BCAJ | Bombay Chartered Accountant Journal

Income-tax Act, 1961 — S. 251, S. 254. While the powers of CIT(A) are co-terminus with the powers of Assessing Officer, AO has no power to admit fresh claim otherwise than by way of revised return but Appellate Authorities including CIT(A) and ITAT have p

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60 (2010) TIOL 377 ITAT (Mum.)

Asian Paints Ltd. v. Addl. CIT

A.Y. : 2003-04. Dated : 23-3-2009

Income-tax Act, 1961 — S. 251, S. 254. While the powers of
CIT(A) are co-terminus with the powers of Assessing Officer, AO has no power to
admit fresh claim otherwise than by way of revised return but Appellate
Authorities including CIT(A) and ITAT have power to admit such claim. The Apex
Court in the case of Goetze (India) Ltd. has itself clarified that their finding
does not impinge on the power of ITAT u/s.254 of the Act, CIT(A) has similar
power u/s.251(1)(c).

Facts :

The assessee in its return of income did not make any claim
of Rs.98.36 lakhs on account of prior period adjustments. In the course of
assessment proceedings, it pressed such claim. The Assessing Officer (AO) did
not entertain the claim.

Aggrieved the assessee preferred an appeal to the CIT(A) who
relying on the decision of the Supreme Court in Goetze (India) Ltd. (284 ITR
323) (SC) held that the claim for deduction can be made only in the return of
income filed and that a claim which is not made in the return of income cannot
be subsequently made. He upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal having considered the observations of the
Supreme Court in the case of Goetze (India) Ltd. (supra) and also the powers of
the first Appellate Authority as examined by the Supreme Court in CIT v.
Nirbheram Deluram, (224 ITR 610) (SC) held as under :

(1) The Apex Court clarified in Goetze (India) Ltd.
(supra) itself that their finding does not impinge on the power of the
Income-tax Appellate Tribunal u/s.254 of the Act. We find that the CIT(A)
has also similar power u/s.251(1)(c) of the Act.

(2) The AO has no power to admit fresh claim otherwise
than revised return but Appellate Authorities including the CIT(A) and ITAT
have power to admit such claim.

The Tribunal held that without prejudice to its above finding
the claim of the assessee is in accordance with the judgment of the Apex Court
in the case of Goetze (India) Ltd. The Tribunal in the interest of natural
justice and keeping in view the ratio laid down by the Apex Court in the case of
Goetze (India) Ltd. remitted the matter back to the file of the CIT(A) with a
direction to decide the issue on merit in accordance with law and after
providing reasonable opportunity of hearing to both the sides.

Compiler’s Note :

The above was one of the grounds before the Tribunal. Other
minor issues have not been covered above.

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Nirav Shah

S. 115JB — Long-term capital gain which is exempt u/s.47(iv) cannot be excluded from the book profits for the purpose of S. 115JB.

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59 (2010) 41 DTR (Hyd.) (SB) (Trib.) 449

Rain Commodities Ltd. v. DCIT

A.Y. : 2004-05. Dated : 2-7-2010

S. 115JB — Long-term capital gain which is exempt u/s.47(iv)
cannot be excluded from the book profits for the purpose of S. 115JB.

Facts :

The assessee credited an amount of Rs.149.77 crores as profit
on transfer of assets to its wholly-owned subsidiary to its profit & loss
account. It claimed the exemption u/s.47(iv) of the Act. While working out the
book profits for the purpose of S. 115JB, the assessee reduced this profit and
claimed that it cannot form part of the book profits. A Special Bench was
constituted to adjudicate the matter.

Held :

The AO has power to alter the net profits as shown in the P &
L A/c only in two cases; (1) if it is discovered that P & L A/c is not drawn up
in accordance with Part II and Part III of Schedule VI of the Companies Act, (2)
if accounting policies, accounting standards are not adopted for preparing such
accounts and methods, rates of depreciation which have been incorrectly adopted
for preparation of P & L A/c laid before the annual general meeting.

Part II & Part III of Schedule VI of the Companies Act
require the P & L A/c of a company to disclose every material feature including
credits or receipts and debits or expenses in respect of non-recurring
transactions or transactions of an exceptional nature. As held by the Bombay
High Court in the case of CIT v. Veekaylal Investment Co. (P) Ltd., 249 ITR 597,
the capital gain should be included for the purposes of computing book profits
under MAT provisions.

It is an undisputed fact that the long-term capital gain
earned by the assessee is included in the net profit determined as per P & L A/c
prepared as per Part II and Part III of Schedule VI of the Companies Act. It is
not the case of the assessee that the capital gain earned by the assessee was
not included in the net profit determined as per P & L A/c of the assessee
prepared under the Companies Act. The taxability of capital gain is relevant
only for the purpose of computation of income under the normal provisions of the
Income-tax Act, and has nothing to do with the preparation of P & L A/c in
accordance with the provisions of Part II and Part III of Schedule VI of the
Companies Act. Under these circumstances, as long as long-term capital gain is
part of profit included in the P & L A/c prepared in accordance with the
provisions contained in Parts II and III of Schedule VI of the Companies Act, it
cannot be excluded from the net profit unless so provided under Explanation to
S. 115JB for the purpose of computing book profit. In the absence of any
provision for exclusion of capital gains in the computation of book profit under
the above provision, the assessee is not entitled to the exclusion claimed. The
decision of the Calcutta Special Bench of the Tribunal in the case of Sutlej
Cotton Mills Ltd. v. ACIT, 45 ITD 22 held to be reversed by the decision of the
Bombay High Court in the case of Veekaylal Investment Co. (P) Ltd. (supra).

The Ss.(5) of S. 115JB provides that “save as otherwise
provided in this Section, all other provisions of this Act shall apply to every
assessee, being a company, mentioned in this Section”. The contention of the
assessee that since all other provisions of this Act shall also apply, it is
entitled to reduce the long-term capital gain exempted u/s.47(iv) is not
accepted. All other provisions of the Act shall apply, but subject to the
provisions otherwise provided in S. 115JB. The provision for computing book
profit by increasing or reducing the net profit as shown in the P & L A/c
prepared in accordance with the provisions of Part II and Part III of Schedule
VI of the Companies Act are specifically provided in S. 115J or S. 115JA or S.
115JB itself, as the case may be, and consequently all other provisions of the
Act providing the manner of computation of total income under normal provisions
of the Act cannot be applied while computing book profit u/s.115J or u/s.115JA
or u/s.115JB, as the case may be. The decision of ITO v. Frigsales (India) Ltd.,
4 SOT 376 (Mum.) is overruled.

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Nirav Shah

Capital gains vis-à-vis business income — Transactions in shares.

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58 (2010) 41 DTR (Mumbai) (Trib.) 426

Management Structure & Systems (P) Ltd. v. ITO

A.Y. : 2004-05. Dated : 30-4-2010

Capital gains vis-à-vis business income — Transactions in
shares.

Facts :

The assessee company is engaged in the management
consultancy, investment advisory and equity research services and also dealing
in investments. It filed return of income declaring profits of Rs.1.03 crores
earned by it on sale of shares as long-term and short-term capital gains. The AO
noted that the assessee was regularly dealing in the shares throughout the year
and held that the profit/gain earned from dealing in the shares is a business
income. Upon further appeal, the CIT(A) also confirmed the assessment order on
this issue.

Held :

The balance sheet filed by the assessee and as per the books
of account, the assessee has treated the entire investment in the shares as an
investment only and not as a stock-in-trade. Another important aspect to be
considered here is that the assessee is not a share-broker, nor is he having a
registration with any stock exchange. Moreover, some scrips are held for more
than five years and it is not the case of the AO that there were any derivative
transactions by the assessee, nor is it a case of the AO that there were
transactions without delivery. In the present case, both the authorities have
not disputed that the transactions are complete with delivery. The assessee has
not borrowed any money for investing in shares and used his own surplus funds
and these facts have not been disputed by the AO. In the case of the assessee,
in the preceding years, the assessee is consistently declaring the gain/profit
on the sale of the shares under the head ‘capital gains’ either
long-term or short-term and the same has been accepted by the AO. It is true
that the rule of res judicata is not applicable to the income-tax proceedings,
but at the same time, it is also well-settled principle that if there is no
change in the facts, then there should be consistency in the approach of the
Revenue authorities while deciding the tax liability of the assessee. Another
aspect to be considered here is that the assessee has received substantial
dividend and that is also disclosed. After considering the totality of the
facts, it was held that the transactions of sale and purchase of the shares by
the assessee cannot be treated in the line of trading in the shares, nor can it
be treated as an adventure in the nature of the trade.

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Nirav Shah

S. 194J — Various charges like VSAT charges, lease line charges, BOLT charges, Demat charges, etc. paid to stock exchange by member — Not in the nature of fees for technical services.

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57 (2010) 41 DTR (Mumbai) (Trib.) 296

DCIT v. Angel Broking Ltd.

A.Y. : 2005-06. Dated : 9-12-2009

S. 194J — Various charges like VSAT charges, lease line
charges, BOLT charges, Demat charges, etc. paid to stock exchange by member —
Not in the nature of fees for technical services.

Facts :

As a member of BSE and NSE, the assessee company had paid
various charges like VSAT charges, lease line charges, BOLT charges, Demat
charges, etc. to the stock exchange. According to the AO, the aforesaid sum paid
by the assessee to the stock exchange was a fee for technical services and,
therefore, the assessee ought to have deducted tax at source on such payment.
Since, the assessee had not deducted tax at source on such payment, the
aforesaid sum claimed as deduction was disallowed by the AO.

Held :

Following the decision of Skycell Communications Ltd. v. DCIT,
251 ITR 53 (Mad.) it was held that stock exchanges do not provide any technical
services by installing VSAT network. It is the facility provided to its members
and hence such payment cannot be said to be fees for any technical services
rendered. The AO in coming to the conclusion that the payment was for fees for
technical services has relied on the fact that the screen-based trading is a
sophisticated method of trading. This by itself will not be sufficient to hold
that technical services are rendered. The AO has held that services are not
available to the public at large but only to registered members, again this by
itself will not make the services in question as technical services. Another
reason given by the AO is the speed at which transactions were completed. This
again is not a relevant criteria for holding that the services rendered were
technical services. All the above features present in screen-based trading saves
time. This is the result of improved technology. That does not mean that stock
exchange is providing technical services. Stock exchanges are not the owner of
this technology to provide them for a fee to prospective users. They are
themselves consumers of the technology. Therefore the payment in question is not
fee for technical services.

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Nirav Shah

Notification No. 531. Legal : 710/(m) dated 23rd July, 2010

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Part D : COMPANY LAW

Changes relating to Company
Law for the period 15th July, 2010 to 15th August, 2010

106 Notification No. 531.
Legal : 710/(m) dated 23rd July, 2010

The Company Secretaries (Amendment)
Regulations, 2010 has substituted Regulations 6, 11, 13, 14, 98, 99, 114,115,
118, 150, 152, 154, 155 & 161; amendments have been made from Regulations 15-19,
101 & 117; Regulations 15A, 101A, 154A, 168A and 168B have been added;
Regulations 56 to 87W, 106 and 116 have been omitted.

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Nirav Shah

New versions

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Part D : COMPANY LAW

Changes relating to Company
Law for the period 15th July, 2010 to 15th August, 2010

105 New versions

New versions of Form 1, Form
1AA, Form 4, Form 4C, Form 15, Form 20A, Form 20B, Form 22, Form 22B, Form 23,
Form 23AA, Form 25C, Form 44, Form 49, Form 52, Form 61, Form DD-B, Form I- Cost
Audit Report and Form 67 are available on the portal — www.mca.gov.in —
effective 1st August, 2010.

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Nirav Shah

Government amends public shareholding requirement rules.

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Part D : COMPANY LAW

Changes relating to Company
Law for the period 15th July, 2010 to 15th August, 2010

104 Government amends public
shareholding requirement rules.

Government has issued a
Notification amending the Securities Contracts (Regulation) (Amendment) Rules,
2010 notified on 4th June 2010. This Notification allows public shareholding of
10% (as against 25% earlier) to public sector enterprises. It also provides more
flexibility to all companies in attaining the public shareholding levels.

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Nirav Shah

Notification No. 1510/CR-90/Taxation-1

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Part B : INDIRECT TAXES

MVAT UPDATE

MVAT Notification

103 Notification No.
1510/CR-90/Taxation-1

Every registered dealer, liable to file
quarterly return, shall make payment electronically under the MVAT Act, 2002
w.e.f. 1st October, 2010.

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Nirav Shah

Clarification regarding certain issues arising out of budgetary changes — D.O. Letter D.O.F. No. 334/03/2010-TRU, dated 1-7-2010.

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Part B : INDIRECT TAXES

SERVICE TAX UPDATE

Notifications :

102 Clarification regarding
certain issues arising out of budgetary changes — D.O. Letter D.O.F. No.
334/03/2010-TRU, dated 1-7-2010.

By this letter the Research
Unit, Department of Revenue under the Ministry of Finance has issued the
following clarifications to resolve certain issues arising out of budgetary
changes :

(1) The Finance Act, 2010
has added eight new services to the list of taxable services and modified
scope of nine existing services. These changes become effective from 1-7-2010
being the appointed date notified by Notification No. 24/2010-Service Tax,
dated 22nd June 2010. It has been decided to specifically exempt service tax
on the partial or full amount of consideration received by the service
provider before the appointed date which pertains to services provided after
the appointed date.

(2) In case of domestic
air journey, service tax will be leviable @ 10% of the gross value of the
ticket or Rs.100 per journey, whichever is less. In case of international air
journey undertaken in economy class, service tax will be leviable @ 10% of the
gross value of the ticket or Rs.500 per journey, whichever is less. The
aforesaid rates are subject to non-availment of CENVAT credit. And for the
purpose of gross value of the ticket, all the charges except statutory levies
shall be considered.

(3) It is clarified that
when ticket covers more than one domestic journey/flight/sector (say,
Mumbai-Delhi-Mumbai) or in case of
round-trip journey ticket, tax would be separately chargeable for each
journey/flight/sector since the taxability is on embarkation in India for
domestic journey.

(4) Tickets involving
multiple journies/flights with one of the sectors involving embarkation or
disembarkation at North-Eastern States/Bagdogra, the journey/flight that
involves embarkation or disembarkation at North-Eastern States/Bagdogra would
alone be covered under exemption from service tax under Notification No.
27/2010-ST, dated 22nd June, 2010.

(5) The scheme of tax on
passengers embarking in India for an international journey in higher class
remains unchanged.

(6) In respect
of aircraft operations services, the airlines or the agent may not issue a
separate invoice to the passenger, but the ticket in any form showing
specified particulars would be deemed to be the invoice/bill/challan for the
purpose of Rule 4A of the Service Tax Rules, 1994.

(7) With intent to ease
the classification disputes, the definitions of port, other port and airport
services were amended to comprehensively cover under their ambit, all services
provided within an airport, or a port or other port whether or not they are
otherwise classifiable as distinct taxable services. But some apprehensions
have been raised that these changes may have certain unintended effects with
reference to exemptions, abatements, etc. To address these issues, various
measures as enlisted at (a) to (g) in this letter have been taken by way of
promulgating post-budget Notifications.

(8) The definition of
existing taxable service, namely, ‘Sponsorship Service’ is amended to remove
exclusion available for sponsorship pertaining to sports events organised by
private organisations or business entities. However, exemption is provided for
sponsorship service with reference to certain sports championships or
tournaments, such as national tournament.

(9) The Finance Act, 2010
has, in respect of commercial & residential complex construction services,
inter alia introduced concept ‘completion certificate’ to be issued by
‘competent authority’. As the practice regarding issuance of completion
certificates varies from State to State, the scope of the phrase ‘competent
authority’ to issue completion certificate has been widened by including
therein architect, chartered engineer and local licensed surveyor.

(10) Abatement of 75% of
the gross value of construction of industrial or commercial complex or
residential complex is available where the gross value includes cost of land
and 67% of the gross value where the gross value does not include cost of the
land.

(11) Two flagship schemes
of the Government of India, namely, Jawaharlal Nehru National Urban Renewal
Mission (JNNURM) and Rajiv Awaas Yojana are kept outside the ambit of the
service tax under construction of residential complex service.

(12) Service tax on
transport of goods by railways though leviable is not yet operational and this
levy will now take effect from 1st January, 2011.

(13) Taxable services
provided by distribution licensee or a distribution franchisee authorised to
distribute power under the Electricity Act, 2003 for distribution of
electricity is exempt from levy of service tax.

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Nirav Shah

ExtractNow (Size 1MB)

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81 ExtractNow (Size 1MB)

This utility allows you to extract multiple
archives quickly and easily. Supports ZIP, RAR, ISO, BIN, IMG, IMA, IMZ, 7Z,
ACE, JAR, GZ, LZH, LHA, TAR, SIT archive formats. Extract files into current
directory, named folder, or favourite folder of choice. Integrates with Windows
Explorer via special context menu items
http://www.extractnow.com/

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Nirav Shah

ExplorerXP (Size 410 KB)

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80 ExplorerXP (Size 410 KB)

This is a fast, small, compact file manager for
Windows 2000/XP. Unlike the regular Windows Explorer, it displays the total size
of each folder and allows you to browse multiple folders from a tabbed
interface. It also supports multi-rename, split and merge, etc. You can download
it from http://www.explorerxp.com/

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Nirav Shah

Gadwin PrintScreen (Size 2.75 MB)

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79 Gadwin PrintScreen (Size 2.75 MB)

This captures the contents of the screen with a single
keystroke. The captured screen can then be sent to the printer, or saved to disk
as a file in six different graphics file formats (BMP, JPEG, GIF, PNG, TIFF,
TGA). Gadwin PrintScreen can capture the entire Windows screen, the active
window, or a specified area, when the hot key is pressed. The hot key defaults
to the PrintScreen key but users can define other keys too to initiate a
capture. Gadwin PrintScreen allows you to e-mail the captured images to
recipients of your choice.

http://www.gadwin.com/download/ps_setup.exe

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Nirav Shah

Mozilla Firefox 3.0 (size 7.14 MB)

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78 Mozilla Firefox 3.0 (size 7.14 MB)

A small, fast and easy to use browser, it includes tabbed
browsing and pop-up blocker. The new version 3 has improved performance, add-ons
manager, download manager, smart location bar, better password manager and
malware protection. Please look up

http://majorgeeks.com/download.php?det=2248

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Nirav Shah

Merriam-Webster Concise Dictionary

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77 Merriam-Webster Concise Dictionary

(Size 1.59MB)

This contains more than 40,000 entries, clear and
concise definitions, written pronunciations, and variant spellings. The iFinger
engine under the hood works both online and offline, checking spelling
automatically or allowing you to run manual text searches for specific queries.
Internet required while installing this software. Download from http://www.download.com/Merriam-Webster-s-Concise-ictionary/3000-2279_4-10059666.html

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Nirav Shah

Here is some freeware software that could be of help during everyday computer usage.

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76 Here is some freeware software that could be of
help during everyday computer usage.

Dictionary Software (the first two)

WordWeb 5.5 (Size 7.44MB)

This is a one-click English thesaurus and
dictionary for Windows that can look up words from almost any program. It works
off-line, but can also look up words in web references such as the Wikipedia
encyclopedia. Features of the free version include : Definitions and synonyms,
Proper nouns, Related words, Pronunciations, 1,50,000 root words, 1,20,000
synonym sets, Fixed web reference tabs, etc. It can be downloaded from
http://wordweb.info/

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Nirav Shah

Issues for professionals.

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75 Issues for professionals.

Top 5 issues for practice members :

retaining quality clients

balancing work and personal issues

attracting the right clients

staying on top of professional development requirements

balancing the volume of work.

Top 5 issues for business members :

managing work/life balance

health/stress

developing management skills

keeping up with the volume of work

developing leadership skills.

(Source :
Internet Newswires)

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Nirav Shah

Inflation to touch 17% by September, says Barclays.

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74 Inflation to touch 17% by September, says
Barclays.

Global Investment banker Barclays Capital has
projected that inflation may surge to 17% by September on back of another round
of hike in fuel prices in the same month. ‘We believe WPI inflation will remain
in double-digit territory until May 2009. We expect WPI inflation of 17% by
September 2008,’ the report said. For the week ended June 28, wholesale
prices-based inflation touched a new 13-year high of 11.89% — much higher than
the Reserve Bank’s tolerance limit of 5.5% for the current fiscal. According to
the report, the government is likely to hike fuel prices by 10-20% again as
early as September to limit fiscal risks. Rise in the price of the Indian crude
oil basket to $ 145-150 per barrel from the current $ 132 per barrel could be
the trigger for another round of increase in fuel prices, it said.

(Source : The Economic Times, 14-7-2008)

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Nirav Shah

UK urges return to wartime frugality.

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73 UK urges return to wartime
frugality.

Waste not, want not. Evoking an era of World War II
austerity, British families are being urged to cut food waste and use leftovers
in a nationwide effort to fight sharply rising global food prices.

With food and energy prices soaring around the
world, a constant supply of high-quality, affordable food is no longer
guaranteed, the officials are warning Britons.

Tim Lang, professor of food policy at London’s City
University, said junk food will remain readily available, but good-quality,
nutritious produce could become scarce worldwide. The government says the public
might find one solution by looking into their garbage pail. Britons throw out
4.5 million tonnes of edible food a year, or about $ 830 worth per home —
wastefulness the government says contributes substantially to rising prices.

(Source : The Times of India, 13-7-2008)

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Nirav Shah

AICPA Ph.D. programme.

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72 AICPA Ph.D. programme.

The CPA profession has created an Accounting
Doctoral Scholars programme to help reverse a shortage of Ph.D. accounting
faculty in U.S. colleges and universities. The new programme is being
spearheaded by the largest accounting firms and will be administered by the
American Institute of Certified Public Accountants Foundation.

To date, more than 70 of the country’s biggest
firms, along with several state CPA societies, have committed a total of $ 15
million to the program. The firms will recruit top employees for the program and
encourage them to become accounting professors in the audit and tax disciplines.

(Source : Internet Newswires, 30-7-2008)

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Nirav Shah

CVC recovers Rs.19.62 crore in corruption cases.

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71 CVC recovers Rs.19.62 crore in corruption
cases.

The Central Vigilance Commission (CVC) has
recovered Rs.19.62 crore after investigating corruption cases in government
departments and public sector undertakings during the first-half of the year.

While the Commission advised major penalty
proceedings in 651 cases, it advised imposition of major penalties in 350 cases
during the period.

The central watchdog, which has been mandated by
the Supreme Court to monitor the issue of granting sanction for prosecution of
officials in various government organisations, advised prosecution
in 84 cases and the requisite orders were sanctioned in 49 cases.

(Source : Internet Newswire, July 2008)

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Nirav Shah

Current oil prices abnormal : OPEC Chief.

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70 Current oil prices abnormal :
OPEC Chief.

Crude oil prices above $ 120 a barrel are
‘abnormal’ and could fall to around $ 78 under the right circumstances, said
OPEC President Chakib Khelil on Tuesday.

(Source : Mumbai Mirror, 30-7-2008)

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Nirav Shah

Stalin made a saint ? Holy Christ !

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69 Stalin made a saint ? Holy
Christ !

The Orthodox Church in Russia is under growing
pressure to make former Soviet dictator Josef Stalin a saint if he wins a
popularity poll to nominate the greatest Russian in history.

The Soviet leader, responsible for the deaths of 15
million people during his 31-year dictatorial rule, is in second place in online
voting that seeks to nominate the greatest Russian historical figure. Stalin has
undergone a remarkable renaissance in recent years with opinion polls naming him
Russia’s greatest post-revolution leader after Vladimir Putin — PTI

(Source : The Times of India, 24-7-2008)

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Nirav Shah

$ diplomacy : China using investments to build political influence on world stage

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82
$ diplomacy : China using investments to build political influence on world
stage

Flush with more than $2
trillion in foreign exchange reserves, China has directed its state firms to
scour the globe for opportunities. As it does so, China is playing by its own
rules, giving its firms an edge over US and other multinational companies bound
by internationally mandated restrictions intended to promote fair competition.

In addition, Brazil and
other developing countries, which once saw China as an ally, are now realising
that Chinese companies are competing on their own turf for resources and market
share. And some analysts say the US has been slow to perceive that China is
using investment to build political heft.

Chinese firms have bought
stakes in Brazil’s electrical grid; they are building steel mills, car plants in
that country. A simple formula, or deviously foresighted? Time will tell — and
soon.

(Source: Hindustan Times dated 27th July, 2010)

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Nirav Shah

Interpretation issue : Excluded services under commercial construction services

1. Preamble :

Recently on July 27, 2009, the Government issued Notification No. 24/2009-ST, whereby services provided in relation to management, maintenance or repairs of roads is notified as exempt from the whole of the levy of service tax. This prima facie appears to have been done to put an end to the controversy over the issue of taxability of these services. However, the question arises here is, can the Government exempt a service which was always outside the purview of the levy ? The issue of the Notification does not end the controversy over taxability of the services for the period prior to July 27, 2009, as it would mean that the services covered under the Notification were taxable till such date. Whether the services at least of repairs of roads were excluded from the purview of service tax or otherwise is discussed and analysed below.

2. Background :

2.1 Construction service was introduced w.e.f. September 10, 2004 in clause (30a) of S. 65 of the Finance Act, 1994 (The Act). The definition inter alia excluded construction of road, dams, tunnels, etc. CBEC vide its Circular F.No.B2/8/2004-TRU dated 10-9-2004 explained the scope of this service. Subsequently, with effect from 16-6-2005 this service was renamed as ‘commercial or industrial construction service’ under clause (25b) of S. 65 and the erstwhile clause (30a) defined taxable service called ‘construction of complex’. The new clause (25b) also excluded services provided in respect of roads, tunnels and dams along with construction services in respect of airports, railways, transport terminals and bridges. Further, when execution of works contract service was introduced vide clause (zzzza) in S. 65(105) of the Act from 1-6-2007, this category also excluded works contract in respect of the same items. The relevant definitions are reproduced here :

S. 65(25b) :

‘Commercial or industrial construction service’ means —

(a) construction of a new building or a civil structure or a part thereof; or

(b)

(c)

(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,

which is —

(i) used, or to be used, primarily for; or

(ii) occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams”. (emphasis supplied)

S. 65(105)(zzzza) :

‘Taxable service’ means any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation — For the purposes of this sub-clause, ‘works contract’ means a contract wherein, —

(i)

(ii) such contract is for the purposes of carrying out, —

(a)

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) (emphasis supplied)

The above definitions clearly indicate inclusion of repair, alteration, renovation or restoration or similar services in relation to commercial building or civil structure, pipeline or conduit in sub-clause (d) alongside construction services in sub-clause (a) and (ii)(b), respectively in the above definitions.

2.2 Under another category of service viz. ‘management, maintenance or repair’ in S. 65(64) of the Act, maintenance or repair of properties whether immovable or not has been made taxable w.e.f. May 01, 2006. The definition is reproduced here :

“65(64) ‘management, maintenance or repair’ means any service provided by :

(i)

(ii)

(a) ;

(b) maintenance or repair of properties, whether immovable or not; or

(c)

Explanation — For the removal of doubts, it is hereby declared that for the purposes of this clause, —

(a)

(b) ‘properties’ includes information technology software”. (emphasis supplied)

2.3 Thus, there has been an overlap of repair services in relation to immovable properties under both the above taxing entries. This gave rise to dispute with the authorities for the assessees particularly in relation to (b) different construction services in relation to road and other areas (a) repairs or restoration services in relation to roads.

3. Repair services in respect of roads :

3.1 Different kinds of services are provided by construction service providers in cases of both public and private roads. For instance, widening of existing roads, resurfacing, relaying, concretisation, etc. Since commercial or industrial construction service as well as execution of works contract service clearly include services in relation to repairs, alteration, renovation or restoration of any building or civil structure and exclude such services in relation to roads, the issue arose as to whether repair, renovation, etc. of road is classifiable under commercial or industrial construction service, or works contract service, as the case may be, on one side or under management, maintenance or repair service under the other. Service tax authorities at various places adopted divergent practices. On referring the matter to the Board by the Department, Circular No. 110/4/2009-ST, dated 23-2-2009 was issued providing the following clarification :

“2. Commercial or industrial construction service [S.65(105) (zzq) specifically excludes construction or repairs of roads. However, management, maintenance or repair provided under a contract or an agreement in relation to properties, whether immovable or not, is leviable to service tax u/s. 65(105) (zzg) of the Finance Act, 1994. There is no specific exemption under this service for maintenance or repair of roads, etc. Reading the definitions of these two taxable services in tandem leads to the conclusion that while construction of road is not a taxable service, management, maintenance or repair of roads are in the nature of taxable services, attracting service tax.

The next issue requiring resolution is the types of activities that can be called as ‘construction of road’ as against the activities which should fall under the category of maintenance or repair of roads. In this regard the technical literature on the subject indicate that the activities can be categorised as follows, :

A) Maintenance or repair activities:

I. Resurfacing

II. Renovation

III. Strengthening

IV. Relaying

V. Filling of potholes

B) Construction activities:

I. Laying of a new road

II. Widening of narrow road to broader road (such as conversion of a two-lane road to a four-lane road)

III. Changing road surface (gravelled road to metalled road/metalled road to black-topped/blacktopped to concrete, etc.)

4. The cases may be decided/revenue should be protected based on the above classification. Suitable trade and public notices may be issued for information of the trade and field formations.”

3.2 The above Circular appears to be not in harmony with the rules for classification of services required to be followed when a taxable service is prima facie classifiable under two or more taxing entries. S. 65A of the Act contains these rules. According to the first rule, specific description is always preferred over general description. Accordingly, if roads are specifically excluded from commercial or industrial construction service, as well as execution of works contract service and as both these categories specifically include repairs, renovation, restoration, etc. of buildings or civil structures as construction services, the sub-clause in management, maintenance or repair service of maintenance or repair of immovable ‘properties’ appears generic in nature for services in relation to roads. The Tribunal in the case of Dr. Lal Path Lab. Pvt. Ltd. v. CCE, Ludhiana 2006 (4) STR 527 (Tri.-Del.) held “What is specifically kept out of a levy by the Legislature cannot be subjected to tax by the Revenue administration under another entry”. “In the present case, Revenue is seeking to discard the specific entry and to bring the appellant’s services under a very general entry only because under the specific entry, no tax is payable. This approach is contrary to the scheme of legislation.” Also, under the excise law, similar view was held inter alia in the cases of Tata Tea Ltd. v. CCE, 2004 (164) ELT 0315 and TTK Healthcare Ltd. v. CCE, 2008 (231) ELT 0273. In the case of CCE v. Konkan Marine Agencies, 2009 (13) STR 7 (Kar.), it was held to the effect that once the definition of the taxing entry excluded a specific aspect, service tax could not be levied. It appears therefore a reasonable view that the above Circular restricts the scope of the taxing entries viz. commercial or industrial construction service and execution of works contract service. “Circulars contrary to the correct legal interpretation are not binding on judicial authorities” was held in the case of Videocon International Ltd. v. Commissioner, 2004 (167) ELT 33 (Tri.-Mum). Similarly, it was held in the case of Mahakaushal Builders Welfare Association v. Supdt., 2006 (3) STR 721 (MP) that Circular does not create liability for payment of service tax if assessee not liable to pay tax under law relating to service tax. In the case of Pahwa Chemicals Pvt. Ltd. v. Commissioner, 2005 (181) ELT 339 (SC), it was held that the Board can issue directions only for purpose and in furtherance of and not contrary and derogation to provisions of the Central Excise Act, 1944.

3.3 Construction services per se cover repairs, renovation or restoration services as these services also involve’ construction’ and / or reconstruction in part. Roads are per se civil structures. When an existing road is redone completely, it can be called restoration. Clause (d) in the relevant definition cannot be rendered redundant by issuing a Circular. Further, there is a thin line of distinction between the terms ‘relaying’ and ‘laying of a new road’. Can ‘relaying’ not be covered by the terms ‘renovation’ or ‘alteration’ ? A further question arises as to whether the word ‘renovation’ used in the Circular directing that it is a maintenance service liable for service tax and the same word used in clauses (25b) or (zzzza) mean different? It is a cardinal principle of interpretation of taxing status that interpretation leading to absurdity cannot be accepted. By the parameter adopted by the Circular, even repair services in respect of a dam, bridge or any airport also would be considered taxable under clause (64) of S. 65 as all such services are also provided under a contract. Admittedly, revenue consideration of the authorities is on a higher footing than any other parameter like natural or grammatical meaning, principle of harmonious construction in a statute or principle of legality.

3.4 In effect, the Board’s Circular interprets the definition of commercial or industrial construction service in a restrictive manner merely to suit the Revenue needs. If sub-clause (a) under commercial or industrial construction service and sub-clause (ii)(b) under execution of works contract service, which provide for construction of a new building or a civil structure or a part thereof apply to the respective exclusionary part of the definition, why would sub-clause (d) under both the definitions providing for repair, alteration, renovation or restoration or similar services in relation to building or civil structure, etc., cannot apply to the exclusionary clause? If the scope of the definition is comprehensive enough to extend coverage to various services in relation to construction including those of repair, restoration aspects, the same ‘expansive’ scope applies to the exclusionary clause of the definition containing such services provided in respect of roads, airports, tunnels, dams, etc.” Such clarification being binding on the lower authorities would certainly create litigation than relief for the period prior to July 27,2009 when Notification No. 24/2009-ST was issued.

4. Services of construction of dam, tunnel and road:

4.1 The above Circular in no ambiguous terms clarifies that construction of road is not a taxable

The project was completed in February 2007. The tax demanded for the period April 2005 to March 2008 was made in the following manner:

Tax was computed on the entire amount received from WBSEB without granting abatement of 67%.

Computation of liability was made on the gross value even though service tax was not collected.

Invoked extended period of limitation on the charge of mis-representation and mala fide intention of evasion.

4.2 The Noticee’s case contained chiefly the following grounds :

Scope of the service included civil works structures of dams, tunnels and roads and did not include designing of power generation system or providing electrical and mechanical works for the plant.

The service was covered more appropriately under execution of works contract service introduced from 1-6-2007, whereas the project was completed in February 2007.

Filing of return or taking registration under wrong category could not be the basis for the levy.

Declaration of the entire value of the contractual service and claiming exemption on the proach or a voyage of discovery of the authorities ground of exclusion of dams, tunnels and roads in the definition of commercial or industrial construction service in various returns from time to time and providing copy of the agreement in October 2005 to the Department evidenced against the charge of suppression or evasion.

Wide range of activities described in the scope of work in the contract under different nomen-clature related only to construction of dams, tunneling and roads.

Each activity described in the agreement was clarified to prove construction/civil works related to dams, roads and tunnels.

4.3 Order in a nutshell contained the following observations:

Based on examination of definition of ‘dam’ cited in Encyclopedia Britannica and the reading of the agreement clauses concluded that construction of dam involves several auxiliary works. Exclusion of dam in the purview of the definition would mean exclusion of all auxiliary works and that there was no scope to view the exclusion provision in narrow meaning.

No distinction could be made between construction of ordinary dams, tunnels and roads and tunnels, dams and roads as an integral part of the hydroelectric power project as the statute does not provide for it and therefore the statute cannot permit such distinction. Moreover, the dams are generally used for generating hydroelectric power.

There is no scope for segregating the agreement for considering any part of the work as taxable service.

Allegation of suppression also being unmeritous, the case failed both on the question of merit and the question of limitation.

5. In conclusion, to issue a half-baked Circular which generates controversy rather than settling it and then to combat it, issue a Notification or another Circular which also would not end the existing controversy is peculiar to the administration of the levy of service tax. The analysis and discussion above amply demonstrate the state of administration of the levy which otherwise contains several ambiguities and limiting factors leading to litigation due to dichotomy in interpretation. In most cases, it appears frivolous and a result of innovative approach or a voyage of discovery of the authorities at the peril of assessees at large.

