BCAJ | Bombay Chartered Accountant Journal

[2015-TIOL-1602-CESTAT-MUM] Commissioner of Central Excise, Nagpur vs. M/s Shri K. M. Sharma

Charges levied on the basis of activities and material involved and not on the basis of number/nature or scope of manpower cannot fall under the category of “Manpower Supply and Recruitment Services”.

Facts:
Respondents undertook work as incidental to fabrication of Iron Steel Products supplied by the manufacturer. Department alleged that they provided services of Supply of Manpower. It was argued that the consideration is received and charged on per metric ton of output and is done on a job basis which was supported by the invoices. The First Appellate authority cancelled the demand, against which revenue is in appeal.

Held:
The Tribunal concurred with the views of the first appellate authority who noted that the charges do not have any nexus with the number/nature/scope of manpower supply and charges pertained to various types of activities and quantity of material involved. Further, the activity was with respect to goods which were still on the production line of the manufacturer, therefore the respondents were entitled to the benefit of exemption notification no. 8/2005-ST which exempts the taxable service of production of goods on behalf of the client. Relying on the decision of M/s. Ritish Enterprises vs. CCE, Bangalore [2010 (18) STR 17 (Tri.-Bang) the order of the first appellate authority was confirmed. A similar decision was also rendered in the case of Commissioner of Central Excise, Nagpur vs. Shri GM Mate, Shri Babulal Ladse [2015-TIOL-1663- CESTAT-MUM].

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[2015-TIOL-1593-CESTAT-DEL] M/s. Ambedkar Institute of Hotel Management vs. Commissioner of Central Excise and Service Tax, Chandigarh.

Meals prepared at one’s own premises and simply supplied at pre-determined rates without getting involved in serving of meals in any manner would not be covered by the definition of outdoor caterer.

Facts:
Appellant is an institute providing mid-day meal to the schools under the Government Scheme. The institute prepares food as per the fixed menu and supplies to the schools and is neither supplying any crockery etc. nor is involved in serving the meal at the school. The department sought to levy service tax under outdoor catering service. Besides, the space in the institute was also made available to various persons for their functions. The Commissioner confirmed both the demands under outdoor catering and mandap keeper services respectively. Aggrieved by the same, the present appeal is filed.

Held:
The Tribunal noted that the Appellant was neither preparing the meals at the school nor serving them and the meals were only supplied at pre-determined rates. Accordingly, it was held that the activity was not a taxable service of outdoor catering. Though the Appellant was a ‘caterer’ within the meaning of section 65(24) of the Finance Act, 1994, the Tribunal stated that the service covered u/s 65(105)(zzt) of the Finance Act, 1994 was that of an “outdoor caterer” and not by a ‘caterer’. Further in respect of the second matter, it was confirmed that mandap keeper service was provided by them, however since the turnover was below the threshold limit, they were exempted from the service tax.

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[2015-TIOL-1453-CESTAT-MUM] Larsen and Toubro Ltd vs. Commissioner of Service Tax, Mumbai.

A works contract can be vivisected prior to 01/06/2007 and be subjected to levy of service tax under “erection, installation and commissioning service”. Also, longer period of limitation invokable.

Facts
The Appellant had entered into six lumpsum turnkey contracts prior to 01/06/2007 each having three parts and a consideration for each of the parts viz. designing, procurement of various capital goods and thereafter installation of such goods was ascertainable. They were discharging service tax in respect of designing under “consulting engineer service”. No service tax was discharged in respect of the third part considering it to be an indivisible works contract comprising of both goods and services on the basis of the decision of the Tribunal in the case of Daelim Industrial Co. Ltd vs. CCE, Vadodara [2006(3) STR 124(T)]. Member (Judicial) and member (technical) had divergent views both in respect of taxability as well as invocation of extended period and therefore the matter was placed before the third member.

Held:
The third member distinguished the decision in the case of Daelim Industrial Co. Ltd (supra) by stating that the said decision has not taken into account the 46th constitutional amendment which inserted clause (29A) in Article 366 of the constitution mandating that the indivisible contracts could be split up and a part of it could be subject to tax. The member relying on the decision of the five member Bench reported in 2015-TIOL-527-CESTAT-DEL-LB held that works contract can be vivisected prior to 01/06/2007 and the service portion can be subjected to levy of service tax. In respect of extended period, the member noted that the same is a question of facts and law and stated that if the Appellant had a bonafide belief, they would have reflected the transaction as an exempted service in the service tax return and by not doing so, they had suppressed the material fact from the department. Further, it was also stated that though there are divergent views of various forums, a large number of them are based on Daelim Industrial Co. Ltd. (supra) which is irrelevant to the issue and the remaining are expressed after 2007. Thus, when tax was rightfully discharged in respect of designing activities it ought to have been discharged on the installation activity being the dominant service in these contracts and accordingly extended period invokable.

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TS-429-AAR-2015 SkillSoft Ireland Limited Order dated: 20.07.2015

Article 12 of India-Ireland Double Taxation Avoidance Agreement (DT AA) –Payment for E-learning products providing access to E-learning platform and the educational content embedded in the form of computer software is royalty under India-Ireland DT AA

Facts
Taxpayer, a Company resident of Ireland, was engaged in providing on-demand e-learning content, online information resources, online courses, flexible learning technologies and performance support solutions (E-Learning products).

The Taxpayer had entered into a reseller agreement with an Indian Company (I Co) for the sale of E-learning products in India. I Co purchased E-learning products on principal-to-principal basis and sold the product to end users/customers in India in its own name. It also entered into license agreement with end users.

As per the license agreement, end-users were granted non-exclusive, non-transferable license to access E-learning products which enabled the users to access the E-learning platform and the educational content embedded therein.

Taxpayer contended that the payment received by it from ICo was for a copyrighted article and not for the copyright and therefore, it was not royalty under the DTAA . Tax Authority contended that consideration for license to use confidential information embedded in licensed software amounts to royalty under India-Ireland DTAA .

Held
E-learning products of Taxpayer consists of two components. First is the course content and second is the software through which course content is delivered to end-customer who gains access to specially designed software for understanding the content. Such especially designed software was not available in public domain but was licensed to I Co who in turn sub-licensed to endcustomers. Merely because the license had been granted on non-transferable and non-exclusive basis, it did not take away the software out of the definition of copyright. Further, the present case was not similar to an e-library or on-line banking facility provided by a bank.

To constitute ‘royalty’ under DTAA , it is not necessary to transfer any exclusive right. What is necessary is that the consideration should be for the use of or right to use any copyright. Reliance in this regard was placed on Karnataka High Court (HC) decision in the case of Synopsis International Old Ltd (212 Taxman 454).

Reliance was placed on AAR decision in the case of Citrix Systems Asia Pacific (343 ITR 1) to conclude that distinction between copyright vs. copyrighted article is illusory as copyrighted article is nothing but an article which incorporates the copyright of the owner/licensee and the permission for using such an article is also for the copyright embedded therein. Software and computer databases would qualify as “literary work” under the definition of royalty provided under the DTAA.

Thus the right to use confidential information embedded in the form of computer software programme would constitute royalty under the DTAA .

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Disallowance u/s. 40(a)(ia) – Deduction of tax under Wrong Section

Issue for Consideration
Section 40(a)(ia) of the Income-tax Act, 1961 provides for disallowance of 30% of any sum payable to a resident on which tax is deductible at source under chapter XVII-B, where such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in section 139(1). Till assessment year 2014-15, the whole of such sum payable was disallowable.

At times, a taxpayer deducts tax at source under a particular section of the Act, while the tax authorities take a view that tax ought to have been deducted under another section of the Act. For example, an assessee while deducting tax on payment deducts tax at 2% u/s. 194C, while the tax authorities take a view that the tax should have been deducted u/s. 194J as in their view the payment represented the payment of fees for the technical services. If the rate at which tax has been actually deducted is lower than the rate at which tax is deductible in the view of the tax authorities, it is usual for them to disallow the claim for deduction on the ground that the tax was not deducted at source leading to a violation of the provisions of section 40(a)(ia) of the Act. The question which arises for consideration, under the circumstances, is, whether the tax authorities can disallow the whole or part of the expenditure on the ground that tax has not been deducted at source on such expenditure ignoring altogether the fact that the tax was in fact deducted though under a different provision of the Act .

While the Calcutta High Court has taken the view that no disallowance u/s. 40(a)(ia) could be made in such cases, the Kerala High Court has taken a contrary view and has held that the provisions of section 40(a)(ia) would apply if tax was deducted under a wrong provision of law and the claim for deduction would be disallowed.

S. K. Tekriwal’s case:
The issue first arose for consideration before the Calcutta High Court in the case of CIT vs. S. K. Tekriwal, 361 ITR 432.

In this case, the assessee had deducted tax at source from payments made to a machinery contractor u/s. 194C as payment to a sub-contractor at the rate of 1%. The assessing officer took a view that the payments were in the nature of machinery hire charges, which amounted to rent under the provisions of section 194-I, and that tax therefore ought to have been deducted u/s. 194-I at the rate of 10%. The assessing officer therefore, disallowed proportionate payments (90%) by invoking section 40(a)(ia).

In the appeal, the Tribunal deleted the disallowance. The Tribunal noted that section 40(a)(ia) had 2 limbs – one requiring deduction of tax, and the second requiring payment of the tax into the government account. There was nothing in that section, treating the assessee as a defaulter where there was a shortfall in deduction. According to the Tribunal, it could not be assumed that on account of the shortfall, there was a default in the deduction. If there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee could be declared to be an assessee in default u/s. 201, and no disallowance could be made by invoking the provisions of section 40(a)(ia).

The Calcutta High Court, on an appeal by the Revenue, after noting the observations of the Tribunal, held that no substantial question of law was involved in the case before it, and therefore refused to admit the appeal.

PVS Memorial Hospital’s case:
The issue again came up before the Kerala High Court recently in the case of CIT vs. PVS Memorial Hospital Ltd, 60 taxmann.com 69. The 2 years involved in this appeal were assessment years 2005-06 and 2006-07.

In this case, the assessee was a hospital, which had entered into an agreement with another hospital, where that other hospital had undertaken to perform various professional services in the assessee’s hospital. The assessee, on payment to the other hospital for its services, deducted tax at source at 2% u/s. 194C by treating the payments as the payment for carrying out the work in pursuance of the contract.

The assessing officer took the view that the payment was in the nature of fees for technical services and the tax was deductible at 5% u/s. 194J, and therefore disallowed the entire payment u/s. 40(a)(ia) in both the years. For assessment year 2005-06, the Commissioner(Appeals) as well as the Tribunal confirmed the addition and rejected the appeals.

For assessment year 2006-07, the Tribunal allowed the appeal following the Calcutta High Court’s decision in S. K. Tekriwal’s case(supra). According to the Tribunal, the disallowance u/s. 40(a)(ia) could be made only if both the conditions were satisfied, i.e. tax was deductible at source and such tax had not been deducted. The Tribunal took the view that where tax was deducted by the assessee, even if it was under a wrong provision of law, the provisions of section 40(a)(ia) could not be invoked. The Kerala High Court, while examining the issue, noted that in the case before it, tax was deductible u/s. 194J and not u/s. 194C.

The Kerala High Court on examination of the provisions of section 40(a)(ia), expressed the view that the section was not a charging section but was a machinery section, and that such a provision should therefore be understood in such a manner that it was made workable. For this proposition, it relied on the Supreme Court observations in the case of Gurusahai Saigal vs. CIT 48 ITR 1, where the Supreme Court had observed that the provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that was to say, in accordance with the clear intention of the Legislature, which was to make effective a charge that was levied .

According to the Kerala High Court, if section 40(a)(ia) was to be understood in the manner as laid down by the Supreme Court, the expression “tax deductible at source under chapter XVII-B” had to be understood as a tax deductible at source under the appropriate provision of chapter XVII-B. Therefore, if tax was deductible u/s. 194J but was deducted u/s. 194C, according to the Kerala High Court, such a deduction did not satisfy the requirements of section 40(a)(ia). The latter part of the section that ‘such tax had not been deducted’, in the view of the Kerala High Court, again referred to the tax deducted under the appropriate provision of chapter XII-B.

The Kerala High Court held that a cumulative reading of the provision showed that deduction under a wrong provision of law would not save an assessee from the disallowance u/s. 40(a)(ia) expressly dissenting from the Calcutta High Court’s decision in S. K. Tekriwal’s case(supra), and confirmed the disallowance u/s. 40(a)(ia).

Observations
On a bare reading of the provisions of section 40(a)(ia), it is gathered
that the said provision requires a disallowance in a case where there
is a failure to deduct tax at source,where it was deductible, or after
deduction the same has not been paid on or before the due date specified
u/s. 139(1). It does not, at least expressly, cover a case of a partial
non-deduction on the lines similar to the one provided u/s. 201 which
provides for the consequences of the failure to deduct tax at source.
Section 201 by express language using the specific terms,“ wholly or
partly” seeks to rope in the cases of partial or a complete failure and
makes an assessee liable for the consequences. The legislature by not
including the above terms “ wholly or partly” in section 40(a)(ia) have
sought to cover the cases of the absolute failure to deduct tax and not
the case of the partial failure to deduct. Importantly section 201, as
it originally stood, did not provide for the cases of partial deduction
and hence did not seek to penalise an assessee in a case where there was
a short deduction of tax by him. Section 201 has since been amended to
rope in the cases of even a partial failure to pay the deducted taxes.

Further,
section 201 of the Income-tax Act clearly brings out that a failure in
whole or in part, would result in an assessee being treated as in
default. Similarly, section 271C clearly specifies that the penalty can
be levied for failure to deduct the whole or any part of the tax as
required by chapter XVII-B. Unlike both the sections, section 40(a)(ia)
uses the term “has not been deducted”, without specifying whether it
applies to deduction in whole or in part.

Secondly, even in
cases of acknowledged failure, the Andhra Pradesh High Court, followed
by many high courts, in the case of P. V. Rajagopal vs. Union of India
99 Taxman 475, held, in the context of the provisions of section 201 as
it then stood [the language of which was similar to the language used in
section 40(a)(ia)], that if there was any shortfall due to any
difference of opinion as to the taxability of any item, the employer
could not be declared to be an assessee in default. The Tribunal in the
cases of DCIT vs. Chandabhoy & Jassobhoy 49 SOT 448 (Bom), Apollo
Tyres vs. DCIT 60 SOT 1 (Coch) and Three Star Granites (P) Ltd vs. ACIT
32 ITR (Trib) 398, held that the provisions of section 40(a)(ia) would
be attracted only in the case of total failure to deduct tax at source,
and where tax had partly been deducted at source, it could not be said
that tax had not been deducted at source. In all these cases, the
tribunal noted the decision of the Andhra Pradesh High Court in the case
of P. V. Rajagopal vs. Union of India(supra) with approval.

The
enormous litigation on the subject of TDS clearly indicate that there
is a lack of clarity on the applicability of the appropriate provision
of chapter XVIIB for deducting tax at source on a particular payment,
which needs to be interpreted and settled by the courts alone. Over a
period of time, certain clarity has emerged on various types of
payments, but there are still various types of payments where the
position is still not so clear, some of which ultimately have to be
resolved by the Supreme Court.

In such a situation, where a tax
deductor has taken a bona fide view in respect of tax deductible from a
particular type of payment, adopting one of the two possible views on
the matter, should he be penalised by disallowance of the expenditure,
besides being asked to pay the tax short deducted, as well as interest
on such short deduction? Can a tax deductor be expected to have the same
legal competence in interpreting a legal provision as a High Court or a
Supreme Court?

In the context of penalty for concealment, the
Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd. 322
ITR 58 held that where a taxpayer based on a possible view of a matter,
claimed a deduction, a penalty for concealment could not be levied on
him even where his claim for deduction of such payment was disallowed in
assessment of his total income. The Supreme Court held that if the
contention of the revenue was accepted, then in case of every return
where the claim made was not accepted by the Assessing Officer for any
reason, the assessee would invite penalty u/s. 271(1)(c). That was
clearly not the intendment of the Legislature.

The disallowance
u/s. 40(a)(ia) is a form of penalty on a tax deductor for failing to
perform an onerous duty, and therefore where a taxpayer makes a genuine
mistake, taking a possible interpretation of the provision under which
tax should be deducted, he should not be penalised for it.

Undoubtedly,
the intention was to ensure that a deductor on payment did deduct tax
at source from payments on which tax was deductible at source and in
doing so he should tax at the rate applicable under a specific provision
which in his bona fide belief is the provision that is applicable to
such a payment. The intention of the Legislature certainly could not
have been to penalise actions taken under a bona fide belief of a
deductor, particularly when the view taken by him is a possible one.

The
better view therefore seems to be that taken by the Calcutta High
Court, that no disallowance can be made u/s. 40(a)(ia) where tax has
been deducted at source at a lower rate under a particular section,
though the rate of tax under the correct section under which tax is
deductible at source may be higher, particularly in cases where there is
a genuine dispute as to the appropriate section under which tax is
deductible at source. In our opinion, the mistake if any of deducting
under a wrong provisions of law, if based on a bona fide belief, is a
case of trivial mistake and should not even lead to holding the assessee
as in default as has been held by the apex court in the case of
Hindustan Steels Ltd., 83 ITR 26 (SC). The question of disallowance
should not arise at all.

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Cancellation of registration upon violation of section 13(1) – section 12AA(4)

1. Background

Section 12AA (3) of the Income-tax Act,
1961 (hereinafter referred to as “the Act”) deals with cancellation of
registration of a charitable institution in circumstances specified in
the said section. The Income-tax Appellate Tribunal [“Tribunal”] has
consistently held in a number of cases that registration of an
institution cannot be cancelled u/s. 12AA (3) merely because section
13(1) of the Act applies to it. [Krupanidhi Educational Trust vs. DIT,
(2012) 27 taxmann.com 11 (Bang); Cancer Aid and Research Foundation vs.
DIT, (2014) 34 ITR (Trib) 56 (Mum); Parkar Medical Foundation vs. DCIT,
(2014) 34 ITR (Trib) 286 (Pune), TS-469-ITAT -2014 (Pune)]. In order to
overcome this position in law, the Finance (No.2) Act, 2014 inserted
section 12AA (4) with effect from 1-10-2014 to provide for cancellation
of registration of a charitable institution upon operation of section
13(1). This article attempts to explain and analyse the provisions of
section 12AA(4).

2. Text

Section 12AA(4) reads as follows:

“(4)
Without prejudice to the provisions of sub-section (3), where a trust
or any institution has been granted registration under clause (b) of
sub-section (1) or has obtained registration at any time under section
12A [as it stood before its amendment by the Finance (No.2) Act, 1996]
and subsequently it is noticed that the activities of the trust or the
institution are being carried out in a manner that the provisions of
section 11 and 12 do not apply to exclude either whole or any part of
the income such trust or institution due to operation of sub-section (1)
of section 13, then, the Principal Commissioner or the Commissioner may
by an order in writing cancel the registration of such trust or
institution:

Provided that the registration shall not be
cancelled under this sub-section, if the trust or institution proves
that there was a reasonable cause for the activities to be carried out
in the said manner.”

3. Summary

Preconditions for applicability of section 12AA(4)

(a) A charitable institution been granted registration u/s. 12AA(1)(b) or section 12A.
(b) After the registration, it is noticed that
(i) section 13(1) applies to the charitable institution;
(ii)
the activities of the charitable institution are being carried out in a
manner that section 11/12 do not apply to whole or any part of the
income due to operation of section 13(1)
(c) The charitable
institution cannot prove that there was reasonable cause for the
activities to be carried out in the said manner.

Consequences of applicability of section 12AA94)

(a) The Principal Commissioner (“PCIT”) or the Commissioner (“CIT”) may cancel the registration of such charitable institution.
(b) Such cancellation shall be done by an order.
(c) Such cancellation order shall be in writing.

4. Rationale/Purpose

4.1 The relevant passage in Memorandum explaining the provisions of the Finance (No. 2) Bill, 2014 reads as follows:

“There
have been cases where trusts, particularly in the year in which they
have substantial income claimed to be exempt under other provisions of
the Act, deliberately violate provisions of section 13 by investing in
prohibited mode etc. Similarly, there have been cases where the income
is not properly applied for charitable purposes or has been diverted for
benefit of certain interested persons. Due to restrictive
interpretation of the powers of the Commissioner under section 12AA,
registration of such trusts or institutions continues to be in force and
these institutions continue to enjoy the beneficial regime of
exemption. …

Therefore, in order to rationalise the provisions
relating to cancellation of registration of a trust, it is proposed to
amend section 12AA of the Act to provide that where a trust or an
institution has been granted registration, and subsequently it is
noticed that its activities are being carried out in such a manner
that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Act);
(iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or
(iv)
its funds are invested in prohibited modes, then the Principal
Commissioner or the Commissioner may cancel the registration if such
trust or institution does not prove that there was a reasonable cause
for the activities to be carried out in the above manner.”

4.2 The relevant paragraphs in Circular explaining the provisions of the Finance (No.2) Act, 2014 read as follows:

“9.2
There have been cases where trusts, particularly in the year in which
they had substantial income claimed to be exempt under other provisions
of the Income-tax Act though they deliberately violated the provisions
of section 13 of the said Act by investing in prohibited modes other
that specified modes, etc. Similarly, there have been cases where the
income is not properly applied for charitable purposes or is diverted
for the benefit of certain interested persons. However, due to
restrictive interpretation of the powers of the Commissioner under the
said section 12AA, registration of such trusts or institutions continued
to be in force and these institutions continued to enjoy the beneficial
regime of exemption.
…

9.4 Therefore, in order to
rationalise the provisions relating to cancellation of registration of a
trust, section 12AA of the Income-tax Act has been amended to provide
that where a trust or an institution has been granted registration, and
subsequently it is noticed that its activities are being carried out in
such a manner that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Income-tax Act, 1961);
(iii)
any income or property of the trust is used or applied directly or
indirectly for benefit of specified persons like author of trust,
trustees etc.; or
(iv) its funds are not invested in specified modes,

then
the Principal Commissioner or the Commissioner may cancel the
registration, if such trust or institution does not prove that there was
a reasonable cause for the activities to be carried out in the above
manner.”

[CBDT Circular No. 1 / 2015, dated 21.01.2015]

5. Violation of section 13 cannot be used as a ground to deny registration

Courts/Tribunal have held that violation of section 13 is not a ground on which registration can be denied to a charitable institution [see CIT vs. Leuva Patel Seva Samaj Trust, (2014) 42 taxmann.com 181 (Guj), (2014) 221 Taxman 75 (Guj); Malik Hasmullah Islamic Educational and Welfare Society vs. CIT, (2012) 24 (taxmann.com 93 (Luck), (2012) 138 ITD 519 (Luck), (2013) 153 TTJ 635 (Luck); PIMS Medical & Education Charitable Society vs. CIT, (2013) 31 taxmann.com 371 (Chd)(Trib), (2013) 56 SOT 522 (Chad)(Trib), (2012) 150 TTJ 891 (Chd)(Trib); Chaudhary Bishambher Singh Education Society vs. CIT, (2014) 48 taxmann.com 152 (Del)(Trib); Kurni Daivachara Sangham vs. DIT, (2014) 50 taxmann.com 53 (Hyd)(Trib); Modern Defence Shikshan Sanstha vs. CIT, (2008) 26 SOT 21 (Joh)(URO); Ashoka Education Foundation vs. CIT, (2014) 42 CCH 0090 (Pune)(Trib)]. On a plain reading, there is no change in this position even after amendment. This is because section 12AA(4) provides that “where a trust or any institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [asit stood before its amendment by the Finance (No.2) Act, 1996] and subsequently it is noticed that …”. Thus, the section is triggered only subsequent to the registration.

6. Is cancellation independent of assessment? Can CIT suo moto take cognisance of the violation of section 13(1) prior to assessment by AO?

The section states that “if it is noticed that the activities of the trust or the institution are being carried out in a manner …” It does not state that the violation of section 13(1) is noticed only upon assessment. If the CIT can independently come to a conclusion that there has been a default u/s. 13(1) and the provisions of section 11 and 12 do not apply as a result of the default, then, on a literal reading, he can suo moto take cognisance of the violation of section 13(1) prior to assessment by AO. Thus, the action u/s.er section 12AA(4)

a. could precede the assessment; or

b. be concurrent with the assessment; or

c. succeed the assessment.

To illustrate :

Suppose, a search and seizure action u/s. 132 is taken against a charitable institution and during the proceedings, it is found that the Managing Trust has siphoned off certain funds of the institution. In that case, section 13(1)(c) could apply and the PCIT or CIT could initiate proceedings u/s. 12AA(4).

However, it appears that the ultimate outcome of cancellation would, inter alia, depend on the position taken or finally accepted in assessment proceedings vis-à-vis the operation of section 13(1). Hence, if the assessment order is reversed at the appellate stage, then the cancellation order cannot survive.

7. Cancellation only in respect of operation of section 13(1)

7.1 The provision applies pursuant to operation of section 13(1). Thus, it does not apply pursuant to operation of the following sections :

Section 13(7) – anonymous donations

Section 13(8) – exemption not available on account of first proviso to section 2(15) becoming applicable to the institution.
7.2 The position vis-à-vis other sub-sections of sectio 13 is explained in the following paragraphs :

Section 13(2)

The said sub-section provides for situations when the income or property of an institution is deemed to have been used or applied for the benefit of an interested party. This sub-section is an “extension of section 13(1)(c) / (d)” and hence a violation of section 13(2) could also trigger the proceedings for cancellation of registration u/s. 12AA(4).

Section 13(4) and 13(6)

Section 13(4) provides that if the investment in a concern in which an interested person referred to in section 13(3) does not exceed 5% of the capital of that concern, then, subject to its provisions, the exemption u/s. 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment.

Section 13(6) provides that if a trust has provided educational or medical facilities to an interested person referred to in section 13(3), the exemption u/s. 11 or 12 shall not be denied in relation to any income other than the income referred to in section 12(2).

It appears that the above sections are not independent sections : both are in connection with violation u/s. 13(1)(c) or section 13(1)(d). They merely give a concession and relax the rigors of section 13(1)(c) and section 13(1)(d) apply. Income is not excluded from section 11 by reason of application of section 13(4) or (6), The breach would be only be on account of section 13(1)(c) or (d). Hence, it appears that, on a literal interpretation, the provision covers cases where section 13(4) and section 13(6) are applicable.

8. General principles for interpretation of section 12AA(4)

Section 186 (1) of the Act, prior to its omission with effect from 01.04.1993, read as follows:
“(1) If, where a firm has been registered or is deemed to have been registered, or its registration has effect under sub-section (7) of section 184 for an assessment year, the Assessing Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard cancel the registration of the firm for that assessment year:”

It is noticed that both, section 186(1) and section 12AA(4), refer to cancellation of registration and both use the term ‘may’, that is, the Assessing Officer (in section 186) and the PCIT or CIT [in section 12AA(4)] may cancel the registration.

Hence, the principles laid down by Courts in section 186 could be applied for interpreting section 12AA(4), to the extent applicable. Now, in the context of section 186, it has been held that withdrawal of the benefit of registration in respect of an assessment year results in serious consequences; it is penal in nature in that the consequences are very serious to the assessee and that is why discretion is conferred on the authority by requiring him to give a second opportunity [CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP)]. Likewise, it is submitted that section 12AA(4) is also a penal provision and the principles applicable in interpretation of penal proceedings, including the following, could ordinarily apply in interpreting section 12AA(4):

A penal provision must be interpreted strictly and in favour of the assessee [CIT vs. Sundaram Iyengar & Sons (P) Ltd. (TV), (1975) 101 ITR 764 (SC); Jain (NK) vs. Shah (CK), AIR 1991 SC 1289 and CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]

If two views are possible, the benefit should go to the assessee. [CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) (in the context of section 271 of the Income-tax Act); CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]. In other words if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. A court is not competent to stretch the meaning of an expression used by the Legislature in order to carry out the intention of the Legislature. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742]

9. Does a default u/s. 13 automatically lead to cancellation of registration?

For the following reasons, it appears that a mere default u/s. 13(1) would not automatically result in cancellation of registration:

Section 12AA(4) provides that the PCIT/CIT may by an order in writing cancel the registration. The use of the word “may” shows that it is discretionary, and the PCIT/CIT has a discretion not to cancel registration even in spite of the default of the assessee. [see J. M. Sheth vs. CIT, (1965) 56 ITR 293 (Mad); CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (both in the context of section 186)].

A similar term is used in section 271(1)(c), where the AO “may” levy penalty on an assessee upon the assessee furnishing inaccurate particulars of income or concealing income. Courts have held that in view of the word “may”, the penalty is not automatic [Dilip N. Shroff vs. JCIT, (2007) 161 Taxman 218 (SC), (2007) 191 ITR 519 (SC)]. Now, section 12AA(4) is also a penal provision. Hence, applying the same principle, the cancellation u/s. 12AA(4) is also not automatic.

Section 12AA(3) provides that if the Commissioner is satisfied that the activities of trusts are not genuine, he shall pass an order in writing cancelling the registration. The use of the word “may” in section 12AA(4) as against “shall” in section 12AA(3) clearly shows that the power in section 12AA(4) is discretionary.

The proviso to section 12AA(4) states that the registration shall not be cancelled if the charitable institution proves that there was a reasonable cause for the activities to be carried out in the manner provided in the section. Hence, a mere default does not trigger cancellation, if there is a reasonable cause for the default.

The relevant passage in section 12AA(4) reads as follows:

“… it is noticed that the activities of the trust or the institution are being carried out in a manner that the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principle Commissioner or the Commissioner may by an order in writing cancel the registration …”

Suppose the expression “the activities of the trust or the institution are being carried out in a manner” (hereinafter referred to as “the relevant expression”) is removed from the language. In that case, the provision (hereinafter referred to as “modified provision”) would read as follows:

“It is noticed that … the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principal Commissioner or the Commissioner may by an order in writing cancel the registration.”

A plain reading of modified provision shows that if provisions of section 11 and 12 do not apply due to operation of section 13(1), then it could trigger cancellation of registration. Thus, if mere default in section 13(1) triggered cancellation, then the modified provision without the relevant expression would have been sufficient and the relevant expression would be superfluous!

It is now very well settled that redundancy should not be attributed to the legislature and no part of a statute should be read in a manner that it becomes superfluous. [CWT vs. Kripashankar Dayashanker Worah, (1971) 81 ITR 763 (SC)] If a mere default in section 13(1) could result in the CIT exercising his power, then the entire expression “the activities of the trust or the institution are being carried out in a manner ” would not have been required and it would have been sufficient if the section had been worded as “it is noticed that the provisions of section 11 and 12 …”. In view of this, some meaning has to be attributed to the relevant expression. The point for consideration is what meaning should be attributed to the said phrase? It is submitted as follows:

i)“Activities”

The relevant expression refers to “activities”. Now ordinarily, section 13 of General Clauses Act, 1897, provides that singular includes plural and vice versa, unless the context otherwise requires. It could be argued that in this case, depending on facts, the expression “activities” in plural may not include singular “activity” especially because cancellation of registration is an onerous provision and a single default should not result in such harsh consequences.

ii)“Are being carried out”

The relevant expression uses the phrase “are being carried out”. The terms ‘is’ (singular of ‘are’) and “being” have been judicially interpreted as follows:

In F. S. Gandhi vs. CWT, (1990) 51 Taxman 15 (SC), (1990) 184 ITR 34 (SC), (1990) 84 CTR 35 (SC), the Supreme Court had to interpret the expression “any interest in property where the interest is available to an assesssee for a period not exceeding six years…” The Court observed as follows:

The word ‘available’ is preceded by the word ‘is’ and is followed by the words ‘for a period not exceeding six years’. The word ‘is’, although normally referring to the present often has a future meaning. It may also have a past signification as in the sense of ‘has been’ (See Black’s Law Dictionary, 5th edn., p. 745). We are of the view that in view of the words ‘for a period not exceeding six years’ which follow the word ‘available’ the word ‘is’ must be construed as referring to the present and the future. In that sense it would mean that the interest is presently available and is to be available in future for a period not exceeding six years.

The term “being” has been interpreted as follows:

“In Stroud’s Judicial Dictionary (fourth edition) the expression “being” is explained thus at page 267 of volume I:

“Being — ‘Being as used in a sense similar to that of the ablative absolute, has sometimes been translated as, ‘having been’; but it properly denotes a state or condition existent at the time when the conclusion of law or fact has to be ascertained.”

In other words, it is clear that the phrase “the business of such company is not being continued” must be interpreted to mean the company whose business is non-existent at a time when the requisite opinion contemplated by the section is formed by the Central Government and if at such time the business is not continued or has stopped, the case would fall within that phrase.”

[UOI vs. Seksaria Cotton Mills Ltd., (1975) 45 Comp. Cas 613 (Bom)] [for the purpose of: section 15A of the Industries (Development & Regulation) Act, 1951] In Harbhajan Singh vs. Press Council of India, AIR 2002 SC 135, the Supreme Court observed as follows :

“In Maradana Mosque (Board of Trustees) vs. Badi-ud-Din Mahmud and Anr.- (1966) 1 All ER 545, under the relevant Statute the Minister was empowered to declare that the school should cease to be an unaided school and that the Director should be the Manager of it, if the Minister was satisfied that an unaided school “is being administered” in contravention of any provisions of the Act. Their Lordships opined, “Before the Minister had jurisdiction to make the order he must be satisfied that ‘any school. is being so administered in contravention of any of the provisions of this Act’. The present tense is clear. It would have been easy to say ‘has been administered’ or ‘in the administration of the school any breach of any of the provisions of this Act has been committed’, if such was the intention of the legislature; but for reasons which common sense may easily supply, it was enacted that the Minister should concern himself with the present conduct of the school, not the past, when making the order.

This does not mean, of course, that a school may habitually misconduct itself and yet repeatedly save itself from any order of the Minister by correcting its faults as soon as they are called to its attention. Such behaviour might well bring it within the words ‘is being administered’ but in the present case no such situation arose. There was, therefore, no ground on which the Minister could be

‘satisfied’ at the time of making the order. As appears from the passages of his broadcast statement which are cited above, he failed to consider the right question. He considered

only whether a breach had been committed, and not whether the school was at the time of his order being carried on in contravention of any of the provisions of the Act. Thus he had no jurisdiction to make the order at the date on which he made it”.

On a combined reading of the term “are” as a plural of “is” and “being”, as interpreted above, it could be argued that the defaulting activities should continue to be carried out or at least they have been carried out in near past. The CIT cannot invoke the provision for a default committed before many years and especially in a re-assessment when the default u/s. 13 was completed much earlier and was not detected or was held as not being applicable in the original assessment.

10. Proceedings before PCIT/CIT

10.1 Cancellation of the registration should only be after complying with the principles of natural justice, which necessarily implies that –

if the PCIT/CIT is satisfied with the explanation offered by the assessee, he must drop the proposal to cancel the registration. [see CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 185)]

a reasonable opportunity of being heard shall be given to the assessee;
the PCIT/CIT shall not use any material without giving an opportunity to the assessee to rebut such material.

10.2 The PCIT/CIT should exercise his power not arbitrarily or capriciously but judicially in a manner consistent with judicial standards and after a consideration of all relevant circumstances. [see Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 11 (SC), (1972) 83 ITR 26 (SC); J.M Sheth vs. CIT, (1965) 56 ITR 293 (Mad) (in the context of section 186)].

10.3 For the purpose of section 271(1) it has been held that the regular assessment order is not the final word upon the pleas which can be taken at the penalty stage. The assessee is entitled to show-cause in penalty proceedings and to establish by the material and relevant facts which may go to affect his liability or the quantum of penalty. He cannot be debarred from taking appropriate pleas simply on the ground that such a plea was not taken in the regular assessment proceedings. [Jaidayal Pyarelal vs. CIT, (1973) Tax LR 880 (All)]

Applying the same principle an assessee cannot be debarred from taking appropriate pleas in the cancellation proceedings simply on the ground that such a plea was not taken in the regular assessment proceedings.

10.4 For the purpose of section 271 it has been held that the findings given in assessment proceedings, though relevant and admissible material in penalty proceedings, cannot operate as res judicata. [CIT vs. Gurudayalram Mukhlal, (1991) 95 CTR 198 (Gau), (1992) 60 Taxman 313 (Gau), (1991) 190 ITR 39 (Gau).] Similarly, the findings in respect of section 13(1) given in assessment proceedings cannot operate as res judicata.

10.5 It has been held that additional evidence is admissible in penalty proceedings and it is possible for the parties to bring on record additional material for determining if the penalty should be imposed. [CIT vs. Babu Ram Chander Bhan, (1973) 90 ITR 230 (All)]. Applying the same principle it appears that additional evidence is admissible in the cancellation proceedings.

11. Order passed by CIT/PCIT

Section 12AA(4) requires the CIT/PCIT to pass an order ‘in writing’.

It is now well settled that a quasi-judicial order has to be a speaking order containing

a) submissions of the assessee;

b) detailed reasons why the submissions are not acceptable. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742; Travancore Rayons vs. UOI, AIR 1971 SC 862; Appropriate Authority vs. Hindumal Balmukand Investment Co. P. Ltd., (2001) 251 ITR 660 (SC)] or a mere statement that after hearing the assessee and perusing the record, he did not find any substance in the submissions is not enough [see Sanju Prasad Singh vs. Chotanagpur Regional Transport Authority, AIR 1970 Pat 288 explaining the meaning of “speaking order”].

12. Reasonable cause

12.1 Registration cannot be cancelled if the assessee proves that there was reasonable cause for the activities to be carried out in a particular manner.

12.2 Institution to prove reasonable cause

The institution has to prove that a reasonable cause existed for the activities being carried out in the particular manner. The term “proved” is defined in section 3 of the Indian Evidence Act, 1872 as follows:

“A fact is said to be ‘proved’ when after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.”

In view of the above, the test of proof is that there is such a high degree of probability that a prudent man would act on the assumption that the thing is true. [Pyare Lal Bhargava vs. State of Rajasthan, AIR 1963 SC 1094, (1963) 1 SCR Supl. 689 (SC)]

12.3 Reasonable cause – meaning

Courts have explained the term “reasonable cause” as follows:

‘Reasonable cause’ as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow. [Woodward Governors India (P.) Ltd. vs. CIT, (2002) 253 ITR 745 (Del) (For the purpose of section 273B of the Income-tax Act, 1961)]

In Oxford English Dictionary (first edn. published in 1933 and reprinted in 1961, Volume VIII), the expression ‘reasonable’ has been defined to mean ‘fair, not absurd, not irrational and not ridiculous’. Likewise, the expression ‘good’ has been defined in the said Dictionary in Volume IV to mean ‘adequate, reliable, sound’. Similarly, the expression ‘sufficient’ has been defined under the same very Dictionary in Volume X to mean ‘substantial, of a good standard’.

From the definitions referred to above, it would appear that reasonable cause or excuse is that which is fair, not absurd, not irrational and not ridiculous … if a reason is good and sufficient, the same would necessarily be a reasonable cause. [Banwarilal Satyanarain vs. State of Bihar, (1989) 46 TAXMAN 289 (Pat), (1989) 179 ITR 387 (Pat), (1989) 80 CTR 31 (Pat) (for the purpose of section 278AA of the Income-tax Act, 1961)]

Reasonable cause, as correctly observed by the Administrative Tribunal, is a cause that a prudent man accepts as reasonable. The test to assess the reasonableness of the cause for default is, therefore, to find whether in the judgment of a common prudent man the cause is such that any normal man would, in the same or similar circumstances be also a defaulter. [Eknath Kira Akhadkar vs. Administrative Tribunal, AIR 1984 Bom 144 [for the purpose of section 22(2)(a) and section 32(4) of the Goa, Daman and Diu Buildings (Lease , Rent and Eviction) Control Act, 19968]]

The Bombay High Court has held that the expression ‘reasonable cause’ in section 273B for non-imposition of penalty u/s. 271E would have to be construed liberally depending upon the facts of each case. [CIT vs. Triumph International Finance (India) Ltd., (2012) 22 taxmann. com 138 (Bom), (2012) 208 TAXMAN 299 (Bom), (2012) 345 ITR 270 (Bom), (2012) 251 CTR 253 (Bom)]

12.4 Some illustrations/principles regarding reasonable cause

a) Ignorance of law

It has been held that ignorance of law can constitute a reasonable cause [see ACIT vs. Vinman Finance & Leasing Ltd., (2008) 115 ITD 115 (Visk)(TM), para 13; Kaushal Diwan vs. ITO (1983) 3 ITD 432 (Del)(TM) (in the context of 285A of the Income-tax Act, 1961)]. Hence, in a given situation, the ignorance of the provisions of section 13(1) may constitute a reasonable cause.

b) Bonafide belief

It has been held that penalty is not justified where the breach flows from a bonafide belief of the offender that he is not liable to act in the manner prescribed by the statute. [see

Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC);
DCIT vs. Dasari Narayana Rao, (2011) 15 taxmann.com 208 (Chennai Trib) (in the context of section 272A of the Income-tax Act, 1971);

ACIT vs. Dargapandarinath Tuljayya & Co. (1977) 107 ITR 850 (AP) followed in Thomas Muthoot vs. ACIT, (2014) 52 taxmann.com 114 (Coch Trib) (in the context of section 271C of the Income-tax Act, 1961);

IL & FS Maritime Infrastructure Co. Ltd. vs. ACIT, (2013) 37 taxmann.com 297 (Mum Trib), para 8 (in the context of section 271BA of the Income-tax Act, 1961)].

Applying the aforesaid principle, a mistaken bonafide belief that section 13(1) is not applicable can constitute a reasonable cause.

It has been held that if a particular action is bonafide taken on the basis of an opinion from a senior counsel, then, it constitutes a reasonable cause and merely because it turns out to be wrong, a penalty cannot be levied on the assessee. [CIT vs. Viswapriya Financial Services & Securities Ltd., (2008) 303 ITR 122 (Mad)] Applying the same principle, if a charitable institution has relied upon an expert opinion, then, merely because the expert had held a different view, it does not mean that there is no reasonable cause for the default.

(d) Bonafide mistake

It has been held that registration of an assessee firm cannot be cancelled upon a bonafide mistake which was not intentional.[see CIT vs. Pawan Sut Rice Mill, (2004) 136 Taxman 640 (Pat) (in the context of section 186 of the Act)]. Applying the principle, the registration may not be cancelled if there is unintentional, bonafide mistake as a result of which section 13(1) became applicable to an assessee.

13. No penalty upon technical or venial breach

It has been held that the authority competent to impose the penalty will be justified in refusing to impose the penalty when there is a technical or venial breach of the provisions of the Act. [Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC)]. Applying the same principle, the registration may not be cancelled when there is technical or venial breach upon application of section 13(1).

14. Whether registration can be cancelled in certain situations involving quantum assessment

For the purpose of section 271(1)(c), it has been held that penalty cannot be levied in the following situations :

a. the assessee’s appeal against the quantum assessment has been admitted as substantial question of law (because this shows that the issue is debatable) [CIT vs. Liquid Investment and Trading Co., ITA No. 240/Del/2009, dated 05.10.2010].

b. where two views are possible in respect of a particular addition in the quantum assessment and the issue is debatable.

c. where the position adopted by the assessee is supported by a Tribunal or High Court judgment in another case.

Likewise, if the applicability of section 13(1) has been admitted by the High Court as a substantial question of law or if two views are possible regarding operation of section 13(1) or there is a case u/s. 13(1) supporting the view adopted by the assessee, it is a point for consideration as to whether the PCIT/CIT should not cancel the registration on the ground that the discretionary power u/s. 12AA(4) entails him to use the discretion in favour of the assessee in such matters and/or their exists a reasonable cause for the activity to be carried out by the assessee in the manner it has done.

15. Wilful default

The registration can be cancelled if the default is a wilful default. [See CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (in the context of section 186)]

16. Cancellation – whether with retrospective effect?

16.2 There are two views on the issue :

a. Registration cannot be cancelled retrospectively

b. Registration can be cancelled retrospectively

16.3 Registration cannot be cancelled retrospectively

For the purpose of section 35CC/CCA, Courts have held that an approval granted could not be withdrawn with retrospective effect.

[see B. P. Agarwalla & Sons Ltd. vs. CIT, (1993) 71 Taxman 361 (Cal), (1994) 208 ITR 863 (Cal)

CIT vs. Bachraj Dugar, (1998) 232 ITR 290 (Gau), (1999) 152 CTR 367 (Gau)

Jai Kumar Kankaria vs. CIT, (2002) 120 Taxman 810 (Cal)]

Applying the aforesaid principle, registration cannot be cancelled with retrospective effect.

For the purpose of sales tax, it has been held that the registration certificate of a dealer could not be cancelled with retrospective effect. [M. C. Agarwal vs. STO, (1986) 11 TMI 372 (Ori), (1987) 64 STC 298 (Ori)]

Section 12AA(4) does not refer to cancellation with retrospective effect. In the absence of such specific provision, registration cannot be cancelled with retrospective effect.

16.4 Registration can be cancelled retrospectively

In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), the Tribunal held that registration of a charitable institution could be cancelled u/s. 12AA(3) with retrospective effect. Applying the same principle, registration could be cancelled u/s. 12AA(4) with retrospective effect.

The judgments for section 35C/CCA and under sales tax are distinguishable since a retrospective cancellation in those cases prejudicially affected the counterparty. However, in retrospective cancellation of certificate u/s. 12AA(4), it is primarily the charitable institution which is affected.

16.5 Even if registration can be cancelled retrospectively it can not be before 1st October 2014

Even if registration could be cancelled with retrospective effect, it could not be retrospective before 1st October, 2014 being the date of insertion of section 12AA(4). This is supported by the following arguments:

In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), it was held that the registration to a charitable institution could not be cancelled beyond 1st October, 2010, being the date on which the provision became applicable.

It is now well settled that law that a person, who has complied with the law as it exists, cannot be penalised by reason of the amendment to the law effected subsequently, unless such intention is expressly stated and the imposition of such penalty is not contrary to any of the provisions of the Constitution.[CIT vs. Kumudam Endowments, (2001) 117 Taxman 716 (Mad)]

Again, it is now well settled that unless the terms of a statute expressly so provide or necessarily imply, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. [CED vs. Merchant (MA), (1989) 177 ITR 490 (SC); CWT vs. Hira Lal Mehra, (1994) 205 ITR 122 (P&H); A fiscal statute will not therefore be regarded as retrospective by implication, particularly a penal provision therein. [CWT vs. Ram Narain Agarwal, 1976 TLR 1074 (All); Thangalakshmi vs. ITO, (1994) 205 ITR 176 (Mad)]

16.6 Summary

The matter is not free from doubt. However, even if it is held that the registration can be cancelled with retrospective effect, the retrospectivity cannot be prior to 1.10.2014.

To illustrate, suppose an assessee commits a default in financial year 2013-14; the CIT notices the default in June 2015 and cancels the registration in July 2015. In this case, the cancellation can have effect from 1st October 2014, and not for the period prior to 1st October, 2014.

16.7 Impact of cancellation of registration upon past years if registration cannot be cancelled with retrospective effect. (view 1)

Suppose a charitable institution violates section 13(1) during financial year 2015-16 and its registration is cancelled in financial year 2018-19. If there is no default u/s. 13(1) in financial year 2016-17 and 2017-18, can it avail of the benefit of section 11 and 12 during these years?

Section 12A(1)(a)/(aa) provide that the provisions of section 11 and 12 shall not apply in relation to the income of a charitable institution unless such trust is registered u/s. 12AA. Thus, in order to avail of the benefit of exemption, an institution is required to be registered u/s. 12AA. It appears that if the registration is valid throughout the previous year and if it is cancelled after 31st March of the relevant previous year, then, so far as the said previous year is concerned, it ought to be regarded as registered u/s. 12AA for the purposes of aforesaid section 12A(1) (a)/(aa). Thus, in the aforesaid illustration, the institution should be regarded as registered for financial year 2016-17 and financial year 2017-18, that is, assessment years 2017-18 and 2018-19; the registration should be regarded as cancelled only from financial year 2018-19 onwards.

17 Writ

Like any other order, in an appropriate case, a writ under Article 226 of the Constitution would lie against the cancellation order before the jurisdictional High Court and the Court may stay the operation of the cancellation order; or quash the cancellation order; or set aside the order directing the PCIT/CIT to pass a fresh order after complying with the directions of the Court.

18 Appeal against the cancellation order

An assessee aggrieved by the order passed by PCIT or CIT, may appeal to the Appellate Tribunal against such order. [see section 253(1)(c)]

Dual appeal

An assessee whose registration has cancelled will now have to pursue two appeals, one against the assessment order with the CIT(A) and another against the cancellation order with the Tribunal.

19.On cancellation, whether the charitable institution is debarred from making fresh application for registration?

Suppose the registration is cancelled for a default which no longer exists. To illustrate, an institution made an investment contrary to the mode specified in section 11(5). It has liquidated the investment and there is no continuing default u/s. 11(5). In such circumstances, even if the CIT cancels the registration, it appears that the institution can immediately reapply for fresh registration and the CIT has to deal with such application in accordance with the provisions of section 12AA(1).

20. Impact on cancellation order upon deletion of operation of section 13(1) in merits

The Supreme Court has authoritatively laid down that where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled. [K. C. Builders vs. ACIT, (2004) 265 ITR 562 (SC)]

Likewise, if it is held in the appellate proceedings that there is no violation of section 13(1) then, the cancellation order cannot survive. Further, such reversal of the cancellation order should be regarded to have retrospective effect ab initio and all the actions taken on the basis of the cancellation order would no longer survive.

21 Implications under other sections

21.2 Section 56(2)(vii)

Section 56(2)(vii) provides that if an individual or HUF receives any sum of money or property without consideration, then, the sum of money so received or the value of property so received shall be regarded as income
of the individual. The proviso to the said section provides that the provision will not apply in respect of any sum of money or property received from a charitable institution registered u/s. 12AA. Hence, if the institution supports any individual after the cancellation of registration, then such donation or contribution/aid would be regarded as income of the individual and shall be taxable beyond the basic exemption of Rs.50,000.

21.3 Section 80G

Section 80G(5)(i) provides that an institution is eligible for approval u/s. 80G if its income is not liable to inclusion in its total income under the provisions of sections 11 and

Now, if the registration is cancelled, the exemption u/s. 11 and 12 would not be available to the institution and the income would be liable to inclusion in total income. In such circumstances, the institution would not be eligible to obtain an approval u/s. 80G(5) or its existing approval would be liable for cancellation.

21.4 Exemption u/s. 10

Where an institution has been granted registration u/s. 12AA or 12A and the said registration is in force for any previous year, then the assessee is not eligible for exemption u/s. 10 except exemption in respect of agricultural income or u/s. 10(23C) [section 11(7)]. By implication once the registration is cancelled, the assessee would be entitled to claim exemption under section 10 e.g. dividend income u/s. 10(34) or long term gains u/s. 10(38).

22 Conclusion

Section 12AA(4) is another measure by the Government to tighten the law relating with charitable institutions. While the tax department may invoke it in many cases involving operation of section 13(1), it is felt that the ultimate cancellation of registration hinges on fulfilment of many conditions and restrictions and would lead to protracted litigation.

shailesh.kwebmaker

Need for professional institutions to become transparent

Governance deficit has been a major stumbling block in India’s march to becoming an economic superpower. Transparency in the functioning of the government, its various organs and public institutions, will go a long way in ensuring good governance. However, the powers that be seem to be working in exactly the opposite direction. Two events, which have been reported in the RT I feature in this issue, have been the trigger for this editorial.

The first is the action of the National Green Tribunal (NGT) in refusing to entertain an application requesting for certain information, on the ground that instead of an Indian postal order of Rs.10, the applicant had attached court fee stamps of Rs.10. When the applicant filed an appeal, the administrative authorities of the NGT engaged an advocate paying him fees of Rs.31,000 to defend its order of refusal. It is tragic that a tribunal which is an institution for dispensing justice, should harbour such an attitude and refuse information. The second instance is the decision of the Maharashtra State Cabinet in June proposing an amendment to the Criminal Procedure Code, whereby a magistrate cannot take cognisance of a complaint against a public servant without the permission of the competent authorities in the government. If this is the attitude of those who are responsible for dispensing justice and governance, then the situation is indeed grim.

While this attitude is indeed a cause for worry, should the educated sections of the public, only voice their concern, criticise or can and should they do something more? I believe that in situations like this, the intelligentsia has a great responsibility to shoulder. Today, the opinion makers in the Society belong to different professions. These professions are regulated by professional bodies, which are by and large autonomous. To illustrate, we have the profession of lawyers regulated by the Bar Councils, the medical profession by the Indian Medical Association (IMA) and our very own profession by the Institute of Chartered Accountants of India (ICAI).

If one examines the track record of many such institutions in regard to transparency in the conduct of their own affairs, the results would not be very encouraging. Most of the time the impression in the mind of the common man is that these institutions protect and further only the interests of their members. The impression that the public has is; lawyers go on strike for their own demands obstructing dispensation of justice, doctors in hospitals hold patients to ransom for an increase in remuneration. As far as our own Alma mater is concerned, the impression that the public has, is that we do very little to bring the black sheep among our profession to book.

If we as citizens clamour for transparency from those in authority, then it is the duty of those who run these institutions to set an example by a transparent conduct. The stakeholders in these institutions are primarily three, the members who belong to that particular profession, the users of their service and the government which looks at these institutions for regulation of the profession as well as for proactive participation in regard to the developments in their respective fields.

These bodies are generally run by members elected from among those who belong to the profession. They therefore understand the nuances in various issues that arise in their field. For example, if the medical profession would put in the public domain the problems that are faced by their members while rendering services in public hospitals, the public would be sympathetic to their agitations. The support of the public would then help in putting pressure on the government to resolve those problems. Even if that does not happen, such transparency would increase the faith of the public in these institutions.

In regard to our own profession, there are a number of decisions that the ICAI takes which affect members. In such a situation, the gist of the deliberations that take place or the thought process behind those decisions should be made known to the members. Possibly even prior to this, when the issue is on the agenda of the Council, suggestions from members or interactions with them should be encouraged. This would help acceptance of the decision by those who are affected by them. I am conscious that one needs to tread with care, in this area, as the disclosure of such information would have various implications. But with the collective wisdom of our representatives, modalities can be worked out.

