BCAJ | Bombay Chartered Accountant Journal

Taxation of ‘Fees for Technical Services’ : Application of the concept of ‘Make Available’

In this article the concept of ‘Make Available’ used in the Article in the Tax Treaties relating to ‘Fees for Technical Services (FTS)’ or ‘Fees for Included Services’ has been discussed and analysed. In the second part of the Article to be published next month we shall deal with the Indian Judicial decisions dealing with the subject.

A. Concept of ‘Make Available’ and historical background :The expression ‘make available’ used in the Article in the Tax Treaties relating to ‘Fees for Technical Services (FTS)’ has far reaching significance since it limits the scope of technical and consultancy services in the context of FTS.

India has negotiated and entered into tax treaties with various countries where the concept of ‘make available’ under the FTS clause is used. India’s tax treaties with Australia, Canada, Cyprus, Finland, Malta, Netherlands, Portuguese Republic, Singapore, UK and USA contain the concept of ‘make available’ under the FTS clause. Further, the concept is also applicable indirectly due to existence of Most Favored Nation (MFN) clause in the protocol to the tax treaties with Belgium, France, Israel, Hungary, Kazakstan, Spain, Switzerland and Sweden.

It is interesting to note that India-Australia tax treaty does not have separate FTS clause but the definition of Royalty which includes FTS, has provided for make available concept. An analysis of the countries having the concept of make available directly or indirectly in their tax treaties with India reveals that almost all of these countries are developed nations and they have successfully negotiated with India the restricted scope of the definition of FTS as almost all of them are technology exporting countries.

In view of the above, while deciding about taxability of any payment for FTS, the reader would be well advised to examine the relevant article and the protocol of the tax treaty to examine whether the concept of make available is applicable to payment of FTS in question and accordingly whether such a payment would be not liable to tax in the source country. He would also be well advised to closely examine the relevant judicial decision to determine the applicability of the concept of ‘make available’ to payment of FTS in question.

B. Explanation of the concept in the MOU to the India-US Tax Treaty :

Article 12(iv)(b) of the India US tax treaty reads as follows :

“4. For purposes of this Article, ‘fees for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

(a) . . . .

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.”

As per Article 12(4)(b) of the India US tax treaty, payment of any kind in consideration for rendering of services results in FTS if :

(a) Such services are technical or consultancy services;

(b) They ‘make available’ knowledge, experience, skill, know how, or processes or alternatively, consist of development and transfer of a plan or design; and

The three conditions above are cumulative and not alternative. In order to fall under the Article 12(4)(b) of the India US tax treaty, it is essential that services should make available knowledge, experience, skill, know-how, or processes.

The Memorandum of Understanding (MoU) to the India-US Tax Treaty, Technical Explanation to India-US Tax Treaty, Technical Explanation to India-Australia Tax Treaty, and various Indian Judicial Pronouncements, have laid down different tests for considering whether or not services ‘make available’ knowledge, experience, skill, know-how, or processes.

The concept of ‘make available’ is interpreted and explained with concrete illustrations in the ‘Memorandum of Understanding concerning Fees for Included Services in Article 12’ appended to the said India-US DTAA. The concept is explained as under in the Memorandum of Understanding :

“Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.) This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.” (Emphasis supplied)

“Typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in paragraph 4(b), include :

1 Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering);

2 Architectural services; and

3 Computer software development.

Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following areas :

1 Bio-technological services;

2 Food-processing;

3 Environmental and ecological services;

4. Communication through satellite or otherwise;

5. Energy conservation;

6. Exploration or exploitation of mineral oil or natural gas;

7. Geological surveys;

8. Scientific services; and

9. Technical training.”

This concept is further explained by Examples 3 to 7 in the MoU which are as follows:

Example (3) :

Facts:

A U.S. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than standard products of its type. An Indian builder wishes to produce this product for his own use. He rents a plant and contracts with the U.S. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wall-board. The U.S. contractors work with the technicians in the Indian firm for a few months. Are the payments to the U.S. firm considered to be payments for ‘included services’ ?

Analysis:

The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill, and processes.

Example (4) :

Facts:

A U.S. manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the US. company to produce wallboard at that plant for a fee. The Indian company provides the raw materials and the US. manufacturer fabricates the wall-board in its plant, using advanced technology. Are the fees in this example payments for included services?

Analysis:

The fees would not be for included services. Al-though the U.S. company is clearly performing a technical service, no technical knowledge, skill, etc., are made available to the Indian company, nor is there any development and transfer of a technical plan or design. The U.S. company is merely performing a contract manufacturing service.

Example (5) :

Facts:

An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company’s wares. The company wants to modify its software to permit the salesmen to access the company’s central computers for information on products available in inventory and when they can be delivered. The Indian firm hires a U.S. computer programming firm to modify its software for this purpose. Are the fees which the Indian firm pays to be treated as fees for included services?

Analysis:

The fees are for included services. The U.S. company clearly, performs a technical service for the Indian company, and transfers to the Indian company the technical plan (i.e., the computer program) which it has developed.

Example (6) :

Facts:

An Indian vegetable oil manufacturing company wants to produce a cholesterol-free oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the US. company to modify the formulae which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulae. Are the fees paid by the Indian company for included services?

Analysis:

The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company.

Example (7) :

Facts:

The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the U.S. company for included services?

Analysis:

The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b).

It is important to note that in the protocol to the said DTAA the Government of India has also accepted the interpretation of Article 12 (Fees for included services) in the following words:

“This memorandum of understanding represents the current views of the United States Government with respect to these aspects of Article 12, and it is my Government’s understanding that it also represents the current views of the Indian Government.” (emphasis supplied)

C. Application of concept of ‘make available’ – Relevant and irrelevant tests:

In ‘The Law and Practice of Tax Treaties: An Indian Perspective’ (2008 edition), the learned authors Shri Rajesh Kadakia and Shri Nilesh Modi, have culled out the relevant and irrelevant tests (on pages 569-571) as under :

Relevant tests:

1. The expression ‘make available’ is used in the sense of one person supplying or transferring technical knowledge or technology to another.

2. Technology is considered to be ‘made available’ when the service recipient is enabled to apply the technology contained therein. [Bharat Petroleum Corporation v. DfT, (200) 14 SOT 307(Mum.)]

3. If the services do not have any technical knowledge, the fees paid for them do not fall within the meaning of FTS as per Article 12(4).

4. The service recipient is able to make use of the technical knowledge, skill etc. by himself in his business or for his own benefit and without recourse to the performer of the services, is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill, etc. must remain with the person utilising the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering the services to the person utilising the same is contemplated by the article. Some sort of durability or permanency of the result of the ‘rendering of services’ is envisaged which will remain at the disposal of the person utilising the services. The fruits of the services should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience, skill, etc.

5. The service recipient is at liberty to use the technical knowledge, skill, know-how and processes in his own right.

6. The technical knowledge, experience, skill, know-how, etc. must remain with the service recipient even after the rendering of the service has come to an end.

ii) Irrelevant tests:

1. Provision of service may require technical input by the service provider;

2. Use of a product which embodies technology;

3. The service recipient gets a product and not the technology itself;

4. Merely allowing somebody to make use of services, whether actually made use of or not;

5. Service recipient acquires some familiarity or in-sights into the manner of provision of services.

D. Concept of ‘make available’ as explained in various judicial pronouncements:

The concept of make available has been examined, explained and applied by various judicial authorities in India in the following cases (which shall be summarised in the next part of the Article) :

E. Application of explanation and examples given in MoU to the India-US Treaty to other Treaties:Although the abovementioned interpretation is given in the context of the DTAA between India and the USA, considering that identical terminology is used in other DTAAs between India and other countries, the Government can be considered to have contemplated the same meaning to be assigned to the .same term in the other DTAAs. This proposition, has found judicial recognition.

E.1 The above interpretation of the concept of ‘make available’ has now gained acceptance even with the Indian judicial authorities in the context of a variety of DTAAs India has entered into with different countries. In Raymond Ltd. v. Deputy CIT, [2003] 86 ITD 791 (Mum.), the assessee made an issue of Global Depository Receipts (GDRs) to in-vestors outside India, and it paid, inter alia, com-mission to the managers to the GDR issue, who were residents outside India, for rendering a vari-ety of services outside India for the successful completion of the GDR issue. The question before the Tribunal, among others, was whether the com-mission paid for such services rendered outside India could be taxed in India as ‘fees for technical services’ in the light of the provisions of S. 9(1)(vii) of the Act read with Article 13(4) of the DTAA with the UK. It is noteworthy that the terminology used in Article 13(4)(c) of the DTAA with the UK is the same as that used in Article 12(4)(b) of the DTAA with the USA. Although in this case the Tribunal was concerned with the interpretation of Article 13(4)(c)of the DTAA between India and the UK, the Tribunal made a reference to the identically worded Article 12(4)(b) of the DTAA between India and the USA, took into consideration the interpretation and the illustrations given in the Memorandum of Understanding appended to the said DTAA, and observed that the same can be used as an aid to the construction of the DTAA with the UK because they deal with the same subject (namely, fees for technical services). The Tribunal also observed that merely because these treaties are with different countries does not mean that different meanings are to be assigned to the same words, especially when both have been entered into by the same country on one side, namely, India. It it is difficult to postulate that the same country (India) would have intended to give different types of treatment to identically defined services rendered by entrepreneurs from different countries. On the facts of the case, the Tribunal held that the commission paid by the assessee for the various services rendered by the non-resident manager to the GDR issue did not fall within the definition of ‘fees for technical services’ given in Article 13(4) of the DTAA between India and the UK because no technical knowledge, experience, skill, know-how or process, etc. was ‘made available’ to the assessee by the managers to the GDR issue. After referring to the grammatical purpose of the word ‘which’ used in Article 13(4)(c) of the DTAA with the UK, the Tribunal gave its inter-pretation of the expression ‘make available’ in the following clear-cut words (paragraphs 92 and 93) :

“92. We hold that the word ‘which’ occurring in the article after the word ‘services’ and before the words ‘make available’ not only describes or defines more clearly the antecedent noun (‘services’) but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services is not roped in unless the person utilising the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill, etc. must remain with the person utilising the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering the services to the person utilising the same is contemplated by the article. Some sort of durability or permanency of the result of the ‘rendering of services’ is envisaged which will remain at the disposal of the person utilising the services. The fruits of the service should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience, skill, etc.

93. In the present case, … after the services of the managers . . . came to an end, the assessee-company is left with no technical knowledge, experience, skill, etc. and still continues to manufacture cement, suitings, etc. as in the past.” (emphasis supplied)

The Tribunal also noted the language employed in the definition of ‘fees for technical services’ in Article 12(4)(b) of the DTAA between India and Singapore to the effect “if such services … make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein”, and opined that these words, though not found in the DTAAs with the UK and the USA, merely make explicit what is embedded in the words ‘make available’ appearing in the DTAAs with the UK and the USA.

E.2 In the decision in CESC Ltd. v. Deputy CIT [2005] 275 ITR (AT) 15 (Kol) (TM) this interpretation of the concept of ‘make available’ used in Article 13(4)(c) of the DTAA between India and the UK got the stamp of judicial approval. In this case, a UK company acted as a technical adviser to cer-tain financial institutions in India and the assessee, CESC, paid some fees to the UK company for the services rendered in respect of the technical appraisal of the assessee’s power project. One of the questions before the Tribunal was whether the fees paid to the UK company fell within the sweep of the expression’ fees for technical services’ as understood in Article 13(4)(c) of the DTAA between India and the UK. As noted earlier also, the terminology used for defining the expression’ fees for technical services’ in the DTAA between India and the UK is the same as that used in, among many others, the DTAA between India and the USA. The Tribunal held that the fees paid by the assessee to the UK company did not fall within the expression ‘fees for technical services’ as it did not result in making available to the assessee any technical knowledge, skill, etc. The Tribunal made a reference to Article 12 of the DTAA between India and the USA and to the Memorandum of Understanding appended thereto, discussed above, as also to the Protocol attached thereto wherein it is stated, inter alia, that the Memorandum of Understanding with regard to the interpretation of Article 12 (Royalties and fees for included services) also represents the views of the Government of India, and observed that under Article 12(4)(b) of the DTAA between India and the USA, which is pari materia with Article 13(4)(c) of the DTAA with the UK, technology would be considered made available when the person acquiring the services is enabled to apply the technology; that the mere fact that the provision of services may require technical input to the person providing the services does not per se mean that technical knowledge, skill, etc. are made available to the person purchasing the services. Since in this case the role of the engineers providing the services was of mere reviewing and opining rather than designing and directing the project, the Tribunal held that no technical knowledge, etc. was made available to the assessee and therefore the fees paid to the UK company did not fall within the scope of ‘fees for technical services’ under Article 13(4)(c) of the DTAA with the UK. It is pertinent to note that the Tribunal made certain observations at page 25, which, in effect, mean that the interpretation adopted by the Tribunal of the term ‘fees for technical services’ with reference to the DTAA between

India and the UK, particularly of the concept of ‘make available’, relying upon the definition and interpretation of the term ‘fees for included services’ used in the DTAA with the USA, should apply to several subsequent DTAAs India has entered into using the same phraseology, including specifically the DTAA between India and the UK.

E.3 In NQA Quality Systems Registrar Ltd. v. Deputy CIT, (2005) 92 TTJ (Del.) 946, wherein the above-referred decision in Raymond Ltd. v. Deputy CIT (supra) is followed and similar views are expressed in the context of the DTAA with the UK. In this case, the assessee, an Indian company, made payments to certain non-resident companies in the UK for certain services rendered by those UK companies. The assessee was in the business of ISO audit and certification. The nature of services provided by the UK companies to the assessee included providing the assessee with assessors to assess the quality assurance systems existing with the assessee’s customers, visits to the assessee’s customers, providing of training, etc. The question was whether while remitting the fees to the UK companies the assessee was required to deduct tax at source there from. The Tribunal analysed the definition of the term ‘fees for technical services’ given in Article 13 of the DTAA with the UK, noted the similar provisions of Article 12 of the DTAA with the USA, the Memorandum of Understanding appended thereto, and concluded that the nature of services provided by the UK companies to the assessee did not make available any technical knowledge, experience, skill, etc. to the assessee and therefore the fees paid by the assessee to the UK companies do not fall within the definition of the term ‘fees for technical services’ and that, therefore, the assessee was under no ob-ligation to deduct tax therefrom u/s.195 of the Act.

E.4 In National Organic Chemical Industries Ltd. v. Deputy CIT, (2005) 96 TT] (Mum.) 765, this interpretation of the concept of ‘make available’ is reiterated by the Tribunal in the context of Article 12(4) of the old DTAA between India and Switzerland. It is in effect observed by the Tribunal that when there is mere rendering of services without the transfer of technology it cannot be said that technology, etc. are ‘made available’ within the meaning of Article 12(4) of the DTAA between India and Switzerland and therefore payment for such services is not liable to tax in India.

E.5 In Dy. CIT v. Boston Consulting Group Pte. Ltd., [2005] 94 ITD 31 (Mum.) reiterates similar views. In this case, the non-resident company, a resident of Singapore, was in the business of ‘strategy consulting’. One of the issues before the Tribunal was whether the fees paid for such services fell within the term ‘fees for technical services’ under Article 12(4)(b) of the DTAA between India and Singapore where more or less the same language is employed as in the DTAA with the USA, the UK, etc. Noting the above-referred decision in Raymond Ltd. v. Deputy CfT (supra), the language of Article 12 of the DTAA with the USA, the Memorandum of Understanding appended to the said DTAA and the illustrations given therein, the concept of ‘make available’, etc., discussed above, the Tribunal concluded that the fees paid for such strategy consulting do not fall within the scope of ‘fees for technical services’ used in Article 12(4)(b) of the DTAA with Singapore. However, interestingly, it seems that the Tribunal has given an altogether different dimension to this issue by making a very broad observation at page 57 that so far as the DTAA with the USA is concerned, consultancy services which are not technical in nature cannot be treated as fees for included services. Though not clear, perhaps this view is influenced by a more general or profound statement made in the Memorandum of Understanding appended to the DTAA between India and the USA, under the paragraph titled ‘Paragraph 4 (in general)’, regarding the interpretation of the term ‘fees for included services’ given in Article 12(4)(b) of the said DTAA, which statement runs as follows:

“Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services.”

F. Indian Treaties where the concept of ‘make available’ is used and differences in the wordings used in the relevant Articles:

Detail of DT AA with different countries having ‘make available’ phrase in FTS clause or indirectly made applicable through Protocol

BCAJ Admin

Gaps in GAAP

Accounting Standards

Can an entity be consolidated when the ‘parent’ has the
ability in practice, but not the legal right to exercise control over the
entity ? e.g., Entity A owns 40% of the voting power in Entity B
and the remaining 60% of shares are widely dispersed, such that Entity A may
exercise de facto control.

‘Control’ is defined in IAS 27 as : “the power to govern
the financial and operating policies of an entity so as to obtain benefits from
its activities”. It follows from this definition that control involves :
(a) decision-making ability that is not shared with others; and (b) the ability
to give directions with respect to the operating and financial policies of the
entity concerned, with which directions the entity’s directors are obliged to
comply. In order to meet the definition of control, an investor must govern the
financial and operating policies of an entity for the purpose of obtaining
benefits from the entity’s activities. A trustee or other fiduciary with
decision-making powers that are limited to directing the on-going activities of
an entity for the benefit of others does not meet the IAS 27 definition of
control.

In order to have the ability to govern the financial and
operating policies of an entity, an investor must be able to hold the management
of the entity accountable. It is therefore unlikely that de facto control
over an entity can exist unless the investor has the power to appoint and remove
a majority of its governing body (i.e., normally the board of directors
in the case of a company). This power is normally exercisable by holders of the
voting shares in general meeting.

Since the concept of control is defined in terms of
decision-making ability and not how power is actually exercised,
it is theoretically possible for control to be exercised passively as well as
actively. However, any determination of whether de facto control
exists will always have to be made based on the particular circumstances and
it is unlikely to be sufficiently certain that de facto control exists
until actions have been taken that provide evidence of control, i.e.,
control must have been actively exercised.

This will be evidenced by participation and voting at the
Annual General Meeting, where strategic decisions are put to the vote – e.g.,
director nominations. Evidence will be required that the entity was able to vote
in a director of their choice or make decisions that indicated an alignment with
their own business and purpose. In general, the more the legal or
contractually-based powers that are held in relation to an entity fall short of
50% of the total, the greater will be the need for evidence of actively
exercised de facto control.

In practice, de facto control is most likely to be
evidenced where a minority voting interest holder is able to (re) nominate its
nominee to an entity’s board of directors and its votes exceed 50% of the votes
typically cast in the entity’s election of directors. For example, if typically
only 70% of the eligible votes are cast on resolutions for the appointment of
directors, a minority holding of 40% might give de facto control,
provided that if the remaining shares are widely held (such that, for example,
no party has an interest of sufficient size either of itself or with a small
number of others to block decisions).

The October 2005 issue of IASB Update states, “an entity
holding a minority interest can control another entity in the absence of any
formal arrangements that would give it a majority of the voting rights. For
example, control is achievable if the balance of holdings is dispersed and the
other shareholders have not organised their interests in such a way that
they exercise more votes than the minority holder.”

At this moment it appears that there is a mixed practice with
regards to consolidation based on de facto control under IFRS. This is
because the IASB has not come up with any detailed guidance on this issue. Until
such time as the IASB issues detailed guidance to assist preparers in exercising
the judgment required to apply the control concept, there will be differences in
how IAS 27 is applied.

In India, under Indian GAAP, the general practice is not to consolidate
entities based on de facto control. That may change once India adopts
IFRS.

levitra

BCAJ Admin

Vikram Aur Vetal

Cancerous Corruption

Vikram was fond of moving around in the graveyard in the
horrifying night to catch Vetal after day-long practice as chartered accountant.
For Vikram, friendship with Vetal was real education. Vetal being a spirit of
intelligent human frustrated in his lifetime, was still on the earth
posthumously to find answers to innumerable questions lingering in his mind
during his stint as human being. He developed friendship with Vikram. After
playing hide and seek game, Vikram used to catch Vetal in the wee hours of
morning. Then he would put Vetal on his shoulder and tread through the woods of
graveyard. Vetal would laugh weirdly in the silence of the graveyard and
thunder :

“So Vikrambhai, you succeeded to catch me once again, keep
walking, don’t look back, if you speak a word I will vanish. Well, I would tell
you a story of a spiritual guru like Bhagwan Rajneesh, Yogi Mahesh or Satya
Saibaba, well, you are clever enough to get the lead . . . . so our spiritual
guru Baba Ramjay was a very revered person. It was believed, after spending many
years in seclusion somewhere in the high altitudes of Himalaya, Baba established
connection with the almighty. He taught his confused disciples how to live life
in peace and tranquility, how to detach the mind from the mundane world and seek
solace beyond the present life. It was not surprising that he had disciples all
over the world, rich and wealthy. In search of peace of mind they were
squandering their wealth for Baba Ramjay. It seemed that Baba Ramjay’s
philosophy of life was “high living and high thinking”. Over a period he amassed
huge wealth in cash and kind through his charitable trusts or otherwise.
Obviously he was being spied on by the Income-tax Department. I mean he was on
the radar of the Department. A raid was conducted on Baba’s Ashram. On that day
his disciples were celebrating the most auspicious day, Baba’s birthday. It was
believed that he was incarnation of great Buddha. Baba chanted “Om Shanti Shanti
Shanti”. One of the disciples in the close circuit of the Baba announced :

“Ladies and gentlemen, for your kind attention those who wish
to express their gratitude towards our revered Baba Ramjay, we have kept
offertory box”

There was a sudden rush towards the offeratory box. What a
phenomenal impact Baba Ramjay had on the minds of his disciples. They were ready
to sacrifice, though not everything, but something which the government cannot
do through full-fledged tax laws. I think the Finance Minister should learn a
lesson from him how to mobilise funds. Jokes apart, Vikrambhai, Baba was about
to leave the “Dhyan Mandir” (meditation centre). A tall and middle-aged person
full of bureaucratic arrogance barged into the Dhyan Mandir along with his
assistants. Without losing much time he disclosed that he and his assistants
were from the Income-tax Department. He ordered all present not to leave the
place till his further order and asked to hand over cellphones to one of his
assistants. Baba Ramjay sank back in the sandal wood throne. When Baba was
trying to use his cellphone, the alert officer recovered the cell-phone from
Baba. Inwardly Baba was very furious at the audacity of the officer. But Baba
kept chanting “Om Shanti Shanti”. What else he could do ? nothing. The alert
officer was the chief of the raid team. He proceeded further. He showed the
search warrant to Baba Ramjay. Baba pretended to be still in trance of
meditation and said, “My child, I see great future for you, I can read from your
face, believe me, our tryst is pre-planned by the destiny . . . . . Om Shanti
Shanti.”

For a few moments the chief forgot his duty and bowed before
Baba to touch Baba’s feet. But after finishing the ritual the chief regained his
sense of duty as Income-tax Officer the moment he smelled sandalwood aroma of
Baba’s throne studded with precious stones and said mischievously, “Baba I will
meet you at some other time to check how great future I have. Right now I have
to record your statement about your great fortune, I mean your wealth, your
income in the present”

Baba realised that the chief was a hard nut. He was a bit
irritated.

Most of the questions Baba ducked by saying “My team of
Chartered Accountants would explain it, right now I am not aware of it”. It took
two hours to complete the recording of the statement. By that time Baba was a
fully grounded person. Baba realised “reality — not spirituality” would work in
this situation. Baba asked his assistant to arrange refreshments for the search
party. Baba and the chief moved from meditation centre to Baba’s closet.

“Look officer, I have a large number of disciples all over
the world. I have connections with political bigwigs, film stars,
industrialists, leading stockbrokers, etc. They adore me in their drawing rooms.
I don’t wish to waste my time in litigations. Let us now negotiate something
reasonable for you and other members of the search party”. Baba as an ordinary
human being exposed his mind to the officer.

The chief was very shrewd. He did not respond to Baba’s offer
instantly. He was thoughtful for a long time. His silence was killing Baba’s
patience. Eventually the chief broke his silence.

“Look Baba, I have strict instructions from the top, no let
up in the investigations. I am helpless.” said the chief. It was more a threat
than honest disclosure.

Thus the raid proceeded. At the end of the raid the chief and
Baba again went to Baba’s closet.

The chief put all the documents, notings and jottings
incriminating Baba and a couple of his close disciples, which the chief had
secreted from others during the course of search, on the table.

“Om shanti shanti” Baba chanted, staring nervously at the
chief.

“Gurudev, look at all these documents and papers, very damaging, they show your clandestine investments abroad, money laundering, violation of FEMA.”

” know, I know but you would agree that I have not earned any money from doing any “illegal business”, I mean black-marketing, smuggling, gambling or the like, all this money comes from my disciples teaching spirituality, guiding them how to live in peace and tranquility, giving them lessons of Yoga. Most of the donations are being accepted in the name of different trusts. All that money is being spent on philanthropic objects.” Baba made a futile attempt to earn sympathy.

“Gurudev, I am not concerned with your philan-thropic deeds, I know your trusts are doing great service to the society at large. But I can’t ignore all these papers and documents which implicate you individually. You are caught with your pants down.” For a while there was pin-drop silence in the room. Baba was flipping through the documents and papers.

“Why don’t you hand over those papers and documents having my reference as if you did not detect them at all ?” asked Baba staring at the chief.

“Ok, but not without price! What about other papers having names of your confidents, I mean second in command of the your Ashram ?” responded the chief.

“It’s for you to decide. Who am I to direct you?” the chief got pampered by Baba’s unexpected respect.

“Well, all right, I understand, so the deal is struck” said the chief.

Baba scribbled a figure on the paper and said, “Is this enough for you ?”

“It’s all right, but what about others?” queried the chief.

“Oh I just forgot them, how many are they?” asked Baba.

“Seven” said the chief making headcount on his fingers.

Again Baba scribbled a figure per member of the raid team on the paper and stared at the chief for his approval.

The chief hesitated, he asked for more.

“Okay, I increase the amount as you desire. Can you give me guarantee you will not pocket the amount meant for them ?” asked Baba.

“I would call them right now if you suspect my honesty towards my colleagues” retorted the chief.

“Om Shanti Shanti Shanti, I am sorry, I am sorry” said Baba with a smile on his face.

Baba got a “clean” chit. His team of chartered accountants managed to convince the assessing officer that in Baba’s case everything was on “board”, nothing hidden or concealed. However Baba’s three disciples were implicated to the hilt for concealment of income and violations of different provisions of the Income-tax Act, FEMA, Customs, etc.

So Vikrambhai, my questions to you:

First how do you differentiate between Baba Ramjay and the chief ?

Second, what works in any given situation ?

Third, both Baba Ramjay and the chief are dishonest persons. Who would you prefer as a friend ?

If you remain silent knowing the answers to my questions, I will chop your head with your sword.” Vetal roared.

Vikarm began to answer,

“Both Baba Ramjay and the chief are social evils. But Baba is more dangerous than the chief. Forget his philanthropic deeds. The chief is an ordinary corrupt bureaucrat. Whereas Baba is an extraordinary corrupt member of the society, he pretends to be ‘spiritual’ for the society at large on the one hand and amasses huge wealth in the name of spirituality on the other hand. I think an avid spiritual person tends to abandon the mundane world in his pursuit to practise the principles of spirituality. Well, the chief has greed for money, whereas Baba has greed for money and ‘image’ both. Greed for image is more powerful than the greed for money.

Answer to your second question, in any given situation it’s not spirituality, ethics traditions or culture, but ‘survival instinct’ of an individual works. This survival instinct varies from individual to individual.

And lastly, I would prefer the chief as my friend instead of Baba Ramjay, Baba Ramjay is more selfish than the chief. He betrays his close confidents. On the contrary, the chief looks after the interest of his colleagues.”

“Vikrambhai, you broke the silence, I am vanishing” again VetaI’s laugh was echoing in the graveyard.

BCAJ Admin

Part B : Some Recent Judgments

I. High Court :

1. CENVAT Credit :

Non-alcoholic beverage manufacturers of concentrates whether are eligible to avail credit of service tax paid on advertisement, sales promotion, market research and utilise the same against duty liability on the concentrates is the issue involved.

Coca Cola India (P) Ltd. v. CCE, 2009 (22) SIT 130 (Bom.) (HC)

The credit was denied on the ground that advertisements did not relate to concentrates manufactured by the appellant although advertisement expenses formed part of the sale price of the said concentrates manufactured by the appellant. The appellant contended that the advertisement of the brand name with a soft drink had direct relationship with the manufacture of concentrate inasmuch as the demand and consequently, the production of concentrate depended on the consumption of the soft drink and that the advertisement enhanced the market-ability of the concentrate. It was also pleaded by the intervener in the case that service tax like CENVAT was a consumption tax, which had to be borne by the consumer. There was an integral link between the concentrate manufactured by the appellant and the beverage viz. aerated water manufactured by the bottler from it. In this context, the definition of ‘input service’ was analysed in great detail. Further, the Supreme Court’s decision in the case of Bombay Tyres International, 1983 (14) ELT 1896 (SC) was discussed at length. In this case, the Supreme Court held that even though the levy was on the manufacturer, the measure could be with reference to the sale price. Accordingly, it was held that the expense for marketability and selling including advertisement and publicity would form part of the value of goods under assessment. It was also contended by the appellant that revenue never disputed that advertisement of aerated water was an activity related to manufacture and sale of concentrate and that cost of advertisement was relatable to aerated water which formed part of the value of concentrate in the hands of its manufacturer and therefore, it was included in the sale price of concentrate charged by the manufacturer. In this background, the terms ‘means’, includes’, ‘such as’ and ‘business’ used in the definition of ‘input service’ were extensively analysed with reference to several Supreme Court and Larger Bench decisions which inter alia included the following:

Pepsi Foods Ltd. v. CCE, 2003 (158) ELT 552 (SC)

Bharat Co-op. Bank (Mumbai) Ltd. v. Co-op. Bank Employees Union, (2007) 4 SCC 685

Good Year India Ltd. v. Collector of Customs, 1997 I.(95) ELT 450

Doypack Systems (P) Ltd. v. UOI, 1988 (36) ELT (SC).

In summation, what followed from the discussion was that credit was availed on the tax paid on the Input service, which was advertisement and not the contents of the advertisement. Thus, it was observed that it was not necessary that the advertisement must relate to the final product manufactured by the person advertising. So long as the manufacturer can prove that the advertisement services used had an impact on the manufacture of the final product, he could avail the credit of the service tax paid by him. The correlation between the soft drink and the concentrate being direct and proportionate, the advertisement indirectly enhanced the marketability of the concentrate. Once the cost incurred for service was added to the cost assessed, the nexus of the cost of the advertisement service was established with the manufacture of the final product. As such, the expression ‘input service’ was capable of covering indirect use in or in relation to the manufacture of the final product and accordingly, CENVAT credit was available to the manufacturer for payment of duty.

2. Import of service:

Unitech Ltd. v. CST, 2009 (15) STR 385 (Delhi)

The High Court agreed with the issue settled by the Bombay High Court in the case of Indian National Shipowners Association v. UOI, 2009 (13) STR 235 (Bom.) and held that the Revenue could collect tax only upon being invested with due legal authority, an event which occurred only on insertion of S. 66A on 18-4-2006 and as such, the demand confirmed by Tribunal from recipient of taxable service of foreign architect for the period 1-1-2005 till 15-6-2005 was held as done without authority of law and accordingly answered the question of law.

3.Penalty: Power of Commissioner (Appeals) to reduce:

CCE v. Madhuri Travels, 2009 (15) STR 241 (Bom.)

The short question before the Tribunal was, to examine whether minimum penalty prescribed u/ s.76 could be reduced by Commissioner (Appeals). The Court ruled that considering S. 80 of the Finance Act, 1994 the authority was vested with the power not to impose penalty or reduce the same and matter being covered in the order of the Court in the case of CCE&C Nashik v. D. R. Gade, 2008 (9) STR 348 (Bom.), revenue’s appeal was dismissed.

II. Tribunal:

4.(a) Appeals: Hearing without pre-deposit when divergent views prevail :

SRC Projects P. Ltd. v. CCE, 2009 (15) STR 463 (Tri.-Chennai)

In the instant case, the appellant adjusted excess service tax paid against later liability. The original authority relied on the Single Member Tribunal’s decision of Nelson Org. Mang. P. Ltd. V. CCE, Delhi 2006 (3) STR 503 (Tri.-Del). However, various other decisions including the one in the case of Nima Architect and Valuers V. CCE, 2006 (1) STR 305 (Tri.-Del) decided that excess payment of service tax could be adjusted against later liability of service tax. The Commissioner (Appeals) dismissed the appeal as payment of pre-deposit ordered was not complied with. The Tribunal remanded the matter for fresh decision with a direction that the matter be heard without insisting on pre-deposit in the circumstances when divergent views were held in various Tribunal decisions.

b) Pre-deposit not insisted if tax paid with interest:

K. Fasteners V. Commissioner of Central Excise, Salem 2009 (15) STR 330 (Tri.-Chennai)

The appellant assembled items supplied by its principal. Service tax was demanded under ‘business auxiliary service’ and applicable interest and penalties were levied. The appellant contended the activity as manufacturing yet paid service tax with interest before issuance of Show Cause Notice. The appellant’s appeal before the Commissioner (Appeals) was rejected for non-payment of pre-deposit insisted on penalty amount for considering the appeal. While hearing the stay application, appeal itself was taken up by the Tribunal and the matter was remanded to the Commissioner (Appeals) directing that the appeal be heard without pre-deposit as usually when tax is paid with interest, pre-deposit should not be insisted upon.

5. CENVAT Credit :

a) Service tax on construction of compound wall – an input service:

In re: Raymond Zambaiti P. Ltd., 2009 (15) STR 596 (Commr. App)

Appellant availed service tax paid on construction service of compound wall of the factory. CENVAT credit was disallowed on the ground that it was neither used directly for ‘manufacture’ of excisable goods nor for any output service. The appellant contended that the compound w311was part of the factory. Reliance was placed on Apex Court’s decision in the case of South Eastern Coalfields Ltd. V. CCE, 2006 (200) ELT 357 (SC) and according to which ‘precinct’ had to be given broader meaning to include the surrounding area. It was further observed that the definition of ‘input service’ included services used in relation to setting up, modernisation, renovation or repairs of factory and no factory could function without a compound wall to take care of security, environmental protection etc., the construction of compound wall would be input service within the meaning of its inclusive definition and as such, CENVAT credit was considered allowable.

b) Security agency service used for factory admissible:
CCE&C Guntur V. Hindustan Coco-Cola Beverages P. Ltd., 2009 (15) STR 248 (Tri. Bang.)

Services of security agency at the depot and services of pest busters were used in the manufacturing activity of food products for human consumption. The former service used to prevent theft and the latter from contamination were found eligible for CENVAT credit by Commissioner (Appeals) after detailed analysis of ‘input service’ and following precedent of DCM Shriram Consolidated Ltd., 2006 (4) STR 610 (Comrnr. Appl.) Finding no infirmity in the order, plea of department for stay of order was rejected.

c) Substantive benefit not denied on procedural ground:

C&CCE. Vapi v. DNH Spinners, 2009 TIOL 1216 CESTAT-AHM

The assessee received invoices from vendors in the name of head office instead of factory. Based on the decisions in the case of Eveready Industries India Ltd., 2007 (219)ELT 333 and Tisco Ltd., 2008 (228) ELT 224, it was held that when the invoices received by head office/registered office were endorsed by the appellant, substantive benefit could not be denied on procedural ground. Incidentally, the appellant being only manufacturing unit, the head office could not be considered as input service distributor and the denial was dismissed.

6. Import of Service:

a) Limitation: Plea justified when clarity in law is absent:
Ashok Leyland Ltd. v. CCE&ST, LTU Chennai, 2009 (15) STR 289 (Tri. Chennai)

The appellant paid commission to foreign parties during 2004-05 and 2005-06 till October 30, 2005. This was covered as Business Auxiliary Service. However, service was exempt till 9-7-2004 under Notification No. 8/04-ST until it was restricted to services of commission agents relating to agricul-tural produce. The appellant had a bonafide belief as to non-taxability under reverse charge until the introduction of S. 66A on 18-4-2006. Several deci-sions were cited. which inter alia included ‘ Sterlite Industries (India) Ltd. v. CCE, 2008 (11) STR 375), Lohia Strangler v. CCE, 2008 (10) STR 483 (Tri.-Del), Foster Wheeler Energy Ltd. v. CCE, 2007 (7) STR 443. The Tribunal also took a note of the Larger Bench’s decision in the case of Hindustan Zinc Ltd. v. CCE, 2008 (11) STR 338 (Tri.-LB) and distinguished Apex Court’s decision in the case of Kerala State Electricity Board (KSEB) v. CCE, 2008 (9) STR 3 (SC) cited by the department. The Tribunal found force in the limitation plea as no clarity existed in law at material time as to the issue of applicability of reverse charge provision. It accepted bonafide belief in non-taxability and provided waiver of pre-deposit as part payment was made by the appellant prior to the issuance of Show cause Notice.

(b)(i) Import of service (ii) operational assistance for export considered BSS :

Fifth Avenue v. CST, 2009 (15) STR (Tri.-Chennai)

Service tax was paid by the appellant for the period April 2006 to September 2006 being receiver of operational assistance for execution of export orders to whom payment was made in foreign exchange. Issue involved was two fold: Appellant pleaded to consider the service of operational assistance for export orders as business support service and not business auxiliary service and secondly application of reverse charge was also contended to be applicable only from 18-4-2006 relying on the Bombay High Court’s decision in the case of Indian National Shipowners Association v. UOI, 2009 (13) STR 235 (Bom). Appellant succeeded on merits on both the pleas and therefore, service tax demand for the period prior to 1-5-2005 was set aside.

c. Bathija International v. Commissioner of Central Excise, Salem 2009 (15) STR 249 (Tri. Chennai)

Appellant, an exporter, paid commission to agents abroad. Service tax was demanded under ‘Business Auxiliary Service’ and applicable interest and pen-alties were imposed for the period 12-8-2004 to 27-9-2006. Appellant contended that there being no li-ability prior to introduction of S. 66A on 18-4-2006 and the liability for the subsequent period already having been paid by them, plea was made for remand without further pre-deposit. The matter was remanded without pre-deposit.

7. Refund: Admissible based on credit notes:

Professional International Couriers Pvt. Ltd. v. CST, 2009 (15) STR 295 (Tri.-Chennai).

Appellant being co-loader for a courier agency was not required to pay service tax as per Board’s Circular, however inadvertently paid service tax after collecting the same from the principal courier agency and claimed refund. The principal agency was returned the so-collected service tax by way of credit note. The principal agency even reversed the credit taken by them for service tax so paid to the appellant. Relying on the ratio of decision in the case of Shiva Analyticals (I) Ltd. v. CST, 2007 (7) STR 35 (Tri.-Bang.), it was held that in the circumstances when service tax erroneously collected was returned to the customer whether by cheque or by issuing credit note and the fact supported by chartered accountant’s certificate, there being no unjust enrichment, the refund was held as admissible.

8. Valuation: Benefit of Notification No. 12/ 2003 to caterer’s service:

a. Grand Ashok v. CST, 2009 (15) STR 344 (Tri.-Bang.)

The appellant, an in-flight caterer was called upon to pay service tax on the gross amount of their bill, which included supply of goods and beverages on which VAT was paid. Service tax was paid on handling and transportation. Decision of Imagic Creative P. Ltd. v. CCT, 2008 (9) STR 337 (SC) was discussed at length and relied upon. Apex Court’s decision in case of Bharat Sanchar Nigam Ltd. v. UOI, 2006 (2) STR 161 (SC) also was relied upon and it was held that service tax was liable to be paid on outdoor caterer’s service. However on sale of goods, since VAT was paid, service tax could not be levied and the appellant was entitled to benefit under Notification No. 12/2003-ST. Further, appellant being under bonafide belief, longer period of limitation was not invokable.

b. On a similar issue in the case of LSG Sky Chefs (India) Pvt. Ltd. v. CST, 2009 (15) STR 545 (Tri.-Bang.), it was held that sales tax and service tax being mutually exclusive and separate invoices having been issued for supplies of goods, service tax could not be imposed on the portion of the contract on which VAT was paid.

c) Pre-deposit waived: Cost of goods in construction service:

M/s. Sobha Developers Ltd. v. CST, Bangalore 2009 TIOL 1176 CESTAT-Bang.

In case of residential consumption service, the appellant paid service tax on 30% of the contract and VAT was paid on the balance 70% representing value of goods and material. Relying on the same Bench’s final order No. 24/2009 dated 16-1-2009 in case of M/s. LSG Sky Chefs (India) Pvt. Ltd. (supra) and in the case of Wipro GE Medical System Pvt. Ltd., 2008 TIOL 2476 CESTAT-Bang., it was observed that the Board also has issued circular to the effect that the appellant is not liable to pay service tax and the appellant had a strong case of merits based on the fact that where sales tax is paid, service tax would not be demanded and the balance remaining unpaid pre-deposit was waived.

BCAJ Admin

Lecture Meetings

Meeting addressed by Delnaz Mistry, Manager NSDL on Government’s Initiatives on Electronic Credit for Income Tax payments on 26-8-2009 at IMC was well received and appreciated by alL

The Power Point presentation covered all practical issues dealing with TIN, E-payments, Challan Status Enquiry key points for preparation and submission of E-TDS statements, Quarterly Statement Status, Refund Status, Registration for view of Form 26AS and benefits of Form 26 AS.

She brought out the common errors/inconsistencies and gave practical hints to overcome the same and also informed of new initiatives planned which are likely to be introduced   in near future. Members resolved their queries and pointed out difficulties faced in the question-answer   session.

Vispi Patel, Chartered Accountant, addressed members on Transfer Pricing Audit – Documentation and Benchmarking in the background of Recent Assessments/Decisions. He started with some important provisions, and then dealt in detail with documentation and Benchmarking of international transactions with associated enterprises. He not only covered important decisions on the topic but also dealt with interesting case study, so as to have a better understanding of the subject, in his inimitable style,’ which was appreciated by all those present in the meeting.

Accounting & Auditing Committee:

Seminar on Audit of NBFCs on 21-8-2009:

Non-Banking Financial Companies (NBFCs) are highly regulated entities and have many statutory /reporting compliances to be adhered to, especially if they are accepting deposits from the public. It is a specialised area of operations and the domain knowledge of the functions, operations, regulations and statutory compliances of NBFCs is necessary for handling matters relating to NBFCs.

NBFCs are fast emerging as an important segment of Indian financial system, performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI)within the framework of the Reserve Bank of India Act, 1934, and the directions issued by it under the Act.

To make the members and professionals in industry aware about the overall working of the NBFCs, BCAS under its Accounting & Auditing Committee, had organised this full day seminar at Hotel Marine Plaza. It was addressed by four eminent speakers having expert knowledge of the areas covered by each of them. The seminar was well attended by 80 participants and more than half of the participants were from industry, reflecting the importance of the subject.

The seminar was inaugurated by President of BCAS, Ameet Patel who emphasised the need to understand the regulations and compliances for NBFCs properly, so that their audit can be carried out in a meaningful manner.

Later, Chairman of the Accounting & Auditing Committee Himanshu Kishnadwala, touched upon the concept and the importance of topics chosen for the seminar.

The first session was addressed by Archana Mangalagiri, GM, Department of Non-Banking Supervision, RBI. She spoke on the topic of ‘Classification and Regulation for Deposit Acceptance’. Before going into the nitty-gritty of the classification and regulation, she took the participants through the history and build-up of regulatory mechanism over the years, which gave them an in-side view of the purpose of the classification and its regulatory requirements. She also dealt with the supervisory framework undertaken by RBI in the form of on-site inspection, off-site inspection and market intelligence. She further highlighted the importance attached to the role of auditors in the supervisory framework.

The second session was addressed by Jayant Thakur. He dealt with the topic ‘Some Regulatory Aspects for Auditors’. He touched upon the perspectives in NBFCs which are very relevant for the auditors and also shared his knowledge on the working of minimum NOF, what receipts are termed as public deposits, etc.

The third session was addressed by Manish Gujral. He gave a presentation on the topic’ Audit

Procedures and Reporting for NBFCs’. He briefly highlighted the Circulars and Guidelines issued by RBIwhich have to be taken into consideration while preparing financial statements of NBFCs as well as while auditing the same. He very methodically explained the disclosures to be made in the financial statements and also explained the procedures to be performed by the auditors to check the compliances and adequacy of the disclosures.

The last session was addressed by Yogesh Thar. He dealt with the ‘Typical Tax Issues in NBFCs’. He elaborately explained the controversies as to the compliance of Prudential Norms while provisioning of interest and bad debts vis-a-vis the allow ability of those expenses in Income Tax. He also shared his experience on the controversies relating to applica-bility of S. 14A and explanation to S. 73.

Overall, the seminar was a success as the participants got good insight into the important aspects of NBFCs which needs to be complied to have smooth functioning of the NBFCs as well as to carry out a quality audit of NBFCs.

Taxation Committee:

Seminar on Direct Tax Code:

The Taxation Committee of BCAS had conducted a Special Seminar on Direct Tax Code (DTC) on 28th and 29th August 2009 at Y. B. Chavan Pratishthan, Nariman Point. The seminar received very good response. The total enrolment was 470 participants which included members from the industry and from different parts of the country. The seminar was addressed by prominent speakers namely; Kishor Karia, Pinakin Desai, Gautam Doshi, Rajan Vora, Gautam Nayak, Yogesh Thar and Amrish Shah. The speakers highlighted many of the important aspects of the Direct Tax Code and gave suggestions for making proper representations to the Government on certain contentious and far reaching conse-quences that the DTC may have.

Taxation Committee:

Workshop on ‘How to conduct a Tax Audit’:

The Taxation Committee of BCAS had also conducted a half-day workshop on ‘How to conduct a Tax Audit’ on 4th September 2009 at Wa1chand Hirachand Hall of IMC. The workshop was conducted by CA Himanshu Kishnadwala and CA Anil Sathe, both past presidents of the Society. The speakers covered all the related aspects of tax audit and the participants were immensely benefited with the interactive session. About 270 members benefitted from the workshop. The audience included articled students, tax audit assistants and fresh chartered accountants.

Accounting & Auditing Committee:

Seminar on ‘Implementation of Standard on Quality Control’

A half-day seminar on SQC 1 (Quality Control for Firms that Perform Audits & Related reviews of Historical Financial Information, and Other Assurance & Related Services Engagements) was held on Saturday 5th September 2009 at the premises of the Society. It was attended by 55 participants and addressed by 2 Chartered Accountants in practice, Govind Ahuja and Ramchandran Vasudevan.

The seminar was interactive and covered various nuances of this new Standard on Quality Control which was issued to align quality aspects of Indian Audit practices with the rest of the world. The speakers dealt with important clauses of the standard and in particular covered documentation, monitoring audit assignments, and how a practice can establish quality control mechanism within a medium-sized practice. The participants not only benefitted from the insights of the speakers but received answers to their questions as well.

BCAJ Admin

Miscellaneous

Creation of business reconstruction reserve to adjust impairment of fixed assets, goodwill on consolidation and other costs

Hindalco Industries Ltd.

— (31-3-2009) (standalone)

From Notes to Accounts :

(a) The Company has formulated a scheme of financial restructuring to deal with various costs associated with its organic and inorganic growth plan. The recent economic downturn particularly in the commodity space is also expected to result in impairment/diminution in value of certain assets/investments. Accordingly, as per a scheme of Arrangement under Sections 391 to 394 of the Companies Act 1956 (‘the Scheme’) between the Company and its equity shareholders approved by the High Court of Judicature of Bombay, a separate reserve account titled as Business Reconstruction Reserve (‘BRR’) has been created by transferring balance standing to the credit of Securities Premium Account of the Company for adjustment of certain expenses as prescribed therein. Accordingly, Rs.8,647.37 crores has been transferred to BRR and following expense incurred during the year have been adjusted against the same as per the Scheme :

(i) Impairment of fixed assets amounting Rs.66.80 crores, net of deferred tax of Rs.34.40 crores (refer Note no. 24 in this schedule).

(ii) Certain costs amounting to Rs.0.18 crores in connection with the Scheme.

(b) Had the Scheme not prescribed aforesaid treatment, the impact would have been as under:

(i) in the Profit and Loss Account

From Auditors’ Report:

6. Without qualifying our opinion, attention is drawn to the following:

b) As per Scheme of Arrangement u/ s.391 to 394 of the Companies Act 1956 approved by the Honourable High Court of Mumbai vide its Order dated 29th June, 2009 the company has been allowed to create Business Reconstruction Reserve by transferring balance standing to the credit of Securities Premium Account for adjusting certain expenses as defined in the scheme. Accordingly, the management of the Company, during the year has identified and adjusted Impairment of Fixed Assets amounting to Rs.66.80 crores (Net of Tax) and certain expenses amounting to Rs.0.18 crores against Business Reconstruction Reserve. This has resulted in the profit before tax and profit after tax for the year being higher by Rs.101.38 crores and Rs.66.98 crores respectively and deferred tax asset being lower by Rs.34.40 crores. Refer Note No. 22 in Schedule 19.

From Directors’ Report:

Scheme of arrangement:

The Company has formulated a scheme of financial restructuring to deal with various costs associated with its organic and inorganic growth plan. The recent economic downturn particularly in the commodity space is also expected to result in impairment/diminution in value of certain assets/investments. The Board of Directors of the Company at its meeting held on 14th February, 2009 had approved said Scheme of Arrangement. Accordingly, as per the Scheme of Arrangement under Sections 391 to 394 of the Companies Act 1956 (‘the Scheme’) between the Company and its equity shareholders approved by the High Court of Judicature of Bombay, a separate reserve account titled as Business Reconstruction Reserve (‘BRR’) has been created by transferring balance standing to the credit of Securities Premium Account of the Company for adjustment of certain expenses as prescribed therein. Accordingly, Rs.8,647 crares has been transferred to BRR and Rs.67 crores in standalone accounts and Rs.4,617 crores in Consolidated accounts have been adjusted against the same as per the Scheme during the year.

HINDALCO INDUSTRIES LTD. – (31-3-2009) (consolidated)

From Notes to Accounts:

8.(a) The Company has formulated a scheme of financial restructuring to deal with various cost!’ associated with its organic and inorganic growth plan: The recent economic downturn particularly in the commodity space is also expected to result in impairment/ diminution in value of certain assets Zinvestments, Accordingly, as per a scheme of Arrangement under sections 391 to 394 of the Companies Act 1956 (‘the Scheme’) between the Company and its equity shareholders approved by the High Court of judicature of Bombay, a separate reserve account titled as Business Reconstruction Reserve (‘BRR’) has been created by transferring balance standing to the credit of Securities Premium Account of the Company for adjustment of certain expenses as prescribed therein. Accordingly, Rs.8,647.37 crores has been transferred to BRR and following expenses incurred during the year have been adjusted against the same as per the Scheme:

i) Impairment of goodwill amounting Rs.3,597.30 crores arises on consolidation of Novelis Inc. while preparing consolidated accounts of the Company.

ii) Impairment of fixed assets amounting Rs.111.30 crores (net of deferred tax of Rs.34.40 crares).

iii) Interest and Finance Charges amounting Rs.544.47 crores on loan taken by A. V. Minerals (Netherlands) B. V., subsidiary of the Company, for acquisition of Novelis Inc. by the Company.

iv) Costs amounting to Rs.363.62 crores in connection with exiting business.

v) Certain costs amounting to Rs.0.18 crores in connection with the Scheme.

b) Had the Scheme not prescribed aforesaid treatment, the impact would have been as under:

i) in the Profit and Loss Account

From Auditors’ Report:

5. Without qualifying our opinion, attention is drawn to the following:

c) As per Scheme of Arrangement u/s.391 to 394 of the Companies Act 1956 approved by the Honourable High Court of Mumbai vide its Order dated 29th June, 2009 the company has been allowed to create Business Reconstruction Reserve by transferring balance standing to the credit of Securities Premium Account for adjusting certain expenses as defined in the scheme. Accordingly, the management of the Company, during the year has identified and adjusted Impairment of Goodwill in a subsidiary amounting to Rs. 3,597.30 crores, Impairment of Fixed Assets amounting to Rs. 111.30 crores (Net of Tax) and certain expenses amounting to Rs. 908.27 crores against Business Reconstruction Reserve. This has resulted in loss for the year before tax being understated by Rs. 4,651.27 crores and profit for the year after tax of Rs.485.31 crores of the group would have been converted in a loss for the year of Rs. 4,165.96 crores. Refer Note No. 8 in Schedule 20.

BCAJ Admin

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Shri Sandeep Abbott, a firm engaged in share trading filed a complaint against the member. In this complaint it was alleged that the member induced the complainant to become his client by giving free swot scan (stock market review by CAs) offering useful tips. This swot scan did not come till the close of his business. It was also alleged that the member was engaged in the business of brokership of shares besides his practice as an auditor. It was further alleged that the member had not disclosed in his statement the deliveries not given to the complainant and shares which were sent for transfer on behalf of the complainant. Further, the member had not given to the complainant the right or preferential quota for the said shares. It was also alleged that the member had sold some shares without consent of the complainant and not paid the sale proceeds of the shares to the complainant.

When the case was referred to the Disciplinary Committee of ICAI (DC), the member did not appear at the time of hearing and did not make any written representation in his defence. After considering the documents and evidence produced by the complainant, the committee decided that the member was guilty of professional misconduct under clause (11) of the First Schedule (Engagement in other occupation) and of ‘Other Misconduct’ u/s.22 of C.A. Act.

The Council accepted the above finding of the D.C. The member did not appear before the Council and did not send written representation. As regards the first charge, it was decided by the Council that the name of the member be removed from the Register of Members for a period of 6 months. As regards the 2nd charge that the member was guilty of ‘Other Misconduct’, the Council recommended to the Delhi High Court that the name of the member be removed for a period of 3 months.

The Delhi High Court noted that the member did not appear before the D.C., the Council as well as the High Court. After considering the report of DC/Council, the High Court directed that the name of the member be removed for a period of 3 months. (C.A. Journal August, 2009, Page 220).

2. Valuation of Material-in-Transit (EAC Opinion) :

A govt. company is in the business of refining and marketing of petroleum products. It has refineries for processing crude oil and lube blending/filling plants. The main raw material for processing in the refineries is crude oil which is both imported and indigenously procured. On the date of Balance sheet, a few shipments of crude oil are in transit. The company also imports other products which can also be in transit on the Balance sheet date.

The crude oil cargos are generally lifted from load port on FOB basis and consequently the ownership of the goods shipped vests in the company. Once the tanker is loaded from the port, liability for associated expenses like freight, insurance, customs duty, survey fees, wharfage and handling charges (herein referred to as incidental expenses) becomes the cost to the company. The company makes provision for these expenses, irrespective of whether the material enters the Indian territorial waters or not before the Balance sheet date. The company values the crude oil-in-transit as well as other material-in-transit at the Balance sheet date inclusive of all such incidental expenses. The company sought the opinion of Expert Advisory Committee (EAC) of ICAI as to whether this method of valuation of crude oil-in-transit (material-in-transit) was in order.

The EAC has considered paras 6, 7, 11 and 13 of AS-2 (Valuation of Inventories) and given the opinion that the above method of valuation of material-in-transit was not in order. According to the EAC, only those expenses which contribute to bringing the inventory to its present location and condition can form part of the cost of the inventory. Therefore, the liability for the expenses for (i) freight, (ii) handling charges at the load port (iii) customs duty on imported cargo, and (iv) wharfage should be recognised in the books of account in respect of material-in-transit only when those are incurred or the liability in respect of the same has arisen. As regards insurance and survey fees, the same should not be included in the valuation, unless they are mandatory i.e., without which the material cannot be moved or transported from the port. (Refer page 221-222 of C.A. Journal, August, 2009).

3. Exposure Draft of AS-1 (Revised)

— Presentation of Financial Statements :

ICAI has issued the above exposure draft. This Exposure Draft is issued pursuant to the decision to converge with IFRSs in respect of accounting periods commencing on or after April 01, 2011. This corresponds with IAS-1.

The objective of the Standard is to prescribe the basis for presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of the previous periods and with the financial statements of other entities. The general purpose financial statements are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.

The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to wide range of users in making economic decisions.

A complete set of financial statements comprises : (a) a statement of financial position at the end of the period; (b) a statement of comprehensive income of the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; (e) notes, comprising a summary of significant accounting policies and other explanatory information; and (f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. An entity is required to present a complete set of financial statements (including comparative information) at least annually.

This Accounting Standard is mandatory for accounting periods commencing on or after April 01, 2011.

This Standard also gives guidance for implementation and has also given illustrative presentation of financial statement. [Refer pages 317 to 334 of ICAI Journal, August, 2009].

4. Auditing standards :

The following Auditing Standards have been issued and published on pages indicated below in the CA.

Journal for August, 2009. These are effective on all audits relating to accounting periods beginning on or after 1-4-2010.

i) Standard on Auditing (SA) 320 (Revised) :

Materiality in Planning and Performing an Audit (P. 335-338).

ii) Standard on Auditing (SA) 402 (Revised):

Audit Considerations Relating to an Entity Using a Service Organisation (P. 339-346).

iii) Standard on Auditing (SA) 450 :

Evaluation of Misstatements Identified During the Audit (P. 347-350).

iv) Standard on Auditing (SA) 610 (Revised) : Using the Work of Internal Auditors (P. 351-353).

5. NBFC Auditors’ Report:

Reserve Bank of India has issued directions called ‘Non-Banking Financial Companies Auditors’ Report (Reserve Bank) Directions, 2008′. They have been notified by a Circular dated 1-7-2009 and they have come into force on that date. Full text the directions is published on P. 288-291 of CA. Journal, August 2009.

6. Transfer/Termination of articleship :

ICAl has clarified, by a Notification dated 30-6-2009, that transfer/termination of articleship of articled assistants under Regulation 56(1) will be permitted under the following circumstances only:

“(a) Medical grounds requiring discontinuance of articles for a minimum period of three months (on production of a medical certificate issued by a Government hospital).

b. Transfer of a working parent to another city involving a distance of minimum 50 kms (on production of a certified copy of the transfer order and the proof of relocation to another city).

c. Misconduct involving mortal turpitude.

d. Other justifiable circumstances/reasons:

i. Grounds already permissible in the Char-tered Accountants Regulations, 1988 (on submission of requisite proof of the act warranting transfer/termination of article-ship) :

a) Industrial training (Regulation 51).

(b) Secondment of articles (Regulation 54).

c) Conversion from PCC to lPCC (for termination of articles only. Re-registration of articles to be allowed only after passing Croup-I of lPCC).

(d) Death of Principal [Regulation 57(1)(c)]

e) Ceasing of practice by the Principal [Regulation 57(1)(a)].

f) Removal of name of the Principal from the Register of Member due to any reason [Regulation 57(1)(b)].

ii. Marriage basis (only if there is relocation to another city involving distance of 50 kms).

iii. Irregular payment or non payment of stipend with reference to Regulation 67.

iv. Articled assistant desires to serve balance period of training outside India.

v. Shifting by the principal to another city involving distance of more than 50 kms.

The articled assistants are required, in the first instance, to get the consent of the Institute before getting Form 109 signed by the Principal, in their own interest.

The request, on anyone or more of the aforesaid grounds, of an articled assistant on plain paper with recommendations of the Principal for transfer/termination of articleship accompanied by evidence/ proof (self-attested by the articled assistant) to the satisfaction of the Institute be made.”

7. Campus Placement Programme:
As in the past, ICAI has organised Campus Placement Programme for providing opportunity to our students who have qualified in CA. Final Examinations held in May, 2009. The campus placement interviews will be held at the following places on the dates mentioned below:

8. Know Your Ethics:

The Ethical Standards Board has issued certain clarifications about ICAI Ethical Standards which are published on page 192 of CA. Journal for August, 2009. The following clarifications may be noted:

i) Management consultancy companies floated by Chartered Accountants can receive remuneration from an employer based on percentage of the annual CTC of the candidate while providing services relating to recruitment or placement of such candidate. However, a firm of Chartered Accountants is not permitted to charge fees on percentage of CTC of the candidate for rendering similar services.

ii) A Member who is in practice cannot use the designation of ‘District Governor’ in his Rotary Club visiting card along with the word ‘Chartered Accountant’.

iii) It is not permissible for a member of ICAI, who is practising as an advocate, to use CA logo on his personal stationery, visiting cards, etc.

9. ICAI News:

(Note: PageNos. given below are from c.A. Journalof August, 2009)

i) lCAl Elections:

Elections to the 21st Council and 20th Regional Councils will take place on 4th and 5th December, 2009. Details about these elections are put on the web site of ICAI www. icai.org. (Page 306).

ii) lCAl MOTO Song:
ICAI MOTO song instills a sense of pride amongst members of our Institute and expresses our solidar-ity with the Institute. This is uploaded on the web site of lCAl. (Page 188).

iii) Membership Card:
ICAI is issuing membership cards. Those who have not so far obtained this card can apply to ICAl. (Page 188).

(iv) Payment of Annual Membership Fees:
ICAI has issued a clarification that the Annual Membership Fees and Certificate of Practice Fees for 2009-10was payable on 1-4-2009.If any member has not paid the fees so far he/she can make the payment on or before 30-9-2009. (Page 308)

(v) New Branch of ICAl :
119th Branch in Western Region has been opened at Vapi w.e.f. 9-7-2009. (Page 300)

(vi) Publications of ICAl :
(a) Technical Guide on Internal/Concurrent Audit of Investment Functions of Insurance Companies (Page 299)
(b) Micro Insurance (Page 299)
(c) Technical Guide on Internal Audit of Intangible Assets (Page 300)

BCAJ Admin

From The President

Dear Professional Colleagues,

India has hit the headlines once again. Slumdog Millionaire
has won 8 Oscars including the one for The Best Film, and A. R. Rahman, the
heartthrob of millions for his composition and background score. One really
feels proud to be an Indian.

There have been some comments that the film is really a
British film and only the performers are Indians. I believe that the Awards are
for the excellence in performance and there is no doubt that many of the
performers are Indians. Any film is a team effort and India therefore deserves
the credit and the accolades. I felt really happy for those six children who are
a part of this film. One only hopes that this glory, which the film and its
artists have achieved, results in improvement in the quality of life of all
those kids whose story the film depicts. While today’s newspapers are expectedly
filled with coverage of the Oscar Awards, a story in a reputed daily which was
carried alongside these reports caught the eye. The report stated that even
though public expenditure on health had increased, the percentage of
undernourished children both in the rural and urban areas had gone up — a clear
indication of the fact that the expenditure is not achieving expected results.

Without detracting from the fabulous achievement of the
entire team of Slumdog Millionaire, I feel that the reaction from the government
could have been different. As I write this communication, three States have
already declared this film tax free. One really needs to examine whether these
exemptions achieve the intended results. If the desire is to ensure that more
people watch the film, it would be better to collect the tax and earmark it for
providing facilities to those who cannot afford the luxuries of visiting a movie
theatre today. Passing on the benefit of a tax exemption to the urban elite who
visit the multiplexes, really makes no sense.

The reaction of the public fortifies one feeling that we are
a nation that enjoys celebrations and loves celebrities. We do not tolerate
losers. The moment our cricket team wins a tournament, the cricketers are
worshipped, the minute they lose they are trashed, cursed, their homes attacked.
To the media everything is an event to be milked to the maximum.

The world believes that India is a country with immense
talent. Occasions such as the Oscars for the Slumdog team prove this confidence
is not misplaced. The challenge is to ensure that the achievements, successes,
victories, do not remain merely events, but encourage actual action on the
ground. An A. R. Rahman, Resul Pookutty, Bindra, Sachin, Sania will definitely
inspire the talented youth of this country. It is our duty, and responsibility
of the powers that be, to provide them with the opportunity.

A week before the mega Oscar event, Pranab Mukherjee, the
Finance Minister, presented the interim budget, the last one of this government.
Considering the prevailing economic situation, many were expecting the Finance
Minister to provide substantial tax cuts and other incentives. It would have
been politically expedient, but Mr. Mukherjee refrained from going overboard. He
has provided some marginal tax cuts in excise and service tax, but they were
necessary, and cannot be treated as an election bonanza. He has left the task of
providing a more comprehensive economic stimulus to the next government. By the
time this communication reaches you, election dates may have been announced, and
the nation will prepare itself for another mega event.

In the coming elections let us all vote, and encourage our
friends and relatives to vote. Undoubtedly, our choice may be limited, but we
must exercise our franchise and send the best from the available to parliament
as our representatives. One of the duties of the government is to legislate, but
our politicians have no time for this. At the end of this Lok Sabha, 39 bills
which had been introduced will lapse, while 29 others which had been introduced
in the Rajya Sabha will await action by the next government. Compare this with
the seven bills lapsed at the culmination of the first Lok Sabha. I am putting
down all these thoughts not with a view to criticise but when I witnessed the
Oscar ceremony, I felt that our country has tremendous latent talent. All we
need is better governance.

The entire world is on the threshold of an economic slowdown
or possibly a recession. All economists feel that India is one of the few
countries which will register positive economic growth, while all other major
economies will decline. The world believes that India will be the first off the
block, when the turnaround takes place. We must start believing in ourselves. We
must not let this opportunity pass. We have the potential; if we utilise it, we
will be well placed to lead when the world order changes in the coming decades.
Jai Ho India !

Anil Sathe

levitra

BCAJ Admin

From The President

Dear Professional Colleagues,

    When I wrote my communication for the May issue, we were in the middle of an election. All pollsters predicted a fractured mandate, with all its adverse consequences. Many of us were reconciled to an unstable government and many compromises that government formation would have required. Fortunately the Indian voter turned out to be far wiser than what the experts expected him to be. We have a stable government in place. Though it is still a coalition government the baggage of allies has become far lighter. This may mark a turning point in our national history. There are huge expectations from this government which is headed by a Prime Minister with a clean image.

    There is hope that the economy will be back on track. Our profession will have a significant role to play in the upsurge of economic activity. The question that we need to ask ourselves is how far are we equipped to meet the demands society will make on us ? In this communication I have attempted to discuss a few of the challenges that we face.

    Our role as book-keepers has diminished considerably. The routine, repetitive work is now taken care of by technology. Armies of accountants have now been replaced by computers driven by intelligent software. However, verification of huge databases is still our responsibility. It is in this area that we face our first major challenge. The new entrants to the profession are techno-savvy but most of the seniors are not. We must harness technology to validate databases. Data security is a subject we must learn. We realise our inadequate knowledge when we have to deal with subjects like information security and system audits. Undoubtedly, a few of us may have acquired the requisite knowledge but many of us have not. The Institute of Chartered Accountants of India (ICAI) already has a subject of this nature in the curriculum and is making efforts to equip existing members. However, far more needs to be done. During the course of our audit we do rely on the work of experts in this area, but our level of comfort will increase only when our members equip themselves with knowledge in these areas.

    The second challenge is the area of accounting standards. The ICAI is the standard setter. One certainly understands that with globalisation, the stake-holders in business are spread over different geographical locations and belong to different countries. In order to ensure that we do better business with each other it is necessary that we speak in the same accounting language. In this context convergence to International Financial Reporting Standards (IFRS) is welcome. However, our leaders must appreciate that while large business houses have significant impact on the economy, in absolute terms their numbers are small. The majority of small/medium businesses have a different perspective, culture and the professionals who service them play a different role from those who service large business houses. Consequently the accounting, audit and documentation standards that apply to these entities must be significantly different from the standards that apply to global business. I am conscious that basic accounting standards and principles must be adhered to. The debate is over ‘what is basic ?’. We have seen that advisors, regulators were responsive to the needs of business in the context of the problems large corporates faced given the unforeseen foreign exchange fluctuations that occurred in recent months. The same degree of sympathy and response must be shown to problems of small/medium businesses and their service providers in adhering to accounting and audit standards. If this does not happen, the standards will be observed more in breach and compliance will be in letter and not in spirit.

    The third challenge is to change the mindset of professionals that their survival depends on statute-based work. We have seen a debate about the methodology of allotment of audits of banks and public sector undertakings, etc. While one entirely supports transparency in appointment of auditors where public interest is involved, the profession must introspect and see as to how it can add value to the services that it delivers. If regulators begin to feel that the services that we provide are only ‘ticking the boxes’, then the statutory mandate will be done away with. I understand that in the UK, audit of small private limited companies is optional. It is only when auditees perceive a value in our services that they receive, that they would be willing to remunerate us handsomely. Today, statute-based compliance cost is considered as a tax by the payer, it must translate into a fee.

    The fourth challenge is adherence to ethical standards. Regulators and other authorities treat our authentication with trust. They expect that we take due degree of care. We must ensure that blatant offenders amongst us are brought to book and action is taken quickly. I entirely appreciate that in some cases our authentication is to be read with certain qualifications due to the inherent limitations of the verification process. The need is to communicate such limitations clearly so that misunderstanding is minimised. We must perform with diligence once we accept assignments. Limiting our effort to make it commensurate to the fee should never enter our minds. Our members must understand the distinction between a profession and a business and the line that divides the two.

    The last challenge is to remain relevant to the society at large. It is a fact that despite all the ills that affect it, the medical profession is respected because it touches the lives of all, of the richest person in a mansion and of the man on the street. Our profession must also consider how it can make available its skill sets to society at large. We must look at environmental audits, energy audits and may be even social responsibility audits. It is only then that the trust and confidence that the public places in the letters ‘CA’ of the English alphabet will be reinforced.

BCAJ Admin

From The President

From the President

Dear Professional Colleagues,

“I have never let my
schooling interfere within my education “. These famous words of Mark Twain
would possibly reflect the sentiment of many a successful individual about our
schools and colleges. Over the last fortnight we have been reading the
travails of students, who having passed through school are knocking at the
doors of institutions of higher education. After six decades of independence,
the State is unable even to fathom the magnitude of the problem, let alone
solve it.

The world is facing an
economic slowdown, but it is said that once the upswing starts, India will
lead the pack of developing nations. Its young educated population is said to
be one of its strengths. One really wonders how far this is correct and even
if it is, whether the advantage will last.

I believe that as a
developing nation, we have not given the priority to education, which it
deserves. In any cabinet formation, there are no takers for this portfolio.
The problems that the education sector faces are enormous. I think that they
can be broadly divided into three areas, availability, affordability and
quality.

