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The RBI has issued clarifications regards to the LRS (given hereafter):
Presently, non-resident acquirers, subject to certain conditions, can open Escrow account and Special account with a bank in India for acquisition/transfer of shares/convertible debentures of an Indian company through open offers/delisting/exit offers.
This circular permits a bank to issue bank guarantee, without prior approval of RBI, on behalf of a nonresident acquiring shares or convertible debentures of an Indian company through open offers/delisting/ exit offers, if:
a) The transaction is in compliance with the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) [SEBI (SAST)] Regulations.
b) The guarantee is covered by a counter guarantee of a bank of international repute.
c) The guarantee will be valid for a tenure coterminus with the offer period only, as required under the SEBI (SAST) Regulations.
Presently, Indian residents are not allowed to cancel and rebook forward contracts, involving the rupee as one of the currencies, booked by them to hedge their current and capital account transactions. However, exporters are allowed to cancel and rebook forward contracts to the extent of 25% of the contracts booked by them in a financial year for hedging their contracted export exposures.
This circular has:
1. Increased the said limit of 25% to 50% for exporters. Hence, exporters can now cancel and rebook forward contracts up to 50% of the contracts booked by them in a financial year for hedging their contracted export exposures.
2. Importers are now permitted to cancel and rebook forward contracts entered into by them to the extent of 25% of the contracts booked in a financial year for hedging their contracted import exposures.
Presently, ECB cannot be availed for general corporate purpose.
This circular permits eligible borrowers to avail ECB from their foreign equity holders for general corporate purposes under the Approval Route subject to the following conditions:
(a) Minimum paid-up equity of 25% must be held directly by the lender.
(b) Minimum average maturity of ECB must be 7 years.
(c) Such ECB cannot be used for any purpose not permitted under the extant ECB guidelines (including on-lending to their group companies/ step-down subsidiaries in India).
(d) Repayment of the principal can commence only after completion of minimum average maturity of 7 years. No prepayment will be allowed before maturity.
This circular clarifies that:
(a) All the financial commitments made on or before 14th August, 2013, in compliance with the earlier limit of 400% of the net worth of the Indian Party under the automatic route will continue to be allowed. As a result, such investments will not be subject to any unwinding or approval from the RBI.
(c) Limit of 400% of the net worth of the Indian Party will apply in case the financial commitments are funded by way of eligible ECB raised by the Indian Party as per the extant ECB guidelines.
Certain additional/consequential clarifications are also annexed to this circular.
Presently:
(a) An NRI can invest under PIS on repatriation and/or non-repatriation basis in shares and convertible debentures of listed Indian companies on a recognised stock exchange in India through a registered stock broker.
(b) An NRI can purchase and sell shares/convertible debentures under the PIS through a branch designated by an Authorised Dealer for the purpose and duly approved by the Reserve Bank of India.
This circular has made the following changes:
(a) Unique Code Number will be allotted only to Link office of the AD Category-I bank
(b) Allotment of Unique Code Number to each branch designated by that AD Category- I bank administering the Scheme is being dispensed with. Accordingly, banks are free, subject to certain terms and conditions, to permit their branches to administer the Portfolio Investment Scheme for NRIs.
Salient features of PIS for investments by an NRI are annexed to this circular.
Foreign Investments in Asset Reconstruction Companies (ARC)
Presently: –
(a) Foreign Direct Investment (FDI) up to 49% in the equity capital of ARC is permitted subject to certain conditions.
(b) FIIs are not permitted to invest in the equity capital of ARC
(c) General permission is granted to an FII to invest in Security Receipts (SR) up to 49% of each tranche of scheme of SR. However, a single FII cannot invest more than 10% in each tranche of scheme of SR.
This circular has made the following changes:
(a) Ceiling for FDI in ARC has been increased from the present 49% to 74%. However, no sponsor can hold more than 50% of the shareholding in an ARC either by way of FDI or by routing through an FII. Foreign investment in ARC would need to comply with the FDI policy in terms of entry route conditionality and sectoral caps.
(b) The foreign investment limit of 74% in ARC would be a combined limit of FDI and FII.
(c) Prohibition on investment by FII in ARC is being removed. The total shareholding of an individual FII cannot exceed 10% of the total paid-up capital.
(d) The limit of FII investment in SR is being enhanced from 49% to 74% of the paid-up value of each tranche of scheme of SR issued by the ARC.
(e) Individual limit of 10% for investment of a single FII in each tranche of SR issued by ARC is being removed. However, such investment must be within the FII limit on corporate bonds and sectoral caps under the extant FDI regulations have to be complied with.
SEBI
has laid down a large variety of acts, generally and specifically, that
are treated fraudulent or manipulative practices under the PFUTP
Regulations. However, curiously, there is a specific Regulation 4(2) (q)
which deals with, while not using that term, front running by
intermediaries. The Regulations prohibit intermediaries from engaging in
such acts.
The SAT had earlier held in Dipak Patel’s (Appeal
No. 216 of 2011, decision dated 9th November 2012) case held that this
Regulation applied specifically to intermediaries only and there are no
other provisions in the Regulations/Rules/Act that specifically prohibit
front running by non-intermediaries. Hence, persons who are not
intermediaries cannot be held guilty of such charges. In that case, an
employee of a foreign institutional investor had, as per the findings,
advance information of certain proposed trades of his employer. He
conveyed this information to his cousins in India. Using this
information, the cousins carried out such advance trades. Then these
trades were reversed when his employer came to acquire the shares in the
market. The advance trades were at a lower price and these shares were
sold to the employer at a higher price, and substantial profits were
made. However, the employee was not an intermediary. Thus, the SAT held
that he could not be held liable under the PFUTP Regulations. SAT,
accordingly, had observed:-
“In the absence of any specific
provision in the Act, rules or regulations prohibiting front running by a
person other than an intermediary, we are of the view that the
appellants cannot be held guilty of the charges levelled against them.
There is no denying the fact that when the appellants placed their
order, these were screen based and at the prevalent market price.
Admittedly Passport was the major counter party for trading in the
market and was placing huge orders and hence possibility of order of
traders placing orders for smaller quantities matching with orders of
Passport cannot be ruled out. Therefore, it cannot be said that they
have manipulated the market. The alleged fraud on the part of Dipak may
be a fraud against its employer for which the employer has taken
necessary action. In the absence of any specific provision in law, it
cannot be said that a fraud has been played on the market or market has
been manipulated by the appellants when all transactions were screen
based at the prevalent market price.”
Thus, what was emphasised
was that, if at all, it was a fraud by the employee on the employer. And
for such fraud, the employer may take due action. But there was no
fraud or manipulation by the employee on the markets. Hence, there was
no violation of the PFUTP Regulations.
SAT followed the above
decision in Sujit Karkera vs. SEBI (Appeal No. 167 of 2012 dated 17th
December 2012) and this decision was on the same lines.
These
decisions created some dissatisfaction and were well debated. Now,
however, SAT has given a decision holding a view contrary to its earlier
decisions. As will be seen later, SEBI too has amended the law with
retrospective effect.
The findings of SEBI in the present case
were also similar. To point out a few, the Appellant was the wife of the
equity dealer of Central Bank of India (“CBI”). In 14 out of 16 trading
days, the trades of the Applicant matched with that of CBI. It was
found that the Appellant used to buy ahead of CBI and then sell the
shares when CBI came to purchase the shares of that Company on the same
day. It was noted that the Appellant sold all of the shares purchased on
that day to CBI. The price of purchase and the price of sales were
noted and in particular, the manner in which a higher-than-last traded
price was put as offer price for sale to CBI by the Appellant was noted.
SAT considered both its earlier decisions. However, using the
following reasoning, it departed from them and held that front running
was a fraudulent market practice and violation of 3(a), (b), (c), (d)
and 4(1) of the PFUTP Regulations and thus punishable. It observed:-
“A
minute perusal of the judgment of Dipak Patel makes it evident that act
of front running is always considered injurious be it an intermediary
or any other person for that reasons. We would like to give a liberal
interpretation to the concept of front running and would hold that any
person, who is connected with the capital market, and indulges in front
running is guilty of a fraudulent market practice as such liable to be
punished as per law by the respondent. The definition of front running,
therefore, cannot be put in a straight-jacket formula.”
The SAT also observed:-
“Advance
information of definite trade by CBI at manipulated price of particular
scrip was available to Appellant no. 1 and on basis of this information
she traded in security market and secured undue profits, which was
disadvantageous to other investors, since they were not privy to this
privileged information and resulted in manipulation of securities in
market.”
It could not be specifically proved that the Appellant received information from her husband by way of recording of phone calls, etc. However, SAT took into account the curious fact of consistent matching of transactions, timing and of course the relation between the Appellant and the employee of CBI, her husband.
The findings in the orders of SEBI and SAT clearly suggest that that the Appellant with her husband profited at the cost of CBI. Nevertheless, certain thoughts come to mind.
Would this not be treated as a fraud on CBI, the employer, by the employee by sharing information with the Appellant, his wife? And therefore this should be actionable by CBI and not SEBI?
The Order says that there was a loss/disadvantage to other investors. This too is difficult to understand. The Appellant purchased the shares from other investors on the same day. Later during the day, she sold the same at a higher price to CBI. But if this had not happened and CBI had come directly in the market, would not the sellers got the same price as they got in original sale as the transactions would have taken place in the same manner? The counter-argument possible is that though this may be a fraud by the employee on the employer, the fraud was carried out on the stock market which is a public arena for investors generally and not in a private transaction.
Finally, the question of redundancy of Regulation 4(2) (q) remains. If such transactions are violation of the other general provisions of the PFUTP Regulations, then what is the relevance of Regulation 4(2)(q)? Would not such an interpretation by SAT/SEBI make such a Regulation redundant and thus such interpretation violative of accepted principles of interpretation of statutes? The counter-argument is of course that if such a universal rule was made, then the various prohibitions say, on stock brokers, may be interpreted as not applicable to persons who are not stock brokers.
Nevertheless, the decision of SAT now creates a precedent that front running is a violation of the PFUTP Regulations and thus punishable.
SEBI has also amended the PFUTP Regulations by inserting an Explanation to Regulation 4 by a Notification dated 6th September 2013. The Explanation reads:-
“Explanation—For the purposes of this sub-regulation, for the removal of doubts, it is clarified that the acts or omissions listed in this sub-regulation are not exhaustive and that an act or omission is prohibited if it falls within the purview of regulation 3, notwithstanding that it is not included in this sub-regulation or is described as being committed only by a certain category of persons in this sub-regulation.”
Thus, it seeks to clarify that (i) the prohibited acts/ omissions in Regulation 4(2) are not exhaustive and (ii) acts/omissions included in Regulation 3 are prohibited even if Regulation 4(2) does not specifically include them or prohibits them only if committed by certain category of persons. Effectively, this Explanation seems to provide that if front running can be held to be covered under Regulation 3, then it will be an offence. This is despite the fact that Regulation 4(2) covers only front running committed by intermediaries.
In view of the above, front running, whether by intermediaries or non-intermediaries, will be an offence under the PFUTP Regulations. This is unless the SAT decision is appealed before the Supreme Court which, taking also into account the clarificatory amendment to the Regulations, gives a different decision.
Central
Sales Tax- Declared Goods-Iron and Steel-Stainless Steel Wire-Does Not
Fall under Entry “Tool, Alloy and Special Steels”- section 14((iv) (ix)
of the Central sales Tax Act, 1956.
The
appellant is engaged in manufacture and sale of Stainless Steel Wire,
and was assessed under the UP sales tax Act and CST Act for the period
1999-2000 in which the assessing authorities levied tax @ 4% on sales of
Stainless Steel Wire by treating it declared goods covered by entry(ix)
of clause (iv) of section 14 of the CST Act, relating to “ Tool, Alloy
and Special Steels of any one of the above categories”. Subsequently,
the revising authorities issued notice to reopen the assessment to levy
higher rate of tax on sales of such Stainless Steel wire being not
covered by the term iron and Steel as defined in section 14(iv) of the
CST Act. The appellant filed writ petition in the Allahabad High Court
against issue of the said notice. The High Court dismissed the writ
petition holding that “stainless steel wire” is not covered under the
item “tool, alloy and special steels” in entry (ix) and, therefore, does
not fall under “iron and steel” as defined under clause (iv)of section
14 of the Central Act and therefore the provision of section 15 of the
Central Act does not apply. The appellant filed an appeal to the Supreme
Court against the said judgment of High Court.
Held
The
language used in entry no. (ix) is plain and unambiguous and that the
items which are mentioned there are “tool, alloy and special steels”. By
using the words “of any of the above categories” in entry no. (ix),
would refer to entries (i) to (viii) and it cannot and does not refer to
entry No. (xv). However, entry (xvi) of clause (iv) would be included
in entry (xvi) particularly within the expression now therein any of the
aforesaid categories. Therefore, the specific entry “tool, alloy and
special steels” being not applicable to entry (xv). Therefore, it was
held that the stainless steel wire is not covered within entry (ix) of
clause (iv) of section 14 of the Central Sales Tax Act, 1956.
The appeal u/s. 384 of the Indian Succession Act, 1925 had been filed against the order passed by the Additional District Judge, Nimbahera dated 17-04-1998, whereby the application filed by the respondents No. 1 and 2 u/s. 276 of the Act was allowed and a probate of will executed by deceased Bheru Lal dated 06-04-1992 was ordered to be granted to them. Brief facts of the case are that Smt. Mangi Bai and Smt. Suhagi Bai, both daughters of Shri Veni Ram filed application u/s. 276 of the Act seeking probate of registered will dated 06-04-1992 executed by their brother Bheru Lal, who died on 01-02-1993. It was stated in the application that they were real sisters of deceased Bheru Lal, who died issueless and had no wife and to take care of the fact that there is no dispute in the future, the said will was executed by the deceased Bheru Lal in their favour. It was further indicated that the appellant herein who was impleaded as defendant in the said application had got the land, which was bequeathed under the will to them, mutated in her favour by claiming herself to be the wife of deceased Bheru Lal and the said land was acquired for construction of Mansarovar Dam and award in this regard was passed, which was sought to be received by the appellant herein. Ultimately, it was prayed that probate of the said will be issued in their favour.
However, during the pendency of the said proceedings on 07-04-1998, a compromise dated 31-3- 1998 in the form of application under Order XXIII, Rule 3 CPC was filed by the appellant as well as respondents No. 1 and 2.
It was held that there is no bar in entering into compromise in probate proceedings. It is open for parties in contested probate proceedings to settle their disputes by way of compromise-Refusal to pass decree in terms of compromise entered into amongst parties to proceedings despite filing of application under O.23, R.3 was improper.
Presently, the time limit for submitting form DPX 1, PEX-1 and TCS-1 is 30 days of entering contract for grant of post-award approval.
This circular has done away with the requirement of submission of forms DPX1, PEX-1, TCS-1 and DPX-3, to the concerned regional office of the RBI (Foreign Exchange Department) by the Approving Authority (AA). However, these forms may continue to be submitted to ECGC and Exim Bank where their participatory interests by way of funded/non-funded facilities, insurance/risk cover, etc., are involved.
External Commercial Borrowings (ECB) Policy–Liberalisation of definition of Infrastructure Sector
This circular has expanded the definition of infrastructure sectors and sub-sectors for the purpose of ECB. The expanded definition is as under:
(a) Energy which will include (i) electricity generation, (ii) electricity transmission, (iii) electricity distribution, (iv) oil pipelines, (v) oil/gas/liquefied natural gas (LNG) storage facility (includes strategic storage of crude oil) and (vi) gas pipelines (includes city gas distribution network);
(b) Communication which will include (i) mobile telephony services/companies providing cellular services, (ii) fixed network telecommunication (includes optic fibre/cable networks which provide broadband/ Internet) and (iii) telecommunication towers;
(c) Transport which will include (i) railways (railway track, tunnels, viaducts, bridges and includes supporting terminal infrastructure such as loading/ unloading terminals, stations and buildings), (ii) roads and bridges, (iii) ports, (iv) inland waterways, (v) airport and (vi) urban public transport (except rolling stock in case of urban road transport);
(d) Water and sanitation which will include (i) water supply pipelines, (ii) solid waste management, (iii) water treatment plants, (iv) sewage projects (sewage collection, treatment and disposal system), (v) irrigation (dams, channels, embankments, etc.) and (vi) storm water drainage system;
(e) (i) mining, (ii) exploration and (iii) refining;
(f) Social and commercial infrastructure which will include (i) hospitals (capital stock and includes medical colleges and paramedical training institutes), (ii) Hotel sector which will include hotels with fixed capital investment of Rs. 200 crore and above, convention centres with fixed capital investment of Rs. 300 crore and above and three-star or higher category classified hotels located outside cities with population of more than 1 million (fixed capital investment is excluding of land value), (iii) common infrastructure for industrial parks, SEZ, tourism facilities, (iv) fertiliser (capital investment), (v) post-harvest storage infrastructure for agriculture and horticulture produce including cold storage, (vi) soil-testing laboratories and (vii) cold chain (includes cold room facility for farm level pre-cooling, for preservation or storage of agriculture and allied produce, marine products and meat.
This circular reiterates the prohibition on undertaking online trading in foreign exchange through portals/websites by residents. Further, it warns of stern action, as prescribed under FEMA, against the residents undertaking these transactions as well as banks which continue to allow the residents to undertake these transactions and fail to report these violations to the RBI.
This circular states that non-residents can carry Indian currency up to a maximum of Rs. 10,000 beyond Immigration/Customs desk to the Duty Free Area/Security Hold Area (SHA) in the departure hall in international airports in India for meeting miscellaneous expenditures. However, they must dispose of Indian currency before boarding the plane.
Further, in order to provide money-changing facility to non-residents to convert unspent Indian rupees with them, Foreign Exchange Counters can be opened in the Duty Free Area/SHA beyond the Immigration/Customs desk in the departure halls in international airports in India.
Foreign Direct Investment (FDI) in India–Review of FDI policy–definition for control and sector specific conditions
This circular contains the following information:
1. Revised definition of the term ‘control’—’Control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.
2. The State Governments of Himachal Pradesh and Karnataka have given consent to implement the FDI policy on Multi-Brand Retail Trading in Himachal Pradesh and Karnataka respectively. As a result the list of States stands modified with the addition of the names of the above two States.
3. The Central Government has issued the new Consolidated FDI Policy which has come into effect from 5th April, 2013. The RBI has accordingly revised and updated the FDI caps and routes for various sectors in order to bring the same in uniformity with the sectoral classification for FDI as notified under the Consolidated FDI Policy Circular.
A Hindu joint family consisting of Vithoba, his wife Radhabai, son Chandrabhan and daughter Tanabai, owned and possessed the ancestral property. Vithoba died intestate on 23-01-1934, leaving behind him his widow Radhabai, son Chandrabhan and daughter Tanabai.
A Regular Civil Suit filed by the respondent Tanabai, claiming a declaration that she is the owner of half portion of the suit property, being the daughter of one Vithoba Nimbarte, who was the owner. The Trial Court, by its judgment and order dated 31-12-2001, has partly decreed the said suit and the declaration is granted that the plaintiff is the owner of 1/3rd share in the suit property. Accordingly, a decree for partition of the suit property has been passed and an enquiry into mesne profit has been ordered.
The Appellate Court held that after the death of Vithoba, his widow Radhabai had a right of maintenance. Hence, after coming into force of section 14 of the Hindu Succession Act, she became the absolute owner of half share in the suit property of Vithoba. After the death of son Chandrabhan, his widow Bhagirathibai was entitled to get the property as limited owner as per the provisions of section 3 of the Hindu Women’s Right to Property Act, as Chandrabhan had no Class I heir. According to the Appellate Court, Radhabai and Bhagirathibai were in possession of the suit property and by virtue of section 14 of the Hindu Succession Act, 1956, they became the owners of half portion each of the suit property. Upon the death of Radhabai, Tanabai and Wanmala shall become the owners of 1/4th share each in the suit property.
Hence, the first question is about the rights of widow Radhabai and daughter Tanabai in the ancestral property after the death of Vithoba. The son Chandrabhan died intestate in the year 1952, leaving behind him his mother Radhabai, sister Tanabai, widow Bhagirathibai and daughter Vanmala. Hence, the other question is about the rights of the heirs of Chandrabhan to succeed the ancestral property after his death. The Hindu Succession Act, 1956, came into force from 17-06-1956, and hence the last question is whether it confers any right to property upon the mother Radhabai and sister Tanabai in the ancestral property.
A Hindu joint family consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. A daughter ceases to be a member of her father’s family on marriage and becomes a member of her husband’s family. A joint or undivided Hindu family may consist of a single male member and widows of deceased male members. The existence of at least one male member is essentially for constituting a joint family with other members. A Hindu coparcenary is a much narrower body than the Hindu joint family. The coparcenary not only consists of father and sons, but also grandsons, great-grandsons of the holder of the joint family property for the time being. It includes only those persons who acquire by birth an interest in the joint or coparcenary property.
The property inherited by a Hindu from his father, father’s father or father’s father’s father is an ancestral property, whereas the property inherited by him from other relations is his separate property. If a Hindu inherits the property from his father, it becomes ancestral in his hands as regards his son. In such a case, it is said that the son becomes a coparcener with the father as regards the property so inherited and the coparcenary consists of a father and a son. Even a wife, though she is entitled to maintenance out of her husband’s property and has, to that extent, an interest in his property, is not her husband’s coparcener, nor is a mother a coparcener with her son, neither a mother-in-law with her daughter-in-law. Undisputedly, in the present case, there was no partition between Vithoba and his son Chandrabhan, when Vithoba was alive. Vithoba died intestate on 23-01-1934.
Here, in the present case, after the death of Vithoba on 23-01-1934, his undivided interest in the coparcenary property devolved upon the sole coparcener Chandrabhan by survivorship. Hence, Chandrabhan became the absolute owner of the entire property, and neither Radhabai, the widow of Vithoba, and the mother of Chandrabhan, nor Tanabai, the daughter of Vithoba and the sister of Chandrabhan, acquired any right in the coparcenary property.
As per the provision of section 3(1) of the Hindu Women’s Right to Property Act, when a Hindu governed by the Mitakshara School of Hindu Law dies intestate leaving separate property, his widow shall, subject to the provision of s/s. (3), be entitled in respect of the property in respect of which he dies intestate to the same share as a son. In the present case, there was no partition between Vithoba and his son Chandrabhan prior to the death of Vithoba on 23-01-1934. Hence, though Vithoba died intestate, he did not leave any separate property. It was only a coparcenary property in the hands of the son Chandrabhan after the death of Vithoba. Hence, section 3 of the said Act will not be attracted so as to make Radhabai entitled to even a limited interest in the property in question.
The next question, which falls for consideration, is the effect of coming into force of the Hindu Succession Act, 1956, with effect from 17-06-1956.
In the present case, Chandrabhan died before coming into force of the said Act, and hence his mother Radhabai did not possess any vestige of title. The mere fact that Radhabai was in possession of the suit property along with Bhagirathibai, the widow of Chandrabhan, after 1952, was not sufficient to attract the provisions of section 14 of the Hindu Succession Act. The section is not intended to validate the illegal possession of a female Hindu and it does not confer any title on a mere trespasser, as has been held by the Apex Court in Eramma’s case, cited supra.
The petitioner is a manufacturer of menthol powder, menthol crystal, D.M.O. and menthol oil and engaged in exporting them without payment of duty under Rule 19 of the Rules. Between October 2005 to April 2006, it accordingly cleared six consignments for export under the letter of undertaking submitted to the jurisdictional Assistant Commissioner, Central Excise. It also submitted the proof of export before the said authority for acceptance under the above provision of the Rules, where after the said authority accepted the same. It was thereafter that, by letter dated 26-10-2006, that the said authority withdrew the acceptance of the proof of export covering the consignments. Though meanwhile, as the petitioner claims, the consignments had been duly exported after being inspected by the customs authorities at the port concerned, in terms of the relevant instructions issued by the Central Board of Excise & Customs. A show-cause notice dated 27-10-2006 followed, encompassing all the six consignments requiring the petitioner to show cause as to why the central excise duty of Rs. 69,73,481 would not be recovered from it u/s. 11A of the Act, together with interest contemplated under section 11AB thereof.
The petitioner’s/assessee’s appeal before the Commissioner (Appeals), and the revision u/s. 35EE against the proposed consequential action for realisation of central excise duty with interest and penalty, having been rejected, filed a writ before the Court for relief. The petitioner incidentally had preferred appeal before the Central Excise Service Tax Appellate Tribunal.
The Tribunal having rejected the appeal as not maintainable, as the subject-matter thereof was covered by the eventualities contemplated in clauses (b) & (c) enumerated under the proviso to Section 35B(1), it thereafter sought refuge u/s. 35EE of the Act and preferred a revision thereunder. As admittedly, the revision application was at the time of institution was not only barred by time in terms of s/s. (2) of section 35EE, but also beyond the period extendable by the revisional authority under the proviso thereto, interference was declined on the ground of bar of limitation. Contending that as the petitioner had been pursuing its relief bona fide before the wrong forum i.e. the Tribunal, the learned revisional authority ought to have adjudicated its application u/s. 35EE on merits, the petitioner has sought the remedial intervention of the Court.
The petitioner’s revision u/s. 35EE has been dismissed only on the ground of delay without any adjudication on merits, there is no merger thereof with the decision of the Commissioner (Appeals) and thus, it is entitled to lay its challenge to the impugned actions of the respondent authorities under Article 226 of the Constitution of India, independently de hors such dismissal.
However, the above rejection of the petitioner’s revision application u/s. 35EE being only on the ground of limitation and not on merits, the arguments against merger thereof with the order of the Commissioner (Appeals), Jaipur has substance.
The assessee manufactured H.T. circuit breakers of various types and discharged payment of duty at 5%, in terms of Notification No.53/1993/CE, dated 28th February, 1993, classifying the goods under a particular Heading 8535. The Commissioner confirmed the demand of duty on the ground that the goods were classifiable under Heading 8537 and also imposed penalty. The assessee challenged the said order before CESTAT. By an order dated 31st May, 2002, the Tribunal held that the notification was applicable from date of publication and there was no deliberate suppression or misstatement of facts with an intent to evade payment of duty and consequently, the extended period of limitation under the proviso to section 11A(1) of the Central Excise Act, 1944 was not available and remanded the matter for redetermination of classification and to restrict the demand of duty to six months only. This order of the Tribunal was not challenged. The Commissioner thereafter passed a final order and held that the circuit breakers with control panels were classifiable under Heading 8537 of the Central Excise Tariff Act, 1985 in terms of the Board’s Circular No. 32/8/94-CX-4, dated 14th July, 1994, that the circular was applicable prospectively and confirmed the demand of duty for the period from 14th July, 1994 to 31st July, 1994. On appeal by the Department, the Appellate Tribunal held that the Department’s prayer for confirmation of entire duties invoking the extended period could not be accepted and remanded the matter to the Commissioner for quantification of duty for a period of six months on the reason that in the earlier order, the Tribunal had held that the demand be restricted to six months’ period only and that the order had not been appealed against. On appeal by the assessee, the High Court held, allowing the appeal, that the issue involved was covered by the decision of the Supreme Court and consequently, the order passed by the Tribunal without considering the decision of the Supreme Court was not correct. Merely because the assessee had not challenged the earlier order of the Tribunal or the Commissioner, it could not be taken as a precedent when already, on the very same issue, the Supreme Court decided in favour of the assessee. The Tribunal was bound to follow the decision of the Supreme Court in preference to the decision of the Tribunal, though such decision had become final in so far as the assessee was concerned.
Against the final order of the CESTAT, the appellant had filed an appeal before the Supreme Court u/s. 35G of the Central Excise Act, 1944. The appellant also filed an application for rectification before the Tribunal on the ground that certain grounds that were raised in the Memorandum of Appeal were not dealt with in the order of the Tribunal. While rejecting the application, the Tribunal noted that neither in the oral submissions nor in the written submissions that were tendered to it during the course of the proceedings, were any submissions advanced with reference to those grounds. Hence the appellant preferred an appeal before the Hon’ble High Court.
The appellant submitted that the Tribunal was duty bound to consider and deal with every grounds urged in the Memorandum of Appeal even though these were not raised or advanced during the course of the submissions.
The Hon’ble Bombay High Court observed that the Tribunal is indeed duty bound to address those grounds which are placed in issue, during the course of the oral arguments. Where in a given case, in the considered exercise of a professional judgment of Counsel appearing on behalf of the Appellant, the Counsel has not considered it appropriate to raise certain grounds during the course of the oral submissions, it would be unreasonable to expect that the Tribunal must nonetheless deal with all those grounds which are raised in the Memorandum of Appeal. The grounds in the Memorandum of Appeal may as contemporary experience shows, cover a broad canvas of the draftsman, who may seek to raise every possible ground of challenge. Which ground of challenge should actually be pressed before the Tribunal is a matter which lies in the exercise of the professional judgment of Counsel appearing on behalf of the contesting party. No fault can be found with the Tribunal because it has not addressed a submission which was not advanced at the hearing of the appeal before the Tribunal. In the present case, even before this Court, it is an admitted position that what has been recorded by the Tribunal in the extract noted earlier, is the correct record. The Tribunal has noted at more than one place that the ground on which the application for rectification was moved, was not advanced either in the oral submissions or for that matter, in the written submissions. Therefore, the appeal against the rectification order was dismissed, holding that there was no error apparent on the face of the order of the Tribunal.
“….it has been observed that many assessees file appeals to the Tribunal only to obtain stay of demand and avoid payment of justified taxes. In order to discourage this practice, and ensure speedier collection of outstanding tax, the Act has amended Section 254…”
However, the language used by the legislature to introduce the proviso to section 254(2A) was subject to various interpretations by the judicial forums in the following decisions:
• Subhadra (B) vs. ITO (2005)(272 ITR 100)(Hyd.)(AT);
• Centre for Women’s Development Studies vs. DDIT (257 ITR 60)(Del)(AT);
• Anuradha Timber Estates vs. DCIT (282 ITR 59)(Hyd) (AT), etc
While the language of the proviso to section 254(2A) achieved its object, it created hardships for those assessees who had genuine reasons for stay of demand. They were subjected to unjustified and unreasonable recovery proceedings.