Nirav Shah

Is it fair to bar a Company from buying back its shares, for delay in filing of annual returns with the Registrar ?

Is It Fair?

Power to buyback :

As we all know the Companies Amendment Act, 1999 inserted S.
77A in the Companies Act 1956 (hereinafter referred to as the ‘Act’) giving
power to the company to buy back its own shares. At the same time it also
inserted S. 77B restricting or prohibiting the buyback of shares by the company
in certain circumstances. Here we are referring S. 77B(2).

Prohibition for buyback in certain circumstances :

S. 77B(2) reads as follows :

No company shall directly or indirectly purchase its own
shares or other specified securities in case such company has not complied
with provisions of S. 159, S. 207 and S. 211.

S. 159, S. 207 and S. 211 of the Act :

We will analyse compliances under the above Sections one
by one.

S. 159 requires a company to file annual return within 60 days from the
day on which the annual general meeting is held. This Section also provides
that it should be in the format specified in Part I of Schedule V.

S. 207 requires a company to pay or post dividend warrants within 30 days
from the date of declaration to all the shareholders entitled for it.

S. 211 requires that every balance sheet of a company to give true and
fair view of the state of affairs of the company at the end of the financial
year and shall be in the form as specified in Part I of Schedule VI of the
Act or as near as to or as may be approved by the Central Govt. Every profit
and loss account shall give a true and fair view of the state of affairs of
the company for the financial year and shall be in the format as specified
in Part II of Schedule VI of the Act with few exceptions as stated in the
Section. The Company shall comply with the accounting standards as
prescribed under it.

Non-compliances u/s.159, u/s.207, u/s.211 of the Act :

If we go through above, we can analyse as follows :

If the company fails to file annual return with Registrar of Companies
(hereinafter referred to as ‘ROC’) within 60 days , it will be treated as
non-compliance under that Section. It means even a single day delay would
cause non-compliance u/s.159.

If there is a small deviation in the format of the annual return from the
format specified under Part I of Schedule V, filed by the Company with ROC,
it will be considered as default u/s.159 of the Act.

If the company makes a delay of 1 day in payment of dividend or
dispatching dividend warrants to shareholders beyond 30 days from the date
of declaration, it will be considered as default u/s.207 of the Act.

In case of the following situations :

o The Company does not comply with the accounting
standards; or

o Balance sheet of the company does not give true and
fair view of its state of affairs; or

o Profit and loss account of the company does not give
true and fair view of its state of affairs; or

o Balance sheet and/or profit and loss account are not in
the format specified under Part I/II of Schedule VI or as near as
circumstances admit or as per Central Govt. direction, it will be considered
as default u/s.211 of the Act.

S. 77B(2) does not prescribe any time or period during which
the prohibition will prevail. Does this mean that if a default is committed,
say, for the year ended 31st March, 2001 and the company desires to buy back
shares in the year 2010 — it cannot buy back its shares. This leads to an absurd
situation.

Non-compliances u/s.159, u/s.207 and u/s.211 of the Act and
prohibition on buyback u/s.77B of the Act :

Any default under the Act is penalised under the same Section
or S. 629A of the Act. The penalty depends on the gravity of the compliances
provided under respective sections.

We may agree to it that defaults u/s.207 or u/s.211 of the
Act should be penalised as it may cause monetary loss to shareholders or
misleading the shareholders by not giving true and fair view of the state of
affairs of the company.

But can we agree that a single day default in filing annual
return of the company with ROC is a major default ?

Is it fair to prohibit a company from buying back its shares
because it has not filed its annual return within 60 days from the date of
annual general meeting and when it has paid penalty for it ?

To make the law fair, the law should be amended to
clarify that prohibition shall apply for a period of twelve (12) months from the
date of default and the necessary penal consequences have been suffered by the
company.

Further, if the company makes default in complying with any
of the provisions of S. 159, S. 207 and S. 211, it cannot buy back its shares in
its lifetime.

Once a default is committed under the above Sections, the company is not eligible to buy back its shares in the entire
lifetime of it.

S. 77B does not give any immunity to the company or does not
provide any time period after which the company can buy back its shares, say
after expiry of 5 years from the date of default.

Conclusion :

One should really look at the gravity of the defaults u/s.159, u/s.207 and u/s.211. Default u/s.207 i.e., non-payment of dividend within prescribed time limit and 211 i.e., non-disclosure of true and fair view in financial statements or not following accounting standards, etc. can be considered as material defaults. Defaults u/s.207 or u/s.211 may cause monetary loss to its shareholders/stakeholders.

But, if the company has failed to file its annual return within 60 days and causing delay of, say, one day is not so material default of S. 159 of the Act.

It is really not fair to put such restrictive clause u/s.77B of the Act prohibiting a company from buying back its shares for a single day delay in filing its annual return with ROC.

S. 77B of the Act needs alteration as it is really unfair to prohibit a company to buy back its shares for lifetime if it commits default u/s.159, 207 and 211 of the Act.

There are two options for alteration of S. 77B of the Act:

a) Remove reference of S. 159 S. 77B (2) of the Act; or

b) Specify, after expiry of certain period from the date of default u/s.159, u/s.207 and u/s.211 of the Act, the company can buy back its shares.

Nirav Shah

Legal Risk — A Case Study

Overview :

Definition :

Legal risk is risk from uncertainty due to legal issues, impact of legislation, actions or uncertainty in the applicability or interpretation of laws and regulations that affect the organisation and its operations and activities. Such impact can arise due to contracts and contractual claims, third party obligations, torts and operation of law. Depending on the circumstances, legal risk may entail such issues as broadly listed out below.

Issues for consideration :

A number of issues that can give rise to risks that are external in nature are outlined below. The issues can be generally divided into two segments. One relating to contracts that constitute the basis for majority of interaction and activity in a civilised society. The other part relates to the different laws adopted by society for smooth functioning and their implications and impacts.

Contract formation :

What constitutes a legitimate contract ? Is an oral agreement sufficient, or must there be a legal document ? What documentation is required ?

Intra vires and ultra vires contracts :

Certain contracts are intra vires and others ultra vires. The latter can have serious unintended consequences for the contracting parties in terms of incomplete (in choate) contracts.

Capacity :

Does a counterparty have the capacity to enter into a transaction ? For example, in 1992, the United Kingdom’s House of Lords determined that the London Borough of Hammersmith and Fulham lacked capacity to transact in derivatives linked to interest rates. Not only were contracts dating back to the mid-1980s with that borough declared void, but contracts with over 130 other councils were effectively invalidated. A number of derivatives dealers suffered losses.

Legality of derivatives transactions :

In some jurisdictions there are issues relating to whether certain derivatives could be deemed gambling contracts and thus made unenforceable. This was a significant concern during the early days of OTC derivatives markets.

Perfection of an interest in collateral :

A claim is perfected if it is senior to any existing or future third-party claims in the event of bankruptcy. A perfected interest represents a lien on collateral. Requirements to perfect a claim can be complex and vary by both jurisdiction and the nature of the collateral.

Netting agreements :

Under what circumstances will a close-out netting agreement be enforceable ?

Incomplete contracts, quasi contracts, contract with minors and insane persons also give rise to legal risks.

Contract frustration :

Unforeseen circumstances may invalidate a contract. E.g., if a contract is linked to an index or currency which ceases to exist, the contract could become invalid.

Another dimension of legal risk :

Legal risk is the risk arising out of infraction of the law. If business and organisational activities and operations are tainted by illegality or result in a legal insult or impact that has legal consequences, this risk is attached.

In fact whenever information systems and Internet technology is used, this can attract emerging legislation like cyber laws which can give rise to legal risk for such activities.

Given the nature of legal risks and issues, this is an external high-level risk that is difficult to control. Dealing with legal risk is not an easy task and needs a proactive approach.

Legal risks can affect the functioning of a business and may even result in its closure in extreme circumstances. A procedural or lower level infraction of law can result in disruption and damage to business and reputation. These legal risks range from serious risks at one end of the spectrum to technical and procedural risks at the other. Thus legal issues that arise in serious risks are fundamental in nature, affecting the ownership, organisation, operations and continued existence & functioning of a business.

Technical aspects of legal risks would cover legal risks relating to compliance with regulatory requirements, formalities and business laws like Companies Act, Partnership Act, Taxation Laws, Labour laws and other legal requirements.

Procedural aspects of legal risks would involve legal risks relating to operations and procedures and functioning of the organisation and its day-to-day activities. e.g., when employing or terminating the services of an employee whether due process of law has been followed ?

Techniques for raising awareness of legal risk:

One of the most effective ways of dealing with legal risks is to raise awareness of the employees and staff. Here, we will focus on some practical ways in which the effective management of legal issues and disputes can create greater efficiencies in a company’s continuing business relations with its various stakeholders including customers, suppliers and joint venture partners.

The following are some of the important ‘hard’ and ‘soft’ elements of the legal dimension of risk and techniques of dispute management that are relevant for understanding and appreciating legal risks.

1) General awareness raising:

This involves presentations, workshops and ‘road shows’ to offices in the parent country and around the world, to as many employees, associates and business partners as possible, in order to raise awareness and increase familiarity with aspects of legal risk and the methods the company or organisation uses to minimise and avoid it. This should include clear identification and designation of a contact point (in the legal or compliance department) whom the employee can call, as a demonstration of commitment and back-up behind the communication programme.

2) ‘Legal Audits’ :

These help identify areas of strength and weakness, for example:

a review of current litigation,arbitration and/ or other conflict resolution techniques used to assess internal and external costs, likelihood of success, settlement options and likely outcomes.

a review of standard contracts to assess whether the dispute resolution mechanisms are the most appropriate for the type of activity covered by the contract.

a review of existing contractual relationships with suppliers, distributors, customers and joint venture partners to assess whether there are any ongoing disputes that can be avoided, or potential disputes that are likely to escalate into litigation, to tackle.

3) Training in ‘alternative’ dispute resolution skills (ADR):

In addition to building an awareness of the strengths and weaknesses of different types of more formal dispute resolution techniques (such as seminars on arbitration options), better awareness can be achieved by introducing a series of workshops on, for example, mediation and how the mediation process works. This will enhance core communication and negotiation skills if well presented.

Warning signs – things to consider avoiding, during negotiations and whilst the contract is being performed:

an unusual amount of time spent on negotiation of non-commercial terms

lawyers spending increasing time discussing non-commercial or non-core terms

business people not in control of the commercial elements of the negotiation

key commercial terms are not clearly set out, or there is delay in clarifying them

changes in the pattern of negotiation (e.g., from face to face, to more written exchanges, or vice versa)

after signature, there is a personnel change which breaks continuity in the relationship be-tween parties, or understanding of the commercial rationale for the contract and its intended implementation

poor preparation and planning before negotiations start, inadequate follow-up either internally or with the counterpart, so that lack of clarity as to the process exacerbates lack of clarity as to the content, and as to the eventual commercial objectives.

Warning signs – what to look for to avoid disputes developing

increasingly late payments

late response or non-response

move from verbal to written communication

tone of verbal/written communications – more fractious questioning or legalistic rhetoric

internal time spent on analysis of legal position

internal disagreements as to strategy and/ or approach (are there hidden agendas ?)

loss of product or service quality Ill. change of personnel

different messages reaching different layers of the organisation from the counterpart company

in a joint venture: misalignment of interests which are dealt with as minor differences, but which could conceal longer-term strategic differences, arguments over budgets, technical objectives, marketing campaigns, etc.

The impact of legal risks has a far-reaching effect on the constitution, organisation structure, function-ing and performance of organisations.

Normally it is the legal department or the secretarial department that deals with legal risks.

Apart from the classification suggested at the begin-ning of the article, legal risks can also be classified according to their severity, significance, area it affects or even its applicability ani pervasiveness.

Like most other external risks they pose a challenge and threat to business as well as present opportunities for growth in business and destabilise and/ or pose problems for others. They thus result in a shake out that results in changes to the playing field.

The example picked up for this month’s case study is that of a pharmaceutical company that is engaged in development, manufacture and sale of drugs, formulations and medicines.

Quick Care Ltd. is a pharma company operating in India for over twenty years now. It has developed formulations and drugs for skin infections, allergies and asthma. It is manufacturing and marketing these medicines under the name ‘Life Care’ and ‘Total Care’.

The company has registered its products both as brands and trademarks in India.

With the changes in intellectual property rights post-WTO regime the company has become conscious of the stricter legal regime that it faces.

As the risk manager of the company the CEO has asked you to examine the legal risks in the following areas as well as the organisation wide legal issues involved:

i) On a preliminary enquiry you discover that ‘Life Care’ is also a brand registered in Australia by another company, though in the field of healthcare and nursing.

ii) A company in the US named True Care has a logo that has the letters TC in it. The logo of the company ‘Total Care’ which also uses the letters TC look identical and have a close re-semblance to each other.

iii) On enquiries you find that your key employee who led the team that formulated the anti-allergy and asthma drug was earlier employed with an international pharma company and was working on similar research. It is likely that he had signed a non-disclosure/non-complete agreement before he left that company two years back.

iv) In respect of certain drug trials on monkeys and on human beings, a particular NGO has been writing articles about the issues involved and generally against such practices. The name of the company was also mentioned once in a television programme on this issue.

v) The company has recently acquired a small subsidiary making syringes and other medical devices. This company has certain pending labour disputes and tax cases that have not been fully resolved.

vi) The company had recently been awarded a contract to supply drugs to a rural hospital aided by the World Bank. The CEO is concerned whether any unfair means have been used, as this could result in the company being blacklisted.

You are required to make a brief report on the legal risks involved and how the same could be dealt with.

Solution to the case study:

1. In case of the Australian brand name, it poses a greater legal risk for the ‘Life Care’ brand registered in India if the Co. in Australia has signed the World Intellectual Property Organisation (WIPO) convention. The WIPO in Geneva administers these conventions. WIPO now has a ‘new’ convention, the Madrid Protocol (1989). Lifecare brand in India may be liable for trademark infringement or dilution – with potential risks of an injunction, disgorgement of profits, payment of damages, and more – for use of the name. H it hasn’t, Indian company should not delay in signing WIPO conventions. The company should also do trade-off analysis in justifying the fees to be paid for signing up or to change the brand name itself.

The company ‘Life Care’ may change its name to a similar name which will be more attractive and will gain customers’ attention. It may propagate or spread awareness among its customers about the change assuring them about the quality of the product. But before that they must also check whether there is any other company existing with the same name to avoid facing same circumstances again.

2. ‘True Care’ company in the US may sue the company in India for infringement of trademark by using identical and similar logo, though it may not have the same business and there is no competitive overlap. TRUE CARE company in the US may also be liable for trademark dilution by using the famous mark of another company in case the company is famous in the US and can claim huge compensation or a huge share in the profits of the company. Other way to tackle this issue is to make an attempt in resolving the dispute internally, whereby either of the companies will sign mutual agreement to not to interfere in each others’ business operations.

3. If the keyman has Signed a non-disclosure agreement with the company where he was previously employed, then the international pharma company may sue him as well as the company in which he is presently employed, as there is chance of using the same or similar formulae or strategy by him which would have been used in the previous company. The international pharma company may ask for certain percentage of their turnover or profit as compensation due to which the company may incur heavy loss or they may bring a stay on the experiment which formulated the anti-allergy and asthma drugs because of which the company may incur heavy losses.

4. In the event of the issue raised by an NGO for conducting tests on monkeys, the company must find another alternative for drug trials such as rats, guinea pigs, etc., as there is a risk that the name or goodwill of the company may go down as there will be more and more awareness, and more and more people may agitate for the same.

5. The company should resolve all the labour disputes as it may cause strikes in the company, the production may be at a stand still and hence there will be a shortage of goods in the company, the company should also resolve the tax cases as it may cause a heavy burden to the company.

6. For the World Bank developmental project, the CEO of the company must make sure that there is no unfair practice in obtaining the contract or in the actual execution of the contract, such as insufficient drugs supplied to the hospital or any adulteration in the drugs has taken place. As this would result in the company being blacklisted by the World Bank due to which none of the financial institutions in India as well as in foreign countries will grant loan to the company in case of financial crunch or will trade with the company as it is being blacklisted.

Other pre-emptive and protective solutions:

Risk management strategies not only serve their primary purpose, which is to layoff potential risks, but may also act as a vital business development tool.

1. When planning for a drug discovery, the following issues should be addressed:

The type of disease to be treated and the patient population;

How it should be delivered to the patient (delivery system);

In what form it should be made (capsule, pill, ointment, or liquid);

The route of administration (injection, oral, inhalation, or skin absorption);

How and where to do the research and formulation; and

Whether it is going to be outsourced or will be manufactured in-house.

Not only legal managers but also corporate counsels have an opportunity to contribute their ideas to issues pertaining to IP Rights, dispute management, identifying the business by plugging loop-holes and adding to operational and client assurance.

Rather than assigning a separate in-house legal team or appointing an external consultant, the CEO can create a mix team of both of them. Internal employees will give the consultants the correct picture at micro level, whereas consultants with their expertise and experience provide solutions at macro level.

Explain the drug development process to their patients in a subtle way;

The drug company or sponsor performs these tests to discover how the drug works and whether it is likely to be safe and works well in humans. Next, a series of tests is conducted among patients to determine whether the drug is safe when used to treat a disease and whether it provides a real health benefit. This will help address and neutralise adverse public opinion that may have been generated.

Apart from this the company will do well to identify and implement some of the strategies outlined below:

Identify essential development and pre-clinical requirements;

Identify requirements for characterisation of pharmaceutical products;

Assess and implement good manufacturing (GMP) and good laboratory (GLP) practices; and

Describe and formulate a regulatory submission.

The marketing authorisation application (NDA) can be submitted in two different formats: the traditional format, or the Common Technical Document (CTD) format.

These together will help the company to keep legal risks in control.

Nirav Shah

Bhopal Gas Tragedy

Risk Management

This month’s case study is a
live case of an Industrial Disaster Risk. — the Bhopal Gas tragedy.

Since the early days of the
industrial revolution till date there have been many incidents, mishaps and
unfortunate accidents — both large and small in which many lives have been lost,
damage has occurred and financial loss has been suffered. Industrial activity
that harnesses technology has always been prone to the risk of disasters — be it
the Chernobyl nuclear incident or the Exxon Valdez oil spill. These have ranged
from explosions, crashes, fires, leaks causing massive loss of life to
contamination and environmental and financial damage.

Even with modern-day systems
and risk management and mitigation procedures in place and proactive steps
including effective disaster management mechanisms by governments and corporates
alike, this continues to be a key area of concern and the size, scale and scope
of disasters has not reduced significantly.

The Bhopal gas tragedy that
occurred in the early hours of December 3rd, 1984 — over 200 years after the
industrial revolution, was by far one of the biggest industrial disasters in the
modern times. It has been described as an endless nightmare for those who
suffered it.

Bhopal is once again in the
news with eight UCIL executives including former chairman Keshub Mahindra being
convicted of criminal negligence and sentenced to two years in jail on 7th June,
2010. The sentences are under appeal. On June 24, the Union Cabinet of the
Government of India approved a Rs.1265 cr aid package. It will be funded by the
Indian Government.

Twenty-five years have
elapsed since that night that witnessed a ‘dance of death’ in Bhopal,
which saw a cloud of deadly gases emerging out of a faulty tank in a pesticide
factory and silently spread into the homes of unsuspecting sleeping multitude.
Although no official count of casualties has ever been done, estimates based on
hospital and rehabilitation records show that about 20,000 people died and about
5 to 6 lakh suffered bodily damage, making it by far the world’s worst
industrial disaster ever. Disasters can strike at any time, at any place.
Disasters keep happening all the time, but the tragedy still remains, a
catastrophe with no parallel.

What really happened ?

In the early hours of
December 3, 1984, from the Union Carbide factory at Bhopal manufacturing the
pesticide ‘Carbaryl’, an estimated 43 tonnes of deadly Methyl Isocyante (MIC)
gas leaked out from the tank No. 610C and escaped into the atmosphere. The
sleeping city of Bhopal was converted into a gas chamber.

MIC as a gas has to be
stored in a liquid form. A potentially lethal practice since water reacts
exothermically with MIC releasing heat that can cause a violent explosion.

On the day of the disaster
water leaked into the tank No. 610C causing a build-up of pressure and
temperature. The management decided to release the gas into the atmosphere
rather than have the tank explode which could have caused a greater damage.

The release of gas into the
air was a contingency that was planned and known to the factory management and
accordingly safety systems existed, but they failed.

What was the setting ?

The Union Carbide plant was
set up in 1968. However the plant had no long-term permission for storage of
MIC. In December 1982 there was a massive gas leak of Chlorine. 16 workers were
affected. The issue of danger to Bhopal from a pesticide plant was raised in the
Legislative Assembly of the State. While the gas leaked, Union Carbide’s works
manager exhibited a rather chilling overconfidence. He stated “The gas leak
cannot be from my plant. The plant shuts down automatically”.

The Time Line of the
Disaster

— December 02/3, 1984 :

— 10.30 p.m. the
late-night shift at the plant starts.

— 12.00 a.m. (midnight)
the operator checks MIC tank No. 610C and finds that the rupture disc has
burst; the gas has started leaking into the atmosphere.

— 12.06 a.m. MIC vapors
leak into the atmosphere through the 33m high-flare tower
December 03, 1984 12.06 a.m. — 12.15 a.m.

— gas starts leaking
from MIC tank No. 610C safety systems collapse and efforts to ignite the gas
fail as the pilot flare system is inoperable.

— workers panic and
abandon all efforts to contain the leak.

— control room is
notified, and the rest is history.

Probable causes identified :

— Effect of MIC on
humans and the antidotal treatment was not known to the medical fraternity
and such knowledge if available was not disseminated to the emergency
services.

— Poor plant maintenance
practices.

— Economy measures,
overriding safety concerns.

— Densely populated
areas around the plant.

— Lack of effective
emergency medical facilities.

— People sleeping in
exposed areas, jhuggies, road-side, on pavements/ railway platforms.

— Administration
collapsed with key functionaries running for their lives instead of manning
key positions.

— Relief
operations became difficult as the disaster caused total confusion and
affected the ability and mental strength of those entrusted with
emergency relief.

Lessons learnt:

— knowledge of the chemicals that were being stored.

— Emergency — accident — management manual should exist.

— Emergency procedures should be rehearsed at pre-prescribed intervals.

— Maintenance procedures and schedules should be strictly followed.

— knowledge of nearest medical facilities

— System of contacting top factory management.

— Residents living in the vicinity should be aware of the risks and trained to respond to emergency services.

The
leak was a watershed in formulating environmental legislation the world
over. The laws also require civic bodies and local officials to plan on
how to address a potential disaster situation.

Hindsight and way ahead:

Sheila
Jasanoff in her book ‘Learning from Disaster?: Risk Management after
Bhopal’ has provided a deeper insight into what are the issues to be
really addressed and the lessons we need to learn from such disasters
that not only provide a wider perspective to risk management, but also
give us, as human beings, food for thought.

“Although ‘hard’
engineering played its part in precipitating the events, the plant’s
defective components — the leaking valve, the broken refrigeration
system, the malfunctioning warning signal, and the inadequate storage
tank — were themselves the symptoms of more deep-seated social problems.

These
included the dearth of medical and scientific knowledge about an
extremely hazardous technology, the imperfections of information
transfer across national boundaries, the lack of regulatory resources in
a still developing country, the absence of workable relief and
rehabilitation plans, and the profound imbalance of economic power and
legal and managerial expertise between nations of the North and the
South.

Many of these deficiencies became apparent only in the
aftermath of Bhopal. Corrective policies have to address not only the
design of artifacts, but also (indeed, perhaps even more so) the human
practices and presuppositions that determine their management and use.
Seen from this perspective, a serious technological mishap ceases to be
merely accidental, for it opens windows onto previously unsuspected
weaknesses in the social matrix surrounding the technology.

Stringent
environmental regulations in developed countries have driven ‘dirty’
technologies to developing countries, where they operate under
disaster-prone conditions. Disasters are particularly likely to happen
when there is a sharp disjunction between the social order that gives
birth to a technology and the one in which it is eventually deployed.”

The
recent ‘oil spill’ in the Gulf of Mexico has again highlighted the need
for availability and strict adherence to mitigation procedures as
non-availability of these impact the very existence of the entity.

Nirav Shah

Stress management

New Page 1

77 Stress management

A stressor is a
situation, thought or stimulus that triggers your stress response. We all need a
little stress in our lives. Good stress makes us feel alert and stimulated. But
chronic, acute stress can cause anxiety, depression and disease. Different
people may respond differently to the same stressor. It’s important to identify
what stressors cause you distress. The more you learn about your stressors, the
more likely you are to diminish, control or eliminate them.

When you’re
stressed, you lose sleep. When you lose sleep, you feel more stressed. Sleep
deprivation doesn’t just make you tired. It interferes with the natural pattern
of stress hormone production . . . . Exercise protects the body against the
effects of physical and psychological stress. But there are some caveats. First,
to reap anti-stress benefits, exercise should be aerobic. Weight training has
important health benefits, but it’s not a great stressbuster. Second, you will
get more benefits if you exercise in bouts of at least 30 minutes. This is how
long it takes for the brain to produce endorphins — those natural opiates that
give you the ‘jogger’s high’.

Third, you might
not benefit if you don’t want to exercise. When animals are forced to exercise,
they become more — not less — stressed. Take a deep breath. This is one of the
oldest stress management tips around. Take a deep breath and exhale — slowly.
When you inhale, you speed up your sympathetic nervous system. When you exhale,
you slow it down — a minitress reducer.

(Source : The Economic Times, dated 31-7-2010)

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Nirav Shah

Gururaj Deshpande to co-chair Obama’s Advisory Council

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76 Gururaj Deshpande
to co-chair Obama’s Advisory Council

India-born Gururaj
Deshpande, chairman of Tejas Networks, A123 and Akshaya Patra, has been
appointed co-chairman of US President Barack Obama’s National Advisory Council
on Innovation and Entrepreneurship. He will support Obama’s
innovation strategy by helping develop policies that foster entrepreneurship,
create jobs and drive economic growth.

Popularly known as
‘Desh’, Deshpande is one of the 26 members of the council which includes serial
entrepreneurs, university presidents, investors and non-profit leaders. Steve
Case and Mary Sue Coleman will serve as the other co-chairs.

(Source : Business Standard, dated 23-7-2010)

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Nirav Shah

kcr for Commonwealth Games a waste, should’ve gone to poor kids.

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75 ‘35kcr for
Commonwealth Games a waste, should’ve gone to poor kids.

A verbal spat was
initiated by Congress leader Mani Shankar Aiyar when he was asked to comment on
the rainy morning by some media persons outside Parliament House. “I am
delighted in a way because rains are causing difficulties for the Commonwealth
Games. Basically, I will be very unhappy if the games are successful, because
then they will start bringing Asian Games, Olympic Games and all those,” the
former sports minister replied.

Explaining his
opposition to the Games, Mr. Aiyar said a whopping Rs.35,000 crore were being
spent on the sporting event, when it should have been spent on children who did
not have the basic facilities to play. “Those who are patronising the Games can
only be evil. They cannot be God. Thousands of crores are being spent on
circuses like these while the common children are being deprived of basic
facilities to play,” Mr. Aiyar said, adding that all ‘expectations’ from the
Games had been belied.

Mr. Aiyar also
alleged that India had bribed other Commonwealth nations for the Games. “To take
the Games, the Olympic association of every Commonwealth country was given $ 1
lakh . . . . it was given to Australia, New Zealand, Canada, and Britain. Those
countries did not need this money,” he said adding that “I would call it a
bribe.”

(Source : The Economic Times, dated 28-7-2010)

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Nirav Shah

Desi lawyers teach English to US attorneys

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74 Desi lawyers teach
English to US attorneys

Many top US law
firms are hiring Indian lawyers to edit and make grammatical and syntax
corrections in legal drafts/contracts prepared by their lawyers. A Fortune 100
client of a US law firm, Smith Dehn LLP, has specifically requested that legal
research, analysis, writing, editing exercises that cost millions of dollars in
the US be done by Indian attorneys.

A recent American
bar council journal article compared the scenario to a man bites dog story. It
says highly-trained LPO (legal process outsourcing) attorneys in India have been
assigned the task of correcting grammatical and other mistakes of partners and
associates at some of the top 100 law firms in the US. It further said,
high-quality and effective English writing has been out of fashion in the US for
several decades.

Till some time
ago, Indian lawyers were seen to use lofty English British-style pomposity, a
vestige of colonial rule. Their sentences were long and
winding. There were too many usages of passive and indirect speech. Today, they
are good with plain, crispy, clear and clean English writing. In fact, LPO has
made them think global and grow global. American lawyers are liking it, a
high-quality second look at the draft, said Russell.

(Source : The Times of India, dated 26-7-2010)

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Nirav Shah

Double standards Case :

New Page 1

72 Double standards
Case :

US :
Asbestos-related suits

India : Bhopal Gas
tragedy

Damage :
US : 700,000 people affected

India : 20,000
dead, 570,000 injured with possible generational impacts

Caused by :
US : Asbestos fibres

India : Methyl
Isocyante gas released from the factory

Liability :
US : Carbide and Amchem cases being fought by Dow

India : Dow
refuses to take liability of Carbide

Payments :
US : $ 487mn litigation costs, $ 1.5bn resolution costs & $ 839mn estimated
future liability

India : $ 470mn
paid by Carbide in 1989. Refuses any further payment.

(Source : The Times of India, 3-7-2010)

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Nirav Shah

Online evaluation sparks revolution

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73 Online evaluation
sparks revolution

Engineering
students pursuing their PhDs needn’t fret over errors in their results anymore.
The Visvesvaraya Technological University (VTU) has introduced online evaluation
of answerscripts for its PhD students from 2010-11.

On a pilot basis,
VTU has already scanned the 750 PhD answerscripts. If all goes well, it’ll be
extended to MTech and MBA courses, too.

Manual evaluation
leaves multiple scope for errors. In case of multiple solutions, the evaluator
will have the freedom to decide. The process take only a few minutes and the
scripts get stored in the system. A software developed exclusively for digital
evaluation helps the evaluator open the answer booklet with just a mouse-click.
Next, the screen displays a series of register numbers. The evaluator can have
his pick. The question for the particular answer is displayed on the screen,
along with the scheme of evaluation. This also allows two evaluators to check
the same answerscript simultaneously. The final evaluator draws an average. In
case of a difference of 15 marks or more, the third evaluator reassesses the
script.

(Source : The Times of India, dated 15-8-2010)

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Nirav Shah

IFAC president warns against auditor rotation

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71 IFAC president
warns against auditor rotation

Mandatory auditor
rotation makes no sense, according to International Federation of Accountants
president Robert Bunting.

“While firm
rotation might seem to remove any bias that may be attached to past decisions,
it makes no sense at all,” Bunting said.

“In most parts of
the world there are not enough choices to allow for this without forcing
companies to choose audit firms that have no expertise in their industry.”

Bunting said a
number of countries have experimented with mandatory rotation before abandoning
it as almost impossible to implement. Yet, it is still being considered as a
remedy to the Satyam scandal in India.

It would not be a
pragmatic solution and would set the country apart from nearly all of its
trading partners, Bunting said.

(Source : www.ifac.org)

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Nirav Shah

10% and 30% of the amount recovered to Whistle blowers – USA – SEC

New Page 1

70 10% and 30% of the
amount recovered to Whistle blowers – USA – SEC

In what could give new meaning to the phrase — “If you see something, say
something” — a clause within the financial reform legislation is offering big
cash rewards to whistleblowers who report fraud and other wrongdoing at
U.S.-listed companies and Wall Street banks.

Under the program,
which is already live, anyone who provides a tip that leads to a successful
Securities and Exchange Commission action will be able to collect between 10%
and 30% of the amount recovered — as long as the total amount exceeds $1
million. This means the minimum payout is $ 100,000. The whistle blower could be
a company insider or a private investor, if they’re able to offer information or
analysis that leads to an action. And with potential payoffs netting millions —
or even tens of millions — of dollars, experts are bracing for a surge in
tipoffs.

The program also
protects squealers against company retaliation. Any whistleblower who is fired,
demoted, suspended, threatened, harassed or discriminated against by a company
for providing info or testifying in an SEC investigation, can file an action in
the U.S. District Court. If they succeed in proving their case, the legislation
guarantees the person’s reinstatement, two times the amount of backpay owed, and
coverage of all court and attorney fees — so long as the action is filed within
a certain time period.

Even a mid-cap
company could wind up with a consent order or suit in the millions of dollars,
says Daniel Karson, executive managing director and counsel at Kroll, a risk
consulting company. “So 10% for making a phone call is a pretty good payday,” he
says.

(Source : TIME.COM, 19-8-2010)

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Nirav Shah

Vodafone deal : Tax burden draws flak

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Vodafone deal : Tax burden draws flak

The
Government’s attempt to change its tax laws in order to slap a $ 2 billion tax
bill on Vodafone for its roughly $ 11.1 billion purchase of Hutch Essar in
2007, is meeting with stiff resistance from powerful US investors. Claiming
that the move has killed investment appetite in India, US investors have
written to the Finance Minister Pranab Mukherjee, asking for a review of the
Revenue authorities decision to tax cross-border investments with
retrospective tax legislation enacted in 2008.

The strongly
worded letter, expressing concerns about India’s investment climate has also
been sent to principal secretary to PM, T. K. A. Nair, Cabinet Secretary K. M.
Chandrasekhar, Deputy Chairman, Planning Commission, Montek Singh Ahluwalia
and the Commerce Ministry. The letter has been written by the National Foreign
Trade Council (NFTC), an association of 300 US business enterprises engaged in
all aspects of international trade and investment.

According to
the NFTC, any necessary changes made to the laws should be with prospective
effect only, rather than through retrospective changes in interpretation of
current law or application of withholding tax provisions.

The NFTC
warns that the move “creates an impression among foreign investors that
investing in India brings with it a significant risk of tax liabilities
arising from unforeseen new interpretations of tax laws and retrospective tax
changes’’. ‘‘Our members will have limited funds to invest overseas and this
new interpretation may cause several of them to reconsider investing in India,
looking instead to other countries which have not taken this position and
which act in a perceived less arbitrary manner in taxing foreign investors,’’
it added.

Pointing out
that US-based MNCs have a history of robust investment in India, NFTC said ‘‘
Indian Revenue authorities have begun to argue that India is entitled to tax
certain capital gains on global M&As taking place outside of India.’’

(Source :
Internet & Media Reports, 8-8-2009)

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Nirav Shah

Right to education becomes law, puts India in select league

New Page 1

Right to education becomes law, puts India in
select league

India on Tuesday joined a select global club with the passage of the Right to
Free and Compulsory Education Bill, setting in motion an ambitious, if
much-delayed, scheme of providing education to every child between 6 and 14
years.

The law is unique as, while providing compulsory education, it would not fail
any student till Class VIII. It also enjoins all Government and private
schools to provide 25% quota to ‘disadvantaged’ kids. The law provides for
building neighbourhood schools in three years whose definition and location
will be decided by states.

The legislation, which has already been passed by the Rajya Sabha, will soon
be enacted after getting the assent from President Pratibha Patil. The RTE
would empower the seven-year-old 86th Constitutional amendment that made free
and compulsory education a fundamental right. The Bill sets down guidelines
for States and the Centre to execute and enforce this right. Earlier,
education was part of the directive principles.

(Source :
The Times of India, 5-8-2009)

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Nirav Shah

India to amend tax treaty with Mauritius

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India to amend tax treaty with Mauritius

India is planning amendments to the Double
Taxation Avoidance treaty with Mauritius to prevent its misuse for avoiding
taxes. “Amendments to the Indo-Mauritius DTAC (Double Taxation Avoidance
Convention) to prevent its misuse and enhance exchange of information,
including banking information, are being pursued . . .,” Minister of State for
Finance S. S. Palanimanickam said in a written reply in the Rajya Sabha.

