though the domestic climate is conducive for growth, the future very much depends on Government initiatives. If adequate steps are taken to speed up reforms and controlled capitalism is well supported, a golden era for the country can usher. However, if there is any policy lag, it can result in large unemployed and underfed population. If jobs do not get created at the same speed at which the younger generation is aspiring and joining the workforce, it can create social unrest and economic problems.

Today is the time for great opportunities for India, but it is laden with inherent risk. The Government will need to handle the situation carefully with a result-oriented approach. The next two decades for India can be great and most of us may be fortunate to witness this era.

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A. P. (DIR Series) Circular No. 21 dated 8th October, 2015

Memorandum of Procedure for channeling transactions through Asian Clearing Union (ACU)

This circular permits the use of the Nostro accounts of commercial banks of the ACU member countries, i.e., the ACU Dollar and ACU Euro accounts, for settling the payments of both exports and imports of goods and services among the ACU countries and reiterates that all eligible export/import transactions with other ACU member countries (except in the case of certain countries where specific exemptions have been provided by the Reserve Bank of India) must invariably be settled through the ACU mechanism.

As a consequence, payments for all eligible: –

a) Export transactions must be made by debit to the ACU Dollar/ACU Euro account in India of a bank of the member country in which the other party to the transaction is resident or by credit to the ACU Dollar/ACU Euro account of the authorised dealer maintained with the correspondent bank in the other member country.
b) Import transactions must be made by credit to the ACU Dollar/ACU Euro account in India of a bank of the member country in which the other party to the transaction is resident or by debit to the ACU Dollar /ACU Euro account of an authorised dealer with the correspondent bank in the other member country.

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A. P. (DIR Series) Circular No. 20 dated 8th October, 2015

Risk Management & Inter-Bank Dealings: Booking of Forward Contracts – Liberalisation

Presently,
to manage/hedge their foreign exchange exposures arising out of actual
or anticipated remittances, both inward and outward, resident
individuals, firms and companies, are allowed to book forward contracts,
without production of underlying documents, up to a limit of US $
250,000 based on self-declaration.

This circular has increased
the said limit to US $ 1 million. Hence, all resident individuals, firms
and companies, who have actual or anticipated foreign exchange
exposures, are now allowed to book foreign exchange forward and FCY-INR
options contracts up to US $ 1,000,000 (US $ one million) without any
requirement of documentation on the basis of a simple declaration.
Although contracts booked under this facility will normally be on a
deliverable basis, cancellation and rebooking of contracts is permitted.
However, depending upon the track record of the entity, the concerned
bank can call for underlying documents, if considered necessary, at the
time of rebooking of cancelled contracts.

The existing
facilities in terms of A.P. (DIR Series) Circular No. 15 dated 29th
October, 2007 for Small and Medium Enterprises (SMEs) will remain
unchanged.

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A. P. (DIR Series) Circular No. 19 dated October 6, 2015

Investment by Foreign Portfolio Investors (FPI) in Government Securities

This circular has increased the investment limit in Government Securities as under: –

The
security-wise limit for FPI investments will be monitored on a day-end
basis and those Central Government securities in which aggregate
investment by FPI exceeds the prescribed threshold of 20% will be put in
a negative investment list. No fresh investments by FPI in these
securities will be permitted till they are removed from the negative
list.

There will be no security-wise limit for SDL for now.

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Notification No. FEMA. 353 /2015-RB dated 6th October, 2015

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Ninth Amendment) Regulations, 2015

This Notification has amended Schedule 5 of Notification No. FEMA 20/2000-RB dated 3rd May 2000 as under: –

(A) in paragraph 2,
(i) the existing sub-paragraph (3) shall be re-numbered as Paragraph 2C (ii) after the existing sub-paragraph (2), the following shall be added namely: –
“(3) A Non- Resident Indian may subscribe to National Pension System governed and administered by Pension Fund Regulatory and Development Authority (PFRDA), provided such subscriptions are made through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA Act. The annuity/ accumulated saving will be repatriable.”
(iii) after adding sub-paragraph (3) in paragraph 2, the existing paragraph 2C shall be re-numbered as sub-paragraph (4) in Paragraph 2.

(B) In paragraph 3, after the existing sub-paragraph (2), the following shall be inserted namely: –
“(2A) A non-resident Indian who subscribes to the National Pension System, under sub-paragraph (3) of paragraph (2) of this Schedule shall make payment either by inward remittance through normal banking channels or out of funds held in his NRE/FCNR/NRO account.”

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DIPP Press Note No. 11 (2015 Series) dated 1st October, 2015

Foreign Direct Investment (FDI) up to 100% in White Label ATM Operations under Automatic Route

This Press Note states that the Government of India has permitted 100% investment under the Automatic Route in White Label ATM Operations, with immediate effect.

Accordingly, a new sub-paragraph 6.2.18.8.3 has been inserted in paragraph 6.2.18.8 of the Consolidated FDI Policy as under: –

Other conditions: –
1. Any non-bank entity intending to set-up WLA should have a minimum net worth of Rs. 100 crore per the latest financial year’s audited balance sheet, which is to be maintained at all times.
2. In case the entity is also engaged in any other 18 NBFC activities, then the foreign investment in the company setting up WLA, shall also have to comply with the minimum capitalisation norms for foreign investments in NBFC activities, as provided in Para 6.2.18.8.2.
3. FDI in the WLAO will be subject to the specific criteria and guidelines issued by RBI vide Circular No. DPSS. CO.PD. No. 2298/02.10.002/2011-2012, as amended from time to time.

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A. P. (DIR Series) Circular No. 18 dated 30th September, 2015

Notification No. FEMA . 348 /2015-RB dated 25th September, 2015 Regularisation of assets held abroad by a person resident in India under Foreign Exchange Management Act, 1999

This circular clarifies that in the case of persons resident in who have held assets abroad in violation of FEMA and who have made a declaration under the provisions of the Black Money Act, and have paid the tax and penalty due thereon: –

a) No proceedings will lie under the Foreign Exchange Management Act, 1999 (FEMA) against the declarant with respect to an asset held abroad for which taxes and penalties under the provisions of Black Money Act have been paid.
b) No permission under FEMA is required to dispose of the asset so declared and bring back the proceeds to India through banking channels within 180 days from the date of declaration.
c) In case the declarant wishes to hold the asset so declared, she/ he has to apply to RBI within 180 days from the date of declaration if such permission is necessary as on date of application. Such applications will be dealt by RBI as per extant regulations. In case such permission is not granted, the asset will have to be disposed of within 180 days from the date of receipt of the communication from RBI conveying refusal of permission or within such extended period as may be permitted and the proceeds brought back to India immediately through the banking channel.

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A. P. (DIR Series) Circular No. 17 dated 24th September, 2015

External Commercial Borrowings (ECB) Policy – Issuance of Rupee denominated bonds overseas

This circular contains guidelines with respect to the overseas issuance of Rupee denominated bonds within the ECB Policy. The guidelines are as under: –

1. Eligibility of borrowers
Any corporate or body corporate is eligible to issue Rupee denominated bonds overseas. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) coming under the regulatory jurisdiction of the Securities and Exchange Board of India are also eligible.

2. Type of instrument
Only plain vanilla bonds issued in a Financial Action Task Force (FATF) compliant financial centres; either placed privately or listed on exchanges as per host country regulations.

3. Recognised investors
Any investor from a FATF compliant jurisdiction. Banks incorporated in India will not have access to these bonds in any manner whatsoever. Indian banks, however, can act as arranger and underwriter. In case of underwriting, holding of Indian banks cannot be more than 5 % of the issue size after 6 months of issue. Further, such holding shall be subject to applicable prudential norms.

4. Maturity
Minimum maturity period of 5 years. The call and put option, if any, shall not be exercisable prior to completion of minimum maturity.

5. All-in-cost
The all-in-cost of such borrowings should be commensurate with prevailing market conditions. This will be subject to review based on the experience gained.

6. End-uses
The proceeds can be used for all purposes except for the following: –
i. R eal estate activities other than for development of integrated township/affordable housing projects;
ii. Investing in capital market and using the proceeds for equity investment domestically;
iii. A ctivities prohibited as per the foreign direct investment (FDI) guidelines;
iv. O n-lending to other entities for any of the above objectives; and v. Purchase of land.

7. Amount
Under the automatic route the amount will be equivalent of USD 750 million per annum. Cases beyond this limit will require prior approval of the Reserve Bank.

8. Conversion rate
The foreign currency – Rupee conversion will be at the market rate on the date of settlement for the purpose of transactions undertaken for issue and servicing of the bonds.

9. Hedging
The overseas investors will be eligible to hedge their exposure in Rupee through permitted derivative products with AD Category – I banks in India. The investors can also access the domestic market through branches/subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back to back basis.

10. Leverage
The leverage ratio for the borrowing by financial institutions will be as per the prudential norms, if any, prescribed by the sectoral regulator concerned.

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A. P. (DIR Series) Circular No. 16 dated 24th September, 2015

Processing and settlement of import and export related payments facilitated by Online Payment Gateway Service Providers

Presently, banks are permitted to offer repatriation facility with respect to export related remittances pertaining to export of goods and services by entering into standing arrangements with Online Payment Gateway Service Providers (OPGSP).

This circular: –
1. Now permits banks to offer similar facilities for import payments by entering into standing arrangements with the OPGSP.
2. This circular contains revised guidelines for facilitating payments of exports and imports by entering into standing arrangements with OPGSP.

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A. P. (DIR Series) Circular No. 15 dated September 24, 2015

Opening of foreign currency accounts in India by ship-manning/crew management agencies

Presently, ship-manning/crew managing agencies that are rendering services to shipping/airline companies incorporated outside India, are permitted to open, hold and maintain non-interest bearing foreign currency account with a bank in India for meeting the local expenses in India of such shipping or airline company.

This circular states that the under mentioned guidelines in respect of such accounts need to be strictly followed: –

a) Credits to such foreign currency accounts can only be by way of freight or passage fare collections in India or inward remittances through normal banking channels from the overseas principal.
b) Debits will be towards various local expenses in connection with the management of the ships / crew in the ordinary course of business.
c) No credit facility (fund based or non-fund based) must be granted against security of funds held in such accounts.
d) The bank must meet the prescribed ‘reserve requirements’ in respect of balances in such accounts.
e) No EEFC facility can be allowed in respect of the remittances received in these accounts.
f) These foreign currency accounts can be maintained only during the validity period of the agreement.

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2015 (39) STR 1034 (Tri. –Del.) Commissioner of C.Ex. Allahabad vs. Sangam Structurals Ltd.

CBEC circular, prescribing declaration by GTA on consignment note that notification conditions are fulfilled is beyond the requirement of exemption notification.

Facts:
Notification No. 32/2004-ST dated 3rd December, 2014 conferred exemption to GTA services subject to nonavailment of CENVAT credit on inputs or capital goods by transporter and non-availment of benefit of Notification No. 12/2003-ST dated 20th June, 2003. In this context, CBEC issued clarification that the consignment note would state compliance made of conditions specified in Notification No. 32/2004. The respondents furnished declaration as per aforesaid notification from transporters before Commissioner (Appeals). Further, sample consignment notes containing required declaration were also submitted.

Held:
There was no evidence that any such credit or the benefit of 12/2003-ST was availed. Submission of declaration from transporters at the stage of commissioner (Appeal) was sufficient compliance of notification. Furthermore, conditions prescribed by the CBEC circular seemed to go beyond the requirement of the exemption notification. It is settled law that CBEC circular cannot restrict or expand the amplitude of an exemption notification nor can they add/subtract conditionalities thereto/therefrom.

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2015 (39) STR 995 (Tri.- Mumbai) Tetra Pack India Pvt. Ltd. vs. CCE, Pune-III

Reimbursable expenses not includable while determining gross value of services.

Facts:
Department sought service tax on recovery made for reimbursable expenditure which ought to be incurred while providing output services. Reimbursable expenditure were reckoned as consideration for services rendered as per Rule 5(1) of Service Tax (Determination of Value) Rules, 2006 (Valuation Rules).

Held:
Rule 5(1) of Valuation Rules was struck down by the Hon’ble Delhi High Court in case of Intercontinental Consultants & Technocrats Pvt. Ltd. vs. Union of India 2013 (29) STR 9 (Del) on account of rule being ultra vires sections 66 and 67 of the Finance Act,1994 based on which the order was set-aside.

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[2015-TIOL-2106-CESTAT-MUM] Commissioner, Service tax-I, Mumbai vs. M/s FIL Capital Advisors India, Pvt. Ltd.

Merely because bills are in personal name, it cannot be said that services are not used by the Respondent when the expenditure towards that bill is booked in their account and CENVAT credit on group and medical polices of employees is allowed as the same is a requirement as per the Factories Act.

Facts:
The Revenue filed an application for rectification of a mistake of the Tribunal on the ground that in Revenue’s Appeal one of the ground was that the first appellate authority while allowing the CENVAT credit did not give any finding on how the input services of group and medical policies for employees and outdoor catering had a nexus with the output service and further how the bills in personal names were admissible as credit.

Held:
The Tribunal held that the services of general insurance for group and medical policies are in respect of the employees and as per the statutory provisions under the Factory Act and therefore are allowable. Moreover, outdoor catering has been allowed in various judgments and in respect of bills in personal name, the expenditure towards that bill was booked in the Respondent’s account and thus the credit allowed by this Tribunal was maintained.

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[2015-TIOL-2081-CESTAT-MAD] M/s TV Sundram Iyenger and Sons Ltd. vs. Commissioner of Central Excise, Madurai

Unless the CENVAT credit wrongly availed is utilised there shall be no payment of interest.