The media concentrates on the
problems in higher education, but those who face these have crossed the
threshold of school. We have been concentrating on the top of the pyramid,
while ignoring the base. Undoubtedly, we must build many more institutions of
higher education, many more colleges and institutions like ITI which impart
job-oriented education. But these will be utilised by a larger cross section
of the population, only if we have more schools. It is disturbing to read
stories of children having to trudge 5 to 6 kilometres to reach their school.
A vast population of children still does not have school education available
to them. While in urban areas the problems are of admission to college to a
child, in a village, a school with one blackboard, one teacher and a roof that
does not leak, is still a dream. We all talk of physical infrastructure like
roads, bridges and dams. These can be built with monetary investment, but
building a strong foundation of schools will require funding, planning and
above all honest intentions and strong will. We need to invest vast sums in
primary education and ensure that these sums are well spent. In this area the
government needs to involve NGOs both for actually building the
infrastructure, and running primary schools as well as in monitoring
government spending in these areas. One can possibly make a beginning by
asking the government as to where it has spent the education cess that it has
collected for the past 5 years.

The other problem area is
affordability of education. Many are unable to pursue higher education simply
because it is beyond their means. Here, possibly a private-public partnership
will work, if schemes are well-structured and well-monitored. In fact, the
principle of cross subsidisation which is contemplated in health care
services, should also be used in education. A healthy return on investment
should be permitted by recovering fees from those who can afford it, while the
education to the economically weak is subsidised. The schemes must be
transparent and free from political interference. Further, the availability of
educational loans should be increased substantially. The State supports soft
loan schemes to agriculture. It should increase the support to loans for
education with adequate safeguards to ensure that this subsidy is useful to
the nation when the student completes his/her education.

The third aspect is the
quality of education. A major reason for the drop in quality is the standard
of teachers / professors. Except for coaching classes, one does not find the
teaching profession to be remunerative. Consequently, it does not attract
talent. I am conscious that the world over, the teaching profession is
underpaid. This is compensated by social respect and recognition. In our
country even this respect has been on a decline. It is often seen that while
fixing pay scales, the salary of a school teacher is equated with that of a
clerk. In government parlance the grade of a teacher is a clerical grade. I
simply do not understand, as to how a primary school teacher who is expected
to inculcate values in a child, teach him principles of mathematics, and
introduce him to literature can be equated with the salary of a booking clerk
who issues tickets across the window. School education has to become
affordable, but not cheap. It is only if we compensate teachers well, will we
be able to attract talent in this field. If this causes a deficit, the State
must pick up the tab. It is only if we are able to revamp our education
sector, will we be able to dream of a solid future. To quote Franklin
Roosevelt “We cannot always build future for our youth but we can build youth
for the future”.

I selected education as the
subject of my last communication since this is a subject close to my heart.
When this issue reaches you, I will have completed my term as the president of
a body which prides itself as an institution imparting professional education.
I have enjoyed communicating with you in these twelve months. I hope you read
those communications and found the time spent worthwhile. During my tenure I
have been fortunate to have the support, guidance, blessings and good wishes
of a large number of people. I take this opportunity to express my gratitude.
In the next month I will join the rank of ‘past presidents’.

The diamond jubilee year of
the Society is nearing completion. A milestone will soon be crossed. It is as
they say in cricketing parlance, time for the institution to take fresh guard.

Ameet Patel, a dear friend,
the incoming president, will communicate with you. He has dreams and the drive
to turn them into reality. In the words of Victor Hugo, “There is nothing like
a dream to create the future. Utopia today; flesh and blood tomorrow.” With
Ameet at the helm, the Society has a great future. I wish him and his team all
the very best.

Thank you and Good bye

With warm regards,

Anil Sathe

levitra

BCAJ Admin

From The President

Dear Professional Colleagues,

As the December issue was going to the press, we witnessed a
ghastly terror attack on Mumbai. My first thoughts came to you by way of post
script printed after my communication. Thereafter our Vice-President Ameet Patel
expressed our anguish through Rabindranath Tagore’s poem. Much has been written
and spoken about the attack. The post mortem of the event will continue. The
reality is that we have lived with and will have to continue to live with
different forms of terror. We can minimise risks, control damage, but cannot
eliminate terrorism.

It is not the first time that our country has faced a terror
attack, nor is it the first time that so many innocent citizens have lost their
lives. But the reaction of the public has however been significantly different.
Whenever an attack took place in the past, our neighbour was blamed, the
security personnel lambasted and thereafter many of us went about their business
as if nothing had happened. This time persons in the power were held responsible
and there is an effort to ensure a continuous accountability of those in public
service. Though it may sound harsh, the difference in the reactions is probably
on account of the fact that terror has now reached the doorstep of the elite.
They were forced to descend from their ivory towers because those towers are no
longer safe. The feeling of being insulated from such mishaps has vanished.

There is a feeling of anger and anguish within all sections
of the society. It is justified, but very little will be achieved if it is
directed only towards bureaucrats, politicians and their ilk. We should be
angry with ourselves too. Since independence, we are a nation of citizens
who clamour for rights, but are not as conscientious when it comes to performing
our duty. There will of course be honourable exceptions, but otherwise it is
true of most of us. We all want to make government officials and the politicians
accountable, but we must pause and ponder as to how many of us are in a position
to render an honest account of ourselves to society. We must appreciate that
persons whom we hold responsible are not aliens from another planet, but are one
of our own breed.

The show of solidarity, the lighting of candles and meetings
to express sympathy were all necessary because these help to soothe the emotions
that had been aroused due to the tragedy. But if true lessons are to be learnt,
much more needs to be done. As an immediate measure, the needs of the victims
must be ascertained and catered to. Some of them will need emotional support
which only family members and friends can give, but others will need financial
support both in the short term and for longer duration as well.

In the medium term the need is to create awareness about
security and vigilance. The railway police at the CST were criticised because
their weapons did not fire as they had not been used in years. It is easy to
point a finger, but we must ask ourselves some questions and there will be
unpleasant answers. Many of us live in high-rise buildings, but the disaster
management systems (if any have been installed) have not been used in years. We
may not have war, but will face a number of warlike situations. Are we prepared
for that ? I think that a year of compulsory military or paramilitary training
will go a long way in creating mental toughness, discipline and patriotism
amongst the youth. The aspect of security needs to be brought into focus on a
continuous basis so that, being vigilant becomes the second nature.

The root cause of why ten individuals could wreak the havoc
they did is that those in public service are not accountable. A large majority
of the public is busy in earning their daily bread while the elite get their
work done through resources. Creating a permanent platform where citizens remain
vigilant and make the powers that be accountable, will be a real challenge. For
that, a proper infrastructure needs to be put in place. This activity will
require substantial funding as well as the commitment of a large number of
individuals. After witnessing the tragic events of 26th November, every person
has the urge to contribute but is at a loss to decipher the course of action
that he can take.

What role we professionals in general and Chartered
Accountants in particular have to play ? I would divide our role into two parts;
one is our role as ordinary citizens. As citizens, we should contribute to a
number of organisations who have come forward, to aid the victims. This
contribution could be financial as well as of our time. Our role however does
not end there. We are professionals who have through training, acquired specific
skills. In order to ensure that citizens continue to care, a robust
infrastructure is required. Our enthusiastic past President Mr. Narayan Varma is
associated with a group of citizens which is contemplating a platform that will
be supported by various Non-Government Charitable Organisations. This effort
needs not only funds but committed support. We the members of the Society
through modalities that will be worked out will support this new platform. We
may communicate with you to understand what commitment the members of our
Society can make.

So much for the events of the recent past. The year 2008 has
been a mixed bag. While the economy was surging ahead in the first two quarters,
the last two have seen a sharp downturn. People are slowly coming to terms and
realising that this slowdown is here to stay for a while. For us, professionals,
the year ahead promises to be exciting as well as challenging.

Even though we have witnessed a national tragedy, I am
confident of a resurgent India. So let us hold our heads high and salute all
those who laid down their lives in the year gone by and welcome 2009. I hope it
brings cheer to all.

With warm regards,
Anil Sathe

levitra

BCAJ Admin

From The President

Dear Professional Colleagues,

I write this communication to you having returned from the
42nd Residential Refresher Course (RRC) at Goa. More than 230 delegates from all
over the country participated in the deliberations. The experience was
undoubtedly enriching. It must however be accepted that the shadow of Satyam
loomed large upon the minds of participants.

The editorial deals with the various issues that arise in
regard to the audit function, the perception of the public regarding auditors in
light of the Satyam episode. I will therefore refrain from dwelling on the
subject. I must however state that in my view the situation is serious. Not only
should the ICAI act quickly but it must be seen to act. I am conscious that
there are, and there will be limitations on the speed and extent of actions of
the Institute. I also recognize that a regulator must act with responsibility
and that taking any step without the requisite evidence may cause injustice. I
only hope that these facts are brought to the notice of the public.

The RRC ended on 26th January, 2009 and we rendered the
national anthem. Every time the national anthem is rendered or recited, there is
a surge of patriotism. We feel proud to be Indians. Fifty-nine years ago we
constituted ourselves into a republic. Our nation has now entered the diamond
jubilee year. The next year we will be celebrating the diamond jubilee of our
republic. In the last fifty-nine years how have we fared in regard to the goals
we set out to achieve ?

The Preamble to the Constitution reads

WE, THE PEOPLE OF INDIA, having solemnly resolved to
constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to
secure to all its citizens :

JUSTICE, social, economic and political;

LIBERTY of thought, expression, belief, faith and worship;

EQUALITY of status and of opportunity;

and to promote among them all

FRATERNITY assuring the dignity of the individual and the
unity and integrity of the Nation;

Fifty-nine years ago we promised our citizens justice,
liberty, equality and fraternity. Let us look at our performance in each one of
these parameters.

Justice — It is said that justice delayed is justice denied.
On that test alone we have failed miserably. Let alone the time lag, many forums
of redressal are simply not accessible to a vast majority. Judicial
pronouncements are delivered after decades, but many a time do not result in
justice because there is no action by the executive. While it is true that it is
this pillar of democracy that has suffered the minimum decay, justice as
contemplated by the founding fathers of the Constitution is still a mirage.

Liberty — Do our citizens have liberty of expression ? On the
contrary, we seem to have become extremely intolerant. Those whose beliefs do
not conform to beliefs of groups who are powerful, are throttled sometimes
physically. The standards of public morality are set by these groups. They wield
this power because some of them occupy high public office, or on account of
brute force of a mob. Women who constitute half of our citizens have severe
limitations on their freedom and the State seems to be helpless.

Equality — After six decades, disparities both social and
economic persist. On the social front there has been some degree of alleviation,
but on the economic front the gap has widened. Even opportunities are unequal.
Primary education which would have acted as a leveller is not available to vast
majority. As far as higher education is concerned, reservation was expected to
provide relief, but it has been substantially abused, and has created far more
acrimony than the benefits it has bestowed.

Fraternity — We call ourselves Indians, but permit
politicians to divide us on lines of religions, languages, and regional
aspirations. Fraternity is displayed only when a crisis looms large and is
forgotten the moment it blows over.

So our report card is rather dismal. What then is the
solution ? The solution lies in asking questions both to ourselves and the
powers that be and seeking answers again and again from ourselves and those who
are responsible for taking action. For too long we have remained silent. We seem
to have forgotten that 59 years ago we constituted ourselves into a democratic
republic. A democracy can survive and flourish only if every citizen
participates.

So the need is to participate in the democratic process and
it is not limited to elections. It means being accountable to society and
holding others accountable. It is not possible for an individual to carry on
this activity as a sustained programme. In the aftermath of the 26/11 tragedy
very senior and responsible citizens have formed a platform ‘Citizens take
Charge’. It seeks to ask questions and elicit an account from ourselves and the
authorities. Vigilance should become a habit. All of us should join either this
or any similar forum. The name of the forum is not important, the cause that it
promotes is.

I am an eternal optimist. This country has had a glorious
past, and if all of us take a step forward together, I am sure it will have a
brilliant future.

With warm regards,
Anil Sathe

levitra

BCAJ Admin

From The President

From the President

Dear BCAJ Lovers,

As I begin writing this month’s President’s Page, the news
of the sad, sudden and premature death of Mr. Rahul Roy, a past president of
the ICAI at a young age of 46 was received by me with shock and sorrow. He
expired as a result of cardiac problems. This news comes close on the heels of
the news of the passing away of Mr. Ranjan Das, the CEO & MD of SAP India —
again at a very young age of 42 years. He died of a heart attack.

I did not know either Mr. Roy or Mr. Das personally. Yet,
their passing away has disturbed me. The reason being that what happened to
them (and what will now happen to their family members) can happen to any one
of us. Today, most people and specifically professionals are living highly
stressful lives and there are no signs of any changes happening even in the
distant future, leave aside the near future. I had already referred to this
aspect in the last month’s message. But the recent tragedies have prompted me
to communicate again on the same topic.

What are the typical lifestyles of most of us today ? In
large cities like Mumbai, I perceive the following scenarios :

Physical stress caused by several factors — long
working hours, very long and tiresome travel time (from home to office and
back); uncomfortable physical working conditions (including cramped work
spaces leading to bad body postures; several hours of working on computers;
lack of physical exercise, irregular eating habits; long gaps between meals;
frequent travel plans; lack of adequate sleep.

Mental stress caused by constant work pressure;
unplanned work schedules leading to haphazard time management; always having
to deal with deadlines;

Stress caused by the dilemma of witnessing
corruption through consistent interaction with Govt. departments and
taxpayer non-friendly actions and behaviour of bureaucrats.

The above are, of course, only a few important aspects.
There would be many more. But the main point to be noted is that, in general,
most of us are facing at least some, if not all, of the above situations in
our lives today.

Is there anything that we can do to deal with the above ?
Let us not forget that today, we are trying to cope with and adjust our lives
to this constant stress. But our children are born and are living in this
environment from day one. For them, stress will become a way of life from
birth itself. This is a very dangerous and scary scenario. Let us all strive
to change our life-styles. Slowing down the pace of life, reducing the number
of working hours, spending more time at home and also doing regular physical
exercises are a few basic things that we must work on immediately. The time to
act is now. There is no time left to delay this any longer. Can we not work
from homes (technology is there to allow us to do so) on at least 1-2 days a
week instead of travelling long distances ? Can we spare one day in a month to
get rid of useless papers from our table-top and cabinets, so that our offices
are not unduly cluttered up ? We sit at our office desks for almost 8-10 hours
a day. Have we spent any time and efforts to find out whether the seating
arrangement is suitable to our health ? Is your chair comfortable ? Is
the distance between your head and your computer screen adequate ? Are your
arms and wrists in the right position while you type on your keyboards ?
Nothing that I have mentioned involves rocket science. It’s just that we
simply don’t feel it is important enough or urgent enough to pay attention to.
Most readers would be paying for annual maintenance contracts for their
computers, fax machines and other equipments. What about the regular
maintenance of the most complicated equipment in the world — the human body ?

If you agree with me, please refresh your memory and
recollect what happens when stress reaches breaking point. Hopefully, this
will jolt some of the readers into action.

I guess, it’s time to move on to less morbid topics. The
IFRS month of the BCAS was kicked off on 25th November by Mr. N. P. Sarda, a
past president of ICAI and a person who must have taught thousands of CA
students what costing means (I remember standard costing even today, only
because he made it appear to be so simple). It’s always a pleasure to hear
him. He was at his best on 25th when he spoke on IFRS. The IFRS RRC that we
have arranged in mid December has received an overwhelming response. I am glad
that we took the decision to devote an entire month for IFRS-related events. I
thank the members of BCAS who have supported the Society at all times and have
made our programmes so successful.

One year has elapsed since the dastardly terrorist attacks
in Mumbai on 26th November, 2008. The memories of those 3 eventful days still
haunt most Mumbaikars even today. Has anything really changed since then ?
Have our authorities learnt any lessons ? Are we any bit safer today than what
we were a year back ? I wonder. We all need to get involved and be a catalyst
to bring about change in society.

Social networking sites have become a rage nowadays. Not
only youngsters but even seniors are taking to these sites in thousands every
day. The BCAS recognises the power and the potential of such sites in bringing
people from all over the globe together. I am determined to make BCAS known to
Chartered Accountants across the world through the medium of such sites. I
seek your support in harnessing this extremely powerful technological tool to
unleash the power of networking amongst professionals. Let us all get together
and form a cohesive force that thinks together, acts together and brings about
social and economic changes for the improvement of our society in general and
our laws in particular. A CFO of a company recently wrote to me after reading
my previous month’s President’s Page. He complimented me on what I had written
but commented that, as usual, there was nothing in the message relating to
members in industry. I agree with him and will devote some time from now
onwards in making efforts to draw CAs in industry into the BCAS fold. How I
will go about this and when I would achieve this — I am not sure. But what I
do know is that where there is a will, there is a way.

Finally (and I know that the Editor of BCAJ is going to be
pleased with me for restricting the size of this month’s message to about
1,000 words !), I hope that readers have voted in the ICAI elections. At the
BCAS, we tried our best to make a difference in these elections. Let us hope
that we get dynamic leaders who will lead the profession forward into a new
horizon, leaving behind the inglorious moments that we have been witnessing
for the past few months. Eternal optimism ? May be !

BCAJ Admin

From The President

From the President

Dear BCAJ Lovers,

It is my proud privilege to
address my first communication to you as the newly elected President of BCAS.
I am daunted by the huge responsibility that is cast upon me and I hope to
complete the year ahead with ease on the back of unstinted support of members
and well wishers of this august body. The large number of congratulatory
messages that I received on my assuming the post of President have left me
speechless. I am thankful to every one of them.

The BCAS year 2009-10 has
begun with a very encouraging event. For the first time in its history, the
BCAS celebrated its Founding Day by combining it with the Budget lecture
meeting. S. E. Dastur, as usual, addressed a packed house of more than 2,000
people in his inimitable style. Apart from these people, a large number of our
members and others also took advantage of the lecture by viewing it online on
a real-time basis. We had arranged a live webcast of the AGM and the lecture
meeting for the benefit of a larger audience. This facility was welcomed by
several members and the response that we received is truly amazing. The web
statistics show that people from USA, UK, Switzerland, Singapore and UAE also
watched the webcast, apart from the large number of our members from all over
the country. This has given us the reassurance that we need and, in future, we
hope to bring more programmes to our members through webcasts.

In the year ahead, we hope to
usher in certain changes at the Society to improve its functioning and also to
reach out to more and more people. We will also strive to encourage younger
members to come forward and take up leadership positions in the Society.

Budget 2009 was preceded by
the usual hype on the part of media. But, it turned out to be much ado about
nothing. Considering the fact that the Finance Minister has promised to table
the new Direct Tax Code very soon, the large number of changes announced in
the Budget could have been held back. The minor tinkering with the threshold
limits will hardly make any difference to the tax payment by individuals.
However, the abolition of surcharge is welcome. The salaried class in the
higher income group will stand to benefit by this change. The abolition of the
infamous FBT will hopefully close a painful chapter in the history of the
Indian tax regime. However, one major grievance that most tax professionals
would have against the Finance Minister would be the manner in which the
Finance Bill is sought to be converted into law. Hardly any time has been set
aside for discussion on the floor of the Parliament. It is obvious that due to
lack of time, the possibility of professionals and trade bodies making
representations to the Government and the chances of the Finance Minister
having the time to read such suggestions are very remote. This is most
unfortunate and does not augur well for a healthy manner of legislation.

The postponement of the new
rules for TDS was expected and was badly required. The unnecessary hurry with
which the CBDT has tried to bring in such sweeping changes without putting in
place the infrastructure to implement the changes could have easily been
avoided. One hopes that in future, the Govt. consults professionals before
taking such decisions. The CBDT must realise that in order to bring about
major changes, it is essential to first win the confidence of the tax-paying
community. In contrast to the attitude of our CBDT, I was amazed to read about
the US Govt.’s proposal to bring in mobile telephone expenses under Fringe
Benefit Tax. There, when the Govt. wanted to bring in one item of expense
under the FBT, the proposal has been placed on the IRS website for public
comment for more than 2 months ! The new rules for remittance of funds out of
India are now in place. The system appears to be working well. However, one
will have to wait and watch how the Income-tax department uses the information
that it will collect. Let us hope that this is not used by them as one more
tool for hounding honest taxpayers and deductors.

The ICAI has recently set up
a Women Steering Group. This group is dedicated to serving women
Chartered Accountants and female students aspiring to be the members of the
ICAI. This is a welcome development. A few years ago, the BCAS had conceived
the idea of creating a special forum for women CAs and it had met with a good
response. Recently, it is observed that the percentage of girl CA students and
lady members has risen considerably. I am sure that with ICAI now taking up
this initiative in a big way, more ladies will stand to benefit.

Finally, as I write this
page, the media has reported that the lone terrorist captured alive during the
Mumbai terror attacks has confessed to his crime. Finally, justice will be
done and the perpetrator of a heinous crime will be suitably punished. This
will not bring back the hundreds of lives which were lost on those fateful
days of November. But at least the world now knows for sure what our
neighbours have been up to.

Ameet Patel

levitra

BCAJ Admin

ICAI And Its Members

1. Retrospective Amendment of Accounting Standard (AS-11)

By a Gazette Notification dated 31.3.2009, the Central Government has amended Accounting Standard (AS-11) dealing with “The Effects of Changes in Foreign Exchange Rates” as notified by the Companies (Accounting Standard) Rules, 2006. It may be noted that para 46 has been added in this Accounting Standard with retrospective effect from 7th December, 2006. This para reads as under :

“46. In respect of accounting periods commencing on or after 7th December, 2006 and ending on or before 31st March, 2011, at the option of the enterprise (such option to be irrevocable and to be exercised retrospectively for such accounting period, from the date this transitional provision comes into force or the first date on which the concerned foreign currency monetary item is acquired, whichever is later, and applied to all such foreign currency monetary items), exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, insofar as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a ‘Foreign Currency Monetary Item Transaction Difference Account’ in the enterprise’s financial statements and amortised over the balance period of such long-term asset/liability but not beyond 31st March, 2011, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with paragraph 15. For the purposes of exercise of this option, an asset or liability shall be designated as a long-term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of 12 months or more at the date of origination of the asset or liability. Any difference pertaining to accounting periods which commenced on or after 7th December, 2006, previously recognised in the profit and loss account before the exercise of the option shall be reversed insofar as it relates to the acquisition of a depreciable capital asset by addition or deduction from the cost of the asset and in other cases by transfer to ‘Foreign Currency Monetary Item Translation Difference Account’ in both cases, by debit or credit, as the case may be, to the general reserve. If the option stated in this paragraph is exercised, disclosure shall be made of the fact of such exercise of such option and of the amount remaining to be amortised in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortised.”

From the retrospective amendment of AS-11, it will be possible for all corporate bodies to exercise the option to restate their long-term Foreign Currency Monetary Items acquired during accounting periods commencing on or after 7.12.2006. The effect of this amendment will be as under :

(i) If the long term Foreign Currency Monetary Item relates to other than an acquisition of a depreciable capital asset, exchange differences should be accumulated in the “Foreign Currency Monetary Item Transaction Difference Account” and amortised over the life of the monetary item but not beyond 31 March, 2011.

(ii) If the long-term Foreign Currency Monetary Item relates to acquisition of a depreciable capital asset, exchange differences arising on such monetary items should be added to or deducted from the cost of the asset.

By a separate notification dated 31/3/2009, the Central Government has also amended Schedule VI of the Companies Act. By this amendment the second paragraph along with explanation 1 and explanation 2 of the instructions under the head ‘Fixed Assets’ has been deleted with effect from 31.3.2009. The effect of this amendment will be that the requirement of capitalisation of foreign exchange difference relating to the liability incurred for acquiring fixed assets purchased from a foreign country, gets removed. Therefore, if any fixed assets are purchased from a foreign country by taking loan in foreign currency, the foreign exchange difference will have to be recorded as provided in AS-11 as modified by Para 46 inserted w.e.f. 7.12.2006.

2. Limited Liability Partnership

The Central Government has issued a Notification u/s. 1 (3) of the Limited Liability Partnership Act, 2008 (LLP Act) on 31st March, 2009. notifying that LLP Act has come into force from that date. LLP Rules, 2009 and forms are also notified by a separate Notification. The Ministry of Corporate Affairs has now started registering LLP under the LLP Act/Rules.

It may be noted that the position of LLP under the Income-tax Act is not yet clarified. Unless this position is clarified, the existing partnership firms or unlisted companies may not exercise the option of conversion into LLP status. Even new partnership to be formed hereafter may not like to register as LLP unless the position under the Income-tax Act and Wealth-tax Act is clarified.

The LLP Act is silent regarding taxation of LLP under the Income-tax Act. The basic structure of LLP is that of a partnership and the only difference is that the liability of partners is limited. Therefore, the Government should grant the status of a ‘Firm’ to LLP for the purpose of Income-tax Act. In other words, the definition of the words ‘Firm’, ‘Partner’ and ‘Partnership’ in Section 2 (23) of the Income-tax Act should be so amended that it includes definition of these words under the LLP Act. Once this is done, there will be no need to amend other provisions of the Income-tax Act. Accordingly, LLP will pay tax at the flat rate applicable to a ‘Firm’ and it will get deduction for interest and salary to working partners as provided in Section 40 (b) of the Income-tax Act. Share of profit received by a partner from LLP will be exempt from tax. Losses of LLP will be allowed to be carried forward in the hands of the LLP. Other provisions relating to changes in constitution of LLP, dissolution, conversion of LLP to the status of company etc. will apply as they presently apply in the case of a Firm.

3. Working Hours of Articled Assistants

The Council of ICAI has taken certain decisions relating to working hours for training of articled assistants. Some decisions, among others, relate to the minimum and maximum working hours for the articled assistants per week, the course of action required to be taken in case the minimum working hours exceed, etc. These decisions are as follows:

i) The minimum working hours for the articled assistants shall be 35 hours in a week excluding the lunch break.

ii) The office hours of the principal for the articled assistants shall not be generally before 9.00 a.m. or after 7.00 p.m.

iii) The normal working hours of the articled assistants shall not start after 11.00 a.m. or end before 5.00 p.m.

iv) If the exigencies or nature of training so warrants, the articled assistant shall work beyond the normal office hours. However, the maximum working hours for the articled assistants should not normally exceed 35 hours in a week, excluding the lunch break and in any case or circumstances should not exceed 45 hours per week. In case the articled assistant is required to work beyond 35 hours per week, he/she is entitled to compensatory leave calculated with reference to the number of completed hours worked over and above 35 hours per week. The principal shall ensure that long , working hours are not imposed on the articled assistants on a regular basis, and only in case of exceptional circumstances where time-bound work is to be delivered, the articled assistants may be required to work longer hours which will still be subject to a maximum of 45 hours per week. The principal shall be free to allow compensatory leave or off hours in lieu of extra working beyond 35 hours.

(Source: Communication from Secretary, dated 3.4.2009)

4. Auditing Standards

The following Auditing Standards are issued by the Institute.

(i) Standard on Auditing (SA) 500 (Revised)- ‘Audit Evidence’. This Standard was hitherto known as SA 500 (AAS-5) ‘Audit Evidence’. The revised standard is effective for audits of financial statements for periods beginning on or after 1st April, 2009.

(Refer pages 1818 – 1825 of C.A. Journal for April, 2009)

ii) Standard on Auditing (SA) 720 – “The , Auditor’s Responsibility in Relation to other Information in Documents containing Audited Financial Statements”. This standard is effective for audits of financial statements for periods beginning on or after 1st April, 2009.

(Refer pages 1826 – 1828 of C.A. Journal for April, 2009)

5. ICAI News

(Note: The page nos. given below are from C.A. Journal for April, 2009)

i) Chapter of ICAI in Singapore

The Singapore Government has permitted leAl to open a chapter in Singapore. This will be inaugurated in April/May, 2009. (page 1668)

ii) International Conference at Agra

As part of the Diamond Jubilee celebrations of ICAI, an International Conference will be held at Agra from 3rd to 5th July, 2009. The theme of the conference will be “Winds of Challenges – Global Strategies for Accounting Profession”. (page 1669)

(iii) ICAI Publications
(a) Compendium of Standards on Internal Audit

(b) Manual on Internal Audit

(d) Training Material on Internal Audit

(e) Compendium of Opinions, Vol. I to Vol. XXV on CD.

(f) Handbook of Auditing Pronouncements (2008 Edition) (Vol. I & II)

(g) Practitioner’s Guide to Audit of Small Entities

(h) Implementation Guide to Risk-based Audit of Financial Statements

(i) Guidance Note on Audit of Banks ( 2009 Edition)
(Refer page 1808 – 1809, 1812 – 1813)

(iv) Master in Business Finance
ICAI has introduced a Certificate Course in ‘Master in Business Finance’. This course is open to members of ICAI and those students who have passed their final examination. Registration for 2009-10 session is in progress. The classes will be held on Saturdays/Sundays at Mumbai, New Delhi, Chennai and Kolkata from 1st June, 2009 (page 1811).

(v) ICAI Examinations
(a) PE-II, PCE, Final and all other examinations will be held from 1st to 15th June, 2009.

(b) CPT examination will be held on 28.6.2009

BCAJ Admin

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. Shri Raj Kumar N. Iyer, the
member had given tax audit report u/s.44AB of the Income-tax Act to his client.
The said audit report was not accompanied by the Balance Sheet, and Profit &
Loss Account as annexure to Form 3CD. During the course of
a survey u/s.133A, a few days after the said report was filed with the AO, it
was found that the assessee had no books of accounts. When the statement of the
member was recorded by the AO, he admitted that the assessee did not maintain
proper books of account as mentioned in the tax audit report. The member also
stated that no books of accounts were generated through the computer and,
therefore, he stated that (i) it was not possible to furnish Trading and Profit
& Loss Account and Balance Sheet, (ii) the opinion given in Form 3CB that the
accounts give true and fair view of the financial statements was not correct,
and (iii) the audit report should be treated as incorrect.

On these facts, the Assessing Officer complained to the
Institute that the member had given a false audit certificate in Form 3CB and
3CD and, therefore, he was guilty of professional and/or other misconduct.

In the disciplinary proceedings, the member pleaded guilty
under Regulation 15(2) of the C.A. Regulations. Therefore, he was held to be
guilty of professional misconduct under Clause (8) of Part I of the Second
Schedule. The Council referred the matter to Bombay High Court with a
recommendation to reprimand the member.

At the time of hearing, the member did not attend before the
High Court. However, the High Court has taken the view that since the member has
admitted the guilt, he deserves a lenient punishment. On this basis the High
Court accepted the recommendation of the Council and ordered that the member be
reprimanded. (C.A. Journal for February, 2009 — Page 1377).

2. New office bearers of the Council :

The Council of ICAI has elected new office bearers for
2009-10 on 5-2-2009. 4 Standing Committees and 36 Non-standing Committees are
also elected as under :

(i) Shri Uttam Prakash Agarwal from Mumbai is elected as
President. Our greetings and best wishes to him for a successful term of
office.

(ii) Shri Amarjit Chopra from New Delhi is elected as
Vice-President. Our greetings and best wishes to him for a successful term of
office.

(iii) Executive Committee — President, Vice-President, C.A.
V. C. James, Abhijit Bundopadhyay, K. P. Khandelwal and V. K. Garg.

(iv) Examination Committee — President, Vice-President,
C.A. R. S. Adukia, Preeti P. Mahatme, J. Venkateswarlu, Manoj Fadnis and Shri
K. R. Maheshwari.

(v) Disciplinary Committee (Old Cases) — President,
Vice-President, C.A. G. Ramaswamy, K. K. Gupta and Shri O. P. Vaish.

(vi) Disciplinary Committee (New Cases) — President, C.A.
S. Santhanakrishnan, Anuj Goyal, Shri R. K. Handoo and Shri M. P. Lohia.

(vii) Board of Discipline (New Cases) — President, C.A. K.
P. Khandelwal and Shri S. K. Nayak.

(viii) Chairmen of some of the Other Committees :

3. The Companies Bill, 2008 :

The Companies Bill, 2008 has been introduced in the Lok Sabha
on 23-10-2008 to replace the existing Companies Act, 1956. There is no proposal
about rotation of statutory auditors in the Bill. However, some of the
provisions are proposed to ensure that the independence of statutory auditors is
not impaired. In brief, these provisions are as under :

Special Resolution will be required if an auditor, other than the retiring auditor, is proposed to be appointed.

An auditor who has direct financial interest in the company or who receives any loans or guarantee from the company or who has any business relationship (other than as an auditor) with the company cannot be appointed as auditor.

A person whose relative is in employment of the company as a director or key managerial personnel cannot be appointed as auditor.

If a firm is appointed as auditors, only a partner of the firm, as authorised by the firm, can sign the audit report on behalf of the firm.

An auditor cannot accept any other assignment from the company like accounting, book keeping, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, investment banking services, financial services and management services.

Audit report shall state whether the financial statements comply with the accounting standards and auditing standards. It may be noted that the National Advisory Committee appointed by the Government will now be required to advise the Government about accounting standards as well as auditing standards. In other words, the auditors will have to comply with auditing standards laid down by the Government on the advice of the National Advisory Committee.

Auditor shall have a right to attend every annual general meeting and shall have a right to be heard at such meeting on any part of the business conducted at the meeting.

If the auditor makes default in complying with the provisions relating to reporting on the financial statements, provisions prohibiting rendering of other services, and allowing any person other than an authorised person to sign audit report, he shall be liable to pay fine of Rs.25,000, which may extend to Rs.5 lacs. If it is found that the auditor has knowingly or willfully contravened any of the above provisions, he shall be punishable with imprisonment for a term up to one year or with fine of Rs.1 lac, which may extend to Rs.25 lacs or with both. It is also provided that in such cases, the auditor will have to refund the fees and also pay for damages to the company or to any other persons for loss arising out of incorrect or misleading statements of particulars made in the audit report.

From the above provisions proposed in the Companies Bill, 2008, it will be noticed that these provisions are more stringent and are being introduced with a view to achieve the goal to strengthen the independence of statutory auditors and improve quality of audit. It appears that the Government is keen to ensure that the independence of statutory auditors is not affected by any weakness in the corporate governance.

4. Accountancy Museum:

ICAI – Accountancy Museum was opened at ICAI Bhavan, Noida, on 2-2-2009. The museum presents rare and historic images (evidence of the oldest balance sheet in human civilisation) and documentary evidence of the evolution of accountancy in India. The items on display include the minutes of Indian Accountancy Board (responsible for the birth of the Institute), first gold medals of R.A. final and CA final examinations, first annual report of the Council, our own first balance sheet, rare photographs and so on. It presents very unique images including documents that have been acquired from the British Museum, London, and other private collectors from India as well as abroad. This museum will serve as a great source of learning, inspiration and professional pride for all of us.

5. Results of CA. Examinations:

i) CPT (December, 2008) – out of 89,253 (including 11,588 girls) students who appeared, 34,251 (38.3%) passed CPT examination.

ii) Final (November, 2008) – Both Groups – Out of 14,606 students who appeared, 2,961 (20.27%) passed.

Group I – out of 6,588 students who appeared, 1,235 (18.76%) passed.

Group II – out of 9,235 students who appeared, 1,952 (21.13%) passed.

6. MoU with CPA Australia:

ICAI has signed MoU with CPA Australia. As per the MoD reached, members of ICAI who are graduates will be eligible for CPA Australia membership on passing one paper on Business Strategy & Leadership. On the other hand, members of CPA Australia will be eligible for ICAI membership, subject to passing two papers on Corporate and Allied Laws and Taxation and two more papers on Advanced Auditing and Professional Ethics and Financial Reporting, if they have not already passed them as part of the CPA Australia programme.

This MoU will open professional opportunities to our members in Australia and this will bring the two countries, India and Australia, closer.

7. Auditing Standards:

The following Auditing Standards are issued and published in C.A. Journal for February, 2009 on pages stated below:

i) Standard on International Audit (SIA) 12

Internal Control Evaluation (Page 1444-1448)

ii) Standard on Internal Audit (SIA) 13

Enterprise Risk Management (Page 1449-1450)

iii) Revised Standard on Auditing (SA) 530

Audit Sampling (Page 1451-1456)

iv) Revised Standard on Auditing (SA) 540

Auditing Accounting Estimates, including Fair Value Accounting Estimates and Related Party Disclosures.

8. ICAI News:

(Note: Page Nos. given below are from CA. Journal for February, 2009)

i) Enhancing Audit Quality:

Some observations made by the Financial Reporting Review Board are listed on Page 1417 in order to enable members to improve the quality of audit of corporate bodies. These observations relate to presentation under various heads in Balance Sheet and Profit & Loss AI c. as required under Parts I and 11 of Schedule VI of the Companies Act.

(ii) Certificate Course on Enterprise Risk Management:
The Internal Audit Standards Board of ICAI has launched the above course for our members. The duration of this course is 200 hours spread over 6 weekends. Details are given on Page 1431.

iii) ICAI publications:

a) Manual on Concurrent Audit of Banks.

b) Technical Guide on Review and Certification of Investment Risk Management Systems and Process of Insurance Companies.

c) Guide to Implementing Enterprise Risk Management.

BCAJ Admin

ICAI And Its Members

1. Disciplinary Case

In the case of ICAI vs. Y.M. Mansuri, the Commissioner of Income tax filed a complaint alleging that, in his statement u/s. 131, the member admitted that the audit u/s. 44 AB of the Income- tax Act in his clients’ case was conducted in January/February but the audit report in Form 3CB was backdated i.e., 30th October to avoid penalty in his clients’ case u/s. 271 B. It was noticed that there were no markings in the books of accounts of the assessee and it was found that the books and other records were not verified and that audit report u/s. 44 AB was given without conducting the audit.

The Disciplinary Committee as well as the Council of ICAI found the member guilty of professional misconduct and recommended that the name of the member be removed from the Register of Members for a period of six months.

The Gujarat High Court has accepted the above findings of the Disciplinary Committee and the Council of ICAI. The defence of the member was that there was no loss of Government revenue. The High Court has observed, “Though, in financial terms, the member may be correct in stating that there is no loss of revenue, but the said contention is bereft of any substance when the underlying idea of obtaining tax audit report is considered”. The High Court has also observed, “Once statutory obligation is cast on a person and such statutory obligation provides for a period of limitation within which a particular document is required to be submitted, failure to do so within prescribed period of limitation is, by itself, liable to be visited with penalty, unless explained by a reasonable cause.” In conclusion the High Court has accepted the recommendation of the Council of ICAI to remove the name of the member from the Register of Members for six months (C.A. Journal, May 2009, page 1879).

2. Accounting for expenditure on development of corporate portal

The Expert Advisory Committee (EAC) of ICAI has given the following opinion in the case of a Government company at Pages 1882-83 of C.A. Journal for May, 2009.

(i) Facts

(a) During the year 2005-06, the company had awarded a contract for design and development of corporate portal of the company to M/s. XYZ Ltd. at Rs.32.20 lacs. The corporate portal is leveraging the web/Internet technologies/tools for dissemination of information and allows a familiar, easy to use web. The portal is being accessed through Internet and/or Intranet. The portal is facilitating the users throughout the enterprise to access a wide variety of information, e.g., company’s announcements, tender calendar, etc. Also employees of the company can view human resource details. Portal is also helping in the speedy and efficient dissemination of information.

(b) The company has stated that an amount of Rs.32.20 lacs was incurred on development of the web portal. As per the accounting policy adopted by the company, the amount incurred on development of the web portal was capitalised along with the computer/server. A disclosure in this regard was given in the notes to the accounts.

(c) During the course of audit, the C & AG suggested that Rs.32.20 lacs should be separately shown as an Intangible Asset as required under AS -26 dealing with ‘Intangible Assets’. According to the company it was clarified that in its case AS-10 dealing with ‘Accounting for Fixed Assets’ was applicable.

(ii) Issue before EAC

The company sought opinion of EAC on the question as to whether AS-10 or AS-26 applied in such a case.

(iii) Opinion of EAC

EAC has observed in para 11 of its opinion as under :

“11. The Committee notes from the facts of the case that the company has capitalised the application software internally developed by the company along with the web application server and data-based server for which the reason is stated to be that the application software is an integral part of the web application server and data-based server and that the said computer machines were not supposed to be operated as stand-alone machines. In this regard, the Committee notes that application software is a software program running on the top of the operating system that has been created to perform a specific task for a user. The said computer machines can still be run through the operating system without the application software, though not for the desired tasks. Thus, the Committee is of the view that the application software cannot be treated as an integral part of the related machines and cannot be capitalised along with the said computer machines. Accordingly, in the view of the Committee, the computer software under consideration should be treated as separate internally developed intangible asset, provided it meets the requirements of AS-26.”

3. Peer review of audit firms of listed companies

An important announcement of ICAI on this issue is at page 1991 of C.A. Journal for May, 2009. This reads as under :

“The Council of ICAI accepted the recommendation of SEBI that for appointment as an auditor of listed companies for accounting periods commencing on or after April 1, 2009 the auditor firms/practice units must have a certificate from the Peer Review Board of the Institute. Further, the Council also accepted the recommendation of SEBI that the financial statement of an unlisted company coming out with an initial public offer (IPO) should also be certified by the audit firms/practice units who have been issued a certificate from the Peer Review Board. The firms who have already been selected for peer review and their review is in progress at different stages may gear up their peer review process and ensure that their final report is submitted by the reviewer to the Board at the earliest. In order to complete the peer review exercise timely and smoothly, all the practice units and reviewers are hereby requested to expedite their peer review process. Firms who are interested in getting themselves peer reviewed may contact the Peer Review Board by emailing their request at peerreviewboard@icai.org. The mail should also indicate whether the firm is undertaking audit of listed companies as of now. For any further queries you may contact CA. K. Raghu, Chairman, Peer Review Board at kraghu9999@gmail.com.”

4. Internal auditor cannot be tax auditor– Clarification by ICAI

The Council in its 281st meeting held from 3rd to 5th October, 2008 decided that an internal auditor of an assessee, whether working with the organisation or an independently practising Chartered Accountant being an individual chartered accountant or a firm of chartered accountants, cannot be appointed as its tax auditor.

The said decision came into force from December 12, 2008. As per the decision an internal auditor cannot carry out tax audit on or after December 12, 2008. Subsequently, representations have been made pointing out the hardship being caused by the above said decision in respect of those internal auditors who have been appointed as tax auditors for the financial year 2008-09 on or before December 12, 2008. The Council considering this hardship has decided that the decision taken by the Council at its meeting between 3rd to 5th October, 2008 shall be applicable to all appointments as tax auditor made on or after December 12, 2008 and accordingly those internal auditors whose appointments have been made as tax auditors before December 12, 2008, can carry out the tax audit of the financial year ending on March 31, 2009, i.e., Assessment Year 2009 – 10 only.

5. ICAI move to check dummy articleship

ICAI has prepared action plan to check the system of dummy articles hip which appears to be prevalent in the profession. The following Notification dated 27.3.2009 is published on page 1983 of CA. Journal for May, 2009.

a) The coaching classes shall not continue after 9.30 a.m./or start before 5.30 p.m. so as to enable the articled/ audit assistants to concentrate wholly on practical training.

b) Members of the Institute who are engaged in coaching be advised not to undertake coaching between 9.30 a.m. and 5.30 p.m.

c) An articled assistant should undergo practical training in accordance with the guidelines of the Institute between 10.30 a.m. and 5.30 p.m. During the period an articled assistant shall not be permitted to attend colleges / other institutions for graduation or any other course.

d) Every articled/ audit assistant shall submit once in a year a specific declaration duly countersigned by the principal to the effect that he is regularly attending training and his college hours do not clash with his articles timings and that no coaching is undertaken by him between 9.30 a.m. and 5.30 p.m. on any working day. In the event of breach of these guidelines and not taking permission as required, the articles already undergone shall be derecognised for such period as the Institute may decide.

e) Every articled/audit assistant shall be required to maintain mandatorily the Work Diary in the form to be prescribed by the Board of Studies.

f) The Institute to call for at random training report along with attendance record and stipend details and also Work Diary maintained by articled / audi t assistant from any member / firm in respect of any articled assistant at any point of time during the period of practical training for verification.

g) In case an articled assistant is found not undergoing articles in the manner prescribed, he shall be debarred from appearing in the exam up to 3 consecutive exams besides cancellation of such period of articles. The concerned member who allowed such an articled assistant be subject to punitive action besides withdrawing either partly or fully his eligibility to train articled assistant. In Peer review, the reviewer be required to verify whether training is imparted to the articled assistant in the manner prescribed.

h) No request for termination of articles is entertained from any articled assistant in general and more particularly during the first six months and also during the last twelve months of articles except as provided in the Regulations. In the event of termination, his articles shall not be registered in the same city.

i) No request of an articled assistant for termination (transfer) of articleship shall be considered unless his/her working parent(s) is/are transferred from the city / place where the articled assistant is receiving training to another city and a copy of transfer order/proof is submitted to the principal in proof thereof. On such
termination the articled assistant concerned shall join articles training in and around the place of posting of his/her parent (s) and shall not re-register articles in the same city or within 50 kms radius of the city where he/she has undergone articles prior to such termination.

j) If the articled assistant is not able to serve the articleship for specified genuine medical reasons, thereby opting to discontinue the CA course for a period of at least three months, the termination of articles be permitted, provided that the medical grounds are such that warrant termination of articleship.

k) In the event of misconduct involving moral turpitude, gross negligence or unsatisfactory performance of the articled assistant, his articles shall be liable to be terminated by his principal besides being cancelled or extended for such period as may be decided by the Institute. Board of Studies to decide and enumerate the acts constituting misconduct.

l) Termination of articles be permitted on such other justified circumstances as my be deemed genuine by the Council.

m) While forwarding the Form No.109 the principal shall state specifically the clause (the relevant clause mentioned above) under which the articles have been terminated.

6. ICAI News

(Note: Page Nos. given below are from C. A. Journal for May, 2009).

i) Working hours of articled assistants

In May, 2009, issue of BCA Journal some details on the above issue were given from a communication of the secretary dated 3.4.2009. Now detailed guidelines on the subject are published on page 1989.

ii) Amendment of Form 3 CD u/s. 44 AB

In Form 3 CD after item No.17, item No.17 A as under is added-

“17A. Amount of interest inadmissible under Section 23 of the Micro, Small and Medium Enterprises Development Act, 2006”. (Refer page 1876).

iii) Panel of arbitrators

ICAI is maintaining a panel of arbitrators. The names of the members who have undergone the Certificate Course successfully as stated on page 1932 is included in the panel.

iv) Guidelines for network

The guidelines for network amongst the firms of Chartered Accountants have been revised. The revised guidelines are published at pages 1964-1969.

v) Perspective Planning Committee

The Perspective Planning Committee of ICAI has submitted its Survey Report in February 2009. Detailed findings of this survey can be obtained from ICAI website’ Announcements’ page dated 6.2.2009. Synopsis of this report is published at pages 1974-1977.

vi) Membership fees for 2009-10

The membership fees for 2009-10 are due on 1.4.2009. Announcement for this purpose is at page 1988.

(vii) Formation of CPE Study Circles for members in industry

ICAI has developed the norms for formation of CPE study circles which will cater the needs of members in industry – Details of these norms are published on pages 1992-1995.

(viii)Advisory for Multipurpose Empanelment Form for 2009-10

The last date for submitting of applications for Empanelment Form in 15.6.2009. This Form has been simplified and the same has been published on pages 1996-2000.

ix) Accounting Standard (AS-11)

In May 2009 issue of BCAS Journal the issue relating to amendment of AS-ll dealing with ‘The Effects of Changes in Foreign Exchange Rates’ has been discussed. ICAI has now clarified that this amendment is applicable to corporates registered under the Companies Act, 1956. In other words, AS-ll as issued by ICAI will apply to all entities other than companies. It may be noted that by this amendment of AS-II, para 46 is added in AS-11 by Government Notification. Para 46 gives option to follow the revised procedure to all enterprises. Therefore, it is difficult to understand how the amendment can be restricted to only companies. Let us hope that ICAI reconsiders its view.

x) New publications of ICAI

a) Technical Guide on Information Systems Audit (P.1982).

b) Technical Guide on Systems Audit of Stock Brokers (P.1982).

c) Technical Guide on Share Valuation (P.1984).

d) Technical Guide on Revenue Recognition for Software (P.1984).

e) Technical Guide on Accounting for Micro-Finance Institutions (P.1985).

f) Technical Guide on Internal Audit of StockBrokers (P.1986).

BCAJ Admin

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI vs. Shri A. L. Ghael (C.A. Journal — June, 2009, P. 2054-55) CIT Gujarat had filed a complaint against the member. In this complaint it was alleged that during the search carried out u/s.132 of the Income-tax Act, at the premises of the member, the Department found as under :

(i) 15 bogus certificates purported to have been issued by a bank to the effect that the bank was maintaining a non-resident external savings bank account. These were bogus bank certificates of gifts from NRE account.

(ii) 13 bank acknowledgements of Income-tax returns affixed with the seal of ITO and receipts under the seal of the Department.

The disciplinary committee, after examining the evidence brought on record, held that the member acted contrary to the conduct befitting a Chartered Accountant and committed ‘other misconduct’ for which he was liable u/s.22 read with S. 21 of C.A. Act. The Council of ICAI accepted the report of the disciplinary committee and recommended to the High Court that the name of the member be removed from the Register of Members for a period of 6 months.

The Gujarat High Court has taken a serious view of the conduct of the member. It has observed that so far as bogus certificates of the bank with regard to NRE account were concerned, it was clear that even after knowing the fact that the certificates were bogus, the member did not give copies to the Bank Manager for further investigation. This indicated the guilty mind behind the conduct of the member. As regards the blank acknowledgements and receipts under the seal of Income-tax Department, it was observed that the intention of the member was bad and illegal. Such conduct would not only result into loss of revenue but would also be a fraud on the public. On overall consideration of the matter, the court has confirmed the finding of the council of ICAI and held that the name of the member be removed from the Register of Members for a period of six months.

2. Auditing Standards :

(Note : Page Nos. stated below are from C.A. Journal for June, 2009)

The following Exposure Drafts are issued by ICAI. Members can submit their comments by 31-7-2009.

(i) Standard on Review Engagements (SRE) — 2400 (Revised) — ‘Engagements to Review Financial Statements’. (Pages 2154-2161)

(ii) Standard on Auditing (SA) — 700 (Revised) — ‘Forming an Opinion and Reporting on Financial Statements’. (Pages 2162-2176)

(iii) Standard on Auditing (SA) — 705 — ‘Modification to the Opinion in the Independent Auditors’ Report’. (Pages 2177-2188)

(iv) Standard on Auditing (SA) — 706 — ‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors’ Report’. (Pages 2189-2193)

3. EAC opinion :

The Expert Advisory Committee of ICAI (EAC) has given an opinion for accounting for maintenance spares supplied free of cost along with the main equipment in the case of a public sector undertaking. One of the usual terms of the sale of the equipment by the company is that the price of the equipment includes certain specified quantity of maintenance spares supplied free of cost. In other words, the company agrees to supply certain spares free of cost i.e., without charging anything in excess of the agreed price of the equipment. However, while recording such sales, the company credits the sales account with the gross value of the equipment plus value of spares to be supplied free of cost and debits the account of the customer. Thereafter, the company debits the sales account with the value of the spares supplied free of cost and gives credit to the account of the customer. The question for consideration was whether the above accounting entry was in compliance with Accounting Standard (AS-9) dealing with ‘Revenue Recognition’.

The Committee has given the opinion that the accounting for sale of equipment duly reducing the value of free supply of spares would be in line with AS-9 provided significant risks and rewards of the ownership in respect of free spares are transferred at the time of the delivery of spares to the buyer. However, according to EAC, separate entries should be passed for (a) booking recognition of revenue from sale of equipment net of the amount related to revenue from spares when the risk and rewards of ownership of the equipment are transferred and (b) booking recognition of revenue from spares when the risks and rewards of ownership of spares are transferred. (Refer pages 2059-2061 of C.A. Journal for June, 2009)

4. Enhancing Audit Quality :

Financial Reporting Review Board (FRRB) reviews the General Purpose Financial Statements of certain enterprises and auditors’ reports thereon. Observations on major non-compliances in the following matters noted by FRRB are stated on page 2130 of C.A. Journal for June, 2009 :

(i) Disclosure of Accounting Policies (AS-1)

(ii) Valuation of Inventories (AS-2)

(iii) Revenue Recognition (AS-9)

(iv) Accounting for Investments (AS-13)

(v) Leases (AS-19).

5. Women Steering Group :

The World celebrated International Women’s Day on 8th March 2009. ICAI has constituted a Women Steering Group (WSG). The Mission statement of WSG states as under :

“The Women Steering Group of the Institute of Chartered Accountant of India (WSG of the ICAI) is a wing of ICAI, which is dedicated to serving women Chartered Accountants and female stu-dents aspiring to be the members of the ICAL The WSG will provide a supportive environment and valuable resources for female members and students to achieve their personal and professional goals. through various opportunities including leadership, networking and education.”

To accomplish this mission, WSG offers in-depth support in four important areas:

1. Increase Professional and Public Awareness about the Indian Women Chartered Accoun-tants.

2. Facilitate a national network of individuals and organisations to encourage networking and mentoring of women members.

3. Provide opportunities for professional growth.

4. Advocate professional parity.

It is stated that out of about 1,50,000 CAs. in our country, about 15% (22,500) are women. Out of about 4,50,000 CA. students, about 40% (1,80,000) are girl students. (Details about activities of WSG are published on pages 2132-2133 of CA. Journal for June, 2009).

6. ICAI News:

(Note: Page Nos. stated below are from CA. Jour-nal for June, 2009)

i) Transfer of Articles:

Announcement of the Council of ICAI dated 27-3-2009 about transfer of articles of Articled Assistants has been published in BCA Journal of June, 2009. This has now been published in CA. Journal for June, 2009 at page 2134.

(ii) Requirement of CPE credit:

Now members can view / check their CPE credit hours (Calendar yearwise) on the site www.cpeicai.org.maintained internally by the EDP Section, at the member login (not POU Login) for which they need to insert six (6) digit membership number [add zero (0), if required] and password would be that (6)-digit membership number pre-fixed with the letters (cpe). (Refer details on page 2136)

iii) Working hours of Articled Assistants

On page 240 of BCA Journal for May, 2009, summary of the announcement relating to Working Hours of Articled Assistants is published. Details are now available on pages 2137-38 of CA. Journal for June, 2009.

iv) ERP Courses:

ICAI is offering ERP Courses for members and students (Final / Articles completed) of the Institute to enable them to offer value-added services in the field of ERP consulting as functional consultants in the finance domain. Details are on page 2146.

v) Your Inspiring Success Stories:

On page 2142 there is an inspiring announcement by the Editorial Board on CA. Journal which reads as under:

“As part of multi-pronged activities to mark the ICAI Diamond Jubilee year, the Editorial Board has decided to publish extra-ordinary success sto-ries of Chartered Accountants in various walks of professional life in the Institute’s Journal, ‘The Chartered Accountant’. Do you think there is something remarkable about your achievements in professional life that the others should know? If yes, write down that glorious story and send it to us. You may ask yourself: What did I do to create my professional success? What inspired me in this mission? How did I not deviate despite the presence of blockages and distractions in my way? How did I overcome my weaknesses and work on my strength? How my achievements helped the organisation/other professionals/society at large? and Finally, how my CA qualification laid the foundation of my success?

The object of the write-up should be to motivate all our students, members, other readers as well as those who wish to join chartered accountant fraternity.”

vi) Professional Development Portal:

Professional Development Committee has enhanced and upgraded P.O. Portal with a view to provide timely and necessary information on practice development and professional opportunities to members. (Refer page 2139 for details)

BCAJ Admin

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. Vijay R. Ashar, reported on P.
1006 of C.A. Journal for December, 2008, it was reported to the Institute that
the member had audited the accounts of a company in which the wife of the member
had substantial interest (holding more than 20% equity shares). It was also
reported that the member did not disclose the nature of his wife’s interest in
his audit reports given to the company for all the six years for which this
complaint was filed with ICAI. It was alleged that by not disclosing his
interest, the member had violated the guidelines issued by ICAI.

The Disciplinary Committee, after hearing the parties and
examining the evidence, held that the member had violated Clause (4) of Part I
of Second Schedule to the C.A. Act and, therefore, he was guilty under that
clause. The Council of ICAI accepted this finding and referred the matter to the
Bombay High Court with a recommendation that the member be reprimanded.

The High Court has held as under :

That Code of Conduct for the chartered accountants framed
by the Institute of Chartered Accountants of India provides that where the
partner or relative of the member as a director in the company holds
substantial interest, the member may desist from undertaking audit of the
financial statements and/or expression of opinion and if the member feels that
his independence is not affected and undertakes the audit of such company, he
should disclose such interest in his report while expressing his opinion on
the financial statement of such company. The explanation of the member before
the Disciplinary Committee was that he was ignorant of the said guidelines.
The Court was of the view that the explanation put forth by the member was
hardly acceptable. It could not be believed that as a professional chartered
accountant in practice, he was not aware of the guidelines and the Code of
Conduct framed by the ICAI.

The High Court, accordingly, concurred with the finding
recorded by the Disciplinary Committee and accepted by the Council, that the
member had violated Clause (4) of Part I of the Second Schedule of the Act.
Accordingly, the Court held that the recommendation of the Council that the
member be reprimanded is reasonable and rather lenient.

It may be noted that in Clause (4) of Part I of the Second
Schedule as amended by the Chartered Accountants (Amendment) Act, 2006, w.e.f.
17-11-2006, it is provided that a member cannot express his opinion on financial
statements of any business or enterprise in which he, his firm, or a partner in
his firm has a substantial interest. In other words, a member or his firm cannot
accept audit assignment of a company in which he or his partner or his relative
has substantial interest.

2. MOU between ICAI and ICAEW :

ICAI has signed an MOU with the Institute of Chartered
Accountants in England and Wales (ICAEW) on 20-11-2008 at Jaipur. In brief, the
MOU provides as under.

(i) Existing members of ICAI, in good standing and with two
years post-qualification experience (availing credit of prior learning) will be
eligible for ICAEW membership on passing of only one paper of ICAEW on Case
Study. The ICAI members with less than two years’ experience ( not availing
credit for prior learning) will be required to appear for additional papers in
Business Reporting (T1) and Business Change (T2) along with Case Study. They
will also be required to pursue the structure training in ethics. There is no
additional requirement of undergoing any additional training experience
requirements or take any other examinations.

(ii) Existing members of ICAEW who are trained in public
practice will be become eligible for ICAI membership, subject to passing ICAI’s
examination papers for the special modules of Auditing & Assurance; Law, Ethics
& Communication; Information Technology & Strategic Management; and Taxation.

(For further details refer P. 955-956 of C.A. Journal for
December, 2008)

3. CPE Credit requirements for 3 years’ rolling period 2008-2010 :

Members may note the CPE Credit Requirements for three years’
rolling period 2008-2010, which are as under :

(i) For members holding certificate of practice (excluding
members residing abroad), unless exempted,

— 60 CPE credit hours (Minimum 20 credit hours each year)
of structured learning during 2008- 2010.

— 30 CPE credit hours of structured/unstructured learning
during 2008-2010.

— For members above 60 years of age, the CPE credit hours
of structured/unstructured learning required is of 70 credit hours (Minimum 10
credit hours in 2008 and 20 credit hours in each year thereafter) during
2008-2010.

(ii) For members not holding certificate of practice and all
members residing abroad, 45 CPE credit hours (Minimum of 10 credit hours each
year) of structured or unstructured learning during 2008-2010. For members above
60 years of age, this period is 35 credit hours during 2008-2010 (Minimum 5 in
2008 and 10 in each year thereafter).

(Refer Page 1057 of C.A. Journal, December 2008)

Note : It is reported that during the period
1-1-2008—10-11-2008 ICAI, its Regional Councils, Branches, Study Circles, etc.
have generated about 7,65,000 CPE credit hours. Out of about 70000 members
(excluding senior members and members residing abroad) holding C.P., about 14000
members have completed the minimum requirement for CPE credit hours. Details
about CPE credit hours of each member can be obtained through CPE Portal,
www.cpeicai.org .

4. Accounting and Auditing Standards :

(Note : Page Nos. given below are from C.A. Journal
for December, 2008)

(i) The following Accounting Standards are published :

(a) Accounting Standard for Local Bodies (ASLB)

– ASLB-3 ‘Revenue From Exchange Transactions’

This Standard deals with revenue recognition on sale of goods, rendering of services yielding revenue and use by others of entity assets yielding interest, royalties and dividends (Pages 1072- 1079).

– ASLB-4 ‘Borrowing Costs’

This Standard deals with Borrowing Costs i.e., interest and other costs incurred by an entity in connection with the borrowing of funds (Pages 1080-1084).

ii) The following Revised Auditing Standards are published:

a) Revised Standard on Auditing (SA) 250 ‘Consideration of Laws and Regulations in an Audit of Financial Statements’ (Pages 1085-1090).

b) Revised Standard on Auditing (SA) 260 ‘Communication with Those Charged with Governance’ (Pages 1091-1100).

c) Revised Standard on Auditing (SA) 570 ‘Going Concern’ (Pages 1101-1107).

iii) Standard on Internal Audit (SIA) 8 on ‘Terms of Internal Audit Engagement’ has been published on Pages 1108-1109.

iv) The following Exposure Drafts are published for comments by members by 12-1-2009:

a) Standard on Internal Audit (SIA) – ‘Enterprise Risk Management’ (Pages 1110-1111).

b) Standard on Internal Audit (SIA) – ‘Internal Control Evaluation’ (Pages 1112-1116).

5) Engagement by students in business or other occupation:

An articled/ audit assistant (student) cannot engage himself or herself in any business or other occupation without the previous approval of the Council of ICAI. He/she has to apply in Form No. 112 duly recommended by the principal with whom articled/ audit service is registered. This permission is normally granted by the Council in the following cases if the conditions stated on pages 1058-1059 of CA. Journal for December, 2008 are satisfied.

(i) Teaching:

This engagement should be before or after the office hours. Further, it should be in the same city or town. The number of hours for the teaching assignment should not exceed the prescribed hours.

(ii) For Directorship:

The directorship should be in a company in which the family of the student has majority interest. The company should be in existence before the articled/audit service started. The principal or the firm in which the student is working as articled/ audit assistant should not be the auditor of the company. The student should not be actively engaged in the business of the company and should not receive any remuneration other than director’s meeting fees.

(iii) Sleeping Partner:

The student can be a sleeping partner in the family concern. Strict conditions are laid down for granting this permission.

(iv) Additional vacancies for Articled Assistants:

This is granted by the Council under Regulation 57 for the reasons stated on page 1059 and on compliance of certain conditions stated therein.

6. Campus Placement Programme:

ICAI organised this programme during August – September, 2008 at 16 cities for those candidates who qualified in May, 2008, examination. In all, 3817 candidates had the opportunity to avail this service. The interviews were conducted by 149 Interview Boards representing 77 organisations. The following figures will indicate the importance of this exercise which is undertaken by ICAI twice in a year (Refer Page 1040 of CA. Journal for December, 2008).

i) Range of annual salary packages offered and number of candidates selected:

7. ICAI News

(Note: Page Nos. given below are from CA. Journal for December, 2008)

i) Enhancing Audit Quality:

Some observations made by the Financial Reporting Review Board are listed in order to enable members to improve the quality of audit of corporate bodies. These observations relate to major non-compliances relating to

a) AS-2 ‘Valuation of Inventories’,

b) AS-3 ‘Cash Flow Statements’,

c) AS-5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’,

d) AS-9 ‘Revenue Recognition’ and

e) AS-13 ‘Accounting for Investments’ (Page 1033).

ii) Revised Resolution under Regulation 190A of CA. Regulations:

ICAI Council has passed a Resolution under Regulation 190A specifying the activities in which a practising CA. can engage either with the specific permission or without the permission of the Council. This Resolution is published as Appendix No. (9) of CA. Regulations. The following modifications are made in the Resolution w.e.f. 9-8-2008 (Refer Page 1054):

(i) No specific permission is now required for holding “Interest in agricultural land and allied activities carried on with the help, if required, of hired labour”.

(ii) General permission is now granted for the following activity.

“Owning agricultural land and carrying on agricultural activity.”

(iii) Empanelment of CA. Firms with C&AG for 2009-10 :

Applications can be made online by CA. Firms to C&AG for Empanelment for appointment as auditors of Government Companies/Corporations for the year 2009-10. The format of application along with detailed instructions will be available on the web site ‘www.cag.gov.in’ from 1-1-2009 to 16-2-2009. The last date for receipt of specified documents by C&AG is 27-2-2009. (Refer Page 1057)

iv) Forensic Accounting:

A certificate course for CAs on ‘Forensic Accounting and Fraud Detection’ is being started by ICAI. (Page 949)

v) lFAC Board:

Shri Ved Jain, our President, has been appointed as member on the Board of International Federation of Accountants (IFAC) for a term of 3 years w.e.f. 13-11-2008.Our best wishes to him for a successful term of office. (Page 952)

(vi) New Publications by lCAl (Page 1055) :
(a) Principles and Practice of Life Insurance
(b) Principles and Practice of General Insurance
(c) Risk Management and Reinsurance
(d) Business Strategic Planning and Information Technology for Insurance Sector
(e) Code of Ethics

BCAJ Admin

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. Shri P. U. Patil, the Addl.
Collector of Customs had filed a complaint against the member alleging that the
member had issued false certificates of past exports to several parties without
verifying any supporting records or documents. On the strength of these false
certificates, certain unscrupulous importers were able to obtain import licences
and effect imports without payment of duty.

The allegations were examined by the Disciplinary Committee
of ICAI and it was found that the member was guilty of professional misconduct
under clauses (2), (7), and (8) of Part I of the Second Schedule to the C.A.
Act. The Council of ICAI accepted this finding and referred the case to the
Bombay High Court with recommendation to award punishment of removal of name of
the member for one month.

In the statement made before the customs authorities, the
member stated that his friend one Mr. ’D’ brought one certificate typed on the
letter-head of one of the importers and also brought one form of certificate to
be issued by him on his letter-head. The member requested Mr. ’D’ to produce the
relevant documents and records. However, Mr. ’D’ told him that the said importer
was known to him and, therefore, there was no need to verify the
records/documents. On this basis, the member issued the certificate without any
verification. The member had issued similar certificates to other parties also
on the basis of the recommendation of Mr. ‘D’. The member could not produce any
working papers before the Disciplinary Committee. The member did not attend
before the Bombay High Court. Considering the conduct of the member, the High
Court has ac-cepted the recommendation of the Council and held that the name of
the member be removed for one month. (P. 1198 of C.A. Journal for January,
2009.)

2. Compliance with CPE Credit Hours :

ICAI has made the following announcement.

(i) The time limit for completing the CPE Credit Hours for
2008 has been extended to 31-1-2009. In other words, a member may complete the
required 30 hours (including minimum 20 structured) of learning for 2008 by
31-1-2009. Similarly, members not in practice and senior citizens who have to
complete specified period (15 or 10) of unstructured learning in 2008 can
complete this period by 31-1-2009.

(ii) Members who have not completed the above CPE Credit
Hours of learning in a year will have to complete double the number of deficit
hours in the next year.

(iii) In cases where members holding certificate of practice
do not complete the CPE Credit Hours for 2008, the Council has decided that
names of such members will not be included in any panel that is forwarded by the
Institute, on or after 1st January, 2009, to any regulators or other
authorities. In the case of a firm, if any partner/paid assistant has not
completed the requisite CPE credit hours for the year 2008, the name of the
partner/paid assistant will not be included while considering the eligibility
criteria and this fact will be stated in case the firm is otherwise found
eligible after excluding names of such partners/paid assistants.

3. Accounting Technicians Course :

(i) The C.A. Regulations are amended by a Notification dated
2-12-2008 to give recognition to the above course for students. These amendments
are published on pages 1232-1236 of C.A. Journal for January, 2009. Broadly
stated, this course provides that a student who has passed 10 + 2 examination
can join this course after passing the CPT entrance examination. Thereafter, the
student needs to pass four papers in (a) Accounting, (b) Business Laws, Ethics
and Communication, (c) Cost Accounting and Financial Management, and (d) Direct
& Indirect Taxation after undergoing study course for about 9 months with the
Board of Studies. The student has also to undergo 100 hours computer training
and an orientation course. To ensure that the student has adequate practical
exposure, such student will be required to undergo practical training of one
year under a Chartered Accountant whether in industry or in practice before
he/she is awarded Accounting Technician Certificate (ATC). He/she will be able
to use designation as ‘Accounting Technician’.

(ii) The following categories of candidates are entitled for
grant of Accounting Technician Certificate and such students, for the purpose of
issue of the Certificate are required to make an application to ICAI at Regional
office. No fees are payable for getting this certificate.

(a) Passed Professional Competence Examination, in
entirety, and also completed the prescribed period of practical training, as
applicable at the relevant time including excess leave, if any.

(b) Passed Professional Education (Examination II), in
entirety, and also completed the prescribed period of practical training, as
applicable at the relevant time including excess leave, if any.

(c) Passed Intermediate Examination under the Chartered
Accountants Regulations, 1988, in entirety, and also completed the prescribed
period of practical training, as applicable at the relevant time including
excess leave, if any.

(d) Passed Intermediate Examination under the Chartered
Accountants Regulations, 1964, in entirety, and also completed the prescribed
period of practical training, as applicable at the relevant time including
excess leave, if any.

(e) Passed Intermediate or the First Examination under the
Chartered Accountants Regulations, 1949, in entirety, and also completed the
prescribed period of practical training, as applicable at the relevant time
including excess leave, if any.

(f) Exempted from passing the First Examination under the
Chartered Accountants Regulations, 1949, in entirety, and also completed the
prescribed period of practical training, as applicable at the relevant time
including excess leave, if any.

Note : The above application can be made online and the
relevant Form of Application appears on the website of the Institute at http://www.icai.org/addupdate/dec72008.php.

4. Changes in the C.A. Course for Students:

Some important changes are made in the existing CA. Course for the students. In the new scheme, any CPT pass student can get registered for ‘Integrated Professional Competence Course’ (IPCC) (new name for the course earlier called PCC) without articleship registration and can sit in the new IPCC exam after 9 months of registration. The new IPCC comprises 2 groups. Group 1 has 4 papers and Group 2 has 3 papers.

Though the number of papers of the IPCC has been increased from 6 to 7, there is no change in the syllabus. The existing syllabus on Accounting has been divided into two parts. The first part has been named as Accounting in Group I and the second part has been named as Advanced Accounting in Group H. Only on passing Group I of the IPCC will a student be eligible to get registered for articleship, which shall now be for a period of 3 years as against the existing requirement of 3 1/2. Further, under the new scheme, a student will be eligible to sit in the final exam in last six months of his articleship as against the existing condition to sit in final exam only after the completion of articleship.

The new scheme has come into effect from 10th December 2008.However, an option has been given till 30th June 2009to the existing CPT pass students and to those who appeared in CPT examination held on 14th December 2008to choose between the PCC and the new IPCC.Those students who have passed CPT and have not so far got themselves registered for articleship and also those who pass CPT exam held on 14th December 2008, are free and eligible to get registered under the new scheme for the IPCC after the declaration of CPT result without articleship registration. All such students getting registered for the IPCC on or before 31st January 2009 will be eligible to sit in the new IPCC exam scheduled for November, 2009, as they will have completed 9 months of study by that time.