The changes in the treaty are being worked upon
through a joint working group constituted for this purpose, he added. Many
companies route their investments into India through tax havens to avoid
paying taxes.

The Organisation for Economic Cooperation and
Development (OECD) has said that all countries should permit access to bank
information for all tax purposes, so that tax authorities could fully
discharge their revenue raising responsibilities, the Minister said.

(Source : Business Standard, 5-8-2009)

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Nirav Shah

UK amends citizenship rules

New Page 1

UK amends citizenship rules

The automatic right for non-EU citizens,
including Indians, to apply for a British passport after working in the UK for
five years has been ended with the introduction of ‘probationary citizenship’,
under which they must demonstrate commitment to the country through voluntary
work and integration.

There is a double benefit in the requirements to
demonstrate a commitment to Britain and a willingness to play a part in
community life. These allow the authorities to judge a person’s economic
potential and contribution to society. Crucially, migrants will be helped to
settle in, a particular challenge for people learning a new culture. Points
could also be removed for ‘bad’ behaviour.

Under the new system, applicants for citizenship
require a total of 20 points to gain probationary citizenship either through
the work route — meeting the immigration rules (10 points) and passing
knowledge of life in the UK or the English language test (10 points).

To gain full citizenship applicants must pass
knowledge of life in the UK or an English language test. Those who have failed
either test will have to retake it.

(Source : Business Standard, 5-8-2009)

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Nirav Shah

Companies routing funds to evade taxes face taxing times

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Companies routing funds to evade taxes face taxing times

The Government is mulling new laws to bring into the tax
net domestic companies which deliberately route their overseas investments
through tax havens to avoid paying taxes at home.

The inclusion of new provisions in the existing tax laws,
called Controlled Foreign Corporation (CFC) laws, was also suggested by the
Kelkar Task Force on tax reforms.

India, however, is still debating on the modality of the
CFC, though the Kelkar report, submitted to the Government six years ago, had
recommended “introduction of anti-abuse provisions in the domestic law,
enacting of CFC regulations and the law relating to thin capitalisation”.

The advantage of having CFC laws is that it will not be
affected by the Double Taxation Avoidance Agreement (DTAA). Currently, the
profits of subsidiaries of Indian companies are not taxable in India, as there
are no laws to bring them under the tax net. In fact, foreign subsidiaries do
not declare their dividends to avoid being taxed in India.

(Source : Business Standard, 3-8-2009)

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Nirav Shah

Oh, for some rectitude

New Page 1

Oh, for some
rectitude

You can’t spend more without
higher revenues. ‘Calculated risks’ is a euphemism for fiscal brinkmanship

“There has been an unsustainable increase in
Government expenditure. Budgetary subsidies, with questionable social and
economic impact, have been allowed to grow to an alarming extent. The tax
system still has many loopholes. The crisis of the fiscal system is a cause
for serious concern. The fiscal deficit of the Central Government, which
measures the difference between revenue receipts and total expenditure, is
estimated at more than 8% of GDP in 1990-91, as compared with 6% at the
beginning of the 1980s and 4% in the mid-1970s. This fiscal deficit had to be
met by borrowing. The burden of servicing this debt has now become onerous.
Interest payments alone are about 4% of GDP and constitute almost 20% of the
total expenditure of the Central Government.

Without decisive action now, the situation will
move beyond the possibility of corrective action. There is no time to lose.
Neither the Government nor the economy can live beyond its means, year after
year. The room for manoeuvre, to live on borrowed money or time, does not
exist anymore.”
— From the first budget speech of Manmohan Singh, 24 July 1991.

Today interest payments account for Rs.2,25,511
crore; defence Rs.1,41,703 crore; and subsidies Rs.1,11,276 crore. These three
alone siphon off 78% of Centre’s net revenue. None build infrastructure.
(Note : The above analysis remains valid even today. Our fiscal
situation is much worse than in 1991. Have we learnt any lessons in last 18
years ? Where are the remedial measures ?)

(Source : Businessworld Magazine, 3-8-2009)

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Nirav Shah

600 years on, House stops lording over law

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600 years on, House stops lording over law

More than 600 years of British history and tradition ended
when Parliament’s upper chamber, the unelected House of Lords, ceased to also
be the nation’s highest court.

The 12 ‘Law Lords’ convened in their debating chamber and
delivered the institution’s final seven judgments. The Lords of Appeal in
Ordinary, as they’re formally known, are moving to the Supreme Court of the UK
on October 1.

The House of Lords has been operating as a court since
1399. Prior to that the full Parliament could weigh cases. While the House of
Lords has kept separate judicial and legislative functions since 1876, the two
weren’t physically divided. After hundreds of years it looks ‘unusual’ for
lawmakers to be involved in judicial affairs, and the Supreme Court is a ‘nice
symbol’ of modernity.

The new court will be located in a refurbished building
overlooking Parliament Square. It will be made up of 11 of the 12 Judges that
worked in the House of Lords. Anthony Clarke will be the 12th Justice, and the
first to be appointed directly to the Supreme Court. Nicholas Phillips, now
senior law lord, will be the first President of the UK Supreme Court.

While ‘constitutionally nothing will change,’ the symbolic
importance of physically separating the Legislature and the judiciary is
significant, head of Justice, a UK human rights and law reform organisation.

(Source : The Times of India, 31-7-2009)

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Nirav Shah

Subbarao spells out RBI’s five big challenges

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Subbarao spells out RBI’s five big challenges

The first challenge is managing the balance between the
short-term compulsions of providing ample liquidity to the market and the
potential for an inflationary pressure.

The second challenge is to manage “the Government’s large
borrowing programme without crowding out present or potential private credit
demand’’. Despite active liquidity management by the central bank, Government
borrowing has led to hardening of yields. The third challenge is to maintain
policy rates and liquidity conditions that could spur private investment
demand. Having a fiscal consolidation process with a concrete roadmap was also
a challenge before the RBI.

“Large fiscal deficits, if continued strictly beyond the
recovery period, can crowd out private investment and trigger inflationary
pressures”. “It is also necessary to focus on the quality of fiscal adjustment
while pursuing quantitative targets’’.

For the medium-term, the challenge was to improve the
country’s investment climate to move forward with financial sector reforms “to
promote financial inclusion, further widen and deepen financial markets and
strengthen financial institutions’’.

(Source : The Times of India, 22-7-2009)

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Nirav Shah

Foreign investment law in the works

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Foreign
investment law in the works

The Government is working on a proposal to
introduce a new legislation relating to foreign investment aimed at removing
the distinction between various categories of overseas capital, a move
intended to ensure stability in policy and help Indian firms attract long-term
capital.

The new Foreign Direct Investment Act would seek
to remove the distinction between various categories of overseas fund flows
such as portfolio investment, venture capital, private equity and direct
investment. Rules on external investment in Indian companies make a
distinction between portfolio investment, in which an investor buys shares of
a company from the secondary market, and foreign direct investment (FDI), in
which the investor normally acquires a relatively larger holding directly.
The new legislation would involve major changes to the existing Foreign
Exchange Management Act, or FEMA, which deals with both inbound and outbound
foreign investment.

The new legislation would remove all confusion
and provide stability in terms of policy. The Finance Ministry has already
started work on the new legislation and would seek inputs from the Reserve
Bank (RBI) on it, the official said. The new Act will also give clearer
guidelines on convertibility.

The RBI has consistently been of the view that in
the hierarchy of preferred capital flows, FDI ought to be at the top. The
current policy is largely ad hoc. It is governed by several rules that
are changed through so-called ‘Press Notes’ issued from time to time by the
Department of Industrial Policy and Promotion (DIPP) and FIPB. Interestingly,
the official said the Press Notes issued by the DIPP have no legal sanctity
since changes to guidelines on foreign investment require changes to FEMA
rules, which rarely gets done.

(Source : The Times of India, 8-8-2009)

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Nirav Shah

British Airways gets Rs1.44 billion tax notice.

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86 British Airways gets Rs1.44 billion tax
notice.

UK-based British Airways has been slapped a service tax
notice by the Revenue Department asking it to pay the balance of Rs.143.5 crore
(Rs.1.44 billion) liability on sale of tickets in India between May 2006 and
November 2007.

“We have issued a notice to the British Airways on July 25
intimating the company of its service tax liability,” a senior Excise and
Customs Department official said. He, however, clarified that the company has
already paid Rs.117 crore (Rs.1.17 billion) tax, although after a delay.

(Source : Internet News, 29-7-2008)

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Nirav Shah

Are you addicted to your BlackBerry ?

New Page 1

85 Are you addicted to your
BlackBerry ?

Its nickname, CrackBerry, says it all. There is no
recreational use of Research in Motion’s BlackBerry. It is a compulsive
addiction, or you’re not a user.

Academic studies back up the notion. It found that
a third of BlackBerry users show signs of addiction ‘similar to alcoholics’. The
BlackBerry found its first big pool of users in corporate America. Helping with
productivity and collaboration at work, it lets employees keep up with
colleagues, customers and suppliers even while away from the office.

But, like addicts, users of these devices are not
using the time savings and productivity gains to shorten their work hours.
Instead, they work longer. Glenn Wilson, a psychologist at King’s College
London, found that two-thirds of users check work e-mails out of office hours
and on holidays.

Getting more done, thanks to the speed of
communication, doesn’t necessarily enhance the quality of life.

Wilson found that a compulsion to reply to each new
message led to constant changes of direction, which inevitably tired and slowed
down the brain. The distractions of constant e-mails, text and phone messages
are a greater threat to IQ and concentration, he says, than taking cannabis.

Even those most reliant on this technology worry
about never-ending workweeks and the toll imposed by the constant interruptions
to family life and personal relationships—a result of having this umbilical cord
to work. People are always partly somewhere else, whether at dinner or in bed,
surreptitiously glancing down at the glowing screen and stroking the scroll
wheel.

And the suspicion must be that it is double the
trouble when both partners are constantly connected to Exchange servers more
than to each other—especially among couples dubbed DILS and DINS (for double
income, little sex, and double income, no sex).

One solution : Don’t slavishly respond to every
e-mail. In Europe, it is increasingly considered ill-mannered to read an e-mail
that arrives during a meal, let alone answer it, just as it would be considered
rude to read a book at the table during dinner.

King College’s Wilson found in a clinical trial
commissioned by Hewlett-Packard that one in five of those studied broke off from
meals or social engagements to receive and deal with messages. Although nine out
of 10 agreed that answering messages during face-to-face meetings or office
conferences was rude, one-third nonetheless felt that this had become
“acceptable and seen as a sign of diligence and efficiency.”

Stress and a compulsive addiction to overworking
aren’t solely caused by wireless push e-mail, though it makes it easier to get
hooked. And there is a generation that has grown up expecting to connect 24/7 to
friends and family by e-mail, IM and SMS that can separate work and social
never-severed connectivity.

If you are not one of them, you don’t have to go
cold turkey. Remember, even the CrackBerry has an off button.

(Source : Internet Newswires)

levitra

Nirav Shah

FlashGet (size 4.4 MB)

New Page 1

84 FlashGet (size 4.4 MB)

This is a download manager. It uses MHT
(Multi-server Hyper-threading Transportation) technique, supports various
protocols such as HTTP, FTP, BT, MMS, RTSP and has document management features.

FlashGet can call anti-virus automatically to clean
viruses, spyware and adware after finishing download. Check it out at

http://www.flashget.com/index_en.htm

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Nirav Shah

Recover Files (Size 1.17 MB)

New Page 1

83 Recover Files (Size 1.17 MB)

This is file recovery software that allows the user
to recover accidentally deleted files, even files removed from the Recycle Bin,
network drive, compact flash card, portable drives, in a DOS window, or from
Windows Explorer. Download from

http://www.download.com/Recover-Files/3000-2094_4-10715455.html

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Nirav Shah

Stickies 6.5a (Size 975 KB)

New Page 1

82 Stickies 6.5a (Size 975 KB)

Stickies is a PC utility to try to cut down on the
number of Post-It notes you leave stuck to your monitor. It is a computerised
version of those notes.

http://www.majorgeeks.com/download5501.html

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Nirav Shah

Part A — Provisional Attachment of Property under Service Tax

Service Tax

1. Introduction :

Notification 30/2008 — Service Tax was issued on July 01,
2008, whereby Service Tax (Provisional Attachment of Property) Rules, 2008 have
been notified under Chapter V of the Finance Act, 1994 (The Act) to protect the
interests of revenue in certain cases in terms of power given u/s.94(1) and (2)
read with S. 73 C of the Act.

2. Statutory provisions :

2.1 Provisions of S. 73C :

S. 73C was introduced with effect from April 18, 2006 vide
the Finance Act, 2006. However, for the past two years no rules were prescribed
in this respect and therefore, the provisions appearing draconian in nature
remained on hold. With the prescription of the rules, the issue involving
provisional attachment of property assumes great significance. Where any
proceeding u/s.73 or u/s.73 A is pending and a notice is served on a person
u/s.73(1) or u/s.73A(3) and the Central Excise Officer forms an opinion that to
protect the interests of the Revenue, it is necessary to provisionally attach
any property belonging to such person, he may do so in the manner prescribed in
the rules notified now.

2.2 Provisions of S. 73(1) and S. 73A(3):

S. 73(1) provides that where any Service Tax has not been levied or paid or
has been short-levied or short-paid or erroneously refunded, the Central
Excise Officer is empowered to
issue a show-cause notice on the person charge-able with Service Tax which has
not been levied/paid or which has been short-levied/short-paid or a refund is
erroneously issued under ordinary circumstances within 1 year and in case of
fraud/collusion/willful misstatement, suppression/evasion within 5 years.

U/s.73A(3), a show-cause notice can be served when a person liable to pay
Service Tax has collected an amount representing Service Tax from the
recipient of service either in excess of the amount determined to be payable
or has collected which is not required to be collected and has not paid to the
credit of the Central Government.

3. Position under Central Excise and Customs :

With effect from July 13, 2006, S. 11DDA and S. 28BA were
introduced in the Central Excise Act, 1944 (the excise law) and Customs Act,
1962 (the customs law), respectively, to provide for provisional attachment of
property of a person to whom show-cause notice has been served u/s.11A or
u/s.11D of the excise law or S. 28 or S. 28B of the customs law as the case may
be. These provisions are similar to the provisions of S. 73C narrated above.
However, the discussion here is restricted to the attachment under the Service
Tax law.

4. Prescribed procedure contained in the Rules :

Obtaining previous approval of the Commissioner of Central Excise by an order in
writing.

If the Assistant/Deputy Commissioner of Central Excise is
satisfied that to protect the interest of revenue during the pendency of
proceeding u/s.73 or u/s.73A of the Act, it is necessary to provisionally attach
any property of a person, he may send proposal to do so to the Commissioner of
Central Excise after verifying facts and circumstances of the case in the
prescribed format. The Commissioner of Central Excise in turn is required to
satisfy himself that facts and circumstances justify such an action and then
only proceed to send a notice to the person whose property is considered for
provisional attachment.

The notice to be served must contain :

(a) the reasons for initiating action of provisional
attachment;

(b) details of property to be attached provisionally.

The Commissioner of Central Excise is also required to give opportunity to
such person to make submissions within 15 days of service of such notice.

After duly considering the submissions provided by such person in writing or
in person or both, the Commissioner may pass an order in writing to
provisionally attach the property of such person.

5. Which property could be attached ?

The rules specifically provide that the order of the Commissioner would not
attach any personal property of proprietor or partners or directors, as the
case may be.

The provisional attachment of the property shall be to the extent required to
protect the interests of the Revenue meaning that value of the property
attached shall be of the value which would be nearly equivalent to that of the
amount of pending revenue against such person.

Any movable property of such person could be attached only if the immovable
property available for attachment is not sufficient to protect the interests
of revenue.

6. Period of provisional attachment :

Provisional attachment will be rendered ineffective on expiry of six months of serving of the order for attachment.

Only when the Chief Commissioner of Central Excise considers it necessary to extend this period, he would do so only after recording the reasons in writing. However, the total extension would not exceed two years in any case.

7. For any reason, if a person pays pending revenue amount with interest, the provisional attachment would cease to exist.

8. The person whose property is provisionally attached is obliged not to mortgage, lease, transfer or deliver the attached property in any manner except with the previous approval of the Commissioner of Central excise.

9. Some issues:

In the above background, the following questions may arise in the minds of assessees under the Service Tax law :

9.1 Whether the Department can attach bank accounts of a service provider ?

9.1A Any bank account whether current or overdraft account or even a fixed deposit is a movable property. If value of the immovable property proposed to be attached is insufficient to cover the amount of the show-cause notice, the bank account of a service provider could be attached.

9.2 It is experienced and observed by many that in case of some show-cause notices, even after filing replies for over one year or more, the Department has not adjudicated the SCN. Can the Department take recourse to provisional attachment in such cases?

9.2A Service Tax law has not prescribed any time limit for disposal of a show-cause notice. Therefore, it is true that many show-cause notices remain unadjudicated after receiving replies thereto and in some cases even after hearing the noticee in person, no order is passed for months and years. Nevertheless, the Central Excise Officer proposing provisional attachment of property of a person is required to record reasons in writing and the same is required to meet with the approval of the Commissioner of Central Excise. This approval and reasoning are however discretionary and unless is exercised in a judicious manner, can cause harm to service providing fraternity. Further, ‘protection of interests of the Revenue’ being a highly relative term, misuse of the powers by some officers cannot be ruled out. Evaluation of facts and circumstances of a case is a matter of personal judgment when no parameters for determination of the same are prescribed. Service Tax legislation is only fourteen years old. Further, drafting of the provisions lack precision and this has given rise to numerous genuine interpretation issues. The law is slowly evolving only through judicial decisions. Amidst umpteen controversies over interpretational issues, empowering bureaucracy to provisionally attach property based only on show-cause notices does not appear sound at this juncture. Professionals come across several SCNs issued frivolously or without application of mind merely in a routine manner on interpretational issues. In many cases, such notices contain no discussion whatsoever as to why and in what manner a particular taxing entry is applicable to the noticee but may contain a huge demand of Service Tax and consequential interest and penalty and such demands are considered by the Department as disputed recoveries. The demand of these huge amounts is more often than not unrealistic. For instance, in the case of Martin Lottery Agencies Ltd. v. UOI, 2007 *8)STR 561 (Sikkim), demand was shown as over rupees 2,000 crores. In the scenario, prescription of rules for provisional attachment appears premature for the fact that technically, pending adjudication attachment on provisional basis is possible. Therefore, apprehension of misuse is not out of place.

9.3 Whether property of a service provider can be provisionally attached when an adverse order is issued by the adjudicating authority and appeal is admitted by the Appellate Authority?

9.3A The rules for provisional attachment can be invoked only if proceedings are pending u/ s. 73 of the Act. S. 73 does not apply once appeal is admitted and therefore, proceeding for provisional attachment cannot be initiated for adjudicated orders pending in appeal. However, if property is already attached provisionally prior to adjudication, the appeal admitted subsequent to such attachment would not necessitate the Department to release the property attached. However, the provisions of over-all time limit as discussed above would indeed apply.

Nirav Shah

FDI inflow through tax havens increases manifold — Mauritius, Singapore & Cyprus contribute 61% of FDI inflow in 2007-08.

New Page 1

68 FDI inflow through tax havens
increases manifold — Mauritius, Singapore & Cyprus contribute 61% of FDI inflow
in 2007-08.

FDI from Mauritius, jumped from Rs.28,759 crore in
2006-07 to Rs.44,483 crore in F.Y. 2008, registering a 55% growth, whereas FDI
inflows from Singapore rose by whopping 362% during the same period, an analysis
based on FDI data reveals. FDI from Cyprus rose over 12 times from Rs.266 crore
in F.Y. 2007 to Rs.3,385 crore.

(Source : The Economic Times, 20-7-2008)

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Nirav Shah

Pakistani investors stone Karachi Exchange.

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67 Pakistani investors stone Karachi Exchange.

Pakistan investors stormed out of the Karachi Stock
Exchange, smashed windows and cursed regulators after the benchmark index fell
for 15th day, the worst losing streak in at least 18 years. The index has
plunged 35% from the record of 15,676.34 on April 18.

(Source : The Economic Times, 18-7-2008)

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Nirav Shah

SEC sanctions E&Y.

New Page 1

66 SEC sanctions E&Y.

Ernst & Young LLP, one of the so-called Big Four
accounting firms, agreed to forfeit more than US $ 2.9-million to settle U.S.
regulatory claims that it compromised its independence while auditing three
companies.

The firm “engaged in improper professional conduct”
after agreeing in 2002 to create an audio series of recorded interviews with
industry leaders in collaboration with Mark Thompson, a board member for three
of its clients, the Securities and Exchange Commission said in a statement on
Wednesday. It didn’t identify the companies.

Best Buy Co., the largest U.S. electronics dealer,
announced plans in 2004 to drop Ernst & Young as its auditor after learning
Thompson, a member of its audit committee, had a separate relationship with the
accounting firm. Thompson earned about half his income by coaching Ernst & Young
partners to conduct talk show-style interviews for its ‘Thought Leaders Series’
of compact discs, the SEC said.

The regulator also cited Ernst & Young’s Chief
Operating Officer, John Ferraro, for allowing the violations. He settled by
pledging to refrain from similar misconduct in the future. Thompson settled by
agreeing to forfeit US $ 123,900.

The firms, like the other defendants in the case,
didn’t admit or deny wrongdoing. Ernst & Young is giving up almost US
$ 2.4-million in audit fees, plus interest.

(Source : Internet Newswire, 6-8-2008)

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Nirav Shah

I-T nod likely to be made mandatory for remittances.

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65 I-T nod likely to be made mandatory for
remittances.

Sources said a certificate from Assessing Officer (AO)
prescribing the rate at which withholding tax is to be deducted would be
required. This regulation existed some years ago, but was done away with to make
the process less cumbersome. However, with increase in remittances, both
corporate and individual, there is a growing feeling in the Department that tax
could be escaping the Department’s eye.

Tax experts feel this condition would create an unnecessary
roadblock. They feel the Department should specify a threshold or exempt
requirement of NOC in cases where no tax is payable.

(Source : The Economic Times, 8-8-2008)

[Compilers’ Note : Bureaucrats always want to gain and
regain controls. Does the Department have the time and requisite resources to
scrutinise even the Remittance Certificates issued by CAs u/s.195 ?]

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Nirav Shah

Top companies ignore ICAI rule on forex loss treatment.

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63 Top companies ignore ICAI rule
on forex loss treatment.

First-quarter results of several big companies such
as Reliance Industries, Reliance Communications, Bharti Airtel and Jet Airways
would have been a lot worse had they followed the Accounting Standards (AS) 11
rules prescribed by the Institute of Chartered Accountants of India (ICAI).

Most of these companies, however, chose to comply
with Schedule 6 of the Companies Act, which is at variance with the treatment
prescribed in AS-11 for the exchange loss incurred on foreign
currency-denominated liabilities for acquiring fixed assets.

For example, if the forex loss on this account were
taken to the profit and loss (P&L) account as required under AS-11, the net
profits of Reliance Industries for the quarter-ended June would have been 23%
lower than reported. Similarly, Reliance Communications’ net profits would have
shrunk 70% if it had taken the forex loss on the P&L account.

“The effect of changes in foreign exchange rates
has to be charged to the profit and loss account. The standard has been notified
by the Government and is part of the rules. Any violation has to be dealt with
by the Government,” said ICAI President Ved Jain.

The problem is that the Companies Act has not gone
through a consequential amendment.

“The three agencies (Sebi, ICAI and the Ministry of
Company Affairs) need to work in tandem so that there’s no ambiguity,” said
Sanjay Aggarwal, Head, Financial Services, KPMG.

(With inputs from Business Standard Research
Bureau)

(Source : Business Standard, 6-8-2008)

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Nirav Shah

ICAEW Joint Disciplinary Scheme fines KPMG £ 1.6 million.

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64 ICAEW Joint Disciplinary Scheme
fines KPMG £ 1.6 million.

In its latest batch of disciplinary orders and
regulatory decisions, the ICAEW has found KPMG at fault for its work on the 2000
audit of Independent Insurance Group.

The firm “accepted that loss could be turned to
profit by using stop loss insurance which was too good to be true”. KPMG’s audit
partner, named as a Mr. Sayers, was advised by the firm’s concurring partner to
confirm the stop loss terms directly with the reinsurers. No reason was provided
for why the audit partner failed to do this. Independent’s actuaries, Watson
Wyatt, told Sayers that they “did not understand why the reinsurers were writing
these contracts when they appear to be obviously loss making.”

It subsequently turned out that Independent had
agreed to pledge £ 141 million as a condition of obtaining the stop loss, and
there were further agreements which limited the liability of the reinsurers and
sought to pass risk on to an Independent subsidiary. In addition, a different
stop loss contract required the payment of a premium of £ 1.6 billion over four
years. Shortly afterwards Independent’s Chief Executive resigned and the company
went into liquidation.

Eight years after the event, KPMG were finally
reprimanded by the Institute, fined £495,000 and ordered to pay costs of £ 1.15
million.

(Source : Internet Newswires, 8-8-2008)

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Nirav Shah

Da Vinci copied Chinese art, says British historian.

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62 Da Vinci copied Chinese art, says British
historian.

Leonardo da Vinci’s drawings of machines are
uncannily similar to Chinese originals and were undoubtedly derived from them, a
British amateur historian says in a newly-published book.

Gavin Menzies sparked headlines across the globe in
2002 with the claim that Chinese sailors reached America 70 years before
Christopher Columbus.

Now he says a Chinese fleet brought encyclopedias
of technology undiscovered by the West to Italy in 1434, laying the foundation
for the engineering marvels such as flying machines later drawn by Italian
polymath Leonardo.

The 70-year-old sold more than a million copies of
his first book, “1421”, which argued Chinese sailors mapped the world in the
early 1400s before abandoning global seafaring.

To support his argument, Menzies publishes drawings
of weapons, mills and pumps from a 1313 Chinese agricultural treatise, the Nung
Shu, and from other pre-1430 Chinese books, next to apparently similar
illustrations by Leonardo, Di Giorgio and Taccola. “By comparing Leonardo’s
drawings with the Nung Shu we have verified that each element of a machine
superbly illustrated by Leonardo had previously been illustrated by the Chinese
in a much simpler manual,” he says.

(Source : The Times of India, 30-7-2008)

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Nirav Shah

Recent Developments in Direct Taxation

Lecture MeetingDate
: 14th July, 2010

Venue : IMC Hall, Churchgate, Mumbai

Speaker : Pinakin D. Desai, Chartered Accountant

Subject :
Recent Developments in
Direct Taxation

1. After a brief
introduction of the topic for the evening, the learned speaker took up for
discussion the Source Rule. The amendment by the Finance Act, 2010 had widened
the source rule for interest, royalty and fees for technical services. As a
result, in case if technical services are rendered by a Non-Resident (NR) in
India, then even if the NR does not have a residence/place of business/business
connection in India or the NR has not rendered services in India, still a case
could be made out that the non-resident will be chargeable to tax in India.

The learned speaker explained the decision of Ishikawa
Jima Harima Heavy Industries Ltd. v. CIT, (288 ITR 408) (SC) which had laid
down the theory of Territorial Nexus for taxing the income of a non-resident in
India. The learned speaker was of the view that the retrospective amendment by
the Finance Act was made with a view to overrule the said decision as well as
the ratio of :

Jindal Thermal Power Co. Ltd. (Kar.) (225 CTR 220)

Clifford Chance v. DCIT, (Bom.) (221 CTR 1)

Subsequent to the amendment, the Mumbai Tribunal in the case
of Ashapura Minichem Ltd. (2010) (5 Taxman 57) made a distinction between
rendering of service in India and provision of service in India, viz.,
provision of service in India does not require that the service must be
performed or rendered in India. The speaker observed that in the context of
territorial nexus the rendition and provision of service should have been
regarded synonymous conditions. However, since this aspect was not addressed by
the Tribunal, the controversy in regard to whether or not the test of Ishikawa
is satisfied in case of a NR performing service from outside India remains open.

In the opinion of the speaker the following situations would
not be affected by amendment :

Absence of Article on Fees for Technical Services (FTS) in DTAA

DTAA on restrictive fees for included services (FIS) concept

Cases protected by Independent Personal Services Article

Interest/royalty/FTS paid for business/source of income outside India
[Domestic Source Rule exception — in S. 9(1)(vi)(b)]

2. The next development discussed was the taxability of
shares received by non-corporates. S. 56 was amended w.e.f. 1st June 2010 to
hold that in case of a partnership firm or a closely-held company, if there is
receipt of shares of a closely-held company, without consideration or for a
consideration less than the fair market value (FMV), then such shares would be
liable to tax in the hands of the recipient if the difference between the FMV
and the consideration exceeds Rs.50,000.

As per the explanatory memorandum, the purpose of this
provision was to capture the clandestine transactions in the transfer of
property through the medium of shares. The speaker felt that this intent may not
be appreciated by lower judicial forums and that could result in problems in
respect of genuine transactions.

According to the learned speaker the amendment would not
apply to the following assets :

Mutual fund units

Convertible or non convertible debt instrument

Coupon/warrants

Areas of concern would be receipt of bonus shares, rights
shares, receipt of shares on amalgamation, conversion, split, etc.

3. The third amendment was the insertion of S. 47(xiiib). The
speaker was of the view that the following conditions specified may pose a
challenge for a smooth conversion of a company to an LLP :

All shareholders of company to become partners in the LLP : This
would mean that even the preference shareholders should become partners in
the LLP. This might not be an acceptable criteria and some remedial action,
such as redemption or conversion of preference shares to debt, might need to
be undertaken.

Shareholders not to receive any benefit except by way of profit share &
capital contribution : The safest position would be to convert the
accumulated profits to capital contribution and not to withdraw the same for
3 years. Salary and interest could be continued to be paid as they are not
payments on conversion to LLP.

Sales/Turnover/Gross Receipts in business to not exceed Rs.60 lakhs in
the first 3 years : It could be contended that if the company is not in
business, i.e., it is not carrying on any business activity, this
condition would not apply. If the company is in profession, this condition
may still apply because business includes profession.

Another issue would be as regards the operation of S. 79. In
the opinion of the speaker, the term shareholding has been defined very
restrictively by courts and hence, conversion to LLP could constitute change in
shareholding and as a result the benefit of carry forward of losses may be lost.

The fourth issue was regarding losses in respect of transaction in derivatives. The learned speaker felt that the CBDT issued Instruction to Assessing Officers to disallow losses in respect of such transactions decision of the Apex Court in Woodward Governor India P. Ltd. (312 ITR 254] Actual losses allowable only if the transactions qualify as ‘eligible derivative transactions’ under clause (d) of proviso to S. 43(5) : There have been judicial decisions that if a derivative transaction, not covered by S. 43(5)(d), is a hedging transaction, then the onus is on the assessee to prove the same. However, once it has been proved, then the transaction has to be treated as a business transaction and not as a speculation transaction. Hence, this part of the instruction is also questionable.

4. The speaker then discussed various proposal mooted by the Direct tax code (DTC) the concept of place of effective management (POEM) proposed by the DTC. According to judicial forums POEM would be where the Board of Directors or Executive Directors make their decisions. In such a case a wholly-owned foreign subsidiary of an Indian company would have a POEM in India and therefore become resident.

The provision regarding Controlled Foreign Company (CFC) proposes to tax passive undistributed income of a CFC of a resident. In respect of the passive income earned by a Foreign Company (FCo) controlled directly or indirectly by an Indian resident, the DTC proposes that income not distributed shall be deemed to be dividend received from FCo.

As a result, there could be double taxation. The income of the CFC would be taxed once in the hands of the FCo on the basis of residential status and again, in the hands of the ICo on the basis of the CFC provisions.

General Anti-avoidance Rules (GAAR), gave immense powers to the Assessing Officer to disregard an arrangement that had been entered into by a taxpayer for the purpose of obtaining a tax benefit. According to the speaker, GAAR would apply to a transaction if while obtaining a tax benefit, the transaction fulfils any one of the following four conditions :

The arrangement not at arm’s length

It represents misuse or abuse of the provisions of the Direct Tax Code

Lacks commercial substance

I sentered in a manner not normally employed for bona fide business purposes

The learned speaker then discussed the concerns regarding the implementation of GAAR provisions.

5. Finally, the following recent rulings were discussed by the learned speaker :

Vijaya Bank (SC) 320 ITR 577 :

Credit entry in debtor’s account not necessary to constitute ‘write-off’ for the purposes of bad debt write-off deduction u/s.36(1)(vii).

Kelvinator of India (SC) (LB) 320 ITR 56 :

AO does not have power to ‘review’ his own order. S. 147 permits reassessment where there is ‘reason to believe’. Reassessment on change of opinion is review of order.

Kanchanganga Sea Foods Ltd. (2010 TIOL 03 SC-Intl.) :

S. 5(2) creates charge for NR Company, inter alia, in respect of income received in India. If first receipt in kind is in India, subsequent sale and realisation outside India does not impact taxation.

Times Guarantee (Mum. SB) (ITA No. 4917 and 4918/Mum./2008) :

Law as applicable on 1st day of relevant assessment year applies to carry forward and set-off of Unabsorbed Depreciation (UD). S. 32(2) was amended substantively from A.Y. 2002-03 and position applicable to A.Y. 1996-97 was restored. Such amendment is not applicable to UD of the period from A.Y. 1997-98 to A.Y. 2001-02.

Nirav Shah

ETHICAL PRACTICE IS A DELIBERATE EFFORT

Namaskaar

“Like the sharp edge of a razor is that path difficult to
cross and hard to tread — thus the wise say”

(Kathopanishad)

Things around us do not auger well, not only for the human
mankind but also for all other living beings on this earth. There is rampant
corruption, greed, dishonesty and selfishness pervading our lives that we have
often forgotten of what it is to be ethical. I know not if these are the
characteristics of the so-called ‘Kaliyuga’, but suffice it to say that human
greed and dishonesty have broken all barriers and may be it is on account of
this that the quality of our lives both mentally and physically has waned.

In such an environment, there is a tendency to overlook
ethics, ethical practices and good values as all of us, or most of us, are in
the rat race. When one is approached and a topic of ethics is broached for
discussion, defences are built up to say that it is difficult to confront
negative tendencies in the environment. It is believed that it is easier to
behave like the masses, as that gets results rather than confronting the system.
This choice arises as individuals have the desire to stay away from difficulties
or that it creates a sense of insecurity.

To be ethical requires a great deal of determination. It has
to necessarily be both in thought and action. It has to be cultivated and
gradually nurtured to reach a stage of personal satisfaction and a character par
excellence. It is not a matter of recognition but it is a matter for deep
contemplation and personal satisfaction; a satisfaction for the soul. It is a
feeling beyond expression. To express is to lose the feeling of it, and it has
to be instantaneous without forethought. The terrain is a difficult one and
therefore requires constant endeavour, deliberate effort and sincerity in
approach. It is a path of dedication and requiring lot of sacrifices along the
way.

It is indeed not an easy task to expect any transformation
overnight. The ways of the world are tricky. But as Lord Gautama Buddha says
that to accept ethical living requires dispassionate reflection upon one’s
conduct. Such a one should develop positive skills and thinking so that human
mankind’s humane possibilities may be realised. If this is so, then this is
beyond monetary considerations, material comforts and mundane living. Can we
accept this challenge ? May be yes, but it requires building up tremendous
potential and grit of conviction for one to be there.

Public recognises money, recognises power and therefore
people tend to gravitate towards the wealthy and powerful. No attempt is made to
segregate the chaff from the grain. It is there for us to see as an everyday
phenomena and we bother not to worry about the methods or the means. We are awed
by their positions or with their possessions. On the other hand, we have no
respect for people who fall short of stature in public life. People who have
towed ethical lines may not have achieved anything in life, for obvious reasons,
but we tend to ignore them or praise their virtues for it is neither endowed
with riches or with positions in public life. Public life is replete with such
examples and requires no examples for substantiating it.