In regard to the interactions of the ICAI with the government authorities, when these authorities take some action by way of enactment of legislation or otherwise, it would be advisable for a summary of those interactions to be made known to all stakeholders. It is quite possible that despite the best efforts by our representatives in putting forth their point of view, the authorities may not react favourably, for they may have their own compulsions and limitations. But once this information is in the public domain, members will be confident that their alma mater has discharged its obligation.

Over the last decade or so, our profession has been facing criticism from the public that the regulatory body tends to unduly protect its members from any disciplinary action. In this aspect as well, the limitations under which the regulatory body acts, the principles of natural justice, and rules of evidence result in processes getting delayed. The regret is that while this is true, by not being transparent enough, the image of the institution is unnecessarily sullied. Transparency, to the extent possible, will mitigate this problem.

Finally, when information is sought from any professional body, it would be appropriate that the information is willingly and expeditiously provided, rather than making an attempt to hide behind technicalities. One fully understands that there would be possibly severe administrative limitations for furnishing this information. The machinery may be inadequate and there may be other hurdles. Every authority that was brought under the RT I had the same argument initially. But with the arsenal of technology at hand, it is not impossible, though difficult. As they say – where there is a will, there is a way.

Once professional institutions set an example of the transparency, it is natural that the government and bureaucracy will follow suit. It is then that democracy will flourish and Peter Finn’s words “A basic tenet of healthy democracy is open dialogue and transparency”, will ring true.

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The Real Maths

“Who are you?”

“I am Jay Desai,“ said Jay.

“What is the
difference between you the Jay Desai and Jay Desai’s dead body? A dead
body is wearing the same clothes, have the same heart, lungs & liver
etc. But living Jay is able to do all activities including thinkingm
and dead Jay cannot do anything.”

Jay said, “The dead body has
no Soul and that is why it’s dead.” “So, there can be two types of Jay –
1) Living 2) Dead. Body + Soul = Living and Body – Soul is Dead.
Right?” Jay agreed.

“So these are two different separable things: Body & Soul.”

“Well,
Yes.” Jay said and added, “Soul separated from the body is death. So
yes, both are different & separable. Making sense.”

“Therefore, who is Jay? Dead body or a Living body?”

“Both” replied Jay.

“So you mean, (Body + Soul) = (Body – Soul) = (Jay), but just now you agreed, both body and Soul are separable and different.

Now
if the dead body is also Jay, then the living body is = Jay + Soul
& likewise, if the living body is Jay, then the dead body is = Jay –
Soul.

Jay – Soul = Dead body, cannot do anything.

Jay + Soul = Living body, can do all thinking, talking, walking, etc. Everything is put together as Activities.

This
equation proves, that the power of doing activities including talking,
walking, and thinking, rests with the Soul and not with the body.

Therefore, the answer to the first question – Who are you? Is Soul right?

Answer
giving capacity rests with the Soul and not with Jay’s body. So, the
talker is the Soul and not the body as both are different. “

Jay was speechless, but convinced about the difference. “So all of us are Souls with different bodies? Right?”

“Absolutely.”

“But on death, after the departure from one body, where does the Soul go?” Jay asked.

“There
are millions of living beings. Each of these bodies needs one Soul to
remain alive. The soul gets a new body after the death of the previous
body.

If we plant 100 seeds and offer equal growing conditions,
some will grow, some will not grow and some will grow but won’t offer
quality fruits. What could be the reason for these differences?

“Quality of seeds.” Jay was spot on.

“Yes.
The quality of seeds decides the outcome, likewise quality of Soul’s
Karma decides which next body it will get. Don’t we see beggars on the
streets or millionaires in apartments? Don’t we see pet dogs and dogs on
street facing stones? Why there is a difference in everyone’s financial
status or happiness quotient?”

“So you mean Karma, “I” i.e.
Soul does in this birth as a human being will have an impact on my
future bodies and happiness? “ Jay was in sync.

“Yes.”

“Therefore, today also, we are suffering or happy as the result of my past Karmas?” asked Jay.

“Yes, shouldn’t it be?”

“Hmm,
this theory of Karma is making sense, as we see everyone around us is
living a different life. There must be some science behind this.”

“Theory
of Karma applies to every Soul. But the problem is we don’t consider
self as a soul and act as if we are a body. There lies the problem. If
you agree on the above equation and act accordingly, quality of your
journey as a soul will improve.”

That means our belief will make
us decide the journey we are embarking upon.” Jay said and added,” |
Birth — Death | is the body approach and | — Lion–Human– Cat– Elephant–
Cow–| is the Soul approach.

“Absolutely right.”

“Oh. What
a fundamental change it can bring in approach. My bad act in the
present body for limited happiness can attract bad Karma to me, i.e.
Soul and results in misery and pain in my present as well as next body. “

“Yes, it can even influence the new body the Soul gets.”

“Suppose I do more good deeds then will it help me get happiness in future?” Jay asked.

“Yes it does, but your journey as a Soul will continue.”

“Then what should be the ultimate goal of the Soul.” Jay was curious.

“Do
you see anybody permanently happy anywhere? No. Therefore, ending the
cycle of the new body should be the objective of every Soul. All pains
and happiness are suffered by the Soul and not the body. Revisit the
above equation.”

“How is it possible to end the cycle?” Jay was inquisitive.

“By becoming a Karmaless Soul.”

“If
the Soul’s liberation from bodies is the way for permanent happiness
then knowing the laws of Karmas is essential for every Soul.” Jay was
realising the importance of the laws governing every Soul.

“Yes, but we as CAs prefer to know the laws of Income tax and Companies act and even International tax.“

“That is because we Souls have become engrossed with the body and bodily requirements.” Jay reasoned.

“I
am not stating not to know all these laws, but I am indicating about
the priority. The Death of this human body is certain and no one knows
when. It can be even today. All these bodily acts and deeds with one of
the other motives are the source of the dirt for the Soul.”

“Oh,
so I can make my clients happy by advising them about tax avoidance
practices and other ways to wrongfully escape the clutches of laws, but
by doing so I am as a Soul attracting more bad Karmas.” Jay was relating
it.

“Yes, just for the mere temporary benefit of the body and
praise from clients, the Soul is attracting new dirt i.e. Karma which
can make the Soul unhappy and prolong the pain potential for the Soul.”

He
decided to know how to make his Soul completely dirt-free i.e.
Karma-free and that was the first step of his spiritual journey.

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A. P. (DIR Series) Circular No. 15 dated 28th July, 2014

Compilation of R-return: Reporting under FETERS – Discontinuation of ENC and Sch 3 to 6 file

This circular states that with effect from the first fortnight of September, 2014 banks are not required to submit ENC and Sch. 3 to 6 file under FETERS. Banks have to submit only BOP6 file and QE file under FETERS.

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A. P. (DIR Series) Circular No. 14 dated 25th July, 2014

Issue of Prepaid Forex Cards – Due Diligence and Adherence to KYC norms

This circular states that banks/FFMC selling pre-paid foreign currency cards for travel purposes are required to follow the same rigorous standards of due diligence and KYC that they follow while selling foreign currency notes / travellers cheques to their customers.

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A. P. (DIR Series) Circular No. 11 dated July 22, 2014

Notification No. FEMA 310/2014-RB dated 12th June, 2014

Export of Goods and Services – Project Exports

This circular has: –

1. Done away with the requirement of obtaining approval of the Working Group in case of project exports and deferred service exports proposals for contracts exceeding US $ 100 Million. Henceforth, banks/Exim Bank will consider awarding post-award approvals without any monetary limit and permit subsequent changes in the terms of post award approval within the relevant FEMA guidelines/regulations.

2. R emoved the time limit of 30 days for submission of form DPX1/PEX-1/TCS-1 to the Approving Authority (AA) by the exporters. Exporters now have to submit the appropriate form to their banks for approval.

The revised Memorandum of Instructions on Project and Service Exports (PEM) is annexed to this circular.

A. P. (DIR Series) Circular No. 13 dated 23rd July, 2014 Foreign investment in India by SEBI registered long-term investors in Government dated Securities

Presently, FII, QFI and long term investors can invest up to US $ 30 billion in Government securities. Out of the above limit, a sub-limit of US $ 10 billion is available for investment by long term investors in Government dated securities.

This circular has, while maintaining the overall limit at US $ 30 billion, made the following changes: –

1. T he limit for investment by FII/QFI/FPI in Government dated securities has been increased by US $ 5 billion to US $ 25 billion.

2. T he limit for investment by long term investors in Government dated securities has been reduced from US $ 10 billion to US $ 5 billion.

FII/QFI/FPI will have to invest the said additional sum of US $ 5 billion in government bonds with a minimum residual maturity of three years. Also, all future investments against the limit vacated when the current investment by an FII/QFI/FPI runs off either through sale or redemption will have to be made in government bonds with a minimum residual maturity of three years. However, there will be no lock-in period and FII/QFI/FPI can freely sell the securities (including that are presently held with less than three years of residual maturity) to the domestic investors.

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A. P. (DIR Series) Circular No. 10 dated 21st July, 2014

Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 – Money Transfer Service Scheme – Recognising E-Aadhaar as an ‘Officially Valid Document’ under PML Rules

This circular states that Indian Agents under MTSS can treat physical Aadhaar card/letter or Aadhaar letter download from the UIDAI under the e-KYC process as ‘Officially Valid Document’ under PML Rules. Further, if the address provided by the customer is same as that on the Aadhaar letter, Aadhaar letter may be accepted as a proof of identity as well as proof of address.

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A. P. (DIR Series) Circular No. 9 dated 21st July, 2014

Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 – Money Changing Activities – Recognising E-Aadhaar as an ‘Officially Valid Document’ under PML Rules

This circular states that Authorised Persons can treat either physical Aadhaar card/letter or Aadhaar letter download from the UIDAI under the e-KYC process as ‘Officially Valid Document’ under PML Rules. Further, if the address provided by the customer is same as that on the Aadhaar letter, Aadhaar letter may be accepted as a proof of identity as well as proof of address.

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The tightening noose around insider trading – net gets wider, more legal fictions applied to catch offenders

Synopsis
In this article, the learned author stresses on Insider Trading as a growing phenomenon globally, especially in India and the efforts taken by SEBI to safeguard the investors. The author brings to our attention a new concept ‘Temporary Professional Relationship’ and its coverage with regards to Insider Trading. Importance is also given to various important nuances of Insider Trading and several types of persons who could be termed as ‘Insiders’ with their knowledge of price sensitive information.

INTRODUCTION
The law to define and catch insider trading on unpublished price sensitive information is quite widely worded. Moreover, several terms contain legal fictions/deeming provisions. Appellate authorities too have adopted further legal fictions or rebuttable presumptions. The noose of the law has got one notch tighter with a recent decision (in the matter of KLG Capital Services Limited, order of SEBI dated 24th July, 2014). In this decision, SEBI, perhaps for the first time, applied the concept of “temporary professional relationship” of a person with a company that would make him an insider, and thus, held that his trades with unpublished price sensitive information (UPSI), is insider trading. Whether such trades were with such UPSI was also determined by applying deeming provisions. Moreover, two other deeming principles established by earlier cases have also been applied here. Finally, the case is especially noteworthy for the systematic manner in which information is collected, the relationships determined and the sequence of transactions analysed.

Background of law relating to insider trading
The law relating to insider trading is principally contained in detailed Regulations – the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“the Regulations”). The punishable act of insider trading is determined in a fairly complex manner wherein several legal fictions/deeming provisions are applied. Importantly, not all of deeming provisions are rebuttable presumptions, and hence they are presumed to be true with no choice to prove otherwise. Certain persons are deemed to be insiders if have certain specified types of close relationships with the Company. However, several categories of persons are deemed to be connected with the Company and hence insiders.

Insider trading takes place if such insiders trade while in possession of UPSI or if they share such UPSI. However, several types of information are deemed to be UPSI. Then, certain trades by insiders are also deemed to be insider trades in the sense that such trades are simply prohibited. And so on. However, it is ironical that even with such a widely framed law, the cases caught and punished are relatively very few. And even in cases detected and punished, a very detailed investigation is required to establish the violation.

Facts in the present case
In the present case, it was found that a certain company (“Acquirer”) acquired shares of a listed company (“the Company”) that resulted in the Acquirer being required to make an open offer. Certain persons (“the Traders”) were alleged to have acquired shares of the Company while in possession of the UPSI that such open offer would be made. The shares were thereafter sold at a substantially higher price, resulting in a large sum of gains to the Traders.

SEBI alleged that this was in violation of the insider trading Regulations. Let us see how SEBI went about establishing the necessary ingredients of insider trading in the facts of that case using several legal fictions.

Having information of open offer whether UPSI?
Does having information of an impending open offer by itself a UPSI? The answer is yes, though it appears that this was not disputed in this case. Hence, this was not required to be established in detail. A takeover is deemed to be UPSI as per the definition of that term.

Whether the traders in the present case were “insiders”?
The crucial question was whether the Traders were insiders. There were two aspects to this. One was that the fact that the Traders were not connected with the Company but they were connected with the Acquirer. Secondly, even with regard to their connection with the Acquirer, the Traders were not connected in any of the forms specified in the Regulations. The question was whether they could still be deemed to be connected with the Acquirer.

For the first aspect, the issue was whether the Traders need to be connected with the Company whose shares were dealt in, or whether they can be connected to any company. The common understanding is that the inside information usually emanates from the Company whose shares are traded in. A person is closely connected with such company as officer, consultant, director, etc. and becomes aware by virtue of such connection about UPSI. He then trades, based on such UPSI. Thus, a connection with any other company ought not meet the requirement. However, SEBI relied on an earlier decision of the Securities Appellate Tribunal (“SAT ”) which had held that the connection may be with any company. Since the Traders were shown, as is seen later, connected with the Acquirer company, it was held that this was sufficient.

The following words of the SAT in V.K. Kaul vs. Securities and Exchange Board of India (Appeal No. 55 of 2012) were relied on:-

“Regulation 2(e) defines ‘insider’ to mean any person who, (i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company or; (ii) has received or has had access to such unpublished price sensitive information. It needs to be appreciated that the clause makes a distinction between ‘the company’ and ‘a company’. When it refers to ‘the company, the references is to the company whose Board of Directors is taking a decision and when it refers to ‘a company’, the reference is to a company to which the decision pertains. This has been explained even by the adjudicating officer by way of an illustration in para 30 of his order dated January 4, 2012, in the case of Mr. V. K. Kaul as under:-

“30. To illustrate, if noticee’s submission is accepted then a situation will arise wherein a Director of the company X cannot be held guilty of insider trading if he trades in the scrip of company Y based on the UPSI, that company X is going to make a strategic investment / placing a huge purchase order for plant and machineries in company Y. Such a scenario will defeat the purpose of PIT Regulations.”

We are, therefore, of the view that the term price sensitive information used in regulation 2(HA) is wide enough to include information relating directly or indirectly to ‘a company.’ The solrex had decided to purchase shares of the target company. Here, solrex is ‘the company’ and target company is ‘a company.’ The decision of solrex to purchase shares of the target company is likely to materially affect the price of securities of the target company. Only the insiders of solrex are aware about this decision of the company. If the insiders of solrex are allowed to trade in the shares of the target company ahead of purchase of shares by solrex, surely the trading will be on the basis of insider information. the decision of solrex to purchase shares of the target company is, therefore, UPSI for the insiders of solrex and they are prohibited from dealing in the shares of the target company till such information becomes public. It is not obligatory under the regulations that the upsi must be in the possession or knowledge of ‘a company’ in whose securities an insider of ‘the company’ deals. As long as, an insider of ‘the company’ deals in the securities of ‘a company’ listed on any stock exchange while in possession of UPSI relating to that company, the provisions of regulation 3(i) of the regulations will get attracted.”

The next aspect was whether the traders were connected with the acquirer. the traders were not directors, advisors, etc. of the acquirer. however, the records showed that they had some connection with either the acquirer or companies connected with it. they were involved directly or indirectly with the acquirer in terms of carrying out of certain acts relating to the takeover or otherwise having other connections. the persons who actually traded in the shares were also shown connected and the flow of the UPSI to them was also shown. Based on such findings, SEBI held that the traders had a “temporary professional connection” with the acquirer and hence, were deemed to be connected.

This is relevant for any person connected with a Company, particularly professionals like Chartered accountants. even if they are not statutory auditors and have a one- time connection of any sort, they could be held to have a “temporary professional connection”, and thus deemed to be insiders.

Reliance on Phone/sms records it is interesting to note, how the records of phone/sms between the traders during the critical time when the transactions were carried out were obtained and placed on record. This helped support the case of SEBI.

How to Establish that Insiders Traded while in Possession of UPSI
A regular problem faced in cases of insider trading is how to establish that dealings by insiders were so, while being in possession of UPSI. Not all trades of insiders are automatically insider trading. An additional condition required to be proved is that they were, while in actual possession of inside information. An earlier decision of the sat helped introduce yet another fiction. At that time, the law was worded more strictly and it was required to be proved that the person dealt on the basis of UPSI. However, sat held that once an insider deals in securities, it will be presumed that he has done so on the basis of inside information. SEBI relied on the observation of hon’ble sat in the matter of Rajiv B. Gandhi and Others vs. SEBI (appeal no. 50 of 2007) that:

“We are of the considered opinion that if an insider trades or deals in securities of a listed company, it would be presumed that he traded on the basis of the unpublished price sensitive information in his possession unless he establishes to the contrary. Facts necessary to establish the contrary being especially within the knowledge of the insider, the burden of proving those facts is upon him. The presumption that arises is rebuttable and the onus would be on the insider to show that he did not trade on the basis of the unpublished price sensitive information and that he traded on some other basis. He shall have to furnish some reasonable or plausible explanation of the basis on which he traded. If he can do that, the onus shall stand discharged or else the charge shall stand established.”

Relying on this decision, SEBI held that the insider who trades would be presumed to have traded while in possession of UPSI.

This principle is also important for persons close to the Company which would include Chartered accountants acting as auditors, internal auditors, advisors, independent directors, etc. if they deal in the shares of such a Company, it is possible that they would be presumed to have done so while in possession of UPSI. And then it would be upto them to show how they did not. Thus, such persons may consider adopting a policy to never deal in the shares of a Company in which they are regularly or even temporarily connected.

Whether a Person merely Possessing is UPSI Deemed To be an Insider?
The decision of the sat in Dr. Anjali Beke’s case (Dr. An- jali Beke vs. SEBI (appeal no. 148 of 2005)) was relied on to support the argument that even a non-insider who receives UPSI would be deemed to be an insider person who could violate the regulations if he deals, etc. in the securities. Reliance on this decision explicitly was perhaps necessary since at the time of the alleged acts of insider trading, the law was ambiguous. It was only a few months later that the regulations were amended explicitly and clearly state that a person who merely receives UPSI is an insider.

Reliance on Circumstantial Evidence for Establishing offence of Insider Trading
The next concern arises out of the peculiar nature of insider trading. Many of the ingredients required to prove insider trading are difficult to establish directly. The US Court in rajratnam’s case had held that circumstantial evidence can be relied on in insider trading cases. This decision was applied on by the sat in V. K. Kaul’s case. SAT had observed:-

“…The adjudicating officer has rightly relied on the observations of u. s. Court in rajaratnam case (supra) on the relevance of circumstantial evidence in para 38 of the impugned order which reads as under :-

38. Regarding the issue of relevance of circumstan- tial evidence, the hon’ble district Court southern district of new york in the matter of united states of america V raj rajaratnam 09 Cr. 1184 (rjh) decided on 11.08.2011 has observed as follows: “…moreover, several other Courts of appeals have sustained insider trading convictions based on circumstantial evidence in considering such factors as “(1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the trades or the relationship between the tipper and the tippee.” United States vs. Larrabee, 240 f.3d 18, 21-22 (1st Cir. 2001)…”

The above principles are not in conflict with the regulatory framework prescribed by the Board and can be looked into while deciding case of insider trading under the indian regulatory framework.”

SEBI relied on this decision to rely on various circumstantial evidence in the present case.

Disgorgement of Gains with Interest the gains made by the traders were thus worked out. to that, simple interest @ 12% was added for six years. the traders were also debarred from dealing in the securities markets for specified period of time.

Conclusion
This decision reiterates and emphasises several aspects that need consideration by professionals and executives having any connection to the company. The wide definitions and numerous deeming provisions may result in their own trades, or of persons related/connected to them, being held to be insider trading. Apart from suffering disgorgement of the gains with interest, the person may also suffer penalties, prosecution, debarment and of course, loss of reputation.

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Precedent – Judicial discipline – Third Member is bound to consider judgement of Division bench – CESTAT order was unsustainable for non consideration of law in favour of assessee:

Larsen and Toubro Ltd vs. Commissioner of Central Excise; 2014 (306) ELT 27 (Bom.)(HC)

There was a difference of opinion between the Judicial member and the Technical Member. The appeal before the Tribunal was therefore referred to a Third Member. The Third Member held against the appellant/assessee. Prior to the decision of the Third Member, there was a decision of the Tribunal which supported the appellant’s contention before the Tribunal. That decision was brought to the notice of the learned Third Member before passing the order. The Third Member was bound to consider the judgment of the Tribunal. He, however, did not do so.

Prima facie, at least, even before the Tribunal the position for law appears to be in favour of the appellant. Unfortunately, the third member did not consider the judgment of the Tribunal.

The court also observed that the order of Tribunal was referred not because it has any precedent value in this court but is a indication of what the impugned order of the third member may well have been, had the judgement been considered by the learned third member.

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Precedent – Law declared by Supreme Court – Binding on all High Courts – High Court Judge sitting singly bound by Supreme Court decision rather than Division Bench Judgement which is contrary to Supreme Court. (Constitution of India, Article 141)

Sidramappa and others vs. State of Karnataka and Others; AIR 2014 Karnataka 100 (Karn.)(HC) (FB)

The learned single Judge of Karnataka High Court in a Writ Petition passed an order stating that earlier judgement of a Division Bench of the High Court requires reconsideration and in the absence of any statutory provision empowering him to refer the same to the larger Bench the relevant papers be placed before Chief Justice to examine the question and constitute a larger Bench.

The Hon’ble Court observed that according to Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all Courts within the territory of India. The expression “all courts” means Courts other than the Supreme Court. The decision of the Supreme Court is binding on all the High Courts. In other words, the High Court’s cannot hold the law laid down by the Apex Court is not binding on the ground that relevant provisions were not brought to the notice of the Supreme Court, or the Supreme Court laid down the legal position without considering all the points. The decision of the Apex Court binds as much the pending cases as the future ones. Even the directions issued by the Apex Court in a decision constitute binding law under Article 141. It is pertinent to state that the Supreme Court is not bound by its own decisions and may overrule its previous decisions. It is also pertinent to state that the Apex Court may overrule the previous decisions either by expressly saying so or impliedly by not following them in a subsequent case. Thus, in view of Article 141 of Constitution of India, when there is a decision of the Apex Court directly applicable on all fours to the case on hand, the Learned Single Judge could have decided the Writ Petitions following the decision of the Apex Court, holding that the decision of the Division Bench is contrary to the law laid down under Article 141 of the Constitution of India. Therefore the learned single Judge could decide the petitions in accordance with the law laid down by the Apex Court.

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Guarantor – Mortgage by deposit of title deeds – Liability of Guarantor – Loan taken from bank – Deposit of title deeds with Bank. Section 128-Contract Act, Transfer of property section 58(f).

Allahabad Bank vs. M/s. Shivganga Tube Well and Others; AIR 2014 Bombay 100 (Bom.)(HC)

The original defendant No. 1 had availed a loan of Rs. 10 lakh on for the purposes of purchase of a truck with Bore-Well Rig, Machine, Screw Compressor, Drilling Rig, etc. The original defendant No.1 – the borrower hypothecated the said machinery and its accessories with the plaintiff Bank. At the same time, the defendants No. 2 to 6 i.e., present respondents No. 2 to 6 agreed to stand as continuing guarantors for the original defendant No. 1 in repayment of the loan amount as agreed between the appellant Bank and the defendant No. 1. They agreed to mortgage their respective immovable property. They accordingly delivered their title-deeds. Thus, equitable mortgage by depositing the title-deed was created by these respondents.

All the defendants attended the Himayatnagar branch of appellant Bank and deposited the title-deeds of their respective immovable properties, as detailed in the plaint. They had agreed by executing affidavits regarding the confirmation of the mortgage by deposit of title-deeds and had further agreed that the revival of the loan, if any by the borrower i.e. defendant No. 1 shall bind the mortgagor.

The Appellant Bank filed a suit for recovery of an amount of Rs. 27,76,137/- and for preliminary decree for sale of the mortgaged property for recovery of the said amount was decreed against the borrower-original defendant No. 1, but was dismissed against the guarantors i.e., defendants No. 2 to 6. Hence, the appeal was filed against the guarantors.

The Hon’ble Court noted the difference between “the agreement to mortgage” and “mortgage by deposit of title-deeds”. The mortgage by deposit of title-deeds is defined by section 58(f) of the Transfer of Property Act, 1882.

It is undisputed that the city of Hyderabad is a notified city where the delivery of the title-deeds of immovable property can be made with the intention to create a security thereon.

It is a settled position of law that the mortgage by deposit of title deeds requires no registration. However, if any document is executed, which would show that the mortgagee has, under the said document, mortgaged the property by deposit of title-deeds, then only the registration of the said document is required. However, the contemporaneous document fortifying the “intention to create the security” is neither an agreement to mortgage or a mortgage. The deposit of title-deeds itself with intention in the mind of the person that the said title-deeds are being deposited with intention to create a security thereon, is sufficient to culminate the transaction into a mortgage by deposit of title-deeds. This mortgage by deposit of title-deeds is sometimes called as equitable mortgage, as was prevalent in England. However, the ingredients of the equitable mortgage and the mortgage as defined u/s. 58(f) of the Transfer of Property Act are not identical.

The documents on record, coupled with the affidavits as admitted by the defendant and positively proved by the relevant witness of the plaintiff would show that the title-deeds were deposited with the plaintiff Bank, with an intention to create the security thereon.

The title-deeds of the respective respondents were admittedly put in the custody of the appellant Bank at that time. None of the relevant respondents at any time asked for return of those title-deeds, nor complained of keeping the same in the custody of the Bank.

The documents on record would show that the respondents No. 2 to 6 had intention to create the security for the repayment of the loan availed by the principal borrower. Therefore, they showed their readiness to deposit the title-deeds by various agreements and affidavits and also by placing all the title verification certificate by the Advocates, etc. and ultimately, they deposited the titledeeds with the appellant Bank at Hyderabad branch.

The above facts is sufficient to hold that the respondents No. 2 to 6 stood as guarantors and created mortgage of their property for repayment of the loan advanced to the principal borrower by depositing their title-deeds.

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Frivolous Litigation – State as a Litigant/party – Expenses to be paid personally by officials concerned.

Haryana Dairy Development Co-op Federation Ltd. vs. Jagdish Lal; (2014) 3 SCC 156 (SC)

In the instant case, an amount of Rs. 8,724/- was to be paid to the Respondent employee as reimbursement of his medical claim. The Petitioner Haryana Dairy Development Cooperative Federation Limited filed SLP before Supreme Court. The Court frwoned upon such practice of the petitioner corporation as the corporation must have spent the amount already by filing this petition more than the total amount involved herein.

The Law Commission of India in its 155th report has observed that what is distressing is that the number of pending litigations relate to trivial matters or petty claims, some of which have been hanging for more than fifteen years. It hardly needs mention that in many such cases money spent on litigation is far in excess of the stakes involved, besides wasting valuable time and energy of the concerned parties as well as the Court.

The court directed that the expenses of the litigation shall be incurred by the Managing Director personally who has signed affidavit in support of the petition and it shall not be taken from the Federation.

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Deficiency in service – Mental Agony & harassment – Cost of Litigation-Builder. (Consumer Protection Act section 17).

Col. Sukhawant Singh Saini (Retd.) vs. GBM Builders and Developers P. Ltd.; (State Consumer Disputes Redressal Commission, UT Chandigarh).

The facts, in brief, are that the complainant booked a 2 BHK flat , the price whereof was Rs. 22,50,000/-. He paid a sum of Rs.1.00 lakh, as booking amount, to the builder. The allotment letter, dated 13-10-2011, was issued in favour of the complainant, in respect of the aforesaid flat. Totally, the complainant paid a sum of Rs. 21,50,000 towards the price of the flat, in question. The remaining amount of Rs.1.00 lakh was to be paid by the complainant, at the time of handing over possession of the flat, by the builder (Opposite Party). The Opposite Party, failed to deliver the possession in time. The complainant wrote a number of letters requesting the Opposite Party, to hand over physical possession of the flat. The opposite Party vide letter dated 06-12-2012 intimated the complainant that possession of the flat shall be delivered on or before 15-01-2013. Even on that date, the possession of the flat was not delivered. It was intended that the complainant suffered a lot of mental agony and physical harassment, on account of non-delivery of possession of the flat, in question, by the stipulated date, or non-refund of the amount deposited by him. It was further stated that the aforesaid acts of the Opposite Party, amounted to deficiency, in rendering service, as also indulgence into unfair trade practice. When the grievance of the complainant was not redressed, left with no alternative, a complaint u/s. 17 of the Consumer Protection Act, 1986 was filed claiming from the Opposite Party compensation for mental agony and physical harassment; refund of Rs. 21.50 with interest @18% p.a. from the date of deposit of the said amount; pay interest @10.75% p.a., which was being paid by him (complainant) to the Bank of India, for the loan facility, availed of by him to purchase the flat, in question; etc.

The state commission observed that as per the evidence produced, on record, it is evident that the complainant only booked one flat, bearing No. 498, in the project of the Opposite Party, for a sale consideration of Rs. 22.50 lakh. There is nothing, on record, that the complainant purchased this flat, for commercial purpose with the intention to resell the same as and when there was escalation in prices. Thus the complainant falls within the definition of a consumer, as defined by section 2(1)(d)(ii) of the Act.

The next question, that falls for consideration, is, as to within which period the possession of the flat was to be delivered. It is evident from this document, that the Opposite Party stated therein, that it would try to give possession of the flat by 15-01-2013. It means that possession of the flat was to be delivered, on or before this date. However, there is no document, on record, to prove that either on 15-01-2013 or immediately thereafter offer of possession of the flat, in question was made to the complainant, but he refused to accept the same. Had the construction of the flat, in question, been complete, in all respects, then certainly the Opposite Party would have sent offer of possession of the flat, after 15-01- 2013, to the complainant. Non-sending of such a letter, in itself, indicates that construction of the flat, in question, was not complete, and as such, the question of offer of possession thereof on or after 15-01-2013 did not at all arise. By making a false promise, that the possession shall be offered by 15-01-2013, and failure to abide by the commitment, the Opposite Party was not only deficient in rendering service but also indulged into unfair trade practice.

Even by the time the complaint was filed, the possession of the flat was not offered to the complainant. The Opposite Party utilised the amount, deposited by the complainant, for a sufficient long period. Neither the possession was offered to the complainant, nor refund of the amount, was made to him. Since the Opposite Party failed to deliver possession of the flat by the stipulated date or even by the time the complaint was filed, it was its bounden duty to refund Rs. 21.50 and Rs. 37,028/- (paid as service tax) to the complainant but it failed to do so. It was, therefore, held that the complainant was entitled to the refund of Rs. 21,50,000/- deposited by him towards the price of the flat and Rs. 37,028/- paid by him, towards service tax to the Opposite Party. By not refunding the amount aforesaid, the Opposite Party was deficient, in rendering service.

For the financial loss caused to the complainant on account of non-refund of the amount, deposited by him immediately after the expiry of the stipulated date for delivery of possession of the flat, the complainant was entitled to refund of the aforesaid amounts, with interest @12% interest p.a. from the respective dates of deposits.

As stated above, neither possession of the flat by the stipulated date, was given to the complainant, nor refund of the amounts paid by him, was made. One can really imagine the mental condition of a person, who deposited 95% of the price of the flat, but was neither delivered the possession thereof nor refund of the amounts deposited by him was made. The complainant, thus, suffered a lot of mental agony and physical harassment, on account of the acts of omission and commission of the Opposite Party. Not only this, the complainant shall also not be able to purchase a flat, at the same rate, on account of escalation in prices. Compensation for mental agony and physical harassment and on account of escalation, in prices to the tune of Rs. 1,50,000/- was granted Litigation cost of Rs.15,000/- also granted. (Dated 02-07-2014 complaint Case No. 41 of 2014).

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Accounting for cost of test runs

BACKGROUND
The accounting for cost of test runs raises some very interesting questions both under Indian GAAP and IFRS. Paragraph 16 of IAS 16 states that the cost of an item of plant and equipment includes any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Paragraph 17 enumerates examples of directly attributable cost and includes cost of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition; such as samples produced when testing equipment. However, it does not clearly state what the treatment should be when the net proceeds are greater than the cost of testing. Now consider the following two scenarios.

Scenario 1
The cost of test run is Rs. 100. The samples produced are sold at Rs. 80. Theoretically, two answers are possible. The first answer is to capitalise Rs. 100 and consider Rs. 80 as revenue (P&L). The second answer is to capitalise net, i.e., Rs 20. Nothing is taken to P&L.

Scenario 2
The cost of test run is Rs 100. The samples produced are sold at Rs. 130. Theoretically, the following three possibilities exist.

1. Capitalise Rs.100. Take Rs. 130 to revenue (P&L)
2. Capitalise a negative amount of Rs. 30. Nothing is taken to P&L.
3. Capitalise zero amount. Take Rs. 30 to revenue (P&L).

Interpretation under IFRS
This matter was discussed in the IFRS Interpretation committee. They felt that the way paragraph 17 is written, it is only the costs of testing that are permitted to be included in the cost of the plant and equipment. These costs are reduced by the net proceeds from selling items produced during testing. It is self-evident that if the net proceeds exceed the cost of testing, then those excess net proceeds cannot be included in the cost of the asset. Those excess net proceeds must therefore be included in the P&L.

IFRS Interpretation Committee also relied upon paragraph 21 of IAS 16, which indicates that proceeds and related costs arising from an operation, which is not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management, should be recognised in P&L and cannot be capitalised. Paragraph 21 is reproduced below.

“Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management. These incidental operations may occur before or during the construction or development activities. For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense.”

Based on the above discussion, in Scenario 1, a net amount of Rs. 20 is capitalised. In Scenario 2, zero amount is capitalised, and Rs. 30 is taken to revenue (P&L).

Interpretation under Indian GAAP
The following guidance is available in Indian GAAP. It may be noted that the below mentioned Guidance Note on Treatment of Expenditure During Construction Period is withdrawn, but nonetheless relevant for our assessment, since it does not conflict with any accounting standard with respect to the principle that is being debated.

Paragraph 9.1 of AS 10 Accounting for Fixed Assets

The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price.

Paragraph 9.3 of AS 10 Accounting for Fixed Assets

The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalised as an indirect element of the construction cost.

Paragraph 8.1 of Guidance Note on Treatment of Expenditure During Construction Period

It is possible that a new project may earn some income from miscellaneous sources during its construction or preproduction period. Such income may be earned by way of interest from the temporary investment of surplus funds prior to their utilisation for capital or other expenditure or from sale of products manufactured during the period of test runs and experimental production. Such items of income should be disclosed separately either in the profit and loss account, where this account is prepared during construction period, or in the account/statement prepared in lieu of the profit and loss account, i.e., Development Account/Incidental Expenditure During Construction Period Account/Statement on Incidental Expenditure During Construction. The treatment of such incomes for arriving at the amount of expenditure to be capitalised/deferred, has been dealt with in para 15.2.

Paragraph 11.4 of Guidance Note on Treatment of Expenditure During Construction Period

During the period of test runs and experimental production it is quite possible that some income will be earned through the sale of the merchandise produced or manufactured during this period. The sale revenue should be set off against the indirect expenditure incurred during the period of test runs as suggested in para 15.2.

Paragraph 15.2 of Guidance Note on Treatment of Expenditure During Construction Period

From the total of the aforesaid items of indirect expenditure (one of the aforesaid items included expenditure relating to expenditure on test runs) would be deducted the income, if any, earned during the period of construction, provided it can be identified with the project.

Paragraph 14.5 of Guidance Note on Treatment of Expenditure During Construction Period

Income during the construction or pre-production period should be shown separately in the financial statements (see paragraph 8.1 of this Note).

Conclusion
Based upon the above guidance, it is clear in Scenario 1, that a net amount of Rs. 20 is capitalised and nothing is taken to the P&L. However, in the case of Scenario 2, when the corresponding income is greater than the cost of trial run, neither the guidance note nor the standard are absolutely clear on what should be done. However, the author believes that based on similar arguments produced above in the context of IFRS interpretation, a net amount of zero is capitalised and Rs. 30 is taken to revenue (P&L).

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TS-435-ITAT-2014(Mum) Reuters Transaction Services Ltd vs. DDIT A.Ys: 2008-10, Dated: 18.07.2014

Electronic deal matching services provided through equipment installed at customers’ location would constitute royalty under India-UK DTAA .

Facts:
The Taxpayer, a company incorporated in England and a Tax Resident of UK, is engaged in the business of providing an electronic deal matching systems services which enables authorised dealers in foreign exchange in India (customers), such as banks etc. to effect deals in spot foreign exchange with other foreign exchange dealers. The services are provided against certain monthly charges. Further, the server through which such services are provided is located outside India.

The electronic deal matching system services facilitates the customers to deal in the foreign exchange with the other counterparts who are ready for the transaction of purchase and sale of foreign currency.

In order to avail the above services, the customers entered into two contracts:

• Agreement to provide matching services with the Taxpayer
• Access agreement with an Indian company (I Co), a subsidiary of the Taxpayer, for obtaining equipment in order to avail the above matching services. The customers could avail the services of the Taxpayer only through the equipment and connectivity provided by the Taxpayer through I Co.

Separately, Taxpayer had entered into a marketing agreement with I Co.

The fee for providing the above services would be charged by the Taxpayer from the Indian subscribers and the Taxpayer in turn would remunerate I Co for the marketing and installation services provided by I Co to the customers.

Taxpayer contended that the fee received from its customers in India is in the nature of business profit which is not taxable in India in the absence of a PE as per Article 7 of the India-UK DTAA . Further, such fees did not constitute Royalty or FTS under the India-UK DTAA .

The Tax Authority contended that such fee was Royalty as well as FTS both under the Act as well as the DTAA . Alternatively, I Co constituted an Agency PE for the Taxpayer in India, and the equipment installed by I Co would also constitute a fixed place PE for the taxpayer in India and hence taxable as business profits.

Held:
The nature of service rendered by the Taxpayer includes the information concerning commercial use by the customer. The entire system along with the matching system and connectivity involves processing of customer’s business queries and orders and finding out the matching reply in the shape of counterpart demand or supply for execution of the transaction of purchase and sale of foreign exchange. This system of the Taxpayer is available only to the customers who have been given the access to the information concerning commercial as well as processing the orders placed by the customers.

As per the terms and conditions stipulated in the agreement the Indian customers accept the individual non-transferable and non-exclusive license to use the licensed software programme for the purpose of carrying out the purchase and sale of foreign exchange. The facts on hand is not a case of Payment for access to the portal by use of normal computer and internet facility but the access is given only by use of computer system and software system provided by the Taxpayer under license.

Customers make use of the copyright software along with computer system to have access to the requisite information and data available on the server of the Taxpayer.

Accordingly, by allowing the use of software and computer system to have access to the portal of the Taxpayer for finding relevant information and matching their request for purchase and sale of foreign exchange amount to imparting of information concerning technical, industrial, commercial or scientific equipment work and hence the payment made in this respect would constitute royalty.

Delhi HC decision in the case of Asia Satellite Telecommunications Co. Ltd (332 ITR 340) is distinguishable in the facts of this case. The Asia Sat’s case was based on the finding that the transponder capacity has only a media for uplinking and downlinking of signals of the broadcaster and TV operators to be transmitted to their customers without any manipulation for improvement, whereas in the case on hand, the Taxpayer is providing not only media but also allowed to use the information, store the information on server and even to manipulate and drive the data to anyone for their commercial purpose.

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TS-481-ITAT-2014(Mum) Cosmic Global Ltd vs. ACIT A.Y: 2009-2010, Dated: 30.07.2014

Section 9(1)(vii) – Translation of a text from one language to another is not “technical” in nature, does not fall within the definition of FTS under the Act.

Facts:
The Taxpayer is an India company engaged in the business of providing translation services through the web. For this purpose the Taxpayer availed translation services from translators residing in India as well as outside India.

In respect of fee paid to translators in India, the Taxpayer withheld necessary taxes. However on fee paid to the nonresident (NR) translators the Taxpayer did not withhold tax at source.

The Tax Authority held that the fees paid to the NR translators are technical in nature as per section 9(1)(vii) of the Act and hence was liable to withholding of taxes. Thus the Tax Authority disallowed the payments made to NR translators in computing the business income of the Taxpayer, for failure to withhold the tax at source.

The order of the Tax Authority was upheld by the First appellate Authority. Aggrieved, the Taxpayer appealed before the Tribunal.

Held:
Fee for technical services under the Act is defined to mean any consideration for the rendering of any managerial, consultancy or technical services. The term “technical” is defined by dictionary to mean a service relating to a particular subject, art, craft, or its technique requiring special knowledge to be understood or services involving or concerned with applied and industrial sciences.

In the present case, the Taxpayer is getting the translation of the text from one language to another. The only requirement for translation from one language to the other is the proficiency of the translators in both the language.
Apart from the knowledge of the language, the translator is not expected to have the knowledge of applied sciences or the craft or techniques in respect of the text to be translated. The Translator is not required to contribute anything more to the text that is to be translated nor is he required to elaborate the meaning of the text.

A bare perusal of the definition of FTS under the Act and the dictionary meaning of the word “technical” makes it unambiguously clear that the translation services are not technical in nature. Thus fee paid to NR translators is not FTS u/s. 9(1)(vii) of the Act.

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TS-418-ITAT-2014(Mum) MISC Berhad vs. ADIT A.Ys: 2004-08 and 2009-2010, Dated: 16.07.2014

Charter arrangement includes slot charter arrangement and covered within the ambit of Article 8, shipping income, of India-Malaysia DTAA ?Facts: Taxpayer, a tax resident of Malaysia, is engaged in the business of shipping in international traffic. The Taxpayer operates ships that are either owned by it or taken on lease. Insofar as the shipping business from India is concerned, the Taxpayer books cargo from shippers/customers in India up to the final destination port, with all risks and responsibility. The bill of lading is issued for the entire voyage.

The Taxpayer, under a slot charter arrangement, arranges for transport of cargo from the Indian port to the hub port, using the service of feeder vessels which are owned by a third party.

From the hub port, the Taxpayer’s containers are transhipped on the mother vessel, which are owned/ leased by the Taxpayer, and from the hub port it is carried to the final destination port.

The Taxpayer had claimed the benefit of Article 8 of the India-Malaysia DTAA on the entire freight income which comprised two components: (i) Transportation of cargo in international traffic by operating ships owned or pooled by the Taxpayer. (ii) Carriage of goods by feeder vessels belonging to another shipping line wherein the Taxpayer did not have any pool arrangements.

However, the Tax Authority allowed the benefit of Article 8 on the first component and denied the benefit of Article 8 on freight income on the second component. The Tax Authority contended that Article 8 of India-Malaysia DTAA applies only when the taxpayer is the owner, lessee or charterer of a ship.

Held:
Article 8(1) of the India – Malaysia DTAA provides that profits derived by an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in the State in which the ships are operated. The activity of “operation of ships” carried on by a person cannot be understood merely as a person who operates the ships. It has to be understood in the broader sense of carrying out shipping activity. Carrying out of shipping activity could be as an owner or as a lessee or as a charterer of a ship. Where the word “owner” has to be inferred as a person who owns a ship and the word “lessee” as one who owns a ship for a given lease period, the word ”charterer” has to be understood as a person who charters/hires a ship for a voyage.

Reliance was placed by the Tribunal on several definitions and Bombay HC decision in the case of Balaji Shipping UK Ltd. [253 CTR 460] to support the following:

• Operation of a ship can be done as a charterer who does not mean to own or control the ship, either as an owner or as a lessee.
• Charterer is a hirer of a ship under an agreement to acquire a right to use a vessel for transportation of goods on a determined voyage, either the whole/part of the ship in a charter party agreement.
• The word “charterer” includes a voyage charter of part of a ship/slot, since it is an arrangement to hire space in a ship owned and leased by other persons.

The concept “charterer of ships” under the Act includes slot charter arrangement. The facility of slot hire arrangement is not merely an auxiliary or incidental activity to the operation of ships, but is inextricably linked to such activity.

The risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting cargo of a person who has hired the ship. The risk of the Taxpayer is towards its customers with whom it has agreed to transport the cargo.

Transportation of cargo in the container belonging to the Taxpayer from the Indian port i.e., the port of booking to the hub port through feeder vessel by way of space charter/ slot charter arrangement falls within the ambit of the word “charterer”. This component cannot be segregated from the scope of “operation of ships” as defined in Article 8 of India- Malaysia DTAA .

The voyage between the Indian port to the hub port through feeder vessel and from the hub port to the final destination port through mother vessel owned/leased by the Taxpayer are inextricably linked and there is complete linkage of the voyage. Therefore, the entire profits derived from the transportation of goods carried on by the Taxpayer is to be treated as profits from operation of ships and, therefore, the benefit of Article 8 cannot be denied to the Taxpayer on the part of the freight from voyage by the feeder vessels.

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Representation seeking deferment of new Tax Audit Report or extension of time for filing the Return of Income for Assessment Year 2014-15 to 30th November 2014

25th August 2014

The Chairman
Central Board of Excise & Customs
Government of India,
North Block, Vijay Chowk,
New Delhi 110 001.

Hon’ble Sir,

Re: Representation seeking deferment of new Tax Audit Report or extension of time
for filing the Return of Income for Assessment Year 2014-15 to 30th November 2014

The Central Board of Direct Taxes (“CBDT”) vide Order dated 20th August under section 119 of the Act, has extended the due date for obtaining and furnishing of the report of audit under section 44AB of the Act for Assessment Year 2014-15 in case of assessees who are not required to furnish report under section 92E of the Act from 30th September, 2014 to 30th November, 2014. However the Order is silent on the extension of due date for filing the Return of Income.

The CBDT vide Notification No.33 dated July 25, 2014 has notified new Form No. 3CA, Form No. 3CB and Form No. 3CD for furnishing Audit Report u/s 44AB of the Income Tax Act, 1961 [Tax Audit Report]. Various new clauses have been added while many others have been amended. The new clauses and the amended clauses require auditor to certify the correctness of figures having a direct impact on the total income of the assesse.

The Tax Audit report is the basis of computation of income. Various deductions and disallowances are quantified in the Tax Audit Report to be included in the return of income.

It is respectfully submitted that the relief sought to be provided by the CBDT by granting extension of time for filing the Tax Audit Report without a corresponding extension of due date for filing the Return of Income would not serve the desired purpose. It will actually necessitate filing of the Return of Income without audited figures in respect of various deductions and disallowances being available.

Considering the substantial changes made in the new Form 3CD, in principle and to be fair and just, the new requirement should not have been made retrospectively applicable to the Financial Year 2013-2014 [Asst. Year 2014-2015] as that causes severe hardship to the assessees as well as the auditors. Instead of deferring this to Financial Year 2014-2015 [Asst.Year 2015-2016], only the date of obtaining and furnishing Tax Audit Report has been extended and that too, without making consequential extension in the due date of furnishing the Return of Income for the Asst.Year 2014-2015 [Financial Year 2013-2014] and hence, this extension is effectively meaningless.

As such, the extension granted for obtaining and furnishing of the report of audit under section 44AB would not provide relief to the assessees and the hardships faced would continue. In fact, many returns may not have correct figures and the return of income filed without audited figures being available may need to be revised after obtaining the Tax Audit Report, particularly in case of non-corporate assessees. This would lead to avoidable duplication of work as well as additional time and costs to be incurred by assesses as well as the Department (having to process a large number of revised returns).

Hence to provide the desired relief to assessees, it is earnestly requested that either the applicability of new form of Tax Audit Report should be deferred to the next year [Financial Year 2014-2015] to avoid it’s retrospective applicability [which is the just and fair thing to do] or atleast, the due date for filing the return of income for the Assessment Year 2014-15 for all assessees (other than assessees who are required to furnish report under section 92E of the Act) liable to Tax Audit should be extended to 30th November 2014 i.e. the date upto which extension has been granted to obtain and furnish the Tax Audit Report.

We trust you would find merit in our above genuine request and accede to the same.Your early action in the matter will be highly appreciated.

Thanking you.

Yours Sincerely

Bombay Chartered Accountant Society

Nitin Shingala President,

Kishor B. Karia Chairman Taxation Committee

Sanjeev R. Pandit Co-Chairman

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Extension of due date of deposit of Service Tax and TDS in October 2014 due to Public Holidays

6th August 2014

The Chairman
Central Board of Excise & Customs
North Block,
Rashtrapati Bhavan,
Defence Headquarters.
New Delhi 110 001

The Chairman
Central Board of Direct Taxes
Government of India
North Block
Parliamentary Street
New Delhi 110 001

Respected Sirs,

Sub: Extension of due date of deposit of Service Tax and TDS in October 2014
due to Public Holidays

This is to bring to your notice that there will be a series of public holidays in the first week of October 2014 as mentioned below:

In view thereof, it will be very difficult for the taxpayers to make payment of Service Tax/Excise Duty and TDS by their due dates being the 6th and the 7th of the month respectively. You are therefore requested to consider extension of the due dates for payments of Service Tax/Excise Duty and the TDS from 6th October 2014 and 7th October 2014 respectively to 10th October 2014.

Your early action in this regard will help in easing undue hardships to the taxpayers and will be highly appreciated.

Thanking you.

Yours faithfully

Bombay Chartered Accountant Society

Nitin Shingala President,

Kishor B. Karia Chairman Taxation Committee

Sanjeev R. Pandit Co-Chairman

Govind G. Goyal Chairman Indirect Taxes & Allied Laws Committee

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India’s antiquated law on contempt of court restricts personal liberty and must be overhauled

After having raised the issue of whether the clubby and secretive collegium system actually preserves the independence of the judiciary former Supreme Court judge, Justice Markandey Katju, has now trained his guns on India’s antiquated contempt of court law. He has made the valid point, that judicial supremacy cannot be based on the law of kings in a democracy. Is interference or disruption of the due course of judicial proceedings or the administration of justice contempt of court? Or, does criticism of a judgment or a judge constitute sufficient ground for invocation of the dreaded law? While it ought to be the former in India it’s often understood as the latter, as the contempt law has been employed when judges were made targets of personal attacks or to silence criticism of judgments. But criticising a judge or a judgment perceived to be flawed cannot be seen to be an illegitimate act that scandalises the court or seriously undermines public confidence in the administration of justice. In the UK and US, where both civil and criminal contempt laws are in operation, substantial amendments have constrained the powers of judges who might otherwise have acted to vindicate their authority, pomp and majesty which are anathema to a democratic institution.

The Indian contempt Act of 1971 has evolved over time to incorporate amendments that delineated what does not constitute contempt and framed rules to regulate contempt proceedings, yet inconsistencies remain. In 2006, an important amendment to the 1971 Act provided for truth as a valid defence in contempt proceedings, especially because the law was considered a threat to the fundamental rights to personal liberty and freedom of expression. Not just the doctrine of truth but public interest must be the cornerstones on which the law must be based. The judiciary, executive and legislature must ensure there are enough safeguards against arbitrary exercise of the power for contempt of court

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Labour law overhaul must happen at the centre

Reform of India’s archaic and restrictive labour laws are central to any reform programme. This is a wellunderstood fact now; that the unfortunate stunting of India’s manufacturing sector, particularly in labourintensive industries, can largely be laid at the feet of these statist laws is undeniable. Not only do they provide bureaucrats with a reason to harass entrepreneurs, and place an excessive and unfair burden on small and medium enterprises, but they have signally failed to protect India’s workers. The fact that every employer wishes to avoid the incidence of these laws has led to widespread casualisation of the workforce. As a consequence, over 90 per cent of Indians work in the unorganised sector. Any comprehensive approach to restarting the economy from the new government will need to include a complete overhaul of labour law.

It is unfortunate, therefore, that the new government has shown little interest in pushing the envelope as far as this essential reform is concerned. Instead, the Bharatiya Janata Party (BJP), which leads the National Democratic Alliance government, has stressed that the Rajasthan government – which it also runs – is conducting labour law reform. The Rajasthan government will alter the application of related central laws: for example, raising the threshold of the number of employees who can be laid off without government permission from 100 to 300, and applying the Contract Labour (Regulation and Abolition) Act only to companies with more than 50 workers, compared with 20 now. Similar labour law changes are being contemplated in Madhya Pradesh, also ruled by the BJP, and even Haryana, which is ruled by the Congress. These are certainly welcome developments, indicating that labour law changes as necessary reforms to revive the manufacturing sector have begun to gain wider acceptance in many states.

(Source: Business Standard, dated 23-07-2014)

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Supreme Court feels slighted snaps at Centre on National tax tribunal

The Supreme Court reacted sharply to the Centre’s stand that the purpose behind creation of National Tax Tribunal (NTT) was to associate domain experts in deciding taxation disputes as it was often felt that judges lacked expertise in specialized fields.

A five-judge constitution bench comprising Chief Justice R M Lodha and Justices J S Khehar, J Chelameswar, A K Sikri and R F Nariman wondered why the government rushed to the judges whenever they faced a problem.

“Judges may not be experts. But whenever there is a problem, they come to the judges by way of courts or commissions,” the bench said before reserving its order on a petition filed by Madras Bar Association challenging the National Tax Tribunal Act.

The petitioner had alleged that these tribunals could not have been empowered to decide questions of law, which exclusively fell within the courts’ domain. It said the government, by constituting NTTs and providing appeal against their orders directly to the Supreme Court, had denuded the jurisdiction of high courts.

The inclusion of chartered accountants and company secretaries on NTTs and allowing them to decide questions of law did not go down well with the apex court. “How can a CA or CS help determine the question of law involved in a taxation dispute,” the bench asked.