Details of the new course are given in the Notification dated 2-12-2008published at pages 1232-1236 and on pages 1238-1239of C.A. Journal for January, 2009.

5. Internal Audit – Standards & Exposure Drafts (SIA) :

(Note: Page Nos. below are from CA. Journal for January, 2009)

A. Standards on Internal Audit (SIA) :

(i) SIA-9 Communication with Management (Pages 1253-1255)

(ii) SIA-10 Internal Audit Evidence (Pages 1256-1257)

(iii) SIA-11 Consideration of Fraud in an Internal Audit (Pages 1257-1259)

B. Exposure Drafts on Standards on Internal Audit (SIA) :

i) SIA – Using the Work of an Expert (Pages 1286-1287)

ii) SIA- Internal Audit in an Information Technology Environment (Pages 1288-1292)

iii) SIA – Knowledge of the Entity and its Environment (Pages 1292-1294)

6. Auditing Standards and Exposure Drafts:

(Note: Page Nos. below are from c.A. Journal for January,2009)

A. Standards on Auditing (SA) :
(i) SA-230 (Revised) – Audit Documentation (Pages 1260-1265)
(ii) SA-560 (Revised) – Subsequent Events (Pages 1266-1271)

B. Exposure Drafts of Standards on Auditing (SA) :
(i) SA-320 (Revised) – Materiality in Planning and Performing an Audit (Pages 1272-1276)
(ii) SA-450 – Evaluation of Misstatement Identified During the Audit (Pages 1277-1281)
(iii) SA-610 (Revised) – Using the Work of Internal Auditors (Pages 1282-1285)

7. ICAI News:

(Note: Page Nos. below are from C.A. Journal for January,2009)

i) Enhancing Audit Quality:

Some observations made by Financial Reporting Review Board are listed in order to enable members to improve the quality of audit of corporate bodies. These observations relate to major non-compliances relating to :

AS-18 Related Party Disclosures
AS-19 Leases
AS-20 Earnings per Share
AS-22 Accounting for Taxes on Income
AS-26 Intangible Assets
AS-28 Impairment of Assets (Page 1226)

ii) ICAI to be XBRL Indian Jurisdiction

The Institute has been assigned the Indian jurisdiction of XBRL (eXtensible Business Reporting Language) International. Consequently, the Institute will be the Indian entity which will encourage the development and adoption of XBRL in India and will represent the Indian interest at this international level. The Ministry of Corporate Affairs and the various regulators, namely, RBI, SEBI and IRDA are part of the group constituted by the ICAI and are supporting the Institute in this initiative. XBRL is a novel way of communication of business and financial data that is of immense utility to governments, regulators, stakeholders, etc.

iii) Exclusive T.V. Channel for learning:

The Institute is launching an exclusive TV channel dedicated to learning. This channel will greatly boost the ICAl’s credentials as a pioneer in teaching through the distance education mode. This channel will make quality accountancy education accessible to interested students in the country, and will particularly cater to the needs of the students hailing from lower strata of society. This will also help in conducting CPE programmes on a regular basis. These programmes will also be accessible even in remote/far-flung areas of the country.

iv) New ICAI Secretary:

Shri T. Karthikeyan who joined ICAI in 1978 has been appointed as Secretary of the Institute. He has worked in the Institute in various capacities during the last 30 years and gained popularity with the staff, students and members of the Institute by his efficient and dedicated work. In particular, he has thorough knowledge about the CA. Act and Regulations as well as disciplinary cases. We wish him successful term of office as Secretary of the Institute.

v) ICAI Publications:

a) Implementations Guide to SQC-l (Page 1152)
b) Handbook on Foreign Trade Policy and Guide to Export and Import (Page 1242).

BCAJ Admin

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Shri R. K. Tayal, the Bank had complained that it had sanctioned loan of Rs.630 lacs to one of its clients (Company) for its expansion- cummodernisation project. As per the terms and conditions of the sanction, the Company was to bring about Rs.135 lacs by way of promoter’s contribution. While requesting for disbursement of the sanctioned amount, the Company stated that it had already spent Rs.147.21 lacs for the project and, in support of this, it submitted a certificate from the member. In this certificate it was stated that the Company had already spent Rs.147.21 lacs for the project. Based on this certificate the Bank disbursed loan of Rs.315 lacs. In the above certificate the member had stated that certain payments were made which was found to be not correct. Hence, the Complainant Bank alleged that the member had not verified the records properly before issue of the certificate and that the said certificate did not mention about the end use of the funds.

The Disciplinary Committee, after examining the evidence, submitted a report to the Council that the member was guilty of professional misconduct under clauses (5) to (8) of Part I of Second Schedule to CA Act (Gross negligence in performance of professional duty). This finding was accepted by the Council and it recommended to the High Court that the name of the member be removed from the Register of Members for 3 months.

In its judgment, the Delhi High Court has held that the member was grossly negligent in his professional duties in giving the certificate to the Bank without proper verification of the records. The High Court observed that the lack of responsibility displayed by the member clearly showed that he had acted in a manner unbecoming of a Chartered Accountant. The High Court further observed that there has to be some degree of integrity and probity which is expected of a Chartered Accountant who is regularly concerned with the financial transactions and on the basis of whose recommendations and certificates, financial institutions, banks, etc. disburse loans or enter into other financial transactions. With these observations the High Court has accepted the recommendation of the Council to remove the name of the member from the Register of Members for 3 months (Refer page 737-738 of CA Journal for November, 2009).

2. Some ethical issues :

The Ethical Standards Committee of ICAI has issued the following clarifications on some ethical issues in the form of questions and answers for the benefit of members.

(i) Q. Can a Chartered Accountant in practice accept original professional work emanating from the client introduced to him by another member ?

Ans. : A Chartered Accountant in practice should not accept the original professional work emanating from a client introduced to him by another member. If any professional work of such client comes to him directly, it should be his duty to ask the client that he should come through the other member dealing generally with his original work.

(ii) Q. Can a member in practice solicit clients or professional work by advertisement ?

Ans. : The CA Act prohibits a member in practice from soliciting clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means.

However, there are following exceptions to it :

(i) A member can respond to tenders or enquiries issued by various users of professional services or organisations from time to time and securing professional work as a consequence.

(ii) A member may advertise changes in partnerships or dissolution of a firm, or of any change in the address of practice and telephone numbers, the advertisement being limited to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the newspaper or magazine and number of insertions.

(iii) A member is permitted to issue a classified advertisement in the Journal/Newsletter of the Institute intended to give information for sharing professional work on assignment basis or for seeking professional work on partnership basis or salaried employment in the field of accounting profession provided it only contains the accountant’s name, address, telephone, fax number and e-mail address.

(iii) Q. Whether sponsorship or prizes can be instituted in the name of Chartered Accountants’ firms ?

Ans. : As per the CA Act it is not objectionable to institute prizes in the name of the individual Chartered Accountant and also in the firm’s name provided the designation ‘Chartered Accountant’, is not indicated in the prize and the clause relating to advertisements and publicity are complied with.

(iv) Q. Whether a Chartered Accountant in practice can give public interviews and also whether he can furnish details about himself or his firm in such interviews ?

Ans. : A Chartered Accountant in practice can give public interviews. While doing so, due care should be taken to ensure that such interviews or details about the members or their firms are not given in a manner highlighting their professional attainments, which may hit clauses (6) and (7) of the First Schedule of the CA Act.

(Refer Page 718 of CA Journal for November 2009)

3. ICAI accounts :

The Council has adopted audited accounts of ICAI for the year 2008-09 on 25-9-2009. Some salient features of the accounts are as under :

4. EAC opinion:

The Expert Advisory Committee (EAC) of ICAI has recently given an opinion on accounting for business of manufacture, erection and commissioning of Wind Electric Generators (WEGs).

The company based on negotiation prepares three separate purchase/works orders viz. (a) purchase order for supply of WEGs (b) work order for civil, electrical and infrastructure work and (c) order for erection and commissioning of WEGs. The company recognises revenue based on the completion of an activity covered in the aforementioned three purchase/works order separately.

The EAC of lCAl is of the view that the three sepa-rate contracts entered into by the company with its customers are in fact one composite contract which has been broken into three separate agreements.

Further, the committee noted that the performance in respect of sale of WEGs is not complete until the commissioning of WEGs and commissioning is an essence of the contract. Therefore, the company can not adopt the policy on revenue recognition independently for the three orders as these form part of the single composite contract. Hence, the company should recognise revenue only on commissioning of the WEGs.

[Pleaseseepage nos. 739 to 741 of c.A. Journal for November, 2009.]

5. Standards on Auditing – Exposure Drafts:

The following Exposure Drafts are published by lCAl for comments of members. Page Nos. given below are from CA Journal for November, 2009 :

i. Standard on Auditing (SA) 220 (Revised)

Quality Control for Audit of Financial Statements (P. 820)

ii. Standard on Auditing (SA) 501 (Revised)

Audit Evidence – Specific Consideration for Selected Items (P. 826)

iii. Standard on Auditing (SA) 505 (Revised)

Analytical Procedures (P. 830)

iv. Standard on Auditing (SA) 505 (Revised)

External Confirmations (P. 834)

v. Standard on Auditing (SA) 620 (Revised)

Using the Work of Auditors Expert (P. 840)

8. New publications by ICAI :

Details of the following publications are given on P. 811 of CA Journal for November, 2009:

i) Data Analysis of Auditors – Practical Case Studies on using CAATS

ii) XBRL – Primer

BCAJ Admin

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Shri Basab Kumar Sarkar, (C.A. Journal, July, 2009, P. 99) the Bank of Baroda had filed a complaint against the member alleging that the member had misappropriated the funds of its client. According to the Bank, the member opened an SB A/c. (No. 7831) with one of its branches. After some time, the member added the name of his client in the above account as a joint account holder without his client’s knowledge. His client had a separate account in the same branch of the Bank. When its client gave 14 cheques of Rs.22.11 lacs to the member for depositing these cheques in his A/c., the member deposited these cheques in his A/c. 7831 and withdrew the funds. Similarly, certain FDRs of Rs.5 lacs belonging to its client were also used by the member to take loan from the bank and this money was misappropriated by him.

The Disciplinary Committee found the member guilty of ‘Other Misconduct’. The Council of ICAI accepted this finding and recommended to the High Court to remove the name of the member from the Register for 3 months. The Kolkata High Court, in its order, observed that the member had not co-operated during the course of inquiry. The member did not make any submissions before the High Court. Considering the facts of the case, the High Court has accepted the above finding of the Council and ordered that the name of the member be re-moved from the Register of Members for 3 months.

2. Provision for LTC benefits :

A Government company was accounting expenditure on leave travel concession (LTC) to employees in the year of availment of leave due to uncertainties in accrual.

The Expert Advisory Committee has given an opinion that ‘accrual’ being one of the fundamental accounting assumptions, the cost of providing benefits to employees in return for the services rendered by them in an accounting period should be accounted for in that period. AS-15 (revised) 2005 recognizes that the liability towards employee benefits should be provided as and when the services are rendered. Further, this falls in the category of ‘other long term employee benefits’. As per AS-15, LTC benefits should be measured on actuarial basis using the Projected Unit Credit Method. The actuarial basis of valuation takes into account various uncertainties. Therefore, the method adopted by the company was not in compliance with the existing Accounting Standard and the standard accounting principles. (Please refer Pages 136 to 137 of C.A. Journal of July, 2009]

3. Enhancing Audit Quality :

Financial Reporting Review Board (FRRB) has made certain observations about non-compliance in the published financial statements and Auditor’s Report on P. 138-139 of C.A. Journal, July, 2009. These observations are made on review of the published financial statements with a view that the audit quality is enhanced. These observations are as under :

(i) AS-20 — Earnings per share :

(a) Some enterprises disclose the numerators and denominators used in calculating basic and diluted earnings per share. However, they do not disclose the reconciliation between the two denominators which is not in accordance with AS-20.

(b) In some cases, the enterprises are not considering the weighted average number of equity shares outstanding during the period. This is not in accordance with AS-20.

(c) In some cases, the enterprises determining the weighted average number of equity shares outstanding during the period considering the number of equity shares as at the beginning and at the end of the year without adjusting the same for the effects of all dilutive potential equity shares.

(ii) AAS-28 — The Auditor’s Report on Financial Statements :

In some cases the auditor/partner of Audit Firm does not give his Membership Number. This is in contravention of AAS-28.

(iii) CARO Report :

(a) In some cases the auditors do not report on the second part of para 4(iv) which requires the auditor to state whether there is a continuing failure to correct major weaknesses in internal control system.

(b) In some cases it was noticed that CARO report is addressed to directors whereas it is required to be addressed to the members.

4. Secondment of articled assistants :

It is possible to send an articled assistant to another member entitled to train articled assistants for an aggregate period of one year during the period of articleship. The following Rules for this purpose are given on P. 150 of C.A. Journal, July, 2009.

(i) A principal may, with the consent of the articled assistant, second from time to time the articled assistant to other member or members with a view to provide the articled assistant the opportunity of gaining practical experience in areas where the principal may not be in a position to provide the same.

(ii) The articled assistant shall be seconded only to a member who is entitled to train one or more articled assistants in his own right or to a member in industry who is entitled to train one or more industrial trainees.

(iii) The member to whom the articled assistant is seconded will not be entitled to train more than two such assistants on secondment at a time.

(iv)(a) The maximum period of secondment shall be one year which may be served with a single eligible member.

(b) The Council may permit secondment with more than one such member provided the minimum period of secondment shall be four months and the aggregate period served on secondment with such members shall not exceed one year.

(v) Where an articled assistant is seconded to a member in industry, the total period spent in industry by the articled assistant, including the period of industrial training under the Regulations, shall not exceed one year.

(vi) During the period of secondment, the member with whom the articled assistant is seconded shall pay the stipend as provided under the Regulations.

(vii) The member with whom the articled assistant is seconded shall be responsible for imparting training during secondment. He shall maintain records of practical training undergone by the articled assistant during secondment and forward the same to the principal on completion of period of secondment. The principal shall include required particulars in the report to the Council under Regulation 64.

viii) A statement in the form approved by the Council shall be sent to the Secretary for records within thirty days from the date of commencement of training on secondment.

5. Accounting and Internal Audit Standards:

i) Exposure Draft of AS-16 :

Borrowing Costs (Revised) has been published by ICAI for comments before 10th August. There is no major difference between the revised AS-16 and IAS-23 except in respect of application of the standard to borrowing costs that are directly attributed to the acquisition, construction or production of inventories that are manufactured or otherwise produced in large qualities on a repetitive basis. (Refer P.155 of CA. Journal, July, 2009).

ii) Exposure Draft of Standard Internal Audit (SIA) :

This standard deals with ‘Consideration of Laws and Regulations in an Internal Audit’. This standard deals with Internal Auditor’s responsibility to consider laws and regulations when performing an Internal Audit or such other review exercise with the objective of providing assurance thereon. The draft is published on pages 168-173 of CA. Journal of July, 2009.

6. Accounts and Audit of Limited Liability Partnership (LLP) :

LLP Act and Rules have now come into force from 1-4-2009. The Sections relating to conversion of firms and private and public unlisted Companies into LLP have also come into force from 31-5-2009. The Finance (No. 2) Act, 2009, recently enacted, provides that LLP will have to pay tax under the Income-tax Act in the same manner as a Firm. Therefore, LLP will not be required to pay MAT, Dividend Distribution or Wealth tax. The provisions relating to accounts and audit of LLP are as under:

i) U / s.34 of the LLP Act, an LLP has to maintain the books of accounts as prescribed in Rule 24. Such books may be maintained either on cash basis or accrual basis of accounting.

ii) LLP has to follow accounting year from April to March only. It cannot choose any other accounting year.

iii) Rule 24 provides that the above books of accounts should be preserved for 8 years.

iv) The above accounts have to be audited by Chartered Accountant(s) if the turnover of LLP exceeds Rs.40 lacs or the contribution by the partners exceeds Rs.25 lacs.

v) The designated partners of LLP or the partners shall appoint an auditor or auditors as under:

For first financial year before the end of the year.
For subsequent years, atleast 30 days before the end of the year.
For filling up the casual vacancy in the office of the auditor.
For filling up the vacancy caused by removal of an auditor.

vi) The auditor appointed as above shall hold office for the financial year for which he is appointed. He shall hold such office till any other person is appointed as auditor.

vii) The partners of LLP can remove an auditor from his office at any time by following the procedure in LLP agreement.

viii) An auditor of LLP can resign by giving notice to LLP. If he does not want to be reappointed he shall give atleast 14 days notice.

ix) The remuneration of the auditor may be fixed by the designated partners of LLP or by fol-lowing the procedure laid down by the LLP Agreement.

x) LLP has to get the accounts audited each year on or before 30th September and file Statement of Account and Solvency in Form No. 8 with ROC on or before 31st October with the pre-scribed fee. LLP is also required to file Annual Return in Form No. 11 with ROC with pre-scribed fee within 60 days of the close of the financial year (i.e., before 31st May).

xi) The LLP Act or Rules do not prescribe the form of profit & loss A/c. and balance sheet or the form of audit report which the auditor has to give. Therefore, ICAI will have to recommend these forms for the guidance of our members. Form No. 8 provides for information to be given to ROC about assets, liabilities, income and expenditure. It also states that auditor will have to give a certificate in the following form.

“It is hereby certified that I have verified the particulars in the statement of Account and Solvency including the Statements of Assets and Liabilities as at ……………. and the Income and Expenditure for the period ending …………….. from the accounting records and other books and papers of (LLP) and found than to be true and fair.”

7. New Publications of ICAI :

Technical Guide on Estimation of Future Cash Flows and Discount Rates for the purpose of AS-28 – Impairment of Assets (P. 146 of CA. Journal, July, 2009).
Study on Benefits of Preferential Trade Agreements (P. 153 of CA. Journal July, 2009).
Taxation of Charitable Trusts and Institutions – A Study.
Data Analysis for Auditors (Practical Case Studies on using CAA T’s).
Motor Third Party Claims Management.
Clean Development Mechanism and Carbon Credits – A Primer.
Professional Opportunities for Members – An Appraisal.

BCAJ Admin

ICAI And Its Members

ICAI and Its Members

1. Code of Ethics : Whether a person who is not a partner of an audit firm can sign the audited financial statements and audit report on behalf of the audit firm is a question which is under debate at present. It may be noted that Clause (12) of Part I of First Schedule of the C.A. Act, 1949 provides that a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he allows a person not being a member of the Institute in practice, or a member, not being his partner to sign on his behalf or on behalf of the firm, any balance sheet, profit & loss account, report or financial statements.

The above Clause prohibits a member from allowing another member who is not his partner to sign any balance sheet, profit and loss account, or financial statements on behalf of his firm.

This Clause is to be read in conjunction with S. 26 of the C.A. Act which stipulates that ‘No person other than a member of the Institute shall sign any document on behalf of a Chartered Accountant in practice or a firm of such Chartered Accountants in his or its professional capacity.’

The Council has, however, clarified that the power to sign routine documents on which a professional opinion or authentication is not required to be expressed may be delegated in the following instances and such delegation will not attract the provisions of this clause :

(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.

(iii) Letter forwarding draft observations/financial statements.

(iv) Initialing and stamping of vouchers and of schedules prepared for the purpose of audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording the results thereof in the books of the clients.

(vii) Issuing acknowledgements for records produced.

(viii) Raising of bills and issuing acknowledgements for money receipts.

(ix) Attending to routine matters in tax practice, subject to provisions of S. 288 of the Income-tax Act.

(x) Any other matter incidental to the office administration and routine work involved in practice of accountancy.

It is also clarified that where the authority to sign documents given above is delegated by a firm of Chartered Accountants, the fact that the documents have not been signed by a Chartered Accountant is not a defence to the firm in an enquiry relating to professional misconduct.

However, the Council has decided that where a Chartered Accountant while signing a report, a financial statement or any other document is statutorily required to disclose his name, the member should disclose his name while appending his signature on the report or document. Where there is no such statutory requirement, the member may sign in the name of the firm.

Clause 124(2) of the Companies Bill, 2008 also provides that only a partner of the audit firm, as authorised by the firm, shall sign the audit report and financial statements on behalf of the audit firm.

2. EAC Opinion : The Expert Advisory Committee (EAC) has considered the question of deferred tax treatment in re

spect of assets given on finance lease (see pages 1515 to 1517 of C.A. Journal for March, 2009).

In this case a Government company was engaged in providing rolling stock assets to the Ministry of Railways (MOR) on finance lease. Hence, the rolling stock of assets given on finance lease were not capitalised in the books of the lessor company and shown as ‘lease receivables’ at an amount equal to the net investment in the leased assets as per revised Accounting Standard (AS-19) ‘Leases’. Therefore, the lessor company did not provide depreciation in the books of account but claimed it under the Income-tax Act, as per CBDT Circular No. 2, dated February 09, 2001.

However, while computing the total income, the company added notional depreciation under the Companies Act, even though not provided in the books of account, and claimed depreciation as per Income-tax Act. Thus, the difference in depreciation was considered by the company as a timing difference on which it provided deferred tax liability (DTL). On the these facts, the auditors were of the view that the company should treat the difference in depreciation as permanent difference and no DTL should be provided.

EAC has examined the above facts and stated in

para 12 of its opinion as under : “12. The committee is of the view that, with a view to reflect the true impact of the lease transaction on accounting income and taxable income, the lease transaction as a whole should be considered since the individual items are related. Accordingly, the difference between finance income for accounting purposes and tax finance income representing difference between the lease rental income and depreciation allowance for income-tax purposes originating in a particular year should be treated as timing difference for applying AS-22. This is based on the principle of ‘substance over form’.”

On the above basis EAC has concluded that the method followed by the company for determining DTL was not proper and it should follow the method suggested above.

(Note : Reading the above opinion, it appears that by following the above method the DTL will not get reversed in future and, therefore, this opinion of EAC requires reconsideration.)

3. Auditing Standards:

The following Auditing Standards are issued and published in C.A. Journal for March, 2009 on pages stated below.

(i) Reoised Standard on Auditing (SA) 510 :

Initial Audit Engagements – Opening Balances (Pages 1627-1632),

(ii) Revised Standard on Auditing (SA) 550: Related Parties (Pages 1633-1644)

iii) Standard on Internal Audit (SIA) 14: Internal Audit in an Information Technology Environment (Pages 1645-1648)

(iv) Standard on Internal Audit (SIA) 15 : Knowledge of the Entity and its Environment (Pages 1649-1651)

(v) Standard on Internal Audit (SIA) 16: Using the work of an Expert (Pages 1652-1(53)

4. ICAI News:

(Note: Page Nos. given below are from c.A. Journal for March, 2009)

(i) Enhancing Audit Quality :

Some observations made by the Financial Reporting Review Board are listed on page 1602 in order to enable members to improve the quality of audit of corporate bodies. These observation relate to presentation in financial statements and audit reports as under:

(a) Schedule VI of Companies Act, 1956.

(b) Standard on Auditing (SA) 700 – The Auditors’ Report on Financial Statements.

(ii) Campus Placement Programme – March/April, 2009:

ICAI has organised Campus Placement Programme for newly qualified chartered Accountants at various centres all over India. This scheme has been evolved to provide an opportunity, both to employing organisations as well as the young professional aspirants, to meet and explore the possibility of taking up positions in industry.

It may be noted that in the last such programme organised in August-September, 2008 at various centres, 77 recruiting teams of leading organisations of the country reviewed the bio-data of more than 3800 newly qualified chartered accountants. 874 candidates were offered employment in industry.

Those who have cleared C.A. Final Examination held in May, 2008 and November, 2008 can appear for this interview at the following centres.

(iii) ISA Qualification:

Members who have qualified in the Post-Qualification Course in Information Systems Audit can now use the title D.I.S.A. (lCAI) instead of existing title D.I.S.A. (ICA) (Page 1614).

(iv) Admission of Members in Service as Fellow Members:

The difficulties being faced by members in service while complying with the requirements for admission as fellow members in terms of Regulation 5(3) have been considered by the Council and it is decided that members who are not in practice be admitted to Fellow Membership provided the member has been an Associate Member for a continuous period of five years and submits a self-declaration to the effect that he has been in Government service or is ordinarily holding or has held for a continuous period of not less than five years anyone or more posts carrying duties relating to accounts, cost accounts, audit, finance, taxation, company law, administration and/ or secretarial work in :

(i) an educational institution approved by the Council, or

(ii) a private or government, industrial, commercial or trading undertaking having a minimum paid-up capital of Rs.25 lakhs or a minimum turnover of Rs.50 lakhs or a minimum paid-up capital of Rs.10 lakhs and a minimum turnover of Rs.30 lakhs or minimum total assets of Rs.50 lakhs.

(iii) Employed under a statutory authority; or

(iv) Employed under a local authority having within its jurisdiction a population of not less than 5 lakhs during each of the five years of his service.

The Council has also clarified that there will be no change in the eligibility requirements so far as members in practice and full-time paid assistants under practising Chartered Accountants or firm of Chartered Accountants are concerned.

It is further clarified that there will be no change in other conditions and requirements for admission as a Fellow Member.

For format of self-declaration form visit ICAI website www.icai.org. (Refer page 1615)

(v) ICAI Publication:

Code of Ethics (Revised 11th Education – 2009)

BCAJ Admin

Miscellaneous

Qualifications in Audit Report on Consolidated Financial Statements (CFS)

Significant Accounting Policies :

Particulars of consolidation :

(ii) Borg Warner Morse TEC Murugappa Private Limited ceased to be a Joint Venture with effect from 30th September 2008, consequent to the sale of shares held in them by the Company. Accordingly, the Unaudited financial statements/information from 1st January 2008 to 30th September 2008 available with the Management have been considered for the purpose of the Consolidated Financial Statements.

From Notes to Accounts (CFS) :

Joint Ventures :

8(a) Provisioning for Standard Assets and Capital Reduction :

Considering the overall economic environment, CDFL has reviewed its past practice of provisioning for its loan portfolio and, as against the practice hitherto followed and, having regard to the principle of prudence and conservatism, has decided to voluntarily create a Provision for Standard Assets in respect of the Standard Assets in the Books of Account as at 31st March 2009 and apply such provisioning norms for the Standard Assets, suo moto, on an ongoing basis, though statutorily not required under the Non-Banking Financial (Non-deposit Accepting or Holding) Companies ‘Prudential Norms (Reserve Bank) Directions, 2007.

Pursuant to the Capital Reduction Proposal under Sections 78, 100 to 103 of the Companies Act, 1956 as approved by the shareholders of CDFL through postal ballot and the Capital Reduction Proposal confirmed by the Hon’ble High Court of Judicature at Madras on 29th April 2009, whose Order and minute dated 20th April 2009 was registered with the Registrar of Companies on 30th April 2009, an amount of Rs.323.53 Cr. (Share of the Group Rs.100.08 Cr.), being the balance in the Securities Premium Account of CDFL as at 31st March 2008 has been withdrawn for meeting the specific purposes as indicated below.

According to the Capital Reduction Order as approved by the Hon. High Court of Judicature at Madras, the following can be utilised/adjusted/set off against the balance of Rs.323.53 Cr. (Share of Group Rs.100.08 Cr.) available in the Securities Premium Account of CDFL as at 31st March 2008 :

Utilisation towards creation of Provision for Standard Assets for an amount not exceeding Rs.200 Cr. (Share of the Group Rs.61.87 Cr.) in respect of the existing standard assets in the books of account of CDFL as at 31st March 2009 based on the provisioning norms approved by the Management for various categories of loan portfolios.

Adjustments of the write-off of the bad debts/loan losses/other non-recoverable assets, if any, existing in the books of account of CDFL as at 31st March 2009, whether provided for or not, for an amount not exceeding Rs.100 Cr. (Share of the Group Rs.30.93 Cr.). Provisions existing for such bad debts/loan losses/other non-recoverable assets, if available, as at 31st March 209 will be credited back to the Profit and Loss Account on such write-off of bad debts/loan losses/other non-recoverable assets.

Setting off of the provision for diminution, other than temporary, if any, in the value of the investments made by CDFL in one of its subsidiary companies, M/s. DBS Cholamandalam Distribution Limited, and setting off the provision for doubtful receivables, if any, from the said subsidiary in the books of account of CDFL as at 31st March 2009 for an amount not exceeding Rs.23.53 Cr. (Share of the Group Rs.7.28 Cr.).

Such utilisation/adjustment/set-off has been made by withdrawal of such sums from the Securities Premium Account of CDFL to the Provision for Standard Assets Account, Loss Assets Written Off Account and Provision for Diminution in the Value of Investments Account in the Profit and Loss Account.

Hence, for the year ended 31st March 2009, such Provision for Standard Assets amounting to Rs.200 Cr. (Share of the Group Rs.61.87 Cr.), Write-off of the Bad Debts/Loan Losses amounting to Rs.100 Cr. (Share of the Group Rs.30.93 Cr.) and Provision for Diminution in the Value of the Investments amounting to Rs.23.53 Cr. (Share of the Group Rs.7.28 Cr.), as determined by the Management, have been debited to the Profit and Loss Account and such sums have been withdrawn from the Securities Premium Account and credited to the Profit and Loss Account into the respective heads of account.

The said adjustments are not in accordance with the Accounting Standards notified by the Government of India under Section 211(3C) of the Companies Act, 1956 and other relevant Pronouncements of the Institute of Chartered Accountants of India.

Had CDFL not made Provision for Standard Assets in accordance with its revised provisioning policy and had the aforesaid adjustments to Securities Premium not been effected, the consequent impact on the consolidated results of the Group would have been as indicated in the table below under the head ‘Proforma Results of the Group’ :

b) Bank reconciliation :

There are certain outstanding open items in some of the bank reconciliations of CDFL (Bank Cash Credit Accounts – Net total excess of book balance over the bank statement balance as at 31.3.2009-Rs.63.35 Cr. : and Bank Current Accounts – Net total excess of book balance over the bank statement balance as at 31.3.2009 – Rs.6.74 Cr.), which CDFL is in the process of resolving. The Management of CDFL is of the opinion that adjustments, if any, arising out of clearance of such reconciling items should not have a material impact on the reported amount of assets, liabilities, income and expenses and, consequently, on the financial statements of CDFL as well as the Consolidated Financial Statements for the year ended 31st march 2009.

c) Assets de-recognised – Share of the Group:

Notes:
(i) During the current year, the Gujarat High Court, in the case of Kotak Mahindra Bank v. O.L. of M/s. APS Star India Limited, held that Banks are prohibited from transferring or purchasing debts. Consequent to the above, the petitioners have filed a Special Leave Petition (SLP) with the Supreme Court. In its interim order, the Supreme Court has held that in the event of dismissal of the SLP, the assignment deals entered into by banks would be deemed not to have materialised.

However, CDFL is hopeful (If a favourable outcome to the aforesaid Special Leave Petition (SLP) filed in the Supreme Court given: that such deals are widely prevalent in the banking and financial services industry and the RBI has itself issued specific guidelines in respect of Securitisation transactions and hence, no adjustments to the financial statements have been considered necessary at this stage by the Management in this regard.

ii) There have been no Securitisation of Receivables during the current year as well as the previous year and hence the disclosure requirements under RBI Circular No. DBOD. NO.BP.BC.60/21.04.048/2005-06 have not been given. The details given above relate to Securitisation transactions prior to 31st March 2007.

d) Change in Accounting Estimates for Non-Performing Assets Provisions:

During the year, the Management of CDFL has reviewed the provisioning norms applied for Non-Performing Assets and has streamlined the same duly taking into account the stipulated minimum provisioning requirements of the Reserve Bank of India (RBI), the current economic environment and the voluntary Provision for Standard Assets of Rs.200 Cr. (Share of the Group Rs.61.87 Cr.) as at 31st March 2009 [Refer Note 8(a) above]. Such changes in the provisioning estimates by the Management used for the year ended 31st March 2009 in respect of assets identified for 100% provision as compared to the previous year ended 31.3.2008 has resulted in the share of the Group in the Provision for Non-Performing Assets for the current year being lower by Rs.20.70 Cr. and, consequently, the profit before tax for the year ended 31.3.2009 of the Group is higher by that amount.

e) Exceptional items:

The year 2008-2009 saw a global financial crisis, both in terms of liquidity and volatile interest movement. The schemes of DBS Chola Mutual Fund also were impacted as there were redemption pressures at various points of time. Therefore to protect the interest of unit holders, one of the subsidiaries of CDFL – DBS Cholamandalam Asset Management Limited absorbed the losses of Rs16.12 Cr. on account of securities (including loss of Rs.8.37 crores on Non-Convertible Debentures purchased and sold back to Mutual Fund Schemes) to correct the valuation of the securities. Accordingly the Group’s share of .such losses amounting to Rs.4.99 Cr. has been shown under Exceptional Items in the Consolidated Financial Statements.

From Auditors’ Report on CFS :

4. As stated in Note 2(ii) of Schedule 17, in the case of one of the JVs which ceased to be a JV with effect from 30.9.2008, the figures used for the consolidation are based on the unaudited financials statements/information available with the management. The Company’s share of total revenues and net profit after tax for the period 1.01.2008 to 30.9.2008 relating to the said JV considered in the Consolidated Financials Statements is Rs.6.75 crores and Rs.0.12 crores, respectively.

5. In the case of one of the joint ventures of the Company, M/ s. Cholamandalam DBS Finance Limited (CDFL) :

a) Attention is invited to Note 8(b) of Schedule 18 regarding certain outstanding open items in some of the Bank Reconciliations of CDFL, which CDFL is in the process of resolving. The Management of CDFL is of the opinion that adjustments, if any, arising out of clearance of such reconciling items should not have a material impact on the reported amounts of assets, liabilities, income and expenses and, consequently, on the financial statements for the year. Pending clearance of such outstanding open items and completion of the said Reconciliations we are unable to form an opinion in the matter.

b) Without qualifying our report, we invite attention to Note 8(a) of Schedule 18 on capital reduction by CDFL regarding utilisation/ adjustment/set-off of the Securities Premium Account towards creation of Provision for Standard Assets for an amount of Rs.200 crores, adjustment of write-off the bad debts/loan losses and other non-recoverable assets for an amount of Rs.I00 crores and setting off of the provision of diminution, other than temporary, in the value of investments in one of CDFL’s subsidiaries, M/ s. DBS Cholamandalam Distribution Limited amounting to Rs.23.53 crores, by withdrawal of such sums from the Securities Premium Account to the Profit and Loss Account of CDFL, made in accordance with the Capital Reduction Proposal under Sections 78, 100 to 103 of the Companies Act, 1956 and confirmed by the Hon. High Court of Judicature at Madras on 29th April 2009, whose Order and minute dated 20th April 2009 was registered with the Registrar of Companies, Chennai on 30.4.2009. This is not in accordance with the Accounting Standards referred to in Section 211(3C) of the Companies Act, 1956 and the relevant Pronouncements of the Institute of Chartered Accountants of India.

As stated in the aforesaid Note, had CDFL not made Provision for Standard Assets in accordance with its revised provisioning policy and had the aforesaid adjustments to Securities Premium not been effected, the profit after tax of the Group for the year would have been Rs.16.22 crores as against the profit after tax of the Group of Rs.54.43 crores.

c) Without qualifying our report, we invite attention to Note 8(d) of Schedule 18 regarding the change in the provisioning norms of certain loan portfolios of CDFL during the year ended 31 March 2009 by the Management of CDFL for the reasons stated therein.

6. In the case of one of CDFL’s subsidiaries, M/ s. DBS Cholamandalam Asset Management Limited (DCAML):

Without qualifying our report, we invite attention to Note 8(e) of Schedule 18 regarding the Group’s share of loss of RS.2.59 crores relating to the purchase and sale back of securities to the Mutual Fund Schemes by DCAML for the reasons stated therein.

7. In the case of one of the subsidiaries, M/ s. Cholamandalam MS General Insurance Company Limited (CMSGICL), the other auditors’ report on its financial statements for the year ended 31.3.2009 includes the following matters:

a) The actuarial valuation in respect of Incurred But Not Reported (IBNR) Claims and Incurred But Not Enough Reported (ffiNER) Claims, included under Sundry Creditors in the financial statements as at 31.3.2009, is the responsibility of the subsidiary’s appointed actuary. The actuarial valuation of liabilities as at 31.3.2009 has assumptions considered by him for such valuation are appropriate and are in accordance with the requirements of Insurance Regulatory and Development Authority (IRDA) and Actuarial Society of India in concurrence with IRDA. The auditors have relied upon the actuary’s certificate in this regard.

b) Without qualifying the opinion, attention is invited to Note 1(n) of Schedule 18 regarding a fire claim repudiated by the Company and accordingly no provision is considered necessary based on legal opinion.

8. We report that the Consolidated Financial Statements have been prepared by the Company’s Management in accordance with the requirements of Accounting Standard 21 Consolidated Financial Statements and Accounting Standard 27 Financial Reporting of Interests in Joint Ventures and on the basis of the separate audited financial statements of the Company, its subsidiaries and joint ventures included in the Consolidated Financial Statements except for the unaudited financial statements in the case of one of the joint ventures as indicated in Para above.

9. Subject to our comments in paragraphs 5(a) above and the consequential effects thereof, if any, which are not determinable at this stage, based on our audit and on consideration of the reports of the other auditors on the separate financial statements and other financial information of the entities referred to in paragraph 3 above and read with our comments in paragraphs 4, 5(b), 5(c), 6 & 7 above, and to the best of our information and according to the explanations given to us, we are of the opinion that the aforesaid Consolidated Financial Statements give a true and fair view in conformity with the accounting principles generally accepted in India.

BCAJ Admin

From The President

Dear BCAJ Lovers,

    You may have read the BCAS Vision Statement. There are four limbs to it. One of them deals with students. It says that “BCAS shall provide to students an environment conducive to the pursuit of knowledge, and encourage them to achieve their potential to become complete Chartered Accountants.”

    Lately, we have been conducting many programmes for the benefit of students. Recently, we had organised an Annual Day for our Students’ Forum. The HR Committee worked very hard for this event and the efforts bore fruit when more than 150 young, enthusiastic and bright students gathered under one roof and had a wonderful time. My brief presence there took me down the memory lane and I recollected my student days — both in college as well as during articleship. As the cliché goes, I thought about the “good old days”.

    When I compare my student days with the days that our present students are facing, I find a huge difference. Earlier, the pressure on students was much lesser. First of all, very few students did their articleship along with their graduation. I, for one, could have begun my articleship after successfully passing the Entrance Examination. But I was asked by my principal late Mr. S. V. Ghatalia to first complete graduation and then join his firm as a student. I am ever so grateful to him for giving me this advice. This not only allowed me to enjoy my college life and take part in several activities (which, in turn, have helped me a great deal in life), but also made me more mature and capable of handling the various assignments that were allotted to me during the articleship. At the same time, because we students already had the basic knowledge of tax and audit and a few other laws, we did not have to attend coaching classes. This in turn, saved us a lot of time. We were all able to leave our homes in the morning at decent timings and also reach home when our parents were awake.

    In contrast today, our students are leading completely different lives. They insist on starting articleship during the graduation process. When I tried to reason with my own daughter and convince her to first become a graduate and then start articleship, I nearly started a war in the family ! Because they go to college and also for articleship, the students are out of their homes for long hours. Also, for reasons best known to them, they believe that without attending coaching classes, they cannot pass the CA examinations. And so, they also go for classes. Thus, in effect, an average CA student would leave his/her house in the morning at around 6.30 a.m. and return at around 10 p.m.

    Further, the focus of today’s students is only to pass the CA examinations. They forget that the period of articleship is supposed to be the time when they have to gain know-ledge from their principals and seniors. Instead of aiming at absorbing knowledge and experience, the students channelise their energies only towards the examinations. In the process, the most important aspect of articleship i.e., learning, is either ignored or given secondary importance by the students. Also, attention span is very short nowadays. Although the younger generation is far more smart than the earlier generations, when it comes to common sense and grasping of fundamental principles, the present generation is far behind the ‘oldies’. This, of course, is a sweeping statement. But I am willing to begin a debate on this.

    What is it that we CAs can do for our students ? Can we make life less stressful for them ? Can BCAS do something that will supplement the efforts of the ICAI in providing the students with much more than merely a degree ?

    I believe that BCAS certainly has a very important role to play — nay, it is our duty to do something for the students. We need to bring about a paradigm shift in the thinking process of our students. First of all, we need to remove from their minds the wrong notion that without coaching classes, they cannot pass the examinations. Secondly, the students need to be mentored carefully. Today, their focus is to pass the CA examinations. The golden opportunity of gaining knowledge and experience during the articleship days has been sacrificed at the altar of examination-oriented approach. Many students make compromises in the quality of work that they do (or, in some cases, don’t do) during the articleship. I appeal to BCAS members to mould their students in the right direction. Let us impart not only technical training relating to taxes and accounting standards. Let us also educate them on how to become fine human beings apart from becoming fine professionals. Let us spend some time on how to make them good leaders and exemplary members of society in general. This year, at the BCAS, we will make sustained efforts to reach out to the students and create a sense of belonging in them towards the BCAS. Help me in taking this mission forward by enrolling your students for our programmes. Also, now that the Final CA examination results have been declared, I hope your students have qualified as Chartered Accountants. As they step into a new world and begin their careers, it would be a fitting gesture on your part to gift them an entry into BCAS. I invite you to gift one year’s membership of the BCAS to your successful students.

    The recently concluded ITF Conference organised by the International Tax Committee of the BCAS was a resounding success despite the fact that participants and their family members were very worried about the repercussions of going to Lavasa which is very near Pune where the H1N1 virus is currently playing havoc with normal life. Thankfully, everything went off well for us. We would now be focussing on the new Direct Tax Code which was unveiled recently by the Finance Minister for public debate. The Annual Referencer of the BCAS which is a prized possession for many will be released shortly. The BCAS has also made two representations on tax matters — one to the Finance Minister and the other to the CBDT. Copies of the same would be printed in the BCAJ.

    Lately, certain mails have been doing the rounds on the Internet which have cast our parent body — the ICAI and also its top leadership — in very bad light. One hopes that the controversy is resolved very soon. Ultimately, mud slinging of this kind and washing of dirty linen in public is bound to hurt our profession and, thereby, all of us. The ICAI elections would soon be held in early December. Let us all resolve to exercise our valuable franchise and that too wisely. Ballot is the biggest weapon in a democracy. Let us not waste it. We have worked hard to become Chartered Accountants. Can we allow a few people to let that hard work go down the drain ? Rabindranath Tagore once said — “You can’t cross the sea merely by standing and staring at the water”. Now is the time to act !

BCAJ Admin

From The President

From the President

Dear BCAJ Lovers,

By the time you get this issue of BCAJ in your hands, the
busy month of September would have been over and you would be a bit relaxed.
The wonderful festival of Diwali would be round the corner. I wish all readers
a peaceful, joyous and memorable festive season.

The views expressed by me regarding today’s students in my
last month’s President’s Page have touched a cord in many readers’ hearts. I
have received calls from several persons including a past president of ICAI
complimenting me on accurately bringing out the plight of students. I am glad
that readers are alive to this serious issue. I hope that more and more people
take a lead in guiding and mentoring the children of today so that we have
better human beings, capable professionals and able leaders tomorrow.

The elections to the regional and central councils of ICAI
have now been announced. The first week of December will see hotly contested
elections. If the past is anything to go by and if reports that are trickling
in are to be believed, the elections this time will see many more candidates
and intense campaigning across the country. Elections in our country – be they
political ones or the ones that take place in professional and other
organisations like ICAI, generally have one feature in common – a lot of
people interested in contesting and very few people interested in voting.
Candidates cry themselves hoarse in inviting, cajoling, imploring voters, to
come out and vote. And voters simply stay at home. This year too, most of us
would have by now been approached by someone or the other, who is planning to
contest the elections. Already, the media of sms, e-mails, facebook, groups,
etc., have started being used by some such persons. Unfortunately, the
enthusiasm shown by the contestants is not shared by the voters. Every
election sees a dismal voter turnout. Not even 50% of professional voters in
the country deem it fit to spend a few minutes to fulfil their moral duty to
go and vote. Why does this happen? First of all, what is it that attracts so
many people to contest the ICAI elections ?

If I don’t have the time and inclination to vote, I have no
moral right to complain about the leaders that get elected. This holds good
for every one of us. We must vote. The recent developments at the ICAI, which
all of us are well aware of, in view of the widely circulated e-mails, are
highly deplorable. When elections are round the corner, it offers all of us a
golden opportunity to set our house in order. Let us all carefully analyse the
credentials of each candidate and then vote for the most competent and
deserving one(s). Hopefully, the ICAI elections would not be fought on caste
and communal lines. Hopefully, the results of elections would not be dependent
on the power of influential candidates backed by large firms or political
parties. Hopefully, ICAI will create a platform for all candidates to appear
before their voters and present their views and thereby allow voters to judge
for themselves whom to vote for and whom not to vote for. Last time, the BCAS
had decided to organise an event titled “Know your Candidates”. However, the
same could not be held on account of the restrictions placed by ICAI on the
candidates appearing in such programmes. This is most unfortunate and I
strongly urge the Central Council to reconsider this particular issue and, if
necessary, to amend its election guidelines to allow candidates to meet their
voters on a common platform. Even during the political elections, we have seen
such programmes being held. It is not enough for ICAI to merely send a
standard booklet giving academic and other achievements of the various
candidates. It is the need of the hour for ICAI to permit the voters to
collectively meet the candidates on a common platform and let the voters judge
the candidates on the basis of personal interaction. In fact, if our leaders’
yoga sessions could be telecast on a TV channel, why not a panel discussion of
the candidates? The future of our profession is dependent on its leaders. If
our leaders are not worthy, our future is hazy.

I urge every member of our Institute who reads the BCAJ to
wake up and take the ensuing elections seriously. Let us rise to the occasion
and vote this time to make a difference. Let us seriously consider the merits
of each candidate and then elect only good, competent and selfless people. Let
us question every person who approaches us for our vote as to why he/she is
contesting the elections. There have always been lurking allegations about
using one’s position in the Council for obtaining empanelment and allotment of
bank and PSU audits or for helping others in doing so. The ICAI must bring out
a clarification on this issue. The ICAI members have every right to question
the ICAI as well as its leaders. After all, that is what democracy is all
about. Several of the sitting and aspiring Council members are my friends. To
all of them as well as to all others, my message is simple and common – prove
your worth and genuineness to me if you want my vote. There is also one
controversial matter that has been at the back of my mind for a long time. I
would like to vote only for the candidate who promises me that he/she would
strive for getting BCAS programmes recognised for CPE credit purposes. This of
course is something which cannot be decided by one or two council members.
However, I have yet to come across any candidate who has actually promised to
make efforts in this behalf. Where there is a will, there is a way. I am
searching for the person with the will. Many BCAS members whom I meet, often
ask me why the BCAS programmes are not recognised for CPE credits even though
they are excellent in terms of quality. My answer to them is to go and ask
this question to the ICAI council members. Maybe, now that elections are round
the corner, it would be a good time to ask this question. This applies with
equal force to programmes organised by other sister organisations which have
been doing fantastic work for their members.

The mystery of the Direct Tax Code is slowly getting known
to all of us. By now, several programmes have been held across the nation on
this subject. One hopes that this Finance Minister reads the Representations
that are made. One also hopes that the large number of mistakes, problems and
anomalies that have been discovered will be rectified when the final version
is unveiled.

The Accounting and Auditing Committee of the BCAS has come
up with an ambitious plan of an IFRS month in December, 2009. We would be
focussing on IFRS during that month. The enthusiastic members of the committee
are excitedly planning for the same. Plans for the annual RRC are also in
progress. You will read more about all these in the days to come.

The BCAS has always excelled in arranging programmes on
technical matters. I would now like the organisation to also help and guide
its members in running their own offices more efficiently and in a better
manner. Practice Management is something that most small and medium sized
firms do not pay much attention to. In the September issue of BCAJ, there is an article on HR. I am hopeful that we will be able to carry more such articles in future on the subject. If smaller firms are serious about facing the challenges from larger firms and global firms, they need to drastically improve their internal systems and processes. BCAS would play the role of a catalyst in this matter, as usual. I invite your feedback on the same.

Have a great festive season.

Sincerely yours,

Ameet Patel
President

BCAJ Admin

From The President

From the President

Dear BCAJ Lovers,

As I sit down to write this month’s column, the wonderful
festival of lights has just ended. I am now resuming office after a 4-day
holiday during which I relaxed, spent time with my family, met a lot of friends
and relatives and ate lots of food which is bound to make the weighing scale
groan if I have the guts to stand on it to check my weight. I am sure that all
of you too would have similar experiences. Diwali is like that — it tempts you
to be on a ‘forbidden trip’.

After a relaxing break, we all will once again get back into
the rut. Most CAs live an extremely hectic life and a very stressful one at
that. We have moulded ourselves into workaholics who take on the world’s
troubles on their shoulders. We allow our clients to force ourselves to work at
the absolute last minute and, in the process, create extremely stressful
conditions for ourselves. If a client’s case is selected for scrutiny, the sky
falls on our heads while the client is blissfully watching the latest Bollywood
movie or going for a 5-star cruise. Is this fair ? Is this required ? Is this
warranted ? Why are CAs such a meek lot ? Why do we not raise our voices loud
and clear ? Why do we get bullied into the corner every time ? Is there not
anything that we can all collectively do to reduce stress and make our lives
more relaxed ? Is there a problem of time management or is there a problem of
the ‘chalta hai’ attitude ? Can we not write to our clients in the month of
March every year itself and ask them to be ready with their accounts by April or
May end ? Can we not educate our clients about the advantages of being online as
far as their accounting and taxation goes ? This problem is faced not by small
practitioners alone. I have seen even the big accounting firms facing the same
stress and last minute chaos that sole proprietors and 2-3 partner firms face.
This clearly reflects a larger problem which pervades the profession at large.
Something needs to be done on an emergency basis. I invite views and feedback of
readers and assure you that BCAS will act promptly on suggestions received.

The ICAI elections are drawing closer. My thoughts expressed
in the October issue have drawn several responses. All of them agree with my
views. Of course, very few candidates have bothered to send in their feedback.
Obviously, their energies are directed at vote gathering. At BCAS, we earnestly
request every member to vote in the ensuing elections. While we cannot force
anyone to go and vote, we can certainly impress upon our members the need to
vote intelligently. I hope that the percentage of voting is high this time.

I was thinking about my wish list for the new team that will
take charge at the helm of affairs at ICAI. Some of the important matters that
need urgent attention are :

Allowing
creation of multi-disciplinary partnership firms so that CAs can team up with
other professionals and offer a broader spectrum of services to clients.

Allowing
our members to convert their existing partnership firms into LLPs.

Aggressively creating new areas of practice for our members so that over
dependence on bank and PSU audits is done away with. This will automatically
have a positive impact on our profession.

Deciding
once and for all whether global firms should be allowed to practise in India
or not.

Improving the public image of the CA profession.

Taking a
fresh look at our existing Code of Conduct. There are several provisions
particularly dealing with marketing one’s services, use of logos, use of
photographs on one’s website, use of name of one’s international network on
the stationery, etc. which are archaic and not in sync with global trends. If
we are serious about sending a message to the international fraternity that
Indian CAs are of global standards, then we need to seriously have a relook at
our rules and regulations.

Revisiting the issue of CPE credits. Conceptually, one cannot find fault with
the ICAI expecting every member to be academically updated. However, the
manner in which the entire system is being administered leaves a lot to be
desired. The first and most important issue that needs to be dealt with in
this connection is the monopoly that the ICAI has taken upon itself in
organising programmes that fetch CPE credits to its members. This needs
serious rethinking. I wonder what are the norms followed in other countries. I
find it very difficult to digest the fact that when a programme is organised
by a Regional Council of the ICAI with a speaker Mr. A, it gets CPE credit
whereas another programme arranged by any other professional organisation on
the same topic with the same speaker fetches no CPE credits. Is this fair ?
Similarly, if I start a study circle with 100 members today and register it
with ICAI, that study circle will get immediate recognition for CPE purposes.
On the other hand, a study circle of BCAS which has been in existence for
several years does not get any recognition. In the same manner, programmes
arranged jointly by ICAI and other organisations too do not get any CPE
credit.

Bringing
about electoral reforms in the ICAI. At present, the voter turnout is
generally very low. Can we not allow our members to cast their votes online
instead of having to travel to the booths for voting ? This would allow many
members who are not in India or who are travelling out of their cities to cast
their votes. Similarly, if I find that none of the candidates deserves my
vote, why can I not say so by casting a ‘No Vote’ ? This matter is already
generating a lot of discussion at the national level. Let ICAI take a lead in
this matter and allow its members to make bold statements.

Finally, please do something for our students. Every few months, there is a change in the CA course. Not only the students but even the principals find it difficult to keep track of these changes. Can we not have some stability in this matter? Also, our CA course is a peculiar one where the entry is kept very simple but the exit is extremely difficult and painful. We are welcoming thousands of students with open arms into the CA course. But the number of students who ultimately qualift) is very small. This is something which needs to be urgently looked at. In comparison, the Engineering or the Medical courses are very different where entry is very difficult, the number of seats is limited, the entrance tests are very stringent and only the top few get admissions. But the number of students who ultimately qualify is quite high. This reduces frustration amongst the students. We are all aware of the large number of CA students who keep on appearing for the examinations every 6 months only to fail and appear again.

I sincerely hope that whoever wins the ensuing elections takes note of the above few important action points.

Finally, let me end by sharing with you the news about the wonderful work that the BCAS Foundation is doing with respect to Right to Information Act. We have recently been part of two important events – celebration of the 4th Anniversary of the enactment of the RTI Act and a Press Conference where Shailesh Gandhi shared his views. Both the events were very encouraging. We also had the occasion to host an interaction with noted social activist Ms. Aruna Roy, a recipient of Magsaysay award and who is considered instrumental in the enactment of the RTI Act seeing the light of the day.

I have, as usual, run out of space and even though I have lots to write about, I have to stop.

More next month.

BCAJ Admin

From The President

Dear Professional Colleagues,

As I write this communication, the election to the Lok Sabha is in full swing. On 16th May, the results will be declared and we will hopefully have a new stable government in place. One wonders whether it will be different from its predecessor governments.

As the news of the voting percentage of the first two phases of election came in, it was disappointing to note that voting percentage had dropped in comparison to last election. Even more disturbing was the fact that voting percentage in urban areas was lower than in rural areas. Therefore, in the educated and elite there is apparent indifference towards the election process. The number of voters would have increased since the last Lok Sabha election, and the literacy levels would have also improved. The apathy of the educated voter seems to be unchanged.

A large number of groups, non-government organisations and the media have all been exhorting the public to vote but the effect seems to be minimal. Despite the fact that election day is a public holiday, the voting booths are at convenient locations in most places, people simply do not seem to be interested. This lack of interest is not unique to the election to the parliament. A Chartered Accountant, who is a member of the Institute of Chartered Accountants of India is a professional who is highly educated. He ought to be interested about the regulation of the profession to which he belongs. However, in the case of elections to Regional and Central Councils of our Institute, the voting percentage never crosses 50.

There could be a number of reasons for this, but the most important reason appears to be total disconnect between institutions, the leaders that run them, and the people who are or have been members of those institutions, i.e. the stakeholders. The sense of ‘belonging’ is on the decline. We often talk of our political leaders not having national interest at heart. I believe that a ‘nation’ is not an independent concept. It is made up of concentric circles beginning from individuals, their families, neighbours, cities, regions and States.

Readers will pardon me if I sound too philosophical but I think that this sense of belonging comes from the heart and not the head. We have gradually become a little too self-centered. Many of our actions are on the basis of a cost benefit analysis. Consequently, if the institution does not give one any future benefit, the person feels he has neither an obligation nor does he have any attachment towards it. There would of course be, honourable exceptions to this. When I was reflecting on the contents of this communication I tried to recall the extent of my participation in or contribution to the school that I passed out from or the college that I graduated from. Sadly, it is virtually nothing. For this, one can always give a number of reasons, but they will not change the fact. Having said this, one must also accept that institutions also have to take a fair share of the blame. Many of them have lost their focus, are no longer serving the purpose for which they were incorporated.

If democracy has to become more meaningful, institutions that make up the entire system must become responsive, and willing to change. They must become more transparent and inclusive. This change should occur not only in fact but also in perception. Individuals on their part must come forth and give whatever they can to the institution. They must participate in the affairs of the institution. There needs to be installed a mechanism, whereby this participation is facilitated on an ongoing basis. Education must also instil this sense of belonging among the coming generations.

Coming back to Elections 2009, it is heartening to note that some professionals have taken the plunge and are contesting as independent candidates. Irrespective of the result, this participation has to continue. Citizens must continue to be involved in the governance process on a continuous basis. It is only then that accountability that has reached abysmal low level, will improve. We will then fare better in terms of human satisfaction or happiness index that welfare organisations measure.

When one reads the news or watches the various channels, one gets a depressing feeling. However, there is hope. I witnessed the national anthem being played at a small function. The seniors in the audience stood to attention, while a college student was talking on the cell. A child, possibly his younger brother, tugged at his sleeve and asked him to switch off the cell as the anthem was being played. These children with impressionable minds are young Indians and are our future. We owe them a debt. Let us attempt to repay it.

With warm regards,

Anil Sathe

BCAJ Admin

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Dayal Singh, (Page 589 of C.A. Journal, October, 2009) the complainant alleged that the member was instrumental in getting a loan of Rs.49.8 lacs sanctioned from a Bank in favour of M/s. S. K. Trading Co. (Firm) on the basis of forged documents such as quotations, supply orders, money deposit receipts, rent deeds, rent receipts, etc. It was also alleged that the member gave a false certificate stating that the Firm had brought the contribution required in the books. On the basis of this certificate the Bank released the loan amount.

The disciplinary committee gave a report that the member was guilty of ‘Other Misconduct’. The council has accepted this finding and recommended to the High Court that the name of the member be removed from the register of members for a period of one month.

The Delhi High Court observed that the act of the member in issuing such a vague certificate with the intention of persuading the Bank to grant loan to his client was ‘Other Misconduct’. The High Court also observed that the lack of responsibility displayed by the member clearly shows that he had acted in a manner unbecoming of a Chartered Accountant and, therefore, the Council rightly recommended removal of his name form the register of members for a period of one month. As regards the punishment recommended by the Council, the High Court observed that there has to be some degree of integrity and probity which is expected of a Chartered Accountant who is regularly concerned with financial transactions and on the basis of whose recommendations and certificates financial institutions such as banks disburse loans or enter into other financial transactions. Under the circumstances, the Court was of the view that the punishment awarded to the member was not unduly harsh.

2. Some ethical issues :

The Ethical Standards Board of ICAI has issued the following clarifications on some ethical issues in the form of questions and answers for the benefit of members.

(i) Q. Can a chartered accountant in practice agree to select and recruit personnel, conduct training programmes and work studies for and on behalf of client ?

A. Yes, the ‘Management Consultancy and other Services’ as specified by the Council includes both, personnel recruitment and conduct of training programmes and work studies. As such, the same are permitted for a chartered accountant in practice.

(ii) Q. Whether a member in practice can act as insurance agent and arrange business for the Insurance Companies ?

A. No, a member in practice is permitted to render Insurance Financial Advisory Services only. It is not permissible for member to do any kind of marketing and business procurement for any insurance company. Their services are limited to professional services in the form of advisory and consultancy services.

(iii) Q. Whether Code of Ethics is applicable outside India ?

A. The Code of Ethics of the Institute is applicable to all the members, even outside India.

(iv) Q. Can a member in practice indicate in a book or an article, authored/contributed/published by him, his association with any firm of Chartered Accountants ?

A. No, as per C.A. Act, 1949, a member is not permitted to indicate in a book or an article, authored/contributed/published by him, his association with any firm of Chartered Accountants.

(v) Q. Can a Chartered Accountant in practice seek professional work from his professional colleagues ?

A. Yes, as per C.A. Act, 1949 a member is permitted to apply or request for, or to invite, or to secure professional work from another Chartered Accountant practice.

(Refer Page 572 C.A. Journal October, 2009)

3. Classification of Compulsorily Convertible Debentures in the Balance Sheet — EAC Opinion :

A private limited company, engaged in the business of construction and development of real estate, issued ‘Compulsorily Convertible Debentures’ to a Bank. These debentures were compulsorily convertible into equity after 39 months. Till the date of conversion interest at 13.65% p.a. was payable. The debentures were unsecured.

The company held the view that the amount raised by compulsorily convertible debentures has to be treated as ‘equity’ and should form part of Shareholders Funds. The auditors took the view that this amount should be considered as ‘Unsecured Loans’. When the matter was referred to the Expert Advisory Committee (EAC) of ICAI, it has given the following opinion.

From the facts of the case it is evident that the debentures issued by the company carry an interest @ 13.65% on quarterly basis till the date of conversion. Accordingly, the Committee is of the view that till the date of conversion the debentures are in the nature of loans. The company is a private limited company and, therefore, the provisions of Schedule VI to the Companies Act, 1956 would apply with respect to the form of balance sheet of the company. Schedule VI to the Companies Act, 1956 requires debentures to be classified under the head ‘secured loans’ and the disclosure is required to be made with respect to the terms of redemption or conversion (if any) of debentures issued to be stated together with earliest date of redemption or conversion. The debentures issued by the company are unsecured. Accordingly, the committee is of the view that the same should be classified under the head ‘unsecured loans’ in the balance sheet of the company.

(Refer Page 590 of C.A. Journal — October, 2009)

4. Campus Placement Programme :

ICAI organised Campus Placement Programme for newly qualified Chartered Accountants at 16 centres during the month of September, 2009. 3235 candidates appeared before 133 Interview Teams representing 71 organisations. 902 jobs were offered. Highest salary offered was Rs.10.61 lacs p.a. Minimum salary offered was Rs.3 lacs p.a. Average salary offered to the candidates works out to Rs.5.15 lacs p.a. (Refer page 574 of C.A. Journal for October, 2009).

5. Present status of ICAI Branch buildings:

Land has been acquired for the building of the branches of Pimpri – Chinchwad (15,000 sq.ft.), Kota (1,277.75 sq.ft.), Hubli (38,745sq.ft.), Sangli (4,888.16 sq.ft.), Ahmednagar (4,990 sq.ft.), [algaon (5,200 sq.ft.), Bhilwara (27,000 sq.ft.), Mathura (6,988.59 sq.ft.), Faridabad (28,890 sq.ft.) Hisar (20,498 sq.ft.), Kakinada, Vijayawada, Sangrur, Bilaspur, Bikaner and Ajmer, while the acquisition is still in process for Rohtak.

The construction of ICAI Bhavan branch building has been completed at Cuttak and Mangalore (renovated). A building measuring 8,200 sq.ft. has been acquired for the Pune branch.

Construction for Auditorium in Ludhiana and Indore has been completed and same have been inaugurated and become functional. Besides, a seminar hall in Guntar has also become operational.

Building construction has been commenced for the branches and the proposal for construction of building is under consideration for the branches of Mathura, Faridabad, and Bellary.

The proposal of acquisition of land is already approved for the branches of Kottyam, Solapur, Kolhapur, Jammu & Kashmir and Nellore. The branches of Varanasi, Bareilly and Allahabad have already started the process of acquisition of land.

The Building Committees for the branches, which do not have their own land or building, have been advised to acquire land and building respectively.

The guidelines have also been revised. It has been decided to standardwise the front elevation of the branch buildings.

A new branch at Vapi (WIRC) has been set up taking the total number of ICAI branches to 119.

(Refer Pages 558 of c.A. Journal for October, 2009)

6. Peesent studies of IFRS – Convergence:

To ease the convergence with IFRS, the Ministry of Corporate Affairs has constituted a core group under the Chairmanship of Secretary, Ministry of Corporate Affairs, while three members from the ICAI have been nominated for the core group.

The ICAI, as part of its efforts to facilitate smooth implementation of IFRS from 2011, has launched a website on IFRS and prepared study materials for each individual IFRS.

A CD on e-learning on IFRS has also been issued.

In-house Executive Development Programmes were organised for the corporates for imparting training on IFRS. Nearly 25 such programmes have so far been conducted since February, 2009.

A study group has been formed to study the tax implications of the implementation of IFRS in India.

Report on issues relating to SEBI Rules and Regulations (other than Mutual Funds) arising out of convergence has been finalised.

Report on issues relating to Companies Act aris-ing out of convergence with IFRS has been finalised.

(Refer Page 562 of CA. Journal for October, 2009)

7. Accounting Standards for Local Bodies (ASLB) Exposure Drafts:

Following Exposure Drafts are published for comments by members:

i) Property, Plant and Equipment (ASLB) 5

ii) Events after Reporting Dates (ASLB) 6

(Refer Pages 683 and 693 of CA. Journal for October, 2009)

8. ICAI News:

(Note Page Nos. given below are from CA. Journal for October, 2009)

i) Election Code of Conduct:

As reported on Page 98 of B.CA. Journal for October, 2009, elections to Central and Regional councils are to be heldon 4th and 5-12-2009. ICAI has published the Election Code and Conduct on Pages 673-677. Members are requested to take a note of this Code of Conduct and ensure that they vote on the date/s fixed for these elections. Names of members contesting these elections will be intimated to each member by ICAI in the month of November, 2009.

ii) New Publications of lCAl :

a) Compendium of Statements on Auditing (As on 1-7-2009)

b) Compendium of Guidance Notes on Auditing Pronouncements (as on 1-7-2009) (refer Page 664)

iii) Outsourcing by Registrar of Companies (ROC) :

ROC has decided to outsource the work of technial scrutiny of Financial Statements for 2009-10 filed by companies with ROC to our members (Page 546).

iv) Special Audit of Excise Records:

S. 14A and S. 14AA of the Central Excise Act, 1944 have been amended in the last Budget. Our members as well as Cost Accountants are now eligible to conduct Special Audit u/s.l4A dealing with computation of ‘Value of Goods’ and u/s.14AA dealing with ‘verification of proper utilisation of credit’ under the Central Excise Act and Rules. (Page 546)

v) Accounting Technicians:

Students who have passed Intermediate/PE-II/PCE and completed the prescribed period of articleship can opt to apply for issue of Accounting Technician Certificate without any further conditions. No fee is payable for this purpose. They will continue to be eligible to appear in the Final Examination. (Page 549)

vi) Names of candidates for lCAl Elections:

The following candidates are contesting the elections to be held on 4th and 5th December, 2009, for Central/Regional Councils from Western Region. Members are requested to note the names and treat it as their duty to cast their votes. Each member has to select a deserving candidate so that we have a strong council at the Centre and at the Regional Level which can enhance the prestige of our profession. We have to elect 11 candidates for central council and 22 candidates for WIRC The voting is by Single Transferable vote system.

a) Candidates for Central Council from Western Region

CA (1) Rajkumar Adukia, (2) Brijmohan Agarwal, Atul Bheda, (4) Praful Chhajed, (5) Ms. Bhavna Doshi, (6) Tarun Ghia, (7) Jayant Gokhale, (8) Pankaj [ain, (9) Nihar Jambusaria, (10) S. K. Maheshwari and I l I) Nilesh Vikamsey from Mumbai, (12) Arun Aanandagiri, (13) K. L. Bansal, (14) C V. Deshpande and (15) S. B. Zaware from Pune, (16) Durgesh Buch, Dhinal A. Shah, (18) Dilip Shah, and (19) Raju C Shah, from Ahmedabad, (20) M. K. Madkholkar (Thane), (21) Mahesh Sarda (Rajkot), (22) B. K. Rathi and (23) Hardik P. Shah from Surat, (24) Ashok R. Thakkar (Vadodara) and (25) [aydeep N. Shah (Nagpur).

b) Candidates for WIRC :

CA (1) S. H. Agarwal, (2) V. K. Agarwal, (3) A. S. Bhandari, (4) V. V. Dodhia, (5) N. C. Hegde, (6) A. C. Jain, (7) S. Y. Joshi, (8) D. K. Kabra, (9) J. V. Kala, S. K. Kedia, (11) D. K. Khandelwal, (12) M. P. Khare, (13) S. D. Lalan, (14) N. P. Majilhia, (15) N. L. Mishra, (16) S. K. Ratodia, (17) Ramesh Shetty, Shardul D. Shah, (19) Ms. Shruti J. Shah, (20) R. S. Sharma, (21) A. P. Shenoy and (22) K. K. Vaidya from Mumbai, (23) A. J. Patel, (24) A. K. Patel, (25) N. M. Pathak, (26) P. R. Raval, and (27) Y. A. Vyas from Ahmedabad, (28) R. N. Advani, (29) K. S. Mantary and (30) Dayaram Paliwal from Thane, (31) D. M. Apte, (32) D. B. Gandhi, (33) M. Y. Limaye and (34) C. D. Upasani from Pune, (35) S. G. Brahme (Dombivli), (36) J. A. Chaaira and (37) M. S. Modi from Surat, (38) P. D. Dhamankar (Vasai), (39) M. M. [oshi, and (40) J. M. Shah from Nagpur, (41) C. V. Pawar (Nashik), (42) R. N. Shah (Vadodara), (43) U. R. Sharma (Aurangabad) and Gautam Verlekar (Goa).

BCAJ Admin

Some Recent Judgments

I. Supreme Court :

1. Import of service : Recipient not liable prior to 1-1-2005 :

Department’s appeal against the CESTAT Misc. Order No. ST/85/2008 (PB) dated 27-6-2008 in the case of Hindustan Zinc Ltd. v. Commissioner, 2008 (11) STR 338 (Tri.-LB) was dismissed with the comment ‘no merit’. In view of this, the Larger Bench’s decision that recipient of service provided from outside India or by a non-resident having no office in India is not liable to pay service tax prior to 1-1-2005. (Detailed analysis of the decision of the Larger Bench was made in September 2008 issue of BCAJ).

2. Explanation widening tax net is not retrospective for operation :

UOI v. Martin Lottery Agencies Ltd., 2009 (14) STR 593

In the definition of business auxiliary service u/s.65(19) of the Finance Act, 1994, an explanation was inserted with effect from 16-5-2008 whereby promotion and marketing of lottery tickets was made exigible to service tax. However, the present appeal arose from a judgment and order dated 18-9-2007 (period prior to insertion of the explanation) passed by the Sikkim High Court in a writ petition filed by the respondent challenging legality wherein the High Court had not upheld the levy under the category of business auxiliary service. Service tax was sought to be recovered from the respondent agent considering the service in relation to promotion/marketing of lotteries as business auxiliary service.