We are all aware that there are numerous examples in Mahatma
Gandhi’s life which are worthy of emulation. It was easy for him to live and
swear by those values, only because he had given up every material possession
and hence was beyond fear. When you have no fear of losing anything, you get the
liberty and freedom of behaving without causing harm to the living environment.
You can refuse and desist to actions beyond ethics. Therefore the bottom-line
for adopting ethical values stems from the thought of willing to lose and the
willingness to let go.

We cannot be lured by money, we cannot be lured by material
comforts and we are not going to be influenced by mass psychology. God has given
us the mind to think and therefore we think for the general good of mankind. We
shall desist to efforts which have the tendency of thwarting natural methods of
living. This then gives us the strength of acting and behaving without fear.

Let us not have a false sense of insecurity in our lives. Let
us live our lives fully without fear and this requires a constant endeavour of
living with values and virtues. Sacrifices are a must and we have to consciously
be aware to let go things that cannot be obtained or achieved through natural
means. Hence, ethical practice is by choice and deliberate efforts.

“Your only obligation in any lifetime is to be true to
yourself.”

— Richard Bach

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Nirav Shah

Drafting of Appeals, Representation and Rules of Evidence

Lecture Meeting

Subject : Drafting of Appeals, Representation
and Rules of Evidence

Speaker : Chetan Karia, Chartered
Accountant

Venue : I.M.C. Hall, Churchgate, Mumbai.

Date : 6th August 2008

(1) The learned speaker, while setting out the scope and
coverage, remarked that the subject has three elements. Actually each element
can become a topic by itself for discussion. Still to make the discussion
concise and informative, he combined the first 2 elements, viz. drafting
and representation together and the third one was considered separately.

(2) The right of appeal is not an inherent right, but is
conferred by statute to ensure natural justice in arriving at fair and just
quantum of income through Appellate process. In CIT v. Ashoka Engineering
Co., 194 ITR 645 (SC), the Supreme Court held that such provisions giving
right of appeal should be liberally construed.

(3) The speaker suggested that before filing an appeal, the
order appealed against needs a careful study. Apart from quantum addition and
its tax effect, one has to ascertain whether the additions are unjust and unfair
and also whether they are contrary to provisions of law. One should also examine
whether addition, though small in the current year, would set a bad precedent
for future. While deciding whether the appeal is really called for the merits
and strength of the case should be looked objectively. The appellant should also
keep in mind the powers of enhancement vested in CIT(A). There is no right to
withdraw the appeal. The entire assessment gets open before CIT(A) and his
powers are co-terminus with powers of the AO. CIT v. Rai Bahadur Hardotrai
Motilal Chamaria, 66 ITR 443 (SC).

(4) Drafting of Statement of Facts and Grounds of Appeal
: The statement of facts plays very important role in appeal proceedings.
The Appellate authorities while deciding the appeal need to have before them the
basic facts and events that transpired during assessment proceeding. Whatever is
stated in the assessment order is the version and viewpoint of the AO while
arriving at his decision. If the appellant is in disagreement with the AO’s
version, he has to convincingly put forth before the Appellate Authority, his
standpoint and facts of his case and evidences in support of those facts. At
this juncture, it is necessary to consider whether all these facts and evidences
were laid before the AO during the assessment proceedings.

As regards drafting of grounds of appeal, the speaker advised
that grounds should not be argumentative and lengthy, but should be short,
precise and to the point. Once it is decided that the appeal is to be filed,
then it must be filed strictly within the period of limitation.

(5) The various issues that need consideration in appeal proceedings are :

(a) whether the AO had jurisdiction to pass the impugned
order. Jurisdiction means not only territorial, but also consideration of period
of limitation within which the order is to be passed (S. 153), the financial
limits, obtaining prior approvals of superior authorities, recording in
assessment order and on proceeding sheets about his satisfaction that a
particular default was committed, particularly in penalty proceeding
u/s.271(1)(c). In appropriate cases jurisdiction should be challenged.

(b) Consideration of additional evidence : If
it is the case of the appellant, that the AO has not given sufficient
opportunity to present such evidence before passing the order or that the
assesses was prevented by sufficient cause from adducing such evidence, then
specific prayer should be made to take on record and consider such evidence
before passing Appellate order.

(c) The appellant can take additional grounds and press fresh
claims not set out in appeal memo, if the material relevant thereto is already
on record. In the following cases before Supreme Court and High Courts, this
issue has been considered and the ratios of those cases should be considered
before taking up such additional grounds. The assessee can make alternative
pleas for consideration of Appellate Authority, e.g., allowing
depreciation, if certain expenditure is treated as capital expenditure.

The citation of cases on making fresh claims not originally
claimed in grounds of appeal are as follows :

(i) CIT v. Kanpur Coal Syndicate, 53 ITR 225 (SC).

(ii) CIT v. Jute Corporation, 187 ITR 688.

(iii) National Thermal Power Co. Ltd. v. CIT, 229
ITR 383 (SC).

(iv) Ahmedabad Electric Co. v. CIT, 199 ITR 351 (Bom.)
(FB)

(d) The following judgments on filing of additional grounds
not originally taken in the appeal memo :

(i) Shilpa Associates v. ITO, 263 ITR 317 (Raj.),

(ii) Baby Samuel v. ACIT, 262 ITR 385 (Bom.).

It was held that additional ground can be taken any time
before the appeal is heard.

(e) The appellant should ensure that all taxes due on
returned income are paid before filing of appeal. S. 249(4) puts a clear bar or
powers of CIT(A) to entertain any appeal if taxes due on returned income are
unpaid on date of filing of appeal.

(6) Filing appeal before ITA Tribunal and filing of cross
objections :

Both the parties i.e., the assessee and the Assessing Officer, aggrieved by order of CIT(A) can file their appeal before the ITA Tribunal. The time limit is 60 days from the date of receipt of Appellate order of CIT(A) where the Department has filed an appeal to ITAT; the assessee can file cross objection to the Department’s appeal. In such cross objections the assessee can file an appeal on all grounds raised by him which have not found favour with CIT(A). So also where the assessee has claimed allowability on alternate grounds and CIT(A) has allowed on one ground and dismissed the other, then the assessee can raise cross objection against alternate ground dismissed by CIT(A).

(7) Representation before Appellate authorities:

The role of the representative is to assist the Court in arriving at correct and judicious judgment. While taking every effort to present the client’s case more effectively, the tax representative should not identify himself with success of client’s case. The facts of the case should be carefully studied before making appearance before the Court. The submission both on facts and on law should be compiled in the form of paper book.

The paper book should be exhaustive enough to cover all materials supporting the grounds but not bulky. The order in which the papers should be arranged should assist smooth flow of presentation of arguments to be made before the Appellate authorities.

In case of appeal before ITAT as per ITAT Rules, though bulky paper book is filed during proceedings, it is only those papers which are referred to in the Appellate order form part of the case records.

The rules governing the filing of additional evidence are Rule 46A of IT Rules for appeal before CIT(A) and Rule 29 of ITA Tribunal Rule, for appeal before the Tribunal.

8) Presentation of judgments, decided cases before the Court :

The accessibility to innumerable cases with citations has become possible due to computer technology. This calls for skill of a professional to be selective. it is not the decision, nor discussion in a judgment cited is to be relied upon, but the ratio decidendi is more important. There is difference between ratio and obiter dicta. Doctrine of precedents should also be borne in mind. Supreme Court judgment is binding on all authorities and becomes the law of the land. After the Supreme Court, the judgment of jurisdictional High Court has equal binding force in that State, till such judgment is reversed. Where there is no judgment of jurisdictional High Court, then judgments of High Courts of other States have binding force on the Tribunal. If there is conflict in judgments of two High Courts, the Tribunal can follow judgments which are closer to the case before it. So also the judgment of Special Bench is binding on coordinate Division Benches.

9) Some practical suggestions on presentation and on ideal behaviour of tax representative during hearing:

a) Dress Code: The prescribed dress to be worn should not be too gaudy.

b) Behaviour gestures, body language, should not be irritating, provocative but should be normal and decent.

c) Eye contact should be maintained with Members of the Bench.

(d) The speech, its tone and speed: The tone should be polite and should have clarity whereby the message gets conveyed.

e) It must always be remembered that the Appellate authority i.e., CIT(A) or the Tribunal Bench being deciding authorities, have every power to ask any question for finding of facts as well as for collecting information. The representative must reply all such questions patiently and to the point. He should never question the relevance of enquiry.

f) The representative should avoid the habit of interrupting when the representative of other side (DR) or members of the Bench are speaking.

g) The representative should know where to stop.

(10) Rules of evidence:

The authorities deciding the case, the AO, CIT(A) and the Tribunal have to give their findings while deciding the case. For that purpose support has to be taken of some credible and conclusive evidence. Such evidences is required to be brought on record by following certain procedure:

a) In Prabhavati S. Shah v. CfT, 231 ITR 1 (Born.); the Bombay High Court has held that the Rules put fetters on rights of the assessee to produce additional evidence, but not on Appellate authorities to consider it if they want to consider. Where the AO has made addition based on statement of any party behind the back of the assessee and contents of such statement is contradicted by the assessee, then he must be given opportunity to cross-examine the deponent. This is relevant while deciding merits of additions u/s.68 and u/s.69.

b) Income-tax proceedings are quasi-judicial civil proceedings and hence the provisions of the Evidence Act applicable to criminal proceedings are not applicable to Income-tax proceedings. This is held in the following cases:

i) Dhakeshwari Cotton Mills v. CfT, 26 ITR 775 (SC)

ii) Kishinchand Chellaram v. CIT, 125 ITR 713 (SC)

iii) J. S. Parker v. V. B. Palekar, 94 ITR 616 (Born.)

iv) Chuharmal v. CfT, 172 ITR 250 (SC).

c) Books of accounts regularly maintained are good evidence but not conclusive. This is held as evidence in V. C. Shukla’s case 3 SCC 410 (SC), 82 ITD 85 (Mum.) (TM).

d) If opportunity is not given to the assessee, such evidence is not good evidence and addition based thereon will not sustain. [Kishinchand Chellaram, 125 ITR 713 (SC)]

e) Cross-examination and statement of witnesses: if during the cross-examination the witness contradicts his earlier statement, then his statement cannot be relied upon by the AO for making addition and is to be completely ignored.

f) The information given by the witness should be factual and not based on hearsay. It is necessary to prove what is apperant is real. [Durgaprasad More v. CIT, 82 ITR 540 (SC)]

g) Rule 46A : The CIT(A) has full right to decide whether additional evidence should be admitted or not. Where it is the contention of the assessee that he was prevented by sufficient cause, he has to prove it.

h) Substantial cause and Rule 46A of the LT. Rules or Rule 29 of the ITAT Rules: The Supreme Court in K. Venkat Ramaiah v. A. Seetharam Reddy, AIR 1963 SC 1526 has ruled that in the interest of a fair judgment, the Appellate authority should take a sympa-thetic view and should not deny admission of evidence on hypertechnical ground.

The meeting terminated with a vote of thanks to the learned Speaker.

Nirav Shah

Prayer makes one complete — Part I

Namaskaar

Prayer does not necessarily change things for you, it changes
you for things.” — Swami Chinmayananda

Two years back, when my mother was on deathbed, I prayed
intensely for her life. A few days passed as if my prayers were not answered as
her condition was deteriorating. Suddenly, one day, a realisation dawned on me
that she was suffering a lot and it was my love, which was holding her back.
From that moment, I left everything to God’s will, and when finally she passed
away, I remained calm. This realisation through prayers helped me to remain
composed and experience my mother’s presence beyond her physique.

Do we need Prayer ?

When I thought of this, a counter question flashed in my
mind as to whether we need food to live on ? What food is to body, prayer is
to the mind. Prayer makes our mind healthy, positive, sensitive and humble.
Our attitude or reaction to the situation undergoes change, even as we derive
strength from within.

Prayer and service

Service to mankind is prayer in action !

In May 2008, I visited a place called Nirmal Hriday (Tender-Hearts)
— a home for dying destitutes run by the Mother Teresa Foundation in Kolkata.
I was touched to the core by the selfless services rendered by the volunteers
to the terminally ill. I found that they bring people who are dying on the
roads of Kolkata and provide them refuge with love, care and affection. One of
the volunteers said, that “we are really doing no great thing but just are
serving the suffering humanity — a prayer, indeed. I saw ‘prayer in action’
for the first time. Prayer until then to me was reciting a few hymns — the
meaning of which I hardly ever knew. However, later I realised that prayer is
not merely reciting hymns or visiting temples but it (prayer) is a means
communicating with God. I also realised that one of the channels of
communication with GOD is service to the humanity — as it is said “Manav
Seva is Madhav Seva.” To quote Mother Teresa “the fruit of silence is
prayer, the fruit of prayer is faith, the fruit of faith is love, the fruit of
love is service and the fruit of service is peace.”

Prayer and Emotions

An emotion laden prayer is an invocation to His grace !

Questions often arise in our mind, as to how do we pray ?
And what will make God answer our prayer ? For prayer to be effective or
responsive, it is not important how long we pray, but how intensely we pray.
Intensity comes from heart overwhelmed by emotions. Prayer without emotions is
blabbery, whereas prayer packed with emotions does not need any verbalisation,
for He is omnipotent and omniscient who knows all we intend, think or speak.

A small boy in a Church was reciting alphabets — A, B, C,
D. The presiding priest offered to teach him how to pray but was stunned by
the answer given by the boy who said, “I know not complex hymns or words,
though I know that they all are composed of alphabets, and God being
omnipotent, can understand my alphabets hence He can compose a prayer from me
of His choice’. Needless to say that the prayer of the child was well
received, rather than that of the priest who prayed more from his mind
rather than from his heart. But then generating emotions in prayer
is easier said than done. How does one go about it ? Let me give you a simile.
We human beings have launched many communication satellites whose signals are
beamed across the globe. In order to receive these signals and strike a
communication link, we need to adjust the frequency and/or wavelength of our
handset (mobile). Some receive messages/images in colour, others in Black and
White. The quality of communication depends upon the quality of the handset,
that is, whether or not it is capable of receiving colour images, how it is
programmed and so on. If we switch off the handset, we cannot receive any
communication/message whatsoever, notwithstanding the fact that signals of the
message are there in the atmosphere. But, remember, there is no flaw in His
communication. We only need to fine-tune our receiving set to match His
wavelength and frequency in order to strike a link between HIM and us. This
can be done through love, faith and devotion, wherein faith and devotion make
for proper programming and love acts as a battery — battery that supplies
power, — power which keeps the receiving set tuned at all the times.

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Nirav Shah

Is life worth living ?

Namaskaar

Poets and philosophers from days gone by have tried to find
an answer to the question “Is life worth living ?” However, with the
examinations mercifully more than four months away and Bombay’s less warm
season, (Bombay never has a winter), just about to make its bow, one would
really be a cynic to answer it in the negative.

Particularly when this question is put to college students
the answer cannot but be in the affirmative, for life with its vast uncharted
vistas full of adventures and the joy of accomplishment is still before us. Each
one of us has his ambitions to be a Fleming, an Edison, a Lincoln, a Marshall,
Hall and surely the mere opportunity of being able to put in an effort to bring
to fruition our dreams, makes life worth living.

By saying that life is worth living, I do not mean that there
are no hardships to be endured, nor does it signify the absence of pain and
sorrow, nor even of death; thought it so often strikes most cruelly and
unexpectedly. As a matter of fact it is these disappointments, it is this
challenge full of uncertainties and vicissitudes which life offers, the suspense
that it holds, adds zest to living. In the type of Brave New World envisaged by
Aldous Huxley, life would indeed be physically comfortable, but there we would
merely be existing and not living. We on the other hand want a world where a man
by facing his troubles can prove his manhood. May this world always have
something to be solved, patched, or mended ! But above all, may it never be a
soft place for soft people with soft heads. This world of ours with dreams for
us to dream, really deserves a vote of confidence, for, with its dirt and
cleanness, its ups and downs and its total unexpectedness, it has given, through
variety, more pleasure than pain. As the poet says :

“This world that we are living in,

Is mighty hard to beat

There is a thorn on every rose

But ain’t the roses sweet ?”

If, of course one wants to sit whimpering in a corner pitying
oneself for the slings and arrows of outrageous fortune, then undoubtedly one
will not find life worth living for the simple reason that one is determined not
to find it so. Surely one lacks some essential human quality if one does not
find life worth living when a former President of the United States who could
not walk without being supported, an English poet who was blind, a German
composer who was deaf, an American lady, still happily with us, who for the
major portion of her life has been unable to see or hear or speak have all
unequivocally declared that life has given them great satisfaction and they
would not like to change anything if they were to re-live it.

The inventions of modern science have placed so much in the
hands of so many for so little, that today there is no reason for anyone to find
life not worth living. No longer do we have to regulate our work by the sun, no
longer does it take months to communicate information from one place to another,
no longer are optimism and a faith in God the main foundations of medical
science.

There is no excuse today to feel bored with life. We have the
cinemas, the theatres, the art galleries —to mention but a few of our modern
amenities. It may of course be stated that all this costs money and it is only
for the ‘haves’ that life is worth living. But let us not delude ourselves. The
best things in life are free. One does not need a large bank balance to watch
the sun reluctantly merging in the sea, sending forth a last ray in salutation
and leaving, as it departs, its footprints on the clouds of the sky amidst a
beautiful colour scheme. What more satisfying experience can one have than to
watch the sea on a full-moon night, the waves shimmering in the moonlight as
they dash, to no avail, against the rocks and then roll back. Here indeed is a
form of rock and roll more ancient and certainly more graceful than its human
variant.

One may ask next : “What is the secret which makes life worth
living ?” It is to remember to remain contented always — to thank God, it is not
worse. A small verse comes to mind :

“From the day that we were born

Till we ride the hearse

Nothing ever happens

That couldn’t have been worse.”

One should also not forget that when we point an accusing
finger at another, three are pointing towards ourselves and that it is far
better to trust and be cheated than never trust at all.

Life is not necessarily made worth living merely by
accomplishing great things. A Tom Thompson can find life as enjoyable as a
Winston Churchill. It is the little things which count. The smile received when
a frown was deserved, the first time one saw one’s name in print, that glorious
cover drive off the back foot by Wally Hammond, the memorable occasion when one
entered the Quarter-finals of the District Championships, the joy one obtained
in reading that book by P. G. Wodehouse, lying curled up in bed with the rain
beating outside and at a time when one really should have been in college, the
wonderful sense of achievement one felt when one successfully placed a mouse in
that nasty mathematics-teacher’s drawer, the sheer bliss of that first kiss —
these are the things which make life worth living.

I am not unaware of the fact that poets and sages throughout
the ages have stated that Life is not worth living. As Shelley said in his “Ode
to a Skylark”.

“We look before and after,

And pine for what is not.

Our sincerest laughter

With some pain is fraught,

Our sweetest songs are those that

tell of saddest thought.”

But as one rambles through the woods with a clear blue sky
above, with one’s pet dog trotting a few paces behind, with the trees in full
bloom and the birds giving vocal expression to the joy which one feels in one’s heart – the joy just to be alive at a time like this to be able to repeat such divine poetry does not that in itself make life worth living?

Nirav Shah

An insight into Draft Point of Taxation Rules

1.
Introduction :

Given the fact
that frequent change in the rate of tax on services over a period of time has
caused confusion and uncertainty both among tax officers and assessees as to
the criteria based on which the tax may be levied, the Government has decided
to provide framework to determine point of taxation in different situations by
publishing Draft Point of Taxation (for Services Provided or Received in India)
Rules, 2010 (the POT Rules). The said POT Rules are also accompanied by a
preamble letter and Explanatory Notes on the POT Rules. The Government has
clearly expressed that the proposed rules are meant to provide the regulatory
framework and clarity to determine point of taxation whenever there is a change
in the rate of service tax. Similar difficulty is faced in determining point of
tax in the cases of continuous services. The taxable event under the law takes
place on provision of service. However, the liability to pay service tax
currently arises only on the receipt of the payment. In the POT Rules, there is
a shift proposed by providing a link to the payment of tax with raising of
invoice or payment for service provided or to be provided or provision of
service, whichever is occurring earlier. According to the Government, the
current rule allowing payment of tax on receipt basis does not fall in line
with the Central Excise law and the VAT laws of the states of India. In both
these cases, the payment is required to be made on accrual basis i.e., on the
event of clearance of goods in the case of former and issue of invoice in the
case of latter and that Goods and Service Tax (GST) which is in the offing is
likely to follow this practice. Thus, the proposed POT Rules appear to be a
precursor to GST, which is likely to be implemented in April, 2011.

2. Taxable
event and point of taxation :

In any fiscal
legislation, specific provisions exist for charge of tax and collection of tax.
Under the service tax law, the charge of tax is created by S. 66 of the Finance
Act, 1994 (the Act) on prescribed taxable services. ‘Taxable Service’ is
defined as a service provided or to be provided. Therefore when a service is
provided or agreed to be provided, there takes place the taxable event. As
against this, the POT Rules seek to define ‘taxable event’ as the event which
causes the tax liability to arise, namely, the provision of service, issuance
of invoice or the receipt of payment. The events of issuance of invoice and
receipt of payment are deemed as provision of service under a fiction proposed
to be created under the law. When an invoice is issued or payment is received
prior to providing the service by a service provider, the service would be
deemed to be provided at the time the invoice was issued or the payment was
received, whichever occurred earlier and the liability to pay tax would arise
at this point. Referring now to the collection of service tax, currently Rule
6(1) of the Service Tax Rules, 1994 provides that service tax liability arises
when payment for taxable services Is received. In the POT Rules however, ‘Point
of Taxation’ is defined to mean the point of time when the tax becomes payable
to the Government. Thus, the POT Rules have proposed to shift the point of
taxation away from the receipt of payment for the service to either at the time
of provision of service or the issuance of invoice for the service or the receipt
of payment, based on various situations as envisaged in the Rules, but
essentially on the concept of accrual rather than solely on the receipt of
payment.

3. Key
features :

3.1 The POT
Rules essentially provide framework to determine the point of taxation mainly
under the following situations :

à When any advance payment is received towards any
taxable service.

à When there is a change in the rate of tax with regard
to existing taxable service whether exempt or otherwise and there is a
difference in date and timing of provision of
service, raising of invoice and date of receipt of payment.

à When there is a change in the rate of tax with regard
to service which is taxed for the first time.

à When there is a continuous supply of a service or a
service provided on a long-term basis.

à When there is a transaction between associated
enterprises.

à In case of royalty and similar payments.

3.2 Advances
towards taxable services :

Under Rule 4,
the point of tax for advances is dealt with. It provides that service tax is to
be paid on the date of receipt of the advance towards provision of a taxable
service and the rate applicable would be the rate prevailing at the time of
receipt of such advance. Thus, the tax payment under this rule falls in line
with the basic principle underlying the provisions in the POT Rules that the
tax payment is linked to the issuance of invoice or receipt of payment,
whichever is earlier. The Government in its explanatory note in this regard has
clarified that once the tax is charged on the payment, the determination of tax
would be final. Further, it is expressly provided in the rule that no tax is to
be paid on interest-free refundable deposits.

3.3 Change in
rate of tax – Existing services :

Rule 5 seeks to
determine the point of taxation where there is a change in the rate of tax as
regards existing taxable services whether exempt or otherwise and there is a
difference of time between provision of service, raising of invoice and the
time of receipt of payment of taxable service. Table1 sets out the
determination of point of taxation under the said rule.

The principle followed in the above rule is that when two points of taxation have occurred, the ear-lier of the two would be the point of taxation.

3.4 Introduction of new services in the tax net :

Table
2

Sr.

Provision

Issue of

Receipt of

Point of

No.

of service

invoice

payment

taxation

for service

(i)

Before the

Irrelevant

No tax

date of

new levy

(ii)

Irrelevant

Before

No tax

when

the date

provided

of new

levy

(iii)

After the

Before

No tax

date of

the date

new levy

levy but

of new

within 14

levy

days of

receipt of

payment

Rule 6 provides for determination of point of taxation when a service is brought in the tax net for the first time. Refer Table 2. This rule however does not apply to services provided on a continuous or long-term basis. (Rule 7 deals with services supplied continuously or for a long duration of time.)

3.5 Continuous supply of services :

Sr.

Provision of service

Issue of invoice

Receipt of payment

Point of taxation

No.

for service

(i)

Before change

After change

Date of invoice or payment,

in rate

whichever is earlier

(ii)

Before change

Within 30 days of

Date of invoice*

in rate

invoice date

(iii)

After change

Before change

After change

Date of payment

in rate

(iv)

After change

Before change

Date of payment or invoice,

in rate

whichever is earlier

Continuous supply of services is defined to mean services supplied under a contract for a period exceeding six months or services as specified by the Government to be in continuous supply. The proposed Rule 7 provides that the rate of tax would be the rate applicable on the date of payment becoming due in terms of the contract irrespective of whether or not payment is received or invoice is raised. If the payment becomes due on completion of any milestone in terms of the contract, the date of completion of such milestone is the point of taxation. If the contract does not contain any clause for date of payment or mile-stone, the service tax is required to be paid on raising of invoice or receipt of payment, which occurs earlier.

It is further provided that when the service supplied continuously is covered under this rule is introduced for the first time in law, no service tax is required to be paid on payments received prior to service becoming taxable, even if the service is provided subsequently. The Government has clarified that in case of ongoing contracts of construction, the tax is liable to be paid on the basis of raising of invoice or the date provided for payment in the contract or the actual date of payment, as the case may be. When payment for construction is received prior to applicability of service tax and commencement of construction occurs after the levy coming into force, no service tax would be levied on such payments made prior to the applicable date.

3.6 Services provided to associated enterprises:

In case of transactions with associated enterprises, Rule 8 has provided that the relevant date is the date of debit or credit in the books of account or issuance of debit or credit note or the date of payment, which is earlier.

3.7 Royalty and similar payments:

As regards royalties and similar payments where the whole amount of consideration for service is not ascertainable at the time of performance of service and subsequently the use or the benefit of these services by a person other than the supplier gives rise to any payment of consideration, Rule 9 has provided that the service would be deemed to be provided at the time of each payment is made or invoice is raised, which is earlier.

At the end:

While the attempt of the Government to introduce framework of POT Rules should be regarded as a welcome step since it is done with the basic objective of addressing some of the prevailing certainty and open issues under the current dispensations of law, there exists certain aspects which appear to add to complexity and difficulty of implementation. For instance :

As aforesaid, currently the charging S. 66 of the Act determines the taxable event and which is ‘provision of a service’. To redefine this rudimentary aspect of the fiscal statute under the rules proposed to be issued in exercise of the powers conferred u/s.94(2) of the Act seem to be going beyond the Finance Act, 1994 and to this extent, re-consideration of this very fundamental aspect appears necessary.

The objective of the Government as indicated in the preamble letter and Explanatory Notes is to specify point of taxation as the date of raising of invoice, provision of service or receipt of payment, whichever is earlier, whereas the POT Rules have dealt with only specific conflicting situations and not the remaining or residuary situation/s. If the point at which the service provider should pay tax is changed, it is not indicated whether the existing Rule 6(1) of the Service Tax Rules, 1994 would be amended consequent upon the proposed POT Rules coming into force. Or else, is it to be contended that the point of taxation except in the case of specified situations, would be still the time of receipt of payment? In any case, the proposed rules should be consistent with the provisions of the Service Tax Rules 1994, existing or suitably amended.

Provision of multiple parameters under different situations if introduced without modification, is likely to pose a serious challenge in implementation as Rules 5, 6 and 7 are complex and keeping a track of all the three events viz. provisions of service, raising of invoice and receipt of payment under any of these rules is a huge task for businesses after understanding and interpreting the said rules.

The POT Rules have not dealt with a situation when services are provided from outside India i.e., when reverse charge mechanism operates u/s.66A of the Act. Specific consideration for this also appears necessary.

Rule 4 provides that interest-free refundable deposit would not attract service tax. Does this mean that when interest is payable on a refundable deposit, the tax is payable? If intention is not so, suitable change is required on this issue.

The class of service providers in India is not analogical to that of manufacturing units or VAT dealers. There could be tremendous cash flow issue for a number of service providers when one is required to pay at the point of raising of invoice or provision of service which may result in delay in compliance of law followed by penal action and litigation. Further, the POT Rules as proposed are silent over the treatment of non-payment for services or bad debts, cancellation of invoice, discounts, etc. Similarly, in the current scenario also, there already exists the issue of availability of CENVAT credit (in terms of existing CENVAT Credit Rules) when service tax is paid on advances. If multiple taxable events as proposed are introduced, well-thought out consequential amendments in CENVAT Credit Rules, 2004 also would be required. Further, one could envisage a chaotic condition while taking CENVAT credit as complexity in record maintenance would also arise again resulting in litigation.

Since the Government has invited public comments on the Draft POT Rules before September 01, 2010, it can be hoped that major creases would be ironed out if the Government is keen on notifying the Rules. As a matter of fact, since GST is soon likely to be a reality, it would be a better proposition to implement broad-based rules along with GST rather than half-baked rules as precursor to GST, which may only worsen the already uncertain scenario.

Nirav Shah

Switching off mains can reduce power bills by 30%

New Page 1

78 Switching off mains
can reduce power bills by 30%

Be careful of
electronic devices such as mobile chargers that you think don’t consume too much
power.

Putting off your
television set with a remote control does not mean that it (along with a set-top
box) has stopped consuming electricity. Similarly, pulling the charger from your
mobile handset does not mean that power consumption stops.

Not putting off
the main switches of even the smallest electronic appliances reflects in your
monthly bill. Such negligence, say power experts, inflates power bills by
25-30%. This, says power expert Ashok Pendse, means extra consumption of 75-90
units for average monthly residential consumption of 300-350 units.

(Source : The Times of India, dated 9-7-2010)

levitra

Nirav Shah

DOMESTIC ARBITRATION

Laws and Business1.
Introduction :

1.1 Arbitration is one of
the oldest dispute resolution systems across the world. Even in India,
arbitration has been in existence from ancient times. Considering the time it
takes in India for a Court case to be resolved, the importance of arbitration
has increased manifold in the last few years. Almost all types of civil disputes
can be subjected to arbitration, such as disputes in relation to joint ventures,
infrastructure projects, concession agreements with the Government, property
matters, etc.

1.2 The Arbitration and
Conciliation Act, 1996 (‘the Act’) totally revamped the law in relation to
arbitrations in India. The Act replaces the Arbitration Act, 1940. Let us
examine the process in relation to an arbitration under the 1996 Act.

1.3 An arbitration means any
arbitration whether or not administered by permanent arbitral institution.

1.4 This Article gives a
bird’s-eye view of some of the important features of ‘arbitration’.

2.
Arbitration Agreement :

2.1 An Arbitration Agreement
means an agreement by the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them in respect of a
defined legal relationship, whether contractual or not. An arbitration agreement
should be in writing and signed by both the parties. There is no prescribed form
for the same. It could also be by way of an exchange of letters, telex,
telegram, etc. The reference in a ‘contract document’ containing an arbitration
clause constitutes an arbitration agreement as that arbitration clause is part
of the contract.

2.2 The Arbitration
Agreement is the starting point by which parties refer disputes to arbitration.
Since it is an agreement, the provisions of the Indian Contract Act, 1872 must
also be borne in mind. Thus, provisions, such as capacity of parties to
contract, agreements opposed to public policy, etc., should be considered.

2.3 Salient features of an
Arbitration Agreement :

(a) The intention for
reference to arbitration must be clear and unambiguous.

(b) It should mention :

(i) the place/venue of
arbitration

(ii) the law which would
be followed

(iii) the procedure for
appointing
arbitrators

(iv) the language in
which the arbitration proceedings will be conducted

Full freedom is accorded to
the parties in selecting the above features. In addition, the agreement may also
lay down the procedure for conducting arbitration proceedings, use of experts,
etc.

2.4 An arbitration agreement
is not discharged by the death of one of the parties and his legal
representatives would step into the shoes of the deceased party.

2.5 The arbitration
agreement may also provide that arbitration would be the only dispute resolution
mechanism and none of the parties will approach any Court for resolving the
dispute.

3.
Arbitrators :

3.1 The parties can decide
on the number of arbitrators to be appointed, provided that the number of
arbitrators is not an even number. Thus, they could be 1, 3, 5, etc. If the
agreement is silent, then the Act provides for a sole arbitrator. Usually, an
arbitral tribunal consist of 3 arbitrators with each party appointing one
arbitrator and the two appointed arbitrators jointly appointing the third
arbitrator, who is known as the presiding arbitrator.

3.2 There is no
specification as to who can be appointed as an arbitrator. However, it is
preferable that he should be a man of commerce, law, or having expertise in the
field of dispute resolution and he should be someone who is perceived to be fair
and impartial to all parties. Usually, advocates, chartered accountants,
chartered engineers, bankers, and retired judges, etc. are appointed as
arbitrators.

3.3 If there is a failure to
appoint arbitrators, then the Chief Justice of the High Court has powers to
appoint an arbitrator under the Act.

3.4 Before accepting
appointment, the arbitrator must disclose to the parties any matters which are
likely to give rise to justifiable doubts about his independence or
impartiality. Similarly, the appointment of an arbitrator may be challenged on
grounds that there are circumstances which give rise to justifiable doubts about
his independence or impartiality. A challenge can also be made on grounds that
he does not possess the qualifications agreed to by the parties.

4.
Procedure of arbitration :

4.1 The arbitration tribunal
is not bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act,
1872. The parties are, and failing them the tribunal, is free to determine the
procedure to be followed. In the absence of defined or agreed procedure.

4.2 The arbitral tribunal
would issue notice of hearing to the parties.

4.3 The parties would make their written and/ or oral submissions. The parties must submit their statement of claim and defence. They can also rely on various documents and evidence in support of their claims and defence. They may also rely on and submit expert testimony if so permitted by the tribunal or agreed upon by the parties. The other party may file rebuttal submissions against the expert testimony.

4.4 The arbitrator is bound to observe the principles of natural justice whilst conducting the proceedings. He must give an equal opportunity of being heard to both parties.

4.5 The arbitrator may also prescribe certain deposit for the costs of arbitration which both parties have to pay.

5. Award:

5.1 The award shall be in writing, state its date and place of making. It must be signed by the arbitrator.

5.2 The reasons on the basis of which award was passed, shall be recorded unless the parties agree otherwise. The sum awarded may include ‘interest’ if the claimant is entitled to interest either under the agreement or the arbitration agreement.

5.3 It must provide for the costs and which party would bear them. Costs would include costs relating to fees and expenses of the arbitrators and witnesses, legal fees, administration and other costs in connection with the arbitration proceedings.

5.4 A signed copy of the award must be delivered to each party. Within 30 days from the receipt of an award by a party, the party may request the arbitration tribunal to correct any errors in the award.

5.5 The arbitrator can also make an interim arbitral award.

5.6 The award is final and binding on the parties and it can be enforced under the Code of Civil Procedure, 1908 in the same manner as if it is a decree of the Court. However, this is subject to award not being be challenged and set aside by the Court.

6. Setting aside of an award:

6.1 The Court would set aside an award in the following cases:

   a. The party was under some incapacity.
   b. The arbitration agreement is invalid.
   c. The party was not given proper notice of hearing or was unable to present its case.
   d. The award deals with a dispute not contemplated by the agreement or contains matters beyond the scope of the agreement.
   e. The award is in conflict with the public policy.
   f. The composition of arbitral tribunal was not in accordance with the arbitration agreement.

6.2 An application for setting aside the award may be made to the Court u/s.34 of the Act. It must be made within 3 months from the receipt of the award. The Court may grant an additional 30 days in some circumstances.