The said insertion of proviso to section 254(2A), however, did not limit the powers of the Tribunal to pass fresh orders of stay on expiry of 180 days. In order to address the said anomaly, the Legislature substituted the aforesaid proviso vide Finance Act, 2007 with the following three new provisos to section 254(2A):
• First Proviso—After considering the merits of application of stay arising in the appeal, the Tribunal shall pass orders of stay and dispose the appeal within a period of 180 days;
• Second Proviso—If the appeal is not disposed of within a period of 180 days, then the Tribunal may extend the period of stay or pass an order of stay for further period or periods as it thinks fit, provided the Tribunal is satisfied that delay in disposing of the appeal is not attributable to the assessee, pursuant to the application so moved before the Tribunal by the assessee on expiry of aforesaid 180 days of stay; and
• Third Proviso—The period of stay originally allowed and/or extended as above shall not exceed 365 days and the Tribunal shall dispose of the appeal within the said original and/or extended period, which if not disposed would vacate stay of demand on expiry of the said period.
However, the Bombay High Court in the case of Narang Overseas (P) Ltd vs. ITAT and Ors (295 ITR 22), relying upon the decision of the apex court in the case of CCE vs. Kumar Cotton Mills (P) Ltd. (180 ELT 434) [judgment delivered while considering similar provisions on powers of Tribunal to stay demand under the Indirect Tax Laws] held that the third proviso to section 254(2A) so inserted vide the Finance Act, 2007 cannot be construed as limitation on the powers of the Tribunal to grant interim relief even if the delay in disposal of appeal is not attributable to acts of the assessee.
Pursuant to the aforesaid observations, the third proviso to section 254(2A) was again amended vide the Finance Act, 2008 to address the said interpretation, by specifically clarifying that the order of stay by the Tribunal shall stand vacated after 365 days from the date of initial stay, even if the delay in disposing the appeal is not attributable to the assessee.
The impugned proviso of section 254(2A) as amended vide the Finance Act, 2008 has since then been subject to different interpretations by judicial forums on the powers of Tribunal to stay demand beyond a period of 365 days from the date of initial stay. One finds that the issue of whether the Tribunal has powers to stay demand beyond 365 days can be divided into three parts:
1. Determination of powers of the Tribunal under the Act;
2. Constitutional validity of third proviso to section 254(2A) of the Act; and
3. Whether third proviso to section 254(2A) is mandatory or directory
1. Determination of powers of the Tribunal under the Act:
At the outset, reliance is placed on the decision of the apex court in the case of ITO vs. M.K.Mohammed Kunhi (71 ITR 815), wherein the court made the following specific observations w.r.t. powers of the Tribunal under the Act:
“….The right of appeal is a substantive right and questions of fact or law are at large and are open to review by the Tribunal. …The powers which have been conferred by section 254 on the Tribunal with widest possible amplitude must carry with them by necessary implication all powers and duties incidental and necessary to make the exercise of those powers fully effective… It is well known that the Tribunal is not [a] Court but it exercises judicial powers. The Tribunal’s powers in dealing with appeals are of the widest amplitude and have in some cases been held similar to and identical with the powers of an appellate Court under the CPC…”
The above decision holds that while the Tribunal is not a Court, it has judicial independence and in certain cases even has powers similar and identical to an appellate Court as provided in the Civil Procedure Code. The question which then arises is can the legislature impose conditions and/or limit the said powers of the Tribunal to provide stay on demand proceedings?
On study of relevant decisions which are set out later, the following characteristics of the right of appeal emerge:
• The right of appeal is not a natural or inherent right and cannot be assumed unless expressly given by the statute;
• Right of appeal is neither an absolute right nor an ingredient of natural justice;
• The appeal is a creation of a statute and therefore subject to the conditions imposed by the statute;
However, the aforesaid plenary powers of the legislature to impose conditions in regard to the right to appeal are subject to certain limitations, which are as under:
• The conditions imposed and/or specified have to be in relation to the assessee as something which is required to be complied with by the assessee. But where the assessee has no control or say, then the said provisions cannot be sustained;
• An appeal is the right of entering a superior court and invoking its aid and interpretation to redress the error of the court below; anything which pares down this very right, carving the kernel out, it violates the provision creating the right;
• Appeal is a remedial right and if remedy is reduced to a husk of procedural excess, and
• The law does not compel a man to do that which he cannot possibly perform (lex non cogit ad impossibilia) and an Act of the Court shall prejudice no man (actus curiae neminem gravabit).
The aforesaid relevant legal propositions were observed in the following decisions while opining on the powers of the legislature to impose subjective conditions of prepayment of deposit of disputed tax and/ or penalty and/or its waiver thereof for entertaining the appeals before the Tribunal under the respective statutory acts, which are as under:
• Vijay Prakash D. Mehta and Jawahar D. Mehta vs. Collector of Customs, Bombay (AIR 1988 SC 2010);
• Seth Nand Lal & Anr. vs. State of Haryana & Ors. (AIR 1980 SC 2097);
• Emerald International Ltd. vs. State of Punjab and Ors. (122 STC 382)(P&H)(FB);
• Anant Mills Co. Ltd vs. State of Gujarat & Ors. (AIR 1975 SC 1234);
• Sita Ram and Others vs. State of UP (AIR 1979 SC 745);
• Raj Kumar Dey and Others vs. Tarpada Dey and Others (1987)(4 SCC 398);
• PML Industries Ltd vs. Commissioner of Central Excise (2013)(30 STR 113) (P&H); etc.
So, while the legislature has plenary powers to impose conditions on the Tribunal in regard to the right of appeal, it is equally true that conditions so imposed cannot be so unreasonable or onerous that they violate the exercise of said right of appeal itself. On application of aforesaid principles to the issue under consideration:
• Firstly, the assessee’s right for grant of stay is subjected to functioning of the Tribunal to pass final orders on appeal within the period of stay, over which the assessee has no control;
• The assessee shall not have right for grant of stay beyond a prescribed period, if the Tribunal cannot pass final orders within period of stay, for no fault of the assessee;
• The cause and effect relationship are prejudicial to the assessee; and
• The assessee will not be granted stay of demand beyond the prescribed period, even though on merits he deserves and has a genuine case of stay.
Therefore, one may conclude that the conditions imposed by the legislature vide the provisos to section 254(2A) seriously affect right of appeal of the Tribunal which includes right to stay demand beyond the prescribed period.
2. Constitutional validity of the third proviso to section 254(2A) of the Act
The constitutional validity of the third proviso to section 254(2A) of the Act was under challenge in the case of Jethmal Faujimal Soni vs. ITAT & Ors. (333 ITR 96)(Bom); however, it was not adjudicated upon on account of request by the department to instead give directions for expeditiously disposing the appeal, which was accepted by the court.
However, in the case of Narang Overseas (supra), the court, while considering the powers of the Tribunal to grant stay of demand, made the following relevant observations w.r.t. constitutional validity of the provisos to section 254(2A) of the Act, which is as under:
“…..The mischief if and at all was the long delay in disposing of proceedings where interim relief had been obtained by the assessee. The second proviso as it earlier stood could really have not stood the test of non-arbitrariness as it would result in an appeal being defeated even if the assessee was not at fault, as in the meantime the Revenue could proceed against the assets of the assessee. The proviso as introduced by the Finance Act, 2007 was to an extent to avoid the mischief of it being rendered unconstitutional. Once an appeal is provided, it cannot be regarded nugatory in cases where the assessee was not at fault.”
[Emphasis supplied]
So, the High Court in very clear terms held that any arbitrary conditions imposed to defeat the right of appeal for no fault of the assessee would regard it as unconstitutional.
Recently, CBEC issued Circular No. 967/01/2013 dated 1st January 2013, with similar conditions as present under consideration. The said Circular provides for initiating recovery proceedings against the assessee if no stay was provided by the relevant appellate authority within the prescribed period of filing an appeal. The said conditions in the Circular on being challenged before various courts, was decided in favour of the assessee by either reading down the said onerous conditions of the Circular; or setting aside the said provisions of the Circular with specific observations that no recovery proceedings shall be initiated in cases where there is no fault of the assessee; or providing interim stay of demand:
• Larsen & Toubro Ltd. vs. Union of India and Others (2013)(29 STR 449)(Bom.);
• Manglam Cement Ltd. vs. Superintendent, Central Excise and Ors. (86 DTR 215)(Raj);
• Gujarat State Fertilizers Co. Ltd. vs. UOI through Secretary and Others (86 DTR 176)(Guj.);
• PML Industries Ltd. vs. CEC (supra); and
• Ultratech Cement Ltd. vs. Union of India and Others (W.P. No. 736 of 2013) dated 9th January, 2013
In light of the above discussions, it is possible that the third proviso to section 254(2A) may fail to pass the test of constitutional validity and the courts may decide to read down the provisions to mean that the Tribunal has powers to order stay of demand even beyond 365 days from the date of initial stay, provided there is no fault of the assessee in the disposal of appeal.
3. Whether the third proviso to section 254(2A) is mandatory or directory:
Alternatively, without going into the constitutional validity of the impugned provisos, one may urge that the said provision is directory in nature. It is a well-settled position that if a provision is mandatory then an act done in breach thereof will be invalid, but if it is directory then the act will be valid although the non-compliance may give rise to some other conse-quences. Even a complete non-compliance of a directory provisions has been held in many cases as not affecting the validity of act done in breach thereof.
On perusal of the relevant decisions on the subject, the following tests, (which are by no means exhaustive) have been applied by the courts to determine as to whether a provision is mandatory or directory:
• Generally, the intent of the legislature is of paramount importance and not the language of the provision in which the intent is clothed;
• The meaning and intention of the legislature are to be ascertained by considering its nature, its design, and the consequences which would follow from construing it one way or the other;
• The phraseology of the provisions is not by itself a determinative factor. The use of the word “shall” or “may” respectively, would ordinarily indicate imperative (mandatory) or directory character, but not always;
• Whether non-compliance with the provision would render the entire proceedings invalid or not;
• When consequences of nullification on failure to comply in a particular manner is provided by the statute itself, then such statutory requirement must be interpreted as mandatory;
• If the object of the enactment will be defeated by holding the provision directory, it will be construed as mandatory, whereas if by holding it mandatory serious inconvenience will be caused to innocent persons without furthering the object of enactment, the same will be construed as directory;
• The provision enacted is generally regarded as mandatory, if the language of the provision is clothed in a negative form. Negative words are clearly prohibitory and are ordinarily used as a legislative device to make a statute imperative;
• When the provisions of statute relate to performance of a public duty and the case is such that to hold null and void acts done in neglect of this duty would cause serious inconvenience or injustice to persons who have no control over those entrusted with the duty and at the same time would not promote the main object of the legislature, it has been the practice of the courts to hold such provisions to be directory;
• When a public authority is required to do a certain thing, within a specified period, the same is ordinarily directory; however, it is equally provided that when consequences for inaction on part of the statutory authority within the specified time is expressly provided, it must be held imperative; and
• When mandatory and directory requirements are lumped together in a provision, then in such a case, if mandatory requirements are complied with, it will be proper to say that the enactment has been substantially complied with notwithstanding the non-compliance of directory requirements;
The relevant decisions which were considered in order to list down the aforesaid legal propositions are as under:
• M/s. Delhi Airtech Services Pvt Ltd. and Anr vs. State of UP and Anr. (2011)(9 SCC 354);
• May George vs. Special Tahsildar & Ors. (2010)(13 SCC 98);
• Bhavnagar University vs. Palitana Sugar Mills Pvt Ltd. (2003)(2 SCC 111);
• Balwant Singh vs. Anand Kumar Sharma (2003)(3 SCC 433); etc.
On the touchstone of the aforesaid principles, if the provisions of section 254(2A) are to be determined as to whether they are a mandatory or directory provision, one may infer as under:
• Legislative history suggests that the main intention of the provision was to discourage practice of those assessees who used to defer the payment of justified taxes for months or years under the garb of stay of demand till disposal of appeal by the Tribunal and to ensure speedier collection of said taxes;
• A Tribunal being a public functionary takes a decision on the final appeal and interim application for stay of demand and it is not within the powers and control of the assessee. The provisions of section 245(2A) relate to performance of public duty. So, on failure of the Tribunal to dispose of the appeal within the period of stay would cause serious general inconvenience or injustice to assessees who have no control over those entrusted with the duty;
• The third proviso to section 254(2A) has caused serious inconvenience to the public (assesses), since the provisions provide for automatic vacation of stay of demand and thereby initiation of recovery proceedings, for even those who have genuine case and/or at no fault for delay in disposal of appeals; and
• Section 254(2A) alongwith provisos thereof are not clothed in a negative form, barring use of negative words w.r.t. expiry of period for disposing of orders.
In light of the above, it may be urged that section 254(2A) read with provisos, are lumped together with both mandatory and directory conditions. The mandatory condition being the Tribunal has to decide on merits the assessee’s application for stay of demand, thereby reflecting substantial compliance with the provisions. The condition of disposing stay granted appeal within a prescribed period as being a directory condition.
Therefore, in view of the above, one can conclude that the Tribunal has powers to pass order for stay on merits even on expiry of prescribed period, provided the delay in disposal of appeal in not on account of the assessee.
For the sake of completeness, it would be necessary to mention that in the case of CIT vs. Ecom Gill Trading Pvt Ltd. (2012)(74 DTR 241)(Kar), the Court considering the provisions of section 254(2A), has held that the Tribunal has no powers to grant stay of demand for a period exceeding 365 days from the date of initial stay. The High Court has based its conclusions on the following important findings:
• The Tribunal which is the creature of the statute should abide by the statutory provisions in letter and spirit and the introduction of third proviso to the Finance Act, 2008 makes it abundantly clear that the purpose is to ensure that order of stay of demand has no effect after the period of 365 days from the date of initial stay; and
• None of the decisions of the Bombay High Court viz., Narang Overseas (supra), CIT vs. Ronuk Industries (333 ITR 99), have any significance or an impact on the amendment brought about by the third proviso to section 254(2A) vide the Finance Act, 2008.
These findings of the High Court to hold otherwise have either been addressed in detail in the aforesaid paragraphs and/or can be distinguished. In addition to the above, the following are the decisions of various other judicial forums, wherein it has been held that the Tribunal has powers to stay demand beyond 365 days from the date of initial stay under section 254(2A):
• CIT vs. Ronuk Industries (supra);
• Tata Communications Ltd vs. ACIT (130 ITD 19) (Mum)(SB);
• Vodafone West Ltd. vs. ACIT (S.A. No. 86,87/ Ahd/2012 arising out of ITA No. 386 and 387/ Ahd/ 2011) dated 11th January 2013; and
• Qualcomm Incorporated vs. ADIT (S.A. No. 177 to 183/Del/2012 arising from ITA No. 3696 to 3702/
Del/2012) dated 28th September 2012
The aforesaid decisions are not discussed in detail, as they have either followed the decisions discussed in detail above and/or no new observations are made therein.
Based on the aforesaid averments, one may argue that Tribunals have powers to stay demand proceedings even beyond 365 days; however, it shall be equally necessary to remind oneself of the observations of the apex court in the case of ITO vs. M.K.Mohammed Kunhi (supra), which read as under:
“A certain apprehension may legitimately arise in the minds of the authorities administering the Act that, if the Tribunal proceeds to stay recovery of taxes or penalties payable by or imposed on the assesses as a matter of course, the Revenue will be put to great loss because of the inordinate delay in the disposal of appeals by the Tribunal. It is needless to point that the power of stay by the Tribunal is not likely to be exercised in a routine way or as a matter of course in view of the special nature of taxation and revenue laws. It will only be when a strong prima facie case is made out that the Tribunal will consider whether to stay the recovery proceedings and on what conditions, and the stay will be granted in most deserving and appropriate cases where the Tribunal is satisfied that the entire purpose of the appeal will be frustrated or rendered nugatory by allowing the recovery proceedings to continue during the pendency of the appeal.”
Governments are always
starved of funds. To mitigate this problem, they enter into contracts
with private parties; particularly in the area of public service for the
development, financing, operation and maintenance of infrastructural
facilities such as, roads, bridges, ports, etc. An arrangement typically
involves a private sector entity (an operator) constructing the
infra-structural facilities used to provide the public service and
operating and maintaining those infrastructural facilities for a
specified period of time. The operator is paid for its services over the
period of the arrangement through user fees or the grantor pays
annuity. Such an arrangement is often described as a
‘build-operate-transfer’ (BOT) or a ‘public-to-private service
concession arrangement’. A feature of these service arrangements is:
1.
The grantor (generally the Government or a public sector company)
controls or regulates what services the operator must provide with the
infrastructural facilities, to whom it must provide them, and at what
price; and
2. The grantor controls through ownership, beneficial
entitlement or otherwise any significant residual interest in the
infrastructural facilities if remaining at the end of the term of the
arrangement.
Typically under current Indian GAAP, practice is
that the grantor records the cost of constructing the infra-structure as
fixed assets or in some cases as intangible assets. No profit is
recognised on the construction, since it is not appropriate to recognise
any profit on constructing fixed assets/intangible assets for own use.
However,
if one were to look more deeply into the current Indian GAAP, a more
appropriate accounting interpretation of the arrangement would be as
follows:
1. The infrastructure facilities should not be
recog-nised as property, plant and equipment of the operator, because
the contractual service arrangement does not convey the right to control
the use of the public service infrastructure facilities to the
operator. The operator has access to operate the infrastructure
facilities to provide the public service on behalf of the grantor in
accordance with the terms specified in the contract.
2. Under
the terms of contractual arrangements, the operator acts as a service
provider. The operator constructs infrastructure facilities used to
provide a public service and operates and maintains those infrastructure
facilities (operation services) for a specified period of time.
3.
The operator should recognise and measure revenue in accordance with
Accounting Standard (AS) 7, Construction Contracts and Accounting
Standard (AS) 9, Revenue Recognition for the construction and operating
the services it performs.
If the operator performs more than one
service under a single contract or arrangement, consideration received
or receivable should be allocated by reference to the relative fair
values of the services delivered, when the amounts are separately
identifiable.
4. Paragraph 34 of AS 26 Intangible Assets
states that “An intangible asset may be acquired in exchange or part
exchange for another asset. In such a case, the cost of the asset
acquired is determined in accordance with the principles laid down in
this regard in AS 10, Accounting for Fixed Assets.” Paragraph 11.1 of AS
10 states that “When a fixed asset is acquired in exchange for another
asset, its cost is usually determined by reference to the fair market
value of the consideration given. It may also be appropriate to consider
the fair market value of the asset acquired, if this is more clearly
evident.”
5. If the operator provides construction services,
the consideration received or receivable by the operator should be
recognised at its fair value. The consideration may be, rights to a
financial asset (annuities are received from the government), or an
intangible asset (toll charges are collected from public).
6. The operator should recognise a financial asset when it receives annuities from the grantor.
7.
The operator should recognise an intangible asset to the extent that
it receives a right (a licence) to charge users of the public service.
Let’s consider a simple example of how the intangible asset model would work.
Example
The
terms of the arrangement requires an operator to construct a road
within two years and maintain and operate the road to a specified
standard for eight years (i.e. years 3–10). At the end of year 10, the
arrangement will end and the road ownership will continue with the
government. The operator estimates that the costs it will incur to
fulfill its obligations will be as shown in Table 1.
Table 1 — Estimate of Costs
The operator
recognises contract revenue and costs in accordance with AS 7,
Construction Contracts and AS 9, Revenue Recognition. In year 1, for
example, construction costs of Rs. 500, construction revenue of Rs. 525
(cost plus 5 per cent), and hence construc-tion profit of Rs. 25 is
recognised in the statement of profit and loss. The operator provides
construction services to the grantor in exchange for an intangible
asset, i.e. a right to collect tolls from road users in years 3–10. In
accordance with AS 26, Intangible As-sets, the operator recognises the
intangible asset at cost, i.e. the fair value of consideration
transferred to acquire the asset, which is the fair value of the
consideration received or receivable for the construc-tion services
delivered. In accordance with AS 26, the intangible asset is amortised
over the period in which it is expected to be available for use by the
operator, i.e. years 3–10. The depreciable amount of the intangible
asset (Rs. 1,050) is allocated using a straight-line method. The annual
amortisation charge is therefore Rs. 1,050 divided by eight years, i.e.
Rs. 131 per year. The road users pay for the public services at the same
time as they receive them, i.e. when they use the road. The operator
therefore recognises toll revenue when it collects the tolls. The
statement of P&L for years 1-10 will appear as shown in Table 2.
The
above example has been kept simple and numerous other complications
have not been considered such as capitalisation of borrowing costs,
resurfacing obligation, negative grants, revenue sharing arrangements,
etc.
To sum up, it could be said that the current Indian GAAP is
not explicit as to how BOT contracts should be accounted for.
Therefore, there appears to be two methods in which BOT contracts can be
accounted.
Method 1
A classic and conventional
method has been to recognise the construction cost of the infrastructure
as fixed asset and depreciate it over a period of time. The
corresponding revenue on user fees is recognised when user fees are
collected.
Challenges in applying method 2
Intangible asset, financial asset, or both
The
next step is to determine which of the two ac-counting models
(intangible asset or financial asset) to apply. This decision will have a
significant impact on the revenues recognised from the contract. For
example, it is not uncommon for a contract accounted for by applying the
intangible model to give rise to double the revenues, compared to a
contract with nearly identical cash flows that is accounted for using
the financial asset model. Fortunately, the selection of the model to
apply is not an option. Rather, the model flows from whether the
operator has the right to charge for services (intangible model) or the
right to receive cash flows from the grantor (financial asset). This may
require careful analysis, since a contract that initially appears to
fall within the intangible model may have an element of guaranteed cash
flows. For example, if in the early years of the contract, the
government body guarantees a minimum level of revenues from the
operation of a new expressway to encourage private investment, there may
be both a financial asset and an intangible asset. Accounting for these
“combined model” concessions can become very complex, since costs and
revenues must be divided between the two components of the contract.
Dividing the total consideration into the two components may involve the
use of significant management judgment and estimation.
Estimates and fair values
Accounting
for concession arrangements typically involves an extensive use of
estimates and valuations, which are expected to have a significant
impact on the company’s financial statements. For example, revenues and
costs need to be recognised for the construction of the infrastructure
asset in accordance with AS-7. Since the contract is unlikely to specify
separately the revenue from construction, it is typically necessary to
impute construction revenues by applying an appropriate margin to the
construction costs, and to assign the balance of revenue to operations,
maintenance, etc. Companies may need to use either internal or external
benchmarking for similar construction contracts, since an assessment of
profitability on a service concession arrangement is normally made on an
overall IRR basis and not separately for the construction and operation
phases of the project.
Accounting for negative grants
Certain
arrangements include the provision for negative grants, wherein the
operator is required to make the payment to the grantor during the
duration of the arrangement. The negative grant may be either in the
form of fixed payment (upfront or annual throughout the service
concession arrangement) or in the form of a percentage of revenue earned
during the arrangement. The upfront fixed payment should be treated as
an intangible asset. In the case of annual fixed payment, intangible
assets should be recognised at the present value of the annual amounts.
However, there are mixed practices under Indian GAAP in these matters.
Where the negative grant is in the form of share in the percentage of
revenue earned during concession arrangement, the company should assess
whether the revenue is to be shown on a net or gross basis.
Other factors
Numerous
other issues need to be considered such as capitalisation of borrowing
costs, provision for maintenance obligation, etc. and the efforts
involved in applying method 2 should not be undermined.
Issue
Parent
Ltd is a listed entity. Parent Ltd has set up a special purpose vehicle
(SPV) which is its 100% subsidiary, for the purposes of entering into
an arrangement with NHAI. SPV has entered into BOT contract with NHAI.
As per the Agreement, NHAI has granted an exclusive right to the SPV to
construct, operate and maintain the road for a period of thirty years.
The SPV has sub-contracted the construction for 60% of the road contract
to Parent. In 2012-13, Parent has executed the work of above road
project and the profit margin is approximately 5%. Parent recognises the
margin earned in its stand-alone financial statements. Whether Parent
should eliminate the profit on revenue received from SPV from
construction services provided to the SPV, in its consolidated financial
statements (CFS)?
Response
The response to the
above question will depend on the method the Parent is following with
respect to the accounting of service concession arrangements.
Method 1
CFS. This is primarily for two reasons. Firstly,
paragraph 10.1 of AS-10 Accounting for Fixed Assets states as follows
“In arriving at the gross book value of self-constructed fixed
assets…………
Any internal profits are eliminated in arriving at such costs.” Secondly, paragraph 16 of AS-21 Consolidated Financial
Statements
states as follows “Intragroup balances and intragroup transactions and
resulting unrealised profits should be eliminated in full.”
Method 2
The
application of accounting treatment above should not be seen as a means
of applying the Indian GAAP principles (method 2) to selectively
recognise the profits that Parent has made on its billing to the SPV.
Rather, it is a holistic application of Indian GAAP principles to the
entire service concession arrangement. Therefore, in addition to the
cost incurred by the SPV on billings by Parent, there may be other cost
incurred in executing the contract. The Indian GAAP principles
enumerated above should be applied to the total construction cost
including those charged by Parent to the SPV. This would mean that in
addition to not eliminating the profit made by the Parent on its billing
to the SPV, Parent would also have to recognise an additional profit
representing the margin on other cost. Further, all service concession
arrangements that fulfils certain specific criteria (and explained in
this article), will have to be accounted for in this manner. In
ad-dition, other matters may need careful consideration such as
provision for maintenance and resurfacing obligation, negative grant,
sharing of revenue with grantor, capitalisation of borrowing cost, etc.
Thus
under method 2, the entire arrangement is recorded based on Guidance
Note/IFRIC 12 principles. There are numerous challenges in applying
method 2 and it is not a straight forward exercise. This may have the
effect of recognising the profit made on the construction services
including the billings of the Parent to the SPV; however, it has too
many other repercussions and accounting consequences (discussed in this
paper) which would need careful consideration.
Method 2
An
alternative method under current Indian GAAP is to recognise the
construction of the infrastructure as a construction service rendered to
the grantor in exchange of an acquisition of a right to use (an
in-tangible asset) or an unconditional right to annuities (a financial
asset). Those principles of current Indian GAAP are more clearly
articulated in the Exposure Draft Guidance Note on Accounting for
Service Concession Arrangements. International Financial Reporting
Standards IFRIC 12 Service Concession Arrangements also has similar
requirements. The working model with respect to this method has been
explained in this article, using a simple example where the construction
service is exchanged for an intangible asset (right to use). There are
numerous challenges in applying method 2, which are described below.
When method 2 is used, it should be applied to all contracts in the
group that meet the requirements set out in the Guidance Note ED/ IFRIC
12.
Forms 15CA and 15CB, which were introduced in this regard, created contentious issues for practitioners and the Income-tax Department. The procedure was that for making a payment to a non-resident or a foreign company, the person making the remittance was required to obtain the certificate of a Chartered Accountant in Form 15CB, submit Form 15CA online based on the same, and finally submit both these documents to his bankers to complete the transaction. On 5th August 2013, CBDT issued Notification No. 58/2013 amending Rule 37BB and these forms with effect from 1st October, 2013. However, soon thereafter, on 2nd September 2013, CBDT amended Rule 37BB and the forms further by way of Notification No. 67/2013, again with effect from 1st October, 2013.
This article intends to highlight the changes in the reporting requirements and the impact of the same.
Changes in reporting
Hitherto, Forms 15CA and 15CB were required to be furnished by the person making the remittance to a non-resident, not being a company, or a foreign company, for every payment—irrespective of the quantum or the taxability of such payment. Rule 37BB, as amended by the two notifications referred above, provides certain relaxations in the reporting requirements based on the quantum and nature of payment. The changes are summarised in the table below:
• Indian investment abroad in equity/debt/branches and wholly owned subsidiaries/subsidiaries and associates/ real estate
• Loans to non-residents
• Operating expenses of Indian shipping /airline companies operating abroad
• Booking of passages abroad—airlines companies
• Business travel, travel under basic travel quota, travel for pilgrimage, medical treatment, education
• Postal services
• Construction of projects abroad by Indian companies
• Freight insurance relating to import and export of goods
• Maintenance of offices/Indian embassies abroad
• By foreign embassies in India
• By non-residents towards family maintenance and savings
• Personal gifts and donations, donations to religious and charitable institutions abroad, grants and donations to other Governments and charitable institutions established by the Governments, donations by Indian Government to international institutions
• Payment or refund of taxes
• Refunds or rebates on exports
• By residents on international bidding
Note 2: The following items appeared in the specified list as per Notification No. 58, but are missing in the superseding Notification No. 67:
• Payment for life insurance premium
• Other general insurance premium
• Payments on account of stevedoring, demurrage, port-handling charges etc.
• Freight on imports—airline companies
• Booking of passages abroad—shipping companies
• Freight on exports—shipping companies
• Freight on imports—shipping companies
• Payments for surplus freight or passenger fare by foreign shipping companies operating in India.
• Imports by diplomatic missions
• Payment towards imports—settlement of invoice
• Advance payment against imports
Impact and Issues
It is clear that the revised procedures for making remittances to non-residents seek to reduce the burden of compliance in several cases—where payments fall under the specified list, which are not liable to tax in India or where the remittances are very small in quantum. Furthermore, in cases where the proposed reporting is as extensive as the existing requirements, these amendments seek to capture much more information, thereby casting more onerous duty on the remitter as well as the Chartered Accountant issuing the certificate in Form 15CB. The revised Form 15CB and Part B of the revised Form 15CA attempt to capture nearly the entire process of determination of taxability of a cross-border payment. In doing so, however, the amendments leave several existing issues unanswered and also manage to raise new concerns. Some of these concerns are outlined below:
Persisting Issues:
i) Personal Payments:
Section 195 places a burden on any person making payments to non-residents for personal expenses such as online purchases, paid downloads, etc. It is impractical for the payer either to obtain a Tax Deduction Account Number (TAN) or to undertake the procedures under Rule 37BB in order to comply with these provisions. While carving out several transactions from the reporting net, payments of personal nature other than gifts or donations have been left out of the specified list.
ii) Payments to non-residents operating in India:
The obligation to deduct tax at source or to furnish details in Form 15CA are in respect of payments made to non-residents irrespective of whether such payments involve any outward remittance or not. As a consequence, one faces difficulties in making payments in Indian rupees to non-residents who are operating in India. For instance, a person banking with the Indian branch of a foreign bank ends up paying a foreign company every time his bank charges him for services provided. This in turn implies that he must comply with Section 195 read with Rule 37BB while making such “payments”.
iii) Credit Card Payments:
Rule 37BB, as it stood before the amendment, as also the revised Rule 37BB require the details in Form 15CA to be furnished prior to making the remittance. However, in the age of e-commerce, electronic payments through credit cards and net transfers have become the order of the day. In such cases, it becomes difficult for the payer as well as the remitting bank to ensure compliance with the prescribed procedures.
iv) ECS/Auto debits:
Similar to credit card payments, it is near impossible to single out the payments made by way of system generated Auto Debits and ECS. Clarity is required on the issue of how details are required to be furnished in such cases and whether monthly compliance would be required.