Facts:
The Appellant wrongly availed additional duty of customs as CENVAT credit and also partly utilised the same. Entire erroneously availed credit was reversed, but interest was paid only on the portion utilised and reversed. The Revenue authorities demanded interest also on the unutilised portion.

Held:
The Tribunal relying on the decision of the Supreme Court in case of Commissioner of Central Excise, Mumbai-I vs. Bombay Dyeing & Mfg. Co. Ltd [2007-TIOL-141-SC-CX], held that unless the credit is utilised there would be no payment of interest. Further, the Tribunal noted that such a proposition was not cited before the Apex Court in the matter of Ind-Swift Laboratories Ltd [2011-TIOL-21-SCCX] and thus the case is distinguishable. Accordingly the case was remitted to the adjudicating authority for the limited purpose of quantifying the credit availed and utilized to calculate the interest thereon.

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[2015-TIOL-2134-CESTAT-MUM] Bhima Sahakari Karkhana Ltd vs. CCE, Pune III

In absence of issuance of a consignment note, mere transportation of goods in a motor vehicle is not a service provided under Goods Transport Agency service.

Facts:
The Appellant is a factory and had paid an amount as inward freight. The Revenue authorities demanded service tax as a service recipient under Rule 2(1)(d) (v) of the Service Tax Rules,1994 read with Notification No. 35/2004-ST. It was argued that it being a sugar manufacturing co-operative unit, amounts paid were for combined expenses of harvesting, loading and transportation of sugarcane and the payments were made to individual truck owners who did not issue any consignment note. The adjudicating authority as well as the first appellate authority decided the matter against the Appellant leading to the present appeal.

Held:
The Tribunal relied on the decision of Nandganj Sihori Sugar Co. Ltd. vs. CCE Lucknow [2014 (34) STR 850 (Tri.-Del)]. The said decision noted the definition of “Goods Transport Agency” provided u/s. 65(50b) of the Finance Act as any commercial concern which provides service in relation to transport of goods by road and issues consignment note. A consignment note should have the particulars as prescribed in explanation to Rule 4B of the Service Tax Rules, 1994. The transportation of goods by individual truck owners without issue of consignment note would be simple transportation and not the service of Goods Transport Agency. Accordingly the appeal was allowed.

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[2015-TIOL-1983-CESTAT-MUM] ICICI Bank Ltd vs. Commissioner of Service Tax Mumbai-I

Without client-custodian relationship and without entrusting of securities for safe keeping, amounts received from Reserve Bank of India cannot be considered as custodial services taxable under Banking and Financial services.

Facts
The Appellant Bank acts as an “Agency Bank” for the sale of bonds to the public issued by the Reserve Bank of India. The Bank maintains the details of the subscriber, pays out interest and redeems the bond at the end of the tenor. In return, they are remunerated by the Reserve Bank of India by way of a brokerage for effecting the sales to the subscribers and a commission for the handling of sales, payment of interest and redemption value and for keeping Accounts. The Appellant has paid service tax on brokerage and commission received after 01/07/2003 under “business auxiliary service”. A Show Cause Notice was issued proposing levy of service tax under Banking and Financial services from 16/07/2001 alleging that the Bank carried out securities broking and also rendered custodial service by keeping accounts of the subscribers. The original authority confirmed the demand and the Appellant is in appeal.

Held:
The Tribunal noted that custodial services in relation to securities are primarily the safekeeping of the securities of a client and the services incidental thereto. The relationship of the Appellant with the Reserve Bank of India exists because of their potential of reaching out to a vast number of subscribers. The Reserve Bank of India is not a client as far as the securities are concerned because they are not the owners of the bonds. Further, it was also noted that a custodian for a fee performs incidental services viz. receiving the security, collecting interest or dividend on behalf of the investor and obtaining redemption value on instruction from the investor. However, in the present case the Appellant Bank itself pays the interest and the redemption value on behalf of the Reserve Bank. Thus, the bond subscriber only pays the bond price to the Bank and there is no client-beneficiary relationship with the bond subscriber. The Tribunal held that without client custodian relationship and without entrusting the securities for safekeeping, the services do not merit classification under Banking and Financial services and were liable under Business Auxiliary service only with effect from 01/07/2003.

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[2015] 61 taxmann.com 124 (Jharkhand) – Adhunik Power Transmission Ltd vs. UOI.

Dismissal of delayed appeal by Commissioner (Appeals) for want of application for condonation of delay is valid.

Facts:
The petitioner preferred appeal against the order beyond statutory period of 90 days with a delay of 14 days. The petitioner did not file the application for condonation of delay at the time of appeal and hence appeal was rejected. The petitioner’s case is that office of the Commissioner (Appeals) did not point out this defect and therefore, petitioner did not file the condonation application. It was also contended that no opportunity to file the condonation application was given by the office of the Commissioner (Appeals).

Held:
Dismissing the petition, the Hon. High Court held that the petitioner cannot say that there ought to have been appeal defect pointed out by the office of Commissioner (Appeals), otherwise the petitioner will never file delay of condonation application. Such ‘convenient’ argument is not accepted because the petitioner is a company limited and is not an illiterate or ignorant person. Reasons cannot be presumed by the Commissioner (Appeals). Thus, everybody should know the law and should have filed the condonation application for delay, if there is delay in preferring appeal. Ignorance of law is not excuse.

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[2015] 61 taxmann.com 244 (Mumbai – CESTAT)- CESTAT, MUMBAI BENCH Racold Thermo Ltd. vs. CCE, Pune-I

Once the payment arising out of CENVAT discrepancies pointed out in
the course of Audit is made by the assessee along with interest and
without contesting it further, the show cause notice cannot to be issued
for levy of penalty.

Facts:
In the course of Audit by
Central Excise Audit Team, it was observed that appellant was directed
to reverse the CENVAT credit pertaining to the value of certain written
off inputs for F.Y. 2009-10. The appellant paid the same along with
interest. Subsequently, during CERA Audit, similar written off inputs
were observed also during F.Y. 2007-08 and F.Y. 2008-09. The appellant
on their own calculated the credit and paid the same along with
interest. However show-cause notice was issued alleging penalty on the
said amount and demand was confirmed. The Revenue contended that at the
first occasion when audit was conducted and this discrepancy was raised,
the appellant should have reversed CENVAT credit for the period 2007-08
and 2008-09 also as they are aware about written off value of inputs
during the said period also. Therefore appellant although having
knowledge about written off value in their books of account, neither
reversed it nor intimated to the department; therefore the case was one
of suppression of facts. The Appellant contended that in the course of
first audit the same issue was discussed and it was held that no
reversal was required in respect of the said year and that the fact that
inputs were written of was evident from financial records and hence
there was no suppression.

Held:
The Tribunal held
that once the appellant paid the amount along with interest as per their
calculation immediately after the same was pointed out by CERA audit
team without any contest and intimated it to the department; the matter
is covered by sub-section (2B) of section 11A(1) according to which no
show cause notice is required to be issued. Therefore, penalty to that
extent was deleted. However as regards some differential amount
mentioned in the show cause notice which was not paid by the appellant,
demand of service tax, interest and penalty were confirmed.

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[2015] 61 taxmann.com 140 (Mumbai CESTAT) – ISMT Ltd vs. CCE Aurangabad

CENVAT credit availed of security service p rovided to guest house
shall be admissible as input service if such guest house is used for
lodging of employees and outside auditors who perform their service to
the appellants’ factory.

Facts:
Appellant availed CENVAT
credit for security service provided to guest house located near
factory used for lodging of employees and outside auditors who performed
their service to appellant’s factory. CENVAT credit of security
services was denied on the ground that it has no nexus with production
of goods and therefore did not qualify as input service. The confirmed
demand with interest and penalty was upheld in the first appeal.

Held:
The
Tribunal allowed the credit holding that the guest house is used for
lodging of the employees and outside auditors who perform their service
to the appellant’s factory and has a direct nexus with factory which
produces excisable goods and nothing is available on record to show that
guest house is used for any other purpose.

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2015 (39) STR 964 (Bom.) Top Security Ltd. vs. CCE & ST

Even if the assessee does not comply with the provisions of pre-deposit, the appeal cannot be dismissed without hearing on merits.

Facts:
The appeal was dismissed without hearing on merits due to non-compliance with the stay order of the Appellate Tribunal. Relying on the Hon’ble Supreme Court’s decision in case of Balaji Steel Re-Rolling Mills 2014 (310) ELT 209, it was argued that the appeal must be adjudicated on merits irrespective of such non-compliance. The department contended that the Tribunal’s order did not require any interference since it did not raise any substantial question of law. The questions of law put forth before Hon’ble High Court was that since modification of stay application was pending, financial hardship pleaded by assessee was not considered and huge service tax liability was already discharged, whether the Tribunal was right in dismissing the appeal? It was also observed that the revenue had recovered certain service tax dues from customers of the appellants. The revenue contested that there would be a recurring liability and the liability and recovery cannot be stopped since appeal for the earlier period was pending.

Held:
The Tribunal cannot dismiss the appeal without hearing on merits. The conditional stay order was complied with albeit belatedly. Further, the bank accounts of appellants were attached and certain recoveries were made from their customers directly by the revenue. For further duty liability, if there is a recovery by coercive means, it would be open for the appellants to adopt such proceedings as are permissible in law in the event they feel aggrieved by the process initiated. All contentions of both sides in that regard were kept open. Without deciding the legal issue, the appeal was restored before Tribunal to be decided on merits and in accordance with law.

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The Trans-Pacific Partnership, which excludes India, highlights need to get the economy in order

Even as Prime Minister Narendra Modi toured the world and talked up India’s trade interests, President Barack Obama may just have thrown him a one-two punch by concluding negotiations for the Trans-Pacific Partnership (TPP). Twelve countries on the Pacific Rim — encompassing 40% of the global economy — participated in the negotiations. Fragmentation of world trade into standalone blocs is not in India’s interest as we don’t get a say in determining the rules of the game. However, with trade deals at WTO hard to actualise — indeed, India has often played the role of spoiler here — TPP signals the advent of new trade challenges for India.

For example India will lose out to Vietnam, which is a member of TPP, when it comes to accessing the US market in job spinning sectors such as textiles, clothing and leather footwear. At a strategic level, TPP is being driven by a US determined to put its stamp on global trading rules. It is about enhancing the trade competitiveness of developed countries such as the US and Japan, with their emphasis on higher labour and environmental standards. TPP is not yet a done deal. Its detailed text has not yet been finalised and national legislatures of members have to approve it. But with the US already in talks with EU to conclude a Transatlantic Trade & Investment Partnership, continuing fragmentation is inevitable.

Where does that leave India? These trade deals do affect India — not only because they favour insiders as opposed to outsiders but also because they set general standards over which we have no say. Getting in can be a problem as well. For example, draconian rules for intellectual property protection would favour US and European Big Pharma, while crippling Indian pharma which is good at producing low-cost drugs.

There is no alternative to getting our economy in order. The size of India’s market is an advantage which needs to be leveraged by an environment in which economic activity is easier. NDA must push domestic reform, which has to be complemented by smarter tactics at ongoing trade talks. For instance, the government can bring in more domain experts laterally in negotiations over a Regional Comprehensive Economic Partnership (RCEP), where there will likely be demands for TPP-like rules. India needs to be seen as a country which comes to talks with ideas, without which we cannot secure national interests. TPP is a rude wake up call.

(Source: Editorial in The Times OF India dated 08-10- 2015)

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Now, Prepare for the Fed Rate Hike: The respite offered should not be frittered away

From the story about the boy who cried wolf, the most commonly drawn lesson is that one should not raise an alarm about an unpleasant eventuality when it is not imminent. It is equally important to bear in mind that the wolf will eventually come, when you are least prepared for it. The US Fed rate lift-off has been like the wolf in the tale. It has not happened on a few past occasions when it could have. This does not mean that it will not happen, perhaps later this year itself. India would do well to use the respite offered by the Fed’s decision to hold its hand for the time being to prepare for when US policy rates will move up from 0-0.25 per cent. The Reserve Bank of India (RBI) cutting its policy rate is just one of those things.

The dollar has dropped against most currencies, after the decision to defer a rate hike. The rupee, too, has strengthened, against the dollar. Which means that it has extended its overvaluation against other major currencies, further hurting exports. This is as good a time as any to nudge the rupee lower. One way to do that is to lower the central bank’s policy rate, which would induce some foreign capital reallocation away from India. If much of the volatile capital leaves India before the Fed lifts rates, there would be little room for any violent impact on the markets. Consumer prices are rising again, if you leave aside the year-on-year figure and look at the sequential movement of the index month to month. This might inhibit the RBI from paring rates. Food price inflation in a year of deficient monsoon cannot be the yardstick for setting monetary policy. The government has been adopting supply-side measures to ease the pain and should do more, to ease the upward pressure on food prices.

The government has to clean up the act when it comes to de-clogging stalled payments to vendors and construction companies for their work done, for itself or for stateowned enterprises. If that happens, new work orders from the Railways and national highways will take off better, and give momentum to the economy in the short run, before the rate hike does make its appearance. Even three little pigs managed to best the wolf.

(Source: Editorial in The Economic Times dated 19-09-2015.)