7. Role of CAs:

7.1 CAs can play a very important role in arbitration proceedings of their clients. They can make submissions on behalf of their clients or appear as an expert and give testimony on subjects, such as valuation, accounting, etc., or can even preside as an arbitrator. They can get empanelled with Chambers of Commerce, such as IMC, CII, etc., as arbitrators. Considering the slow pace of court litigation, CAs should advise their clients to strongly consider arbitration as a dispute resolution mechanism. They could also advise the clients whilst reviewing contracts during the course of audit to have an ‘arbitration agreement’ unless an arbitration clause is already included in the contract.

Nirav Shah

Legal compliance — Directors’ responsibility — Part 2

Laws and Business

Last month we examined the various laws under which a company
can be liable and thus, the directors can also be held responsible. Let us now
examine situations in which directors can be held responsible and the safeguards
they can take.

1. What is the meaning of the terms

‘Connivance, Neglect and Consent’ ?

Since the terms ‘connivance’, ‘neglect’ and ‘consent’ are
very important and often find mention in various statutes while defining
directors’ responsibilities, it is very essential to understand their meaning.
These words are defined by various judicial decisions and dictionaries as
follows :

1.1 Connivance :

(a) “A figurative expression, meaning voluntary blindness to some present act or conduct, to something going on before the eyes, and is inapplicable to anything past or future; an agreement or consent, directly or indirectly given that something unlawful shall be done by another; consent; passive consent; voluntary oversight

To constitute ‘connivance’ something more than mere negligence is necessary. Pothi Gollari v. Ghanni Modal, AIR 1963 Ori 60″.

(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)

(b) “The secret or indirect consent or permission of one person to the commission of an unlawful or criminal act by another. A winking at; voluntary blindness; an intentional failure to discover or prevent the wrong; forbearance or passive consent. Pierce v. Crisp, 260 Ky. 519, 86 S.W. 2nd 293, 296.”

(Black’s Law Dictionary, 6th Edition, West Publishing Co.)

(c) “The Act of conniving — to encourage or assent to a wrong by silence or feigned ignorance; knowledge of a wrongful or criminal act during its occurrence”

(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)

(d) “Secretly allow a wrongdoing”

(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)

(e) “Pretended ignorance or secret encouragement of wrongdoing; knowledge or encouragement of a wrongdoing without participation in it; avoid noticing something wrong; give aid to wrongdoing by not telling of it;”

(The World Book Dictionary, World Book, Inc.)

1.2 Neglect :

(a) “May mean to omit, fail or forbear to do a thing that can be done or that is required to be done, but it may also import an absence of care or attention in the doing or omission of a given act. And it may mean a designed refusal, indifference or unwillingness to perform one’s duty. In Re. Perkins, 234 Mo. App. 716, 117 S.W. 2d 686, 692.”

(Black’s Law Dictionary, 6th Edition, West Publishing Co.)

(b) “A failure to do what is required; omission, forbearance to do anything that can be done or that requires to be done; the omission to do or perform some work, duty or act; the omission or disregard of some duty; the omission from carelessness to do something that can be done and that ought to be done; negligence. Neglect to do a thing means to omit to do a duty which the party is able to do. King v. Burrell, 12A.&E.468.468.

The word ‘neglect’ is wide enough to cover erosion of the kind indulged in by the petitioner. (It certainly cannot mean that a person on whom a notice has been served can only be prosecuted if he fails to give any reply at all and that any sort of reply to the notice, however inadequate or evasive, is sufficient to avert the prosecution for failure to comply with the terms of the notice.) Pirthi Raj v. The State, AIR 1958 Pun 396, 397.

To disregard; to pay little or no attention to; to fail to perform, render, discharge (a duty) to take (a precaution).

The word ‘neglect’ means ‘gross neglect’, wilful, intentional, culpable or flagrant disregard of duties. Baburao Vishwanath Mathpati v. State, AIR 1996 Bom 227, 231 (DB), Maharashtra Municipal Councils Act Act”

(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)

(c) “To neglect doing is the omission to do some duty which the party is able to do (per Patterson J. King v. Burrell, 12A & E, 468)”

(Stroud’s Judicial Dictionary, 5th Edition, Sweet & Maxwell Ltd.)

(d) “To disregard; ignore; To fail to give proper attention to or to take proper care of; Habitual want of attention or care”

(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)

(e) “Fail to give proper care or attention to; fail to do something”

(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)

(f) “To give too little care or attention to”

(The World Book Dictionary, World Book, Inc.)

1.3 Consent :

(a) “(In the Contract Act) Two or more persons are said to consent when they agree upon the same thing in the same sense.”

‘Consent’ is an act of reason, accompanied with deliberation, the mind weighing, as in a balance, the good and evil on each side. Where a consent is given substantially, the Court does not look very minutely into the form in which it is given” (Per Stirling, J., Re Smith, 59 LJ Ch 284.)

“You cannot consent to a thing unless you have knowledge of it” Jessel, M.R., Ex parte Ford; In Re Caughey, (1876) LR 1 CD 528.

‘Consent’ must imply a knowledge of the necessary facts and materials which leads to the consent, consent cannot be given in the abstract or in vacuo : Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw, AIR 1953 Bom 285.

‘Consent’ must imply a knowledge of the necessary facts and materials which leads to the consent, consent cannot be given in the abstract or in vacuo: Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw, AIR 1953 Bom 285.

Consent and assent. ‘Consent’ in law means an affirmative, positive act and ‘assent’ means passivity or inaction: S. Raghbir Singh Sandhawalla v. The Commissioner of Income-tax, AIR 1958 Pun 250, 252.

Connivance is also consent in the legal sense. ‘To consent’ means according to the Concise Oxford Dictionary, ‘to acquiesce’ or ‘to agree’ To connive’ at a thing means, to wink at it. The word’ connive’ is only used in connection with a thing which is, unlawful or immoral which one ought to oppose. It implies knowledge and lack of opposition where there is a duty to oppose. Sheopat Singh v. Narishchandra, AIR 1958 Raj 324, 332. [Representation of the People Act, 1951, S. 100].”

(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)

a) “Consent. A concurrence of wills. Voluntarily yielding the will to the proposition of another; acquiescence or compliance therewith. Agreement; approval; permission; the act or result of coming into harmony or accord. Consent is an act of reason, accompanied with deliberation, the mind weighing as in a balance the good or evil on each side. It means voluntary agreement by a person in the possession and exercise of sufficient mental capacity to make an intelligent choice to do something proposed by another. It supposes a physical power to act, a moral power of acting, and a serious, determined, and free use of these powers. Consent is implied in every agreement. It is an act unclouded by fraud, duress, or sometimes even mistake.”

(Black’s Law Dictionary, 6th Edition, West Publishing Co.)

c) “Consent is an act of reason, accompanied by deliberation, the mind weighing, as in balance, the good and evil on each side.”
(Stroud’s Judicial Dictionary, 5th Edition, Sweet & Maxwell Ltd.)

d) “A voluntary yielding to what is proposed or desired by another; acquiescence; Agreement in opinion or sentiment”
(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)

e) “Permission; agree to do something”
(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)

2. Supreme Court decision:

2.1 The Supreme Court has passed a landmark decision under the Negotiable Instruments Act in the case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, 2005 8 SCC 89. Although this is a judgment under the Negotiable Instruments Act, it has several far reaching consequences and its ratio descendi can be applied under various other statutes which affix a vicarious criminal liability on directors in respect of offences committed by a company.

2.2 In this case, the Court was posed with important questions regarding the criminal liability of directors of a company in case of dishonour of a cheque issued by such company. Ultimately the Supreme Court answered the queries posed to it as under:

(a) It is necessary to specifically aver in a complaint under the Negotiable Instruments Act that at the time the offence was committed, the person accused was in-charge of and responsible for the conduct of business of the company. This averment is an essential requirement of the Negotiable Instruments Act and has to be made in a complaint. Without this averment being made in a complaint, the requirements cannot be said to be satisfied.

(b) Merely being a director of a company is not sufficient to make the person liable under the Negotiable Instruments Act. A director in a company cannot be deemed to be in-charge of and responsible to the company for conduct of its business. The requirement of the Negotiable Instruments Act is that the person sought to be made liable should be in-charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact, as there is no deemed liability of a director in such cases.

(c) A Managing Director or a Joint Managing Director would be in-charge of the company and responsible to the company for conduct of its business. Holders of such positions in a company become liable under the Negotiable Instruments Act. Merely by virtue of being a Managing Director or Joint Managing Director, these persons are in-charge of and responsible for the conduct of business of the company. Therefore, they get covered under the Negotiable Instruments Act. So far as signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the dishonour and will be covered.

3. What can Directors do to safeguard their interests?

3.1 The vexed question which thus arises is, what can Directors do to safeguard their interests and ensure that they are not made personally liable for any defaults by the company?

3.2 One of the first things which the Board of Directors must ensure is that the company has a system for compliance with all the applicable laws. The company must have a written Compliance Manual enlisting all the laws applicable to it, which it must comply with and also who from the company is responsible for ensuring compliance with the same.

Further, the laws must be bifurcated into those which are critical to the survival of the company and those which although are not so crucial must be complied with. For instance, compliance with Food & Drug Administration Law is paramount for a pharmaceutical company. Similarly, compliance with the SEBI Merchant Banker Regulations .are critical for the existence of a merchant banker. Any serious lapse in such laws may result in the company’s registration being suspended or even permanently cancelled. There have been several recent instances where certificates of SEBI intermediaries have been suspended for not complying with the Code of Conduct or the conditions of registration.

The Manual may contain the important provisions with a reference to the relevant sections, rules, notifications, circulars, important case laws, etc., so that the user can refer to the same. It may be segregated into various sections, for instance, Corporate laws, SEBI Regulations, etc. It should be updated on a regular basis, so that the users do not refer to outdated material. The Referencer published by the BCAS is a very good starting point for preparing a Compliance Manual.

The optimum utility of the Manual would be if it is prepared by an outsider, i.e., not someone from within the company. A CA or a lawyer can be entrusted with this assignment. This is necessary because in several transactions there is a cross-influence of laws. For instance, in case of a loan given by a company to a related entity, the provisions of the Companies Act (e.g., S. 295), the Income-tax Act [e.g., S. 2(22)(e)], FEMA (if the recipient is a non-resident), etc. would have to be considered. In such situations, it is better if an independent professional prepares a comprehensive Manual. There must also be certain Red Flag Transactions, i.e., before such transactions are to be entered into, the Company Secretary or the Legal head must be consulted. A list of the Red Flag Transactions should also be circulated to the Head of the Accounts, so that his department should not process such transactions without receiving the prior approval of the legal department. A classic example of a Red Flag Transaction would be an inter-company investment within the group. In several cases it is observed that the listed company funds the private limited companies within the group by way of loans or investment. In all such cases, the concurrence of the legal department should be obtained before executing the transaction. Thus, the Accounts department should not write a cheque or pass an entry till it has been cleared by the legal cell.

3.3 The company must appoint a compliance officer to ensure compliance with various applicable laws and regulations. He must be a person who is well-versed with the legal and commercial fields, say, a Chartered Accountant, a Lawyer, a Company Secretary, etc. At every Board Meeting, the Compliance Officer should be asked to table a Compliance Certificate certifying compliance with all laws. This should also be preferably signed by the Managing Director and/ or the Whole-Time Directors and must be backed up with supporting certificates from various departmental heads who are responsible for compliance with individual laws. For instance, the Head of Administration can be asked to certify compliance with the Shops and Establishments Act; similarly, the Factory Head can be asked to certify compliance with pollution/ effluent control regulations, etc. This way the Directors can demonstrate that they have not failed in their duty of setting up a competent system for ensuring legal compliance. Whenever in doubt, the company should not hesitate to obtain an opinion from an appropriate CA or a lawyer. It is better to be cautious than to act in haste and make everyone repent at leisure.

In addition to the Compliance Certificate, the CEO / MD and the various Departmental Heads along with the Legal Head/Company Secretary must be asked to table an Action Taken Report at each Board meeting. This Report must list down regulatory lapses, problems, issues which had arisen at the last meeting and the action taken by the company on the same. Quite often what happens is that niggling issues are swept under the rug and they come to the fore only once they have blossomed into full-fledged calamities. In this way, the Independent Directors can keep a track of the problems as they arise and the actions taken by the company and thereby nip a problem in the bud.

3.4 Another aspect which a good compliance system must have is a mechanism which provides for “what to do in case a default arises ?” Quite often, a small problem snowballs into a major crisis. Hence, if violations and lapses are tackled at an initial stage itself, then there might not be major problems at a later stage. The Compliance Officer and/or the Managing Director or some other Executive Director must be informed about all such compliance lapses and this must be followed up with immediate corrective action and expert professional aid.

Item 15 of Annexure-IA to Cl.49 of the Stock Exchange Listing Agreement, which provides for items which must be placed before the Board of Directors includes, “Non-compliance of any regulatory, statutory nature”.

3.5 It may be a good move to seek expert certifications on all important compliance matters, e.g., a periodic certificate from an outside consultant on matters of pollution control. Several listed companies have started obtaining certificates from practising company secretaries on compliances with various corporate laws. This is a step in the right direction and needs to be beefed-up with similar certificates in other areas of compliance.

3.6 Other important areas which the Directors need to monitor are of protecting and preserving the title of the company’s assets. Especially at the time of acquisition of assets, such as immovable properties, they should ensure the obtaining of a title search, proper conveyance/ adequate documentation, payment of appropriate stamp duty, registration, if required, etc. Similarly, the protection of intellectual capital of the company in the form of patents, copyrights, trademarks, designs, etc. is very essential. Proper steps must be taken in this regard to ensure that these IPRs are valid and subsisting. To ensure preservation of assets, the Directors must ensure that there is an appropriate system which addresses issues, such as payment of taxes, compliance with conditions of lease deeds, adequate insurance, etc.

3.7 Independent Directors have a vital role to play in ensuring that the company complies with all applicable laws. In case of defaults, they may be saddled with penalties and prosecutions for offences which they have never committed or were never even aware about. Hence, they should at every Board Meeting ask intelligent questions about the state of the company’s legal department, the compliance policies and procedures. If they feel that the company is taking a wrong view on certain issues or has wrongly interpreted certain provisions, they may insist upon a second opinion.

4. Epilogue:

4.1 To conclude, it must be remembered that compliance with laws and regulations is a journey and not a destination. It is more a question of a mindset which must percolate through the organisation right from the top, i.e., the Board of Directors all the way down to the lowest rank and file. Once the company imbibes a compliance culture, it would become second nature to the executives. Several companies have an attitude that they would tackle the problem only if and when it arises. Such a shortsighted fire-fighting approach is detrimental to the interests of all the stakeholders in the long run. It may yield some results in the short term, but once the law of averages catches up, there would be serious trouble. Hence, the top management must instill a ‘zero-tolerance’ attitude within the organisation towards legal lapses.

4.2 One can only wish that just as companies strive for prestigious Quality Certifications, such as ISO: 9001, ISO: 9002, etc., they would also strive for similar standards in the field of Regulatory Compliance.

4.3 It must also be reckoned that one of the tenets of ‘Corporate governance’ is to conduct business according to the laws of the land – hence to do this awareness of applicable laws is essential. An attempt has been made in this write-up to bring awareness of the consequences of non-compliance. It is also clarified that the list of laws applicable given here in above is not exhaustive and the directors must obtain from the management the list of applicable laws and record the same in the minutes. This list should be annually reviewed in view of the fact that new laws are being enacted and existing laws amended on a continuous basis at times without realising economic and social consequences.

Nirav Shah

Proposed recast of Takeover Regulations

Securities Laws

(1) The SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 (‘the Regulations’ or
‘the Takeover Regulations’) are, at first impression, a set of Regulations that
has a fairly narrow applicability as they would seem to apply to the occasional
event of company takeovers. However, in reality, the scope of the Regulations is
far broader. They apply in a multitude of situations such as investments by
major investors, regular disclosures, inter-se transfers, sharing of control and
so on. The Regulations were originally notified in 1994 and then replaced by a
fresh set in 1997. Thereafter, there have been several amendments to them.

(2) However, particularly
considering the stakes involved and the wider application, many of the
provisions had to be tested and interpreted repeatedly and several times. This
required appeal to the Supreme Court. Further, the repetitive and sporadic
amendments made the Regulations complex. It was also felt that these amendments
were fire-fighting measures to meet rather than a considered overview of the
whole subject.

(3) SEBI thus set up a
Committee with very learned members from a range of background to reconsider the
Regulations in light of experience of more than a decade and in light of several
complaints and contentious issues. The Committee, after due deliberations and
inviting comments from all concerned, submitted its Report on 19th July 2010
making major recommendations for amending the Takeover code.

(4) The Report is quite
detailed and it not only contains the recommendations for amendments but also
provides a draft of the proposed and rewritten Regulations. Thus, even in legal
terms, it is possible to see what the exact proposed amendments and examine
their implications.

(5) It is worth considering
some important recommendations here since it would help us understand the
existing Regulations better and would also give a glimpse of things to come.
However, while the Report is quite detailed and makes numerous recommendations,
only certain important aspects are discussed here, though we can consider the
amendments in far more detail when they are actually made.

(6)
Increase of threshold limit from 15% to 25% :

(a) Presently, if a person
acquires 15% or more shares in a company, then he is required to make an open
offer for another 20%. Earlier, this threshold limit was 10%. Now, it is
proposed to increase it to 25%. Thus, acquisitions till such holding will only
require disclosures at various stages but no open offer. The increased threshold
would make things easier for large investors such as private equity funds. A
concern widely expressed, however, is that this will make it easier for
‘predators’ to increase their holdings to a larger extent and threaten existing
promoters. However, I do not see what is wrong in an outside investor increasing
his stake, even if the existing Promoters feel threatened. An existing Promoter
seeking to retain his control may well ensure that he invests sufficiently in
the company so as to retain control.

(b) The 25% limit is
apparently derived from the limit beyond which it may be possible to veto
special resolutions. Of course, this is only theoretically true. In practice, a
25% holding would be almost always more than 25% since at least some
shareholders would not come to the meeting and/or would not vote.

(c) A practical significance
of this increase in limit is that significant shareholders below 25% can now
increase their holding up to 24% without having to make an open offer.

(7)
Requirement of making 100% open offer :

(a) It is proposed that the
acquirer making an open offer should offer to buy 100% of the shares held by the
public shareholders instead of the existing just 20% of the capital from the
public shareholders. Thus, for example, if an acquirer acquires the Promoters’
holding of 40% of the share capital, then under existing Regulations, he would
be required to make an offer of another 20% of the share capital from the public
shareholders. If the public response is higher than the offered quantity, the
acceptance is on a proportionate basis. To give an example, if the response is
of 40%, then only half of the shares offered by every such public shareholder
would be accepted.

(b) Under the proposed
Regulations, the offeror would be required to acquire all the shares offered.

(c) This proposal is
strongly criticised on the ground that it would increase the cost of acquisition
since, at least theoretically, the offeror would have be ready to pay for 100%
of the share capital of the company. However, on another plane, it is not
difficult to see the logic and benefit of such a requirement. The existing
requirement allows the Promoters to sell the whole of his shareholding but the
public gets a chance to sell only a lesser quantity of their shares. Often,
takeover of companies are at a price that is at a premium over the ruling market
price. In such a case, the Promoters get the full price for their shares but
shareholders get a partial benefit only. The price of the shares in the market
often falls to the pre-takeover position.

(d) The proposed amendment
thus restores the balance and allows the public also to get the benefit of the
higher price.

(e) Skeptics have also
pointed out that the concern that there would be a higher response than the
existing 20% is theoretical and is not borne out of past experience. In other
words, in the past too, only in a few cases, the response from the public was
more than such 20%.

On the other hand, the
seamless delisting procedure may encourage multinationals to convert their
existing subsidiaries or new acquisitions into wholly-owned subsidiaries. If
this is not done at a fair price, then this could be an unhealthy trend and
deprives the Indian shareholder of sharing in the growth of the target. Thus
these provisions as well as related delisting and buyback provisions need to be
reconsidered.

(8) Voluntary open offer:

If an acquirer triggers off any of the thresholds requiring a mandatory open offer, he has to offer to acquire 100% of the shares held by the public. However, in case the open offer is purely voluntary, then there is a special dispensation proposed. The acquirer can offer to acquire at least 10% of the equity share capital by way of a voluntary open offer. In such a case, the acquirer would acquire only that extent of shares that are offered within the limit he has proposed. In case of excess response, he would accept proportionately.

Minimum public shareholding:

An issue that comes up repetitively and is unfortunately covered by a diverse of provisions of law is that relating to the minimum public shareholding. It is worth reviewing the conceptual issue involved here. When a company makes a public issue, the law requires that a certain minimum percentage of the capital be issued to the public. This percentage has changed over a period of time and hence there are listed companies having differing initial public shareholding. In other words, different companies listed today on the stock exchanges have been subjected to differing initial public holding requirement. The matter is further complicated by the fact that owing to poor legal drafting and legal requirements, the holding of the public in numerous cases has fallen below even such initial public shareholding requirement. Where the public shareholding is very low, the purpose of listing may be lost.

Over several years now, the government as well as SEBI has been making attempts to ensure that the companies, whose public shareholding is below a specified minimum holding, increase such holding to such minimum level. These attempts have been generally unsuccessful.

However, while attempts continue to get all listed companies have a minimum specified public shareholding, in the meantime, steps are also taken to ensure that the existing situation does not get worse. That is to say, that existing companies do not cross this minimum shareholding limit and if they have already crossed such limit, they do not go further.

One such situation where public shareholding can cross such limit is in case of a mandatory open offer under the Takeover Regulations. To take an example, if an acquirer acquires the Promoters’ holding of 60%, then he is required to make an open offer of 20%. The post-open offer holding could thus go to 80%. The Regulations thus provide that in such a case, since the maximum limit of 75% is breached, the acquirer should dilute his holding in the specified manner to at least 75%.

Under the Report, the recommendation creates a situation where in every case, there is a chance of this limit being breached. The recommendation is that 100% of the public shareholding should be offered to be acquired.

The Report suggests a better solution to the problem. Firstly, it states that in case the limit is breached, then the acquirer shall scale down his acquisitions from the Promoters as well as the public proportionately, so that the final share-holding of the acquirer is not more than the maximum permissible percentage.

The alternative situation allowed is a case of delisting where the acquirer may actively pursue delisting of the shares. In such a situation he is permitted to acquire and retain shares beyond this limit. However, this is provided that he actually gets enough shares that are cumulatively beyond the 90% minimum holding required to permit delisting of the shares. If this limit is not reached, delisting is not permitted and the acquirer is required to scale down his acquisitions accordingly.

A valid criticism against this proposal is that it permits direct delisting and to some extent circumvents the normal delisting requirements. Under the current Regulations, there is an elaborate procedure for delisting whereby the offer price has to be worked out in a certain manner and approval from the shareholders is also required as per the prescribed majority and manner. Further, though the proposal is well intended, it does not alleviate the existing complexity of multiple provisions of law dealing with the same issue.

Having said this, in fairness, it must be also said that the Committee had to cover a situation where the maximum limit would be breached and within the scope of its mandate it has offered a reasonable compromise. However, ideally, SEBI should separate this issue and provide for a comprehensive solution at one place.

Creeping acquisitions:

Finally, an area that has seen numerous amendments in the past with the result that there is a complex set of provisions governing creeping acquisition. As readers may be aware, persons holding more than the threshold limit are permitted to increase their holdings by a specified percentage every year. In other words, they can increase their holding in a creeping manner without requiring an open offer.

The Report seeks to simplify the provisions relating to creeping acquisitions considerably. Firstly, a uniform creeping acquisition of 5% per annum for all persons having holding between 25% and 75% is proposed. Thus, the elaborate set of existing provisions governing creeping acquisition at various percentages is sought to be dropped. Secondly, even the complications, explicit and implicit, relating to how this creeping acquisition would be counted, are clarified.

Conclusion:

It seems to me that the Takeover Regulations are given an importance in the media that is far disproportionate to its actual relevance. There are other serious issues such as insider trading, price manipulation, corporate governance, etc. that need more attention. Having said that, the Takeover Regulations also have relevance directly or indirectly in many areas. Rarely can any financial restructuring, investment, etc. in relation to listed companies be soundly worked out unless the provisions of the Takeover Regulations are kept in mind. Thus, the auditors and even other Chartered Accountants who have some or the other concern with listed companies would need to keep track of these Regulations and amendments thereto.

Nirav Shah

SEBI order on share warrants and amendments relating to creeping acquisitions

Securities Laws

(1) In this article, two recent developments in the field of
Securities Laws are covered. One relates to clarifications issued by SEBI on
creeping acquisitions under the Takeover Regulations. The other relates to a
public interest litigation petition in relation to issue of Share Warrants
particularly to Promoters and SEBI’s order on the matter pursuant to directions
of the Bombay High Court. Let us consider the clarifications relating to
creeping acquisitions first.

(2) Readers may recollect that SEBI had amended the Takeover
Regulations in October 2008 and permitted an aggregate maximum of 5% creeping
acquisition of shares under the Takeover Regulations for acquirers who held
shares between 55-75%. It may also be recollected that in the normal course,
persons holding substantial shares in a listed company of more than 15% can
acquire another 5% shares in a financial year. However, this is possible only so
long as cumulative holding is 55%. SEBI had allowed in October 2008 what was
felt to be a temporary measure to allow holders to acquire another 5%, even
beyond 5%, considering the reces-sionary phase of the capital market at that
time. Ap-parently, there were certain areas where clarifications were needed and
now, after about 10 months, after the fact that the Sensex has almost doubled,
SEBI has issued a Circular dated August 6, 2009, clarifying on some issues
relating to the amendment. Some comments on the clarifications made :

(a) The clarifying Circular is issued under Regulation 5 of
the Takeover Regulations, which permits SEBI to, inter alia, issue
directions to remove difficulties in interpretation. S. 11 of the SEBI Act is
also relied on.

(b) It is seen that some of the interpretations given go
clearly beyond the plain wording and meaning of the dispensation given in
October 2008. It is possible that in the future, a legal issue may come up
whether such ‘clarification’ can go beyond the express and unambiguous wording
of the Regulations. An example of this is given later herein.

(c) It is clarified that the 5% acquisition may be made in
one or more tranches. Thus, the acquisitions can be made in one or more
tranches so long as the aggregate is not more than 5%.

(d) Further, the acquisitions need not be made in a single
financial year — it can be made any time in as many tranches as found
convenient.

(e) For calculating the 5% acquisitions, sales cannot be
netted off. Thus, only gross purchases would be counted. For example, the
acquirer cannot purchase 4%, then sell 3% and then acquire another 4% and
claim that the net purchases are within the 5% limit. This is not really
brought out by the plain reading of the amendment though, one must accept,
this is the well-accepted interpretation for other similar clauses.

(f) The cumulative holding of the acquirer cannot exceed
75%. Thus, a person holding, say, 73% can acquire only a further 2%.

(g) The cumulative holding limit of 75% is irrespective of
the minimum public shareholding that is required to be maintained under the
Listing Agreement. Thus, e.g., in respect of a company having a 10%
minimum public shareholding, the upper limit for this Regulation will still be
75% and not 90%.

(3) Public interest litigation relating to abuse of Share
Warrants and SEBI Order pursuant to the Bombay High Court decision :

(a) I had written earlier in the BCAJ issue of April 2009,
particularly on the inequity relating to Share Warrants. Essentially, I had
argued that Share Warrants were heavily being misused by Promoters. They
allotted, almost exclusively to themselves, Share Warrants at a price and
terms that appeared to be absurdly below their fair value. Had a really
independent Board been deciding the issue in each case, the Companies would
almost never have allotted Share Warrants to an outsider on such sweet
terms. Issuing Share Warrants to Promoters in this manner causes serious loss
to the Company and its non-Promoter, i.e., public, shareholders.

(b) Of course, while this issue was a concern for many
years, the article referred to earlier was in connection with the amendment by
SEBI of its DIP Guidelines in February 2009, whereby the upfront
non-refundable amount payable on Share Warrants was increased from 10% to 25%
of the Conversion Price.

(c) It did not help, hence promoters of numerous companies
gladly allowed their Share Warrants to lapse considering that the market price
had fallen far below the Conversion Price of the Share Warrants and thus
forfeited their 10% deposit. Many of them actually issued fresh Share Warrants
paying the higher 25% deposit but on a Conversion Price that was far lower.

(d) A public interest litigation was filed by Rajkot Saher/Jilla
Grahak Suraksha Mandal in the Bombay High Court and the Hon’ble Court had
directed SEBI vide order dated June 18th 2009 to hear the petitioner and pass
appropriate orders within 6 weeks of the order. SEBI has passed an order dated
July 30, 2009 on the matter.

(e) SEBI’s order dated July 30, 2009 is available on SEBI
website. In this 23-page order, SEBI has essentially concluded that there is
nothing wrong in the current law and safeguards :

if
Promoters have allowed their Share Warrants and deposits to lapse, and

if
they acquired fresh warrants by paying higher upfront deposits.

(f) Readers may go through this 23-page order for more
detailed reasoning; however, I offer quick comments on some
observations/decisions of SEBI.

1. SEBI, justifying the low 10% deposit amount on Share
Warrants, says “I also note that in other jurisdictions, the option premium is
generally in the range of 10% to 15% for trading of long dated options.”. I
find this justification difficult to accept in the Indian context. The basic
important elements of the Black-Scholes option valuation formula (who, I
believe, got the Nobel Prize for this) are interest rates and volatility. Is
it plausible that interest, in India, is only 10% for a total period of 18
months? It is even less plausible — in fact consistently found untrue in every
option valuation I have come across — to believe that the volatility is 10%
over an 18 month period. And mind you, option value is at least the total of
the interest and volatility (and a few other factors).

2. Then, SEBI says that, from just 8 companies listed, a sum of Rs.1515 crores received as deposits from Promoters have been forfeited when they did not exercise the Share Warrants. SEBI seems to imply that far from the Company and the public losing, the Company has actually gained such a huge amount – it says – “it may be incorrect to argue that the Promoters stand to gain at the cost of the Company and its shareholders.” But is not the reality exactly the opposite? In fact, this shows that the companies granted options to exercise Rs. 15150 crores since the deposit amount is just 10%.

3. Further, of these Rs.1515 crores, effectively a significant portion goes back to the Promoters to the extent of their holding in the Company. If the average holding is, say, 50%, then Rs.758 crores goes back effectively to the Promoters!

4. SEBI then goes on to say,

“It is also noted that of the 4934 listed companies, there had been 1108 preferential allotments since April 2007, of which only 360 were preferential allotments of warrants. Out of the said 360 cases, there were only 100 companies where promoters did not fully exercise the option on the warrants issued to them. Considering the total number of listed companies and number of preferential allotments made during the above period, it is seen that the instances of reissue of warrants to the promoters have not been significant or frequent.”

5. Again, I find it disturbing that as many as 360 companies allotted Share Warrants apparently to Promoters since April 2007. Further, in as many as 100 companies, the Promoters allowed their deposits and Share Warrants to lapse. While the 8 companies referred to ear-Her may be the larger of these companies, note that in just 8 companies, the amount lapsed was totally Rs.1515 crores!

6. On the issue raised by the petitioner that ‘issue of further securities should be only against full payment’, SEBI says, “the same would discourage the companies to raise funds through the allotment of warrants and also indirectly restrict the issue of capital to only shares of the company. Considering the nature of the said instruments (warrants) and the fact that only a few instances (as brought out in Para 10 above) were noticed where the warrants issued to the Promoters had not been exercised, it would be a retrograde step to disable a product which is accepted universally as a fund-raising tool. Such a restriction on issuance of warrants may also deprive the operational and capital structuring flexibility for Indian companies.” I find it difficult to believe that there would be anything wrong in prohibiting the issue of Share Warrants at a mere 10/25% deposit exclusively to Promoters – I find it even more difficult to believe it would be a retrograde step and would “deprive the operational and capital structuring flexibility for Indian companies”. What is wrong with a demand that if Share Warrants are to be issued, issue them to all shareholders – let each shareholder decide whether he wants to subscribe or not? Why are Promoters being preferred and given an exclusive deal and why banning such exclusive sweet deals will be a retrograde step?

7. In the end, SEBI does not find that the circumstances warrant any immediate ban and on a related aspect has stated that it “initiates a consultative process …. to suggest policy changes, if required …. “,

Conclusion:

All in all, while I personally feel SEBI has missed an opportunity to carry out a complete rehaul, it is also true that SEBI on its own cannot prevent mis-use of such instruments by the Promoters. The Promoters should remember that they would suffer in the long run if they lose their credibility and loss of credibility will eventually impact the capital market as a whole. Having said that, I raise a question:

‘Isn’t retaining and restoring the credibility of the capital market the function of SEBI?’

I feel SEBI has failed so far as the question of issue of Share Warrants to Promoters is concerned.

Nirav Shah

SC Notices by E-Mail

New Page 1

81 SC Notices by
E-Mail

With the pendency
of cases refusing to come down, the Supreme Court decided to experiment with
email notices to respondents to cut the delay in the traditional method of
serving notices.

The traditional
method — registered post with acknowledgement due — usually takes a long time
and mostly results in adjournment of hearings because of non-service of the
notices on the
respondents. Chief Justice of India S. H. Kapadia, sitting with Justices K. S.
Radhakrishnan and Swatanter Kumar, realised the difficulty and took immediate
action by asking all the lawyers present in the Court about putting in practice
the serving of notice through emails, at least to start with in commercial
matters. When Attorney General
G. E. Vahanvati and senior advocate Harish Salve welcomed the idea, it took
Justice Kapadia no time to dictate an order to that effect — sending notices
through email in commercial cases.

To help speed up
the process, Vahanvati volunteered to give within two weeks details of email
addresses of every Central Government department, which is the single largest
litigant in the Court. The AG said : “The cabinet secretariat will provide email
addresses of each and every department and regulatory authorities and names of
nodal officers.”

But the
traditional method of serving notices would not be given up. “We hereby direct
the SC registry to send additional notice at the email addresses of respondents,
whenever the advocate . . . furnishes them with a soft copy of the petition or
appeal,” the Bench said.

(Source : The Times of India, dated 27-7-2010)

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Nirav Shah

Many of India’s billionaires have made money from proximity to government.

New Page 1

80 Many of India’s
billionaires have made money from proximity to government.

The proliferation
of dollar billionaires in India in recent years has often been cited as evidence
of the country’s growing economic might, but Raghuram Rajan, previously chief
economist of the International Monetary Fund and now an economic advisor to the
Prime Minister said he had no problems with wealth creation, “but I do think
there is a problem if much of this wealth comes from proximity to government’’.

Pointing out that
India had the second largest number of billionaires per trillion dollars of GDP
in the world (after Russia) prior to the crisis, and now possibly the largest,
Rajan said “If you look at the areas where we have so many billionaires, many of
them are not software entrepreneurs, it’s things like land, real estate, natural
resources and areas that require licences.’’

While conceding
that some of these people have genuinely created entrepreneurial firms that have
done wonderful things, in telecom for instance, Rajan added, “There are other
areas which are less competitive and where proximity to government helps. That’s
a worrisome factor.’’

India, he said,
faced the danger of sliding into some sort of oligarchic capitalism like Mexico.
“I would argue that there is a danger that if we let the nexus between the
politician and the businessman get too strong, we could shut down competition.
That could slow us down tremendously and also maybe create questions eventually
for our democracy,’’ he warned.

Rajan, said there
has been a ‘privatisation by stealth’ of the state in India. Expanding on that
phrase, he said “I worry that in the areas where there isn’t adequate
governance, we are letting the private
sector determine things that should naturally be the prerogative of the state.’’

As with the
billionaires, so too with India’s membership of the G-20 — Rajan is not overly
impressed by this apparent sign of the country having arrived at the high table.
First, he maintained that international meetings rarely achieved anything
concrete.

Characterising the
NREGS as a stop-gap measure, Rajan said at least four elements were needed to
move the bulk of the population in the rural areas to the modern economy —
infrastructure to connect them to towns, education and healthcare to enable them
to participate in a modern economy, and financial inclusion. Without these, he
warned, India’s much-touted ‘population dividend’ could turn into a ‘population
curse’.