Added Concerns:
i) Sums not chargeable to tax:
The language of the revised Rule 37BB clearly spells out that it would apply in respect of remittances made for sums which are chargeable to tax under the Income-tax Act. This is a deviation from the language of Rule 37BB prior to Notification No. 58 and especially from the language used in Notification No. 58. This leads to an inference that the revised procedure is not applicable in cases where the payments are not liable to tax in India. However, the notification lists 28 specific types of payments for which no information is required to be furnished. This may lead to an interpretation that all payments not falling within that list but which are not chargeable to tax in India would call for furnishing some information, either limited or extensive.
ii) Small payments:
Small payments of upto Rs. 50,000 individually or aggregating to Rs. 2,50,000 in the financial year have limited reporting requirements in Part A of Form 15CA. Accordingly, if one were to make a lumpsum payment exceeding the individual limit of Rs. 50,000 to a non-resident or a foreign company without crossing the annual limit of Rs. 2,50,000, it would attract the reporting in Part B of the Form. This would result in unintended consequences, foiling the intent to reduce the compliance burden for small payments.
iii) Difference in opinion on taxability:
If the revised Rule 37BB is not to apply to payments, which are not liable to tax in India, the same would present practical difficulties in application of the revised procedure. There could be a difference of opinion between the remitter and the authorised dealer on the taxability of a particular remittance. In the absence of any consensus, the authorised dealer may end up insisting on Form 15CA from the remitter before making a payment, while in the view of the latter, the same is not required.
iv) Import payments:
While payments for imports are considered not taxable in India in a vast majority of cases, this issue in not dealt with in the revised Rule 37BB, which otherwise exempts several types of payments from reporting requirements. In fact, in the proposed Rule 37BB as per Notification No. 58, the specified list consisted of import payments, thereby casting lesser obligations on such remittances. Deletion of imports from the specified list now creates even further ambiguity.
v) Capital Gains:
Section 195(2) is very clear that in case where only a part of the payment made to the non-resident or foreign company is liable to tax, the payer must make an application to the Assessing Officer (AO) for determination of that portion of the remittance which is taxable. The Supreme Court in the case of GE India Technology Centre Private Limited has held that the payer cannot by himself determine the taxability of such amount. Typical instances where 195(2) would get triggered and hence, an application to the AO would be required, include business income taxable in India or capital gains.
However, the revised Form 15CB requires the sum of long term and short term capital gains to be reported along with the manner of determination of the capital gains. This would imply that a Chartered Accountant can certify quantum of tax to be deducted from capital gains. This runs counter to the current interpretation of 195(2). As a consequence, it appears that the revised Form 15CB casts the duty of computation of capital gains income on the Chartered Accountant and a remittance/payment can be made to the payee on the basis of his certificate without making an application to the AO.
vi) Instructions by the RBI:
Currently, Rule 37BB does not require the details to be furnished to the authorised dealer. In fact, the requirement to submit Form 15CA accompanied with Form 15CB prior to making remittance is a mandate given by the RBI to the authorised dealers. The revised Rule 37BB(3) puts the onus on the authorised dealers for gathering of the information as well as retaining it, since an income-tax authority is entitled to call upon the authorised dealers to furnish a signed printout. Since the obligation cast under the Income-tax Act supersedes the instructions of the RBI, the revised requirements would need to be notified by the RBI. In the absence of notification by the RBI, the authorised dealers would be confused as to whether the process prescribed by Rule 37BB, the RBI or both is to be followed.
vii) Hasty implementation:
The amendments to the procedures are sought to be implemented at a very short notice. The original Notification was issued on 5th August, 2013 followed by the Notification No. 67 issued on 2nd September, 2013. Both these notifications seek to usher in the new requirements with effect from 1st October, 2013. Considering that this is a very short-time frame, the existing system may not be geared for the changes. Further, if the RBI does not issue corresponding directions by 1st October 2013, implementation of the amendments would go haywire.
viii) AD to furnish details to income-tax authority:
Apart from specifically requiring the details to be furnished to the authorised dealers, the revised Rule 37BB also places a cumbersome burden on them to produce the documents submitted to them if required by any income-tax authority during the course of any proceedings under the Act. This would place the authorised dealers under the duty to maintain the documents for a very long period of time.
Conclusion
The recent amendments in Rule 37BB intend to reduce the compliance burden on the remitter and the authorised dealers and facilitate more information for the income-tax authorities. However, two hurried amendments, followed by super-rapid implementation without addressing the lacunae could end up negating the intended benefits of the amendments to all concerned.
Unlike China, Hong Kong, Taiwan, Singapore, Korea, Malaysia, South Africa and Brazil. (Source: The Economic Times dated 13-09-2012) 120 (2012) 44-B BCAJ (Comment: We do not promote meritocracy in India. Politics of reservation in all walks is a big hindrance to promotion of meritocracy.)
Remember, GAAR was always proposed to be part of the new direct taxes code, which was supposed to be in force by now. What additional preparation time will three years gain? It merely kicks the responsibility for introducing GAAR and calming market participants over to the next government. It strains belief to assume that, by that time, distrust of the income tax authorities will have ended. GAAR needs to be redrafted to ensure that excessive discretion is minimised — but six months is long enough to do that. The new tax policy should be in place by the next Budget. To try any less hard would be to betray the core purpose of GAAR: to serve as part of a co-ordinated, international crackdown on the sources and destinations of unaccounted-for and tax-avoiding money. This was a compact between the countries of the G20 post the financial crisis, when government resources were crucial to staving off the worst that could happen; and it is clearly something that voters desire. The government should do it properly, and do it now.
Some other aspects of the recommendations are equally questionable. For one, there is insufficient recognition that the incentivisation of “foreign” investment from Mauritius must end. The tax treaty that India currently has with Mauritius must be renegotiated, and the grandfathering of investment made under more lax rules must not also perpetuate the “evergreening” of tax-free pipelines even after laws change. Entities investing in India must be properly regulated, even if in low-tax environments like Singapore, and should meet more stringent know-your-customer requirements than has hitherto been expected of those from Mauritius. The “Mauritius route” is unsustainable, and must be closed. A clear timeline and method to do so must be laid out.
Finally, there is the question of tax on short-term capital gains from listed securities, which the panel suggests be ended. This – yet another attempt to boost listed securities as destinations for India’s savings – is problematic in isolation. However, the Shome committee suggests that securities transaction taxes receive a compensating hike, in order to ensure no loss of revenue to the government. That has some points in its favour: a securities transactions tax does have the advantage of ensuring that more people come into compliance with the law. It serves as an incentive against speculation. It is simple. These are all positive qualities. In the end, it must be remembered that India’s tax system is starkly regressive, and taxation is too easy to avoid. The concerns of equity must be borne in mind when designing taxation. GAAR is an essential tool towards equalizing the tax burden, and must not be watered down beyond recognition.
Certainly, the main opposition party should seek answers from the government on important issues, including corruption. However, the place for such interrogation is Parliament. The BJP is also within its rights to disagree with government initiatives, be it subsidy reduction or retail reform. But to come across as neither interested in debate nor offering alternatives to the policies it bashes, doesn’t bolster the party’s image. The BJP seems more concerned with destabilising the government than with resolving issues.
Why does the BJP limit its critique of the diesel price hike or retail reform to making noise? Surely, it should also prescribe how it thinks India should promote much-needed fiscal consolidation. Petrol prices rose several times under the tenure of the NDA, which endorsed price decontrol in 2002. Nor was the NDA hostile to retail reform, as pointed out by commerce minister Anand Sharma. Opposing multi-brand retail FDI today, the BJP must explain how else investors can be made to help boost the agri-value chain. Or how direct contact between farmers and buyers could be facilitated to raise farm incomes and lower prices for consumers.
When ruling at the Centre, the NDA brandished pro-growth policies to claim India was shining. Today, the BJP comes across as wilfully disowning a modern economic vision in tune with fastglobalising India. Tomorrow, if it comes back to power, can it afford to blink at reforms and let the economy go further down the tube? It’ll also serve the nation better by providing constructive opposition rather than fuelling political uncertainty.
a) Compendium of Guidance Notes on Accounting (As on 1-7-2012)
b) Technical Guide on Audit of NBFC (Revised Edition 2012) c) WIRC Reference Manual (2012-13)
Amongst other provisions, the amendments also stipulate Direct Entry Scheme to CA Course. Henceforth, Commerce Graduates/Post Graduates with prescribed percentage of marks and other students who have passed the Intermediate level examination or its equivalent examination by whatever name called, conducted by the Institute of Cost Accountants of India or by the Institute of Company Secretaries of India, shall be exempted from passing the Common Proficiency Test (CPT) if they wish to join the C.A. course. The details of the Scheme have been hosted on the Institute’s website and also published on Pages 507-517 of C.A. Journal for September, 2012.
A – Well, I was attentive. I did understand; but find it difficult to digest and implement.
S – That is always the situation. You are impatient to grab the audit work; and are reluctant to comply with your Institute’s rules.
A – Unfortunately, our mindset has become that way. We often think of short-cuts or bypassing the rules or complying only at the 11th hour.
S – 11th hour is also not bad. You do it at 13th hour with a backdate!
A – We always have some hypothetical fear of doing things in time. We can’t work without tension! Now tell me, if directors of a company give us an appointment letter, is it not sufficient?
S – You often behave as if you have never studied the Companies Act. You can never see anything beyond income tax! That is the whole trouble.
A – Tell me then what I need to do.
S – At least read clause (9) of the First Schedule. First see whether you are the first auditor of that company or there is a change?
A – Why? Is there a difference? I just go by the directors’ letter.
S – Oh! Very dangerous! There are many who don’t even take an appointment letter! You are little better!
A – I am talking of a private limited company. Who is going to verify? Everything is within the family.
S – Are you sure – never are there any disputes in the family? Then why did you fight with Kauravas?
A – They were our cousins! Here, they are husband-wife and their son.
S – In Kaliyuga, there are instances where husband and wife – both CAs – separated and lodged complaints against each other to the Institute!
A – Oh Lord! I must keep Draupadi and Subhadra in good mood. Otherwise, they will drag me into court!
S – Can’t rule out! So, don’t be in a slumber. Previously you were ‘innocent’; but now they will call you ‘stupid’!
A – Anyway. Then what should I see?
S – See Sections 224 and 225 of the Companies Act. If it is the first appointment, then directors can appoint the auditor. But this has to be done within 30 days from incorporation.
A – Oh! And if they don’t?
S – That was sub-section (5) of Sec 224. Otherwise, they will have to hold an extraordinary general meeting and appoint the first auditor.
A – Ah! That’s simple. These are paper meetings. I will ask my friend to write minutes. He is a company secretary.
S – Arey Arjuna, don’t take it so lightly. All formalities of EGM must be observed.
A – Yeah! He will draft the notice and minutes. Everything is internal!
S – One should see the record of service of notice. Remember, directors and members can deny that they received the notice. They can challenge the validity of the meeting itself.
A – Why should they? It is being done in company’s interest only.
S – So you feel. When everything is smooth and amicable, they will agree. But when friction starts, they will conveniently forget it.
A – Unnecessary complications! Very disgusting
. S – Why are you so uncomfortable when the compliances are so simple? After all, it is a corporate entity. There is sanctity behind these provisions.
A – Then tomorrow, there could be disputes amongst partners also!
S – Yes. That is very common. It is inevitable. Partners are bound to dispute and separate one day or the other! For every birth, there is a death and partnership is no exception.
A – Then, do you mean we should take everything in writing?
S – If possible, you should obtain signatures of all partners on your copy of balance sheet. Do you ever read the partnership deed of a client? There is normally a clause there that accounts will be signed by all partners.
A – Ah! All those are standard clauses. I don’t even ask for the Deed. Same is the case of memorandum and articles of a company. What’s the use of all those stereotyped clauses?
S – Then be ready for trouble.
A – Now, I am in practice for 24 years! Nothing has happened so far.
S – You have not died in the last 50 years. Can you not die now?
A – Come back to auditor’s appointment. What if there is a change of auditors?
S – You have to first ensure whether the previous auditor has resigned or was removed. He may have just given a letter expressing his unwillingness to be reappointed.
A – Then what? Is it not sufficient?
S – It may be an item requiring special notice under section 190 of the Companies Act. You have to see all these things.
A – This is too much! If I spend time on this, when shall I audit the accounts. There are deadlines.
S – This happens because you don’t recognise any other deadline except your tax returns. Why don’t you understand that your appointment should be validly made? It is of prime importance. Why are you so casual about it?
A – Clients come to us only at the last moment.
S – So to accommodate them, you compromise everything! If they are careless, make them understand the things. If you accommodate them, they will take you for granted. As if everything is your own duty.
A – I think I should insist on a company secretary’s certificate regarding compliances.
S – That will be better. At least some safeguard!. Client must spend for it. But your basic duty still remains.
A – What duty? S – At least to see the prima facie compliance.
A – Tell me further. Board can fill up a casual vacancy. Is it not?
S – Yes. But every vacancy is not a casual vacancy. First see whether the Board has power to do so. I mean, whether the vacancy is really casual.
A – Why?
S – Don’t expect me to teach you the whole of the Company Law. Why don’t you read the publication on Code of Ethics of your Institute?
A – Where will I get it?
S – That also you want me to tell? What kind of a CA you are! Go to WIRC. The latest edition is of January 2009 – reprinted in May 2009.
A – Okay! I will see that. There seems no escape!
S – And remember, these provisions of Companies Act and Code of Ethics are very well thought of. Don’t take them as a burden. They are designed to safeguard your own interest. Otherwise, someday, you yourself will crib about your unjust removal.
A – I agree; but our clients are like that! And other CAs also are not bothered about it.
S – Don’t let your client take your professional work for granted. Read all these carefully and update yourself regularly. They are meant for your betterment. Your conduct with the client will decide the dignity of your fraternity, not only now but also in future. If you conduct yourself very loosely before the client, I am sure your future generation will pay for it.
The Ministry of Corporate Affairs has introduced a refund process on 16th September, 2012 for the unlinked incorrect NEFT payments, to be done through a revised refund e-Form available on the MCA21 portal.
On receipt of an application for conversion of a Co-operative Society into a Producer Company, the ROC’s will seek a written consent from the local Co-operative Department of the concerned state, certifying that the Society desirous of being converted into a Producer Company, under part IX A of the Companies Act, 1956, has no dues payable to the State at the time of such conversion and the Cooperative Department has ‘no objection’ to its being converted into a Producer Company. Further, the ROC’s need to satisfy themselves fully that the applicant society has indeed extended its activities outside the State where it is registered a Co-operative Society under the local/State level Law governing Co-operative Societies which are not inter State Co-operative Societies.
Various types of transactions take place in day to day commercial world. A peculiar issue which is being considered here is about the status of a transaction where the dealer received goods for repair from his customer. The dealer replaces the same with his own goods and receives charges for repair. The old one, received from customer, is retained with him for further replacement after repair. The issue is whether on receipt of money from customer towards repair, whether the dealer would be liable to tax under Sales Tax Laws or it can be considered as transaction of exchange of goods thereby not liable to sales tax, or whether it falls in the category of works contract?
Judgment of Hon. M.S.T. Tribunal
The above issue was dealt with by Maharashtra Sales Tax Tribunal in the case of Kirloskar Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011).
Before Tribunal, reliance was placed on following judgments. G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT
(1) Gannon Dunkerley & Co. (9 STC 353) (SC)
(2) Devi Dass Gopal Krishnan (20 STC 430) (SC)
(3) Hotel Sri Lakshmi Bhavan (33 STC 444)
(4) Vishnu Agencies (P) Ltd. (42 STC 31) (SC) & others.
Tribunal held that in a transaction of cross transfer of property in defective compressor received from customer and giving repaired compressor off the shelf, there is no consensual agreement of sale supported by price or money consideration. Holding this as not a ‘sale’ transaction, Tribunal set aside the tax.
Madras High Court’s Judgment
Recently, Madras High Court had an occasion to deal with a similar issue. Reference is to the judgment of Madras High Court in Sriram Refrigeration Industries Ltd. Vs. State of Tamil Nadu (53 VST 382)(Mad).
In this case also, the dealer received defective compressors, in its Tamil Nadu office, gave another repaired compressor and also charged repair charges. The defective compressor was then transferred to Hyderabad workshop to repair and keep it in rolling stock.
“The learned counsel appearing for the petition/ assessee contended that the Tribunal was wrong in holding that it is a deemed sale. He further contended that the Tribunal is wrong in holding that the transfer of property by way of replacement of defective parts in the compressors while undertaking repair works took place within the State of Tamil Nadu and hence, the transactions are liable to tax. He further submitted that the authorities have failed to appreciate the fact that the petitioner/assessee received defective compressors from their dealers, who had earlier received the same from their respective customers to whom the said compressors were sold by them and later, these defective compressors were despatched to the factory at Hyderabad for repair and reconditioning; that the repaired compressors were taken into the petitioner’s/assessee’s floating stock in due course on receipt from Hyderabad. But soon after the receipt of defective compressors, the reconditioned compressor was given to the authorized dealer from their floating stock and flat rate was charged as repairing charges, therefore, the assessing officer ought to have appreciated that the transactions partake the character of an exchange not exigible to tax under the provisions of the Tamil Nadu General Sales Tax Act.”
In addition, it was also argued that the transaction is not works contract as use of spares etc. is negligible and not amounting to works contract. In alternative, it was argued that it is a transaction from Andhra Pradesh and not in Tamil Nadu. Hon. High Court rejected contention and upheld the levy considering it as works contract. In its judgment, Hon. High court observed as under:
“The petitioner/assessee is the manufacturer of compressors and the said compressor is an important component in the air-conditioner/ refrigerator. The petitioner/assessee supplied refrigerators to the customers. There is no factory with repairing facility within the State of Tamil Nadu. The defective compressors were brought to the petitioner for repairs. When the defective compressor is handed over, a rectified compressor is immediately supplied by the petitioner. The petitioner, in order to have quick servicing, replaced the defective compressor by a re-conditioned compressor of the same model. The defective compressor received was subsequently transferred to the factory in Andhra Pradesh for rectification of the defects. The appellant/dealer collected repair charges for the defective compressors. The whole transaction is completed within the State. Therefore, the authorities below have taken a view that the transaction is works contract and the transfer of property in goods involved in the execution of works contract and thereby imposed sales tax on such transfers. The authorities have also held that there is no separate particulars towards labour charges and value of the property transferred. The provision of section 3B of the Act was attracted and the lower authorities correctly allowed 30 per cent deduction towards labour charges and the remaining 70 per cent was taxable at the appropriate rate. From the transaction, it is clear that the supply of defective compressor has been returned as a rectified compressor and therefore, the authorities below held that it amounted to works contract.
After the 46th Amendment, the definition of “sale” was enlarged including the transfer of property of goods involved in the execution of the works contract and thereby, imposed sales tax on such transfer and therefore, the tax on transfer of property in goods “whether as goods or in some other form” involved in the execution of works contract falls within the ambit of article 366(2A) of the Constitution of India. In this case, the defective compressor is repaired and regarding the same, the assessee also produced certain invoice wherein it is categorically stated that the repair charges were charged.”
“From a reading of the above finding, it is clear that the whole transaction forms part of an implied contract for repair of the defective compressor in the State. It is only a replacement with a reconditioned compressor of the same mode instead of a defective compressor. Therefore, the authorities below are correct in coming to the conclusion that there is no contract for sale of compressors. Therefore, the transaction has to be treated only as works contract. The reconditioned compressors are handed over and the defective compressors were received by the assessee after charging repair charges and the whole transaction is within the State. After considering the nature of the transaction, all the authorities have given a categorical finding that there is a works contract and the transfer of property acquired within the State in the said contract. Further, the authorities below are correct in holding that in the absence of separate particulars towards labour charges and the value of property transferred the provisions of section 3B of the Act were attracted and allowed 30 per cent deduction towards labour charges and only the remaining turnover was chargeable to tax at the appropriate rate. The concurrent findings given by the authorities below are based on valid materials and there is no error or illegality in the order of the Tribunal warranting interference.”
Conclusion
It appears that such replacement in repair transaction will be works contract transaction. However, it is a debatable issue. It is possible to argue that replacement by a repaired compressor is normal ‘sale’ itself as there is transfer of a pre-existing repaired compressor from the assessee to the customer at a specific charge. The receipt of the defective compressor only helps the customer to bring down the take away price for the repaired compressor. In any case, in this judgment, based on finding of lower authority that the transaction is a works contract, the High court has upheld the levy as a works contract.
In the light of the above judgment, the judgment of Tribunal cited above will be correct to the extent that it is not ‘sale’ simpliciter. However, the position that it will not be covered under the Sales Tax Laws at all, cannot be a correct position. Though not as normal sale, but by way of a works contract, it will be taxable under the Sales Tax Laws.
Under the Export of Services Rules, 2005 (ESR) which were in force prior to 01/07/2012, it was provided in Rule 4 that, any service which is taxable under clause (105) of section 65 of the Finance Act, 1994 (‘Act’), may be exported without payment of service tax. Further clarifications were issued in the context of proportionate credit rules under CENVAT Credit as to the treatment to be given to “exported services”.
W.e.f. 01/07/2012, ESR have ceased to exist, and Place of Provision of Services Rules, 2012 (POP Rules) have been introduced. Importantly, for the first time, the concept of “exported services” has been specifically introduced under Service Tax Rules, 1994 (ST Rules).
This feature discusses the concept of “exported service” and consequent implications in terms of CENVAT Credit Rules, 2004 (CENVAT Rules) and Point of Taxation Rules, 2011 (POT Rules) in regard to “exported services” However, it needs to be expressly noted that, for determination as to whether a service constitutes “export” or not, provisions under ST Rules should be read with the provisions under POP Rules.
Relevant Statutory Provisions
ST Rules Rule 6A – (Export of Services)
“(1) The provision of any service provided or agreed to be provided shall be treated as export of service when –
a) The provider of service is located in the taxable territory,
b) The recipient of service is located outside India,
c) The service is not a service specified in section 66D of the Act,
d) The place of provision of the service is outside India,
e) The payment for such service has been received by the provider of service in convertible foreign exchange, and
f) The provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of Section 65B of the Act.
(2) Where any service is exported, the Central Government may, by notification, grant rebate of service tax or duty paid on input services or inputs, as the case may be used in providing such service and the rebate shall be allowed subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification.”
CENVAT Rules
Rule 2(e) “exempted service” means a –
(1) Taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) Service, on which no service tax is leviable under section 66B of the Finance Act; or
(3) Taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken; but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994”.
Rule 5: Refund of CENVAT Credit
“(1) A manufacturer who clears a final product or an intermediate product for export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT Credit……… Explanation 1 – For the purpose of this rule – (1) “export service” means a service which is provided as per Rule 6A of the Service tax Rules, 1994.”
Rule 6 – Obligation of a manufacturer or producer of final products and a provider of output service “………..
(7) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the taxable services are provided, without payment of service tax, to a unit in a Special Economic Zone or to a developer of a Special Economic Zone for their authorized operations or when a service is exported.
(8) For the purpose of this rule, a service provided or agreed to be provided shall not be an exempted service when –
(a) the service satisfies the conditions specified under rule 6A of the Service Tax Rules, 1994 and the payment for the service is to be received in convertible foreign currency; and
(b) Such payment has *not been received for a period of six months or such extended period as may be allowed from time-totime by the Reserve Bank of India, from the date of provision.” [*Note: The use of the word ‘not’ appears erroneous].
Exported Service – Whether “taxable service” or “exempted service”
Under Central Excise, it has been a settled position that, exported goods are in the nature of taxable goods and not exempted goods. However under service tax, there was no clarity and issues continued to be raised. In the context of CENVAT Credit, vide Circular No. 868/6/2008 – CX dt. 9/5/08 it was clarified, as under: ……………
6 Whether export of service without payment of service tax under Export of Service Rules shall be treated as exempted service for the purpose of rule 6(3)?
No, export of services without payment of service tax are not to be treated as exempted services. W.e.f. 01/07/2012, Rule 2(e) of CENVAT Rules which defines “exempted services”, clearly provides that, services exported in terms of Rule 6A of ST Rules, would not be “exempted services”.
However, it needs to be expressly noted that, this is for the purpose of CENVAT Rules only.
Brief Analysis of Rule 6A of ST Rules – “export of service”
Each of the specified conditions is discussed hereafter.
a) Service provider should be located in the taxable territory. This is in line with the concept of export which presupposes that service is usually provided from taxable territory to non– taxable territory. In this regard, the following definitions under the Finance Act, 1994 as amended (FA12) need to be noted.
Section 64 of FA 12
“(1) This Chapter extends to the whole of India except the State of Jammu and Kashmir.” ……… Section 65(27) of FA 12 “ ‘India’ means, –
(i) the territory of the Union as referred to in clauses (2) and (3) of article 1 of the Constitution;
(ii) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters. Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976);
(iii) the seabed and the subsoil underlying the territorial waters;
(iv) the air space above its territory and territorial waters and (v) the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof;” Section 65 (52) of FA 12 “ “Taxable territory” means the territory to which the provisions of this Chapter apply.” Thus, simply stated, service provider should be located in India except in the State of Jammu & Kashmir.
b) Service recipient should be located outside India. Here also, it is to be understood that Jammu & Kashmir is otherwise a non-taxable territory. However, if recipient is located in Jammu & Kashmir, the condition of location outside India is not satisfied. This is also in line with the general concept of ‘export’.
c) Service should not be a service specified in the Negative List of Services under section 66D of FA 12. This is very important inasmuch it spells out an important legislative intent that services which are specified in the Negative List are totally excluded from the service tax ambit. Hence, the question of the same being regarded as ‘export’, does not arise at all.
d) The place of provision of service is outside India. This does raise many questions inasmuch as POP Rules contemplate that services could be provided by a service provider based in the taxable territory to a service recipient based in a non–taxable territory.
For instance, if the services are physically provided/performed outside India, the same would be completely out of the service tax ambit and hence, the question of the same being considered as ‘export’ would not arise at all. This anomaly also existed under ESR which was in force prior to 01/07/2012.
In this regard, attention is drawn to the following clarifications by the department in the context of some specific services:
CBEC Circular No. B-11/3/98-TRU dt. 7/10/98 – Market Research Agencies
Para 6.3
“An issue has been raised whether service tax is payable in respect of services rendered to foreign clients in India, and in respect of such services rendered abroad. It is clarified that service tax is payable on all taxable services rendered in India whether to an Indian or foreign client. However, services rendered abroad shall not attract service tax levy as service tax extends only to services provided within India.”
Dept Trade Notice No 1/2000 dt. 27/4/2000, Pune I – Tour Operator Services
Para 6.7
“Service tax on services rendered by tour opera-tors is only on services rendered in India in respect of a tour within Indian Territory. Services rendered by tour operators in respect of out-bound tourism i.e. for tours abroad, do not attract service tax. In case of a composite tour which combines tours within India and also outside India, service tax will be leviable only on services rendered for tours within India provided separate billing has been done by the tour operators for services provided in respect of tours within India.”
This remains an unresolved issue. Possibly the only logical reason appears to be treatment for determination of availability of CENVAT Credit.
e) Realisation of consideration in convertible foreign exchange by a service provider. Compliance of this condition has assumed increased significance.
It needs to be expressly noted that, w.e.f. 01/07/2011, POT Rules have been introduced, whereby there is a liability to pay service tax on the service provider irrespective of realisation from the service recipient. Hence, in cases where consideration is not received (either fully or partly) by a service provider from the service recipient within the time limit permitted by RBI, the benefit of export would be denied subject to discussion in paras hereafter and service tax liability may be triggered from the date of completion of service in terms of POT Rules with applicable interest.
In cases where payments are not received by an exporter service provider within the time permitted by RBI, it would be advisable that appropriate procedure under RBI Regulations (like seeking an extension of time for unrealised proceeds) are complied with by service providers.
(f) Service provider and service recipient should not be merely establishments of a distinct person in terms of Explanation 2(b) (should be read as 3) to section 65B(44) of the Act which defines ‘Service’. The said explanation reads as follows:
“(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons”.
At this point, it is required to note the relevant extracts from Department clarifications titled “Education Guide” dated 20/06/2012 issued in the context of Negative List based taxation of services introduced w.e.f. 01/07/2012 reproduced below:
Para 10.2.2
“Can there be an export between an establishment of a person in taxable territory and another establishment of same person in a non–taxable territory?
No. Even though such persons have been specified as distinct persons under the Explanation to clause (44) of section 65B, the transaction between such establishments have not been recognized as exports under the above stated rule.”
Para 2.4.1
“What is the significance of the phrase “carried out by a person for another”?
The phrase “provided by one person to another” signifies that services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice versa.”
Para 2.4.2
“Are there any exceptions wherein services provided by a person to oneself are taxable?
Yes, two exceptions have been carved out to the general rule that only services provided by a person to another are taxable. These exceptions, contained in Explanation 2 (read as ‘3’) of clause (44) of section 65B, are :
Implications of these classificatory remarks are that inter se provision of services between such per-sons, deemed to be separate persons, are likely to be taxed by the department. For example, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multinational company located outside India would be treated as taxable provided other conditions relating to taxability of service are satisfied.
The term ‘establishment’ has not been defined under FA12/POP Rules/ST Rules. However, in this regard useful reference can be made to, “Education Guide” dated 20/06/2012 available on www. cbec.gov.in
In the line with the legislative intent, whereby services availed from an establishment based outside India by another establishment of the same legal entity in India are deemed to be taxed under reverse charge (as per Education Guide at least), it is being provided that in a reverse case scenario the benefit of export would be denied in such cases even if all the other conditions of Rule 6A of ST Rules are satisfied.
Despite the deeming fiction, which was introduced u/s 66A of the Act (in force upto 30/06/2012) and has been continued w.e.f. 01/07/2012 [section 65B(44) – Explanation 2], whether transactions between two establishments within one legal entity can be taxed at all under service tax, remains an unresolved legal issue which would have to be judicially tested.
Implications in case of delays in realisation of export proceeds
An important practical issue that would arise in such cases is, what would happen in cases where there is a delay in realisation of proceeds for “exported services” and application for extension has been made before RBI, and the case comes up for scrutiny/inquiry by the service tax authorities?
Similar issues did arise under income tax, wherein there was a procedure which prescribed for an application to be made to the Commissioner for seeking extension of time in cases of delays in realization of export proceeds. It was commonly found that applications were not disposed off/ nor proceeds realised till the time of completion of assessment. In many cases, assessing officers disallowed deduction claimed u/s 80HHC (subject to rectification) and raised demands which had to be appealed against.