Appearing for an association of chartered accountants and company secretaries, senior advocate K V Vishwanathan said the CA and CS courses involved study of taxation laws.

The bench said, “These days, Class VIII and IX students also study about Constitution. That does not mean they have knowledge of law. The taxation experts may be able to help a judicial member understand the complexities involved in a dispute but how will they determine a question of law?”

In a lighter vein it said, “Many clerks and stenographers after long association with lawyers know the provisions of law quite well. Can they be said to have knowledge enough to decide questions of law. A CA or a CS would be studying taxation law from the angle of tax purposes only and not for understanding the questions of law that would arise in a dispute.”

Appearing for the petitioner, senior advocate Arvind Datar said NTT experimentation was dangerous for the judiciary as slowly, the government would take away expert subjects – disputes relating to company law, trademark and intellectual property – from the high court’s jurisdiction by creating separate tribunals in the name of infusing experts into the dispute redressal mechanism.

NTT, instead of supplementing the judiciary, was supplanting the court’s jurisdiction, Datar said.

The bench asked solicitor general Ranjit Kumar whether NTTs enjoyed any autonomy at all. “The NTT chairman does not even have power to set up benches. This power is vested with the central government. What is the autonomy we are talking about,” it asked.

(Source: Times of India, dated 24-07-2014)

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Judicial appointments need transparency

Amid growing concerns about political pressure on the appointment or extension of judges, the government has indicated that it intends to move quicker on creating a judicial appointments commission. This immediately follows the revelation of a series of events from 2005 which, although the facts continue to be disputed, nevertheless raise serious concerns. Former Supreme Court judge, and current chairman of the Press Council of India, Markandey Katju recently said that a judge of the Madras High Court was granted an extension although a report by the Intelligence Bureau had said that he was corrupt. Mr. Katju said that the collegium that appoints judges, then headed by the erstwhile chief justice of India, R C Lahoti, had given in to pressure from the government. Mr. Katju said that the ex-prime minister, Manmohan Singh, was put under pressure from a coalition partner – who could only be the Dravida Munnetra Kazagham(DMK) from Tamil Nadu – to protect the judge, and a senior minister pressured the collegium on behalf of the government. Then law minister, H R Bhardwaj, subsequently claimed that extensions to the judge were solely the collegium’s decision. It has now emerged, in a report by The Times of India, that the Prime Minister’s Office had, in fact, lobbied in favour of making the judge in question a permanent member of the Madras High Court bench.

On one level, this is a reminder of the bad old days of coalition politics under the United Progressive Alliance (UPA). The DMK proved itself to be a difficult and bullying ally, and often used its pivotal numbers in the parliamentary coalition to dubious ends. Whether it is in the reported arm-twisting of Ratan Tata by the telecom ministry it controlled; or its insistence that A Raja be retained as a minister in 2009; or in the doubtful Maxis- Aircel deal, the DMK bears a great deal of responsibility for the downfall of the UPA . If these latest allegations are true, however, then it becomes clear that Dr Singh himself had no intention, right from the start, of standing up to this ally. It is no surprise, then, that the UPA failed to manage its coalition.

However, the larger point that must be made is on the nature of judges’ appointments. The incumbent government has already been accused of intervening unduly in judicial appointments, by refraining from returning the nomination of eminent lawyer Gopal Subramanium to the collegium. With each such report, there are more holes in the existing justification for the collegium, that it is immune to political pressure. However, the answer is not to simply replace it with another opaque system. The appointment of judges must be made in the open, and transparently. The executive must be given a greater, but circumscribed, say in the choice of judges, certainly. However, if accusations of corruption or bias are going to be thrown around in this manner, then it is clear that the process requires clarity and light in order to preserve the aura of the judicial system. The proposed judicial appointments commission should, thus, not be a closed and opaque body.

(Source: Business Standard, dated 24-07-2014)

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Another market crash in the offing?

Reserve Bank of India governor Raghuram Rajan has added his voice to a steadily rising chorus warning of the heightened risks of a global market crash. Specifically, he says there’s a disconnect between the state of the economy and asset prices; that excessively accommodative monetary policy in the developed economies has led to asset bubbles; that competitive monetary easing is leading to beggar-thy-neighbour policies reminiscent of the Great Depression in the 1930s; that the recent low volatility masks many of the risks; and that not enough is being done in terms of improved regulation.

Rajan should know. He was one of those who predicted the financial crisis. At that time, he had said that among the reasons for the crisis were the skewed incentives for fund managers that led to excessive risk-taking. That hasn’t changed. Nor has the pervasive inequality in the US. Several economists have argued that the lack of growth in real wages was the underlying reason for the explosion of private sector debt that led to the financial crisis, as debt was substituted for income. The International Monetary Fund has warned that housing markets are once again getting overheated in several countries.

There have been half-hearted attempts at regulation, but it’s far from enough. The attempt has been to get back to business as usual, by papering over the cracks with money. As the Bank for International Settlements pointed out in its annual report last year, the role of accommodative monetary policy was to buy time to put reforms in place. Instead, it warned, “The time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.”

The worry is the bubbles seem to be getting larger and larger and we are still to recover from the bursting of the last one. And after using up all available ammunition on tackling the current crisis, how will the world deal with another bust?

Will the central banks be able to engineer a soft landing? The history of serial booms and busts casts serious doubts about that. Indeed, if history is any guide, the Chinese Communist Party’s record of steering its economy to a soft landing is much better than that of Western governments and central banks, although whether they will be able to handle their current crisis remains to be seen. The silver lining, if one may call it that, is that there is often a gap between the first warnings and the final bursting of a bubble. For instance, some had cautioned as early as 2004 that a bubble was in the making. And Raghuram Rajan’s famous warning at Jackson Hole was made in August 2005, two years before the crisis hit.

(Source: Extracts from an Article by Mr. Manas Chakravarty in the Mint Newspaper dated 11-08-2014)

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BUSINESS CASE FOR ANTICORRUPTION

Efforts on anti-corruption has taken a front seat
for the past couple of years. The beginning of 1990s saw several
international organisations introducing anti-corruption instruments to
make the functioning of businesses clean. With globalisation and
business opportunities spread across the globe, companies have to follow
the norms of several countries. Strong anti-corruption rules of USA and
Britain has led many companies to introduce anti-graft initiatives in
their working. However, India still lags behind.

In the recently
published Ease for Business Index (2014) constituted by the World Bank,
India ranked 134 amongst 189 nations in the world (the lower bottom),
indicating that India is an investment / business averse country. Ease
for Business Index takes into account, procedures of obtaining licenses,
permits, tax regulations and infrastructure facilities. Lack of
transparency and accountability shrouds all the above procedures.

Though
India is trying to address the issue of corruption by making
legislative changes, ratifying international conventions and adopting
technology in its administrative functioning, merely rules and
regulations will not address the issue. It is important that the
business stakeholders are committed and come together to participate in
the fight against corruption.

Business Case for Anti-corruption
A
recent report of Price Waterhouse Coopers (PWC), a leading consultancy
firm, mentions that increasingly companies have recognised “corruption”
as a major threat to their business.

• 63% of the companies indicate that they have experienced corruption.

• 39% of the businesses have lost important bids due to corrupt officers.

•
Corruption leads to the damage of the brand name. Correspondingly,
companies have reported that having an anti-graft programme has a great
chance of enhancing the brand name.

• The report goes as far as
mentioning that the total money that a company spends on legal,
financial and regulatory suits due to corruption is much less compared
to the reputational damage (brand) which is done to the organisation.

• 43% of the companies do not enter a particular market which is highly vulnerable to corruption.

Risks of not engaging in the anti-corruption initiatives
• Criminal prosecution (heavy cost to the company)
• Exclusion from bidding processes
• No legal remedies in case the company increases the
cost of the materials
• Damage to reputation, brand and share price
• Regulatory censure
• Cost of corrective action
• Demotivated employees
• Uneven market, loss of business opportunities
• Policy-makers responding by adopting tougher and more rigid laws and regulations (domestic, national and international)

Benefits of introducing anti-corruption initiatives in the companies:

•
With strong anti-corruption mechanism in a company, the organisation
saves on legal suits. Further, it also attracts new companies through
rigorous business integrity policies.
• Business attracts investments from ethically oriented investors.
• Employee retention and morale of the employee increases as hard work will be the key criteria for progress of the employees.
• Increase productivity by means of a motivated workforce.
• Business can obtain a competitive advantage of becoming a preferred choice of customers, through positive branding.
• Together, businesses can create a level playing field.
• Business collaboration on anti-corruption initiatives influences positive rules and regulations.

Global
Compact Network India, is one of the local networks of UN Global
Compact; a strategic policy initiative for businesses that are committed
to aligning their operations and strategies with ten universally
accepted principles in the area of Human Rights, Labour, Environment and
Anti-Corruption. The 10th principle of UNGC is holistically dedicated
to fight against Anti-corruption in all its form. Furthering the 10th
principle Collective Action Project India provided a platform for
anti-corruption dialogue between private and public sector and
incentivise ethical behavior of businesses. The project in a phased out
manner has taken up pressing corruption issues in the Indian context, in
the spheres of public procurement, bribery and fraud, and supply chain
transparency and sustainability in India.

In the past three
years, since Collective Action was launched in India in 2011, one of the
significant achievements of GCNI has been creation of a platform for
dialogue and deliberation; with an equal number of participants from
public sector, private sector, business associations and SMEs. GCNI has
also been successful in making the businesses take notice about the
merits of adoption of international instruments, one of them being
Integrity Pact (to achieve transparency in procurement). From a time
when discussing corruption was a taboo to a time when talking and
tackling corruption is seen as a sign of sustainable business, GCNI, in a
short duration, has achieved much more than its anticipated goal of
creating awareness about graft.

In its first series of pan-India
consultation conducted during 2010-2011 titled Ethical Business for
profitability, GCNI partnered with academicians, civil society, chambers
of commerce, international business councils to share their best
practices which are being followed in various sectors. Mr. J. F. Ribeiro,
former Supercop, speaking at the Seminar in Mumbai pointed out the
importance of the topic and highlighted the need to understand and
analyse the different ethical dilemmas that companies face today,
especially with relation to corruption. Mr. N. Vittal, Former
Central Vigilance Commissioner delivering the keynote address in Chennai
emphasised that policies based on ethics, of any business, would mean
that they are legal, fair and open to public scrutiny. Any company which
does not practice such a policy is most likely to face contempt and
ridicule at some point or the other. Seminar participants in all four
cities (Mumbai, Chennai, Delhi, Kolkatta) unanimously confirmed that
business can attract and retain talent if they are branded as an ethical
business today.

In the second series of pan-India consultation
conducted between 2011-2012 titled Turning Down the Demand and Cutting
off the Supply saw increased participation from private sector and small
and medium sector enterprises (SMEs). The main aim of second series of
consultations was to know about innovated ways in which corruption could
be tackled and some of the ground realities which are not factored in
while constructing Anti-Corruption policies. Corporate Fraud triangle
was explored so that efforts could be made at all levels through
Collective Action.

In
conclusion, ‘Collective Action’ is a collaborative and sustained
process of cooperation among stakeholders. It increases the impact and
credibility of individual action, brings vulnerable individual players
into an alliance of likeminded organisations and levels the playing
field between competitors. Collective action besides representing big
private and public sector organisations also leverage equal
representation to the Medium/Small scale enterprises who despite being
major contributor to the Nation’s income fail to convey the issues and
challenges faced by them and thus become more prone to corrupt
practices.

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A. P. (DIR Series) Circular No. 19 dated 11th August, 2014

Liberalised Remittance Scheme for resident individuals-clarification

This circular states that banks are no longer required to report remittances under the Liberalised Remittance Scheme (LRS) for acquisition of immovable property outside India because as per A.P. (DIR Series) Circular No. 5 dated 17th July, 2014 facility under LRS can be used for acquisition of immovable property outside India.

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A. P. (DIR Series) Circular No. 18 dated 30th July, 2014

Constitution of Special Investigating Team – sharing of information

This circular advices Authorised Persons to ensure that all information/documents as and when required by the Special Investigation Team (SIT) are made available to them.

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A. P. (DIR Series) Circular No. 17 dated 28th July, 2014

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

This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till 31st December, 2014: –

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

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A. P. (DIR Series) Circular No. 16 dated 28th July, 2014

Trade Credits for Imports into India – Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till 31st December, 2014: –

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

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TS-482-ITAT-2014(Mum) GECF Asia Limited vs. DDIT A.Y: 2007-08, Dated: 06.08.2014

Services such as accounting and legal support, sales and marketing, human resource services etc rendered from own knowledge and experience without imparting the know-how/experience to the other person does not constitute royalty under the India-Thailand Double Taxation Avoidance Agreement (DTAA ).

Facts:
The Taxpayer, a Thailand tax resident, entered into a master agreement with Indian company (I Co) to provide various services such as accounting and finance support, legal and compliance services, sales and marketing services, etc.

The Taxpayer filed NIL return for the relevant assessment year on the ground that the income accrued to him on account of above services qualifies as business income and the same cannot be taxed under Article 7 of India–Thailand DTAA in the absence of a Permanent Establishment (PE) in India.

The Tax Authority, in its draft order, held that the fee received by the taxpayer from I Co qualifies as fees for technical services (FTS) under the Income-tax Act, 1961 (Act) and alternatively such fee would also fall within the definition of “royalty” under the India – Thailand DTAA . Thus such income would be taxable in India.

Aggrieved, the Taxpayer filed its objections before the Dispute resolution panel (DRP). However, the DRP also concluded that the fee received by the Taxpayer is for providing industrial, commercial or scientific experience and, hence, the fee constituted “Royalty” under the DTAA , and hence it would be taxable in India. Aggrieved the Taxpayer appealed to the Tribunal.

Held:
Royalty is defined under India-Thailand DTAA to include payments of any kind received as a consideration for the use of, or the right to use, information concerning industrial, commercial or scientific experience. Consideration for information concerning industrial, commercial, scientific experience to be regarded as royalty should allude to the concept of knowhow. There should be an element of imparting of know-how to the other, so that the other person can use or has right to use such knowhow.

If services are being rendered simply as an advisory or consultancy, then it cannot be termed as “royalty”, because the advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience.

If there is no “alienation” or the “use of” or the “right to use of” any knowhow i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, then it cannot be termed as “royalty”.

The services may have been rendered by a person from own knowledge and experience but such knowledge and experience has not been imparted to the other person as the person retains the experience and knowledge or knowhow with himself, which are required to perform the services to its clients. In principle, if the services have been rendered de– hors the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of royalty.

Accordingly, the matter was restored back to Tax Authority to examine the nature of services based on the above principles.

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International Taxation-Recent Developments in USA

In this Article, we have given information about
the recent significant developments in USA in the sphere of
international taxation. Since many Indian Corporates have substantial
business interests in and dealings with USA, we hope the readers would
find this information useful. This will help to create awareness about
impending important changes in law and practices in USA.

1. IRS issues FATCA guidance and final FFI agreement for foreign financial institutions

The
US Internal Revenue Service (IRS) has issued Revenue Procedure 2014-13
to provide guidance to foreign financial institutions (FFIs) entering
into FFI agreements directly with the IRS to be treated as participating
FFIs under the Foreign Account Tax Compliance Act(FAT CA). Revenue
Procedure 2014-13 also provides guidance to FFIs and branches of FFIs
treated as reporting financial institutions under an applicable Model 2
inter governmental agreement (IGA) (reportingModel2FFIs) on complying
with the terms of the FFI agreement, as modified by the Model 2 IGA.

Revenue
Procedure 2014-13 includes a final FFI agreement for participating FFIs
and for reporting Model 2 FFIs. The FFI agreement finalises the draft
FFI agreement that was released on 29th October, 2013 as section V of
IRS Notice 2013-69.

Revenue Procedure 2014-13 states that the
FFI agreement generally does not apply to a reporting Model 1 FFI, or
any branch of such an FFI, unless the reporting Model 1 FFI has
registered a branch located outside of a Model 1 IGA jurisdiction so
that such branch may be treated as a participating FFI or reporting
Model 2 FFI. In such a case, the terms of the applicable FFI agreement
apply to the operations of such branch.

Revenue Procedure 2014-13 is effective on 1st January ,2014.

2. Public comments requested on source of income from sales of natural resources and other inventory

The
US IRS and the Treasury Department have issued a notice requesting
comments on the existing regulations (TD8687) that provide rules for
allocating and apportioning income from sales of natural resources or
other inventory produced in the United States and sold outside the
United States or produced outside the United States and sold in the
United States. The regulations were issued u/s. 863 of the US Internal
Revenue Code (IRC).

Under the regulations, gross receipts equal
to fair market value of natural resources at the export terminal are
allocated to the location of the farm, mine, well, deposit, or uncut
timber, with the source of gross receipt from such sales in excess of
the product’s fairmarket value at the export terminal allocated to the
country of sale.

The regulations also provide rules for
allocating and apportioning income from inventory sales other than
natural resources where the taxpayer produces property in the United
States and sells outside the United States, or produces property outside
the United States and sells in the United States. Such income is
treated in part as USsource income and in part as foreign-source income
under one of the three methods described in the regulations: the 50/50
method, the independent factory price method, and the books and records
method.

The information collected under the regulations issued
by the IRS to determine on audit whether the tax payer has properly
determined the source of its income from export sales.

3. Updated IRS Publication 80 issued–Federal Tax Guide for Employers in US possessions

The
US IRS has released the revised IRS Publication 80, Circular SS
(Federal Tax Guide for Employers in US Virgin Islands, Guam, American
Samoa, and the Commonwealth of the Northern Mariana Islands). The
publication is dated 17th December, 2013 and is intended for use in
preparing 2014 tax returns.

Publication 80 provides information
for employers whose principal place of business is US Virgin Islands,
Guam, American Samoa, and the Commonwealth of the Northern Mariana
Islands (CNMI), or who have employees subject to income tax withholding
in these US possessions. Publication 80 notes that employers and
employees in these jurisdictions are generally subject to US social
security and Medicare taxes under the US Federal Insurance Contributions
Act (FICA), and summarises employer responsibilities to collect, pay,
and report these taxes. Additionally, Publication 80 provides employers
in the US Virgin Islands with a summary of the irresponsibilities under
the US Federal Unemployment Tax Act (FUTA ).

Revised Publication 80 provides information on new rules, including:

– The social security wage base limit (ceiling) for 2014 is $117, 000

– The social security tax rate remains 6.2% for each of the employer and employee;

– The Medicare tax rate remains 1.45%for each of the employer and employee;

–
Beginning 1st January, 2014, any entity assigned an employer
identification number (EIN) must file IRS Form8 822-B (Change of Address
or Responsible Party—Business) to report the change in the identity of
its responsible party; and

– IRS Notice 2013-61 provides special
administrative procedures for claims for refund or adjustments of over
payments of social security and Medicare taxes resulting from
recognition of certain same-sex marriages

Revised Publication 80 also provides reminders, including:

–
Employers are required to withhold an Additional Medicare tax of 0.9%
from wages paid to an employee in excess of $ 200,000 in a calendar
year;
– The IRS will not assert that an employer has understated
liability for FICA taxes by reason of a failure to treat services
performed before 1st January, 2015 in the CNMI by residents of the
Philippines as “employment” u/s. 3121(b)of the USIRC; and
– CNMI government employees are subject to social security and Medicare taxes beginning in the fourth quarter of 2012.

Publication 80 includes a calendar with the due dates for the IRS filing requirements.
In addition, Publication 80 refers to other IRS publications that are relevant in this context, Including:

– P ublication 15, Circular E (Employer’s Tax Guide) for information on US federal income tax withholding;
– P ublication 509 (Tax Calendars); and
–
P ublication 570 (Tax Guide for Individuals With Income From US
Possessions) for information on the self-employed tax. Publication 80 is
available on the IRS website.

4. IRS publishes quarterly list of individuals who have expatriated: Q2/2014

The
US IRS published on 7th August, 2014 a quarterly notice with a list of
US citizens and long-term US residents (green cardholders) who have
renounced their citizenship or resident status for tax avoidance
purposes.

The notice is dated 18th July, 2 014, and is based on
information that the US Treasury Department received during the quarter
ending 30th June, 2014.

The notice is required u/s. 6039G of the
USIRC. The list contains the name of each individual losing US
citizenship or long-term resident status within the meaning of IRC
sections 877(a) or 877A, dealing with the tax treatment of individuals
who are deemed to have expatriated from the United States for tax
avoidance purposes.

5 Public comments requested on treatment of compensatory stock options under transfer pricing rules

The us irs and the us treasury department have is- sued a notice requesting comments on information collection requirements imposed by the existing final regulations (td9088) dealing with the treatment of compensatory stock options under the transfer pricing rules of section 482 of the us IRC. the notice was published in the federal register on 7th august, 2014.

The final regulations, which were issued on 26th August, 2003, provide guidance on the treatment of stock-based compensation for purposes of the transfer pricing rules governing qualified cost sharing arrangements and for purposes of the comparability factors to be considered under the comparable profits method.

The final regulations adopted with modifications the proposed regulations (reG-106359-02 ) issued on this subject on 29th july, 2002. the irs requested that comments be submitted no later than 6th october, 2014. The mailing address and other contact information are given in the notice.

6. IRS updates FAQs on FATCA registration System

The us irs has released updated frequently asked Questions (FAQs) on the FATCA under the heading of FATCA registration system. the FAQs indicate a last reviewed or updated date of 1st august, 2014.

The fAQs provide guidance on the following topics:
–   FATCA registration system–overview;
–   registration system resource materials;
–   General system questions;
–   fatCa account creation and access;
–   Registration status and account notifications;
–   Expanded Affiliated Groups (EAG);
–   registration updates;
–   sponsoring entity;
–   ffi list;
–   paper registrations;
–   Global Intermediary Identification Number (GIIN)–
overview; and
–   GIIN format.
The update is made by adding:
–   Question 1 to the topic, fatCa account creation and access;
–   Questions 6 and 7 to the topic, registration status and account notifications; and
–   Question 7 to the topic, registration updates.

The IRS notes that additional fAQs are available for the FATCa–FAQs General (last reviewed or updated on 29th july, 2014) and fAtCa FFI list (last reviewed or updated on 1st august, 2014).

7. IRS updates FAQs on FATCa FFI List

The us irs has released updated frequently asked Questions (fAQs) on the fatCa under the heading of irs ffi list fAQs. the fAQs indicate a last reviewed or updated date of 1st august, 2014.

The FFI list is a list that is issued by irs and that includes all financial institutions and branches that have submitted a registration and have been assigned a Global interme- diary Identification Number (GIIN).

The fAQs provide guidance on the following topics:
–   FFI list overview;
–   registration deadline;
–   FFI List fields;
–   FFI list;
–   downloading;
–   searching;
–   legal entity name; and
–   XML/CSV files.

Rhe update is made by adding questions 1 and 2 to the topic, ffi list, and adding question 2 to the topic, searching.

8. IRS further updates countries with residence waiver for foreign earned income exclusion for 2013

The us irs released announcement 2014-28 on 30th july, 2014 to update the list of foreign countries for which the residence requirement for the us foreign earned income exclusion u/s. 911 of the us irC can be waived for 2013 due to adverse conditions that prevented the normal conduct of business. the original list for 2013 was provided in revenue procedure 2014-25.

Announcement 2014-28 adds south sudan, effective for departure on or after 17th december, 2013.

IRC section 911 permits qualified individuals to exclude a limited amount of foreign earned income ($97, 600 for 2013, see united states-5, news 23rd october, 2012) from us taxation and to claim an exclusion or deduction for certain foreign housing costs if a foreign residence re- quirement is met.

The residence requirement can be waived for an indi- vidual who left the listed countries on or after the stated departure date if:

– There are adverse conditions, such as war, civil un- rest, or similar conditions, that prevent the normal con- duct of business in the countries; and

– The individual can establish a reasonable expectation of meeting the residence requirement but for the ad- verse conditions.

9. IRS issues revised instructions for requesters of withholding certificates (Forms W-8) to implement FATCA

The US IRD has released revised irs instructions for the requester of forms W-8Ben, W-8eCi, W-8eXp, and W- 8imy to implement the fatCa. the instructions are dated 16th july, 2014.

The revised instructions supplement the instructions for the following forms:

– Form W-8BEN (Certificate of Foreign Status of Ben- eficial Owner for United States Tax Withholding (Indi- viduals));

– Form W-8BEN-E (Certificate of Status of Beneficial owner for united states tax Withholding and reporting (entities));

– FormW-8ECI (Certificate of Foreign Person’s Claim that income is effectively Connected With the Conduct of a trade or Business in the united states);

– FormW-8EXP (Certificate of Foreign Government or other foreign organisation for united states tax Withholding); and

– Form W-8IMY (Certificate of Foreign Intermediary, foreign flow-through entity, or Certain us Branches for united states tax Withholding).

A withholding agent or a foreign financial institution (FFI) may need to request, and obtain, a withholding certificate (i.e., form W-8series) in order to:

– establish the status of a payee or an account holder under chapter 4 of the us irC (dealing with the fat- Ca provisions)or the payee’s status under irC chapter 3 (dealing with the regular withholding on us-source income paid to foreign persons); or
– Validate a payee’s or an account holder’s claim of for- eign status when there are us indicia associated with the payee or the account.

The revised instructions provide, for each form, notes to assist withholding agents and ffis invalidating the forms for chapters 3 and 4 purposes. The revised instructions also outline the due diligence requirements applicable to withholding agents for establishing a beneficial owner’s foreign status and claim for reduced withholding under an income tax treaty.

10. Guidance issued on FTC limitations for foreign asset acquisitions

The IRS and the us treasury department have issued notice 2014-44 to announce their intention to issue regulations addressing the limitations of foreign tax credits (FTCs) related to certain foreign asset acquisitions u/s. 901(m) of the irC. notice 2014-44 was released on 21st july, 2014.

FTCs may be limited by IRC section 901(M)if the FTCs result from certain foreign asset acquisitions, referred to as “covered asset acquisitions” (Caas), in connec- tion with which taxpayers may elect to claim a higher tax basis in the “relevant foreign assets” (RFAS) for us tax purposes than for foreign tax purposes. as a result of the difference, the amount of taxable gain from the rfas, and potentially the tax, is higher in the foreign jurisdiction than in the united states.

IRC section 901(m) disallows the portion of the ftC (the”disqualifiedportion”) that is attributable to the tax basis difference in the rfas to the extent the basis dif- ference is allocated to the taxable year. The disqualified portion of any ftC is allowed as a deduction. irC section 901(m)(3)(B)(i) allocates the basis difference to taxable years using the applicable cost recovery method for us income tax purposes.

IRC section 901(m)(3)(B)(ii) provides that, if there is a dis- position of an rfa, the basis difference allocated to the taxable year of the disposition (the “dispositionamount”) is the remaining (i.e., unallocated) basis difference, and no basis difference will be allocated to any subsequent taxable years (the “statutory disposition rule”).

To prevent taxpayers from avoiding the purpose of irC section 901(m) by invoking the statutory disposition rule, notice 2014-44 provides that, for purposes of section 901(m), a disposition means an event (for example, a sale, abandonment, or mark-to-market event) that results in gain or loss being recognised with respect to an rfa for purposes ofus income tax or a foreign income tax, or both. Notice 2014-44 clarifies that a disposition does not occur from a tax-free deemed liquidation that arises when an acquired foreign target corporation makes an entity classification election to become a disregarded entity for us tax purposes under the us check-the-box regulations.

Notice 2014-44 applies two separate rules for determin- ing the disposition amount, depending on whether or not the disposition is fully taxable for both us and foreign income tax purposes. in addition, notice 2014-44 contains special rules with re- gard to a Caa that is an acquisition of an interest in a partnership that has an election in effect under irC section 754, i.e., an election that permits the inside tax basis of partnership assets to be increased under irC section 743 following the acquisition of an interest in the partnership. notice 2014-44 also provides that IRC section 901(m) continues to apply to an rfa until the entire basis difference in the rfa has been taken into account using the applicable cost recovery method or as a disposition amount (or both), regardless of a change in the ownership of an RFA.

The rules provided in notice 2014-44 will generally apply to dispositions occurring on or after 21st july, 2014, subject to exceptions described in section 5 of the notice.

11. Joint Committee on Taxation issues report on proposal store form taxation of multinational corporations

The joint Committee on taxation of the us Congress (JCT) has released a report on recent proposal store form the us taxation of multinational corporations.

The report is entitled present law and Background re- lated to proposals to reform the taxation of income of multinational enterprises. the report is dated 21st july, 2014, and is designated jCX-90-14.

The report includes the following:
–   a description of present us tax law applicable to in- bound investment (the us activities of foreign persons) and outbound investment (the foreign activities of uspersons);
–   a description of current policy concerns related to the taxation of multinational corporations;
–   Background on recent global activity related to the taxation of cross-border income; and
–   descriptions and a comparison of recent proposal store form the us international taxs ystem.

The report was prepared in connection with a public hear- ing that the us senate Committee on finance held on 22nd july, 2014 with regard to the taxation of cross-bor- der income.

12. Final regulations issued regarding information re- porting by US passport applicants

The us treasury department and the irs have issued final regulations (td9679) to provide guidance on information reporting rules for certain individuals that apply for us passports (including renewals) u/s. 6039e of the us IRC. The final regulations were published in the Federal register on 18th july, 2014.

IRC section 6039e requires individuals applying for permanent residence (i.e., a green card) in the united states or for a us passport to include certain tax information in their applications. the us federal agency, to which the applica- tion is made, must provide such information to the IRS.

On 24th december, 1992, proposed regulations (intl- 978-86,reG-208274-86) were issued with guidance for both passport and permanent residence applicants to comply with information reporting rules under irC section 6039e. the 1992 proposed regulations also indicated the responsibilities of the specified US Federal agencies to provide certain information to the irs.

On 26th january, 2012, new proposed regulations (reG- 208274-86, rin1545-aj93) were issued to withdraw the 1992 proposed regulations and to provide guidance on information reporting by passport applicants. the 2012 proposed regulations did not provide rules for information reporting by applicants for permanent residence. The final regulations adopt the 2012 proposed regulations with minor revisions.

The final regulations provide that a passport applicant, other than an applicant for an official passport, diplomatic passport, or passport for use on other official US government business, must provide his or her full name (including previous name, if applicable), permanent address and, if different, mailing address, tax payer identification number (TIN), and date of birth. a penalty of $ 500 may be imposed for non-compliance.

The final regulations further provide that a passport appli- cant who fails to provide the required information has 60 days (90 days for an applicant outside the united states) from the date of the irs’s written notice of the potential penalty assessment to respond to the notice if the appli- cant wishes to avoid the penalty. the applicant must do this by establishing that the failure is due to reasonable cause and not due to willful neglect.

The final regulations are designated Treasury Regula- tion section 301-6039e-1. they are effective on 18th july, 2014, and apply to passport applications submitted after 18th july, 2014.

13. Final regulations issued regarding source rules for allocation and apportionment of interest expenses

The us treasury department and the irs have issued final regulations (td9676) to provide guidance on the allocation and apportionment of interest expenses between us and foreign sources u/s. 861 and 864(e) of the us IRC. The final regulations were published in the Federal register on 16th july, 2014.

The final regulations provide guidance on a number of is- sues, including the allocation and apportionment of interest expenses by corporations and individuals that own a 10% or greater interest in a partnership, as well as rules for valuing debt and stock of related persons. The final regulations also update the interest allocation regulations to conform to the statutory amendments regarding the al- location and apportionment of interest expenses by us corporate groups that include certain affiliated foreign cor- porations for purposes of irC section 864(e).

IRC section 864(e) provides that interest expenses of us corporate groups are to be allocated and apportioned between us and foreign sources as if all members of the group were a single corporation, and further that such allocation and apportionment are to be made on the basis of the assets of the corporate group (i.e., us and foreign) rather than on the basis of the gross income of the group. the amended irC section 864(e)(5)(a) treats a qualifying foreign corporation as a member of a US affiliated group for interest allocation purposes, and thus all the assets and interest expenses of the foreign member are taken into account, if specified 80% stock ownership and 50% us gross income/effectively Connected income (ECI) requirements are met.

The final regulations adopt, with no substantive change, the temporary regulations (td9571) issued on 17th january, 2012, as well as the portions of the earlier temporary regulations (td8228), issued on 14th september, 1988, that were not amended by the 2012 temporary regulations.

The final regulations amend provisions within Treasury regulation sections 1.861-9, -9t, -11, and-11t.

The final regulations are effective on 16th July, 2014, and generally apply to taxable years beginning on or after 16th july, 2014.

14. IRS issues Memorandum on withholding on pay- ments to beneficial owner that fails to file income tax returns

The Office of Chief Counsel of the IRS has issued a memorandum that discusses the us withholding consequences of a beneficial owner’s failure to file US income tax returns after claiming a withholding exemption for us effectively connected income.

In the facts of the Memorandum, a Beneficial Owner (BO) provided a Withholding agent (WA) with irs formW-8eCi (Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a trade or Busi- ness in the united states) to claim an exemption from us withholding tax on payments of income effectively con- nected with the conduct of a us trade or business (eCi). the Wa did not withhold on the payments made to the Bo in reliance on the form W-8eCI.

The BO certified in the FormW-8ECI that the amounts re- lated to the claim of exemption were ECI and were includible in the us gross income. the formW-8eCI includes a note that “Persons submitting this form must file an an- nual us income tax return to report income claimed to be effectively connected with a us trade or business.” the BO, however, did not file a US income tax return for any of the taxable years at issue.

Sections 1441 and 1442 of the irC require a withholding agent to withhold 30% of US-source fixed or determin- able, annual, or periodical (fdap) income paid to a foreign person. irC section 1441(c)(1), however, exempts withholding for eCi that is included in the gross income of the recipient. the consequence of this procedure is that the foreign person reports the eCi on a us income tax return and computes us income tax liability on a net in- come basis (i.e., gross income less allowable deductions) using the regular progressive us income tax rates rather than computing US tax liability at a flat 30% rate (or lower treaty rate) on the gross amount of the payment.

Under treasury regulation (treas. reg.) section 1.1441- 7(b)(1), a withholding agent may rely on a claim of exemption contained in formW-8eCi, but a withholding agent that receives a valid formW-8eCi must still withhold if it has actual knowledge or reason to know that the claim of exemption is incorrect.

The memorandum concludes that, because the BO made a claim of exemption for ECI and failed to file US tax

Returns including such amounts in gross income, the irs can determine the claim to be “incorrect” and provide direct notification to the WA under Treas. Reg. section 1.1441-7(b)(1) that it cannot rely on the Bo’s claim of exemption. the memorandum further states that the Wa will not be able to rely on the Bo’s claim of exemption beginning on the date that is 30 calendar days after the Wa receives such a notification, as described in Treas. Reg. section 1.1441-7(b)(1).

The memorandum is designated ilm201428007. the memorandum is dated 7th may, 2014, and indicates are lease date of 11th july, 2014.

15. IRS updates FaQs on general FATCA issues

The us irs has released updated frequently asked Questions (faQs) on the FATCA under the heading of FATCA–fAQs General. the fAQs indicate a last reviewed or updated date of 10th july, 2014.

The updated fAQs provide guidance on the following topics:

–   Qualified Intermediaries (QIs)/Withholding foreign partnerships(Wps)/Withholding foreign trusts (Wts);
–   inter Governmental agreement (iGa) registration;
–   Expanded Affiliated Groups (EAGs);
–   sponsoring/sponsoredentities;
–   Responsible Officers (ROs) and Points Of Contact
(POCS);
–   financial institutions (FIS)
–   Exempt beneficial owners;
–   non-financial foreign entities (NFFES);
–   registration updates;
–   Branches/disregarded entities;
–   FFI and AGG changes;
–   General compliance;
–   additional supports; and
–   FATCA registration system technical supports.

The update was made with regard to NFFES, FFI and EAG changes, and registration updates.

16. IRS issues instructions to withholding certificate for foreign entities (FormW-8BEN-E) for FATCA

The us irs has released irs instructions for irs formW- 8BEN-E (Certificate of Status of Beneficial Owner for united states tax Withholding and reporting (entities)) to implement the fatCa. the instructions are dated 20th june, 2014.
the irs previously issued the new irs form W-8Ben- E (Certificate of Status of Beneficial Owner for United states tax Withholding and reporting (entities)) to be used by entities.

IRS formW-8Ben-e is used by a foreign entity:

– To certify its status as a beneficial owner or payee of a payment for purposes of chapter 3 of the us irC (dealing with the regular withholding on income paid to foreign persons);

– To claim income tax treaty benefits, if applicable, for the purpose of IRC chapter 3;

– to certify its status under irC chapter 4 (dealing with the fatCa provisions); and

– to submit to a payment settlement entity (pse) re- questing the form if the entity receives payments that would trigger information reporting for the pse under irC section 6050W (i.e., payments made in settlement of payment card transactions and third-party network transactions) unless the payee is a foreign person.

A foreign entity must furnish irs form W-8Ben-e to the withholding agent or payer when:

–   the foreign entity receives a withholdable payment from a withholding agent;
–   the foreign entity receives a payment subject to chap- ter 3 withholding; and
–   a foreign financial institution (ffi) with which the for- eign entity maintains an account requests the form.

IRS form W-8Ben as in use for 2013 and previous years was completed by both individuals and entity beneficial owners of the income to which the form related. the re- vised 2014 IRS FormW-8BEN (Certificate of Foreign Sta- tus of Beneficial Owner or United States Tax Withholding (individuals)) is for use exclusively by and entities should use the new irs form W-8BEN-E.

17. IRS revises instructions to Form 1042-S for reporting foreign persons’ US source income to include FATCA requirements

The us IRS has released revised irs instructions for form 1042-s (foreign person’s us source income subject to Withholding). the instructions are dated 24th june, 2014. the irs previously issued revised irs form 1042-s. irs Form 1042-S has been modified to accommodate report- ing of payments and amounts withheld under chapter 4 of the us IRC, commonly known as the fatCa, in addition to those amounts required to be reported under irC chap- ter 3. IRC chapter 3 deals with the regular withholding on US-source income paid to foreign persons, including fixed or determinable annual or periodical (fdap) income.

When a financial institution reports a payment made to its financial account, IRS Form 1042-S also requires the reporting of additional information about a recipient of the payment, such as the recipient’s account number, date of birth, and foreign tax payer identification number, ifany. For withholding agents, intermediaries, flow-through entities, and recipients, irs form 1042-s requires that the chapter 3 status (or classification) and/or the chapter 4 status be reported on the form according to codes provided in the instructions.

In addition, IRS Form 1042-2 must be filed to report specified Federal procurement payments made to foreign persons that are subject to withholding under IRC section 5000C and to report distributions of us effectively Connected income (ECI) by a publicly traded partnership or nominee.

18. IRS issues instructions for FATCA reporting form

The us IRS has released IRS instructions for form 8966 (fatCa report). the instructions are dated 20th june, 2014.

The irs previously issued new irs form 8966. irs form 8966 is required to be filed under chapter 4 of the US IRC, commonly referred to as the FATCA, to report information with respect to certain us accounts, substantial us owners of passive non-financial foreign entities (nffes), us accounts held by owner-documented foreign financial institutions (FFIS), and certain other accounts as applicable based on the filer’s chapter 4 status.

Filers of irs form 8966 include a participating FFI (PFFI), a us branch of a PFFI that is not treated as a us person, a registered deemed-Compliant (RDC) ffi (including a reporting model 1 FFI), a limited branch or limited ffi, a reporting Model 2 FFI, a Qualified Intermediary (QI), a Withholding foreign partnership (Wp), a Withhold- ing foreign trust (Wt), a direct reporting nffe, and a sponsoring entity. for calendar years 2015 and 2016, irs form 8966 is also filed by PFFIs, RDCFFIs, and reporting Model 2 FFIs to report certain amounts paid to their account holders that are non-participating ffis.

The initial filing of IRS Form 8966 will be required to be made on or before 31st march, 2015 for the 2014 calen- dar year.

19. IRS releases addendum to user guide for FATCA online registration

The us IRS has released publication 5118a (addendum to the fatCa online registration user Guide). the addendum is dated july, 2014.

The addendum serves as a supplement to, and should be used in conjunction with, publication 5118 (FATCA online registration user Guide, rev.12-2013). the user guide provides instructions for using the FATCA registration system to complete the fatCa registration process online.

The addendum describes new functionality introduced since the last revision of the use rguide. Specifically, the addendum updates 6.6 appendix e: Country look up table of the user guide (pages 116 through 121) by adding the West Bank and Gaza (numeric Code: 275).

20 IRS announces changes to its offshore voluntary compliance programmes

The us irs has announced major changes in its off shore voluntary compliance programmes that will allow a broader group of us tax payers to participate so that they can come into compliance with their us tax obligations. The announcement was made in an irs news release (IR- 2014-73) dated 18th june, 2014. the irs Commissioner has also issued a statement dated 18th june, 2014.

The changes include an expansion of the streamlined filing compliance procedures announced in 2012 and modifications to the 2012 Offshore Voluntary Disclosure program(oVdp).

Expansion of streamlined filing compliance procedures the expanded streamlined procedures are intended for us tax payers whose failure to disclose their offshore assets was non-wilful.

The changes to the streamlined procedures include:

– extending eligibility to include us taxpayers residing in the united states, in addition to us taxpayers resid- ing broad;

– eliminating a requirement that the taxpayer have usd 1,500 or less of unpaid tax per year;

– eliminating the required risk questionnaire; and

– requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

Modifications to OVDP

The modified OVDP is designed to cover US taxpayers whose failure to comply with reporting requirements is considered willful in nature, and who therefore do not qualify for the streamlined procedures.

The modifications to the 2012 OVDP include:

– Requiring additional information from taxpayers apply- ing for the programme;

– Eliminating the reduced 5% and 12.5% penalties for certain non-wilful taxpayers in light of the expansion of the streamlined procedures;

– Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the oVdp application;

– Enabling an electronic submission of records; and

– Increasing the offshore penalty from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the irs or the us department of justice.

Related items
The IRS has also released the following related items:

– a factsheet (fs-2014-6) with highlights of the irs offshore voluntary programmes since 2009;

– A factsheet (FS-2014-7)with tax filing information for us taxpayers with offshore accounts; and
– OVDP documents and forms.

Results of offshore evoluntary programmes

The IRS notes that its three voluntary programmes in 2009, 2011, and 2012 have resulted in more than 45,000 disclosures and the collection of approximately USD6.5 billion in taxes, interest and penalties.

21. IRS releases guidance on options for US taxpay- ers with undisclosed foreign financial assets

The us IRS has issued guidance on options for us tax- payers who have previously failed to comply with us tax and information return obligations with respect to their non-us bank accounts and other foreign investments. the guidance indicates a last reviewed or updated date of 18 june 2014.

The guidance includes the following options:

– the 2012 offshore Voluntary disclosure program (oVdp);

– streamlined filing compliance procedures;

– delinquent fBar submission procedures; and

– delinquent international information return submission procedures.

The OVDP is specifically designed for taxpayers with ex- posure to potential criminal liability and/or substantial civil penalties due to a wilful failure to report foreign financial assets and pay all tax due in respect of those assets. The OVDP is designed to provide such taxpayers with protection from criminal liability and sets out the terms for resolving their civil tax and penalty obligations.
The streamlined filing compliance procedures are available to taxpayers who certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from wilful conduct. the streamlined procedures are designed to provide such tax- payers with a streamlined procedure for filing amended or delinquent returns and set out terms for resolving their tax and penalty obligations.

The   delinquent   FBAR submission   procedures   are intended for taxpayers who:
–   have not filed a required Report of Foreign Bank and financial accounts (FBAR) (finCen form 114, previously form TD f 90-22.1);
–   are not under a civil examination or a criminal investi- gation by the irs; and
–   have not already been contacted by the irs about the delinquent fBars.

The delinquent international information return submis- sion procedures are available to taxpayers who:

–   have not filed one or more required international infor- mation returns;
–   have reasonable cause for not timely filing the infor- mation returns;
–   are not under a civil examination or a criminal investi- gation by the irs; and
–   have not already been contacted by the irs about the delinquent information returns.

For a report on the recent announcement of changes to the 2012 oVdp and the streamlined procedures, see united states-1, news 23rd june, 2014.

22. Final and proposed regulations issued on IRS Form 5472 reporting requirements

The us treasury department and the irs have issued final regulations (TD9667) and proposed regulations (reG–114942–14) u/s. 6038a and 6038C of the us irC to provide guidance on the requirements to file IRS Form 5472 (information return of a 25% foreign-owned us Corporation or a foreign Corporation engaged in a us trade or Business). the form is used by the irs to collect information on transfer pricing transactions between related parties.

IRC section 6038a requires information reporting by a 25% foreignowned domestic corporation with respect to certain transactions between such corporation and related parties.

IRC section 6038C imposes a similar reporting requirement on a foreign corporation engaged in a trade or business within the united states.

Final regulations (td8353) were issued on 19th june, 1991 to provide that:
–   a reporting corporation under irC sections 6038a and 6038C is required to file Form 5472 with its US income tax return by the due date of the return with respect to each related party with which the corporation has had any reportable transaction during the taxable year;
–   Such reporting corporation is also required to file a duplicate form 5472 with the irs Centre in philadel- phia, pa (i.e.,the duplicate filing requirement); and
–   if a reporting corporation’s income tax return is not timely filed, Form 5472 nonetheless I required to be filed (with a duplicate to the IRS Centre in Philadel- phia, pa) at the irs Centre where the return is due (i.e.,the untimely filed return provision), and, when the income tax return is ultimately filed, a copy of Form 5472 must be attached to the return.

Temporary regulations (TD9529) were issued on 10th June, 2011 to remove the duplicate filing requirement on the ground that advances in electronic processing and data collection in the irs made it no longer necessary.

The new final regulations (TD9667)adopt the 2011 temporary regulations without substantive change as final regulations. The final regulations are designated Treasury regulation (treas.reg.) section 1.6038a-1, and -2. the final regulations are effective on 6th June, 2014.

In addition, the new proposed regulations (reG–114942–14) Eliminate the untimely filed return provision to promote efficient tax administration and consistency with other similar international reporting obligations applicable to us persons. as a result, the proposed regulations require a reporting corporation to file Form 5472 only with its in- come tax return by the duedate (including extensions)of the return.

The proposed regulations are designated treas.reg. section 1.6038a-1, -2, and-4. the proposed regulations will apply to taxable years ending on or after the date on which the proposed regulations are published as final.

23. IRS releases its first list of FATCA compliant financial institutions

The US IRS released the first IRS Foreign Financial Institution (FFI) list. the irs has also issued a related statement dated 2nd june, 2014.

The IRS FFI list is a list of financial institutions (FIS) and other entities (e.g. direct reporting non-financial foreign entities and sponsoring entities) that have completed fatCa registration with the irs and obtained a Global Intermediary Identification Number(GIIN).

The first FFI List includes FIs in approved status as of 23rd May, 2014. The FFI List is updated on the first day of each month and will only include fis that are approved five business days prior to the first day of the month.

The FFI list search and download tool can be used to look for fis and their branches to determine if they are on the FFI list. the tool can download the entire FFI list or search for a particular fi by its legal name, GIIN,or country. no login or password is required to search or download the ffi list. the results will be displayed on the screen and can be exported in CSV, Xml, or pdf formats.

The IRS previously issued the following related items:

–   publication 5147 (FFI list search and download tool: UserGuide);
–   fatCa FFI list resources and support information Webpage; and
–   FFI list frequently asked Questions(fAQs).

24. Regulations issued to amend FaTCa provisions and coordinate FaTCa regulations with pre-existing tax rules

The us treasury department and the IRS issued temporary regulations (TD9657) on 20th february, 2014 to make additions and clarifications to the previously issued regulations on implementation of the FATCA. the treasury department and the irs also issued additional temporary regulations (TD9658) on the same day to provide guidance to coordinate FATCA rules with pre-existing reporting and withholding requirements under other provisions of the us IRC.

The treasury department issued a related press release dated 20th february, 2014, together with a factsheet on the new regulations.

Amendments to prior FATCA regulations

The first regulations (TD9567) contain over 50 amend- ments and clarifications to the previous FATCA regulations that were issued on 17th january, 2013 (TD9610) in response to certain stakeholder comments regarding ways to further reduce compliance burdens. Key changes include those relating to:
–   the accommodation of direct reporting to the irs, rather than to withholding agents, by certain entities regarding their substantial us owners;
–   the treatment of certain special-purpose debt securi- tisation vehicles;
–   the treatment of disregarded entities as branches of
foreign financial institutions (FFIs); –   The definition of an expanded affiliated group; and
–   transitional rules for collateral arrangements prior to 2017.

Coordination of FATCA with pre-existing reporting and withholding rules

irC chapter 3 contains reporting and withholding rules relating to payments of certain us-source income (e.g. dividends on stock of us corporations) to non-us per- sons. irC chapter 61 and irC section 3406 impose the reporting and withholding requirements for various types of payments made to certain us persons (us non-ex- empt recipients).

the second regulations (td9568) coordinate these pre- fatCa regime with the requirements under fatCa to in- tegrate these rules, reduce burden (including certain du- plicative information reporting obligations), and conform the due diligence, withholding, and reporting rules under these provisions to the extent appropriate. Specifically, the coordinating rules make changes that are intended:

–   to remove inconsistencies in the chapter 3 and fat- Ca documentation requirements relating to the identi- fication of payees (including inconsistencies regarding presumption rules in the absence of valid documenta- tion);
–   to ensure that payments are not subject to withhold- ing under both irC chapter 3 and ftCA, or under both IRC section 3406 and FATCA;
–   to relieve non-us payors from chapter 61 report- ing to the extent the non-us payor reports on the account in accordance with the fatCa regulations or an applicable inter governmental agreement (iGa);
–   to provide a limited exception to reporting under irC chapter61 for both us payors and non-us payors that are ffis required to report under fatCa or an applicable iGa, with respect to payments that are not subject to withholding under irC chapter 3 or irC section 3406 and that are made to an account holder that is a presumed (but not known) us non-exempt recipient;
–   to provide a limited exception from reporting under irC chapter 61 for us payors acting as stock transfer agents or paying agents of distributions from certain passive foreign investment companies (PFICS) made to us persons; and
–   to make other conforming changes.
Effective date: the regulations will become effective when published as final

25.   IRS releases Transfer Pricing audit roadmap

The transfer pricing operations (TPO)of the large Business and international (lB & I) division of the us irs has released the transfer pricing audit roadmap (roadmap)to the public. The irs also issued a statement announcing the release of the road map on 14th february 2014.

TPO is a dedicated team of transfer pricing specialists that is established by the lB & i of the irs and that encompasses both the advance pricing and mutual agreement program (APMA) and the transfer pricing practice (TTP).

TPO has developed the road map to provide the irs transfer pricing practitioner with audit techniques and tools to assist with the planning, execution, and resolution of transfer pricing examinations. the road map is organised around a notional 24-month audit timeline.
The IRS notes that the road map is not intended as a template, but rather serves as a toolkit that provides recommended audit procedures and links to useful reference material. the road map also provides the public within sight into what to expect during a transfer pricing exami- nation.

The IRS also states that TPO will review the road map and make changes over time as new techniques arise or additional reference materials become available.

[Acknowledgement/Source: We have compiled the above information from the Tax News Service of IBFD for the period 01-01-2014 to 09-08-2014]

shailesh.kwebmaker

DCIT vs. Rajeev G. Kalathil ITAT Mumbai `D’ Bench Before Rajendra (AM) and Dr. S. T. M. Pavalan (JM) ITA No. 6727/Mum/2012 A.Y.: 2009-10. Decided on: 20th August, 2014. Counsel for revenue/assessee: J. K. Garg/Devendra Jain

Section 28, 37 – Purchases cannot be disallowed, merely because the supplier is treated as a havala dealer by VAT authorities, if receipt of material is substantiated by delivery challan and other evidences and payment is by account payee cheque.

Facts:
In the course of assessment proceedings, the AO sent notices u/s. 133(6) to various parties at random. Of these, notices sent to two parties were returned unserved with the remarks not known. The AO asked the assessee to furnish correct address or explain why purchases of Rs. 13,69,417 (Rs. 5,05,259 from NBE and Rs. 8,64,158 from DKE) should not be treated as bogus purchases.

The assessee furnished its reply expressing inability to establish contact with the parties but furnished letter from its banker stating that the payment has been made to the two parties in subsequent year. Sample bills were also filed which had TIN Numbers.

The AO verified the TIN numbers from the official website and found that NBE was specifically mentioned as `Hawala Dealer’ and the search for DKE did not show any result. He, accordingly, added Rs. 13.69 lakh to total income of the assessee on account of bogus purchases.

Aggrieved, the assessee preferred an appeal to CIT(A) and contended that suppliers were registered dealers and were carrying proper VAT registration; bills were accounted and payments were made by cheque; certificate from banker giving details of payments made to said parties were furnished; copies of consignment note received from government approved transport contractor showing material was delivered at site were furnished to the AO; some of the items purchased from these parties were reflected in closing stock. The CIT(A) allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The AO made addition because one of the supplier was declared a havala dealer by VAT Department. According to the Tribunal, this could be a good starting point for making further investigation and to take it to logical end. Suspicion of highest degree cannot take place of evidence. According to the Tribunal, the AO could have called for details of bank accounts of suppliers to find out whether there was any immediate cash withdrawl from their account. It observed that transportation of goods to the site is one of the deciding factors to be considered for resolving the issue. It noted the finding of fact given by CIT(A) that some of the goods received were forming part of closing stock.

The Tribunal held that the decision of the Mumbai Tribunal in the case of Western Extrusion Industries (ITA /6579/ Mum/2010 dated 13-11-2013) was distinguishable since in that case there was no evidence of movement of goods and also cash was withdrawn by the supplier immediately from the bank.

This ground of appeal filed by the revenue was dismissed.

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Raj Kumari Agarwal vs. DCIT ITAT, Agra Pramod Kumar (A.M.) and Joginder Singh (J.M.) I.T.A. No.: 176/Agra/2013 Assessment Year: 2008-09. Decided on July 18th, 2014 Counsel for Assessee/Revenue: Arvind Kumar Bansal/S D Sharma

Section 57(iii) – Interest paid on loan taken against fixed deposit is deductible against interest earned on the fixed deposit.