The core question that the Court had to consider was whether the explanation inserted post-decision of the Sikkim High Court was clarificatory or declaratory so as to be interpreted as having retrospective effect and retroactive operation. Referring to and relying on the decisions of several High Courts and the Supreme Court, the Court ruled that by reason of an explanation, a substantive law may be introduced. The Parliament is entitled to bring new concepts of imposition of tax and also entitled to raise legal fiction. However, when substantive law is introduced, it will have no retrospective effect. For the said purpose, an expression like ‘for the removal of doubt’ is not conclusive. The Court also stated that constitutional validity was not examined by them. However, holding that explanation was not clarificatory/declaratory, the High Court’s decision was upheld opining categorically that service tax, if any, would be payable only and with effect from May 2008, i.e. prospectively on the insertion of explanation.

II. High Court :

3. Clearing and Forwarding Agent :

CCE v. Kulcip Medicine Pvt. Ltd., 2009 (14) STR 608 (P & H)

â In this case of Revenue’s appeal, the short question relates to whether or not both ‘clearing’ and ‘forwarding’ are necessary to be covered within the scope of the definition of clearing and forwarding services as the assessee was engaged in the activity of handling and distribution of products of manufacturer and thus not engaged in clearing activity i.e. he dealt with already cleared goods from the factory. The Court in this case noted and approved the decision in the case of M/s. Mahavir Generics v. CCE, Bangalore 2006 (3) STR 276 (Tri.). According to the Court, the word ‘and’ used after the word ‘clearing’ and before the word ‘forwarding’ in the definition provided in S. 65(105)(j) of the Finance Act, 1994 has to be understood in a conjunctive sense and not disjunctive. According to the Court, if the word ‘and’ was read as ‘or’, then it would amount to doing violence to the simple language used by the legislature which cannot be imputed to ignorance of English language. The Court thus expressed its inability to accept the view taken by the Larger Bench in the case of Medpro Pharma Pvt. Ltd. v. CCE, 2006 (3) STR 355 (Tri.-LB) and overruled the same. Further, stressing on the binding nature of the Board circular, the Court observed that they were meant for adoption for the purpose of bringing uniformity and on that count also, the expression ‘clearing and forwarding agent’ was interpreted in the light of the Board Circular dated 20-4-2002 issued in this regard. The Court also observed and the revenue agreed that the department had not appealed against the decision in the case of Mahavir Generics and as such it had attained finality. Thus, considering the dealer not as a clearing and forwarding agent, the revenue’s appeal was dismissed.

4. Bottling of liquor considered manufacturing and not liable for service tax :

SOM Distilleries Pvt. Ltd. & Ors. v. UOI & Ors., 2009 TIOL 292 HC – MP – ST – LB

Question referred from Divisional Bench, whether bottling of liquor amounts to ‘manufacture’ (as defined by clause (f) of S. 2 of the Central Excise Act, 1944) of liquor or only packaging so as to attract Service Tax u/s.65(76b) of the Finance Act, 1994.

The Court, overruling the decision of the division bench in M/s. Vindhyanchal Distilleries Pvt. Ltd. v. State of M.P. and Anr., (2007) 7 VST 197 (MP) held that packaging and bottling of liquor falls within the ambit of ‘manufacture’ and does not attract service tax u/s.65(76B) of the Finance Act, because:

S. 65(76b) by referral legislation excludes from liability any process amounting to ‘manufacture’ as defined in clause (f) of S. 2 of the Central Excise Act, 1944.

The question as to whether exclusion clauses goods/processes would apply to non-excisable goods (as even though they fall within the definition of ‘manufacture’, alcoholic beverages are excluded from excise duty by Entry No. 92C in list 1 of Schedule VII to the Constitution of India) has now been settled by Cir. F.No. 249/1/2006-CX.4, dated 27th October 2008 to conclude that ‘manufacturing process’ is a term which must be understood distinctly and it is not necessary for every process amounting to manufacture to result in the emergence of an excisable good.

M/s. Vindhyanchal Distilleries (supra) was incorrectly decided in that the question of whether tax is exigible in respect of a transaction is to be determined on the terms of the contract alone, and not from the invoice issued by the person entitled to receive money under the contract. [Arun Electrics Bombay v. Commissioner of Sales Tax, (1966) 17 STC 576].

Further, that the process of bottling can be regarded as independent (as in M/s. Vindhyanchal Distilleries) is not correct, especially in view of the statutory requirement that liquor must be sold in sealed bottles. Therefore, packaging and bottling of liquor is a part of the manufacturing process and because it falls within the ambit of clause (f) of S. 2 of the Central Excise Act, 1944, it is excluded from service tax liability in view of the exclusionary facet of the definition contained in S. 65(76b) of the Finance Act, 1994.

III. Tribunal:
5. CENVAT Credit:

(i) Outward transportation from place of removal is input service — A Larger Bench decision:

M/s. ABB Ltd. & Others v. CCE & ST & Others, 2009 TIOL 830 CESTAT-Bang. (Tri.-LB)

The Larger Bench made a detailed analysis of the definition of ‘input service’ in terms of Rule 2(1). The definition, according to the Tribunal could be conveniently divided into the following 5 categories:

(a) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products,

(b) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal,

(c) Services used in relation to setting up, modernisation, renovation or repairs of a factory, or an office relating to such factory,

d) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

e) Services used in relation to activities relating to business and outward transportation upto the place of removal

The Tribunal noted that each of the limbs is an independent benefit/ concession and therefore even if an assessee satisfies one of the limbs, the credit is admissible. To illustrate this, it is stated that a service in relation to renovation or repair of factory will be allowed as credit as it is a service in relation to setting up of modernisation even if it is assumed as an activity not relating to business. Various decisions were cited and discussed in support of this contention which inter alia included Share Med.ical Care v. UOI, 2007 (2009 ELT 321 (SC), HCL Ltd. v. Collector, 2001 (130) ELT 405 (SC), Indian Petro Chemicals, 1997 (92) ELT 13 (SC).

The Tribunal noted that the definition of ‘input service’ includes the expression ‘activity relating to business’. The term ‘business’ is of wide import and the words ‘in relation to’ further widen the scope. The words are of comprehensiveness, which may have direct, as well as indirect significance. It is equivalent to or synonymous with ‘concerning with’ or ‘pertaining to’ which are expressions of expansion and not of contractions. Further, there is no qualification to the words’ activities relating to business’. The words ‘such as’ in the definition also are purely illustrative.

Transportation of goods to customer’s premises is an activity relating to business and an integral part of manufacturing business. The Tribunal further noted that if the activities like advertising and market research are eligible to credit, the service ensuring physical availability of goods i.e. transportation should also be eligible for credit.

The Tribunal stated that for admissibility of instant credit, there is no requirement that the cost of freight should enter the transaction value of the manufactured goods. Meaning thereby that credit cannot be automatically disallowed in cases where freight does not form part of the transaction value. Referring to the case of All India Federation of Tax Practitioners v. UOI, 2007 (7) STR 635 (SC), it stated that service tax is a value added tax in the sense that it is on commercial activities and not a charge on the business but a tax on value addition by rendition of service.

An additional observation that the Tribunal has made in this case is that the dispute in the case bemg that of admissibility of credit of service tax on GTA service and not one of valuation of excisable goods u/s.4 of the Central Excise Act, 1944 and therefore, the two issues viz. ‘valuation’ and ‘CENVAT Credit’ are independent and have no relevance with each other. In this frame of reference the relevant guidelines issued by OECD were discussed. Citing the decision of All India Federation of Tax Practitioners (supra), it stated that revenue’s submission that no CENVAT credit is available if the nature of service does not form part of value of goods subject to excise duty, is against the princip,l,e laid down in the said case of All India Federation of Tax Practitioners and the OECD guidelines, as service tax and excise duty are consumption taxes to be borne by the consumer. If credit is denied, Ievy T’ of service tax on transportation will become a tax on business rather than on consumption.

Lastly, the Tribunal has further made a very important and distinct point that the interpretation of the expression ‘input service’ cannot fluctuate with the change in the definition of value in S. 4 of the Central Excise Act and cannot vary depending on whether the goods are levied to duty u/s.4A of the Excise Act or tariff value u/s.3(2) of the Excise Act. This has been done by the Tribunal while also noting the decision of Punjab & Haryana High Court in the case of Ambuja Cements Ltd. v. UOI & Others, 2009 (14) STR 3 (P&H) which provided its decision based on and approving the clarification given vide CBEC Circular No. 97/8/2009 dated 23-8-2007 as regards CENVAT credit. Thus, interpreting all the aspects of the definition of ‘input service’ in detail, it was held that GTA service of final products from the place of removal should be treated as input service.

[Note: Readers may note that the last two points make the decision distinct from the decisions provided in the case of CCE Mumbai 5 v. GTC Industries ua., 2008 (12) STR 468 (Tri.LB) and the Punjab & Haryana High Court decision in the case of Ambuja Cements Ltd. (supra). The gist of these two decisions was provided in December 2008 and May 2009 BCAJ respectively].

ii) Supplementary invoices and invoice without registration number, whether eligible for credit :

Sanghi Industries Ltd. v. CCE, Rajkot 2009 (14) STR 462 (Tri.-Ahmd.)

In this case CENVAT credit was denied on the ground that a supplementary invoice was issued for the amount of service tax as the original invoice omitted to mention the same. In another invoice, registration number of the service provider was not provided. It was held that Rule 9 of the CENVAT Credit Rules was not considered by the lower authorities: Substantive compliance being sufficient for granting credit, the matter was remanded to the Commissioner (Appeals) to decide afresh in the light of the aforesaid observations.

iii) Car repairs, photography, rent-a-cab, etc. used ,for business admissible as credit:

CCE, Jaipur v. J. K. Cement Works, 2009 (14) STR 538 Tri.-Del)

Revenue’s appeal against allowance of CENVAT credit in respect of rent-a-cab service, repairs of motor cars and photography services used for business purposes was dismissed on the following grounds:

(a) The revenue did not controvert use for business.

(b) Tribunal’s decisions in various cases including those in the case of Indian Rayon Industries Ltd. v. CCE, 2006 (4) STR 79, Grasim Industries v. CCE, [aipur 2008 (11) STR 168 and CCE, Nasik v. Cable Corporation of India Ltd., 2008 (12) STR 598 were considered wherein allowancy of CENVAT in relation to similar services was upheld as input services for the manufacturer based on the con-tention that ‘in relation to’ in the definition of input service has to be given wider connotation and the illustrative list of the activities is not ex-haustive as the words ‘such as’ follow the words ‘activities relating to business’. Accordingly, denial of credit was not found justified.

(iv) GTA services used for construction of plant admissible as input service:

CCE, Vadodara v. Videocon Industries Ltd., 2009 (14) (STR) 692 (Tri.-Ahmd.)

The Revenue’s appeal was rejected as service tax paid on goods transport agency service in respect of steel, cement, etc. used in civil work of new plant/factory was held as covered by the definition of input service.

BCAJ Admin

Some Recent Judgments

I. High Court :

1. Binding nature of law laid down by High Court’s order :

A.C. Nielsen ORG – MARG Pvt. Ltd. v. UOI 2009 (16) STR 259 (Bom.)

Order dated : 22-7-2009

The petitioner in this case was denied waiver of pre-deposit by the Tribunal in the issue of service tax demand as recipient of service for the period prior to 18-4-2006, in spite of relying on the High Court decision in the case of Indian National Shipowners Association v. UOI, 2009 (13) STR 235 (Bom). The High Court ruled that once this Court lays down the law that the recipient of the service was not liable for paying service tax, that law was binding on all Tribunals and authorities functioning within the jurisdiction of this Court and accordingly, directed to proceed with the appeal without any pre-deposit.

2. When appeal relates to rate of duty, Supreme Court is the authority u/s.35L :

CST v. Delhi Gymkhana Club Ltd., 249 (16) STR 129 (Del.)

In the instant case, the Tribunal had dismissed the appeal made by the Revenue against the order of the Commissioner (Appeals) who, relying on the judgments of the Calcutta High Court in the cases of Saturday Club Ltd. v. A.C. Service Tax, 2006 (3) STR 305 (Cal.) and Dalhousie Institute v. AC Service Tax, 2006 (3) STR 311 (Cal.), had held that the service provided by a club to its members did not attract service tax as principle of mutuality prevailed in such cases. The Revenue, challenging the order of the Tribunal filed appeal in the Delhi High Court u/s.35 of the Central Excise Act read with S. 83 of the Finance Act, 1994. In terms of the provisions of S. 35G read with S. 35L of the Central Excise Act against certain orders of the Tribunals, appeal is to be made to the High Court, whereas in respect of certain other orders passed by the Tribunal, a direct appeal to the Supreme Court has to be made. The High Court in this case, accepting the respondent’s contention, held that the appeal would not be maintainable as the question decided by the Tribunal relates to the rate of duty and when the issue relates to the rate of duty or tax or value of goods or assessment, relying on the decision in the case of Navin Chemical Mfg. & Trading Co. Ltd. v. Collector, 1993 (68) ELT 3 (SC), the remedy for the appellant to file appeal u/s.35L was to be to the Supreme Court and therefore, the appeal was held not maintainable on this ground.

II. Tribunal :

3. CENVAT credit :

CCE & CUS Guntur v. CCL Products (India) Ltd., 2009 (16) STR 305 (Tri.-Bang.)

Final Order 216-220/2009 & Stay Orders 303-305/2009, all dated 20-3-2009

The issue involved related to denial of credit availed on service tax paid on insurance premium, repair of vehicles, AMC charges on telecom & courier charges not considering the said services as input services. Considering inclusive part of the definition of ‘input service’ as exhaustive and having a bearing on the main part of the definition and further considering expressions ‘in or in relation to’ expansive, the Commissioner (Appeals) held the services used by the manufacturer as in relation to the manufacture and clearance of final products. Relying on the Larger Bench’s decision in the case of Commissioner v. GTC Industries Ltd., 2008 (12) STR 468 (Tri.-LB) and which was followed in 2009 (13) STR 616 (Tri.), the Tribunal rejected the Revenue’s contention that courier services were akin to outward transportation of final goods and therefore they could not be treated as ‘input service’ under Rule 2(1) of the CENVAT Credit Rules as per decision in the case of Universal Cables Ltd. v. CCE, 2007 (7) STR 310 (Tri. Del.) and thus maintained the order of lower authority relying on the decision in the case of GTC Industries (supra).

Wrong classification by service provider cannot make credit ineligible :

CCE, Chennai v. Carborandum Universal Ltd., 2009 (16) STR 181 (Tri.-Chennai)

Input credit was considered ineligible on the ground that the service involved was classifiable under manpower recruitment and supply agency, and not business auxiliary service, although the same was claimed on valid documents on which service tax was paid by the respondent. The period in which credit was taken was prior to 16-6-2005, during which time the service of manpower supply was not taxable. Holding that service tax was paid by the provider of service under the business auxiliary service and it was so assessed, credit taken based on valid documents could not be questioned on the basis that the assessment of the service by the department at the end of service provider was incorrect, the appeal of the Revenue was dismissed.

Rebate under Notification No. 12/2005-ST : Liberal view of procedural lapse for exports :

CST Delhi v. Convergys India P. Ltd., 2009 (16) STR 198 (Tri.-Del)

The respondent provides customer care services on behalf of foreign clients through telephone, email and web-based interaction. These services being in the nature of exports, claim of rebate was lodged under Notification 12/2005-ST. They used several input services like advertising, courier, leased circuit, rent-a-cab services, security agencies, management consultancy services, air travel agencies, online information services, etc. and inter alia also used management consultancy services from outside India. Rebate claim was rejected on the grounds that declaration being a mandatory requirement was filed late and some of the services were not used for providing output services but used for maintaining capital assets/ goods, etc. and therefore could not be considered input services. Provisions of Notification 12/2005-ST were discussed at length. Late filing of declaration was considered procedural lapse, where by substantive benefit was considered not deniable. Further, rebate was considered admissible also considering that the definition of input service was inclusive and that when cost of the goods and services becomes part of cost of output services, such goods or services in common parlance are inputs and input services in relation to final products are output services. Accordingly, services used in connection with procurement of other input services are also to be treated as input services. Similarly, services used in day-to-day activity like maintenance services, etc. are input services. The eligible criteria under the CENVAT Credit Rules get satisfied if services in part or full are used for taxable services and therefore, the rebate would be admissible. The Tribunal further observed that in respect of exports, a liberal view requires to be taken.

4. Longer period of limitation:

Whether sustainable when disclosure provided in ST-3 Returns:

CCE Kanpur v. Taj Tours & Travels, 2009 (16) STR 273 (Tri.-Del.)

The respondent, a tour operator, provided services of monumental tours, local transportation, rail/ air ticket booking, etc. on behalf of principal agents. The turnover representing purchase of tickets and principal’s services was deducted from the value of taxable services, and accordingly remark was made in the ST-3Returns. Suppression was alleged by the Revenue. Since disclosure was made in the ST-3 Returns, charge of misstatement or suppression was held incorrect and the Commissioner (Appeals)’s ruling based on judgments in the cases of Anand Nishikawa Co. v. CCE, 1995 (75) ELT 721 (SC), etc. that mere failure to give some information did not amount to willful mis-declaration and that there must be a positive act from assessee to final willful suppression was upheld.

When Department has knowledge, whether invokable?

Mahaveer Generics v. CCE, Bangalore 2009 (16) STR 289 (Tri.-Chennai)

Stay Order dated 2-4-2009.

The appellant, a consignment agent of CIPLA, made a stay plea for non-applicability of longer period of limitation as the activity of the firm was known to the Department, as service tax demanded from the firm as clearing and forwarding agency was set aside by the Tribunal rejecting interpretation of the Revenue. Prima facie considering the appellant not guilty of suppression of facts with intent to evade-payment of duty so as to attract longer period of limitation, pre-deposit of service tax and penalty was totally stayed.

When invoked consequent upon audit:

Aditya College of Competitive Exams v. CCE, 2009 (16) STR 154 (Tri.-Bang.)

Appellant is a commercial training and coaching centre. It had collected certain amount towards service to be provided prior to the date on which levy was introduced viz. 1-7-2003. An amendment in S. 67 was made effective 13-5-2005 to levy service tax on advances received for the services to be provided. However, since this amendment was made later i.e., from 13-5-2005, it could not have retrospective effect according to the appellant. Further, the demand was made by the Assistant Commissioner based on audit objection. Relying on the decision in the case of Vikram Ispat v. CCE, Raigad 2007 (8) STR 554 (Tri.-Mum), the demand was held as barred by limitation and therefore penalty, etc. could not be upheld.

5. Penalty:

Deccan Mechanical & Chemical Industry Pvt. Ltd. v. CCE, Pune 2009 (16) STR 263 (Tri.-Mum.)

Order dated 24-3-2009

The appellant paid service tax with interest before issuance of show-cause notice and pleaded for waiver of penalty levied u/ s.76. The Revenue insisted on pre-deposit on the strength of judgment of the Supreme Court in the case of Union of India v. Dharmendra Textile Processor, 2008 (231) ELT 3 (sq. The Tribunal on weighing arguments by both the sides held that prima facie S. 76 was not comparable with penalty imposable u/s.ll AC of the Central Excise Act which provided for penalty on defaults arising on account of fraud, suppression or contravention of law with an intent to evade payment of duty and therefore held that on the strength of such case law, prima facie waiver of pre-deposit could not be resisted upon.

6. Rectification of mistake (ROM) :

Ridhi Sidhi Transport v. CCE, 2009 (16) STR 271 (Tri.-Bang.)

Order 25/ /2009, dated 5-5-2009.

In this case, the Tribunal in its order made a mention about contention of the appellant with regard to non-applicability of extended period of limitation. However, no finding on the issue was provided and therefore, ROM application was filed. Despite the Revenue’s view that ROM would mean review by the Tribunal itself, it was held that recalling was necessary in the interest of principles of natural justice and matter was decided to be reheard.

8. Valuation: Whether collection for ‘mess charge’ includible ?

Aditya College of Competitive Exams v. CCE, 2009 (16) STR 154 (Tri.-Bang.)

In this case, the Revenue demanded service tax by including mess charge collected by the college in the value of taxable service. It was held categorically that there should be nexus between the amount collected and services rendered. Mess charges were collected for availing facility of the mess. It cannot be brought under the category of receipt for commercial training and coaching service and subject it to service tax. There is no provision for inclusion of any amount whatsoever collected by the appellant. Demand was held as unsustainable.

BCAJ Admin

Right to Information

Part A : Decisions of the Court and CIC

Whether co-operative Societies are public authorities ?

In the judgment delivered on 3-4-2009, the Kerala High Court examined under the writ petitions the applicability of the RTI Act to co-operative Societies registered under the Kerala Co-operative Societies Act (KCS Act).

The Registrar of Co-operative Societies issued Circular No. 23/06, taking the view that all co-operative Societies registered under the KCS Act, hereinafter, for short, the ‘Societies’, are under the administrative control of the Registrar and therefore, public authorities for the purpose of the RTI Act. Directions were hence issued, requiring all Societies to discharge the obligations as public authorities under the RTI Act and to follow the procedure stated therein. The information officers in the co-operative department of the State Government commenced acting on complaints for non-consideration of requests for information made by different persons to Societies. These writ petitions are hence filed, seeking to quash the aforesaid Circular and for the declaration that the RTI Act does not apply to Societies registered under the KCS Act. Certain actions taken by the officers under the KCS Act and orders issued by the State Information Commission touching the issue, in individual cases, are also under challenge.

Societies are not government organisations. S. 2(h)(ii) of the RTI Act uses the term ‘Non-Government Organisations’, one not defined in the Act. S. 2(h)(ii), therefore, refers to something that is not part of the Government; which is very true of a Society, as pointed out even by the petitioners. If a Society is substantially financed, directly or indirectly by funds provided by appropriate Government, it falls within the inclusive definition of ‘public authority’; within the expanse of that definition clause. Therefore, any co-operative Society registered under the KCS Act is a non-government organisation and if it is substantially financed, directly or indirectly by funds provided by appropriate Government, it is a public authority for the purpose of S. 2(h) of the RTI Act.

The Court then notes that the word ‘substantial’ has no fixed meaning. It ought to be understood definitely by connecting the context. The Court then quoted a few judgments of providing its meaning in the context of the code of civil procedure, the Income-tax Act, the Customs Act, etc. and as defined in the dictionary. It then said : “Such a spectrum of substantial wisdom essentially advises that the provision under consideration has to be looked into from the angle of the purpose of the legislation in hand and the object sought to be achieved thereby, that is, with a purposeful approach. What is intended is the protection of the larger public interests as also private interests. The fundamental purpose is to provide transparency, to contain corruption and to prompt accountability. Taken in this context, funds which the Government deal with are public funds, they essentially belong to the sovereign, “We, the People”. The collective national interest of the citizenry is always against pilferage of national wealth. This includes the need to ensure complete protection of public funds. In this view of the matter, wherever funds, including all types of public funding, are provided, the word ‘substantial’ has to be understood in contradistinction to the word ‘trivial’ and where the funding is not trivial to be ignored as pittance, the same would be ‘substantial’ funding because it comes from the public funds. Hence, whatever benefit flows to the Societies in the form of share capital contribution or subsidy, or any other aid including provisions for writing off bad debts, as also exemptions granted to it from different fiscal provisions for fee, duty, tax, etc. amount to substantial finance by funds provided by the appropriate Government, for the purpose of S. 2(h) of the RTI Act”.

Based on the above view and after examining as to whether the provisions of the KCS Act and Rules are relevant to decide whether the definition in clause in S. 2(h) of the RTI Act applies to co-operative Societies, the Court came to the conclusion that it is beyond doubt that the Societies are substantially financed by funds provided by Government.

The Court then rules : “It is held that co-operative Societies registered under the KCS Act are public authorities for the purpose of the RTI Act and are bound to act in conformity with the obligations in Chapter II of that Act.”

As the applicability of RTI Act to the co-operative Societies has arisen in many States and being discussed at many platforms, I reproduce three concluding paras of this judgment which are of common application in all cases :

The question for decision in every other individual case of a Society, in the event of any dispute, would be as to whether it is substantially financed by the State Government, in the light of what is stated above. That may have to be determined with reference to the financing of each Society. That question would arise for decision only when any co-operative Society refuses to act as a public authority. In such event, any citizen whose right to information is legislatively conferred as per S. 3 of the RTI Act would be entitled to trigger the duty of the State Information Commission in terms of clauses (b), (e) and (f) of S. 18(1) of the RTI Act. In that context, the State Information Commission has every jurisdiction to adjudicate and decide on the question as to whether a particular co-operative Society, against which a complaint is made u/s.18(1), is a public authority for the purpose of S. 2(h). The mere fact that the RTI Act does not expressly prescribe any limits as to finance, to determine the scope of the word ‘substantially’ in S. 2(h) does not give rise to any presumption of possible abuse of power. This is because the State Information Commission, as already found, is the authority which can determine that issue on a case-to-case basis. That power is with that high office, the quality of which is statutorily regulated. Declaration of law as made in this judgment would stand to aid as precedent, by law. Advertence to Sections 12, 15, 16, etc. would show that the Legislature has reposed the powers in such a manner that there could be really no room for any presumptive argument as to possible arbitrariness and apprehension of incompetence. Even with reference to the KCS Act, lots of yardsticks would be available. There is no ground for any such apprehension being recognised with any element of legitimacy.

Insofar as the contention that information is sought for by different individuals for no rhyme or reason is concerned, the answer is short but clear, and is found in S. 6(2), which provides that an applicant making request for information shall not be required to give any reason for requesting the information or any other personal details except those that may be necessary for contacting him.

Having found that co-operative Societies are public authorities for the purpose of the RTI Act, another issue surfaces for consideration. In some of the cases in hand, applications for the information were submitted to the statutory authorities under the KCS Act and KCS Rule requiring them to summon information from the Societies. Instead of summoning information by exercising the authority under the KCS Act and KCS Rules, those officers have forwarded those requests to the Societies, requiring them to answer the queries. The definition of information in the RTI Act includes information as is accessible through such statutory authorities. All such information as is accessible through the mechanism of the KCS Act and KCS Rules thus becomes information for the purpose of the RTI Act. Therefore, the provisions under the RTI Act themselves would be sufficient for reaching at such information. Hence, the question whether the authorities under the KCS Act and KCS Rules should have summoned the documents without requiring the Societies to communicate the information, is too technical and should necessarily give way to the primary object of the RTI Act, viz., to provide access to information. Therefore, there is no illegality in any officer vested with powers under the KCS Act and KCA Rules forwarding the request obtained by them to the concerned. Societies with a request or direction to that Society to provide information directly to the person who has sought the information.

[Thalapalam Service Co-operative Bank v. Union of India, WP (C). No. 18175 of 2006 and connected cases decided on 3-4-2009 in the High Court of Kerala at Ernakulam].

Denial of information by the Registrar of Companies:

Mr. Dharmendra Kumar Garg sought certain information from the PlO of ROC of NCT Delhi and Haryana regarding Bloom Financial Services Ltd. The same were denied. Before the Commission, the PlO submitted the following:

1. Once the information is available in the public domain accessible to the citizens, the information is automatically excluded from purview of the RTI Act as held by Hon’ble Information Commissioner Shri A. N. Tiwari in the case of ClC/ AT / A/2007 /00112.

2. S. 610 of the Companies Act, 1956 provides that any person may inspect any document kept by ROC and obtain copy of any document from the ROC concerned on payment of prescribed fee. Therefore, the complainant need not seek information under the RTI Act. This was held by the Hon’ble Information Commissioner Shri M. M. Ansari in the case of ClC/MA/ A/2006/0016.

Following is the order of ClC, Mr. .Shailesh Gandhi:

For the first argument the Respondent relied on the order number ClC/ AT / A/2007 /00112 where it was held by the Hon’ble Commission while interpreting S. 20) of the RTI Act that” …. Unless information is exclusively held and controlled by a public authority, that information cannot be said to be information accessible under the RTI Act. Inferentially it would mean that once a certain information is placed in the public domain accessible to the citizens either freely or on payment of a pre-determined price, that information cannot be said to be ‘held’ or ‘under the control of the public authority’ and thus would cease to be information accessible under the RTI Act …. ” I would respectfully beg to differ from this decision. Even if the information is in public domain, an applicant can still ask a public authority to grant him the information if it is held by it. Even if some information is available at various places, it is the citizen’s choice from where he wishes to access it. The only exemptions from disclosure of information available in the RTI Act are provided u/s.8 and u/s.9. The Commission would like to clarify that S. 2 of the RTI Act is the definitional provision and therefore S. 2(j) is not an exemption clause under the RTI Act. It merely defines the ‘right to information’. So the exemption from disclosing the information cannot be sought u/s.2(j). It is also the basic tenet of the law of statutory interpretation that no Section should be interpreted in such a manner which would violate the basic objective of the statute. The basic objective of the Right to Information Act, 2005 is to provide the information sought by the applicant from a public authority and therefore the Sections of the Act should be interpreted to further the objective of this Act. Also the information sought by the complainant here has not been provided on the internet. The information asked for is very basic information and records related to this particular information are missing. This information is very important for the complainant as he is facing a threat of arrest and needs the information to prove his innocence. Not granting such information clearly leads to violation of the fundamental right of the complainant as provided under Article 21 of the Constitution.

With regards to the second argument of the respondent about information to be sought only u/s.610 of the Companies Act, the respondent has relied on order number ClC/MA/ A/2006/0016 of the Commission where the Hon’ble Commissioner Shri M. M. Ansari upholding FAA’s order stated that “There is already a provision for seeking information u/s.610 of the Companies Act, 1956. The complainant may accordingly approach the ROC as advised by the Appellate Authority to obtain the relevant information.” If the complainant has more than one way of seeking remedy he has the freedom to opt for the way which is more convenient for him. No claim has been made by the PlO of any exemption under the RTI Act to deny the information. If a public authority has a procedure of disclosing certain information which can also be accessed by a citizen using the Right to Information Act, it is the citizen’s prerogative to decide which route he wishes to take. The existence of another method of accessing information cannot be a justification to deny the citizen this freedom to exercise his fundamental right codified under the Right to Information Act. If the Parliament wanted to restrict this right, it would have been stated expressly in the Act. Nobody else has the right to constrain or limit the rights of the Sovereign Citizen.

With the views taken as above, the ClC directed that complete information will be given to the complainant before 25th July 2009. If records are not available for any of the queries, this will be stated categorically.

[Mr. Dharmendra Kumar Garg v. Registrar of Companies & CAPIO, decision No. ClC/SG/C/2009/ 000753/4129 of 14-7-2009].

Part B : The RTI Act

Work practices at an Information Commission:

Yutika Vora and Shibani Ghosh have made out a report on the above subject in July 2009. It is a report written with primary objectives that taken by Mr. Shailesh Gandhi, Central Information Commissioner, New Delhi may be adopted, after making necessary changes, in other Commissions across the country. Mr. Gandhi’s office is continuously striving to improve its work processes. Increasing efficiency entails that more time is available to focus on S. 4 compliance and S. 25 monitoring. The Right to Information is a fundamental right enshrined in the Constitution of India and as statutory bodies entrusted with the responsibility to uphold this right, Commissions must deliver to give this right its full meaning.

I reproduce some extracts from the said report. (Full report is posted on BCAS website www.bcasonline.org)

This report describes the working processes that have been adopted in Mr. Shailesh Gandhi’s office, which have resulted in a high rate of disposal of cases; reduced the time in which communication received by the office are responded to; and monitoring of S. 4 compliance have been initiated. The report also provides examples of documents that have been referred to in the report in the form of Annexure – such as types of responses sent by Mr. Gandhi’s office, his orders, and other documents used by the office during its working.

Mr. Shailesh Gandhi took charge as Central Information Commissioner on 18th September 2008. He brought with him the conviction that for the rule of law to be upheld, the legal system has to function in a timely manner and justice has to be delivered in time. If justice is delayed, then the rule of law becomes a fiction and the citizen is denied his rights in a democracy.

The fundamental premise on the basis of which his office works is that law is time-bound. For the information to be useful it has to ensure that it is made available within a reasonable period of time. One of the biggest strengths of the Right to Information Act, 2005 is that it requires information to be provided within a reasonable timeframe. If cases are not disposed within this timeframe, the spirit of this Act is-severely undermined. The importance of the time element in this Act is apparent when one looks at the penalty provision S. 20 of the Act. In fact, to ensure timely response by the Information commission, the first RTI Bill of 22nd December, 2004 had a provision that the Information Commission would dispose a case within thirty days.

However, this provision was dropped at the last moment without any explanation. Mr. Gandhi’s office believes that a timely response is essential and therefore makes strenuous efforts to ensure that cases are disposed within ninety days.

An Information Commissioner costs the nation about 25 lakh Rupees annually. The average yearly disposal of Information Commissioners across the country is around 600, thus the nation is spending an astounding amount of over Rs.4,100 per case only on the Commissioners. This is of course only a part of the expenditure on each case as it does not include costs to maintain an office, infrastructure, etc. If however a Commissioner could achieve an average disposal rate of 4000 cases per year, the nation would spend Rs.625 per case on the Commissioner.

Mr. Gandhi’s office has achieved an average monthly rate of disposal of 535 during 2009, with disposal of 3212 cases in the first six months of 2009. Mr. Gandhi is not the only Commissioner to have achieved such figure. Ms. Annapurna Dixit, Central Information Commissioner, has achieved an average monthly disposal rate of 345 cases by clearing 2070 cases in the same period. Setting a target of 4000 cases a year, and achieving an average monthly disposal of 330-340 case’, is not an impossible task and Mr. Gandhi and Ms. Dixit have proved it consistently.

Mr. Gandhi’s office receives on an average nearly 1600 ‘daks’ every month and a system is developed that between 4 to 6 assistants, the same are distributed, each person is given 10 to 20 daks. Most of the staff members are trained and encouraged to take up various functions in the work flow. Daks are attended within 24-48 hours. Numbers of templates have been prepared to reply to daks. Once an appeal or complaint is found in order, it is registered on the online registration system at www.rtiadmin.nic.in.

After the Second Appeal is registered, a summary is prepared. The summary is used as a preface to the order given by the Commission. The summary is available to Mr. Gandhi from at least a week before the date of hearing. The summary is also open on his desktop during the hearing and he can at any time refer to the documents which are also in front of him. Reading the summary helps Mr. Gandhi to get a gist of the case before the hearing.

It also serves as a ready reference for someone reading the order subsequently, who does not have access to the file.

Once the summary is prepared for a case, it is scheduled for hearing. Mr. Gandhi fixes 20 cases a day for hearing and notice for hearing is sent generally 25 to 45 days before the date of hearing.

In most of the cases, after hearing both the parties which takes approx 15 minutes, the decision is dictated and directly typed on the computer; the decision gets signed by Mr. Gandhi immediately and delivered on the spot. In less than 5%, the Orders are reserved and delivered on a later date after due consideration to the matter.

A very effective process for deciding a complaint is also worked out. Similar effective process is also worked out to deal with non-compliance of orders delivered by the Commission. The Commission also receives dak which are not Appeals or complaints, etc. The same are dealt with as under:

Queries with regard to RTI Act:

A few dak each week ask queries with regard to implementation of the RTI Act as well as the rights and obligations under the RTI Act. All efforts are made to send an adequate response to such queries as Mr. Gandhi believes that the Commissioner’s responsibilities are not restricted to cases brought before him, but also extend to disseminating awareness and better understanding of the RTI Act.

Communication in relation to S. 4 compliance:

The office sometimes receives communication from citizens that certain information which should have been disclosed suo moto by a public authority by 12th October 2005 and till date has not been disclosed. In such cases, after due consideration to the facts and research, a letter is sent to the head of public authority directing it to ensure that it fulfils its obligations u/s.4.

Communication in relation to monitoring u/s.25 :

U / s.25 of the RTI Act, public authorities have to submit information on the implementation of the RTI Act to the Commission. Mr. Gandhi has asked certain public authorities to submit information to him by the 10th of every month. This information can be sent to the office by email or by post in a form which is standardised.

Mr. Gandhi believes that to ensure a holistic success of the Act, emphasis needs to be laid on the fulfilment of the obligations u/s.4 of RTI Act. For this reason constant efforts are being made to bring to the attention of public authorities their obliga-tions u/ s.4 of the RTI Act.

Disposals in his office in the first six months of 2009 are more than the number received. In six months from January to June 2009, appeals and complaints registered are 1575 and 758, respectively, totalling 2333. Against the above, appeals disposed are 1975 and complaints disposed are 1219, totalling 3194.

The pendency of cases at the end of June 2009 is 618 cases, out of which 56 cases have been pending over 60 days. Mr. Shailesh Gandhi is reaching soon to his goal of all disposals of appeals and complaints within 60 days.

Part C: Other News

• Wajahat Habibullah

Sayed Nazakat in the magazine WEEK of August 16, writes:

There aren’t many bureaucrats like Wajahat Habibullah. As India’s first Chief Information Commissioner (CIC), he defends the right of common people to open information. “When someone learns to use RTI, he almost becomes addicted to it,” says Wajahat, sitting in his office in South Delhi. He explains why it is important to create more awareness about the Right to Information (RTI) : “It will bring democracy to its rightful owners – the people of India.”

The Right to Information Act was passed nearly four years ago, and Wajahat was asked to implement it. Today, it allows citizens to inspect Government records, take copies and question the authorities for a fee of Rs.10. “RTI is a magic wand. For the first time, the common man has an effective tool to fight bribery and bureaucratic apathy,” he says. “it has worked particularly well for routine tasks, such as getting passports and pensions, which previously took months or years.”

RTI has not been popular with bureaucrats who often ignore requests for information. The CIC is pondering granting of appeals which would allow people the right to access the sources of funds of anyone seeking public office.

• How effective is India’s RTI Act:

The news item in the Hindustan Times quoted a prominent Central Information Commissioner Shailesh Gandhi, warning the country that the Government and the judiciary together pose a serious threat to the RTI. Gandhi argued that the Government’s infrastructure — training, resources for implementation of the RTI is woefully inadequate. He also highlighted the role of the Courts in weakening the Act. The judiciary has been granting stays on orders of the Information Commission – which he noted is a very dangerous trend.

• Mockery of the RTI Law by some Courts:

The gap between the judiciary’s traditionally insular self-image and the public’s rising expectations of accountability from all institutions is evident from the rather surprising interpretation made by the Supreme Court and some of the High Courts on the nature of information that would fall under the ambit of the RTI.

Making a mockery of this much-vaunted legislation, these Courts have made out on their administrative side that the only kind of information that can be accessed by citizens under RTI is what is already “in the public domain”.

When it challenged the Central Information Com-mission’s direction on the declaration of assets by Judges, the Se, in its petition before the Delhi HC earlier this year, had claimed that RTI’s definition “shows that the information which is required to be given must be information in the public domain.” Accordingly, it argued the application regarding declarations of assets by Judges was not maintainable inasmuch as the information sought for was neither in the public domain, nor was it required to be given or maintained under any statue or law.”

If the SC’s interpretation of the definition of information were to be valid, none of the public authorities should have been, for instance, disclosing file notings because given the confidential manner in which they are written by bureaucrats and ministers during decision-making, they are clearly not in the public domain. It is the operation of RTI that has brought into the public domain all manner of information that would have otherwise remained behind the official veil of secrecy. The wide-ranging definition of information contained in S. 2(f) of RTI does not bear out the SC’s claim that it is limited to material lying in the public domain. In fact, the SC seems to have imported the expression “in the public domain” into its petition on the basis of the rules framed by the Delhi HC

For, under the rules framed by it in 2006, the Delhi HC assumed the power to withhold “such information that is not in the public domain or does not relate to judicial functions and duties of the Court.”

• Pay-Se-Park in Mumbai :

An advocate, whose two-wheeler was towed away because he did not give in to the demand of a man who was running an illegal pay-Se-park racket, used the RTI Act to learn how BMC contractors exploit the lack of parking space to line their pockets.

Advocate Sushil Dalvi, who works with the I-T Department, says, “Parking in South Mumbai is a horrible experience. Rules provide charge for two-wheelers at Re.l per hour, but I have been charged anything between Rs.S to 40.”

Most people cough up the money as they don’t want their vehicle towed away. But Dalvi’s tolerance ended six months ago. He had parked his scooter near Cafe Noorani at Haji Ali, a spot where several two-wheelers were parked. But, when he returned after lunch, only his two-wheeler had been towed away though there were several parked in the same spot. After probing around a bit, he learnt why.

He had refused to pay a person who claimed to be running a pay-&-park business there. And, he was right in doing so because the business was illegal. The space had not been earmarked for pay-&-park and was, in fact, a no-parking zone. Dalvi got his vehicle after paying a fine.

Immediately after the incident, Dalvi filed an RTI query with the BMC demanding details of pay-Se-park contracts allotted in wards A, B, C, D, E, F (south and north) and G (south).

“When I compared the plans with the actual parking plots, I found out that most accommodate more vehicles than they are authorised to. Also they expand their area of operations by encouraging double parking, parking on both sides of the road and on footpaths. But when I pointed out these illegalities to civic officials, they simply threw up their hands.” said Dalvi.

(Source: Mumbai Mirror of August, 2009)

• Mumbai SSC Board and RTI :

Pune Information Commissioner Vijay Kuvalekar has ruled in the case pertaining to Pune SSC Board that answer sheets were not confidential since they were not covered ul s.8 of ‘he RTI Act.

However, Mumbai SSC Board’s PlO in case of Samir Kanparia, rejected the application to inspect the answer sheets and held that they are confidential as per the provisions of law, and secondly, that no public interest will be served if the student is allowed inspection of answer sheets, hence will not allow him to inspect them. Kanparia also submitted before the Board the order passed by the Central Information Commission, in which it had directed the Institute of Chartered Accountants of India to show answer sheets to a student.

Matter is now pending in appeal before CSIC, Dr. Suresh Joshi.

• Proposed Amendments to RTI Act:

In a bid to strengthen the Right to Information Act, the Government has initiated action on a proposal to review the exemption of security and intelligence organisations from its purview. It is being examined whether some of the organisations could be deleted from the second schedule of the Act. Another proposal under examination of the department is to add some more categories of information to the list given in S. 4(1) of the Act which all public authorities are required to publish suo motu. This will enable greater proactive disclosures by public authorities.

• Performance at the Central Information Commission of 7 Commissioners:

The following is the chart of disposals by CICs in the first seven months of 2009.

BCAJ Admin

Right to Information

Part A: Decisions of the Court and CIC

S. 8(1)(e), (i), (j) and S. 10(1) of the RTI Act :

Ms. J. D. Sahay, CCIT-1, Ahmedabad had applied for empanelment/appointment to the post of member, CBDT in 2006 but was not selected. Aggrieved by non-selection, in 2007 she sought certain information, which could throw light on the reason for her non-selection.

Vide two RTI applications, the appellant had sought copies of various documents including her ACRs of 10 years, minutes of the meeting of Committee of Secretaries (COS) and certain other information concerning the process of empanelment.

Both, her applications and appeals were rejected on the ground that the information sought for is personal and confidential in nature and, therefore, exempted from disclosure u/s.8(1)(j) of the RTI Act and also on the basis that information sought is of secret/ confidential in nature, therefore, exempted from disclosure u/s.8(1)(i) of the RTI Act.

Interestingly, the First Appellate Authority (FAA) further invoked S. 8(1)(e) stating that the information is available with the Department of Revenue in their fiduciary relationship with officers who were under consideration during the selection.

In her appeal before CIC, she made following submissions :

(i) Both CPIO and Appellate Authority erred in denying her the information and the decision was announced without hearing her. Hence grave injustice has been done to her;

(ii) Information has been used against her without disclosing the comments/gradation to her at any time. This is gross injustice done to her;

(iii) The plea regarding secret and confidential nature of information does not hold force because the information relates to the appellant and that she is not seeking information in respect of any other person;

(iv) The procedure and technique followed to determine any cut-off point should be disclosed to the aspirants. The action relating to the determination and application of cut-off points being a critical factor for an aspirant should be put in public domain.

At the hearing before the full Bench of CIC, Ministry of Finance, Department of Revenue in the written submission argued that file dealing with selection of Members, CBDT contains various secret and personal information about the officials considered for selection. This information is exempted from disclosure in view of the provisions contained in S. 8(1)(e), (g), (h), and (j) of the RTI Act. At the time of hearing, the respondents also stated that what are being asked for are not DPC proceedings but proceedings of a Selection Committee consisting of senior Secretaries. All these proceedings are confidential and marked as such. They also submitted that these minutes are not with them but the Cabinet Secretariat.

CIC in its order stated :

The object of RTI Act is also to bring in transparency and accountability in the working of Public Authorities. RTI Act confers a right on the citizen to access information held by a public Authority and every public Authority is obliged to facilitate this right. ACRs do contain an objective assessment of an officer and non-communication of the same has been held to be arbitrary by the Court and as such violative of Article 14 of the Constitution of India.

In regard to the disclosure of Annual Confidential Report, it has been our view that what is contained therein is undoubtedly ‘personal information’ about that employee. Accordingly, in Shri Gopal Kumar v. Maj. Gen. Gautam Dutt, DGW, Army HQ, (Appeal No. CIC/AT/A/2006/00069 dated 13-7-2006), a Division Bench of Commission held that ACRs are protected from disclosure because arguably such disclosure seriously harms interpersonal relationship in a given organisation. Further, the ACR notings represent an interaction based on trust and confidence between the officers involved in initiating, reviewing or accepting the ACRs. These officers could be seriously embarrassed and even compromised if their notings are made public.

As regards the documents concerning DPC, the concerned Public Authority is directed to make available information in terms of request of the appellant but there shall be no obligation to disclose details concerning 3rd parties. The respondent Public Authority may suitably use the severability clause in S. 10(1) of the Right to Information Act.

Note :

Paras 1 and 2 in above order are contradictory to each other. In para 1, as stated, the Supreme Court has held that fairness and transparency in public administration requires that all entries whether poor, fair, average, good or very good in the ACR whether in civil, judicial, police or any other State service except military must be communicated to him within a reasonable period so that he can make a representation for its upgradation. The Apex Court held that in their opinion this is the correct legal position even though there may be no Rule/G.O. requiring communication of the entry, or even if there is a Rule/G.O. prohibiting it, because the principle of non-arbitrariness in State action as envisaged by Article 14 of the Constitution in our opinion requires such communication. Article 14 will override all rules or government orders.

In para 2, inspite of above position, Commission has denied disclosure. It has taken the following view :

There are, thus, reasonable grounds to protect all such information through a proper classification under the Official Secrets Act. This decision of the Commission has been followed in several other decisions also and the Commission has held that the disclosure of ACR is exempt u/s.8(1)(e) of the Right to Information Act, 2005 unless the Competent Authority is satisfied that a larger public interest warrants disclosure of such information.

It is further noted that the Commission may change the hitherto held view if a full Bench of the Commission considering the matter in a couple of appeal/complaint cases decides otherwise. Presently, the matter is still considered as sub-judice by the commission.

[Chief CIT-I, Ahmedabad v. Ministry of Finance, Department of Revenue, New Delhi, Appeal No. CIC/AT/A/2008/00027 & 33; Decided on : 6-2-2009]

(Full Bench Coram : Mr. Wajahat Habibullah, CIC, Prof. M. M. Ansari, IC and Mr. A. N. Tiwari, IC)

Whether co-operative societies are public authorities?

In September 2009 issue of BCAJ, in this column is reported the judgment of the Kerala High Court holding that co-operative societies are public authorities.

Similar issue has come before the H.C. of Bombay (Nagpur Bench) decided on 31-1-2009 in which the Court has held :

It is well settled that general regulations under an Act, like the Companies Act or the Cooperative Societies Act, would not render the activities of a company or a society as subjects to control of the State. Such control in terms of the provisions of the Act are meant to ensure proper functioning of the society and the State or statutory authorities would have nothing to do with its day to day functions.

As pointed out earlier in the present matter we have to find out whether the petitioner-bank is controlled by the government, if ‘yes’ it will be ‘public authority’ and if ‘no’ it will not be ‘public authority’, because none of the other requirement to make an institution a ‘public authority’ are available in the present case. ‘Control’ does not mean regulatory or statutory control. In the case of Ajay Hasia v. Khalid Sehracvardi, reported in AIR 1981 SC 487 three judges’ Bench of the Supreme Court had laid down the law and it was reiterated by the Constitution Bench of the Supreme Court in the case of Pradeep Kumar Biswas v. Indian Institute of Chemical Biology, (2002) 5 SCC 111 and the observations of the Supreme Court in Pradeep Kumar v. Indian Institute were reiterated in the case of S. S. Rana v. Registrar Co-op. Societies. Thus, it is clear that the control must be particular to the body in question and it must be deep and pervasive. If it is – so found then such body is ‘State’ within the meaning of Article 12 of the Constitution of India or a ‘public authority’ within the meaning of S. 2(h) of the Right to Information Act. When the control is merely regulatory; whether under statute or otherwise, it would not serve to make the body a ‘State’ or ‘public authority.’ In view of the full Bench authority of this Court in the case of S.V. Co. op. Bank v. Padubidri, (AIR 1993 Bom. 91) and in view of law laid down by the Supreme Court in several authorities, it is clear that, in absence of existence of deep and pervasive control with reference to the institution, it cannot be called a ‘State’ or ‘public authority’ within the meaning of the Right to Information Act.

In view of the fact and legal position discussed earlier, it must be held that the petitioner Bank is not a ‘public authority’ within the meaning of S. 2(h) of the Right to Information Act.

I find that the State Information Commissioner committed error in allowing the appeals filed by respondent No. 3. Therefore, it is necessary to intervence and set aside the impugned order”.

[Dr. Panjabrao Deshmukh Urban Co-operative Bank Ltd. v. The State Information Commissioner, W.P. No. 5666 of 2007; decided on 31-1-2009]

Author’s comments:

Similar to the decision as above of Bombay High Court, in more than one case, Karnataka High Court has. also decided on similar ground, that co-op. SOCIetiesare not public authority.

What distinguishes decisions of Bombay & Karnataka High Court v. that of Kerala HC is that the former is based on ‘control’ provision while the latter is based on ‘substantially financed’ part of the provision [So2(h)(d)(i) reads: body owned, controlled or substantially financed]. Kerala High Court has taken within its sweep all funds provided by appropriate Government from its own funds or funds which reach societies thru Government or with its concurrence i.e. financed directly or indirectly by appropriate Government.

I am of the opinion that the decision of Kerala High Court is eorrect and needs to be accepted by all. Other day justice D. Chandrachud said: “There must be wider norms for disclosure. Suppression of information must be the exception. He also said that time has come when RTI should not only cover just public bodies but also private bodies. In number of cases, Information Commission has stated: “Under this Act, providing information is the rule and denial is an exception. Any attempt to constrict or deny information to the sovereign citizen of India without the explicit sanction of the law will be going against rule of law”.

Part B : The RTI Act

Continuing from October BCAl, the summary of two reports:

One study by Price water house Coopers (PWC) as appointed by the Department of Personnel and Training (DOPT), titled as ‘Understanding the key issues and constraints in implementing the RTI Act.’ Its final report as Executive Summary is published in June 2009.

Second study by National Campaign for People’s Right to Information (NCPRI) and RTI Assessment Analysis Group (RaaG) in collaboration with number of other social bodies including TISS, Mumbai under the title ‘Safeguarding the Right to Information’ .

DOPT-PWC Report:

Improving convenience in filing requests:

As determined by the survey, most of the applications (more than 70% of the people surveyed) for information are filed at the Government offices, a conducive and facilitative environment at Government offices is a necessary condition to ensure that citizens are able to apply and receive information in a convenient manner.

Key issues:

As per S. 4(1)(b)xv-xvi, S. 6(1) and S. ‘5(3), the Public Authority is expected to proactively provide certain information/facilitate the citizens in accessing the information as per the RTI Act. However, during the study, it was noticed that there was a wide gap in ensuring convenience to the citizens in filing requests for information. There were also anecdotal instances where the citizen was discouraged to file for information requests (e.g., the form for requesting information is only a guideline, but at many places, the information requests were rejected if the applications were not in the prescribed format).

Submission at the PlO office is the most prevalent channel. However, over 26% of the citizens had to pay more than three visits to submit applications and 17% said no sign boards were present to help them with the process.

Lack of an updated list of PIOs, which leads to citizen inconvenience [providing updated list of PIOs as per S. 4(1)(b)(xvi)].

Payment of cash is the most prevalent channel. However, it has the inherent limitation of requiring the applicant to be present physically, whereas as per the Act, there is no such restriction. Most of the payment modes accepted by the Public Authorities have this inherent limitation.

Inadequate help was provided to applicants or the attitude of PIOs was non-friendly [assistance is expected from PIOs as per S. 5(3) and S. 6(1)].

Approximately 89% of the PIOs were not using the provision of inspection of records by citizens, which led to delay in providing information. (As per S. 2(j)(i), ‘inspection of work, documents, records’ is a means to provide information under Right to Information Act).

Over 75% of the information seekers were dissatisfied with the quality of information provided.

Encouraging accessibility to information is one of the major change management issues among Government employees. For a Government servant, there has been a significant shift from the ‘Official Secrets Act’ mindset to the ‘Right to Information Act’ mindset.

Recommendations:

In order to facilitate filing RTI requests / appeals, the following alternative channels should be considered :

Common Service Centers (CSCs) is a scheme of the Government of India under which 1,00,000 CSCs are being created. This means that there would be approximately 1 CSC for every 6 villages. These CSCs are expected to act as front-end/single window outlets for many Government services. These are being operated by private agencies under the Public-Private-Partnership model. It is recommended that these CSCs should be used to collect applications [to act as APIO, as per S. 5(2)] and facilitate Citizens in filing RTI applications.

Department of Posts (GoI) is already a designated APIO under the S. 5(2) for Central Government. It is suggested that the State Governments also accord the status of APIO to post offices and designate staff to assist citizens in drafting and forwarding the applications/appeals.

RTI Call Centers : these have already been implemented in some states or are in the process of being implemented (e.g. in Bihar, Haryana). This is a convenient channel wherein the RTI application is taken by the call centre and payment of fee is included in the telephone bill.

RTI Portal: In this case the information request can be made through the RTI portal. Various State Governments have already started planning the implementation of this recommendation. The RTI portal should contain links to all Ministry /Department websites of the appropriate Government.

The Ministry/Departments should provide a comprehensive list of agencies/offices under its control and a link (or a webpage) which contains all the suo-moto information desired in S. 4(1)(b).

These agencies / offices should be categorised as recommended in ARC report, viz. (i) constitutional body (ii) line agency (iii) statutory body (iv) public sector undertaking (v) body created under executive orders (vi) body owned, controlled or substantially financed and (vii) NGO substantially financed by the Government.

The RTI application is made online by choosing the relevant Public Authority on the website owned by IC/appropriate Government. The information seeker has the option of making the payment of fee through a payment gateway.

Also there are various e-Governance initiatives (such as e-District, e-Municipalities) which are proposed to have an RTI module in the software application being developed for this project. The role of e-District kiosks would be to act as APIOs for the other State Govt. departments.

Further, it is suggested that the appropriate Government amend relevant rules so as to facilitate ease in paying the requisite fees from any part of the country, as per S. 6(1). Some of the recommendations are as follows:

Define certain minimum channels for payment, some of which are convenient to people residing in other parts of the country. At the least, it should have the following channels:

i) Indian Postal Order

ii) Demand Draft

iii) Cash

iv) Court fee stamps

v) Non-judicial stamps

Introduce RTI envelopes, which would have an inbuilt cost of application fee.

Facilitate payment through Electronic Pay-ment Gateway while submitting RTI application on the web.

At this stage, it would be pertinent to mention that some of the above channels may lead to revenue loss for the State Government (for example payment made through Indian Postal Order /RTI envelopes would result in revenue accruing to the Central Government, whereas the revenue should accrue to the State Government in case the RTI application is for a Public Authority under the State Government.

However, it may be noted that this loss would be insignificant and the revenue accruing to the Central Government would be utilised for strengthening the Act through awareness generation, Knowledge Resource Centre, etc.

Raag & NCPRI Report:

Current status and preliminary findings:

(2) Urban survey:

RTI applications have been filed in Public Authorities (PAs) of the Central Government, 10 State Governments and Delhi. However, the current analysis is based on applications received by 305 PIOs in 6 States, the Central Government and Delhi. These applications are addressed to the sample of public authorities as listed and also included district level public authorities. The objective was to assess the ease of accessing information through the use of the RTI Act. The applications filed asked for lists of RTI applicants and appellants that have filed applications in the respective PAs, along with data on the total number of applications and appeals the PA received since 2005. The application also requested details of the nature of responses, and copies of all the applications, the appeals, and orders of the first appellate authority.

To assess the ease of applications, the RAAG team tracked these applications for four months to asses speed of responses, nature of response, process of accessing information based on the response and finally, the first appeal process.

Some interesting findings emerging from the Urban Survey’s RTI filing process are :

Response rates – Nearly three fourths of the applications filed received responses.

However, the responses were somewhat slow in coming. In only a third of the cases where the responses were received, were received within the stipulated time period of 30 days.

Access to information – Of the total responses received, three-fourths furnished information directly or upon receiving payments for photocopying.

About half of the total applications filed received positive responses. However, many difficulties were encountered in payments for photocopying and other fee demanded.

Variations across Centre, State and District PAs:

Overall, the central government responded much more quickly and shared much more information than state governments. The Ministry of Environment and Forests and the Railways stand out for speediest responses on a large number of applications. Nearly %th of the RTIs filed were responded to within 30 days and in over half the cases, information was furnished .

At the state level, Meghalaya stands out as the quickest, the most compliant, and also the politest amongst all the states surveyed, in responding to RTI applications – the largest percentage of responses with all the information requested were received from Meghalaya.

Overall, districts appear to be much slower, and much less efficient in responding to RTI applications than states. Meghalaya and Karnataka stand out for quickest responses at the district level.

PA level analysis suggests that the police department is overall the slowest to respond to RTI applications. The largest number of rejections also came from the police.

Interestingly most of these come from Delhi police. Revenue department and the women and child department come a close second to the police.

The RAAG Team’s practical observations on the RTI filing process:

In filing and appealing this vast diversity of applications, the RAAG team confronted four major challenges, which would certainly act to stymie RTI applications by those with less resources than we had.

Plethora of state rules and payment modes – As we discovered through hard experience, every State has its own set of RTI fee and mode of payment rules. In some States, the application fee is Rs.10 and can be paid by IPO; in others it is Rs.20 and can only be paid by Demand Draft or a court fee stamp issued in that particular state. Many of our applications were thus returned, and we had to pore over the plethora of differing State rules to ensure that we got it right the second time. Similarly, some States require that only treasury challans be used to pay for requested information, which required many trips to Government offices and officials, but without much success.

Poor information on First Appellate Authority – In many states, it proved very difficult, if not impossible, to find the name and address of the First Appellate Authority for the departments in which we filed RTIs. Almost none were listed on the departmental website, and many are not listed on the State RTI or SIC portal either. This was especially true at the district level.

Appealing deemed refusals – While the RTI Act binds the PlO to inform the applicant who the First Appellate Authority is in case of a rejection, the absence of publicly available FAA information becomes especially problematic in deemed refusals. Since, in such cases, the applicant receives no response at all from the PlO, he or she is constrained to appeal to the FAA. Thus, if FAA information is not easily available, it becomes a particular handicap in taking forward an application.

Unfamiliarity with the concept of a PlO – Confirming the rural survey finding that many PIOs do not know they are PIOs, many of our West Bengal district applications came back unopened. The post master’s remark was that the application had been rejected by the District Collectorate, because no such official existed.

Gender bias – Given the dominance of male applicants, PIOs appear to be convinced that anyone who files an RTI application MUST necessarily be male. Although RAAG RTI applications were all filed by women, unfailingly all the responses addressed us as ‘Mr.’ Equally amusing, but a poor reflection on attention to detail in public authorities, is that most responses completely miss-spelt and distorted our names, even though our RTI applications had all been typed to eliminate any such possibility. Bincy thus variously became Binoy, Vinay, Biceny, Binno, Bissy, etc. !

Part C : Other News

RTI query shows how undertrials suffer in jails:

All those who have been locked up while being completely innocent or have served more than half the prison terms as an under trial of the prescribed maximum sentence for their alleged crime are very ordinary people, without influence to raise a stink or money to hire pushy lawyers. To begin with they were all bewildered by the charge being brought against them, and then terrorised by the relentless grind of the wheels of justice, and finally left rotting behind bars with their spirit crushed. There are as many as 14 under trials and five convicts in judicial custody in just one jail of Tihar for the past five years because their appeal is yet to be heard by the Delhi High Court. These facts have come to light thanks to flurry of pointed questions under the Right to Information Act by a public-spirited lawyer, Manish Khanna.

Hawkers in Mumbai :

BMC wards give different answers to a query raised under RTI application like blind men trying to figure out the shape of an elephant. Jagdeep Desai wanted to know from the civic body as to what is the definition of ‘legal hawker’. But the confusing replies he got from different departments illustrate how clueless they are, and how lightly the BMC is treating the menace.

The Superintendent of Licence chose not to answer the query, stating that “the matter is sub-judice”. D/ ward and K/West Ward authorities replied that a hawker s a “person who sells goods kept on his head m ving around the street or road, and a legal hawke is one who has licence u/s.313 of the Mumbai Municipal Corporation Act”. S/Ward requested Desai to collect required information/ documents on payment of necessary charges from respective senior inspector (encroachment) of the ward while B/Ward and E/Ward replied that “the necessary information has already been furnished to you by the Superintendent of Licence”.

Desai is perplexed that while one BMC official did not answer the RTI query citing legal obligations, other replied readily. This is a complete contradiction. It seems that the information is being held back on purpose, because they have an issue with the definition of a legal hawker. Otherwise, all the replies to questions raised in the application should have been the same.

Chief Justice of India under RTI :

In many issues in past under this column, I have covered the huge controversy and litigation which was going on re. applicability of RTI Act to the office of CJI. After two years of stiff resistance, the Supreme Court finally replied to a Right to Information query, saying that its judges were declaring their assets to the Chief Justice of India (CJI).

President of India on RTI :

The 4th Annual RTI Convention hosted by Central Information Commission was inaugurated on 12th October by Smt. Pratibha Oevisingh Patil, the President of India. In her speech she stated:

“There is a fine balance which needs to be maintained between application under the Right to Information to public authorities and also ensuring that public authorities are not flooded with applications, some of them frivolous nature, which could over-whelm their ability to respond in time. She said that institutions were increasingly coming under” greater scrutiny and information was no longer the preserve of a few and there is greater emphasis on transparency of work and accountability”.

Elaborating on the initiatives taken by the government, minister of state for personnel, public grievance and pensions, Prithviraj Chavan said a policy on data sharing and accessibility was under’ active consideration’. He added, “A large amount of Scientific, technical and economic data is generated with public funds. The policy will encourage the data to be prepared in standardised, digital form so that all non-sensitive data can be shared for legitimate use”.

Statistics:

Number of RTI queries filed in Maharashtra

2006 1.4 lakh2007 3.16 lakh
2008 4.16 lakh 2009 2.5 lakh (6 months)

Projection by the end of 2009 around 5 lakh

17-18 lakh queries all across India

RTI’s 4th anniversary function on Monday, 12-10-2009 in Mumbai:

Private bodies should also be brought under the ambit of the Right to Information (RTI) Act, Bombay High Court judge justice Ohananjay Chandrachud said on Monday. “We cannot disempower our-selves, thinking that private bodies do not come under the purview of the Act.”

Celebrating four year of the sunshine act, RTI activists appealed that its scope be widened by including the private sector in the public service under it. “When the act is for fighting corruption, why not have it for the private sector too?” Ashok Rawat, an activist, asked.

“Disinvestment and deregulation have seen the government handing over public services to private hands. Now, private players are just as important as government. The RTI Act is not code to give information, but a constitutional right of a person to know about something. Right to Information is now beyond the scope of disclosure” said Chandrachud.

Introduced in 1766 in Sweden, the RTI Act has been adopted in 85 countries with varied levels of implementation. Activists also complained about the roadblocks public information officer (PIOs) created in their attempt to scuttle information. “The most common argument is that the information asked for does not come under the definition of the Act,” said Narayan Varma, a trustee of PCGT, an NGO working to spread the RTI awareness.

“Unfortunately, bureaucrats themselves train PlO how not to disclose information” said Rawat.

“One needs to understand that access to information is means to an end. This means should be eliminated as disclosure should be voluntary,” said Chandrachud.

“We are sensitising our officers. There is a need to institutionalise experience at the state level, jut as it had been at the Centre by making Shailesh Gandhi the Central Information Commissioner, so that there is a uniform pattern that will speed up the process of deliverance.”

Some NGOs, like Mahiti Adhikar Manch and PCGT, plan to set up a panel to ensure voluntary disclosure of information, which is part of the Act.

BCAJ Admin

Right to Information

Part A : Decisions of CIC

Mr. Mahavir Chopda of Mumbai addressed a few queries under
the RTI Act to NMIMS University of Vile Parle (W), Mumbai. The queries raised
included :

In how many instances did students cancel admission after
paying fees for admission to your FT-MBA Course ?

What amount of fees was retained by NMIMS (i.e.
collected but NOT refunded to students) due to the above cancellations ?

PIO refused to give the information and the First AA did not
reply to the appeal.

In the appeal before CIC, the representative of NMIMS
submitted that NMIMS is not a public authority. To decide on this issue, CIC
stated that two matters need to be determined :

a) Whether NMIMS is public authority by virtue of being a
deemed University.

b) Whether NMIMS is ‘substantially financed’ by Government.

In the hearing before CIC, Mr. Shekhar Gupta appeared on
behalf of NMIMS. He was asked to inform the Commission whether they have
received land at concession rates, or any other subsidies. He was also asked
whether donations received by the Institution are exempt from payment of Income
tax. If any of the concessions described have been availed of, he was to give a
Chartered Accountant’s certificate certifying the value of these concessions.

The respondent has stated that they are unaided Institution.
It was also argued that information sought is exempt u/s.8 (1)(d) of the RTI
Act. An affidavit was filed by Mr. Madhav N. Welling, Pro-Vice Chancellor of
NMIMS University dated 3 February, 2009 stating that the deemed University has
not obtained any land at concessional rates nor are the donations received
exempt from payment of Income tax.

‘Public Authority’ is defined u/s.2 (h) of the RTI Act. It
includes any authority or body or institution of self government established or
constituted . . . . by notification issued or order made by the
appropriate government.

Section 3 of the University Grants Commission Act, 1956,
which provides for the constitution of Deemed Universities reads as follows :

“The Central Government may, on the advice of the Commission,
declare by notification in the official Gazette, that any institution for higher
education, other than a University, shall be deemed to be a University for the
purpose of this Act, and on such a declaration being made, all the provisions of
this Act shall apply to such institution as if it were a University within the
meaning of clause (f) of Section 2.”

CIC noted : Thus, it is clear that a deemed University
gets this status by virtue of a notification issued by the Central Government.
NMIMS has been conferred the status of a deemed University by virtue of
notification No.F9-37/2001-U-3 dated 13 January, 2003 of the Government of
India. It clearly meets the criterion of sub-clause (d) of clause (h) of section
2 of the RTI Act. Hence, all deemed Universities are Public Authorities as
defined under the RTI Act. Since NMIMS University is also a deemed University by
virtue of a notification by the Central Government it is a Public Authority and
must furnish information as mandated by the RTI Act.

The Commission also held that provisions of section 8(1)(d)
do not exempt the information sought, as the said information is not of
commercial confidence, trade secrets or intellectual property the access to
which would harm the competitive position.

In view of the above view taken by the Commission, it held
that NMIMS University is a Public Authority as defined in the RTI Act and must
give the information sought by the appellant. “The information shall be supplied
by Mr. Madhav N. Welling, Pro-Vice-Chancellor of NMIMS University to the
appellant free of cost before 20 April 2009”.

[Mr. Mahavir Chopda vs. NMIMS University, Decision No.CIC/OK/A/2008/01098/SG/2550
dtd. 31.03.2009].

Part B : The RTI Act

Standing committee of the Parliament on RTI Act, 2005 :

In previous 4 issues of BCAJ, 10 items have been reported :

1. Level of awareness

2. Use and Misuse of the RTI Act

3. Reduction of 20-year period for keeping documents

4. Voluntary Disclosures

5. Changes in Section 8

6. Penalties

7. Use of the RTI Act and refusal of information

8. Grievance redressal

9. Application fee

10. Strengthening the RTI Act

Now 11th and final item is being reported :

Central Information Commission

The Central Information Commission has a huge backlog of cases, which seems to grow larger everyday. This is mainly due to the very poor support system and infrastructure provided by the government to the Information Commission. For the Commission to function effectively, they need to have access to a large number of qualified advisors who can do a preliminary analysis of each appeal and complaint, thereby making the task of the Commissioner easier.

Given the role the Commission has to play, especially in adjudicating on matters relating to the government, it is important that the Commission retains its intellectual and functional independence. This is difficult to do when departments and ministries of the government control their budgets. It is, therefore, important that the budgetary allocations for the Commission are voted directly by Parliament or, at the very least, are a separate plan head without being subsumed under any ministry.

It has been observed that various public authorities are not following many of the Commission’s orders and directions. Considering the role the Parliament envisaged for the Information Commission, this is essentially subverting the wishes of the Parliament.

Therefore, it is important that the Prime Minister’s office send out a strong letter directing all public authorities to strictly follow the orders and directions of the Information Commission, unless they have been able to obtain a stay from a competent court. The PMO should also set up a mechanism to review compliance on a monthly basis and the report of compliance should be discussed at the three monthly meeting of the earlier suggested RTI Council.

The manner in which Information Commissioners are selected is shrouded in secrecy and reeks of arbitrariness and patronage. Though the Act very clearly specifies that Information Commissioners must be ‘persons of eminence in public life’, for the government this has mostly meant retired civil servants. No effort has been made to open up the process of selection to public scrutiny, or even to share with the public the rationale for choosing the people who are chosen and not others. This is so even when there have been demands from the public to do so, as in the case of the recent appointment of four new information commissioners. It is ironic that while appointing the Central Information Commissioners under the RTI Act, the Government of India repeatedly violates both the spirit and the letter of the RTI Act, specifically Section 4(1)(c & d).

These sections specify that the government must, suo moto: “publish all relevant facts while formulating important policies or announcing the decisions which affect public; …. provide reasons for its administrative or quasi-judicial decisions to affected persons”. Surely the appointment of Information Commissioners is an administrative decision that affects all the people of India, and also an ‘important decision that affects the public’ !

Part C : Other News

Haj House in Mumbai

Replying to an RTI application filed by Mumbai-based social activist A. M. Attar in November 2008, the Haj Committee of India (HCI) has said that Haj House – the committee’s headquarters – does not belong to the Muslim community.