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Trans Pacific Partnership – Domestic reform is key for membership

The Trans-Pacific Partnership (TPP) is becoming a reality, threatening those outside the 12-country bloc with trade diversion and lost opportunity. The agreement, reached among Pacific Rim countries including the US and Japan but excluding China, shows up the World Trade Organization (WTO ) as an effete organisation that has not been able to secure a major deal since 1995 and is stuck with an economic framework that has been overtaken by the pace and nature of global integration. The TPP creates a new framework for trade that embraces not just low tariffs but also convergent safety standards, intellectual property rights, labour standards and environmental norms, and a dispute settlement mechanism for investment-related disputes.

How should India respond to the development? By acting simultaneously on three fronts: trying to join the Asia- Pacific Economic Cooperation as a necessary stepping stone to joining the TPP, taking a proactive role in making the multilateral WTO salient again and carrying out domestic reform, including by reducing import duties further. Trade in goods and services add up to roughly 50% of GDP (a little less in 2014-15). How competitive these are matters a lot to the entire economy. Countries like India stand to lose from being left out of dynamic trading blocs like TPP. China will probably become a member soon, though as someone who accepts the rules already set without having had a chance to contribute to the rule-making process. India, too, must join the group. The second task of reforming the working of the WTO is best accomplished by accepting the economic logic that opening up is good for India and abandoning the negotiating logic of diplomats, which holds that giving in is surrender.

India has to cut its tariffs, transit to a goods and services tax and remove infrastructure bottlenecks at the fastest pace, including clamping down on power theft and giveaways. Sectarian politics that creates social schism and violence will, however, make economic reform tough and beside the point.

(Source: Editorial in The Economic Times dated 12-10-2015.)

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Toxic food – Regulation of pesticide use in farming is too lax

India’s food chain continues to suffer from excessive toxicity, brought
on by the rampant and unrestrained use of pesticides. Official data were
released last week that showed nearly 18.7 per cent of samples tested –
samples of commonly consumed foods like vegetables, fruits, milk,
pulses, meat and spices – contained pesticide residues in varying
degrees. In over 2.6 per cent of the samples, the toxicity level was
higher than the permissible limits. The incidence of toxicity seems to
have nearly doubled when compared to similar studies in the past. Nor is
the problem confined to big cities, although Delhi and Mumbai are among
the worst hit: samples from small urban centres too have failed to pass
the safety test.

Earlier studies had shown that even drinking
water, beverages and soft drinks were not totally free of hazardous
chemicals. Worst of all, traces of banned or unapproved pesticides have
been found in commonly consumed foodstuffs. Clearly, regulation has
failed to check the circulation of prohibited chemicals and spurious
insecticides – substances which can be far more hazardous than the
permitted pesticides. Many of these harmful chemicals are feared to be
carcinogenic besides being injurious to the central nervous systems and
liver. A joint parliamentary committee(JPC) was set up in 2003 to go
into the safety standards for soft drinks, fruit juices and other
beverages. The Food Safety and Standards Authority of India (FSSAI) came
into being after the report of this JPC. However, many of the useful
recommendations of this panel, including one concerning formulation of
standards for individual food items – rather than for vegetables, fruits
and others collectively as a group – have yet to be fully implemented.

The
problem is not that India uses too much pesticide. In fact, India’s
per-hectare consumption of plant protection chemicals is just a fraction
of that in developed countries. Yet the problem of toxicity is far more
serious here than elsewhere. The real cause is the improper and
indiscriminate use of pesticides by farmers. Most pesticide
manufacturers stress the necessary precautions to be observed while
using these hazardous chemicals; these include allowing a prescribed
time to elapse between spraying pesticide and harvesting the crop. This
is necessary to let the pesticide molecules degenerate. But these
essential precautions are often ignored by farmers in India. Many of
them, especially vegetable growers, dip their produce in chemical
solutions just before going to the wholesale markets – which they
believe will improve their appearance and assure them better prices. The
use of chemicals like calcium carbide to artificially ripen fruits like
bananas, papayas and mangoes also contaminates them. This can be curbed
only by educating India’s farmers on the safe use of pesticides.
Pesticide marketing also needs to be better regulated. Only registered
dealers who have some knowledge of pesticides and their safe use should
be allowed to do business. This is important because farmers usually
rely on the advice of pesticide sellers when it comes to plant
protection issues. The pesticide industry must be pushed to contribute
to this effort.

(Source: Editorial in Business Standard dated 08-10- 2015)

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Fortify Aadhaar with Privacy Protection

It is welcome that the Supreme Court has referred the Aadhaar dispute to a larger bench that will also examine whether it violates privacy. The government must legislate an explicit law to protect privacy, and penalize its violation.

The absence of a defined right to privacy now gives credence to concerns over how Aadhaar can be abused, for example, by using the Aadhaar tag to collate information on a person’s history of, say, medical, financial and government transactions.

A robust privacy law will offer a shield. Use of Aadhaarseeded bank accounts for transferring government benefits to citizens will eliminate duplication, fraud and waste. Such a system will allow the government to abandon product subsidy, with its inherent potential for diversion and other malpractice, and replace it with transfer of the subsidy amount directly to the end-beneficiary.

This will not just overhaul India’s subsidy administration but also get rid of the ills of product subsidy, such as subsidized kerosene being used to adulterate unsubsidised diesel. That the court has not gone back on its earlier order allowing the use of Aadhaar for food and cooking gas subsidy delivery is recognition of Aadhaar’s potential.

There remains the question about whether Aadhaar is mandatory. Aadhaar must be used wherever administration of subsidy is involved. This would be onerous only if Aadhaar enrolment were difficult. The onus is on the government to ensure that no eligible welfare beneficiary is denied the unique identity number. A beneficiary cannot be denied an entitlement if she cannot obtain Aadhaar. However, if Aadhaar is made available, and the beneficiary chooses not to enroll, she should forgo the benefit. You do not have to have a passport, but if you want to travel abroad, you need one.

(Source: Editorial in The Economic Times dated 09-10- 2015.)

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The 2G case – CBI deliberately withheld crucial files, concealed facts: Trial court

Withholding of crucial documents, concealment of important facts and contradiction in statements of prosecution witnesses led to collapse of CBIs case in the 2002 additional spectrum allocation scam case. Special CBI Judge O. P. Saini, who discharged former Telecom Secretary Shyamal Ghosh and three telecom firms –Bharti Cellular Ltd., Hutchison Max Pvt. Ltd. and Sterling Cellular Ltd. in the case, said that CBI totally failed to prove its allegations. The court said that various documents, which were dubbed as unrelied upon by CBI, were “most important documents” and the agency had deliberately rendered it as inconsequential. It added that the agency wanted to give the impression that a grave crime had been committed when none had been done by “fabricating facts”.

It pointed out that TRAI reports and many other relevant documents were not filed in the court, adding that these facts “did not even find mention in the statements of witnesses.” CBI’s conduct in “relegating these (TRAI and other relevant) documents to a distant stage by not making them part of documents initially filed with the chargesheet and then dubbing them as unrelied upon and not placing on record certain other documents having important bearing on the case” went totally against the agency.

CBI’s allegation that Department of Telecommunications (DoT) had not obtained the required recommendation from TRAI prior to allocation of additional spectrum, fell flat. “I find myself in agreement with the defence counsel that TRAI recommendations were already there and DoT was not required to ask for fresh recommendations,” the judge said. The court noted that the previous TRAI recommendations of June 23, 2000 and October 24, 2000 had covered both inadequacy of the existing spectrum to the existing operators and also need for additional spectrum and also the rate at which spectrum was to be charged.

There were also contradiction in statements of prosecution witnesses which proved that CBI’s allegations were not true. The court pointed out several discrepancies in the statements of then Deputy Director General of DoT J. R. Gupta and then Wireless Advisor P. K. Gupta on whether then Member Finance was consulted before allocation of additional spectrum. CBI had alleged that former Telecom Minister Pramod Mahajan had taken this “hasty decision” on recommendation of Ghosh without consulting relevant bodies. The court, however, trashed CBI’s version and said the decision was “well debated and discussed.”

The court lambasted CBI for “deliberately” concealing and “changing its stand” over certain documents. The court added that it was because of this confusion that it summoned Bharti Cellular Ltd. CMD Sunil Bharti Mittal, Essar Group promoter Ravi Ruia and Asim Ghosh, then Managing Director of accused firm Hutchison Max Telecom Pvt. Ltd. as “additional accused” in the case. These three were not chargesheeted as accused in the case but were summoned by the court on March 19,2013 which relied on some documents placed by CBI. However, CBI later declared that it was not relying on these documents.

“The unrelied upon documents are by and large considered to be of no use to the prosecution. In the instant case, on January 14, 2013 and also in the application dated January 30, 2013, the prosecution referred to documents as unrelied upon, but in the course of submission changed its stand that these documents may also be taken as relied upon one. This change of stand distracted the attention of the court from these documents. In a sense, these documents lost credibility,” the court observed. On January 9 this year, Supreme Court had set aside the special court’s order summoning Mittal and Ruia, who was then a Director in Sterling Cellular Ltd., as accused in the case.

In 2012, CBI had filed a chargesheet in the case alleging a scam during the NDA regime in 2002. It had named Ghosh, Hutchison Max (P) Ltd., Sterling Cellular Ltd. and Bharti Cellular Ltd. as accused, claiming that on account of the conspiracy between these accused, Department of Telecommunications (DoT) allocated additional spectrum that had allegedly led to a loss of Rs 846.44 crore to the exchequer. The chargesheet also named former Telecom Minister Pramod Mahajan as an accused and alleged criminality on his part. However, since Mahajan had passed away, the proceedings against him were abated. (Remarks: The credibility & reliability of CBI is so low & yet the Establishment goes on entrusting more & more cases to CBI !!!)

(Source: The Times of India dated 16-10-2015.)

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Mr. M and Mrs. G

The more one thinks about it, the more one is inclined to compare Narendra Modi with Indira Gandhi. The original Mrs. G was the last Indian prime minister to create an emotional bond with the public. The crowds at her memorial are far greater than at the Nehru Museum, situated at the other end of Teen Murti Marg. Irrespective of the long-term damage she did to the economy, and however much she fostered corruption, the poor thought she stood for and by them. Narendra Modi is the first prime minister after Mrs. G to have created a comparable bond. Whatever happens in the future, he will always remain the “hriday samraat” for a lot of Hindus who consider him the first Indian prime minister who is truly their own.

As with Mrs. G, the more his critics sound off about him, the stronger will be the bond between Mr. Modi and his public. It happened in Gujarat, and it may be happening now across much of the country north of the Vindhyas. For Mr. Modi stands tall in a way that no one has since Mrs. G. Like her, he can and does reach out directly to voters, without the need for party intermediaries. His party needs him more than he needs it — imagine the BJP’s Bihar campaign without Mr. Modi.

When Mrs. G came to power, she was broadly acceptable to most people. In about three years, though, she had alienated much of the English language press, and a good part of the chattering classes (as they later came to be called). Something not entirely dissimilar has now happened with Mr. Modi. Even those who were willing to give him the chance of a fresh start as prime minister have decided that Mr. Modi is in fact the same as of old. He mostly ignores them and what they say, just as Mrs. G did. Like her, if he responds at all, it is at mass rallies. Like her, he has no regard for the media.

But here’s the thing: the chattering classes play the role sometimes of the canary in the cage, down a mine shaft. When they turn against a political leader, it is a political warning shot. It happened with Rajiv Gandhi and with V. P. Singh: the alienation of the chattering classes marked the beginning of political decline. In Mrs. G’s case, her downfall did not come because of the chattering classes, but she would have avoided crucial mistakes if she had listened to them. She nationalised the wholesale trade in foodgrain in the middle of a drought! Soaring food prices provoked student protests that blossomed into a broader movement against corruption. Her brutal crackdown on the railwaymen’s strike of 1974 alienated yet more people.

The Emergency was the culmination of poor economics, the undermining of institutions and the centralisation of power, and it led to her ouster.

Mr. Modi is the first prime minister after Mrs. G with the power and possibly the intention to change the Indian system. Mrs. G’s bid to perpetuate power carried with it no great economic or social agenda, only a personal one. She overstepped several Laxman Rekhas, and paid the price. Mr. Modi has an agenda that goes beyond himself, and he has decided that he will not rein in those pushing social and intellectual illiberalism. Just as it wasn’t certain at the time whether Mrs. G would succeed in her gambit, we don’t know how far Mr. Modi will go or stop short. The tea leaves suggest that we will see more Dadris, or its equivalents. So Mr. Modi wouldn’t harm himself if he paid some attention to his critics — he won’t get their votes, but they might prevent him from making mistakes.

(Source: Weekend Ruminitions by Mr.T. N. Ninan in Business Standard dated 17-10-2015.)

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NJAC overturned in judicial overreach – Supreme Court’s decision to revive system of judges appointing judges pits judiciary against executive

The collective order by a five-judge Constitution Bench of the Supreme Court to strike down as “unconstitutional and void” the 99th Constitutional Amendment Act and the National Judicial Appointments Commission (NJAC) Act 2014 legislated to replace the two-decade old collegium system of judges appointing judges, draws a line under arguably the biggest flashpoint between the judiciary and the executive over the past two decades. But given the widespread consensus that the collegium system has failed, this is unlikely to be the end of the matter.

Ordering the revival of the collegium system which allowed judges to appoint new judges since 1993, the Bench rejected the government’s plea to refer the case to a larger Bench.The apex court has simultaneously invited suggestions to improve the collegium system, fixing November 3 for its hearing on the matter. The broader judicial message is crystal clear. As senior lawyer Harish Salve put it, “SC is giving a message that the power is with them.”