(Source : The Times of India, dated 31-7-2010)

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Nirav Shah

Comments and Suggestions by Bcas to Accounting Standards Board of ICAI on Exposure Drafts

Representation

Reference :

Calculation of EPS : Weighted average number of treasury shares
held.

Comments :

In India, publishing of standalone financial statements is
required. At present, publishing of consolidated financial statements is
required only for listed companies. In this context clarification is required
that treasury shares held by subsidiaries are not required to be adjusted in
working of weighted average number of shares for standalone financial
statements.

Reference :

Para 26 and 27(b) — example 4, calculation of basic EPS for
the year 2001.

Comments :

Regarding rights issue, clarification is required on the
treatment to be given to the effects of the rights issue in working out diluted
EPS.

Reference :

Para 45, 46, 47 and 63.

Comments :

Clarification is required to calculate Average Market Price
(AMP) based on simple or weighted average.

Reference :

Appendix B : Example 1.

Comments :

In India, dividend on preference shares is liable to
dividend distribution tax. In our view, for calculation of profit available
for equity shareholders, such distribution tax also needs to be deducted in
addition to dividend on pReference : shares. The same needs to be incorporated
in the illustration.

Reference :

Appendix B : Example 7.

Appendix B : Example 7 Note (e) of Diluted EPS.

Comments :.

Contingently issuable shares : Example explains that in
the working of basic EPS, earnings contingency for which shares are to be issued
at the year-end need not be considered in working out basic EPS for each quarter
of that year. The question arises whether the same treatment is required even if
there is substantial certainty of achieving the required earnings. Similarly, in
case of diluted EPS sum of EPS for all the quarters do not total to the EPS of
full year. An explanation for the same is required.

Note (e) mentions that anti-dilution rules do not apply
because the loss during the third quarter is attributable to a loss from
discontinued operations. It is not clear as to why anti-dilution rule is not
applicable in such circumstances. We believe that even if the rule is made
applicable, diluted EPS for quarter 3 will remain the same.

Reference :

Appendix B : Example 8.

Comments :

In the example, convertible bonds carry interest rate of 6%
against prevailing market rate of 9%. It seems that the issuing entity has
option to settle principal amount in cash. In such circumstances, question may
arise as to why lower rate for bond will be acceptable to the investors ?
Clarification is required in the context of breaking up components of liability
and equity in convertible bond. (as per related provisions of AS 31).

Reference :

Appendix D dealing with difference between the revised draft
and existing AS 20.

Comments :

The Appendix does not specify the following
additional differences :

(a) Para A16 deals with treatment to be given in
calculation of diluted EPS for partly paid shares. This has not been dealt
with in existing AS 20.

For the last sentence of Para A16 i.e., ‘the
number of shares included in diluted earnings per share is the difference
between the number of shares subscribed and the number of shares assumed to be
purchased’, clarification is required whether it is applicable only if
partly paid shares are not entitled to participate in dividend or otherwise ?

(b) Paragraph 64 is different from paragraph 44 of the
existing AS 20. It does not provide for restatement of EPS for changes in
accounting policies.

Paragraph 64 of the draft contains the following :

‘In addition, basic and diluted earnings per share of all
periods presented shall be adjusted for the effects of errors and adjustments
resulting from changes in accounting policies accounted for retrospectively.’

Comments on ED of Ind-AS 41

(Corresponding to IFRS 1)

‘First-Time Adoption of Indian Accounting Standards’

Reference :

Example in Para 8.

Comments :

Para 8 requires an entity not to apply different versions of
Ind-ASs which were effective at earlier dates. However, it (entity) can apply
new Ind-AS that is not mandatory if early application is permitted.
Concession on similar lines is also provided under IFRS. This requirement of
Para 8 is also indicated in the example to the said Para, under the heading
‘Application of requirements’, which reads as under :

“If a new Ind-AS is not yet mandatory but permits early
application, entity A is permitted, but not required, to apply that Ind-AS in
its first financial statements.”

This requirement as specified in the example is restricted
only to an entity which applies Ind-ASs effective for financial year/periods
ending on March 31, 2012, but does not present
comparative information. However, the said requirement should also apply to an
entity which decides to present comparative information in those financial
statements for one year. Not considering the aforesaid requirement for the other
entities seems inadvertent.

In view of the foregoing, it is necessary that the aforesaid
Para (given in bold herein) either should be moved at the end of the example or
a new para with the same wordings be added at the end of the example.

Reference :

Appendix D — Para D5 and D6 on Deemed Cost.

Comments :

Para D5, allows an entity to measure an item of property,
plant and equipment (PPE) at the date of transition to Ind-ASs at its fair value
and use the same as its deemed cost.

Para D6 allows a first-time adopter to use a previous GAAP revaluation of an item of PPE at, or before, the date of transition to Ind-ASs as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to: (a) fair value; or cost or depreciated cost in accordance with Ind-ASs, adjusted to reflect, for example, changes in a general or specific price index.

It is not clear whether the fair value referred to in (a) has a Reference: to the fair value as on the date of transition or on the date of revaluation.

It may be appreciated that the revaluation carried out on an earlier date may not broadly be comparable to the fair value on the date of transition (which would be later than the date of the revaluation) and in that case, such concession to use the previous GAAP revaluation may not have any practical utility. Clarification is desired that on which date ‘the fair value’ in (a) should be comparable Is it at the date of transition or the date of the revaluation? It may be known that almost in all cases, the revaluation carried out at an earlier date, may not be broadly comparable with the fair value on the date of the transition.

Comments on ED ON AS 14 (revised) (corresponding to IFRS 3) ‘Business Combinations’

Reference:

Paragraph B56 of the Application Guidance.

Comments:

In the ED, the word ‘award’ has been replaced by ‘transaction’, (refer para 30, para 52 of the ED).

Nirav Shah

Various Representations

August 18, 2009

Shri Pranab Mukherjee
Hon’ble Union Finance Minister
Government of India
North Block, Room No. 134
New Delhi-110001.

Respected Sir,

Re : Extension of time period up to 31st October 2009 for submission of comments on the Direct Tax Code

We would like to congratulate you on presenting the Direct Tax Code, well within the 45-day period that the UPA Government had promised.

We appreciate the efforts of all contributors in the preparation and presentation of the same and also appreciate the Government’s decision for inviting suggestions from the public.

The Direct Tax Code is of great interest not only to tax professionals and accountants, but also to a common man and we request that the time period for submission of comments be extended up to 31st October 2009 so as to give appropriate time to all to give their best input.

The months of August and September being extremely busy for tax professionals and corporates, in view of the finalising of accounts and filing of tax audits and returns, the above request of extension is being made for.

Thanking you,

    Sincerely yours,
    Ameet Patel,                    Kishor Karia                 Rajesh Shah
    President,                       Chairman,     Co-chairman,
                                        Taxation Committee     Taxation Committee

CC :

(1) Shri S. S. Palanimanickan, Hon’ble Union Minister of State for Finance.

(2) Shri S. S. N. Moorthy, Chairman, CBDT.

(3) Shri Rahul Gandhi, Gen. Secretary, Indian National Congress.

August 3, 2009

To,

The Chairman
Central Board of Direct Taxes,
North Block, New Delhi

Respected Sir,

Subject : Representation on the procedure followed in disposal of applications u/s.197 of the Income-tax Act, 1961

S. 197 of the Income-tax Act, 1961 (the Act) deals with applications for deduction of tax deducted at source (TDS) at a lower rate. Recently, while obtaining such certificates, a large number of assessees have faced certain difficulty on account of a different interpretation by the Assessing Officers (AOs) and thereby denying the issuance of such certificates even if the assessee is otherwise rightfully eligible to get the same. S. 197 is meant for avoiding hardship to the assessee in cases where he has no tax liability or his tax liability is much less.

We narrate the facts hereunder :

Issue :

S. 197 of the Act provides for grant of certificate for lower rate or nil rate of TDS. Upon an application being made, the AO is empowered to issue a certificate of lower rate or nil rate in the manner provided in Rule 28AA of the Income Tax Rules, 1962 (the Rules).

Normally, the AOs work out lower rate or nil rate, as the case may be, prescribed under Rule 28AA(1) of the Rules, which inter alia pitches the word ‘average rate of tax’.

Till recently, the AOs used to work out the average rate of tax on the gross amount received by the applicant as it is this amount on which tax is deducted. To explain with a simple illustration :

• Amount received towards rent say Rs.100

• TDS rate applicable 22.66%

• Deduction for interest paid say Rs.20

• The approximate tax liability would work out as under :

Accordingly, on the gross receipt, the rate would work out to 16.995%.

It was usual practice to grant certificate u/s.197 of the Act at such rate as ultimately that represents the actual liability for tax cf the applicant.

Recently, the Central Board of Direct Taxes (the CBDT) has issued a clarification’, upon the same being sought by the Chief Commissioner of Income Tax, Chandigarh, regarding interpretation of the term ‘average rate of tax’ paid by the assessee in the last three years as mentioned in sub-clause (ii) of Rule 28AA of the Rules.

The CBDT viewed that the ‘average rate of tax’ should be considered as explicitly defined in S. 2(10) of the Act to mean the rate arrived at by dividing the amount of income-tax calculated on the total income, by such income. As no other interpretation of the term ‘average rate of tax’ is possible, the CBDT directed that the ‘average rate of tax’ should be taken with regard to total income rather than gross receipts disclosed by the assessee in the earlier years.

In the above illustration, the income works out to Rs.50 and the tax works out to 16.995. Applying the said clarification, the average rate of tax works out as under:

This is nothing but the tax rate applicable to corporate assesse on his/its taxable income. Applying this rate to the gross receipts results in a higher deduction than the actual liability of the assessee leading him/ it to apply for a certificate u/s.197 of the Act.

Background :

The relevant S. 197 of the Act is reproduced hereunder, for the sake of brevity:

“………

197. (1) Subject to rules made under sub-section (2A), where, in the case of any income of any person or sum payable to any person, income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of Sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-1, 194J, 194K, 194LA and 195, the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate.

2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.

(2A) The Board may, having regard to the convenience of assessees and the interests of revenue, by Notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate u/ss.(l) and’the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.

3) [***]

………….”

S. 197 of the Act provides for the power to the AO to give a certificate of nil deduction or deduction at a lower rate, so as to avoid excessive deduction of tax at source.

In other words, S. 197 of the Act empowers AOs to grant certificate to the persons in receipt of income on which tax is required to be deducted at source; provided that the estimated total income justifies the lower rate or nil rate of tax. Presently, such certificate can be sought on incomes derived by way of salaries, interest on securities, other interest, payment to contractors or sub-contractors, commission or brokerages, rent, fees for professional or technical services, income in respect of certain units, and compensation on acquisition of certain immoveable property.

The lower rate or nil rate, if it is to be applied, shall be in respect of the aforesaid income only. This fact is evident from the terminology of section which covers income in respect of which tax is required to be deducted at source.

The mechanism for giving effect to the power granted to AOs u/s.197 of the Act is specified in Rule 28AA of the Rules, which reads as under:
“…………..

Certificate of no deduction of tax or deduction at lower rates from income other than dividends:

28AA. (1) The Assessing Officer, on an application made by a person under sub-rule (1) of Rule 28, may issue a certificate in accordance with the provisions of Ss.(l) of S. 197 for deduction of tax at source at the rate or rates calculated in the manner specified below:

i) at such average rate of tax as determined by the total tax payable on estimated income, as reduced by the sum of advance tax already paid and tax already deducted at source, as a percentage of the payment referred to in S. 197 for which the application under sub-rule (1) of Rule 28 has been made; or

ii) at the average of the average rates of tax paid by the assessee in the last three years, whichever is higher.

2) The certificate shall be valid for the assessment year to be specified in the certificate, unless it is cancelled by him at any time before the expiry of the specified period. An application for a fresh certificate may be made, if required, after the expiry of the period of validity of the earlier certificate.

(3) The certificate shall be valid only for the person named therein.

(4) The certificate shall be issued direct to the person responsible for paying the income under advice to the applicant.

(5) [* * *].

……..”

This rule inter alia specifies the manner of calculating and arriving at nil rate or lower rate. It specifies that this rate should be higher of:

average rate of tax arrived by the net total tax payable (after considering advance tax already paid and tax already deducted at source) on estimated income as a percentage of payments referred to in S. 197; or

last 3 years’ average of average rate of tax.

The aforesaid CBDT’s letter has interpreted the average of average rate of tax of last 3 years.

Impact :

If one is to give effect to the aforesaid clarification, it may give rise to some anomalies and/ or predicaments, as explained hereunder, with the result that the assessees will be saddled in the administrative turmoil.

The maximum rate of income-tax would be 30%, in any case.

If one were to apply for lower rate or nil rate for particular income, then applying the definition of average rate of tax, as clarified, under Rule 28AA(1), the resultant rate of tax, for specified income on which lower TDS is applied, would always be at 30%, in case of corporate asses sees which is higher than the rate at which TDS on different income is to be effected.

This figure is the effect of being the higher of resultant rate arrived under sub-clause (i) or sub-clause (ii) to Rule 28AA(1). The reason being that

Under sub-clause (i), the. rate can be applied within the range from 0% up to 20% (being maximum rate prescribed for the income on which tax is required to be deducted at source);

Under sub-clause (ii), the average of average rate of tax for last 3 years would work out to 30%, in case of corporate assessees, even if there is a small portion of income

The rate derived under sub-clause (ii) would always be higher than the rate derived under sub-clause (i) and hence the whole process of seeking lower rate uls.197 becomes redundant. Effectively, all Companies/Firms etc., where income is taxable at flat rate will, in most cases, never be eligible for issue of such certificate even though undisputedly their tax liability is much lower or Nil.

Only covers assessees incurring or having loss:

The Rule 28AA gives desired results to loss-making companies, as the tax payable in such case would be zero. However, this rule becomes redundant for assessees having higher turnover but lower profits as aforesaid. Therefore, in all such cases, funds of the asses sees will get unjustifiably blocked and they will have to claim re-funds.

This will also hinder assessees working on smaller margins, which will shrink their working capital due to unintended blockage of funds into Government treasury. With the present situation of slow down in the economy, this has become added problem for the business community. We believe that this can never be the intention of the CBDT.

Undue interest burden on the Government

As the assessees would claim refund of the excess TDS as aforesaid, such refunds would also result into interest entitlement which will be an unnecessary burden on the Government treasury.

Further, S. 197(2A) speaks about ‘convenience of assessees’ and ‘interests of the revenue’. Interests of the Revenue cannot be harmed since the AO is expected to take into account the estimated income-tax and the advance tax/TDS already paid. However, the assessees will surely be inconvenienced if the interpretation of the CBDT is allowed to be carried through.

Corrective measure:

As a corrective measure, it is suggested that the average rate of tax may be calculated taking into consideration the total gross receipts/turnover (that is liable for TDS) to the tax payable instead of total income. This mechanism will ensure that the legislative intent will be given effect and with the issuance of requisite certificate on that basis, undue hardship of the assessees will be removed. Moreover, in any case, as higher of sub-clause (i) or subclause (ii) is to be taken the lower rate of TDS that may be granted will never be less than the tax payable by the assessee (after considering advance tax and TDS already deducted). Since there is no loss to the revenue, a harmonious and mearingful interpretation is required to be given to the provisions.

The above view is also endorsed by the Chief Commissioner of Income-tax, Chandigarh through his request letter? for interpretation of Rule 28AA of the Rules.

In view of the above, there is urgent need to issue clarification on above basis and we have to request your Honour to kindly take necessary steps for the issue of much needed clarification.

Since large number of genuine assessees has been affected and the TDS is deducted on an ongoing basis, an early resolution of the matter would help to solve the genuine problem faced by them.

Thanking you,

Sincerely yours,

Ameet Patel, Kishor Karia Rajesh Shah

President, Chairman, Co-chairman,

Taxation Committee Taxation Committee

Nirav Shah

Reply of BCAS Letter

Ombudsman OrdersOmbudsman’s
reply to BCAS’s application dated 25-5-2008, seeking supply of information.

D.O.F.No.Admn/Corres/D.O.
letters/07-08

Hardayal Singh Ombudsman	Government of India Office of the Ombudsman Income Tax Department, Mumbai-400020.
	Dated : 18th April, 2007

My Dear,

1. May I at outset wish you and your officers every success
in your endeavours during the current financial year. Even as all of you attend
to your onerous responsibilities, I am sure you will all find time to attend to
taxpayer grievances, an important area of concern for the Government. I am happy
to return to Mumbai as the Department’s Ombudsman. I am indeed looking forward
to working with you and your officers in the larger interests of the
Organisation.

2. Since the institution of Ombudsman is new, I am enclosing
herewith a copy of Income Tax Ombudsman Guidelines – 2006. It would be helpful
to me if you could have this document circulated amongst all the officers of
your charge, so that they become conversant with its provisions.

3. Very briefly, the Ombudsman will mostly focus on
administrative complaints. These have been clearly specified in Guideline 9
(Chapter IV), and include inter alia grievances relating to delays in
disposal of applications related to rectification applications, appeal effects,
waiver of interest, release of seized books of accounts and assets, issue of
refunds, failure to give credit for taxes paid, etc.

4. Under Guideline 13, the Ombudsman is ordinarily expected
to settle a taxpayer’s grievance by agreement within a month of the filing of
the complaint. Accordingly, my office would directly be writing to the officer
concerned immediately on receipt of the complaint. Ordinarily, the officer would
be expected to reply back within 15 days of the receipt of this complaint. If he
has settled the grievance by then, he should indicate as such. In that case no
further action would be necessary. Ideally, from every point of view this would
be the best result. If, however, the grievance cannot be settled, the officer
should forward his comments to me after consulting his superiors. I am sure you
would agree with me that as a general rule there should be a genuine effort to
settle as many grievances as possible on the basis of agreement.

5. Where a grievance cannot be settled by agreement, I would
mediate as required under the Guidelines. If results are still not forthcoming,
I would be passing an Award.

6. Under Guideline 8(II)(e), I am required to send a monthly
report to the Chairman, CBDT and Secretary, Department of Revenue, Ministry of
Finance, recommending appropriate action against erring officials who fail to
redress legitimate grievances. My own expectation however is that such instances
would be very rare indeed and mostly confined to very few cases where the
officials concerned are guilty of recalcitrant conduct involving deliberate
defiance.

7. Under Guideline 8(II)(g), I am required to annually
forward to you and the Board, a list of Awards made by me during the financial
year against the officials working in your charge, so that cognisance can be
taken of the same while writing their Annual Confidential Reports. Again, the
number of cases where adverse notice would need to be taken may perhaps be
limited.

8. The purpose behind my outlining some of the relevant
provisions in the preceding paragraphs is not to scare or demoralise your
officers. I would like to begin my innings on a very positive note. I am quite
sure if we all follow the spirit of Guidelines and take interest in redressing
the legitimate grievances of taxpayers in a prompt and efficient manner, there
will be no occasion to invoke any punitive provision.

9. Please rest assured that I will always be available to
your officers for any guidance or help. They are always free to approach me
after taking an appointment from my office.

With regards Yours

(Hardayal Singh)

Encl : As above†

To,

The Chief Commissioners of Income Tax — I to VII, IX to XIII, Cent-I & II,
Mumbai.

Nirav Shah

LEGAL DUE DILIGENCE IN M&A TRANSACTION

Any responsible management will
require a comprehensive assessment of the possible legal risks related to the
corporate status, assets, contracts, securities, intellectual property, etc. of
the target company concerned before concluding any merger and acquisition
(‘M&A’) deal. Therefore, the process of legal due diligence assumes great
importance in a M&A transaction.

Meaning :

The expression ‘due diligence’
in a M&A transaction is used to refer to sort of an audit of a company’s legal,
financial, environmental and business affairs, and includes investigations into
the acquisition of the assets, risk analysis and general inquiries about the
company prior to entering into a contract. This process is undertaken by the
buyer before investing in a company, to ensure that the seller and the target
company have good title to assets proposed to be bought and also to know the
extent of the liabilities it will assume. Therefore, this data gathering process
forms an integral and critical part of the M&A process as it provides
information about the target’s business that enables the buyer to decide whether
the proposed acquisition represents a sound commercial investment.

Purpose :

Typically in an acquisition, the
purpose of legal due diligence is for the acquirer to check :

(i) the value of the assets
the seller is proposing to sell,

(ii) that the seller has
good title to the assets/shares free from all encumbrances,

(iii) that there are no
liabilities or risks that will reduce the value or use of the assets,
i.e., no third party has any right to use the assets,

(iv) applicable labour laws
and service contracts, etc.; and

(v) that there are no
existing or potential undisclosed liabilities that may adversely affect the
business of the target company and also evaluate disclosed liabilities.

The due diligence process helps
the buyer to properly evaluate the target company by investigating items that
either validate the offered price or items that diminish the company’s value and
its purchase price. The buyer may seek contractual protection from the seller in
the form of representations and warranties, but in practice, the protection
offered may be limited by disclosure and other contractual provisions. The
seller is required to disclose all relevant information relating to the target
to the buyer and often finds himself in a conflicting situation. On the one
hand, the seller wants to provide all relevant information to the buyer so as to
make the buyer comfortable with the seller’s offered price and on the other
hand, the seller does not want to reveal unnecessary information to the buyer,
for fear that should the deal not consummate, the prospective buyer may obtain
valuable commercial information and use to compete unfairly with the seller. In
the event of buyer’s breach, seller’s right to sue for damages and injunctive
relief may not be adequate protection or remedy, as such damages for breach may
be difficult to quantify and to enforce. Some prudent sellers require the buyer
and its advisers to enter into a confidentiality agreement.

Scope :

The scope of due diligence
review will depend on the purpose and nature of M&A transactions. For example,
acquisition of a company will demand extensive areas of inquiry than the
investigation made by a potential joint venture partner on the other joint
venture partners or inquiry made by a purchaser of shares in a company. The
extent of due diligence review is also likely to be governed by factors such as
available time, cost, the need to get the transaction done and the seller’s
sensitivity about the exercise.

In a due diligence process,
risks are identified and are borne by one or both parties and the parties will
negotiate the risks and the bargaining between the seller and the buyer will
relate to apportionment of the risks between them. The seller may give
warranties and indemnities with respect to risks that are identified, but more
often the seller is not aware of its problems until the buyer discovers it
during the due diligence process. However, representations, warranties and
indemnities from a seller covering a particular risk is not an adequate
substitute for carrying out the due diligence, because :

(i) warranties and
indemnities survive only for a few years by operation of law and contract,

(ii) warranties are often
qualified as to the materiality or the warrantor’s best knowledge,

(iii) indemnity claim have a
de minimis limit,

(iv) there is a time limit
in which the claim must be made usually within two to three years after
closing,

(v) sellers are more
cooperative prior to the closing as they need to close the transaction, but
are reluctant to address even the most valid warranty claims post closing,
and

(vi) by the time the
warranty claim is made, the warrantor may not be in existence or may not be
in a position to meet the claims.

The information obtained in the
due diligence review will place the buyer in a better position to assess the
risks and advantages of his investment and enable him to appropriately
renegotiate the terms of the acquisition. Therefore, a buyer not undertaking due
diligence would lose the opportunity to obtain more favourable terms of
purchase.

It must be noted that every due
diligence investigation depends on the quantity of data supplied by the seller.
The data may be sent to the buyer and its due diligence team to analyse at it
own offices or the buyer’s due diligence team is sent to the target’s office
where it is given access to the data room. It is necessary for the buyer to
support the data collection by securing representation, warranties an indemnity
from the seller, wherever possible, on those issues that are impossible for the
buyer to check and verify.The buyer usually requires that the seller warrants that the information supplied by the seller to the buyer’s due diligence team is complete and accurate. The seller more often would not war-rant those matters that would be known to the buyer during the course of due diligence process. In a situation where the due diligence exercise is limited, the buyer usually investigates key issues and may take the following precautionary steps to protect itself, such as:

i) secure appropriate representations, warranties and indemnities;

ii) consider negotiating a retention of the purchase price to cover potential claims;

iii) propose a price adjustment, if required;

iv) require compliance of certain conditions as a condition precedent to close of transaction, for example, obtaining of consents to the change of control from lender, etc.

Team conducting due diligence:

The legal due diligence team of a law firm usually consists of a partner, a senior associate, associates and paralegals (number of associates and para-legals will depend on the volume of documents to be reviewed). The senior associate is generally responsible for preparing the due diligence report for the client. The partner will be responsible for supervising the due diligence report and negotiating the acquisition agreements. The legal team prepares the legal due diligence questionnaire/ checklist and same is forwarded to the buyer’s personnel who after reviewing it will forward it to the seller. The legal team is constantly in touch with the buyer’s personnel to discuss issues arising out the due diligence review as the buyer’s personnel is the only person who will be able to make effective judgments as to the commercial importance and potential risk brought to light by the information revealed in the due diligence process.

Areas of legal due diligence:

The legal due diligence exercise will generally cover all of the areas listed below. This list is usually indicative and not conclusive and is tailored according to such factors as to whether the transaction is an asset purchase or share purchase and will also depend on the target’s industrial sector and size of the transaction:

i) Secretarial

ii) Real Estate

iii) Intellectual Property

iv) Litigation

v) Insurance

vi) Licences

vii) Employees

viii) Loans/Debts

ix) Material Contracts

x) Investments

xi) Environmental

xii) Competition

xiii) Other Laws

Gist of what the due diligence team investigates under the following heads are given below?:

Secretarial:

The investigation of corporate secretarial focus on the incorporation particulars, memorandum of association containing details about its objects, paid up capital, authorised capital, the number of shares issued, and the articles of association of the target containing provisions as to the directors, restrictions on shares, if any, shareholding pattern, etc. Under corporate secretarial, the register of members and directors and the minutes of meetings of the target are examined as well. Every company under the provisions of the Companies Act, 1956 is liable to maintain a register of members, register of charges and a register of directors to record and maintain minutes of all meetings of shareholders and of the board of directors held in the course of transacting business of the company. The target company is required to file records pertaining to their balance sheet and profit & loss account, annual return, consent of persons to act as directors, in case of increase of share capital/members, registration of resolution, creation/modification of charges, return of allotment, share transfer form, etc. with the registrar of companies. The due diligence team reviews all filings made with the registrar of companies. In case a company commits default in maintaining the said registers, or do not file their records with the registrar of companies in time, penal action may be initiated against the target company. The due diligence team besides examining compliance under the general provisions of the Companies Act, 1956, also gives particular attention to review compliances with provisions requiring government sanction.

Real Estate:

Investigation of real estate should delineate the immovable property held by the target, to whether it is leased, licensed or owned. If it is an owned property, the title of the target to such property must be ascertained. The due diligence team examines covenants attached to the transfer deed which may prohibit certain activities or may reserve easement rights and also assesses if there is a situation where the target may not have fully paid up the consideration or certain installments may be pending. In some cases, the target may not have obtained final deed of conveyance/sale deed in respect of the owned immovable property and there could also be outstanding dues pertaining to such property, namely, property tax, electricity and water charges, all of which needs to be checked. In case of leased and licensed property, one must check its capability to transfer the said property.

Intellectual property:

As regards the intellectual property, such as patents, designs, softwares, trade marks, careful assessment is required to ascertain whether they are owned and/or licensed by the target company and/ or licensed to the target company and whether they are registered or unregistered and whether they are in compliance with the relevant laws. The due diligence team examines whether there are any challenges, disputes or infringements of any registered and unregistered intellectual property rights licensed or owned by the target company. The due diligence team will also review pending applications related to intellectual property.

Litigation:

The due diligence team examines significant details of any disputes by or against the target company. Buyers may set a threshold in monetary terms to determine those litigation matters to be reviewed (for example, the buyer may not be interested in any claims for outstanding amounts from debtors below a certain figure). The diligence team may assess the contingent liability that the target may incur and examine the likely impact on the business of the target and details of any judgments given against the target and its assets as a result of litigation.

Insurance:

The investigation of documents relating to insurance would involve assessing the significant details of the insurance arrangements for the target company, such as whether there are any circumstances likely to give rise to a claim under insurance policies for the target company, whether insurance obtained by the target is valid, or whether the renewal of the policy is refused or premiums increased, whether there are any unusual terms in the insurance policies, and whether the target’s assets have been fully insured.

Licences:

The due diligence team must assess whether the licences or consents necessary to the operation of the target’s business, have been obtained, are valid and whether they are capable of being transferred/assigned to the buyer.

Employees:

With respect to employees and consultants of the target company, due diligence review would involve examination of service/employment contracts, letters of appointments, the executive and non-executive directors, consultants, key employees and managers have signed with the target company and the significant terms of those letters of appointments and contracts such as remuneration provisions, notice period for termination, any special payments on termination, term of contracts, absence of provisions on confidentiality, any restrictions during employment, restrictive covenants post-employment and confidentiality clause, etc.

The due diligence team inquires if there are any employees who have terminated or intend to terminate their employment in the period leading up to the transaction and examines the employee benefits such as share option schemes, bonus schemes, employee provident fund, gratuity, retirement benefits, etc. Investigation would also identify whether there are any trade unions / associations representing the personnel of the target company. The due diligence team makes inquiries about payment obligations to employees, whether relevant labour legislation has been complied with, whether there has been any strikes or litigation with respect to trade unions and employees or if there are any anticipated, industrial disputes or employment related litigation, involving the target company.

Loans:

Investigation with respect to loans would involve assessment of loans given by the target company to third parties and other members of the target group, whether there are any pending instalments or restrictive covenant in the loan documents that requires intimation to the lender in case of change in constitution of the target or whether the liability under the loan documents can be transferred to the buyer. The due diligence team also inquires if the seller has given any guarantees or indemnities in respect of the target and whether the target has provided any guarantees or indemnities for any other third party.

Material Contracts:

Evaluation of material contracts would include review of commercial agreements to which the target is party for example, any agency agreements, distribution agreements, share purchase agreements, licensing agreements and supply or purchase of goods agreements, hire-purchase agreements, etc. The due diligence team draws attention of the buyer to the relevant provisions in such agreements, such as obligations of the parties, termination provisions and effect of termination, change of control provisions, non-assignment provisions, representations and warranties, indemnities and guarantees, any other restrictive covenants.

Investments:

The due diligence team makes inquiries regarding any investments made by the target, including shares held in other companies, or fixed deposits or purchase of any other kind of instruments.

Environmental:

Environmental due diligence may be required in case of acquisition of a company which is a manufacturing company, or whose assets include land used for industrial processes. Environmental due diligence is conducted by lawyers or technical personnel who are experts in the field of environment. The environment due diligence team investigates potential responsibility for any clean-up and liability in relation to environmental damage. The investigation may range from a brief site visit to a more detailed survey involving detailed sampling of soil and ground water.

Competition:

The competition law is at a nascent stage in India, but the lawyer engaging in the diligence exercise is required to bear in mind the general competition law principles while reviewing the data of the target company. The due diligence team would need to seek information from the sellers to assess anti-competitive behavioural risks. Competition issues may have an effect on the acquisition value of the business or target, or may have an impact on the timelines for an M&A transaction. The analysis on competition issues is undertaken in consultation with lawyers specialising in competition law.

Other laws:

In case the target company is listed in any of the stock exchanges, the due diligence team would review all compliances the listed company is required to make under the Securities and Exchange Board of India Act, 1992, the Foreign Exchange Management Act, 1999 and other applicable laws.

Legal due diligence report:

The legal due diligence report is prepared by the buyer’s lawyers and addressed to the client-buyer, pursuant to the due diligence process of reviewing documents provided by the seller. The client may request for detailed form of report or just an executive summary summarising all the key findings of the legal due diligence review. The key findings in the executive summary will enable the buyer to consider issues for negotiations with the seller and help in deciding whether or not to proceed with the transaction. The description of key issues would include the change of control provisions in material contracts, prohibitions on assignment in material contracts, expiration of critical agreements, licences and registrations necessary for the operation of the target’s business, high-value on-going litigation matters, etc. Detailed reporting would include summary of all the documents reviewed in all areas of law.

Nirav Shah

Is it fair that the Charity Commissioner’s office does not have a practice of updating the trusts’ records ?

Is It Fair

1. Introduction :

Various types of organisations are regulated by various
authorities established under the respective legislations. Each regulator’s
office has its own style of functioning. Trusts are governed basically under
two legislations — Indian Trusts Act, 1882 and Bombay Public Trusts Act, 1950
(BPT Act). The regulatory authority is the Charity Commissioner. So also, the
Registrar under the Societies Registration Act, 1860 is the same authority,
viz. Charity Commissioner. In Maharashtra, every society under the
Societies Registration Act is also required to get itself registered as a
trust. This write-up proposes to bring out a peculiar system in the Charity
Commissioner’s (CC) office which causes enormous hardship to the honest social
organisations.

2. The ‘unfair’ practice :

Readers are aware that in respect of other organisations
like companies, partnership firms, etc. the changes in the names, addresses,
etc. of directors, partners as the case may be, are intimated to the ROC/ROF
and in due course of time, the changes get updated in the records of those
regulators. In the CC’s office, even if you submit the changes, etc. in the
particulars of trustees; or any other information about the trust — such as
addresses, alterations in rules and regulations; there is no system or
practice of updating the records. At the same time, when there are occasions
where you need a specific permission from the CC’s office — e.g.,
alienation of immovable property; borrowings, etc. you are required to first
ensure that your record in their office is updated. Thus, if there is a change
in the trustees or managing committee and the changes are duly intimated to
the CC’s office; and if the new trustees approach the CC’s office, they are
not entertained at all, on the ground that their names do not appear in CC’s
records. There were instances where the trusts had to do the exercise for 10
to 35 years ! That is the reason why such permissions may take an inordinately
long time — may be even a couple of years ! It is indeed a herculean task,
often very difficult if not impossible !

3. Reasons :

The probable reasons for such a situation may be numerous :

3.1 Innumerable trusts : Although the formation
process is a little cumbersome and time consuming, the cost of formation is
very meagre. Many people are overenthusiastic in forming such trusts with high
dreams. The initial corpus may be even less than a thousand rupees. Hence,
there is a mushrooming growth. The CC’s office does not have adequate
infrastructure and manpower.

3.2 No filing fee : The intimations to the offices
of ROC & ROF are accompanied by a filing fee. Thus, the administrative cost of
updating the records is largely taken care of. In the CC’s office there is a
yearly contribution payable by every trust — at 2% of its receipts. It is a
separate issue as to how the enormous amount collected so far by the CC’s
office is utilised. The accumulation may be in the vicinity of a few hundred
crores of rupees.

3.3 No incentive to staff : Most of the persons
dealing with the CC’s office on behalf of the trusts are supposed to be
‘social workers’. Many of them may not have resources and willingness to spend
on paperwork, etc. The staff may not have motivation to render service.

4. Some thoughts :

4.1 A few of the states have taken a practical and sensible
decision not to regulate the charities at all. I am told, the Karnataka State
does not have any legislation parallel to our BPT Act.

4.2 Since the year 2000, all companies were required to
have a minimum paid-up capital — i.e., Rs. one lakh for private limited
and Rs. five lakhs for public limited companies. A similar requirement may be
brought in respect of the basic corpus.

4.3 A small filing fee may be introduced for registering
all the changes.

4.4 Weeding out process may be carried out on a mass scale.
The trusts who have not sent any communication to the CC’s office for past,
say, 10 years, may be de-registered.

4.5 There are many trusts which were registered 30 to 40
years ago and have been defunct for 10 to 15 years. The trustees may be
planning to revive the activities. The present system is a serious deterrent
for the well-intentioned trustees. An amnesty scheme may be introduced and
only the present position may be taken on record by prescribing some
procedures — like affidavits, indemnity bonds, etc.

levitra

Nirav Shah

Is it fair to create ambiguity about service of notice u/s.143(2) ?