Facts:
During the course of the assessment proceedings, the AO noticed that the assessee had made a fixed deposit of Rs. 1 crore with abank and earned interest of Rs 11.78 lakh thereon. However, whilecomputing the income from other sources, the assessee claimed a deduction of Rs. 4.37 lakh on account of interest paid on loan of Rs 75 lakh taken on the securityof deposits. When asked to justify this deduction, the assessee submitted that she needed her funds, as she had to give money to her son and with a view toavoid premature encashment of the fixed deposits, which wouldhave resulted in net loss to her, she took a loan against fixed deposit so as to keepthe fixed deposit intact and earn the interest income thereon. It was contended thatthe interest of Rs. 4.37 lakh paid on the borrowings from the Bank against security of fixed deposit, was thus made for the purpose of earning FDR interest. The AO rejected the claim of deduction observing that interest onloan has not been laid out or expended wholly and exclusively for the purpose ofmaking or earning income from FDR. On appeal the CIT(A) upheld the order of the AO.

Before the Tribunal, the assessee also justified her claim with the working showing that she has returned higher interest income of Rs. 7.41 lakh (Rs. 11.78 lakh minus Rs. 4.37 lakh paid) while if she had encashed the FDR then the interest income from FDR would had beenat lower sum of Rs. 5.38 lakh.

Held:
According to the Tribunal, the question that needs to be adjudicated was whether interest paid can be said to have been incurred “wholly and exclusively” for the purpose of earning interest income from fixed deposits.For this purpose, it referred to a decision by the coordinate bench of its own Tribunal in the case of AjaySingh Deol vs. JCIT [(91 ITD 196). Relying thereon, it observed that even in a situation in which proximate or immediate cause of an expenditure was an event unconnected to earning of the income, in the sense that the expenditure was not triggered by the objective to earn that income, but the expenditure was, nonetheless, wholly and exclusively to earn or protect that income,it will not cease to be deductible in nature (emphasis supplied). According to it, in order to protect the interest earnings from fixed deposits and to meet her financial needs, when an assessee raises a loan against the fixed deposit, so as to keep the source of earning intact, the expenditure so incurred is wholly and exclusively to earn the fixed deposit interest income. It further observed that the assessee could have gone for premature encashment of bank deposits, and thus ended the source of income itself as well, but instead of doing so, she resorted to borrowings against the fixed deposit and thus preserved the source of earning. The expenditure so incurred, according to the tribunal was an expenditure incurred wholly and exclusively for earning from interest on fixed deposits.

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ACIT vs. Iqbal M Chagala ITAT Mumbai “I” Bench Before Vijay Pal Rao (J.M.) and Rajendra (A. M.) ITA No. 877/Mum/2013 Assessment Year 2009-10. Decided on 30/07/2014 Counsel for Revenue/Assessee: Garima Singh/P J Pardiwala

Section 14A and Rule 8D – Application of the Rule is not automatic. Disallowance cannot exceed the expenditure claimed and if no expenditure is claimed by the assessee then disallowance cannot be made

Facts:
During the assessment proceedings, the AO noted that the assessee had earned exempt income and the audit report did not show disallowance of any expenses relating to exempt income. According to the assessee, the investment transaction undertaken by him were managed by the investment advisors whose fees amounting to Rs. 5.64 lakh had been debited to the capital account of the assessee. Plus, demat expenses and security transaction tax amounting to Rs. 2.2 lakh was also debited to the capital account of the assessee. However, the AO held that looking into the fact that partof the expenses on account of salary, telephone and other administrative expenses must have been related to the activities for earning exempt income, he disallowed the sum of Rs. 16.36 lakh, being 0.5% of average investment of Rs. 32.72 crore.

On perusal of Profit and Loss Account of the assessee the CIT(A) noted that the assessee had not made any claim of expenditure incurred in relation to exempt income, therefore according to him, the provisions of section 14A (1) r.w.s.14A(2) were not attracted. Therefore, relying on the cases of Walfort Shares & Stock Brokers Pvt. Ltd.(326 ITR 1) and Godrej & Boyce Manufacturing Co. Ltd (328 ITR 81) he deleted the disallowance of Rs.16.36 lakh made by the AO.

Held:
The tribunal noted that as per the audit report filed by the assessee, expenses in respect of exempt income was Rs. Nil and the assessee had debited all expenses relating to exempt income in the capital account. The AO had merely presumed that the assessee must have incurred someexpenditure under the heads salary, telephone and other administrative charges for earning theexempt income. Further, it was noted that that the total expenditure claimed by the assessee for the year was about Rs. 13 lakh and the AO had made a disallowance of about Rs.16 lakh. According to it, the AO had just adopted the formula of estimating expenditure on the basis of investments. But, the justification for calculating the disallowance was missing. The onus was on the AO to prove that out of the expenditure incurred under various heads part related to earning of exempt income. Not only thatthe AO was required to give the basis of calculation. In any manner disallowance of Rs.16.36 lakh, as against the total expenditure of Rs.13 lakh claimed by the assessee was not justified. Provisions of Rule 8D cannot and should not be applied in a mechanical way. Facts of the case have to be analysed before invoking them. Accordingly, the appeal filed by the AO was dismissed and the order of the CIT(A) was confirmed.

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[2014] 149 ITD 363 (Agra) Rajeev Kumar Agarwal vs. Addl CIT A.Y. 2006-07 Order dated – 29th May, 2014

Section 40(a)(ia) – Second proviso to section 40(a) (ia), which states that if assessee fails to deduct tax at source while making payments but the recipient has included the income embedded in the said payments in his tax return furnished u/s. 139 and had also paid the tax due thereon on such payments, then disallowance of such payments u/s. 40(a)(ia) cannot be invoked for assessee; has retrospective effect from 01-04-2005.

Facts:
The assessee had made interest payments without discharging his tax withholding obligations u/s. 194A. Therefore, the Assessing Officer disallowed payment u/s. 40(a)(ia).

The assessee contended that, in view of the insertion of second proviso to section 40(a)(ia) by the Finance Act, 2012, and in view of the fact that the recipients of the interest had already included the income embedded in the said interest payments in their tax returns filed u/s. 139, disallowance u/s. 40(a)(ia) could not be invoked in this case.

He also contended that since the said second proviso to section 40(a)(ia) is ‘declaratory and curative in nature’, it should be given retrospective effect from 01-04-2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

Held:
The scheme of section 40(a)(ia) is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee.

Section 40(a)(ia) is not a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction to compensate for the loss of revenue for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in section 271C, and section 40(a)(ia) does not add to the same Thus, disallowance u/s. 40(a)(ia) cannot be invoked in a case, where assessee fails to deduct tax at source but recipients have taken, in their computation of income, the income embedded in the payments made by the assessee, paid taxes due thereon and filed income tax returns in accordance with the law.

The provisions of section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee’s tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision and, thus, obviate the unintended hardships, such an amendment in law, in view of the well-settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso to section 40(a)(ia) must be given retrospective effect from the point of time when the related legal provision was introduced.

Accordingly, the insertion of second proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 01-04-2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

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[2014] 149 ITD 169 (Hyderabad) Binjusaria Properties (P) Ltd vs. ACIT A.Y. 2006-07 Order dated- 4th April, 2014

Section 2(47) of The Income-tax Act, 1961 Where assessee enters into a development agreement of land with a developer in terms of which developer has to develop property and deliver a part of constructed area to assessee, capital gains cannot be brought to tax in year of signing of development agreement if developer does not do anything to discharge obligations cast on it and it is only upon receipt of consideration in the form of developed area by the assessee in terms of the development agreement, the capital gains becomes assessable in the hands of the assessee.

Facts:
• The assesee gave its plot of Land for development and had received a refundable deposit in the relevant year. According to Development Agreement-cum-General Power of Attorney, the developer had to develop the property, according to the approved plan from the competent authority, and deliver to the assessee 38% of the constructed area in the residential part.

• No development activity was carried out by the developer in the year of the agreement and accordingly, assessee did not offer the sum for tax.

• The Assessing Officer was of the view that, in terms of the development agreement, the transfer has taken place during the year under appeal and the assessee was liable to pay capital gain taxes on the date of transfer.

• The CIT (A) confirmed the view of assessing officer and, therefore aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
• Tribunal observed the following:-

The assessee has executed a ‘Development Agreement- cum-General Power of Attorney’ which indicates that the assessee has given a permissive possession to developer.

The refundable deposit received by the assessee is to be refunded on the complete handing over of the area falling to the share of the assessee and in the event of the failure on the part of the assesee, the same shall be adjusted at the time of final delivery.

It is undisputed that there is no development activity carried out in the said relevant year. Even the approval of plan was not obtained and the process of construction has not been initiated.

• Considering specific clauses in the agreement, all abovementioned facts and circumstances and the reading of section 2(47)(v) of the Income-tax Act, 1961 alongwith section 53A of The Transfer of property Act, 1882, Tribunal held that the assessee had fulfilled its part of obligation under the development agreement but the developer had not done anything to discharge the obligations cast on it under the development agreement, the capital gains could not be brought to tax in the year under appeal, merely on the basis of signing of the development agreement .

It is only upon receipt of consideration in the form of developed area by the assessee in terms of the development agreement, the capital gains becomes assessable in the hands of the assessee.

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TDS: Salary: S/s. 192 and 201 of I. T. Act, 1961: A. Y. 2008-09: Consultant doctors employed by hospital: No administrative control: Doctors free to come at any time and treat patients: No provision for payment of provident fund and gratuity: No employer and employee relationship: Payment to doctors is not salary: Section 192 for TDS is not applicable:

CIT vs. Yashoda Super Speciality Hospital; 365 ITR 356 (AP):

For the A. Y. 2008-09, orders u/ss. 201 and 201(1A) were passed treating the assessee hospital as an assessee in default for non deduction of tax at source u/s. 192 of the Income-tax Act, 1961 holding that the payments made by the assessee to the consultant doctors was salary. The Tribunal held that there was no employer employee relationship between the assessee and the consultant doctors and accordingly such payments did not constitute salary paid by the assessee. The Tribunal therefore set aside the said orders.

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

“i) O n the facts and on examining the agreement between the consultant doctors and the assessee hospital under which the services of the doctors were engaged, the appellate authorities found that there was no relationship of employer and employee between the doctors and the hospital. The doctors were not administratively controlled and managed by the assessee and they were free to come at any point of time as far as their attendance was concerned and treat the patients. There was no provision for payment of provident fund and gratuity to them.

ii) T he only clause in the agreement was that the doctors could not take up any other assignment. The existence of one prohibitory clause did not change the basic character of the relationship between the assessee and the doctors concerned. There was no employer and employee relationship. And their payments could not be treated to be salaries and, as such, deduction of tax at source did not need to be made u/s. 192.

iii) O n a careful reading of the impugned judgment and order of the Tribunal, we are of the view that the law has been correctly applied. Therefore, we do not find any question of law involved in the matter. The appeal is accordingly dismissed.”

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Industrial undertaking: Manufacture: Deduction u/s. 80-IB: A. Ys. 2004-05 to 2007-08: Assessee buying monitor, key board, mouse etc. and assembling them and selling computers so assembled: Activity is manufacturing activity: Assessee is entitled to deduction u/s. 80-IB:

CIT vs. Sai Infosystem India P. Ltd.; 365 ITR 433 (Guj):

The assessee bought basic computer items such as monitor, key board, mouse, etc., and was into the activity of assembling them. The assessee claimed deduction u/s. 80-IB of the Income-tax Act, 1961. For the A. Ys. 2004-05 to 2007-08, the Assessing Officer disallowed the claim holding that the activity of the assessee could not be said to be manufacturing activity so as to enable the assessee to claim the deduction. The Tribunal allowed the assessee’s claim.

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

“i) T he Tribunal had rightly deleted the disallowance of deduction u/s. 80-IB made by the Assessing Officer. There was a specific finding of the Commissioner(Appeals) that the assessee had employed at least ten persons. This was a finding of fact and it could not be said that the assessee was not entitled to deduction u/s. 80-IB of the Act.

ii) T he questions raised in the present tax appeals are held against the Revenue and in favour of the assessee. Consequently, the tax appeals are dismissed.”

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Charitable purpose: Education: Exemption u/s. 11 r/w. s. 2(15): A. Y. 2009-10: Assessee-association conducting various continuing education diploma and Certificate Programmes, Management Development Programmes, Public Talks, Seminars, Workshops and Conferences: Assessee’s activities would fall within realm of education which is ‘charitable’ as per section 2(15): Proviso is not applicable: Assessee is entitled to exemption u/s. 11:

DIT(E) vs. Ahmedabad Management Association: 366 ITR 85 (Guj): 47 taxmann.com 162 (Guj):

The assessee, a public charitable trust, was dedicated to pursue the objects of continuing education, training and research on various facets of management and related areas. It claimed exemption u/s. 11 of the Income-tax Act, 1961 on ground that it undertook multifaceted activities comprising of conducting various continuing education diploma and certificate programmes, management development programmes, public talks, seminars, workshops and conferences which falls in the realm of “education” as the charitable purpose. For the A. Y. 2009- 10, the Assessing Officer observed that considering the nature of courses, its durations and resultant surplus from each activity, the activity of the assessee is not educational in nature. The Assessing Officer held that activities of assessee fell within scope of amendment of ‘advancement of any other object of general public utility and any other activity’ of section 2(15) and, since the aggregate value of receipts were more than Rs. 10 lakh, proviso to section 2(15) was applicable and the assessee was not entitled for exemption u/s. 11. The Tribunal had held that the activities of the assessee were in the field of education and, therefore, the assessee was eligible for exemption u/s. 11.

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

“i) I t is required to be noted that all throughout for the previous years, right from the A. Y. 1995-96 till A. Y. 2008-09 the revenue has considered the activities of the assessee as educational activity and has granted the benefit u/s. 11.

ii) H owever, subsequently and w.e.f. A. Y. 2009-10, proviso to section 2(15) has been added and section 2(15) has been amended by the Finance Act, 2008 by adding the proviso which states that the ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of (a) any activity in the nature of trade, commerce or business; or (b) any activity of rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity. The revenue has denied the exemption claimed by the assessee u/s. 11 mainly relying upon the amended section 2(15) by submitting that the case of the assessee would fall under the fourth limb of the definition of ‘charitable purpose’ i.e., ‘advancement of any other object of general public utility’ and, therefore, the assessee shall not be entitled to exemption from tax u/s. 11.

iii) T he activities of the assessee such as continuing education diploma and certificate programme; management development programme; public talks and seminars and workshops and conferences etc., is educational activities and/or is in the field of education.

iv) O n fair reading of section 2(15) the newly inserted proviso to section 2(15) will not apply in respect of relief to the poor; education or medical relief. Thus, where the purpose of a trust or institution is relief of the poor; education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of the commercial activities.

v) I n the present case, the activities of the assessee would fall within the definition of ‘charitable purpose’ as per section 2(15) and, therefore, would be entitled to exemption u/s. 11.”

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Capital gain: Slump sale or exchange: S/s. 2(42C) and 50B: A. Y. 2005-06: Transfer of division of undertaking in exchange for issue of preference shares and bonds: No monetary consideration: Exchange and not a sale: Not a slump sale:

CIT vs. Bharat Bijlee Ltd.; 365 ITR 258 (Bom):

In the relevant year, the asessee transferred its lift field operations undertaking to one T under the scheme of arrangement as approved by the Court in exchange for issue of preference shares and bonds. The assessee claimed that it is a case of exchange and not a case of slump sale attracting the provisions of section 50B of the Income-tax Act, 1961. The Assessing Officer rejected the claim of the assessee and held that the transaction squarely fell within the definition of “slump sale” in section 2(42C) and was taxable in terms of section 50B of the Act. The Tribunal held that a reading of the clauses in the scheme of arrangement showed that the transfer of the undertaking had taken place in exchange for issue of preference shares and bonds. The scheme did not refer to any monetary consideration for the transfer. It was a case of exchange and not a sale. Therefore, section 2(42C) was inapplicable and section 50B was also inapplicable.

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

“i) I n the given facts and circumstances and going by the clauses of the scheme of arrangement and reading them harmoniously and together, the Tribunal had held that the transfer of the lift division came within the purview of section 2(47) but could not be termed as a slump sale.

ii) This finding of fact could not be said to be perverse or based on no material. It also could not be said to be vitiated by an error of law apparent on the face of the record.

iii) We do not find any merit in the appeal. It is accordingly dismissed.”

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Business expenditure: TDS: Disallowance: S/s. 9, 40(a)(i) and 195: A. Y. 2009-10: Commission paid by the assessee to the non-resident agent for procuring orders for leather business from overseas buyers – wholesalers or retailers: Services rendered by non-resident agent can at best be called as a service for completion of export commitment: Services provided by non-resident agent are not technical services: Assessee is not liable to deduct tax at source when the nonresident agent provides servi<

CIT vs. Faizan Shoes P. Ltd.; [2014] 48 taxmann.com 48 (Mad):

The assessee is a company engaged in the business of manufacture and export of articles of leather. In the course of business, the assessee entered into an Agency Agreement with a non-resident agent to secure orders from various customers, including retailers and traders, for the export of leather shoe uppers and full shoes by the assessee. As per the terms of the Agency Agreement, the business will be transacted by opening letters of credit or by cash against document basis. The non-resident agent will be responsible for prompt payment in respect of all shipments effected on cash against document basis. The assessee undertook to pay commission of 2.5% on FOB value on all orders procured by the non-resident agent. For the A. Y. 2009-10, the Assessing Officer disallowed the claim for deduction of the said commission relying on the provisions of section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of tax at source u/s. 195 of the Act. The Commissioner(Appeals) and the Tribunal allowed the assessee’s claim. The Tribunal observed that the non-resident agent was only procuring orders for the assessee and following up payments and no other services are rendered, and accordingly held that the nonresident agent was not providing any technical services to the assessee. The Tribunal also held that the commission payment made to non-resident agent does not fall under the category of royalty or fee of technical services and, therefore, the Explanation to section 9(2) of the Act has no application to the facts of the assessee’s case. The Tribunal, therefore held that the commission payments to non-resident agents are not chargeable to tax in India and, therefore, the provisions of section 195 of the Act are not applicable.

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

“i) T he services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of “fees for technical services”, we are of the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, section 195 of the Act does not come into play.

ii) We find no infirmity in the order of the Tribunal in confirming the order of the Commissioner of Income Tax (Appeals).

iii) I n the result appeal is dismissed.”

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Business expenditure: Section 36(1)(ii): A. Y. 2006-07: Commission paid to directors for providing personal guarantee to bank as precondition for grant of credit facilities cannot be disallowed stating that otherwise it would have been payable to the directors as dividend;

Control and Switchgear Contractors Ltd. vs. Dy. CIT; 365 ITR 312 (Del):

In the A. Y. 2006-07, the assessee company had claimed deduction of Rs. 24,37,500/- being commission paid to the directors for providing personal guarantees to the bank for grant of credit facilities to the company. The Assessing Officer disallowed the claim for deduction holding that the same would have been otherwise payable to the directors as dividend. The Tribunal upheld the disallowance. Assessee’s rectification application was rejected by the Tribunal.

The Delhi High Court allowed the writ petition filed by the assessee, reversed the decision of the Tribunal and held as under:

“i) The directors having provided personal guarantees had acted beyond the call of duty as employees of the assessee. It was not within the jurisdiction of the Assessing Officer to impose his views with regard to the necessity or the quantum of the expenditure undertaken by the assessee. The Assessing Officer had only to determine whether the transactions were genuine or real.

ii) The directors would not be entitled to receive the amount paid to them as commission, as dividends because even if it was assumed that non-payment of commission would add to the kitty of distributable profits these would have to be distributed pro rata to all the shareholders and not selectively to the directors. Dividend is paid by a company as distribution of profits to its shareholders in the ratio of their shareholding in the company. The directors were not the only shareholders of the company and, therefore, in the event the commission had not been paid by the assessee it could not have been distributed to them as dividend.

iii) The writ petition is allowed. The said disallowance and the additions made on this count are set aside.”

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Agent of non-resident: Section 163: A. Y. 2003- 04: Where a person in respect of whom agent is sought to be made a representative assessee, does not attain status of non-resident during relevant accounting period, provisions of section 163 cannot be invoked in such a case:

Comverse Networks Systems India (P.) Ltd. vs. CIT; [2014] 48 taxmann.com 1 (Delhi)

One F was an employee with the petitioner. In respect of the A. Y. 2003-04, which is relevant in this case, the said F had filed the return of income and was assessed in the status of “Resident & Ordinarily Resident”. On 16/03/2010, the ACIT issued a notice u/s. 163(1)(c) of the Income-tax Act, 1961 proposing to treat the petitioner as the representative agent of F for the A. Y. 2003-04. In reply, the petitioner stated that F was not a non-resident in the A. Y. 2003-04 and accordingly that the petitioner could not be treated as a representative agent of F u/s. 163(1)(c) of the Act and, therefore, the petitioner requested the ACIT to drop the proceedings. The ACIT did not agree with the submissions of the petitioner and passed an order dated 31.01.2011 treating the petitioner as the agent of F u/s. 163 of the Act for the A. Y. 2003-04. The Commissioner rejected the revision application made by the petitioner u/s. 264 of the Act.

The Delhi High Court allowed the writ petition filed by the petitioner and held as under:

“i) S ection 160(1)(i) of the said Act makes it clear that the expression “representative assessee” has to seen “in respect of the income of a non-resident”. It is obvious that when we construe the expression “income of a non-resident” it has reference to income in a particular previous year/accounting year. The income of that year must be of a non-resident. If that be so, the agent of the non-resident or the deemed agent u/s. 163 of the said Act would be the representative assessee. The petitioner is not an agent of F.

ii) S ection 163(1)(c) talks about the person from or through whom the non-resident “is in receipt of any income, whether directly or indirectly”. The income bears reference to the accounting year for which the statutory agent is to be appointed. In the present case, the year in question is the year ended on 31-03-2003. During that year F was not a nonresident. Therefore, the petitioner cannot even be regarded as a deemed agent u/s. 163(1)(c) of the Act. Consequently, the petitioner cannot be considered to be the representative assessee of F in respect of the A. Y. 2003-04.

iii) T he writ petition is allowed and the impugned order is set aside.”

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Income: Deemed dividend: Section 2(22)(e): Advance or loan to a shareholder: Section 2(22) (e) cannot be invoked where the assessee is not a shareholder in the lending company:

CIT vs. Impact Containers Pvt. Ltd.(Bom); ITA No. 114 of 2012 dated 04/07/2014:

The Assessing Officer found that the assessee company had received loans from a company and also found that the assessee had shareholding in a company which had controlling interest in the lending company. The Assessing Officer applied the provisions of section 2(22)(e) of the Income-tax Act, 1961 and held that the loan received by the assessee is deemed dividend u/s. 2(22)(e) of the Income-tax Act, 1961 and made the addition accordingly. The Tribunal found that the assessee company was not a shareholder of the lending company and therefore, by following the decision of the Special Bench in the case of ACIT vs. Bhaumik Colour Pvt. Ltd.; 313 ITR(AT ) 146 (Mum)(SB) deleted the addition.

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

“i) T he consistent view taken is that if the words as noted by us herein-above have been inserted in the definition so as to make reference to the beneficial owner of the shares, still the definition essentially covers the payment to the shareholder and the position of the shareholder as noted in the Supreme Court’s decision, cannot undergo any change. That legal position and the status of the shareholder being same, we do not see how the view prevailing from CIT vs. C. P. Sarthy; 83 ITR 170 (SC) is in any way said to be changed. That is how all the judgments subsequent thereto have been rendered.

ii) We have noted that the Delhi High Court, even after exhaustive amendment to section 2(22)(e) held that the payment made to any concern would not come within the purview of this sub-clause so long as it contemplated shareholders. The Division Bench of Delhi High Court has made detailed reference to all the decisions in the field. It has also referred to the order passed by the Special Bench of the Tribunal in arriving at the same conclusion.

iii) In CIT vs. Ankitech Pvt. Ltd.; 340 ITR 14(Del), The Hon’ble Delhi High Court referred to both Sarathi Mudaliar and Rameshwarlal Sanwarmal, extensively. It also referred to the arguments of the Revenue which are somewhat similar to those raised before us. It is in dealing with these arguments that the Division Bench concluded that all the three limbs of the section analysed in CIT vs. Universal Medicare; 324 ITR 263 (Bom) denote the intention that closely held companies in which public are not substantially interested which are controlled by a group of members, even though having accumulated profits would not distribute such profits as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concerns in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholders. In such an event, by the deeming provision, such payment by the company is treated as dividend. The purpose is to tax dividend in the hands of the shareholder.

iv) We do not see how such a view taken by the Delhi High Court and which reaffirms that of this Court in Universal Medicare can be said to be contrary to the legal fiction or the intent or purpose of the legislature in enacting it.

v) We are of the view that so long as the Tribunal holds that the assessee company is not a shareholder in any of the entities which have advanced and lent sums, then, the addition is required to be deleted.”

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Business expenditure: Disallowance of expenditure in relation to exempt income: Section 14A: A. Ys. 2001-02 to 2005-06: Where available interest free funds are more than the investment in tax free securities, disallowance of interest u/s. 14A will not be justified:

CIT vs. HDFC Bank Ltd.(Bom): ITA No. 330 of 2012 dated 23-07-2014:

In the relevant years, the assessee claimed that no disallowance of interest be made u/s. 14A of the Incometax Act, 1961 in view of the fact that the asessee had interest free funds available more than the investment in tax free securities. The Assessing Officer rejected the claim and made disallowance of interest u/s. 14A on proportionate basis. The Tribunal deleted the addition.

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

“i) We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd.; 313 ITR 340 (Bom). The findings of fact given by the ITAT in the present case is that the assessee’s own funds and other non-interest bearing funds were more than the investment in the tax-free securities.

ii) I n the present case, undisputedly the assessee’s capital, profit reserve, surplus and current account deposits were higher than the investment in the taxfree securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd.; 313 ITR 340 (Bom), it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the assessee.

iii) We therefore, are unable to agree with the submission of Suresh Kumar that the Tribunal had erred in dismissing the appeal of the Revenue on this ground.

iv) We do not find that the question gives rise to any substantial question of law. Appeal is therefore rejected.

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Exemption – Educational Institute – Application for grant of certificate u/s. 10(23C)(vi) was rejected for the reason that the applicant was not using the entire income for the educational purposes – In view of the amendment to the objects, the Supreme Court set aside the orders of the High Court and authorities concerned with liberty to apply for registration afresh.

Om Prakash Shiksha Prasar Samiti & Anr. vs. CCIT & Ors. [2014] 364 ITR 329 (SC)

The appellants had applied for grant of a certificate u/s. 10(23C)(vi) of the Income-tax Act, 1961, inter alia, requesting the authorities to grant certificate to claim exemption under the provisions of the Act. The said certificate was not granted by the authorities primarily on the ground that the appellants were not using the entire income for the educational purposes for which purpose the trust was established.

Being aggrieved by the order passed by the Chief Commissioner of Income-tax, the appellants approached the High Court. The writ petitions were dismissed by the High Court.

During the course of hearing before the Supreme Court the learned counsel for the appellants stated that the appellants had amended the objects of the society, with effect from 31st March, 2008. The Supreme Court was of the view that if that was so, the appellants should make an appropriate application before the authorities for grant of certificate u/s. 10(23C)(vi) of the Act for the assessment years 2002-03 to 2007-08 along with the amended objects of the society.

In view of this subsequent development and keeping in view of the peculiar facts and circumstances of the case, the Supreme Court set aside the order passed by the High Court and the authorities concerned and permitted the appellants to file a fresh application within a month’s time from the date of the order. The Supreme Court directed that if such application is filed within the time granted the authority would consider the same in accordance with law, keeping in view the amended objects of the society, with effect from 31st March, 2008. All the contentions of both the parties were left open by the Supreme Court.

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Online reservation services by overseas company to foreign company

Whether online reservation services by overseas company to foreign company liable under reverse charge?

In
a recent decision in relation to reverse charge mechanism in British
Airways vs. Commissioner (ADJN), Central Excise, Delhi
2014-TIOL-979-CESTAT -DEL, the Tribunal by majority set aside the demand
of service tax on British Airways, India (BA India) the branch of
British Airways PLC, U.K. (BA UK) at Gurgaon.

Background in brief
The
Appellant as branch office provides air transportation services for
passengers and cargo and on these services has been paying service tax
under (zzn) and (zzzo) of section 65(105) of the Finance Act, 1994 (the
Act). BA UK like airlines all over the world have agreements with
Central Computer Reservation System service providing companies such as
Galileo, Amadeus, Abacus, Sabre etc. (CRS companies) all located outside
India. These CRS companies facilitate reservation and ticket
availability position to air travel agents in India and all over the
world through online computer system. None of these service providers
has branch or an establishment in India. Accordingly, they maintain
database of BA UK as regards flight schedule, fares, seat availability
on flight etc. on real time basis and make information available to all
IATA agents across the world. In terms of the agreements with BA UK, CRS
companies provide hardware and connectivity with their network. Based
on the ticket sale by the IATA agents using their database, these
companies receive their fees from BA UK. The IATA agents do not have to
pay any fees. The services provided by CRS companies were considered
“online database access or retrieval service” by the department as
contained in section 65(105)(zh) read with sub-Clause (75) and (36) of
section 65 of the Act and since the services are used by IATA agents of
BA India in India to sell tickets, they were treated as received and
consumed in India by BA India. Hence, service tax was demanded on the
remuneration received by CRS companies from BA UK from the Appellant in
this case BA India, under reverse charge mechanism u/s. 66A of the Act
read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994. The
Commissioner confirmed the demand and imposed penalties against which
this appeal was filed.

The dispute in the appeal hinges around
the main issue viz. whether the Appellant BA India, a BA UK branch can
be treated as entity separate from its head office, BA UK in terms of
section 66A(2) and therefore the Indian branch be taxed as recipient of
services of CRS companies. Additional issue involved was whether or not
service provided by CRS companies be considered an online service since
both the members were in agreement with treating the service taxable as
online database access and retrieval service contained in section
65(105)(zh) of the Act read with section 65(75) thereof; not much
discussion is provided herein.

The Appellant contended that
service was provided outside India as the CRS companies and their parent
company were situated outside India. Therefore there cannot be tax
liability for the Appellant, BA India. The Appellant’s view of
non-taxability of service tax was based on the grounds that CRS
companies abroad provided services to their head office in London. CRS
company’s server was connected with the server of the head office of the
Appellant and thus the head office received those services abroad. In
terms of section 66A(2) of the Finance Act, 1994 (the Act), the branch
and the head office are to be treated as separate entities. Relying on
Paul Merchants 2012-TIOL-1877-CESTAT – Delhi, the Appellant also
contended that service recipient is the person on whose orders the
service is provided, who is obliged to make payment for the same and
whose need is satisfied by the provision of service. Further, they
advanced the argument that had they paid service tax, it was a revenue
neutral case as they would have got CENVAT credit of the same. They also
contended that longer period of limitation did not apply to them as
they bonafide believed that they had no tax liability.

Revenue
discarded this plea finding that CRS companies even if situated outside
India were providing services to the Appellant having establishment in
India which enabled their appointed IATA agents to use the system for
booking tickets and thus derived benefit therefrom and therefore the
Appellant was ultimate service recipient in India from foreign based CRS
companies of online database access or retrieval services u/s. 66A of
the Act from 18/04/2006. According to revenue, since BA UK was permitted
by Reserve Bank of India (RBI) to operate in India, the head office of
the Appellant and the Appellant cannot be two distinct entities under
law. Section 66A(2) of the Act did not apply to them. Existence of
Appellant in India without its head office was impracticable and
existence in India was only to fulfill object of its head office in UK
and act on its behalf in India under limited permissions granted by RBI
which in essence and substance is the same. The establishment in India
was created on temporary basis to carry out business in India. On the
above pleas made by the Appellant and the revenue, the two members of
the Division Bench of the CESTAT , Delhi had different views.
Consequently, the matter was referred to the Third Member. The views of
both the members along with those of the third member are summarised
below:

Conclusion: Member (Judicial):
The learned Member
(Judicial) after considering the case of the adjudicating authority and
examining relevant statutory provisions, examined the letter issued by
RBI to BA UK and the agreement between BA UK & Galileo, the CRS
company. RBI ‘s letter contained permission to carry out air
transportation business in India regulated by FEMA in view of the
foreign currency transactions involved.

• The Bench observed
that BA UK had its place of business in India in terms of section
66A(1)(b) of the Act during the impugned period. As a participant of CRS
agreement, the Appellant at its own cost was required to provide
Galileo complete data, timely and accurate in order that the CRS company
would be able to maintain and operate the system to provide access to
the IATA agents the services of reservation, seat availability etc. on
real time basis for a consideration payable by BA UK. According to the
Member, BA India was in no way different from its head office and
therefore the contention that BA India was not party to the agreement
was not correct.
• Air travel agents appointed by the Appellant
received and used the services of CRS and Appellant having place of
business in India is the recipient of services from foreign based CRS
companies.

• Who makes payment to the service provider is not material and no free service is provided by the service provider.

•
When the Appellant is covered by section 66A(1)(b) of the Act as
recipient of taxable service u/s. 65(105)(zh) of the Act, their plea
that they are immune from service tax in India is ill-founded as their
existence in India is only under the RBI permission whereas 66A(2) of
the Act recognises only different situs under law, but the said s/s.
does not grant immunity from taxation in India once incidence of tax
arises in India. What is charged by revenue is services received in
India and the Appellant has consumed them in India and not the services
received by its head office outside India.

• Appellant’s plea of
revenue neutrality would not exonerate them from the liability it has
under the law and reliance on Paul Merchants (supra) is misplaced as it
related to export of service.

• Since the Appellant failed to register and file Returns periodically, they committed breach of law which cannot be eroded by lapse of time. Bonafide should be apparent from conduct and a mere plea does not render the adjudication time-barred and thus extended period could be invoked.

Conclusion: Member (Technical) the member (technical) differing from the above conclusion drawn by the member (judicial) made following observations. He however agreed on the issue of classification that services were classifiable as online/ access/retrieval services:

• Since the term ‘service’ was not defined during the period under appeal, not only there must be an activity provided by a provider of service to the recipient thereof, but there must also be flow of consideration, cash or other than cash, direct or indirect from recipient to the provider and the provision of services must satisfy some need of the recipient which may be personal or business.

• Under Rule 3 of the Export of Service Rules, 2005, when a service provider is in india and the recipient thereof are outside india, no service tax is chargeable and when the provider is located abroad being a person having a business or fixed establishment outside India and the recipient is located in india being a person having a place of business, fixed establishment in india, he is a person liable for service tax in terms of section 66A read with rule 2(1)(d)(iv) of the service tax rules.

• U/s. 66A(2), when a person carries out a business through a permanent establishment in india and through another permanent establishment in another country, the two establishments are separate persons for the purpose of this section. second proviso to section 66a(1) is that when a service provider has his busies establishment in more than any one country, the establishment which is directly concerned with the provision of service will be considered service provider. This principle in the hon. Member’s view would apply to determine as to who is the service recipient in the instant case when provider of service is located abroad and it will be reasonable to treat the establishment most directly concerned with the use of the service provided as recipient of such services provided by the person abroad.

• Unlike the transaction of goods, receipt and consumption of a service goes together, as the provision of a service satisfies the need of recipient, the service stands consumed. Accordingly, if service recipient is located in india, the service is received and hence consumed in india but if the recipient is located abroad, there is no liability for the person in india to pay service tax. This is in accordance with the principle of equivalence mentioned in the apex Court’s judgment in the case of all India Federation of Tax Practitioner 2007-TIOL-149-SC-ST and association of Leasing and Financial service companies 2010 (20) STr 417 (SC).

• Conceptually, Export of Service Rules, 2005 and taxation of service (provided from outside india and received in india) rules, 2006 put together are the rules which determine the location of service recipient. thus, when the provider of service is located in india and the recipient thereof is outside india, in accordance with rule 3(iii) applicable to the services other than these in relation to immovable property and performance based services and when they relate to business or commerce, these will be export services and there would be no taxation in india whereas in the reverse scenario, there will be import of service in respect of which the service recipient is located in india. However, if both service provider and receiver of category (iii) for use in his business are also located outside india, there would be no import and therefore no taxation in india.

• As regards services of CRS companies located abroad, whether they can be treated as received by the appellant in india is to be determined based on the above legal provisions.

• As regards letter from RBI, it was observed as follows:

i)   BA UK and Ba india are separate establishments and that the branch was not in the nature of a temporary establishment as contended by the department.
ii)   the   agreement   was   between   BA UK   and   CRS companies abroad which did not have any branch or establishment in india.
iii)   entire payment to Crs companies was made directly by Ba uK outside india and no part was paid by Ba india.

Thus, the services provided by CRS companies were received by BA UK as both Ba UK and Ba India are to be treated as separate persons in view of the provisions of section 66a(2). They would be treated as received in india only if it has been received by the recipient located in india for use in relation to business or commerce.

Reasoning why the Branch is not the recipient of service.

According to the hon. Member (technical), the revenue’s view that Ba india was the recipient of the services of CRS companies was incorrect for the following reasons:

• In a transaction of service, the recipient consumes the service simultaneously with the performance of service. thus recipient of a service is the person who is legally entitled for provision of service. further, consideration in some cases can be direct or indirect. applying this criteria, Ba india can be treated as recipient only if the service provided by CRS companies is meant for the BA india and if BA UK had acted as only facilitator and there was flow of consideration, direct or indirect from BA india to CRS companies. In the instant case, neither BA India is recipient nor is there a flow of consideration, direct or indirect form Ba India to CRS companies.

• CRS companies did not provide any branch specific service. The job of BA india is only to appoint iata agents, collect sales proceeds of tickets sold by agents, fares and remitting the same to h.o. and nothing showed that key business decisions were taken by them for the entire company. applying the principle of second proviso of section 66A(1) discussed above, it is BA UK – the H.O. office which is to be treated as directly concerned with the services provided by CRS companies as it cannot be said that the indian branch was the sole beneficiary or that H.O. acted as a facilitator to enter into the agreements with CRS companies on behalf of branches for providing services to them. The business needs of H.O. are satisfied and therefore h.o. is the recipient of service.

• There is no evidence or even allegation that BA India made any payment to CRS companies directly or indirectly and there is an accepted position in the order that payment was made abroad by the h.o. directly to CRS companies and that the two establishments of BA india and BA UK their h.o. have to be treated as separate persons in terms of section 66A(2), the transaction of provision of service has to be treated as taken place outside india. therefore, the service received by BA UK cannot be treated as service received by Ba india.

• Merely because IATA agents appointed by BA India used the services of CRS companies from abroad, the appellant does not become the recipient of service.

• The only situation in respect of which service tax can be levied on the branch of a recipient company in india would be wherein the services provided by a service provider located outside india against an agreement with head office of a company incorporated and located outside India and when the head office has entered into a framework agreement with the service provider by way of centralised sourcing of service, the provision of service at various branches located in different countries and the service is provided at the branch in india and the role of the h.o. is only of facilitator. in the instant case of Ba india, from the agreement, it cannot be inferred that the Crs companies were to provide location specific service to the branches of BA UK all over the world.

• As regards applicability of longer period of limitation also, it was found not available to the department in view of the fact that intent to contravene the provisions of the act could not be attributed when collection of tax would have been a revenue neutral exercise.

Reference to Third Member:
Briefly stated, the points of difference referred to the Third member were:

• Whether on the facts and in the circumstances of the case, the appellant permitted by reserve Bank of india to carry out air transport activity in india was a branch in india and was recipient of “online database access or retrieval service” from Crs service providers abroad and liable for service tax in terms of section 65(105) (zh) read with section 65(75) under reverse charge mechanism u/s. 66a with effect from 18/04/2006 or exempt in terms of 66a(2) and also whether longer period of limitation was available to the department for recovery of tax.

• The learned Third Member acknowledged various undisputed facts among others that the Crs companies were located outside india, the agreement was between Ba uK and them and payment for the said service was made by Ba uK and in the light of these facts, what was to be considered was whether Ba india was the extension of Ba uK or they had to be treated as separate legal entities. She noted the contentions of the revenue that various provisions of the Companies act, 1956 which interalia included that the entire accounts from the indian operations stand debited by the head office along with the expenses incurred by the corporate office in relation to operations in india and which also included the payment of CRS debit for tax sold in indian ticketing. Further, that there was no legal distinction between foreign companies with its parent office abroad and their local subordinate branch office in India and under these circumstances that Ba uK was given permission to open its branch office in India.

She nevertheless, discussed the provisions of 66A read with explanation to s/s. (2) in her observations and found herself in agreement with the observations and finding of Member (Technical) analysed above that services provided by a foreign based company to a foreign based head office cannot be any liability of the appellant to discharge its service tax in as much as service tax being a destination and consumption based tax cannot be created against the non-consumer of the services. Likewise she also concurred with non- availability of longer period of limitation for recovery to the department as she found revenue neutral situation and also that the issue involved being complicated issue of legal interpretation which cannot be held to be a settled law also found favour with the appellant’s bonafide belief.

Conclusion:
The above decision allowing appeal by the majority will serve as a guiding decision for disputes relating to cross border transactions and particularly those relating to liability of service tax under reverse charge mechanism. the decision however relates to the period prior to introduction of definition of ‘service’ with effect from 01-07-2012 and also place of provision of services

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Appeal to the High Court – The High Court has the power to frame substantial questions of law at the time of hearing of the appeal other than the questions on which appeal had been admitted.

CIT vs. Engineers India Ltd. [2014] 364 ITR 686 (SC)

The Supreme Court noted that the appeal filed by the Revenue u/s. 260A of the Income-tax Act, 1961 had been admitted by the High Court and two substantial questions of law were framed for consideration of the appeal.

The grievance of the Revenue before the Supreme Court was that by necessary implication, the other questions raised in the memo of appeal before the High Court stood rejected.

The Supreme Court held that the Revenue was under some misconception. The proviso following the main provision of section 260A(4) of the Act states that nothing stated in s/s. (4), i.e., “The appeal shall be heard only on the question so formulated” shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

According to Supreme Court, therefore, the High Court’s power to frame substantial questions of law at the time of hearing of the appeal other than the questions on which appeal had been admitted remains u/s. 260A(4). This power is subject, however, to two conditions, (one) the court must be satisfied that appeal involves such questions, and (two) the court has to record reasons therefore.

In view of the above legal position, the Supreme Court did not find any justifiable reason to entertain the special leave petitions. Accordingly, the special leave petitions were dismissed.

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FINANCE (NO.2) AC T – 2014 – AN ANALYSIS

1.Background

1.1 After the unique General Elections in May, 2014, the BJP led NDA Government, under the leadership of Shri Narendra Modi, presented its first Budget in the Parliament on 10th July, 2014. While presenting his first budget, the Finance Minister Shri Arun Jaitley, has stated as under in Para 2 of his Budget speech.

“The people of India have decisively voted for a change. The verdict represents the exasperation of the people with the status-quo. India unhesitatingly desires to grow. Those living below the poverty line are anxious to free themselves from the course of poverty. Those who have got an opportunity to emerge from the difficult challenges have become aspirational. They now want to be a part of the neo middle class. Their next generation has the hunger to use the opportunity that society provides for them. Slow decision making has resulted in a loss of opportunity. Two years of sub five per cent growth in the Indian economy has resulted in a challenging situation. We look forward to lower levels of inflation as compared to the days of double digit of food inflation in the last two years. The country is in no mood to suffer unemployment, inadequate basic amenities, lack of infrastructure and apathetic governance”.

1.2 T he Finance (No.2) Bill 2014 presented with the Budget, contained 71 sections dealing with amendments in the Income-tax Act and 41 sections dealing with amendments in Indirect Taxes and other matters. As is customary, the Finance Bills presented by the Governments elected in July after General Election are not referred to the standing committee on Finance and, therefore, there is no public debate on the amendments made in the Direct or Indirect Tax Laws. There was no serious debate on the amendments in the Parliament and the Bill, with minor modifications proposed by the Finance Minister in the Lok Sabha, was passed by the Lok Sabha on 25th July, 2014. This Bill was also passed by the Rajya Sabha on 30th July, 2014 and it has received the assent of the President on 6th August, 2014.

1.3 I t may be noted that in Para 4 of his Budget Speech, the Finance Minister stated his approach for economic growth as under:

“As Finance Minister I am duty bound to usher in a policy regime that will result in the desired macroeconomic outcome of higher growth, lower inflation, sustained level of external sector balance and a prudent policy stance. The Budget is the most comprehensive action plan in this regard. In the first Budget of this NDA government that I am presenting before the august House, my aim is to lay down a broad policy indicator of the direction in which we wish to take this country. The steps that I will announce in this Budget are only the beginning of a journey towards a sustained growth of 7-8 per cent or above within the next 3-4 years along with macro-economic stabilization that includes lower levels of inflation, lesser fiscal deficit and a manageable current account deficit. Therefore, it would not be wise to expect everything that can be done or must be done to be in the first Budget presented within forty five days of the formation of this Government”.

1.4 T he Finance Minister referred to the Retrospective Amendments made in the Income-tax Act in 2012 and gave the following assurance in Para 10 of his Budget speech.

“The sovereign right of the Government to undertake retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate. This Government will not ordinarily bring about any change retrospectively which creates a fresh liability. Hon’ble Members are aware that consequent upon certain retrospective amendments to the Income-tax Act 1961 undertaken through the Finance Act 2012, a few cases have come up in various courts and other legal fora. These cases are at different stages of pendency and will naturally reach their logical conclusion. At this juncture I would like to convey to this August House and also the investors community at large that we are committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth. Keeping this in mind, we have decided that henceforth, all fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of the Assessing Officers will be scrutinized by a High Level Committee to be constituted by the CBDT before any action is initiated in such cases. I hope the investor community both within India and abroad would repose confidence on our stated position and participate in the Indian growth story with renewed vigour.”

1.5 While concluding his Budget Speech he stated that he had given relief to individuals, HUF etc. and also given incentives to manufacturing sector which will result in Revenue Loss of Rs. 22,200 crore in Direct Taxes. As regards Indirect Taxes, his proposals would yield additional Revenue of Rs. 7,525 crore.

1.6 I n this Article some of the important amendments made in the Income-tax Act by the Finance (No.2) Act, 2014, have been discussed. It may be noted that this year, barring one or two, almost all amendments have prospective effect.

2. Rates of taxes:

2.1 T here are no major changes in the Rates of Taxes for A.Y. 2015-16. However, certain reliefs given to Individual Tax Payers are referred to in Para 192 of Budget Speech of the Finance Minister. These are explained in brief below.

2.2 Individual, HUF, AOP etc.: The Rates of Income Tax, Surcharge and Education Cess for Individuals, HUF, AOP, BOI and Artificial Juridical Person for A.Y. 2015-16 (Accounting Year ending 31.03.2015) will be as under.

Notes:
(i) Surcharge on Super Rich: In the Budget Speech of 2013 it was announced that surcharge of 10% of the tax on persons earning total income exceeding Rs. 1 crore will be levied for A.Y. 2014-15 only. In this year’s Budget, this surcharge is continued for A.Y. 2015-16
(ii) Rebate of Tax: A Resident Individual having total income not exceeding Rs. 5 lakh, will get rebate upto Rs. 2000/- or tax payable (whichever is less) u/s. 87A.
(iii) E ducation Cess: 3% (2+1) of the tax is payable as Education Cess by all assessees.

2.3 Other Assessees: The rates of taxes (including surcharge and education cess) for A.Y. 2015-16 are the same as in A.Y. 2014-15. In the case of domestic companies the surcharge of 5% of tax, if the total income exceeds Rs. 1 crore, but does not exceed Rs.10 crore will continue to be payable in A.Y.2015-16. Further, the rate of surcharge will be 10% of tax on the entire income in the case of domestic companies if the total income exceeds Rs.10 crore.

In the case of a foreign company, there is no change in the rates of taxes. The existing rate of surcharge will be 2% of tax if the total income is between Rs.1 crore and Rs.10 crore. If the total income exceeds Rs.10 crore, the rate of surcharge will be 5% of tax on the entire income, if the total income exceeds Rs.10 crore.

2.4 Tax On Book Profits: The rates of taxes on Book Profits u/s. 115JB and 115JC will continue to be the same in A.Y.2015-16 as in A.Y.2014-15.

2.5 Dividend Distribution Tax (DDT): (i) Section 115.0 and 115-R provide for payment of additional tax by domestic companies and mutual funds on distribution of dividend or income. These two sections have been amended w.e.f. 01-10-2014. The amendment provides that the amount of dividend or income so distributed should now be grossed up and the additional tax at the rates specified in these two sections should be paid by the domestic companies or mutual funds.

ii)the logic for making this amendment is given in the explanatory memorandum to the finance Bill as under:

“prior to introduction of dividend distribution tax (ddt), the dividends were taxable in the hands of the shareholder. the gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%. however, after the introduction of the ddt, a lower rate of 15% is currently applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company. therefore, the tax is computed with reference to the net amount. similar case is there when income is distributed by mutual funds.

Due to difference in the base of the income distributed or the dividend on which the distribution tax is calculated, the effective tax rate is lower than the rate provided in the respective sections.

In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax.

Therefore, it is proposed to amend section 115-o in order to provide that for the purposes of determining the tax on distributed profits payable in accordance with the section 115-o, any amount by way of dividends referred to in sub-section (1) of the said section, as reduced by the amount referred to in sub-section (1A) (referred to as net distributed profits), shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in s/s. (1), be equal to the net distributed profits.

Similarly, it is proposed to amend section 115r to provide that for the purposes of determining the additional income-tax payable in accordance with sub-section (2) of the said section, the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increase amount at the rate specified in s/s. (2), be equal to be amount of income distributed by the mutual fund”.

iii) On the above basis, the ddt on grossed up dividend distributed by a domestic company on or after 01-10-2014 shall be payable at 20.03% as against 17% as at present.

iv) Similarly, the additional tax payable by the mutual funds on income distribution u/s115 r will work out as under:

v) From the logic given in the explanatory memorandum it is evident that the additional that collected u/s. 115-0 and 115-R from domestic companies and mutual funds is nothing but tax payable by the shareholder/unit holder. instead of collecting such tax from the share holder/unit holder, it is collected from the company/mutual fund. though judicial forums have taken a view that the tax paid by the Companies/ mutual funds is not tax paid by the shareholder/unit holder, the rationale set out in the memorandum may give one further opportunity to the taxpayer to urge the proposition that this income is not ‘exempt’ and section 14a ought not to apply.

2.6 Rate of tax on dividends from foreign Companies: the concessional rate of tax at 15% plus applicable surcharge and education cess which was applicable for only two years i.e., a.y. 2013-14 and
a.y. 2014-15 u/s. 115BBd has now been extended in respect of dividends received by an indian Company from a specified Foreign Company to A.Y. 2015-16 and subsequent years. For this purpose the indian Company should hold 26% or more of equity share capital in the foreign company.

3 Tax deduction at source (TDS):

the following amendments are made in some of the provisions relating to TDS w.e.f. 01-10-2014.

(i) In section 194a it is provided that tax should not be deducted at source @ 10% from interest received by a Business trust from special purpose Vehicle (i.e., the indian company in which the Business trust holds controlling interest or any specified percentage of shareholding or interest as provided in the relevant regulations).

(ii) Section 194da has been inserted w.e.f. 01-10-2014 to provide for tds @2% from the taxable amount (including Bonus) paid under a life insurance policy. in such a case, no tax will be deductible under this section from the payments which are exempt u/s. 10 (10d). it is also provided that this provision for tds will not apply where the aggregate of taxable payments is less than rs.1 lakh in any financial year.

(iii) Section 194lBa has been inserted w.e.f. 01-10-2014 to provide for tds @10% from income referred to in the new section 115ua (i.e., interest income received by Business trust from spV) distributed to a resident unit holder of Business trust.

If such income is distributed to a non-resident unit holder the rate of tds will be 5% plus applicable surcharge and education cess.

(iv) Section 194lC which provides for tds in respect of payment of interest on loans in foreign Currency by specified companies will also apply to payment made by Business trust. further, the time limit of loan agreement provided in the section from 01-07- 2012 to 01-07-2015 has now been extended up to 01-07-2017.

(v) Section 200(3) provides for filing of Statement of TDS. By amendment of this section it is now provided that the tax deductor can now file a correction statement for rectification of any mistake, or to add, delete or update information. Consequential amendment has been made in section 200A.

(vi) At present u/s. 201(3) no order treating a person as an assessee in default for failure to comply with tds provisions can be passed after the expiry of 2 years from the end of the financial year in which statement of TDS in filed and after expiry of 6 years if statement of TDS in not filed. This provision is now amended w.e.f. 01-10-2014 to provide for a common time limit of 7 years from the end of the f.y. in which payment is made or credit is given to the payee. Thus, even if TDS statement is filed, the tax deductor can be treated as assessee in default at anytime within 7 years. in other words, the existing time limit of 2 years is extended to 7 years.

(vii) Section 206aa provides for tds at higher rate where the payee does not furnish permanent account number the section is not applicable to interest on long –term infrastructure Bonds referred to in section 194 lC. it is now provided, w.e.f. 01-10-2014, that this section shall not apply to interest on long-term Bonds referred to in section 194 lC.

4. Exemptions and deductions

4.1 Section 10AA: under this section, newly established undertakings in SEZs can claim deduction in respect of profits and gains derived from export of articles or things or from providing services. Presently, deduction can be claimed even by such undertakings carrying on ‘Specified Business’ u/s. 35AD. This section is now amended w.e.f. a.y.2015-16 to provide that where deduction u/s. 10AA has been availed by any assessee in respect of the profit of the Specified Business for any assessment year, no deduction u/s. 35AD shall be allowed in relation to such Specified Business for the same or any other assessment year. Similarly, section 35 AD has, also been amended to prohibit claim of deduction u/s. 10AA in respect of Specified Business where deduction u/s. 35AD has been claimed and allowed for the same or any other assessment year. Effectively, the assessee will, therefore, have to choose between a deduction u/s. 10AA and a deduction u/s. 35AD in respect of Specified Business.