This sets the stage for the most serious face off between judiciary and executive in a generation. While senior lawyer Ram Jethmalani hailed the verdict as a “historic day for democracy”, Attorney General Mukul Rohatgi scathingly called it “a flawed judgment ignoring the unanimous will of the Parliament, half the state legislatures and the will of the people for transparency in judicial appointments”. Union law minister Sadanand Gowda too says he was “surprised” because the NJAC “had 100% support of the people”.

NJAC was indeed enacted after a broad political consensus which evolved after several commissions and parliamentary committees found flaws in the collegium system over the years. It was ratified by Parliament as well as 20 state legislatures. This is why a senior advocate like K. T. S. Tulsi, while expressing disappointment over the judgment, quoted parliamentarians talking of the “tyranny of the unelected over the elected”.

This paper has argued in favour of NJAC because it promised to end opacity in judicial appointments. Judges don’t have unbridled power to appoint judges in most other liberal democracies. For example, US Supreme Court judges are appointed by the president and ratified by the Senate. For the UK’s apex court, an independent committee makes candidate recommendations to the prime minister who makes a final recommendation to the queen.

The Constitution envisages separation of powers between legislature, executive and legislature – which means each branch of government should stay within its own remit. Under NJAC the commission to select judges is composed equally of judges and non-judges, which should prevent power vesting exclusively with either judges or the political class.

With all due respect, rulings cannot be based on institutionalised distrust of the political executive or legislature. By calling for further discussion on the collegium system, the apex court itself has accepted that there were flaws in the system. It must now fix them. The judiciary remains a bulwark of Indian democracy and while preserving its independence is crucial, what’s equally incumbent on it is to look within and reform.

(Remarks : In India, the credibility & goodwill of the Politicians have reached such a low point and the Parliament has become so dysfunctional that citizens trust the higher Judiciary more than the Political Establishment.)

(Source: Editorial in The Times of India dated 17-10- 2015)

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By questioning expanding reservations, Bhagwat and Prasada draw fire but point out the obvious

RSS chief Mohan Bhagwat’s call for a non-political committee to examine and determine which categories require reservation benefits and for how long has stirred a political hornets’ nest. Coming ahead of Bihar assembly elections BJP’s opponents – particularly RJD supremo Lalu Prasad – had a field day slamming Bhagwat. Given the atmosphere in poll-bound Bihar where every party is trying to get its caste calculations right, BJP quickly issued a clarification.

But political calculations aside, Bhagwat’s take on the reservations system isn’t without merit. Few can argue against his assertion that reservations have been politicised and aren’t being implemented in the spirit of their original intention. In fact, only last week Congress’s Jitin Prasada asked his own party to rethink the reservations policy and urged it to champion a new mechanism for social justice that focusses on the most backward castes and the poor among upper castes. This is an implicit admission that quotas have come to be cornered by a few powerful OBC castes that dominate the administrative machinery.

With parties across the political spectrum rushing to legitimise the reservation demands of different caste groups in the hope of cultivating vote banks, they have kicked off a race to the bottom. As a result, even influential communities are demanding a share of the reservations pie. This is precisely what the recent Hardik Patel-led Patidar agitation in Gujarat represents. Besides touching off caste conflicts, the fallout of this great reservations game has been the slow strangulation of meritocracy. This in turn has disastrous consequences for administration. The Yadavisation of the UP police force, wherein one particular OBC caste has come to dominate that state’s law and order machinery even as crime rates soar and communal riots break out, exemplifies this point.

The need of the hour is not just to reimagine the reservations policy but also create a new paradigm for social justice. One of the reasons for the reservations rush is the lack of adequate job opportunities elsewhere which makes government postings extremely lucrative and highly prized. This clearly isn’t sustainable. Boosting job creation in the formal sector, and not just economic growth, will enlarge the pie for all communities. Economic reforms along with sufficient investments in quality school education will create a level playing field and mitigate the need for quotas. It’s time to enact policies that lift all boats.

(Source: Editorial in The Times of India dated 23-09-2015.)

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[2015-TIOL-2225-HC-MAN-ST] Suprasesh General Insurance Services & Brokers Pvt. Ltd. vs. The Commissioner of Service Tax & CESTAT, Chennai

Services of a re-insurance broker involves more than mere receiving and transmitting the premium to the re-insurer.

Facts:
The Appellant, an Insurance broker as well as a reinsurance broker paid service tax under “Insurance Auxiliary service” in respect of broking activity. However no service tax was paid for brokerage retained from the net premium remitted to the overseas re-insurer on evidencing it as export of service. The revenue demanded service tax on the said brokerage retained. The demand was confirmed holding that the services were rendered to the Indian insurance company by way of identifying re-insurer rendering consultancy and risk management services for re-insurance negotiation on behalf of the insurance company. The only service rendered to the overseas reinsurer is remittance of premia for reinsurance for which the commission is retained. So the service is rendered and consumed in India and not exported. It was further held that retention of brokerage cannot be termed as payment received in convertible foreign exchange. The Tribunal restricting the demand to the normal period of limitation confirmed the demand. Accordingly, the present appeal is filed.

Held:
The High Court relying on the decision of JB Boda and Co. Pvt. Ltd. vs. Central Board of Direct Taxes [1997- 223-ITR-271 (SC)] held that the Appellant is not merely receiving and transmitting the amounts to the overseas insurer but much more is done by the Insurance broker even as per the IRDA (Insurance Brokers) Regulations. He is required to furnish all the details about the risk involved, the premium payable, the period of coverage and the portion of the risk which is sought to be reinsured and thus serves the overseas insurer in the course of business. Accordingly it was held that the services are exported. Further, the Court noted the CBEC circular No. 56/5/2003 dated 25/04/2003 which clarified that service tax is a destination based consumption tax and is not applicable to export of service. Further, even under the Export of Service Rules, 2005, the proviso of receipt in foreign exchange applies only in respect of a recipient having a commercial or a business establishment in India and thus does not apply to the present case. Accordingly, it was held that the question of receiving the payment in convertible foreign exchange does not arise and thus the appeal is allowed.

[Note: Readers may note that sub-rule 3(2) of the Export of Service Rules, 2005 inserted with effect from 19/04/2006 provides that any service will be treated as export only if the amount is received in convertible foreign exchange. Further with effect from 01/07/2012, Rule 6A of the Service Tax Rules mandates receipt in foreign exchange to qualify as an export of service. However, the Apex Court in the case of JB Boda (supra) has held that retention of the amount would qualify as a receipt in foreign exchange to avoid the unnecessary two-way traffic which is an empty formality and a meaningless ritual. Accordingly post the amendment in the Rules, the retention of amounts from the payments to be remitted in foreign currency should qualify as a receipt in foreign exchange.]

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Software – sale vis-a-vis service

Introduction
The menace of double taxation (i.e. VAT and Service Tax both on the same transaction) is increasing day by day. Both the authorities are trying to extract maximum out of the confused and unsettled legal position about attraction of VAT and Service Tax on certain type of transactions.

In relation to software, we come across sale/purchase transactions wherein both Service Tax and VAT are being levied. This is on account of uncertainty of legal position. There are different judgments from various Tribunals and High Courts.

Copyright in software
In relation to software, the sale/purchase transactions can take place on the premises that there is sale/purchase of copyright in the concerned software. However, whether there is sale/purchase of copyright either outright or by way of transfer of right to use goods is to be decided on the facts of each case. There can be certain guidelines based on decided cases.

Reference can be made to the judgment of the Hon’ble Karnataka High Court in the case of Sasken Communication Technologies Ltd. (55 VST 89) Karnataka.

In this judgment, it was observed that if the copyright is in regard to software developed for customer, firstly it belongs to the developer and thereafter if transferred to the customer for a consideration then it will be sale of software. There can be another situation, where the software is developed, wherein copyright from the inception belongs to the customer. In such circumstances, the software so developed belongs to customer only. The developer in such a case is rendering services. In such a situation, VAT is not applicable. Relevant observations of the High Court can be noted as under;

“39. From the aforesaid Clauses it is abundantly clear that the parties have entered into an agreement whereby the assessee renders service to the client for development of software, i.e. for software development and other services. Pursuant to the agreement and the work orders, the service shall be performed by the assessee. Services must be requested by issue of a valid work order together with a statement of work. As compensation for the service rendered to the customer, the fees specified in the relevant work order or in the statement of work is payable and billing is done on a time and material basis or on a fixed price on a monthly basis. Pricing for time and material projects shall be fixed at a rate set forth in Annexure-A to the agreement.

40. The assessee agrees, that all patentable and unpatentable, inventions, discoveries and ideas which are made or conceived as a direct or indirect result of the programming or other services performed under the agreement shall be considered as works made for hire and shall remain exclusive property of the client and the assessee shall have no ownership interest therein. Promptly, upon conception of such an invention, discovery, or idea the assessee agrees to disclose the same to the client and the client shall have full power and authority to file patent applications thereon and maintain patents thereon. At the request of the client the assessee agrees to execute the documents including but not limited to copyright assignment documents, take all rightful oaths and to perform such acts as may be deemed necessary or advisable to confirm on the client all right, title and interest in and to such inventions, discoveries or ideas, and all patent applications, patents, and copyrights thereon. Both the source code of developed software and hardware projects of worldwide Intellectual Property in and each shall be owned by the client. The assessee acknowledges that all deliverables shall be considered as works made for hire and the client will have all right, title including worldwide ownership of Intellectual Property Rights in and each deliverable and all copies made from it. If acceptable to the client, the client may reuse all or any of the components developed by the assessee outside the scope of those contracts for the execution of the projects under this agreement.

41. Therefore, even before rendering service, the assessee has given up his rights to the software to be developed by the assessee. The considerations under the agreement is not for the cost of the project, the consideration is for the service rendered, based on time or man hours. Once the project is developed, all rights in respect of the said project including the Intellectual Property Rights vest with the customer and he is at liberty to deal with it in any manner he likes. The assessee has agreed to execute all such documents which are required for the exercise of such absolute rights over the software developed by the assessee.

42. The ‘deliverables’ has been defined under the agreement to mean all materials in whatever form generated, treated or resulting from the development including but not related to the software modules or any part thereof, the source code and or object code, enhancement applications as well as any other materials media and documentation which shall be prepared, written and or developed by the developer for the client under this agreement and/or Project Order. If the customer agrees to provide any hardware, software and other deliverables that may be required to carry out the development and provide the deliverables he may do so. Otherwise the assessee has to make or provide all those hardware and software to develop the deliverable and the final product. No doubt at the end of the day, this software which is developed is embedded on the material object and only then the customer can make use of the same. The software so developed even before it is embedded on the material object or after it is embedded on a material object exclusively belongs to the customer. In the entire contract there is nothing to indicate that the assessee after developing the software has to embed the same on a material object and then deliver the same to the customer so as to have title to the project which is developed. The title to the project/software to be developed lies with the customer even before the assessee starts rendering service.”

Uncertainty prevails
In spite of the above judgments, the disputes are still arising about attraction of both the taxes. Recently, there was a controversy before the Hon’ble Karnataka High Court, where three separate transactions about software were involved. The reference is to the latest judgment of the Hon’ble Karnataka High Court in case of Infosys Ltd. (Writ Petition no. 57023-57070/2013 dated 9.2.2015.

The facts in this case are that the appellant M/s Infosys was having 3 separate transactions. One for sale of ready software like “Finacle”, another transaction was that it could be customised as per requirement of the customer. Both these transactions were considered as sale and VAT on the same was charged.

The third transaction was about implementation of the software supplied to the customer. Appellant was contending that this is a separate transaction for only rendering services and cannot be made liable to VAT . However, the sales tax authorities considered such implementation part also as part of the total transaction of supply and customisation. So, VAT was levied on the full implementation charges also.

High Court’s observations
So far as implementation part is concerned, the Hon’ble High Court did not agree with the understanding of the authorities. The relevant observations of the Hon’ble High Court are as under;
“52. The understanding of the authorities is that the assessee has developed a software viz., ‘Finacle software’ which is a basic software relating to banking activities and is the copyright holder for the same. Whenever customer namely a bank approaches the assessee to develop software for their business activities, the assessee will take steps to develop the said software as per the requirement of the customers. In this activity, the assessee will make changes to the Finacle software held by it by customising the same to the requirement of the customers and will deliver the improved/modified version of the Finacle software to them. Here, what is transferred is the software with all modifications as per the request and the proposal made by the customers. This implementation process is nothing but value addition to the Finacle software, but the dealer while declaring the turnover, splits the said transaction into two parts namely, sale part and service part. This act of the dealer in splitting the contract as one for sale and the other for implementation of finacle software, thereby claiming exemption on the latter part is not correct because in almost all the instances, what is supplied by the assessee to the customers is the software as per the requirements and the amount received towards the whole process of customisation has to be considered as the amount received for the supply of customised Finacle software.

53. From the aforesaid findings, it is clear that the Assessing Authority is of the view that the customisation is equivalent to implementation. During customisation when scripting or code writing is done in order to make the standard or package software useful to the client, the consideration paid for customisation constitutes the consideration for transfer of goods. The said aspect is not disputed by the assessee.