Is It Fair

1. Introduction :

In recent years, ‘scrutiny assessments’ have become a
nightmare for taxpayers as well as professionals. It is also seen that many of
the officers themselves are not very comfortable with the manner in which things
are administered or thrust on them. The starting point of the ‘scrutiny’ is the
service of notice u/s.143(2) of the Income-tax Act, 1961 (the Act). After the
introduction of Fringe Benefit Tax (FBT) by Finance Act, 2005, S. 115WE(2) also
contemplates an assessment similar to S. 143(3). Because of these two
assessments, a peculiar problem is faced. The same is discussed in the
succeeding paragraphs. This is all the more relevant, particularly when there
were two separate returns i.e., one for income and the other for FBT.
Even after introduction of combined form of return of income and FBT, it is
pertinent to note that there are two separate assessments for each.

2. Nature of problem :

2.1 A few assessees received notice u/s.115WE(2) for
assessment u/s.115WE for FBT. This was received within the prescribed time for
A.Y. 2006-07.

2.2 Further, due to e-filing of returns, the assessees also
received notices u/s.142(1) requiring them to furnish hard copies of accounts,
reports, TDS certificates and so on.

2.3 It may be pertinent to note that notice u/s. 142(1) is
common for both the assessments i.e., the assessment of income as well as
of fringe benefits.

2.4 Assessees confirm having received aforementioned notices;
but are sure that the cover did not contain any notice u/s.143(2).

2.5 These assessees received fresh notice u/s. 143(2) dated
much beyond the time permissible u/s.143(2). Strictly speaking, the notice is
out of time on the face of it.

2.6 Now, the dilemma arises. The acknowledge-ment is given
for the cover (envelope). There is no clarity as to its contents. If at all the
notice was served earlier u/s.143(2) along with the notice for FBT assessment,
there is no need for fresh notice u/s.143(2).

2.7 The Finance Act, 2008 has given considerable liberty to
the AOs to commit lapses —
E.g.,

— S. 282A : Notice need not be signed and only name
and designation is printed/stamped/ otherwise written is sufficient.

— S. 292BB : Where an assessee appeared in any
proceedings/co-operated in any inquiry, it shall be deemed that the notice has
been duly served and he shall be precluded from taking any objections in this
regard, after completion of assessment.

2.8 At the same time, one cannot really afford to take a
tough stand regarding non-service of notice. Everybody is aware of the nuisance
value resulting from such an action.

3. Conclusion :

There is already abundant litigation with regard to the
service of notice e.g., Notice accepted by a neighbour or a servant or a
person other than assessee. There are also issues of service of notice by
affixture. The dilemma being created by two separate assessments will add to
this litigation. Therefore, it is high time that the CBDT issues a Circular to
clarify the position.

levitra

Nirav Shah

China is now world’s 2nd largest economy

New Page 1

79 China is now
world’s 2nd largest economy

China has overtaken Japan to become the world’s
second largest economy, the fruit of three decades of rapid growth that has
lifted hundreds of millions of people out of poverty. Depending on how fast its
exchange rate rises, China is on course to overtake the United States and vault
into the No. 1 spot sometime around 2025, according to projections by the World
Bank, Goldman and others.

(Source : The Economic Times, dated 31-7-2010)

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Nirav Shah

Inflation to touch 17% by September, says Barclays.

New Page 1

74 Inflation to touch 17% by September, says
Barclays.

(Source : The Economic Times, 14-7-2008)

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Nirav Shah

UK urges return to wartime frugality.

New Page 1

73 UK urges return to wartime
frugality.

Waste not, want not. Evoking an era of World War II
austerity, British families are being urged to cut food waste and use leftovers
in a nationwide effort to fight sharply rising global food prices.

With food and energy prices soaring around the
world, a constant supply of high-quality, affordable food is no longer
guaranteed, the officials are warning Britons.

(Source : The Times of India, 13-7-2008)

levitra

Nirav Shah

S. 10B — Gain on account of foreign exchange rate fluctuation qua export proceeds credited/deposited in EEFC account of assessee in foreign exchange is export realisation which constitutes profits derived from export business eligible for exemption u/s.10

New Page 1

59. (2009) 121 TTJ 751 (Ahd.) (TM)

ITO v. Banyan Chemicals Ltd.

A.Y. 2001-02. Dated 29-12-2008

S. 10B — Gain on account of foreign exchange rate
fluctuation qua export proceeds credited/deposited in EEFC account of
assessee in foreign exchange is export realisation which constitutes profits
derived from export business eligible for exemption u/s.10B.

The assessee-company was a 100% EOU. For the relevant
assessment year, the Assessing Officer excluded the amount of net foreign
exchange gain which it received on account of gain on foreign exchange on
conversion of receipts from export sales. The learned CIT(A), by following the
decisions in the cases of K. Uttamlal Exports Ltd. v. Dy. CIT, (2003)
133 Taxman 196 (Mumbai) (Mag.) and Mohindra Impex v. Asstt. CIT, (2002)
121 Taxman 326 (Del.) (Mag.), allowed the claim of exemption u/s. 10B of the
Act. Since there was a difference of opinion between the Members, the matter
was referred to the Third Member u/s.255(4).

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

(1) The receipt of the sale consideration was in US
dollars. It was credited/deposited in the EEFC account of the assessee to be
retained in US dollars as per guidelines for operating this account. In this
account, the receipts may be kept in foreign currency instead of converting
it to Indian rupees.

(2) The gain on account of exchange fluctuation is part
of the receipt of foreign currency of export sales made by an assessee. It
is a part of the receipt of sale proceeds converted into Indian rupees.
There is no exception in S. 10B like that in Expln.(baa) to S. 80HHC.

(3) The gain accounted for by the assessee is the excess
rupee value of US dollars on the date of realisation of sale proceeds
credited. Therefore, the exchange gain on the date of deposit in the EEFC
account has to be treated as sales realised in US dollars on that date. The
exchange gain is thus sales realisation of the billed amount in US dollar
and would be an income derived from the export of goods and articles.

However, in respect of gains arising at the time of
withdrawal of amount from the EEFC account by way of difference in exchange
rates between the date of deposit into the account and the date of withdrawal
from the EEFC account, the Third Member noted adversely as under :

(1) Such gain would not be part of sales as once the sale
consideration is deposited in EEFC account, the exchange gain accrued
thereafter would not be a part of the turnover and, consequently, not a
profit arising from the export of goods.

The Third Member relied on the decisions in the following
cases :

(a) Smt. Sujata Grover v. Asst. CIT, (2002) 74
(Mumbai) TTJ (Del.) 347

(b) Renaissance Jewellery (P) Ltd. v. ITO, (2006)
104 TTJ (Mumbai) 382/(2006) 101 ITD 380 (Mumbai)

(c) Shah Originals v. Asst. CIT, (2007) 112 TTJ
(Mumbai) 754

(d) Priyanka Gems v. Asst. CIT, (2005) 94 TTJ (Ahd.)
557

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Nirav Shah

S. 140C, S. 244A(2) — Where power of attorney has not been attached to the return of income filed by a non-resident Company, which has been processed u/s.143(1)(a) and also assessment made u/s.143(3) without power of attorney, grant of interest u/s.244A(2

New Page 1

58. 2009 TIOL 483 ITAT (Del.)

China Trust Commercial Bank v. ADIT

(International Taxation)

A.Y. : 1998-99. Dated : 15-5-2009

S. 140C, S. 244A(2) — Where power of attorney has not been
attached to the return of income filed by a non-resident Company, which has
been processed u/s.143(1)(a) and also assessment made u/s.143(3) without power
of attorney, grant of interest u/s.244A(2) cannot be denied on the ground that
the delay is attributable to the assessee.

Facts :

The assessee, M/s. China Trust Commercial Bank incorporated
in Taiwan was engaged in the business of international banking services. The
assessee filed its return of income for A.Y. 1998-99 on 28-11-1998 declaring
taxable income of Rs.71,94,840. The return was processed u/s.143(1)(a) on
31-3-1999 and the assessment order u/s.143(3) was passed on 29-12-2000
accepting the income declared in the return of income. The Assessing Officer
issued a refund as claimed in the return of income, however, he did not grant
interest u/s.244A of the Act. The assessee filed an application u/s.154 of the
Act requesting the AO to rectify the mistake by granting interest u/s.244A.
The application u/s.154 of the Act was rejected on the ground that the
assessee had not filed valid power of attorney in due time, which was filed
only after the lapse of a long delay and, therefore, delay in issuing refund
was attributable to the assessee. He, therefore, denied granting interest
u/s.244A of the Act.

The CIT(A) held that the issue of declining interest
u/s.244A(2) to the assessee is well beyond the scope of proceedings u/s.154
being an issue on which two views are always possible. He upheld the order of
the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal noted that the power of attorney was filed on
30-9-2002. Non-grant of interest was because the power of attorney was not
filed alongwith the return. The refund became due on processing the return
u/s.143(1)(a) on 31-3-1999. The Tribunal noted the provisions of S. 140C of
the Act which mandate that in case of a non-resident company, the return of
income is to be signed and verified by a person who holds a valid power of
attorney and the power of attorney be attached to the return. The Tribunal
also noted that the return was processed without the power of attorney, the
assessment u/s. 143(3) was also made without the power of attorney. In the
circumstances, the Tribunal held that the refund due on such processing or on
making the assessment cannot be withheld because of the absence of such power
of attorney. The Tribunal held that if without the power of attorney the
return could be processed and assessment could be made, the refund could also
be prepared and made to the assessee. The Tribunal held that from a bare
reading of the Section it is evident that the delay is to be seen with
reference to the proceedings resulting in refund and the delay is attributable
in such proceedings, to the assessee. The proceedings which result in refund
are the processing of the return or making an assessment u/s.143(3) and since
these proceedings were completed long back even without the power of attorney,
the delay in filing the power of attorney was not the cause for delay in the
proceedings resulting in refund.

However, the Tribunal noted that the provisions of S.
244A(2) provide that where the question arises as to which period is to be
excluded, it shall be decided by the Chief Commissioner or the Commissioner
whose decision thereon shall be final. Since the AO had not referred the
matter for the decision of the Chief Commissioner or the Commissioner the
Tribunal set aside the order of the CIT(A) and the AO and remitted the matter
back to the file of the AO to decide the issue of excluding the period for
granting interest to be decided by the Chief Commissioner or the Commissioner,
as the case may be, and follow his decision on that.

levitra

Nirav Shah

S. 54 — Where assessee paid advance to a builder for purchase of a house, but due to inability to arrange funds, could not purchase the property and got the advance back, the conditions of purchase/construction within time specified in S. 54 are not satis

New Page 1

57. 2009 TIOL 512 ITAT (Bang.)

Mrs. Shakuntala Devi v. DDIT (International
Taxation)

A.Y. : 2005-06. Dated : 23-6-2009

S. 54 — Where assessee paid advance to a builder for
purchase of a house, but due to inability to arrange funds, could not purchase
the property and got the advance back, the conditions of purchase/construction
within time specified in S. 54 are not satisfied. In such a case, exemption
can be denied only on expiry of time period of 3 years from date of transfer
of original asset.

Facts :

During the previous year relevant to assessment year
2005-06 the assessee sold two flats — one at Prithvi Apartments and another at
Embassy Diamante, Bangalore. Long-term capital gain arising on sale of these
two flats was worked out at Rs.46,51,537. The assessee advanced a sum of
Rs.98,69,970 to the builder towards the purchase of the flat at Embassy
Habitat. Accordingly, it claimed the sum of Rs.46,51,537 to be deductible
u/s.54 of the Act. In an order passed u/s.143(3) r.w.s. 147 of the Act, the
Assessing Officer stated that the assessee failed to furnish either the
registered sale deed or the purchase agreements to substantiate her claim both
for sale of two properties and also for purchase of the flat at Embassy
Habitat. He also noted that the statement of affairs as on 31-3-2006 did not
reflect the flat at Embassy Habitat as her asset. He held that the since the
title of the property was not transferred to the assessee the provisions of S.
54 were violated and accordingly, he denied the exemption claimed by the
assessee u/s.54 of the Act.

The CIT(A) confirmed the order of the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal. On behalf of the assessee it was submitted that the assessee had
entered into an agreement for purchase of a house and had paid an advance, but
subsequent to the payment of advance the assessee could not raise the
necessary funds for purchase of the flat and therefore, the agreement entered
into by the assessee was terminated and cancelled and the assessee received
back the advance paid by her. It was also contended that it is premature to
decide upon denial of exemption. It was submitted that unutilised amount is to
be brought to tax in the assessment year relevant to the previous year in
which the period of three years from the time of transfer of original asset
ends. For this proposition reliance was placed on provisions of S. 54(2) of
the Act which provides for depositing the amount of gain into a Capital Gain
Account and utilisation therefrom within the prescribed time period. Upon
failure to utilise the amount deposited in Capital Gain Account for purchase
or construction within the prescribed time period, the unutilised amount is
charged to tax in the previous year relevant to the assessment year in which
the period of three years from the time of transfer of original asset (that
resulted in the capital gains arising in the first place) ends.

Held :

Since the transaction entered into by the assessee did not
culminate into purchase of residential house either one year before or two
years after the date of transfer nor a residential house was constructed
within a period of three years after the date of transfer, the CIT(A) was
justified in denying the claim of exemption u/s.54 of the Act.

As regards the alternative contention raised the Tribunal
restored the issue to AO with a direction to decide the same as per facts and
law, after providing due opportunity of hearing to the assessee.

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Nirav Shah

S. 28, S. 45 — Gain arising on transfer of land held by the assessee as its capital asset in lieu of 50% of the constructed areas to be constructed by the developer at his own cost without any construction activity to be carried on by the assessee is char

New Page 1

56. 2009 TIOL 477 ITAT (Mum.)

ACIT v. Shree Dhootapapeshwar Ltd.

A.Ys. : 2001-02 and 2002-03.

Dated : 30-3-2009

S. 28, S. 45 — Gain arising on transfer of land held by the
assessee as its capital asset in lieu of 50% of the constructed areas to be
constructed by the developer at his own cost without any construction activity
to be carried on by the assessee is chargeable to tax as capital gains.

Facts :

The assessee company was engaged in the business of
manufacturing and trading in ayurvedic medicines. It was owner of land
acquired by it in 1936 on which it had constructed a factory for manufacturing
ayurvedic products. The land was held by it as a fixed asset and was
consistently shown as fixed asset in its accounts. The assessee had not
converted this land into its stock-in-trade. The development agreement entered
into by the assessee recorded that the assessee did not have the requisite
expertise and know-how to undertake the development of the said land. As per
the agreement, the assessee was to part with the land and in lieu thereof was
entitled to receive 50% of the constructed area without carrying out any task
of development. The assessee was not required to meet any of the expenses
towards construction of the buildings.

The AO noted that — (i) the agreement described the
assessee as the owner and the developer as the licensee; and (ii) under the
agreement the assessee was given absolute rights to sell all the residential
as well as commercial property developed and handed over by the developers at
whatever rate as per the prevalent market conditions. Considering these, the
AO charged the profit arising on transfer of land under the head ‘Income from
Business’.

The CIT(A) allowed the assessee’s appeal.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that CIT(A) has observed that (a) the
constructed area was to be shared amongst the parties; (b) the parties were
free to deal with their respective areas in the manner they thought fit; (c)
this was not a case where the parties by virtue of the agreement have decided
to share the profit from the project; (d) the assessee was to receive 50% of
the constructed area, irrespective of the cost of development incurred by the
developer.

On facts and having noted the observations of the CIT(A),
the Tribunal held that the agreement could not be regarded as a joint venture
and the constructed area received by the assessee was consideration for
transfer of land. The Tribunal agreed with the conclusion of the CIT(A) and
noted that the conclusion of the CIT(A) is supported by the following judicial
decisions :

(a) CIT v. Smt. Radha Bai, (272 ITR 265) (Del.)

(b) CIT v. B. K. Bhaumik, (245 ITR 614) (Del.)

(c) CIT v. Mohakampur Ice and Cold Storage, (281
ITR 354) (All.)

The appeal filed by the Revenue was dismissed.

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Nirav Shah

S. 28, S. 45 and S. 56 — Amount of liquidated damages received by the assessee from the vendor of the property under an agreement for purchase of property constitutes a capital receipt not chargeable to tax.

New Page 1

55. 2009 TIOL 511 ITAT (Bang.)

Mrs. Yogesh Aurora v. ITO

A.Y. : 2005-06. Dated : 9-4-2009

S. 28, S. 45 and S. 56 — Amount of liquidated
damages received by the assessee from the vendor of the property under an
agreement for purchase of property constitutes a capital receipt not
chargeable to tax.

Facts :

The assessee was working as a consultant with a
pharmaceutical company. She had entered into an agreement for purchase of
property for Rs.17,95,175 and paid an advance of Rs.10 lakhs. The agreement
for purchase inter alia provided that if the vendor fails to register a
sale deed within the period mentioned in the agreement in favour of the
assessee or her nominee he shall be liable to pay liquidated damages of Rs.5
lakhs. The vendor did not execute the sale deed. The assessee obtained legal
opinion and was advised that the only legal recourse available to her was to
accept liquidated damages. The assessee contended that the amount of
liquidated damages received by her constituted capital receipt not exigible to
tax.

The Assessing Officer (AO) charged this sum to
tax.

The CIT(A) was of the view that the property
sought to be purchased was huge considering the fact that the assessee was a
professional. He, therefore, held that the transaction was an adventure in the
nature of trade. However, since on the date of receipt of the amount the
adventure in the nature of trade had not come into full-fledged existence, he
held that the amount be charged to tax under the head ‘Income from Other
Sources’.

Aggrieved, the assessee preferred an appeal to
the Tribunal where it was contended that the compensation was received on
foregoing a right to acquire a capital asset and therefore, it is a capital
receipt. Reliance was placed on the decision of the Apex Court in the case of
Kettlewell Bullen and Co. Ltd. v. CIT, (53 ITR 261) and also in the
case of Oberoi Hotels Pvt. Ltd. v. CIT, (236 ITR 903).

Held :

The Tribunal noted that the Gujarat High Court in
the case of CIT v. Hiralal Manilal Mody, (131 ITR 421) and Calcutta
High Court in the case of CIT v. Ashoka Marketing Ltd., (164 ITR 664)
had considered similar issue. Following the ratio of the decisions of these
two Courts the Tribunal held the amount of liquidated damages to be capital
receipt. It also observed that because no cost can be attached to the right,
therefore, following the ratio of the decision of the Apex Court in the case
of CIT v. B. C. Srinivasa Shetty, (128 ITR 294) the amount cannot be
taxed as capital gain.

The appeal filed by the assessee was allowed.

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Nirav Shah

S. 142A r/w S. 143 — Reference to valuation cell u/s.142A can be made during the course of assessment and reassessment, and not for the purpose of initiating reassessment — Where Assessing Officer had not rejected books of accounts by pointing out any def

New Page 1

54. (2009) 118 ITD 382 (Luck.)

ITO v. Vijeta Educational Society

A.Ys. : 1998-99 to 2001-02 and 2003-04 to 2004-05

Dated : 28-9-2007

S. 142A r/w S. 143 — Reference to valuation cell u/s.142A
can be made during the course of assessment and reassessment, and not for the
purpose of initiating reassessment — Where Assessing Officer had not rejected
books of accounts by pointing out any defect, reference to DVO for valuation
of cost of construction of building incurred by the assessee was not valid,
and hence, the DVO’s report could not be utilised for framing
assessment/reassessment even though the same was obtained u/s.142A.

The assessee society was granted registration u/s. 12A. In
the course of assessment, the AO referred the valuation of building
constructed by the assessee to valuation cell. However the AO completed the
assessment without considering the report as the DVO’s report was not received
in time. Subsequently, the AO received the report from the DVO, wherein it was
shown that the assessee had made additional investment of Rs.46.87 lacs in the
building. On the basis of the said report, the AO initiated reassessment
proceedings, treating the differential amount as income from undisclosed
sources.

The CIT(A) held that even if the said addition was to be
added to the assessee’s income, the same would be exempt u/s.11, and deleted
the addition.

On second appeal by the department, it was held :

1. If the assessee has maintained proper books of
accounts and all details are mentioned in such books, which are duly
supported by vouchers, no defects are pointed out and the books are not
rejected, then the figures mentioned therein will have to be followed. The
valuation report has to be taken into consideration only when the books of
accounts are not reliable, in the opinion of the ITO.

2. Further, there cannot be any reference u/s.142A when
there is no process of assessment which is initiated after filing of return
of income, or issuance of notice u/s.142(1).

3. The process of reassessment can be initiated only
after issuance of notice u/s.148(1) after duly fulfilling the formalities
mentioned therein. It is clear that invoking S. 142A is a process after
re-opening of the assessment. The use of the word ‘require’ in S. 142A is
not superfluous but signifies a definite meaning, whereby some preliminary
formation of mind by the Assessing Officer is necessary which requires him
to make a reference to the DVO u/s.142A.

4. The provisions of S. 142A cannot be read in isolation
to S. 145. If books of accounts are found to be correct & complete in all
cases, no defect being pointed out therein, then addition made on account of
difference in cost of construction on the basis of DVO’s report is not
correct. Use of such a report obtained u/s.142A is not mandatory, but
discretionary.

Hence, the order of the CIT(A) was to be upheld, though on
different grounds.

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Nirav Shah

Assessee was a mutual concern in the strict sense as all the members were travel agents in India, and convention receipts, membership and subscription fees and interest therefrom were exempt being in the nature of mutual receipts — Hence, having regard to

New Page 1

53. (2009) 118 ITD 285 (Mum.)

Travel Agents Association of India v. ACIT

A.Ys. : 1997-98, 1998-99, 2001-02

Dated : 10-2-2008

Assessee was a mutual concern in the strict sense as all
the members were travel agents in India, and convention receipts, membership
and subscription fees and interest therefrom were exempt being in the nature
of mutual receipts — Hence, having regard to the fact that once said receipts
were taken out of computation of excess of income over expenditure, such
receipts could not decide the character of activities carried out by the
assessee and in such circumstances, when assessee was held to be a mutual
concern, S. 115JA was not applicable to it.

The assessee was a company incorporated u/s.25 of the
Companies Act, to promote interests of travel agents in India. Distribution of
income or property was prohibited by the Memorandum of Association & Articles
of Association. The assessee contended that it conformed with the requirements
of a mutual association and hence income was exempt from taxation on the
grounds of mutuality. The assessing authority held that even if the assessee
was a company registered u/s.25, it was liable for assessment u/s.115JA. The
CIT(A) held that as the Profit & Loss A/c had been prepared in accordance with
Schedule VI, book profit was liable to be taxed u/s.115JA.

On appeal to the Tribunal it was held :

1. S. 115JA deals with companies earning normal business
profits. The assessee was earning ‘income’ and not profits. The expression
‘income’ was a little different from ‘profits’, and hence S. 25 of the
Companies Act provides that such company has to prepare ‘Income &
Expenditure Account’, instead of ‘Profit & Loss A/c’. Companies carrying on
activities of charitable purposes or mutual interest are registered u/s.25.

2. Where the mutual association like the assessee does
not carry on any business and almost entire income is derived from mutual
activities, it is exempt from tax. Only when such a company indulges in
activity of earning profits and distributing the same, it comes out of the
tax exemption.

3. It is possible that a mutual association may earn
income from services/facilities provided to non-members. If such activity is
the major activity, then the question of taxability would arise in a
substantial way, and the rule of mutuality would be questioned.

4. In the instant case, the assessee was a professional
association and there was no case of non-members being involved in the
affairs of the company. Therefore, the activities carried on by the assessee
company were meant only for the member travel agents and were mutual in
character. It was held that the assessee was a mutual concern, it did not
declare dividends, nor distribute its income. Therefore, it did not come
under the MAT regime.

Hence, the computation of income made for the relevant
assessment years u/s.115JA was to be set aside.

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Nirav Shah

Provisions of S. 115JB (MAT) are not applicable to foreign companies that do not have physical presence in India, in the form of an office, branch or a permanent establishment (PE).

New Page 1Part C : Tribunal & AAR International Tax Decisions

22 The Timken Company &

Praxair Pacific Limited

2010 TII 25 & 26 ARA-Intl.

S. 115JB of the Act, Article 5 of India-USA DTAA and

Article 13 of India-Mauritius Treaty

Dated : 23-7-2010

Provisions of S. 115JB (MAT) are not applicable to foreign
companies that do not have physical presence in India, in the form of an office,
branch or a permanent establishment (PE).

Facts :

As part of its global
restructuring exercise, Timken, a US company (USCO) proposed to transfer
shares of in an Indian listed company. The proposed transfer was to be through
stock exchange, and hence, was expected to qualify for exemption from capital
gains tax in terms of S. 10(38) of the Act.
The issue raised
before AAR was whether in absence of any presence in India, USCO was liable to
pay tax under MAT provisions on capital gains arising from transfer of shares.

Ruling of AAR :

On the following grounds, AAR held that MAT provisions did
not apply to foreign companies that had no business presence in India :

A foreign company
that has not established a place of business in India is not required to
prepare its financial statements in accordance with S. 591 r.w. S. 594 of the
Companies Act.
The context of the
MAT regime, the Finance Minister’s speech and the administrative circulars
indicate that the MAT is not designed to be applicable to a foreign company
which does not have presence in India.
The earlier AAR
ruling holding that MAT is applicable to foreign companies was in the context
of an entity that was doing business in India and had a PE in India. Such
foreign company had obligation to comply with the provisions of the Companies
Act and maintain books of accounts in India and therefore, was liable to MAT.

Note : This ratio was also applied when a foreign transferor
company earned capital gains, which was exempt from tax in terms of the
India-Mauritius Treaty. (Praxair Pacific Limited)

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Nirav Shah

Partnership firms, though assessed as fiscally transparent entities1 in the country of residence, are eligible to claim treaty benefits under the India-UK DTAA.

New Page 1

Part C : Tribunal & AAR International Tax Decisions

21 Linklaters LLP v. ITO

2010 TII 80 ITAT Mum.-Intl.

Article 5 & 7, India-UK DTAA

Partnership firms,
though assessed as fiscally transparent entities1 in the country of residence,
are eligible to claim treaty benefits under the India-UK DTAA.
A Service PE is a
deemed PE and, therefore, does not need to satisfy requirement of Basic PE
rule. The presence of personnel in excess of the specified time-threshold,
triggers service PE in India.
By providing for
coverage ‘profits indirectly attributable to permanent establishment’ Article
7 of India-UK DTAA incorporates Force of Attraction (FOA) rule. Profits
relating to services rendered outside India in respect of Indian projects are
also taxable in India.

Facts :

The taxpayer, was a
UK-based limited liability partnership, engaged in law practice. It did not
have a branch or any other similar form of presence in India, but rendered
legal services to certain clients whose operations extended to India. These
services were rendered partly from the UK and at times, by partners and staff
visiting India. During the financial year under consideration, the taxpayer’s
partners/staff were present in India for more than 90 days.
The taxpayer
disclosed ‘nil’ taxable income in Indian tax return by claiming treaty benefit
and by contending that it has no PE presence (including service PE) in India.
Without prejudice,
the taxpayer also claimed that as per DTAA, profits of PE were to be computed
having regard to the market conditions in India. Arm’s-length income of PE is
based on fiction of independence and is required to be calculated having
regard to the rates that would have been charged by Indian
lawyers/professionals for similar services.
The Tax Department
rejected the taxpayer’s arguments and concluded that the taxpayer had a
service PE in India. Entire income in relation to Indian projects (including
services rendered from the UK office) was taxed on the ground that no details
about overseas work was furnished.
On appeal, the CIT(A)
agreed with the AO on the applicability of service PE Rule, but restricted
taxation only to the extent of services rendered in India.

Held :

Treaty eligibility to the overseas firm assessed as flow
through entity in home country :

The ITAT raised the issue about eligibility of the UK firm to
claim treaty benefit. The issue was raised on account of ‘reverse hybrid
situation’ and ‘asymmetrical taxation’ scenario arising from the UK firm being
taxed in India at an entity level, whereas in the UK, the assessment is as a
pass through/transparent entity in the name of the members of the firm. The ITAT
rejected primary contention of the taxpayer challenging right of the tribunal to
consider the issue for the first time. The ITAT was convinced that the legal
issue could be examined by it after providing reasonable opportunity of hearing
to the parties if the tribunal finding did not enlarge the quantum of income as
assessed by the lower authorities.

Having proceeded to answer the issue, the ITAT held :

The UK legal firm is
a person under the treaty definition of the term.
The difference in
taxation system applicable to the partnership firm in the source jurisdiction
[(India) and residence country (UK)] results in economic double taxation
though not juridical double taxation. The philosophy of DTAA which supports
merits of avoiding juridical double taxation should equally be applicable to a
situation of economic double taxation.
The decision of
Canadian Court in the case of TD securities (USA) LLC v. Her Majesty the
Queen, (2010 TCC 186) supports that the treaty benefit can be given even in a
situation involving asymmetrical taxation. In this case, single-member LLC of
the USA was given the benefit of USA-Canada treaty despite the fact that in
Canada, assessment was in the names of LLC whereas in the USA, due to the
option exercised, the assessment was in the name of the member of the LLC. The
decision also supports that the treaties need to be interpreted on a
contextual basis rather than based on strict principles of interpretation as
applicable to tax laws. The treaty interpretation is not subjected to literal
interpretation in isolation with the objects and the purpose for which the
treaty provisions are made.
The treaty benefit is
available to a person who is a treaty resident of the other country. In terms
of the treaty, an entity is resident of the UK if it attracts tax liability in
the UK on account of criteria such as domicile, residence, place of
management. Though the modalities or mechanism of taxation may vary, facts of
taxation need to be decided in an objective and uniform manner.

In a situation where the entire income of a partnership firm is taxed in its own hands or in the hands of a partner, the definition of residence should be regarded as fulfilled. The Canadian decision in TD Security’s case supports that the term ‘liable to taxation’ needs to be interpreted in a pragmatic manner so as to extend the treaty benefits to fiscally transparent entities. The test of fiscal domicile relevant for treaty residence purpose is fulfilled so long as the country of residence has right to tax income of the firm, irrespective of whether such right is actually exercised by the resident state or not.

As a result, the taxability of entire income in the country of residence is more relevant rather than the mode of taxability i.e., whether the tax is levied in the hands of the firm or in the hands of the partners. The treaty benefit therefore cannot be denied to the firm so long as entire income of the firm is taxed in the residence country, not in its own right but in the hands of the partners.

Incongruent result arising on account of asymmetrical result needs to be avoided and the benefit of the treaties is to be given so long as income of the enterprise is subjected to taxation in the other jurisdiction either directly or indirectly.

The OECD report dealing with applicability of DTAA to partnership has indicated that in case of asymmetrical taxation, benefit should be available to the partners and not to the partnership firm. The ITAT consciously took the decision of adopting a view different from that by the OECD report which suggested grant of treaty benefit to the members of the firm. Reference was made by the ITAT to the reservation of India on the OECD commentary to conclude that the Government had rejected the stand of the OECD.

Other issues :

The firm had a fictional service PE in view of presence of its partners/personnel in excess of the specified threshold.

Actual revenues earned by taxpayer needs to be considered in respect of third-party dealings. It is not correct to apply hypothetical rates of earnings based on what could be the earnings of other Indian legal firms.

The UK treaty provides for taxation of profits in the state to the extent they are directly or ‘indirectly attributable’ to that PE. The inclusion of profits indirectly attributable to the PE incorporates a force of attraction principle in the UK treaty.

This permits taxability of overseas income in respect of services rendered for an Indian project if it is similar or relatable to the services rendered by the PE.

Nirav Shah

Income from hiring of equipments under global usage Bareboat Charter Agreements (BCA) arises at the place where the equipment is delivered. Subsequent use by lessee as per his discretion is not relevant for determination of place of accrual.

New Page 1Part C : Tribunal & AAR International Tax Decisions

20 Seabird Exploration FZ LLC

AAR No. 829 of 2009

S. 9(1)(vi) & S. 44BB, Income-tax Act

Dated : 25-6-2010

Income from hiring of equipments under global usage Bareboat
Charter Agreements (BCA) arises at the place where the equipment is delivered.
Subsequent use by lessee as per his discretion is not relevant for determination
of place of accrual.

Facts :

The taxpayer, UAE Company (UAECO) provides geophysical
services to the oil and gas industry in India. For this purpose, the taxpayer
entered into agreements for hiring the vessels (equipment) pursuant to BCA on
global-usage basis. Under the agreements, the lessor (owner) provided the
vessels to the taxpayer on hire without providing any crew or other services.
The terms of the agreement had the following features :

Agreements for hiring
of vessels were entered into outside India;
In terms of the
agreement, hire charges were payable outside India;
Delivery and
redelivery of vessels was to take place outside India;
The taxpayer was
obliged to pay period-linked hire charges irrespective of usage of vessel
i.e., even during idle period fixed hire charges were payable;
Vessels were under
complete control and dominion of the hirer;
It was the discretion
of the hirers to use equipment in or outside India;
The owner had limited
responsibility of maintenance of equipments and consequential right of
inspecting the vessels during the term of the agreement.

The charges paid pursuant to the agreement were not covered
by royalty definition u/s.9(1)(vi) of the Act in view of provisions of S. 44BB
of the Act. The taxpayer contended that the hire charges were not taxable in
India as it represented income earned by non-resident owners outside India.

The Tax Department sought to assess the amount on gross basis
u/s.44BB of the Act by contending that the income accrued/arose in India due to
use of vessels in India.

Held :

The AAR accepted contentions of the taxpayer and held :

The income can be
taxed in the hands of the non-resident owner only if income accrues or arises
in India or is deemed to be accruing or arising in India, given the fact that
the hire charges were payable outside India.
The income can be
deemed to accrue or arise in India if it was income earned through or from any
asset or source of income in India. The source of income for owner of the
equipment lies in delivering and transferring control of the vessel to the
hirer outside India and not its subsequent utilisation which may or may not be
in India.
The expression
‘source of income’ is not a legal concept, but needs to be understood the way
a practical man would regard it to be a real source of income. It is required
to be understood in a broad and practical sense and not in a technical manner.
Reliance was placed
on the following extract of Privy Council decision in the case of Commissioner
of Inland Revenue v. Hang Seng Bank Ltd. [1991 (1) AC 306]

“. . . . . , if the profit was earned by the exploitation of property assets
as by letting property, lending money or dealing in commodities or securities
by buying and reselling at a profit, the profit will have arisen in or derived
from the place where the property was let, the money was lent or the contracts
of purchase and sale were effected.”
Having regard to the
above, it was concluded that in case of hire of moveable property, the source
of income is the place where property is let out and delivered and subsequent
utilisation of such equipment as per the discretion of the hirer does not
impact the determination of source.
Consequentially,
income from hire charges does not accrue or arise in India if the asset is
delivered outside India. It can be charged to tax only if the delivery of the
asset is in India either at the time of entering into original agreement or at
the time of renewal of the agreement.

levitra

Nirav Shah

S. 92CA — Difference on tangible bearing on costs, price or profit to be given due weightage while comparing controlled & uncontrolled transactions

New Page 1

22 Egain Communications Pvt. Ltd. v.
ITO Pune

(2008) TIOL 282 Pune

Transfer Pricing Provision — S. 92CA

A.Y. : 2004-05. Dated : 10-6-2008

Issue :

While comparing the controlled and uncontrolled transactions
under the Transactional Net Margin Method (TNMM), the differences having
tangible bearing on costs, price or profit are to be given due weightage to make
suitable adjustments.

Facts :

The assessee, an Indian company (ICO) was engaged in the
business of software development and was a registered STPI eligible for 100% tax
break u/s.10A of the Act. The entirety of turnover of ICO was in favour of its
parent in the USA (USCO). The USCO had assured complete buyback from ICO. USCO
had privity with the ultimate customers and was responsible for all risks
including the risk of credit, marketing risk, recovery risk, inventory risk,
warranty risk, foreign exchange risk and post-sales risk, etc.