It is felt that, similar situations may arise under service tax as well, whereby subject to discussions in paras hereafter, service tax authorities may raise protective demands with interest which would have to be contested by service providers. It would be advisable for the service providers to make appropriate disclosures in service tax returns.
Implications in cases where proceeds for exported services are not realised either fully or partially.
As stated earlier, non–realisation of proceeds for exported services, may trigger liability to service tax with interest from the point of completion of service in terms of POT Rules.
Further, it needs to be expressly also noted that, POT Rules do not have any provisions for abatements of service tax in case of bad debts (either fully or partially). Hence, this could cast an additional burden on the “exported services” provider, in addition to the loss on account of bad debt.
Implications under CENVAT Rules/ST Rules in cases of non–realisation of proceeds for exported services
a) It has been a settled position in the context of duty drawback under the Customs law, that in case of non–realisation of export proceeds, drawback benefits received by an exporter are required to be paid back to the Government with appropriate interest.
b) On the lines of duty draw back rules, it would appear that, refunds availed by an “exported services” provider under Rule 5 of CENVAT Rules/Notifications issued in terms of Rule 6A of ST Rules would have to be paid back to the Government with appropriate interest.
c) On a combined reading of Rule 2(e) & Rule 6(8) of CENVAT Rules, it prima facie appears that, in cases where proceeds are not realised for “exported services”, the said services could be treated as “exempted services” with consequent implications.
This appears to be inconsistent considering the fact that, in cases where proceeds for exported services are not realised as prescribed in Rule 6A of ST Rules, export benefit would be denied and service tax liability may arise. Hence, if appropriate service tax liability has been discharged by an “exported services” provider, there should not be any adverse implications in terms of CENVAT Rules.
POP Rules v. ST Rules:
POP Rules were introduced w.e.f. 01/07/2012 in terms of the powers granted u/s 66C of FA 12 to determine the place where services are provided/ agreed to be provided or deemed to have been provided/agreed to be provided. This is essentially done to determine the taxability of cross border transactions. In addition to the said POP Rules, Rule 6A as discussed above in detail is introduced under ST Rules w.e.f. 01/07/2012, specifying conditions for determination of ‘export’ service. The said Rule 6A has not been made subject to POP Rules. Further, the clarification of the Government dated 20/06/2012 (para10.21 of Education Guide), clearly states that all the conditions under the said Rule 6A should be satisfied for a service to be treated as ‘exported’ service. On this backdrop, an important issue that arises for consideration is what would happen in cases where all the conditions specified in Rule 6A are not satisfied (for example, realisation in convertible foreign exchange) but the transaction is outside the taxable territory as per POP Rules.
According to one school of thought, such transaction would be regarded as non-taxable and therefore for the purpose of CENVAT Rules, the same would be treated as “exempted service” and hence the benefit of credits/refunds would be denied. The amendments in CENVAT Rules w.e.f. 01/07/2012 seem to support this line of thinking. According to an alternative school of thought, non-compliance of any of the conditions specified in Rule 6A of ST Rules could trigger service tax liability from the date of completion of service as per POP Rules with interest. This would result in apparent inconsistency vis-à-vis amendments in CENVAT Rules w.e.f. 01/07/2012.
To conclude, it appears that it is a contentious issue which needs to be speedily addressed/clarified to avoid litigation in this regard.
During the relevant year i.e., AY 2004-05, the amount paid was not taxable as per the legal position prevalent at the relevant time and hence, Taxpayer was not liable to withhold tax on the amount paid, irrespective of the retrospective amendment to bring to tax such payments. Accordingly, the provisions of section 40(a)(i) of IT Act, triggering disallowance for not withholding tax, cannot be invoked. Facts The Taxpayer, an Indian Company (ICO), entered into an agreement with a Thailand Company (FCO), for satellite up-linking and telecasting programmes. The amount paid to FCO was claimed by ICO as expenditure on account of broadcasting and telecasting. In addition, consultancy charges were also paid by ICO to FCO. Tax Department considered the payments made by the ICO to FCO as royalty/FTS under the DTAA/IT Act and disallowed the amount paid to FCO on the ground that tax withholding was not made by ICO.
Held:
On Characterisation of payments made to FCO As the ICO does not utilise the process or equipment involved in the operations, relying on Delhi HC decision in the case of Asia Satellite Telecommunication Co. Ltd. (332 ITR 340), ITAT held that the charges paid can neither be treated as royalty nor be treated as FTS under the IT Act. The receipt is in the nature of business income which is not chargeable in the absence of PE.
There is no need to take recourse to other income Article of the DTAA which covers only the items of income not covered expressly by any other article in the DTAA. On deduction of taxes at source on account of retrospective amendment
On Tax Department’s contention that the payments were taxable due to the clarificatory retrospective amendments made by Finance Act 2012, the ITAT held that during the relevant year i.e., AY 2004-05, the amount paid was not taxable as per the legal position prevalent at the relevant time and hence, ICO was not liable to withhold tax on the amount paid irrespective of the retrospective clarificatory amendment carried out by Finance Act 2012 in section 9 of IT Act, which seeks to tax such payments.
Reliance was placed on SC’s decision in the case of Krishnaswamy S.PD (281 ITR 305) and Ahmedabad ITAT’s decision in the case of Sterling Abrasive Ltd (ITA No. 2243,2244 Ahd/2008) where emphasis was placed on the legal maxim ‘lex non cogit ad impossiblia’ meaning that the law cannot possibly compel a person to do something which is impossible to perform.
In the facts of the case, payments made for transfer of allocated capacity in telecommunication submarine cable system does not constitute transfer of ownership right in the system.
In the facts of the case, payment for transfer of capacity was consideration for right to use a process and/or right to use commercial or scientific equipment. Payment was therefore ‘royalty’ under the IT Act as well as the India-Saudi Arabia DTAA.
The Applicant, a company incorporated in India, was engaged in the business of providing telecommunication services in India. A company registered in Saudi Arabia, (FCO), was engaged in operating telecommunication paths, facilities and network infrastructures in Saudi Arabia and other countries (except India). FCO was part of a consortium which entered into an agreement to plan and lay the Europe India Gateway cable (EIG Cable System), linking Indian subcontinent and the UK as part of telecommunication system. Each member of the consortium was entitled to a capacity allocation in the EIG Cable System, based on the proximity to the country to which the consortium member belonged. Further, the member was entitled to transfer its allocated capacity in the EIG Cable System to other telecommunication entities on a private basis, subject to a condition that the transferee should agree to the terms of the consortium arrangement. FCO entered into a Capacity Transfer Agreement (CTA) with the Applicant for transfer of 40% of its total allocated capacity in the EIG Cable System and received consideration of INR1,252 million from the Applicant. The total investment of FCO was agreed at INR3,129M in the project, out of which the Applicant contributed INR1,252M, as consideration for transfer of 40% capacity by FCO. The Applicant approached the AAR on the taxability of the consideration paid to FCO for capacity transfer.
AAR Ruing
The following features of CTA were considered by AAR to conclude that agreement was for grant of use of capacity and not for transfer of ownership rights in the system.
(1) A member of consortium held the allotted capacity on an ownership basis and was entitled to transfer the capacity to other telecommunication entities;
(2) Transfer of the capacity meant ‘making available to a non-member the right of use of capacity’, though primary responsibility to meet consortium obligations continued with the member;
(3) Right to use the agreed capacity is granted only for use by the transferee and it is not-transferable to any third party;
(4) CTA did not result in transfer of the entire rights and obligations of FCO;
(5) No right of ownership, property in or title to the capacity, facilities or network infrastructure, equipment or software were conveyed to or vested in the Applicant;
(6) In the event of termination of the CTA, all rights of the capacity transferred were to revert to FCO unless mutually agreed otherwise.
In view of clarificatory amendment vide Finance Act 2012 and even otherwise, there is not much doubt that the amount paid was for right to use a process and/ or a right to use commercial or scientific equipment. Under the DTAA, consideration paid for use of or right to use a design or model plan, commercial or scientific equipment is royalty. Further, such royalty would be taxable in India as the payer is located in India. Payments made by the Applicant do not constitute reimbursements of FCO’s costs.
Such payments are not made by the Applicant to the consortium on behalf of FCO. The obligation towards consortium is and continues to be that of FCO. The payment, therefore, can neither be regarded as reimbursement nor cost recoupment.
Fiscally transparent Swiss partnership firm is not eligible to claim benefits of India–Switzerland DTAA either at the partnership level or at the level of its partners.
The Applicant, a Switzerland-based partnership firm (Swiss firm) was engaged in the practice of law and carried out its activities only in Switzerland. All the partners of the firm are tax residents of Switzerland. An Indian Company (ICO) appointed the Swiss firm to represent ICO in the adjudication proceedings in Switzerland.
The work in relation to the adjudication proceedings was performed by the Swiss firm primarily in Switzerland and Germany, except for a site visit and an adjudication hearing which happened over a period of six days in India. The Applicant approached the AAR to determine whether the fees received for legal services would be chargeable to tax in India under the provisions of the DTAA.
AAR Ruling
The AAR denied benefit of the treaty to the firm as also to the partners and held that the income was sourced from India so as trigger tax in India.
It held :
(1) The partnership can be said to be domiciled in Switzerland or having its place of residence in Switzerland.
(2) However, for claiming treaty benefits, one needs to determine whether the firm is a ‘person’ within the meaning of the DTAA. If the body of individuals or any other entity is not a taxable entity in the contracting State, it will not be a ‘person’ under the DTAA.
(3) There is no definition of person in Swiss tax law corresponding to the IT Act, which confers the status of a ‘person’ on a partnership. Considering that partnership is not a taxable entity under the Swiss laws, it cannot claim the benefit of the DTAA.
(4) Benefit of DTAA cannot even be claimed by the partners as they are not the recipients of income. Partners merely have right to share profits of the partnership.
(5) Reliance placed on the OECD Commentary to support treaty eligibility is not accepted, since India is not a member of the OECD and India has also expressed its reservations on that part of commentary conclusion .
(1) The source of the income received by the Swiss firm, for rendering professional services to the Indian company, is in India. The fact that the major part of the services are rendered outside India in respect of a dispute arising in India cannot alter the source of income. Income would, therefore, be chargeable in India irrespective of whether it is FTS or not.
Buy back of shares by an Indian Company from its Mauritius Parent is not a scheme designed for tax avoidance and Mauritius Parent is entitled to claim benefit of ‘no-taxation in India’ under the India-Mauritius DTAA.
Under the IT Act, buy back is taxable and exemption u/s. 47 would be available only when either the holding company or the nominee holds the entire share capital and not otherwise.
TP provisions under the IT Act would apply, even though the transaction may not be taxable in view of the DTAA.
The applicant (MCO), a tax resident of Mauritius holding a valid Tax Residency Certificate (TRC), is a wholly owned subsidiary (WOS) of a company incorporated in UK (UKCO). UKCO was, in turn, held by an US Company (USCO). Pursuant to the scheme of corporate reorganisation, one of the businesses of existing Indian company was demerged into another Indian company (ICO) which eventually came to be held by MCO.
ICO proposed to buyback certain number of shares from MCO in terms of the provisions of Indian Companies Act, 1956. Capital gains arising to MCO on buy-back was claimed to be tax exempt under DTAA. Tax Department resisted the claim by alleging that MCO was a shell company without any business purpose and buy-back was not a bonafide transaction.
AAR Ruling
Though MCO is incorporated in Mauritius and the investment was made through it for acquiring shares of ICO and such was the structure to take advantage of the beneficial provisions of the DTAA, this fact, by itself, is not sufficient to deny the benefits of the DTAA. This aspect had been laid down by the Supreme Court (SC) in the case of Azadi Bachao Andolan [263 ITR 706].
The Tax Authority had not disclosed adequate material to justify a finding that MCO or its parent resorted in devising a scheme for tax avoidance. Once MCO is eligible to claim the benefits of the Mauritius DTAA, capital gains arising out of the proposed buyback of shares of ICO is not taxable in India irrespective of its taxability in Mauritius.
As the proposed buyback is an international transaction and out of which income arises, same is subject to the Transfer Pricing (TP) provisions under the IT Act, even if same is exempt under DTAA. Based on its earlier ruling in the case of RST [AAR No. 1067 of 2011], the AAR held that exemption u/s.. 47 of the Act would be available only when either the holding company or the nominee holds the entire share capital and not otherwise.
2) Income-tax (Dispute R esolution Panel)(first amendment) R ules, 2012 – Notification No. 33/2012 dated 24th August,2012
CBDT will assign one CIT as a Reserve Member to each panel who would replace any Member of the Panel as and when the DGIT(Intl Tax) deems it necessary. He would function as a Member of the Panel in addition to his regular duties. Further, the notification states that the DGIT (Intl Tax) maytransfer the case of an eligible assessee from one Panel to the other after giving him due opportunity of being heard.
3) Report u/s. 115JC of the Income-tax Act, 1961 for computing adjusted total income and alternate minimum tax for LLP –Rule 40BA and Form 29C introduced– Notification no. 34/2012 dated 28th August 2012
4) Multilateral convention on mutual administrative assistance on tax matters with OECD member countries signed on 26th January, 2012 notified – Notification 35/2012 dated 29th August,2012
5) Advance Pricing Agreement Scheme notified- Notification 36/2012 dated 30th August, 2012
Income-tax (10th Amendment) Rules, 2012 notifies following rules detailing the Advance Pricing Agreement Scheme:
Rules 10S prescribes the renewal of the said agreement and Rule 10T deals with Miscellaneous matters. Rule 44GA has been introduced, which prescribes the procedure to be followed to deal with requests for bilateral or multilateral agreements
6) Income-tax (11th Amendment) Rules, 2012. -Notification No. 37 dated 12th September 2012 Rule 31ACB and Form 26A introduced being the format of the certificate to be issued by an Accountant under the first proviso to sub-section (1) of section 201. Rule 37J and Form 27BA introduced being the format of the certificate to be issued by an Accountant under first proviso to sub-section (6A) of section 206C
7) Cost Inflation Index for the financial year 2012-13 is 852 – Notification No. 38/2012 dated 17 September 2012
Section 263 r.w.s. 40(b) – Allowability of interest to partners – Interest amount calculated as per daily product method by the assessee – Whether CIT is justified in holding the view that the interest should be calculated on the average amount of opening and closing balances – Held, no.
The CIT noticed that the assessee had paid interest of Rs. 2.05 crores to a partner on his current account, which was computed under daily product method. According to him, it should have been calculated on the average amount of opening and closing balances, based on which, the interest payable to partner worked out to Rs. 1.59 crore. Accordingly, he set aside the order of the AO by holding that the assessment was erroneous and prejudicial to the interest of the revenue. The assessee appealed before the tribunal challenging the order of the CIT.
Held:
Referring to the Supreme court decision in the case of Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83), the tribunal observed that the revision of order u/s. 263 is permissible only after showing that the order passed by the AO is erroneous and prejudicial to the interest of the revenue. It further noted that the assessee has followed the product method for the purpose of calculating interest payable to the partner, since the partner was having frequent transaction of both receipts and payments. According to it, the said product method is scientific and also followed by the banks and financial institutions. The method takes into account all transactions of payments and receipts carried out throughout the year. On the other hand, the method suggested by the CIT was unscientific which does not taken into account the transactions that have taken place during the year. Accordingly, it held that the CIT has failed to establish that the assessment order was erroneous. Therefore, it set aside the order of the CIT.
Section 12A – registration as charitable institution – assessee formed for improving the quality and profitability of the members’ enterprises by providing suitable platform to its CEOs who only could become assessee’s members – Whether entitled to registration – Held, yes.
The assessee incorporated as a private limited company was granted license u/s. 25 of the Companies Act, 1956. Its main object as per its Memorandum of Association was as under: “To promote and provide networking facilities to the Chief Executive Officers (CEOs) of both private and public companies for improving the quality and profitability of their enterprises by providing a platform for CEOs for exchange of ideas and promotion of entrepreneurship through shared experience in India and to apply its income or profits if any, solely for the promotion of its objects and for the promotion of commerce in India and abroad.” The assessee applied for registration u/s. 12A.
According to the DIT, the object for which the assessee was incorporated were clearly not for the benefit of general public as a whole, but was confined to specific members only, viz., CEOs of companies and was commercial in nature. Hence, the assessee cannot be termed as a charitable association falling within the definition of section 2(15). Further, from the details filed, he noted that most of the activities of the assessee were held outside India. Therefore, relying on the decision of the Bombay high court in the case of State Bank of India (169 ITR 298), he held that the trust would not be entitled to exemption.
Held:
From the decision of the Supreme Court in the case of Surat Art Silks Cloth Manufacturers Association (121 ITR 1), the tribunal noted that the object which seeks to promote or protect the interest of a particular trade or industry is object of public utility. It further noted that the main object of the assessee, was to promote networking facilities to the CEOs for improving the quality and profitability of their enterprises, by providing a platform for CEOs for exchange of ideas and promotion of entrepreneurship through shared experience in India. According to it, advancement or promotion of trade, commerce and industry leading to economic prosperity ensures a benefit of the entire community. It further observed that, that prosperity would also be shared by those who engage in the trade, commerce and industry, but on that account, the purpose is not rendered any less an object of general public utility. As regards holding of conference abroad, it held that the said act would not make the activities of the assessee being carried out outside India. The benefit of such conference will ultimately go to assessee and its members. Thus, it held that the reasons assigned by the DIT for rejecting the assessee’s application for registration cannot be sustained.
Sections 50C of the Income Tax Act, 1961 – Section 50C cannot be invoked on receipt of refund of booking advance paid earlier to a builder.
The Assessing Officer held that the flat was registered for value of Rs.57.57 lakh as against Rs.16.12 lakh refund received by the assessee. He, therefore, treated the difference of Rs.41.45 lakh as unexplained income u/s.50C. The CIT(A) deleted the addition made by the Assessing Officer.
The Tribunal, relying on the decision in the case of Dy.CIT V. Tejinder Singh (2012) 147 TTJ 87 (Kol)/ (2012) 72 DTR (Kol) (Trib) 160 held in favour of the assessee. The Tribunal noted as under:
Prior to the execution of the tripartite agreement, the assessee had neither paid full consideration of the flat nor had he acquired the possession of the flat from the builder.
From the agreement, it was evident that it is the builder who is transferring the capital asset i.e. the flat to the new buyer by handing over the possession of the flat as also the legal ownership thereof to the new buyer and the appellant only received back the advance paid by him to the builder by relinquishing his booking right in respect of the said flat.
From the reading of section 50C, it is evident that it is a deeming provision and it covers only to land or building or both. Section 50C can come into play only in a situation where the consideration received or accruing as a result of the transfer by an appellant of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of State Government for the purpose of payment of stamp duty in respect of such transfer. It is a settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section.
Therefore, it is essential that for application of section 50C the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both”, then section 50C will not apply.
From the facts of the case, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with the capital asset and therefore section 50C cannot be invoked.
S/s 56(2)(v) – Gift of India Millennium Deposit Certificate (IMD) received by an assessee is not taxable u/s. 56(2)(v) since the same is not money.
On 25.9.2005, the assessee received, from a nonresident Indian, a gift in the form of IMD of face value of INR94,000. On 5.10.2005, the assessee prematurely encashed these IMDs and received maturity amount of INR139,452 equivalent to Rs. 98,56,827. While assessing the total income of the assessee, the AO stated that the assessee utilised the unaccounted income of the group company to obtain a non-genuine gift. He also held that the IMDs were equivalent to sum of money and attracted provisions of section 56(2) (v). He added the amount received by the assessee u/s.. 56(2)(v) on the ground that the status of IMDs with the facility of premature encashment available was on par with the legal status of a bank fixed deposit. Aggrieved, the assessee filed an appeal to the CIT(A) who held that the gift was a genuine gift and following the ratio of the decision of ITAT in the case of Shri Anuj Agarwal (130 TTJ 49)(Mum) held that the gift of IMDs is gift in kind and outside the purview of section 56(2)(v) of the Act. He deleted the addition made by the AO. Aggrieved, the Revenue preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the facts of the present case before it were identical to the facts before the Tribunal in the case of Haresh N. Mehta (ITA No. 6804/M/2010, AY 2006-07, order dated 31.1.2012). In the case of Haresh N. Mehta, the Tribunal relying on the decision of co-ordinate Bench in the case of ACIT v Anuj Agarwal, 130 TTJ 49(Mum) and also the decision of ITAT Vizag Bench in Sri Sarad Kumar Babulal Jain v ITO (ITA No. 29/Viz/2011) order dated 11.8.2011 dismissed the appeal of the department by confirming the order of CIT(A). Following the decision of the
Council members play an
important role in deciding the destiny of the profession in general. It
is important that the profession gets a capable and an efficient council
consisting of members who can shoulder that responsibility.
The
Institute, established as a statutory body, is entrusted with the
responsibility of regulating the profession of accountancy in the
country. This includes training and education of students aspiring to be
chartered accountants. Alongwith regulating the profession, the
Institute wields a significant influence at various levels. Opinion of
the Institute matters and should matter, while framing various economic
and corporate laws and policies.
Our Institute, to a large extent, is an
autonomous body. If the autonomy of the Institute has to be preserved,
then it is important that the profession conducts itself well and the
Council, the body that represents the profession, performs its functions
in a manner, that respect for the views of the profession is enhanced
in the government as well as within the industry. Great burden lies on
the shoulders of the members of the Central Council.
As a member of the
profession, what do I expect from the Council members who represent the
profession? I believe we must convey our expectations to those aspiring
to be our leaders. First and foremost, any person who aspires to become a
Council member must have impeccable integrity. Just as citizens expect
politicians to be honest, so also the professionals expect their
representatives to be persons of integrity. Is it too much to ask?
I
expect my Council members to have the will and the capacity to serve the
interest of the profession alongwith the interest of the nation. I put
the two – the national interest and the professional interest – together
because by encouraging the complicated laws, one may apparently serve
the professional interest by creating work for the profession, but that
certainly would not augur well in the national interest.
Our Institute is of the professionals, so it is important that the council members have good domain knowledge and the capacity to think ahead, take a holistic view, form a considered opinion and convey it effectively. As an emerging economy with a large market, India evokes great interest amongst the developed countries. At this juncture, it is necessary that our Institute plays a greater role at international accounting bodies in formulating accounting and auditing pronouncements.
This requires research and that is possible if the Institute collaborates with those in the industry and academics. Last but not the least, the ethics. Ethical behaviour goes beyond the Code of Ethics under the Rules and Regulations. Can a Council member change his name (albeit following all the legal formalities) to include a phrase as a part of his name that indicates he represents CAs? To me, that is seeking publicity in an inappropriate manner. Members of the Council that regulates the profession must refrain from such gimmicks.
Members of the profession expect more transparency. Every year, there are elections for the post of the President and the Vice-President. When one attempts to get the information about who were the candidates and how they fared in that election, that information is just not available. Why not make this information public? There have been frequent changes in the criteria for joining the CA course. One is unaware of the thought process behind these frequent changes. There are many such issues where transparency will only inspire confidence of chartered accountants in the Council and its members. Elections are still more than two months away.
So, let us give a thought to these issues and also give some food for thought, to the candidates for the Central Council and the Regional Councils. If we don’t think and act, we don’t have the moral right to blame our representatives.
Section 43(5)(d), Rules 6DDA and 6DDB, Notification dated 22.5.2009 recognising MCX as a recognised stock exchange – Transactions in commodity derivatives carried out on MCX are not speculative transactions w.e.f. 1.4.2006 though MCX has been notified, vide notification dated 22.5.2009, as a recognised stock exchange prospectively.
While assessing the total income of the assessee for AY 2007-08, the AO noticed that w.e.f. AY 2006- 07, section 43(5)(d) provides that transactions in derivatives will not be regarded as speculative transactions if they have been carried out on a notified stock exchange. He also noted that MCX has been notified as a recognised stock exchange vide notification dated 22.5.2009 prospectively. He, accordingly, held the loss in trading in commodity derivatives to be speculative and denied the set off of the same against short term capital gains and income from other sources as was claimed by the assessee.
Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the assessee’s appeal. Aggrieved, the Revenue preferred an appeal to the Tribunal. C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants Tribunal news
Held:
The Tribunal noted that the AO has treated the loss under consideration to be speculation loss mainly on the ground that the Notification No. 46 of 2009 issued by CBDT on 22.5.2009, recognising MCX as a recognised stock exchange for the purpose of section 43(5) only from the said date has a prospective effect and therefore, derivative trading in commodity through MCX prior to the said date will amount to speculation business. The Tribunal also noted that The Finance Act, 2005 has w.e.f. 1.4.2006 inserted clause (d) in the proviso to section 43(5) as a result of which w.e.f. 1.4.2006 trading in derivative carried out through the recognised Stock Exchange is treated as non-speculative transaction. For this purpose, Rules 6DDA and 6DDB provide that notification of recognised stock exchange will be done by the Central Government (CBDT).
The Tribunal held that a combined reading of 43(5) (d) and rules 6DDA and 6DDB and Explanation (ii) to section 43(5) indicates that the rules prescribed are only procedural in nature and they prescribe the method as to how to apply for necessary recognition and consequent notification. When a rule or provision does not affect or empower any right or create an obligation but merely relates to procedural mechanism, then it is deemed to be retrospective and will apply to all the proceedings, pending or to be initiated, unless such an inference is likely to lead to an absurdity. It also held that just because the procedural mechanism has taken a long time to notify a stock exchange as recognised stock exchange, it will not lead to an inference that the same would be applicable from the date the stock exchange is notified to be a recognised stock exchange. It observed that the notification does not empower any right or create an obligation, but only recognises what is already provided in the statute. It held that the transactions carried out through MCX Stock Exchange after 1.4.2006 would be eligible for being treated as non-speculative within clause (d) of proviso to section 43(5).
This circular clarifies that foreign Non-Government Organisations/Non-Profit Organisations/Foreign Government Bodies/Departments, by whatever name called can set-up/establish offices in India (liaison/ branch/project) only after obtaining prior approval of RBI under the Approval Route.
Comprehensive Guidelines on Over the Counter (OTC) Foreign Exchange Derivatives – Cost Reduction Structures
Presently, use of cost reduction structures, i.e., cross currency option cost reduction structures and foreign currency – INR option cost reduction structures, is permitted only to hedge exchange rate risk arising out of trade transactions and the External Commercial Borrowings (ECB).
This circular permits the use of cost reduction structures, additionally, for hedging the exchange rate risk arising out of foreign currency loans availed of domestically against FCNR (B) deposits.
This circular has amended the guidelines relating to submission of Annual Performance Report (APR) as under: –
An Indian party, which has set up/acquired a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) overseas, will have to submit to its designated Bank every year, an Annual Performance Report (APR) in Form ODI Part III in respect of each JV or WOS outside India and other reports or documents as may be specified by the Reserve Bank from time to time, on or before the 30th of June each year.
The APR so required to be submitted, has to be based on the latest audited annual accounts/unaudited accounts, as the case maybe, of the JV/WOS, unless specifically exempted by the Reserve Bank.
(i) The trade credit must be initially contracted for a period not less than 15 months and must not be in the nature of short-term roll overs.
(ii) Banks cannot issue Letters of Credit/Guarantees / Letter of Undertaking (LOU)/Letter of Comfort (LPC) in favour of the overseas supplier/bank /financial institution for the period beyond three years. The all-in-cost ceiling of the trade credit, with maturity period upto five years will be 350 basis points over six months, LIBOR for the respective currency of credit or applicable benchmark. The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.
(i) Bridge finance must be replaced with a long term ECB.
(ii) ECB must comply with all the extant norms.
(iii) Prior approval of RBI will have to be obtained for replacing the bridge finance with long term ECB.
This circular permits replacement of bridge finance (including buyers’/suppliers’ credit) availed of for import of capital goods with ECB under the Automatic Route subject to the following: –
i. Buyers’/suppliers’ credit is refinanced through an ECB before the end of the maximum permissible period of trade credit.
ii. Import of capital goods must be verified from the Bill of Entry by the Bank.
iii. Buyers’/suppliers’ credit availed of is compliant with the extant guidelines on trade credit. iv. The goods that are imported, comply with the DGFT policy on imports. v. The proposed ECB must be compliant with all extant ECB guidelines. vi. Banks in India cannot provide any form of guarantees for the ECB. However, the borrower will still have to obtain prior approval of RBI (under Approval Route) for availing of bridge finance.
(a) An Indian company in the manufacturing and infrastructure sector, which has consistent foreign exchange earnings during the last three years can avail ECB; i. upto 75% of the average foreign exchange earnings realised during the immediate past three financial years; or ii 50% of the highest foreign exchange earnings realised in any of the immediate past three financial years, whichever is higher.
(b) A Special Purpose Vehicles (SPV), which have completed at least one year of existence from the date of incorporation and do not have sufficient track record/past performance for three financial years, can avail ECB upto 50% of the annual export earnings realised during the past financial year.
(c) The maximum ECB that can be availed of by an individual company or group, as a whole, under this scheme is INRNaN billion.
i) Entire investment in equity and/or debt in India as on a particular date through foreign currency – INR options.
ii) Initial Public Offers (IPO) related transient capital flows under the Application Supported by Blocked Amount (ASBA) mechanism through Foreign Currency – INR swaps.
Presently, a non-resident can issue a guarantee to a resident lender as security for funds lent to a resident borrower. RBI has granted general permission to resident borrower to make payment to the non-resident guarantor who has met the liability under the guarantee.
This circular grants general permission to a nonresident to issue a guarantee to a resident provider of non-fund based facilities, such as Letters of Credit/ Guarantees/Letter of Undertaking/Letter of Comfort, etc., to a resident borrower. General permission has also been granted to a resident borrower to make payment to the non-resident guarantor who has met the liability under the guarantee.
Further, annexed to this circular is a format introduced by RBI for reporting, on a quarterly basis, the issue and invocation of such guarantees. This format has to reach the Chief General Manager, Foreign Exchange Department, ECB Division, Reserve Bank of India, Central Office Building, 11th floor, Fort, Mumbai – 400 001, not later than 10th day of the following month.
Assessee was carrying on the business of leasing. The assessee had let a hotel building and the lessee used it as a hotel. In the A. Ys. 1988-89 to 1992-93, the assessee claimed exemption from wealth tax in respect of the property u/s. 40(3)(vi) of the Finance Act, 1983 as an asset used in the assessee’s business. The Assessing Officer rejected the claim. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) One of the conditions to be satisfied by the assessee u/s. 40(3) was that, the asset must be used in the assessee’s business. The assets let out were used in the leasing business. Not all the assets used in the business were exempt from the purview of the wealth tax. Once the asset let out came within the specified clause as contemplated u/s. 40(3)(vi) of the Finance Act, 1983, the assessee was entitled to exemption.
ii) One of the objects of the assessee was leasing and another object was running a hotel in the property. Accordingly, the assessee had leased out the property as a hotel and the lessee also used the property as a hotel. Therefore, the assets came within the specified assets as contemplated u/s. 40(3)(vi) of the Finance Act, 1983. The assessee was entitled to exemption.”