54. What the assessee contends is that the assessee has the packaged software ‘Finacle’ a banking solution. If the said software cannot be used as such by the banks, then they make known their requirements to be incorporated in the said packaged software either by way of modifications, additions and so as to make it customer specific, which is called as customisation. What is sold by the assessee to the bank is the customised software and not the packaged software. It is clear from the invoice that for the consideration received for this customised software, the assessee has paid VAT because the assessee has copyright not only in the packaged software but also in the customised software and what is transferred to the bank is only the right to use the said software which is a deemed sale. After this customised software is installed in the premises of the bank, before bank starts using it, the process of integration with other systems has to be carried out. It is for that purpose a separate contract called service contract is entered into. The terms of the said contract as set out above involves only rendering service and rendering training to the employees of the bank, so that the installed software starts functioning. The terms of the agreement makes it clear that it is not obligatory for the bank/customer to have the services rendered only by the assessee as a part of contract of sale or a condition of sale. It is open to the customers to have the services rendered by any other competent agency. Therefore, the Assessing Authority has misconstrued this implementation to that of customisation of the software and erred in holding that the customisation involves transfer of goods and the assessee cannot avoid payment of VAT by describing the same as implementation.”

Thus, the Hon’ble High Court has appreciated that the transactions were independent. Further, where there is no transfer of copy right and only services are involved, no VAT can be levied.

Conclusion

The issue about dual taxation of VAT and Service Tax is a burning issue. The customers are suffering due to double levy by the vendors. The clarity of law is therefore very much required. We hope that with the help of above judgments both the concepts i.e. about independent nature of transactions and nature of transactions involving sale/purchase of software will become clear. Therefore, there will be some certainty and correct tax will be levied. We hope that authorities from both the departments will follow the judgment in the spirit of Law so as to overcome the problem of double taxation.

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SOME BURNING ISSUES

I Utilisation of education cess & secondary higher education cess for payment of excise duty & service tax.

Background
Education Cess (EC) was first introduced through the Finance Bill in 2004 as a surcharge with a purpose to fund basic education. Similarly, Secondary Higher Education Cess (SHEC) was introduced through the Finance Bill, 2007 as a surcharge with a purpose to fund secondary and higher education. In terms of sub-clauses (vi) (via) & (x) & (xa) of Rule 3(1) of the CENVAT Credit Rules, 2004 (CCR 04) a manufacturer of final products (MFP) or provider of output service (OSP) is allowed to avail CENVAT Credit on EC and SHEC. Further Rule 3(7) of CCR 04 provides that EC/SHEC on excisable goods and services can be utilised either towards payment of EC/SHEC on excisable goods or for payment of EC/ SHEC on taxable services. However, in view of specific restrictions provided under CCR 04, EC and SHEC on goods and services cannot be utilised towards payment of basic excise duty (CENVAT ) or service tax

Exemption from EC & SHEC
In a significant move, the EC levied u/s. 91 read with section 93 of the Finance Act, 2004 on excise duty is fully exempted vide Notification No. 14/2015-CE dated 1st March, 2015. Similarly, SHEC leviable u/s. 136 read with section 138 of the Finance Act, 2007 on excise duty is also fully exempted vide Notification no. 15/2015-CE dated 1st March, 2015.

Consequently, section 91 read with section 95 of the Finance (No.2) Act, 2004 and section 136 read with section 140 of the Finance Act, 2007 levying EC and SHEC respectively on taxable services have ceased to have effect from June 01, 2015 in terms of the said Notification No.14/2015- Service tax, dated 19th May, 2015.

Notification allowing utilisation of CENVAT credit on EC and SHEC towards payment of basic excise duty

Consequent upon exemption of EC and SHEC on excise duty, the government issued Notification No. 12/2015 – CE (NT) dated 4th April, 2015 allowing utilisation of CENVAT credit on EC / SHEC towards payment of basic excise duty. The Notification is reproduced below for ready reference:

“2. In the CENVAT Credit Rules, 2004 (hereinafter referred to as the said rules), in rule 3, in sub-rule (7), in clause (b), after the second proviso, the following shall be substituted, namely:- “Provided also that the credit of EC and SHEC paid on inputs or capital goods received in the factory of manufacture of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise leviable under the First Schedule to the Excise Tariff Act:

Provided also that the credit of balance fifty per cent EC and SHEC paid on capital goods received in the factory of manufacture of final product in the financial year 2014-15 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act:

Provided also that the credit of EC and SHEC paid on input services received by the manufacturer of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act.” [emphasis supplied]

Issues not addressed in the Notification
Although the above Notification has addressed some issues of the trade & industry, their primary concern remains unaddressed. Even after the amendment of Rule 3(7)(b) of CCR 04 utilisation of EC & SHEC towards payment of basic excise duty is not possible under various scenarios described below:

Unutilized balance of EC & SHEC of inputs, capital goods and input services as on 28th February, 2015.

EC & SHEC paid on inputs & input services received prior to 1st March, 2015 and CENVAT credit availed after 1st March, 2015.

Availment of first 50% credit of EC & SHEC paid on capital goods received prior to 1st March, 2015 and CENVAT credit availed after this date.

EC & SHEC credit availed on inputs and capital goods reversed prior to 1st March, 2015 in terms of Rule 4(5)(a) of CCR 04 and re-credits taken on or after this date.

EC & SHEC credit on input services reversed prior to March 01, 2015 and re-credit taken in terms of Rule 4(7) of CCR 04 on and after 1st March, 2015.

Re-credit taken of EC & SHEC on or after 1st March, 2015 in pursuance of any order of adjudicating authorities.

No Notification issued so far to allow utilisation of CENVAT credit on EC & SHEC for payment of service tax.

a) Effective 1st June 2015, the levy of EC & SHEC on services has been done away with. Although CBEC has issued Notification providing mechanism for utilisation of EC and SHEC for payment of excise duty on clearance of final products, corresponding provision for service tax on taxable output services is not provided for. Thus, differential treatment is provided to OSP compared to MFP, without any sound reasoning.

b) For the service providers, there could be a scenario wherein a service provider has availed credit on EC & SHEC on goods and services but not started providing any output services before 1st June 2015. Under such circumstances, there will be huge unutilised credit balance of EC & SHEC in the CENVAT credit account which cannot be utilised by such service provider unless the government allows such unutilised credit by issuing necessary clarification/amendment in CCR 04.

c) Since CCR 04 treats MFP & OSP at par for the purpose of utilisation of CENVAT credit, differential treatment will defeat the legislative intent of the government, to provide CENVAT credit benefit to the assessees across goods and services. Hence, an equal benefit needs to be extended also to service providers.

Suggestion
The Union Budget for 2015-16 has focused at making India an easier place to do business and has unveiled a number of facilitation measures to advance the said cause. In line with the said vision, the government should come out with an amendment in CCR 04 to mitigate the hardships faced by the trade & industry, so as to address primary concerns of the MFP & OSP. It is suggested that:

The government should amend sub Rule 7 of Rule 3 of CCR 04, by deleting the restriction imposed with reference to utilisation of CENVAT credit on EC & SHEC.

Further, the proviso recently incorporated under Rule 3(7) of CCR 04 vide Notification No. 12/2015 – CE (NT) dated 30th April, 2015 also requires to be deleted being restrictive in nature for the reasons explained above as it is creating hardship to industry due to large amount of CENVAT credit relating to EC & SHEC remaining unutilised.

II Services provided by agents/distributors of mutual fund or asset management companies.

Background
Prior to 1st April 2015, the following services were exempted from service tax under Mega Exemption Notification No. 25/2012 – ST dated 20th June, 2013 (as amended) :

Entry No. 29 – Services in relation to Mutual Fund or Asset Management Company by

i) Mutual Fund agent to a Mutual Fund or Assets Management Company

ii) Distributor to a Mutual Fund or Asset Management Company. With effect from 1st April, 2015, these exemptions have been withdrawn and consequent thereto an amendment is made vide Notification No. 7/2015 dated 1st March, 2015 in Reverse Charge Mechanism (RCM) contained in Notification No. 30/2012 – ST dated 20th June, 2012 (as amended), whereby 100% service tax on services provided by a MF Agent / Distributor to a MF/AMC is required to be paid by the recipient of service (viz. MF / AMC) as it used to be under the law prevailing till 30th June, 2012 in case of services of mutual fund agents or distributors.

Issue:

Post 1st April, 2015, it is understood that MF/AMC discharge their service tax obligations and make payment of commission to agents or distributors of MF/ AMC after deducting the service tax paid by them under RCM. However, it is a well-known fact that the chain of MF/AMC intermediaries is not limited to merely agents or distributors but often goes up to three to four layers of sub–agents or sub–distributors.

In the scenario, relevant provision of Rule 2(p) of CCR 04 defining “output service” is examined below :

“Output service” means any service provided by a provider of service located in the taxable territory but shall not include a service –

………..

1 ……..

2 Where the whole of service tax is liable to be paid by the recipient of service”.

Due to the above specific provision, agents and distributors of MF or AMC cannot avail CENVAT credit of service tax that may be paid by sub-agents /distributors in the chain and hence are unable to reimburse service tax to them inasmuch as they have already suffered tax through reduced commission (net of service tax) paid to them by Mutual Funds and/or AMCs.

This is resulting in a severe burden on the large section of MF and AMC intermediaries whereby there is a service tax incidence of 14% at every stage in the chain rendering the business model almost unviable The given scenario also is against the principle of value addition. This needs to be urgently addressed inasmuch as it could result in large number of MF/AMC intermediaries going out of business.

Suggestion

Rule 2(p) of CCR 04 defining output service needs to be amended whereby sub-clause (2) reproduced above is deleted. Alternatively, RCM provisions made applicable to services provided by agents/distributors of MF/AMC be done away with and instead service providers should be made liable to discharge service tax obligations so as to ensure that CENVAT chain is not broken. Another alternative is to provide exemption to sub-distributors/sub-agents under entry 29(a) of Mega Notification No. 25/2012-ST along with the exemption provided to sub-brokers of stockbrokers as sub-brokers of stock brokers and those of mutual funds are at par on this issue.

III Commission received from overseas principals in convertible foreign exchange by business intermediaries in India

Background

Business establishments in the country includes business intermediaries/agents who act as essential support link to the smooth running of small and medium businesses by ensuring stable supplies and in particular keeping overseas suppliers’ unbroken engagement in Indian markets at reasonable prices through regular marketing and other support services.In addition to providing employment in a sizeable measure, the said business intermediaries earn valuable foreign exchange for the country.

Some recent amendment in service tax law has adversely impacted stated business intermediaries receiving commission from overseas principals in convertible foreign exchange. For the period prior to 1st July, 2012, commission received in convertible foreign exchange for services provided from India by intermediaries/agents (for goods and services) to overseas principals was considered as “exported services” Hence, the said commission was exempted from payment of service tax. However, post 1st July, 2012 a new concept of ‘Intermediaries’ is introduced in Place of Provision of Services Rules, 2012 (POP Rules), whereby intermediaries (for services) providing services from India to overseas principals were made liable to pay service tax despite the fact that commission is received by the said intermediaries in convertible foreign exchange in India.

Further, vide Notification No.14/2014 dated 11th July, 2014 an amendment was made in Rule 9 of POP Rules whereby, even intermediaries/agents for goods have been made liable for service tax with effect from 1st October, 2014, despite the fact that they receive commission from overseas principals in convertible foreign exchange in India.

Issue:

The principal concern of trade & industry is that the stated policy of the government is, “we need to export our goods & services and not our taxes”. Hence, levying service tax on commission received by intermediaries in convertible foreign exchange in India from overseas principals is contrary to this policy and also contrary to taxation practice prevalent in VAT/ GST systems worldwide.

The service tax amendments made with effect from 1st July, 2012 and 1st October, 2014 has resulted in an unprecedented scenario, whereby an intermediary receiving commission in convertible foreign exchange in India is taxed whereas an intermediary based outside India to whom commission is paid from India (other than for exports) in convertible foreign exchange would not be liable for service tax under reverse charge mechanism.

It is impossible for the business intermediaries to pass on service tax of 14% to the overseas suppliers, unlike other service providers. Hence, this has resulted in a huge cost burden for the business intermediaries in India. It is apprehended by the trade & industry that the total tax incidence (Central & States) under GST regime could be as high as 27% based on report presented by a Sub-Committee to the Empowered Committee of State Finance Ministers. This would be in addition to the peak income tax of 33%(+). The same would have a cumulative impact of rendering the business of intermediaries in India commercially unviable. There is an imminent prospect of thousands of small & medium sized intermediaries existing across the country going out of business resulting in loss of livelihood and creating unemployment as well.

Suggestion

In order to ensure that there is consistency vis-a-vis stated policy of the government for the exports and also adherence to taxation practices followed worldwide with an objective of keeping costs of exports minimal to achieve global competitiveness, due encouragement is required to be provided to businesses carried out by thousands of self-employed individuals or small and medium enterprises and earning foreign exchange. In order that their businesses are not rendered unviable, the following is suggested:

Appropriate amendment be carried out in Rule 9 of POP Rules, whereby concept of ‘Intermediary’ is done away with, in cases where recipient of service is located outside India and commission is received in convertible foreign exchange by Intermediaries (for goods & services) in India. Alternatively, Rule 9 of POP Rules be amended with immediate effect, to restore exemption hitherto available to commission received by intermediaries for goods in India from overseas principals in convertible foreign exchange. If the objective of the government was to provide relief to exporters of goods paying commission to overseas intermediaries, the same can be extended by granting exemption in the same manner as provided prior to 01/07/2012.

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Welcome GST – Part II VA T (GST) in Australia & New Zealand

Preface
In continuation of our discussion on evolution of VAT and its journey to India, while Indian GST is still to be legislated, let’s try to understand in brief the practices being followed in some of the leading countries the world over.

VAT (GST) in Australia

Introduction
The Federal Government of Australia introduced the system of Goods and Services Tax (GST), throughout the country, with effect from 1st July 2000. GST has replaced the age old system of Wholesale Sales Tax, (which was prevalent in Australia) and many other taxes, duties and levies such as banking taxes, stamp duties etc., (which were being levied by various States and Territorial Governments).