The popular notion that the massive Haj House near CST, built with donations from the community without any government funding, belongs to the Muslim community is wrong. The HCI, which falls under the ministry of external affairs (MEA), has clarified that Haj House is not a Muslim property and that it belongs to the MEA. Interestingly, The Haj Committee Act, 2002 does not clarify who owns Haj House.

“Muslims had contributed to the construction of the building. Apart from a couple of months when the Haj season is on, the building remains unused. This is gross under-utilisation of a prime property”, said city-based hotelier A. M. Khalid who, along with Attar, is fighting to get Haj House out of the MEA’s control.

CA Examination

Students who fail in chartered accountant exams can find out their mistakes by going through their answer sheets as the Delhi HC directed the Institute of Chartered Accountants of India (ICAI) to provide a certified copy of the paper of students under the Right to information Act. Dismissing an ICAl’s plea against a CIC order, the HC said the answersheet cannot be excluded from the purview of the RTI.

New Rules for RTI applications by NRI

In order to simplify the RTI application process from abroad, the CIC has framed new rules enabling NRIs to pay application fees and information costs at the Indian embassies and missions abroad. “The commission will meet officials from the external affairs ministry and DoPT to smoothen issues related to the mode of payment and acceptance of appeals. Embassies may accept only the fee and information cost and provide e-receipt to applicants”, CIC chief Wajahat Habibullah said.

Padma awards

In response to a Right to Information query filed by Subhash Chandra Agarwal, the Home Ministry has admitted that “no specific record of the deliberations of the meeting of the Padma awards committee is maintained.

Only the final recommendations of the awards committee are submitted for the approval of the Prime Minister and the President”.

In what appears to be an attempt to shrug off disclosure, the government said there were no ‘specific records’ created in terms of receipt of nominations when asked about the number of recommendations that were received by the Home ministry by the cut-off date of September 30.

Incidentally, the decision on the awards was taken over a period of three days in meetings held on December 19, 20 and 22, 2008. The non-official members of the committee nominated by PM Manmohan Singh included Prof. [yotindra Jain, Kapila Vatsyayan, R Chidambaram, Tarun Das and Sayeeda Hameed.

Assets of the Ministers from Rajya Sabha

Earlier PMO had ruled that information on MP’s assets as being furnished to the speakers of the Lok Sabha (LS) and Rajya Sabha (RS) are exempt.

On appeal to CIC, he referred the matter to the speakers of LS and RS. In response, the Rajya Sabha has agreed to provide asset details of the Union Ministers who are members of RS. In reply to RTI query, it provided the information details of assets and liabilities of 16 ministers out of 18 as available.

PM Manmohan Singh owns only Maruti 800, Mr. Praful Patel is the richest cabinet minister with combined wealth of Rs.46.8 crores, Mr. A. K. Antony has the least financial muscle with combined worth of Rs.17.9 lakhs.

Report of Maharashtra State Information Commission

Maharashtra SIC submitted the annual report of 2008 to Vidhan Sabha on 16.03.09. It is a document in Marathi. English translation is under preparation and hopefully will be available in early June. Meantime, some interesting statistics:

5 Commissioners together have imposed penalty in 256 cases, total amount of penalty levied Rs.34,01,432.

Total pendency of appeals as on 31.12.08 is 14,273 (In Mumbai 1574, in Konkan 1,339, Pune 3,863, Nashik 10, Aurangabad 3,584, Amravati 912, Nagpur 970).

Total pendency of complaints u/s.18 is 1207, (highest in Mumbai 560).

It is understood that Maharashtra is the first state in India to present annual report of 2008 as required under section 25 of the RTI Act.

BCAJ Admin

Right to Information

Part A : Decisions of CIC

S. 5(4) of the RTI Act :

Ss.4 of S. 5 of The RTI Act provides that the Public Information Officer may seek the assistance of any officer as he or she considers it necessary for the proper discharge of his or her duties.

Rakesh Agarwal of New Delhi applied for inspection of certain records of Tis Hazari Court, New Delhi.

In reply, the PIO stated that the appellant can inspect the records or take copies of the documents with the permission of Ld. Presiding Officer.

The appellant objected to the condition put for inspection in an appeal to CIC.

CIC, Shailesh Gandhi, in the Order noted as under :

“The onus lies on the PIO to approach any officer of the court as he considers necessary to procure the information that the appellant is seeking. If the appellant is exercising his right to information under the RTI Act, then he is within his statutory rights to only approach persons designated as PIO or APIO. He is not expected to seek permission from persons who are not designated under the RTI Act. The purpose of putting in place S. 5(4) is to ensure that applicants for information do not have to run from pillar to post to access information to which they are rightfully entitled to under the RTI Act. In present case, to ask the appellant to apply for permission from the Presiding Officer of the Court is in clear contradiction to the spirit and word of the law. The Commission considers the PIO’s reply as an instance of shirking responsibility and takes strong exception to such actions.”

S. 28 of the RTI Act :

S. 28 provides that the competent authority (the Chief Justice of all High Courts and Supreme Court are competent authorities u/s.2(e) of the RTI Act) may make rules to carry out the provisions of the RTI Act.

The Delhi High Court (Right to Information) Rules, 2006 as amended include :

The information specified in S. 8 of the Act shall not be disclosed and made available and in particular the following information shall not be disclosed :

(a) Such information which relates to judicial functions and duties of the Court and matters incidental and ancillary thereto.

CIC in his order noted as under for above rule :

The Delhi High Court RTI Rules have been framed u/s.28 of the RTI Act. This provision clearly states that the competent authority may make rules to carry out the provisions of the Act. Therefore, rules framed by the High Court u/s.28 cannot run contrary to the fundamental basis of the RTI Act which is to ensure that citizens can enjoy their fundamental as well as statutory right to information. Rule as above, in effect, appears to add another ground based on which disclosure of information can be exempted. No public body is permitted under the Act to take upon itself the role of the Legislature and import new exemptions hitherto not provided. The Act leaves no such liberty with the public authorities to read law beyond what it is stated explicitly. There is absolutely no ambiguity in the Act and creating new exemptions will go against the spirit of the Act.

Under this Act, providing information is the rule and denial an exception. Any attempt to constrict or deny information to the sovereign citizen of India without the explicit sanction of the law will be going against rule of law.

Right to information as part of the fundamental right of freedom of speech and expression is well established in our constitutional jurisprudence. Any restriction on the fundamental rights of the citizens in a democratic polity is always looked upon with suspicion. Even the Parliament, while constricting any fundamental rights of the citizens, is very wary. Therefore, the Commission is of the view that no competent authority has the sanction to import new exemptions and in the process curtail the fundamental right of information of citizens”.

Above two issues are part of the decision in Mr. Rakesh Agarwal v. Tis Hazari Court, New Delhi : CIC/SG/A/2009/000677/3392 of 22-5-2009.

PM’s surgery :

Mr. Jagdish Jetli made an RTI application to AIIMS, New Delhi seeking information on 7 points connected to the second heart by-pass surgery on the Prime Minister Dr. Manmohan Singh by a team drawn from Asian Heart Institute (AHI), Mumbai led by Dr. Rama Kant Panda. Information sought included :

Details of expertise of all members of the AHI team

Rules of the AIIMS under which a team from a private institute was asked to conduct this surgery.

The CPIO gave certain information which according to Mr. Jetli was vague and evasive.

The Bench of Mrs. Annapurna Dixit, CIC decided as under:

“The respondent submitted that the AIIMS has nothing on record regarding the qualifications of Dr. Panda who conducted the by-pass heart surgery, nor have reasons for his selection been recorded. He stated that the decision to invite Dr. Panda was taken jointly by the PMO and family members of the Prime Minister. The appellant’s contention was that the public has a right to know why a premier institute such as the AIIMS which is staffed by the best doctors in the country and with the best of medical facilities had to invite a “doctor from outside to conduct the operation in its premises. He added that this is a matter of great concern to the public and that inviting a doctor from another institute has eroded the reputation of AIIMS. Keeping the peculiar facts of the case in mind and in the light of the fact that Dr. Panda had used the facilities belonging to AIIMS, which is a public authority, the Commission directs the CPIO to obtain the relevant information from the Asian Heart Institute regarding particulars of Dr. Panda and to provide the same to the appellant. The appellant also to be informed about how the decision to invite Dr. Panda to conduct the surgery was arrived at and for what reasons and also be provided with minutes of any meetings in this connection, available with the AIIMS. All information to be provided by 20th June, 2009.”

[Mr. Jagdish Chander Jetli v. AIIMS, CIC/ AD/ A/ 09/00609 dated May 21, 2009]

Part B : The RTI Act

S. 25 of the RTI Act provides that the Central Information Commission and the Sta te Informa tion Commissions as soon as practicable after the end of each year, prepare a report on the implementation of the provisions of the RTI Act during the year and forward a copy thereof to the appropriate Government.

Annual Report 2006-07 of Central Information Commission is now submitted in April 2009. It is surprising that it has taken two years to prepare and publish the annual report. One does not know when Annual Reports of 2007-08 and 2008-09 would be prepared and published. Words ‘as soon as practicable’ are nebulous. One wishes that time limit was set in the Act as it stands in other Acts like the Companies Act. As reported in this feature in June, Maharashtra SIC submitted the annual report of 2008 to Vidhan Sabha on 16-3-2009, i.e., within less than 3 months, praiseworthy achievement. Hereunder, I reproduce salient features of the Annual Report of the Central Information Commission as appears in the executive summary printed in the said Report:

i) The number of requests made to each Public Authority [Vide S. 25(3)(a) of RTI Act] : the period under report witnessed exponential increase in the number of requests (1,71,404) received by Public Authorities. If all ministries are taken together the number of requests received in year 2006-07 are seven times over previous year. This increase will rise to more than 8 times if comparison is made for top ten ministries. The number of requests received by Public Authorities of top ten Ministries in year 2006-07 were 1,38,501 in comparison to 16,680 during 2005-06.

ii) Rejection of the requests [Vide S. 25(3)(b) of RTI Act] : out of 1,14,724 requests received by top 5 ministries only 8.9% requests are rejected during 2006-07 in comparison to rejection of 26.5% requests by top five ministries under different sections in the previous year. When all ministries are considered together, only 8.98% requests received are rejected in the year 2006-07 in comparison to 13.9% in the previous year. The major rejections were u/s.8 of RTI Act 2005 followed by u/s.11, u/s.24 and u/s.9. On an average, authorities under different ministries disposed 66% of the requests received in year 2006-07.

iii) Number of appeals/complaints decided by the Central Information Commission (Vide S. 25(3)(c) of RTI Act) : Total number of appeals or complaints received by CIC were 6839 during 2006-07 (1156 in Quarter-I, 1483 in Quarter-If, 1583 in Quarter-Ill, and 2617 in Quarter-Tv). The total number of appeals received by Public Authorities during 2006-07 was 15298. Out of these 8466 (74.93%) appeals were accepted by Public Authorities and 4888 (31.95%) were rejected.

iv) Disciplinary action taken [Vide S. 25(3)(d) of RTI Act] : The total number of show cause notices issued against various public information officers by Central Information Commission for not being able to comply with the provisions of the RTI Act during 2006-07 were 259. Out of these 259 cases, penalties are imposed in 24 cases u/s.20(1) of the RTI Act and also recovered in 12 cases. In addition, S. 20(2) was invoked in 8 cases. Further, compensation was awarded to 12 appellants by the Central Information Commission u/s.19(8) of RTI Act.

Part C : Other News

Amendments to the RTI Act :

In the address by the President of India, Shrimati Pratibha Devisingh Patil to the Parliament on 4th June 2009, in Para 32, she has covered number of measures on which her Government will initiate steps within the next hundred days. One of the items therein is :

Strengthening Right to Information by suitably amending the law to provide for disclosure by Government in all non-strategic areas.

However, it appears that amendments proposed are completely of different nature: The Times of India on June 19 reports:

In a body blow to claims of transparency, the UPA Government has proposed amendments to the RTI Act exempting all file notings except those dealing with social and development issues besides restricting access to pending policy decisions, cabinet documents and examrelated documents. The amendments also envisage increasing RTI fees substantially. The draft amendments proposed by the DoPT signal that the Government is keen to bring in changes in the law that it had been forced to drop in 2006 under pressure from Left parties and RTI activists. In a move aimed at discouraging ‘motivated information-seekers’ the DoPT Ministry has suggested that payment (at present Rs.10)should be hiked. There is a view in the Government that citizens should be made to pay for the pay of the officers working on RTI besides the amount for photocopying or accessing the information sought.

Objecting to the above proposal, Mr. Shailesh Gandhi, earlier RTI activist and presently erc has addressed a letter to the Prime Minis ter.

He states: It would be appropriate if the Government transparently accepts certain boundaries in the exercise of improving transparency.

The minimum requirements for this would be :

1) No reduction in the scope of S. 2(0, (h), (i) and (j).

2) No increase or addition in the exemptions u/s.8(1) of the RTI act.

The law has been spread by citizens across the coun-try and they value it very dearly. There are some worries in their minds about losing anything in the exercise of their fundamental right. It would be in the fitness of things if the Government declared the amendments they are proposing to the Act, and gave the reasons for the amendments publicly. I request you to clarify these matters soon so that citizens feel reassured.

• File notings :

Probably, as noted above, the proposed amendment for non-disclosure of file notings is caused by the serious battle going on between CIC and DoPT since years. CIC has often ruled (including under the Full Bench decision) that file notings are information as defined u/s.2(f). On the other hand, DoPT continues to hold the view that it is not an information. In FAQs as appearing on www.persmin.nic.in the Ministry, on interpretation of ‘what does information mean ?’ answers:

Information means any material in any form including records, documents, memos, emails, opinions, advices, press releases, circulars, orders, log books, contracts, reports, papers, samples, models, data material held in any electronic form and information relating to any private body which can be accessed by a public authority under any other law for the time being in force but does not include file notings’.

In an unprecedented move, CIC chief Wajahat Habibullah in early June issued summons to Joint Secretary S. K. Sarkar and Deputy Secretary Anuradha Chagti to appear on June 17 to explain why they should not be prosecuted under the IPC and penalised under the RTI for their failure to correct the misleading claim made on the DoPT website about file notings.

The provocation was the DoPT’s refusal, despite repeated directions to correct the misleading claim made on its website, that file notings were not part of the information that could be disclosed under the RTI. While other public authorities, including the Law Ministry and the Sc, have long accepted the CIC’s ruling that file notings are not exempt from disclosure, the DOPT has maintained otherwise on its website, much to the CIC’s chagrin. Habibullah found it. ‘appalling’ that the nodal department of RTI had ‘sought to emasculate the mandate’ of S. 19(7) which stipulates that the CIC’s decisions are ‘binding’.

RTI rescues Chembur residents from illegal garages:

For over five years, around 20,000 families in Chembur, Mumbai faced cronic problems of noise and air pollution coming from nearby illegal commercial garages and workshops. Their repeated complaints to the civic authorities failed to bring any relief. Irked by the indifference from the authorities, the residents filed a Right to Information plea and have now got their way. The RTI application clearly stated that these establishments were operating without licences. Not only that, they had encroached upon the footpaths violating more rules.

The civic officials have admitted that the RTI information will help them to come strongly against the illegal garages. The residents have more than one reason to cheer now, as not only their action will ensure less pollution, but it will also stop water-logging during the monsoons.

• RTI and e-governance :

Citizens across the country can now exercise their Right to Information on the phone and Internet. Inspired by the success of [aankari, a Bihar State Government initiative to accept RTI applications through phone calls, the Centre is all set to replicate the model across the nation.

Listing his priorities after taking over as the Min-ister of State for Personnel and Public Grievances, Mr. Prithviraj Chavan said that the Government of India would soon facilitate RTI queries through the phone and Internet by adopting the Jaankari model, albeit with more refinements in technology.

The Bihar Government’s citizen-centric Jaankari project had earned it the national e-governance award last year. Using the effective tools of voice communication, thus enabling even the poor and uneducated to file RTI queries. The Jaankari initiative only involves making a phone call by dialing 155311 and communicating details of the desired information to a call-centre person. The call-centre executive then drafts an RTI application and sends it to the public authority concerned.

• Electricity Consumption bills (ECb) in Mumbai:

You may be shocked with these figures but they are as obtained under RTI application:

We pay taxes to meet above bills!

BCAJ Admin

Right To Information

Part A: Decisions of the Court and CIC

S. 2(h), 2(f), 8(1)(e), 8(1)(j) of the RTI Act :

It is a very unusual court case when the Supreme Court of India (SCI) files writ petition to the Delhi High Court (DHC) ! The issue came up before the DHC whether the Chief Justice of India (CJI) is a Public Authority and whether CPIO of the SCI is different from the office of the CJI and if so, whether the RTI Act covers the office of CJI.

The writ petition covers a number of issues and the judgment runs into 70 printed pages (85 paras). Decisions on some of the issues are reported hereunder.

The CJI is a public authority u/s.2(h) of the RTI Act.

Asset declaration by the SC Judges, pursuant to the 1997 resolution is ‘Information’ within the meaning of the expression u/s.2(f) of the RTI Act. In Para 36 of the judgment, the DHC gave a very significant interpretation for this expression ‘Information’. It says :

As is evident, the definition is extremely wide; the crucial words are ‘any material in any form’. The other terms amplify these words, explaining the kind of forms in which information could be held by an authority. It also includes ‘information relating to any private body, which can be accessed by a public authority under any other law for the time being in force.’ Facially, the definition comprehends all matters which fall within the expression ‘material in any form’. There is no justification in cutting down their amplitude by importing notions of those materials which are mandatorily held by it. The emphasis is on the information available, having regard to the objectives of the Act; not the manner in which information is obtained or secured by the authority. Thus, inter se correspondence of public authorities may lead to exchange of information or file sharing; in the course of such consultative process, if the authority borrowing the information is possessed of it, even temporarily, it has to account for it, as it is ‘material’ held. As far as the later part of the definition, i.e., accessing of information by or under any law is concerned, it appears that this refers to what is with a private organisation, but can be accessed by the public authority, under law. The Court deduces this, because the theme is included by the conjunctive ‘and’; but for such inclusion, such private information would not have been subjected to the regime of the Act. Therefore, it is held that all ‘material in any form’ includes all manner of information; the absence of specific exclusion leads this Court to conclude that asset declarations by judges, held by the CJI are ‘information’, u/s.2(f).

CJI does not hold such declarations in a fiduciary capacity or relationship and hence not exempt under clause (e) of S. 8(1) of the RTI Act.

Contents of asset declarations pursuant to the 1997 and the 1999 Conference Resolution are entitled to be treated as personal information, and may be accessed in accordance with the procedure prescribed u/s.8(1)(j). Here, I also reproduce para 62 of the judgment which is very enlightening :

The right to access public information, that is, information in the possession of State agencies and governments in democracies, is an accountability measure empowering citizens to be aware of the action taken by such state ‘actors’. This transparency value, at the same time, has to be reconciled with the legal interests protected by law, such as other fundamental rights, particularly the fundamental right to privacy. Certain conflicts may underlie particular cases of access to information and the protection of personal data, arising from the fact that both rights cannot be exercised absolutely in all cases. The rights of all those affected must be respected, and no single right must prevail over others, except in clear and express circumstances. To achieve these objectives, and resolve the underlying tension between the two (sometimes) conflicting values, the Act reveals a well-defined list of 11 kinds of matters that cannot be made public, u/s.8(1). There are two types of information seen as exceptions to access; the first usually refers to those matters limited only to the State in protection of the general public good, such as national security, international relations, confidentiality in cabinet meetings, etc. The second class of information with State or its agencies, is personal data of individual citizens, investigative processes, or confidential information disclosed by artificial or juristic entities, like corporations, etc. Individuals’ personal data is protected by the laws of access to confidential data and by privacy rights. Often these guarantees — right to access information, and right to privacy, occur at the same regulatory level. The Universal Declaration of Human Rights, through Article 19 articulates the right to information; Article 12 at the same time, protects the right to privacy :

“no one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference of attacks.”

[CPIO, Supreme Court of India v. Subhash Chandra Agarwal & Anr., W.P. (C) 288/2009 decided on 2-9-2009]

S. 8(1)(a), (e) and (j) of the RTI Act :

The applicant, Sh. Chetan Kothari (of Mumbai) filed an RTI application with the CPIO, Ministry of Health & Family Welfare seeking information about medical, surgical or such other health-related problems of the Prime Minister. Specific points as follows :

(a) Major and minor types of operations done on the Prime Ministers of India during their tenure as Prime Ministers during the last five years, giving yearwise break-up of major/minor surgeries separately;

(b) Medical-related expenses incurred during each such operation, giving yearwise break-up of last five years;

(c) For how many days were the patients hospitalised during such major/minor operations giving yearwise break-up with names of the hospitals for last five years;

(d) Who bore the medical expenditure, whether deducted from PM’s salary or paid by the Government of India in a yearwise break-up form;

Both CPIO and the first AA refused the information sought on the ground that the medical care scheme for the Prime Minister being a classified document, information pertaining to the same was exempt from disclosure.

The evasive response of the Respondent Public Authority compelled the appellant to file a second appeal before the ere. The appellant contended that denial of information by the respondent public authority without quoting the appropriate Section, under which exemption from disclosure was sought, indicated the deliberate attempt of the public authority of hiding the information and leading to wrongful denial of information.

Extracts from the decision:

The first query seeks information about the number of major and minor operations done on the Prime Minister / s during the last five years. This information is an indicator of the health and medical history of the present Prime Minister of the country and is classified as sensitive and ‘Secret’ information as per the Government Notification as also defined in the Office Memorandum of the Government of India, Ministry of Home Affairs, dated 6-2-2002 titled Guidelines on review of departmental security instructions wherein the Clause 2.1 of the Security Classifications clearly defined ‘Secret’ as “…. information and material, the unauthorised disclosure of which could be expected to cause serious damage to the national security or national interests or cause serious embarrassment to the Government in its functioning”. Thus this information is exempt u/s.8 (l)(a)’of the RTI Act since disclosure of information about the health and/ or medical problems of the Prime Minister could be misused and/or abused to the detriment of the national interest and security. Hence, such sensitive information, which could jeopardize national security and interest, need not be disclosed.

In so far as the information as sought by the appellant against the points (b), (c) and (d) is concerned, some information already exists in the public domain like the information pertaining to the present Prime Minister’s by-pass heart surgery, number of days spent in hospital, medical expenses incurred for the operation and as to who – paid for the operation.

The remaining information, if any, still unavailable in public domain, despite the wide coverage by the media, deals with information of personal nature and is exempt under the scope of S. 8(1)G) of the RTI Act. In fact, the appellant has not made out a case that the said information is sought to serve any cause of larger public interest.

The respondent in his oral submissions has further sought exemption from disclosure of information under provisions of S. 8(1)(e) of the RTI Act, on account of the said information being of fiduciary nature between the Prime Minister and his team of doctors and medical experts. At this juncture, ‘fiduciary relation’ needs to be analysed in the light of its various connotations. The word ‘fiduciary’ is derived from the Latin termfiducia meaning’trust’.

The fiduciary relationship can also be one of moral or personal responsibility due to the superior knowledge and training of the fiduciary as compared to the one whose affairs the fiduciary is handling. In short, it is a relationship wherein one person places complete confidence in another in regard to a particular transaction or one’s general affairs of business.

S. 16 of Indian Contract Act also clarifies ‘fiduciary relationship’ while defining ‘Undue Influence’.

In fiduciary relationship, a person with the legal duty to act primarily for another’s benefit enjoys a position of trust, good faith and responsibility.

Thus the word ‘Fiduciary’ is often used as an alternative term for ‘trustee’. The relationship between doctor-patient, lawyer-client or banker-customer are the various examples of fiduciary relationship. Thus, the Respondent Public Authority stands in fiduciary relation with the Prime Minister, holding the information in trust/ confidence.

In view of the above-mentioned facts and circumstances of the case, the Commission observes that the information, as sought by the appellant, and if not already available in the public domain, the respondent public authority holding the said information in fiduciary capacity on behalf of their patient (in this case, the Prime Minister), is exempt under provisions of S. 8(1)(e) of the RTI Act. So whether the patient is a Head of a State or a common person, the information nevertheless re-mains fiduciary and is exempt from disclosure to the public at large,since it is held in great confidence and trust.

Thus, it was held by the Commission that the information as sought by the appellant is exempt on the threefold grounds of national security, protection of individual’s right to privacy and also because the information is available with the DGHS in fiduciary capacity.

Therefore, among the information sought, the in-formation about the health and medical problems of the present and former Prime Ministers which already exists in the public domain, due to extensive media coverage or otherwise, like the recent cardiac surgery of the present Prime Minister, may be provided by the CPIO by 15 November, 2009 to the appellant.

[Sh. Chetan Kothari v. 1. Ministry of Health & Family Welfare 2. DGHS, CIC/ AD/C/2009/000620 decided on act. 15, 2009 by CIC Annapurna Dixit]

Part 2 : The RTI Act

Continuing from October & November BCAl, the summary of two reports :

One study by PriceWaterhouseCoopers (PWC), appointed by the Department of Personnel and Training (DOPT), is titled as ‘Understanding the key issues and constraints in implementing the RTI Act.’ Its final report as Executive Summary is published in June 2009.

DOPT-PWC report :

Common infrastructure & capacity building:

The study also focussed on the information provid-ers to understand how well-equipped the Government/PA machinery is to respond to the needs of the RTI. This was studied from various aspects – training/knowledge, usage of IT, availability of basic infrastructure (like availability of photocopier at Panchayat level), etc. and whether adequate bud-gets existed to address the limitation.

o Key issues:

Record management:

o More than 38% of PIOs stated ineffective record management system for delay in pro-cessing

o Approximately 43% of the PIOs were not aware of the record management guidelines

Training/Knowledge:

o Approximately 45% of PIOs mentioned that they had not been provided training in RTI

o Approximately 43% of PIOs were not aware of the proactive disclosure of their PAs

o Approximately 39% of the PIOs were not aware of key SIC (State Information Commission) judgments

o Training was limited to the provision of the RTIAct. Key aspects related to public dealing, motivation, technology, service levels, etc were not addressed.

Usage of information technology:

o Lack of software application capturing details mentioned in S. 25(3)

o Lack of software application to improve effi-ciency at the Information Commission

Low motivation of PIOs :

o Most of the PIOs have taken up the role un-willingly, leading to low motivation among them. Often, junior officers have been given the role of the PIOs and First Appellate Authority

o There was a perception among PIOs that lack of adequate budget and infrastructure ham-pers RTI implementation

o Approximately 89% PIOs said that there was no additional allocation of staff for RTI, while their work has increased.

The gaps highlighted above are partly due to lack of clear accountability established through appropriate Government rules and lack of controls to measure the level! effectiveness of implementation. This has been addressed in the report through detailing the roles and responsibilities of various entities and establishing a control mechanism through the use of IT and Third-Party Audits.

o Recommendations:

Re-organisation of record management system to promote information management. A separate study is recommended to improve the current record management guidelines and make them ‘RTI friendly’.

The following interventions in training to be taken:

o Knowledge Resource Centre should be the owner of developing and updating the training content.

o At the State level, the State Nodal Department Agency should design a training implementation plan with support from the State Administrative Training Institute and National Training Agency.

Head of the Public Authority should own the responsibility of training the officials in its Department through State Administrative Training Institute or State-empanelled agencies.

Preparation of RTI ready plan: It is suggested that each Public Authority should do a self evaluation and identify areas of improvements and budget requirements. This would help in meeting the infrastructural needs, thereby meeting the requirements of the Act.

In order to ensure good performance of PIOs in implementing the RTI Act :

Allocation of responsibility of PIOs and AAs ~ to senior level officials in a Public Authority
is required.

o A mandatory column on the PlO’s performance must be added into the forms of Annual Confidential Reports (ACRs)/even if the posting as PlO is only a part of the over-all responsibilities handled by him/her.

o A monetary incentive for the PIOs may be considered at PA level. Often, the PIOs are”‘ liable to pay penalty, for reasons beyond their control. So while a penalty has been man-dated by the Act, the PAs should also get rewarded for good performance. This is important at places where PIOs handle a high volume of RTI applications.

Specific software applications/’information request management’ for implementation at Pub-lic Authority level and at the Information Commission.

Usage of RTI-compliant standard template for quick and rational responses to the applicant.

The ARC report had suggested that as a one time measure, GoI should earmark 1% of the funds of all flagship programmes for a period of five years for updating records, improving infrastructure, creating manuals, etc. (an amount not exceeding 25% of this should be utilised for awareness generation). This was a good suggestion to address the above-mentioned issues. On the same lines, it is suggested that all Central and State Ministries/Departments should earmark 1% of their planned budgets for implementing the recommendations suggested in this report.

Raag & NCPRI Report:

Current status and preliminary findings:

3) Analysis of RTI Rules made by States and High Courts:

Background: The RTI empowers State Governments and Competent Authorities to frame rules to operationalise the Act, as also to educate both Government functionaries and citizens about the Act. These rules are critical, since they detail application fees, payment for information requested, and mode of payment. Moreover, the RTI Act [So 7(5)] states that the application fee shall be ‘reasonable’, so as to facilitate the use of the Act by ordinary citizens.

The People’s RTI Assessment 2008 is analysing the RTI rules made by the Central and State Governments (appropriate government) and the Supreme Court, High Courts, the Parliament and State Legislatures (competent authorities) to determine whether they keep with the Act in letter and in spirit, and how people and transparency friendly they are. The necessary data was collected through desk research and by filing RTI applications asking for the required information.

The analysis of High Court RTI rules is now almost complete, as is that of the variety of RTI-related payment modes required by individual states.

Preliminary findings:

High Court R1’I rules – Of India’s 21 High Courts (excepting in [ammu and Kashmir), RTI rules have been framed for at least 17 (Allahabad, Andhra

Pradesh, Assam, Chhattisgarh, Delhi, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Kolkata, Madras, Mumbai, Orissa, Patna, Punjab, Haryana, and Rajasthan).

A detailed analysis of these rules suggests that many of these rules seem to be in violation of the RTI Act, and some go beyond the scope of the RTI Act, under which they have been framed.

For example, the High Courts of Karnataka, Chhattisgarh, Delhi, Gujarat, Punjab and Haryana have through the rules, sought to add exemptions over and above the exemptions specified in the RTI Act, specifically in S. 8(1) and S. 9. These High Courts have also sought to set up, through the rules, an appeals process which is at variance with that laid down in the RTI Act. The RTI rules of the High Courts of Delhi, Kolkata, and Gujarat also ignore the penalties specified in the RTI Act and specify their own penalties which are at variance with the ones specified in the RTI Act.

Similarly, the High Courts of Patna, Punjab & Haryana, Gujarat, Delhi, and Himachal Pradesh have framed rules that explicitly violate S. 6(3) of the RTI Act. Whereas the RTI Act says that where a PlO receives an application that in whole or part asks for information that is with some other public authority, the PIa must transfer that information to the concerned PIa within 5 days. However, the rules of the said High Courts state that all applications shall be rejected if the information they seek is outside the jurisdiction of the public information officer. These rules go on to declare that applications will also be rejected if the information they seek can be obtained under High Court rules or other general rules (Civil/Criminal) operational in a High Court. This is despite the fact that the RTI Act specifies that where there is an inconsistency with any other law, the RTI Act will prevail (S. 22).

All this is despite the fact that there are several rulings of the Supreme Court of India saying that rules cannot go beyond or modify the statute under which they are framed.

Modes of payment – In filing RTI applications in states other than the one you reside in, a major problem is the transmission of application fee and the additional fee that is to be paid for photocopying, etc. Different states prescribe different modes of payment (and different rates of payment). In some states they only accept treasury chalans, but making treasury chalans in Delhi for other states has proved to be nearly an impossible task and despite spending nearly a week running around, we have not yet been successful. Others demand court fee stamps or non-judicial paper of their state – which of course is not available in Delhi or in any other state!

Demand Drafts are also sometimes problematic, since these can only be accepted if made in the name of a specifically-designated official and the name of the designated officer is often not available, not even on the PA website or the State RTI portal. The RAAG team had to call up each department, and even then it was difficult to get this information. In many cases, we were thus compelled to request our teams in the concerned state to make payment on our behalf. But this is not possible for all citizens to do.

Part C : Other News

Blatant case of corruption exposed:

In a blatant case of corruption, a civic body spent Rs.2.5 lakh on fitting paver blocks on a particular road. But the road continues to be in as pathetic a state as ever.

On paper, the Kalyan-Dombivli Municipal Corporation (KDMC) is said to have got the work done from a contractor, even paid him the money. But the paver blocks are nowhere in sight.

As per papers available with Mumbai Mirror, paver blocks were to be installed on a 300 metre stretch of Gaushala Road in Kalyan (W). The task was sanctioned in March 2008 and work began in November 2008, the work was completed in January 2009. What’s more, a month later KDMC even paid the contractor Rs.2.5 lakh !

The seam was exposed after Narsinh Deshmukh, from Kalyan, obtained details under the RTI Act, and even filed multiple complaints. When nothing came of the complaints, he decided to go on a hunger strike.

“I just sat on the footpath with all the documents. I also initiated a signature campaign. However, hours after I began my hunger strike, it started raining heavily and my resolve was weakened,” he said.

But friends and locals who had seen the papers pertaining to the road, got him umbrellas and stood by him.

Finally, KDMC Commissioner Govind Rathod heard about Deshmukh’s hunger strike, and decided to check things out. “I went to the road and found that paver blocks were not in sight. Later, I found that our engineers had got the paver blocks fixed on another road, which was a private area,” confirmed Rathod. He added that it is nothing but a blatant case of corruption.

Rathod immediately ordered an inquiry, and even issued show-cause notices to a deputy engineer and junior engineer concerned. It was only after the inquiry committee was set up that Deshmukh called off his hunger strike.

Rs.28 lakh on decoration, mostly on flowers!

When Karnataka Government decided to hold cabinet meeting in Gulbarga, they spent Rs.28 lakh on decoration alone – most of it on flowers. Information was obtained by The Times of India by filing RTI query.

The decoration expenditure included putting up many buntings and welcome arches for 34 ministers, their secretaries and staff, who had taken the trouble of travelling 623 km from Bangalore to Gulbarga for the cabinet meeting.

The total expenditure for this one meeting was a shade lower than Rs.1 crore – Rs.92.39 lakh.

Speed-Post is now ‘snail’ post! !

An article sent through Speed-Post is supposed to reach its destination – be it any part of the country within 24 hours. However, Post Office data shows that 27,774 items sent even within Mumbai limits from Post Offices in the western suburbs overshot the deadline.

The 2006 postal directive to all Post Offices states that under the money-back guarantee scheme, the sender has the right to ask for refund in case the article does not reach within the stipulated time. “It is unfortunate that things sent to destination even within Mumbai do not reach on time,” said Dadar based RTI activist Milind Mulay. Articles, worth around Rs.5.90 lakh, were delivered late. Mulay claimed that all the senders should now demand for
a refund.

Political posters in Mumbai :

In 2008, political parties plastered the city with approximately 20 lakh posters and hoardings of candidates – birthdays, festival greetings, victories, welcomes, etc. Of these, just 1,590 were legal as they had taken permission from the BMC. This means 19,98,410posters, etc. were liable to pay a fine to the BMC – between Rs.1,000 and Rs.5,000 each.

RTI application has revealed that not a single political party paid the fine, a loss of Rs.30 lakh approxi-mately, to the BMC exchequer.

This year too, till September 19, of the 52,788 political posters, just 1,349 had BMC permission. Here again not a rupee was paid to the BMC – a loss of Rs.12 lakh. The same was true for 2007. There are no figures available for the pre-assembly and post-poll posters, etc., but the figures would be phenomenal.

In contrast, the BMC collected Rs.51,89,901 as fine from non-political hoardings, primarily of films, product advertisements, etc.

R. B. Bhosale, Deputy Municipal Commissioner (Special) said, “It is very difficult to nail an offender in the case of illegal posters/banners/hoardings. For instance, if it’s a banner celebrating Vilasrao Deshmukh’s birthday, we can’t go and ask him to pay the fine. Even if it has the signature of the party’s office bearer’s name, he washes his hands off, saying he hadn’t authorised it. For non-political hoardings there is always a mention of a store or a product and it is easier to nail the offender.”

Leader of Opposition in RTI ambit :

After ruling that the office of the Supreme Court of India comes under the ambit of the Right to Information (RTI) Act, the Central Information Commission has ruled that the office of the Leader of Opposition in the Lok Sabha was also covered under the RTI Act. It is a public authority as it is created by a notification of the government, but reserved his decision on whether the office was part of the Lok Sabha Secretariat or an independent office. Disregarding the orders of the ClC, the Lok Sabha Secretariat has not set up the information office for the leader of opposition as per the requirement of the RTI Act despite repeated letters from L. K. Advani’s office.

How much of snacks, etc. in 8 months!

An RTI query revealed that Puducherry Chief Minister V. Vaithilingam and his five colleagues had spent more than Rs.36 lakh on tea, snacks and beverages while hosting visitors in just eight months between Sept. 2008 and April this year. Welfare Minister topped the list by spending Rs.l0.5 lakh.

Do the Right Thing:

The limes of India in the Editional on November 3, 2009 covers some significant points on life in a democracy. I reproduce it fully hereunder:

It has been four years since the Right to Information (RTI)Act came into force, ushering in a new era of transparency and accountability, or so it was hoped. While RTI might not have been the unqualified success many expected it to be, it is an important tool that civil society can use to keep the government honest. That’s why we are watching the debate raging over the appointment of the next Chief Information Commissioner (ClC) with some apprehension.

Civil society groups have every right to suggest a name for a post as important as that of the ClC. RTI is an instrument that gives citizens some measure of control over information, and it is understandable that civil society would be wary that excessive intervention from: the bureaucracy would blunt the Act’s powers. But by asking that decorated police officer Kiran Bedi be appointed to the top post and demanding that the merits of a different choice be explained to them, information rights activists have polarised the debate to the point of blackmaiL

Lobbies are a fact of life in a democracy, but the kind of pressure tactics that those lobbying on behalf of Bedi have employed are likely to put the government on the defensive. In entering into a confrontation with the government over the post of ClC, the activists have failed to take into account that it is not only they who have a stake in RTI and its functioning, the State is also a stakeholder, and as with all disagreements where many actors are involved, all views must be taken on board and a consensus involved.

Since its inception, RTI has met with mixed success. The results of a recent study into the conduct of information commissioners across the country indicate that only 27% of RTI applicants receive the information they asked for, while a significant chunk of the population remains unaware of how to file an application for information. Another potential problem is that only two of every 100 RTI Act violations are penalised. Even when Information Commissioners direct officers to release information, a majority- as much a 61% – ignore the order. With so many questions over the implementation of the Act, it is important that the debate over RTI is not restricted to the appointment of the ClC. Information rights activists should work towards strengthening RTI by beginning a discussion on how best to expand its scope.

(Arvind Kejriwal retorted on above as published in The Times of India on November 6, 2009. Though not reproduced here, due to constraint of space, you may view it on timesofindia.indiatimes.com)

BCAJ Admin

Right to Information

Part A : Decisions of CIC

l S. 2(f) and S. 7 :

Mr. Rakesh Agarwal sought the following information under RTI application to Mr. K. S. Rawat, PIO, Tis Hazari Courts, Delhi :

1. Whether intimations are sent by each traffic court of Delhi presided over by Spl. M.M.S. as required by S. 210 of the Motor Vehicles Act 1988 ?

2. If not, reasons for the same.

3. If yes, copies of all such intimations that pertain to convictions on 9 and 10 January 2008 across all Traffic Courts of Delhi.

The PIO held that information sought for was not held by or under the control of any public authority and therefore did not fall u/s.2(f) of the RTI Act, which defines ‘information’.

Further, the PIO stated that the appellant was representing his newspaper/magazine called ‘Nyay Bhumi’ and had filed 3 RTI applications in 15 days and the appellant was working for promotion of his business rather than serving social interest. Hence, it was a blatant misuse of the RTI Act.

The First Appellate Authority (FAA) directed the PIO to collect the information from the Courts dealing with traffic cases and send it to the appellant within 20 days. The order was passed by FAA beyond 45 days and no hearing was given.

The following two were grounds of appeal before CIC :

The PIO demanded payment for providing information thereby violating S. 7(6)

FAA did not afford a hearing to the appellant and received the FAA’s order on 25-2-2009 thereby exceeding the time limit set in the Act.

It may be noted that the PIO had first held that information sought was not covered u/s.2(f) and only when FAA directed to furnish information, he agreed to provide it but only on payment of prescribed fee (i.e., Rs.2 per page). While the appellant’s contention was that having not validly denied supply of information, the same has to be submitted free as provided u/s.7(6) which reads as under :

S. 7(6) : Notwithstanding anything contained in Ss.(5), the person making request for the information shall be provided the information free of charge where a public authority fails to comply with the time limits specified in Ss.(1).

CIC in the decision stated :

“It is a basic tenet of statutory interpretation that words of a statute should be interpreted keeping in mind the context in which they appear. Information is to be provided free of cost if S. 7(1) is not complied with. Rejection of a request for any of the reasons specified in S. 8 or S. 9 has to be valid rejection in law. If a ground for exemption from disclosure is wrongly relied upon, then it does not amount to ‘rejection of a request’ as started in S. 7(1). It is absurd to contend that the appellant must be made to pay the additional fees when the PIO wrongly denies information. The Commission finds the PIO’s deliberate misconstruction of the law unacceptable. This is an attempt to obstruct the implementation of the RTI Act and to delay the provision of information to the appellant without any reasonable cause.

CIC also observed that the PIO on several occasions, all of which are on record, has made unwarranted and irrelevant observations which give the impression that the PIO is malafidely denying information to the appellant. The Commission strongly advised the PIO to refrain from making such comments in future.

Based on the above, the Commission directed the PIO to provide the information to the appellant free of cost. He was also asked to show cause as to why penalty should not be imposed and disciplinary action be not recommended against him u/s.20(1) of the RTI Act.

[Mr. Rakesh Agarwal v. PIO, Tis Hazari Courts, Delhi, CIC/SG/A/2009/000675/3390, dated 22nd May 2009]

Ration card :

The appellant had applied for a ration card in 2006 and in spite of repeatedly being shunted to various places did not get any ration card. The PIO stated that the Government has subsequently declared as to how many BPL cards will be issued and time was set for applications to be made for BPL cards. The Delhi Government accepted applications for BPL cards in February-March 2009 and decided on a maximum number of cards which are to be given. He stated that the applications were received and sent to a Vigilance Committee headed by MLA of the area. He admited that these cards are supposed to be given in 45 days, but the time at the Vigilance Committee headed by MLAs takes indefinite time.

CIC Shailesh Gandhi in the decision stated :

The appellant has not been given any appropriate reply indicating what is happening to her ration card application. The approximate loss to her per month of free foodgrain and kerosene is about Rs.500 per month. The appellant should have got proper answer to her RTI application by 6-4-2009. The loss of free foodgrain due to her is already for three months by which she has suffered loss of Rs.1500. The Commission also feels that the loss of time and trauma which she suffered on account of not getting her due entitlement and pursuing this application and appeal should be compensated with another Rs.1000. Hence the Commission awarded a total compensation of Rs.2500 to the appellant for loss of entitlement and to compensate for the effort and the trauma suffered in pursuing this matter.

The PIO was directed to give the information to the appellant before 10th July 2009 about the status of her application giving names and designations of the officers who have dealt with the BPL card application and where the application is presently.

[Smt. Nagina Devi, Delhi v. PIO, Food Supplies & Consumer Affairs, GNCT of Delhi, CIC/SG/A/2009/001213+1214/3969, dated 2nd July 2009]

Part B : The RTI Act

Annual Report Maharashtra State Information Commission :

Please refer to RtoI of June, 2009. Under other news, I had reported some statistics as covered in the Annual Report of Maharashtra State Information Commission. Now the report in English is published and Dr. Suresh Joshi, CSIC has kindly sent me a copy.

It is Third Annual Report of the year 2008. Some interesting extracts from it:

1,23,000 applications in 2006, 3)6,000 in 2007 and 4,16,090 in 2008 have been received respectively. In bigger States of our country less than one lakh applications come in one year. In the international arena England receives about 60,000, Mexico about 94,000. Similarly the Central Government receives about two and a half lakh applications. Thus it is seen that the people of Maharashtra have given tremendous response to this Act.

Understanding the important issues touching the lives of the people by using this Act agitating them on proper platform, fighting injustices, checking corruption, increasing the commitment of government employees to work and increasing the overall transparency in government functioning – many such like issues have been addressed due to the use of this Act.

Many young people have thrown themselves in this movement of the Right to Information. Similarly, many people above 60 years have also participated in spreading awareness about right to information. It is heartening to see that associations of officers, employees of the Government of Maharashtra have declared their support for this Act and have appealed to their members to give maximum information to the people through this Act. All these factors have proved useful in obtaining people’s support for this Act.

Maharashtra is the only State in the country where Benches of the Information Commission have been set up at the Division, level. Greater Mumbai, Konkan, Pune, Aurangabad, Nagpur already have Benches. Towards the end of 2008 Amravati Bench was constituted and on 24 December 2008 the Information Commissioner was appointed there. Only Nashik Bench now remains to be established and I am hopeful that it would be done soon.

Due to the formation of Divisional Benches the Commission’s work has reached nearer to the people. Commissioners have not only heard appeals at the divisional headquarters, but have attempted to hear them at the District level. Therefore people realised that ‘the Commission has come to our doors’ and this was perhaps one of the reasons for increasing number of RTI applications.

In 2007 the Commission decided 3611 appeals and complaints. This number is 15026 for the year 2008. The Commission has also started arranging hearings through video conferencing.

Annual Report 2006-07 of Central Information Commission :

(continuing from July 2009)

v) Collection of Charges by Public Authority (Vide: S. 25(3)(e) of RTI Act) : All the Minis-tries/Departments/ Apex-level Offices taken together collected Rs.30,71,167 in the year 2006-07. In the year 2005-06, the amount collected was Rs.5,08,490. There is six times increase in the amount collected in year 2006-07 over the previous year. Top 10 Ministries collected a total of Rs.22, 82,984 (74.33% of the total) in the year 2006-07.

vi) Disposal of appeals (Vide: S. 25(3)(c) of RTI Act) : All the Ministries/Departments/ Apex-level Offices, on an average, disposed 75% of the appeals received during the year 2006-07. Out of 57 Ministries/Departments/ Apex-level Offices, 22 Ministries have disposed 100% appeals during the year and 65 Public Authorities have received more than 50 appeals.

vii) Implementation of the Act (Vide: S. 25(3)(f) of RTI Act) : Efforts taken by Public Authorities to administer and implement the spirit and intention of RTI Act include launching of website to disseminate information with respect to Act and developing Public Grievance Redressal and Monitoring System (PGRMS) by some Ministries. Suggestions were received from Public Authorities about increasing fee for seeking information, for filing first and second appeals, increase in time to respond for older records, and taking up more capacity building programmes.

viii) Recommendations for Reforms, etc. (Vide: S. 25(3)(g) of RTI Act) : The Central Information Commission has made valuable recommendations for reforms and with respect to specific Ministries with a view to make RTI Act more effective. The recommendations include (a) streamlining the procedure of dealing with RTI applications, (b) strengthening of the staff for efficient disposal of RTI applications, (c) implementation of homogeneous fee structure, (d) full conformance with spirit of RTI Act, (e) respect for dignity of citizens. In addition CIC made some observations with similar objectives. These observations are with respect to (a) promotion of employees of Public Authorities, invasion of the privacy, (c) interpretations of rules and Acts, (d) language issues, (e) communication issues, (f) adherence to record retention policies and process of weeding out information, (g) computerisation, (h) training of the staff, and status of governing body and strengthening of staff grievances redressal system.

Part C : Other News

• Unclaimed money in the banks:

Coming down heavily on banks that keep funds in ‘suspense accounts’, the Central Information Commission has asked RBI to disclose details regarding ICICI Bank. CIC also directed RBI to provide information in 10 days if other banks, including govt-run ones, were following this practice. In his order, Information Commissioner Satyananda Mishra asked RBI to give a “comprehensive reply stating categorically if the RBI had ever issued any instruction on the subject and if according to them such practice was being followed in other banks including public sector banks”. The decision could have far-reaching impact in bringing information on unclaimed money into the public demain.

• File notings :

[Further to file notings as appeared in July 2009 issue]

In a Circular issued in the third week of June, DoPT has stated, “It is hereby clarified that file notings can be disclosed except those containing information exempt from disclosure u/s.8 of the Act.” DoPT’s move comes after the CIC had issued notice to two Department officers seeking reason why they should not be prosecuted for disobeying its orders. The Commission had asked the Department to correct its website which said notings couldn’t be disclosed under the Act. DoPT Minister Prithviraj Chavan has said that notings were not part of the proposed amendments to the RTI Act.

• BSE and SEBI :

Yogesh Mehta, a former sharebroker, and whom BCAS foundation RTI clinic on ongoing basis provides assistance has again received an order from CIC in his favour. CIC in a landmark order has directed the SEBI to procure information from the BSE’s Investor Protection Fund (IPF) and provide it to Mr. Mehta whose shares worth lakhs of rupees are lying impounded with IPF since last 13 years.

While BSE did not have any objection in providing information to SEBI, it was of the view that SEBI cannot provide the same to the citizen under the RTI Act. It is learnt that now a big battle awaits between BSE, SEBI and the applicant.

• Mediclaim Policy refund:

The RTI Act has come to the help of thousands of Mediclaim policy holders who have been struggling to get refund for the excess premium they have paid. The Central information Commission (CIC) has directed New India Assurance Company Ltd. to make public the details of the total number of policy holders who are still to get a refund for the excess premium charged. The CIC has asked the company to provide the information on the company’s website and send a copy of information to the Insurance Regulatory Development Authority.

Is vacation an excuse to delay on RTI application?

CIC has ruled that there is no law that allows Courts to give up their obligation under the Right to Information Act even if many staff members are on vacation. CIC’s disapproval came on HC’s failure to furnish an RTI response to an applicant on the ground that staff is lean owing to vacation.

“The Commission finds it difficult to accept that any public authority can claim vacation from RTI for one month which is not provided for in law,” Information Commissioner Shailesh Gandhi noted in a recent decision.

BCAJ Admin

Part B — Some recent landmark judgments

New Page 1

I. High Court :

1. Whether order liable to be set aside when issued after
a period of more than four months after hearing ?

Shivsagar Veg. Restaurant v. Asstt. Commr. Of Income-tax,
Mumbai, 2009 (13) STR 11 (Bom.)

The appellant was aggrieved by the order of ITAT as the order
was passed after 4 months of hearing, dismissing the appeal without recording
reasons, propositions of the law urged and case laws relied upon by them.

It was contended that Appellate authority could not just stay
away from its duty of assigning reasons as to why it agreed with the reasons and
findings of the lower authority by just stating that findings of CIT(A) are
just, fair and in accordance with the law and inter alia decisions in the
cases of Jawahar Lal Singh v. Naresh Singh, (1987) 2 SCC 222 and State
of West Bengal v. Atul Krishna Shaw, AIR 1990 SC 2205 were relied upon.
Various judgments had been considered for prejudice caused to the litigant as
regards delayed delivery and even pronouncement. Relying inter alia on
the case of Anil Rai v. State of Bihar, 2002 (3) BCR (SC) 360, the Court
directed the president of the Appellate Tribunal to issue guidelines to all the
Benches of Tribunal to decide matters heard within three months from the date of
closing of judgment. The Appellate Tribunal directed to rehear the said appeal
and give fresh order with sound reasons.

II. Tribunal :

2.
Coaching services provided online
whether classifiable as online information and data based services ?

Burden of
proof on the Department.

Dewsoft Overseas Pvt. Ltd. V. CST, New Delhi 2008 (12)
STR 730 (Tri.-Del.)

(i) The issue in the case related to whether providing online
computer training is classifiable as online information and data-based access
and retrieval service. As the essential character of the service provided
involved computer education through the medium of Internet, the service was not
restricted to merely providing online access to data or information and
therefore was classifiable as commercial training and coaching service. However,
Notification No. 9/03-ST, dated 20-6-2003 exempted computer training institutes,
the appellant’s activity was held as exempt.

(ii) The appellant provided the said services of computer
training through various franchisees. During the period under dispute, four
conditions were required to be fulfilled cumulatively in order to hold the
arrangement as ‘franchise’. The Tribunal held that the burden of proving that
all the conditions were fulfilled lay on the Revenue. Since the Revenue failed
to do so, the Tribunal held that no service tax was payable as the arrangement
could not be considered as ‘franchise’.

3. CENVAT Credit — whether credit for service tax paid on
cell phones, landline and courier services while providing output services of
maintenance and repairs allowable ?

No penalty where dispute relating to interpretation of
statute.

Wiptech Peripherals Pvt. Ltd. V. CCE, Rajkot 2008 (12)
STR 716 (Tri.-Ahmd.)

The Tribunal held that the issue relating to service tax on
cell phones or landlines was no more res integra and stood settled by
various Tribunal decisions. However, since the appellant was unable to establish
that cell phones in the names of individuals were exclusively used in relation
to output services, the matter was remanded to the original authority for
verifying the said facts.

The Tribunal held that no penalty can be levied when the
dispute relates to interpretation of the provisions of law, while setting aside
the penalty.

4. Institutes registered with UGC, whether considered commercial coaching
centre :

ICFAI v. CC & CE, Hyderabad-II, (2008) 17 STT 501
(Bang.-CESTAT)

The appellant, a non-profit society registered under the
State Societies Registration Act imparts education and awards degrees/diplomas
recognised by the law. Service tax was demanded under ‘Commercial Training &
Coaching Service’. The Commissioner held that absence of profit motive was an
immaterial factor and rejected the contention of the appellant. The appellant
contended that the Institutes were societies for educational purposes and their
surplus was pooled back for attainment of their objectives. ICFAI, Dehradun and
ICFAI, Tripura were recognised as universities under the affiliated universities
of Universities Grants Commission and the institutions were exempted from
payment of Income-tax u/s.12A or u/s.10(23C)(vi) of the Act. Circular No.
59/8/2003-ST, dated 20-6-2003 clarified that institutes or establishments which
issued certificate, diploma or degree recognised by law and provided training
for competitive examinations were outside the scope of service tax. The
difference between ‘education’ and ‘coaching or training’ was emphasised and
reliance was placed on Bihar Institute of Mining and Mine Surveying v. CIT,
(1994) 208 ITR 608 (Pat.) for the same. Further, replacement of the word
‘commercial concern’ with ‘any person’ w.e.f. 1-5-2006 had not been effected in
respect of ‘Commercial Training or Coaching Centre’ implied that an activity
could not be commercial in nature but intention to take it up could be, which
was not apparent in the case.

Against this, the Revenue contended that distinction between
‘education’ and ‘training’ was baseless relying on the decision in the case of
JMC Educational and Charitable Trust v. CCE, (2008) 12 STT 308 (Chennai-CESTAT)
where pre-deposit amount was demanded.

It was finally held that the appellant were imparting higher
education and conferred degrees recognised by law and had recognition from
various State Governments and UGC and as such, these services provided by
institutions registered under the Societies Registration Act for educational
purposes were outside the purview of the definition of commercial coaching. The
decision in the case of Great Lakes Institute of Management Ltd. V. CST,
(2008) 12 STT 306 (CESTAT–Chennai) was relied upon. The longer period was not
found invokable as the brochures and information available through website, etc.
Proved that evasion was not the intention.

5. Import of service :

ABS India Ltd. V. Commissioner of Service Tax, Bangalore,
2008 (13) STR 65 (Tri.-Bang.)

The appellant, an Indian company, booked orders for sale of goods manufactured by its subsidiary situated in Singapore and received certain commission for which they paid service tax initially. The appellant argued that service was deemed to be provided abroad as it could not be considered as delivered in India when the recipient was located abroad. Relying on Blue Star Ltd. v. Commissioner, 2008 (11) STR 23 (Tribunal), it was held that if the recipient is located abroad, the company situated abroad utilised the benefit of the service rendered by the Indian company was exported service and therefore not liable for service tax.

Unitech Ltd. v. CST, Delhi 2008 (12)STR752(Tri.-Del.)

The issue in this case related to:

i) Whether the definition of architect under the Act is capable of covering persons not registered as architects in India?

ii) Whether the assessee is liable to pay service tax as receiver of service?

It was held that definition of architect services under the Act is wide enough to cover commercial concerns engaged in rendering services in the field of architecture and therefore, the recipient received taxable services of architect for the purposes of the Finance Act, 1994.

The Tribunal further held that although comprehensive provisions for taxing import of services came when S. 66A was introduced on 18-4-2006and import rules were notified by Notification No. 11/2006-ST from 18-4-2006,but the taxable services provided in India by a foreigner or a non-resident not having any office or business establishment in India to any person in India are liable for service tax even prior to 18-4-2006 u/s.66 read with S. 65(105) of the Act by virtue of Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 read with Notification No. 36/2004-ST, dated 31-12-2004issued u/s.68(2) of the Finance Act, 1994 as recipient in India was liable for service tax with effect from 1-1-2005.

6. Refund:

K. C. Enterprises v. Commissioner of Central Excise, Vadodara 2009.(13) STR 39 (Tri.-Ahmd.)

The appeal was filed on the ground that during the period, the appellant had paid service tax for the amount billed for the services rendered rather than the amount actually received. The appellant was required to produce invoicewise details, date of receipt of actual amount along with cheque numbers or mode of payment, instead of merely submitting monthwise details showing amount billed and received. Further, the appellant failed to substantiate its claim by not submitting TR-6 challan with relevant documents and evidences of payment of tax to enable refund sanctioning. The appeal therefore was rejected.

BCAJ Admin

Some Recent Judgments

Service TaxI. HIGH COURT :

1. Whether bottling of liquor amounts to packaging service ?

Maa Sharda Wine Traders v. UOI, 2009 (15) STR 3 (MP)

In this case, the question arose as to whether bottling of liquor amounted to packaging activity, liable for service tax considering that alcohol is not dutiable under the Central Excise Act (although it is liable under the State Excise Laws). The appellant among various others had filed a writ in the High Court primarily to challenge constitutional validity of the definition of packaging activity [S. 65(76b) of the Finance Act, 1994]. However, it was felt that justice would be done even on adopting apposite interpretative process whereby conclusion could be reached as to whether bottling of liquor could be treated as service liable for service tax or treated as ‘manufacture’ u/s.2(f) of the Central Excise Act and therefore, not liable under the service tax law. After doing a detailed analysis of the terms ‘manufacture’ and ‘excisable goods’ and considering the Department’s clarification vide CBEC Circular No. 249/1/2006-CX-4, dated October 27, 2008 in consonance with the statutory provisions as well as the law laid down by the Apex Court in Sir Shadilal Distillery and Chemical Works v. State of Uttar Pradesh, (1998) 8 SCC 428, it was held that bottling of liquor being incidental or ancillary to the completion of a manufactured product was ‘manufacture’ for the purpose of S. 2(f) of the Central Excise Act and since this is excluded from the definition of ‘packaging activity’ under the service tax law, it was held as not liable for service tax. Decision in the case of Vindhyachal Distilleries Pvt. Ltd. 2006 (3) STR 723 (LMP) was accordingly overruled.

Note :

The case has been reported in the July issue of BCAJ under the citation SOM Distilleries Pvt. Ltd. & Ors v. UOI & Ors., 2009 TIOL 292 HC MP ST LB. It may be noted further that to render the decision ineffective prospectively, Budget 2009 has sought to amend the definition of ‘business auxiliary service’ by excluding ‘manufacture of excisable goods’ instead of mere ‘manufacture’ in terms of S. 2(f).

2. Penalty :

CCE Jalandhar v. Darmania Enterprises, 2009 (14) STR 741 (P&H)

The Commissioner in this case enhanced the penalty imposed by the Assistant Commissioner while exercising revisional power u/s.84 of the Act from Rs.1,000 to Rs.31,652. The Commissioner also recorded suppression. However, the Tribunal set aside revision order and restored the original order by observing that leniency considered in view of S. 80 did not suffer any illegality and therefore, could not have been interfered by the revisional authority. The Court observed that since no evidence was produced before the revisional authority to prove fraud, misrepresentation, etc., no jurisdiction was acquired by the authority to impose penalty and dismissed the appeal stating that no question of law arose for determination of the Court.

II. TRIBUNAL :

3. Binding precedent :

S. V. Colour Lab v. CCE, 2009 (15) STR 231 (Tri. Bang.)

The issue of excluding cost of paper, chemicals, etc. being covered by the Tribunal decision in case of Shilpa Colour Lab & Others v. CCE, 2007 (5) STR 423 (Tri.-Bang), the Tribunal held that finding of the Commissioner (Appeals) that the Tribunal decision was distinguishable was wrong and against the judicial discipline and allowed the appeal.

4. Cargo Handling Service :

ITW India Ltd. v. CCE, Hyderabad 2009 (14) STR 826 (Tri.-Bang)

The issue in this case related to whether packaging viz. strapping of steel items, a part of manufacturing process which already suffered excise duty, was chargeable to service tax as cargo handling service. Packaging activity was brought under service tax only from 16-6-2005 and the assessee paid service tax from this date. The decision of the Calcutta Tribunal in the assessee’s own case reported at 2007 (8) STR 490 as well as B. K. Thakkar’s case 2008 (9) STR 542 (Tri.) were distinguished. Relying on the Rajasthan High Court’s decision in the case of S. B. Construction Co. v. UOI, 2006 (4) STR 545 (Raj.), wherein it was held that when goods are packed for transport, it should be followed by transportation of the same in order to be covered by cargo handling service. It was held that later amendment in the definition of cargo handling service also linked service of packaging together with transportation of cargo and therefore, demand of service tax under the category of cargo handling service was not sustainable.

5. CENVAT Credit : Document for availing credit :

(i) CCE Vapi v. Jindal Photo Ltd., 2009 (14) STR 812 (Tri.-Ahd.)

Credit was taken based on invoices not containing registration number of Input Service Distributor (ISD) viz. the head office of the appellant. However, the receipt of services was not in dispute. Considering that the omission took place when relevant rules were being implemented, credit was held as admissible in terms of the proviso to Rule 9(2) and Rule 14 of the CENVAT Credit Rules.

(ii) Rohit Surfactants P. Ltd. v. CCE, 2009 (15) STR 169 (Tri.-Del)

Holding that the words ‘directly and indirectly’ used in relation to ‘manufacture’ in the definition of input service had to be given very wide meaning, and relying on the decision in the case of Keltech Energies Ltd. v. Commissioner, 2008 (107) STR 280 (Tri.), it was held that banking & other financial services, general insurance service and courier agency service are to be treated as input service; stay petition was allowed.

6. Chartered Accountant’s Service — whether explanation had retrospective effect ?

Sridhar & Santhanam v. CCE (ST) Chennai, 2009 (14) STR 756 (Tri.-Chennai)

Exemption under Notification 59/2002-ST was not extended to a C.A.s’ firm by applying explanation in Notification No. 15/2002-ST re-trospectively. The Notification did not indicate retrospective effect in specific terms, so it was held that the amendment had to be held effective from the date of issue of Notification. Observing that the benefit available on plain reading could not be made retrospective by issuing Notification, the appeal was allowed.

7. Penalty: Levied u/s.78, whether reducible?

CCE, Mumbai v. Ria Travels & Tours (I) Pvt. Ltd., 2009 (15) STR 124 (Tri.-Mum.)

In this case, the assessee was registered as a travel agent for its multi-locational business. On investigation by DCCEI authority, short payment of service tax was discovered. After upholding the service tax liability as demanded in the SCN, the Divisional Bench was divided on the view of levying penalty u/s.78. The Member Judicial held that in terms of the decision in the case of CCE&E v. Ashish Vasantrao Patil, 2008 (10) STR 5 (Born), the Tribunal has the power to reduce the penalty imposed u/ s.80. The fact that only in one out of twenty branches, the infraction was brought on record, the penalty of Rs.50 lakh in place of Rs.10 cr. would meet the ends of justice. However, the other Member dissented and per majority decision, it was held that mandatory penalty u/s.78, was not reducible as held by the Supreme Court in the case of UOI v. Dharmendra Textile Processors, 2008 (231) ELT 3 (SC) where the suppression was found deliberate. It was further held that the non-obstante S. 80 provided for NIL penalty in case of bonafide belief. The Member Judicial however did not hold that there was bona fide belief. Citing Dharmendra Textile Processor (supra), it was further observed that the Court could interpret the law and not legislate the same and accordingly, the wordings of the statute in S. 78 had to be given full effect by virtue of which the penalty had to be equal the amount of short payment. As such, the penalty of Rs.10 cr. was held as sustained.

8. Valuation:

Sky Gourmet Pvt. Ltd. v. CST, Bangalore 2009 (14) STR 777 (Tri.-Bang.)

The appellant’s services being those of supply of food, beverages, etc. to airlines, were registered as outdoor catering service provider. Supply of food was claimed as exempt under Notification No. 12/ 2003-ST and on which due VAT was paid. Demand was made to receive service tax on gross receipts and agreeing to grant only abatement under Notifications 20/2004-ST and 1/2006-ST but not benefit under Notification No. 12/2003-ST. Invoices evidencing sale were available on records. Considering both the Notifications as mutually exclusive and relying on BSNL v. UOI, 2006 (27) STR 161 (SC), the appellant’s right to avail option of more beneficial Notification was upheld.

BCAJ Admin

Some Recent Judgments

I. High Court :

1. Beauty parlour service :

Whether carrying out activities of electro homoeo-pathy consultation and certain other related activities, such as hair bonding/hair weaving, sale of wigs, clips etc. were covered under ‘Beauty treatment services’ ?

    Commissioner of Central Excise, Mangalore v. Beau Monde’s Clinic, (2009) 21 STT 326 (Kar.)

    The appellant carried on activities of electro homo-eopathy consultation and had allegedly undertaken certain other related activities, such as hair bonding/hair weaving, sale of wigs, clips, etc. The original authority raised demand under the category of ‘Beauty Parlor Services’ on the contention that these activities would fall within ambit of ‘Beauty Treatment’. The Commissioner (Appeals) ruled in favour of the appellant. However, further appeal was preferred by Revenue in CESTAT. The Tribunal agreed with the detailed reasoning by Commissioner (Appeals) in his order, elaborating reasons why these activities of the assessee would not fall under ‘Beauty Treatment’ and ‘Beauty Parlor Service’. Finding no merit for interference, the appeal was dismissed by the High Court.

    2. Refund :

Whether refund of Service Tax can be granted when service tax is paid under wrong assumption in spite of not rendering any services and where credit notes have been issued by the assessee ?

Shiva Analyticals (I) Ltd. v. Commissioner of Service Tax, Bangalore, (2009) 21 STT 328 (Kar.)

The appellant claimed refund of service tax u/s.11B of the Central Excise Act, 1944 on contending that service tax was originally paid inadvertently considering that they were liable to pay service tax. Original authority allowed refund on finding that appellant had not rendered any service. The Order was revised by the Commissioner directing to re-credit the refund as the same was erroneously gran-ted. On appeal by the appellant, CESTAT allowed the appeal relying upon the decision in case of Mohd. Ekram Khan & Sons v. Commissioner of Trade Tax, (2004) 6 SCC 1083 and held that since the appellant issued credit notes towards refund of service tax to its clients, refund order passed by the original authority was legal and proper. On appeal by the department calling for interference in the order of CESTAT, the Hon’ble Court held that the order was perfectly legal and valid, and did not call for interference as no questions of law much less the substantial questions framed in the appeal arose for consideration.

II. Tribunal :

3. CENVAT Credit :

CENVAT credit reversed on being pointed out non-admissibility.

3.1 CST Ahmedabad v. Amola Holdings P. Ltd., 2009 (16) STR 46 (Tri.-Ahd.)

Respondent was providing commercial construction service and as such paid service tax at abated rate under Notification No. 1/2006-ST dated 1-3-2006. He also availed CENVAT credit. However, on being pointed out that benefit of abatement was available only on the condition of non-availment of CENVAT credit, voluntarily reversed credit taken but not utilised and also paid interest. Commissioner (Appeals) relying on Chandrapur Magnet Wires (P) Ltd., 1996 (81) ELT 3 SC set aside the pe-nalty proposed by the revenue. Revenue challenging this, contended that once credit is availed, they became ineligible for abatement of 67% and subsequent reversal would not help as exemption Notification has to be strictly construed and relied on Supreme Court’s decision in Bombay Dyeing’s case [2007 (215) ELT 3 (SC)]. However, distinguishing the facts of the case of Bombay Dyeing (supra) and relying on the decision in the cases of Precot Mills Ltd. 2006 (201) ELT 356 (Tri.-Chennai) and Hello Minerals Water (P) Ltd. 2004 (174) ELT 422 (All.), it was held that since credit was not utilised and precedent decision holding exemption squarely applied to the respondent, revenue’s appeal was rejected.

3.2 GHCL Ltd. v. CCE, Bhavnagar 2009 (16) STR 89 (Tri.-Ahmd.)

Appellant was disallowed CENVAT credit of service tax paid on services utilised prior to 10-9-2004 and service tax paid on credit card services, security services, repairs and maintenance services, etc. Factually, security service was used for plant, residential colony and mining and was also evident as per invoice dated 1-11-2004. The contract for repairs and maintenance services pertained to period from 1-9-2004 to 31-8-2005. Since security service was one of the sixteen services covered by Rule 6(5), the credit was considered admissible and proportionate credit in case of repair service after working out was considered admissible for the period 10-9-2004 and 31-8-2005. In case of credit card services, for want of details and the invoice being in the name of individual, credit was disallowed. Appeal accordingly was remanded for limited purpose of working out proportionate admissible credit.

3.3 Whether debit note is an admissible document for allowance of credit.

Pharmalab Process Equipments P. Ltd. v. CCE, Ahmedabad 2009 (16) STR 94 (Tri.-Ahd)

The Tribunal in this case observed that debit notes contained all relevant information required under Rule 9(2) of the CENVAT Credit Rules and therefore, the credit in principle was admissible based on such document which was not named as ‘invoice’. However, the matter was remanded to the original authority as there was no clarity whether the authority had verified the same documents which were presented before the Tribunal. Directions were issued to verify the documents and ensure receipt of service after allowing opportunity to appellant to present the case.

4. Classification : Exclusion under one entry — Whether could be taxed under another entry ?

Kiran Motors Ltd. v. CCE, 2009 (16) STR 74 (Tri.-Ahmd.)

The appellant is an authorised service station of Tata Motors. vehicles and receives reimbursements for providing free service to customers during warranty period. Revenue demanded service tax u/ s. 6S(10S)(zzb) treating the service as business auxiliary service. Since the services provided by the appellant are in respect of servicing/repairs of vehicles as authorised service station services, the ‘- services are classifiable u/s.6S(10S)(zo) as authorised service station service and not under sub-clause (zzb) as contended by revenue. Under sub-clause (zo), only motor cars, light motor vehicles and two wheelers are included and commercial vehicles are not included. The appellant paid service tax in respect of motor cars etc. and the demand of the revenue was only in respect of light commercial vehicles. Relying on the Board’s Circular No. 87/ OS/2006-ST dated 6-11-2006 and Code 36.02 in the Master Circular No. 96/7/07-ST dated 23-8-2007, it was held that transport vehicles were clearly excluded from the category of authorised service station; it could not be brought to tax under another general category of business auxiliary service.