For the A. Y. 2002-03, the assessee had filed the return of income, declaring a loss of about Rs. 14.5 crore. Assessee had claimed the ALP of royalty at the contractual value of Rs. 7.43 crore. The Assessing Officer computed the ALP of royalty at Rs. 5.85 crore on the ground that the assessee had paid royalty even in respect of the products sold by it to the clients who had not paid for the products purchased by them. This resulted in the reduction of the loss of about Rs. 1.50 crore. The Tribunal allowed the assessee’s appeal and held that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The Tribunal rightly came to the conclusion that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction. Section 92C provides the basis for determining the ALP in relation to international transactions. It does not either expressly or impliedly consider failure of the assesee’s customers to pay for the products sold to them by the assessee to be relevant factor in determining the ALP.
ii) Indeed, in the absence of any statutory provision or the transactions being colourable bad debts on account of purchasers refusing to pay for the goods purchased by them from the assessee can never be a relevant factor, while determining the ALP of the transaction between the assessee and its principal.
iii) Once it is accepted that the ALP of the royalty is justified, there can be no reduction in the value thereof on account of the assessee’s customers failing to pay the assessee for the products purchased by them from the assessee.
iv) The question is therefore, answered in the affirmative in favour of the assessee. The appeal is accordingly dismissed.”
When the assessee’s appeal for the A. Y. 2002-03 was pending before the Tribunal, search proceedings were initiated against the assessee. The Tribunal passed the order as under:
“i) The present appeal arises out of the assessment made prior to the date of search. The intention of the Legislature is to make a combined assessment of all the income disclosed or assessed in regular assessment and discovered in search. We accordingly restore the assessment to the file of the Assessing Officer to consider these additions in the assessment u/s. 153A as well. However, in an event where search is declared illegal by any court or the assessment u/s. 153A is held invalid, then this appeal in relation to regular assessment will revive at the instance of the Department, if an application is moved to the Tribunal in this behalf.
ii) Accordingly, the appeal of the assessee was allowed, but for statistical purposes and subject to the observations made above.”
On appeal by the Revenue, the Allahabad High Court reversed the decision of the Tribunal and held as under:
“i) We are of the opinion that the Income Tax Appellate Tribunal erred in abating the regular assessment proceedings, which had become final, and restoring them as a consequence of search u/s. 132, and notice u/s. 153A of the Act to the file of the Assessing Officer.
ii) The appeal is allowed. The order of the Tribunal is set aside. The Tribunal will decide the appeal on the merits in accordance with law.”
For the A. Ys. 1994-95 to 1997-98, the Assessing Officer issued a combined notice u/s. 148 of the Income-tax Act, 1961 and passed reassessment orders. The Tribunal upheld the validity of the notice and the reassessment order.
On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under:
“i) Each assessment year is an independent unit of assessment and the provisions of the Act applied separately. Even where there had been escapement of income, the Assessing Officer was obliged to issue a separate notice for each assessment year.
ii) He had not issued a separate notice u/s. 148 of the Act and instead had issued a composite notice which did not meet the requirement of section 148 of the Act. Thus the entire reassessment proceedings were wholly without jurisdiction.”
MS Office is a popular application software and enjoys wide usage across the world. Recently, Microsoft released the Customer Preview of the latest version of its Office suite i.e. Microsoft Office 2013 (a. k.a Office 15). This write up briefly discusses some of the new features likely to be introduced in the new software, product enhancements to existing features, some pros and cons associated there with.
Background
This write up is the second part of the article on MS Office 2013. The first part dealt with some of the new features that are expected to be a part of MS Office 2013. Some of the features described in the article were:
In this part, we will look at some of the enhancements, new features which are expected to be a part of MS Office 2013. While there are many features that one could write about, given below is a short summary of the changes / new features that you may find useful:
Right from the first moment you start Word, you will notice the crisp new interface. The basic interface has been changed (“Metrified”). The ribbon feature has been changed (Microsoft has made it more flatter) to appear more spacious. One of the reasons for this is that, when the MS Word is used on a smart phone, the look and feel and the user experience while switching from desktop to tablet / smart phone would appear seamless.
Besides the above, cleaning up the main inter-face has the effect of giving more space and allows the user to focus on the document itself rather than the tools (which are supposed to help and not hinder). To be candid, when I migrated from Office 2003 to Office 2007, the one convenience that I appreciated the most, was that the interface allowed me to work on the document / spreadsheet. All the tools that I would need, were neatly organised on the ribbon. Whenever the need arose, they were only 2 or 3 clicks away or (most of the time) just a right click away. I haven’t had the chance to use the MS Word 2013, but I have a feeling that the experience is going to be even better.
The Read Mode feature is yet another feature to look forward to. This feature is particularly aimed at tablet users. As the name suggests, this feature is for reading. When you switch to the Read Mode, the interface is literally reduced to a bare minimum, thus allowing the document to reflow and to fit in to the screen. One can say its almost like the full screen mode. The interface provides “thumb friendly” buttons on either side of the screen for easy navigation. Some users may be in for some disappointment, because this mode allows the reader to read only one document at a time. Duh ….. you wanted to read ….right!!!!, what else do you want???.
The track changes feature too has been improved for better user experience. The user interface in Word 2013 uses a simpler mark-up look, which appears to be less overwhelming (for many) and intimidating (for some) than the earlier red (strikethroughs) and blue (bold/ underline) mark ups. The new Markup view provides final version of the document with indicators in the margin to indicate the sentences which may have been edited. Whenever you are ready to focus on the changes, just click on the indicator line and it will expand into a thread. Users may find this feature particularly useful while collaborating with others.
One of the conveniences that have been discontinued in MS Office 2013 is the option to add spelling in auto correct by right clicking. This feature was introduced way back in MS Office 97 (I think) and was an instant hit. This feature was very useful for correct typos – – the types you make while typing any document for instance you type “o fthe” instead of “of the”. Earlier, all the user needed to do was to right click and instead of just correcting this one instance—add to the auto correct and save the effort for all similar typos. MS Office 2013 will no longer offer this convenience… but don’t despair, you can still go to the Auto Correct menu and add the same. The only difficulty will be finding it.
EXCEL:
Once again, the basic interface has been metrified i.e. looks and feels very crisp. The look and feel is common between all the other applications of MS Office 2013.
If you thought that MS Excel was an outstanding product, the latest version Excel is even better. Microsoft has added some awesome tools, Quick Analysis tool is one them. In the earlier version, if you selected a range of cells with numbers, nothing happened. In MS Office 2013 – Excel, if you select a range of cells with numbers, a QUICK ANALYSIS tool pops up next to the selected range and gives you a variety of options like—Conditional formatting, charts showing most of the information, formulae, tables formats and in cell sparklines (introduced in Office 2010). However, go around any of the options and you will see it either in the data or in one of the pop up charts. The suggestions are intuitive and change according to the data highlighted. While the overall number of options remain the same, the interface would suggest some of the options (such as why a particular chart or a pivot table may be more suitable) which you may find useful.
The next in line is the Chart advisor. An early prototype was featured on the Office Labs, which has now been fully integrated along with other analytical tools in excel. One can say its a plain vanilla version of professional business analytic tools. With the Chart Advisor, the likelihood of you getting the right chart or pivot table in the first attempt itself is far higher…….which many may agree……… translates to tremendous savings in time. Guess that’s one up for artificial intelligence.
The previous avatar of MS Office ie Office 2010 brought in several features which kinda added “jazz” to Excel. The current version ie Office 2013 has focussed more on functionality rather than “jazz”. But that does not mean that there is no “jazz” added in MS Office 2013. As a matter of fact, the error function (ie the indicator which highlight errors or inconsistencies) has been spruced up quite a bit. For instance: if you move between cell or add or delete some figures that lead to a change in some other result or formula, you are likely to see subtle animations to draw your attention to what changes have happened. So what’s new eh!!!!! Well, for starters, if the change is in the area (ie the displayed area / sheet) then the animation is …. let’s just say …..less animated and if its in a different sheet or so …. the animation is …..a bit more animated. If you click the cell, there will be onscreen prompts to lead you to whatever it is that Excel intends to draw your attention to. This makes it much harder to change or delete information that changes your results without noticing that it makes a difference.……sounds exciting, doesn’t it?
Even the error messages are more useful. For instance: suppose you drag a cell across the worksheet when what was really meant to do was to click somewhere else — the older version would give you a fairly “cryptic” warning ….. but this will not be a problem in MS Office 2013— now Excel gives you a warning in far more simple / descriptive manner, suggesting what’s wrong. Add to this, now there is a whole new add-in to look for errors and inconsistencies between worksheets.
Time slicer & the Quick analysis tools are some other tools to look forward to. The time slicer tool helps you to dig further into your data. For instance: it organises data by date, so you can filter down to a specific period or jump through figures month by month to see the differences. The Quick Analysis is like a shortcut of sorts for making sense of your data as it is or one may say that it is a way to preview different visuals i.e. you’ll see various format-ting options, and as you hover over them you’ll see the document change accordingly, giving you a glimpse of what you’ll see if you end up selecting that option. This is quite similar to the formatting and fonts option available since the Office 2007 days.
In MS Office 97, Microsoft introduced the auto fill feature. It’s one of the features that I have come to appreciate over a period of time. It is an excellent tool to use when filling up data in tables. The Flash Fill apparently is a step up. Flash Fill is a feature that recognizes your data patterns to the point where it should be able to predict what belongs in the remaining blank cells and fill them in for you. For example, if you were to make a time sheet spreadsheet detailing on which client time was spent and by which employee, Excel would eventually pick up on the fact of every employee who has worked on the client / specific project and fill up the data for you. For instance: every Saturday is booked for internal filing etc– in theory, you just have to enter some of that data and then go to the Data tab, where you press the Flash Fill button to make it fill in the rest. A bit of caution here …. Feedbacks available indicate that the Flash Fill is not able to interpret / pick on trends in “all” data.
There are several other features to write about but may be in future… once I lay my hands on the official version. Well that’s all for this month… wish you a Happy Diwali in advance.
Disclaimer: The discussion regarding the features and enhancements contained in this write up are based on the various feedbacks/ reviews available on the internet and various magazines, blogs, etc. The purpose of this write up is only to share the knowledge and not to malign any person or product.
In the A. Y. 2004-05, the assessee received rent and service charges in respect of a property owned by it. It claimed both rent income and service charges as ‘Income from house property’. The Assessing Officer accepted the rent income as ‘Income from house property’. So far as service charges were concerned, he held that these service charges were for ancillary services and, therefore, assessable under the head ‘Income from other sources’ and not as ‘Income from house property’. The CIT(A) allowed the claim of the assessee. The Tribunal held that the assessee was providing no services/facilities to the occupants of its property. The services, if any, were being provided by the society. Mere splitting of rent was not decisive and each case had to be examined on its own facts to determine whether the service charges were part of the rent. Therefore, the service charges could not be taxed under the head ‘Income from other sources’, but had to be taxed along with rent income as ‘Income from house property’. Further, the service charges received by the assessee were considered by the Assessing Officer to determine the net maintainable rent and fair market value of the property under the provisions of the Wealth-tax Act. It, therefore, upheld the order of the CIT(A).
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) There are concurrent findings of fact by the Commissioner (Appeals) as well as the Tribunal that no services are being provided by the assessee to the occupants of its property and that the service charges have to be included as a part of its rental income.
ii) The test to determine whether the service agreement is different from the rent agreement would be whether the service agreement could stand independently of the rent agreement. In the instant case, the service agreement is dependent upon the rent agreement, as in the absence of the rent agreement there could be no service agreement.
iii) It may also be pointed out that according to the assessee, the services being provided under the service agreement are in respect of staircase of the building, lift, common entrance, main road leading to the building through the compound, drainage facilities, open space in/ around the building, air condition facility, etc. These are services which are not separately provided, but go along with the occupation of the property. iv) Therefore, the amounts received as service charges are to be considered as a part of the rent received and subjected to tax under the head ‘Income from house property’.”
The assesses were private companies engaged in the business of prospecting and mining for diamonds and other minerals. For the purpose of carrying out geophysical survey, the assessee entered into an agreement with a Netherlands company Fugro. For the technical services rendered by them, the assessee paid a consideration. The Assessing Officer treated the consideration as falling within the definition of fees for technical services under article 12 of the DTAA between India and Netherlands r.w.s. 90 of the Income-tax Act, 1961. Alternatively, he also held that the payment in question was for development and transfer of a technical plan or technical design. He, therefore, held that the assessee had failed to deduct tax on the payments made to Fugro and treated the assessee in default. He levied tax u/s. 201(1) and interest u/s. 201(1A) of the Act. The Tribunal allowed the assessee’s appeal and held that Fugro had not developed or transferred any technical plan or design to the assessee so as to attract article 12(5)(b) of the DTAA and that the amount was not assessable in India.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:
“i) In terms of the contract entered into with Fugro, Fugro had given the data, photographs and maps, but had not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessee, which the assessee could apply independently and without assistance and undertake such survey independently. The technical services provided by Fugro would not enable the assessee to undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the survey. In view of the matter, though Furgo rendered technical services as defined under Explanation 2 to section 9(1)(vii), it did not satisfy the requirement of technical services as contained in the DTAA. Therefore, the liability to tax was not attracted.
ii) By way of technical services, Fugro delivered to the assessee the data and information after such operations. The data was certainly made use of by the assessee. Not only the data and information was furnished in the digital form, it was also provided to the assessee in the form of maps and photographs. These maps and photographs which were made available to the assessee could not be construed as technology made available. Fugro had not devised any technical plan or technical design. Therefore, the question of Fugro transferring any technical plan or technical design did not arise in the facts of the case.
iii) Therefore, the cases did not fall in the second part of clause 15 dealing with development and transfer of plans and designs. Thus, the amount was not taxable in India.”
The assessee, a public sector undertaking, was engaged in the business of handling and transportation of containerised cargo. The activity of the assessee was carried out mainly on its inland container depots, Central freight stations and port container terminals which were spread all over the country. The assessee had a total of 45 inland container depots. For the A. Ys. 2003-04 to 2005-06, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80-IA(4). The Tribunal upheld the disallowance.
On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:
“i) Out of the total 45 inland container depots operated by the assessee, except two, all others were notified by the Central Board of Direct Taxes for the purposes of section 80-IA(12)(ca). Having regard to the provisions of the Customs Act, the Communication issued by the Central Board of Excise and Customs as well as the Ministry of Commerce and Industry, the object of including “inland port” as an infrastructure facility and also that customs clearance also takes place in the inland container depot, the assessee’s claim that the inland container depots were inland ports under Explanation (d) to section 80-IA(4) required to be upheld.
ii) The appeals are allowed.”
The assessee is in the business of manufacturing telecommunication and power cables. For the A. Y. 2001-02, the assessee claimed deduction of the software expenditure as revenue expenditure. The Assessing Officer disallowed the claim, holding it to be capital expenditure. The Tribunal allowed the assessee’s claim. On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The Tribunal in the assessee’s own case for the preceding year had allowed the software expenditure as revenue expenditure, finding that software did not form part of the profit making apparatus of the assessee. The appeal filed by the Revenue for that year has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for that year has attained finality.
ii) Further, it held that the business of the assessee was that of manufacturing telecommunication and power cable accessories and trading in oil tracing system and other products. The software was an enterprise resource planning package and, hence, it facilitated the assessee’s trading operations or enabled the management to conduct the assessee’s business more efficiently or more profitably but it was not in the nature of profit making apparatus. Therefore, the expenditure is to be allowed.”
For the A. Y. 2004-05, in the return of income, the assessee had claimed deduction of Rs. 20,00,000/- in respect of payment of SEBI fees taking into account the provisions of section 43B of the Income-tax Act, 1961. Subsequently, the assessee found that the amount actually paid and allowable u/s. 43B was Rs. 40,00,000/-. As the time for filing revised return was over, the assessee made the claim for deduction of Rs. 40,00,000/- by a letter, in the course of assessment proceedings and also filed the relevant evidence.
The Assessing Officer disallowed the claim, relying on the judgment of the Supreme Court in Goetz (India) Ltd. Vs. CIT; 284 ITR 323 (SC). CIT(A) allowed the assessee’s claim and the same was upheld by the Tribunal. On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “In an appeal before the CIT(A) and Tribunal, an assessee is entitled to raise additional grounds not merely in terms of legal submissions, but also additional claims not made in the return filed by it.”
The assessee’s housing project commenced prior to 01/04/2005, when section 80-IB(10) of the Incometax Act, 1961 did not impose any ceiling on the commercial area that could be embedded in the project. For the A. Y. 2006-07, the Assessing Officer denied deduction u/s. 80-IB(10) relying on the ceiling prescribed in section 80-IB(10) as amended by the Finance (N0.2) Act, 2004 w.e.f. 01/04/2005. The Tribunal upheld the decision of the Assessing Officer.
On appeal by the assessee, the Gujarat High Court reversed the decision of the Tribunal and held as under:
“i) The judgment of the Bombay High Court in Brahma Associates 333 ITR 280 (Bom) holding that w.e.f. 01/04/2005, deduction u/s. 80-IB(1)) would be governed by the restriction on the commercial area imposed by clause (d) does not mean that even projects approved prior to 01/04/2005 would be governed by the said restriction.
ii) Neither the assessee nor the local authority responsible to approve the construction projects are expected to contemplate future amendment in the statute and approve and/or carry out constructions maintaining the ratio of residential housing and commercial construction as provided by the amended Act.
iii) The entire object of section 80-IB(10) is to facilitate the construction of residential housing project and if at the stage of approving the project, there was no such restriction in the Act, the restriction subsequently imposed has to be necessarily construed on the prospective basis
and as applying to the projects approved after that date.”
It was a batch of cases on an identical issue wherein Respondents had paid penalties levied by adjudicating authorities, inspite of having proved that there was a reasonable cause for non payment/ short payment of taxes. The Commissioner exercising powers under the then section 84, revised the orders of lower authorities to enhance the penalties.
Held:
The imposition of penalty is not automatic. Not only the ingredients of the penal sections should exist but also there should be absence of reasonable cause for the failure to comply with the law. The adjudicating authority has the discretion to levy penalty within the limits prescribed under the law. Penalty sections to be construed strictly and if there are two views possible, the one which is favourable to the assessee should be preferred. If the penalty levied is not less than the minimum limit prescribed, the revisional authority has no power to enhance the same on the ground that it is less. If the adjudicating authority exercising powers conferred u/s. 80 has held that there was a reasonable cause for non levy of penalty, revisional authority can’t take a contrary stand and levy penalty. No penalty can be imposed u/s. 76 as well as section 78 for the same offence.
Wrong availment of CENVAT Credit – Assessee not paid tax on roaming charges received from other operators but availing CENVAT Credit on output services in excess of prescribed limit of 35% – Availment of CENVAT Credit on exempted services not disclosed – Deliberate suppression and not mere omission – Held – Extended period applicable – Penalty levied u/s. 76 and 78 held valid.
The appellant was engaged in the business of providing cellular telephone service. Apart from charges received from its own subscribers, it also received roaming charges from other operators towards roaming facility provided by the appellant to the subscribers of the latter. The appellant did not pay any tax on the amount so received towards roaming charges and utilised the entire service tax credit availed of on various input services for payment of service tax without any restriction of 35% as required under Rule 3(5) of the Service Tax Credit Rules, 2002 and nowhere disclosed the said excess amount so utilised.
Held:
The appellant wilfully suppressed the facts of availment of input credit in respect of exempted services in excess of the prescribed limit of 35%. When the limit is prescribed, facts ought to have been mentioned clearly. When exempted service was availed of in excess of the prescribed limit, it was incumbent upon the appellant to disclose it. Thus, the case being covered under the proviso to s/s (1) of section 73 of the Act, the case is not one of mere omission to give correct information but was devised deliberately to evade tax liability. Not finding any involvement of substantial question of law, the Court dismissed the appeal.
There are many non-resident Indians having long term capital assets, particularly residential house properties in India. After the sale of such assets, many of them further propose to reinvest requisite amounts either in house property or in eligible bonds to avail benefits of section 54/54EC/54F of the Income tax Act, 1961 (‘the Act’) . Since it is a transaction with a nonresident, the issue of withholding tax arises. Ideally, since the assessee seller is going to reinvest in eligible assets u/s 54/54EC/54F, no tax should arise. However, the buyer (being the payer of the sale consideration) would be under an obligation to deduct tax for payment being made to a non resident in terms of section 195 of the Act.
In such cases, most of the non-residents opt to apply under section 197 for NIL/lower deduction certificates. An affidavit that requisite amounts would be invested in eligible assets u/s 54/54EC/54F is also submitted alongwith other documents (like sale deed, proof of being a non-resident, computation of capital gains etc.). On the basis of the same, it can be fairly decided that the buyer need not deduct any tax or deduct tax at lower rate. It has been observed that it is a normal practice within the Department to issue such certificate but with a direction to the buyer to issue a cheque of requisite amount directly in favour of REC/NHAI Bonds or Capital Gains Account Scheme (‘CGAS’).
The unfairness:
The facility of obtaining NIL/lower deduction certificates in case of non-residents is to make matters easier for them and not to subject them to unnecessary conditions. Such directions frustrate the very purpose of applying for NIL withholding certificate. C.N.Vaze Chartered Accountant is it fair? The fact that the assessee is submitting an affidavit should be sufficient proof that he wishes to comply with the necessary provisions.
Further, where it is proposed to reinvest in house property, the direction of issuing cheques directly in favour of CGAS account is not fair as the assessee has got time upto due date of filing return of income and may like to deposit his funds in fixed deposit for the time being, to reap the benefit of higher interest rates. In an extreme illustration, sale may be effected in the month of April so that the seller has an option of making investment within six months (for section 54EC of the Act) and upto 30th September of the following year (for CGAS Scheme) as the case may be. This option is unduly curtailed by such conditions.
In many of the cases, it may really put the assessee (i.e. the non-resident seller) and the buyer in a dilemma where part payment is to be made by the bank (being housing loan obtained by the buyer) directly to the seller and part payment is made by the buyer himself. Further, it may also give rise to serious practical problems if the payment is deferred/ made in instalments. At the most, the assessee may be directed to submit the proof of such investment before the due date of filing return. Needless to state that since all documentary evidences are on record, the tax department always has power and access to catch hold of the concerned persons, if they commit any default.
Conclusion:
Such direct instruction to the buyer to issue a cheque of requisite amount directly in favour of REC/NHAI Bonds or CGAS Account would be encroaching upon assessee’s right to plan his investments. This also brings us to the question as to whether the assessing officer has the power to issue such directions to the payer.
A partnership firm in the name and style of M/s Guru Govind Singh Rice Mills was constituted on 25.3.1975 consisting of petitioner and six others partners. The said partnership stood dissolved on 29.10.1984. A fresh partnership deed was executed by the petitioner with one of his ex-partners and three other partners of the dissolved firm in the name and style of M/s UP National & General Rice Mills.
One of the partners died, as a consequence of which the firm was dissolved. In this behalf, a deed of dissolution was executed between the petitioner and four partners and legal heirs of the deceased person. Two partners received a sum of Rs.1.80 and Rs.1 lakh respectively towards their share in the capital of the dissolved firm. The other two partners namely Balbir Singh and Rajesh Kumar received their shares in the shape of assets i.e. land, building, plant, machinery. After dissolution of the firm, petitioners and other partners, Rajesh Kumar entered into a fresh partnership in the name and style of the earlier dissolved firm namely UP National & General Rice Mills, which is in existence.
Report of the Deputy Registrar (Stamp) suggested that there was shortage of levy of stamp of 84,990/- and shortage in the registration fee amounting to Rs. 14,660/-. Notice was issued by Addl. Collector. A detailed reply was filed by the petitioner indicating that there was no transfer of movable or immovable property while effecting the dissolution of the firm. It was purely a share received by the petitioner upon the dissolution of the partnership and as such did not constitute ‘Conveyance’ as defined u/s 2(10) of the Indian Stamp Act. The plea of the petitioner was rejected by the Addl. Commissioner, Stamp. The appeal was also dismissed.
On further appeal, the High Court observed that in order to attract provision of explanation to section 2(10) of Stamp Act, an essential feature is that a person who is transferring his right in the property, should have a definite and assigned share in the property before its transfer to other partners. There is no assigned or definite share of the partners in the movable or immovable assets and assigning of shares on dissolution is done on the basis of the shares which the partners hold in the firm. By no stretch of imagination, does it fall within the explanation of section 2(10) of the Stamp Act.
Receipt of the assets of the firm on dissolution would not be construed as conveyance as contemplated u/s 2(10) of the Stamp Act, as the error in construing the same as conveyance/transfer is based upon the premise of treating the status of member of the partnership firm with that of a person holding joint property with definite shares. The finding that on account of dissolution of firm the assets which are distributed by the partners amongst themselves or in favour of some person who has retired from the partnership would constitute the transfer as defined in the Transfer of Property Act, is wrong.
Where the immovable properties had been allotted in the deed of dissolution to the releasees and therefore, the consequential deed of release was only based on the dissolution and in such circumstances, the document could never be treated as a conveyance. The immovable properties had been allotted in the deed of dissolution to the partners. The deed of release was only a sort of acknowledgement of the title of the partners to the immovable properties which was conferred on them by the deed of dissolution. It could not, by any stretch of imagination, be treated as a conveyance of the properties, because the releasors had no right to the properties at the time of the release. In that view, the document could not be treated as a conveyance and stamp duty cannot be demanded on that basis.
Refund of port services cannot be denied on the ground that the service provider was not authorised by port – It should be allowed provided service tax was paid to the service provider by the recipient.
Refund of Goods Transport Agency (GTA) services should be allowed based on the debit notes issued by the service provider vide Rule 4A of the Service Tax Rules, 1994 and Rule 9(2) of the CENVAT Credit Rules, 2004.
The appellant claimed refund of CENVAT Credit on port services and GTA services on exporting finished goods. The refund claim for port services was rejected on the ground that the service provider was not the authorised person of the port. The refund claim for GTA services was rejected on the ground that the CENVAT Credit was claimed on the basis of debit note and the original copies of debit note/invoice were not signed and as such, the appellant could not produce sufficient documentary proof to the satisfaction of the lower authorities.
Held:
The issue with respect to port services has already been decided in favour of the assessee by the Ahmedabad Tribunal in the following cases:
With respect to refund of GTA services, the Tribunal observed that proviso to Rule 4A of the Service Tax Rules, 1994 specifically allowed any document containing requisite details from a GTA service provider. Further, Rule 9(2) of the CENVAT Credit Rules provided that the Adjudicating Authority could accept any document containing details as specified in the said Rule and the appellant provided a detailed statement showing the details of value of services, service tax payable and paid etc. and the same could be considered to be valid in the absence of the ledger. The self certified copies of documents cannot be a reason to reject the refund claim and the same is a curable defect and the matter was remanded to the original adjudicating authority.
Export of services-Merely not showing the commission separately in profit and loss account cannot be a ground to reject the claim of the assessee that the services are exported especially when other documentary evidences proving provision of services to foreign client and receipt of amount in foreign currency were in place and not rebutted by the department.
The department demanded service tax on differential amount as shown in service tax returns and profit and loss account. The appellant contended that the said amount pertained to export of services and there was no mandatory requirement to show export of services in service tax returns during the relevant period, therefore, the same was not reflected in the service tax returns. Further, the appellant mainly contended that commission was received from foreign clients in foreign currency and the documentary evidences in this respect, was provided to the department. However, the same was not challenged by the department. Further, service tax was demanded without showing any working. Also, non-mention of the foreign commission separately in the profit and loss account was not a valid ground for demand of service tax. The demand was however confirmed as there was no bifurcation of domestic and export commission.
Held:
The ground taken by the Commissioner (Appeals) that the commission was not shown separately in the profit and loss account, cannot be a valid ground to reject the services in view of documentary evidences proving that the commission was received from foreign clients in foreign currency. Further, the appellant had paid service tax on domestic commission which was submitted to the Commissioner (Appeals), therefore, there were no contradictory stands taken by the appellant. Vide Circular no. 111/5/2009-ST dated 24.2.2009, the foreign commission was not liable to service tax since the phrase “used outside India” was required to be interpreted to mean that the benefit of the service should accrue outside India including cases where all the activities pertaining to provision of service were performed in India. 7
Doctrine of unjust enrichment whether applies to refund of pre-deposit when the burden is not passed on to the customers.
The respondent made a pre-deposit u/s. 35F of the Central Excise Act, 1944. In view of favourable decision from the Commissioner (Appeals), the respondent filed refund claim for pre-deposit. The lower adjudicating authority and the Commissioner (Appeals) granted the refund. Therefore, the department filed the present appeal and contended that Mumbai Tribunal in case of Poona Rolling Mills vs. CCE, Pune – I 2009 (240) ELT 85 held that the doctrine of unjust enrichment is applicable in case of pre-deposits as well, and the said doctrine was not examined in the said case. However, the respondent argued that the said doctrine did not apply to the present case in view of non-passing of the burden of such pre-deposit to any other person.
Held:
Section 11B of the Central Excise Act, 1944 dealing with doctrine of unjust enrichment is applicable to duties and not to pre-deposits. Since the burden of pre-deposit was passed on to others in the case of Poona Rolling Mills (Supra), the said case is distinguished from the present case. The doctrine of unjust enrichment does not apply to refund of pre-deposit when the same is not passed on to others.
Royal Western Turf Club Ltd. charged fee from bookies, royalty income from other racing clubs for live telecast of races and royalty from caterers for providing infrastructural facility inside the club – None of the activities taxable under respective categories of “Intellectual Property Rights Services”, “Broadcasting Services” and “Business Support Services” – Total confusion in the minds of adjudicating authorities as to the nature of the tax and the measure of the tax – Impugned orders demanding Rs.6 crore set aside – Appeals allowed with consequential relief.
The appellant, engaged in the activity of conducting horse racing, provided stalls to bookies during the race and they accept bets from the public in the premises of the appellant for which the appellant charged fixed and variable fees. They also conducted live telecast of races at other racing clubs in India for which they received royalty income viz. fixed and variable. They also received royalty from caterers who have been permitted to use the infrastructural facilities and operate within the premises of the club.