Threshold
Business Enterprises : T urnover of GST supplies Australian Dollar (A$) 75,000 Non-profit
Non-profit Organisations : Turnover of GST supplies Australian Dollar (A$)1,50,000
Provider of Taxi Travel : Nil

Business Enterprises/charitable organisation having annual turnover below the threshold may opt for voluntary registration.

Business Enterprises are defined as follows:
An enterprise includes a business. It also includes other commercial activities but does not include:

• Private recreational pursuits and hobbies,
• Activities carried on as an employee, labour-hire worker, director or office holder,
• Activities carried on by individuals (other than trustees of charitable funds) or partnerships (in which all or most of the partners are individuals) without a reasonable expectation of profit. It however includes the activities of entities such as charities, deductible gift recipients, religious and government organisations, and certain non-profit organisations.

The term ‘sales’ (supplies) includes: Sale of goods or services, leasing of premises, hiring of equipments, providing advice, exporting goods, etc. However, a sale (supply) will fall in one of these three categories:

1. Taxable Sale
2. Input Taxed Sale
3. GST Free Sale

Registration:
There is very simple procedure for registration. Once a business enterprise or an organisation is liable to register on the basis of crossing the threshold, it needs to apply for registration [to obtain Australian Business Number (ABN)], within 21 days, to the Australian Tax Office (ATO) either online via the Business Portal External Link, or by phone (by calling on a given number) or through a registered tax agent or BAS agent. On satisfactory submission of necessary details, the registering authority will notify the ABN to the applicant.

Similarly, a business enterprise or an organisation may apply for voluntary registration any time as it may desire.

Coverage
GST is levied on all taxable sale/supply of goods, properties and services. It is to be paid by a taxable person, who sells/supplies such goods, properties and/or services for a consideration.

The consideration may be monetary or otherwise. The non-monetary considerations may be such as barter transactions or payment in the form of refraining from doing something, etc.

Certain kind of transactions in land and buildings are covered under taxable sale/services. The term ‘property’ includes; an interest or right over land, a personal right to call for or be granted any interest in or right over land, and a licence to occupy land or any other contractual right exercisable over or in relation to land. Sale of newly constructed premises (whether commercial or residential) are included in the category of ‘taxable sales’.

Exemptions (Tax free sales)
1. Exports
2. GST free products and services
3. Sale of a business as a going concern

Exports:
Export of goods and services from Australia to any foreign destination are generally tax free (zero rated). Thus, no tax is levied on exports but full input tax credit is available to the exporters.

It may be noted that exported goods are generally tax free (zero rated) if they are exported from Australia within 60 days from one of the following, whichever occurs earlier:

(1) The supplier receives any payment for the goods,
(2) The supplier issues an invoice for the goods so exported

And in case of services – broadly the supply of service/s are GST free (zero rated) if the recipient of service is outside Australia.

There is also a Tourist Refund Scheme whereby a receipt for goods with a combined total over A$ 300 is eligible for a refund of any GST paid upon exiting the country with refunds claimed at a TRS (Tourist Refund Scheme) counter at the airport. The advantage of this arrangement is that goods purchased 60 days prior to departure may be freely used within Australia prior to departure as long as they are carried in hand luggage and presented when making a refund claim, or shown to customs officials before being checked in as baggage.

GST free products and services
Certain goods and services are tax free (zero rated). The sale/supply of such goods and services are not liable for GST but full input tax credit is available to the seller/supplier. The list of GST free products and services includes:

Most of the items of food and beverages, some medical and health care services, specified medicines, medical aids & equipments, educational courses, course material, child care services, religious services, some of the charitable activities, supply of accommodation and meals to residents of retirement villages, cars for disabled people, water sewerage & drainage services, precious metals (such as Gold, Silver, etc.), sale of goods through duty free shops, farm land, grant of land by Government, international mail, specified tele-communication services, etc.

Sale of a business as a going concern
The Sale of a business as a going concern is GST free (zero rated) if all of the following conditions are satisfied:

(1) Everything necessary for the business’s continued operation is supplied to the buyer,
(2) The seller carries on the business until the day it is sold, that is, until settlement,
(3) The buyer is registered or required to be registered for GST, and
(4) Before the sale, the buyer and seller agree in writing that the sale is as a ‘going concern’.

Input Taxed Sales
Certain types of transactions of sale/supply of goods and/ or services are categorised as Input Taxed Sale. No tax (GST) is levied on the sale/supply of such goods and/or services as the case may be, but such transactions are not eligible for input tax credit, These include; banking and financial services, and supply of residential premises by way of rent or sale.

Financial sales (supplies) are defined under the GST Regulation. Examples include: Lending or borrowing money, buying or selling shares or other securities, creating, transferring, assigning or receiving an interest in, or a right under a super fund.

Charitable institutions (non-profit organisations) are permitted to have input taxed sales of food by school tuck shops and canteens, etc.

Taxable Sale
Sale of goods and services, that must have GST included in their price, are referred to as ‘taxable sales’. The term ‘taxable sale’ does not include sale/supplies which are described as (1) GST Free Sales and (2) Input Taxed Sales. Thus sale/supply of all goods and services (other than GST Free and Input Taxed Sale) are taxable sale, if such sale/supplies are made by a taxable person (i.e. a business enterprise or an organisation registered or liable for registration), and such sales/supplies are made;
1. for a consideration,
2. in the course of furtherance of business (enterprise), and
3. the sale is connected with Australia

It may be noted that:

1. Consideration may be monetary or non-monetary such as barter or refraining from doing something.
2. Only those goods and services are considered as taxable sales which are sold/supplied as part of conducting business. It will also include sale of business assets such as machinery, equipments, vehicles, etc. And it also includes things done during the course of setting up or winding down the business.

3.   A sale of goods is connected with Australia if the goods are any of followings:-
(i)   Delivered or made available to the purchaser in Australia
(ii)   Removed from Australia (however exports of goods and services, as described above, are generally tax free)

(iii) Brought to Australia – provided the seller either imports the goods or installs or assembles the goods in Australia.

4. A sale of property is connected with Australia if the property is situated in Australia.
5. A sale/supply of something other than goods and property is connected with Australia if any of the following applies:

(i) The thing is done in Australia

(ii) The seller makes the sale/supply of thing through a business which is carried on in Australia
(iii) The sale/supply is a right or option to purchase something that would be connected with Australia.

Rate of Tax

Australia has adopted the single rate of GST @ 10% on sale/supply of all taxable goods, properties and services.

Input Tax Credit (ITC)

A registered tax payer as well as a required to register tax payer is entitled to claim input tax credit of GST paid on goods and services acquired for the purposes of its business (except in case of input taxed sales).

There are provisions to work out input tax credit in case of mixed sale such as ‘taxable sale’ and ‘input taxed sale’, and, in case of mixed purchases (acquisitions) i.e. purchases for the purposes of business and for personal use.

The only document required, for the purposes of claiming Input Tax Credit, is the possession of ‘Tax Invoice’ issued by the supplier. Input tax credit in respect of any purchases (acquisitions) of the value exceeding A$ 82.50 can be claimed only on the basis of ‘tax invoice’ issued by the seller/supplier. However, ITC on small purchases having value up to A$ 82.50 can be claimed even without a ‘tax invoice’ (i.e. on the basis of records maintained by the purchaser).

There is a four years time limit to claim input tax credit.

Tax Invoice

It is necessary for a ‘tax payer’ (seller/suppler of taxable goods/services) to issue ‘tax invoice’ to its customer for sales/supplies exceeding A$ 82.5 (including GST). The time limit for issuing tax invoice is 28 days from the date of supply. A purchaser can claim input tax credit only after receiving ‘tax invoice’ from its supplier. If the supplier fails to issue a tax invoice within the prescribed period of 28 days, the purchaser can seek permission from the concerned GST authorities for claiming input tax credit on such purchases (acquisitions).

For sales/supplies of up to A$ 82.50, the supplier can either issue a ‘tax invoice’ or ‘invoice’ or ‘cash docket’ or a ‘receipt’. The purchaser can claim input tax credit on the basis of such ‘invoice’ or ‘cash docket’ or a ‘receipt’, etc., as the case may be.

In absence of any such document (from the supplier), the purchaser still can claim input tax credit of such small purchases on the basis of his own books/diary having full particulars of such purchases such as description of purchases, quantity, date, price paid and the ABN of the supplier. There is also a provision for Recipient Created Tax Invoice.

Essential Ingredients of a Tax Invoice

Tax invoices for taxable sales of less than A$1,000 must include enough information to clearly determine the following seven details:

1. that the document is intended to be a tax invoice

2. the seller’s identity

3. the seller’s Australian business number (ABN)

4. the date of issuing tax invoice

5. a brief description of the items sold, including the quantity (if applicable) and the price
6. the GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, as a statement such as ‘Total price includes GST’

7. the extent to which each sale on the invoice is a taxable sale (that is, the extent to which each sale includes GST).
In addition to above, a ‘tax invoice’ of A$ 1000 and above must contain ABN of the purchaser, Interstate sales/ supplies

All taxable sales/supplies within Australia are liable to single rate GST (whether sold within a particular state or inter-state).

It may be noted that Australia is having federal structure. There is a Central Parliament called ‘common wealth parliament’, six states and two major territories, each having a separate parliament. The states are sovereign entities, subject to certain powers of the Commonwealth as defined by the Constitution. Australian Constitution governs the rights of Federal Legislative Powers and States Legislative Powers.

As far as GST is concerned, it is collected and administered by the Federal Parliament and the revenue is distributed to the States under a set system.

Sales/supplies within the Group Enterprises There are provisions whereby related entities may form a single group for GST purposes.

An entity may separately register a branch for GST purposes if this suits its management and accounting structure. Two or more related entities may form a GST group if they satisfy certain membership requirements.

GST groups are treated as a single entity. Generally, transactions between group members are ignored for GST purposes. So, there is no tax on inter-group supplies and so no input tax credit to the receiver.

One entity, known as the representative member, manages the group’s GST affairs. The representative member is responsible for the GST payable and can claim the GST credits on transactions undertaken by group members (except transactions between group members).

The representative member is the only group member who must complete the GST component of an activity statement. In doing this, the representative member will effectively be accounting for the group’s total GST liability. However, if an entity opts to register separately a branch for GST purposes, the branch operates as a distinct entity for reporting purposes, accounting for GST separately from its parent entity. Thus, unlike GST groups, transactions between the branch and the parent entity will be taxable and GST credits can be claimed accordingly.

Filing of Returns & Payment of Taxes

A ‘Taxable Person’ is required to submit Business Activity Statement (BAS) generally quarterly and the taxes are required to be paid accordingly within 28 days from the end of reporting period. But, certain dealers (tax payers) have to submit their statement on monthly basis, within 21 day from the end of month, such as those dealers whose annual GST turnover is A$ 20 million or more. Small dealers are permitted to submit BAS annually.

There are also provisions whereby a dealer (having annual turnover of less than A$ 20 million) can be permitted to make payment of GST quarterly and the BAS is submitted annually. There is also an easy installment payment scheme for small dealers having turnover up to A$ 2 million. The Financial Year in Australia is from 1st July to 30th June.

For payment of taxes, there are various options such as internet banking, credit/debit card, direct transfers, through cheque/money orders, and, also through cash payment at post offices (up to A$ 3,000). The monthly/quarterly or annual BAS to be submitted mainly electronically either through ATO’s business portal or directly from business software enabled for Standard Business Reporting (SBR) or through myGov account linked to Australian Tax Office (ATO). However, there is also a facility to submit paper return by post (in specific circumstances). And, if there is no activity to report during the period i.e. if it is a ‘NIL turnover return’, it can be just reported on phone to the ATO.

There are prescribed provisions regarding accounting for GST purposes for different classes of tax payer such as accounting on cash basis, normal mercantile basis and there are also separate provisions regarding sale of goods made under ‘lay by sale agreement’ (i.e. goods identified by the purchaser, initial payment made, the balance payable in installments and the delivery of goods on receipt of final payment).

There are also provisions for simplified accounting methods to make calculating GST easier for the retailers such as bakeries, milk bars, convenience stores, etc.

Assessment

Australia has adopted Self Assessment System since 1st July 2012. The periodic Activity Statement submitted by the tax payer is treated as notice (order) of assessment.

Refunds

Refunds, if any, due to the tax payer as per periodic Business Activity Statement submitted by the tax payer, are granted within prescribed time limit of 14 days from the date of submitting return, and, the same is directly sent to the nominated bank account of the tax payer (unless withheld for any further enquiry or investigation or for adjusting against earlier dues). No separate application is required for claiming refund.

VAT (GST) in New Zealand

GST in New Zealand was introduced much earlier i.e. with effect from 1st October 1986. Its introduction represented a major change in New Zealand’s taxation policy as until this point almost all revenue had been raised via direct taxes. It is administered by the Inland Revenue Department of Government of New Zealand.

Most of the provisions under New Zealand GST Law are similar to those as discussed in Australian GST, with a few exceptions. One major notable difference is the rate of GST. It was 10% at the time of introduction in the year 1986. But, since then it has undergone two changes; first in the year 1989, it was raised to 12.5% (on 1st July 1989) and thereafter in 2010 it was raised to 15%. At present, it is 15%, effective from 1st October 2010.

However, there is no departure from the concept of single rate GST. It is the same rate applicable to all taxable goods and services. Overall, the broad scheme of taxation is the same in Australia and New Zealand.