4.2 Section 24 (b): While computing income from self occupied property (sop) constructed on or after 01-04- 1999, the assessee is eligible for deduction on account of interest paid on amounts borrowed for acquisition or construction of the s.o.p provided such acquisition or construction is completed within a period of three years from the end of the financial year in which the capital is borrowed. the deduction is restricted to rs. 1.5 lakh at present. from a.y. 2015-16, this limit of deduction for such interest has now been increased to rs. 2 lakh. it may be noted that if construction of property is not completed within 3 years, deduction of interest will be of rs. 30,000/- only. if property is let out deduction of interest will be of the entire amount without any limit subject to conditions in section 24.

4.3 Section 80C: This section provides for deduction upto rs.1 lakh in respect of investment by an individual or huf in ppf, lip, elss etc. this deduction is increased from a.y.2015-16 to investment upto rs.1.5 lakh. in para 138 of the Budget speech, it is stated by the finance minister that the Limit for investment in PPF in the financial year will now be increased to rs.1 .5 lakh.

4.4 Section 80 CCD: This section provides for deduction in respect of contribution to pension scheme of Central Govt. at present non-Govt. employees employed on or after 01-01-2004 are eligible for such deduction. now, from a.y. 2015-16 even non-Govt. employees employed before 01-01-2004 will be eligible to get the benefit of this section. further, this section is amended from a.y. 2015- 16 to provide that the deduction under this section shall not exceed rs.1 lakh in any year.
4.5 Section 80 CCE: This section lays down limit for deduction u/s. 80C, 80CCC and 80CCd to rs. 1 lakh in the aggregate. this limit is now increased from a.y. 2015 to rs.1.5 lakh.

4.6 Section 80 – IA(4) (iv): At present, deduction under this section is allowed to undertakings which commence their business of Generation or Generation and distribution of power, transmission or distribution of power, complete substantial renovation or modernisation of existing transmission or distribution lines if the same is completed on or before 31-03-2014. this time limit is now extended to 31-03-2017.

4.7 New Investment Opportunities for Small Savings :
The finance minister has announced the revival of the following investment opportunities for small savings.

(i) Kissan Vikas patra : This will be reintroduced during the year.

(ii) Varishta pension Bima yojna: This scheme will be reintroduced for one year from 15-08-2014 to 14-08-2015 for benefit of senior citizens.

5 Business Trusts:

(i) This is a new concept introduced in this year’s Budget. The term “Business Trust” is defined in section 2(13a) of the income tax act from 01-10-2014 to mean “a trust registered as an “infrastructure investment trust” (invits) or a “real estate investment trust” (reit), the units of which are required to be listed on a recognized stock exchange, in accordance with the seBi regulations and notified by the Central Govt”.

(ii) In para 26 of the Budget speech, the finance minister has explained this new concept as under:

“Real Estate Investment Trusts (REITS) have been successfully used as instruments for pooling of investment in several countries. I intend to provide necessary incentives to REITs which will have pass through for purpose of the taxation. As an innovation, a modified REITs type structure for infrastructure projects is also being announced as Infrastructure Investment Trusts (invits), which would have a similar tax efficient pass through status, for PPP and other infrastructure projects. These structures would reduce the pressure on the banking system while also making available fresh equity. I am confident that these two instruments would attract long term finance from foreign and domestic sources including the NRIs.”

(iii) In order to implement the above scheme for taxation of Business trusts, its sponsors and unit holders new sections are inserted in the income-tax act and some sections are amended. these sections are 2(13A), 10(23FC), 10(23FD), 10(38), 47(xvii), 49 (2AC), 111A, 115A, 115UA, 139(4E), 194A(3) (Xi), 194LBA, 194LC, and sec. 97 and 98 of finance (no.2) act, 2004 relating to stt. these sections come into force from a.y. 2015-16 and/or 01-10-2014.

(iv) The Business trusts have the following distinctive elements:

(a) The trust would raise capital by way of issue of units ( to be listed on a recognised stock exchange) and can also raise debts directly both from resident as well as non- resident investors:

(b) The income bearing assets would be held by the trust by acquiring controlling or other specific interest in an indian company (spV) from the sponsor.

(v) The amendments are made to put in place a specific taxation regime for providing the way the income in the hands of such trusts is to be taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts. These provisions, briefly stated, are as under:

(a) The listed units of a business trust, when traded on a recognised stock exchange, will attract same levy of stt and will given the same tax benefits in respect of taxability of capital gains as equity shares of a company i.e., long term capital gains, will be exempt and short term capital gains will be taxable at the rate of 15%.

(b) In case of capital gains arising to the sponsor at the time of exchange of shares in spV with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, the preferential capital gains tax (consequential to levy of stt) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal of units. further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor. The holding period of shares shall also be included in the holding period of such units. Indexation benefit in the case of long term capital gain will be available. (sections 47(xvii) and 49(2AC)).

(c) The income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV as provided in section 194a w.e.f. 01-10-2014. however, withholding tax at the rate of 5 % in case of payment of interest component of income distributed to non-resident unit holders and at the rate of 10 % in respect of payment of interest component of distributed income to a resident unit holder shall be deducted by the trust. this is provided in section 194lBa w.e.f. 01-10-2014 (sections 10 (23FC), 194A and 194LBA)).

(d) In case of external commercial borrowings by the business trust, the benefit of reduced rate of 5 % tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in section 194lC of the act w.e.f. 01-10-2014.

(e) The dividend received by the trust shall be subject to dividend distribution tax at the level of SPV but will be exempt in the hands of the trust, and the dividend component of the income distributed by the trust to unit holders will also be exempt. (section 10(38)).

(f) The income by way of capital gain on disposal of assets by the trust shall be taxable in the hands of the trust at the applicable rate. however, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder. any other income of the trust shall be taxable at the maximum marginal rate.

(section 115ua and 10(23fd)). (4e).

(g) The business trust is required to furnish its return of income u/s139

(h) The necessary forms to be filed and other reporting requirements to be met by the Business trust shall be prescribed to implement the above scheme.

6 Charitable Trusts :

In this finance act, sections 10(23C), 11, and 115 BBC have been amended from a.y. 2015-16 and sections 12a and 12 aa have been amended from 01-10-2014. all these amendments relate to taxation of Charitable trusts. These amendments are briefly discussed below :
6.1 Charitable and religious trusts cannot claim exemption u/s. 10: a trust or institution which is registered or approved or notified as a charitable or religious Trust u/s. 12aa or 10(23C) (iv), (v),(vi) and (via) will not now be entitled to claim exemption under any of the general provisions of section 10. the intention is that such entities should be governed by the special provisions of sections 10(23C) 11,12 & 13, which are a code by themseves, and should not be entitled to claim exemption under other provisions of section 10. therefore, such entity will not now be able to claim that its income, like dividend income (exempt u/s. 10(34)) or income from mutual funds (exempt u/s. 10(35)), or interest on tax free bonds, is exempt u/s. 10 and hence, not liable to tax. such income continues to qualify for exemption u/s. 10(23C) or section 11, subject to the conditions contained therein.

Agricultural income of such an entity, however, will continue to enjoy exemption u/s. 10(1). Further, such an entity eligible for exemption u/s. 11 will not be barred from claiming exemption u/s. 10(23C).

6.2 Depreciation on Capital assets: (i) Hitherto, almost all courts in india while interpreting section 11 have held that income of a charitable trust u/s. 11 is to be computed on the basis of accounting method adopted by the trust following commercial principles. (CIT vs. Trustees of H.E.H. Nizam’s Supplemental Religious Endowment Trust 127 itr 378(ap), CIT vs. Estate of V.L.Ethiraj 136 itr 12 (mad) and CBdt circular no.5-p (lxx-6) dated 19-06-1968). on this basis, the courts have taken the view that depreciation on assets of the trust is to be deducted for the purpose of calculation of income of the trust in commercial sense u/s. 11 of the income-tax act. The well settled principle of law, as laid down by various courts, during the last more than 50 years is that under the scheme of section 11, there are two steps. in the first step, the income of the trust is to be “computed” on commercial principles and depreciation on capital assets is to be deducted for this purpose. In the second step, the income so computed is to be compared with “application” of this income to objects of the trust. For application of such income, Capital and revenue expenditure incurred during the year for the objects of the trust is be treated as application therefore, “depreciation” and outgoing for acquiring “Capital asset” are different and distinct claims and there is no double deduction of expenditure (refer CIT vs. Framjee Cawasjee Institute 109 Ctr 463 (Bom), CIT vs. Institute of Banking Personnnel Selection 264ITR – 110 (Bom), CIT vs. Society of Sister of St. Anne 146itr 28 (Kar), CIT vs. Seth Manilal Ramchhoddas Vishram Bhavan Trust 198 itr 598(Guj)).

(ii) By amendment of section 10(23C) and 11, from a.y. 2015-16, it is now provided that depreciation will not be allowed in computing the income of the trust or institution in respect of an asset, where cost of acquisition has already been claimed as deduction by way of application of income in the current or any earlier year. It may be noted that this amendment will overrule all the above decisions of various high Courts.

(iii) Logic for the above amendment is given in the explanatory memorandum as under:

“The existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital assets. subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. the provisions need to be rationalized to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose.”

It will be noticed that this logic is contraryto the well settled law as interpreted by various high Courts.

(iv) The effect of the above amendment will be that all the trusts/institutions which will be affected by this amendment will have to maintain separate records of Capital assets as under:

(a) WDV of Capital assets in respect of which depreciation as well as deduction by way of application of income is claimed upto a.y. 2014-15.

(b) WDV of Capital assets in respect of which deduction by way application of income has not been claimed upto A.Y. 2014-15 but only depreciation is claimed and allowed.

It may be noted that from a.y. 2015-16, depreciation will not be allowed in respect of WdV of Capital assets as stated in (a) above. as regards WdV of Capital assets as stated in (b) above, it appears that depreciation can be claimed in a.y. 2015-16 6 even after the above amendment, as the same is not retrospective

6.3 Section 10 (23C): The existing section 10(23C) (iiiab) and (iiiac) grant exemption to educational institutions, universities and hospitals that satisfy certain conditions and which are wholly or substantially financed by the Government. The term “substantially financed by the Government” is not defined and hence resulted in litigation (refer CIT vs. Indian Institute of Management 196 taxman 276 (Kar.)). It is now clarified that if the Government grant to such institutions exceeds the prescribed percentage of the total receipts, (including voluntary contributions), then it will be considered as being substantially financed by the Government.

6.4 Section 12A- Registration of trust: Section 12a has been amended w.e.f. 01-10-2014. at present a trust or an institution can claim exemption only from the year in which the application for registration u/s. 12aa has been made. as such, registration can be obtained only prospectively and this causes genuine hardship to several charitable organisations. It is now provided that the benefit of sections 11 and 12 will be available to such trusts for all pending assessments on the date of such registration, provided the objects and activities of such trusts in these earlier years are the same as those on the basis of which registration has been granted. it is also provided that no action for reopening assessment u/s. 147 shall be taken by the Assessing Officer merely on the ground of non- registration. accordingly, completed assessments in which benefit u/s. 11 has been granted, will not be adversely affected on account of non-registration. it may be noted that such benefit will not be available to trusts where the registration was earlier refused or was cancelled.

6.5 Section 12AA – Power to CIT to cancel registration: (i) the amendment made in section 12AA,
w.e.f. 01-10-2014, giving additional power to the CIT to cancel registration of a trust will create great hardships to the trusts. at present, for non-compliance with some of the requirements of section 11,12 or 13 a trust is liable to pay tax for that year. Now, the amendment in section 12aa empowering CIT to cancel registration of the trust for such non-compliance will mean that a trust which has been complying with these provisions for several years in the past and also in subsequent years will lose exemption in the year of non-compliance and also in subsequent years. this is a very harsh and uncharitable provision and will lead to unending litigation in which trustees will have to spend trust funds which they would have utilised for charitable purpose. Surprisingly, none of the public trusts or institutions have seriously opposed this amendment before it was passed in the parliament.
(ii) Briefly stated, the amendment in section 12AA is as under:

At present, registration of a trust / institution once granted, can be cancelled only under the following two circumstances:

(a) the activities of the trust are not genuine; or

(b) the activities are not being carried out in accordance with the objects of the trust.

Now, the Commissioner has also been given power to cancel registration, if it is noticed that the trust has not complied with the provisions of sections 11,12 and 13 i.e.,

(a) Income does not enure for the benefit of the public;

(b) Income is applied for the benefit of any religious community or caste (in case of a trust established on or after 01-04-1962).

(d) funds are invested in prohibited modes i.e. there is non-compliance with sections 11(5) or 13.

It is however provided that registration will not be cancelled if the trust/institution proves that there was reasonable cause for breach of any of the above conditions.

(iii) It is true that the Trustees can file an appeal against the order of Cit to itat when such registration is cancelled. But this will invite litigation in which trust money will have to be spent.

(iv) it may be noted that this additional power given to Cit raises several issues which have not been considered while making the above amendments. some of these issues are as under:

(a) Compliance with section 11,12 and 13 raise several issues of interpretation. therefore, the question will arise as to at what stage the Cit will exercise this additional power to cancel registration. in other words, whether he can cancel registration when any adverse assessment order for a particular year is passed by the a.o. or whe the entire appellate proceedings, in which the order is challenged, are completed.

(b) Whether cancellation of registration as a result of this amendment will be for the year in which there is non- compliance with sections 11, 12 or 13. if this is not the case, the trust will not be able to claim exemption u/s. 11 in subsequent years although all the conditions of sections 11 to 13 are complied with.

(c) If the registration is cancelled for non-compliance with sections 11 to 13 in one year, whether the Cit can consider granting registration in subsequent years when the trust is complying with these provisions.

(d) If registration is cancelled in the case of trust holding certificate u/s. 80 G, what will be the position of persons who have given donations and claimed deduction u/s 80G, in that year and in subsequent years. it may be noted that there is no amendment in section 80G where by CIT can cancel certificate given under the section.

(v) Considering all these issues, it appears that when the trust is required to pay tax in the year when provisions of sections 11 to 13 are not complied with, this additional power to Cit to cancel registration of the trust should not have been given. there is a grave danger of unhealthy practices being adopted by those dealing with assessments of Charitable trusts.

6.6 Section 115-BBC- anonymous donations: the existing provisions of section 115BBC provide for levy of tax at the rate of 30 % in the case of certain assessees, being university, hospital, charitable organisation, etc. on the amount of aggregate anonymous donations exceeding 5% of the total donations received by the assessee or rs. 1 lakh, whichever is higher. the section is amended from a.y. 2015-16 to provide that the income- tax payable shall be the aggregate of the amount of income-tax calculated at the rate of 30 % on aggregate of anonymous donations received in excess of 5 % of the total donations received by the assessee or rs. 1 lakh, whichever is higher, and the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by such excess. this amendment is to rationalise the provisions of the section.

7 Income from business or profession:

7.1 Investment allowance – Section 32 aC: (i) in order to encourage manufacturing companies that investsubstantial amount in acquisition and installation of new plant and machinery, finance act, 2013 inserted section 32aC (1) in the act to provide that where a company engaged in the business of manufacture of an article or thing, invests a sum of more than rs.100 crore in new assets (plant and machinery) during the period 01-04- 2013 to 31-03-2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16.
(ii) as growth of the manufacturing sector is crucial for employment generation and development of an economy, this section is amended to extend the deduction available u/s. 32aC for investment made in plant and machinery up to 31-03-2017. further, in order to simplify the existing provisions of section 32aC of the act and also to make medium-size investments in plant and machinery eligible for deduction, it is now provided that the deduction u/s. 32aC (1a) shall be allowed if the company, on or after 1st april, 2014, invests more than rs. 25 crore in plant and machinery in the previous year. it is also provided that the assessee who is eligible to claim deduction under the existing combined threshold limit of rs.100 crore for investment made in previous years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under the existing provisions contained in section 32aC(1) even if its investment in the year 2014-15 is below the proposed new threshold limit of investment of rs. 25 crore during the previous year.

The deduction allowable under this section from a.y. 2015- 16 after the amendment in different cases of investment is given by way of illustration in the following table:

Sl.

No.

Particulars

P.Y. 2013-14

P.Y. 2014-15

P.Y. 2015-16

P.Y. 2016-17

Section applicable

Amount of investment

–

32AC(1)

Deduction allowable

Nil

16.5

–

Amount of Investment

–

32AC(1A)

Deduction allowable

Nil

–

Amount of investment

32AC(1A)

Deduction allowable

Nil

4.5

Amount of investment

150

32AC(1) &

32AC(1A)

Deduction allowable

22.5

10.5

Nil

Specified business. Further, section 28(vii) taxes any sum received on account of demolition, destruction, discarding or transfer of such asset, the entire cost of which was allowed as a deduction u/s. 35ad.

(ii) section 35AD has been amended from a.y.2015-16 as under:

(a) The benefit of the section is extended to the following two businesses, commencing operation on or after 1st april, 2014:

(i) Laying and operating a slurry pipeline for the transportation of iron ore;

(ii) Setting up and operating a semi-conductor wafer fabrication manufacturing unit notified by the Board in accordance with the prescribed guidelines.

(b) It is now provided that any asset in respect of which deduction has been claimed and allowed under this section shall be used only for the specified business for a period of at least 8 years, beginning with the previous year in which such asset is acquired or constructed;

(c) Further, it is provided that where any asset, in respect of which a deduction is claimed and allowed under this section, is used for any other purpose during the specified period of 8 years, the total deduction so claimed and allowed in one or more previous years, as reduced by the depreciation allowable u/s. 32, (as if no deduction u/s. 35ad was allowed) shall be deemed to be the business income of the assessee of the previous year in which the asset is so used. however, this provision will not apply to a BIFR Company (sick company) during the specified period of 8

Investment Linked Deductions – Section

7.3 Corporate Social Responsibility (CSR) Expenditure Section 37: (i) it is very strange that section 37 of the act has been amended from a.y. 2015-16 to provide that expenditure incurred by a company for CSR activities as provided u/s. 135 of the Companies 35aD: (i) section 35ad provides for a deduction in respect of any capital expenditure, other than on the acquisition of any land or goodwill or financial instrument, incurred wholly and exclusively for the purposes of any act, 2013 shall not be considered as expenditure incurred for the purpose of Business or profession. this is strange because one legislation made by the parliament i.e. Companies Act, 2013, mandates certain specified companies to spend upto 2% of its average profits of last 3 years for Csr activities. elaborate list of such expenditure is given in schedule Vii of the Companies act and elaborate rules and forms are prescribed under that act. Csr expenditure is treated as part of the business expenditure of the company under the Companies act and when it comes to income-tax act it is now provided that this is not an expenditure for the business or profession of the Company. such a provision in section 37 is contrary to the provisions of section 135 of the Companies act and requires to be reconsidered. at best, the deduction u/s. 37 could have been restricted to 2% of the Gross total income under the income-tax act.

(ii) The logic for this provision in section 37 is explained in the explanatory memorandum as under:

“Under the Companies act, 2013 certain companies (which have net worth of Rs.500 crore or more, or turnover of Rs.1,000 crore or more, or a net profit of Rs.5 crore or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate social responsibility (CSR). under the existing provisions of the act expenditure incurred wholly and exclusively for the purpose of the business is only allowed as a deduction for computing taxable business income. Csr expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. as the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on Csr cannot be allowed as deduction for computing the taxable income of the company. moreover, the objective of Csr is to share burden of the Government in providing social services by companies having net worth/ turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure”.

From the above, it will be noticed that for tax purposes the Government has taken the view that Csr expenditure is application of income whereas under the Companies act the same Government states that it is business expenditure. if it is only application of income how there can be compulsion under the Companies act on the Directors that 2% of average profits of previous 3 years should be spent for specified activities listed in schedule Vii of the Companies act.

(iii) In the Explanatory Memorandum it is clarified that CSR expenditure which qualify for deduction u/s. 30 to 36 of the income-tax act will be allowed as deduction. if we refer to schedule Vii, most of the items of expenditure may not qualify for deduction under the above sections. in order to get deduction of the CSR expenditure most of the companies may prefer to contribute to (a) the prime minister’s national relief fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the sC, st, OBC, minorities and Women or for (b) contribution to approved rural development projects approved u/s. 35AC.

(iv) It may be noted that CSR expenditure incurred by the Company will be allowable in computing Book profits u/s. 115jB. no such disallowance is required to be made u/s. 115JB.

7.4 Disallowance for non deduction of Tax Section 40(a): (i) section40 (a) (i) is amended from a.y. 2015- 16 to provide that if tax is deducted from payment made for specified expenditure to a Non-Resident in a previous year, no disallowance for the expenditure will be made if the tds amount is deposited by the deductor with the Government before the due date for filing return of income u/s. 139(1). At present, the time limit for such deposit of tax is as prescribed in section 200(1) (refer rule 30). if the tds amount is deposited after the due date, deduction for expenditure will allowed in the year in which tds amount is deposited.

(ii) Section 40(a)(ia) provides for disallowance of payment of specified expenditure to a Resident, if tax deductible has not been deducted or deposited with the Government before the due date for filing the Return of Income. This section is amended from a.y. 2015-16 as under:

(a) At present, the section applies to payment under certain specified heads viz. interest, rent, professional fees, Brokerage, Commission etc. it is now provided, by this amendment, that the section will apply to all payments from which tax is to be deducted under Chapter XVii B. In other words, the assessee will suffer disallowance under this section if tax deductible in respect the above specified heads as well other payments viz. salaries, director’s fees, purchase of immovable property as stock-in- trade, non-compete fees etc. has not been deducted or deposited with the Govt.

(b) At present, if the tds amount is not deducted and/or deposited with the Government, 100% of the expenditure is disallowed. By this amendment, it is provided that only 30% of the expenditure will be disallowed from a.y. 2015-16.

(c) further, the amended section provides that if the amount from which tax is deductible under chapter XViiB is deducted but paid after the due date as stated above, 30% deduction will be allowed in the year in which such tds amount is deposited with the Government. it may be noted that this amendment does not take care of the following type of situations which will arise in many cases.

Illustration

•   ABC Ltd. has deducted tax of Rs. 2 lakh from payment of commission during the year ending 31-03-2013.
•   Due date for filing return for A.Y. 2013-14 is 30-09- 2013, but the company has deposited tds amount of Rs. 2 lakh in april, 2014.
•   100% of the Commission Amount will be disallowed u/s. 40(a)(ia) in a.y. 2013-14.
•   Under the amended section 40(a)(ia) since the TDS amount is deposited in april, 2014 i.e. a.y. 2015- 16, only 30% of the commission will be allowed as deduction when 100% of the commission has been disallowed in a.y.2013-14.
•   To this extent, this amendment requires reconsideration.

(d) The second proviso to section 40(a) (ia) inserted by the finance act, 2012 from a.y. 2013-14 provides that if the resident payee has paid tax on such income on the date of furnishing his return of income, no disallowance under the section will be made in the case of the payee. it may be noted that explanation below this second proviso refers to payments under specified heads viz. commission, Brokerage, professional fees, rent, royalty, technical service fees and payment to contractors. Since section 40(a) (ia) is now amended to provide for disallowance in respect of non-deduction of tds from all sections under Chapter XVii B, including salaries, directors’ fees etc.,explanation below the second proviso of this section should have been similarly amended.

7.5 Commodity Derivatives Section 43 (5): Commodity derivative transactions were excluded from the purview of speculative transactions with effect from a.y.2014-15 u/s. 43(5)(e) by the Finance Act, 2013. It is now clarified from a.y. 2014-15, that in order to be eligible for such exclusion, such transactions should be chargeable to Commodities transaction tax (Ctt).

7.6 Goods Carriages Business – Section 44 aE: section 44ae (2) is amended to provide that the presumptive amount of profits and gains for any type of goods carriage shall be Rs. 7,500 per month or part of a month for which
each such goods carriage is owned by the assessee or the amount claimed to have been actually earned by the assessee, whichever is higher. the earlier amounts were rs.5,000 for each heavy goods carriage and rs. 4,500 for each other goods carriage. the distinction between goods carriages and heavy goods carriages has been done away with from the a.y. 2015-16.

7.7 Losses in Speculation Business –Section 73:
at present, section 73 provides that if any part of the business of a specified company consists of purchase and sale of shares of other Companies, loss in such business shall be treated as speculation loss. there is one exception in the case of a company whose principal business is of banking or granting of loans and advances. this exception is now widened from a.y. 2015- 16 to provide that in the case of a company whose principal business is of trading in shares, such loss in purchase and sale of shares will not be considered as a speculation loss. this is a welcome provision for companies which are share brokers and which are mainly dealing the shares of Companies.

8 Income from other sources

(i) Sections 2(24), 51 and 56(2) have been amended from a.y. 2015-16. section 51 provides that where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received or retained by the taxpayer in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, while computing cost of acquisition.

(ii)   It is now provided in the newly inserted section 56(2)
(ix) That the amount received as advance or otherwise   in the course of negotiations for transfer of capital asset shall be chargeable to tax under the head “income from other sources” if:
(a)   such advance money is forfeited; and

(b) the negotiations do not result in transfer of the capital asset.

(iii) Corresponding amendment is made in section 51 to provide that any such forfeited advance, taxed u/s. 56(2) (ix), Shall not be deducted from the cost or the written down value or the fair market value of capital asset while computing the cost of acquisition. Consequential amendment is also made in section 2(24)(xvii).

9 Capital gains
9.1 Definition of Capital asset: Section 2 (14): section 2(14) defining the term “Capital Asset” has been amended from a.y.2015-16. it is now provided that any security held by a foreign institutional investor (fii) which has invested in such security as per seBi regulations shall be considered as a “Capital asset”. the effect of this amendment will be that in the case of fii any gain from transfer of such investment in shares and securities as per seBi regulations will be treated as short/long term Capital Gain only. it will not be considered as Business income. it may be noted that fii is now called foreign portfolio investors (FPI) under SEBI regulations.

9.2 Short Term/Long – Term Capital asset and Tax rate-Section 2(42A) and 112:
(i) By an amendment of section 2(42a) from a.y.2015-16, the holding period for (a) unlisted shares of Companies and
(b) units of m.f. (other than units of equity – oriented funds) shall now be 36 months, instead of 12 months, as at present. accordingly, these assets will now be treated as short-term capital assets if they are held by the assessee for 36 months or less before the date of transfer, subject to applicable relaxation provided in the explanation (1) to section 2(42a).

(ii) Presently, under the proviso to section 112, an option is available to a taxpayer to pay tax at 10% on un-indexed long-term capital gains or 20% on indexed long-term capital gains on transfer of units of m.f. this option in respect of such units has now been withdrawn and the same will now be taxed at 20% after indexing the cost.

(iii) It may be noted that the finance minister has announced at the stage of passing the finance Bill that the above provision will not apply to shares of unlisted Companies or units of mf transferred during the period 01-04-2014 to 10-07-2014. The relevant sections have been amended for this purpose.

9.3 Enhanced Compensation received on Compulsory acquisition of Capital asset – Section 45(5): (i) at present, section 45(5)(b) provides that where enhanced compensation is awarded by any court, tribunal or other authority in case of compulsory acquisition of a capital asset, it shall be taxed in the year in which it is received. it is now provided that, if any amount of compensation is received in pursuance of an interim order of a court, tribunal or any other authority, it shall be taxable as capital gains in the previous year in which the final order of such court, tribunal or other authority is made. This amendment is made from a.y. 2015-16.

(ii) it may be noted that the amendment does not clarify as to how capital gain will be computed if such enhanced compensation received under an interim order of the court passed in an earlier year was taxed in that year u/s. 45(5) (b). it is presumed that only the amount receivable as per the final order, after deducting the amount taxed in the earlier years, will be taxable in the year in which the final order is passed by the court, tribunal or other authority.

9.4 Section 47:
section 47 has been amended from a.y. 2015-16 to provide that transfer of a Government security carrying a periodic payment of interest made outside india through an intermediary dealing in settlement of securities, from one non-resident to another non-resident, will not be liable to Capital Gains tax.

9.5 Cost Inflation Index – Section 48:
At present, cost inflation index for a particular financial year means such index as may be notified by the Government having regard to 75% of the average rise in Consumer price index (Cpi) for urban non-manual employees for the immediately preceding year to such financial year. since this method of Cpi has been discontinued, it is now provided that cost inflation index shall mean such index as may be notified by the Government having regard to 75% of the average rise in Consumer price index (urban) for the immediately preceding previous year to such financial year. This provision will apply from A.Y. 2016-17.

9.6 Reinvestment in residential House – Section 54 and 54F

At present section 54 dealing with long term capital gains arising on transfer of a residential house, and section 54f dealing with long –term capital gain on transfer of a capital asset other than a residential house, provide for exemption from capital gains u/s. 45, subject to specified conditions. one of the conditions is that the taxpayer, within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer, constructs a residential house. There is a controversy as to whether the benefit of exemption is available in respect of purchase/construction of more than one residential house and whether such house has necessarily to be located in india. Both these sections are now amended from a.y. 2015 – 16 to provide that the exemption under the above section will be available only in respect of one residential house situated in India. It may be noted that if one or more adjacent flats are acquired and they satisfy the test of one residential

House as held in various tribunal and Court decisions, the tax payer may still be entitled to claim the exemption in respect of such adjacent flats

9.7 Investment of Capital gains in Specified Bonds – Section 54 EC:

(i)Section 54eC provides that where capital gain arise from the transfer of a long-term capital asset and the assessee has, within a period of six months after the date of such transfer, invested the whole or part of capital gains in the long- term (specified bonds) such capital gains shall be proportionately exempt. Such investment in specified Bonds is Limited to Rs. 50 lakh in a financial Year.

(ii) Some assesses invested rs. 50 lakh each in two successive years (while ensuring that both dates of investment fell within the specified time limit of six months) and claimed exemption of up to rs.1 crore. this interpretation was upheld in certain tribunal orders. In order to set at rest this controversy, this section is amended from a.y. 2015-16 to provide that the investment made by an assessee in the long-term specified bonds in respect of capital gains arising from transfer of one or more capital assets during the financial year shall not exceed `50 lacs whether the investment is made in that year or in the subsequent financial year.

10 Transfer pricing – sections 92b, 92c, 92cc and 271g:

10.1 Section 92B: section 92B(2) extends the scope of the definition of ‘international transaction’ by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation to the transaction between such other person and the associated enterprise or the terms of the relevant transaction are determined in substance between the other person and the associated enterprise.

There was a doubt as to whether or not, for the transaction to be treated as an international transaction, the unrelated person should be a non-resident. By amendment of this section from a.y. 2015-16 it is now provided that such transaction shall be deemed to be an “international transaction” entered into between two associated enterprises, whether or not such other person is a resident or non-resident.

10.2 Section 92C: at present, under the transfer

Pricing (tp) regulations, where more than one price is determined by most appropriate method, the arithmetic mean of all such prices is taken for determination of arm’s length price (alp) with a tolerable range of +/-3% or +/- 1%. the application of this methodology has been one of the reasons for tp litigation. to reduce this litigation a third proviso is inserted in section 92C to provide that where more than one price is determined by the most appropriate method, the alp in relation to an international transaction or specified domestic transaction shall be computed in such manner as may be prescribed. With the introduction of the new mechanism from a.y. 2015-16 the existing methodology as stated above for determination of alp will not apply.

10.3 Section 92CC: section 92CC dealing with advance pricing agreements (apa) is amended w.e.f.10-10-2014 to provide for roll-back mechanism. accordingly, the apa may provide for determining the alp or specify the manner in which alp is to be determined in relation to an international transaction entered into, during any period not exceeding four previous years preceding the first of the previous year for which the apa applies in respect of the international transaction to be undertaken. this roll-back provision would be subject to conditions, procedure and manner to be prescribed, providing for determining the alp or for specifying the manner in which alp is to be determined.

10.4 Section 271g: penalty u/s. 271G can be levied upon any person, who has entered into an international transaction or specified domestic transaction and fails to furnish any such document or information as required by section 92d(3). such penalty can now be levied not only by the Assessing Officer or Commissioner (Appeals) but also by the Transfer Pricing Officer w.e.f. 01-10-2014.

11 Alternate minimum tax – section 115jc and 115 jee

(i) The provisions relating to alternate minimum tax (amt) contained in section 115jC to 115jf apply to non- corporate assessees claiming deduction u/s. 10 aa or chapter Vi-a. section 115jee has been amended from
a.y. 2015-16 to provide that the provisions relating to amt will apply if deduction u/s. 35ad is claimed by the assessee.
(ii) AMT is payable with respect to adjusted income. section 115JC has been amended from A.Y.2015-16 to provide that for computing the adjusted total income, the total income shall be increased by deduction claimed
u/s. 35ad as reduced by the amount of depreciation that would have been allowable as if the deduction u/s. 35ad was not allowed. this adjustment will be in addition to the adjustments already specified in the section.

(iii) section 115jee is amended from a.y.2015-16 to provide that even if provisions of the Chapter are otherwise not applicable in that year, either because non- corporate assessee’s (other than partnerships and llps) adjusted total income does not exceed rs. 20 lakh or it has not claimed deduction under Chapter Via, section 10aa or section 35ad, it will be entitled to claim credit for the amt paid in the earlier years u/s 115jd.

12   Survey – Section 133A:
(i)   At present the income-tax authorities can retain the custody of impounded books of account and documents for a period of 10 days without obtaining the approval of the Chief Commissioner or director General u/s 133a. this period is now increased to 15 days.
(ii)   further, by insertion of section 133a (2a) additional powers have been granted to the income- tax authorities to carry out survey for the purpose of verification of compliance of provisions of deduction of tax at source and collection of tax at source. in such survey, the income-tax authorities cannot impound any books of accounts or any document nor make an inventory of cash, stock or other valuable article or thing. these amendments take effect from 1st october 2014.

13 Power to call for information – New Section 133C section 133C has been inserted with effect from 1st october, 2014 to empower prescribed income-tax authorities to call for information or documents from any person for the purpose of verification of information in its possession relating to any person, which may be useful for any inquiry or proceedings.

14 Assessment and Reassement
14.1 Return of Income – Section 139: it is now made mandatory for a mutual fund referred to in section 10(23d), securitisation trust referred to in section 10(23DA) and Venture Capital Company/fund referred to section 10(23FB) to file its return of income, if its income, without considering provisions of section 10, exceeds the non-taxable limit. every Business trust is also required to file its return of income. This amendment is made from a.y. 2015-16.

14.2 Reference to Valuation Officer – Section 142a, 153 – 153B: the existing section 142a has been replaced
by new section 142a from 01-10-2014 to provide that the Assessing Officer can make a reference to the Valuation Officer to estimate the value or fair market value of any asset, property or investment, whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. The Valuation Officer shall estimate the value based on the evidence gathered after giving an opportunity of being heard to the assessee. If the assessee does not co-operate, the Valuation Officer may estimate the value based on his judgment. The Valuation Officer is required to send a copy of his report to the Assessing Officer and to the assessee within a period of six months from the end of the month in which reference is made by the Assessing Officer. The Assessing Officer will then complete the assessment after taking into account such report, after giving the assessee an opportunity of being heard. the period from the date of reference to the Valuation Officer to the date of receipt of the report by the Assessing Officer shall be excluded while computing the period of limitation for the purpose of sections 153 and 153B.

14.3 Method of accounting – Section 145: section 145 is amended from a.y. 2015-16 to provide that the Central Government may notify income Computation and disclosure standards for computing income under the heads ‘Profits and gains of business of profession’ and ‘income from other sources’ . such standards are required to be regularly followed by the assessee and the income is required to be computed in accordance with such standards in order to avoid best judgment assessment u/s. 144.

14.4 Assessment in Search Cases – Section 153 C: In cases of search, if the Assessing Officer is satisfied that the assets seized or books of account or other documents requisitioned belong to another person, then he has to hand over the same to the Assessing Officer having jurisdiction over such other person. Hitherto, it was mandatory for the other Assessing Officer to assess/ reassess income of such other person in accordance with the provisions of section 153A in such cases. the section is amended from 1st october, 2014 to provide that such other Assessing Officer shall proceed against such other person to assess/reassess his income in accordance with the provisions of section 153, only if he is satisfied that the books of account or documents or assets seized have a bearing on the determination of the total income of such other person for the relevant assessment year or years. 15 Settlement Commission – Section 245a and 245C:

(i) An assessee may apply to settlement Commission for settlement of cases at any stage of the case relating to him u/s. 245C. the term ‘case’ as per section 245a (b) means any proceeding for assessment which may be pending before an Assessing Officer on the date on which application is made before settlement Commission. At present a taxpayer is not able to file an application for settlement of cases in cases where reassessment is pending before the Assessing Officer. By an amendment the proviso to section 245a which restricts the scope of the term ‘case’ has been deleted. This amendment will enable an assessee to apply to settlement commission in those cases where reassessment proceedings are pending. the changes in the provisions shall take effect from 1st october, 2014.

Similar changes have been made in Wealth-tax act as well for settlement of cases.

16 Authority for advance ruling(aar) – sections 245 n and 245-O

(i) Currently, an advance ruling can be obtained for determining the tax liability of a non-resident. this facility is not available to resident taxpayers, except public sector undertakings. section 245n(a) is amended to provided that the term ‘advance ruling’ shall mean a determination by the authority in relation to the tax liability of a resident applicant arising out of a transaction undertaken or proposed to be undertaken by him. further, the meaning of the applicant has been amended so that the Central Government may notify the class of resident persons for the purpose of obtaining the advance ruling.

(ii) Following amendments have been made in section 245-O in order to strengthen the aar.

(a) The existing provision provides that the aar will consist of three members. the amendment provides for additional appointment of Vice- Chairmen as members of aar. Further, Central Government has been empowered to appoint such number of Vice-Chairmen, revenue members and law members as it deems fit.

(b) The existing provision does not provide for constitution of benches of aar at various locations. it merely provides that office of AAR shall be located in Delhi. The amended provisions provide as under:

• The office of AAR shall be located in Delhi and its benches shall be located at such places as Central Government may specify.

• Further, benches of AAR have been given authority to exercise power and functions of aar and it has been further provided that such benches will consist of Chairman or the Vice-Chairman and one revenue member and one law member.

17 Penalties and Prosecution:

(i) section 271 FAA: this is a new section inserted from a.y.2015-16. it provides that if a person furnishes inaccurate statement of financial transactions or reportable account u/s. 285 Ba, penalty of rs. 50,000/- can be imposed by the prescribed income tax authority.

(ii) Section 271 H: at present this section does not specify the authority which can levy penalty u/s 271h for assessee’s failure to furnish or for furnishing inaccurate particulars for tds/tcs. it is now provided w.e.f. 01-10- 2014 that such penalty can be levied by the assessing officer

(iii). Section 276D: this section provides that if a person willfully fails to produce accounts and documents as required in any notice issued u/s.142(1) or willfully fails to comply with a direction issued to him u/s.142(2a), he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine equal to a sum calculated at a rate which shall not be less than Rs. 4 or more than Rs. 10 for every day during which the default continues, or with both. now in such a case, such person shall be punished with rigorous imprisonment for a term which may extend to one year and also with fine. This amendment is with effect from 01-10-2014.

18 Other Provisions

18.1 Income Tax authorities – Section 116: the following new income tax authorities are created w.e.f. 01-06-013. these are in addition to existing I.T. authorities.

(i)   principal directors General of income tax.
(ii)   principal Chief Commissioners of income-tax;
(iii)   principal directors of income-tax;
(iv)   principal Commissioners of income-tax.

18.2 Interest Payable by assessee–Section 220:
(i) s/s.(1A) Has been inserted to provide that when the notice of demand has been served upon the assessee and any appeal or other proceedings are filed or initiated in respect of the amount of such demand, then, such demand shall be valid till the disposal of the appeal by the last appellate authority or disposal of the proceedings and the same shall have effect as specified in section 3 of the taxation laws (continuation and validation of recovery proceedings) act, 1964.

(i) Section 220(2) provides for payment of interest in respect of unpaid amount of demand. such interest is payable for the period commencing from the due date of payment of demand to the date of payment. it is further provided that if as a result of any order passed subsequently u/s. 154, 250, 254 etc., the amount on which interest was payable is reduced, then the interest shall also be reduced accordingly. This section is now amended to provide that in such cases, subsequently, as a result of any order under the aforesaid sections or u/s. 263, the amount on which interest was payable is increased, then the assessee shall be liable to pay interest u/s. 220(2) for the period from the original due date of payment of demand, up to the date of payment.

The above amendments are made from 01-10-2014.

18.3 Acceptance or repayment of Loans or Deposits – section 269ss and 269t: sections 269ss & 269t prohibit every person from taking/ accepting or repaying any loan or deposit otherwise than by an account payee cheque or account payee bank draft, if the amount of loan or deposit exceeds the specified threshold. The sections now permit from a/y:2015-16 taking/accepting or repaying such loan or deposit by use of electronic clearing system through a bank account (i.e., by way of internet banking facilities or by use of payment gateways).

18.4 Period for Provisional attachment of Properties
–Section 281B: under the provisions of section 281B, the Assessing Officer may provisionally attach the properties of the assessee during the pendency of the assessment proceedings. such order of provisional attachment can remain into operation for a maximum period of six months from the date of the order. However, the Chief Commissioner, Commissioner, director General or director are given the power to extend such period up to two years. Under the amended provisions, from 01-01- 2014, the above period is extended to 2 years and six months from the date of assessment or reassessment whichever is later.

18.5 Financial Transactions or reportable account
– Section 285Ba: (i) existing section 285 Ba has been replaced by a new section 285 Ba from 01-10-2014. The new section provides for furnishing of statement of Information by a prescribed reporting financial institution along with other persons as stated in existing section 285 BA in respect of any specified financial transaction or reportable account to the income tax authority or prescribed authority or agency. The statement shall be furnished for such period, within such time, and in such form and manner as may be prescribed. The Central Government may notify the persons required to be registered with the prescribed income tax authority, the nature of information, the manner in which such information shall be maintained by the person and the due diligence to be carried out by the person for the purpose of identification of any reportable account. any person who furnishes a statement of information, or discovers any inaccuracy in the information provided in the statement, shall within a period of ten days of discovering the mistake, inform the income tax authority or any other prescribed authority of the inaccuracy and furnish the revised information. Thus, statement of financial transactions or reportable account will now replace ‘annual information return’.

(ii) In line with the amendments u/s. 285Ba as stated above, provisions of section 271fa have been suitably modified to provide for levy of penalty for failure in furnishing such new statement. Further, section 271faa has been inserted which provides for a penalty of Rs. 50,000 which can be levied by the prescribed income- tax authority on concerned reporting financial institution which provides inaccurate information in such statement.

19 To sum up:

19.1 From the above discussion, it will be noticed that the Finance Minister in his first Budget of the new Government has made an honest attempt to reduce the burden of tax on individuals, huf etc., to give incentives for increasing savings, to encourage manufacturing activities with a view to create new jobs and encourage growth of economy, to reduce tax litigation and to make the tax laws taxpayer friendly. in this context, his following observations in para 209 and 210 of the Budget speech need to be noted

“209. Income tax Department is expected to function not only as an enforcement agency but also as a facilitator. A number of Aykar Seva Kendras (ASK) have been opened in different parts of the country. I propose to extend this facility by opening 60 more such Seva Kendras during the current financial year to promote excellence in service delivery.

210. The focus of any tax administration is to broaden the tax base. Our policy thrust is to adopt non intrusive methods to achieve this objective. In this direction, I propose to make greater use of information technology techniques”.

19.2 The concept of Business trusts has been introduced for the first time with a view to encourage investment in infrastructure projects. Let us hope that this becomes popular in the years to come. similarly, the transfer pricing provisions have been simplified to reduce tax Litigation. Again, the benefit of AAR is extended to Residents. This was the demand of the business community which has been accepted after over two decades. The provisions for approaching settlement Commission have also been amended to enable assessees to approach the commission when reassessment proceedings are pending.

19.3 There are some disturbing provisions which will increase tax litigation in the coming years. One is about CSR expenditure for which specific provision is made that these expenses will be disallowed on the ground that these are not expenses incurred for business or profession. The logic for this given by the Government that this expenditure is application of income is not at all convincing when the Companies act mandates that specified companies should spend at least 2% of average profits of earlier 3 years for CSR activities. This expenditure is treated as business expenditure under schedule iii of the Companies act and considered as application of income under the income-tax act. The other disturbing provision is about the additional power given to CIT to cancel registration of a charitable trust u/s. 12AA if the trust does not comply with requirements u/s. 10(23C), 11 or 13. for non-compliance with these provisions in any year, the existing act provides for levy of tax on the trust or institution for that year. If the registration of the trust/ institution is cancelled there will be unending litigation for which expenditure will have to be incurred out of funds of the trust/institution which would otherwise have been spent for charitable purposes. There is yet another area which relates to capital gains on transfer or redemption of units of mutual fund (other than equity oriented funds). This amendment will reduce the investment in such funds and affect the mutual fund industry.

19.4 In para 208 of the Budget speech, the finance minister has discussed about the direct taxes Code (DTC) as under:

“The Direct Taxes Code Bill, 2010 has lapsed with the dissolution of the 15th Lok Sabha. Having considered the report of the Standing Committee on Finance and the views expressed by the stakeholders, my predecessor had placed a revised Code in the public domain in March, 2014. The Government shall consider the comments received from the stakeholders on the revised Code. The Government will also review the DTC in its present shape and take a view in the whole matter”.

The above observation shows that the new Government is determined to replace the existing 5 decade old income
-tax act by the DTC. We are hearing about Government intention about introducing DTC for the last about 10 years. Let us hope that this Government is able to simplify the provisions of the direct tax laws by enacting a taxpayer friendly DTC. One wonders as to why the finance minister has made so many amendments in the existing income tax act if he is keen to bring the DTC into force in the near future.

19.5 GST is another area which is under public debate for over a decade now. In pare 9 of the Budget speech the finance minister has observed as under.

“9 The debate whether to introduce a Goods and Service Tax (GST) must now come to an end. We have discussed the issue for the past many years. Some States have been apprehensive about surrendering their taxation jurisdiction; others want to be adequately compensated. I have discussed the matter with the States both individually and collectively. I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST. This will streamline the tax administration, avoid harassment of the business and result in higher revenue collection both for the Centre and the States. I assure all States that government will be more than fair in dealing with them.”

Let us hope that the new Government is able to introduce GST during this year and get the necessary legislation passed. This will help all concerned and also simplify the levy of indirect taxes.

shailesh.kwebmaker

Tax Audit – Need for defining roles

For around the past one month, virtually all practising chartered accountants have been discussing the revised form of the tax audit report. The form underwent a change by virtue of a notification dated 25th July 2014. The changes in the form were in line with thinking of the tax department which is – shift the onus and the responsibility to assessees or the hapless professionals ! Assuming that the changes were necessary to facilitate assessments, it would have been appropriate to make them from the next assessment year so that both assessees as well as professionals would have geared up for compliance. That not having been done, the representations, including one from the Society were made to the authorities. The concern regarding the 30th September deadline has been partially addressed by the circular of the CBDT on 19th August 2014, extending the date for obtaining and furnishing the tax audit report to 30th November 2014.

Tax audit has been in existence for more than three decades but there appears to be no clarity in regard to the role of the auditor in the minds of the assessee or the auditor himself. Similarly, there is confusion about the scope and purpose of the tax audit in the minds of the tax authorities. When the concept of tax audit was introduced in 1984, the stated objective was to ensure proper maintenance of books of account, reflection of true income of the taxpayer and facilitate assessment. At that time, the role of the tax auditor was restricted to that of expressing an opinion on the true and fair view of the accounts and authenticating the correctness of the particulars prescribed. Over a period of time, a large number of clauses have been added to the report which require, compilation and consequent verification of exhaustive details, as well as expression of opinion on a large number of aspects which involve interpretation of both the Income-tax Act as well as other tax laws. The professional therefore has two roles to perform one that being that of an auditor and the other being that of a tax consultant/advisor/expert. These roles may not necessarily be in sync and could be in conflict with each other.

The problems that arise are for two reasons. Given the threshold prescribed for tax audit, a large spectrum of the business organisations/ assessees who require to get their accounts audited do not have the requisite wherewithal to compile comprehensive accounts and data that is required for the purpose of the tax audit. Consequently, at every stage in this process, a tax auditor is involved in varying degrees. In addition, he normally performs the role of tax advisor to the organisation. This means he is to ensure compliance with tax laws as well as ensure the minimum tax liability for his client. This requires that he wear different hats. The challenge is in understanding that he can wear only one hat at a time and in making a client understand this position.

When he undertakes the role of an auditor, he must in his mind accept that he is performing his duties as an independent person. He will have to express an opinion on the accounts as well as the correctness of the particulars, without letting the fact that he is also the tax advisor, colour his mind. Even if his expression of opinion may have some adverse consequences for his client, he will have to perform that task with the requisite diligence. When he represents his client’s case before the tax authorities he is performing this task as a counsel, and is entitled to urge the assesee’s case, on the basis of views held by the assessee. To my mind there is nothing wrong for an auditor to hold one view while conducting audit, but to canvass the other view before a tax authority as while he does so he is the authorised representative for his client. I am conscious that this is easier said than done. It is this role definition that is extremely important. If a professional permits these two roles to converge he will not be able to do justice to either of them.

As far as the business organisations are concerned, they must appreciate that the prime responsibility of maintenance of accounts and preparation of particulars for tax audit is their responsibility. The work of compilation can be outsourced and not the responsibility. The responsibility of carrying out a verification of the accounts so maintained and the particulars so compiled is that of the auditor. The auditor needs to emphatically state this and the auditee needs to be appreciate it.

The problem is compounded by the mind set of our professional colleagues. We tend to associate with our clients to an extent that it can causes discomfort. I have seen that many chartered accountants fight shy of making a remark in their audit report, for they believe that should they do so, the client will be affected in a tax proceeding. This is because we tend to hold ourselves responsible for the problems of the client, when more often than not the problem is the client’s own creation. We should advise a client to take the requisite steps to avoid recurrence of the problem, but if it has occurred we need to report.

While this is the case with auditors and auditees, the lawmakers must also decide what they want from a tax audit. While requiring an auditor to ensure that the accounts show a true and fair view and that the factual particulars prescribed are correct, to ask an auditor to express an opinion on interpretation of a provision is requiring him to act as an expert. Doing so will be merging the roles of an auditor and a tax expert. If this is so, then those opinions expressed need to be respected unless they are perverse or are contrary-a judicial precedent. When an officer disagrees with an opinion expressed by the tax auditor, it should not be done perfunctorily and the officer should record detailed reasons for the same. One often finds that the tax audit report is dealt with casually.

If this position changes, it will change the perspective of both, auditors and the organisations they audit. If the tax audit exercise is to become more meaningful to business organisations whose accounts are audited, useful to the tax department which relies on the report, and less stressful to chartered accountants, there will have to be a change in attitude and perspective of all stakeholders. Let us hope that Lord Ganesha whose festival we are celebrating, blesses all concerned with the requisite wisdom to do so.

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shailesh.kwebmaker

The most cunning deception is self deception

What is deception? It is an act of not being truthful. Let us ask ourselves as to whether we put on masks whilst dealing with others and above all, whilst dealing with ourselves. The issue are:

• Are we conscious of our failings?
• Do we accept our mistakes?
• Do we accept reality ?
• Do we fantasise that we are right knowing we are wrong ?

Believe me, I am not against dreaming – I believe that unless we dream we cannot achieve. Dreaming of what I want is part of the process of achieving success. Let us never undermine the power of thought. It has virtually been said by every philosopher that, “we are what we think“. However, in my view, there is a difference between dreaming and fantasising. Dreaming is reality – whilst dreaming I am still grounded in reality – whereas whilst fantasising, I am absolutely devoid of reality. When we accept our mistakes and make amends, that is reality. However, when we fantasise that we are not wrong and justify our actions, we are, I repeat, devoid of reality. We are in fact deceiving ourselves and it is this deception that makes us wrongly justify on what we do.

This is our biggest failure and believe me, deception is an impediment to success. The first step to success is accepting oneself, which means to stop deceiving ourself. Hence, once one stops deceiving oneself, one is on the road to success and happiness is what we all seek.

I must confess that most of the time when I put on a mask, it is to hide my emotions with the intention of not hurting others. I have still not learnt the art of being politely blunt and frank. Learning is a life long process and I am making a conscious effort to be politely frank which should obviate the need to put on a mask.

The basic issue is: has the author stopped deceiving himself? The answer has been on this road and is still on this road. To a considerable extent the author lives in reality, accepts reality and moves on and I am sure a day will dawn when the mask will be fully torn and he will exist in reality and there will be no self deception.

The aim and purpose of life, not only of KC but all of us: stop deceiving ourselves and be happy.

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shailesh.kwebmaker

Indian Transfer Pricing – The Journey So Far

1 Introduction

1.1. In 1920-1923,
the International Chamber of Commerce (‘ICC’) commenced a process to
develop a model income tax treaty in the immediate aftermath of World
War I. It was the period of conception for the model treaties of today.
Though the work has been lost as the world has evolved, it is
instructive with respect to the current tax policies being espoused by
Source Countries.

1.2. T he repercussions of the World War I
left England with enormous war debt. There was a material flow of
commerce between England and India. For the most part, England
transferred capital, technology, and access to global markets to
affiliates in India. India responded with commodities and produced
goods. England became a creditor and India a debtor. These dealings led
to a major concern as to how income from these activities should be
shared between “Resident” and “Source” countries.

1.3.
D iagram ‘A’ is still prevalent in present day scenario where tax
havens like BVI, Cayman, Netherlands, Luxembourg, Bermuda, Costa Rica,
etc. are used as a means to drain all the profits generated in developed
and developing countries. 1.4. I CC in its interim report in 1923
proposed what we would call today a profit split or formulary allocation
methodology, to address income allocation between Residence (Creditor)
and Source (Debtor) countries. The proposal was similar to the combined
income methodologies typically used today, to resolve major Competent
Authority cases under treaty mutual agreement procedures cases between
countries with Multinational Enterprise (MNE) in the middle. Frankly, it
is also similar to the methodologies for evaluating intangibles in the
2012 OECD discussion draft. 1.5. T he OECD Transfer Pricing Guidelines
(OECD Guidelines) as amended and updated, were first published in 1995;
this followed previous OECD reports on transfer pricing in 1979 and
1984. The OECD Guidelines represent a consensus among OECD Members,
mostly developed countries, and have largely been followed in domestic
transfer pricing regulations of these countries. Another transfer
pricing framework of note which has evolved over time is represented by
the USA Transfer Pricing Regulations (26 USC 482). The European
Commission has also developed proposals on income allocation to members
of MNEs active in the European Union (EU). Some of the approaches
considered have included the possibility of a “common consolidated
corporate tax base (CCTB)” and “home state taxation.” 1.6. The United
Nations for its part published an important report on “International
Income Taxation and Developing Countries” in 1988. The report discusses
significant opportunities for transfer pricing manipulation by MNEs to
the detriment of developing country tax bases. It recommends a range of
mechanisms specially tailored to deal with the particular intra-group
transactions by developing countries. The United Nations Conference on
Trade and Development (UNCTAD ) also issued a major report on Transfer
Pricing in 1999.