Four different SCN’s covering the period between 2002 and 2009 were issued classifying the above activities under different categories and the same activity under different categories in different SCNs.
The appellant relied on the case of Madras Race Club vs. CST [2009 (14) STR 646 (T)] and the CBEC Circulars viz. no.334/4/2006-TRU dated 28.02.2006 and no. 109/3/2009-ST dated 23.02.2009 to conclude that the receipts received from bookies were not taxable under the category of Business Support Services and relied on the judgement of the Hon. Bombay High Court in C.K.P. Mandal vs. CCE [2006 (3) STR 183 (Bom)] to conclude that receipts received from caterers also were not taxable under the category of Business Support Services.
For demand under the category of Intellectual Property Rights Services, relying on CBEC Circular No. 80/10/2004-ST dated 17.09.2004 stated that neither the SCN nor the O-I-O stated under which intellectual property would the said activity fall viz. patents, copyrights, trademarks or designs. For demand under “Broadcasting Services”, it was contended that the appellant had been charged under the said category by M/s Essel Shyam Communications for providing technical support for the telecast and hence, they cannot be treated as the provider as well as the receiver of the service at the same time and further stated that the activity of telecasting was brought under the tax net from 01.07.2010 vide clause 65(105)(zzzzr) – permitting commercial use or exploitation of any event.
Held:
After perusing the impugned orders, the Hon. Tribunal held that the orders clearly evidenced lack of clarity and understanding on the part of the department. The same activity viz. telecast of horse race, was classified under “Broadcasting Services” during one period and under “Intellectual Property Rights” during another period. Also, the consideration in respect of telecast of horse races and in respect of bookmakers have been classified under two different categories for the same period based on different modes of payment.
Intellectual Property Rights Service
Neither the SCN nor the impugned orders gave a clear proposal or finding as to what is the intellectual property right involved as clarified by the CBEC Circular dated 17.09.2004 and hence the demand was set aside. Broadcasting Services It was held that the said activity was undertaken by M/s. Essel Shyam Communications who appropriately discharged its liability and that the activity of the appellant was covered under the category of permitting commercial use or exploitation of any event w.e.f. 01-07-2010
Business Support Services
As regards the activity to make available space to the caterers and bookmakers, it was held that it was nothing but hiring/leasing of immovable property as defined under 65(105)(zzzz) and not taxable as Business Support Service. It relied upon the definition of Business Support Service as defined under 65(104c) and the CBEC circular No.334/4/2006-TRU dated 28-02-2006. Since no merit was found, the entire demand under all the categories was set aside with consequential relief.
Bombay Flying Club registered as charitable institution – Offered training courses in Aircraft Maintenance Engineering, Pilot training & over-hauling work of aircrafts – Appellant’s courses not considered of Vocational Training for notification 24/2004-ST – AAR ruling applied in view of identical facts and questions of law – Activity of pilot training taxable under “Commercial Coaching or Training Services” – activity of overhauling of air-crafts taxable under “Management, Maintenance & Repair Services” – Pre-deposit ordered of 1.5 crores ordered.
The appellant, engaged in providing training in Aircraft Maintenance Engineering, also undertook maintenance and repair of aircrafts owned by its members. The department contended that the above services were taxable as “Commercial Coaching or Training Services” and “Management, Maintenance and Repair Services”. Accordingly, four show cause notices were issued demanding an amount of Rs.2.56 crore. The appellant stated that it was under a bonafide belief that the activities undertaken by them were statutory functions and being a charitable organisation, there was no commercial aspect to its activities and consequently, they never recovered any service tax. It also contended that the demand for service tax under the category of “Management Maintenance or Repair” for the overhauling of aircrafts of its members was bad in law as the said service was not provided under a contract or agreement. The memorandum of the appellant company wherein they have undertaken to provide the said service to its members is not a contract or agreement. The department on its part relied on the CBEC circular, clarifying that the said activity was liable for service tax under the purview of “Commercial Training or Coaching” service and that exemption under Notification No.24/2004-ST was not available to such training programmes. The department also put their reliance on the AAR ruling in the case of CAE Flight Training (India) Ltd.2010 (18) STR 785 (AAR) which held that the activity undertaken was liable for service tax as “commercial training or coaching”.
Held:
Commercial Coaching or Training services: Referring to sections 65(26) and 65(27) of the Finance Act, 1994 relating to definitions of commercial training or coaching, the Tribunal held that the appellant was not covered under the exclusion clause. It also held that the appellant was not eligible for any duty exemption in terms of Notification No.24/2004–ST dated 10.09.2004 and Notification No.03/2010–ST dated 27.02.2010 (after amendment). Due weightage was placed on the CBE&C circular no.137/132/2010–ST dated 11th May, 2011 and on the AAR ruling. Thus, the activity of pilot training was considered as taxable. Management, Maintenance & Repair Services: Referring to the definition u/s. 65(64), the Tribunal stated that the statute does not stipulate any separate contract or agreement, written or otherwise, with the service recipient so as to bring the activity under the tax net. The fact that the activity was stated in the memorandum in the objects clause showed that there was understanding with the members. Thus, the activity of overhauling of aircrafts was also held as taxable. Bonafide belief was considered and Rs.1.71 crore being within normal period, pre-deposit of Rs.1.5 crore was ordered.
Entries in books of accounts – the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure.
The following three questions of laws were raised before the Supreme Court:
1. Whether Stock Exchange Membership Cards are assets eligible for depreciation u/s. 32 of the Income Tax Act, 1961? Whether, on the facts and in the circumstances of the case, deletion of Rs.53,84,766/- has been made correctly?
2. Whether goodwill is an asset within the meaning of section 32 of the Income Tax Act, 1961, and whether depreciation on ‘goodwill’ is allowable under the said section?
3. The third question raised was regarding cancellation of disallowance of an amount of Rs.83,02,976/- as a bad debt.
The Supreme Court held that the first question was covered by the decision in the case of Techno Shares and Stocks Ltd. [(2010) 327 ITR 323 (SC) ], in favour of the assessee. With regard to the second question, the Supreme Court noted that the facts were as under: In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd. with Smifs Securities Ltd. (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd, were transferred to and vest in the company. In the process, goodwill had arisen in the books of the company.
The excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] was considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.
The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to section 32(1) of the Income Tax Act, 1961 [‘Act’ for short]. The Supreme Court after adverting to the provisions of Explanation 3 to section 32(1) of the Act held that ‘Goodwill’ was an intangible asset under Explanation 3(b) to section 32(1) of the Act. The Supreme Court observed that in the present case, the Assessing Officer, as a matter of fact, had come to the conclusion that no amount was actually paid on account of goodwill. This was a factual finding.
The Commissioner of Income Tax (Appeals) had come to the conclusion that the authorized representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee- Company stood increased. This finding had also been upheld by Income Tax Appellate Tribunal. According to the Supreme Court, there was no reason to interfere with the factual finding. The Supreme Court further observed that against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset u/s. 32 of the Act. In the circumstances, before the High Court, the Revenue had not filed an appeal on the finding of fact referred to hereinabove. So far as the third question is concerned, the Supreme Court noted that the argument on behalf of the revenue was that, since the Tax Audit Report indicated that the amounts have been incurred on capital account, the assessee was not entitled to deduction of bad debt.
The Supreme Court observed that both the CIT(A) as well as the ITAT had concluded that the assessee had satisfied the provisions of section 36(1)(vii) of the Act. They held that bad debt claimed by the assessee was incurred in the normal course of business and, therefore, the assessee was entitled to deduction u/s. 36(1)(vii). The Supreme Court held that it is well settled now by a catena of decisions that the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure.
The Supreme Court held that in the present case, the concerned finding of facts recorded by the authorities below indicated that the assessee was entitled to deduction in the course of business u/s. 36(1)(vii) of the Act.
The question that was before the Supreme Court was – whether interest is payable by the Revenue to the assessee, if the aggregate of installments of Advance Tax/TDS paid exceeds the assessed tax? The Supreme Court observed that advance tax is leviable in the very year in which income accrues or arises. It is normally paid in three installments. A similar situation arises in the case of TDS. It is Tax Deductible at source which is also called as ‘withholding tax’ u/s. 195 of the Act. Broadly, both Advance Tax as well as TDS are based on estimation of income by the assessee.
Before the Supreme Court, the assessee relied upon the decision in Sandvik Asia Ltd. v. CIT (2006)280 ITR 643(SC). The Supreme Court noted that it was a case relating to payment of advance tax. The main issue which arose for determination in Sandvik Asia was; whether the assessee was entitled to be compensated by the Revenue for delay in paying to it the amounts admittedly due. The Supreme Court observed that the argument in Sandvik Asia on behalf of the assessee was that, it was entitled to compensation by way of interest for the delay in payments of the amounts lawfully due to it which were wrongly withheld for a long period of seventeen years and that the Division Bench of the Supreme Court vide Para 23 had held that in view of the express provisions of the Act, the assessee was entitled to compensation by way of interest for the delay in payment of the amounts lawfully due to the assessee, which were withheld wrongly by the Revenue.
The Supreme Court, with due respect to the decision in Sandvik Asia, was of the view that section 214 of the Act does not provide for payment of compensation by revenue to the assessee in whose favour a refund order has been passed. According to the Supreme Court, in Sandvik Asia, interest was ordered on the basis of equity and also on the basis of Article 265 of the Constitution.
The Supreme Court however, expressed serious doubts about the correctness of the judgment in Sandvik Asia. According to the Supreme Court, its judgment in Modi Industries Ltd. v. CIT [1995 (6) SCC 396] has correctly held that advance tax or TDS loses its identity as soon as it is adjusted against the liability created by the Assessment order and becomes tax paid pursuant to the Assessment order. The Supreme Court questioned that – if advance tax or TDS loses its identity and becomes tax paid on the passing of the assessment order then, is the assessee not entitled to interest under the relevant provisions of the Act? The Supreme Court referred to the provisions of sections 195(1), 195A, 214, 219, 237, and 244, which stood at the relevant time and were of the view that Sandvik Asia has not been correctly decided. The Supreme Court directed the Registry to place the matter before the Hon’ble Chief Justice on the administrative side for appropriate orders.
The petitioner, a limited company, was engaged in the business of carrying on various non-banking financial activities. An assessment order for the assessment year 1999-2000 was passed u/s. 143(3) on 28-3-2002 determining total income at Rs.27.72 crore. A notice u/s. 148 was issued on 27-3-2006 (after expiry of four years from the end of the assessment year) for reopening assessment. In the reasons recorded for reopening the assessment, it was stated that from the accounts it was noted that petitioner had a incurred a loss in trading in share. After discussing the various entries appearing in the opening and closing stocks and purchases and sales of those stocks it was concluded that there was a loss of Rs.19.86 crore and that loss was a speculative one and not allowable as deduction.
Accordingly, it was alleged that income to the extent of Rs.19.86 crore had escaped assessment. On a writ petition filed by the petitioner before the Bombay High Court, it was held that there was nothing new which had come to the notice of the revenue. Under the proviso to section 147, it was not possible to reopen the assessment on merely a relook of the accounts. The High Court quashed the notice dated 27-3-2006 (W.P.No.1919 of 2006 dated 28-2-2006). Being aggrieved, the revenue approached the Supreme Court. The Supreme Court observed that the assessee had disclosed full details in the return in the matter of its dealing in stocks and shares. The Supreme Court noted that according to the assessee, the loss was a business loss, whereas according to the revenue, the loss incurred was a speculative loss. The Supreme Court was of the opinion that reopening of the assessment was clearly based on a change of opinion and in the circumstances, reopening of the assessment was not maintainable.
In the assessment year 2004-05, the respondentassessee filed the income tax return declaring the income at 1.14 crore. During the assessment proceedings, the Assessing Office (AO) noticed that the assessee had paid a sum of Rs.3.97 crore to its associate concern, M/s. Cargil Financial Services Asia Pvt. Ltd. (CFSA), Singapore on account of discounting charges for getting the export sale bill discounted. The AO was of the view that the discounting charges were nothing but the interest within the ambit of section 2(28A) of the Income Tax Act (for brevity ‘the Act’). Since the assessee had not deducted tax at source u/s. 195 of the Act, he invoked the provisions of section 40(a)(i) of the Act, and disallowed the sum of Rs.3.97 crore claimed by the assessee u/s. 37(1) of the Act.
CIT(A) deleted the addition holding that the discount paid by the assessee to CFSA cannot be held to be interest and therefore, provisions of section 40(a)(i) of the Act would not apply. Accordingly, he allowed the expenditure of Rs.3.97 crore as claimed by the assessee.
The Revenue did not accept the aforesaid decision of the CIT(A) and therefore, challenged the same by filing the appeal before the Tribunal, which was unsuccessful as the Tribunal affirmed the order of the CIT(A). The Tribunal observed that discounting charges were not in the nature of interest paid by the assessee, rather the assessee had received net amount of bill of exchange accepted by the purchaser after deducting amount of discount. Since CFSA was having no permanent establishment in India, it was not liable to tax in respect of such amount earned by it and therefore, the assessee was not under an obligation to deduct tax at source u/s. 195 of the Act. Accordingly, the Tribunal held that the said discounting charges could not be disallowed by the AO by invoking section 40(a)(i) of the Act.
On an appeal by the Revenue, the Delhi High Court [ITXA No.331 of 2011 dated 17-2-2011] observed that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. According to the High Court, on the facts appearing on record, the Tribunal had rightly held that the discounting charges paid were not in respect of any debt incurred or money borrowed. Instead, the assessee had merely discounted the sale consideration received on sale of goods.
The High Court held that no substantial question of law arose, as the matter was already settled by the dicta of the Supreme Court in Vijay Ship Breaking Corporation v. CIT [(2008) 219 CTR 639 (sc)] as well as clarification of CBDT in Circular No. 674 dated 22-3-1993 itself.
The Supreme Court dismissed the Special Leave Petition filed by the revenue against the aforesaid order of the Delhi High Court.
– Limited two way fungibilty. Presently, automatic fungibility of IDR is not permitted. This circular, subject to compliance with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, permits a limited two way fungibility for IDR. It imposes an overall ceiling of INRNaN billion on raising of capital by foreign companies by issuance of IDR. It also states that re-issuance of IDR would be allowed only to the extent of IDR that have been redeemed/converted into underlying shares and sold.
India has principally agreed to converge to IFRS by implementing Revised Schedule VI, being the first constructive step in the journey. Let us appreciate the requirements of accounting for fixed assets, in specific under Ind AS (ie IFRS), in the light of the existing governing principles under Indian GAAP.
Ind AS 16, corresponding to International Accounting Standard (IAS), 16 governs the accounting, measurement and reporting for fixed assets. This means that it also governs the accounting for depreciation. Presently, two standards namely, AS 6 – Depreciation Accounting and AS 10 – Accounting for Fixed Assets govern the subject.
Following are the major points of differences between the two GAAPs that have wider industry impact:
a. Component approach for accounting of fixed assets
b. Depreciation provision
c. Revaluation of fixed assets
This article brings out the major differentiating characteristics under Indian GAAP including relevant governing provisions under the Statute and Ind AS, for accounting of fixed assets on above points. We later discuss the industry impact analysis and way forward.
Existing Governing Literature in India on Fixed Assets
AS 10 – Accounting for Fixed Assets
This standard governs the treatment of capital expenditure related to acquisition and construction of fixed assets. It introduces broad categories of assets as observed in many entities. These include land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trademarks and designs. The standard requires management to apply judgment to use the aggregation rule for individually insignificant items.
It encourages an improved accounting for an item of fixed asset, where the total expenditure thereon is allocated to its component parts, provided they are in practice separable, and estimate is made of the useful lives of these components. For example, rather than treat an aircraft and its engines as one unit, it may be better to treat the engines as a separate unit if it is likely that their useful life is shorter than that of the aircraft as a whole.
However, the entry in fixed asset register is made at a class of asset. For example, aircraft is capitalised as a single asset. This is because Schedule XIV prescribes a common rate for aeroplanes, aero engines, simulators, visual system and quick engine change equipment at 16.2% (WDV) and 5.6% (SLM). In such a case, often, if the engine is replaced before it is fully depreciated, the balance WDV is charged off to Profit and Loss Account and the new engine is capitalised for being depreciated till the maximum life of its parent asset. This approach may lead to deferment of charge till the year of replacement. Indian Companies Act, 1956 Schedule XIV plays a critical role in accounting for fixed assets under Indian GAAP, in recording of assets and depreciating it over its useful life.
Recording of assets: There are about 20 different rates of depreciation under Schedule XIV under single shift usage, which drive the allocation of cost of assets. The broad categories or class of assets include Land, Building, Plant & Machinery, Furniture & Fitting and Ships. Plant & Machinery is further subdivided into various sub-asset classes considering business specific allocations.
Consider ‘mines and quarries’ being one of the groups under ‘Plant & Machinery’ that attracts 13.91% rate of depreciation. It includes Surface and underground machinery, Head gears, Shafts, Tramways, etc. and all being depreciated at the same rate. In practical terms, all of them may have a different useful life. Companies (Auditor’s Report) Order (2003) (CARO) requires every company to maintain proper records showing full particulars, including quantitative details and situation of fixed assets under para 4.1(a). Companies maintain minimum quantitative records for fixed assets that can be physically verified on an overall basis, in order to comply with CARO.
Depreciation: Section 205(2) of the Companies Act, 1956 (Act) provides that a company can declare or pay dividend only out of its profits. The profits for this purpose are to be arrived at after providing for depreciation as per section 350. If dividend is to be declared out of the profits of any earlier year or years, it is necessary that such profits should be arrived at after providing for depreciation for the respective years.
Section 350 of the Act requires a company to provide depreciation at the rates specified in Schedule XIV of the Act for arriving at net profit of the company for the purposes of section 205(2) and section 349 of the Act. There is no direct reference to useful life in the Act, but has indirect reference to it by prescribing depreciation rates for all types of assets for depreciation under the said Schedule. The rates prescribed under Schedule XIV are minimum rates (Circular No. 2/89, dated March 7, 1989 issued by Department of Company affairs).These are applicable for all the companies.
Thus, entities cannot depreciate the assets at a lower rate even if the technically established useful life of the asset is more than that derived from the rates specified under Schedule XIV, if they are governed by Companies Act. (In case of electricity companies, it is the Electricity Act that governs the minimum depreciation rates). There is also no provision of revisiting the rates at every year end.
AS 6 Depreciation Accounting
Para 5 of AS 6 requires assessment of depreciation based on historical or substituted historical cost, estimated useful life and residual value. U/s. 350 read with Circular. No. 2/89 as mentioned above, companies cannot estimate a useful life longer than that prescribed under Schedule XIV.
Companies exercise their judgement of useful life in the light of technical, commercial, accounting and legal requirements. It may periodically review the estimate and if it is considered that the original estimate of useful life of an asset requires any revision, the unamortised depreciable amount of the asset is charged to revenue over the revised remaining useful life.
Companies can use a shorter useful life based on parameters stated above and disclose the fact by way of a note. However, there is no requirement to review residual value at periodic intervals. AS 6 prescribes two methods of depreciation, namely, Straight line method (SLM) and Written down value method (WDV). The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period. A change from one method of providing depreciation to another is considered as a change in policy and is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or for more appropriate presentation of financial statements. Change in accounting policy requires retrospective recomputation of depreciation as per the new policy i.e. new method of depreciation and adjustment in the accounts in the year of such change. Thus, the depreciation charge in subsequent years is not impacted with the change adjustment.
Ind AS 16: Property, plant and equipment (i.e. IAS 16)
The Standard does not prescribe the unit of measure for recognition. However, judgement is required in applying the recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value. We will discuss the component approach is a separate section below.
Under AS 16, major overhauling expenses are capitalised with the asset line item and are depreciated till the next scheduled maintenance date unlike AS 10 that requires such costs to be expensed as incurred, unless it increases the future benefits from the existing asset beyond its previously assessed standard of performance and is included in the gross book value.
Elements of cost also include an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. The value of such provisions is done based on discounted cash flow approach and depreciated over the useful life of the asset. Any change in estimate on account of principal amount would get adjusted in the cost of asset and any change on account of discount rate would be accounted in finance cost.
The major driving factor for component approach comes from the requirement to depreciate the asset over its own useful life. Though the useful life approach exists under Indian GAAP, the Companies Act has been considered more prominent since it forms part of the Statute.
As a convergence step towards IFRS, Revised Schedule VI has been helpful in addressing the conflict between erstwhile hierarchy of application between Schedule VI and Accounting Standards, by giving an upper hand to Accounting Stan-dards. Ministry of Corporate Affairs (MCA) has so far notified Ind ASs, for which implementation date is still to be notified. One may look forward for similar clarification or convergence of Schedule XIV and/or of section 350 of the Act, with Ind AS 16 useful life approach, so that entities can in true spirit converge to Ind AS 16.
It is practically observed that steel plants of SAIL and Tata Steel are more than 30 to 40 years old. These plants require a regular maintenance and can continue longer. Similarly, many refineries in Europe and US are more than 30 years old as against the derived depreciation rates under Schedule XIV that work out to 18-20 years on SLM basis.
As a point of reference, British Petroleum Plc depreciates its refinery and petroleum assets over a period of upto 30 years. Corus Plc depreciates its steel making facilities upto 25 years under IFRS and Arcelor Mittal Plc has attributed upto 30 years of useful life for its plant & machinery. Both of them have a life more than what is prescribed under the Indian GAAP.
As a reverse impact, items where the useful life under Schedule XIV is likely to be more that its actual useable life, may include electrical machinery, X-ray and electrothera-peutic apparatus and its accessories, medical, diagnostic equipments, namely, cat-scan, ultrasound machines, ECG moni-tors, etc. that have 20% rate under WDV method and 7.07% under SLM for depreciation. This works out to around 13 years keeping 5% residual value. The actual life of these electronic equipments could be less considering the technology advances and consequential obsolescence.
Assuming Ind AS 16 will get an upper hand in terms of accounting of Fixed assets, it may be expected that the entities could benefit from lower provision for depreciation based on more realistic estimate of useful life of the assets such as power plants, refineries, smelters, etc.
Another point of difference comes from para 51 and para 61 of Ind AS 16, which provide that the residual value, useful life of an asset as well as the depreciation method shall be reviewed at least at each financial year-end. Such changes are to be accounted for as a change in an accounting estimate in accordance with Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Ind AS 8 requires such changes in estimates to be accounted prospectively.
Point to note that change in method and rates of depreciation are a change in estimate with prospective application under Ind AS 16 whereas, under AS 6 it is a change in policy that needs retrospective application.
Ind AS 16 is self contained, in the sense that it also prescribes the depreciation guidelines on fixed assets unlike the current environment where it is governed by AS 10, AS 6, Schedule XIV and Guidance notes. One may note that, exposure draft of AS 10 (Revised) issued by ICAI before notifying Ind ASs, was also in line with Ind AS 16, and included component approach and provided for calculating depreciation based on estimated useful life.
Component approach
Is component approach of assets required?
Yes, when it is significant. Ind AS 16 does not prescribe a unit measure. However, it requires that each part of an item of property, plant and equipment which has a probability of future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably and is significant in relation to the cost of the item shall be depreciated separately. Implicitly, component approach is required under para 43 of Ind AS 16 which requires each significant part of the total asset to be depreciated separately.
How to determine components?
The determination of whether an item is significant requires a careful assessment of the facts and circumstances.
These assessments would include, at a minimum:
i. comparison of the cost allocated to the component to the total cost of the property, plant and equipment; and
ii. effect on depreciation expense between component approach and clubbing approach.
Following factors may broadly assist in arriving at component identification:
Shutdown costs are made of replacement of an item and labour cost. Thus, items that require replacement on a regular basis can be identified as separate components. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe.
Revaluation model
Under Ind AS 16, there are two models of accounting fixed assets, namely ‘Historical Cost’ model and ‘Revaluation’ model.
Under AS 10, revaluation of fixed assets is considered as substitution for historical costs and depreciation is calculated accordingly. However, under Ind AS, it is a separate model of accounting. Once an entity chooses ‘Revaluation model’, it will be considered as its accounting policy to an entire class of property, plant and equipment. Revaluation is required to be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.
The base fundamental of Ind AS 16 and AS 10 remain the same, i.e. revaluation does not affect the Income Statement, and valuation difference is recognised in reserves, unless the revaluation adjustment decreases the value of asset below its original cost. In such a situation, it would result in a change in profit and loss account which is indirectly an impairment of asset.
However, there is a difference in amortisation impact when it comes to Ind AS 16. The depreciation is calculated on the fair value of the asset and is amortised over the useful life by debiting profit & loss account without taking any credit from the revaluation reserve. It is pertinent to note that, under the present Indian GAAP, the entities plough back the reserves in income statement to the extent of additional depreciation and balance if any, at the time of disposal in line with paragraph 11 of the Guidance note as stated below; and thus the debit in profit & loss account is reduced to that extent.
“The Revaluation Reserve is not available for payment of dividends. This view is also supported by the Companies (Declaration of Dividend out of Reserves) Rules, 1975. Similarly, accumulated losses or arrears of depreciation should not be set off against Revaluation Reserve. However, the revaluation reserve can be utilised for adjustment of the additional depreciation on the increased amount due to revaluation from year to year or on the retirement of the relevant fixed assets.”(Paragraph 11 from Guidance note on treatment of reserve created on revaluation of fixed assets, issued 1982)
This guidance note will not be applicable once Ind AS is implemented and thus the depreciation charge will increase for the entities that follow Revaluation approach. Additionally, the existing unutilised reserve will get transferred directly to retained earnings instead of being routed through the profit and loss account.
Note: Under Ind AS 12, deferred tax is calculated on all temporary differences. The revaluation adjustment will be considered as a temporary difference and hence the amount that will flow to equity will be net of deferred tax.
Industry Impact Analysis – Ind AS 16 Property Plant & Equipment:
Industry will be impacted due to Component Approach in Ind AS 16. Since the Schedule XIV rates are not split into various parts of heavy duty machinery, companies will have to go through a detailed exercise of breaking down its fixed asset line item into various components and assess each item’s independent useful life.
Mining and Construction
Assets in Mining and Construction industry include heavy duty trucks, vehicles, dozers, excavators, loaders & unloaders, tunnelling machinery, etc. These heavy duty machineries are made up of various assembled parts which are high in value and also have a different useful life as compared to the other parts such as chassis, rollers, body, electrical systems, etc. These items will have to be broken in to their components.
Entities will also have to estimate mine restoration liabilities and capitalise with the initial cost of the mine.
Excerpts from Mining major, Xstrata Plc’s Annual Report 2011:
“Where parts of an asset have different useful lives, depreciation is calculated on each separate part. Each asset or part’s estimated useful life has due regard to both its own physical life limitations and the present assessment of economically recoverable reserves of the mine property at which the item is located, and to possible future variations in those assessments. Plant & equipment have useful lives from 4-30 years.”
“Provision is made for close down, restoration and environmental rehabilitation costs.. ….At the time of establishing the provision, a corresponding asset is capitalised, where it gives rise to a future benefit, and depreciated over future production from the operations to which it relates”.
Commodity manufacturing Industry – Crude, Ore, Power
These industries include oil and ore refineries, smelters that are used to melt the ore, and power plants among others. These plants carry huge investments with complex designs and take years to build. They are made of various facilities that can be identified as first level components such as Water treatment, Gas tapping, Conveyors, Turbines, Rooters, Shafts, Grids, Tankages, Ovens, Casters, Moulds, Furnaces, Rolling mills, etc.. More often one component that is left out in the analysis is the Pipelines, which have material value and dif-ferent useful life.
Second level components will need a detailed analysis of each identified first level component with their individually assessed useful lives. Each unit will need separate line items for identification.
Entities will need to estimate its asset retirement obligations at the time of initial capitalisation.
A Nuclear Power Plant will have to estimate its related decommissioning liabilities and capitalise with power plants.
Another impact will be on account of capital repairs that are incurred during shut down, cell realignment, etc. This will be capitalised under fixed assets and amortised till the next overhauling date.
By virtue of assessment of useful life, entities get a chance to increase the useful life for depreciating the assets to its true useful lives.
Shipping
Main parts of a ship include hull and engine. Further, hull is made up of deck, chassis, propeller, funnel, stern and super structure. A modern ship includes a fair component of electronic and automatic control systems. Entities will have to carry out a detailed exercise and use its judgement for capitalising each component.
Dry dock expenses in shipping industry which carried out periodically will need capitalisation and amortisation.
Similar to the commodity industry, entities will get a chance to increase the useful life for depreciating the assets to its true useful lives. International peers such as B+H Ocean Carrier Plc have estimated useful life of 30 years for its vessels from the date of construction and capital improvements are amortised over a period of five years.
Major differences between AS and Ind AS on Accounting of Fixed Assets:
A restaurant maintains a minimum stock of silverware and dishes. Some entities treat cutlery, crockery, linen, etc, as stores and spares and group them under inventory. Any increase or decrease is accounted as consumption in profit and loss ac-count. Moreover, Schedule XIV does not lay down any rate for depreciating such items and hence companies in India adopt inventory and consumption approach to account these items.
For a restaurant, cutlery is similar to a plant, without which it cannot operate. Under Ind AS 6, these items fall into the definition of tangible assets and hence need to be capitalised as such and depreciated based on its useful life. Considering the nature of these assets, the estimation of their useful life may involve a significant amount of judgment. The management should consider factors such as physical wear and tear, commercial obsolescence, asset management policy of an entity that may involve replacement of such assets after a specified period, etc for such assessment. John Keels Hotels Plc, depreciates its Cutlery, Crockery, Glassware & Linen in a period of three years, as per its 2010 annual report.
Way forward:
(i) It is advisable to start updating the fixed as-set records in SAP or any other ERP with major component details. This can be done by opening various sub group codes for the master asset.
(ii) Any new capitalisation should be based on component approach assessing specific use-ful life of each component and then applying the aggregate rule.
(iii) Expect changes or clarifications for section 350 or Schedule XIV or both to avoid conflict with depreciation principles under Ind AS 16.
(iv) Assessment of useful life and residual value will have to be done by the management on a regular basis.
(v) Estimate dismantling, decommissioning, restoration liabilities valued at discounted cash flow basis at the beginning and continue to reassess on a regular basis.
(vi) Entities following revaluation approach for accounting fixed assets, will be impacted more, as Ind AS 16 does not allow an entity to plough back the reserve in profit and loss account to match the additional depreciation on revaluation. Ind AS 16 will come with first time exemptions under Ind AS 101 and hence entities may decide an appropriate policy when they adopt Ind AS, for the first time.