Some minor differences in procedures may be such as the registration threshold is 60,000 New Zealand Dollars. Application for registration is to be made within 21 days from the date of liability, etc.

A registered tax payer is liable to pay GST (under the same value added tax system i.e. Output Tax – Input tax credit), either on monthly, two monthly or six monthly basis, within 28 days from the end of reporting period. Periodic returns can be filed either online or in paper form Taxes to be paid generally online but cheque payment facility is available to small tax payers. The refunds are granted within 15 working days from the date of submission of periodic return in which refund is claimed by the tax payer.

(To be continued – GST in Singapore, Malaysia, EU countries.)

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National Agricultural Co-operative Marketing Federation of India Ltd. vs. JCIT ITAT Delhi Special Bench `F’ Bench Before Justice (Retd.) Dev Darshan Sud (President), G. C. Gupta (VP) and R. S. Syal (AM) ITA Nos. 1999 & 2000/Del/2008 Assessment Years: 2001-02 & 2002-03. Date of Order: 16th October, 2015. Counsel for assessee / revenue : Hiren Mehta & Sanjeev Kwatra / Sulekha Verma

Section 37(1) – If a claim of damages and interest thereon is
disputed by the assessee in the court of law, deduction cannot be
allowed for the interest claimed on such damages. Deduction can be
allowed only when an enforceable liability to pay the same arises
irrespective of the fact that it relates to earlier years.

Facts
For
assessment year 2001-02, the assessee filed its return of income and
the assessment was completed on 27.2.2004 u/s. 143(3) of the Act. During
the course of assessment proceedings for AY 2003-04, a special audit
u/s. 142(2A) was carried out which divulged interalia that the assessee
had claimed deduction for interest payable to M/s Alimenta SA
Switzerland (`Alimenta’) on account of arbitration award, which was
disputed by the assessee. The Assessing Officer (AO) observed that the
assessee claimed deduction of interest amounting to Rs. 7.92 crore
payable to Alimenta for AY 2001-02. Such interest was not debited to P
& L Account, but was directly reduced in the computation of total
income. He also observed that since tax was not deducted at source,
amount was not allowable u/s. 40(a)(i) as well. Notice u/s. 148 was
issued and duly served on the assessee.

In the course of
assessment proceedings, the AO noticed that the claim for deduction was
not backed by any corresponding liability to pay; the liability claimed
by the assessee as deduction was not acknowledged due to ongoing
litigation and proceedings for compromise. He also noticed that the
assessee had not deducted tax and therefore in view of provisions of
section 40(a)(i), as well, the amount was not allowable. He rejected the
assessee’s contention that there was a breach of contract on its part
for which the Delhi High Court held it liable for loss incurred by
Alimenta and also interest @ 18% per annum from the date of award till
the date of realisation; the judgment delivered by Delhi High Court was
binding, the liability was determined and ascertained because of the
decree of the Delhi High Court notwithstanding the assessee filing an
appeal against it.

The AO disallowed the assessee’s claim.
Aggrieved, by the additions made, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved,
by the order passed by CIT(A), the assessee preferred an appeal to the
Tribunal. Similar issue was decided in favor of the assessee, by the
Tribunal, for assessment years 2003-04 and 2004-05. The Division Bench
was not convinced with the reasoning given by the Tribunal in its order
for AY s 2003-004 and 2004- 05 in deleting the disallowance of interest
and made a reference for constitution of a Special Bench.

The President posted the following question for consideration of the Special Bench-

“Whether
on the facts and circumstances of the case, where claim of damages and
interest thereon is disputed by the assessee in the court of law,
deduction can be allowed for the interest claimed on such damages while
computing business income?”

Held
(i) Under the
mercantile system of accounting, an assessee gets deduction when
liability to pay an expense arises, notwithstanding its actual
quantification and discharge taking place subsequently. The relevant
criteria for the grant of a deduction is that the incurring of liability
must be certain. If the liability itself is uncertain, it assumes the
character of a contingent liability and ceases to be deductible. Thus, a
deduction can be allowed only when an assessee incurs liability to pay
an amount in the nature of an expense. The aspect of incurring a
liability needs to be understood in a correct perspective. It is here
that a distinction between a contractual and a statutory liability
assumes significance. A statutory liability is incurred on a mere
issuance of a demand notice against the assessee and becomes deductible
at that point of time. The factum of the assessee raising a dispute
against such a demand does not ruin the incurring of liability. On the
contrary, a contractual liability is not incurred on a mere raising of
demand by a claimant. It arises only when such a claim is either
acknowledged or in a case of non-acceptance, when a final obligation to
pay is fastened coupled with the claimant acquiring a legal right to
receive such an amount. Unless the claimant acquires an enforceable
right to receive, it cannot be said that the first person has incurred a
liability to pay such an amount. To put it simply, in the case of a
contractual dispute between the parties, liability of the assessee to
pay arises only when the claimant against the assessee acquires some
legal right to receive the amount. In the absence of the vesting of any
such right in the claimant, neither he earns any income nor the assessee
incurs a corresponding liability to pay, entitling him to claim
deduction for the same. The crux of the matter is that, except for the
assessee accepting a contractual claim, his liability to pay does not
arise until some legal obligation to pay is fixed on him. A legal
obligation to pay is attached on an assessee when a competent court
passes order and a suit is decreed against him and not during the
pendency of litigation. This difference between a contractual and a
statutory liability has been recognised by the Hon’ble Delhi High Court
in assessee’s own case since reported as National Agricultural
Co-operative Marketing Federation of India Ltd. vs. CIT (2011) 338 ITR
36 (Del).

(ii) On facts, the legally enforceable liability
against the assessee to pay interest at the rate of 18% to Alimenta,
which was created by the decree of the ld. Single Judge dated 28.1.2000,
remained suspended from the date of stay granted by the Division bench
of the Hon’ble High Court on 28.2.2001. It is only on the passing of the
consequential judgment and decree by the Hon’ble Delhi High Court in
September, 2010, subject to certain stays etc. granted against the
operation of this judgment, that the assessee incurred a legally
enforceable liability to pay such interest to Alimenta.

(iii)
Now the moot question is, whether the assessee is entitled to deduction
for interest at the rate of 18% decreed by the ld. Single Judge of the
Delhi High Court in the computation of income for the years under
consideration. The answer will be in affirmative if the assessee had any
legal obligation to pay such interest during the years in question and
vice versa. We can do this by ascertaining if any legally enforceable
liability existed against the assessee to pay interest in the years
under consideration. Per contra, was Alimenta legally entitled to
receive such interest income during the years in question? It is
pertinent that the stay order against the judgment and decree of the ld.
Single Judge was passed by the Division Bench on 28.2.2001, which is
well within the financial year relevant to the assessment year 2001-02
under consideration and remained operative in subsequent years including
the immediately succeeding year in appeal. This shows that the assessee
did not have any legal obligation to pay interest during these two
years. The hitherto obligation which was created by the judgment of the
ld. Single judge against the assessee was eclipsed and frustrated by the
later judgment of the Division bench and such obligation ceased to
exist for the time being.
iv) Unless there is a specific contrary provision, deduction for an expense can be allowed in the year in which liability to pay finally arises. Once a person has not voluntarily accepted a contractual obligation and further there subsists no legal obligation to pay qua such contractual claim at a particular time, it cannot be said that the person incurred any liability to pay at that point of time so as to make him eligible for deduction on that count. Not withstanding the fact that obligation relates to an earlier year, the liability to pay arises only in the later year, when a final enforceable obligation to pay is settled against that person. In our considered opinion, there is no qualitative difference between the two situations, viz., first, in which no enforceable liability to pay is created in the first instance, and second, in which though the enforceable liability was initially created but the same stands wiped out by the stay on the operation of such enforceable liability. In both the situations, claimant remains without any legal right to recover the amount and equally the opposite party without any legal obligation to pay the same. neither any income accrues to the claimant, nor any deduction is earned by the opposite party. We are instantly confronted with the second type of situation in which the obligation created against the assessee by the judgment of the ld. Single judge on 28.1.2000 was stayed by the judgment of the division Bench on 28.2.2001, which position continued till the decree on the judgment dt. 6.9.2010 reviving the judgment of the ld. Single judge, became enforceable. even though the crystallization of liability of the assessee to pay interest pursuant to the developments after 6.9.2010 also covers earlier years including the years under consideration, but such liability of the assessee became due only on the acquisition of right by alimenta to enforce the decree issued on the advent of the judgment dated 6.9.2010. Consequently, the assessee can claim deduction for such interest only at such a later stage and not during the years under consideration.

(v) The Special Bench answered the question posted before it in negative by holding that in the facts and circumstances of the case, where claim of damages and interest thereon is disputed by the assessee in the court of law, deduction can’t be allowed for the interest claimed on such damages in the computation of business income.

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[2015] 173 TTJ (Pune)(UO) 17 Bhavarlal Hiralal Jain & Others vs. DCIT ITA No. 735 to 738 & 778 to 780/Pn/2013 Assessment Year: 2009-10. Date of Order: 28th November, 2014

Section 2(24)(iv) – In the absence of any material on record to show that the company has paid any amount to its consultant specifically for services rendered by him to the assessee in connection with the individual tax matters of the assessee, no part of the remuneration paid by the company is assessable as a perquisite in his hands.

Facts
The Assessing Officer noticed that a company Jain Irrigation Systems Ltd. (JISL) had paid a sum of Rs. 2,79,000 as consultancy fees to Mr. Wohra, a Chartered Accountant. The said Chartered Accountant had also attended various matters of the assessee and his family members. He had filed returns of 5 gentlemen and 4 lady members of the family of the assessee but had not charged any amount for services rendered to the assessee and his family members. Since the assessee was a director of the company JISL, the Assessing Officer regarded a sum of Rs. 10,000 as a perquisite taxable u/s. 2(24)(iv) of the Act and included it in the total income of the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
It is not mandatory or compulsory for any professional to charge for professional services rendered to any director or relative of a director or close family members of directors when he is getting fees for rendering services to a company. He may do it voluntarily and free of cost as well. The Tribunal observed that there is no material on record to show that the company has paid any amount to the consultant on behalf of the assessee.

In the absence of any material on record to show that the company has paid any amount to its consultant specifically for the services rendered by him in connection with the individual tax matters of the assessee and other family members of the assessee, no part of the remuneration paid by the company was held to be assessable as perquisite in the hands of the assessee.

This ground of appeal of the assessee was allowed.

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[2015] 70 SOT 92 (Mum) Shivalik Venture (P.) Ltd. vs. DCIT ITA No. 2008(Mum) of 2012 Assessment Year: 2009-10. Date of Order: 19th August, 2015

Section 115JB – An item of receipt which does not fall under the definition of “income” at all and hence falls outside the purview of the computation provisions of Income-tax Act cannot also be included in “book profit” u/s. 115JB of the Act.

Facts
The assessee company, engaged in the business of development and leasing of commercial complexes and rehabilitation of buildings under Slum Rehabilitation Scheme held a parcel of land as its capital asset and the said land was attached with development rights/FSI. The development rights/FSI attached to a portion of the said land were transferred by the assessee to its subsidiary company. In view of the provisions of section 47(iv) being applicable, to the assessee company, the capital gains arising on the said transfer to its subsidiary company were not included in the total income of the assessee company.

While computing the `book profit’ u/s. 115JB also, the assessee company did not offer the said amount on the ground that since the said amount was not income it did not come within the purview of section 115JB. The assessee had attached a note in the Notes forming part of accounts explaining therein that the profits arising on transfer of capital asset to its subsidiary company is, in its opinion, not coming within the purview of section115JB.

The Assessing Officer (AO) did not agree with the contentions of the assessee and he included the amount of profit on transfer of development rights in the `net profit’ for the purpose of computing `book profit’ u/s. 115JB of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that the profit and loss account should be read along with the Notes forming part of accounts and the net profit should be understood as the net profit show in the profit and loss account as adjusted by the Notes given in the notes to accounts. It was also contended that since the profit arising on transfer of a capital asset by a company to its wholly owned subsidiary company is not treated as income u/s. 2(24) and since it does not enter into computation provision at all under the normal provision of the Act, the same should not be considered for the purpose of computing book profit u/s. 115JB.

Held
The Tribunal observed that in the instant case the assessee has disclosed an item of income in the profit and loss account, but claimed that the same should be excluded by referring to the Notes to accounts. However, the principle, that the profit and loss account should be read along with Notes to accounts should be applied uniformly in all kind of situations and, hence, due adjustment needs to be done for the effect of items disclosed in the Notes to accounts. The Tribunal held that there is merit in the contention of the assessee that the notes given to Notes to accounts should be read along with the profit and loss account. Hence, the net profit shown in the profit and loss account should be adjusted with the items given in Notes to accounts, meaning thereby, the profits arising on sale of capital asset to its wholly owned subsidiary company should be excluded from the net profit and the net profit so arrived at should be considered as `net profit as shown in the profit and loss account’ used in Explanation I to section 115JB. Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10(other than the provisions contained in clause (38) thereof) is to be reduced from net profit, if they are credited to the profit and loss account. The logic of these provisions, is that an item of receipt which falls under the definition of `income’ is excluded for the purpose of computing `book profit’, since the said receipts are exempted under section 10 while computing total income. Thus, it is seen that the Legislature seeks to maintain parity between the computation of `total income’ and `book profit’, in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of `income’ at all and, hence, falls outside the purview of the computation provisions of the Income tax Act, cannot also be included in `book profit’ u/s. 115JB.

This ground of appeal filed by the assessee was allowed.