The revenue model of ICO was based on cost plus basis. ICO
recovered mark-up of 5% of all the costs including depreciation which was
provided in the books of ICO based on the US system.

The TPO made addition on the ground that comparable PBIT was
about 16%. For the purpose of determining comparable mark-up, TPO took into
account 20 comparable cases which included two high margin cases where the
profit was 67% and 54%, respectively, as against average of 16%.

There was no dispute on application of TNMM being the most
appropriate method with reference to profit level indicator of PBIT.

Before the ITAT, the assessee claimed adjustment to the
comparable margin determined by the TPO on account of the following factors :

(1) Adjustment was made to rework PBIT of ICO by adopting
depreciation as per Schedule XIV rates. This was as against accelerated rates
at which depreciation was provided by ICO based on US system. The adjustment
lowered depreciation charge and improved profitability of ICO.

(2) Adjustment was made to exclude non operating income
like interest income in respect of the comparables adopted by TPO. This was
suggested as ICO did not have any other income.

(3) Adjustment was made to exclude margin of an entity
which was engaged in trading activity — the same being activity unrelated to
the activity of the assessee.

(4) Downturn economic adjustment on account of low risk
profile of ICO as it was a captive unit of USCO which was responsible for all
business risks.

It was also indicated that the parent suffered losses and the
fact that ICO was otherwise eligible for 100% deduction also supported that
there was no motive for transfer pricing evasion. It was also argued by the
assessee that no adjustment was warranted so long as the price charged by the
assessee was within the range of margin of the comparables.

Held :

The ITAT accepted the assessee’s claims for adjustments on
account of the factors narrated above.

The ITAT accepted that in application of TNMM, (i) the
differences likely to affect the price, cost charged or paid or the profit in
the open market are to be taken into consideration to make reasonable and
accurate adjustments to eliminate the differences having material impact; (ii)
if the differences are not capable of being evaluated, the comparables may need
to be ignored.

The ITAT confirmed that Rule 10B as also OECD Guidelines
specifically required suitable adjustments for differences on account of FAR and
other relevant factors. The ITAT also relied on decision of Delhi Tribunal in
the case of Mentor Graphics (Noida) Pvt. Ltd. v. DCIT, (109 ITD 101) to
support that determination of arm’s-length price, functional profile, assets and
assumed risk of controlled and uncontrolled transactions (FAR analysis) need to
be appropriately screened and adjusted for the purpose of making them
comparable.

The ITAT relied on US IRS manual on transfer pricing
provisions which supported adjustments to be made to uncontrolled transactions
to make them comparable.

The ITAT also noted that from out of 20 comparables
considered by the TPO, there were two comparables with high profitability of 54%
and 68% as against the average of 16% and that such extreme cases needed special
consideration. For this ITAT relied on OECD Guidelines :

Para 1.47 of OECD guidelines is to the following effect :

“1.47 Where application of one or more methods produces a
range of figures, a substantial deviation among points in that range may
indicate that the data used in establishing some of the points may not be as
reliable as the data used to establish the other points in the range or that
the deviation may result from features of the comparable data that require
adjustments. In such cases, further analysis of those points may be necessary
to evaluate their suitability for inclusion in any arm’s-length range.”

Having observed the above, the ITAT permitted adjustments as
requested for, since the adjusted profit margin of the assessee was comparable
with uncontrolled margin with tolerance of 5%.

levitra

Nirav Shah

S. 9(1)(vi) —Payment of USCO towards bandwidth for availing standard services not chargeable as equipment royalty.

New Page 1

21 Dell International Services India Pvt.
Ltd. Bangalore

(2008) TIOL 09 ARA IT

S. 9(1)(vi) of the Act

Article 12 of India-US DTAA

Dated : 18-7-2008

Issue :

Payment to USCO towards telecom bandwidth in the form of
private leased line telecom circuits is for availing standard services which is
not chargeable as equipment royalty. Such services are not fees for included
services.

In terms of S. 9(1)(vi)(b), source of income is not outside
India only because customers are located outside India.

Facts :

The applicant, Dell India, an Indian Company (ICO) was
engaged in the business of providing call centre, data processing and
information technology support services to its group companies. For providing
the services, ICO entered into agreement with US Company by name BT America (BTA)
for two-way transmission of voice and data through telecom bandwidth. For this
purpose, ICO was provided private leased line circuit for full country coverage
in the USA and in India. ICO established privity with BTA though the rates of
services were fixed pursuant to Master Services Agreement signed by ICO’s parent
with BTA for all the group concerns. BTA raised invoices for monthly recurring
charges on ICO. The invoice also described the amount as rent for dedicated
private telecom leased circuits.

BTA had its own network up to certain point while it tied up
with other service providers such as VSNL and Bharati for the balance part of
the connectivity. It was however a common ground that ICO had privity only with
BTA, while BTA was responsible for arrangements with VSNL/Bharati, etc. The
following chart depicts the flow of the arrangement.

The applicant sought ruling on TDS implications in respect of
remittance made on account of recurring charges to BTA.

The AAR noted the following to be the features of arrangement
entered into between ICO and BTA :

Agreement described that BTA provided dedicated, point-to-point, international
links directly connecting two customers sites via digital circuits for
transmission of voice & data.

The services provided by BTA was an end-to-end offering between the specific
site in country A and the specific site in country B.

BTA has huge network of optical fibres cables laid under sea, other equipments
and infrastructure which were controlled and operated by BTA for the purpose
of rendering such services. Additionally, BTA had tied up with other service
providers for taking care of the segment in which BTA did not have its own
network.

BT provided similar services to others also. Incidentally, similar services
were provided by other service providers also. The services were standard
services akin to telephone connection.

The agreement made it clear that the arrangement was for provisioning of
services. BTA was responsible for maintenance of service levels. The agreement
was clear that the ownership, right and responsibility of operating and
maintaining assets and infrastructure was that of BTA. The agreement made it
clear that ICO had no control, possession or right of operating the
infrastructure, while BTA had control, possession, dominion over the assets of
its network.

For establishing connectivity, certain instruments were placed at the location
of ICO. While the agreement contemplated recovery of one-time installation
charges, actually the same were waived.

The applicant contended that the remittance did not attract
tax implications either in terms of domestic Act provisions or in terms of
India-USA treaty.

As against that, the Department’s contention was
that the remittance was towards rental of equipment, hence subject to
withholding taxes in India as royalty income both in terms of provisions of S.
9(1)(vi) and in terms of provisions of India-USA treaty.

Held :

AAR held that the contract was for rendition of services
which was admittedly not in the nature of fees for included services and was
therefore not liable to tax in India in terms of India-USA treaty. The AAR held
that the amount was not in the nature of royalty for use or right to use the
equipment. For this purpose, the AAR concluded :

The use or the right to use equipment covers only those arrangements where
there is some positive act of utilisation, application or employment of
equipment for the desired purpose by the payer. Merely because
facility/service is provided to the customer from sophisticated equipment
installed and operated by the service provider does not result in grant of
right of use of equipment to the service recipient.

To determine whether the arrangement involves right of user, the question to be asked is whether the payer is required to do positive act in relation to the equipment such that he operates and controls the equipment in order to enjoy the facility. The right of adapting the equipment for the use by the payer is essential to characterise the transaction as that of equipment rental. The fact that the service availer exercises no possessory rights in relation to the network and merely enjoys facilities/services rendered from the infrastructure, supports that the transaction is that of service and not that of rent.

The fact that BTAmaintains the entire infrastructure for offering services to various other cus-tomers also indicates that use of equipment is by BTA. The AAR likened and compared the arrangement with the use of bridge, road or telephone connection.

The AAR referred to following extract from Professor Klaus Vogel’s commentary to make distinction between service and rent of equipment.

“……the use of a satellite is a service, not rental; this would not be the case only in the event that the entire direction and control over the satellite such as piloting, steering were transferred to the user” (at page 802)”.

The use of expression rentals or the fact that certain part of the instruments were installed at the premises of the assessee were held to be of no relevance.

The AAR also held that the amount was not royalty as consideration for use of secret process. In view of AAR, the treaty triggered royalty taxation only in the event when consideration was for use of secret process and the fact that services were of standard nature and provided by multiple other service providers supported that the arrangement was not for use of secret process.

The AAR did not accept the applicant’s contention that the amount remitted was protected from taxation in India on account of exception of S. 9(1)(vi)(b). In view of AAR, the assessee had its business principally carried out in India and the fact that the export was made to the US counterpart did not lead to conclusion that the source of income was situated outside India. In view of AAR, source is the starting point or the origin from where something springs or comes into existence and the fact that the customers were located outside India did not make the source of income to be outside India.

Nirav Shah

S. 2(31) — AOP is assesable person even when formed without object of deriving income

New Page 1

20 Geoconsult Zt GmbH (2008)

TIOL 11 AAR IT

Explanation to S. 2(31) of the Act

Article 5 and 12 of India-Austria DTAA

Dated : 31-7-2008

Issue :

Joining together with common purpose gives rise to emergence
of AOP, which is assessable as such, even when the members share gross
consideration.

Explanation to S. 2(31)(v) makes AOP an assessable person
even when formed without the object of deriving income.

Facts :

The applicant GZT, a company incorporated in Austria (Ausco),
was specialised in providing consultancy services.

Ausco entered into joint venture with other two Indian
companies by name Rites and Secon.

Under MOU signed in April, 06, Ausco, Rites and Secon agreed
to collaborate together in a joint venture for providing consultancy services to
Himachal Pradesh Road and Infrastructure Development Corporation Ltd. (HPRIDC).
The joint venture executed service agreement with HPRIDC in August 2006, wherein
the JV was service provider / consultant to HPRIDC being the client. The
services were to be rendered by the JV to HPRIDC for HPRIDC’s project of
development of seven tunnels in Shimla. JV was responsible only for consultancy
services and to carry out implementation of said services. The service contract
was a fixed price contract. Ausco was the lead member. In terms of the
agreement, each of the joint venture members was jointly and severally liable to
HPRIDC for performance of the contract.

As a sequel to the service contract signed with HPRIDC,
formal joint venture agreement was executed between three parties viz.
Ausco, Rites & and Secon in September 2006. The AAR took note of the following
features of the joint venture agreement :

(1) The preamble read that the three parties had agreed to
‘collaborate’ for performing all works associated with the consultancy
services to be rendered to HPRIDC.

(2) Each of the members had joint and several liability to
the client, though Ausco was a leading member and one of the employees of
Ausco present in India was designated to be the team leader.

(3) Certain of the tasks were entrusted to each of the
members. The agreement however clarified that while each member had primary
responsibility in respect of task allotted to it, the other parties were bound
to render assistance to the other members.

(4) Each of the members had unrestricted access to the work
carried out by the other members in connection with the project.

(5) In the event of default/insolvency of one of the
members, other members were irrevocably appointed to step in and perform the
work of the defaulting member in view of joint and several liability of the
parties. Also, in the event of default by one, the work was assigned to the
others.

(6) The total consideration received from the client was
distributed at gross level with Ausco receiving approximately 50% of the
amount, while the other parties received 20% and 30% of the amount. The amount
was directly paid to the respective party pursuant to common bill on the
client being raised by HPRIDC. The agreement also clarified that each party
was responsible for meeting its own cost and expenses and was responsible for
maintenance of accounts concerning its own affairs.

The applicant Ausco primarily sought ruling of the AAR on tax
implications of the amount which fell to Ausco’s share. It was the claim of
Ausco that consultancy services which Auso was liable to render viz. the
services of carrying out geological and technical investigation, undertaking
field survey, collecting seismological data, surveying topographical conditions,
etc. were primarily rendered from outside India. And, in absence of PE or long
duration presence in India in connection with the project, the amount was not
chargeable as business income. The applicant however conceded that the amount
was fees for technical services chargeable as such at 10% on gross basis
u/s.9(1)(vii) of the Act read with Article 12 of India-Austria treaty.

During the course of hearing, the department representative
contended that the joint venture of Ausco with Rites and Secon constituted an
AOP, particularly in terms of Explanation to S. 2(31) of the Act.

It was agreed by the parties that the issue of presence or
absence of emergence of AOP was crucial to determine the tax implications of
Ausco and the questions raised before the AAR would be influenced by conclusion
on this basic issue.

Before the AAR, the applicant relied on the AAR’s ruling in
the case of Van Oord ACZBV, 248 ITR 399 (AAR). It was claimed by the applicant
that there was no emergence of AOP as :

Each of the members was responsible for identified task allocated and that
consortium or joint venture was only for convenience of execution.

The agreement was clear that the task of each individual member was identified
and the cooperation amongst them was only for co-ordination and satisfactory
completion of the project.

The joint venture was clear that each of the parties to the contract merely
shared gross revenue and there was no sharing of profit/loss.

All in all, each individual member was executing a standalone and independent
portion of the overall contract and was receiving revenue for the work done by
the member and each member alone was responsible for meeting its part of the
cost.

Nirav Shah

S. 195 — Commission paid to foreign selling agents does not trigger tax with-holdings obligation on payer

New Page 1

19 DCIT, Hyderabad v.
Hyderabad Industries Ltd.

(2008) TIOL 309 Hyd.

S. 195 of the Act.

A.Ys. : 1996-97 to 2000-01. Dated : 30-5-2008

Issue :

Commission paid to foreign selling agents does not trigger
tax withholding obligation on the payer.

Facts :

The assessee, Indian manufacturer of engineering goods,
exported goods to various foreign countries through its sales agents based in
the foreign countries. The assessee remitted commission to foreign agents
without deducting tax at source.

As a sequel to survey operations, the Department held that
the assessee was liable to deduct tax at source in respect of commission
payment. The Department raised huge demand u/s.201(1) and u/s.201(1A) on the
ground that :

The assessee ought to have made application u/s.195(2) before taking the view
on non-applicability of TDS;

The amount was taxable in the hands of the recipient as payment was received
by the agents in India.

Incidentally, the decision has considered only domestic law
provision. It is not clear whether any of the recipients had benefit of a
treaty.

Before the Tribunal, the DR also sought to justify taxation,
on the ground that remittance was in the nature of royalty for commercial
information given by the agent or was in the nature of technical services
rendered by the agent who provided assistance in obtaining LC established or
getting advance payment from customers, etc.

Held :

The Tribunal held that :

Since the contract between the assessee and the overseas agent did not specify
any mode of payment, the remittance made by the assessee by way of cheque or
draft cannot be regarded as payment made in India to the agent of non-resident
in India.

The services rendered by the commission agent were commercial services in
respect of sales effected. The commercial information provided or after-sales
services provided to the customers of the assessee were part of the composite
arrangement which the assessee had with the agent.

The information provided by the commission agent was simple market information
and over which the agent had no exclusive domain. Payment for information can
be termed as royalty only when it is consideration for information concerning
industrial, commercial or scientific experience over which the granter has an
exclusive right. The Tribunal observed :

“The commercial information which the agent in our case is
expected to provide to the assessee is not such over which the agent has an
exclusive domain. It is merely a market information which any Tom, Dick and
Harry can go into the market and obtain it. The definition given in the DTAA
is also in consonance with the definition discussed above. It states that
royalty means payment of any kind received as a consideration for information
concerning industrial, commercial or scientific experience. It simply means
that a person who has an exclusive right over a particular information and
over which no one else in the world is a privy to it, can assign a right to
use such information to the other.”

The Tribunal also held that the services of commission agent were not
technical in nature.

In absence of tax liability of the recipient, the remittance made without
deduction of tax at source was held to be justified.

“. . . ., the Circulars of the Board apply with full force
to the facts of the present case and since the payments made to the
non-residents are not income chargeable to tax in India, the assessee was not
liable to deduct at source u/s.195 of the Act”.

levitra

Nirav Shah

S. 9(1)(i) — Liaison office of USCO acting as buyer’s agent for exports by independent manufacturers to associates of USCO, covered by exclusion

New Page 118 Nike Inc. India Liaison Office
v. ACIT

(2008) TIOL 255 Bang.

S. 9(1)(i) of the Act

India-USA Treaty

A.Ys. : 1999-2000 to 2002-03. Dated : 28-5-2008

Issue :

Liaison office of a US Company, which is acting as
buyer’s agent in respect of exports made by independent manufacturers to the
associates of USCO is covered by exclusion provided in terms of Explanation to
S. 9(1)(b) of the Act.

Facts :

Nike Inc., (USCO) is a company incorporated in USA.
It is a world-known name and brand in sports apparels. It has its main office in
the USA with AEs, subsidiaries (associates) in various parts of the world. The
associates distribute goods in various countries.

From its office in the USA, the USCO arranges
sourcing of goods for all its subsidiaries and associates (being sports
apparels, accessories) from independent manufacturers spread across the globe.
The associates establish direct privity with independent manufacturers. The USCO
acts as procurement and liaisoning agent and provides diverse services to the
associates enabling them to procure the goods. The associates pay
commission/fees to the assessee company for providing assistance in procurement
and purchase of goods from the independent manufactures.

In respect of procurements from India, USCO set up
a liaison office in India with approval of RBI. The approval was obtained for
acting as a communication channel between the manufacturers in India, the H.O.
and the associates. The activities of the Indian liaison office involved the
following functions :

1. Liaisoning with manufacturers. For this
purpose, the liaison office employed merchandisers, product analysts, quality
engineers, fabric controllers, etc.

2. Giving opinion on reasonableness of rates to
be negotiated with independent manufacturers.

3. Getting the samples of products approved by
the H.O. or the associate and ensuring that the final product matched with the
approved sample.

4. Providing training to personnel of the
manufacturers, undertake evaluation of the factory, etc.

5. Supervising the production schedule and
activities of the manufacturer.

6. Undertaking fabric testing, garment testing
and generally to do quality assurance activities.

7. Keeping tab on delivery schedule and shipments
for ensuring timely delivery to the concerned purchaser.

In a nutshell, as a buying agent of its associates,
the USCO assisted by liasoning with the manufacturers, assisting in selection of
goods, supervising production, scheduling, quality control and managing
transportation and logistics of shipment, etc.

The USCO, as a buying agent for the associates, had
entered into agreement with the manufacturers on behalf of the associates. The
agreement with the manufacturers defined their obligations, including the
obligation to purchase equipments required specifically for production of
apparels on which the brand ‘Nike’ was put.

It was a common ground that there was direct
privity between the manufacturers and the associates. USCO earned commission
from associates for performing buying agency services.

The goods which were procured from India
constituted less than a fraction of one percent i.e., about 0.22% of the
overall goods procured the world over, in respect of which USCO earned
commission income from the associates.

The Tax Department held that the liaison office in
India had transgressed the scope of RBI-permitted functions and had indulged in
income earning activity. The Department assessed 5% of the global income as
attributable to the operations of liaison office in India. The Tax Department
rejected contention of USCO that the operations carried out by the liaison
office in India were preparatory and auxiliary and were confined to export of
goods from India and hence no part of income was taxable having regard to
provisions of Explanation to S. 9(1)(b).

To support its contention that the operations of
the assessee were not limited to that of facilitating export and were involved
functions, the Tax Department relied on statements of the employees and the job
profile of the employees employed by the liaison office. The Department
contended that as per the statements of the employees, the employees indulged in
the activities of designing, providing suggestions on manufacturing, verifying
the receipt of raw materials, commercial negotiations of pricing with the
manufacturers, etc. These activities, according to the Department, were part of
core income-earning activity. The Department also contended that exclusion from
taxation in respect of purchase of goods by a non-resident for the purpose of
export would not apply to the buying agent and was limited only to the person
who actually purchased the goods.

Held :

The Tribunal noted that the role of USCO and its
liaison office in India was restricted to provide assistance to the associates
in the matter of procuring goods from India and that USCO/Liaison office had not
acted as an agent of manufacturers and had not received any remuneration or
commission from the manufacturers. The only source of income for the USCO was
buying agent’s commission that it received from its associates.

Nirav Shah

Bhawanji Kunverji Haria vs. DCIT Income-tax Appellate Tribunal Mumbai Bench “F”, Mumbai Before Vijay Pal Rao (J. M.) and N. K. Billaiya (A. M.) ITA No. 4032/Mum/2009 A Y. 2006-07. Decided on 25.05.2012 Counsel for Assessee/Revenue: G. C. Lalka/M. Rajan

Sections 22 and 23—(i) Where on account of interior work being carried out during the year the property could only be leased out from the next financial year, no notional rent could be added as the income of the assessee in the current year; (ii) Income from house property which is used in the business carried out in the partnership firm in which the assessee was a partner eligible for exemption u/s. 22.

Facts:
The assessee owned two commercial properties. In his return of income filed, he had not offered income from house property. According to him, the possession of one of the properties was received in December 2005. He took three months to complete the furniture work and the property was let out from April 2006. The other property was used by the partnership firm in which he was the partner. As regards the first property, the AO held that as the property was in possession of the assessee, the provisions of section 23(1) were attracted and the annual value of the property was deemed to be the income of the assessee. As regards the second property, he held that the individual and partnership firm are two different entities, hence, the exemption claimed in respect of the same u/s. 22 was not available. On appeal, the CIT (A) confirmed the order of the AO.

Held:
In respect of the first property, the tribunal noted that the facts regarding the date of its possession and the time the assessee took to furnish the premises were not in dispute and that immediately thereafter, the premises was let out in April 2006. Therefore, it accepted the assessee’s submission and held that no notional rent could be added as the income of the assessee qua the said property.

As regards the second property which was let out to a partnership firm where the assessee was a partner, the tribunal relying on the decision of the Orissa High Court in the case of Commissioner of Income-tax v. Rabindranath Bhol (211 ITR 299) held that the income from the house property which is used in the business carried out in the partnership firm in which the assessee was a partner would qualify for the exemption provided u/s. 22.

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Nirav Shah

Khar Gymkhana vs. DIT(E) In the Income-tax Appellate Tribunal Mumbai Bench ‘A’, Mumbai Before B. Ramakotaiah, (A. M.) and Vivek Varma, (J. M.) I.T.A. No.: 373/Mum/2012 Asst. Year: 2009-10. Decided on 10-07-2013 Counsel for Assessee/Revenue: A. H. Dalal/ Surinder Jit Singh

Section 12AA—Order cancelling Registration of the trust for carrying on activities in the nature of trade, commerce or business revoked. Registration restored.

Facts:
The assessee trust was granted registration under section 12A(a) since the year 1984. During the course of the assessment proceedings, the AO noticed that the assessee had earned income by the sale of liquor at Rs. 1.45 crore, canteen compensation at Rs. 20.67 lakh, Card and daily games, at Rs. 0.82 lakh, guest fees at Rs. 31.50 lakh and income from banquet. According to the AO these receipts were clearly in the nature of business income and were in excess of the monetary limit as laid down in the provisions of section 2(15) r.w. proviso which has come into effect from A.Y. 2009-10. Therefore, he concluded that such entity cannot be considered as for charitable purpose. Since the assessee is not for charitable purpose then the trust itself becomes non-genuine as it loses its public charitable status and accordingly the provision of section 12AA(3) of the Act gets attracted. Thus in view of the facts and circumstances the AO held that the assessee trust has become non-genuine and the registration as allowed to it in earlier years u/s. 12AA was cancelled/ withdrawn w.e.f A.Y. 2009-10.

Before the tribunal, the assessee contended that the rigours of section 12AA get attracted “if the activities of the trust or institution are not genuine or are not being carried out in accordance with the objects of the trust, as the case may be.” According to the assessee just because the legislature has inserted section 2(15), registration, as allowed by the Income-tax Department cannot get cancelled, without the change of objects and character of the trust. He further placed reliance on the earlier decisions of the tribunal in ITAs no. 4315 & 4316/ Mum/2010 in assessee’s own case.

On the other hand, the revenue justified the order of the DIT and submitted that with the insertion of section 2(15), the character of the charitable trust has got very limited scope. It becomes ineligible for registration, if the trust gets into the field of trade or profit making.

Held:
The tribunal noted that the case of the department was that the assessee had crossed the twin conditions, as mentioned in section 12AA(3), viz., ”that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution”. However, it noted that in the instant case, the department had nowhere mentioned that “social intercourse among members” was not one of the objects of the trust, when it was originally formed on 04-10-1934. Further, it also noted that in the tribunal orders in the assessee’s own case which were relied on by the assessee, the aspect of section 2(15) had also been taken and adjudicated upon. Thus, noting that none of the revenue authorities have made any observation/comments on the objects recited as early as 04-10-1934 of the assessee trust, the twin conditions existing in section 12AA(3) and for ignoring the existing orders of the coordinate Bench in the case of the assessee and following the principles of judicial propriety, as well as the facts coming out of the documents placed before it, the tribunal held that the revenue has erred in cancelling the registration u/s. 12AA(3).

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Nirav Shah

Knight Frank (India) Pvt. Ltd. v. Addl. CIT ITAT Mumbai `A’ Bench Before B. Ramakotaiah (AM) and Vivek Verma (JM) ITA No. 2021/Mum/2011 A.Y.: 2007-08. Decided on: 10th July, 2013. Counsel for assessee/revenue: M. M. Golvala/ Kalik Singh.

Sections 43B, 145A. Provisions of section 145A do not apply to service tax. Accordingly, service tax is not includible in cost of components.

Facts:
The assessee had not considered service tax for computing cost of components. In the course of assessment proceedings the Assessing Officer (AO) asked the assessee to explain why the same should not be included in view of the provisions of section 145A. Rejecting the submissions made by the assessee, the AO enhanced the trading profit by Rs. 69,20,599 and added the same to the total income returned by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A) who sustained the order of the AO on the point of inclusion of service tax by invoking the provisions of section 145A.

Aggrieved, the assessee preferred an appeal to the Tribunal where it placed reliance on the decision of Delhi High Court in the case of CIT vs. Noble & Hewitt (I) Pvt. Ltd. (305 ITR 324)(Del) and Chennai ITAT decision in the case of ACIT vs. Real Image Media Technologies Pvt. Ltd. (306 ITR 106)(AT-Chennai).

Held:
The Tribunal held that since the assessee is a service provider company patently the provisions of section 145A cannot be made applicable because the provision was specifically introduced for the purposes of manufacturing segment of the business. It noted that section 145A(a)(ii) mentions “…by the assessee being goods to the place of location & conditions as on the date of valuation are required to be included.” It also noted that the issue is now covered by the decisions relied upon by the assessee. Following the said decisions, the Tribunal set aside the order of CIT(A) and directed the AO to delete the addition.

This ground of appeal was decided in favour of the assessee.

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Nirav Shah

DCIT v. Hemal Raju Shete ITAT Mumbai `H’ Bench Before P. M. Jagtap (AM) and Dr. S. T. M. Pavalan (JM) ITA No. 2198/Mum/2010 A.Y.: 2006-07. Decided on: 10th July, 2013. Counsel for revenue/assessee: P. K. Shukla/J. D. Mistry & M. A. Gohel.

Section 45, 48. What is to be taxed is the gain received or accrued. Accordingly, deferred consideration under the share sale agreement cannot be taxed. Maximum cap provided in the agreement cannot be equalled either with sale value nor with full value of consideration since the said maximum cap is neither received nor accrued for the purposes of calculating capital gains.

Facts:
The assessee filed its return of income for AY 2006-07 declaring total income of Rs. 11,68,470. The assessee had shown long term capital gain of Rs. 42,38,674 on sale of 75,000 shares of Unisol Infrastructures Ltd and had claimed exemption u/s. 54EC by investing the sale proceeds in bonds of SIDBI. In the course of assessment proceedings, on examining the agreement dated 25.1.2006 pertaining to transfer of shares the Assessing Officer (AO) noticed that the said agreement grants absolute right to the assessee as well as other transferors to receive the specified amount in a deferred manner with nomenclature of `initial’ and `deferred’ consideration being employed. The AO reworked the share of the assessee in the alleged total consideration `accrued’ to the transferors by clubbing the initial consideration and deferred consideration and thereby assessed the capital gain at Rs. 4,91,94,923. He therefore made an addition of Rs. 4,48,54,923 to the total income returned by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee since according to him the deferred gain could not be taxed as the gain was not received nor accrued to the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal where on behalf of the assessee it was pointed out to the tribunal that clause 3 of the agreement dealing with consideration provided that Rs. 20 crore is the maximum limit. This clause served as a cap to the effect that the aggregate of initial and deferred consideration shall not exceed the cap of Rs. 20 crore. The manner of computation of deferred consideration was explained to demonstrate that the assessee may or may not get the deferred consideration. It was pointed out that since there was no certainty of receiving the amount and also that the quantum to be received was not known, taxing the maximum cap provided is not tenable.

Held:
On perusal of the agreement the tribunal found that the amount of Rs. 20 crore was the maximum amount which could be received by the assessee’s group. This amount comprised initial consideration and deferred consideration. There was no guarantee for receipt of this maximum amount by the assessee’s group. In view of these facts, the tribunal agreed that what is to be taxed is the gain received or accrued and not the notional/hypothetical income. It held that the decision of the Supreme Court in the case of CIT vs. George Henderson & Co. Ltd. and that of ITAT in Mrs. Alpana Piramal, relied upon by DR have no application as the ratio in the said cases is applicable when the dispute relates to adopting the full value of consideration visà- vis the sale consideration which is not the case in the present appeal. Maximum cap mentioned in the agreement cannot be equated either with sale value consideration (sic sale consideration) or with full value of consideration since the said maximum cap is neither received nor accrued for the purposes of claiming capital gains. The Tribunal upheld the order passed by CIT(A).

The appeal filed by the revenue was dismissed.

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Nirav Shah

A. P. (DIR Series) Circular No. 25 dated 14th August, 2013

All Scheduled Commercial Banks which are Authorised Dealers (ADs) in Foreign Exchange/All Agencies nominated for import of gold

This circular states that it supersedes all earlier instructions is respect of import of gold by Authorised Dealers in Foreign Exchange/Nominated Agencies. The circular provides that: –

a) Import of gold in the form of coins and medallions is now prohibited.

b) All nominated banks/nominated agencies and other entities must ensure that at least 20% of every lot of gold imported into the country is exclusively made available for the purpose of exports and the balance for domestic use. A working example of the operations of the 20/80 scheme is annexed to this circular. The scheme shall be monitored by customs authorities, and will be implemented port-wise only.

c) Nominated banks/nominated agencies and other entities can make available gold for domestic use only to the entities engaged in jewellery business/ bullion dealers and to banks authorised to administer the Gold Deposit Scheme against full upfront payment only.

d) Nominated banks/agencies/refineries and other entities must ensure that there is no front loading of imports, particularly in the first and second lots of imports. Such imports have to be linked to normal quantities of gold supplied to the exporters by the nominated banks/agencies and must not exceed the highest quantity supplied during any one year out of last three years. The quantity thus arrived at, however, will not be imported in one or two lots only. As a thumb rule, imports of more than maximum of two months of requirements of the exporters in a lot would be considered unusual. In case there is no previous record of having supplied gold to the exporters then nominated banks/agencies must seek prior approval of the RBI before placing orders for import of gold for the first lot under the 20/80 scheme.

e) The 20/80 principle would also apply for the henceforth import of gold in any form/purity including gold dore, whereby 20 % of the gold imported will be provided to the exporters. This will be administered and monitored at the refinery level for each consignment at the time of such imports as well as by the customs authorities. The refinery can make available gold for domestic use only to the entities engaged in jewellery business/bullion dealers and to the banks authorised to administer the Gold Deposit Scheme against full upfront payment and sale of gold against any other form of payment shall not be permitted. Import of gold dore can be permitted only against a license issued by the DGFT.

f) Any authorisation such as Advance Authorisation/ Duty Free Import Authorisation (DFIA) can be utilised for import of gold meant for export purposes only and no diversion for domestic use is permitted.

However, entities/units in the SEZs and EOUs, Premier and Star Trading Houses are permitted to import gold exclusively for the purpose of exports only.

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Nirav Shah

A. P. (DIR Series) Circular No. 24 dated 14th August, 2013

NOTIFICATION [NO.FEMA 263/RB-2013]/GSR 529(E), DATED 05–03-2013

Liberalised Remittance Scheme for Resident Individuals- Reduction of limit from $200,000 to $75,000

This circular has made changes as under to the Liberalised Remittance Scheme (LRS):

1. The existing limit of $200,000 per financial year has been reduced to $75,000 per financial year (April-March).

2. Remittance can be made for any permitted current or capital account transaction or a combination of both. However, no remittance under LRS can be made for acquisition of immovable property, directly or indirectly, outside India.

3. With effect from 5th August, 2013 resident individuals (single or in association with another resident individual or with an ‘Indian Party’ as defined in this Notification) satisfying the criteria as per Schedule V of Notification No. 263/RB-2013 dated 5th March 2013, may make overseas direct investment in the equity shares and compulsorily convertible preference shares in any Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) outside India for bona fide business activities outside India within the limit of $75,000.

4. The existing limit for gift in rupees by Resident Individuals to NRI close relatives and loans in rupees by resident individuals to NRI close relatives has been reduced to $75,000 per financial year.

Schedule V [See Regulation 20A]

A. Overseas Direct Investments by Resident Individuals

1. Resident individual is prohibited from making direct investment in a JV or WOS abroad which is engaged in the real estate business or banking business or in the business of financial services activity.

2. The JV or WOS abroad shall be engaged in bona fide business activity.

3. Resident individual is prohibited from making direct investment in a JV/WOS [set up or acquired abroad individually or in association with other resident individual and/or with an Indian party] located in the countries identified by the Financial Action Task Force (FATF) as “non-co-operative countries and territories” as available on FATF website www.fatf-qafi.org or as notified by the Reserve Bank.

4. The resident individual shall not be on the Reserve Bank’s Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation/enforcement agency or regulatory body.

5. At the time of investments, the permissible ceiling shall be within the overall ceiling prescribed for the resident individual under Liberalised Remittance Scheme as prescribed by the Reserve Bank from time to time. [Explanation: The investment made out of the balances held in EEFC/RFC account shall also be restricted to the limit prescribed under LRS.]

6. The JV or WOS, to be acquired/set up by a resident individual under this Schedule, shall be an operating entity only and no step-down subsidiary is allowed to be acquired or set up by the JV or WOS.

7. For the purpose of making investment under this Schedule, the valuation shall be as per Regulation 6(6)(a) of this Notification.

8. The financial commitment by a resident individual to/on behalf of the JV or WOS, other than the overseas direct investments as defined under Regulation 2(e) read with Regulation 20Aof this Notification, is prohibited.

B. Post Investment Changes

Any alteration in shareholding pattern of the JV or WOS may be reported to the designated AD within 30 days including reporting in the Annual Performance Report as required to be submitted in terms of Regulation 15 of this Notification.

C. Disinvestment by Resident Individuals

1. A resident individual, who has acquired/set up a JV or WOS under the provisions of this Schedule, may disinvest (partially or fully) by way of transfer/sale or by way of liquidation/ merger of the JV or WOS.

2. Disinvestment by a resident individual shall be allowed after one year from the date of making first remittance for setting up or acquiring the JV or WOS abroad.

3. The disinvestment proceeds shall be repatriated to India immediately and in any case not later than 60 days from the date of disinvestment and the same may be reported to the designated AD.

4. No write-off shall be allowed in case of disinvestments by the resident individuals.

D. Reporting Requirements

1. The resident individual, making overseas direct investments under the provisions of this Schedule, shall submit Part I of the Form ODI, duly completed, to the designated authorised dealer, within 30 days of making the remittance.

2. The investment, as made by a resident individual, shall be reported by the designated authorised dealer to the Reserve Bank in Form ODI Parts I and II within 30 days of making the remittance.

3. The obligations as required in terms of Regulation 15 of this Notification shall also apply to the resident individuals who have set up or acquired a JV or WOS under the provisions of this Schedule.

4. The disinvestment by the resident individual may be reported by the designated AD to the Reserve Bank in Form ODI Part IV within 30 days of receipt of disinvestment proceeds.

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Nirav Shah

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