The issue arose for consideration as to whether a co-operative society registered under the Kerala Co-op Societies Act was a `public authority’ u/s. 2(h) of RTI Act. It is fundamental that every member of the society, every depositor and every one interested in the affairs of the society, are entitled to get all information relating to the society, which is possible only if RTI Act is implemented against co-operative societies. However, it may be noticed that sufficient safeguard is made in section 8 of the RTI Act which prohibits furnishing of certain items of information on which statutory immunity is provided thereunder, for obvious reasons. Subject to the exceptions contained in that section, any other information relating to a co-operative society should be made available to the public on application, is what is contemplated under the RTI Act.
The attitude of the managing committee of a society to refuse to furnish information relating to the Society itself, should be a matter of serious concern by the Joint Registrar, because people tend to cover up only wrong things and not things which are properly done. The Court observed that the completion of statutory audit of societies is delayed by four to five years and most of the managing committees escape from being caught for mismanagement only because of delay in auditing, detection of irregularities and delay in initiation of proceedings thereafter. The court was of the view that atleast vigilant members and the public, by obtaining information through RTI Act, will be able to detect and prevent mismanagement in time. Therefore, the RTI Act will certainly help as a protection against mismanagement of the societies by the managing committee and by society employees.
Therefore, it was held that Co-operative Societies registered under the KCS Act are “public authorities” within the meaning of section 2(h) of the RTI Act. The applicability of the RTI Act to Co- operative Societies was upheld. Therefore, even if society by itself does not answer the description of “public authority”, the statutory authorities under the KCS Act being public authorities within the meaning of clause (c) of section 2(h), are bound to furnish information after accessing the same from the co-operative society concerned.
The respondent by an application filed u/s. 6 of the Act, sought the Information from the petitioner (UPSC) namely, inspection of the records, documents, note sheets, reports, office memorandum, part files and files relating to the proposed disciplinary action and/or imposition of penalty against Shri G.S. Narang, IRS, Central Excise and Customs Officer of 1974 Batch and also inspection of records, files, etc., relating to the decision of the UPSC thereof.
The Central Public Information Officer (CPIO) of the petitioner, however, declined to provide the same on the ground that the information sought pertained to the disciplinary case of Shri G. S. Narang, which was of personal nature, disclosure of which has no relationship to any public activity or interest. It further stated that the disclosure of the same may infringe upon the privacy of the individual and that it may not be in the larger interest. The petitioner, therefore, claimed exemption from disclosing the information u/s. 8(1)(j) of the Act.
The Appellate Authority dismissed the Appeal on the same ground that the information sought was exempted from disclosure u/s. 8(1)(j) of the Act. The Respondent preferred an appeal before the CIC. The CIC set aside the decision of the First Appellate Authority and held that opinions/advices tendered/given by the officers (public officials) can be sought for under the Act, provided the same have not been tendered in confidence/secrecy and in trust to the authority concerned, i.e. to say, in a fiduciary relationship. Since the petitioner has not been able to set up the same in the present case, as aforesaid, the claim of exemption u/s. 8(1) (e) stands rejected.
The court observed that a bare perusal of section 8(1)(g) of the Act, makes it clear that the exemption would come into operation only if the disclosure of information would endanger the life or physical safety of any person or would identify the source of the information or assistance given in confidence for law enforcement or security purposes. The opinion/advice, which constitutes the information in the present case, cannot be said to have been given “in confidence for law enforcement or security purposes”, as aforesaid. Therefore, that part of the clause would be inapplicable and irrelevant in the present case. So far as the petitioner’s submission, that the disclosure of Information would endanger the life and safety of the officers who tendered their opinion/advices, is concerned, as aforesaid, in the facts of the present case, may be addressed – by resorting to section 10 of the Act. The exemption u/s. 8(1)(g) of the Act, therefore, as claimed by the Petitioner, would be no ground for disallowing the disclosure of the information (sought by the Respondent) in the facts of the present case.
The other information sought related to the note sheets and final opinion rendered by the UPSC regarding imposition of penalty/punishment on the charged offer. Such information, as is evident from a plain reading, relates to noting and opinion post investigation i.e., after the investigation is complete. Disclosure of such information cannot, by any means whatsoever be held to “impede the process of investigation” which could be raised only when an investigation is ongoing. As such, the exemption u/s. 8(1)(h) of the Act also cannot be raised by the petitioner in the present case.
The Petitioner was aggrieved by the non acceptance of an application submitted before the second respondent for registration of her marriage, under the provisions of Kerala Registration of Marriage (Common) Rules, 2008. According to her, she married a person of Indian origin, who subsequently acquired citizenship of United Arab Emirates (UAE). The marriage was solemnised as per religious rites and customs and it is registered at ‘Kottol Mahallu Juma Masjid’. The Secretary of the Juma Masjid had issued Marriage Certificate about conduct of the marriage as per religious rites. The Complaint of the petitioner was that 2nd respondent had not received the application for registration submitted stating reasons that, both the spouses should appear in person for submitting such application and that a marriage in which a foreign national is one of the parties cannot be registered under the said Rules.
The Hon’ble Court held that there was no need for personal appearance of the parties to the marriage, for presenting the application for registration. The court further relied on the decision of Hon’ble Supreme Court in Seema v. Aswani Kumar (2006 (1) KLT 791 (SC)) in which a direction was issued to all state Governments to formulate Rules for compulsory registration of marriages, irrespective of religion of the parties. The Rule 6 indicates that all marriage solemnised within the state should compulsorily be registered, irrespective of religion of the parties. Nowhere in the Rules, it can be noticed of any insistence about the nationality of the parties contracting the marriage. On consideration of the relevant personal law (Mohammedan Law), no prohibition can be pointed out with respect to a foreign national marrying an Indian lady, if both of them are professing the religion of Islam. Hence, the objection raised by the 2nd respondent for registration of marriage was unsustainable.
One Ganga Prasad had taken an agricultural loan to the tune of Rs.8,425/- from the Union Bank of India on 20.3.1982 and Chuni Lal, father of the Appellant stood guarantor. Ganga Prasad, debtor died in 1985 and Chuni Lal died in 1986. Ganga Prasad could not pay the loan during his life time. Therefore, the bank initiated the proceedings for recovery and ultimately sent the matter to the District Collector, Banda, for realisation of the loan amount as an arrear of land revenue.
In order to make the recovery, land belonging to said Ganga Prasad was put to auction and it could fetch only a sum of Rs. 6,000/-. In order to recover the balance amount, the proceedings were initiated against the Appellants as their father had stood guarantor. The Appellants raised objections that instead of putting their property to auction, the loan amount be recovered from legal heirs of Ganga Prasad as he had left movable/immovable properties and livestocks and other assets to meet the recovery of the bank loan. Their objections were not accepted and the land of the Appellants was put to auction. Respondent No. 4 purchased the said land for Rs.25,000/-. The sale was confirmed and sale certificate was issued by the Collector in favour of Respondent No. 4 and he was put in possession. Aggrieved, the Appellants approached the Board of Revenue, U.P. by filing Revision. However, the same was dismissed. The High Court upheld the said revisional order of the Commissioner.
The Court, on further appeal, observed that there can be no dispute to the settled legal proposition of law that in view of the provisions of section 128 of the Indian Contract Act, 1872, the liability of the guarantor/surety is co-extensive with that of the debtor. Therefore, the creditor has a Dr. K. Shivaram Ajay R. Singh Advocates Allied laws right to obtain a decree against the surety and the principal debtor. The surety has no right to restrain execution of the decree against him until the creditor has exhausted his remedy against the principal debtor, for the reason that it is the business of the surety/guarantor to see whether the principal debtor has paid or not. The surety does not have a right to dictate terms to the creditor as to how he should make the recovery and pursue his remedies against the principal debtor at his instance. Section 146 of the Contract Act provides that co-sureties are liable to contribute equally. Thus, in case there are more than one surety/guarantor, they have to share the liability equally unless the agreement of contract provides otherwise.
A person cannot be deprived of his property except in accordance with the provisions of statute. (Vide: Lachhman Dass vs. Jagat Ram and Ors.: (2007) 10 SCC 448; and Narmada Bachao Andolan v. State of Madhya Pradesh and Anr. AIR 2011 SC 1589). Thus, the condition precedent for taking away someone’s property or disposing of the secured assets, is that the authority must ensure compliance of the statutory provisions.
Therefore, it becomes a legal obligation on the part of the authority that the property be sold in such a manner that it may fetch the best price. Thus essential ingredients of such sale remain a correct valuation report and fixing the reserve price.
One of the objectives of an audit is to identify and assess the risk of material misstatement within the financial statements, together with an assessment of the internal control environment within which an entity operates, to provide a basis for designing and implementing audit procedures to respond to the assessed risks of material misstatement. One of the best ways to identify and assess the risk of material misstatements to the financial statements is through understanding the entity and its environment, which is nothing but having an understanding of the business of the entity which is ultimately to be audited.
Obtaining an understanding of the entity’s business helps to undertake an effective and efficient audit, by tailoring audit procedures to suit the individual facts and circumstances of each client and to undertake the audit procedures and evaluate the audit findings in an informed manner. Knowledge of the entity’s business also helps to develop and maintain a positive professional relationship with the client. Accordingly, business relevance is becoming a key consideration in an audit. In view of the hectic pace at which changes are taking place, auditees have less time and they would prefer to listen to auditors who can demonstrate that they have business knowledge which would make them more credible and relevant. Accordingly, auditing is now a skill which cannot be applied in a business vacuum. Understanding the entity is an iterative and continuous process from the pre-engagement stage to the reporting stage.
The purpose of this article is to identify the professional responsibilities of auditors in dealing with various aspects of the entity’s business environment, which need to be considered by the auditor and evaluating their impact during an audit of the financial statements, duly supplemented by various practical scenarios.
Relevant Auditing Pronouncements:
The following Standards of Auditing (SAs) deal with various aspects of understanding of the entity and its environment during an audit of the financial statements: l SA-315 on Identifying and Assessing the Risks of Material Misstatements Through Understanding the Entity l SA-250 on Consideration of Laws and Regulations in an Audit of Financial Statements l SA-402 on Audit Considerations Relating to an Entity Using a Service Organisation l SA-550 on Related Parties Professional Responsibilities of Auditors: Various professional responsibilities of auditors under each of the above SAs, to the extent they deal with various aspects of understanding of the entity and its environment in an audit of financial statements, are briefly discussed below. SA-315 on Identifying and Assessing the Risks of Material Misstatements Through Understanding the Entity: SA-315 is the primary standard which deals with the various aspects of understanding an entity and its environment, keeping in mind the following two objectives:
Risk Assessment Procedures: The auditor should obtain an understanding of the entity’s strategies and related business risks that may result in material misstatement of the financial statements. Business risk is primarily concerned with external factors that could affect the entity, which may result in material misstatement within the financial statements. It arises as a result of significant conditions, events, circumstances or actions that could adversely affect the entity’s ability to achieve its objectives and strategies. Risk assessment can be undertaken by a combination of one or more of the following procedures:
1. Nature and extent of management override of controls especially in small and promoter driven entities. In such cases, the auditor should specifically inquire as to whether the transactions are undertaken on an arms length basis.
2. The risk of technological obsolescence of certain products which may necessitate provisioning for items lying in inventory.
3. The controls over the preparation and generation of financial information and reporting.
1. Observation of the entity’s activities and operations which would give an insight into the revenue streams, materials used etc.
2. Inspection of various documents like Minutes of meetings, MIS reports, Procedural Manuals etc. which would give an insight into future trends, investments, acquisitions, financial reporting mechanisms etc.
3. Performing walk through tests (i.e observing evidence of controls which are documented in the procedure manuals for a sample of transactions of each type) on various controls which would help identify any procedural inadequacies vis-a-vis the documented controls in the key business cycles like purchasing, revenue, payroll, fixed assets etc. which could result in possible risks and material misstatements.
External Factors:
There are various external factors as indicated below which the auditor needs to evaluate to ascertain the impact thereof during the course of the audit:
1. Seasonality or cyclicality of the products or services which would help in applying appropriate analytical procedures.
2. Technological advances or obsolescence of the entity’s products or service offerings, which could have an impact on the demand and also whether any provision for impairment or obsolescence is warranted.
3. Economic conditions like interest rates, exchange rates etc. which could impact the ability to raise and service borrowings.
2. Investments and investment activities including any planned or recently executed acquisitions, investments in various securities
and special purpose entities.
3. Financing and financing activities including those pertaining to subsidiaries and associated entities, consolidated and non consolidated structures, debt matters and use of derivatives and hedging instruments and structures.
4. Financial reporting issues such as the use of industry specific accounting policies (e.g. financial services, software, media and entertainment etc.), revenue recognition practices (e.g. fertilisers, telecom etc.), fair value accounting (e.g. investments, brand acquisitions etc.) and other complex transactions which could give rise to “substance over form” issues.
Nature of the Entity:
It is of prime importance for an auditor to gain a thorough understanding of the nature and structure of the entity, its owners and other parties who purport to control the entity in substance. This is particularly important for identification of any related party transactions in accordance with the applicable financial reporting and regulatory framework. In case of complex entities operating in various jurisdictions, this can be a complicated and long winding process.
The understanding of the ownership and control structure is particularly important and relevant for new entities, whose audit is accepted for the first time and must be performed prior to acceptance of the audit as part of the KYC procedures, which the ICAI has recently recommended vide its announcement dated 4th August, 2011. In terms of the said announcement, for all attest engagements, the Council has recommended that certain details be obtained by every member before accepting any attest function. Though the above guidelines are recommendatory, it is in the best interest of the auditor to adhere to them.
Internal Controls:
This is the single most important factor which determines the course of the audit, since it helps to identify factors that affect the risk of material misstatements within the financial statements. An ineffective internal control environment is more likely to give rise to material misstatements. However, a robust internal control environment is not a fool proof guarantee of success but merely an enabler to reduce the risk of material misstatements.
Internal controls represent processes designed and implemented by the management, those charged with the governance and other personnel to provide reasonable assurance about the achievement of the entity’s objectives and to address the business risks identified by the management. The nature and complexity of the internal controls is directly proportional to the size of the entity.
For the purposes of determining which internal controls are relevant to the audit, the following five components as laid down in the COSO framework, are useful to ascertain the different aspects of an entity’s internal controls:
The Control Environment:
An entity’s Control Environment is a crucial aspect. More than any tangible factors, it represents the intangibles which define an entity and its culture, values and ethics which the management and employees imbibe through a code of conduct or other similar means. The quality of the entity’s human resources plays a vital role in ensuring the effectiveness of the control environment. The following are some of the matters which an auditor needs to consider, whilst evaluating the adequacy of the control environment and the degree and extent of reliance which he needs to place thereon to determine the nature, timing and extent of further audit procedures:
Entity’s Risk Assessment Process:
The entity should have risk assessment processes in place to deal with the various business risks relevant to the preparation of the financial statements, which would encompass estimating the level of such risks as well as identifying the likelihood of their occurrence. The following are examples of certain factors which need to be considered by the auditor, to ascertain the impact of changes in circumstances due to which either new risks could arise or the existing risks could change:
Information System, including Related Business Processes, Relevant for Financial Reporting and Communication:
In today’s age, most entities deal with reporting and communication of financial issues through the use of IT. It is imperative for an auditor to obtain an understanding of the various general and application controls for various business cycles, to enable him to ensure that all assertions for the generation of financial statements can be tested to enable him to issue an opinion thereon:
The controls for capturing of data especially the master data is of prime importance, to determine the quality of the system generated reports and information, which not only affects the management’s ability to take appropriate decisions, but also enables preparation of reliable financial reports.
Control Activities:
An auditor must obtain a sufficient understanding of the control activities of the various business cycles, to assess the risk of material misstatement at the assertion level and to design further audit procedures in response to the levels of assessed risks. Control activities encompass a combination of one or more of the following procedures, which the auditor needs to review as deemed appropriate:
Monitoring of Controls:
This is an all encompassing activity which covers each of the above components and is primarily performed by the management. It represents the major type of activities that the management uses to monitor internal controls over financial reporting, including those related to control activities relevant to an audit and how corrective actions are initiated. The Audit Committee and Internal Audit are the key facilitators in this process. There are various external and regulatory agencies which also monitor specific aspects of the controls relevant to them like tax authorities, RBI inspectors, factory inspectors etc. One of the most common methods of monitoring controls, is the preparation of the bank reconciliation statement on a monthly or more frequent basis and its regular review and followup.
Other Standards:
The requirements of other SA’s which deal with the audit considerations pertaining to the understanding of the entity and its environment are summarised below:
1. Laws and regulations which have a direct effect on the financial statements and issuance of audit reports and other certificates in respect of the reporting entity.
2. Laws and regulations which do not have a direct effect on the financial statements of the reporting entity, but compliance with which may have a fundamental effect on the operating aspects of the business, non-compliance with which may result in material penalties being levied by the concerned regulatory authorities.
1. The nature of services provided.
2. The contractual terms.
3. The extent to which the internal controls of the entity interact with those of the service organisation.
4. Information available on the relevant internal controls of the service organisation.
5. Types of transactions processed.
The aforesaid information can be obtained in either of the following ways:
1. Visiting the service organisation.
2. Obtaining an independent auditors report on the design, implementation and operating effectiveness of the internal controls of the service organisation, commonly referred to a Type 1 and Type 2 reports.
3. Using another auditor to perform procedures to obtain an understanding of relevant controls at the service organisation.
1. Review of the declarations from directors in Form 24AA under the Companies Act, 1956.
2. Review of the minutes of board meetings.
3. Reviewing the audited accounts of known related parties to identify any step-down relationships.
4. Review of bank confirmation for existence of guarantees given to related parties.
Illustrative Scenarios On Understanding Certain Aspects of Business/Environment in which an Entity Operates:
An attempt here is made to give an illustrative understanding in respect of certain aspects of the business/environment in which an entity is operating which could have an impact on financial reporting.
Business Model/Supply Chain:
An understanding of the business model is the primary driver of the revenue streams and cash flows of an entity. It covers the entire supply chain right from the co-ordination with the suppliers for sourcing of raw materials, the production to be undertaken in line with the demand from the customers, the extent of inventory to be maintained, the various stocking points and the distribution chain. It is imperative to gain an appropriate understanding of the business model and assess its utility in the light of the changes in the business dynamics and competitive environment in which the entity is operating. This would help to assess whether the entity would be able to sustain its existence on a going concern basis, which is one of the fundamental assumptions for the preparation of the financial statements. Understanding the business model/ supply chain gives the auditor an insight into the following matters, amongst others:
Brand/Intellectual Property:
An understanding of the brands/intellectual properties owned/acquired by the entity is imperative to gain an understanding of the sustainability of the business model of the enterprise vis-a-vis the competition. This would help the auditor to assess the value at which it is to be recognised and whether any impairment needs to be considered.
Insurance Coverage
The nature and extent of the risk coverage is an important indicator of the risk management and risk philosophy of the entity. It also helps to assess the extent of loss, both qualitative and quantitative, in times of damages or other stresses that the business might have to undergo. It is imperative that the auditor is able to assess the adequacy of the nature and extent of insurance coverage, to enable the entity to sustain its existence on a going concern basis.
Properties:
The policy of the entity with regard to the type and nature of properties to be acquired needs to be understood, keeping in mind the business model and the cash flows of the entity. This would consequentially determine special accounting requirements, especially with respect to lease transactions and other similar matters.
Conclusion:
Understanding the business environment during the audit is a continuous activity which an auditor needs to undertake for an effective and efficient audit. To conclude, effective auditing requires not just good technical skills, but also a willingness to venture outside the box to gain a better understanding of the entity.
Reference Material:
First Notification exempts sale of furnishing fabrics notified under schedule entry C-101 when sold other than last point of sale within the state. Second Notification adds; furnishing fabrics notified under Schedule Entry C-101, in exclusions from sales turnover under composition scheme for retailers in the notification issued on 1-06-2005 Vat 1505/C.R.105/ Taction-1 for Composition Scheme. Third Notification specifies varieties of furnishing fabrics under Schedule Entry No.C-101 (a). Fourth Notification amends list of varieties of sugar, tobacco textiles and textile articles by Schedule Entry C-101 issued in Notification 1505/C.R. 120/Taxtion 1, Dated 1-6-2005. All the notifications are effective from 1-9-2012.
CBEC- TRU has issued this Circular clarifying certain issues in relation to levy of service tax on certain vocational education/training/skill development courses (VEC). Accordingly, VEC offered by the Central Government or State Government or local authority themselves ,is covered in the Negative List under Section 66D and hence, service tax is not leviable. When the VEC is offered by an institution, as an independent entity in the form of society or any other similar body, service tax treatment is determinable by the application of either sub-clause (ii) or (iii) of clause (l) of section 66D. Services provided by way of education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force, are not chargeable to service tax. Services provided by way of education as a part of an approved vocational education course are not chargeable to service tax.
2. M/S. Prism Cement Limited and Another v.
State of Maharashtra and Others , Writ Petition No. 6475 of 2009 decided
on 30.8.2012 by The Bombay High Court.
Facts
The
dealer filed a writ petition against three trade circulars issued by the
Commissioner of Sales Tax, dated 27.5.2002, 20.7.2002 and 8.2.2007 and
also notices issued by the commissioner for revising the assessment
before the Bombay High Court. By the above mentioned circulars, the
Commissioner had informed that u/s. 8(5) of the CST Act, amended by
Finance Act, 2002 from 11.5.2002, State Government is empowered to grant
exemption only in respect of inter-State sales to the registered
dealers or to the Government covered by section 8(1) of the Act, unless
such sales are supported by declaration in form C or D respectively, as
provided in section 8(4) of the act. It was further informed that as a
result of the above amendment, any notification issued u/s. 8(5) of the
act prior to 11.5.2002, which is contrary to the amended section 8(5)
shall be amended accordingly. In other words according to Commissioner,
unless C or D forms are produced, benefit of exemption or concessional
rate of tax, under any notification issued prior to 11.5.2002, cannot be
granted in respect of any inter-state sales effected after 11.5.2002.
Based
on the above, the department initiated proceedings against the dealer
to recover tax on inter- state sales not supported by either form C or
D, which was claimed by the dealer as exempt from payment of tax under
notification issued by the State prior to 11.5.2002.The dealer filed
writ petition before the Bombay High Court challenging the
abovementioned three trade circulars issued by the Commissioner of sales
tax and other notices issued by the assessing authority.
The
question to be considered by the High Court was, whether section 8(5) of
the act as amended by the Finance Act, 2002 restricts the powers of
State Government to grant exemption either wholly or partially only in
respect of sales of goods to registered dealer/Government subject to
furnishing declaration in form C or D as the case may be?
If the
answer is yes, then whether amended section 8(5) affects the vested
right of the eligible unit to claim the exemption from payment of tax
under package scheme of incentives 1993, so far it relates to
inter-State sales of goods to dealers other than registered
dealers/Government?
Held
The High Court rejected
the self-destructive argument of the department that section 8(5) of the
Act after the amendment, restricts the power of State Government to
grant total/partial exemption in respect of inter-State sales covered by
section 8(1) only. Even after the amendment to section 8(5) of the act,
the power of state Government to grant total/partial exemption in
respect of inter-state sales covered by section 8(2) of the act is not
affected. Since the High Court decided first question in favour of the
dealer, second question was not answered by the High Court.
Accordingly, the High Court allowed the writ petition and quashed and
set aside the impugned trade circulars issued by the Commissioner of
sales tax and other notices issued by the Department.
Valuer services are not consulting engineer services and therefore, not leviable to service tax
The petitioner received a clarification from the Commissioner of Central Excise on 27.03.1998 which stated that valuers of immovable property (other than agricultural lands, plantations, forests, mines and quarries) and valuers of plant and machinery are consulting engineer services leviable to service tax. The petitioner’s contentions were as under: Valuation broadly means assessing worth of any tangible or intangible assets. Following principles are applied for the purpose of valuation:
There is no legislation to regulate the profession of valuation. However, under Wealth Tax Act, 1957, the valuation can be carried out by a person registered with the Central Government u/s. 34AB of the said Act read with Rule 8A of the Wealth Tax Rules, 1957. One such person is defined to be a graduate in civil engineering and therefore, the respondent levied service tax on valuer services. However, valuation is not recognised as a discipline of engineering and the services can be provided by a number of professionals. The very fact that persons having other qualifications can also render valuer services is sufficient to conclude that valuation is not a discipline of engineering. Valuation requires knowledge of law, economics, accountancy, town planning, environmental science etc. Graduate in any stream is eligible for admission to the said course. Valuation is not a discipline of engineering and therefore, the services cannot be leviable to service tax under “consulting engineer services” even if the services are rendered by an engineer. The services are not in the nature of advice, consultancy or technical assistance in common parlance and therefore, when valuer services are provided by a consulting engineer, it is an unreasonable restriction on the fundamental right of the petitioner to carry on their profession and therefore, the levy is unconstitutional.
According to the respondent, provisions of Rule 8A of the Wealth Tax Rules, 1957 suggests that a graduate in civil engineering could become a registered valuer and the services provided by a valuer of immovable property or plant and machinery is a highly technical job. Further, prospectus of a university states that the course is imparted by the faculty of engineering and technology. The course content is mostly in the field of engineering. Reliance is placed on the judgment in case of V. Shanmughavel vs. Commissioner of Central Excise, Chennai – II 2001 (131) ELT 14 (Mad) wherein it was observed that vide Wealth Tax Laws, the person should hold a degree of engineering and should be a high standard engineer. Further, the services are in the nature of advise, consultancy or technical assistance and therefore, are liable to service tax as “consulting engineer’s services”. Therefore, when an engineer becomes a registered valuer of immovable property or plant and machinery, he is rendering consulting engineer’s services.
Held:
Vide Rules 8A of the Wealth Tax Rules, 1957, the qualifications prescribed for each category of valuers are different. The provisions with respect to valuation of immovable property and plant and machinery, allow an engineer to be a registered valuer. However, being an engineer is not a condition precedent for being eligible to be a registered valuer. The syllabus of valuer contains general subjects and subjects pertaining to engineering are limited. Valuation services rendered by a person, not being an engineer, is not consulting engineer’s services. Further, valuation services rendered by an engineer is also not leviable to service tax under “consulting engineer’s services” since there is no advise, consultancy or technical assistance involved in the said activity and it is not in relation to any discipline of engineering. Services rendered by the petitioner as valuer is not leviable to service tax as “consulting engineer’s services”.
Appointed date as approved by High Courts has to be considered the date of amalgamation and therefore, the services provided by the respondent in subsequent period should be considered to be services to self-service tax paid thereon, therefore, is eligible for refund.
The respondent and M/s. Ansal Hotels Ltd. were subsidiary of M/s. ITC Ltd. However, both these subsidiaries were amalgamated into the holding Company. The Hon. Delhi and Kolkata High Courts sanctioned the scheme in September 2004 w.e.f. 01.04.2004. Therefore, the respondent filed a refund claim for service tax paid for services rendered by them to the holding company during the period from April 2004 to September 2004, considering the services provided to self in view of the orders of High Courts. The original adjudicating rejected the refund claim considering the effective date as the date on which all the orders, sanctions, approvals, consents, conditions, matters or filings were obtained/ filed. The respondent had filed application with the Registrar of Companies on 23.03.2005, therefore, effective date of amalgamation was considered to be 23.03.2005. The Commissioner (Appeals) observed that: The date provided in the scheme of amalgamation was to be considered to be the effective date as held by the Hon. Apex Court in case of M/s. Marshall Sons & Co. (India) Ltd. vs. Income Tax Officers 1997 (223) ITR 0809 SC and all the entities to be considered as one entity w.e.f. 01.04.2004 and consequently, services provided between the entities should be considered as services to self, not leviable to service tax relying upon following decisions:
The matter was remanded back to the original adjudicating authority to verify service tax involved in the matter and that the burden of the same was not passed on to others. The department on the other hand contended that as per the scheme of amalgamation, the employees of the transferor company were transferred to the transferee company w.e.f. 23.03.2005. Therefore, the separate identity of the service provider and service receiver remained intact till 23.03.2005 and the scheme further specified that any transactions or proceedings already concluded on or before the effective date should not be affected by the scheme of amalgamation. As per the decision in case of M/s. Wallace Flour Mills Co. Ltd. vs. Collector of Central Excise 1989 (44) ELT 598 (SC), the excise duty had to be determined at the rate prevalent on the date of removal, therefore, the taxable event being provision of service, contrary order cannot be passed by the Commissioner (Appeals).
Held:
In case of M/s. Marshall Sons & Co. (India) Ltd. (Supra), the Hon. Apex Court had held that the date of amalgamation as presented in the scheme, has to be considered to be the transfer date and not the date of the order sanctioning the scheme. The law declared by the Hon. Supreme Court was binding on all the Courts as per Article 141 of the Constitution of India and therefore, the ratio laid down in the Income Tax Act can be made applicable to Service Tax Laws in view of peculiar facts of the case. The Hon. Tribunal’s decision in case of Technocraft Industries (I) Ltd. (Supra) supported the respondent’s case that effective date needed to be preferred over the approval date. Wallace Flour Mills (Supra), was not applicable as it did not deal with the effective date of amalgamation and, accordingly, department’s appeal was rejected.
Hiring of manned cranes to ONGC – Cranes at disposal of ONGC and per day hire charges paid – Service tax paid thereon – Services of staff and maintenance incidental to hiring – ONGC alone entitled to exclusive use of cranes – Transfer of right to use goods – Assam Value Added Tax, 2003.
ONGC entered into contracts with dealers to provide manned cranes according to technical specifications with the necessary accessories with valid permits, insurance, for performing the duties as advised by ONGC, at the appointed time and place. The agreement showed that the activity was in respect of hiring of cranes. The work was to be executed by ONGC itself. The cranes were at the disposal of ONGC and per day hire charges were paid, except maintenance days. The services of staff operating them and maintenance were incidental to hiring of the cranes. The appellant’s case was that it owned cranes and in pursuant to notice inviting tenders, they entered into the contract. The cranes were at ONGC’s disposal without transfer of possession and custody thereof. All operating costs were to be borne by the appellant and thus there was no transfer of ownership of the cranes, nor of the right to use to ONGC and they paid service tax considering this as taxable service. The Revenue contended that the relevant clauses of the agreement such as the availability of cranes on a particular day or time (including maintenance off days), its operational time, arrangements of fuel lubricants etc. remained a sole discretion of ONGC, indicating dominion and control of ONGC during the entire period of operation.