1.7. T he Organisation for Economic
Co-operation and Development (“OECD”) has had an absolute presence as a
provider of global guidelines for international taxation area. While the
OECD is based on the consensus of 34 developed countries, it has
played an enormous role on the international taxation issues such as
setting guidelines for model tax treaty, transfer pricing and permanent
establishment, and tackling the international tax avoidance issue.

1.8.
O n the other hand, the role of the United Nations (UN) having a
membership of 193 economies (whose working is not consensus based), on
the taxation issue had been limited such as making the model tax treaty
for developing countries. However, the UN has recently increased the
presence on this area especially in the field of transfer pricing and
has released its Manual on Transfer Pricing in May, 2013.

2. Evolution of Transfer Pricing in India

2.1.
T he year 1991 is considered a watershed year in modern India’s
economic history. It was after all the year in which the Indian economy
was “opened up,” i.e., liberalised by the then widely hailed Finance
Minister, Dr. Manmohan Singh, the former Indian Prime Minister. The
economic reforms of 1991 were far-reaching including opening up India
for international trade and investment, taxation reforms, inflation
controls, deregulation and privatisation. These reforms opened the
floodgates and caused over the next two decades huge amounts of foreign
cash flows into and out of India.

2.2. From a taxation
perspective, these huge foreign cash flows brought into bright spotlight
the issue of transfer pricing wherein the Indian companies ought to
price their services, or imports as the case maybe, to their group
companies outside India at arm’s length, i.e., what they would charge,
or pay for in case of imports, to an unrelated third party in the open
market.

2.3. The underlying logic is that Indian companies might
under-charge their services or over-price their imports to group
companies and thereby shift their profits abroad for various reasons
such as for saving taxes if the tax rate abroad is lower, etc. The
Indian Government, like most others, is heavily dependent on tax revenue
and simply cannot ignore tax avoidance issues on this scale. So it
stepped up in 2001 and amended the Indian Income-tax Act of 1961 (‘ITA
’) via the Finance Act of 2001 and added a new chapter titled “Chapter
X: Special Provisions Relating to Avoidance of Tax” and introduced
section 92 in Chapter X containing s/s. 92A to 92F and Income Tax Rules
(Rule 10A-10E) laying out specific TP provisions for the first time. In other words, the foundations of the Indian TP maze were laid!

2.4.
In India, under the ITA , prior to the introduction of TPR in 2001,
section 92 was the only section dealing with the Transfer Pricing and
that was the only statutory provision available to the Revenue
Authorities for making certain adjustments in the income of a resident
arising from the business carried on with a non-resident as provided in
the said section 92. Rules 10 and 11 in the Income-tax Rules,1962 (‘the
IT Rules’) were also available for this purpose, i.e., Old Provisions.
However, these statutory provisions and the Rules were not giving
sufficient powers to the Revenue Authority to find out whether the
foreign companies/non-residents operating in India or earning in India
were being taxed on their Indian income on an arm’s length basis and at
the same time, necessary powers were also lacking in most cases, for
making appropriate adjustments in the Indian income of such entities in
cases where the transaction appeared to be not on an arm’s length basis.
At the same time, under the ITA , another provision contained in
section 40A(2) which deals with the disallowance of expenses to the
extent they are found unreasonable where the payments are made to
related parties was also limited in scope to deal with the cases of
cross border transactions. With the liberalisation of policies with
regard to participation of the MNE in the Indian economy, need for
comprehensive provisions to protect the interest of the Indian Revenue
and collect the legitimate due share of taxes in cross border
transactions as also a need to streamline the Law and procedure in that
respect was felt. That is how, new provisions relating to Transfer
Pricing have been introduced by the Finance Act, 2001 (in place of the
above referred section 92) w.e.f. Asst. Yr. 2002-03 i.e., New Provisions.

Objects of the New Provisions

2.5. As stated in the earlier para, the new provisions have been introduced in the act to overcome the limi- tation of the old provisions and also to make more comprehensive provisions in the act and the rules relating to transfer pricing to safeguard the interest of indian revenue with regard to income arising in cross border transactions. the new provisions (sec- tions 92 to 92f) are contained in Chapter-X of the it act with the heading “special provisions relating to avoidance of tax” and therefore, the introduction of the new provisions is primarily an anti tax avoidance measure. This is also further fortified by the fact that CBdt Circular no.14 of 2001, while explaining these new provisions, also explains the same under the head “new legislation” to curb tax avoidance by abuse of “transfer pricing.” the object of these pro- visions gets clarified from the following two paras of the said Circular:

“55.1. The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multi- national group. The profits derived by such enterprises carrying on business in India can be controlled by the multi-national group by manipulating the prices charged and paid in such intra-group, transactions, thereby, leading to erosion of tax revenues.

55.2. Under the existing section 92 of the IT Act, which was the only section dealing specifically with cross border transactions, an adjustment could be made to the profits of a resident arising from a business carried on between the resident and a non-resident, if it appeared to the Assessing Officer that owing to the close connection between them, the course of business was so arranged so as to produce less than expected profits to the resident. Rule 11 prescribed under the section provided a method of estimation of reasonable profits in such cases. However, this provision was of a general nature and limited in scope. It did not allow adjustment of income in the case of nonesidents. It referred to a “close connection” which was undefined and vague. It provided for adjustment of profits rather than adjustment of prices, and the rule prescribed for estimating profits was not scientific. It also did not apply to individual transactions such as payment of royalty, etc., which are not part of regular business carried on between a resident and a non-resident. There were also no detailed rules prescribing the documentation required to be maintained.”

2.6. The above object would be very relevant for the purpose of interpreting the new provisions because the provisions deal with the computation of income from an “international transaction” between “associated enterprises” (‘AES’) and provide the basis of such computation.

3. Transfer Pricing regime in India

3.1. Under the new provisions, any income arising from an “international transaction” is required to be computed having regard to the arm’s length price (alp). The ALP is defined to mean a price which is applied (or proposed to be applied) in a transaction between the persons other than aes, in uncontrolled conditions. It is also clarified that the allowance for any expense or interest arising from an “international transaction” shall also be determined having regard to the alp. in short, the law now expects that computation of income in such cases (including allowance for expense) should be based on a price which one would consider for the purpose of entering in to a transaction with an unrelated party (i.e., not “associated Enterprise” as defined). – [Section 92(1) and explanation thereto and section 92f(ii)].

3.2. It is also provided that in an “international transaction” or “Specified Domestic Transaction” (“SDT”), if under mutual agreement or arrangement between aes any arrangement for sharing cost, expenses etc. incurred (or to be incurred) in connection with a benefit, service or facility for the benefit of such aes is made, the same will also be covered within the new provisions (hereinafter such arrangement is referred to as Cost sharing arrangement) and accordingly, such Cost sharing arrangement between the aes should also be determined having regard to ALP of such benefit, service or facility, as the case may be. accordingly, the allocation or apportionment of cost or expense under such arrangement amongst various aes is also required to be made having regard to the ALP of such benefit, service or facility, as the case may be. – [Section 92(2)]

3.3. s/s. (2a) of section 92 provides that in relation to the SDST would be computed having regard to ALP:
1) Any allowance for an expenditure, 2) any allowance for interest, 3) allocation of any cost or expense and 4) any income. The first two clauses would be relevant from viewpoint of an assessee who incurs the expenses or interest in relation to sdt. the third clause would be relevant in case of cost sharing arrangements, whereby the cost or expense needs to be allocated between two or more assessees having regard to alp. The fourth clause would be relevant from the angle of determining the income of an assessee undertaking an sdt.

3.4. A specific provision has also been made stating that the above referred provisions providing for determining income or Cost sharing arrangement in an “international transaction” on the basis of alp shall not apply if the application of those provisions has the effect of reducing the taxable income or increasing the loss under the act which may otherwise be comput- ed on the basis of entries made in the relevant books of account. Therefore, in effect, the above provisions will have to be applied only if the application thereof results into tax advantage to the Revenue. – [Section 92(3)]

3.5.    Considering the definition of the term “International transaction” and “associated enterprises,” the pro- visions of section 92 will be attracted only in cases where any income arises (including allowance of ex- penses), or in cases of Cost sharing arrangement, only if the transaction is between two AEs [except in exceptional cases, referred to section 92B(2)], and at least one of the parties to the transactions is non-resident and the transaction is regarded as “international Transaction” as defined in the Chapter. Consider- ing the very wide definition of the terms “Associated enterprises” and the “international transaction,” the scope of the applicability of the provisions of section 92 is very wide and therefore, one has to be very careful before coming to conclusion as to non-applicability thereof, particularly in cases where the transaction involves a related non-resident.

?    Associated enterprise (AE)
3.6.    the provisions relating to computation of income or Cost sharing arrangements will be attracted only if the transaction is between “associated enterprises” and therefore, the understanding of the term “associ- ated enterprise” (ae) is very crucial. this has been exhaustively defined in section 92A.

3.7. The tests to be applied for determining whether an enterprise is an AE or not [as contained in section 92a] can be divided into two parts viz. General tests and Specific Tests.

3.8. Under the General tests, in substance, it is provided that if one enterprise, directly or indirectly (or through one or more intermediaries), participates in the management, control or capital of the other enterprise or if common persons similarly participate in the management, control or capital of both the enterprises, then, such enterprise could be regarded as “associated enterprise” (ae). these General tests do not lay down any specific method or percentage to determine as to when the same should be applied. therefore, the application of General tests for such purposes will depend on the facts of each case. this will have to be understood in the context of these provisions. Broadly, these provisions are similar to the provisions contained in article 9 of the Model Conventions (OECD as well as UN). – [Sec- tion 92a(1)]

3.9. Under the Specific Tests, it is provided that two enterprises shall be deemed to be aes if, at any time during the year any of the Specific Tests is satisfied. for this purpose, twelve different tests have been provided and the power has also been given to pre- scribe further tests based on a relationship of mutual interest between the two enterprises. however, till date no such additional test has been prescribed. a debate is on as to whether the Specific Tests are the examples of the General tests or each one of the Specific Tests is exhaustive in the sense that once the same is satisfied, the enterprise should be regarded as ae irrespective of the fact as to whether the test of participation in management, control or capital (referred to in the General Tests) is satisfied or not. – [Section 92A(2)]

3.10. With regard to independent application of the General tests, an important question is whether provi- sions contained in section 92a(1) are in any way controlled by the provisions of section 92a(2). in this context, the issue was under debate as to where the two enterprises do not become aes under any of the Specific Tests, then, whether by applying the General tests independently, two enterprises can be brought within the meaning of aes u/s. 92a(1). it seems that this issue gets resolved on account of the amendment made in section 92a(2) by the finance act, 2002 read with the memorandum explaining the relevant provisions of the finance Bill, 2002, which reads as under:

“The existing provisions contained in section 92a of the income-tax act provide as to when two enterprises shall be deemed to be associated enterprises.

It is proposed to amend s/s. (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in s/s. (2) are fulfilled.”

3.11. In cases where two enterprises have become aes by applying the provisions of section 92a of the act, an interesting issue is under debate as to whether, by taking recourse to article of the relevant treaty dealing with AE [similar to Article 9 of the OECD/ un model treaties], it is possible to argue that such enterprises are not be regarded as aes if, by ap- plication of the provisions of article 9 of the relevant treaty, they do not become aes.

3.12. For the purpose of this Chapter, the term “enter- prise” has already been exhaustively defined and the definition of the term is very wide. In effect, the term “enterprise” would include every person carrying on any activity (which may or may not amount to business) relating to the production, storage, supply, distribution, acquisition or control of articles or goods or know how, patent etc. in fact, list of the activities is so wide that, by and large, every activity may get covered. even a “permanent establishment” (pe) carrying on such activity is also treated as an “enterprise” for the purpose of this Chapter. Therefore, even a Branch of a foreign Bank carrying on any activity in india will be regarded as “enterprise.”

3.13.    The term PE, for this purpose, is defined to include a fixed place of business through which the business of the “enterprise” is wholly or partly carried on. therefore, it appears that the `pe’ would be regarded as an “enterprise” only when it carries on business and that too through a fixed place of business. – [Section 92F(iii) and (iiia)].

?    International Transaction
3.14.    for the purpose of applicability of section 92 a transaction giving rise to income or a transaction relating to Cost sharing arrangement has to be an “international transaction.”

3.15. The term “international transaction” has been ex- haustively defined to mean transaction between two or more aes (of which at least one of them should be non resident) in the nature of purchase, sale or lease of any tangible or intangible property or provision of services or lending or borrowing of money, or any other transaction having a bearing on the profits, income, losses or assets of such en- terprise etc. and includes a Cost sharing arrange- ment between two or more aes. Considering the wide meaning of the term “international transac- tion,” by and large, every transaction between two aes involving at least one non resident will get covered. it is not necessary that for a transaction to be an “international transaction,” it must be cross border transaction. even a transaction between head Office of a Foreign Company outside India and its ae in india may get covered. a transaction between a pe of a foreign Company in india and its ae in in- dia (say, subsidiary of such foreign Company) may also get covered. even a transaction between two non residents giving rise to taxable income under the ita may get covered. on the other hand, transaction between two resident aes will fall outside the scope of the term “international transaction,” e.g. a transaction between an indian Bank and its foreign Branch though regarded as transaction between two aes, the same will not be regarded as “interna- tional transaction” since the same is between two resident enterprises. – [Section 92B(1)]

3.16. A deeming fiction has also been provided to treat even a transaction between one enterprise and another unrelated enterprise (which is not ae) as a transaction entered in to between two aes in a case where there exists a prior agreement between the ae of the enterprise and the unrelated enter- prise in relation to the transaction entered into with such unrelated enterprise or the terms of the rel- evant transaction are determined in substance be- tween such ae and the unrelated enterprise. para 55.8 of the CBDT Circular no.14 of 2001 explains this with an illustration of a case where a resident enterprise exports goods to unrelated persons abroad and there is a separate agreement or an arrangement between such unrelated person and an AE of the resident enterprise which influences the price at which those goods are exported. such a transaction will also be regarded as “international transaction” though the same is entered into with unrelated enterprise by virtue of this deeming fiction provided in the act. it seems that the deeming fiction is attracted only in a case where there exists a prior agreement in relation to the relevant transaction between the unrelated party and such ae. other transactions with such unrelated party would not get covered within the scope of the term “inter- national Transaction.” – [Section 92B(2)]

3.17. The Finance Act, 2012 has now expanded the definition by bringing in specific transactions. The trans- actions that are covered now include purchase, sale, transfer or lease of various kinds of tangible and intangible properties; various modes of capital financing; provision of services; and business re- structuring or reorganisation transactions. further, as per the revised definition, business restructuring transactions include all transactions, whether they have a bearing on profit or loss or not, either at the time of the transaction or at any future date. this has been done in light of recent judicial precedents in Dana Corporation ([2010] 186 Taxman 00187 (AAR)), Amiantit International Holding Ltd. ([2010] 189 taxman 00149 (aar)), Vanenburg Group B.V. (289 itr 464), which held that transfer pricing provisions cannot apply in a case where there is no impact on profit or loss or income.

3.18. The term ‘international transaction’ included transactions in the nature of purchase, sale or lease of intangible property. The term ‘intangible property’ was not defined. The term ‘intangible property’ has now been defined and expanded to a large extent, by including various types of intangible properties related to marketing, technology, artistic, data processing, engineering, customer, contract, human capital, location, goodwill, and any similar item which derives its value from intellectual content rather than physical attributes.

3.19. Presently, transactions entered with an unrelated person is deemed as a transaction between associ- ated enterprises if there exists a prior agreement in relation to such transaction between such unrelated person and an associated enterprise or the terms of the relevant transaction are determined in substance between such unrelated person and the associated enterprise the present provisions do not provide whether or not such unrelated person should also be a non-resident. The Finance act, 2014 has amended such transaction deemed to be an international transaction irrespective of whether such unrelated person is a resident or non-resident as long as either the enterprise or the associated enterprise is a non-resident.

? Arm’s length Price (ALP)
3.20. As stated earlier, the ultimate object of the new pro- visions is to ensure that the “international transac- tions” between aes take place at the alp so that the interest of the revenue is safeguarded and the Country gets its due share of taxes from the income arising in such transactions.

3.21. The methods for determination of ALP are specifi- cally provided. for this purpose, the alp in relation to “international transaction” is required to be de- termined by selecting the most appropriate method out of the following methods:

a) Comparable Uncontrolled Price Method (CUP) – the Cup method compares the price charged for a property or service transferred in a controlled transaction to the price charged for a comparable property or service transferred in a comparable uncontrolled transaction in com- parable circumstances.

b) resale Price Method (RPM) – the resale price method is used to determine the price to be paid by a reseller for a product purchased from an associated enterprise and resold to an independent enterprise. the purchase price is set so that the margin earned by the reseller is sufficient to allow it to cover its selling and operating expenses and make an appropriate profit.

c) Cost Plus Method (CPM) – the Cost plus meth- od is used to determine the appropriate price to be charged by a supplier of property or services to a related purchaser. the price is determined by adding to costs incurred by the supplier an appropriate gross margin so that the supplier will make an appropriate profit in the light of market conditions and functions performed.
d) Profit Split Method (PSM) – Profit-split methods take the combined profits earned by two related parties from one or a series of transactions and then divide those profits using an economically valid defined basis that aims at replicating the division of profits that would have been anticipated in an agreement made at arm’s length. arm’s length pricing is therefore derived for both parties by working back from profit to price.

e) Transactional Net Margin Method (TNMM) – these methods seek to determine the level of profits that would have resulted from controlled transactions by reference to the return realised by the comparable independent enterprise. the TNMM determines the net profit margin rela- tive to an appropriate base realised from the controlled transactions by reference to the net profit margin relative to the same appropriate base realised from uncontrolled transactions.

f) Any other method as may be prescribed – recently vide Circular dated 23rd may, 2012 the CBdt has prescribed a sixth method, i.e., rule 10aB for computation of the arm’s length price operative from 1st april, 2012 and applicable from assessment year 2012-13. for analytical purposes, the new method may be split into two parts:

i. any method which takes into account the price which has been charged or paid; or
ii. any method which takes into account the price which would have been charged or paid

The first part refers to a price that has actually been charged or paid and in that sense necessitates the ex- istence of a real or actual same or similar uncontrolled transaction. this is similar to the existing Cup method though broader in scope. the second part – ‘or would have been charged or paid’ – is more significant with wider ramifications.

3.22. The above referred methods hereinafter are referred to as Specified Methods. Out of the above referred five Specified Methods, the Most Appropriate method is required to be selected having regard to the nature of the transaction, class of transactions or aes, functions performed by such persons or such other relevant factors as may be
prescribed. -[Section 92C(1)]

3.23. For the purpose of determining the alp and selecting the most appropriate method out of the Specified Methods for the International Transac- tions, rules 10B and 10C are relevant.

3.24. Each of the Specified Methods and the manner of determining alp under each one of them has been provided in the Rules. Each of the Specified Methods has been explained and it is also provided that the differences, if any, between the comparable uncontrolled prices/transactions and the relevant transaction should be determined and such dif- ferences should be adjusted to arrive at the alp.
– [Rule 10B(1)]

3.25. Since under each of the Specified Methods, primar-ily, the alp is required to be determined by making comparison with the uncontrolled prices/transactions, necessary general criteria have also been given in the rules to enable the entity as to how to judge the comparability of uncontrolled transactions with the “international transaction.” effec- tively, these criteria are based on general economic and commercial sense approach and the same will have to be used while determining such compara- bility e.g. for determining comparability of transac- tion, the terms and conditions of both the transac- tions also will have to be the same and if there is any difference between the same, the necessary adjustments will have to be made in respect of such difference. – [Rule 10B(2)]

3.26. It has also been specifically provided that the un- controlled transaction shall be treated as compa- rable with the “international transaction” if the dif- ference between the two are not likely to materially affect the price, or cost, charged or paid etc. in such transaction in the open market or alternatively, reasonably accurate adjustment can be made to elimi- nate the material effect of such difference. this, in effect, provides that the uncontrolled transaction ultimately has to be commercially comparable either without material differences or with reasonably accurate adjustments for such differences with the “International Transaction.” – [Rule 10B(3)]

3.27. It has also been provided that for the purpose of determining the comparability of uncontrolled transaction with the “international transaction,” the data relating to the financial year of the “International transaction” should be used to analyse the comparability with the uncontrolled transaction. under certain circumstances, the data of earlier two financial years can also be used for this purpose. – [Rule 10B(4)]

? Most appropriate method
3.28.Since the alp is required to be determined on the basis of the most appropriate method out of the Specified Methods, the basis of selection of the most appropriate method and the manner of appli- cation of the method so selected have also been prescribed in Rule 10C. – [Section 92C(2)]

3.29. It is provided that the most appropriate method shall be selected considering the facts and cir- cumstances of “international transaction” where the same becomes the basis for determining the most reliable measure of alp in relation to rel- evant “international transaction.” for the purpose of making such selection, necessary general crite- ria have also been given in the rules. such crite- ria are primarily based on general economic and commercial common sense approach and also on availability of reliable data, the degree of compa- rability between the “international transaction” and uncontrolled transactions as well as between the enterprises entering into such transactions etc. – [Rule 10C(2)]

3.30.    A specific provision has also been made that while determining the alp by applying the most appropri- ate method, if the variation between alp determined and price at which the international transaction has actually been undertaken does not exceed 3 %, the price at which the international transaction has actually been undertaken shall be deemed to be alp. it may be noted that this provision will be applicable only where more than one price is determined un- der the most appropriate method and not in cases where different prices are determined under different Specified Methods.- [Proviso to section 92C(2)]

?    Determination of ALP by the assessing officer (AO)
3.31.    power has also been given to the ao to determine alp other than the alp determined by the assessee under certain circumstances. the ao is empowered to determine such alp where, on the basis of material, information or document in his possession, the ao is of the opinion that :

• the price charged or paid in an “International Transaction” or sdt has not been determined in accor- dance with section 92C(1) and(2); or

• the prescribed information and document have not been kept and maintained by the assessee; or

• the information or data used in computation of ALP is unreliable or incorrect; or

• the assessee has failed to furnish within 30 days (or extended period of further 30 days) the required information or document.

3.32. The AO can determine such alp only under the above referred circumstances. in this context, the CBDT has clarified that the AO can have recourse to section 92C(3) only under the circumstances enumerated in the section and in the event of mate- rial information or document in his possession on the basis of which an opinion can be formed that any such circumstance exists. In other cases, the value of international transaction should be ac- cepted without further scrutiny [Cir No. 12 dated 23-08-2001]. Therefore, the onus will be on the ao to prove the existence of any of the above circumstances which should become the basis of forming his opinion and he has to be in possession of some relevant material or information or document for the same. – [Section 92C(3)]

3.33. It has been specifically provided that the AO should give proper opportunity of being heard to the as- sessee before determining the alp under the above referred provisions. for this purpose, the ao should also disclose the material or information or docu- ment on the basis of which he proposes to exercise his power u/s. 92C(3) and determine the alp. it seems that even if there is no such specific provi- sion, the ao will have to give such opportunity and disclose the material etc. on which he proposes to rely. there can be some debate as to whether and extent to which the information etc. in respect of other assessees in possession of the ao can be disclosed to the assessee on account of the requirement of confidentiality to be maintained in respect of such information gathered by him in respect of other assessees. However, if the ao decides to use the same, the principle of natural justice demands that sufficient information etc. Pertaining to such other assessee will have to be provided to the assessee to enable him to properly explain and defend his case. Of course, the basic issue is still under debate as to whether the material or information or document received or collected by the ao in respect of one assessee, say mr. a, (either in the course of determining alp of mr. a or otherwise) can at all be used for the purpose of determining the alp u/s. 92C(3) of another assessee, say mr. B. this issue merits consideration because Mr. B would never have had any material information about the transactions of Mr. A at the time when Mr. B had determined the transfer prices between himself and his associated enterprises. – [Proviso to section 92C(3)]

3.34. Once the alp is determined by the ao by exercis- ing his power u/s. 92C(3), he may compute the total income of the assessee having regard to such ALP. It has also been specifically provided that no deduction u/s.10a/10aa/10B or under Chapter Via shall be allowed in respect of the increase in the total income on account of determination of such alp. It may be noted that the ao will not make any adjustment which results in decrease in the total income (or increase in the loss) because of provi- sions contained in section 92(3). – [Section 92C(4) and first Proviso thereto]

3.35. A specific provision has also been made to prohibit any corresponding adjustment in the hands of the recipients of income where any downward adjust- ment is made in the alp in respect of any payment under the above referred provisions where the tax was deducted or deductible under Chapter XViiB e.g., a royalty at the rate of 5% is paid by a ltd. (resident) to B ltd. (non-resident) treating the same as the alp and the tax is deducted while making such payment to B ltd. if in this case, the ao determines the alp at 4% in respect of such royalty by exercising his power u/s. 92C(3), then, the income of the B ltd., in respect of such royalty shall not be recomputed at 4%. however, in this context, one may consider whether recourse can be taken to the relevant treaty for seeking such recomputation. – [2nd Proviso to section 92C(4)]

3.36. Use of multiple year data for comparability analysis Presently, the Indian transfer pricing regulations allow the use of single year data for comparability analysis and multiple year data in exceptional cases

The Income Tax rules, 1962 has been amended vide Finance act, 2014 to introduce the regulations to allow use of multiple year data for comparability analy- sis. rules to be issued on this aspect.

3.37. Inter-quartile range
In India, aLP is determined as the arithmetic mean of the range of prices/margins leading to disputes in majority of the cases. It is a fact that no comparable enterprise can operate at the exactly at the identical level of comparability as the taxpayer/comparables so as to transact at the same price or earn the same margin. Moreover, there are limitations in information available of the comparables and some comparability defects remain that cannot be identified and adjusted. Computing of arithmetic mean as an average of the prices/margins obviously gets distorted by the extreme values and hence does not give a true arm’s length price/margin.

Tax payers as well as tax administrators have gained significant understanding and learning in the data analysis and for the benchmarking processes.

The Finance act, 2014 has introduced the con- cept of inter-quartile range, an internationally accepted concept of range to enhance the reliability of the analysis which includes a sizable number of comparables (statistical tools that take account of central tendency to narrow the range) of such prices/margin will be a step in right direction. This will also reduce disputes at the assessment stage itself.

? Transfer Pricing officer (TPO)
3.38. Since specialised knowledge and expertise is re- quired for the purpose of verification and/or deter- mination of ALP, a specific cell is created in the De- partment to deal with major transfer pricing cases. accordingly, the power has been taken by the Gov- ernment for assigning the job of verification or determination of the alp u/s. 92 C and documentation u/s. 92D to specified categories of officers called as tpo who could be a jt. Commissioner or dy. Commissioner or asst. Commissioner of income- tax authorised by the Board. – [Explanation to
section 92Ca]

3.39. In the last few years, the Government of india has taken many steps in order to strengthen the transfer pricing (taxation) regime in india. a series of amendment has been introduced in order to enhance the ambit of tax base and consequent increase in the revenue. the latest step in this direction was the extension of the transfer pricing provisions to Specified domestic transaction w.e.f. 01-04-2012. another area in which the government achieved considerable success was widening of the scope of the pow- ers of Transfer Pricing Officer. The basic intention of this article is to highlight the latest development that has resulted in strengthening of the powers of the Transfer Pricing Officers along with a summary discussion on section 92 Ca of ita.

3.40. Section 92Ca deals with role tpo under the trans- fer pricing regime. according to section 92 Ca, the assessing officer (AO) may refer the computation of the arm’s length price (alp) u/s. 92C to the tpo if he considers it necessary and expedient and an approval of the commissioner has been obtained.

section 92 CA also casts an obligation on the tpo to provide an opportunity of being heard to the assessee. tpo shall serve a notice to the assessee requiring him to produce (or cause to be produced) on a specified date, any evidence on which the assessee may rely in support of the calculation made by him of the alp in relation to the international transaction. a distinction has to be drawn while interpreting this section with reference to section 92C (3), wherein the ao is obliged to disclose the method adopted by him to compute alp in the show cause notice issued to the assessee but where the ao is referring the computation of alp to tpo, he is not required to disclose the reason for such refer- ring to the assessee. after conducting the hearing and taking into consideration all the relevant facts, the tpo shall by order in writing determine the alp in relation to the transaction in accordance with the provision of section 92C (3) and send a copy of his order to the ao and the assessee. on receipt of the order, the ao shall proceed to compute the total income of the assessee u/s. 92C (3) having regard to the alp determined by the tpo.

3.41. Where any other international transaction other than an international transaction referred under 92Ca(1), comes to the notice of tpo during the course of the proceedings before him, tpo shall apply as if such other international transaction is an international transaction referred to him under 92CA(1). [Section 92CA(2A)]

Where in respect of an international transaction, the assessee has not furnished the report u/s. 92e and such transaction comes to the notice of tpo during the course of the proceeding before him, tpo shall apply as if such transaction is an international transaction referred to him under 92CA(1). [Section 92Ca(2B)]

The Assessing Officer is empowered to either to assess or reassess u/s. 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee u/s. 154, for any assessment year, proceedings for which have been completed before the 1st day of July, 2012. [Section 92CA(2C)]

3.42. The Finance Act, 2014 has been amended to ex- tend the power to levy a penalty of 2% of value of international transaction or SDT for failure to furnish information or documentation under 92D(3) of ITA.

? Maintenance of information and documents
3.43. A specific provision has been made requiring every person who has entered into “international transaction” to keep and maintain the prescribed information and documents. such information and documents should be, as far as possible, contem- poraneous and should exist by the date specified for the submission of report u/s. 92F [i.e., due date of furnishing return of income u/s. 139(1)]. it has also been provided that fresh documentation need not be maintained separately in respect of each previous year in cases where an “international transaction” continues to have effect over more than one previous year so long as there is no sig- nificant change in the nature or terms thereof, other factors having influence on the transfer price, etc. such information and documents are required to be kept and maintained for a period of eight years from the end of the relevant assessment year. relaxation has also been provided from the requirements of keeping and maintaining such information and documents in cases where the ag- gregate value of “international transaction” entered into by the assessee in the previous year does not exceed rupees one crore (i.e., small cases). however, in such small cases, the assessee is still required to substantiate that income arising from such transaction has been computed having regard to the ALP. – [Section 92D(1) and (2) read with rule 10d(2)/(4)/(5)]

3.44. The assessee is required to keep and maintain various information and documents as provided in the rule 10d. such information and documents can be divided into two parts viz. (i) primary infor- mation and documents and (ii) supporting docu- ments. the primary information and documents required to be maintained by the assessee can be classified into three categories viz. (a) documents relating to the enterprise such as the description of ownership structure of the assessee, profile of the multinational group of which the assessee is a part etc., (b) Transaction specific documents such as the nature and terms of “international transaction”, description of the functions performed, the risks assumed and assets employed etc and (c) Computation related documents such as methods considered for determining the alp, the method selected as most appropriate method with the rea- sons for such selection, record of the actual work carried out for determining the alp, assumptions, policies and price negotiations, if any, which have critically affected the determination of the alp etc. the supporting documents would primarily include the official publications, reports, studies etc. of the Government of the country of ae or other country, market research studies, reports and technical publications of reputed institutions (national and international), price publications etc. to support the primary information and documents kept and maintained by the assessee. such information and documents should be furnished before the ao or Cit(a) as and when he requires within a period of 30 days which period can be further extended by another 30 days – [Section 92D (3) and Rule 10D(1) and (3)]

3.45. OECD Transfer Pricing Guidelines, in particular comparability analysis, gives importance to FAR analysis which is primarily based on residency based taxation principle developed by them and is suitable for the developed countries. In fact, the functional analysis is set on a pedestal through FAR Analysis (Functions performed, Assets em- ployed and Risks assumed). But OECD TPG pri- marily pays no heed to the importance of ‘market place’ where consumption takes place. Conversely, United Nations Model Tax Convention is sourced based and has taken into account the primary interest of developed countries’ right to tax such incomes sourced from these countries, id est, market place is recognised by UN in its Model Treaty. However this issue is not fully captured in Article 5 (Permanent Establishment) and Article 7 (Business Profits). If one looks at experience shared by India, China and Brazil, these countries want to retain justifiably their right of taxation through attribution theory by giving importance to market place. United Nations released its Practical Manual on Transfer Pricing for developing countries wherein Comparability Analysis also gives importance to concepts like Location Savings, Location Specific Advantage, Location Rent and Market Premium. The experience shared by three major developing coun- tries (India, China and Brazil) will enable readers to understand the philosophy behind those concepts which are dealt in greater detail in subsequent part of the article. Therefore, in my opinion, these devel- oping countries as well as UN TP Guidance gives importance to FARM Analysis (Functions performed, Assets employed, Risks assumed and Market premium) as against FAR Analysis.

? Accountant’s Report
3.46. Every person entering into “international transac- tion” is also required to obtain and furnish a report from a Chartered accountant in form no. 3CeB on or before the specified date [viz. due date of furnishing Return of Income u/s.139(1)]. – [Sec.92E and rule 10e]

3.47. For the purpose of maintenance of the prescribed information and documents and obtaining and furnishing accountant’s report, reference may also be made to the Guidance note of the institute of Chartered accountants of india (ICAI).

? Penalty
3.48. For non-compliance with the provisions relating to transfer pricing referred to herein before, penalty provisions have been made in the ita in respect of various defaults. 3.49. as stated above, the assessee is required to keep and maintain specified information and documents in respect of international transactions. the same are also required to be produced whenever called for by the AO or the CIT(A) within the specified time limit. If the assessee fails to maintain and/or furnish such information or documents before the authorities as may be required, a penalty can be imposed of an amount equal to 2% of the value of interna- tional transaction or sdt for each such failure. it seems that once the authority is satisfied about such default, the quantum of penalty is fixed under the act. however, no such penalty can be imposed if the assessee proves that there was a reasonable cause for such failure. – [Section 271AA, Section 271G and section 273B.]

3.50. As stated above, the assessee is required to obtain and furnish a report from Chartered accountant in the prescribed form within the specified time limit. in the event of failure to comply with this requirement, without a reasonable cause, a penalty of ru- pees One lac can be imposed. – [Section 271BA and section 273B]

3.51.    A penalty for concealment of income or for furnishing inaccurate particulars of income can levied under the it act of an amount equal to 100% to 300% of the amount of tax sought to be evaded by reason of the concealment of income or furnishing of inaccurate particulars of such income u/s. 271(1)(c) (‘Concealment Penalty’). A specific provision has been made to provide that if an addition is made to the total income of the assessee by ex- ercising power vested in the ao u/s.92C(3), then, for the purpose of provisions relating to Conceal- ment penalty, the amount of such addition to the total income shall be deemed to represent the con- cealed income or the income in respect of which inaccurate particulars have been furnished unless the assessee proves to the satisfaction of the ao or the Cit(a) or the Cit that the price charged or computed in the relevant international transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section in good faith and with due diligence. – [Explanation 7 to section 271(1)]

?    Advance Pricing Arrangements – sections 92cc anD 92cD
3.52.    The taxation tug-of-war between mnes and the indian tax authorities has been a never-ending story. the transfer pricing regulations, which have been a long-drawn contentious issue between the tax authorities and mnes, recently came into the limelight after certain multinationals were slapped with hefty tax demands for allegedly entering into international transactions with their associated enterprises at non-arm’s length prices.

3.53. In each round of audit, the indian tax authorities have ventured into new controversies in areas such as marketing intangibles, share valuation, corpo- rate guarantees, business restructuring and loca- tion savings, in addition to attributing high markups for routine activities. With close to usd 10 billion of adjustments being made in the eighth round of transfer pricing audits, transfer pricing has gained paramount importance for both taxpayers and the tax authorities. With such huge adjustments, the indian tax authorities are reckoned as tough in transfer pricing matters, with india accounting for approximately 70% of all global transfer pricing dis- putes by volume.

3.54. With significant uncertainties existing in the approach of the indian tax authorities towards several complex transactions undertaken by multinationals, an advance pricing agreement (apa) programme has clearly been the need of the hour for multinationals in india. APAS appear to be the best possible solution for obtaining stability and certainty in transfer pricing matters. the apa programme is expected to introduce a whole new dimension to the transfer pricing landscape in india. With taxpayers looking for increased tax certainty, many are opting for the apa route.

3.55. APAs were first showcased as a part of the proposed direct taxes Code back in 2009 and were again mentioned in the direct taxes Code, 2010. however, with the uncertainty surrounding the introduction of the direct taxes Code, the introduction of apas was also deferred. for the highly litigious transfer pricing regime in india, this uncertainty regarding the fate of apas raised much concern amongst large taxpayers. in a much appreciated move, the ministry of finance introduced apas in the finance act, 2012.

3.56. An APA is an agreement between the tax authori- ties and the taxpayer that determines in advance the most appropriate transfer pricing methodology or the arm’s length price for covered intercompany international transactions. the indian apa regime allows multinationals to ascertain the potential price for their international transactions beforehand. Taxpayers are also relieved of many compliance obligations for a period of five years, providing taxpayers with stability and certainty with regard to their tax liability.

3.57. The tax authorities have proved their claim that the apa programme is a big success, by concluding the first number of APAs in just one year since the APA program was introduced in india. india is undoubtedly the first country in the world to achieve this success in the very first year. The tax authorities believe that the apa programme will help to avoid disputes arising from the country’s increasingly aggressive positions on transfer pricing matters.

3.58. Till now, most apa requests in india are from companies belonging to the information technology and information technology enabled services (ITES), automobile, pharmaceuticals and financial sectors, on issues that pertain to captive outsourcing centres, share valuation, the extension of corporate guarantees, royalties, management fees and interest income. these issues have been at the heart of virtually all transfer pricing disputes.

3.59. APAS offer better assurance regarding the taxpayer’s transfer pricing method. another effect is that they reduce risk and assist in the financial reporting of possible tax liabilities. apas also decrease the incidence of double taxation and costs linked with audit defence and transfer pricing documentation preparation. APAS can provide risk management, certainty, avoidance of double taxation and reduced litigation. The bilateral or multilateral approach is far more likely to ensure that the apa will reduce the risk of double taxation.

3.60. However, a significant challenge of an APA is that it relies on predictions about future events. Criti- cal assumptions should provide possible scenari- os and should be appropriately worded to ensure that an apa remains workable. the tax authorities may become privy to highly sensitive information and documentation which could present its own challenges. further, the taxpayers also need to have assurance that past closed years will not be reopened for an audit based on the transfer pricing agreed in the apa.

3.61. The success of the apa programme will be de- termined by its ability to distinguish itself from traditional audits, and to act as a means to facili- tate expedited dispute resolution for international transactions. an apa is certainly a positive step towards a more certain economy; however it is imperative for taxpayers to perform a cost-benefit analysis of all aspects before taking a step forward towards an apa.

? Safe harbour rules
3.62. With the introduction of safe harbour rules, akin to the apa mechanism, taxpayers expect a reduction in litigation. However, as this is the first year for In- dia, taxpayers suffer from the ambiguity surround- ing these rules, including the following:

– As the apa option was only recently introduced in india, taxpayers will have to cleverly evaluate the two available alternatives, namely the apa mechanism or the safe harbour rules, considering the cost and time involved; and

– The eligibility of taxpayers to opt to apply the safe harbour rules is debatable as, although the eligible activities are defined, clarity is still lacking regard- ing which parties fall under those activities.

3.63. The rates indicated in the safe harbour rules are not tantamount to an arm’s length price. However, these rates are provided so as to avoid the litigation process as a whole by the indian tax authorities while jointly achieving consensus on the transfer price.

3.64. The introduction of safe harbour rules is surely a welcomed step, moving towards reducing substantial transfer pricing litigation and building a proper tax environment. Nevertheless, it would have been better if the safe harbour rules had allowed dispensation from compliance with documentation requirements.

3.65. However, from a taxpayer perspective, considering the pressures on profitability and solid competition from other jurisdictions, it might be challenging for many groups to opt to apply the safe harbour regime. It is anticipated that the assessing officer and transfer pricing officer will focus on the functions, assets and risks analysis of the taxpayer to validate the taxpayer’s eligibility to apply the safe harbour rules. Also, no time limit is prescribed within which such validation must be conducted, thereby leaving it open to experience during the time to come.

3.66. Nevertheless, considering that the markup rates are on the higher side, it would be interesting to observe the actual application of the safe harbour rules by taxpayers, more specifically whether the taxpayer opts to apply a higher markup and achieve relief from the lengthy litigation process or prefers to defend its lower markup through the existing litigation mechanisms.

4. Special Issues related to Transfer Pricing

4.1. documentation requirements

a.    Generally, a transfer pricing exercise involves vari- ous steps such as:
•    Gathering background information;
•    Industry analysis;
•    Comparability analysis (which includes functional
analysis);
•    Selection of the method for determining Arm’s length pricing; and
•    Determination of the Arm’s Length Price.

b. At every stage of the transfer pricing process, vary- ing degrees of documentation are necessary, such as information on contemporaneous transactions. one pressing concern regarding transfer pricing documentation is the risk of overburdening the taxpayer with disproportionately high costs in ob- taining relevant documentation or in an exhaustive search for comparables that may not exist. ideally, the taxpayer should not be expected to provide more documentation than is objectively required for a reasonable determination by the tax authorities of whether or not the taxpayer has complied with the arm’s length principle. Cumbersome documentation demands may affect how a country is viewed as an investment destination and may have particularly discouraging effects on small and mediumsized enterprises (smes). c. Broadly, the information or documents that the tax-payer needs to provide can be classified as:

1. Enterprise-related documents (for example the ownership/shareholding pattern of the tax- payer, the business profile of the MNE, industry profile etc);

2. Transaction-specific documents (for example the details of each international transaction, func- tional analysis of the taxpayer and associated enterprises, record of uncontrolled transactions for each international transaction etc); and

3. Computation-related documents (for example the nature of each international transaction and the rationale for selecting the transfer pricing method for each international transaction, computation of the arm’s length price, factors and assumptions influencing the determination of the Arm’s Length price etc).

d. The domestic legislation of some countries may also require “contemporaneous documentation.” Such countries may consider defining the term “contemporaneous” in their domestic legislation. The term “contemporaneous” means “existing or occurring in the same period of time.” different countries have different interpretations about how the word “contemporaneous” is to be interpreted with respect to transfer pricing documentation. some believe that it refers to using comparables that are contemporaneous with the transaction, regardless of when the documentation is produced or when the comparables are obtained. Other countries interpret contemporaneous to mean using only those comparables available at the time the transaction occurs.

4.2. Intangibles
a. Intangibles (literally meaning assets that cannot be touched) are divided into “trade intangibles” and “marketing intangibles.” trade intangibles such as know-how relate to the production of goods and the provision of services and are typically developed through research and development. Marketing intangibles refer to intangibles such as trade names, trademarks and client lists that aid in the commercial exploitation of a product or service.

b. The Arm’s Length Principle often becomes difficult to apply to intangibles due to a lack of suitable comparables; for example intellectual property tends to relate to the unique characteristic of a product rather than its similarity to other products. this difficulty in finding comparables is accentuated by the fact that dealings with intangible property can also occur in many (often subtly different) ways such as by: license agreements involving payment of royalties; outright sale of the intangibles; compensation included in the price of goods (i.e., selling unfinished products including the know-how for further processing) or “package deals” consisting of some combination of the above.

c. The Profit Split Method is typically used in cases where both parties to the transaction make unique and valuable contributions. however, care should be taken to identify the intangibles in question. experience has shown that the transfer pricing methods most likely to prove useful in matters involving transfers of intangibles or rights in intangibles are the CUP Method and the Transactional Profit Split method. Valuation techniques can be useful tools in some circumstances.

4.3. Intra-group Services

a. An intra-group service, as the name suggests, is a service provided by one enterprise to another in the same mne group. for a service to be considered an intra-group service it must be similar to a service which an independent enterprise in comparable circumstances would be willing to pay for in-house or else perform by itself. if not, the activity should not be considered as an intra-group service under the arm’s length principle. the rationale is that if specific group members do not need the activity and would not be willing to pay for it if they were independent, the activity cannot justify a payment. Further, any incidental benefit gained solely by being a member of an mne group, without any specific services provided or performed, should be ignored.

b. An arm’s length price for intra-group services may be determined directly or indirectly — in the case of a direct charge, the Cup method could be used if comparable services are pro- vided in the open market. in the absence of comparable services the Cost plus method could be appropriate.

c. If a direct charge method is difficult to apply, the mne may apply the charge indirectly by cost sharing, by incorporating a service charge or by not charging at all. such methods would usually be accepted by the tax authorities only if the charges are supported by foreseeable benefits for the recipients of the services, the methods are based on sound accounting and commercial principles and they are capable of producing charges or allocations that are commensurate with the reasonably expected benefits to the recipient. In addition, tax authorities might allow a fixed charge on intra-group services under safe harbour rules or a pre- sumptive taxation regime, for instance where it is not practical to calculate an arm’s length price for the performance of services and tax accordingly.

4.4. Cost-contribution agreements

a. Cost-contribution agreements (CCas) may be formulated among group entities to jointly develop, produce or obtain rights, assets or services. each participant bears a share of the costs and in return is expected to receive pro rata (i.e., proportionate) benefits from the developed property without further payment. such arrangements tend to involve research and development or services such as central- ised management, advertising campaigns etc.

b. In a CCA there is not always a benefit that ulti- mately arises; only an expected benefit during the course of the CCa which may or may not ultimately materialise. the interest of each participant should be agreed upon at the outset. the contributions are required to be consistent with the amount an independent enterprise would have contributed under comparable cir- cumstances, given these expected benefits. the CCa is not a transfer pricing method; it is a contract. however, it may have transfer pricing consequences and therefore needs to comply with the arm’s length principle.

4.5. Use of “secret comparables” a. there is often concern expressed by enterprises over aspects of data collection by tax authorities and its confidentiality. Tax authori- ties need to have access to very sensitive and highly confidential information about taxpayers, such as data relating to margins, profitability, business contacts and contracts. Confidence in the tax system means that this information needs to be treated very carefully, especially as it may reveal sensitive business information about that taxpayer’s profitability, business strategies and so forth.

b. Using a secret comparable generally means the use of information or data about a taxpayer by the tax authorities to form the basis of risk assessment or a transfer pricing audit of another taxpayer. that second taxpayer is often not given access to that information as it may reveal confidential information about a compet- itor’s operations.

c. Caution should be exercised in permitting the use of secret comparables in the transfer pricing audit unless the tax authorities are able to (within limits of confidentiality) disclose the data to the taxpayer so as to assist the taxpayer to defend itself against an adjustment. taxpayers may otherwise contend that the use of such secret information is against the basic principles of equity, as they are required to benchmark controlled transactions with comparables not available to them — without the opportunity to question comparability or argue that adjustments are needed.

4.6. Controlled foreign corporation provisions

Some countries operate Controlled foreign Cor- poration (CfC) rules. CfC rules are designed to prevent tax being deferred or avoided by taxpayers using foreign corporations in which they hold a controlling shareholding in low-tax jurisdictions and “parking” income there. CfC rules treat this income as though it has been repatriated and it is therefore taxable prior to actual repatriation. Where there are CfC rules in addition to transfer pricing rules, an important question arises as to which rules have priority in adjusting the taxpayer’s returns. due to the fact that the transfer pricing rules assume all transactions are originally conducted under the arm’s length principle, it is widely considered that transfer pricing rules should have priority in applica- tion over CfC rules. after the application of transfer pricing rules, countries can apply the CfC rules on the retained profits of foreign subsidiaries.

4.7. Thin Capitalisation

When the capital of a company is made up of a much greater contribution of debt than of equity, it is said to be “thinly capitalised”. this is because it may be sometimes more advantageous from a taxation viewpoint to finance a company by way of debt (i.e., leveraging) rather than by way of equity contributions as typically the payment of interest on the debts may be deducted for tax purposes where- as distributions are non-deductible dividends. To prevent tax avoidance by such excessive leveraging, many countries have introduced rules to prevent thin capitalisation, typically by prescribing a maximum debt to equity ratio. Country tax administrations often introduce rules that place a limit on the amount of interest that can be deducted in calculating the measure of a company’s profit for tax purposes. Such rules are designed to counter cross-border shifting of profit through excessive debt, and thus aim to protect a country’s tax base. From a policy perspective, failure to tackle excessive interest payments to associated enterprises gives mnes an advantage over purely domestic businesses which are unable to gain such tax advantages.

4.8. Documentation

a. Another important issue for implementing do- mestic laws is the documentation requirement associated with transfer pricing. Tax authorities need a variety of business documents which support the application of the arm’s length principle by specified taxpayers. However, there is some divergence of legislation in terms of the nature of documents required, penalties imposed, and the degree of the examiners’ authority to collect information when taxpayers fail to produce such documents. There is also the issue of whether documentation needs to be “contemporaneous.”

b. In deciding on the requirements for such documentation there needs to be, as already noted, recognition of the compliance costs imposed on taxpayers required to produce the documentation. another issue is whether the benefits, if any, of the documentation require- ments from the administration’s view in dealing with a potentially small number of non-compliant taxpayers are justified by a burden placed on taxpayers generally. A useful principle to bear in mind would be that the widely accepted international approach which takes into account compliance costs for taxpayers should be followed, unless a departure from this approach can be clearly and openly justified because of local conditions which cannot be changed immediately (e.g. constitutional requirements or other overriding legal requirements). In other cases, there is great benefit for all in taking a widely accepted approach.

4.9. Time Limitations

Another important point for transfer pricing domestic legislation is the “statute of limitation” issue — the time allowed in domestic law for the tax administration to do the transfer pricing audit and make necessary assessments or the like. since a transfer pricing audit can place heavy burdens on the taxpayers and tax authorities, the normal “statute of limitation” for taking action is often extended compared with general domestic taxation cases. however, too long a period during which adjustment is possible leaves taxpayers in some cases with potentially very large financial risks. Differences in country practices in relation to time limitation may lead to double taxation. Countries should keep this issue of balance between the interests of the revenue and of taxpay- ers in mind when setting an extended period during which adjustments can be made.

4.10. Lack of comparables

One of the foundations of the arm’s length princi- ple is examining the pricing of comparable transactions. Proper comparability is often difficult to achieve in practice, a factor which in the view of many weakens the continued validity of the principle itself. the fact is that the traditional transfer pricing methods (Cup, rpm, Cp) directly rely on comparables. these comparables have to be close in order to be of use for the transfer pricing analysis. It is often extremely difficult in practice, especially in some developing countries, to obtain adequate information to apply the arm’s length principle for the following reasons:

1. There tend to be fewer organised operators in any given sector in developing countries; finding proper comparable data can be very difficult;

2. The comparable information in developing countries may be incomplete and in a form which is difficult to analyse, as the resources and process- es are not available. in the worst case, information about an independent enterprise may simply not exist. Databases relied on in transfer pricing analysis tend to focus on developed country data that may not be relevant to developing country markets (at least without resource and informa-tion-intensive adjustments), and in any event are usually very costly to access; and

3. Transition countries whose economies have just opened up or are in the process of opening up may have “first mover” companies who have come into existence in many of the sectors and areas hitherto unexploited or unexplored; in such cases there would be an inevitable lack of comparables.

Given these issues, critics of the current transfer pricing methods equate finding a satisfactory comparable to finding a needle in a haystack. Overall, it is quite clear that finding appropriate comparables in developing countries for analysis is quite possibly the biggest practical problem currently faced by enterprises and tax authorities alike.

4.11. Lack of knowledge and requisite skill-sets

Transfer pricing methods are complex and time- consuming, often requiring time and attention from some of the most skilled and valuable human re- sources in both mnes and tax administrations. transfer pricing reports often run into hundreds of pages with many legal and accounting experts employed to create them. this kind of complexity and knowledge requirement puts tremendous strain on both the tax authorities and the taxpayers, espe- cially in developing countries where resources tend to be scarce and the appropriate training in such a specialized area is not readily available. their transfer pricing regulations have, however, helped some developing countries in creating requisite skill sets and building capacity, while also protecting their tax base.

4.12. Complexity

a. Rules based on the arm’s length principle are becoming increasingly difficult and complex to administer. transfer pricing compliance may in- volve expensive databases and the associated expertise to handle the data. transfer pricing audits need to be performed on a case by case basis and are often complex and costly tasks for all parties concerned.

b. In developing countries resources, monetary and otherwise, may be limited for the taxpayer (especially small and medium sized enterprises (smes)) which have to prepare detailed and complex transfer pricing reports and comply with the transfer pricing regulations, and these resources may have to be “bought-in.” similarly, the tax authorities of many developing countries do not have sufficient resources to examine the facts and circumstances of each and every case so as to determine the acceptable transfer price, especially in cases where there is a lack of comparables. Transfer pricing audits also tend to be a long, time consuming process which may be contentious and may ultimately result in “estimates” fraught with conflicting interpretations.

c. In case of disputes between the revenue authorities of two countries, the currently available prescribed option is the mutual agreement procedure as noted above. This too can possibly lead to a protracted and involved dialogue, often between unequal economic powers, and may cause strains on the resources of the companies in question and the revenue authorities of the developing countries.