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[2015] 154 ITD 299 (Guwahati) Assistant CIT vs. Murlidhar Gattani A.Y. 2007-08 Date of Order: 22nd January, 2015

Section 80-IC of the Income-tax Act, 1961 – ‘Milk’ is an article or thing mentioned in Part-A of Fourteenth Schedule of the Act and profit derived from production of milk is eligible for deduction u/s. 80-IC of the Act.

FACTS
The assessee, a proprietorship concern, was carrying on business of production of milk and milk based products, and had claimed deduction u/s. 80-IC in respect of profit & gains derived from the said business.

The Assessing Officer disallowed assessee’s claim holding that the article or thing, viz., milk, mawa, cream against which the assessee had sought deduction u/s. 80-IC were not specified in the Fourteenth Schedule referred to in section 80-IC(2)(b).

On appeal, the Commissioner (Appeals) held that ‘Milk’ was an article mentioned in Fourteenth Schedule of the Act, and that profit derived from milk was eligible for deduction u/s. 80-IC subject to other conditions laid down in section 80 IC of the Act.

On revenue’s appeal:

HELD

CIT-(A) had held that that Milk is an article mentioned in Fourteen Schedule of the Income-tax Act, 1961 and that profit derived from Milk is eligible for deduction u/s. 80IC of the Act by making following observation-

Sl. No.5 of Schedule 14 in respect of North Eastern States reads as under: Milk and milk based product industries manufacturing or producingi.

i. Milk Powder;
ii. Cheese;
iii. Butterghee;
iv. Infant food;
v. Weaning food;
vi. Malted milk food

The point is whether the first word (milk) in the items read independently or in conjunction with the word “based industries”. In order to find the answer, it may be useful to look at some of the other items in Schedule 14. Item 4 is Food & Beverages Industries. This may read as Food Industries and Beverages Industries. Similarly, meat and poultry Product Industries may be read as Meat Product Industries & Poultry Product industries.

The milk and milk based industries were definitely not used in a similar way because had it been so, one of the words “Milk” appearing therein would become superfluous. Therefore, the first “Milk” appearing in item No. 5 must be read separately. Therefore, the milk is an article or thing mentioned in Part A of Schedule XIV.

Also in the case of CIT vs. Tara Agencies [2007] 292 ITR 444, the Honorable Apex Court while explaining the meaning of the word “production” has observed as under:

‘The expression “produced” was given a wider meaning than the word “manufacture” pointing out that the word “produced” will include an activity of manufacturing the materials by applying human endeavour on some existing raw material, but the word ‘produce’ may include securing certain produce from natural elements, for example, by milching the cow the milkman, produce milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk’

‘The word “production” or “produce” when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.’

In view of the above decision of the Honorable Apex Court, it is held that “Milk” is an article or thing which can be produced by the assessee and the view taken by the CIT- (A) that “Milk” is an article or thing mentioned in Part-A of Fourteenth Schedule of the Act, and that the profit derived from production of milk is eligible for deduction u/s. 80IC of the Act is upheld.

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[2015] 154 ITD 161 (Mumbai – Trib.) Assistant CIT vs.Yusuf K. Hamied A.Y. 2009-10 Date of Order: 21st January, 2015

Section 17 of the Income-tax Act, 1961 – Where assessee occupies accommodation that belongs to employer as per independent rent agreement by paying standard rent and also receives HRA from his employer for not getting accommodation then no perquisite addition can be made u/s. 17(2)(ii).

FACTS
The assessee was having tenancy agreement with his landlord, M/s CIPLA, who was also employer of assessee.

The assessee was occupying the house in the capacity of a tenant by paying standard rent.

The AO held that the assessee had derived the perquisite benefit u/s. 17(2)(ii), since the property could have fetched the rent much higher than the rent paid by the assessee. Accordingly, he made the addition

On appeal, the CIT-(A) deleted the addition holding that the assessee did not derive any benefit in his capacity of employee.

On appeal by the revenue.

HELD
The findings recorded by the ld. CIT(A) for deleting the addition made were as follows –

There is no legal authority or principle to deny coexistence of employer-employee relationship and landlord-tenant relationship. Separate contractual relationships can co-exist with independent terms. No law or principle can come in the way of distinct and independent contractual relationships between the very same parties.

Also the assesse is paying standard rent and standard rent cannot be called as nominal rent. In fact, it is a fair rent which is also the measure for calculating income from house property.

The assessee has occupied the accommodation as a tenant of CIPLA, being the landlord of the premises. CIPLA has not recovered any rent from the appellant pursuant to employer-employee relationship; rather CIPLA has received rent from the assessee in terms of contract of tenancy independent of the contract of employment.

Therefore, CIT(A) was of the considered view that the deemed mechanism of computation of value of perquisite u/s. 17(2)(ii) cannot be applied to the facts of this.

The aforesaid findings of CIT-(A) has not been controverted by the Department.

Hence, since the assessee has occupied accommodation that belongs to employer as per independent rent agreement by paying standard rent and has also received HRA from his employer for not getting accommodation no perquisite addition can be made u/s. 17(2)(ii).

In the result, appeal of the Revenue is dismissed.

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Income or capital – A. Y. 2008-09 – Fund allotted to Government Company for a scheme – Specific direction that the interest on the amount should be utilised for the scheme – Interest is not assessable as income

CIT vs. Karnataka State Agricultural Produce Processing and export Corporation Ltd.; 277 ITR 496 (Karn):

The assessee is a company fully owned by the Government of Karnataka engaged in trading in agricultural produce. The Government of Karnataka sanctioned Rs. 10 crore for improvement of infrastructure in order to encourage the farmers for development of horticulture sector and to promote exports. The grant of Rs. 10 crore was kept in fixed deposits by the assessee till utilisation for the desired projects. The Government of Karnataka had specifically directed that the interest earned on fixed deposits should be treated as additional grant of the scheme and not to be treated as “income of the assessee”. The Assessing Officer assessed the interest as income from other sources. The Tribunal deleted the addition.

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

“There was no profit motive as the entire fund entrusted and the interest accrued therefrom from deposits had to be utilized only for the purpose of the scheme originally granted. The whole of the fund belonged to the State exchequer and the assessee had to channelise them to achieve the objects of centrally sponsored scheme of infrastructural development as specified in the Government order. Hence, interest on all these fixed deposits had to be considered as capitalised and not revenue receipts to be treated as income.”

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Income – Mutuality – A. Y. 1986-87 – Co-operative society allotting plots in land to members at premium – Ownership of land remaining with society – Premium to be utilised for development of common facilities and amenities – Co-operative society a mutual concern – Premium received for transfer of plots exempt from tax

CIT vs. Prabhukunja Co-operative Housing Society Ltd.; 377 ITR 13 (Guj)(FB): 279 CTR 466 (GUJ)(FB):

The
assessee is a co-operative housing society. It owned lands for
residential use. Such lands were developed by the society for providing
common amenities such as internal roads, drainage, street lights if need
be, common plot and club house. Individual plots were allotted to
members who enjoy occupational rights but ownership of the land always
remained with the society. On the plot of land so allotted, the member
would be allowed to construct his residential unit. Upon transfer of the
plot by a member, the society would collect 50% of the excess or
premium. The fund so collected would be appropriated in the common fund
of the society to be utilised according to the bye-laws which envisaged
development of common facilities and expenditure for common amenities. A
part of the surplus would be diverted to the reserve fund of the
society. The surplus could also be utilised for waiver of the lease
amount or for the health, education and social activities of the
members. The Assessing Officer held that the assessee was not a
co-operative society but an association of persons engaged in business
and, accordingly, made an addition to the income of the assessee on
account of the premium received for transfer of plots. The Commissioner
(Appeals) held that the assessee was governed by the principles of
mutuality, and such amount was not taxable in the hands of the assessee
society. The Tribunal confirmed the order of the Commissioner (Appeals).

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

“i)
Contributions made by the members to the general fund of a co-operative
society in various forms would be governed by the principle of
mutuality. Particularly, in the case of premium collected by the society
from its outgoing member from out of a portion of his profit, the
principle of mutuality would apply and the receipt would not be taxable
as income of the society.

ii) There was total identity of
contributors of the fund and recipients from the fund. The contribution
came from the outgoing member in the form of a portion of the premium
and it was utilised for the common facilities and amenities for the
members of the society. Different modes of application of the funds made
it clear that the funds would be expended for common amenities or for
general benefit of the members or be distributed amongst the members in
the form of dividend or lease rents waiver.

iii) Creation of the
society was primarily for the convenience of the members to create a
housing society where individual members could construct their
residential units and common facilities and amenities could be provided
by the society. It was essential thus that a combined activity be
carried on by a group of persons who would be the members in the
co-operative society.

iv) Merely because upon the winding up of
the society, the surplus fund would be utilised by the Registrar as
provided under the Gujarat Co-operative Societies Act, 1961, and would
not be returned to the members, that would not break down the
relationship of mutuality since even in the eventuality of winding up,
there was no scope of profiteering by the members. Therefore, the
premium received by the assesses for transfer of plots was exempt from
tax.”

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Income – Deemed profit – Section 41(1) – A. Y. 2007-08 – Amounts shown for several years as due to sundry creditors – Amount not written off in relevant year – Genuineness of credits not doubted – Amount not assessable u/s. 41

Principal CIT vs. Matruprasad C. Pandey; 377 ITR 363 (Guj):

For the A. Y. 2007-08, the Assessing Officer made an addition of Rs. 56,96,645/- u/s. 41(1), doubting certain sundry creditors amounting to Rs. 56,96,645 appearing in the balance sheet of the assessee for the past several years. The addition was deleted by the Tribunal.

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

“i) The addition u/s. 41(1) cannot be made unless and until it is found that there was remission or cessation of the liability that too during the previous year relevant to the assessment year in question.

ii) The sundry creditors mentioned in the balance-sheet of the assesee were shown as sundry creditors for several years before the relevant assessment year and at no point of time earlier had the Assessing Officer doubted the creditworthiness or identity of the creditors. There was no remission or cessation of the liability during the previous year relevant to the assessment year under consideration. The deletion of the addition was justified.”

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Presumptive income – Section 44BB – The servicetax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee is only collecting the service-tax for passing it on to the government. Thus, for the purpose of computing the presumptive income of the assessee u/s. 44BB, the service-tax collected by the assessee on the amount paid for rendering services is not to be included in the gross receipt in terms of section 44BB(2) rea<

DIT vs. Mitchell Drilling International (P.) Ltd.: [2015] 62 taxmann.com 24 (Delhi):

The High Court of Delhi framed following question of law:

“Whether the amount of service-tax collected by assessee from its various clients should have been included in gross receipts while computing its income u/s. 44BB?”

The High Court held as under:

“(i) Section 44BB introduces the concept of presumptive income and states that 10% credit of the amounts paid or payable or deemed to be received by the assessee on account of “the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oil in India” shall be deemed to be the profits and gains chargeable to tax. The purpose of this provision is to tax what can be legitimately considered as income of the assessee earned from its business and profession.

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

(iii) The position has been made explicit by the CBDT itself in two of its circulars. In Circular No. 4/2008 dated 28th April, 2008 it was clarified that “service tax paid by the tenant does not partake the nature of income of the landlord”. The landlord only acts as a collecting agency for Government for collection of service-tax. Therefore, it has been decided that TDS u/s. 194-I would be required to be made on the amount of rent paid/payable without including the service tax. In Circular No. 1/2014 dated 13th January, 2014, it has been clarified that service-tax is not to be included in the Fees for professional services or technical services and no TDS is required to be made on the service-tax component u/s. 194J.

(iv) Thus, for the purpose of computing the presumptive income of the assessee u/s. 44BB, the service-tax collected by the assessee on the amount paid for rendering services is not to be included in the gross receipt in terms of section 44BB(2) read with section 44BB(1).”

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Housing project – Deduction u/s. 80-IB(10) – A. Ys. 2002-03 to 2007-08 – Architect certifying completion of project, application made to municipal corporation for issuance of completion certificate and fees paid therefor within time specified – Delay by municipal corporation for issuance of certificate – Delay cannot be attributed to assessee – Assessee is entitled to deduction

CIT vs. Hindustan Samuh Awas Ltd.; 377 ITR 150 (Bom):

The assessee was a builder and a developer which undertook a mega housing project on a layout covering an area of about 25 acres. The project was approved in February 2000. The assessee completed part of the project and obtained a completion certificate for that part of the project from the municipal corporation on October 10, 2008. The assessee sought exemption u/s. 80-IB(10) for the A. Ys. 2002-03 to 2007-08 in respect of the profit made in these years from the sale of flats. The claim was denied by the Assessing Officer on the ground that the completion certificate was not issued on or prior to 31st March, 2008. The Tribunal allowed the assessee’s claim and held that in view of the fact that the assessee had made an application seeking a completion certificate prior to 31st March, 2008, the date on which the completion certificate was issued was not material. The delay in issuing the completion certificate was not attributable to the assessee. The delay was beyond its control.

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

“i) The Explanation is quite clear and did not introduce any uncertainty. In other words. The date of completion of a project has to be the date of issuance of completion certificate by the municipal authority. The architect of the project had given a certificate prior to 31st March, 2008. The assessee submitted the application to the municipal authority along with such certificate well in time on 25th March, 2008. The municipal authorities directed the assessee to deposit certain amount for issuance of completion certificate on 27th March, 2008 and the amount was, accordingly deposited on 31st March, 2008.

ii) The delay could not be attributed to the assessee. Therefore, the project for which exemption was sought was completed prior to 31st March, 2008, and entitled to deduction u/s. 80-IB(10).”

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