Held:
For all the practical purposes, it was evident that the use of the cranes was transferred to ONGC for the period of contract and the assessee had no right to use the same. Such a right having been transferred to ONGC for consideration. The mere fact that the responsibility of the maintenance and use was vested with the assessee, does not deviate from the nature of transaction being transfer of right to use. The taxability u/s. 65(105)(zzzzj) under the Finance Act, 1994 – supply of tangible goods services would have been applicable if the right to possession and control remained with the service provider, which is not the case here. The judgement of the Hon. Supreme Court in BSNL vs. Union of India [2006] 3 VST 95 (SC) was relied upon.
For the assessment year 2001-02 the respondent- assessee had filed return declaring loss at Rs.43.47 crore. Thereafter, the revised return exhibiting the income at Rs.3,86,82,128/- was filed under the provisions of section 115JB. The assessment order was framed by the Assessing Officer u/s. 143(3) at a loss of Rs.36.95 crore as per normal provisions and at book profits at Rs.4,01,63,180/- u/s. 115 JB of the Act. While doing so, various additions were made by the Assessing Officer including the following:-
a. In so far the claim of depreciation was concerned, the Assessing Officer disallowed the depreciation to the extent of Rs.32,51,906/-.
b. The addition towards the provident fund of Rs.3,030/- treating the same as income, was also made on the ground that this contribution was made belatedly by the assessee.
c. The Assessing Officer also disallowed deduction u/s. 80HHC of the Act on the ground that the assessee had not adjusted the loss incurred on manufactured and traded goods exported out of India against incentives and had claimed deduction u/s. 80HHC of the Act on 90% of the incentives.
These additions were upheld by the CIT(A).
While drawing the assessment order, the Assessing Officer also directed that penalty proceedings be initiated against the assessee by issuing a show cause notice u/s. 271(1)(c) of the Act. The show cause notice was thus given to the respondent-assessee, who submitted its reply thereto. However, the Assessing Officer was not convinced with the reply and thus, passed the order dated 28th September, 2007 imposing a penalty of Rs.90,97,415/- in respect of the aforesaid three additions, holding that the assessee had furnished inaccurate particulars of the income which fell within the purview of the section 271(1)(c) of the Act and Explanation 1 thereto.
The assessee preferred an appeal, which was allowed by the CIT (A), who set aside the penalty order. The Income Tax Appellate Tribunal affirmed the order of the CIT(A) maintaining that no penalty could have been imposed upon the assessee under the given circumstances.
On further appeal by the revenue, the Delhi High Court [ITXA No.1420 of 2009 dated 26/8/2010] observed that the judgment of the Supreme Court in Gold Coin’s has clarified that even if there are losses in a particular year, penalty can be imposed as even in that situation there can be a tax evasion. As per section 271(1)(c), the penalty can be imposed when any person has concealed the particulars of his income or furnished incorrect particulars of the income. Once this condition is satisfied, quantum of penalty is to be levied as per clause (3) of section 271(1) (c), which stipulates that the penalty shall not exceed three times “the amount of tax sought to be evaded”. The expression “the amount of tax sought to be evaded” is clarified and explained in Explanation 4 thereto, as per which it has to have the effect of reducing the loss declared in the return or converting that loss into income.
The question, however according to the High Court, in the present case, was as to whether furnishing of such wrong particulars had any effect on the amount of tax sought to be evaded. The High Court held that under the scheme of the Act, the total income of the assessee is first computed under the normal provisions of the Act and tax payable on such total income is compared with the prescribed percentage of the ‘book profits’ computed u/s. 115JB of the Act. The higher of the two amounts is regarded as total income and tax is payable with reference to such total income. If the tax payable under the normal provisions is higher, such amount is the total income of the assessee, otherwise, ‘book profits’ are deemed as the total income of the appellant in terms of section 115JB of the Act.
In the present case, the income computed as per the normal procedure was less than the income determined by legal fiction, namely ‘book profits’ u/s. 115JB of the Act. On the basis of normal provision, the income was assessed in the negative i.e. at a loss of Rs.36,95,21,018. On the other hand, assessment u/s. 115 JB of the Act resulted in calculation of profit at Rs.4,01,63,180.
The income of the assessee was thus assessed u/s. 115 JB and not under the normal provisions.
According to the High Court, judgment in the case of Gold Coin (supra), did not deal with such a situation. What was held by the Supreme Court in that case was that, even if in the income tax return filed by the assessee losses are shown, penalty could still be imposed in a case where on setting off the concealed income against any loss incurred by the assessee under other head of income or brought forward from earlier years, the total income was reduced to a figure lower than the concealed income or even a minus figure. The Supreme Court was of the opinion that the tax sought to be evaded would mean the tax chargeable, not as if it were the total income. Once this rationale to Explanation 4 given by the Supreme Court is applied in the present case, it would be difficult to sustain the penalty proceedings. Reason was simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it was the deemed income assessed u/s. 115 JB of the Act which had become the basis of assessment as it was the higher of the two. Tax was thus paid on the income assessed u/s. 115 JB of the Act. Hence, when the computation was made u/s. 115 JB of the Act, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all.
The Supreme Court dismissed the Special Leave Petition filed by the revenue against the aforesaid order of the Delhi High Court. CIT v. Nalwa Sons Investment Ltd.
The general scheme of the Act is, that income is to be charged regardless of the exhaustion or diminution in the value of capital. To this principle of taxation, an exception is afforded by section 32, wherein an allowance is provided in respect of depreciation on the value of certain capital assets in computing the profits and gains of business or profession u/s. 28 of the Income-tax Act, 1961 (‘the Act’).
The relevant part of section 32 of the Act is reproduced below for ease in understanding and ready reference in context of controversy to be discussed:
“32(1) In respect of depreciation of –
(i) Buildings, machinery, plant or furniture, being tangible assets;
(ii) Know-how, patents, copyrights…. or any other business or commercial rights of similar nature, being intangible assets, acquired on or after the 1st day of April, 1988, owned, wholly or partly, by the assessee and used for the purpose of the business or profession, the following deductions shall be allowed……”
Section 32 while conferring the benefit on the assessee, lays down two conditions to be satisfied by an assessee .These two conditions are, firstly, that the asset must be owned by the assessee and, secondly, the asset must be used for the purpose of business or profession of the assessee.
Pradip Kapasi Gautam Nayak Ankit Virendra Sudha Shah Chartered Accountants Controversies Therefore, ownership and usage of the asset by the assessee for the purpose of the business and profession are the pre-requisites for grant of depreciation u/s. 32 of the Act.
The controversy revolves around the determination of the event in point of time when the asset under consideration can be said to be ‘used’ for the purpose of business or profession. Conflicting decisions of the Courts are available on the subject wherein Delhi, Rajasthan, Punjab and Haryana, Madras, Calcutta and Gauhati High Courts have supported the view that an asset which is owned and is kept ready for use should be eligible for grant of depreciation even where the same is actually not used during the year [hereinafter referred to as “passive user of asset”] while the Bombay, Karnataka and Gujarat High Courts have held that not only the asset should be owned by the assessee, but the same should be actually used during the year [hereinafter referred to as “actual user of asset”].
Oswal Agro Mills case
Recently, the Delhi High Court in the case of CIT v. Oswal Agro Mills Ltd. and Anr (supra) (‘the company’) had an occasion to deal with the aforesaid issue under consideration, wherein a question arose for grant of depreciation in respect of assets in the unit of the assessee company at Bhopal, which remained closed throughout the year. The AO denied the claim for depreciation in respect of assets of Bhopal unit of the assessee company on the ground that it was closed throughout the year, which was upheld by the CIT(A) on appeal by the assessee. The Delhi Tribunal, however, reversed the findings of the lower authorities, after considering the submissions of the assessee and held as under:
On further appeal by the Revenue before the Delhi High Court, the Court after referring to the conflicting judgements of other High Courts as referred to above, opined in principle that the passive user of the asset was also recognised as user for the purpose of expression ‘asset used for the purpose of business or profession.’ After relying on its own decisions on the subject, the Court held that even when an asset was not used for certain reason in the concerned assessment year but was kept ready for use, in such a case, assessee should not be denied the claim for depreciation.
For the sake of completeness, as to the facts, in the aforesaid case on facts, the assessee failed to prove that the assets were ready for use, since the assets under consideration were not used for number of years. Even then, the assessee was allowed depreciation on the impugned assets by applying the ‘block of assets’ concept which was brought by the Legislature in section 2(11) of the Act w.e.f. 1st April 1988 vide Taxation Laws (Amendment) Act, 1986 where the grant of depreciation, additions and deletion of assets are considered qua the block of assets and not qua the individual assets. In other words, the High Court held that since the impugned assets had lost their individual identities under the block of asset concept, and therefore, it was not possible to disallow depreciation qua the individual assets of Bhopal unit, once such assets entered the block of assets. Further, the Court also observed that the Revenue would not be put to any loss by adopting such method and allowing depreciation, since whenever the assets at Bhopal unit were sold, it would result in short term capital gain, which would be exigible to tax.
Dineshkumar Gulabchand Agrawal’s case
In a short judgement by the Bombay High Court in the case of Dineshkumar Gulabchand Agrawal (‘the assessee’) v. CIT and Anr (supra) with limited facts on record, the Court held that the word ‘used’ in s. 32 denoted actually used and not merely ready to use. The assessee submitted before the Court that, since the vehicle was ready to use for the purpose of business even though not actually used, should be allowed claim of depreciation placing reliance on the earlier Bombay High Court decision in the case of Whittle Anderson Ltd. vs CIT (79 ITR 613). The Bombay High Court distinguished the decision of Whittle Anderson Ltd (supra) on the ground that in the said case, the Court was concerned with the interpretation of the terms ‘use’ or ‘used’ and further referred to an amendment in section 32 of the Act, post the decision of Whittle Anderson Ltd. Inserted for clarifying that the expression ‘used’ meant actually used for the purpose of the business and accordingly upheld the decision of the Mumbai Tribunal in disallowing the claim of depreciation on vehicles kept ready for use.
In a further development, the assessee’s Special Leave Petition (‘SLP’) before the Apex Court reported in 266 ITR (St.) 106 was also dismissed by the Supreme court with the following observations:
– Firstly, the statement of law contained in the order is a declaration of law by Supreme Court within the meaning of Article 141 of Constitution of India; and
– Secondly, other than the declaration of law, whatever is stated in the order is a declaration of law by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings sub-sequent thereto by way of judicial discipline, the Supreme Court being the apex court of the country;
– But this does not amount to saying that the order of Court, Tribunal or authority below has stood merged in the order of Supreme Court rejecting SLP or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.
In light of above relevant findings of the Supreme Court, it may be concluded that even though SLP to Dineshkumar Gulabchand Agrawal case was dismissed, irrespective whether being speaking or non-speaking order, it would not be binding as res judicata and/or binding on other parties or serve as doctrine of merger to subsequent proceedings between the parties thereto.
Observations
Upon perusing the provisions of section 32 of the Act and the legislative history thereof, one finds that the word “used” was in the statute from its inception and there has been no change brought in the said section except by the second proviso to section 32 inserted vide Finance (No. 2) Act, 1991 and further substituted by the Income-tax (Amendment) Act, 1998 to its present form, which reads as under:
“Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purpose of business or profession for a period of less than one hundred-eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty percent of the amount calculated at the percentage prescribed for an asset under clause ……………”
In Dineshkumar Gulabchand Agrawal’s case (supra), the Bombay High Court found that subsequent to the earlier law as laid down in Whittle Anderson Ltd v. CIT(supra), there has been an amendment to section 32 of the Act in context of the word “used” and so earlier decision as relied upon by the assessee had no application. The Bombay High Court as well as the Supreme Court, while ruling, did not provide any reference to the amendment carried out in the expression “used”. It is also not possible for a reader to fathom the above referred amendment out from a plain reading of the said decision.
It may not be incorrect to hold, in the circumstances, that an erroneous presumption was made by the court which error formed the basis of the decision. It may also be correct to presume that neither this error was pointed out to the court by the assessee nor was it pointed out to the apex court. In the alternative, though not expressly referred to by the court, one may gather that the Bombay High Court was probably referring to the expression “put to use” that is referred to in the second proviso to section 32 of the Act. According to the second proviso to section 32 of the Act, if the assets acquired during the previous year are put to use for less than 180 days, then depreciation is restricted to 50% of the depreciation as otherwise available for the whole year.
Surely, the stipulation in the proviso could not have the effect of curtailing the scope of the main provision, unless specifically provided for. Again, had that been the intention, the main provision could have been amended simultaneously, more so where the controversy was fairly known to all concerned. It may be inappropriate to restrict the scope of the term ‘used’ found in the main provision by gathering the meaning thereof from the proviso, which again has been introduced for the limited purpose of restricting the quantum of depreciation and not for the disallowance thereof. Accordingly, even in the context of the proviso, it is not possible to hold that the eligibility of depreciation under the main provision of section 32 is based on actual user of the asset. The courts have consistently upheld the claim of the assessee on being satisfied with readiness of the asset for its use. This view has been unanimously upheld by all the courts including the Bombay high court for the period prior to the amendment and does not require any change on account of the proviso.
The said proviso otherwise is found to be relevant only for the first year of claim of depreciation and has been found to be inapplicable once the identity of the asset is merged with that of the block of assets. Once in the block, it is not possible to seggregate an asset for disallowance, nor it is possible to determine the written down value of an individual asset that is believed to have not been used for the year.
The Act has used several terms surrounding the user. For example; used, wholly used, put to use and partly used. It has also used the term ‘actually’ wherever required, for example in section 43B where actual payment is desired. All these clearly show that the Act would have provided for in clear terms, that the asset should have been actually used, if the intention was to restrict the depreciation to such user only. In the absence of the condition to ‘actually’ use the asset, it is apt that a wider meaning is given to the term ‘used’ as was given by the Bombay high court in the case of CIT v. Vishwanath Bhaskar Sathe, 5 ITR 621.
The expression “put to use” in a general sense may otherwise also mean and include an asset that is ready for use. In many cases, an asset is not actually used during the year, but is kept ready for use. For example, standby plant and machinery, step-ins, spare parts, etc. Further, in many cases like strike, lock out, flood, fire,etc., the assets cannot be actually used, even if desired. In these cases, though the assets are not actually used during the previous year, even then depreciation is not denied considering the intention to use such assets. It is, therefore ,appropriate to hold that the user of asset should signify all such cases where an asset is kept ready for use for the purpose of business or profession.
This view also finds support from the the Circular No. 621 of 1991 (supra), which attempts to match the claim of the depreciation with the income offered for taxation. Once the assessee has derived income from business to which the said asset belongs, the claim for depreciation should not unreasonably be withheld.
The intention of the legislature cannot be gathered from the proviso introduced at a much later date with the limited effect of reducing the quantum of the claim of depreciation and not for denying the same altogether.
An asset is depreciated for several factors and user is just one of them. Therefore, to deny the claim for depreciation simply for non user is otherwise not very appealing. The position at the most can be held to be debatable and where it is debatable, the view beneficial to the assessee should be adopted especially in interpreting the incentive provisions, like, depreciation.
The Supreme Court in the case of Kunhayammed & Ors. Vs State of Kerala & Anr. (245 ITR 360) while considering the jurisdiction of High Court in cases where a SLP on the same issue is dismissed by the Supreme court, observed as under:
– Firstly, the statement of law contained in the order is a declaration of law by Supreme Court within the meaning of Article 141 of Constitution of India; and
– Secondly, other than the declaration of law, whatever is stated in the order is a declaration of law by the Supreme
Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the apex court of the country;
– But this does not amount to saying that the order of Court, Tribunal or authority below has stood merged in the order of Supreme Court rejecting SLP or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.
Once an asset entered in to the block of assets, in view of the findings of the Delhi High Court in Oswal Agro Mills Ltd’s case (supra), the “user” shall be relevant only in the year of entry of asset into the block, because once it enters the block, it is neither possible nor necessary to consider whether each asset in the block has been used during the subsequent years.
“My life is my message” said Gandhiji.
In the days of our freedom struggle, thousands were arrested. A few of them asked for pardon and got out from jails. There were rumours about terrible tortures being inflicted on our freedom fighters. I had heard a rumour about Dr. Usha Mehta who was caught operating a secret radio station. Dr. Usha Mehta addressed our BCA Society Members, when she talked about this incident. “My mother was a follower of Mahatma Gandhi and was not very highly educated, approached the prison warden, and arranged to send a food parcel to me. In between chapattis, a note was smuggled giving a clear message. “Usha, it is rumoured that you are going to seek pardon of the British Govt. and get released. If ever you do so, never come back to our house again!” – This was the spirit instilled in millions of Indians by Gandhiji. I, Pradeep, have seen many people, who were ordinary persons like you and me who became heroes. They were prepared to sacrifice everything and did sacrifice everything for our country.
Gandhiji’s ability to touch the hearts of people did not end with Gandhiji’s demise. Recently we have the case of Laxman Gole, a young person who had 19 criminal cases pending against him. He changed completely by merely reading Gandhiji’s writings while in jail. He came up clean before the judges and confessed to his crimes. He dedicated himself to spreading Mahatma’s message amongst his fellow prisoners while in jail and later to the outside world. I do not know of any other person who after more than 50 years after his passing away – could influence and change the hearts of men – and change a Walia Robber to a Saint Valmiki.
Some of us know of his work in India, but very little is known about his work in South Africa. Our knowledge is limited to the incident when he was thrown out of the train at Maritzburg Station. Little do we realise that that was the first event, in a struggle which went on for over 10 years! In fact, it was 13 years later, that this resulted into a mass nonviolence resistance against “The Black Act”. We all believe that he gave a legal practice which was quite small and insignificant. I was stunned to read this very recently that he had 30 juniors working under him and the practice in current rupee value was over 1.5 crores annually.
What should we do to remember Mahatma Gandhi? We must remember what Gandhiji said and act accordingly.
Fair value hedges:
A fair value hedge is a
hedge of changes in the fair value of a recognised asset or liability,
an unrecognised firm commitment, or an identified portion of such an
asset, liability or firm commitment, that is attributable to a
particular risk and could affect profit or loss. The following are
examples of fair value hedges: a hedge of interest rate risk associated
with a fixed rate interest-bearing asset or liability (e.g. converting a
fixed rate instrument to a floating rate instrument using an interest
rate swap); a hedge of a firm commitment to purchase an asset or to
incur a liability; or a hedge of interest rate risk on a portfolio basis
(a portfolio fair value hedge).
Accounting for a fair value hedge:
If the fair value hedge is fully effective, the
gain or loss on the hedging instrument would fully offset the gain or
loss on the hedged item attributable to the risk being hedged.
Accordingly, there would be no net impact to the profit or loss account.
The qualifying criteria for hedge accounting remain the same across
types of hedges, i.e. cash flow hedges, fair value hedges or net
investment in foreign operation.
Let us look into fair value hedges in
more detail by way of the following example.
Example 1: Fair Value
Hedges
RV International Limited (RVIL) is a manufacturer with an Indian
Rupees (Rs.) functional currency with trade transactions with several
countries. The company has the maximum number of trade transactions with
companies in the United States of America. RVIL’s reporting dates are
30th September and 31st March.
On 15th July 20X1, RVIL enters into a
contract to sell its manufactured units to a company in the United
States. As per the contract, RVIL is committed to deliver 1,000 units at
a price of INRNaN per unit on 30th June 20X2. The contract contains
several specifications of the units to be delivered and also contains a
penalty clause that states that if RVIL fails to adhere to its time and
quality commitment, as per the specifications of the contracts, it shall
be liable to a penalty of INRNaN million. The invoice is payable on
31st August 20X2. RVIL expects that is shall incur costs of Rs. 67.5
million in manufacturing and packing the units. All such costs are
denominated in its functional currency, Rs.
On the date that RVIL enters
into the contract of sale, its management decides to hedge the
resulting foreign currency risk and enters into a forward contract to
sell INRNaN million against Rs. The terms of the sale transactions and
of the forward contract are as shown in Table 1 and Table 2
RVIL
accordingly adopts a risk management strategy to hedge its firm
commitment denominated in $ as a fair value hedge. The management of the
company designates the spot component of the forward contract as a
hedge of the change in the fair value of the contracted firm commitment
attributable to movements in spot rates. All critical terms of the
hedged item and hedging instruments match, on the date of inception –
15th July 20X1. The hedge is determined to be 100% effective on a
prospective basis considering that all the critical terms match. The
fair value of the forward contract (hedging instrument) is Nil as on the
date of inception. Fair value is calculated as the difference between
the discounted fair value of the forward contract at the forward rate on
inception (18,000,000 * 45.9420 * discount factor at 10.6500% = Rs.
749,959,475) with the discounted fair value of the forward contract on
testing date (18,000,000 *45.9420 * discount factor at 10.6500% = Rs.
749,959,475). On 30th September the fair value shall be Rs. 37,707,866
[(18,000,000 * discount factor at 10.8600 * (48.2040 – 45.9420)]. Hedge
accounting principles also require retrospective effectiveness testing
at each date which is determined to be 100% in this example for each
testing date.
In this example, the designated hedged risk is the spot
component i.e. hedge effectiveness is measured on the basis of changes
in spot component of the forward rates. The change in the fair value of
the derivative attributable to the forward points is excluded from the
hedge relationship. This forward points component does not therefore
give rise to any ineffectiveness. It is recognised in profit or loss as
‘other operating income and expense’. Alternatively, the forward points
can be recognised as ‘interest income and expense’.
Also important to
note is that in a fair value hedge, the full fair value of the hedging
instrument is recognised in the profit and loss account. Hence,
ineffectiveness is not measured separately. The journal entries for the
transaction are as shown in Table 3.
Hence the revenue is recognised, at
a net amount of Rs. 810,000,000, which is equivalent to the value at
the hedged rate i.e. the spot rate on the date of inception (18,000,000 *
45.000). 
Net Investment in a Foreign Operation: Ind-AS 39 does
not override the principles of Ind- AS 21, but it does provide the hedge
accounting model for hedging an entity’s foreign exchange exposure
arising from net investments in foreign operations.
A net investment
hedge is a hedge of the foreign currency exposure, arising from a net
investment in a foreign operation, using a derivative and/or a
non-derivative monetary item as the hedging instrument.
The hedged risk is the foreign currency exposure arising from a net investment in a foreign operation when the net assets of that foreign operation are included in the financial statements. The application of hedge accounting for a net investment in foreign operation is relevant only for the consolidated financial statements of a group of companies.
Accounting for net investment hedges:
Hence, cumulative amounts are recognised in the other comprehensive income – changes on foreign currency translation of the foreign operation and effective portion of the gains or loss on the hedging instrument.
When a net investment in a foreign operation is disposed of, the cumulative amounts recognised previously in other comprehensive income, are re-classified to profit or loss. However, it is necessary for an entity to keep track of the amount recognised in other comprehensive income separately in respect of each foreign operation, in order to identify the amounts to be reclassified to profit or loss on disposal or partial disposal.
Example 2: Hedges of net investment in a foreign operation
On 1st April 20×1, Company P takes a two-year $ 10 million floating rate (Six month LIBOR) loan. Interest payment dates are 30th September and 31st March of the respective years. The loan matures on 31st March 20X3. It is assumed that no transaction costs are incurred relating to the loan issuance.
The management of Company P has decided to hedge its net investment in Company S by designating the $ denominated loan, in order to reduce the volatility in its consolidated balance sheet on account of foreign currency translation of its net investment in Company S. The net investment of Company P is not expected to fall below $ 10 million as company S is a profitable entity and has a profit forecast for future years as approved by the board of directors of Company P. However, on 30th September 20X2, the net investment of Company P in Company S decreases to $ 9.8 million on account of unexpected losses incurred by Company S.
As per hedge effectiveness testing, the hedge is 100% effective upto the time when losses are incurred by Company S which leads to a certain amount of ineffectiveness. Relevant details of the exchange and interest rates are as shown in Table 4 and Table 5 on page 90.
The journal entries for the transaction are as under:
At each period, following the process of consolidation of a foreign subsidiary’s net assets, Company P records a Foreign Currency Translation Reserve (FCTR) which is presented in Column C above. Journal entries relating to the loan are given in Table 6:
1. CORPORATE OVERVIEW
a. Nagarjuna Fertilizers and Chemicals Limited (Erstwhile NFCL) has during the year undertaken restructuring of its businesses. Accordingly, a Composite Scheme of Arrangement and Amalgamation (“Scheme”) was prepared, which was duly consented by the shareholders at the Court Convened Meeting held on 15th April, 2011 and also received the approval of jurisdictional High Courts of Andhra Pradesh at Hyderabad and Bombay at Mumbai. The restructuring envisaged de-merger of the Oil business undertaking to a separate company, Nagarjuna Oil Refinery Limited (“NORL”). The scheme also provide for merger of residual business of Erstwhile NFCL into its wholly owned subsidiary viz., Kakinada Fertilizers Limited (“KFL”) along with the business operation of iKisan Limited (iKisan). The entire scheme is made effective from 30th July, 2011 but operative from 1st April, 2011, being the Appointed Date.
b. Pursuant to the Scheme:
i. Oil Business Undertaking of erstwhile NFCL was demerged into NORL and residual NFCL and iKisan are merged in to KFL.
ii. The Effective Date of the Scheme is 30th July, 2011 but shall be operative from the Appointed Date i.e. 1st April, 2011. The Record Date of determining shareholders eligible to receive shares of KFL and NORL was fixed as 1st September, 2011.
iii. Equity Shares were allotted to the shareholders of erstwhile NFCL and iKisan on 1st October, 2011 and the account of the respective of shares, the existing pre-arrangement issued capital of Rs. 5 lakh stood cancelled.
iv. The name of KFL stands changed to Nagarjuna Fertilizers and Chemicals Limited w.e.f. 19th August, 2011
c. The Financial Statement for the year have been drawn-up incorporating necessary adjustments as envisaged in the Scheme and in compliance with purchase method of accounting under AS 14 (Accounting for Amalgamations). In accordance with the Scheme:
i. the assets and liabilities of residual business of erstwhile NFCL and iKisan have been recorded in the books of KFL at Fair Values as on 1st April, 2011
ii. the fair values were determined by the Board of Directors based on the report obtained from a reputed firm of valuers.
iii. the difference between the fair value of equity shares and face value of equity shares is considered as Securities Premium.
iv. the difference between the value of net assets transferred to KFL over the fair value of Equity shares, and Preference shares allotted is credited to Capital Reserve Account. shareholders were credited in electronic mode or share certificates issued, as the case may be. Consequent to the allotment
v. on and from effective date, the Authorised shares capital of NFCL stands increased to Rs.
801,00,00,000/- comprising of 621,00,00,000 equity shares of Rs. 1/- each and 2,00,00,000 preference shares of Rs. 90/- each.
vi. 59,80,65,003 equity shares of Rs. 1/- each aggregating to Rs. 59,80,65,003/- have been allotted to the shareholders of erstwhile NFCL and iKisan on 1st October, 2011 without payment being received in cash.
d. Amalgamation expenses incurred Rs. 500.16 lakh have been adjusted to capital reserve.
e. The Bombay Stock Exchange vide letter dated 14th December, 2011 approved the application of the company for listing of the equity shares and the National Stock Exchange vide letter dated 13th January, 2012 accorded in-principle approval for listing of the equity shares subject to relaxation by Securities and Exchange Board of India from the fulfilment of requirement under Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957.
Researchers at Rensselaer Polytechnic Institute showed that exposure to light from computer tablets significantly lowered levels of the hormone melatonin, which regulates our internal clocks and plays a role in the sleep cycle. In the study, published in the journal Applied Ergonomics, the researchers had volunteers read, play games and watch movies on an iPad, iPad 2 or PC tablet for various amounts of time while measuring the amount of light their eyes received.
They found that two hours of exposure to a bright tablet screen at night reduced melatonin levels by about 22%.
The petitioner was an STPI unit engaged in development and export of software and a 100% export oriented unit. The Assistant Commissioner rejected the refund claim in absence of registration certificate and requisite documents as well as the reason of time bar and the order was upheld by the Commissioner. The Tribunal observed that the petitioner was entitled to the refund of CENVAT credit with respect to input services even when export of softwares was not liable to service tax and that limitation u/s. 11B of the Central Excise Act did not apply in this case. However, it upheld that the CENVAT Credit could be claimed only when the assessee was registered.
Held:
Bar of limitation was not the ground for rejection of refund claim of accumulated unutilised CENVAT Credit by an export of services. Further, there is no express provision providing restriction on availment of CENVAT Credit in case of unregistered assessees and therefore, it was held that registration is not a pre-requisite for claiming CENVAT Credit. The matter was remanded for verification of invoice/s/bill/s/challan/s, service tax payment etc.
Lord, help me live from day to day
In such a self-forgetful way,
That even when I kneel to pray,
My prayer shall be for “Others”,
P.C.
Your Guru desires that the above message may reach
all tax practitioners of Maharashtra. Please therefore pass on
the above message to your known Tax Practitioners.
From your Guru
Re: Make Section 206AA inapplicable to Non Residents
After 8 years of inaction/ drift, a number of mega scams and countless reported incidents of corruption at high echelons of Indian polity, the Government has now woken up and has initiated steps to stimulate economic growth, encourage FDI and remove misapprehensions from minds of foreign investors caused by the policy paralysis and various retrospective amendments by the Finance Act, 2012.
At the ground level, one provision which greatly inconveniences and irks Non-Residents is Section 206AA inserted with effect from 01-04-2010, requiring every person to obtain and furnish his PAN Number to the payers or otherwise, be ready to suffer TDS @ 20% irrespective of the actual rate of TDS applicable to the transaction either under the Tax Treaty or under various provisions of Incometax Act applicable to Non Residents. One fails to understand the rationale of making this provision applicable to Non-Residents.
The Non-Residents, particularly those who do not have frequent transactions with India, are very hesitant to obtain PAN. Further, the procedure for obtaining PAN is very cumbersome and time consuming. In most transactions, the Non-Resident wants payment net of tax and, therefore, the burden of paying the tax @ 20% falls on the Indian Resident and it works out to 25% due to the application of Grossing up provision u/s 195A.
The Government has all the Information online about the Non-Resident payees, as the payer has to upload full details about all remittances in Form 15CA before making any remittance overseas. If the resident payer makes any mistake in deducting TDS from any remittance to a Non-Resident, the payment is liable to be disallowed u/s 40(a)(i) besides other consequences by way of recovery of tax short deducted, interest and penalty.
How many advanced countries have such harsh provisions? The FM should consider consequences for Indian MNCs and others, if India’s trading partners were to introduce provisions similar to Section 206AA in their Tax Laws.
If the Finance Minister really wants to create a business / investor / tax payer friendly environment in India, he should make Section 206AA inapplicable to Non-Residents. Such an action would remove a massive irritant and also reduce the cost of doing business with Non Residents.
Yours sincerely,
Tarun Singhal.