5. Intellectual property service: Services rendered in 1990 – whether payments in installments relevant to hold the service as taxable?

Modi Mundipharma P. Ltd. v. CCE, Meerut 2009 (15) STR 713 (Tri.-Del.)

Appellant, a manufacturer of medicines under an agreement with a Swiss Company received ‘know-how’ in the form of information, data, drawing, secret formula etc. under its own brand name in India and paid royalty for a period of 10 years or more for the know-how. Service tax was demanded on royalty payment paid as receiver of intellectual property service. After perusing the agreement and Show Cause Notice, the Tribunal accepted the contention of the appellant that there was no finding as to receipt of know-how continuously. Payment whether made lumpsum or on deferred basis for know-how received in 1990 could not determine the liability of service tax as no service was provided during the disputed period and allowed the appeal. Since the appeal was allowed on this short ground, other aspects of the applicable date for ‘reverse charge’ etc. were not gone into.

6. Mandap Keeper’s service:

When a hotel rented out rooms along with gardens, whether room rentals were liable for service tax under ‘Mandap Keeper Service’ ?

Merwara Estates v. Commissioner of Central Excise, Jaipur (2009) 21 SIT 327 (New Delhi CESTAT)

The appellants were running a hotel with gardens adjacent to it. They were renting the gardens for the purpose of various functions and for which they were registered as Mandap Keeper and were paying service tax accordingly. The appellant on few occasions, also rented hotel rooms simultaneously with the garden for the purpose of stay of people arriving for the functions. The appellant’s contention was that service tax was not payable on that portion.of the charges realised which is attributable to renting of hotel rooms. Revenue cited the decision of the Tribunal in the case of Rajmahal Hotel v. CCE, (2006) 3 SIT 75 (New Delhi CESTAT) in support of department’s case.

The Tribunal held that the decision in the case of Rajmahal Hotel (supra) only authorised levy of service tax on renting of halls attached to the hotels but not in respect of renting the hotel rooms. Renting hotel rooms for the purpose of stay was not covered under ‘Mandap Keeper Service’. Hence the view taken by the Tribunal earlier that the appellants were not liable to pay service tax in respect of charges recovered for renting of the hotel rooms was confirmed.

7. Outdoor catering service:

Preparation and serving food in company premises whether can be considered outdoor caterer’s service?

Rajeev Kumar Gupia v. CCE, Jaipur 2009 (16) STR 26 (Tri.-Del. )

Appellant cooked and served food in the canteen of a corporate where place for canteen, kitchen storer, furniture, electricity and even gas stove were provided by the company. The contract also provided for payment for advance to the appellant. It was held to be not liable as outdoor caterer’s service as appellant merely prepared and served food.

8. Penalty:

Not leviable when bonafide belief exists.

8.1 Jay Canesh Auto Centre v. CCE, Rajkot 2009 (15) STR 710 (Tri.-Ahd.)

Appellant, an authorised auto dealer paid service tax with interest before issue of Show Cause Notice and pleaded that on account of confusion as to liability under business auxiliary service on incentive received, did not pay such service tax. However, on receiving clarification from CBEC vide Circular No. 87/05/2006-ST of 6-11-2006, they paid service tax and therefore, penalty u/ s.78 be set aside by extending benefit u/ s.80. Penalty u/ s.78 was set aside.

8.2. Krunal Catering Service v. CCE, Vadodara 2009 (15) STR 716 (Tri:-Ahd.)

Appellant ran a canteen in a factory in the rural area and provided meals to employees. They were ignorant of liability of service tax as outdoor caterer as they merely ran a canteen. On learning about it, they paid service tax with interest. Revenue levied penalty u/ s.78 on the ground that ignorance of law could not be the excuse. According to the Tribunal, section 80 could come into play in the circumstances as the belief as to non-applicability of service tax was bonafide and accordingly, penalty u/ s.78 was set aside.

BCAJ Admin

Some recent judgments

I Supreme Court :

1. Grant of stay pending disposal of case.

Ø Ravi Gupta vs. Commissioner of Sales Tax, Delhi 2009 TIOL 47 SC-CT.

For want of declaration forms, demand for over 8 crore was made on appellant, a dealer registered under the Delhi Sales Tax Act, 1975. The appellant prayed for further time to produce declaration forms, which was declined and on failing to get any relief, the appellant moved the Tribunal in six appeals. Along with the appeal, application to dispense with pre-deposit was filed. The Tribunal after hearing rival stands and particularly that declaration will be filed, directed payment of three crore rupees. The appellant filed a writ before the Delhi High Court questioning correctness of the order. The High Court directed the petitioner to produce statutory forms within six weeks and failing to do so, directed to pre-deposit in terms of the order. As the appellant did not produce the records, the Tribunal held that the appellant was required to pre-deposit three crore rupees as directed earlier and as the appellant failed to do both, appeals were held as not entertainable. A writ was again filed questioning correctness of the order, which was dismissed by the order on the ground that earlier order was not complied with. This order was challenged in appeal to the Supreme Court, wherein it was pleaded that the Tribunal and the High Court failed to appreciate that large number of declaration forms were to be collected from various parties and since the situation was beyond the control of the appellant, the forms could not be produced. If the forms are taken into account, the liability would not be more than 15 lakh.

After examining the relevant provision, the Hon’ble Court observed that though discretion is available, it has to be exercised judiciously. These things are to be considered by the Tribunal while dealing with application for dispensing with the pre-deposit — prima facie case, balance of convenience and irreparable loss. The Court noted, “Merely on establishing a prima facie case, interim order of protection need not be passed. But on a cursory glance, if it appears that the demand has no legs to stand, it would be undesirable to require the assessee to pay full or substantive part and dispose of petition in a routine manner. Merely because the Court has indicated the principles, that does not give a licence to the forum/authority to pass an order which cannot be sustained on touchstone of fairness, legality and public interest. Where denial of interim relief may lead to public mischief, grave irreparable private injury or shake a citizen’s faith in the impartiality of public administration, interim relief can be given ! !”

The Tribunal was accordingly directed to hear the appeal on merits without insisting on any pre-deposit. However, no opinion was expressed on the merits of the case and the appeal was disposed of.

II High Court — Important decisions :

2. CENVAT Credit : Credit for service tax paid on outward freight.

Ø Ambuja Cements Ltd. vs. Union of India and Others 2009 TIOL 447 STR 3 (P&H) — order dated February 10, 2009.

Readers may refer to the decision of Delhi CESTAT reported at 2007 (6) STR 249 (Tri.-Del.) against which instant appeal was filed by the appellant on substantive question of law i.e., whether service of transportation up to the customer’s doorstep in the case of ‘for destination’ sales where the entire freight was paid and borne by the manufacturer would be ‘input service’ for Rule 2(1) of CC Rules and whether interest should have been demanded on the same ?

The Hon’ble Court examined and relied on these aspects, the definition of ‘place of removal’ as provided in Section 4(3)(c)(iii) of the Central Excise Act, 1944, the subsequently issued Board’s Circular No.97/6/2007-ST, dated 23.08.2007 (Master Circular) and the definition of input service as per Section 2(1) of the CC Rules — ‘Place of removal’ means a depot, a premise of consignment agent or any other premises or place where excisable goods are sold after the goods are cleared from the factory. Para 8.2 of the Board’s Circular (supra) contemplates fulfilment of certain conditions; (a) ownership of goods and the property of the goods should remain with the seller till the delivery of goods in acceptable condition at the doorstep of the purchasers, (b) the seller bears the risk of loss or damage in transit to destination, (c) the freight charge should form integral part of the price of goods.

Binding nature of the Board’s Circular also was recognised by the Court relying on the decision of Paper Products Ltd. vs. CCE, (1999) 7 SCC 84 which in turn had relied inter alia on earlier SC decisions like Usha Martins Industries (1997) 7 SCC 47 and Ranade Micro Nutrients vs. CCE (1996) 10 SCC 387 and that the Revenue precluded from challenging the correction of the Circular even on the ground that is inconsistent with statutory provisions.

Further, the Hon’ble Court examined that all the requirements of the Circular were fulfilled —the supply of cement was ‘at destination’. Freight and insurance were borne by the appellant. Referring to the reply filed by the appellant to show-cause notice, the Court ruled that the third condition of freight charge forming part of cost of excisable goods stood fulfilled and thus the service of transportation was ‘input service’ for the CC Rules and accordingly, the credit availed was ruled to have been lawfully availed and there being no contravention of law, consequential interest payment did not arise.

3. Broadband connectivity — liable for VAT as sale of light energy although taxable to service tax.

Ø Bharti Airtel Ltd. vs. State of Karnataka & Others 2009 TIOL 99 HC — KAR-VAT

Vide an order dated January 16, 2009 the judgment in this case has given rise to controversy and uncertainty as the broadband connectivity charge recovered by the appellant is held as ‘sale of light energy’ taxable under the Karnataka VAT Act on the entire sale proceeds in spite of being taxed to service tax and principle laid down by the Supreme Court in the landmark decision of Bharat Sanchar Nigam Ltd. vs. UOI, 2006 (2) STR 161 (SC) is distinguished. The Assessing Authority in this case issued twelve notices under the Karnataka VAT Act (KVAT) to reassess the turnover of the appellant by adding subscription received towards leasing of broadband by treating the same as ‘transfer of right to use goods’ on the ground that physical lines of optical fibres were goods and rejecting appellant’s contention that leasing of broadband was a service on which service tax was paid. The demand was confirmed through a reassessment order on the new ground that the appellant was selling light energy. The appellant’s writ against the order was allowed by way of remand for fresh disposal. Twelve fresh notices were issued proposing to treat the transaction of providing broadband service as ‘sale of light energy’ and then were reassessed treating the leased service as sale of light energy. The Assessing Authority while deciding the case had also observed that there is no express provision in the service tax law that no VAT could be levied on a transaction on which service tax was levied nor does KVAT law contain a provision as to non-levy of VAT on a transaction on which service tax was levied by the Central Government. The appellant strongly relied on the decision of BSNL (supra), State of U.P. and Another vs. Union of India and Another 2003 TIOL 14 SC-ST, Associated Cement Company Ltd. vs. Asst. Commissioner of Sales Tax, Jabalpur and Another 1971 (28) STC 629 and a few other decisions and contended that the order of reassessment was opposed to the decision in the case of BSNL (supra) and that the activity of transmission of data from one place to another through optical fibre cables (OFC) did not involve sale of ‘light energy’ to the subscribers of broadband. What is delivered by the broadband users is data or voice information in electronic wave form and the light emitted by the laser device in the transmitter is used only for transmitting the same data at the destination point and that there was no element of ‘sale’ as Artificially Created Light Energy (ACLE) could not be termed as ‘goods’ as defined under Article 366(12) of the Constitution of India, under Section 2(7) of the Sale of Goods Act, 1930, Section 2(15) of the KVATAct, 2003, as it does not possess any of the properties of goods. The ACLE which is the electronic magnetic wave of high frequency is not capable of being possessed, stored, delivered and marketed and therefore, it cannot be held as goods was contended relying on the decision in the case of BSNL (supra), wherein it was held that ‘goods’ do not include ‘electro magnate waves’ or radio frequencies for the purpose of Article 366(29A)(a). Per contra on behalf of the Revenue, it was contented that the principle enunciated in BSNL’s case (supra) cannot be applied to this case, as it had not considered ‘artificially created light energy’ and placing strong reliance on the decisions of the Supreme Court in (1) Associated Cement Co. Ltd. vs. CC (2001) 4 SCC 493 (2) Tata Consultancy Services vs. AP (2005) 1 SCC 3208 – 2004 (178) ELT 22 (SC) and (3) State of A.P. vs. NTPC & Others (2002) 5 SCC 203. It was further contended by the Revenue that artificially created light energy is capable of being abstracted, possessed and consumed and as such, it could be held as ‘goods’ for the purposes of Article 3661(12), Section 2(7) of the Sale of Goods Act, 1930 and Section 2(15) of the KVAT Act, 2003. The definition of ‘goods’ under these laws was examined in detail by the Hon’ble High Court and it observed that in the decisions of TCS (supra) and ACC (supra), the term ‘goods’ as used in Article 366(12) is very wide and includes all types of properties whether tangible or intangible/ any incorporeal property and accordingly it was held that software sale was sale of goods as it was capable of being extracted, consumed and used and it could be transmitted, transferred, delivered, stored and possessed, etc. The Hon’ble High Court ana lysed observations in the BSNL’s case as regards’ electromagnetic waves’ in detail and distinguished non-extinguishable electromagnetic waves from’ Artificially Created Light Energy: (ACLE)’ and noted that ACLE is made to travel in the confined area in OFC Network and direction of their movement is regulated and that the said light energy gets extinguished and it cannot be reused by the same subscriber for carrying his another data or of any other subscriber. Each specific data is carried by a separate ACLE and it could be safely held that it is being abstracted, possessed, transmitted and delivered during transmission of data to the subscriber and like, in the case of electricity, the creation, supply, possession, use and transmission (movement) and delivery of ACLE takes place almost simultaneously. Rival submissions including expert opinions were placed on record by the appellant as well as by the Revenue. However, artificially created light energy was held as ‘goods’.

Further questions that were examined were – whether there is a ‘sale’ of ACLE by the appellant to its subscriber so as to attract VAT and whether VAT was leviable even if transmission was chargeable to service tax. The definition of ‘sale’ was considered, analysed and discussed at great length and it was held that the nature of the transaction between the appellant and its subscriber under ‘service line agreement’ though is described as ‘service’, is one of ‘composite transaction’ involving ‘service’ and ‘sale’ elements. With ACLE, the data and information of the subscribers cannot be transmitted by using only OFC network. Similarly, without using OFC network, the data/information cannot be transmitted by using only ACLE.

For composite transactions, again the Supreme Court’s observations in BSNL’s case were examined and an opinion was formed that in the instant composite transaction also, the two elements of service and sale cannot be split. In this frame of reference, relying on the decision in State of UP vs. UOI, 2003 TIOL 14 SC-ST, it was held that the entire proceeds received from the subscriber as ‘service rentals’ would have to be taxed under the KVAT Act treating the transaction of providing broadband connectivity to its subscribers as sale of Artificially Created Light Energy *(ACLE) and that the Government of Karnataka had authority to levy VAT on the entire proceeds collected as ‘lease rentals’, despite it being assessed to ‘service tax’ by the Central Government under the Finance Act, 1994.

[Note: The above decision would have repercussions of serious nature if finality is reached for taxing a transaction twice].

4. Whether supply of vessels to ONGC amounts to a service in relation to mining?

Indian National Ship Owners’ Association & Others vs. UOI & Others, 2009 TIOL 150 HC Mum-ST.

Members of the petitioner provide vessels that include offshore drilling rigs, harbour tugs, construction barges, etc. to exploration and production operators such as ONGC in India and in international waters on time-charter basis to carry out various jobs which inter alia includes anchor handling, towing of vessel, supply to rig or platform, supporting offshore construction, piloting big vessels in and out of harbour, etc. When the taxing entry of service in relation to mining of mineral oil or gas was introduced with effect from 01.06.2007 (entry 65(105)(zzzy), the petitioner’s members on approaching service tax authorities were informed that services of supply of vessels to ONGC or the like companies were liable for service tax under the said taxing entry and actions were initiated for recovery of service tax and an instant writ was filed therefor. In the interim, the Finance Act, 2008 with effect from 16.05.2008 introduced entry (zzzzj) to tax service in relation to supply of tangible goods for use without transferring right of possession and effective control of such goods. Accordingly, the petitioner pleaded that the activity of the members was specifically covered by the new entry and since it did not relate to ‘mining’, it was not covered by the earlier entry and that the new entry was not carved out of the old entry. Reliance was placed on Pappu Sweets & Biscuits & An. vs. CIT, UP, (1998) 7 SCC 228 and Yogendra North Naskar vs. CIT, Calcutta, (1969) 1 SCC 555 and also on Glaxo Smithkline Pharmaceuticals, 2005 (188) ELT (TrL), Diebola Systems (P) Ltd. 2008 9 STR 546 (TrL) and a couple of others.

Attention of the Court was drawn to the fact that there existed taxing entries for services of transportation by aircraft, transportation by road and transportation of goods other than water through pipeline or conduit, but no specific entry exists for transportation by sea and, therefore, the activity could not be subjected to service tax.

Provisions of Section 65A, entry (zzzy) and entry (zzzj) along with the respective clarificatory Circulars of the Board were examined. Quoting from the judgment of the Assam Court in the case of Magus Construction P. Ltd. vs. UOI, 2008 TIOL 321 HC GIW-ST, the Court observed that tax on services is a new concept and the Government had adopted selective approach as against comprehensive approach and this distinction needs to be kept in mind as only specified services are taxable under such approach.

The Court further observed that the expressions ‘in relation to’ and ‘in respect of’ are words known as of ‘widest amplitude, but one has to keep in mind the context in which they are used’. The services rendered by a person must have a direct or a proximate relation to the subject matter of the taxing entry. Services having remote connection cannot be included in a taxing entry on the strength of the words ‘in relation to’. Applying this, it was held that entry (zzzzj), was not inserted by amending entry (zzzy) and the former is not the specie of what is covered by (zzzy) and no service tax could be demanded on the activity of supply of vessels under mining service.

5. When does the taxable event take place under the service tax law?

CCE&C Vadodara vs. Schott Glass India P. Ltd., 2009 TIOL 82 HC -AHM-ST 2009 (14) STR 146 (Guj).

The Revenue challenged the order of Ahmedabad CESTA T on the following questions:

o Whether or not in service tax the taxable event is realisation of payment for taxable services rendered and not the time of rendering service?

o Whether or not at the time of realisation of payment for the taxable service provided, the provisions of Rule 2(1)(d)(iv) come into force making the service receiver liable for service tax?

According to the Revenue, in the order in question, the CESTAT had overlooked the fact that service tax burden was shifted to the recipient of service from 16.08.2002 in terms of Rule 2(1)(d)(iv) for services provided by non-residents and the respondent assessee was required to pay service tax on the amount paid in September, 2003. Factually, CESTAT had found that services were rendered prior to March 2002 and at such time, there was no liability cast on the receiver of service. The Court observed that service tax is levied as provided in Section 64(3) of the Act to all taxable services provided or after commencement of Chapter 97 of the Act. Thus, taxable event is providing all taxable services defined by Section 65(105) of the Act. Merely for the fact that invoice was raised later and payment was made subsequently, the liability cannot be fastened. Neither the Section nor did the Rule even suggest that taxable event is raising of the invoice for making the payment. The Tribunal accordingly had decided in accordance with the law based on facts and material on record and there was no legal infirmity in the order.

III Tribunal:

CENV AT Credit :

6. Service tax on accident policies, etc. allowable as credit?

Milipore India Ltd. vs. CCE, Bangalore, II 2009 TIOL 490 CESTAT-BANG.

The issue related to availment of CENV AT credit of service tax on the services of medical and personal accident policy, group personal accident policy, insurance personal vehicle services, landscaping of factory and catering bills. Definition of input service in Rule 2(i) of CC Rules was examined vis-a-vis CAS-4 standards reproduced in the decision of GTC Industries Ltd. 2008 TIOL 1634 CESTAT-MUM-LB Since CAS-4 considered all the services like medical benefit, subsidised food, education and canteen bill, etc. to form part of the cost of final products, the services received should be treated as received in relation to manufacture. , Further, since modernisation, renovation, repair etc. of the office premises, etc. are also included in the broad definition of input service, even landscaping should be treated as in relation to manufacture of final product and accordingly, the credit on all the above services was allowed.

7. Erection of machinery at buyer’s place by a sub-contractor: Whether allowable?

CCEX Vapi IAlidhara Textool Engineers PI Ltd. vs. Alidhora Textool Engineers Ltd./CCEX Vapi, 2009 TIOL 370 CESTAT-AHM.

A manufacturer supplied, installed and erected machinery in buyer’s premises. An agency was outsourced to instal the machines and took credit of service tax paid on erection and commissioning services provided by the said agency. The question involved was whether installation done at buyer’s premise would be treated as input service for manufacturing as it was a post manufacturing activity. It was contended that commissioning and installation cost was included in the price of machines and duty was paid on the same and that part of the service was provided at buyer’s premises and a part at manufacturer’s. Copy of sample sales contract wherein erection and commissioning cost was included was produced. Commissioning was to be managed by the appellant-manufacturer. Sub-contractor was held to be service provider to manufacturer and it was held that CENV AT Credit Rules do not require that the service should be rendered at factory only for determining eligibility of service tax credit and accordingly, credit was allowed to the appellant.

8. Service provided by one person, tax paid by another – whether entitled for credit?

Federal-Mogul-Goetze (India) Ltd. VS., CCE, Chandigarh, 2009 TIOL 460 CESTAT-DEL.

Credit was taken by a manufacturer on the basis of TR-6 challan showing payment of service tax by the sister concern of the service provider. Service provider was not registered initially when service was provided. Hence, its sister concern which was registered paid service tax charged to the appellant for services provided through its sister concern. This fact was intimated to the Asst. Commissioner. However, no reply was received. Later even the unregistered service provider got registered and paid service tax with interest. It was held that TR-6 was a valid document based on which credit was taken. Since the service tax liability was dis-charged and later even service tax registration was obtained by the actual service provider, it was held that credit could not be denied.

9. Service tax credit on mobile phones or landlines at residence of staff admitted as CENV AT credit.

ITC Ltd. VS. CC&CE, 2009 TIOL 439 CESTAT- MAD

Relying on the decision of the High Court in the case of CCE VS. Excel Crop Care Ltd., 2008 (12) STR 436 (Guj.) and also the Tribunal decision in the cases of Indian Rayon & Industries Ltd. VS. CCE Bhavnagar, 2006 (4) STR 79 and Keltech Engineers Ltd. vs. CCE, Mangalore, 2008 (10) STR 280 and the case of CCE (LTU) Chennai VS. Braka India, 2009 (89) RLT 876, it was held to the effect that in the absence of express prohibition under CCR, service tax paid is admissible as the phones were not installed at the factory premises cannot be the ground germane to the provision of rates relevant for the purpose.

10. Whether credit for service tax paid on reimbursable expenses is allowed to be taken?

Chandra Shipping & Trading Services vs. CCE & C, 2009 (13) STR 655 (Tri.-Bang).

The appellant, a Custom House agent was alleged to have wrongfully availed input credit for over 4 years and an amount of over 52 lakh plus interest and penalty under Sections 76 and 78 were demanded. It was contended that CENVAT credit returns were not verified by the Department. The credit was denied on the grounds that credit was taken on services not used and that no evidence was produced by the appellant that no credit was availed by importers/exporters for whom the services were used. The appellant contended that grounds on which credit was denied were extraneous to the CCR, which have to be interpreted strictly and credit could not be denied based on suspicion. Time bar also was pleaded. Benefit of time bar was granted to the appellant. Since the Revenue had not verified the facts, benefit of doubt was granted to the appellant. It was held that the burden of proof was on the Department to prove the allegations with solid evidence. Since the appellant had filed all its Returns regularly, the demand hit by time bar and the penalties were set aside.

11. Credit taken prior to payment for value of input service.

Gujarat Pipavav Port Ltd. vs. CCE Bhavnagar, 2009 (14) STR 53 (Tri.-AHD).

Service tax credit was availed one month earlier than permissible under Rule 3(1) of the Service Tax Credit Rules, 2002. Credit can be availed only after making payment for value of input service and the service tax shown in the invoice. The appellant pleaded technical lapse. Since in any case credit was available in the next month, interest for one month was required to be paid but penalty imposed was waived.

BCAJ Admin

Right To Information

r2i

Tax records of political parties :

Very interesting and significant decision is given by CIC Mr.
A. N. Tiwari under appeal decided on 29-4-2008.

One Ms. Anumeha C/o. Association for Democratic Reforms (ADR)
of New Delhi had sought information from the CPIO, Central Board of Direct
Taxes, New Delhi as noted hereunder. The said application was transferred to
appropriate 9 CPIOs i.e., the appropriate Commissioners of Income-tax
(including CIT of Mumbai, New Delhi, Chennai). The information sought was on the
following three points :

(i) Whether the political parties mentioned in the RTI
application have submitted their Income Tax Returns for the years 2002-03,
2003-04, 2004-05, 2005-06, 2006-07.

(ii) PAN allotted to these parties.

(iii) Copies of the Income-tax returns filed by the
political parties for the afore-mentioned years along with the corresponding
assessment orders, if any.

While CIT, Jammu & Kashmir and Guwahati provided the
information, all other CPIOs declined to divulge information citing various
reasons, some of which were :

Information is covered u/s.8(1)(d), (e), (g), (h) or (j) of the RTI Act.

Permanent Account Number (PAN) is a statutory number, which functions as a
unique identification of each taxpayer. Making PAN public can result in misuse
of this information by other persons and could compromise the privacy of the
financial transactions linked with PAN.

Information relates to third parties who have objected to the disclosure of
this information.

Information is subject to confidentiality u/s.138 of the Income-tax Act, 1961.

In the first appeal made to CCIT, Bhubaneswar, the matter was
remanded to the CPIO but in other cases, concerned CCITs dismissed the appeals.

Before the Commission in the second appeal, the appellant
made certain submissions including the following :

(i) The avowed objective of a political party in a
democracy is to represent people in Parliament and Legislature that are
law-making bodies through the process of elections and that their very
existence is indicative of their goal of representing the interests of the
people who elect them to power.

(ii) Each and every act of theirs should be open to public
scrutiny. Transparency in their working and financial operation is essential
in larger public interest and all sections of government, including the
Income-tax Department, are duty bound to hold the public interest above the
interests of political parties.

(iii) The disclosure of financial information relating to
political parties including I.T. returns and assessment orders to general
public would promote such transparency and reduce the role of black money and
other undesirable, even illegal activities in the operation of political
parties.

Since the information sought involved significant issues, the
Commission decided to issue notices of hearing to all the 20 political parties
in respect of which information was sought and also to the Election Commission
and the Ministry of Law and Justice asking them to file their written
submissions.

Both the Election Commission and the Ministry of Law &
Justice filed their comments. Also political parties submitted their comments.
While CPI & CPM submitted ‘no objection’ to the disclosure of information, other
political parties including (1) BSP (2) NCP (3) The Samajwadi Party (4) BJP (5)
DMK (6) AICC objected to the disclosure of information on various grounds.

The applicant in her rejoinder to the replies submitted by
the above-noted parties made written submissions, which included following
points :

That she herself and her organisation are completely non-political and non-partisan. The Association for Democratic Reforms (ADR), which she represents, works for improving the governance, democratic, political and electoral processes in the country. Earlier also they have filed Public Interest Litigations (PILs) in the Delhi High Court, which resulted in the landmark and historic judgment of the Supreme Court (March 13, 2003) making it mandatory for candidates contesting elections to State Assemblies and Parliament to disclose their criminal antecedents, if any; assets and liabilities; and educational qualifications, by way of a sworn affidavit to be filed as an essential part of the nomination form.

It is also pertinent to refer to the recommendations of the Law Commission of India contained in their 170th Report on ‘Reform of the Electoral Laws’. An extract from para 3.1.2.1 of which is reproduced below :

“It is therefore, necessary to introduce internal democracy, financial transparency and accountability in the working of the political parties. A political party which does not respect democratic principles in its internal working cannot be expected to respect those principles in the governance of the country. It cannot be dictatorship internally and democratic in its functioning outside.”

The appellant also submitted that where plural remedies occur under different enactments, even if inconsistent, they empower a person to choose one, (Bihar State Cooperative Marketing Unions Ltd. v. Uma Shankar Saran, AIR 1993 SC 1222). In the alternative, assuming without prejudice that there is no inconsistency or discordance between the provisions of the RTI Act and S. 138 of the Income-tax Act and both can be given effect to, then the existence of an alternative remedy u/s.138 of the Income-tax Act or any other Act would not bar a citizen from seeking information tinder the RTI Act, 2005 and to accept any other interpretation would mean to render the RTI to a nullity. The RTI Act is an encompassing piece of iegislation and S. 2(f) of the said Act specifically defines ‘information’ to include If information relating to a private body which can be assessed by a public authority under any other lawfor the time being in force. ” The Right to Information Act, 2005 (RTI Act) on the other hand is a specific and special piece of legislation directed towards providing for access to information under the control of public authorities.

The Commission framed the following issue for determination:

Whether income tax returns along with its assessment order and PAN of various political parties can be considered to be exempted u/s.8(1)(d), (e), (g), (h) and (j) of the RTI Act and as to whether such information can be disclosed in larger public interest?

In its decision covering 22 paras and running into nearly 8 pages, the Commission, ruled on the above issue. Some paras in full and others in part are reproduced hereunder:

Political parties are a unique institution of the modern Constitutional State. These are essentially civil society institutions and are, therefore, non-governmental. Their uniqueness lies in the fact that in spite of being non-governmental, political parties come to wield directly or indirectly influence exercise of governmental power. It is this link between State power and political parties that has assumed critical significance in the context of the Right of Information Act which has brought into focus the imperatives of transparency in the functioning of State institu-tions. It would be facetious to argue that transparency is good for all State organs, but not so good for the political parties, which control the most important of those organs. For example, it will be a fallacy to hold that transparency is good for the bureaucracy, but not good enough for the political parties, which control those bureauracies through political executives.

In modern day context, transparency and accountability are spoken of together as twins. Higher the levels of transparency, greater the accountability. This link between transparency and accountability is sharply highlighted in the Preamble to the RTI Act.

The RTI Act aims at expanding accountability through transparency at all levels of governance. It is difficult to be persuaded by the argument that though political parties control the political executives who are their appointees these parties should be allowed to be insulated from the demands of transparency.

The question that additionally needs to be asked is whether the avowed purpose of the RTI Act, as set out in its Preamble to combat corruption is being achieved by allowing the finances of the political parties to remain beyond public scrutiny or even public view. There is now widespread concern about a hyphenated relationship developing between party finance and political corruption. The lack of openness and transparency in party finance is matched by the lack of adequate State regulation of such finance.

The scheme of the Act makes it abundantly clear that disclosure of information to a citizen is the norm and non-disclosure by a public authority an exception and it necessitates justification for any decision not to disclose information.

Democratic States, the world over, are engaged in finding solutions to the problem of transparency in political funding. Several methodologies are being tried such as State subsidy for parties, regulation of funding, voluntary disclosure by donors at least large donors and so on. The German Basic Law contains very elaborate provisions regarding political funding. S. 21 of the Basic Law enjoins that political parties shall publicly account for the sources and the use of their funds and for their assets. The German Federal Constitutional Court has in its decisions strengthened the trend towards transparency in the functioning of political parties. It follows that transparency in funding of political parties in a democracy is the norm and, must be promoted in public interest. In the present case that promotion is being effected through the disclosure of the Income-tax returns of the political parties.

Based on the above, the Commission ruled as under:

The Commission directs that the public authorities holding such information shall, within a period of six weeks of this order, provide the following information to the appellant:

Income-tax returns of the political parties filed with the public authorities and the assessment orders for the period mentioned by the appellant in her RTI-application dated 28-2-2007.

The Commission also directs that the PAN of those political parties whose Income-tax returns are divulged to the applicant shall not be disclosed. It has been decided not to disclose PAN in view of the fact that there is a possibility that this disclosure could be subjected to fraudulent use, reports of which have lately been appearing. It is, therefore, considered practical that while Income-tax returns and the assessment orders pertaining to political parties be disclosed, there should be no disclosure of the PANs of such parties.

[Ms. Anumeha, Clo ADR, New Delhi v. CCITICIT of 9 jurisdictions in nine appeals bearing different numbers]

Part B : The RTI Act

Standing Committee of the Parliament on RTI Act, 2005:

In February 2009, the items were reported :

1. Level of awareness.

2. Use and misuse of the RTI Act.

Hereunder other 2 items:

Reduction of 20-year period for keeping documents:

A common misunderstanding is that the RTI Act only allows access to information that is less than 20 years old. In fact, the RTI Act does not exempt information on the basis of how old it is.

Currently the law [(So8(3)] only allows three categories of exemptions for information older than 20 years, namely, national security [8(1)(a)], Parliamentary privilege [8(1)(c)], and cabinet papers [8(1)(i)]. Therefore, the law does not restrict access to information, which is more than 20 years old, but actually makes it easier to access older information than current information, which is less then 20 years.

However, this does not mean that departments have to preserve records for perpetuity. Departments are free to destroy records or to transfer them to archives as per their rules and procedures related to the destruction or archiving of records. S. 19(8)(a)(iv) of the RTI Act empowers and obligates the Information Commissions to examine the rules and procedure relating to the destruction of records of any public authority and to give directions as necessary to bring these in tune with the intention of the RTI Act. Therefore, we do not think any change is required.

Impediments, including the Official Secrets Act : Our study suggest that the major impediment to the implementation of the RTI Act is the lack of awareness among the people on how to use the Act and what benefits it could have.

A close second is the mindset of the public authorities and the PIOs to find all possible reasons to deny information. The fact that Information Commissions are not imposing penalties, as mandated by the RTI Act, has made many PIOs think that there are no costs to be paid for denying information on the flimsiest of grounds.

Though the RTI Act specifically provides for the overriding of the Official Secrets Act, when there is a conflict between the two, the fact is that the continued existence of the Official Secrets Act (OSA) does cause a fair amount of confusion among both the applicants and the PIOs. Therefore, it might be the best to repeal the OSA and to put the few important provisions that are required, despite the RTI Act, either into an another existing Act like the National Security Act, or into a new Act.

Voluntary disclosures:

We believe that the suo motu voluntary disclosure of information is critical to the success of the RTI Act. As already mentioned, this is perhaps the most effective way in which the pressure of RTI applications on government departments can be minimised. Suo motu declarations not only save time, but also provide protection to applicants from the weaker segments of society, who are otherwise targeted by those who have a vested interest in keeping the information secret.

Suo motu declarations also ensure that government is not just reactive to those who seek information but treats all potential applicants equally. For example, our experience shows that where suo motu declarations are not insisted upon, ration shop owners make sure that those few people who file RTI applications are properly serviced and do not have a cause for complaint. However, this leaves out the very large majority, who for one reason or another either do not file applications or cannot file them. On the other hand, where the complete records of a ration shop are put into the public domain suo motu, the ration shop owner cannot anticipate who among the various customers would check the records and point out any discrepancies. Therefore, the ration shop owner is forced to ensure that everyone’s records are accurate.

Our experience is that most public authorities do not bother to be in compliance of S. 4, and certainly do not put out all the information that could be put out, suo motu. Partly this is because the law does not directly mandate any penalty for non-compliance with S. 4. In addition, there are also no incentives for public authorities to make the effort.

It would perhaps be best if an independent agency from within the government, like the National Informatics Centre (NIC) of the Government of India is given the responsibility of creating, maintaining and updating websites and printed material giving the required suo motu information for all ministries and departments of the government. Additionally, the concerned ministries and departments could also be given positive incentives -like perhaps trophies for those who perform best in terms of suo motu disclosures.

It is also important that suo motu disclosures are not just web-based, as many people in India do not have r access to the web. These should be in printed form, through sign-boards, radio, TV, and even by using voice mail in cell phones and innovatively communicating information through songs and theatre (like the MKSS songs that sing out all the provisions of the RTI Act, and explains them in verse !)

Part C : Other News

Justice D. Y. Chandrachud on the RTI Act:

The Right to Information Act has brought about an enormous change in the way we are governed, assured Justice D. Y. Chandrachud of the Bombay High Court at a recent talk on ‘Democracy, Governance and the Rule of Law’. It transpired that people don’t just seek details of case backlog or judges’ salaries, sometimes there are ‘wholly frivolous’ que-ries as well. Recently, an RTI application asked the High Court to reveal how much was spent on flower decoration at a recent function or at the banquet. The Judge, however, said people have a right to ask even irrelevant details. A Court officer is now tracking the floral budget. He might just come out smelling of roses.

BMC to punish the officer for RTI delay:

The Brihanmumbai Municipal Corporation’s city engineer has issued a show-cause notice to a Public Information Officer – in this case, the Deputy Chief Engineer (Planning and Development) – asking why his increment for next year should not be withheld. The order comes after State Information Commissioner Suresh [oshi levied a fine Rs.25,000 on the officer for not dispatching a Right to Information (RTI) application to the department concerned in time. The State Information Commissioner had also said in his order that the Municipal Commissioner should investigate the delay and take action as necessary.

Answer sheet on examination paper:

The Calcutta High Court allowing transparency in the evaluation system ruled that students had the right to see their answer sheet and educational institutions should allow it. The verdict came on an appeal by Calcutta University against a Single Bench’s order directing it to show a maths answer sheet to Presidency College student Pritam Rooj after he had sought a re-evaluation. Under the current system, students who doubt the marking can seek a revaluation of their answer sheets. But that is done by the examiner and students have to take the examiner’s word for it. Giving its ruling, a Division Bench comprising Chief Justice S. S. Nijjar and Justice Dipankar Datta directed those concerned to act on all such pending applications and show the answer sheets to aggrieved students within a month. The Bench, however, also set a time limit for students to see their answer sheets.

Performance of Information Commissioners of Maharashtra :

Project expedited on RTI application:

Today the villagers of Rangpar (a tiny village of 750 people, 25 km from Wankaner in Rajkot district) were happy to see that there is a 2 km road connecting their village to highway. The Gando Baval (babool) shrubs along the roadside have been cleared by the grampanchayat authorities. It took a visually challenged Ratna Ala, 26, to open the eyes of the authorities through the right to information (RTI)Act. At last some development work has been started by grampanchayat in Rajkot. For the last two years Ala has been using RTI to get information on how many schemes the panchayat implemented and how much money they spent. Though he did not get accurate information, it helped the panchayat realise that its inefficiency would be exposed. Ala’s struggle is on, but he is happy that the road has been constructed and the dense shrubs, which were a hindrance to passers-by, are cleared.

Discloser of the assets of Commissioners of Information:

Information Commissioners have chosen not to disclose their own assets on the ClC’s website in a development which may cause many to wonder whether the transparency watchdog has trouble following what it preaches to others.

In a candid admission, Chief Information Commissioner Wajahat Habibullah said “All Information Commissioners have declared their assets, but they felt that this information should not be put on the Commission’s website. They did not want it on the ClC website.”

Queried further on why the transparency watchdog was not keen on disclosure of its assets, Habibullah said, “The Commissioners felt that they could put up the information on their personal websites”. Crucially, none of the eight Commissioners have their own website.

BCAJ Admin

Right To Information

r2i

Part A : Decisions of CIC and SIC

S. 8(1)(g) of the RTI Act :

S. 8(1) of the RTI Act provides exemption from disclosure of
information, clause (g) thereof says : “Information the disclosure of which
would endanger the life or physical safety of any person or identify the source
of information or assistance given in confidence for law enforcement or security
purposes.”

The issue in the case of Brij Lal v. Deputy Commissioner
of Police was whether a copy of the enquiry report which was conducted by
vigilance branch of the police can be supplied. PIO held the view that the same
cannot be provided due to exemption u/s.8(1)(g). The first AA ordered that
copies shall be provided after deleting the name and identity of the witnesses.
In the appeal before CIC, Mr. Brij Lal asked : “It is appealed that a full and
clean copy of the Inquiry Report indicating clearly the names of the persons
concerned be provided.”

The restriction mentioned in S. 8(1)(g) would seem to clearly
apply to this case as the witness gives assistance in confidence for law
enforcement. Therefore, the names and identity of witnesses are generally not
disclosed, as it may endanger their life or physical safety.

On examination of the report however CIC found that it also
deletes the names of complainant, accused and enquiry officer. The definition
above equally and clearly does not cover names of complainant, accused or
enquiry officer. This will be particularly so when the RTI applicant himself is
either the complainant or the accused. To this extent, therefore, CIC directed
that a fresh copy of the enquiry report be provided to the appellant restoring
the names of the complainant, the accused and the enquiry officer wherever
deleted.

[Brij Lal v. DCP, North West, Appeal No. CIC/WB/A/2007/00516,
decided on 15-5-2007]

S. 6(3) of the RTI Act :

In the last month, one decision of SIC of Maharashtra was
reported. Herewith is one other decision of Dr. S. V. Joshi (CSIC, Maharashtra)

Shri S. K. Nangia had sought from Jt. Chief Registrar,
Directorate of Industries, Government of Maharashtra, information regarding
Notification/ order issued by the Government designating co-operative industrial
estates in Mumbai as public authority.

PIO replied that this information be obtained from the
Government. Citing the provisions of S. 6(3) (which requires PIO to transfer the
RTI application to the appropriate public authority if the information sought is
held by that another public authority, etc.) Shri Nangia insisted that PIO so
do. There was no response. He then filed another RTI application. Again, this
application and the first appeal also remained unattended to. Hence, he filed
the complaint before SCIC. Dr. Joshi made the following order :

In his submission before the Commission, PIO admitted that
as per his knowledge there is no system of publishing the names of the
institution to whom RTI Act is applicable in the Gazette. In fact, this fact
ought to have been made clear by the PIO to the applicant instead of asking
applicant to go to the Government.

PIO has however given instance of his commitment to RTI.
According to him, taking advantage of difference of opinion about
applicability or RTI to co-operative institutions, when Kandivali Co-operative
Industrial Estate was avoiding appointment of PIO, he doggedly pursued the
matter and saw to it that they appoint PIO.

His lapses were basically because of lack of knowledge.

“This Commission feels that all the replies to the
application should have been given by the PIO without him making reference to
the Government or asking applicant to go the Government which he should do
within 5 days of receipt of this order.” Taking into consideration the fact
that he has tried to reply within the time limit and also his commitment to
RTI, Commission decided to give him a chance to work better and discharge his
responsibility under RTI properly by merely reprimanding and not by imposing
any fine.

[Shri S. K. Nangia v. PIO and Joint Chief Registrar,
Directorate of Industries, Mumbai, Complaint No. 2008/621/02, decided on
10-11-2008]

Part B : The High Court decision

The petitioner is PIO, Dr. Celsa Pinto. She has challenged
the order dated 27-7-2007 passed by the Goa Information Commission, holding her
responsible for furnishing incorrect, incomplete or misleading information.

The complainant had sought information on various letters
from GPSC for filling up certain posts, seniority list, etc. She also had asked
the following information :

(i) Copy of the seniority list of the common cadre of the
Librarian post from the Directorate of Education, Technical Education and
Higher Education.

(ii) Why the post of curator was not filled up by promotion
after retirement of V. B. Hubli, and the post filled by direct recruitment
through GPSC ?

(iii) Why the Librarian from the Engineering College was
not considered for promotion for the post of Curator in the Central Library
when it was fallen vacant due to retirement of Shri V. B. Hubli ?

Initially, Dr. Pinto replied to all items of information sought including two questions above as ‘Not available’.

The matter came up before the Goa Information Commission in appeal.

The Goa Information Commission has held the petitioner guilty of furnishing incomplete, misleading and false information and has imposed a penalty of Rs.5,000 which is liable to be deducted from the petitioner’s salary.

Before the High Court, it was submitted that SIC has wrongly held that the petitioner provided incomplete and misleading information, etc.

The High Court passed the following order:

The Commission has with reference to question No. 1 held that the petitioner has provided incomplete and misleading information. As regards point No. 1, it has also come to the conclusion that the petitioner has provided false information in stating that the seniority list is not available. It is not possible to comprehend how the Commission has come to this conclusion. This could have been a valid conclusion if some party would have produced a copy of the seniority list and proved that it was in the file to which the petitioner, Information Officer, had access and yet she said ‘Not Available’. In such circumstances it would have been possible to uphold the observation of the Commission that the petitioner provided false information in stating initially that the seniority list is not available.

As regards the requisition Nos. 2 and 3 by which the petitioner was called upon to give information as to why the post of Curator was not filled up by promotion and why the Librarian from the Engineering College was not considered for promotion, the petitioner had initially answered by stating that the information was “N.A.” (Not Available). Thereafter, she had clarified by stating that it means “I don’t know”. The Commission has initially observed in para No. 13 that it does not see anything wrong in the petitioner’s reply that she does not know the information because “P.LO. cannot manufacture the information.”

It can be recalled that the petitioner corrected the information by explaining that “Not Available” meant “she does not know.” It is not possible to accept the reasoning of the Commission. There is no substance in the observation that merely because the petitioner initially said “Not Available” and later on corrected her statement and said she does not know, the petitioner provided incomplete and incorrect information. In the first place, the Commission ought to have noticed that the Act confers on the citizen the right to information. Information has been defined by S. 2(f) as follows:

“S. 2(f) – Information means any material in any form, including records, documents, memos e-mails, opinions, advices, press release, circulars, orders, logbook, contracts, reports, papers, samples, models, data materials held in any electronic form and information relating to any private body which can be accessed by a public authority under any other law for the time being in force.”

The definition cannot include within its fold answers to the question ‘why’, which would be the same thing as asking the reason for a justification for a particular thing. The Public Information Authorities cannot expect to communicate to the citizen the reason why a certain thing was done or not done in the sense of a justification, because the citizen makes a requisition about information. Justifications are matter within the domain of adjudicating authorities and cannot properly be classified as information.

In this view of the matter, the order of the Commission appears to suffer from a serious error of law apparent on record and results in the miscarriage of justice. In the result, the impugned order is hereby set aside.

[Dr. Celsa Pinto v. Goa SIC & Anr., W.P. No. 419 of 2007, decided on 3-4-2008]

Part C : Other News

• RTI information provided with condition:

In an ingenious attempt to have its cake and eat it too, AIIMS has made a disclosure under the RTI with the condition that it was meant only for the applicant’s ‘personal consumption’ and he should not share it with the media without the ‘written permission’ of its director.

Such conditional disclosure is contrary to the scheme of RTI as it allows the applicant to use the law for any purpose. This is evident from S. 6(2), which exempts the applicant from giving “any reason for requesting the information”.

• SIC, Maharashtra needs police protection:

Chief Information Commissioner Suresh [oshi was among those stuck in office till late in the night on 26/11 though he was nowhere near CST, Hotel Taj, Hotel Oberoi-Trident or Nariman House where terrorists struck. He had been besieged by a group of six RTI activists who allegedly made him sit back well past midnight demanding that he pass an order on an RTI appeal that very day.

Joshi has now written to Police Chief Hasan Gafoor seeking police protection, pointing out that many of the people who visit his office are accused in bomb blasts or named in criminal cases.

Speaking to Mumbai Mirror, Joshi said: “The RTI activists are good people, but they were adamant and were unwilling to leave. Their desire was that I pass an order the same day, but I was firm (on not doing their bidding). They cannot dictate to us. Earlier, we did not feel the need for protection, but now we can’t predict the nature of people visiting our office.”

• RTI and Stamp Duty refunds:

If you are still waiting to get your refund from the stamp duty office even after months of filing your application for the same, the Right to Information (RTI) Act can come to your rescue.

The information law can not only help you get the refund, but also penalise the errant bureaucrat who hasn’t responded to your queries.

Tarun Ghia, a chartered accountant, had sought information on the number of applications that had come for stamp duty refund and the total amount of refund that had been disbursed in the last two years. Mr. Ghia also said that the unreasonable delay may instigate corruption and will be the cause for misery for the common man.

A person is eligible for refund when he has paid the stamp duty, but the document remains unexecuted. Such cases are common, especially in real estate transactions, and the stamp duty office is flooded with applications for refund.

The State Information Commission (SIC) has imposed a penalty of Rs.25,OOOon the Deputy Super-intendent of Stamps, Mumbai, for not providing information to an applicant on stamp duty refunds.

BCAJ Admin

Right To Information

r2iRight to Information
is a fundamental right :

One Mr. Mangla Ram Jat of Jaipur had sought the following
information from the PIO of Banaras Hindu University (BHU).

“Kindly make available to me the complete text of the
‘question paper’, provided by the university to the examinees of the pre-P.G.
Medical (M.D/M.S) Examination 2008 held on 17-2-2008 by the Institute of
Medical Sciences, along with standard answer key adopted by the university.”

He received the following reply :

“With reference to the information/document sought by you
under the RTI Act, this is to inform you that the question paper along with
the key answer to M.D/M.S Exam-2008, conducted by the Institute of Medical
Sciences, BHU cannot be given to you as the disclosure of the same is not
favourable in larger public interest.”

First AA also rejected the appeal. Second appeal then was
filed on 31-5-2008, which came for hearing before the Central Information
Commissioner Mr. Shailesh Gandhi. In his order, he has dealt with some basic
issues and the high power of RTI. The order is considered as landmark and hence
many paras thereof are reproduced hereunder :

The Right to Information is one of the most fundamental human
rights recognised by the world community and stands incorporated in the
Universal Declaration of Human Rights and International Covenant on Civil and
Political Rights (Art. 19). This has always been a fundamental right of the
citizens under Article 19 (1)(a) of the Constitution of India, and stands
codified as the Right to Information Act, 2005.

Before going further, it is desirable to look into the
Preamble of the Act and some of its provisions. The Preamble reads as :

“And whereas democracy requires an informed
citizenry and transparency of information which are vital to its functioning
and also to contain corruption and to hold governments and their
instrumentalities accountable to the governed;

“And whereas revelation of information in actual
practice is likely to conflict with other public interests including efficient
operations of the governments, optimum use of limited fiscal resources and the
preservation of confidentiality of sensitive information;

“And whereas it is necessary to harmonise this conflicting
interest while preserving the paramountcy of the democratic ideal;

“Now therefore, it is expedient to provide for furnishing
certain information to citizens who desire to have it.”

The preamble is the soul of the Act and gives an insight into
the minds of the framers of the Act. It clearly spells out the aims and
objectives of the Act. Accountability and transparency are the paramount
objectives of the Act. Right to Information is not only a legal right, but also
a fundamental right as enunciated by the Supreme Court in plethora of judgments.

S. 3 of the Act states : “Subject to the provisions of this
Act, all citizens shall have the right to information.”

As per S. 3 of the Act, citizen’s right to access information
under the Act is absolute, subject only to limitations prescribed under the Act.
This Section forms the core of the Act and is a crisp, unambiguous declaration
of the aims and objectives of the Act. To make this right meaningful and
effective, citizens are not required to give any justification for seeking
information as laid down in S. 6(2) which reads as follows :

“An applicant making request for information shall not be
required to give any reason for requesting the information or any other
personal details except those that may be necessary for contacting him.”

The obligation on the public authority to give information to
the sovereign citizens is absolute and is limited only by S. 8 and S. 9. (the
said Sections not reproduced here).

Any refusal of information has to be only under one or more
grounds mentioned in S. 8 (1) or S. 9. The Act gives no scope to the
adjudicating authorities to import new exemptions other than those that have
been provided under the Act and thereby deny the information. In a democracy the
government belongs to the people and therefore the rights of the owner to access
this information has to be respected very carefully. Since in S. 3 it has been
stated that ‘subject to the provisions of this Act, all citizens shall have the
right to information’, it follows that denial of information can only be on the
basis of the exemptions in the Act and no other grounds for denial are valid.

A similar question relating to revealing information
regarding exam details came up for consideration under the Act before the High
Court of Calcutta in the matter of Pritam Rooj v. University of Calcutta and
Ors., (AIR 2008 Cal. 118). This judgment which was pronounced on 28-3-2008,
after the orders of the Commission which have been relied upon by the
respondent, states :

“The umbra of exemptions must be kept confined to the
specific provisions in that regard and no penumbra of a further body of
exceptions may be conjured up by any strained devise of construction”.

Going through the decision in Appeal No. 845/ICPB/2007 titled
as B. L. Goel v. AIIMS relied upon by the respondent, the Commission
finds that none of the exemptions as required under the Act to deny information
have been relied upon by the Commission while deciding the said appeal. The
Commission is of the view that the aforesaid appeal was decided citing argument
of ‘public interest’, which is not an exemption under the Act. While deciding
the said appeal, the Commission came to the conclusion that ‘by disclosing this
information we will not be able to protect any larger public interest’. However,
this Commission, after going through the above quoted Sections of the Act is of
the view that nothing in the Act envisages denial of information on the ground
that the information will not be able to protect any larger public interest.

The test of public interest is to be applied to give information, only if any of the exemptions of S. 8 apply. Even if the exemptions apply, the Act enjoins that if there is a larger public interest, the information would still have to be given. There is no requirement in the Act of establishing any public interest for information to be obtained by the sovereign citizen; nor is there any requirement to establish ‘protecting of any larger public interest’. Therefore, in view of the above provisions of the Act, the denial of information in the Commission’s orders is ‘per incuriam’. I therefore, respectfully differ with the view taken by the Commission in B. L. Goel v. AIIMS.

This Commission is conscious of the fact that it has been established under the Act and being an adjudicating body under the Act, it cannot take upon itself the role of the legislature and import new exemptions hitherto not provided. The Commission cannot of its own impose exemptions and substitute their own views for those of the Parliament. The Act leaves no such liberty with the adjudicating authorities to read law beyond what it is stated explicitly. There is absolutely no ambiguity in the Act and tinkering with it in the name of larger public inter-est is beyond the scope of the adjudicating authorities. Creating new exemptions by the adjudicating authorities will go against the spirit of the Act.

Right to Information as part of the fundamental right of freedom of speech and expression is well established in our constitutional jurisprudence. Any restriction on the fundamental rights of the citizens in a democratic polity is always looked upon with suspicion and is invariably preceded by a great deal of thought and reasoning. Even the Parliament, while constricting any fundamental rights of the citizens, is very wary. Therefore, the Commission is of the view that the Commission, an adjudicating body which is a creation of the Act, has no authority to import new exemptions and in the process curtail the fundamental right of information of citizens.

Even the exemptions u/s.8(1) are not absolute, and are subject to larger public interest as mentioned in S. 8(2) which reads,

“Notwithstanding any of the exemptions permissible in accordance with sub S. (1), a public authority may allow access to information if public interest in disclosure outweighs the harm to protected interest.”

The concept of public interest cannot be invoked for denial of information. The Section empowers the Public Information Officer to provide the exempted information if it is in the larger public interest; meaning thereby that access to the exempted information can be allowed if public interest is served in providing the information.

Therefore, for the reasons stated above, the Commission comes to a conclusion that there can be no sanction of law for denying the information to the appellant.

The appeal is allowed.

The PIO will give the information sought by the appellant in his RTI application before 15 January, 2009.

[Mr. Mangla Ram fat v. CPIO, Banaras Hindu University, Appeal No. CIC/OK/ A/2008/00860 decided on 31-12-2008]

CIC v. SC:

A very interesting, delicate and significant issue has surfaced in the context of jurisdiction of Central Information Commission v. that of Supreme Court of India.

Chief Justice of India (CJI) Balakrishnan had taken the view:

“The Chief Justice is not a public servant. He is constitutional authority. RTI does not govern constitutional authorities”.

While the Chief Central Information Commissioner, Wajahat Habibullah held the view:

“The office of the CJI comes under the purview of the RTI”.

Facts of the appeal which came before the Central Information Commission are:

Shri Subhash Chandra Agrawal submitted an application under the RTI Act in November 2007 requesting the tPIO of Supreme Court of India (SC) to provide him a copy of the resolution dated 7-5-2007 passed by all the Judges of the SC which required every Judge to make a declaration of assets in form of real estate or investments held in their names or in the name of their spouses and any person dependent on them to the CJl. The appellant also requested the CPIO to provide him information on any such declaration of assets, etc. ever filed by the Hon’ble Judges of the Se. The RTI application also covered a request for information concerning any declarations filed by the High Court Judges about their assets to the respective Chief Justices in the various High Courts. While the CPIO of the SC provided a copy of the resolution dated 7-5-1997, as referred to above, he declined to provide the remaining part of the information concerning the declaration of assets by the Hon’ble Judges of the SC and High Courts on the ground that the said information is not held by or under the control of the Registry of the SC of India.

The First AA after hearing the appellant in person and after perusal of the records decided to remand back the matter to the CPIO to consider the question as to whether S. 6(3) of the RTI Act is liable to be invoked by the CPIO. The CPIO heard the appellant again in respect of the applicability of S. 6(3) of RTI Act to the facts and circumstances of the case and after considering the matter decided as follows:

“In the case at hand, you yourself knew that the information sought by you is related to various High Courts in the country and instead of applying to those Public Authorities you have taken a short circuit procedure by approaching the CPIO, SC of India remitting the fee of Rs.lO payable to one authority and getting it referred to all the Public Authorities at the expense of one CPIO. In view of this, the relief sought by you cannot be appreciated and is against the spirit of S. 6(3) of the RTI Act, 2005.

You may, if so advised, approach the concerned Public Authorities for desired information.”

When the second appeal came before the Central Information Commission, it decided to constitute full bench of the Commission and heard the matter. Both the parties were represented by senior advocates, the appellant by Shri Prashant Bhushan and another and the SC by Shri Amarendra Sharan, additional Solicitor General and another. Arguments of both the sides are as under:

Learned counsel appearing on behalf of the Supreme Court of India submitted that the RTI application had two parts, the first part related to copy of Resolution, which has already been provided to the appellant, and the 2nd part relates to declaration of assets by the Supreme Court Judges. CPIO submitted that the Registrar of the Supreme Court does not hold the information. The learned counsel submitted that the Resolution passed by the Judges is an inhouse mechanism. The declaration regarding assets of the Judges is only voluntary. The resolution itself describes submission of such declarations as ‘confidential’. It was also submitted that any disclosure of these declarations would be breach of fiduciary relationship. The learned counsel also submitted that the declarations are submitted to the Chief Justice of India not in his official capacity but in his personal capacity and that any disclosure will be violative of the Resolution of the Hon’ble Judges which seeks to make these declarations ‘confidential’. It was also contended that the disclosure will also be contrary to the provisions of S. 8(1)(e) of the Right to Information Act.

Learned counsel appearing for the appellant submitted that the declaration of assets by the Judges is ‘information’ within the meaning of S. 2(f) of the RTI Act and the same is held by the Supreme Court, which is therefore accessible within the meaning of S. 2(h) of the Act. If the Registrar of the Supreme Court states that the information is not held by them but held by Chief Justice of India, then the Chief Justice of India is a separate Public Authority independent and distinct from the Supreme Court of India. The Commission, therefore, has to decide as to whether the Supreme Court of India and the Chief Justice of India are part of the same Public Authority or the CJI constituted a separate and independent Public Authority. If the two are different and distinct Public Authorities then the CPIO should have transferred the RTI application to the Chief Justice of India under S. 6(3) of the Right to Information Act. He also argued that the information held either by the Supreme Court or by the Chief Justice of India cannot be denied to a citizen seeking the same under the provisions of the Right to Information Act.

Based on the above, the Full Bench consisting of IC A. N. Tiwari, IC Prof. M. M. Ansari and Chief IC-Wajahat Habibullah decided as under:

The Supreme Court of India is an institution created by the Constitution and is, therefore, a Public Authority within the meaning of S. 2(h) of the Right to Information Act.

The status and position of the Chief Justice of India is unique under the RTI Act. The Chief Justice of India is also designated as ‘Competent Authority’ u/s.2(e) of the Right to Information Act.

The Chief Justice of India in case of Supreme Court of India and the Chief Justice of High Court in case of High Court are also thus designated as ‘Competent Authority’ within the meaning of S. 2(e) of the RTI Act and S. 28 of the Right to Information Act empowers them to frame Rules to carry out provisions of Right to Information Act.

It may further be mentioned that while the Rules ” made by the Central Government u/ s.27 are required to be laid before each House of Parliament and the Rules made by the State Governments are required to be laid before each House of Legislature, there is no such requirement in respect of the Rules framed by the Chief Justice of India in case of Supreme Court and Chief Justice of a High Court in case of a High Court u/ s.28 of Right to Information Act.

The rule-making power has been explicitly given for the purpose of carrying out the provisions of the RTI Act. The Act, therefore, empowers the Supreme Court and the other competent authorities under the Act and entrusts upon them an additional responsibility of ensuring that the RTIAct is implemented in letter and spirit. In view of this, the contention of the respondent Public Authority that the provisions of Right to Information Act are not applicable in case of Supreme Court cannot be accepted.

After deciding the above, the Commission went on to decide whether the Chief Justice of India and the Supreme Court of India are two distinct Public Authorities or one Public Authority.

In the order, it records as under:

If the provisions of Article 124 of the Constitution are read in view of the above perspective, it would be clear that the Supreme Court of India, consisting of the Chief Justice of India and such number of Judges as the Parliament may by law prescribe, is an institution or authority of which the Hon’ble Chief Justice of India is the Head. The institution and its Head cannot be two distinct Public Authorities. They are one and the same. Information, therefore, available with the Chief Justice of India must be deemed to be available with the Supreme Court of India. The Registrar of the Supreme Court of India, which is only a part of the Supreme Court, cannot be categorised as a Public Authority, independent and distinct from the Supreme Court itself.

In view of this, the question of transferring an application u/ s.6(3)of the Right to Information Act by the CPIO of the Supreme Court cannot arise. It is the duty of the CPIO to obtain the information that is held by or available with the Public Authority. Each of the sections or department of a Public Authority cannot be treated as a separate or distinct Public Authority. If any information is available with one section or the department, it shall be deemed to be available with the Public Authority as one single entity. The CPIO cannot take a view contrary to this.

It may be noted that the information sought in this case was very limited, the applicant was not seeking a copy of the declarations or the contents therein or even the names, etc. of the judges filing the declaration, nor is he requesting inspection of any such declaration already filed. He is seeking simple information as to whether any such declaration of assets, etc. has ever been filed by the Judges of the Supreme Court or High Courts. The Commission held that what he was seeking cannot be held to attract exemption under clauses (e) or G) of S. 8(1).

Finally, the Commission held as under:

In view of what has been observed above, the CPIO of the Supreme Court is directed to provide the information asked for by the appellant in his RTI application as to whether such declaration of assets, etc. has been filed by the Hon’ble Judges of the Supreme Court or not within ten working days from the date of receipt of this Decision Notice.

[Shri Subhash Chandra Agrawal v. Supreme Court of India, Appeal No. CIC/WB/ A/2008/00426 de-cided on 6-1-2009]

It is reported that SC has moved the High Court over the above order. It is the unusual situation when the Apex Court approaches a lower Court. However, as the decision of CICs can be challenged only in a High Court, such unusual situation is created. It is also reported that the Delhi High Court has stayed an order of Central Information Commission. It is also interesting to note that Justice S. Ravindra Bhat has appointed noted jurist FaH Nariman as the amicus curiae to assist the Court and has fixed February 12 as the date of hearing.

It is further reported in the media:

In his communication to the HC, Nariman said, “1 must regretfullydecline the honour since I have very decided views on the matter”.

Nariman made it clear to the HC that he would not be able to maintain neutrality expected of amicus curiae in the matter.

Interestingly, in his letter to the newspaper titled ‘Chuck it, My Lords’. Nariman recalled his visit to the US when he had come across a US law that mandated each SC Judge not only to make public his assets each year but also about each gift which was worth more than $ 50.

(Full copy of this very interesting and landmark order of the Commission is being posted on www.bcasonline.org for those interested to read the full order.)

Part B : The RTI Act

Standing Committee of the Parliament on RTI Act, 2005 :

National Campaign for People’s Right to Information (NCPRI) has made a presentation before the above committee. Some of the items of the said presentation are worth noting to understand present deficiencies of the RTI Act. I shall reproduce them in this column in 3 parts, starting from this issue:

Level of awareness:

Our study suggests that the level of awareness about the RTI Act is very poor, especially in the rural areas. The Department of Personnel and Training, Government of India seems to have done very little to raise awareness about the Act. Much more needs to be done, especially by roping in the television channels, the print media, the All India Radio, and various NGOs.

Spreading awareness amongst the illiterate radio and television programmes are particularly important for this, as are awareness programmes run by NGOs. Workers of political parties can also spread awareness and facilitate use. In any case, there should be one or two nodal people in each village, perhaps the schoolteacher or the health worker,who have received some training, have some material, and are willing and able to help the rural people, especially the illiterate, to access information.

Another mechanism for spreading awareness of RTI among illiterate segments of the population is through social audits Social audits areincreasingly happening in various states around the NREGA, and attracting a large number of rural people, many of whom are illiterate wage-labourers wanting to get their rights under NREGA. In fact, the NREGA guidelines go beyond the RTI Act by stipulating provision of information to applicants within 7 days, rather than the 30 days stipulated under the RTI. RTI principles can therefore be incorporated as mandatory requirements in various other schemes and this would help even the illiterate to understand and exercise their right to information. The Planning Commission could be requested to mandate this in all central and centrally-sponsored schemes and to provide the resources for training and other requirements to make this implementable.

Use and misuse of the RTI Act:

Our study suggests, by extrapolation, that from October 2005 until October 2008, nearly five lakh RTI applications have been filed in rural areas. The number in urban areas is perhaps double this. Delhi itself has nearly eighty thousand applications filed in the last three years.

Despite an extensive survey, no evidence has emerged on the misuse of the RTI Act. There are instances where RTI applications are vague or requisition vast amounts of information; however, these are adequately covered under the law. In fact, it is not clear how the RTI Act can be misused for it only gives access to the truth and how can the truth be misused?

There are two types of apprehensions, one that officers will be blackmailed and the other that they will be harassed because of too many applications. As far as the first apprehension goes, you can only be blackmailed if you have done something wrong. Therefore, rather than demanding that information should not be shared because wrong acts have been committed, it would be better to stop doing wrong things because information will be shared.

Besides, one way of preventing the use of information accessed through the RTI Act to blackmail officials is to put up copy of the application and of the response on the website (except in those few cases where privacy is involved). Once this information is in the public domain, there would be no scope of blackmail.

Few departments receive a large number of applications. Our survey looked at over three hundred departments across the country and at differing levels. The data that emerges suggests that in almost all these departments, a public information officer does not spend more than one or two hours a week (average of between 12 and 24 minutes per working day) on RTI related work.

In any case, even those few public authorities where there is greater pressure, the department can make things much easier for itself if it periodically assesses the type of information the citizens want, and put this suo moto in the public domain, as required u/ s.4 of the RTI Act.

Part C : Other News

Delay in disposal of appeals in Maharashtra State Information Commission:
Dr. Suresh Joshi has replied 3 questions asked by DNA Journalist after some of us RTI activists met him on 30-12-2008.

Q. Activists feel the RTI Act is losing its relevance they say there are pending cases as old as 2006. What is the value of getting information three years after it was asked for ?

Ans. : That is not the case. Hearings are on and Maharashtra is one of the States that get maximum applications. The problem is of shortage of staff. There was a backlog earlier when we started, as I was the only Commissioner. Last year, people had to wait a year and a’ half for the hearing; now, Commissioners are clearing around 1,400 cases each month.

Q. Does a sympathetic approach towards PIOs mean citizens are cited as flaws, negating the relevance of the RTI Act?

Ans. : That’s not true. There are 300 cases of penalties on PIOs till November 2008, with Rs.21 lakhs collected in fines. This average comes to Rs.6,000 to 7,000. If the case is genuine, we fine up to Rs.25,000, or we give them a chance to give information. We fine people when we see an obvious case where they are violating the Act.

Q. Activists say your argument of less staff is a false, deviating attention from the slow processing of cases. They say that in order to shield erring officials who should be fined, offers of help are not taken up.

Ans. : People have helped us out. Some have even worked with us, but they 0.0 not understand that we need to go through all the files. The way they tell us and the format they make does not work out.

RTI query on online lotteries:

In reply to the RTI query filed by the Maharashtra Rajya Lottery Association President, Nanasaheb Kute-Patil, the State Lottery Department said that there is no Central Government law for single-digit lotteries, commonly known as online lotteries.

Noise pollution:

Tired of noise pollution from the playground opposite his home, Kandivli (West) resident Lennon Miranda used the RTI to find out why the play-ground is being used to organise massive functions and fairs without BMC permission.

After receiving RTI application, BMC first put up a board at one end of the ground stating, “it is in the possession of the BMC”, but some days thereafter washed its hands off the property and says that the ground does not belong to the BMC and is a private property.

Assistant engineer Marathe of the Buildings and Factories Department of the ward seconds the above claim, and says that copies of the RTI reply saying the BMC has not given any permission have been sent to the police stations for further action.

Building plans:

The Civic Administration (BMC) has decided that it will not give out prints of the layout to anyone under the RTI Act.

Kishore Gajbhiye, Additional Municipal Commissioner, said it was feared that the information may be misused by terrorists, “It is a classified document and will not be made available.”

But, civic observers say the terrorist attack is being used by the BMC’s Building Proposal Department to block information. It cannot be a confidential document unless it comes under the Exemption clause of the RTI Act. The civic body’s HQ is not a defence installation, nor does the information affect the security of the country.

BCAJ Admin

Right to Information

Part A : Decisions of CIC

S. 27 and S. 28 r.w. S. 2(e) of the RTI Act :

Issue before the M.P. High Court was whether any public authority can make its own rules and prescribe thereby the fees to be paid for issue of information and copies of documents, etc.

Cantonment Board, Jabalpur (CBJ) passed the resolution and prescribed the fees to be paid under the RTI Act. Under it, fees prescribed were Rs.50 per page of A4 size (against Rs.2 as prescribed in the Central Government RTI rules).

The appellant was asked to deposit Rs.650 towards cost of providing information sought. He accordingly filed a writ. Before the Court, CBJ contended : “The Cantonment Board, Jabalpur has determined the schedule of fees looking to the schedule adopted by the M.P. Government and the Hon’ble High Court of M.P. The Cantonment Board, Jabalpur had done so as the expenses incurred in issuing copies and information were much higher than the fees being paid by the applicants seeking information. The Cantonment Board, Jabalpur being a local body akin to the Municipal Corporation adopted the schedule of fees existing for the Municipal Corporation in the State of M.P”.

Further, it was contended that the information is sought at times from various old records more than 50 years old. It requires involvement of staff which is already short. Considering these and various other aspects, reasonable cost for providing information has been prescribed vide Resolution No. 37, dated 20-12-2005, which is within the powers of the Cantonment Board, Jabalpur being municipal body. It has been mentioned specifically that the High Court has fixed minimum fees of Rs.50 per application in case of general application and Rs.500 in case of information related to tenders, documents, bids, business regulations and the actual cost of medium or printing cost price in case of other documents vide No. 15-R(J), dated 10-1-2006, copy of which is on records as Annexure R/2. However, during pendency of the writ petition, the Cantonment Board, Jabalpur acceded to the request of various sections of people and withdrew Resolution No. 37, dated 20-12-2005 vide Resolution No. 6, dated 13-9-2007. Accordingly, it is contended that the petition has been rendered infructuous.