4.13. Growth of the “e-commerce economy”

a. The internet has completely changed the way the world works by changing how information is exchanged and business is transacted. physical limitations, which have long defined traditional taxation concepts, no longer apply and the application of international tax concepts to the internet and related e-commerce transac- tions is sometimes problematic and unclear.

b. The different kind of challenges thrown up by fast-changing web-based business models cause special difficulties. From the viewpoint of many countries, it is essential for them to be able to appropriately exercise taxing rights on certain intangible-related transactions, such as e-commerce and web-based business models

4.14. Location savings

a. Some countries like China, india and other developing countries are taking the view that the economic benefit arising from moving operations to a low-cost jurisdiction, i.e., “location savings”, should accrue to that country where such operations are actually carried out.

b. Accordingly, the determination of location sav- ings, and their allocation between the group companies (and thus, between the tax authori- ties of the two countries) has become a key transfer pricing issue in the context of developing countries. unfortunately, most interna- tional guidelines do not provide much guidance on this issue of location savings, though they sometimes do recognise geographic conditions and ownership of intangibles. The us section 482 regulations provide some sort of limited guidance in the form of recognising that adjustments for significant differences in cost attributable to a geographic location must be based on the impact such differences would have on the controlled transaction price given the relative competitive positions of buyers and sellers in each market. the OECD Guidelines also consider the issue of location savings, emphasising that the allocation of the savings depends on what would have been agreed by independent parties in similar circumstances.

c. The un tp manual states that arm’s length attribution of location savings depends on the competitive factors relating to the access of location specific advantages and on the realistic alternatives available to the associated enterprises (aes) given their respective bargaining power.

d. However, the indian tax administration ac- cording to the India Country specific chapter in the un tp manual, believes that apart from locations savings, profit from location specific advantages (referred to as “location rent”) such as skilled manpower, access to market, large customer base, superior information and distribution network should also be allocated be- tween aes. the price determined on the basis of local comparables does not adequately al- locate location savings and it is possible to use profit split method to determine arm’s length allocation of location savings and location rents where comparable uncontrolled transactions are not available. functional analysis of the parties to the transaction and the bargaining power of the parties should both be considered appropriate factors.

5. Future of Transfer Pricing in Developing Countries

a. The economic significance of the OECD is in rapid decline. in 2000, oeCd nations controlled 60% of gross world product. Now it is at 50% and is expected to drop to about 40% in 2030.

b. Power and influence will need to be shared between developed and developing countries. With new players such as Brazil, russia, india, China, and south africa (BriCs), and the un entering the fray, india and China see themselves as “exceptional countries” and will want a say in writing the rules, whether it is greenhouse gases, transfer pricing, or intellectual property, and that is the way it will be.

c. Confidence levels among Indian and Chinese tax authorities are growing it is clear that these developing countries will not allow themselves to be pushed around much longer. over 70% of the global transfer pricing litigation worldwide is in india a sign of that country’s independent thinking.

d. The big question is whether india and China will pass new regulations to incorporate the po- sitions expressed in the un manual. If so, the nature of global transfer pricing will shift. e. location rents and local intangibles will become part of the analysis. Finally, every global tax director of an MNE will need to figure out a new strategy. Because the principal structure used to provide developing countries a routine profit will get terminated.

6. Key Takeaways

6.1. Transfer pricing is generally considered to be the ma- jor international taxation issue faced by mnes today. Even though responses to it will in some respects vary, transfer pricing is a complex and constantly evolving area and no government or mne can afford to ignore it. Transfer pricing is a difficult challenge for both gov- ernments and taxpayers; it tends to involve significant resources, often including some of the most skilled human resources, and costs of compliance. It is often especially difficult to find comparables, even those where some adjustment is needed to apply the transfer pricing methods.

6.2. Overall, it is a difficult task to simplify the international taxation system, especially transfer pricing, while keeping it equitable and effective for all parties involved. However, a practical approach will help ensure the focus is on solutions to these problems. it will help equip developing countries to address transfer pricing issues in a way that is robust and fair to all the stakeholders, while remaining true to the goals of being internationally coherent, seeking to reduce compliance costs and reduce unrelieved double taxation.

6.3. Recent decisions passed by tribunals and Courts demonstrate that there has been a lot of shifting sands due to various retrospective amendments and controversial statements by revenue department. If such things persist then the indian tax laws are in choppy waters which may impede and become a logjam for foreign investments in india.

6.4. Further, there has been a constant capacity building in the Revenue department. Tax officers are apparently bringing all their investigative skill to the fore for coming up with information which may help them to enhance the quality of their assessments. The department has now sought to use social me- dia (Linkedin profiles) to lend support to their con- tention on the existence of a permanent establish- ment (pe). the tribunal has also admitted these as evidence and has passed an interim order in the case of GE Energy Parts Inc vs. Addl DIT [ITA No 671/Del/2011]/[TS-400-ITAT-2014(DEL)] dated 4th july, 2014. Going forward, it is therefore important for taxpayers to focus and review information published on corporate and business networking websites, as information from these sources can potentially impact their assessments. the internet and social networking sites have really opened up new vistas for not only people to communicate with one another but also to obtain and use information for various purposes. The importance of selection of privacy options on these sites is also paramount as information available thereon can potentially be misused by mischievous and harmful elements. executives in senior positions need to be particularly careful and vigilant about information that is put out in their cases on these websites.

6.5. The “Gurumantra” for tax professionals today would be to closely track business activities, major and minor, identify risks, align with new regulations or prepare defense strategies well in advance in order to ensure minimal potential disputes.

And, dare to hope for the possible stability that na- mo’s entourage would bring a regime of reduced taxes, simplified laws, attenuate its hunger in mak- ing adjustments and have assuaged approach towards litigation, et al!!

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C. V. Cherian vs. CA Patel, [2012] 51 VST 71 (Guj)

Sales Tax – Recovery Of Dues Of Company – Director Of Company – Not Liable To Pay Personally, The Gujarat Sales Tax Act, 1970 and The Gujarat Value Added Tax Act, 2003

FACTS
The Sales Tax Department held auction of personal property of a director of Private Limited Company to recover arrears of tax of the Company. The director filed writ petition against the impugned auction before the Gujrat High Court.

HELD
The attachment and auction of the residential building of the director can not be made to recover dues of the Private Limited Company in which he is a director. The High Court followed the Judgment of division bench in case of Choksi V. State of Gujarat [2012] 51VST 73 (Guj). Accordingly, allowed the writ petition filed by the director.

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State Of Tamil Nadu vs Therman Heat Tracers Ltd, [2012] 51 VST 69 (Mad)

Sales Tax – Turnover – Liquidated Damages – Deducted From Contracotr’s Bill – Does Not Form Part of Turnover Of Sales -Not Taxable, The Tamil Nadu General Sales Tax Act, 1959.

FACTS
Certain amount was deducted from the bill of the contractor by the employer. The assessing authority determined gross amount before deduction of liquidated damages as turnover of sales and levied tax. The Tribunal in appeal allowed the deduction of liquidated damages from total turnover of sales. The Department filed revision petition against the impugned judgment of Tribunal before the Madras High Court.

HELD
The Tribunal had correctly found that the liquidated damages were to be borne by the contractor and the payment was reduced to that extent. Therefore, such amount received after the contractual deductions can alone be treated as turnover. The High Court accordingly affirmed the judgment of Tribunal and revision petition filed by the Department was dismissed.

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M/S. Century India Ltd vs. Asst. Commissioner (Ct), [2012] 51 VST 130 (Mad).

Sales Tax – Rate Of Tax- ‘Halls’ – Ayurvedic Medicine – Not A Confectionary Item, S/s. 17, 28A and Schedule I, Part C, of The Tamil Nadu General Sales Tax Act, 1959.

FACTS
The assessment of the dealer company was completed by treating ‘Halls’ as ayurvedic medicine based on clarification issued by the Commissioner. Later on the Department initiated revision proceedings on the basis that ‘Halls’ is not an ayurvedic preparation and it is only a confectionary taxable at 12%. The dealer filed writ petition before the Madras High Court against impugned notice for revision of assessment.

HELD
The Commissioner of Commercial Taxes has issued clarification that ‘Halls’ is an ayurvedic medicine and assessment is completed on that basis. Further, he had revised assessment on earlier occasion and concluded it and also levied penalty for excess collection of tax. Another assessing authority, by mere change of opinion, cannot propose to revise the assessment treating the said product as confectionary.

Pudina and Nilgiris Thailam, etc. are generally used for ayurvedic preparations and that is why, the Commissioner of Commercial Taxes, Chennai, had clarified that ‘Halls” tablets is taxable at 4%. The extent of medicament used in a particular product and the fact that the use of the medical element in the product was minimum that would not detract that the same being classified as Medicament. It is also not necessary that the said item must be sold under doctor’s prescription and that the availability of the product across the counter in many shops is not relevant.

In view of binding precedents of the circulars, issued by the Commissioner of Commercial Taxes, in favour of the dealer, the High Court set aside the notice for revision of assessment. Accordingly, the High Court allowed writ Petition.

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2014] 47 taxmann.com 108 (New Delhi – CESTAT) – Masicon Financial Services (P.) Ltd vs. CCE

Where section 80 is invoked by the Appellate Authority and penalty u/s. 76 & 78 is reduced, even reduced penalty u/s. 76 and 78 is not tenable in law.

Facts:
Appellant was selling agent of ICICI bank and provided marketing services to it, which were taxable as ‘business auxiliary service’ (BAS) w.e.f. 01-07-2003. However, appellant did not obtain registration under service tax and no service tax was paid under ‘BAS’. SCN was issued confirming service tax demand for the period from 01- 07-2003 to 01-07-2004 invoking extended period of limitation u/s 73(i)(a) of the Act. On appeal, Commissioner (Appeals) invoked section 80 and reduced penalty u/s. 76 & 78 and waived penalty u/s. 77. The appellant disputed invocation of extended period and levy of penalty before Tribunal on the ground that Commissioner (Appeals) has invoked section 80.

Held:
Hon’ble Tribunal held that longer period of limitation correctly invoked u/s. 73(1)(a) since, in terms of section 73 as it stood during the period of dispute, for invoking longer limitation period existence of fraud wilful mis-statement, suppression of facts and deliberate contravention of the provisions of Finance Act, 1994 or of the rules made there under with intent to evade tax was not necessary and what was required was reason to believe on the part of the Assistant /Deputy Commissioner that on account of omission or failure on the part of the assessee to file return u/se. 70 for any prescribed period or to disclose wholly or truly all the material facts required for verification of assessment u/s. 71, some value of the taxable service has escaped assessment or has been under-assessed or service tax has not been paid or has been short-paid or any sum has erroneously been refunded. In this case, during the period of dispute, the appellant did not file any return and did not register and hence in terms of the section 73(1)(a) as it stood during that period, longer limitation was correctly invoked.

However as regards penalty u/s. 76 and 78, Tribunal held that, since the Commissioner (Appeals) gave a finding that the Appellant may not be aware of service tax rules and regulation and invoked benefit u/s. 80 of the Act by reducing quantum of penalty, his decision to retain even reduced penalty u/s. 76 and 78 was set aside.

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[2014] 47 taxmann.com 148 (Ahmedabad – CESTAT) CCEST vs. Aarti Industries Ltd.

Whether CENVAT credit of excise duty paid on capital goods i. e., cylinders can be claimed even if such cylinders were moved temporarily out of factory for the purpose of refilling of gas? Held, yes.

Facts:
Assessee purchased cylinders for storage of hydrogen gas used in the manufacture of various chemicals. The gas is procured from various suppliers, and the empty cylinders have to move out from the factory for refilling of gas. The said cylinders were installed on hired vehicles for ease of their use, movement within the factory and transportation from factory to gas supplier’s premises. Assessee claimed CENVAT credit of excise duty paid on such cylinders being capital goods used for the purpose of manufacture. Denying the same, revenue contended that the cylinders were not installed within factory and procedure under Rule 3(5) relating to reversal and recredit was not followed although such capital goods were removed outside factory.

Held:
It was held that, the only condition for availing CENVAT on capital goods as per Rule 2(a)(A) of CENVAT CREDIT Rules, 2004 is that it must be used in the factory of the manufacturer of final product. There is no such requirement for the capital goods to be installed in the factory. The Tribunal observed that, it was not disputed that the cylinders are not capital goods and it was evident that the gas cylinders were used within the respondent’s factory although cylinders move out temporarily from the factory for the purpose of refilling of the gas. Therefore, it held that, the requirement of use of capital goods within the appellant’s factory in terms of the said Rule 2(a)(A) is fulfilled and credit cannot be denied. It further held that, the temporary to and fro movement of cylinders for the purpose of refilling of the gas is otherwise covered by Rule 4(5)(a) of the CENVAT Credit Rules, 2004.

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[2014] 47 taxmann.com 37 (Bangalore – CESTAT) Hyundai Motor India Engineering (P.) Ltd vs. CCEST.

Prior to introduction of POTR, the “relevant date” u/s. 11B Central Excise Act 1944 for the purpose of claiming refund under Rule 5 of the CENVAT Credit Rules, 2004 read with notification no. 5/2006-C.E. (N.T.), dated 14-03- 2006, in case of export of service shall be the date on which payment for exported service is received.

Facts:
The appellant a 100% EOU of applied for refund of CENVAT credit for the period 7th December to 9th August for service tax paid on input services. The claim was rejected on the ground of time-bar as refund application was made beyond one year from the date of export. Relying on notification no. 5/2006-CE (N.T) revenue contended that section 11B of the Central Excise Act 1944 governs the time limit for filing refund claim and as per the said section refund claim should be filed within one year from the date of export of services. It was also contended that there was no nexus between the input services and the output services and when the appellant is not eligible for CENVAT credit itself there is no question of refund.

Held:
Relying on the decision in case of CCE vs. Eaton Industries (P.) Ltd. [2011] 9 taxmann.com 185 while examining section 11B of the Central Excise Act, it was held that, without clearance of goods, the liability to pay tax does not arise and in the absence of liability to pay tax, further proceedings also would not happen. Thus, if the taxable event is manufacture, the calculation of tax took place after removal than it is the date of removal which is relevant. In the case of goods exported, the relevant date would be the date of export of goods but the same may not apply for the purpose of refund [(sic) in case of services] as the liability to pay tax arises under service tax till the law was amended, only when the consideration was received. Therefore, it is appropriate that the relevant date for calculating the time limit u/s. 11B also should be the date on which consideration is received.

As regards nexus with output services and the admissibility of CENVAT credit, the matter was remanded for calculating the refund claim following the decision of the Tribunal in Infosys Ltd. vs. CST [ST/2045/2011, ST/1912/2012 & ST/26109/2013, Final Order Nos. 20282, 20294 & 20293/2014 dated 26-02-2014] wherein the definition of input services is considered and admissibility of CENVAT credit in respect of various services and the rationale to take such a view has been discussed.

[Note: Readers may note that this decision pertains to period when Point of Taxation Rules, 2011 (POTR) were not in place and liability to pay service tax was on “receipt bases”. However, principle laid down in this case as regards “relevant date” u/s. 11B of CE Act for the purpose of claiming refund in case of export of service is equally applicable even today in the light of POTR]

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2014 (35) S.T.R. 140 (Tri – Mumbai) Hotel Amarjit Pvt. Ltd. vs. Commissioner of C. Ex. & Service Tax, Nagpur

Whether supply of food along with provision of Mandap keeper services is liable to service tax under Mandap keeper services?

Facts:
The appellants provided “Mandap Keeper Service” and ‘Catering Services’. Prior to April, 2005, the appellants were charging one lump sum amount and service tax was levied on combined receipt. With effect from April, 2005, the appellants started splitting the bills, one for banquet hall and another for supply of food and discharged service tax only on banquet hall charges considering the same to be Mandap keeper services. Objecting to splitting of bill, the department confirmed demand on food charges collected as well. The appellants contested that food charges were collected separately on which VAT was levied. Since the transaction was of sale of goods, the same was not leviable to service tax. They further contested that Joint Commissioner of Central Excise of their other unit had accepted their contention and service tax was levied only on hall charges. Accordingly, since department had knowledge of the activity undertaken by the appellants, extended period of limitation also was challenged. The appellants further challenged some calculation errors of the department. On the other hand, relying on the decision of Hon’ble Supreme Court in case of Kalyana Mandapam Assn. vs. Union of India 2006 (3) STR 260 (SC) and Sayaji Hotels Ltd. 2011 (24) STR 177 (Tri.-Del.), the department contested that catering charges were includible in taxable value of Mandap keeper services and contended that though in another unit, the case was dropped, a wrong decision could be perpetuated.

Held:
Having regard to the decision of Hon’ble Apex Court in Tamil Nadu Kalyana Mandapam Assn. (supra) and Sayaji Hotels Ltd. (supra), the services rendered by Mandap keepers as caterer were also liable to service tax under the category of Mandap keeper services since price charged for food formed part of consideration of Mandap keeper’s services. Service tax demand beyond 5 years was quashed. Since every registered premise is considered as a separate assessee under service tax law, dropping of demand at one unit was of no relevance to decide whether extended period of limitation may be invoked or not. The appellants cannot take plea of bona fide belief as Hon’ble Supreme Court has clearly held catering services were liable to service tax. Also, according to the Apex Court’s judgement in the case of Fuljit Kaur and Chandigarh Administration 2010 (262) ELT 40 (SC) if a wrong decision has been passed at a judicial forum, others cannot invoke the jurisdiction of the superior court for repeating the same irregularity. In the present case, the appellants did not disclose consideration received from catering services in bills and ST3 Returns. Hence, it was a case of mis-statement of fact with intent to evade taxes and extended period of time was justified. In light of the above analysis, the matter was remanded back for re-quantification. Penalty u/s. 76 was held imposable for default in payment of service tax since mens rea was not required to be proved to levy such penalty. In view of contravention of provisions in the present case, penalties u/s. 77 were sustainable. Splitting of bills from April, 2005 was a deliberate act to evade Service tax payments and therefore, penalty u/s. 78 was confirmed.

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92. 2014 (35) S.T.R. 94 (Tri. – Del.) Computer Sciences Corpn. India Pvt. Ltd. vs. Commissioner of S.T. Noida

Whether service tax is payable under reverse charge mechanism under ‘manpower supply services’ being secondment of foreign employee from group companies?

Facts:
For furtherance of business operations in India, the appellants hired certain overseas employees who either directly employed by the appellants or were transferred from other group companies situated overseas. During the period of the secondment of these employees, they were treated as employees of the appellants and accordingly, the appellants gave social security benefit such as provident fund. TDS was deducted on their salaries and issued Form 16 and Form 12BA under the Income-tax Act, 1961. The appellants also remitted certain social security and other benefits for these employees as required under foreign laws to its group companies. The appellants also contested that the amounts remitted to overseas group companies were without any margin. However, lower authorities treated remittance to foreign group companies as gross consideration paid for availing manpower recruitment and supply services (import of services) covered under reverse charge mechanism.

Held:
Relying on Mumbai Tribunal’s decision in case of Volkswagen India (Pvt.) Limited vs. 2014 (34) S.T.R. 135 (T), the appeal was allowed. Since Assistant Commissioner, (appeal against which lies only before Commissioner (Appeals)), had ordered adjustment of refund claim against this demand, Tribunal could not pass an order directing the refund. However, Tribunal declared that the petitioner was entitled to refund claim ex debito justita. Consequentially, Tribunal also held that the petitioner was at liberty to apply for refund which shall be disposed of by appropriate authority expeditiously.

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2014 (35) S.T.R. 88 (Tri.-Mumbai) B4U Television Network (I) P. Ltd. vs. Commissioner of Service Tax, Mumbai

Can excessive service tax paid be adjusted against future service tax liability or the assessee needs to file a refund claim?

Facts:
The appellants adjusted excess service tax paid earlier was objected by service tax department. Relying on various Tribunal decisions, the appellants contested that service tax was not collected by them from their clients and they had complied with Rule 6(3) of Service Tax Rules, 1994 and therefore, such adjustment of excess service tax paid was justified. The Department submitted that the case was not covered by Rule 6(3) and that the appellants should have filed a refund claim for claiming back such excess payment.

Held:
Delhi Tribunal in case of Nirma Architects & Valuers 2006 (1) STR 305 (Tri.) had held that if adjustment of excess Service tax paid would not be allowed against future payments, Rule 6(3) would become redundant. Relying on the said decision, Tribunal allowed such adjustment of undisputed excess Service tax paid.

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2014 (35) S.T.R. 78 (Tri.-Mumbai) Shobha P. Bhopatkar vs. Commissioner of C. Ex., Pune-III

Whether composite contract of plantation i.e. landscaping including beautification may be treated as providing advice or consultancy, taxable under interior decorator service?

Facts:
The appellants undertook the activity of plantation of grass, trees, shrubs in the factory area along with maintenance of lawns. On the basis that the appellants had directly or indirectly provided advice, consultancy and technical assistance in respect of beautification of space, Commissioner (Appeals) held that the activities were covered u/s. 65(59) i.e., interior decorator’s service. The appellants contested that they had executed the work and there was absence of any advice or consultancy for beautification of the space and therefore, the activity was not covered under interior decorator services. The department contended that there was a composite contract covering landscaping which included beautification by way of plantation and landscaping was covered under the definition of interior decorator.

Held:
Allowing the appeal, it was held that the work orders were for execution of various works and did not involve advisory, consultancy or technical assistance.

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2014 (35) S.T.R. 77 (Tri.-Mumbai) Jyotsana D. Patel vs. Commissioner of C. Ex., Nagpur

Can refund be claimed of amount paid as service tax by mistake beyond 1 year?

Facts:
The builder had collected and paid service tax on residential unit. However, the Hon’ble High Court in case of K.V.R. Constructions vs. CCE 2010 (17) S.T.R. 6 (Kar.) held that service tax was not leviable on residential unit during the period under consideration. Accordingly, the buyer of residential unit, being ultimate sufferer of service tax filed a refund claim of the amount deposited by builder with service tax authorities. The adjudicating authority sanctioned the refund claim which was appealed by revenue before Commissioner (Appeals). The refund claim was rejected by Commissioner (Appeals) on the grounds that it was barred by limitation. Accordingly, the appellants filed the present appeal before the Tribunal.

Held:
The appellants were not required to pay any service tax on acquisition of residential unit in view of favourable decision delivered by the Hon’ble Karnataka High Court. Therefore, the amount paid by builder did not take colour of service tax and, therefore the provisions of section 11B of the Central Excise Act, 1944, including the time limit of 1 year, are not applicable in the case on hand. Accordingly, the appeal was allowed with consequential relief.

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[2014] 47 taxmann.com 116 (Bombay) – P. K. International vs. CCEx.

Bombay High Court has given general direction to Tribunal not to dismiss any appeal for non-compliance, if appeal filed against order directing pre-deposit is pending for admission before High Court, and give reasonable time of about a couple of weeks to the appellant to obtain urgent orders from the Court where the Tribunal is informed of such pending appeal before Court at the admission stage.

Facts:
The Tribunal directed the appellant to pre-deposit 50% amount of duty and part amount of penalty vide order dated 29-10-2013. The appellant filed appeal before Hon’ble Bombay High Court against the said order for hearing the same on merits. While the matter was pending before High Court at admission stage, the appellant communicated the fact to the registry of tribunal by a letter in writing and requested adjournment of hearing of compliance. However, no adjournment was granted and matter was posted for compliance in the regular course. In the course of hearing, the fact of pending appeal before High Court was mentioned before the Tribunal, however Tribunal did not grant any adjournment and dismissed the appeal for non-compliance.

Held:
(i) H on’ble Bombay High Court expressed serious concerns in following words, about Tribunal dismissing the appeal for non-compliance even after bringing to its notice that, appeal was pending at admission stage before High court.

“Before we deal with the merits of the appeal, we are shocked to note that time and again the Tribunal has been dismissing appeals of the appellants for non-compliance with the order of pre-deposit even in cases where the owner directly pre-deposits, the Tribunal is informed about the appeal was listed before this Court for admission…. it is most unfortunate that the Tribunal did not wait for admission hearing of this appeal by this Court…”

(ii) H igh Court also pointed out similar instances on two other occasions and relied upon decisions of another Division Benches in the cases of Jaiprakash Strips Ltd. vs. Union of India 2009 (243) ELT 341 (Bom) and Saswad Mill Sugar Factory Ltd. vs. CCE [2013] 40 taxman.com 504 (Bom) and directed Tribunal as under:

“13. Having regard to the fact that this is the third instance which is brought to our notice where the Tribunal has dismissed an appeal for non-compliance of the said order of the Tribunal in spite of having been informed about the appeal before this Court being on board or it is adjourned to a near date for admission, we direct that henceforth the Tribunal shall not dismiss any appeal for non-compliance on the above ground and give reasonable time of about a couple of weeks to the appellant to obtain urgent orders from this Court where the Tribunal is informed about the appeal pending before this Court at the admission stage. The Tribunal shall at least give the parties 2 weeks time to move this Court for early hearing of the appeal before this Court.”

(iii) A s regards the merits of the case, The High Court refused to go into the merits for the reason that, issues raised were in respect of the factual aspects of the controversy and hence subject matter of the appeal was before the Tribunal. However, as regards order of pre-deposit was concerned, it held that pre-deposit was restricted to 50% of the duty confirmed and the order of pre-deposit was set aside granting interim stay against coercive recovery during pendency of the appeal before the tribunal.

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[2014] 46 taxmann.com 305 (Allahabad) CCEST vs. Garg Aviations Ltd.

Whether, training and coaching in field of flying of aircraft for obtaining commercial pilot license from Director General Civil Aviation (DGCA) tantamount to qualification recognized by law and hence qualifies for exemption from service tax? Held, yes

Facts:
Assessee provided training and coaching to individuals for flying of aircraft for obtaining Commercial Pilot License (CPL) from Director General Civil Aviation (DGCA). Assessee was also engaged in providing training for obtaining Basic Aircraft Maintenance Engineering Licence (BAMEL). Department demanded service tax under Commercial Training or Coaching Services. The Tribunal, in view of the decision of the Delhi High Court in Indian Institute of Aircraft Engg. vs. Union of India [2013] 34 taxmann.com 191 concluded that service tax could not be levied on the assessee. Aggrieved, revenue filed appeal before Hon’ble High Court.

Held:
The Hon’ble Allahabad High Court concurred with the decision of the Hon’ble Delhi High Court (supra) on following grounds and dismissed Revenue’s Appeal:

(i) “Commercial training or coaching centre” defined during the relevant period in section 65(27) of the Act excluded from its domain “any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognized by law for the time being in force”. This clause was omitted with effect from 01-05- 2011 from the definition and included by exemption Notification No. 33/2011-ST, dated 25-04-2011. The Delhi High Court expressed a view that, the only plausible reason for exempting from payment of service tax those training or coaching centres, even though commercial, whose certificate/degree/ diploma/qualification is recognised by law, can be to exclude from the ambit of service tax those training or coaching centres which are otherwise regulated by any law inasmuch as recognition of certificate/ degree/diploma/qualification conferred by such training or coaching centres will necessarily entail regulation by the same law of various facets of such training or coaching centres.

(ii) I t was observed that that, when institute is approved by DGCA, its activities are very much regulated by the Aircraft Act, 1934, Aircraft Rules, 1937 and Civil Aviation Requirements (CAR) and the instructions/ regulations issued there under from time to time. Thus, the certificate/training/qualification offered by approved institutes, has by the Act, Rules and the CAR been conferred some value in the eyes of law, even if it be only for the purpose of eligibility for obtaining ultimate licence/approval for certifying repair/maintenance/airworthiness of aircrafts. The Act, Rules and CAR distinguish an approved institute from an unapproved one and a successful candidate from an approved institute would be entitled to enforce the right, conferred on him by the Act, Rules and CAR, to one year relaxation against the DGCA in a Court of law. Based on the observations of Hon’ble Delhi High Court, the Allahabad High Court held that, training and coaching for flying of aircraft for obtaining CPL from DGCA and training for obtaining BAMEL license are not liable as they are qualifications recognised by law.

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2014 (35) S.T.R. 220 (Guj.)Commissioner of Central Excise & Customs vs. V.M. Engg. Works

Whether penalty levied u/s. 76 can be reduced by invoking section 80?

Facts:
Since the respondents delayed the payment of service tax, adjudicating authority levied penalty u/s. 76 of the Finance Act, 1994. Being aggrieved, the assessee preferred an appeal before Commissioner (Appeals) who reduced the penalty by invoking provisions of section 80 of the Finance Act, 1994. The matter was appealed by revenue before the Tribunal, but they did not succeed. According to the revenue, it was mandatory to impose penalty u/s. 76 and discretionary powers to reduce penalty was not vested with the authority and neither the Commissioner (Appeals) nor the Tribunal were justified in reducing the penalty. Further to support its contestation, Revenue placed reliance on the decision of the Gujarat High Court in the case of Commissioner, Central Excise & Customs vs. Port Officer 2010 (19) S.T.R. 641 (Guj.).

Held:
Relying on the decision of the Gujarat High Court in case of Commissioner, Central Excise & Customs vs. Port Officer (supra) it was held that in case it is proved by the assessee that there was reasonable cause for failure, penalties may not be levied vide section 76 read with section 80 of the Finance Act, 1994. Accordingly, though discretionary powers are granted, the powers are restricted to waive off the total penalty and penalties cannot be reduced below the minimum limit prescribed u/s. 76. Therefore, the appeal was allowed and the Tribunal was directed to decide the matter afresh in light of the said decision after providing an opportunity of being heard to the assessee.

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2014 (35) S.T.R. 204 (Mad.) C. Adhimoolam vs. Registrar, CESTAT, Chennai

Whether the assessee is allowed to challenge the order before High Court when the appeal is pending before Tribunal?

Facts:
The Assistant Commissioner of Central Excise passed an order against the petitioners to pay service tax along with interest and penalties but the said order was got rejected on the ground of limitation. Hence, the order was further challenged and was pending before the Tribunal along with stay application. However, simultaneously the departmental authorities started taking action to recover tax from the petitioners and hence, the petitioners filed writ petition before the Hon’ble High Court.

Held:
Since the appeal was pending before the Tribunal, only Tribunal would have to decide the appeal on merits. In case, the Tribunal does not waive the condition of predeposit, the petitioner would be required to deposit service tax with interest and penalties. According to Article 266 of the Constitution of India, it was not open for the petitioner to challenge the very same order before the High Court when the appeal was pending before the Tribunal and initiate parallel proceedings before various fora. The writ was thus dismissed.

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2014 (35) S.T.R. 65 (P&H) Barnala Builders & Property Consultants vs. Dy. CCE & ST, Dera Bassi

Is an order passed with respect to service tax Voluntary Compliance Encourage Scheme appealable?

Facts:
Voluntary Compliance Encouragement Scheme (VCES) was introduced vide Finance Act, 2013 for service tax defaulters which is part of the Finance Act, 1994 i.e., part of service tax statute itself. The defaulters were required to pay service tax dues in instalments as specified and were granted immunity from interest and penalty. Vide Circular No. 170/5/2013–ST, it was clarified that the order for rejection of declarations under VCES were not appealable. The petitioners filed a writ petition challenging the validity of the said clarification. The petitioners prayed that the writ petition to be dismissed as withdrawn with liberty to file appeal and that such appeal should be directed to be decided within fortnight.

Held:
After incorporation of VCES into the Finance Act, 1994, all provisions except specifically excluded applies to the scheme. Impugned order passed by the Deputy Commissioner of Central Excise was appealable vide section 86 of the Finance Act, 1994. In view of the request of the petitioner, writ petition was dismissed as withdrawn with a liberty to file an appeal and that the appeal shall be considered and decided within a fortnight.

(Note: The decision that VCES rejection order is appealable is noted. However, the appealability vide section 86 appears incorrect as the Order of Rejection is passed by the Deputy Commissioner. The appeal against this is to be filed under section 85 of the Act according to the authors).

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2014 (35) S.T.R. 28 (Uttarakhand) Valley Hotel & Resorts vs. Commissioner of Commercial Tax, Dehradun

Whether VAT is leviable on amount, leviable to service tax, on presumptive basis with respect to restaurant services?

Facts:
The revisionist was engaged in the business of hotel providing lodging, boarding and restaurant services. Food served in the restaurant was liable for VAT vide Uttarakhand VAT Act, 2005 which was duly discharged. From 1st July, 2012, Service tax was leviable on 40% of the bill amount vide Rule 2C of the Service Tax (Determination of Value) Rules, 2006. The revisionist, hence, made an application to VAT authorities requesting not to charge VAT on such 40% of billed amount which would suffer a burden of service tax. However, Commissioner as well as Tribunal of Commercial Tax rejected the application

Held:
Value Added Tax can be imposed on sale of goods and not on service. Union Government, which is the competent authority to impose service tax, has imposed service tax on restaurant services which is not challenged by the State. VAT cannot be imposed on the element of service. Thus, the revision was allowed.

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Branch transfer vis-à-vis dispatch against estimated demand Introduction

Interstate sale of goods is liable to tax under the Central Sales Tax Act, 1956 (CST Act). However, there can be certain dispatches from one State to another i.e. branch transfers, etc., which are not be considered as interstate sales. The responsibility to prove, that such dispatches are not interstate sales, is on the ‘transferor’, and amongst others, the transferor has to obtain ‘F’ form from the transferee branch. It is also a legal position that in spite of such ‘F’ form being produced, the authorities are entitled to go beyond the forms and find out the real cause of dispatch. If it is established that such dispatch is due to pre-existing sale order then in spite of ‘F’ form being produced, it can be disallowed and subjected to tax under the CST Act. The disputes on this aspect are very intricate.

It is possible that in respect of standard goods, the dealer may receive tentative requirement for future period. These documents are normally referred to as rate contracts. The dealer stocks the goods in respective states and gives delivery upon receiving concrete delivery requirement. So, actual ascertainment takes place in such state. However, the dealers while sending the goods in lots, may refer to number of orders received as rate contracts. There are judgments on both the sides stating that such a transaction may or may not amount to branch transfer. Hon’ble Maharashtra Sales Tax Tribunal has recently decided such issue in the case of M/s. Ina Bearing India Pvt. Ltd. vs. State of Maharashtra (VAT APPEAL No.20 of 2010, dated 25/2/2014). The brief facts, as narrated in the judgment are as under;

(I) The appellant regularly transferred the finished goods from its Talegaon factory to the branches at Gurgaon in the state of Haryana and at Hosur in the state of Tamilnadu, where the stock of goods was maintained for local as well as inter-state sales. All the branch transfers were declared while filing the returns under the CST Act. The appellant had maintained proper records of all branch transfers such as excise invoices, lorry receipts, etc. The appellant had received all the declarations in Form-F from the branches in respect of the transfer made to the branches.

(II) The purpose for which these branches were opened is as follows :- (a) The customer industries did not want to pile up inventory at their end and wanted the suppliers to deliver the goods to them on daily basis. Therefore, the appellant was compelled to open godowns near to the production base of the customer. In these godowns, they had to keep inventory based on the estimate/ expectation of orders from the customers so that on receipt of customer’s delivery schedule, it could supply goods promptly at a short notice. This required stock transfers to branches in a big way. (b) The customer gave his tentative requirement of quantities based on his planned production programme. The customer was at liberty to alter its sourcing pattern and delivery schedule without any liability on itself and therefore, though the supplier undertook production and transfers goods to his godown/branch, it was still not sure of the time when the customers will actually lift such goods. It can be on the next day of arrival of goods at the branch or it can be even after three months or so. This uncertainty of final sales to the customer made it necessary for the appellant to have the goods in stock in the godowns at the branches for meeting the delivery schedule decided by the customer.

(III) The appellant effected the transfers of bearings to its branches and sales of bearing so transferred at branches as follows:-(a)The appellant made planning and production plan based on the market forecast for short/medium term demand for about two or three years. The estimates of market requirements for next six to twelve months based on the trend analysis were used for monthly production plan. The production planning, therefore, started much in advance and at the beginning stage of production planning, the appellant had no idea of customers’ orders. (b)The appellant manufactured according to international standards. These standards specified the outer and internal diameters of the bearing as well as its width or thickness. These basic dimensions and feature remained valid all over the world and the product had very wide range of applications. There were various manufacturers of a single type of bearing and the customer was at liberty to purchase from any of them. In a few cases, such standard products were made more suitable for a range of application as needed by customers and such differentials were denoted by suffix or prefix with the basic bearing number. Even in such cases, basic dimension and technical features remained as per the international standards. Bearings produced by the appellant could be sold anywhere in India to any branch /any dealer/customer depending on his requirements. (c) The appellant sent the goods to its own branch in big lots under the cover of branch transfer note and lorry receipts which were made out in the name of branch after payment of applicable excise duty. (d) The branch had to maintain sufficient stock of all the varieties of bearings, which would possibly be required by the customer. Till the customer approached the branch for purchase of goods, the branch or the appellant had no information about customer’s exact order with quantities and delivery schedules. (e) The branch office sold the goods to customer from its stock on hand as and when required against the customer order/schedule, under the cover of sales invoice. The branch charges applicable local sales tax of the respective State in the sales invoice. The branch issued excise invoice to its buyer so that the buyer got the credit of excise duty paid at the time of branch transfer from its manufacturing unit at Talegaon in Pune District. (f) The appellant, after transferring the goods to branches in the State, as above, had affected local as well as interstate sales at the branches and had paid the local tax and central sales tax in the respective States. The appellant had been assessed for Gurgaon branch in Haryana for the Financial Year 2006-2007 and for the Hosur branch in Tamil Nadu for the Financial Year 2004-2005.

Based on above facts, the assessing authority observed as under and considered the transfers as interstate sales.

“The goods are dispatched against the firm purchase orders from the customers outside the State of Maharashtra. On the dispatch documents the customer’s part number is mentioned. Specific goods are meant for specific customers. The dispatch and the sale are so related that the contract of sale could not be executed without dispatching the goods from the State of Maharashtra. The dispatches from the State of Maharashtra are for sale to the outside customers. Thus, the claim of the dealer that the dispatch is otherwise than by way of sale cannot be entertained in view of the clear facts and circumstances of the case and also having regard to the law well settled in this regard at the level of the Apex Court of India.”

The Hon’ble Tribunal after discussing the issue, made following observations;

“(iv) The appellant has also furnished before us a copy of purchase order placed by m/s. maruti udyog limited, Gurgaon at page no.62 of the compilation, a copy of purchase order amendment by m/s. maruti udyog limited at page no.63 of the compilation, the copies of delivery schedule placed by m/s. maruti udyog limited, Gurgaon placed at page nos.64 to 67 of the compilation, the copies of sales/excise invoices raised by the appellant’s Gurgaon branch on m/s. maruti udyog limited, placed at page nos. 68 to 83 of the compilation, the copies of stock transfer invoices with the copies of lorry receipts placed at page nos.84 to 87 of the compilation and a copy of finished goods stock register placed at page nos. 88 to 121 of the compilation. The details necessary for the purpose of appreciation of the issue as culled out of the documents are as follows;

Sr.No

2. Purchase order No. & Date

3. Part No. & Design

4. Stock Transfer/ Excise
Invoice No. & Date issued on the gurgaon Branch

5. Transferee Branch

6. Excise Invoice No.
issued by gurgaon Branch

7. Customer/ Buyer’s Name

1306582 Dt.11/10/03

KF-217084-HLA-

302155
Dt.22/02/06

Gurgaon

418004

M/s.Maruti
Udyog

09263M25053

Dt.03/04/06

Limited, Gurgaon

1306582 Dt.11/10/03

KF-217084-HLA-

302155
Dt.22/02/06

Gurgaon

418005

M/s.Maruti
Udyog

09263M25053

Dt.03/04/06

Limited, Gurgaon

A perusal of documents namely purchase order, stock transfer invoices, excise invoices being sale invoices raised by the appellant’s Gurgaon branch on the customer m/s. maruti udyog limited, Gurgaon shows that all the sales effected to m/s. maruti udyog limited, Gurgaon, pertains to the purchase order no.1306582 placed by m/s. maruti udyog limited, Gurgaon on 11/10/2003. this is clear from a copy of delivery schedule which is furnished to us. though there are subsequent amendment to the purchase order, the original purchase order is of 11/10/2003. all these stock transfers are affected subsequent to the said purchase order. these transfers can be said to be pursuant to the purchase order with a view to ensuring delivery of the goods to the customer m/s. maruti udyog limited, Gurgaon. the transfers are pursuant to the purchase orders and the goods are delivered subsequently. The impugned transactions, therefore, effected by the appellant to m/s. maruti udyog limited, Gurgaon, by raising sales invoices by Gurgaon branch are interstate sales. the appellant has not furnished before us the documents namely copies of sales invoices in respect of sales affected from 07/04/2006 onwards till 31/03/2007 to m/s. maruti udyog limited. Hence, we are unable to draw any inference in respect of the transactions effected from 07/04/2006 onwards.

(v) Excise invoice dt.30/05/2006 issued by the appellant’s branch at hosur to m/s.tVs motors Co. ltd. in respect of sales of 5600 bearings refers to the purchase order no.100242 placed by tVs motors on the appellant’s branch. the purchase order shows that it is of 31/10/2002, valid for the period 31/10/2002 to 31/03/2015. it is for the goods of the description, “n8010170-roller assy rocker”. the excise invoice dt.30/05/2006 also refers to the corresponding stock transfer/excise invoices nos.400468 dt.28/05/2006 and 400478 dt.27/05/2006 issued by the appellant at pune to its hosur branch. one can infer that the sales of bearings, effected by hosur branch under invoice dt.30/05/2006 are in compliance with the purchase order dt.31/03/2002, which were received by the branch under stock invoice/excise invoice dt.28/05/2006 and 27/05/2006 issued by the appellant’s branch at pune. the movement of the goods effected by the appellant’s branch at pune to its branch at hosur in tamil nadu under the above stock transfer invoices and sold subsequently pursuant to the order dt.31/10/2002 can be said to have been occasioned pursuant to the earlier purchase order dt.31/10/2002 and are therefore interstate sales.” hon’ble tribunal also referred to following judgments;

a)   Union of india and another V/s. K.G.Khosla and Co. ltd. (43 stC 457)
b)   Sahney steel and press Works ltd. and another V/s. Commercial Tax Officer And Others (60 STC 301),
c)   Hyderabad engineering industries V/s. state of andhra pradesh (39 Vst 257)
d)   Tata engineering and locomotive Co. ltd. V/s. assistant    Commissioner    of    Commercial   taxes, jamshedpur and another        (26   stC   354),   and from this judgment, following para is also reproduced.

“Instead of looking into each transaction in order to find out whether a completed contract of sale had taken place, which could be brought to tax only if the movement of vehicles from jamshedpur had been occasioned under a covenant or incident of that contract, the assistant Commissioner wrongly based his order on mere generalities. the assistant Commissioner, on whom the duty lay of assessing the tax in accordance with law, was bound to examine each individual transaction and then decide whether it constituted an inter-state sale exigible to tax under the provisions of the act”.

Thus, the hon’ble tribunal considered such dispatches as interstate sales. however, it also observed that each transaction is required to be examined separately and therefore, remanded the matter back to lower authority.

Conclusion
Such an uncertain position may cause several difficulties for dealers. against estimated requirements, the dealers are required to stock the goods in other states. There may be reference to the documents for such estimated requirements and even for logistic purposes, there may be reference of such numbers on dispatch documents. however, there are a number of factors on account of which goods are not sold or are sold after long interval. There is no firm order in advance. The actual sale takes place only when ascertainment is done after receipt of firm requirement from the buyer. Therefore, merely because the purchase order number is quoted, it cannot be said that there is firm order. Therefore, there is certainly the other view that such dispatches cannot be considered as interstate sales. however, these are all judgment based facts and dealers are required to take proper precaution in such kind of transactions.

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Online Incorporation of Companies in 24 Hours.

The Ministry of Corporate Affairs has vide its General Circular No. 49/2011, dated 23rd July 2011 modified the procedure for incorporation of companies. It is now possible to incorporate a company within 24 hours, provided the Form 1, 18 and 32 have been certified by the practising professional with regard to the correctness of the information and declarations given by the subscribers. This facility is optional and forms can also be processed by the Registrar of Companies where no such certification is done by a practising professional.

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Simplification of procedure for delay in filing forms for charges and for shifting of registered office from one state to another.

The Ministry of Corporate Affairs vide General Circular No. 51/2011, dated 25th July 2011, shifted the work relating to the rectification of charges and condonation of delay in filing the requisite forms for charges u/s. 141 of the Companies Act, 1956, from the Company Law Board to the Central Government. The simplified process is expected to be implemented on 24th September 2011. Similarly the jurisdiction for the approval of shifting the registered office from one state to another and consequent alteration of the Memorandum of Association of the company u/s. 17 of the Act has been shifted from Company Law Board to the Central Government and the simplified process is expected to be implemented on 24th September 2011.

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Guidelines for Scheme of Amalgamation/Arrangement.

The Ministry of Corporate Affairs has issued the Guidelines for Regional Directors/Registrar of Companies in the matter of scheme of arrangement/amalgamation u/s. 391-394 pertaining to compromises or arrangement with members or creditors, vide its General Circular No. 53/2011, dated 26th July 2011.

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Simplification of procedure for winding-up petitions.

The Ministry of Corporate Affairs has vide General Circular No. 55/2011, dated 26th July 2011, prescribed the procedure to be followed by the Registrar of Companies and Regional Directors for winding up petitions filed by management after committing violations under the Companies Act 1956 or misappropriation of funds of the Company and for petitions filed by creditors. The ROC will prepare a preliminary report based on the last five years data within a week of filing of the petition and the MCA will take a final view within 15 days of such preliminary report and any investigation, etc. will be completed by the ROC and report forwarded to Official Liquidator within 30 days.

The Official Liquidator will place the report before the High Court for appropriate action. To speed-up the winding-up petitions, the Ministry has listed the information to be provided by the Official Liquidator in the General Circular No. 54/2011, dated 26th July 2011. Further the official liquidator also needs to file an application praying to the Court to direct the management of the company to submit information duly verified by a chartered accountant.

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Students’ Annual Meet

The Students’ forum of the BCAS has been actively working towards pursuing the vision of providing students a platform conducive for growth and pursuit of knowledge. A step in that direction has been the organising of the fourth students’ annual meet, henceforth to be called as the Jal Dastur Students’ Annual Day. The event was a mix of learning, guidance, inspiration, healthy competition, fun and loads of prizes to be won. The workshop enjoyed the enrolment of over 200 students with active participation in all the contests organised. The meet was organised on Saturday, 6th August 2011 at Directiplex, Andheri 3.00 p.m. Like the first students’ annual meet, this year too we invited Padma Shri CA T. N. Manoharan, a very dear friend of the Society. Mr. Manoharan addressed the students on the topic ‘Design to Win’. The key-note was a blend of theory and case studies in real life. Mr. Manoharan shared with the students his experiences in personal and professional life which in his opinion has played an instrumental role in his successes. Mr. Manoharan chose to draw inferences from his tryst with Satyam Computer Services revival wherein qualities like persistence, discipline, hard work, empathy, positive attitude, in-depth understanding of the ground realities and most importantly the will to succeed were amongst the fundamental reasons for the turnaround of the failed organisation. Mr. Manoharan was successful in striking a cord with the students and driving home the point that challenges may vary but the approach to tackle them can be standardised. With the right approach Mr. Manoharan emphasised, success can be delayed but not denied. The audience redeemed their faith in the learned speaker’s address by giving a worthy applause filled with gratitude and appreciation. The Forum expresses its sincere appreciation to Padma Shri T. N. Manoharan to have spared his valuable time for the common interest of the students’ fraternity. Elocution competition: BCAS had organised an Elocution competition for CA students under the auspices of Smt. Chandanben Maganlal Bhatt Elocution Fund. The competition enjoyed the participation of 33 students conducted at the Conference room of BCAS, Mumbai on Saturday 28th May 2011.

All the participants were given three minutes each to present their views on respective topics. Participants were judged by three very dear friends of the BCA Society; Sonalee Godbole, Mihir Sheth and Nitin Shingala. Each participant competed for 100 marks broken up into the undermentioned criteria: Personal Appearance, Speech Opening, Eye Contact, Voice Modulation, Gestures, Contents, Speech Conclusion, Time Management & Overall Impact. Finally the judges unanimously shortlisted eight participants to compete for the coveted Elocution Prize trophies.

All the finalists competed fiercely in front of a large audience to make a lasting impression on our judges for the finals; Aspi Doctor, Joe Rodrigues and Shyam Lata. The audience was treated to some of the finest speeches encompassing information, humor, satire, thought provocation, inspiration, vision and last but not the least, lots of passion. But like all competitions, only some win while some lose.

This competition was no different, five participants perished and the top three winners emerged to claim the gleaming crystal trophies.

The winners
The winners of the elocution competition were as follows:

Quiz Contest
‘Quiz 20-Twenty’ the quiz contest is organised by BCAS only for CA students. The quiz was designed to test the participants’ knowledge about current affairs and general knowledge; it also had a dash of academics to rake up that grey matter. All in all, infotainment formed the core of this event.

It was an inter-firm competition with all the firms invited to send their best teams to fight for the coveted prizes. The participants in the quiz contest had to appear for a standard set of questions. They were screened on the basis of the marks they scored in this questionnaire. The top scorers were short-listed but announced only on the day of the final quiz on 6th August 2011. The eliminations of the quiz took place along with elocution competition at the conference room of the BCAS Office, Churchgate, Mumbai on Saturday, 28th May 2011. Total number of students participating in the eliminations was over 60 students.

The shortlisted teams to compete in the final round of the quiz were as follows:

The competition had its share of ups and down. All the teams gambled for their fortunes, some got rewarded while some paid dearly. The audiences were treated with a mix of knowledge, fun and most importantly, healthy competition. The winners of the quiz contest were as follows:

The winner of this year’s rotating firm trophy is M/s. B. K. Oza & Associates. Awakening the writer within The writing competition was initiated last year and now this year onwards it is named in the memory of Jal Dastur. The competitive strives to harness talent in literary skills. The initiative also enjoyed the strong backing of the BCAS Foundation. Write-ups not exceeding 1000 words were invited from all the participants and the responsibility of assessment was entrusted to the Society’s very dear friends K. C. Narang, Pradip Kapasi, Gautam Nayak and Pradeep Shah. All the judges need no introduction and anybody regularly following the BCA Journal, must be aware of the immense contribution done by these learned people to the journal over a long period of time.

The winners of the article writing contest were as follows:

The task of the judges was more demanding in this case unlike other competitions because unlike other cases this competition performance cannot be taken of face value. A lot of reading between the lines is necessary by the contestants who don the cap of an evaluator of such contest. But our judges did not let us down and gave us our three winners for this year, the ones who toiled and gave their 100% to the competition, and hence rightly deserved to win. The winner of this year is yet to join a chartered accountant firm for articleship, hence this year the rotating trophy for the firm has not been presented. The evening ended with a show of appreciation for all the persons responsible for organising this wonderful evening full of guidance, entertainment and fun. The students were treated with a sumptuous meal after a hard day’s work with renewed promises to organise and participate in many such programmes to follow in future.

Acknowledgements

We would like to express our sincere gratitude to all the undermentioned persons without whose support this event would not have scaled the heights it did.

Padma Shri T. N. Manoharan
Shri Sohrab E. Dastur
Shri Mukesh Bhatt
Shri Mahendra Turakhia
BCAS Foundation
All the Judges for the various Competitions
Mr. Ashish Fafadia
The Admin Team at Directi Iplex
President & Vice-President, BCAS
Office Bearers of the Bombay Chartered Accountants’ Society
Core Group Members of BCAS.
The Admin Team at B

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Twenty years after liberalisation, the list of India’s economic problems is fairly long

The 20th anniversary of India’s economic liberalisation was celebrated in remarkably studied silence. The odd newspaper article apart, there was no official hubris over the epochal changes undertaken in 1991 by a clutch of reformers, many of whom occupy key positions in the current government. A report by C. Rangarajan, the Prime Minister’s Economic Adviser, throws some light on this extraordinary display of reticence. The message from the former central banker who, alongside Manmohan Singh, untied many of the knots that led to the balance of payments crisis in July 1991: it’s not business as usual in India in July 2011. Graft has paralysed the government and the economy is hurting. Prime Minister Singh cannot ignore this cautionary advice from a fellow reformer and a friend.

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Over 31% SC, HC Judges’ posts vacant

More than 31% of posts of Judges in various High Courts and the Supreme Court are lying vacant, Law Minister Salman Khurshid said in the Lok Sabha. Of the 895 sanctioned posts of Judges in the Apex Court and 21 High Courts of the country, 284 were vacant as on 1st August, 2011, Khurshid said. The largest number of vacancies is in Allahabad High Court where 98 of 160 posts — more than 61% — have not been filled. Himachal Pradesh High Court is the only one which has no vacancies. The Sikkim High Court is functioning with just one Judge against its sanctioned strength of three.

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Is it time to invoke Cicero?

“The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, assistance to foreign lands should be curtailed lest Rome become bankrupt. . . . .,” Marcus Cicero, 55 BC. Down the ages, Cicero’s words have fallen on deaf years of sovereigns. Athens is bankrupt.

Washington, the modern-day Rome, is on the brink of bankruptcy. Stocks are falling, leading currencies are losing their worth, and investors across markets are cutting their positions before August 2 when the world will come to know whether the US can borrow more. If it can’t, a default stares in the face of the largest economy that suddenly looks like a ponzi scheme — something dollar-sceptics have been predicting for a decade. But since a lot is at stake the big hope is that US lawmakers will somehow find a away to avert a default by the US.

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Gold is at an all-time high, but not for any rational reason

What do you say to an asset that has few commercial or practical uses, earns no rents, produces nothing, employs nobody and yields no dividends — but manages to rise nearly 40% in one year? On top of that, this asset has been on a tear away run, its longest surge in the last 31 years, and shows no signs of slowing down. At around INRNaN per ounce, gold is on a roll, though many savvy investors will be stumped if you asked them to explain exactly why. Some might say, after scratching their heads, that gold is a defensive position — the thing to hold when everything around you is turning into dust. Thus, the trendy explanation of gold’s meteoric rise is that it’s a mirror image of what’s happening in developed markets — as the European and US economy looks increasingly shaky, money is fleeing conventional assets and turning, literally, into gold. Which investor, even a sophisticated one, would bet on European currencies now?

Who’d stick their necks out on bonds issued by treasuries that increasingly look like they might go under? When sovereign status begins to sound hollow, people head for the yellow stuff. But why do people buy gold and not tin? Well, some folk are diversifying into silver, palladium and platinum, all of which have become dearer. But why is gold the benchmark of value across cultures and centuries? The Egyptians buried their pharaohs with it, the conquistadors went mad looking for El Dorado in the Amazon forests and Indians have always squirrelled the stuff away in lockers and the bowels of temples. Ultimately, the answer to why we value gold might not lie in rationality, but in its exact opposite: faith. Gold has value simply because so many people collectively share the belief that it does. Without that belief, gold would be about as valuable as, say, tin.