The Court noted that although the resolution in question has already been withdrawn, in view of the stand taken by the respondents that the Resolution No. 37 was rightly passed and further in view of the relief for refund of costs it is thought proper to decide the issue raised herein.

It has been contended by the respondents that the Cantonment Board is a local body like Municipal Council and is well competent to make the rules regarding fees and costs as made by the Court. Suffice to say that the Chief Justice of the High Court is a competent authority within the ambit of definition as contained in S. 2(e) of the Act and therefore, by virtue of S. 28 it has powers to make rules with regard to fees and cost in exercise of powers under S. 28 of the Act. The Cantonment Board, Jabalpur being outside the purview of the term ‘Competent Authority’ within the meaning of S. 2(e) of the Act is not competent like the Chief Justice of High Court to make rules. In this view of the matter, the subject Resolution No. 37, dated 20-12-2005 was without any power and had no legal sanctity. Reliance on the prescription of fee and cost by the High Court is absolutely incorrect and misconceived. Since Resolution No. 37 has already been withdrawn, it is not required to be quashed.

Accordingly, the Court ruled that money received in excess is illegal and by no stretch of imagination it can be retained by CBJ contrary to their entitlement and CBJ was directed to refund the excess money out of the amount deposited by the applicant.

[2009 (1) ID 144 (M.P. High Court) : Amar Chand Bawaria v. Union of India and Others, W.P. No. 9264 of 2007, decided on 5-9-2008]

? Penalty – Reasonable cause Here, in this case, penalty of Rs.10,000 was imposed on the State PIO, S. P. Arora, estate officer of HUDA to be recovered in four monthly instalments for the lapse on his part for delay in furnishing the information. The Commission had also imposed a cost of Rs.2000 on account of considerable harassment to the applicant of the information.

The facts of the case were : The sequence of the events would show that the information was sought on 29-1-2007 on one plot when the file of the plot in question was lying with the Bank. The file was received back on 22-2-2007, but again sent to the Bank on 13-3-2007. The same was received on 30-3-2007 and information was supplied on 10-4-2007.

The Court held : “The penalty can be imposed only if there is no reasonable cause for not furnishing the information within the period of 30 days. The word ‘reasonable’ has to be examined in the manner which a normal person would consider it to be reasonable. The right to seek information is not to be extended to the extent that even if the file is not available for the good reasons, still steps are required to be taken by the officer to procure the file and to supply information. The information is required to be supplied within 30 days only if the record is available with the office. The inference cannot be drawn of the absence of reasonable cause for the reason that file could have been requisitioned back from the Bank. Since file was not available with the office, the inference drawn does not seem to be justified.”

In view thereof, the Court was of the opinion that the order of imposing penalty on the petitioner is not sustainable in law. Consequently, the writ petition was allowed. The impugned order passed by the State Public Information Commission was set aside.

[2009 (1) ID 1 (Pb & Hry. High Court) : S. P. Arora, SPIO Cum Estate Officer, HUDA v. State Information Commission, Haryana and Others, CWP No. 15288 of 2007, decided on : 17-10-2008]

Part B: The RTI Act

Standing Committee of the Parliament on RTI Act, 2005:

In February 2009, two items were reported:

1. Level of awareness.

2. Use and misuse of the RTI Act.

In March 2009, another two items were reported:

1. Reduction of 20 years period for keeping docu-ments.

2. Voluntary disclosures.

Hereunder further 3 items:

Changes in S. 8 :

Though provisions u/ s.8 are all reasonable, one of the most misused Section of the Act, as seen through our study, is S. 7(9). This Section says that information shall ordinarily be provided in the form in which it is sought, unless it would disproportionately divert the resources of the public authority. Unfortunately, many government departments are hiding behind this Section to deny all sorts of information even though a close reading of the Section would make it clear that it does not allow you to deny any information, but only allows you to give it out instead in the form available. A circular from the Department of Personnel and Training has confounded the confusion further. Therefore, a clarification needs to be issued through all Information Commissions that this Section of the Act cannot be used to deny information, but only allows the PA to give asked-for information in the form available, rather than in the form asked for.

Another Section that is being misused to deny in-formation is S. 11(1). Again, a close reading of this Section makes it clear that:

(i) Only that information can be considered third-party under this Section, which has been treated as confidential by the third party. Therefore, all information about a third party does not come under this Section.

(ii) That even third-party information of this type cannot be withheld unless it is exempt u/ s.8 (1).

This Section of the Act is intended to give the concerned third party an opportunity to try and convince the PIa that the information asked for is exempt under one of the subsections of S. 8(1) or S. 9. Therefore, it obligates the PIO to give an opportunity to be heard to the third party.

However many PIOs are rejecting information that pertains to a third party even when it is not considered confidential by that third party, and without giving any notice to the third party or giving any ground for rejection u/s.8(1) or u/s.9, as required.

Penalties :

Though the quantum of penalty prescribed is appropriate for the present, unfortunately there is no inbuilt provision for it to be automatically enhanced. Therefore, it would be useful to have a provision, which raises the quantum of penalty on an annual basis, to keep pace with inflation.

The prescription that Rs.250 per day should be imposed as penalty might be appropriate for cases of delay, but is not appropriate for other categories of offences, like refusal to accept application, wrong-ful denial, giving false information, destroying information, etc. These offences cannot be measured in days. Therefore, it would be more appropriate if for these offences a minimum and a maximum penalty was prescribed, giving discretion of the quantum to the Commissioner. These could be a minimum of Rs.5,OOO and a maximum of Rs.50,000 to be raised in keeping with inflation.

It is also important that penalties should be imposable on public authorities if they violate the RTIAct. So, for example, a public authority that does not comply with S. 4 (suo moto) declaration provisions, or does not appoint PIOs and APIOs, or in any way violates the provisions of the RTI Act, should also be required to pay a penalty of a minimum of Rs.25,OOO and a maximum of Rs.5 lakhs.

Use of the RTI Act and refusal of information:

We have used the RTI Act over three hundred times in the last three years. A bulk of this has been as a part of our study to assess the implementation of the RTI Act. However, there are many other instances where we have filed RTI. One interesting case, where information was denied to us, related to our request for access to records regarding the appoint-ment of the Chief Information Commissioner and other Central Information Commissioners in 2005. Though the Central Information Commission or-dered that this information be given to us, it never was and our review petition with the Information Commission is pending for over a year.

We had also applied to the Prime Minister’s Office and to the Department of Personnel and Training for access to records pertaining to the Cabinet decision, in 2006, to amend the RTI Act. This was also denied to us because the Government claimed that as the matter was not yet over and was still under consideration of the Cabinet, it was exempt from disclosure.

Part C : Other News I

RTI helps physically-challenged youth:

K. Sudalai, a physically-challenged youth of Palayamkottai in Tirunelveli district, might soon join the Tamil Nadu State Transport Corporation (TNSTC) as a bus conductor, thanks to the Right to Information (RTI) Act, 2005.

He had completed standard X in 1996 and possessed a conductor’s licence issued by the Regional Transport Authority. However, his name did not find place in the list of candidates eligible to apply for the post of bus conductor in Madurai Division of TNSTC.

When his enquiry as to why he was dropped from the selection despite necessary qualifications was not replied to, he submitted an application under the RTI Act. In reply, he was informed that physically-challenged persons were not fit to be appointed as conductors.

The reply helped the youngster file a writ petition in the Madras High Court to consider his candidature as enunciated in Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.

Justice K. Venkataraman pointed out that as per the Notification published in the Union Gazette on March IS, 2007, bus conductor was one of the jobs that could be occupied by persons with orthopedic disabili ties.

He agreed with petitioner’s counsel G. Prabhu Rajadurai that there was no reason for the Madurai Division to reject physically challenged persons to the post of conductor when other Divisions were not doing so.

The Judge directed TNSTC to consider the petitioners’ plea within four weeks.

Disclosure of Ministers’ assets:

The controversial issue of disclosure of Ministers’ assets has been hanging fire for over a year. Applicant Subhash Chandra Agarwal had asked for information related to assets of Union Ministers and their kin.

In his order, Chief Information Commissioner Wajahat Habibullah said “the information is not disclosable except with the permission of the Speaker”. This is with reference to the disclosure of information related to Ministers who are LS members. If there is any equivalent rule with regard to the Rajya Sabha, this may also be exercised. The CIC has stipulated a time period of 30 days.

According to sources, there has been precedent when the Speaker has allowed disclosure of assets of LS members. Rules framed by the Parliament committee stipulate that LS members must submit assets in a sealed cover to the Speaker. The information is kept confidential till such time the Speaker deems fit. So far, the Government has been reluctant to part with the information and the PMO holds the view that information sought is exempt u/ s.8 of the RTI Act.

Compliance of S. 4 of the RTI Act:

Maharashtra Information Commission receives the highest number of appeals in this country. Nearly, 16000 appeals and complaints are pending before the State Commission, some of them as old as of 2006. It appears that if the inflow as is presently continues, it will never be able to cope with reduc-ing the pendency. Hence, SCIC Dr. Suresh Joshi has urged State Chief Secretary Johny Joseph to ensure that public servants uphold the spirit of implementation of the RTI Act. In a letter dated February 25, 2009, Joshi warns Public Information Officers (PIa) to implement RTI Act in its true spirit or face action.

In his letter, he writes: “We get the maximum RTI applications in the world and there is no reason why we should not be judged as the most transparent State. PIOs are the fulcrum of the Act. If they do not discharge their responsibilities properly, then there is a fine. If the PIa does not give information on time, it means he is a willful defaulter. He cannot then say tha”the did not know the Act or that he was not trained. We will strictly implement the procedure of the Act”.

Information on selection of Judges:

The Delhi High Court has stayed an order of the Central Information Commission (CIC) asking the Government to disclose documents on the appointment of the Himachal Pradesh Chief Justice, after the Centre pleaded that such information about Judges can’t be revealed under the RTI Act.

Challenging the CIC order that had asked the Govt. to reveal documents and file notings on the appointment of Himachal CJ Jagdish Bhalla, whose promotion file was returned by the then President A. P. J. Abdul Kalam in 2007, Additional Solicitor General P. P. Malhotra pleaded that such information was beyond the RTI purview. Justice S. Ravindra Bhat, after hearing his contention, stayed the CIC order and issued a notice to the RTI applicant on whose plea the Commission had passed the direction.

Numbers at CIC :

The following are the disposals of appeals/complaints at the Central Information Commission from October 2008 to January 2009 :

Losses of State transport vehicles due to riots:

Data available with the Times of India (Tal), accessed through the Right to Information (RTI) Act, shows that the Maharashtra State Road Transport Corporation (MSRTC) incurred damages of around Rs.3 crore in various riots that broke out in different parts of the State in the 32 months between April 2006 and November 2008.

The recent Bombay High Court observation, saying leaders of rioting political parties should be made to pay for their supporters’ violence, has come as a shot in the arm for the transport utilities. MSRTC Vice-Chairman O. P. Gupta told TOI “the transport utility would cite the recent Court order that put the onus on political outfits to pay for damages. The political parties should be made responsible and pay up for the damages incurred”.

VIP Gifts:

The Central Information Commission has given the Ministry of External Affairs (MEA) 20 days to disclose the system of assessing gifts received by ‘political rulers’ and constitutional authorities, including the President of India, the Prime Minister and Judges of higher courts from foreign countries. Information Commissioner Annapurna Dixit directed the Central Public Information Officer of MEA to provide information about how the assessment of these gifts is done and the list of protocol order.

The decision came on an appeal filed by S. C. Agarwal seeking information on the “system fol-lowed on gifts received from foreign countries” by constitutional authorities and others, including the President, Vice-President, LS Speaker, PM, Ministers, Governors, Judges of higher courts, chiefs of three services and others in the protocol list. The appeal also sought a disclosure on whether these gifts were in their official capacity or kept in personal custody or deposited with the Government.

BCAJ Admin

Limited Liability Partnerships

We continue our examination of various laws and the issues arising therein in respect to an LLP.

1. Conversion of firm or company into LLP :

1.1 The LLP Act provides for conversion of a partnership firm and company into an LLP. This conversion is similar to the conversion of a firm into a company under Part IX of the Companies Act. Three issues which arise in respect of this conversion of a firm are the stamp duty, the income-tax liability thereon and the impact on tenancies of the firm/company. All of these contentious issues are very important for healthy growth of LLPs as a form of business in India. The Government must take steps to come out with clear-cut laws in this respect to avoid wasteful litigation.

1.2 Stamp duty :

(a) Para 6(b) of the Third Schedule to the LLP Act on Effect of Registration states that all tangible (movable and immovable) property as well as intangible property vested in the company and the whole of the undertaking of the firm shall be transferred to and shall vest in the LLP without further assurance act or deed.

(b) As explained earlier, stamp duty is on an instrument. If there is no ‘instrument’ of transfer, then no stamp duty can be levied.

(c) If there is a statutory vesting of the assets of the erstwhile firm/company in the newly incorporated LLP, there is no transfer under the Transfer of Property Act. Therefore, no conveyance is required and hence, there should not be any incidence of Stamp Duty.

(d) This view is also supported by the old decision in the case of Rama Sundari Ray v. Syamendra Lal Ray, ILR (1947) 2 Cal. 1 rendered in the context of a Part IX conversion. Applying the same principle, it is submitted that a conversion under Part X of the LLP Act, 2008 would not attract any stamp duty as it amounts to a statutory vesting of the assets of the firm/company in the LLP.

1.3 Income-tax :

(a) There is no transfer between the firm/private and the LLP and the word ‘transfer’ used is not in the sense of a ‘transfer’ as between a transferor and transferee, but is only meant to emphasise the vesting of the assets and liabilities in the LLP. Thus, there is no transfer as understood u/s.2(47) and u/s.45(1) of the Income-tax Act. Since there is no transfer u/s.45(1), the computation of capital gains should not arise.

(c) There is no transfer at the time of conversion of a firm/private company into an LLP as it is a case of a statutory vesting of assets and liabilities under the LLP Act like in case of Part IX of the Companies Act. In fact, it is possible to take a view that at no point of time do both the LLP and the firm/company exist. The firm/company is dissolved and the LLP is created simultaneously and it is the transfer which creates the LLP. Thus, since the two entities are not present at the same time, there is no transfer.

(d) This view has been upheld by the Bombay High Court in its decision of Texspin Engg. & Mfg. Works, 180 CTR 497 (Bom.). The Court held that a partnership firm can convert itself into a company under Part IX of the Companies Act, 1956 and further there would be no incidence of capital gains u/s.45(4) of the Income-tax Act. The ratio decidendi laid down by the Bombay High Court can also be applied in the case of conversion of a firm/company into an LLP. Hence, it is submitted that even though there is no express provision to this effect, the conversion should not attract capital gains tax. Incidentally, the Memorandum Explaining the provisions of the Finance (No. 2) Bill, 2009 provided as under :

“As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of S. 45 shall apply.”

It may be noted that neither the exemption provision nor restrictive conditions mentioned above are found in the Bill or in the Finance Act 2009.

1.4 Tenancies of the firm :

One of the more contentious issues under the Rent Act is in regard to the position of a partnership firm which is a tenant when there is a change of partners. Can the landlord contend that there is an illegal sub-letting or assignment and hence, he can terminate the tenancy. There are several decisions on this subject and there is no clear-cut touchstone to determine under which situations can it be said that there is an illegal sub-letting and when there is not.

These decisions deal with the case where the partners of the firm change hands. In the case of conversion of a firm into an LLP, the entity remains the same. Only its status undergoes a change. It is not a case where there is a transfer of assets. Hence, in my view, the provisions of illegal sub-letting/ assignment of the Rent Act are not attracted and the tenant would not lose the tenancy. However, the issue is not free from doubt.

1.5 Other issues in relation to conversion :

1.5.1 Some other unanswered issues remain in relation to conversion of a firm/company into an LLP. One is relating to carry forward and set-off of unabsorbed losses. Would S. 79 of the Income-tax Act which denies such a set-off in the case of a change in shareholding apply ?

1.5.2 Another issue is in relation to the continuity of service clause of the employees in the case of a conversion. It is submitted that there would be a continuity of service.

1.5.3 Certain institutions such as the MIDC levy a very huge transfer charge for change of user. However, there is a concession in the case of involuntary transfers done by way of a Court order, e.g., mergers, demergers, etc. Such transfers attract a minimum processing fee of the MIDC. What would be the position in the case of conversion into an LLP is an interesting aspect which needs to be considered.

1.5.4 One issue which may gather steam in the coming years is that of reconversion of an LLP into a company. Can an LLP convert itself into a private/ public company is an aspect on which there is no clarity. The LLP Act is silent on this aspect. Part IX of the Companies Act also does not provide any clear-cut answer. The Companies Bill 2008 has done away with Part IX altogether. Hence, what would happen to a business which selects an LLP structure and after becoming profitable it desires to make an IPO is still a question. Obviously, an LLP cannot make an IPO. Would it ever be possible for the business to access the capital markets? This is one aspect which needs immediate attention or else LLPs would lose some of their sheen.

2. Merger of companies and LLPs:

2.1 One more issue which is worth consideration is whether an LLP can merge into a company or vice-versa. The LLP Act only deals with the amalgamation and restructuring of two or more LLPs.

2.2 However, the Companies Act is much broader in its coverage. It permits the merger of a transferor who is any body corporate with a transferee company which is an Indian company. The Companies Act defines a body corporate to include a company. The LLP Act provides that an LLP is a body corporate. Thus, it stands to reason that an LLP being a body corporate, it can be merged into a company. Since the ultimate authority for both companies and LLPs is the MCA, it would be desirable if they frame rules in this respect.

2.3 As stated above, the Companies Act provides that ‘transferor company’ includes any body corporate, whether a company within the meaning of this Act or not, but a ‘transferee company’ only means a company within the meaning of this Act. Hence, the Transferee Company cannot be an LLP and it must always be a company within the meaning of the Companies Act, 1956. Thus, the merger of a company into an LLP is not possible.

3. VCF regulations:

3.1 One of the main uses of LLPs globally is as Venture Capital Funds. In India, VCFs are regulated by the SEBIunder the SEBI (Venture Capital Funds) Regulations, 1996.

3.2 R.2 of these Regulations defines a Venture Capital Fund to mean a fund established in the form of a trust or a company including a body corporate.

Since an LLP is a body corporate, it can also be one of the forms for a VCF under the SEBI Regulations. However, R.15 provides that the VCF would raise money only through the private placement of its units. S. 32 and S. 33 of the LLP Act state only a partner of an LLP will make contributions to the LLP. There is no provision in the LLP Act for the issue of units. Hence, it is a moot point as to whether an LLP can issue units.

3.3 Further, the Regulations provide that the investee company must be a domestic company only. Hence, an LLP cannot attract funds from a SEBI Registered VCF.

4. Foreign tax credits:

4.1 Assuming that a foreign resident can invest in an LLP under the FEMA Regulations, another question which would arise is what would be the tax treatment of the income received by the foreign partner? An LLP is taxed as a firm and hence, the LLP would pay tax @ 30.9% in India. The draft Direct Taxes Code also continues this system of taxation. When the LLP distributes the after-tax income to its foreign partner, would he be able to claim a credit for the tax paid by the LLP ? Unfortunately, the answer is No. The tax treaty benefits will be lost in such a case and the foreign partner may once again pay tax on the income received by him. This is a great disadvantage for foreigners to invest in LLPs.

4.2 To address the above anomaly, the pass-through system wherein the LLP is ignored as a taxable entity and the partner is directly taxed in proportion to his share was desirable. In fact, press reports indicate that the MCA is keen on such an amendment to the Income-tax Act to bring taxation of LLPs in India at par with several western nations.
(To be continued)

BCAJ Admin

To be precise

New Page 4

35 To be precise

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Technologies, to Agencies.

l
“The fellow on the other end, usually the CEO, says : ‘The market looks at us
as a toad. Berkshire Hathaway is looked at as a princess. And if you would
just kiss us, we would turn into a handsome prince.’ And I say : ‘No, we would
turn into a toad’.”

— Warren Buffett, Chairman and CEO, Berkshire Hathaway, in Fortune.

l
“The world has never seen this kind of advance before. These are people who
have known deprivation. These are people who are intent on developing their
skills, improving their lives and showing the world what they can do.”

— Rupert Murdoch, Chairman, News Corp., talking about India
and China, to Agencies.

l
“IT companies in India are investing for the long term and they have a pretty
incredible reputation. They are always considered whenever a global project
comes up.”

— Bill Gates, Chairman, Microsoft, in The Economic Times

(Source : Business Today, dated 2-11-2008 and 30-11-2008)

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BCAJ Admin

New tax haven blacklist likely

New Page 4

32 New tax haven blacklist likely

Seventeen countries led by France and Germany decided to draw
up a new blacklist of tax havens, which could include Switzerland, in a first
step toward rewriting the rules of global finance.

The world’s 40-odd tax havens, such as the Cayman Islands and
Jersey, are known hideaways for undeclared revenue and host many of the
non-regulated hedge funds that came under fire following the recent financial
meltdown.

French Budget Minister Eric Woerth said the 17 governments at
the Paris meeting agreed to task the OECD with drafting a new expanded blacklist
of countries that fail to cooperate on tax evasion and transparency.

German Finance Minister Peer Steinbrueck singled out
Switzerland for criticism, saying it had failed to fully cooperate on taxation
issues and deserved to be on the new list.

“Switzerland should be on the blacklist and not the green
list” of countries that do cooperate, he said.

“Banking secrecy has its limits,” Woerth added. “Switzerland
has made progress . . . but we must take matters farther.”

Switzerland, often criticised for its opaque bank secrecy
laws, decided to boycott the meeting along with Luxembourg, while the US and
Austria declined to send representatives.

(Source : The Economic Times, dated 23-10-2008)

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BCAJ Admin

Voices

New Page 4

27 Voices

“We have not received the kind of support that we were requesting from our
friends. So in a situation like that, one has to look for new friends.”

— Iceland’s Prime Minister Geir Haarde, rebuking European
allies for failing to help ease his country’s financial crisis. Iceland has
since turned to Russia for a
€ 4
billion loan.

“In a bout, compromises and concessions are permissible, but only in one
case : if it is for victory.”

— Russian
Prime Minister and martial-arts black belt Vladimir Putin, in a new video
“Let’s Learn Judo With Vladimir Putin”

“I have found a flaw. I don’t know how significant or permanent it is. But I
have been very distressed by that fact.”

— Former
Federal Reserve chairman and legendary proponent of deregulation Alan
Greenspan, referring to his free-market ideology during a hearing with U.S.
congressional leaders last week.

“How do you prove a guy’s a pirate before he actually attacks a ship?”

— Adm. Mark
Fitzgerald, commander of NATO’s antipiracy control, on why it’s difficult to
defend ships including U.N. aid vessels from pillage by the growing ranks of
pirates off Somalia’s coast.

“I call it the Hotel Honda.”

— Unemployed
IT consultant Bruce Richall, who’s been sleeping in the back of his car after
getting laid off from his job with a multinational bank in the tiny U.S.
suburb of Westport, Connecticut.

“The threat of a new, major terrorist attack on the United States is still
very real.”

— The conclusion of a new independent study, noting that
America remains excessively vulnerable to chemical, biological and nuclear
attacks seven years after the destruction of the World Trade Center.

“This isn’t some disaster movie about a virus from Mars. It’s a recession, a
downturn . . . it doesn’t mean we have to line our rooms with newspaper, get
in the fetal position and live on tins.”

— London Mayor Boris Johnson, railing against Britain’s
funereal credit-crunch atmosphere and encouraging wealthy consumers to resume
spending in order to jump-start the economy.

“It’s a mess.”

— Eric M. Thorson, inspector general of the United States
Treasury Department, on the lack of coordinated oversight of Congress’s $700
billion bailout package

(Source : Newsweek dated October, November, 2008.)

“Touch their money and Swiss get mad.”

— Bernhard Weisberg, editor of Black newspaper, on the
national outpouring of anger over the subprime mess at UBS, the country’s
biggest bank. Locals have recently renamed the site of UBS headquarters from
“Pared Square” to “Pirate Square.”

“There are other ways to get exercise and a peace of mind . . . . Eat less
fatty food.”

— Abdul Shukor Husin, Chairman of Malaysia’s Islamic
Council, which recently issued a fatwa against yoga because of its Hindu roots
and its ‘blasphemous’ meditative chants.

“Our main concern is to get to first flight home and never come back.”

— Australian
newlywed Robert Grieve, who has been stranded along with scores of other
tourists at Bangkok’s international airport after thousands of protesters
swarmed the complex, in the latest escalation of a campaign to topple the
country’s prime minister.

(Source : Newsweek dated 8-12-2008)

“We are removing 10 zeros from our monetary value. Ten billion dollars today
will be reduced to $1.”

— Central Bank Governor Gideon Gono, on his efforts to
restore stability to the Zimbabwe dollar, which is so battered by inflation
that even the new $100 billion notes were not enough to buy a loaf of bread.

“I am proud to be the Prime Minister of a country that investigates its Prime
Ministers.”

– Israel’s Prime Minister Ehud Olmert, announcing his plan to resign in September due to an ongoing corruption investigation against him.

“If energy costs are as high as rents, people will consider whether they’re not able to live reasonably well at room temperatures … with a warm sweater on.”

– German Finance Minister Thilo Sarrazin, whose call for conservation led to calls for his resignation from newspaper readers accusing him of insensitivity to the human toll of rising oil costs.
(Source: Newsweek, dated 11-8-2008)

BCAJ Admin

Part B — Some recent judgments

Service Tax

I. Supreme Court :

1.1 Burden of proof : ‘reverse burden’ only when one party
to a transaction is a dealer (S. 12 of KGST Act, 1963)

Haleema Zubair v. State of Kerala, 2009 (13) STR 113 (SC)

The appellant a proprietor had two concerns — one having
trading activity and another providing professional services of inspection and
certification of quality. Appeal was filed on being aggrieved with the additions
made by the sales tax assessing authority demanding sales tax on the service.
Income-tax returns, assessment orders and other certificates were produced
before the Appellate authority. The Appellate authority reduced the additional
income from 5% to 2.5%. Appeal was filed with the Sales Tax Appellate Tribunal,
where it was contended that as per S. 5(1)(iii) of KGST Act (the Act),
consideration received for transferring right to use any good for any purpose
was liable for tax. The Revenue claimed that the relevant documents were not
produced before the lower authorities and the burden of proof as to taxability
lay on the assessee as per S. 12 of the Act.

The orders passed by the Tribunal and the High Court did not
consider distinction between assessment orders under the Income-tax Act and
Sales Tax Act inasmuch as the fact that income tax would be levied on the entire
income, whereas sales tax could be levied only on the ‘sale’ and not the other
income which did not result out of ‘sale of goods’.

The condition precedent to the passing of an order was
assessment of sale. Professional service rendered did not constitute sale, which
attracted service tax. Further, the Supreme Court ruled that in general law, the
burden of proof lay with the State and ‘reverse burden’ must be construed having
regard to the nature of the statute. In the Kerala General Sales Tax Law,
however, S. 12 places the burden on the assessee, provided a transaction of
‘sales’ has taken place and at least one party to it is a dealer. Definition of
‘Dealer’ was analysed and it was concluded that the concern providing services
was not a ‘Dealer’ and professional fees were liable for sales tax. Appeal was
allowed by way of a remand to the adjudicating authority for consideration of
materials placed by the appellant.

Cases relied upon :

(i) BSNL and Another v. Union of India and Others,
2006 (2) STR 161 (SC)

(ii) Girdhari Lal Nannelal v. The Sales Tax
Commissioner, M.P. 1996 (3) SCC 701

1.2 Violation of
principle of natural justice :

Kothari Filaments v. Commissioner of CVS (Port), Kolkata
2009 (13) STR 225 (SC)

The appellant, an importer of lithosphere, placed order with
a foreign company for import of lithosphere. On physical verification out of
total quantity of 860 bags, only 189 had lithosphere and the rest contained
yellow coloured substance ‘Tetracycline’.

Appellants contended it to be the mistake of exporter and
attached the acceptance of exporters for the same to prevent penal action. The
Commissioner in his order gave directions for confiscation of goods and imposed
penalty before completion of inquiry. Appeal was filed on the grounds of
violation of principles of natural justice.

The respondent contended that acceptance of mistake by
exporter did not facilitate compliance of principles of natural justice and the
indication of outcome of overseas inquiry had been placed in the show-cause
notice. It was the duty of the appellant to prove the mistake of the exporter
and refute the conclusions of inquiry, the authority had no liability to
disclose their materials.

It was held by the Supreme Court that person charged with
misdeclaration had right to know the basis on which he was penalised, to reply
effectively as considered inter alia in the case of Rajesh Kumar
& Ors. v. Dy. CIT & Ors., 2007 (2) SCC 181 and thus the principle of natural
justice was held to be violated. Setting aside the order, the matter was
remanded to the Commissioner for consideration afresh.

II. High Court :

Co-operative Society in public service

Green Environment Services Co-Op. Society Ltd. v. Union of
India, 2009 (13) STR 250 (Guj.)

The assessee, a co-operative society, provided treatment of
effluents and managed waste generated by industrial units which were members of
society. They contended that the object of the society was in the nature of
public service i.e., for Prevention & Control of Pollution Provisions of
S. 65(25a) of the Finance Act, 1994 excluded services in the nature of public
services. S. 93 of the Finance Act, 1994 grants power to the Central Government
to grant exemption from payment of service tax by notifying in the Official
Gazette. The facts of the case led to the conclusion that the petitioner-society
had been established with the aid of Central & State Governments for treatment
of industrial effluents and waste materials in public interest. The
representation to the Central Government for exemption would be made within 2
weeks and would be placed by the Central Government within two months from that
day. Interim stay for recovery was granted.

III. Tribunal :

3.1 Air travel agent : Adjustment of tax on cancellation of tickets :

CCE, Jalandhar v. Sharma Travel, 2009 (13) STR 150
(Tri.-Del.)

The respondent, an air travel agent adjusted service tax
amount on cancelled air tickets and paid the differential amount. The adjustment
was disallowed and was upheld by the Commissioner (Appeals). The Tribunal
remanded the matter to the Commissioner (Appeals) to decide on merits, evidences
and in consideration of question of limitation.

The Commissioner set aside the demand, but the
Revenue pleaded to invoke doctrine of unjust enrichment. Rejecting the Revenue’s
appeal, the Tribunal confirmed the order of the Commissioner (Appeals).

3.2 Registered society and a charitable trust whether
liable under categories club or association service, convention service and
commercial training and coaching ?

M/s. Ahmedabad Management Association v. Commissioner of
Service Tax, Ahmedabad, 2009 TIOL 214 CESTAT-AHM

AMA was a registered society and a charitable trust under Society’s Registration Act and Bombay Public Trusts Act. AMA filed an appeal against the order of the Commissioner for confirmation of demand of service tax on services provided by it. Penalties u/s.7SA, u/s.76, u/s.77 and u/s.78 had been imposed.

The appellant contended that AMA was a non-profit making institution as amounts earned by it were utilised for fulfilment of its objectives and members were liable for liabilities, but had no share in surplus as it was ploughed back. Thus, it was not a commercial concern. The programmes conducted were exempted from year 2003 as vocational training by the government. Therefore, these services cannot be classified as ‘Commercial Training and Coaching Services’. The services of a club or association came under the tax net w.e.f. 16-6-2005. Exclusion clause excluded services provided by associations in nature of public service. AMA did not have any profit motive and provided public services, which were excluded from taxable services. Convention service was liable to tax when provided by a commercial concern. Convention events were not only for members but also for general public. A Circular dated 1-11-2006 clarified that non-commercial concerns would not fall under it.

The respondent considered the definition of commercial training and coaching centre as per the Act and did not consider training programmes conducted at AMA as vocational training programmes, which were exempted.

As regards club or association services, since they were provided to members, they were taxable and were not covered by exclusion clause, according to the Revenue.

As regards convention services, since they were provided to general public not free of cost but for consideration, they could not be excluded from the tax net, as per the Revenue.

It was held by the Tribunal that:

a) AMA was not a commercial concern in consideration of its objectives, ploughing back of sur-pluses or no profits in the hands of members. The cases on which decision was relied upon were Great Lakes Institute of Management 2008 (10) STR 202 (Tri.-Chennai) and Institute of Chartered Financial Analysis of India 2008

(TIOL 2036 CESTAT-Bang). AMA was not liable to pay service tax on membership fees received from members of the club, as it was not providing any specific services.

b) The programmes conducted were continuing education programmes and not commercial programmes.

c) Since AMA was not a commercial concern, no service tax could be levied on convention services, and therefore the appeal was allowed.

3.3 CENVAT Credit: Transfer on takeover:

CCE, [aipur v. Hindustan Coca Cola Beverages Pvt. Ltd., 2009 (13) STR 222 (Tri.-Del.)

The issue in this case was of transfer of credit from one bottling plant to another plant. The Revenue contended that neither the ownership nor the capital goods were transferred.

The Commissioner (Appeals) in his order stated that one bottling plant was taken up by another as registration certificate of the taken over plant was surrendered and the unutilised credit was transferred to the plant which took over. There was no revenue loss and no contravention of any rule. The credit was allowed.

Whether construction of jetty, ‘capital goods’ ?

Penalty: interpretation of statute:

Mundra Port & Special Economic Zone Ltd. v. C.E., Rajkot, 2009 (13) STR. 178 (Tri.-Ahmd.)

The appellants were providers of port services, storage and warehousing services and cargo handling services liable for service tax.

The major issue was availment of credit on steel and cement used for construction of jetty and port building. Attention was drawn by the appellant to the definition of inputs and emphasised on expression ‘used for providing output services’ and reliance was placed on the case of State of Punjab & Another v. British India Corporation Ltd., (AIR 1963 SC 459). It was contended that the operations of port and management serviees was not possible without such construction and only incidental to the main activity should be excluded from the purview of expression ‘used for’, therefore the credit on such inputs should be allowed.

It was held that the jetty did not fall within the definition of capital goods and was constructed by the contractor. Cement and steel were used by the contractor for construction services and considering them ‘not used’ for providing port service, credit was disallowed.

The credit of service tax on mobile phones, CHA and surveyor charges, rent-a-cab and professional fees was allowed and credit on club house fees was disallowed as it was for recreation of employees, and was not for providing output services.

Credit of duty on air conditioners, being ‘capital goods’ as per the Rules, was allowed.

Penalty was set aside as the issue involved bonafide interpretation of law.

Ruchi Health Foods Ltd. v. CCE, Chennai, 2009 (13) STR 330 (Tri.-Chennai)

The assessee was in the manufacture of refined oil and vanaspati, used CENVAT credit on capital goods viz. acid oil plant used for refining and processing. Credit availed was disputed as acid oil was manufactured in a separate plant where, according to the Revenue, no dutiable goods emerged. Further, credit of duty paid on computers, paints and welding electrodes was also disallowed.

Refinery was part of the factory and the assessee could take credit of duty paid on capital goods and not on exempted or nilrated goods. The impugned goods produced PFAD also, which was cleared on payment of duty. Acid oil was also cleared on payment of duty. Thus, machinery installed in refinery was not exclusively deployed in producing only non-dutiable products. Declarations as per the rules, records, invoices and returns relating to credit had been furnished to the Dept. indicating that PFAD was also an acid oil which was cleared on payment of duty. Likewise, credit on duty on computers, electrodes in view of decision of Jawahar Mills Ltd. v. CCE, Coimbatore, 1999 (108) ELT 47 (Tri.-LB) were allowed. The order itself was set aside and appeal was allowed.

3.4 Can penalty u1s.76 be reduced?

CCE – Rajkot v. Shri BSGK Shashtry, 2009 TIOL 173 CESTAT-AHM

The Commissioner (Appeals) reduced the penalty uj s.76 against which the Revenue filed an appeal and contending that S. 76 was unambiguous and did not provide liberty to reduce penalty and submitted that decision in M/ s. ETA Engineering Ltd. [2006 (3) STR 429 (Tri. LB)] had to be followed.

Various decisions in which authorities used discretion to impose less penalty u/ s.80 of the Finance Act, 1994 submitted by the appellant were considered and rejecting the Revenue’s appeal, extension of S. 80 by the lower authority was upheld.

3.5 Limitation:

Refund: Whether barred by limitation?

CCE, Pune-III v. M/s. Beharay & Rathi Constructions, 2009 TIOL 178 CESTAT-Mum.

The respondents, being recipient of ‘goods transport agency’ services, thus liable for service tax, availed abatement of 25% instead of 75%, erroneously resulting in excess payment. The refund claim was held to be hit by time bar of S. 11B of Central Excise Act, 1944.

The Commissioner (Appeals) held that tax collected by mistake of law, did not attract S. 11B and cited various case laws in support.

The Tribunal held that among various decisions cited, many were of prior period in which amendment dated 19-9-1991 in S. 11B had not been considered. Therefore, the impugned refund claim filed by the respondents was hit by time bar in consideration of S. 11B.Reliance was placed on Mafatlal Industries Ltd. v. Union of India, 1997 (89) ELT 247 (SC) and Commissioner of Customs v. Aman Electrical Manufacturing Co., 1997 (90) ELT 260 (SC).

Kilburn Engg. Ltd. v. CCE, Vadodara-II, 2009 (13) STR 285 (Tri.-Ahmd.)

The appellants engaged in the manufacture of machinery, who installed, erected and commis-sioned it at customer’s premises and raised separate bill for this. The dispute related to supervision of erection, commissioning of machinery to attract service tax liability under consulting engineering services.

The Commissioner (Appeals) observed that supervision of erection and commissioning required professional knowledge and therefore fell within the scope and ambit of ‘consulting engineering service’ and relied on the case M. N. Dastur, 2002 (140) ELT 341 (Cal.).

The Tribunal relied upon case CCE, Cochin v. BPL Telecom Pvt. Ltd., 2007 (5) STR 349 (Tri. Bang.),

M/s. Jyoti Ltd. v. CCE, Vadodara, 2008 (9) STR 373 (Tri. Ahmd.) and held that technical assistance provided by manufacturer of goods could not be held as consulting engineering services.

It also considered that first and second show-cause notices for the same period for the same facts being barred by limitation, relief was allowed.

3.6 Jurisdiction:

CCE, Mumbai v. Central Cable Pvt. Ltd., 2009 (13) STR 328 (Tri.-Mumbai)

An appeal was filed against the order passed by CCE (Appeals), for consideration of legal aspects.

The Commissioner (Appeals) in his order observed that the Assistant Commissioner had no jurisdiction to issue show-cause notice.

The Revenue contended that Circulars on which reliance was placed by the Commissioner (Appeals) were not in force when the matter was adjudicated by original authority and he was empowered by a Circular to issue show-cause notices.

The Tribunal remanded the matter back to the Commissioner (Appeals) for reconsideration.

3.7 Reimbursements – whether taxable? (Also limitation) :

Rolex Logistics Pvt. Ltd. v. CST, Bangalore, 2009 (13) STR 147 (Tri.-Bang)

The appellant engaged in ‘Management Consultancy Service’ took over operations of two proprietary firms, which were not providing management consultancy services. They were accused of suppression of value of taxable services as regards reimbursements claimed by the firms and evasion of service tax for which demand along with interest and penalty was raised.

The appellant contended that show-cause notice was issued based on the information from balance sheet and other books of accounts and therefore suppression could not be alleged.

The Tribunal observed that service tax liability accounted only towards the amount received and not towards reimbursements.

It was further held that there was no suppression of facts with an intention to evade tax, therefore longer period could not be invoked.

Some of the cases relied upon:
(i) Scott Wilson Kirkpatrick (l) Pvt. Ltd. v. CST, 2007(5) STR 118 (T)
(ii) B.S. Refrigeration Ltd. v. eST, 2006 (4) STR 103(T)
(iii) Glaxo Smithkline Pharmaceuticals Ltd. v. CCE, 2006 (3) STR 711 (Tribunal)

BCAJ Admin

Limited Liability Partnerships

1. Introduction :

1.1 31st March, 2009, the last day of the financial year 2008-09, saw the Notification of the Limited Liability Partnership Act, 2008 (‘the Act’). The desirability of LLP as a business entity has been expressed by various committees, such as the Bhat Committee (1972); Naik Committee (1992); Expert Committee on Development of Small Sector Enterprises headed by Sh. Abid Hussain in 1997; Study Group on Development of Small Sector Enterprises (SSEs) headed by Dr. S. P. Gupta (2001), Naresh Chandra Committee on Regulation of Private Companies and Partnerships (2003); Dr. J. J. Irani Committee on New Company Law (2005).

In spite of these recommendations, India has been a bit late in recognising this extremely popular form of a business entity, considering that countries such as the USA have enacted a law dealing with Limited Liability Partnerships (‘LLPs’) as far back as in the early 1800s. Internationally, most venture capital funds/private equity funds/hedge funds are structured in the form of LLPs.

Nevertheless as the old adage goes, ‘better late than never’, India has come out with a law on LLPs at a time when the Small and Medium Sector is growing rapidly and entity such as an LLP is the right answer for this sector. The Finance (No. 2) Bill, 2009 has provided for taxation of LLPs.

1.2 LLPs lie somewhere in between the corporate sector which have limited liability but are highly regulated and the unregulated partnership sector which has unlimited liability. LLPs provide a great deal of flexibility and also limited liability. It is important to note that even though the term LLP signifies a partnership, the Act falls within the purview of the Ministry of Corporate Affairs (MCA) and the Registration and all other procedures are carried out by the RoC and not the Registrar of Firms.

1.3 By a series of Articles, let us examine some of the key features of the Act and some possible issues which may arise.

2. Features of an LLP :

2.1 Body corporate :

The most important aspect of an LLP is that it is treated as a body corporate, i.e., it is an independent legal entity with a distinct identity which is separate from its partners. As compared to this a partnership firm does not have an identity separate from its partners. An LLP has the following features of a body corporate :

(a) It has a perpetual succession.

(b) Its existence is not dependent upon its partners and hence, even if there were to be a change in its partners, the LLP’s status would remain unchanged. Death, insolvency, retirement of any partner has no bearing on the LLP.

(c) The property of an LLP is its own property and not the property of its partners. It can own property, whether immovable, movable or tangible, in its own name since it is a separate legal person.

(d) It is capable of suing and being sued in its own name.

(e) It can have a common seal.

2.2 Liability :

The liability of an LLP is to be met out of its property only and the liability does not extend to the partners. Thus, unlike in the case of a partnership firm, the partners are not personally liable for the dues of the LLP. This feature of an LLP is similar to a company where the shareholders and the company are separate legal entities. If the partner, knowingly, does any act which is outside the scope of his authority, then the LLP will not be bound by any such act. If the LLP does or the partners do any act with an intent to defraud, then the LLP and the partners shall have unlimited liability for all the debts of the LLP.

3. Incorporation Document :

3.1 To incorporate an LLP, the following steps must be taken :

(a) Two or more persons must come together to carry on any lawful business with a view to earn profits.

(b) They must subscribe to an ‘Incorporation Document and Statement’ in eForm-2. The Statement is to be digitally signed by a person named in the incorporation document as a designated partner and he must have a DPIN. The Statement must also be digitally countersigned by an advocate/company secretary/chartered accountant/cost accountant in practice who is engaged in the formation of LLP. In case of foreign nationals residing outside India and seeking to register an LLP in India, their signatures and address on the incorporation documents and proof of identity, where required, shall be notarised before the notary of the country of their origin.

(c) The RoC after satisfying himself about compliance with relevant provisions of the LLP Act will register the LLP, within a maximum period of 14 days of the filing of eForm-2 and will issue a certificate of incorporation in Form-16.

3.2 An LLP should have a registered office. Its name should be as per the guidelines laid down in this respect. The last words of the name should be limited liability partnership or LLP, e.g., the name of an LLP could be ‘Apex Venture Fund LLP’.

3.3 The partners of the LLP have to enter into an LLP Agreement.

4. Partners :

4.1 Just as a company has members, an LLP has partners. As per S. 5 of the Act, any individual or any body corporate can be a partner of an LLP. However, in any of the following cases, an individual cannot be a partner in an LLP :

(a) If he is adjudged to be of unsound mind by a Court.

(b) If he is an undischarged insolvent.

Any body corporate can also be a partner of an LLP. The term body corporate has been defined u/s.2 of the Act to mean a company as defined in S. 3 of the Companies Act, 1956, and also includes an LLP registered under the Act, an LLP incorporated abroad, a company incorporated abroad. However, it does not include a corporate sole, a co-operative society and any other body corporate so notified by the Government. Since an LLP is also a body corporate, one LLP can become a partner in another LLP. Two or more companies can also come together to form an LLP. LLPs could be the future for consortium type of arrangements.

4.2 Each LLP must have a minimum number of 2 partners. This feature is at par with a partnership. There is no limit on the maximum number of partners which an LLP can have. A partnership or an AOP cannot have more than 20 partners/members or else it becomes an illegal association. A private limited company cannot have more than 50 members. However, an LLP has no limit on the number of partners. Thus, in this respect it is at par with a public limited company. It is this feature of an LLP which makes it a very attractive structure from a VC/PE perspective since the fund can have as many investors as it likes.

4.3 Designated Partner:

a) The concept of a ‘Designated Partner’ has been introduced by the Act. S. 7 requires an LLP to have at least 2 designated partners, both of whom should be individuals and one of whom should be a resident in India. If there are only 2 partners in an LLP, then both should be treated as designated partners.

b) In case, both the partners are LLPs/companies, then partners of such LLPs or nominees of such companies should become designated partners.

c) The Act incorporates a part of the definition of the term ‘resident in India’ from S. 2 of the Foreign Exchange Management Act, 1999. A resident has been defined to mean a person who resided in India for not less than 182 days during the immediately preceding financial year.

d) The individual must give his prior consent to become a designated partner.

e) To become a designated partner, an individual must obtain a Designated Partner Identification Number (DPIN).

f) A designated partner is one who is responsible for carrying out all the compliance obligations of the LLP imposed by the Act. He is also liable to all the penalties imposed on the LLP for contravention of any of these provisions of the Act. One may loosely equate him with the Managing Director of a company.

g) Any person can be appointed as a designated partner and he may retire also. Any vacancy must be filled within 30 days.

4.4 Relationship of Partners:

a) The mutual rights and duties of the partners of an LLP are governed by the LLP agreement. If there is no such agreement, then S. 23(4) of the Act provides that the mutual rights and duties of the partners shall be as set out in the First Schedule to the Act. Such an agreement and any changes, therein, must be filed with the RoC.

b) For the purposes of the business of the LLP, every partner of an LLP is an agent of the LLP but not of the other partners. This is a fundamental difference between an LLP and a partnership firm, wherein mutual agency is a key condition of the partnership. Each partner is an agent of the firm and of the other partners. S. 4 of the Partnership Act defines a partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

4.5 A person can resign from the LLP by giving a notice to other partners. A person would cease to be a partner on his death or on dissolution of the LLP or if he is declared to be of an unsound mind or if he has been adjudged as an insolvent. When a person ceases to be a partner, the LLP shall file a notice in the prescribed form with the RoC.

5. Contributions:

5.1 A partner of an LLP contributes towards the capital of the LLP. The obligation of a partner to contribute shall be as per the LLP Agreement.

5.2 The contribution can be in the following forms:

a) Tangible, movable, immovable, intangible property or a;ny other benefit to the LLP, e.g., land, goods, IPRs, etc.

b) Money, promissory notes, agreement to contribute cash or property and contract for services to be performed.

The monetary value of the contribution of each partner should be accounted for and disclosed in the accounts.

5.3 If the contribution is in kind, then the same must be valued by a practising CA or an approved valuer. No methodology has been prescribed for the valuation.

6. Tax Treatment:

6.1 The Finance (No. 2) Bill has prescribed the tax treatment for LLPs. The provisions are effective from A.Y. 2010-11. LLPs would now be taxed at par with partnership firms. Thus, the LLP will pay tax on its profits and the partners will receive their share in the LLP tax-free [5. 10(2A)]. The LLP will pay tax @ 30%. The Finance Bill has abolished the surcharge of 10% payable by firms and hence, even LLPs will not have to pay any surcharge. The 3% cess continues and hence, the net rate will be 30.9%.

6.2 LLP will get a deduction for remuneration paid to its working partners. The limits of S. 40(b) have been streamlined and simplified both for firms and LLPs:

a) On the first Rs.3 lakhs of book-profit – A deduction which is the higher of Rs.1.5 lakhs or 90% of the book-profits

b) On the balance book-profits – A deduction @ 60% of book-profits.

Any interest payment by the LLP to a partner in excess of 12% p.a. would be disallowed and any salary, remuneration, commission to non-working partners would be disallowed.

6.3 There will be no incidence of MAT or Divi-dend Distribution Tax or liability to Deemed Dividend on the LLP.

6.4 S. 45(3) would apply to the admission of a partner and S. 45(4) would apply to the dissolution of an LLP or retirement of a partner.

6.5 There is no express provision for the tax treatment of merger or demerger of two LLPs. The provisions contained for amalgamation or demerger in the Income-tax Act, only apply to companies and not to LLPs. It would be beneficial if the Finance Act, 2009 provides for this situation.

BCAJ Admin

Limited Liability Partnerships

1. Accounting requirements :

1.1 An LLP is required to maintain prescribed books of account relating to its affairs. The accounts can be maintained on cash or accrual basis and must be according to the double entry system of accounting. The books must be sufficient to show and explain the LLP’s transaction and must be able to disclose with reasonable accuracy its financial position at any time. They must also enable the partners to ensure that the Statement of Account and Solvency prepared by them complies with all the requirements of the Act.

1.2 The books must specifically deal with the following :

(a) Details of all receipts and payments.

(b) Record of all assets and liabilities of the LLP.

(d) Such other particulars as may be decided by the partners. Thus, the partners can incorporate additional requirements.

As required under the Companies Act, the books are to be preserved for a period of 8 years.

1.3 Within a period of 6 months from the end of the financial year, the LLP shall prepare a Statement of Account and Solvency in Form 8 for the financial year ended. This Statement must be filed with the Registrar of Companies within 7 months from the end of the year to which it relates. The filing fees in relation to the same range from Rs.50 to Rs.200 depending upon the amount of contribution of the LLP. This Statement must be signed by the designated partners. This Statement contains a Statement of Assets & Liabilities (Balance Sheet) and a Statement of Income and Expenditure (P&L Account) of the LLP. The Appendix to this Statement contains various other details, such as :

(a) Details of charges created

(b) Particulars of property on which the charge is created

2. Auditing requirements :

2.1 The accounts of the LLP are required to be audited in case :

(a) its turnover exceeds Rs.40 lakhs, or

(b) its contribution exceeds Rs.25 lakhs.

The turnover limit of Rs.40 lakhs is the same as that laid down for tax audit for a business. However, there is no distinction between an LLP which carries on a business and one which carries on a profession. The auditor must be appointed every financial year by the LLP.

2.2 The designated partners may appoint an auditor at any time for the first FY or at least 30 days prior to the end of any other FY or to fill a casual vacancy.

2.3 If the LLP Agreement so provides, the partners may remove an auditor at any point of time by following the procedure laid down therein. If the Agreement is silent on this point, then the consent of all the partners is required.

2.4 An auditor may resign or specify his unwillingness to be reappointed by giving a notice to the LLP.

3. Annual Return :

3.1 Every LLP must file an Annual Return with the RoC within 60 days of the end of its FY. The Return must be filed in Form 11 and must be signed by a designated partner.

3.2 If the LLP’s turnover is up to Rs.5 crores or it has a contribution of up to Rs.50 lakhs, then the Return must be accompanied by a certificate from a designated partner other than the one signing the Return. The certificate must state that the Return contains true and correct information.

3.3 If the LLP’s turnover exceeds Rs.5 crores or it has a contribution of more than Rs.50 lakhs, then the Return must be accompanied by a certificate from a practising Company Secretary. The certificate must state that the CS has verified the particulars from the books and records and found them to be true and correct. The filing fees in relation to the same range from Rs.50 to Rs.200 depending upon the amount of contribution of the LLP.

3.4 The Return contains the following information :

(a) Contact details of the LLP

(b) Details about the designated and other partners

4.1 One of the best features of the Act is that it provides for the automatic conversion of certain entities into an LLP. Chapter X of the Act provides for the following :

(a) Conversion of a firm into an LLP

(b) Conversion of a private limited company into an LLP

This Chapter is similar to the Chapter IX of the Companies Act, 1956, under which a firm can be converted into a company.

4.2 For the purposes of effecting a conversion of any of the above entities into an LLP, certain Statements must be filed with the RoC. On receiving the documents, the RoC will register the documents and issue a certificate of registration. It may be noted that other than registering the prescribed documents with the RoC, nothing further needs to be done. One of the essential conditions for conversion into an LLP is that all the partners in the case of a firm / all the shareholders in the case of a company must become partners of the LLP.

There is no transfer and no conveyance of the assets from the firm/company to the LLP. There is no liquidation of the company by way of a court-appointed liquidation or a voluntary liquidation. Once the LLP is registered, the company is deemed to have been dissolved and removed from the records of the RoC. There is an automatic change of status of the entity from a firm/company to an LLP.

4.3 If the RoC is not satisfied about certain information, then he may refuse to register the entity as an LLP. An appeal lies against this refusal to the National Company Law Tribunal. Till such time as the Tribunal is notified, the Company Law Board would prevail in the interim.

4.4 All pending proceedings by or against the entity would continue by or against the LLP. In any agreements, deeds, contracts, bonds, instruments, etc., executed by such entity, the LLP would be sub-stituted for such entity /The LLP steps into the shoes of the firm/company. All employees of the firm/ company would continue with continuation of employment under the LLP. Thus, the employees are not worse off by reason of change in status.

4.5 Once the LLP is registered on conversion, the firm/company shall be deemed to be dissolved/ removed from the records of the RoF or RoC, as the case may be.

4.6 The LLP may have to make consequential changes in respect of documents/records standing in the name of the erstwhile firm/company. For instance, for any property registered in the name of the erstwhile company, the Record of Rights/Property Card/Index Il, etc., standing with the Sub-Registrar of Assurances would have to be amended and the LLP’s name would have to be added instead of the company’s name. It should be noted that this change is not taking place by virtue of any transfer. Hence, there should not be any liability to registration fees and/or stamp duty. It would be desirable if the Government enacts amendments to clarify this matter beyond any doubt, since often there is a gap between what is legally correct and what is practically happening.

5. Amalgamations and arrangements:

5.1 The Act contains provisions for the amalgamation, arrangement and reconstruction of LLPs. S. 60 to S. 62 deal with the same. These provisions are similar to S. 391-S. 394 of the Companies Act, but not as wide in its ambit as S. 391-S. 394. S. 60 to S. 62.

5.2 The following schemes are possible:

a) A compromise or an arrangement between an LLP and its creditors.

b) A compromise or an arrangement between an LLP and its partners.

c) A reconstruction of an LLP.

d) An amalgamation of two or more LLPs.

5.3 In order that any such scheme can be approved, a majority of 3/4th in value of the creditors/partners must at a meeting called for this purpose sanction the compromise/ arrangement/ amal-gamation. An application for the same must be made to the Company Law Tribunal. However, till such time as the CLT is notified, the High Courts would have such powers.

5.4 Every order sanctioning the scheme will be made only if the Court is satisfied that the LLP has disclosed all material facts, its latest financial position and details of any pending investigations. While passing the order, the Court would have power to supervise the carrying out of any compromise or arrangement and can also make such modifications in the scheme as it considers necessary. The order must be filed with the RoC in Form 22 within 30 days of making of the order.

5.5 The Act also provides for the merger of two or more LLPs. While passing such an order, the Court may make a provision for the following matters:

a) Transfer of the undertaking of the transferor LLP.

b) Continuation by or against the transferee LLP of any pending legal proceedings by or against the transferor LLP.

c) Dissolution without winding up of the transferor LLP. However, no order for the dissolution will be made until the Official Liquidator first submits his report that the LLP’s affairs have not been conducted in a manner prejudicial to the partners or public’s interest.

d) Provision for any person who dissents to the amalgamation.

e) Such incidental, consequential and supplemental matters as are necessary to fully carry out the amalgamation.

The above provisions also apply to any reconstruction or compromise or arrangement of an LLP.

5.6 Rule 35 of the LLP Rules, 2009 lays down the procedure to be followed in respect of any compromise, arrangement or reconstruction of LLPs. Some of the key provisions are as follows:

(a) An application calling a meeting of the creditors/members must be supported by an affidavit.

(b) The Court may call a meeting or dispense with it. At the meeting voting by proxy is permitted.

(d) A chairman will be appointed for the meeting. He must prepare a report of the proceedings of the meeting.

(e) The report of the meeting’s Chairman and the petition must be presented to the Court.

5.7 The Rules also lay down the procedure for an arrangement for the revival and rehabilitation of an LLP. Some of the key provisions in this respect are as follows:

(a) An arrangement for revival and rehabilitation of any LLP may be proposed in the following circumstances:

(i) If the LLP has outstanding debt which it has failed to pay withn 30 days of the service of the notice of demand or has failed to secure or compound it to the reasonable satisfaction of the creditors and if its creditors representing 50% or more of such debt make a demand; or

(ii) If a petition for winding up of an LLP is pending before the Court and such directions are given by the Court.

(iii) Where the Official Liquidator has filed his report before the Court, in terms of directions given by the Court on the report of the Liquidator.

(iv) Alternatively, the LLP or any creditor or partner, or the Official Liquidator, may make an application for the sanction of the arrangement for revival and rehabilitation before the Tribunal.

(b) An application under sub-rule (12) shall be accompanied by :

(i) A statement of account and solvency of LLP for the immediately preceding financial year, in case the application is made by the LLP;

(ii) Particulars and documents relevant to the scheme including commitments expected from various parties or, proposed restructuring or rescheduling of the debts, undertaking or in case from bank or financial institution through a letter or in any other case through an affidavit of concerned party or parties;

iii) proposed scheme of revival and rehabilitation of the LLP induding a proposal for appointment of an LLP Administrator. The LLP administrator shall be appointed from a panel maintained by the Central Government for winding up and dissolution of LLPs.

c) The Court may hear all the parties concerned and admit or dismiss the application.

d) The LLP Administrator proposed in the scheme shall submit his preliminary report.

(e) On consideration of the report of the LLP Administrator, if the Court is satisfied that the creditors representing 3/4th in value have resolved that it is not possible to revive and rehabilitate the LLP, it may, within 60 days of the receipt of such report, order that winding-up be initiated or sanction the arrangement for revival and rehabilitation of LLP, induding making orders for continuation of the LLP Administrator.

f) The order of sanction of the arrangement by the Tribunal may make provisions, for all or any of the following matters:-

i) powers and functions of the LLP Administrator;

ii) the time period within which various actions proposed in the arrangement to be completed;

iii) any such direction to the LLP or its officers or to the creditors, or to the LLP Administrator or to any other person, as may be considered necessary, for the purpose of implementation of the arrangement of revival and rehabilitation; and

(iv) any other order or orders as may be considered necessary.

(g) The LLP Administrator shall complete all his actions and submit his final report before the Court within 180 days of the Court’s order.

BCAJ Admin

Part B — Some recent landmark judgments

New Page 2

I. High Court :

1. Services provided abroad : Used by Indian persons : From when did
service tax apply ? A landmark decision :

Indian National Ship Owners Association v. UOI, 2008
TIOL 633 HC MUM-ST, Writ Petition No. 1449 of 2006 — Judgment dated 11-12-2008.

(i) By way of a writ petition, the petitioner association had
challenged constitutional validity of S. 66A of the Finance Act, 1994 (The Act),
explanation to S. 65(105) of the Act (in force from 16-6-2005 till 17-4-2006)
and Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 (the Rules). However, no
relief was pressed under the said S. 66A. The challenge therefore
was restricted to the demand of service tax made by the Department for the
period from 16-8-2002 to 17-4-2006 (i.e., prior to the enactment of S.
66A) in respect of services by persons from outside India and rendered outside
India to the persons resident in India but who received services outside India.

(ii) The Hon. High Court took note of and examined the
following :

Board’s Circular No. 36/04/2001, dated 8-10-2001

Scope of S. 64 of the Act

Notification No. 1/2002-ST, dated 1-3-2004

Notification No. 36/2004-ST, dated 31-12-2004 (effective from 1-1-2005)

Rule 2(1)(d)(iv) of the Rules along with the amendments from time to time.

S. 68(2) of the Act.

Explanation below S. 65(105) of the Act (In force from 16-6-2005 till
17-4-2006)

S. 66 of the Act — the charging Section

Overall scope of S. 65 including that of S. 65(105).

(iii) The
Court relied on the following decision :

Laghu Udyog
Bharati v. Union of India, 1999 (112) ELT 365 (SC).

(iv) After
considering submissions made by both the sides, the findings of the Court are
briefly summarised here in below :

Referring to Article 265 of the Constitution, the Court stated that no tax
shall be levied or collected except under authority of law and therefore,
examination was necessary as to whether or not there was a valid law between
1-3-2002 and 12-4-2006 which authorised to levy service tax on services
rendered outside India.

As regards Notification No. 1/2002-ST, the Court stated that the said
Notification extended territorial limits of India to the designated areas in
the continental shelf and Exclusive Economic Zone of India and therefore, this
Notification did not have effect of levying service tax on the recipients of
services.

In the context of Rule 2(1)(d)(iv) of the Rules, it was observed that S. 64
empowered the Central Government to make rules for carrying out provisions of
Chapter V where a service provider was considered an assessee and services
provided were taxed. The rules could not be framed to be in conflict with
provisions of the chapter. If the Act made the person providing the service
liable, the Rule could not make the recipient liable and thus the provisions
of Rule 2(1)(d)(iv) were invalid.

While examining Notification No. 36/2004-ST (supra) on which reliance
was placed by the authorities, the Court observed that S. 68(2) authorised the
Government to notify any taxable service for which rules could be framed. Vide
Notification No. 36/2004 (supra), any taxable service provided by a
non-resident or a person from outside India was notified and if rule 2(1)(d)(iv)
was taken to be the rule pursuant to this provision, then a person receiving
taxable service in India from a non-resident or from a person outside India
would become taxable and not services rendered outside India by a non-resident
or a person from outside India.

Vis-a-vis explanation below S. 65(105) from 16-6-2005, the Court found that the explanation did not authorise the Government to levy service tax in relation to services rendered to vessels and ships of the members of association outside India. In this frame of reference, the Court observed and relied on the case of Laghu Udyog Bharati (supra), wherein the Supreme Court by its judgment clearly laid down a law that by making a provision in the Rules, the levy of service tax could not be shifted to recipients of the services. It further noted that this law squarely applied to Rule 2(1)(d)(iv) also. According to the Court, in spite of the explanation, which made services provided outside India taxable, the charge of the tax continued to be on the provider of service as per scheme of the Act.

At the end, the Court ruled that on amending the Act and inserting S. 66A that the Government got legal authority to levy service tax on recipients of taxable services and before the enactment of S. 66A, no authority was vested by law and therefore, only from 18-4-2006 the recipients could be deemed to be service providers and thus would be liable for service tax in respect of services received from abroad and accordingly, restrained the Government to levy service tax on the members of the petitioner association for the period from 16-8-2002 till 12-7-2006.

(v) Comments:

In the judgment in the case of Hindustan Zinc Ltd. v. CCE, [aipur, 2008 (11) STR 338 (Tri.-LB) (narrated under this feature at length in September 2008 issue of BCAn, no distinction was made between services provided in India by a person from outside India and services performed outside India. As such, the issue of taxability on services provided outside India remained open for the period from 1-1-2005 to 17-4-2006. Decision in the case of Foster Wheeler Energy Ltd. v. CCE Vadodara Il, 2007 (7) STR 443 (Tri.-Ahd), on the other side provided that prior to insertion of S. 66A i.e., 18-4-2006, the recipient could not be made liable for service tax in respect of offshore services provided by person from outside India. However, the validity or otherwise of Rule 2(1)(d)(iv) was not examined, nor was examined the distinction be-tween scope of provision of Notification No. 36/ 2004-ST and that of S. 66A. Only in the case of Sterlite Industries (India) Ltd. v. CCE, 2008 (11) STR 325 (Tri.-Chennai), the issue as a whOle and distinction between coverage of Notification No. 36/2004 and scope of S. 66A was presented by the appellant. However, it being only a stay application, no finality was reached. Hon. Bombay High Court has dealt with all issues concerning services provided by persons from outside India and the liability of Indian receivers vis-a-vis such services, except examining constitutional validity of the extra-territorial jurisdiction of the levy.

2. Handling of export cargo whether liable to service tax?
CCE, Mangalore v. M/s. Konkan Marine Agencies, [2008 TIOL 601 HC Kar. ST]

The assessee paid service tax under the category of ‘port service’ for the period March 2004 to September 2004 and filed a refund claim of service tax and interest paid, stating that they were handling only export cargo which was outside the purview of service tax under ‘cargo handling service’ and that they had erroneously paid service tax under port services. The claim was rejected considering the services as port services. The Commissioner (appeals) remanded the matter to the adjudicating authority to determine the nature of the service. On examination, it was decided to be ‘cargo handling service’, however the refund was directed to be paid to the Consumer Welfare Fund.

The Commissioner took suo motu revision against the order of the adjudicating authority u/ s.84 and held that the services were port services, therefore, refund stood rejected. The assessee filed an appeal before the CESTAT.After relevant findings, CESTAT held that the assessee was not rendering services on behalf of port, but on its own behalf to customers for loading of export cargo. Accordingly, the Revenue’s appeal was dismissed in limine.

3. Whether reimbursement of expenses part of service rendered ?

Intercontinental Conslt. & Tech. Pvt. Ltd. v. Union of India, 2008 (12) STR 689 (Del)

The petitioner challenged constitutional validity of Rule 5 of the Valuation Rules, 2006 as it is ultra vires provisions of S. 66, S. 67 and Chapter V of the Finance Act, 1994 for inclusion of reimbursement of expenses as part of value of services.

The petitioner paid service tax only on services rendered to clients (NHAI) and not on reimbursement of expenses.

The authorities treating reimbursement of expenses as forming part of gross value of taxable services as per S. 67 and Rule 5, issued show-cause notice. The appellant contended that such expenses did not form part of value of services rendered and therefore was not liable u/ s.67 and further that reimbursable expenses were shown separately in the bill issued to clients.

It was held that no coercive steps be taken till an adjudication order was passed, but proceedings for SCN could continue.

II. Tribunal:’
4. Banking and other Financial Services:
CCE, [aipur v. Bank of Rajasthan Ltd., (2008 TIOL 1866 CESTAT Del.)

The Revenue had appealed against the order of the Commissioner (Appeals) whereby’ Anywhere Banking Business (ABB) transactions’ were held not liable to service tax. The respondent contended that ABB came under the net of service tax w.e.f. 10-9-2004, therefore, prior to 10-9-2004 this service was not chargeable to service tax. As this service was only for operation of bank account, the Revenue’s appeal was dismissed. No infirmity in the order.

5. Business Auxiliary Service:
APL Logistics India (Pvt.) Ltd. v. Commissioner of Service Tax, Chennai, 2008 (12) STR588 (Tri.-Chennai)

The appellant was in the business of collecting export goods from different Indian suppliers for a foreign party under an agreement with the latter. Such goods were consolidated into one cargo and exported for a consideration in Indian rupees. Thus, the appellant was undertaking the activity of handling of export cargo that is excluded from the ambit of cargo handling service. The Revenue contended to tax this activity as ‘Business Auxiliary Service’ as services were provided on behalf of client. The decision of Dr. Lal Path Lab Pvt. Ltd. v. CCE; Ludhiana, 2006 (4) STR 527 (Tribunal) was relied upon and contention was made that handling export could not be brought within the scope of ‘provision of service on behalf of the client’ as well as ‘cargo handling service’. Since the matter involved detailed examination for Revenue’s claim, waiver of pre-deposit was granted.

6. CENVAT Credit :
(i) Whether TR-6 challan a valid document?

M/s. Gaurav Krishna Ispat (I) Pvt. Ltd. v. CCE, Raipur (2008 TIOL 1979 CESTAT Del.)

The assessee was denied Cenvat credit for the period prior to 16-6-2005 as TR-6 challan was considered as an invalid document for availing the same.

It was held by the Commissioner (Appeals) that it was an inadvertent omission of not including TR-6 challan as a valid document, which was rectified by Notification. The Tribunal’s decision of National Organic Chemicals India Ltd., 2004 (178) ELT 331 (Tribunal) was also relied upon. It was held that CENVAT credit could not be denied and penalty could not be sustained.

(ii) Can CENVAT credit be denied on procedural ground?

M/s. Bharat Sanchar Nigam Ltd. v. CCE, Salem, (2008 TIOL 1989 CESTAT-Mad.)

BSNL divided the country into what they called Secondary Switching Areas (SSAs) and had a Central Stores Dept. (CSD) at Madurai, which catered the SSAs by purchasing and supplying capital goods required for rendering telephone services. The lower authorities denied the credit taken by SSA, Salem on capital goods supplied by CSD covered by copies of manufacturer’s invoice, on the ground that the credit was taken without issuing invoices as registered first stage dealer in accordance with Rule 9.

However, the appellant’s contention that credit could not be denied on technical grounds as the two substantive conditions (a) that the capital goods must be duty paid, and (b) that they should be used in rendering of output service were satisfied.

On finding that CSD was registered at a later date as a first stage dealer, the credit was allowed.

iii) CENVAT credit: Consignment agent’s place – whether place of removal?

CCE, Rajkot v. Rajhans Metals Pvt. Ltd., (2008 TIOL 1871 CESTAT-Ahm.)

The assessee availed Cenvat credit of service tax paid on transportation service availed for movement from factory to consignment agent’s premises. The property of the goods did not transfer to the agent. The Revenue claimed that only depots could claim credit as per Board’s Circular, therefore Commissioner (Appeals)’ s extension of benefit was incorrect. It was contended that the Circular discussed the place of removal, wherein consignment agent’s premises has been defined as place of removal. It was held that the fact that expenses are borne by manufacturer, property of goods does not get transferred and the consignment agent’s premises are defined as the place of removal makes them eligible for Cenvat credit.

iv) CENVAT credit on capital goods when goods received at one place and invoice issued in the name of other:

M/s. BSNL v. CCE, Bhopal (2008 TIOL 1938 CESTAT-Del.)

The Revenue denied the credit on the ground that the credit was availed on the strength of improper document. It stated that the invoices were in the name of Headquarter Bhopal, whereas credit was taken at Jabalpur on the strength of debit notes. However the appellant contented that invoices for capital goods received at Jabalpur were issued in the name of circle Headquarter i.e., Bhopal, and Jabalpur comes under the Bhopal circle. Further, there was no dispute as to payment of duty on those capital goods and they were used for providing output service. Finding merit in the contention, waiver of pre-deposit and penalties was granted.