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EAC Opinion Capitalisation of Interst during pre-operative period in cable and telecommunication industry

Facts

(i) A closely held company is engaged in the business of providing cable TV (both analog and digital services) and broadband Internet service in the State of Orissa and its neighbouring states. The company plans to expand its operations to different States of India in near future. The company, therefore, is entering into new locations and is also expanding in its locations, and for this, it is incurring borrowing costs.

(ii) The company, as per its business plan, mixed the funding requirement of both equity and debt to meet the capital expenditure including the preoperational expenses at new locations and expansion and upgradation in its existing locations. The nature of activity is such that the same materials are used both for capital expenditure and the repair and maintenance activities. It is also difficult to bifurcate the loan and equity amount that is spent to purchase fixed assets for different locations. The total assets requirement for all locations is pulled and then loan is arranged for the entire lot. The company has stated that it is difficult to identify direct relationship between the loan and the capital item purchased.

(iii) On these facts, the company has sought the opinion of the Expert Advisory Committee (EAC) of ICAI that considering the nature of the business and assets of the company, whether

(a) the company ought to capitalise borrowing cost for the period, when commercial operation is not feasible for certain period initially, and

(b) charging off fully the interest to the profit and loss account will not be proper in view of applicability of AS-16. Opinion The committee observed that the ‘qualifying asset(s)’ in the company’s case is not clear hence the committee is laying down the broad principles to be kept in mind while capitalising the borrowing costs.

(a) Broadly stated, such borrowing costs can be classified into two categories, viz.;

(i) those borrowing costs that are directly attributable to construction/creation of an asset and

(ii) those borrowing costs that are not directly attributable to such constructions/creation.

(b) According to paragraph 6 of AS-16, the borrowing costs that are not directly attributable to construction/creation of an asset (e.g., borrowing costs related to repair charges of an already existing centre or for expenses relating to deployment of manpower) should be expensed in the period in which these are incurred.

(c) The assets which are ready for use when acquired, cannot be considered as ‘qualifying asset’ within the meaning of AS-16, although there may be some time lag between their acquisition and actual use.

(d) The company should evaluate what constitutes a substantial period of time (according to AS-16, ordinarily a period of twelve months is considered as substantial period of time, unless a shorter or longer period can be justified on the basis of facts and circumstances of the case) considering the peculiarities of the facts and circumstances of the case, such as nature of the asset being constructed. In this regard, time which is taken by an asset, technologically and commercially to get ready for its intended use or sale should be considered. When a facility is technologically and commercially ready for distribution to the end customers, the subsequent activities do not add value to the asset and therefore, the borrowing costs incurred thereafter should not be capitalised.

(e) In case the interest incurred is not directly attributable to constructions/creation of an asset, it should be fully expensed in the period in which it is incurred. However. If the interest incurred is directly attributable to construction/creation of a qualifying asset as per the provisions of AS-16, charging it off to the profit and loss account will not be proper in view of AS-16.

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Celebrations on 63rd Foundation Day of ICAI

ICAI celebrated its 63rd Foundation Day on 1st July, 2011. The celebrations were held at New Delhi and at all Regional Councils and Branch Offices all over the country. Report about these celebrations at New Delhi has been published at pages 216-225 of C.A. Journal for August, 2011. Respected Shri Rameshwar Thakur, our Former President and at present Governor of Madhya Pradesh was the Chief Guest at the function at New Delhi. In his speech on this occasion he observed that “Chartered Accountants play an essential role in society, providing reliable and transparent information about public and private bodies. They are the Trustees of Society, at large, and have to shoulder onerous responsibility of protecting and preserving the Trust. They not only have to be adept at work, but also have to adopt with changing environment”.

He advised the members that “As the profession grows, rules and regulations alone would not safeguard the conduct of members. They are more meant to convey what is permissible and what would be frowned upon. Being a Chartered Accountant myself having been in active practice for few decades, I would like to advice every member to uphold the dignity of the profession to conduct them honestly, without fear or favour in carrying out their professional duties. Accounting profession has a long and distinguished history of guarding the integrity of financial statements. As a statutory body, the Institute owes the responsibility to evolve accounting and financial frame-work that facilitates economic growth with certain sense of discipline and stability. I would like to emphasise that our profession owes a moral responsibility to society to sustain the highest degree of professionalism and excellence.”

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Suggested methodology for obtaining audit evidence while reporting default of Directors u/s. 274(1)(g) available online.

The MCA has enabled the viewing of companies in which a person is/was a director by using the DIN or details such as full name of the Director (as given in DIN), father’s last name and date of birth. The list shows the default, if any, of the companies in filing the Annual return and Balance Sheet which is one of the requirements u/s. 274(1)(g). The facility is available after logging in on the MCA portal using your user name and password under the head ‘Services’ — in the ‘Companies in which a person is/was a director’.

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Filing of Statement of Affairs for Companies under Liquidation.

The Ministry of Corporate Affairs has vide General Circular No. 56/2011, date 28th July 2011 informed that DIN (Directors Identification Number) would be blocked consequent to the non-filing of the Statement of Affairs (SOA), pursuant to the winding up orders passed by the Court u/s. 454. The SOA is required to be submitted within twenty-one days from the relevant date (i.e., in a case where a provisional liquidator is appointed, the date of his appointment, and in a case where no such appointment is made, the date of the winding up order), or within such extended time not exceeding three months from that date as the Official Liquidator or the Court may, for special reasons, appoint.

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Filing of Balance Sheet for Phase-I Companies in XBRL mode without any additional fee up to 30-11-2011.

The Ministry of Corporate Affairs has vide Circular No. 57/2011, dated 28th July 2011, has allowed the filing of Balance Sheet and Profit and Loss account in XBRL mode for companies falling in Phase-I without any additional fee up to 30th November 2011 or within 60 days of their due date, whichever is later. Further in supersession of the Circular No. 43/2011, dated 7th July 2011, it is informed that the verification and certification of the XBRL document of financial statements on the e-forms would continue to be done by the authorised signatory for the company and professionals like Chartered Accountant, Company Secretary or Cost Accountant in whole-time practice. [Circular_58-2011 _01aug2011.pdf]

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Certification of Information for Companies under Liquidation.

The Ministry of Corporate Affairs vide General Circular No. 58/2011, dated 1st August 2011, has in view of the representation from professional institutes decided to allow Chartered Accountants/ Company Secretary/Cost Accountant in practice to submit information duly verified by them in case the Official Liquidator has filed such application to the Court.

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Launch of Company Law Settlement Scheme 2011.

The Ministry of Corporate Affairs has vide General Circular No. 59/2011, dated 5th August 2011, launched the Company Law Settlement Scheme 2011 for condoning the delay in filing documents pertaining to the Annual Return, Compliance Certificate and Balance Sheet and Profit and Loss Account only, which were due for filing till 30th June 2011, with the Registrar granting immunity from prosecution and charging additional fee of 25% of actual additional fee payable for filing belated documents under the Companies Act, 1956 and the rules made thereunder. The Scheme is in force from 12th August 2011 to 31st October 2011. It is further informed that on conclusion of the Scheme, the Registrar shall take action against those companies who have not availed the Scheme and are in default in filing the documents in timely manner. Vide General Circular No. 60/2011 dated 10-8-2011, the MCA has clarified that the Scheme will also be applicable to Form 52 (filing of annual accounts by a foreign company).

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Business auxiliary services of production of goods on behalf of client — Activity of applying fusion-bonded epoxy coating on reinforced steel bars supplied by customers — Liability arose only w.e.f. 10-9-2004 when clause (v) of section 65(19) of Finance Act, 1994 inserted — Period prior to 10-9-2004 excluded as services prior to 10-9-2004 excluded — Assessee eligible for CENVAT credit of duty paid on coating material and on input services. Penalty — Non-payment of tax — Revenue never advised as<

(2011) 23 STR 116 (Guj.) — C.C.E., & Cus., Daman v. PSL Corrosion Control Services Ltd.

Facts:

The respondent was engaged in the activity of applying fusion bonded epoxy coating (FBE Coating) on reinforced steel bars supplied by its customers. The respondent failed to register themselves with the Department under the head ‘Business Auxiliary Service’ and service tax was demanded for the activity. Penalty also was imposed along with the interest on the demand of service tax. Tribunal set aside the penalty. On appeal before the High Court, the Revenue inter alia submitted that the Tribunal was not justified in setting aside the penalties inasmuch as the assessee failed to prove the presence of a reasonable cause for not paying the service tax. Also, the respondent failed to get registered with the Department.

Held:

The Court observed that though according to the Revenue the said activities were taxable as ‘Business Auxiliary Service’, they never advised the respondent to pay service tax on the said activity. Further, the Tribunal was justified in setting aside the penalties imposed u/s.80 of Finance Act, 1994 keeping in consideration the bona fide litigation going on as regards the nature of the activity carried on by the respondent. Accordingly, it was held that the order of the Tribunal does not suffer from any legal infirmity so as to warrant interference.

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US Foreign Corrupt Practices Act — A Curtain Raiser

Introduction

There is a famous quote that “Corruption is the most infallible symptom of constitutional liberty”. In the recent past, there has been quite a lot of awareness and activism about corruption and its prevention worldwide and specifically in India. The U.S. Foreign Corrupt Practices Act, 1977 (FCPA) is the single largest, widely recognised piece of legislation in the world which deals with the issue of various corrupt practices and contains the legislative provisions specifically to prevent such practices. Recently, the UK Bribery Act, 2010 was passed on the similar lines of FCPA.

This article deals with the salient features of the FCPA, FCPA settlements, the global legislative framework relating to prevention of corrupt practices, the Indian scenario and the key considerations for ensuring FCPA compliances.

For Accounting Professionals, an awareness of this important piece of legislation is the need of the hour especially when global companies are setting up shops in India and also Indian companies are expanding their wings globally necessitating the compelling need for a high level of awareness of the FCPA and other corruption prevention legislations.

Essence of FCPA

FCPA generally prohibits U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or any person acting while in the U.S., from corruptly paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business. Prohibition under FCPA also extends to making and offering to make payments to foreign public officials, including members of political parties, to further business interests. The FCPA also requires ‘issuers’, including foreign companies, with securities traded on a U.S. exchange or otherwise required to file periodic CANCEROUS CORRUPTION reports with the Securities and Exchange Commission (SEC), to keep books and records that accurately reflect business transactions and to maintain effective internal controls.

The above provisions can be analysed under two broad categories, namely,

Anti-bribery provisions and
Provisions relating to maintenance of books of account.

The first part is generally enforced by the Department of Justice (DOJ) and it prohibits U.S. persons and U.S. firms, or those listed on a U.S. stock exchange, from making and offering to make payments to foreign government officials to obtain, or retain, business or a business advantage. The antibribery provisions make it illegal to directly or indirectly make payments of money or give anything of value to any foreign government official to influence a decision that will result in obtaining or retaining business or secure an improper business advantage. The anti-bribery provisions apply to domestic concerns, issuers (listed entities in the U.S.) and any person while in the territory of the U.S.

The second part relating to books of account is enforced by the SEC. The FCPA’s Books and Records and Internal Control provisions (which apply only to issuers) require:

(i) that books, records and accounts are kept in reasonable detail to accurately and fairly reflect transactions and dispositions of assets, and

(ii) that a system of internal accounting controls is devised

(a) to provide reasonable assurances that transactions are executed in accordance with the authorisation of the management;

(b) to ensure that assets are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets;

(d) to make certain that recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. In many instances, improper payments to a foreign official to obtain or retain business result not only in anti-bribery charges, but also books and records and internal control charges, given that improper payments are often falsely characterised by giving a different colour in the company’s books and records such as payments towards liaisoning services, commissions, miscellaneous expenses, etc. and given the enforcement agencies’ view that the improper payments would not have been made if the company had effective internal controls.

Under FCPA, the organisation can be held responsible for any improper payments made by their subsidiaries, associates, joint-venture partners, directors, agents, employees, associates or third-party intermediaries and representatives as well. FCPA settlements The past few years have seen a tremendous increase in the settlement of FCPA charges by both corporations and individuals. Violations of the FCPA can result in criminal and/or civil liability for companies, and for their individual officers, directors, employees, and agents. The significant point to be noted in ensuring FCPA compliance is that there is no minimum threshold for the dollar amount of infractions, and even what might be considered as a small bribe can result in big penalties, especially if FCPA problems are systemic. Details of the top 10 FCPA settlements in the recent past are given in the table below; The magnitude of the above settlement amounts indicate the gravity of the problem and the need for enhanced monitoring in ensuring strict compliance with the FCPA provisions. Global legislative framework for prevention of corrupt practices Corruption is like a ball of snow, once it’s set rolling, it must increase !

The magnitude of corruption issue has increased manifold in the recent past and has posed serious challenges in establishing and ensuring a good governance framework globally. Hence, the regulators world-wide have taken up various initiatives to prevent the corrupt practices. Under the OECD Convention, government officials are considered to be a particular risk with regards to corruption, because they have the ability to award valuable contracts, or grant favours, and yet are often paid relatively little. The definition of government officials is also broader and it covers ministers and civil servants, government employees including doctors, law enforcement and military, employees of any enterprise majority-owned or controlled by the state and also the tax authorities and local government officials. As a written international agreement, the OECD Convention specifically sets forth the basic, model elements of a foreign corrupt practices statute that each signatory country has agreed to enact into law soon after each country’s ratification of the Convention. Thus, the Convention has particular significance for all U.S. businesses that operate internationally in the signatory countries.

Due to ever-increasing corruption risks, one of the most important trends in FCPA enforcement is the increased aggressiveness of government. The law enforcement authorities are increasingly focussing on global companies. The US regulators are probably very active in this area, but those in other countries are also catching up fast. Regulators around the world are cooperating with each other, sharing information and levying increasingly punitive fines. The other interesting feature in monitoring corrupt practices is the increased attention of the regulators towards individuals responsible, rather than just the companies. They also focus on the extent of companies’ anti-corruption measures when considering fines.

Other than the FCPA of the United States, very recently, the British Parliament has passed the UK Bribery Act, 2010, which is perceived to be more stringent than the FCPA. Under the UK Bribery Act, companies doing any form of business in the UK are covered by these provisions. Thus, any foreign company with operations in the UK that might have engaged in commercial or government-related corrupt activities anywhere in the world could be prosecuted in the UK. In this regard, it may be noted that FCPA covers only bribing foreign government officials, whereas the UK Bribery Act is very exhaustive in nature and has got extended scope and it does not allow any carve-out for facilitation payments or sponsored delegation visits by government officials.

The need for fighting corruption has forced several countries to come up with a separate piece of legislation to fight this evil and also to continuously fine-tune and improve the existing legislations to put in more and more detective and preventive mechanisms in view of the ingenuity with which the corrupt practices are resorted to.

Indian scenario

Implementation of the FCPA in India poses serious challenges for corporates. Though India has anti-corruption and anti-fraud laws, such as the Prevention of Corruption Act, the Prevention of Money Laundering Act and Rules thereunder, as well as various checks under the SEBI Prohibition of Fraudulent and Unfair Practices Regulations, addressing the risk of corruption has become one of the serious challenges for corporations. The recent episode of corruptions and scandals in India has raised concerns in the country and around the globe.

One of the other major challenge in India is providing gifts, hospitality, entertainment, etc. that step over the dividing line from relationship building and good manners, into attempts to influence key decision-makers. This has been the main focus of anti-bribery legislations. The key point to be noted here is what may be regarded by the industry as normal business development practice could well be seen by a regulator as a bribe!

Transparency International — a reputed NGO and the global anti-corruption organisation — publishes a ‘Bribe Payers Index’, which identifies industry sectors which are most likely to have the practice of bribing the public official. In its report on Corruption Perception Index (CPI) 2010, it has placed India at 87th in the list of corrupt nations with a score of 3.3 on a scale of 10 (very clean) to 0 (highly corrupt). Considering this low score, doing business in India is perceived to have high risk from the perspective of corruption risk.

Similarly, according to TI’s Global Corruption Barometer 2007, which details how individuals rate their country’s corruption levels, 25% of respondents in India said they had paid bribes and 90% expect corruption in India to get worse over the next three years. This assessment carried out in FY 2007 is proving to be true in the light of the recent corruption scandals.

In view of the prevailing challenging environment in India, there is an urgent need for creating greater awareness amongst the public at large in India regarding various corrupt practices, strengthening the existing regulatory framework dealing with such corruptive practices, and vigorous implementation of statutory requirements relating to prevention of corrupt practices, etc.

Key considerations for ensuring FCPA compliances

The FCPA has a far-reaching effect and it does not stop only with the entity under consideration. Parent entities can be held responsible for the actions of their subsidiaries also even when the subsidiary has gone to great lengths to conceal the illegal activity and the parent company is unaware of the activity. Further, parent entities can be held responsible for behaviour prior to an acquisition, joint-venture, or merger, especially if a prior payment has led to ongoing profits.

Keeping the provisions of the FCPA in mind to ensure compliance with the FCPA, the entity management could consider the following;

Risk assessment relating to FCPA compliances

Periodic risk assessment by the entity, suo motu, as regards FCPA compliances would help in identifying the weak spots and the exposures, if any, and the corrective action to be taken. Such an exercise would help in identifying the risks which are pervasive in nature as well as specific to a particular activity or a transaction.

Conducting periodic health checks/due diligences

A system should be put in place to assess the health of the entity from the FCPA compliance point of view. Such an exercise should ideally be carried out by an independent person/third party.

Establishing strong internal audit functions

Having a strong and powerful internal audit system is a boon for fighting FCPA non-compliances. By way of timely identification, the internal audit can escalate the matters to those charged with governance and can also help in putting proper controls in place to prevent such non-compliances.

Anti-corruption programmes/policies and creating awareness

The entities should design their own anti-corruption programmes, policies and procedures. Further, it should arrange for dissemination of knowledge amongst all the employees by way of training programmes and other education programmes. Such an awareness exercise will go a long way in ensuring FCPA compliances.

Regular monitoring of intermediaries/third parties

Since the primary responsibility of ensuring compliance with the FCPA provisions vest with the entity, it should monitor intermediaries/third parties who are doing business for the entity on a continuous basis. Their activities, compliances, etc. need to be on the radar of the entity on a continuous basis. Further, it should also carry out the required background checks before appointing such intermediaries to represent the entity.

Reasonability assessments of payments made to various intermediaries

The amounts paid to the various intermediaries and third parties for the services rendered should be reviewed from the perspective of reasonability. Large sums of money paid to intermediaries which are disproportionate to the services rendered by them to the entity could trigger concerns of FCPA non-compliances which need to be investigated in detail.

Establishment of a system of identifying opportunities for corruption

The management should continuously work toward identifying various opportunities for corruption, so as to plug the loop holes by way of putting appropriate controls in place. Such an activity would help in identifying specific non-compliances of FCPA.

Periodic evaluation of performance targets and its achievements

The entities should review the process of achieving performance targets by various business heads keeping in mind the corruption risks. The pressure of achieving targets could force the employees to resort to incorrect/corruptive practices which need to be monitored and timely efforts have to be taken to prevent such non-compliances.

Self-declarations from all the employees for FCPA compliances

There should be a system of obtaining periodic self-declarations from all the employees of the company regarding FCPA compliances. This declaration should not be a form filling exercise, but should facilitate identification of FCPA non-compliances, if any, in letter and spirit.

Dedicated anti-corruption cell

Entities could have a dedicated anti-corruption cell which focusses on identification of FCPA non-compliances. Their mandate could also include closer review of the commercial decisions keeping in mind the anti-corruption requirements, review of the decentralised business models, greater automated surveillance of e-mails, data, and transactions, evaluation of existing sanctions to prevent corruption, etc.

Periodic interactions of the senior management with the employees

The senior management should have a streamlined process of interacting with all the levels of the employees on a periodic basis to identify any issues related to non-compliances of FCPA. Such an interaction could help the senior management in assessing the ground-level situations, obtaining first-hand information regarding FCPA compliance status.

Ethics hotline/helpline and whistle-blower mechanism

Establishing a dedicated ethics hotline/help line and setting up a fool proof whistle-blower mechanism are the pillars for having an effective FCPA compliance framework. All the referrals made to these hotlines/forums should be carefully reviewed to identify any FCPA related non-compliances and their implications.

Other techniques

The entities could also resort to the following other techniques for ensuring FCPA compliances.

Wide publicity for the action taken against corrupt practices

Conducting ethical compliance surveys amongst employees

Mandatory evaluation of employees in dealing with ethical dilemmas

Anti-corruption handbook

Depending on the size and the nature of the entity, one or more of the above mentioned techniques may be introduced by the entities to effectively ensure compliance with the provisions of the FCPA. Needless to add that the success of the monitoring mechanism is purely dependent on the involvement and support of the senior management.

Conclusion
When the greed of the person increases, it is bound to result in quite a lot of irregularities and related consequences and would naturally lead to various corrupt practices. Irrespective of the legislations and the regulatory actions to prevent and fight corruptive practices, the success of their implementation and their enforcement is purely dependent on the setting of the right culture and tone from the top of each and every organisation. When an organisation suspects or uncovers an FCPA violation, its response can be crucial in preventing repeat offenses. Leadership should carefully consider each situation, including asking people to leave the organisation or terminating certain relationships with vendors. When the awareness about the legislation relating to prevention of the corrupt practices increases and the compliance is monitored meticulously, the legislations, be it in the form of FCPA or the Bribery Act, will serve their real purpose. As indicated by Swami Vivekananda, “Arise ….! Awake…..! and Stop not…. till the goal is reached”. The greater level of awareness and the awakening of people about eradication of corruptive practices and fighting corruption through enhanced professional activism, would certainly help in reaching the goal of a corruption-free society.

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Increase in Filing Fee for Name Availability.

The Ministry of Corporate Affairs has vide General Circular No. 48/2011, dated 22nd July 2011, revised the Name Availability Guidelines and the Form 1A pertaining to the Availability of Name for Company and increased the fee to Rs.1000 w.e.f. 24th July 2011.

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Single-Window Registration — a new approach

Presently, most of the Indians think that corruption is a problem bigger than pollution, poverty, poor infrastructure, delayed judgments, etc. It seems true to a great extent because we would have been in a better condition, had there not been corruption.

It is a known truth that bureaucrats or politicians work only when they have some personal interest. Likewise it is also well known that we the public make bureaucrats or politicians corrupt for our personal benefits. The result is that the two parties involved are benefited, but India suffers.

The public becomes a part of corruption willingly or unwillingly due to unnecessary legal requirements and tedious procedures at government departments, which lead to the need of a mediator, hence corruption.

If we take a look at working in our field i.e., chartered accountancy, we will find that to set up a business a client needs to get various permissions from government departments in the form of registrations, licences, NOCs, etc.

To be more specific, to start a business as a private limited company, a client has to apply for the following registrations, licences and numbers:

Registration — Company registration, Industry registration, Service tax registration, VAT & CST, Gumashta or Nagar Nigam, STPI registration, etc.

Numbers —Director Identification Number, Permanent Account Number and Tax Account Number.

Codes and Certificates — Import export code, Digital signature certificate. The main problems in getting the above are:

All these are government agencies, but act as independent to each other.

Most of the documents needed by the various government departments are the same and the businessman has to resubmit them again and again to these departments/agencies. A businessman collects registration from one department and submits it to another department for further registration or licensing.

The businessman also has to fill registration forms in various formats and deposit the registration fees in various challan forms with typical challan number system at pre-nominated deposit centres or banks.

This is a tedious process and leads to birth of agents or mediators, which in turn leads to bribery or corruption.

It will be a repetition to say that technology can control or stop corruption in the government departments. The government has already taken successful steps by making Income tax, service tax, and registration of company work (MCA) online. A solution can come if a centralised system can be designed:

where documents once submitted or generated by one government agency can be used again and again by various departments.

where available information can be automatically used to fill various registration forms and challans.

where a businessman can amend his details and they are automatically intimated to various authorities.

where a businessman can himself apply for registration and pay the required fee online through credit card or online bank account.

In my view all the above are possible through a single-window (SW) registration website. This Single Window Registration website will be an attempt to expedite and simplify information flows between trade and the government and bring meaningful gains to all parties.

In practical terms, an SW environment will provide one entrance (either physical or electronic) for the submission and handling of all data and documents related to the release and clearance of a transaction. This entry point is managed by one agency (may be like NSDL) which informs the appropriate agencies and/or performs combined controls. Centralised registration server may work in the following way :

It is important to mention here that many state governments have worked and are already working through single-window registration. So, the new website will be an attempt to link all departmental websites with single-window registration website. In turn the new website will provide all necessary details directly to the concerned government department.

Public key and private key concept may also be implemented. Public key will be given to various departments to view business details and private key will be given to business for alterations or modifications in its details.

(Paper formalities for registrations, licensing, etc. in the proposed system is illustrated in Annexure.)

Conclusion:

If this suggestion is implemented, then in my opinion this would be a great relief to businessmen and will lead to lesser dependency on mediators, resulting in less corruption.

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IFRS introduces framework for measuring fair values

On 12 May 2011, the International Accounting Standards Board (IASB) issued IFRS 13 Fair Value Measurement that is intended to replace the fair value measurement guidance contained under various standards with a single authoritative pronouncement on fair value measurement.

In this article we focus on the guidance provided under IFRS 13 in relation to the definition of fair value, the framework for measuring the fair value and certain disclosure requirements, giving our perspectives on the requirements that are modified and that are expected to have an impact on the preparers and users of IFRS financial statements.

IFRS 13 provides elaborate guidance on how to measure the fair value when required or permitted under IFRS. It neither introduces new requirements to measure assets or liabilities at fair value, nor does it eliminate the exceptions to fair value measurements on the grounds of practicality in line with guidance contained under certain standards.

Scope of IFRS 13

The IFRS 13 guidance shall be applied to items of assets, liabilities and equity that are permitted or required to be measured at fair value. However, the guidance contained therein does not apply to the measurement and disclosure requirements in certain cases, such as:

share-based payment transactions within the scope of IFRS 2 Share-based Payment;
leasing transactions within the scope of IAS 17 Leases; and
measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.

Further, the fair value measurement guidance also does not apply to the disclosure requirements in certain cases, such as:

plan assets measured at fair value in accordance with IAS 19 Employee Benefits;
retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting and Reporting by Retirement Benefit Plans; and
assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36.

Measurement principles
Definition of fair value

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Measurement of asset or liability

A fair value measurement of an asset or liability considers the characteristics of that asset or liability (e.g., the condition and location of the asset and restrictions, if any, on its sale or use), if market participants would consider those characteristics when determining the price of the asset or liability at the measurement date.

The transaction

A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. The hypothetical transaction is considered from the perspective of a market participant that holds the asset or owes the liability, i.e., it does not consider entityspecific factors that might influence an actual transaction. Therefore, the entity need not have the intention or ability to enter into a transaction on that date. An orderly transaction is a transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities i.e. it is not a forced transaction, e.g., a forced liquidation or distress sale.

Principal or most advantageous market

The hypothetical transaction to sell the asset or transfer the liability is assumed to take place in the principal market. This is the market with the greatest volume and level of activity for the asset or liability.

In the absence of a principal market, the transaction is assumed to take place in the most advantageous market. This is the market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after considering transaction costs and transport costs. Because different entities may have access to different markets, the principal or most advantageous market for the same asset or liability may vary from one entity to another.

Market participants

Fair value measurement uses assumptions that market participants would use in pricing the asset or liability. Market participants are buyers and sellers in the principal (or most advantageous) market who are independent of each other, knowledgeable about the asset or liability, and willing and able to enter into a transaction for the asset or liability.

Price

Fair value is the price that would apply in a transaction between market participants whether it is observable in an active market or estimated using a valuation technique.

Transaction cost and transportation cost

Although transaction costs are taken into account in identifying the most advantageous market, the price used to measure the fair value of an asset or a liability is not adjusted for transaction costs. This is because they are not a characteristic of the asset or liability and are instead characteristic of a transaction. However, if location is a characteristic of an asset e.g., crude oil held in the Arctic Circle, then the price in the principal or most advantageous market is adjusted for the costs that would be incurred to transport the asset to that market, e.g., costs to transport the crude oil from Arctic Circle to the appropriate market.

Application to non-financial assets — highest and best use and valuation premise

A fair value measurement considers a market participant’s ability to generate economic benefit by using the asset or by selling it to another market participant who will use the asset in its highest and best use. Highest and best use refers to the use of an asset that would maximise the value of the asset, considering uses of the asset that are physically possible, legally permissible and financially feasible. Highest and best use is determined from the perspective of market participants, even if the reporting entity intends a different use. However, an entity need not perform an exhaustive search for other potential uses if there is no evidence to suggest that the current use of an asset is not its highest and best use. The concept of highest and best use is relevant only to the valuation of non-financial assets and does not apply to the valuation of financial assets or liabilities.

Liabilities and equity instruments

The fair value of a liability or an entity’s own equity instrument is measured using quoted prices for the transfer of identical instruments. When such prices are not available, an entity measures fair value from the perspective of a market participant holding the identical item as an asset. If quoted prices in an active market for the corresponding asset are also not available, then other observable inputs are used, such as prices in an inactive market for the asset. Otherwise, an entity uses another valuation technique(s), such as a present value measurement or the pricing of a similar liability or instrument. IFRS 13 retains the principle in IAS 39 that the fair value of a financial liability with a demand feature is not less than the present value of the amount payable on demand.

Fair value at initial recognition

The price paid in a transaction to acquire an asset or received to assume a liability, often referred to as the ‘entry price’, may or may not equal the fair value of that asset or liability based on an exit price. If an IFRS requires or permits an entity to measure an asset or liability initially at fair value and the transaction price differs from fair value, then the entity recognises the resulting gain or loss in profit or loss unless the specific IFRS requires otherwise. Therefore, the recognition of a ‘day one’ gain or loss when the transaction price differs from the fair value will be determined by the particular standard that prescribes the accounting for the asset or liability.

Valuation techniques

The objective of using a valuation technique is to determine the price at which an orderly transaction would take place between market participants at the measurement date. An entity uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. IFRS 13 identifies three valuation approaches: income, market and cost.

Fair value hierarchy

IFRS 13 establishes a fair value hierarchy based on the inputs to valuation technique used to measure fair value to increase consistency and comparability. The inputs are categorised into three levels, with the highest priority given to unadjusted quoted price in active markets for identical assets or liabilities and lowest priority given to unobservable inputs.

The level into which a fair value measurement is classified in its entirety is determined by reference to the observability and significance of the inputs used in the valuation model. The valuation technique often incorporate both observable and unobservable inputs, however the fair value measurement is classified in its entirety into either level 2 or level 3, based on the lowest level input that is significant to the fair value measurement.

The availability of relevant inputs and their relative subjectivity might affect the selection of appropriate valuation techniques. However, the fair value hierarchy prioritises the inputs to valuation techniques, not the valuation techniques used to measure fair value. For example, a fair value measurement developed using a present value technique might be categorised within level 2 or level 3, depending on the inputs that are significant to the entire measurement and the level of the fair value hierarchy within which those inputs are categorised.

Level 1 Inputs

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. A quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value.

An active market is a market in which transactions for the asset or liability takes place with sufficient frequency and volume for pricing information to be provided on an ongoing basis.

Level 2 Inputs

The determination of whether a fair value measurement is categorised into level 2 or level 3 depends on whether the inputs used in the valuation techniques are observable or unobservable and their significance to the fair value measurement.

Level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

Observable inputs are inputs that are developed using market data, such as publicly available information about actual events or transactions, and that reflect the assumptions that market participants would use when pricing the asset or liability.

Level 3 Inputs

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.

Inputs into valuation techniques

When selecting the inputs into a valuation technique, an entity selects inputs that are consistent with the characteristics that market participants would take into account in a transaction. A premium or discount, such as a control premium or a discount for lack of control, may be appropriate if it would be considered by market participants in pricing the asset or liability based on the unit of account.

Using quoted prices provided by third parties

IFRS 13 does not preclude the use of quoted prices provided by third parties, such as brokers or pricing services, provided that the prices are developed in accordance with IFRS 13.

Markets that are not active and transactions that are not orderly

IFRS 13 describes factors that may indicate that a market has seen a decrease in the volume or level of activity. An entity evaluates the significance and relevance of factors to determine whether, based on the evidence available, there has been a significant decrease in the volume or level of activity; however, the standard stresses that even if a market is not active, it is not appropriate to conclude that all transactions in that market are not orderly, i.e., are forced or distress sales.

Quoted prices derived from a market that is not active may not be determinative of fair value. In such circumstances, further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to measure fair value.

Disclosures
The objective of the disclosures is to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs (level 3), the effect of the measurements on profit or loss or other comprehensive income.

To meet this objective, an entity provides certain minimum disclosures for each class of assets and liabilities. For non-financial assets and non-financial liabilities that are measured at or based on fair value in the statement of financial position, IFRS 13 requires fair value disclosures that are similar to existing fair value disclosures for financial assets and financial liabilities in IFRS 7. This disclosure is also required for non-recurring fair value measurements (e.g., an asset held for sale). The requirement to disclose a fair value hierarchy and information on valuation techniques is also extended to assets and liabilities which are not measured at fair value in the statement of financial position, but for which fair value is disclosed pursuant to another standard.

In addition, a description of the valuation processes used by the entity for level 3 measurements is required to be disclosed. This includes, for example, how an entity decides its valuation policies and procedures and analyses changes in fair value measurements from period to period. An entity should disclose a narrative description of the sensitivity of level 3 measurements to changes in unobservable inputs, including the effect of any interrelationships between unobservable inputs, as well as quantitative information on significant unobservable inputs used in measuring fair value.

Effective date and transition

An entity should apply IFRS 13 prospectively for annual periods beginning on or after 1 January 2013. Earlier application is permitted with disclosure of that fact.

The disclosure requirements of IFRS 13 need not be applied in comparative information for periods before initial application.

Summary
Overall, the implementation of IFRS 13 will require significant judgment while preparing the entity’s financial statements. The standard is neither mandatorily effective until periods beginning on or after 1st January 2013, nor does it require retrospective application. As such, the comparative disclosures and measurements are not required in line with IFRS 13 in the first period of application.

At this moment, it is unclear by when the corresponding changes will be introduced under the Ind AS framework. However, it is advisable for Indian companies to evaluate the impact of this new standard, as it is inevitable that Ind AS will ultimately incorporate the changes due to the new standard.

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Section A: Disclosures Under Revised Schedule VI

Compiler’s Note:

The Ministry of Company Affairs notified Revised Schedule VI on 28th February 2011. The same is applicable for all companies for financial statements prepared for the financial year commencing from 1st April 2011 onwards.

Paragraph 10 of AS-25 ‘Interim Financial Reporting’ as notified by the Companies (Accounting Standards) Rules, 2006, states that “If an enterprise prepares and presents a complete set of financial statements in its interim financial report, the form and content of those state-ments should conform to the require-ments as applicable to annual complete set of financial statements.” Accordingly, if a company following April-March as its accounting year, prepares complete set of financial statements, it will have to present the same in the Revised Sched-ule VI as applicable for 2011-12.

Infosys Limited follows the practice of preparing full set of financial state-ments for each quarter. In terms of the above, Infosys Limited (which follows April-March as its accounting year) has prepared its financial statements for the quarter ended 30th June 2011. Important extracts from these financial statements prepared in accordance with Revised Schedule VI are being published in two parts.

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GAPs in GAAP — What is substantial period of time?

What is substantial period of time?

Borrowing costs are capitalised during the construction of a qualifying asset, which is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The explanation to the definition of the term ‘qualifying asset’ in AS-16 ‘Borrowing Cost’, notified by the Central Government under the Companies (Accounting Standards) Rules, 2006, provides as follows:

Explanation

“What constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.”

Let us see how this explanation was interpreted in the context of the example below.

Example

Salon Ltd. provides health and beauty solutions through its various salons across the country. From the time of acquiring the premises to the development of the salon, a period of three to five months is required and a substantial cost including capital cost on leasehold improvement is incurred on creating the right aesthetic and ambience. The period of three to five months is representative of the time required for similar construction of assets. The amount to be capitalised (if permitted) is material.

Position prior to EAC opinion (which was finalised on 30-5-2008)

In light of the explanation in AS-16, a period of three to five months was considered far below the 12-month threshold level, and hence in many similar situations companies may not have capitalised the bor-rowing expenses to comply with the explanation.

Position after EAC opinion (which was finalised on 30-5-2008)

The above position has changed completely vide an EAC opinion that was finalised on 30-5-2008 but was only published and available recently in Compendium Volume XXVIII. Paragraph 14 of the opinion states: “The committee is of the view that ordinarily, three to five months cannot be considered as a substantial period of time. The company should itself evaluate what constitutes a substantial period of time considering the peculiarities of facts and circumstances of its case, such as nature of the asset being constructed, etc. In this regard, time which an asset takes, technologically and commercially to get it ready for its intended use should be considered. Accordingly, the assets concerned may be considered as qualifying asset as per the provisions of AS-16.”

EAC opined that the borrowing costs could be capitalised by Salon Ltd.

Author’s comments

It may be noted that IAS 23 Borrowing Costs contains similar principles of capitalisation on qualifying asset. Like AS-16, substantial period of time has not been defined but unlike AS-16, there is no 12-month threshold level in IAS 23. Under IAS 23 there is no consensus globally on what constitutes a substantial period of time, though literature suggests a period of six months or more, to be substantial. Under FAS 34 interest cost is capitalised for all assets that require a period of time (not necessarily substantial) to get them ready for their intended use. However, in many cases, the benefit in terms of information about enterprise resources and earnings may not justify the additional accounting and administrative cost involved in providing the information. The benefit may be less than the cost, because the effect of interest capitalisation and its subsequent amortisation or other disposition, compared with the effect of charging it to expense when incurred, would not be material. In that circumstance, FAS 34 does not require interest capitalisation.

The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing immaterial interest cost for purposes of capitalisation. This aspect is very clear under FAS 34. Therefore if the interest cost is very material the same may be capitalised even if the asset has taken less than 12 months to complete, provided other factors indicate capitalisation is appropriate.

The explanation to AS-16 requires assessing the time which an asset should take technologically and commercially to be ready for its intended use. In fact, under present circumstances where construction period has reduced drastically due to technical innovation, the 12-month period should at best be looked at as a general benchmark and not a conclusive yardstick. It may so happen that an asset under normal circumstances may take more than 12 months to complete. However an enterprise that constructs the asset in 10 months should not be penalised for its efficiency by denying it interest capitalisation and vice versa.

Seen from this perspective, and the mixed practice under IAS 23, the EAC opinion is a step in the right direction as it clarifies that the 12-month period should not be seen as a strict benchmark, and other facts and circumstances should be kept in mind. In that sense, it is more aligned to global practice.

However additional guidance is required with regards to the following issues:

1. The EAC opinion changes the existing thought and practice in this area. In similar situations, if a company had not capitalised borrowing cost in earlier years, would they have to apply the correct treatment retrospectively (from the date AS-16 came into force)?

2. Would retrospective adjustment constitute a change in accounting policy or a rectification of prior period error?

3. Can such change be applied prospectively, given that the EAC opinion establishes a new principle?

4. If it is applied on a prospective basis, should it from the date the EAC finalised the opinion or the date when such an opinion was made public?

More importantly, given that it is intended that India will converge to IFRS, it may be worthwhile for the Institute of Chartered Accountants of India to raise this issue with the International Accounting Standards Board.

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XBRL — FUTURE FINANCIAL LANGUAGE

The Ministry of Corporate Affairs (MCA) has by its Circular No. 9/2011, dated 31st March, 2011, Circular No. 25/2011, dated 12th May, 2011 and Circular No. 37/2011, dated 7th June, 2011. MCA has mandated certain class of companies to file Balance Sheet and Profit & Loss Account along with Directors’ Report and Auditors’ Report for the year 2010-2011 by using XBRL Taxonomy. In the Phase I of its implementation, the following classes of companies have to file the Financial Statements in XBRL form from the year 2010-2011:

All companies listed in India and their Indian subsidiaries;

All companies having a paid capital of Rs.5 crore and above;

All companies having a turnover of Rs.100 crore and above.

However, banking companies, insurance companies, power companies and NBFCs are exempted for XBRL filing, till further orders. Also, vide its Circular No. 26/2011, dated 18th May, 2011, Circular No. 43/2011, dated 7th July, 2011 and Circular No. 57/2011, dated 28th July, 2011 MCA has made it mandatory that the Financial Statements prepared in the XBRL mode shall be certified by a Chartered Accountant or Company Secretary or Cost Accountant in whole-time practice from the year 2010-2011 onwards. The introduction of XBRL filing and its certification by MCA has opened a new avenue for practice for professionals like us. Therefore, it has become necessary that we gear ourselves up for this upcoming challenge. For this what is necessary is the knowledge about XBRL. Let us discuss about XBRL in great depth in the following paragraphs.

What is XBRL?

XBRL stands for eXtensible Business Reporting Language. It is a language for electronic communication of business and financial data which is revolutionising business reporting around the world. It provides major benefits in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data. It is one of a family of ‘XML’ languages which is becoming a standard means of communicating information between businesses and on the Internet. XBRL is being developed by an international non-profit consortium of approximately 650 major companies, organisations and government agencies. It is an open standard, free of licence fees. It is already being put to practical use in a number of countries and implementation of XBRL is growing rapidly around the world.

A simple explanation

The idea behind XBRL is simple. Instead of treating financial information as a block of text, as in a standard Internet page or a printed document, it provides an identifying tag for each individual item of data. This is computer-readable. For example, company’s net profit has its own unique tag. The introduction of XBRL tags enables automated processing of business information by computer software, cutting out laborious and costly processes of manual re-entry and comparison. Computers can treat XBRL data ‘intelligently’. They can recognise the information in an XBRL document, select it, analyse it, store it, exchange it with other computers and present it automatically in a variety of ways for users. XBRL greatly increases the speed of handling of financial data, reduces the chance of error and permits automatic checking of information.

Companies can use XBRL to save costs and streamline their processes for collecting and reporting financial information. Consumers of financial data, including investors, analysts, financial institutions and regulators, can receive, find, compare and analyse data much more rapidly and efficiently if it is in XBRL format. XBRL can handle data in different languages and accounting standards. It can flexibly be adapted to meet different requirements and uses. Data can be transformed into XBRL by suitable mapping tools or it can be generated in XBRL by appropriate software. How XBRL works? XBRL is a member of the family of languages based on Extensible Markup Language (XML), which is a standard for the electronic exchange of data between businesses and on the Internet.

Under XML, identifying tags are applied to items of data, so that they can be processed efficiently by computer software. XBRL is a powerful and flexible version of XML which has been designed specifically to meet the requirements of business and financial information. It enables unique identifying tags to be applied to items of financial data, such as ‘net profit’. However, these are more than simple identifiers. They provide a range of information about the item, such as whether it is a monetary item, percentage or fraction. XBRL allows labels in any language to be applied to items, as well as accounting references or other subsidiary information. XBRL can show how items are related to one another. It can thus represent how they are calculated. It can also identify whether they fall into particular groupings for organisational or presentation purposes.

Most importantly, XBRL is easily extensible, so companies and other organisations can adapt it to meet a variety of special requirements. The rich and powerful structure of XBRL allows very efficient handling of business data by computer software. It supports all the standard tasks involved in compiling, storing and using business data. Such information can be converted into XBRL by suitable mapping processes or generated in XBRL by software. It can then be searched, selected, exchanged or analysed by computer, or published for ordinary viewing. However, the use of XBRL does not imply an enforced standardisation of financial reporting.

On the contrary, the language is a flexible one which is intended to support all current aspects of reporting in different countries and industries. Its extensible nature means that it can be adjusted to meet particular business requirements even at the individual organisation level.

Differences between XML and XBRL

XML (Extensible Markup Language) uses tags to identify the meaning, context and structure of data. XML is a standard language which is maintained by the World Wide Web Consortium (W3C). It is a complementary format that is platform independent, allowing XML data to be rendered on any device such as a computer, cell phone, PDA or tablet device. It enables rich, structured data to be delivered in a standard, consistent way. XML provides a framework for defining tags (i.e., taxonomy) and the relationship between them (i.e., schema).

XBRL is an XML-based schema that focusses specifically on the requirements of business reporting. XBRL builds upon XML, allowing accountants and regulatory bodies to identify items that are unique to the business reporting environment. The XBRL schema defines how to create XBRL documents and XBRL taxonomies, providing users with a set of business information tags that allows them to identify business information in a consistent way. XBRL is also extensible in that users are able to create their own XBRL taxonomies that define and describe tags unique to a given environment.

Benefits and uses for business

All types of organisations can use XBRL to save costs and improve efficiency in handling business and financial information. Because XBRL is extensible and flexible, it can be adapted to a wide variety of different requirements. All participants in the financial information supply chain can benefit, whether they are preparers, transmitters or users of business data.

By using XBRL, companies and other producers of financial data and business reports can automate the processes of data collection. For example, data from different company divisions with different accounting systems can be assembled quickly, cheaply and efficiently if the sources of information have been upgraded to using XBRL. Once data is gathered in XBRL, different types of reports using varying subsets of the data can be produced with minimum effort. A company finance division, for example, could quickly and reliably generate internal management reports, financial statements for publication, tax and other regulatory filings, as well as credit reports for lenders. Not only can data handling be automated, removing time-consuming, error-prone processes, but the data can be checked by software for accuracy. Small businesses can benefit alongside large ones by standardising and simplifying their assembly and filing of information to the authorities.

Users of data which is received electronically in XBRL, can automate its handling, cutting out time-consuming and costly collation and re-entry of information. Software can also immediately validate the data, highlighting errors and gaps which can immediately be addressed. It can also help in analysing, selecting, and processing the data for re-use. Human effort can switch to higher, more value-added aspects of analysis, review, reporting and decision-making. In this way, investment analysts can save effort, greatly simplify the selection and comparison of data, and deepen their company analysis. Lenders can save costs and speed up their dealings with borrowers. Regulators and government departments can assemble, validate and review data much more efficiently and usefully than they have hitherto been able to do.

In a nutshell, XBRL can be applied to a very wide range of business and financial data. It can handle:

Company internal and external financial reporting.

Business reporting to all types of regulators, including tax and financial authorities, central banks and governments.

Filing of loan reports and applications; credit risk assessments.

Exchange of information between government departments or between other institutions, such as central banks.

Authoritative accounting literature — providing a standard way of describing accounting documents provided by authoritative bodies.

A wide range of other financial and statistical data which needs to be stored, exchanged and analysed.

XBRL in action

Organisations benefitting from XBRL

Various specific types of organisations can benefit from XBRL. They are as follows:

Companies in general;

Regulators;

Stock Exchanges;

Investment analysts;

Loan and credit management departments of banks;

Companies in financial information industry;

Accountants;

Companies in information technology industry.

XBRL taxonomies
XBRL makes the data readable with the help of two documents — the taxonomy and the instance document. Taxonomies are dictionaries that contain the terms used in the financial statements and their corresponding XBRL tags (i.e., electronically readable codes for each item of financial statements). Thus, taxonomies define the elements and their relationships based on the regulatory requirements. Instance document is a file that contains business reporting information and represents a collection of financial facts and reports — specific information using tags from one or more XBRL taxonomies. The instance document is a computer file that contains entity’s data and other entity specific information and is generally not intended to be read by the human eye.

XBRL taxonomies are the reporting-area specific hierarchical dictionaries used by the XBRL community. They define the specific tags that are used for individual items of data (such as ‘Net Profit’), their attributes and their interrelationships. Different taxonomies will be required for different business reporting purposes. Some national jurisdictions may need their own reporting taxonomies to reflect local accounting and

other reporting regulations. Many different organisations, including regulators, specific industries or even companies, may require taxonomies or taxonomy extensions to cover their own specific business reporting needs.

A special taxonomy developed and recommended by XBRL International has also been designed to support collation of detailed, drill-down data focussing on internal reporting within organisations. This is the Global Ledger (GL) taxonomy. The XBRL GL taxonomy allows the representation of anything that is found in a chart of accounts, journal entries or historical transactions, financial and non-financial. It does not require a standardised chart of accounts to gather information, but it can be used to tie legacy charts of accounts and accounting detail to a standardised chart of accounts to improve communications within a business. XBRL GL is reporting-independent, system-independent, permits consolidation of data from multiple departments and provides flexibility overcoming the limitations of other approaches such as Electronic Data Interchange (EDI).

The IASB is developing a taxonomy which reflects IFRS. National XBRL jurisdictions will extend this taxonomy to reflect their particular local implementation of IFRS. Taxonomies will thus be available to enable those reporting under IFRS in different countries to use XBRL, enhancing efficiency and comparability as adoption of IFRS expands around the world.

Taxonomies for Indian companies are developed based on the requirements of:

Schedule VI to the Companies Act, 1956;

Accounting Standards notified under the Companies Act, 1956;

SEBI Listing Agreements.

Taxonomies can be extended to accommodate items/relationship specific to the owner of the information. Taxonomy extension can be in the following forms:

Modification in the existing relationships;

Addition of new elements in the taxonomy;

Combination of above.

It is to be noted that the U.S.A. allows extension of the taxonomies by the users while the U.K. does not allow extension of the taxonomies by the users. Taxonomies issued by the MCA for the Financial Year 2010-2011 cannot be extended/ modified by the users. However, this inconvenience will be removed from the Financial Year 2011-2012 onwards.

Creation of financial statements in XBRL
There are a number of ways to create financial statements in XBRL:

XBRL-aware accounting software products are becoming available which will support the export of data in XBRL form. These tools allow users to map charts of accounts and other structures to XBRL tags.

Statements can be mapped into XBRL using XBRL software tools designed for this purpose.

Data from accounting databases can be extracted in XBRL format. It is not strictly necessary for an accounting software vendor to use XBRL; third party products can achieve the transformation of the data to XBRL.

Applications can transform data in particular formats into XBRL.

XBRL is a format for exchanging information between applications. Therefore each application will store data in whatever form is most effective for its own requirements and import and export information in XBRL format, so that it can be readily imported or exported in turn by other applications. In some applications, for example, the XBRL formatted information being used may be mostly tabular numeric information, hence easily manipulated in a relational database. In other applications, the XBRL information may consist of narrative document-like structures with a lot of text, so that a native XML database may be more appropriate. There is no mandatory relationship between XBRL and any particular database or other processing or storage architecture.

The route which an individual company may take will depend on its requirements and the accounting software and systems it currently uses, among other factors.

Role of Chartered Accountants vis-à-vis XBRL financial statements

After understanding what is XBRL, let us now have a look upon our role as a Chartered Accountant in respect of certification of financial statements in XBRL mode.

The Standards on Audit (SAs) issued by the ICAI apply to an audit of general purpose financial statements. The term general purpose financial statements has been defined in the Preface to the Statements on Accounting Standards, issued by the ICAI as including “Balance Sheet, Statement of Profit and Loss, a Cash Flow Statement (wherever applicable) and statements and explanatory notes which form part thereof, issued for the use of various stakeholders, Governments and their agencies and the public.” In fact, the references to financial statements in the said Preface and the Accounting Standards issued by the ICAI and notified under the Companies Act, 1956, are construed to refer to the general purpose financial statements. Clearly, the XBRL financial statements are out of the purview of the general purpose financial statements as envisaged in the said Preface. The current SAs issued by the ICAI, therefore, do not require the auditor to perform procedures on XBRL data as part of the financial statement audit. Accordingly, the auditor’s report in accordance with these SAs on the financial statements does not cover the process by which XBRL data is tagged or the XBRL data that results from this process, and thus, no assurance is given on the accuracy, consistency and completeness of the XBRL data itself.

Insofar as the SA 720, The Auditor’s Responsibilities relating to Other Information Contained in Audited Financial Statements is concerned, it may be noted that XBRL data does not construe ‘other information’ as envisaged in SA 720, because it is only a machine-readable rendering of the data within the financial statements. Since the filing of this XBRL data is not a discrete document, the requirement of SA 720 to ‘read the other information’ for the purposes of identifying material inconsistencies or material misstatements of fact would not be applicable to XBRL-tagged data.

The Chartered Accountants engaged to certify XBRL financial statements in terms of the aforementioned MCA’s Circulars of 7th July, 2011 and 28th July, 2011, can draw guidance from the principles enunciated in the Guidance Note on Audit Reports and Certificates for Special Purposes, issued by the Institute of Chartered Accountants of India. The Chartered Accountants’ procedures in respect of certification of XBRL financial statements would be as follows:

Completeness — A Chartered Accountant would need to assess whether all the information has been formatted at the required levels as defined by the applicable reporting requirements in the instance document and related files and that only permitted information selected by the entity is included in the XBRL files.

Mapping — A Chartered Accountant needs to examine whether the elements selected are consistent with the meaning of the associated concepts in the source information in accordance with the requirements of the company’s financial reporting framework.

Accuracy — A Chartered Accountant should examine whether the amounts, dates, other attributes (for example, monetary units), and relationships (order and calculations) in the instance document and related files are consis-tent with the source information in accordance with the requirements of the entity’s reporting environment.

Structure — It is essential to structure instance documents and related files in accordance with the requirements to which the entity’s XBRL files are subject.

As the regulatory requirement of certifying the financial statements in XBRL mode has an immediate impact on our profession, the ICAI should issue a Guidance Note on the certification of the financial statements in the XBRL mode, also giving factors to be taken care of while issuing a certificate along with an illustrative format of the certificate to clarify the situation.

Conclusion
To conclude, the usage of XBRL technology will lead to more information exchanges that can be effectively automated by use. XBRL will lead to the best interest of the company or more so for the international business interest globally that warrants the accuracy of all the financial data for the end-users and early collaborative decisions by the companies or those whose interest is involved for acquisition/rights, etc.

XBRL is set to become the standard way of recording, storing and transmitting business financial information. It is capable of use throughout the world, whatever the language of the country concerned, for a wide variety of business purposes. It will deliver major cost savings and gains in efficiency, improving processes in companies, governments and other organisations.

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