7. Commercial Training and Coaching Services:

M/s. Administrative Staff College of India, Hyderabad v. The CCE, Hyderabad (2008 TIOL 2007 CESTAT-Bang.)

The appellant is a college for practising managers that pioneered post-experience management education in India. The Revenue proceeded on the grounds that they did not pay service tax on services rendered as ‘Commercial Training or Coaching Centre’ and ‘Scientific or Technical Consultancy’. The Revenue contended that any institute satisfying this definition would be liable for service tax, irrespective of whether it was a commercial institute or not and that the college was recognised as a research institute by the Ministry of Science & Technology and as such, they were covered as Scientific and Technical Consultant.

However, it was held that the word ‘commercial’ qualified the commercial coaching or training. It did not qualify coaching or training, but qualified the centre. As long as the institute was registered under the Societies Registration Act and also exempted from income-tax, it cannot be considered as commercial and so no service tax was leviable under Commercial Coaching or Training Service. As regards Scientific and Technical Research, it was held that the appellants carried out research broadly in the field of social sciences, which was not considered ‘Scientific and Technical Consultancy’, and hence no service tax was leviable and the appeal was allowed on both the counts.

8. Import of services:

Nestle India Ltd. v. Commissioner of Service Tax, New Delhi, [(2008 (12) STR 570 (Tri.-Del.)]

Service tax was demanded under consulting engineer services for import of services. The appellant received service of consulting engineer from their holding company and the period under dispute was 6-8-2002 to 9-9-2004. The Larger Bench of the Tribunal’s decision in the case of Hindustan Zinc Ltd. v. CCE, 2008 (11) STR 337 (Tri.-LB) was followed, finding the facts of the case similar and relief was provided for the period prior to 1-1-2005.

9. Revisionary authority – Whether can revise the decision taken u/s.80 ?
M/s. Solomon Foundry v. CCE, Tiruchirapalli, (2008 TIOL 1826 CESTAT-Mad.)

The assessee entered into a contract when the service of maintenance and repair was not under the tax net, therefore the contract did not contain any provision to recover the service tax from its clients and hence the tax liability was absorbed and lenient decision was prayed for. The original authority considered that default in payment of service tax was because of bona fide belief as to non-taxability. The amount due was mostly paid before the issue of show-cause notice and the remaining before the decision of adjudicating authority.

The Tribunal allowed the appeal and held that the revisional authority does not have powers to revise a decision of competent authority, which had refrained from imposing penalty on the assessee ul s.80 of the Act.

10. Stevedoring a port service? Homa Engineering decision disregarded with issue referred to Larger Bench:

Western Agencies Pvt. Ltd. v. Commissioner of Service Tax, Chennai, 2008 (12) STR 739 (Tri.-Chennai)

In this case, the issue relates to whether or not services other than stevedoring activity could be considered as port services. The Tribunal has dif-fered from the decisions taken in the following cases:

Homa Engineering Works v. Commissioner, 2007 (7) STR 546 (Tribunal)
Kin-Ship Services (India) Pvt. Ltd. v. Commissioner, 2008 (10) STR 331 (Tribunal)
Konkan Marine Agencies v. Commissioner, 2007 (8) STR 472 (Tribunal)
Velji P. and Sons (Agencies) Pvt. Ltd. v. Commis-sioner, 2007 (8) STR 236 (Tribunal)
Western (I) Shipyard Ltd. v. Commissioner, 2006 (3) STR 639 (Tribunal)
Western India Shipyard Ltd. v. Commissioner, 2008 (15) STT 371 (Mum-CESTAT)

Briefly stated, the Revenue contended that the Apex Court dismissed the Department’s appeal against Tribunal decision in Velji’s case (supra) not on merits but for the reason that no appeal against the Tribunal’s order in Homa Engineering (supra) was filed. However, the appeal in Homa Engineering’s case (supra) has been subsequently filed in the Bombay High Court. Therefore, the Tribunal’s de-cision could not be deemed to have been affirmed on merits in case of Velji’s by the Apex Court. It was also observed by the Tribunal that port services of minor ports were governed by the Indian Ports Act, 1908 and major ports by the Major Port Trust Act, 1963 whereas in Velji’s case, services in question were minor port services and decision was rendered with reference to many provisions of the Major Port Trust Act which did not apply. Further, the Tribunal observed that the view taken to the effect that licence issued by the port was unrecognised as authorisation also seemed incorrect. In the case of Konkan Marine Agencies (supra) it was concluded that stevedoring licence issued by the Mangalore Port Trust permitted them to perform within port premises.

According to the Tribunal, cargo handling services i.e., loading and unloading of cargo when performed within territorial limits of minor and major ports qualify to be ‘port services’. Port service can be performed from premises only if authorised by major port or minor port authorities and therefore stevedoring operations performed from port premises were port services. However, considering the importance of the issue and disagreement made with the decision in the above mentioned cases, the matter was referred to the Larger Bench.

11. Turnkey contracts – Daelim’s decision to be examined by Larger Bench:

CCE, Raipur v. Mls. BSBK Pvt. Ltd., (2008 TIOL 1880 CESTAT-Del.]

The respondent was engaged in the business of execution of turnkey contracts for engineering works at the site of their clients. The authorities ordered the respondents to pay service tax and penalty on these contracts to which the respondents appealed before the Commissioner (A) who set aside this order.

Relying on various decisions which inter alia included the decisions on the cases of Daelim Industrial Co. v. CCE, Vadodara, 2003 and Turbotech Precision Engg. P. Ltd. v. CCE, Bangaiore-III, the respondents claim that a turnkey works contract, could be vivisected as sale contract and service contract, and thus a part of a works contract cannot be subjected to tax.

However, the Revenue stated that the decision in Daelim (supra) was not in accordance with the decision of the Supreme Court in BSNLv. VOl and was challenged in the Supreme Court. Considering the decision in Daelim’s case (supra) was not in accordance with the law, the case was referred to the Larger Bench to consider the correctness of the decision.

12. Valuation and S. 67:

Shakti Motors v. Commissioner of Service Tax, Ahmedabad, 2008 (12) STR 710 (Tri.-Ahmd.)

The assessee, an authorised dealer selling motor bikes and scooters, also provides business auxiliary services to various financial institutions. Servicetax was paid by the appellant before issue of show-cause notice and penalty was levied u/ s.76 and u/ s.77of Finance Act 1994.The appellant contended that the amount received was a cum – tax value, therefore actual demand should be reduced and requested waiver of penalty u/ s.80. It was held that amount received could not be treated as cum- service tax price as no evidence supported it. The benefits of S. 80 were granted considering confusions in budget of 2005.The liabilityof interest could not be set aside.

BCAJ Admin

Limited Liability Partnerships

1. Issues under other laws :

In the last three issues, we have analysed various facets of the LLP Act and looked at different provisions contained therein. However, the LLP Act is not an island by itself. One also needs to consider the impact on an LLP by or under various other laws, such as, the Stamp Act, the FDI Policy/FEMA Regulations, tenancy laws, restructuring of companies with LLPs, etc. In this last part, let us look at some such laws and the issues arising therein in respect to an LLP.

2. Stamp Act :

2.1 To incorporate an LLP, the Partners need to execute an LLP Agreement. This Agreement would lay down the respective capital contributions, whether they would be in the form of cash or property, etc. One of the main unresolved issues in relation to an LLP is what would be the stamp duty on such an Agreement ? Stamp Duty is a State subject and hence, the law in this respect would depend upon the State in which the registered office is situated. For the purposes of our discussion, let us consider the Bombay Stamp Act, 1958, which is applicable in the State of Maharashtra.

2.2 The Bombay Stamp Act, 1958 (‘the Act’), which is applicable to the State of Maharashtra, levies stamp duty u/s.3 of the Act. The relevant portion of S. 3 reads as follows :

“3. Instrument chargeable with duty :

Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in Schedule I as the proper duty therefor respectively, that is to say :

(a) every instrument mentioned in Schedule I, which is executed in the State . . . . . .;

(b) every instrument mentioned in Schedule I, which . . . . . . , is executed out of the State, relates to any property situate, or to any matter or thing done or to be done in this State and is received in this State :

Provided that a copy or extract, whether certified to be a true copy or not and whether a facsimile image or otherwise of the original instrument on which stamp duty is chargeable under the provisions of this section, shall be chargeable with full stamp duty indicated in the Schedule I if the proper duty payable on such original instrument is not paid”

From the analysis of s. 3, the following points emerge :

(a) Stamp duty is leviable on an instrument and not on a transaction.

(b) Stamp duty is leviable only on those instruments which are mentioned in Schedule I to the Act.

(c) Stamp duty is leviable on the instrument if it is executed in the State of Maharashtra or on the instrument which, though executed outside the State of Maharashtra, relates to any property situate, or to any matter or thing done or to be done in the State and is received in the State. Hence, for example, even if an LLP Agreement is executed outside the State of Maharashtra but if registered office of the LLP is located in Maharashtra, and the instrument of partnership is received in Maharashtra, then it would be subject to stamp duty under the Act.

(d) The charge of stamp duty is subject to the provisions of this Act and the exemptions contained in Schedule I.

Currently, there is no express provision in the Act for levying stamp duty on an LLP Agreement. Under the Act, the term ‘instrument’ is defined to include, amongst other things, every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded. Stamp duty is always on an instrument and not on a transaction. The LLP Agreement would determine the contribution of capital, distribution of profits, ownership and transfer of property, rights and duties of partner, etc. Therefore, an LLP Agreement would come under the definition of an ‘instrument’ and attract Stamp Duty.

2.3 Let us consider some of the possible Articles of Schedule I to the Bombay Stamp Act under which the LLP Agreement could be stamped.

(a) Conveyance :

Article 25 deals with duty as on a Conveyance. The term Conveyance is defined (as is relevant to this discussion) u/s.2(g) of the Act to include, a conveyance on sale, every instrument by which property or any estate/interest in property is transferred to or vested in any other person inter vivos. Thus, a conveyance includes every transfer of property between two or more persons except those transfers which are covered by other Articles, e.g., lease, leave and licence, gift, etc. It would not be correct to say that an LLP Agreement is a conveyance of property from the partner to the LLP. Hence, in my view, an LLP Agreement should not be stamped with duty as on a conveyance. However, the Legislature can, by an amendment to the Stamp Act, extend the same rate as a conveyance to the introduction of property other than cash as capital contribution of the LLP.

(b) Instrument of Partnership :

Another Article is Article 47 which deals with the duty as on an Instrument of Partnership. Article 47 of Schedule I specifically provides for levy of stamp duty on partnership and the relevant article is reproduced below :

“47. Partnership :

The term ‘instrument of partnership’ and the term ‘partnership’ have not been defined in the Act. Hence, the term ‘partnership’ would have to be understood as defined in the Indian Partnership Act, 1932. At present, an LLP Agreement cannot be covered under Article 47 of the Bombay Stamp Act, 1958 since it expressly deals with a partnership firm and an LLP is not a partnership firm.

(c) Agreement :

Till the time an express amendment is made, the LLP Agreement may be covered under Article 5(h)(A)(iv) of the Bombay Stamp Act which provides as under :

“Agreement or its records or memorandum of an agreement

Thus, in my view, till such time as an express amendment is made to the Act, an LLP Agreement should attract duty @ 0.1% if the value of the capital contribution is less than Rs.I0 lakhs and @ 0.2% in all other cases.

In case the LLP Agreement does not have any monetary value then the duty would be under Article S(h)(B) at Rs.200.

3. Foreign Investment in an LLP

3.1 The next important issue which arises is that can a foreigner /NRI invest in an LLP ? S. 7 of the LLP Act provides that at least one of the Designated Partners of an LLP should be a resident in India. This term is defined to mean a person who stayed in India in the preceding one year for more than 182 days. Thus, the LLP Act itself recognises that a partner of an LLP can be a non-resident.

3.2 However, the Foreign Exchange Management Act, 1999 and the Regulations issued thereunder do not deal with the investment by a person resident outside India (PROI) in the capital of an LLP. FEMA 20/2000 or the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 provide for the Foreign Direct Investment Scheme. Para 1(1) of Schedule I to these Regulations enables a PROI to invest, on a repatriable basis, in the shares or convertible debentures issued by an Indian company. However, these Regulations do not enable a PROI to invest in the capital of an Indian LLP.

3.3 The Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations, 2000 enable an NRI/PIO to invest in the capital of a partnership firm or a proprietary concern in India. R.3 of these Regulations empowers the RBI to permit, on application, any PROI to invest in the capital. of a firm, proprietary concern, AOP in India. However, these Regulations also do not enable a PROI to invest in the capital of an Indian LLP.

3.4 Till such time as the RBI amends the FEMA Regulations, it would be difficult for foreign investors to invest in LLPs. LLPs are a very tax-efficient way of structuring investments, especially in the infrastructure sector, such as in roads, highways, ports, etc. In sectors where the concept of multiple layers of SPVs, Holding Companies, JV Companies, etc., is prevalent, the use of LLPs can minimise the tax leakages. Hence, it is high time for the Government to amend the FEMA to facilitate the investment by PROIs in LLPs.

4. Foreign Investment by an LLP

4.1 FEMA 120/2004 or the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 provide for the Direct Investment Outside India by an Indian party. Under s.2(v) of the FEMA, an LLP would be a person resident in India since it is a body corporate registered or incorporated in India.

4.2 These Regulations permit an Indian party to make an overseas investment in a JV or a subsidiary abroad. R.2(k) defines an Indian party to mean a company or a body created under an Act of the Parliament or a partnership firm registered under the Indian Partnership Act, 1932. An LLP is neither of these three entities. Further, the Regulations also permit Registered Trusts, Societies, unregistered partnership firms, sole proprietary concerns and individuals rendering professional services, etc., to acquire shares in a foreign entity or to set up JV/ WOS under certain situations. However, there is no provision to facilitate the overseas direct investment by an LLP. Hence, till such time as these Regulations are amended an LLP cannot make an overseas investment.

4.3 One wonders why, when the Ministry of Company Affairs is so upbeat about LLPs, it has not aggressively pursued these amendments with the RBI?

(To be continued)

BCAJ Admin

Penalty provisions under MVAT Act, 2002

VAT

Penal provisions : (Part-2)

(Part-1 published in the November issue of BCAJ)

Express penal provisions :

The express penal provisions are those which are specifically
so stated in the VAT Act. A brief summary of these provisions is as under :

Penalties — S. 29 :

S. 29 of the VAT Act provides for different types of
penalties. There are several sub-sections providing for levy of penalty. However
there are certain common provisions applicable to the above sub-sections. It
will be better if these common provisions are discussed first and then the
individual sub-sections can be discussed separately.

S. 29(11) :

This sub-section reads as under :

“(11) No order levying penalty under the foregoing
provisions of this Section shall be passed in respect of any period after
five years from the end of the year containing the said period :”

This sub-section lays down time limit, viz., 5 years
from the end of year, containing the period for which penalty is to be levied.
Thus, if penalty is to be levied for return period of February 2006, the time
limit will be March 2011.

A question will arise in cases where new actions are
initiated, like review, within their respective time limits. In such orders
penalty can be levied. It appears that even if such new action may be within the
time, the penalty can be levied in such proceedings only if it is within the
time limit of above 5 years.

S. 29(12) :

The Section reads as under :

“(12) No order imposing a penalty under any of the
foregoing sub-sections shall be made, —

(a) by a Sales Tax Officer or an Assistant Commissioner
where the penalty exceeds rupees five lakh except with the prior approval of
the Deputy Commissioner;

(b) by a Deputy Commissioner or a Senior Deputy
Commissioner, where the penalty exceeds rupees ten lakh except with the
prior approval of the Joint Commissioner :

Provided that nothing in this sub-section shall apply to
any penalty which may be imposed by an appellate authority.”

The Section is self-explanatory. The procedure for obtaining
approval is not given and whether the dealer will get hearing before such
approval is also not clear.

However the proviso makes it very clear that the appellate
authorities will not require any such permission.

The intention behind such a system of prior approval seems to
be to have some control over lower authorities. An incidental issue, which may
arise is whether the first appellate authority like the Deputy Commissioner or
Joint Commissioner (Appeals) will be able to give relief in case of appeal
relating to such penalty ? Since the penalty would be levied with approval of an
officer of equal rank, it is possible that such appellate authorities may drag
cold feet and may not tinker with the penalty order.

S. 29(13) :

The Section reads as under :

“(13) For the purposes of this Section, Commissioner
includes any appellate authority appointed or constituted under this Act.”

Thus the Section does away with the controversy
arising under the BST Act, 1959. The dispute lingered long under the BST Act, as
to whether Commissioner includes appellate authority or not. Now due to above
specific provision the confusion is clear and Commissioner will include
appellate authorities.

In other words, appellate authorities including the Tribunal
will get jurisdiction to levy penalty even while passing appeal orders.

One more common feature of penalty provisions u/s.29(3) to
u/s.29(9)(c) is that there is no discretion about the quantum. The penalty
amount/s have already been provided in the Section itself. However, there is
another view, according to which despite of fixed amount provided in the
Section, the authorities can levy lesser amount depending upon facts of the
case. It will be a matter of interpretation. The sales tax authorities may take
a view that the amount is fixed. Accordingly the issue before authorities will
be to decide whether to levy penalty or not. Once decided to levy, a fixed sum
may be levied.

It may be a matter of debate whether the penalties should be
of fixed amount or not ? The argument of the Department is that it will reduce
corruption as fixed amount is to be levied, there is no discretion. But dealers
fear that this will increase corruption at the stage of initiation of penalty.

S. 29(3) :

The levy S. 29(3) reads as under :

“(3) While or after passing any order under this Act, in
respect of any person or dealer, the Commissioner, on noticing or being
brought to his notice, that such person or dealer has concealed the
particulars or has knowingly furnished inaccurate particulars of any
transaction liable to tax or has concealed or has knowingly mis-classified any
transaction liable to tax or has knowingly claimed set-off in excess of what
is due to him, the Commissioner may, after giving the person or dealer a
reasonable opportunity of being heard, by order in writing, impose upon him,
in addition to any tax due from him, a penalty equal to the amount of tax
found due as a result of any of the aforesaid acts of commission or omission.”

The ingredients are clear. The concealment of transaction
liable to tax, knowingly misclassifying the turnover or knowingly claiming
excess set-off will be ground for levy of penalty under this Section. Words like
‘concealment’ and ‘knowingly’, sufficiently provide that the Department should
prove the mens rea before levying penalty.

The order levying this penalty can be made while passing an order or even after passing any order. The action can be taken on suo motu findings or on the findings brought to his notice. Who can bring to notice is not clarified and hence even an outsider can bring to the notice of officer and the penalty action can be initiated.

The Section envisages hearing opportunity and passing of written order for levying penalty.

The quantum of penalty will be equal to tax found payable because of the above acts of commission or omission.

S. 29(4):

The Section reads as under :

“(4) Where any person or dealer has knowingly issued or produced any document including a false bill, cash memorandum, voucher, declaration or ‘certificate by reason of which any transaction of sale or purchase effected by him or any other person or dealer is not liable to be taxed or is liable to be taxed at a reduced rate or incorrect set-off is liable to be claimed on such transaction, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him in addition to any tax payable by him, a penalty equal to the amount of tax found due as a result of any of the afore-said acts of commission or omission.”

The ‘Section’ envisages levy of penalty equal to tax amount found due as a result of the acts of commission or omission given in the above Section. The acts are about issue or production of false bill, voucher, declarations, etc. by which the tax payable is avoided or resulting in excess set-off. The other ingredients of the Section are same as above i.e., the order should be after hearing opportunity and be in writing. The mens rea clause applies here also as the provision speaks of acts of commission and omission knowingly.

S. 29(5):

This Section is inserted from 20-6-2006 :

“(5) Where a dealer has sold any goods and the sale is exempt, fully or partly, from payment of tax by virtue of any provision contained in Ss.(3), Ss.(3A), Ss.(3B) or Ss.(5) of S. 8, and the purchaser fails to comply with the conditions or restrictions subject to which the exemption is granted, then the Commissioner may, after giving the said purchaser a reasonable opportunity of being heard, impose penalty on him equal to one and a half times the tax which would have become payable on the sale if the said exemption was not avail-able on the said sale.”

The Government is empowered to provide concessional rate of tax for particular class of dealers by issue of Notification ul s.8(3), u/’ s.8(3A), u/ s. 8(3B) and ul s.8(5). The class of dealers so specified can effect purchases at 4% even though otherwise the goods are liable @ 12.5%. The Government has issued such Notifications under above Sections and allowed concessional rate to organisations like electric power generating company, etc. Now this penalty is provided if the dealer purchases the goods by utilising concession provided ul s.8(5) and fails to comply with the conditions of such concessional rate. The quantum of penalty is one and half time of the concession availed. There is no levy of purchase tax, which used to be there under the BST Act in case of contravention. Under the MVAT Act the Government intends to compensate for loss of revenue due to unauthorised use of concession by levy of penalty at the above quantum. Of course, it being a penalty, the normal defence available to the dealer viz., absence of mens rea, etc. will remain applicable here also.

29(6) :

The Section reads as under:

“(6) Where, any person or dealer contravenes the provision of S. 86, so as to have the quantum of tax payable by him to be under-assessed, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him a penalty equal to half the amount of tax which would have been under-assessed or one hundred rupees, whichever is more.”

The provisions of S. 29(6) apply when there is contravention of provisions of S. 86. S. 86 is about tax invoice and other bills, cash memorandum, etc. The quantum of penalty is linked with under-assessment because of non-compliance of invoice provisions and the same will be 50% of the said under-assessment. It is necessary to note that the words ‘knowingly’, etc. are missing here and hence it appears that the principles of mens rea will not apply here. However ultimately it being a penalty provision the mens rea indirectly creeps in as observed by the Supreme Court in case of Hindustan Steel Ltd. (25 STC 211).

29(7):

The Section reads as under :

“(7) Where, any person or dealer has failed without reasonable cause to comply with any notice in respect of any proceedings, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him, a penalty equal to Rs.1000.”

It provides for levy of penalty for non-compliance of any notice, etc. without reasonable cause. The amount is Rs.1000. The penalty, in my opinion, applies, qua each proceedings and not multiple number of notices within one proceedings.

S. 29(8):

The Section reads as under :

“(8) Where, any person or dealer has failed without reasonable cause to file within the prescribed time, a return for any period as provided u/s.20, (…. ) the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him, a sum of rupees ten thousand by way of penalty. Such penalty shall be without prejudice to any other penalty, which may be imposed under this Act:

Provided that, if the return is filed before the initiation of the proceeding for levy of penalty, the penalty shall be levied at rupees five thousand and in any other case, the penalty shall be levied at rupees ten thousand.”

The Section is resembling to S. 36(4A), etc. under the BST Act, 1959. It speaks about levy of penalty if return is not filed within stipulated period. The penalty will be Rs.10000. However if return is not filed within permissible period, but it is filed before any action is initiated under the above S. 29(8), the penalty will be at Rs.5000.

Since a fixed sum of Rs.10000 and 5000 is prescribed, it appears that the penalty is contemplated for each act of default. However, depending upon the situation of filing, the penalty amount will vary i.e., it may be Rs.10000 or Rs.5000. Only if the dealer proves reasonable cause for default, the penalty may not be levied, else it will become a routine in each case.

S. 29(9)(c) :

The Section reads as under:

“(9)(c) Where a dealer has filed a return and such return is found to be not complete and self-consistent, then the Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, by order in writing, a penalty of rupees one thousand. The levy of penalty shall be without prejudice to any other penalty which may be imposed under this Act.”

The penalty under this Section gets attracted where the dealer fails to file complete and self-consistent return. The complete and self-consistent return is to be seen in light of S. 20(1)(b)and Rule 20 of the VAT Rules.

The above provisions provide for correcting return within one month of serving of defect memo and if one fails to carry out the said corrections, penalty u/s.29(9)(c) at Rs.1000will be attracted.

S. 29(10):

The Section reads as under:

“(10) Where a person or dealer has collected any sum by way of tax in contravention of the provisions of S. 60, –

a) he shall be liable to pay a penalty not exceeding two thousand rupees, and

b) in addition, any sum collected by the person or dealer in contravention of S. 60shall be for-feited to the State Government.

If the Commissioner, in the course of any proceeding under this Act or otherwise, has reasons to believe that any person has become liable to a penalty or forfeiture or both penalty and forfeiture of any sum under this sub-section, he may serve on such person a notice in the prescribed form requiring him on a date and at a place specified in the notice to attend and show cause why a penalty or forfeiture or both penalty and forfeiture of any sum as provided in this sub-section should not be imposed on him. The Commissioner shall thereupon hold an inquiry and shall make such order as he thinks fit. When any order of forfeiture is made, the Commissioner shall publish or cause to be published a notice thereof for the information of the persons concerned giving such details and in such manner as may be prescribed.”

The above penalty is about forfeiture of excess collection of tax. The Section provides for forfeiture as well as penalty for the same. This is the only Section where the penalty is provided as not exceeding Rs.2000, i.e., the authorities can levy penalty as per their discretion from Re.1 to Rs.2000.The other procedure of forfeiture is the same as it was under the BSTAct, 1959.The officer has to issue a notice for the purpose of forfeiture of tax. S. 60 provides the mode of determining the excess collection,hence reference is required to be made to the said Section for correctly knowing the scope of forfeiture. If for-feiture is made, the details of the same should be published in the format given in Rule 39.

BCAJ Admin

From The President

Dear Professional Colleagues,

Financial Year 2008-09 has gone by. To most of us the year has been one which will be remembered for a long time to come, particularly on account of events that occurred on the business and economic fronts. The first quarter of the financial year had the hangover of the heady growth that had been witnessed in the earlier years. In the second quarter, the bad news had started arriving. The crisis deepened in the third quarter and by the fourth, all businessmen, economists, professionals were convinced that we were in for difficult times. The debate now centres on how long the turnaround will take.

Apart from the doomsday predictions on the economic front, a mammoth fraud was revealed in the form of Satyam. Much has been written on the subject and I do not intend to add to the same in this communication. Three months have passed and we have very little authentic information as to the extent of the fraud, the manner in which it was committed and at whose door the blame lies.

There have been various reactions to this mega fraud from the industry, the regulators, the profession and the government. Some of the reactions are knee-jerk ones. There is a proposal which has been reported in the press that an entity which is being audited will have to restate/rectify accounts to give effect to the qualifications by the auditor. In my understanding, the roles of the auditor and auditee are today well defined. The respon-sibility of preparing financial statements is of the auditee, and the job of the auditor is to express an opinion on those financial statements. A change in this position will have far-reaching consequences. I appreciate that the opinion of the auditor needs to be respected, and should be disclosed / reported in a manner that it can be easily understood by users of financial statements. For that purpose various ways of reporting and other modalities should be thought of When an auditor blows the whistle, it must be in a manner that users of the financial statements hear it loud and clear. If they pay no heed, it will be their responsibility. Any change in the classical role of the auditor is perhaps uncalled for. The auditor after all expresses an opinion on the accounts. We as auditors must humbly accept that there could be a bona fide difference of opinion and in all humility appreciate that the auditor’s opinion may not be necessarily right. I am sure the Institute will consider all these aspects and deal with the proposal appropriately.

While the news on the economic front is depressing, I do not endorse efforts to change policies, so that unpleasant consequences of economic downturn do not reflect in the financial statements of corporates. While one understands the reluctance on the part of business houses to disclose weak financial position at times the adverse results are on account of ‘errors’ of judgement, to put it mildly. Many corporates had taken positions in currency derivatives. Theses have resulted in their incurring losses. There may also have been other losses due to fluctuations in currency rates. If there has been a financial impact it must be reflected in thefinancial statements. It would not be appropriate to sweep it under the carpet. At a time when we are advocating greater transparency, there seems to be no reason to disturb existing accounting norms which have been formulated after great thought. Admittedly, the losses are due to exceptional circumstances; but if events leading to losses have occurred in the year under review, their impact needs to be accounted for in the same year. It would not be prudent to wish away the reality in the hope that next year the problem will disappear. Consistency is a well-established principle in the accounting world, and we should not sidestep it for short term. It is only because financial statements are prepared on a consistent basis, that they become comparable and this aspect should be borne in mind when accounting standards are amended.

As far as banks are concerned, many of their assets have eroded in value due to the difficult economic situation. Many borrowers are unable to adhere to repayment schedules. Banks have rightly supported the borrowers by rescheduling the loans. However, if assets have really becomesub-standard or bad, the corresponding loss must be provided for. Merely liberalising the provisioning requirements will only postpone the problem and possibly aggravate it. Instead, it may be advisable to revise capital adequacy norms.

By the time I write my next communication, the general elections will be in progress. There is substantial disenchantment with the political class. All are yearning for change and many citizens’ groups are taking various initiatives, some of which I have referred to in earlier communications. It however takes substantial time for a change to occur. To expedite the change, the educated and the elite will have to shoulder far greater responsibility. The least they can do in this election is vote. I, therefore, appeal to all readers, their friends and families to exercise their right offranchise, for I am sure that if they do exercise it, they will make the right choice.

So do enjoy your vacation, but only after you have voted !

With warm regards,

BCAJ Admin

CBDT Circular No. 14, dated 11-4-1955 — In the case of an assessee following mercantile system of accounting interest expenditure which has accrued during the previous year is allowable as deduction even if it was not debited to P&L Account and also not c

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2009 TIOL 664 ITAT (Del.)

ACIT v. Technofab Engg. Ltd.

ITA No. 4698/Del./2005 & 2666/Del./2006

A.Ys. : 2002-03 and 2003-04

Dated : 30-7-2009

CBDT Circular No. 14, dated 11-4-1955 — In the case of an
assessee following mercantile system of accounting interest expenditure which
has accrued during the previous year is allowable as deduction even if it was
not debited to P&L Account and also not claimed in the return of income but
was claimed by filing a letter, before the assessment, making the claim.

Facts :

The assessee was following mercantile system of accounting,
which was accepted by the Assessing Officer. The assessee had not debited some
interest in its books of accounts and consequently the same was not even
claimed as deduction while computing the total income. The assessee did not
revise its return of income but filed a letter, before completion of
assessment, making a claim that deduction for interest accrued during the
previous year be allowed in accordance with the method of accounting regularly
followed by it. The AO did not accept the claim made by the assessee.

The CIT(A) directed the AO to allow liability of interest
although the same was not debited to the books of account and the said claim
was not made by filing a revised return.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held :

The CBDT has issued circulars, which are binding on the
Department, to the effect that the assessee should be properly guided in
relation to the claims. The CBDT has emphasized upon the AOs to assess the
correct income to tax. If the assessee is following a particular method of
accounting and he has omitted to claim the deduction or exemption, to which he
is otherwise entitled, the Board has emphasized that the AO should guide the
assessee so that the correct income is assessed as per the provisions of the
Act. In Circular No. 14 dated 11-4-1955 CBDT has emphasized that the
Department should not take advantage of the assessee’s ignorance to collect
more tax out of him than the liability due from him. This Circular is very
much binding on the Department. In the light of the said Circular and also in
view of the findings of the CIT(A) that the claim made by the assessee was a
perfectly legal claim supported by the method of accounting which the AO has
accepted from year to year, the Tribunal upheld the order of CIT(A).

The appeal filed by the Revenue was dismissed.

levitra

Nirav Shah

S. 80IA(4), Explanation to S. 80IA(13), S. 255(3) and S. 255(4) — There is a material difference in the circumstances where a reference is made to a Special bench u/s.255(3) and a Third Member or Larger Bench u/s.255(4) — A Third Member/Larger Bench is co

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2009 TIOL 692 ITAT Mum-LB

B. T. Patil & Sons v. ACIT

ITA Nos. 1408 & 1409/Pn/2003

A.Ys. : 2000-01 and 2001-02

Dated : 26-10-2009

S. 80IA(4), Explanation to S. 80IA(13), S. 255(3) and S.
255(4) — There is a material difference in the circumstances where a reference
is made to a Special bench u/s.255(3) and a Third Member or Larger Bench
u/s.255(4) — A Third Member/Larger Bench is constituted only when there are
differing orders — A Bench constituted u/s.255(4) has to apply the law as
amended with retrospective effect even though such law was not available at
the time of passing of the separate orders by the dissenting Members — S.
80IA(4) (even prior to amendment) applies to a ‘developer’ and not to a
‘contractor’ —Deduction u/s.80IA(4) is allowable only to a person directly
engaged in developing, maintaining and operating the facility — There should
be a complete development of the facility and not just a part of it.

Facts :

The assessee was a civil contractor engaged in construction
of various projects of Governments and local authorities. It claimed deduction
u/s.80IA on the ground that it had undertaken ‘infrastructure projects’. The
Assessing Officer (AO) did not allow the deduction on the ground that the
assessee did not do any business in infrastructure facility but had merely
constructed the properties belonging to the Government/statutory bodies for a
fixed consideration. He also held that the other conditions of S. 80IA(4) were
not satisfied.

The CIT(A) confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The JM upheld the claim on the ground that the assessee is a
developer. The AM dissented after taking note of Explanation to S. 80IA then
proposed to be inserted by Finance Bill, 2007 w.e.f. 1-4-2000, rejected the
claim. The President, acting as Third Member, noted that as the AM had decided
on the basis of a point not raised by the parties during the hearing, a
solitary TM decision on the issue may create complications and so the issue
was referred to a Larger Bench.

Before the Larger Bench, apart from the issue under
consideration, two more questions arose (i) whether the reference was made
u/s.255(4) or u/s.255(3) since scope and limitations in both the situations
are different; and (ii) whether the Bench constituted u/s.255(4) has to apply
the law as amended with retrospective effect even though such law was not
available at the time of passing of the separate orders by the dissenting
Members.

Held :

(i) There is a material difference in the circumstances
where a reference is made to a Special Bench u/s.255(3) and a Third Member or
a Larger Bench u/s.255(4). Ss.(4) is a special provision dealing only with a
particular situation in which the members who earlier heard the case differ on
a point or points, as against the language of the relevant part of Ss.(3)
which refers to constituting a Special Bench consisting of three or more
members couched in a general manner. Special Bench u/s.255(3) is always
constituted in the absence of differing opinion expressed by the Members in
that particular case through their separate orders.

(ii) In the present case, the Members had passed differing
orders. Consequently, the reference was u/s.255(4). A Third Member/Larger
Bench is constituted only when there are differing orders.

(iii) Proceedings u/s.255(4) are confined to the point or
points on which Members of the Division Bench differ. One or more of the other
Members appointed under Ss.(4) are supposed to confine himself/themselves only
to the facts of the case before the Bench. Since the Bench has to confine
itself to the facts of the case, interveners are normally not allowed.

(iv) The rule that interveners are not allowed in
proceedings u/s.255(4) is subject to the exception where pure and substantial
question of law is involved in proceedings u/s.255(4). Interveners are allowed
provided their arguments are confined to the substantial legal question posed
before the Bench u/s.255(4).

(v) Proceedings qua the point of difference continue before
the Bench constituted u/s.255(4) and are deemed to continue till passing of
order under this sub-section. A bench constituted u/s.255(4) has to apply the
law as amended with retrospective effect even though such law was not
available at the time of passing of the separate orders by the dissenting
members. The order of the TM/Bench is final and conclusive on the point in
difference and the failure to apply the applicable law will render the order
of the TM/Bench absurd and erroneous.

(vi) On merits, S. 80IA(4) [even prior to insertion of
Explanation below S. 80IA(13)] applies to a ‘developer’ and not to a
‘contractor’. ‘Developer’ is a person who conceives the project which he may
execute himself or assign some parts of it to others. On the contrary
Contractor is the one who is assigned a particular job to be accomplished on
behalf of the developer. His duty is to translate such design into reality.
There may, in certain circumstances, be overlapping in the work of developer
and contractor, but the line of demarcation between the two is thick and
unbreachable. The role of a developer is much larger than that of contractor.
In certain circumstances a developer may also do the work of a contractor but
a mere contractor per se can never be called as a developer. The assessee in
this case was held to be a contractor. Moreover, it did not even own the
facility.

Nirav Shah

S. 45, S. 47, Explanation (iii) to S. 48 — In respect of a capital asset received as a gift, indexed cost of acquisition needs to be computed by applying cost inflation index of the year in which the previous owner had first held the asset.

New Page 2

2009 TIOL 698 ITAT Mum.-SB

DCIT v. Manjula J. Shah

ITA No. 7315/Mum./2007

Date of Order : 16-10-2009

S. 45, S. 47, Explanation (iii) to S. 48 — In respect of a
capital asset received as a gift, indexed cost of acquisition needs to be
computed by applying cost inflation index of the year in which the previous
owner had first held the asset.

Facts :

The assessee transferred a capital asset which was received
by her as a gift on 1-2-2003. The previous owner had acquired the capital
asset on 29-1-2003. While computing long term capital gain, the assessee
computed indexed cost of acquisition by applying cost inflation index of the
year in which the previous owner first held the asset. The AO was of the view
that the provisions of Explanation (iii) to S. 48 which define the term
‘indexed cost of acquisition’ are very clear and as per those provisions the
assessee is entitled to indexation from the year in which the asset was first
held by the assessee and not by the previous owner.

Aggrieved, the assessee preferred an appeal to CIT(A) which
was allowed.

Aggrieved by the order of CIT(A), Revenue preferred an
appeal to the Tribunal. Since there were divergent decisions of Division
Benches on this issue, a Special Bench was constituted to consider the issue.

Held :

A literal reading of Explanation (iii) to S. 48 suggests
that one has to go by the year in which the asset was held by the assessee.
The scheme of the Act as reflected in the definition of ‘short term capital
asset’ in Explanation 1(b) to S. 2(42A) provides that the period for which the
asset was held by the previous owner also has to be taken into account. Also,
the cost of acquisition of the previous owner is regarded as cost of
acquisition of the assessee. It is not logical that the cost of acquisition
and the period of holding is determined with reference to the previous owner
and the indexation factor is determined with reference to the date of
acquisition by the assessee. Therefore, literal interpretation of Explanation
(iii) to S. 48 is inconsistent with the scheme of the Act. Also, literal
interpretation will lead to absurdity and unjust results and will defeat the
purpose of the concept of ‘indexed cost of acquisition’. In accordance with
the principles of purposive interpretation of statutes, Explanation (iii) to
S. 48 has to be read to mean that the indexed cost of acquisition has to be
computed by taking into account the period for which the asset was held by the
previous owner.

The appeal filed by the Revenue was dismissed.

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Nirav Shah

S. 115JB — For purpose of computing book profits u/s.115JB, although provisions made by an assessee are not allowable as deduction, yet certain provisions which are capable of estimation with a reasonable certainty without quantification are allowable, as

New Page 2

(2009) 30 SOT 495 (Mum.)

Dresser Valve India (P.) Ltd. v. ACIT

ITA No. 6464 (Mum.) of 2007

A.Y. : 2003-04. Dated : 24-4-2009

S. 115JB — For purpose of computing book profits u/s.115JB,
although provisions made by an assessee are not allowable as deduction, yet
certain provisions which are capable of estimation with a reasonable certainty
without quantification are allowable, as they are ascertainable.

For the relevant assessment year, the assessee-company
added back the amount of provision for gratuity while computing its total
income but did not do the same while computing book profits in terms of S.
115JB. The Assessing Officer, having found that the assessee had failed to
follow AS-15 and the actuarial method referred to therein with regard to
gratuity for determining actual liability, added back the provision for
gratuity to the book profits u/s.115JB. On appeal, the CIT(A) upheld the
action of the Assessing Officer.

The Tribunal, following the decisions in Dy. CIT v. Oman
International Bank SAOG, (2006) 100 ITD 285 Delhi (SB) and Bharat Earth
Movers v. CIT, (2000) 245 ITR 428/112 Taxman 61 (SC), set aside the order
of the CIT(A). The Tribunal noted as under :

(a) The provisions of S. 115JB are a code by themselves
and determination of the book profits has to be done only as per the
provisions of S. 115JB, which unambiguously provide for exclusion of
provision of ascertained liabilities for the purpose of ‘book profits’.

(b) Although the provisions are not allowable as
deduction, yet certain provisions which are capable of estimation with a
reasonable certainty without quantification are allowable, as they are
ascertainable. On finding that the actual quantification is not a legal
necessity in matters of ascertainment of the gratuity, the provision of
gratuity in the assessee’s case was capable of being estimated with a
reasonable certainty and, therefore, it was not a contingent or
unascertained liability. It was an ascertained liability and the same was
outside the scope of the provisions of clause (c) of Explanation 1 to S.
115JB, warranting no addition to the ‘book profits’.

(c) The Supreme Court has held in the case of Bharat
Earth Movers (supra) as under :

“Business liability arising in the accounting year — the
deduction should be allowed although the liability may have to be quantified
and discharged at a future date. What should be certain is the incurring of
the liability. It should also be capable of being estimated with reasonable
certainty without actual quantification. Till these requirements are
satisfied, the liability is not a contingent one. The liability is in
presenti though it will be discharged at a future date. It does not make any
difference if the date on which the liability has to be discharged it is not
certain.”

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Nirav Shah

A.P. (DIR Series) Circular No. 40 dated, 10-12-2008 — Foreign Exchange Management Act, 1999 — Foreign travel — Mode of payment in Rupees.

New Page 1

Part C : RBI/FEMA

Given below are the highlights of certain RBI Circulars.

23 A.P. (DIR Series) Circular No. 40 dated,
10-12-2008 — Foreign Exchange Management Act, 1999 — Foreign travel — Mode of
payment in Rupees.

Presently, payment for purchase of foreign exchange for
travel abroad can be made in cash if the amount does not exceed Rs.50,000. Where
the amount exceeds Rs.50,000, payment can be made by a crossed cheque/Banker’s
cheque only.

This Circular provides that apart from the above modes,
payment for purchase of foreign exchange can be made by the purchaser through
his own debit card/credit card/prepaid card.

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Nirav Shah

A.P. (DIR Series) Circular No. 39, dated 8-12-2008 — Buyback/Prepayment of Foreign Currency Convertible Bonds (FCCBs)

New Page 1

Part C : RBI/FEMA

Given below are the highlights of certain RBI Circulars.

22 A.P. (DIR Series) Circular No. 39, dated
8-12-2008 — Buyback/Prepayment of Foreign Currency Convertible Bonds (FCCBs)

Guidelines applicable to ECB also apply to FCCB and
accordingly banks are permitted to allow prepayment of ECB up to USD 500 million
without prior approval of the Reserve Bank, subject to compliance with the
stipulated minimum average maturity period as applicable to the loan. Further,
existing ECB can be refinanced by raising a fresh ECB, subject to the conditions
that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity
of the original ECB is maintained. The existing provisions for prepayment and
refinancing will continue, as hitherto.

This Circular has liberalised, subject to other terms and
conditions, the procedure for premature buyback of FCCB, both under the
automatic route as well as the approval route, as under :

A. Automatic Route :

The designated AD Category-I banks may allow Indian companies
to prematurely buyback FCCB, subject to compliance with the terms and conditions
set out hereunder :

(i) The buyback value of the FCCB shall be at a minimum
discount of 15% on the book value;

(ii) The funds used for the buyback shall be out of
existing foreign currency funds held either in India (including funds held in
EEFC account) or abroad and/or out of fresh ECB raised in conformity with the
current ECB norms; and

(iii) Where the fresh ECB is co-terminus with the
outstanding maturity of the original FCCB and is for less than three years,
the all-in-cost ceiling should not exceed 6 months Libor plus 200 bps, as
applicable to short-term borrowings. In other cases, the all-in-cost for the
relevant maturity of the ECB shall apply.

B. Approval Route :

The Reserve Bank will consider proposals from Indian
companies for buyback of FCCB under the approval route, subject to compliance
with the following conditions :

(i) The buyback value of the FCCB shall be at a minimum
discount of 25% on the book value;

(ii) The funds used for the buyback shall be out of
internal accruals, and this has to be evidenced by Statutory Auditor’s and
designated AD Category-I bank’s certificate; and

(iii) The total amount of buyback shall not exceed USD 50
million of the redemption value, per company.

Applications complying with the above conditions may be
submitted, together with the supporting documents, through the designated bank
to the Central Office of RBI for necessary approval.

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Nirav Shah

A.P. (DIR Series) Circular No. 38, dated 4-12-2008 — Deferred Payment Protocols dated April 30, 1981 and December 23, 1985 between Govt. of India and erstwhile USSR.

New Page 1

Part C : RBI/FEMA

Given below are the highlights of certain RBI Circulars.

21 A.P. (DIR Series) Circular No. 38, dated
4-12-2008 — Deferred Payment Protocols dated April 30, 1981 and December 23,
1985 between Govt. of India and erstwhile USSR.

The rupee value of the special currency basket has been fixed
with effect from November 10, 2008 at Rs.62.5050 as against the earlier value of
Rs.65.4398.

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Nirav Shah

Dealers are now required to file MVAT returns online — Notification No. VAT/AMD-1007/IB/Adm-6, dated 20-12-2008.

New Page 1Part B : Indirect taxes

MVAT

20 Dealers are now required to file MVAT
returns online — Notification No. VAT/AMD-1007/IB/Adm-6, dated 20-12-2008.

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Nirav Shah

Filing of claim for refund of service tax paid under Notification No. 41/2007 — Circular No. 106/9/2008-ST, dated 11-12-2008.

New Page 1Part B : Indirect taxes

Service tax

19 Filing of claim for refund of service tax
paid under Notification No. 41/2007 — Circular No. 106/9/2008-ST, dated
11-12-2008.

Certain clarifications have been provided by the Board as
regards the refund claims of exporters, important ones being :

The invoices/challans/bills issued by supplier of taxable service containing
requisite details (name, address and registration No. of service provider, Sr.
No. and date of invoice, name and address of service receiver, description,
classification and value of taxable service and the service tax payable
thereon), are reasonable evidence that the services on which refund is being
sought are taxable service used by the exporter. Random checks are suggested
for actual payment of service tax and where the amounts involved are
substantial, post-refund audit has been suggested.

Clear instructions have been passed on to the field force to dispose of the
pending refund claims expeditiously and adhere to the timeline of 30 days
refund from the date of application of refund to the extent feasible.

Simplified procedure for refund under sanction of refund/rebate of unutilised
CENVAT credit has been made applicable to refund claims under this
Notification. This would mean an interim refund of 80% of taxes paid for
complete applications by specified exporters within 15 days of filing of the
application.

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Nirav Shah

Amendments to Notification exempting services availed by exporters — Notification No. 33/2008-Service Tax, dated 7-12-2008.

New Page 1Part B : Indirect taxes

Service tax

18 Amendments to Notification exempting
services availed by exporters — Notification No. 33/2008-Service Tax, dated
7-12-2008.

This Notification makes the following amendments :

Exemption is granted to exporters who use certain specified services for
export of goods subject to certain conditions. Condition of exporting the
goods without availing duty drawbacks of service tax paid has been removed by
the Notification.

Refund amount on services availed from clearing and forwarding agents outside
India, was restricted to actual amount of service tax paid or service tax
calculated on 2% of FOB value of export goods, whichever is less. This has
been changed to 10% instead of 2%

Additional category of services rendered by clearing and forwarding agents is
included in the list of exempt services, subject to the fulfilment of
conditions prescribed.

Consequential amendments are made in the Form for the claim.

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Nirav Shah

India-Tajikistan DTAA signed on 20th November 2008. It would be effective post date of being published in the official gazette — Press Release dated 20-11-2008.

New Page 1

17 India-Tajikistan DTAA signed on 20th
November 2008. It would be effective post date of being published in the
official gazette — Press Release dated 20-11-2008.

The
Income-tax Department has uploaded list of assessees whose income-tax refund has
been returned due to address being wrong or non-available.
Data is available from A.Y.
2003-04 till A.Y. 2007-08. The link for this is

http://www.incometaxindia.gov.in/CCIT/refundsearch.asp

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Nirav Shah

Clarification on date of filing return of income — Press Release No. BSC/SS/GN- 338, dated 22-12-2008.

New Page 1

16 Clarification on date of filing return of
income — Press Release No. BSC/SS/GN- 338, dated 22-12-2008.

There have been many instances that returns have been
electronically filed on 30 September, however, the acknowledgement number
generated electronically mentions the date of filing as 1 October. The CBDT has
issued a Press Release to clarify that in all such cases, the date of filing the
return would be considered as 30 September, being filed within due date as
prescribed and would be eligible to all the benefits thereof and consequently no
penal consequences would be attracted and interest u/s.234 would also be averted
to this effect.

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Nirav Shah

Income-tax (Eleventh Amendment) Rules, 2008 — Notification No. 107/2008, dated 11-12-2008.

New Page 1

15 Income-tax (Eleventh Amendment) Rules,
2008 — Notification No. 107/2008, dated 11-12-2008.

In the last budget, S. 35(1)(iia) had been newly introduced
to provide weighted deduction of one and one-fourth times for expenses for
outsourcing research and development to an eligible approved scientific research
company. This deduction is only available to the company outsourcing such R&D
activities and not to the company who actually undertakes these activities. A
new Rule 5F and Form No. 3CF-III have been inserted, which prescribe the
authority, guidelines, form, manner and conditions for approval u/s.35(1)(iia)
of the Act.

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Nirav Shah

Definition of ‘Charitable purpose’ u/s.2(15) of the Income-tax Act, 1961 — Circular No. 11/2008, dated 19-12-2008.

New Page 1

14 Definition of ‘Charitable purpose’
u/s.2(15) of the Income-tax Act, 1961 — Circular No. 11/2008, dated 19-12-2008.

S. 2(15) of the Income-tax Act, 1961 (‘Act’) defines
‘charitable purpose’ to include the following :

(i) Relief of the poor

(ii) Education

(iii) Medical relief, and

(iv) The advancement of any other object of general public
utility.

An entity with a charitable object of the above nature was
eligible for exemption from tax u/s.11 or alternatively u/s.10(23C) of the Act.
However, it was seen that a number of entities who were engaged in commercial
activities were also claiming exemption on the ground that such activities were
for the advancement of objects of general public utility in terms of the fourth
limb of the definition of ‘charitable purpose’. Therefore, S. 2(15) was amended
vide the Finance Act, 2008 by adding a 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 a cess or fee or any other consideration, irrespective of
the nature of use or application, or retention of the income from such
activity’.

2. The following implications arise from this amendment :

2.1 The newly inserted proviso to S. 2(15) will not apply in
respect of the first three limbs of S. 2(15), i.e., relief of the poor,
education or medical relief. Consequently, 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 commercial activities.

2.2. ‘Relief of the poor’ encompasses a wide range of objects
for the welfare of the economically and socially disadvantaged or needy. It
will, therefore, include within its ambit purposes such as relief to destitute,
orphans or the handicapped, disadvantaged women or children, small and marginal
farmers, indigent artisans or senior citizens in need of aid. Entities who have
these objects will continue to be eligible for exemption even if they
incidentally carry on a commercial activity, subject, however, to the conditions
stipulated u/s.11(4A) or the seventh proviso to S. 10(23C), which are that

(i) the business should be incidental to the attainment of
the objectives of the entity,

and

(ii) separate books of account should be maintained in
respect of such business.

Similarly, entities whose object is ‘education’ or ‘medical
relief’ would also continue to be eligible for exemption as charitable
institutions even if they incidentally carry on a commercial activity, subject
to the conditions mentioned above.

3. The newly inserted proviso to S. 2(15) will apply only to
entities whose purpose is ‘advancement of any other object of general public
utility’ i.e., the fourth limb of the definition of ‘charitable purpose’
contained in S. 2(15). Hence, such entities will not be eligible for exemption
u/s.11 or u/s.10(23C) of the Act if they carry on commercial activities. Whether
such an entity is carrying on an activity in the nature of trade, commerce or
business is a question of fact which will be decided based on the nature, scope,
extent and frequency of the activity.

3.1 There are industry and trade associations who claim
exemption from tax u/s.11 on the ground that their objects are for charitable
purpose, as these are covered under ‘any other object of general public
utility’. Under the principle of mutuality, if trading takes place between
persons who are associated together and contribute to a common fund for the
financing of some venture or object and in this respect have no dealings or
relations with any outside body, then any surplus returned to the persons
forming such association is not chargeable to tax. In such cases, there must be
complete identity between the contributors and the participants.

Therefore, where industry or trade associations claim both to
be charitable institutions as well as mutual organisations and their activities
are restricted to contributions from and participation of only their members,
these would not fall under the purview of the proviso to S. 2(15), owing to the
principle of mutuality. However, if such organisations have dealings with
non-members, their claim to be charitable organisations would now be governed by
the additional conditions stipulated in the proviso to S. 2(15).

3.2 In the final analysis, however, whether the assessee has
for its object ‘the advancement of any other object of general public utility’
is a question of fact. If such assessee is engaged in any activity in the nature
of trade, commerce or business or renders any service in relation to trade,
commerce or business, it would not be entitled to claim that its object is
charitable purpose. In such a case, the object of ‘general public utility’ will
be only a mask or a device to hide the true purpose which is trade, commerce or
business or the rendering of any service in relation to trade, commerce or
business. Each case would, therefore, be decided on its own facts and no
generalisation is possible. Assessees, who claim that their object is
‘charitable purpose’ within the meaning of S. 2(15), would be well advised to
eschew any activity which is in the nature of trade, commerce or business or the
rendering of any service in relation to any trade, commerce or business.

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Nirav Shah

The Backward Glance of a Lion (History of BCAS for the 6th Decade)

The backward glance of a lion

Prologue :

The Bombay Chartered Accountants’ Society popularly
referred to as BCAS has completed 60 years of its useful existence. The
Diamond jubilee celebrations continued throughout the year including a very
well attended conference in November 2008. The year is coming to an end and I
have been entrusted with the responsibility of penning down the history of
last 10 years, a journey from Golden era to Diamond era.

It was one of our past Presidents and a former editor of
our prestigious journal late Ajay Thakkar who had in his inimitable style
written the history of our Society for the first 40 years. I had the good
fortune to write the continuation thereof for the next 10 years and that I
have already written and it is documented in August 1998 issue of our Journal.

The world today is in a rush, haste and constantly engaged
in a fierce battle against time. Add to this time constraint, technology has
given us increased heartbeats. Our present day life is spent on utilising
scarce time, sorting out competing demands on time and redistribution of time.
Whenever we speed up, we tend to slow down and neglect the past. It is said
that improved technology saves a lot of time. But what about human reflexes ?
One who travels normally by a bullock cart or a cycle, cannot adjust to the
jet speed immediately. We all have a desire to dazzle and aspire for
adulation. It is a very precious chemical compound consumed by all without
watching or caring for side effects. In such a scenario, whether people would
get time to read history ? Add to it, budget to be presented on 3rd July 2009.
Who really has time to read BCAS history for the last decade ?

In such a scenario, there is always a bit of diffidence and
hesitation about the utility of the work for the future. However it is also
said that the importance of a work is to be judged not from the immediate
gains. Recording of history is not for those who live in the present but for
those who will be our future. It may be a guide or a source of inspiration for
future. It is with this background and a hope that I am writing this history
for the last 10 years.

How do I describe this Journey from Gold to Diamond ? Shall
I ‘review’ the events of last 10 years ? No way. ‘Review’ is too often an
official document and a matter of discussion in a meeting. I therefore refuse
to describe History as a bald review. In Western Culture, there is a system of
looking at the past ‘in retrospect’. The idea is to look at the events of the
past in a critical manner. I do not propose such a look ‘in retrospect’. I, on
the other hand, would like to refer to the past events as a backward glance of
a Lion. Our Society is a lion institution. A lion has a habit of frequently
looking back. In vernacular it is known as ‘Sinhavalokan’. There is a
forward marching army ready to attack, but a keen observant lion is required
to have a backward glance, both for guidance for the future journey as well as
protection from a possible attack from behind as a result of some laxity. This
is more native and also positive. My attempt may therefore be looked as a ‘Sinhavalokan’.

Our Presidents :

In an organisation, those who are past Presidents or past
dignitaries are more ornamental designations and they are to be invited with
apparent respect for any function. With BCAS, it is exactly the opposite and
the past presidents do play a very keen and positive role throughout the year
for a collective success of the Society. They occupy positions as active
chairmen of various Committees or as committee members and they are permanent
invitees to the Managing Committee meetings. In fact, on an issue of great
importance, the President in office would convene a meeting of the past
Presidents to ascertain their views and seek their guidance. Although the
President of the Society is elected every year, he invariably enjoys the
blessings of elders in the Society.

This process of selecting/electing a leader has been
continued as per the previous tradition in a healthy manner even in the last
decade. There are some people who could look at this as imposition by the
seniors. In fact, in some quarters, BCAS is described as a closed door joint
family and people believe that it is difficult to get an entry into the
family. I would refer to BCAS as a closely-knit family. The door is always
open to those who wish to devote time and energy for the cause of the Society.
Views differ. The outcome for the last 60 years is for everyone to see. You
cannot think of becoming an office bearer or the President of the Society,
unless you have put in an active association with the activities of the
Society at least for a period 10 years. The process of selection has always
made equitable choices to give leadership to this organisation. There could be
aspirants, but they have to follow the process.

As a result, some persons who deserved to be Presidents may
not have made it to that position. Fragrance of a flower is enjoyable; but
some flowers have the fortune of becoming a garland for the God, some do get
an opportunity to be in close proximity of women, some flowers spread their
fragrance in the nature and fade away in the evening. This is life. Late Jal
Dastur in my view deserved to be the President of the Society. He contributed
to the journal very regularly. He was one such person who would read the
journal from line to line and also point out any shortcomings. He would also
contribute papers for the prestigious RRCs of the Society. He died as a result
of a tragic accident in the year 2005. It is one of those cases of a flower
which spread its fragrance in a very different way. He lives in the hearts of
our members and the interaction with him will always remain etched in memory.

I am recording below and recognising and felicitating our
Presidents in the last decade. The BCAS respects and acknowledges their
contribution for the cause of the Society.

Nirav Shah

Extension of Advance Ruling Schemes to certain categories of Residents — Notification No. 27/2009-ST, dated 2-8-2009.

New Page 1

Part B : Indirect Taxes

Updates in VAT and Service Tax :

Service Tax UPDATE

Notifications

Extension of Advance Ruling Schemes to certain categories
of Residents — Notification No. 27/2009-ST, dated 2-8-2009.

The Advance Ruling Schemes shall be applicable to a public
sector company.

Public sector company shall have the same meaning assigned
to it in Section 2(36A) of the Income-tax Act, 1961.

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Nirav Shah

Effective date for new services — Notification No. 26/2009-ST, dated 19-8-2009.

New Page 1

Part B : Indirect Taxes

Updates in VAT and Service Tax :

Service Tax UPDATE

Notifications

Effective date for new services — Notification No.
26/2009-ST, dated 19-8-2009.

The effective date for new services introduced vide the
Finance Act, 2009 shall be 1st September, 2009.

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Nirav Shah

S. 28, S. 41 — Waiver of amount of loan taken for acquiring capital asset is not taxable under the Act.

New Page 2

2009 TIOL 707 ITAT Mum.

Cipla Investments Ltd. v. ITO

ITA No. 1996/Mum./2008

A.Y. : 2003-04. Dated : 28-8-2009

S. 28, S. 41 — Waiver of amount of loan taken for acquiring
capital asset is not taxable under the Act.

Facts :

The assessee had in 1998 received a sum of Rs.82,91,076
from its holding company towards share application money which was
subsequently transferred to unsecured loans. The amount was utilised for
investment in shares of other concerns. The shares so purchased with borrowed
funds were held as capital assets and income arising on transfer of shares was
offered for tax under the head ‘Income from Capital Gains’. In view of the
losses incurred by the assessee, the holding company had written off the
amount as unrecoverable whereas the assessee company had not written back the
said amount as cessation of liability. The AO taxed the sum of Rs.82,91,076
u/s.41(1) of the Act.

On appeal by the assessee CIT(A), the CIT(A) held that the
provisions of S. 41(1) are not attracted but he held that the assessee’s
business activity comprised investment in shares and securities and
advancement of loan to various parties on interest. He also held that the
amount was obtained in the course of business and by virtue of waiver of the
amount by the holding company the assessee had gained in the course of the
business and therefore the sum waived was held to be taxable u/s.28 of the
Act.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

(i) The CIT(A) was correct in holding that the provisions
of S. 41(1) do not apply.

(ii) In view of the assessee’s contention that it has not
done any trading activity nor shown any income as business income on
investments made the findings of the CIT(A) that the amount was received in
the course of its business are against his findings given while considering
the addition u/s.41(1).

(iii) The assessee’s business activity may comprise
investment in shares and securities, but as far as computation of income is
concerned the profit and loss in those transactions are said to be under the
head ‘Capital Gains’ but not ‘Business Income’, hence, the gain earned by the
assessee in the course of business in investment and advance of loans is in
the capital field but cannot be on the revenue field.

(iv) Remission of a debt by the holding company which was
not claimed and allowed as a deduction in any manner in any earlier previous
year could not be brought to tax either u/s. 41(1) or u/s.28(iv). There is no
benefit or perquisite arising to the assessee in this regard.

(v) The decision of the Bombay High Court in the case of
Solid Containers Ltd. v. Dy. CIT, (308 ITR 417) does not apply to the
facts of the case. The facts of the present case are similar to the decision
of the Bombay High Court in the case of Mahindra & Mahindra Ltd. v. CIT,
(261 ITR 501). The loans availed for acquiring the capital assets i.e.,
shares, when waived cannot be treated as assessable income by invoking the
provisions of S. 28.

(vi) Since the original receipt was undoubtedly capital in
nature its waiver does not have the quality of changing the same into a
revenue receipt.

(vii) On facts, the provisions of S. 28 do not apply and
the amount is not taxable.

The assessee’s appeal was allowed.

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Nirav Shah

S. 14A r.w. S. 143(3) and S. 147 — Proviso to S. 14A inserted by Finance Act, 2002 w.e.f. 11-5-2001 does not confer any jurisdiction on Assessing Officer to make reassessment u/s.147 for any assessment year beginning on or before 1-4-2001.

New Page 2

(2009) 30 SOT 461 (Mum.)

Jt. CIT v. Bombay Dyeing Mfg. Co. Ltd.

ITA Nos. 1632 and 2208 (Mum.) of 2006

A.Y. : 1998-99. Dated : 16-4-2009.

S. 14A r.w. S. 143(3) and S. 147 — Proviso to S. 14A
inserted by Finance Act, 2002 w.e.f. 11-5-2001 does not confer any
jurisdiction on Assessing Officer to make reassessment u/s.147 for any
assessment year beginning on or before 1-4-2001.

For the relevant A.Y. 1998-99, the Assessing Officer issued
notice u/s.148 on 21-4-2004, with a view to reopen the concluded assessment
and disallowed certain expenses, which the assessee had claimed as deduction,
on account of exempted income u/s.14A. On appeal, the CIT(A) upheld the order
of the Assessing Officer.

The Tribunal held that the disallowance made was contrary
to the proviso to S. 14A, as the same was not permissible under reassessment
proceedings u/s.147 in respect of the assessment year beginning on or before
1-4-2001.

The Tribunal noted as under :

1. A bare perusal of the proviso to S. 14A clearly
demonstrates the legislative intent in placing absolute embargo on the
jurisdiction of the Assessing Officer to re-assess the case u/s.147. Having
regard to the express legislative intent, as enshrined by the Parliament,
vide the Finance Act 2002, w.e.f. 11-5-2001, the Assessing Officer ceases to
have any jurisdiction to re-assess any case u/s.147. In such a statutorily
explicit and undisputed position, the question of reopening of the case or
initiation of the re-assessment proceedings u/s.147 r.w. S. 148, is
inconceivable and incomprehensible. Thus, in the absence of existence of
statutory jurisdiction, in terms of proviso to S. 14A with the Assessing
Officer, to make reassessment u/s.47 the very discussion on the validity or
otherwise of assumption of such jurisdiction, by way of issuance of the said
notice u/s.148, is irrelevant and an exercise in futility.

2. The CBDT issued Circular No. 11 of 2001, dated
23-7-2001, and placed restrictions on reopening of completed assessments, on
account of provisions of S. 14A. The said circular clearly demonstrates the
legislative intent in interpreting the newly inserted proviso to S. 14A.

3. The Circulars issued by the CBDT are binding on the
Assessing Officer, even where the same are not in consonance with the
meaning of the provisions, if they are benevolent and issued to mitigate the
hardship of the assessee. It is pertinent to add that the Assessing Officer
had ignored the said Circular of the Board and judicial mandate of the Apex
Court as contained in the various decisions and initiated reassessment
proceedings, in the instant case, despite there being express exclusion of
such jurisdiction of the Assessing Officer by the proviso to S. 14A.

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Nirav Shah

S. 234B r.w. S. 195 and S. 209 — No interest can be levied where advance tax is not paid in respect of income on which tax is not deducted at source by payers who were obliged to deduct the same.

New Page 2

(2009) 30 SOT 248 (Delhi)

Turner Broadcasting System Asia Pacific, Inc., America
v.
Asst. DIT

ITA Nos. 724, 728 and 733 (Delhi) of 2008

A.Ys. : 2001-02 & 2004-05

Dated : 13-3-2009

S. 234B r.w. S. 195 and S. 209 — No interest can be levied
where advance tax is not paid in respect of income on which tax is not
deducted at source by payers who were obliged to deduct the same.

During the relevant assessment years, various parties
advertising their products paid consideration to the Indian agent of the
assessee, who, in turn, remitted such amounts to the assessee. Neither the
advertiser nor the agent deducted tax at source before payment or repatriation
of money, respectively, as provided u/s.195. The AO levied interest upon the
assessee u/s.234B for non-payment of advance tax. The CIT(A) upheld the levy
of interest.

The Tribunal, applying the decisions in the following
cases, deleted the interest levied u/s.234B :

(a) CIT v. Madras Fertilizers Ltd., (1984) 49 ITR
703 (Mad.)

(b) CIT v. Ranoli Investment (P) Ltd., (1999) 235
ITR 433 (Guj.)

(c) CIT v. Sedco Forex International Drilling Co.
Ltd., (2003) 264 ITR 320/(2004) 134 Taxman 109 (Uttaranchal)

The Tribunal noted as under :

1. Since the assessee was a non-resident person, the
amounts paid to their agent in India by the Indian advertisers were liable
for tax deduction u/s.195. The tax had not been so deducted and,
consequently, not paid to the credit of the Government.

2. As provided in S. 209, while computing the amount of
advance tax, the tax deductible at source was to be reduced from the total
tax liability.

3. In the assessee’s case the advance tax payable was Nil
after considering the amount of tax deductible at source u/s.195. It was not
the assessee’s fault, if no tax was deducted by the payers.

4. Since no advance tax was payable as per calculations
in terms of S. 209 and S. 195, there would be no liability to pay interest
u/s.234B. The charge of interest will follow only if there is a default of
non-payment of advance tax. In the absence of default, interest cannot be
charged.

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Nirav Shah

S. 41(1) — Limitation of time is not a determining factor in matters relating to remission or cessation of liabilities.

New Page 2

(2009) 30 SOT 31 (Mum.)

DSA Engineers (Bombay) v. ITO

ITA No. 5354 (Mum.) of 2007

A.Y. : 2003-04. Dated : 12-3-2009

S. 41(1) — Limitation of time is not a determining factor
in matters relating to remission or cessation of liabilities.

For the relevant assessment year, in respect of certain
creditors appearing in the Balance Sheet of the assessee, the AO found that
there was neither a pending litigation in existence nor any correspondence
from the parties demanding for clearing the liabilities and held that the
assessee had not proved that it was yet to make the payment of the said
outstanding balances to the creditors, that it had the intention to make the
said payment, and that the liability had not ceased. He, accordingly, invoked
the provisions of S. 41(1) and deemed the liabilities of the creditors as the
profits and gains of business or profession and treated them as the income of
the year. The CIT(A) upheld the order of the AO.

The Tribunal set aside the orders of the lower authorities.
The Tribunal noted as under :

2. From the rival positions of both parties as well as
the provisions of S. 41(1) and the legal propositions of various judicial
fora, the following issues have emerged :

the
issue of limitation of period of three years

the
issue of discharge of onus when the assessee had not unilaterally written
them off

the
issue of unilateral write-off for the assessments of the post-amendment
period, i.e., after 1-4-1997.

3. Regarding the issue of limitation of three years, it
was noticed that there is no such limitation provided in S. 41(1) or in its
Explanation 1. In the case of Dy. CIT v. Himalaya Refrigeration & Air
Conditioning Co. (P.) Ltd., (2003) 91 TTJ (Delhi) 296, the Tribunal held
that in the absence of any evidence of cessation of liabilities, mere fact
that the liabilities were outstanding for more than three years and were
time barred, was not sufficient ground for addition u/s.41(1). The
limitation of time is not a determining factor in the matters relating to
remission or cessation of liabilities.

4. Regarding the issue of discharging of onus, it was
held that when the assessee continues to reflect or record the liabilities
as still payable to the creditors and decides not to write them off
unilaterally, the Assessing Officer has higher levels of responsibility and,
hence, he has to establish with evidence that the said book entries are
wrong or not bona fide and, thus, the Assessing Officer is under the
obligation to discharge the onus in this regard. The onus is on the revenue
to prove that the liabilities have ceased finally and there is no
possibility of their revival.

5. Regarding the issue of unilateral write off for the
assessments of the post amendment period, i.e. 1-4-1997, it was
noticed that Explanation 1 was brought into statute by the Finance (No. 2)
Act, 1996 with effect from 1-4-1997. Mere unilateral transfer entry in the
accounts does not confer any benefit to the assessee and, therefore, the
revenue cannot invoke S. 41(1). The assessee’s case, being one where the
alleged liabilities were not unilaterally written off, the requirements of
the Explanation were not met and, therefore, it could not be considered as
the case of obtaining of the benefit during the year under consideration.

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Nirav Shah

The Government has signed an agreement with Permanent Court of Arbitration (PCA), the Hague, to open its regional facility in India — Information provided by Shri H. R. Bhardwaj, Minister of Law and Justice, in the Lok Sabha.

New Page 1

Full texts of relevant Notifications, Circulars and Forms are
available on the BCAS website : www.bcasonline.org

Part D : Miscellaneous

24 The Government has signed an agreement
with Permanent Court of Arbitration (PCA), the Hague, to open its regional
facility in India — Information provided by Shri H. R. Bhardwaj, Minister of Law
and Justice, in the Lok Sabha.

This would provide more frequent recourse to international
arbitration as a means of settling disputes since the cost would reduce
considerably. This would apply to disputes between two states as well as foreign
companies having some concern in India or vice versa. It would also open
newer avenues of practice for legal fraternity.

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Nirav Shah

LLP Act has received the Presidential Assent and has been gazetted on 9 January 2009.

New Page 1

Part D :
Miscellaneous

38 LLP Act has received the Presidential
Assent and has been gazetted on 9 January 2009.

It will come into force from a date to be notified.

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Nirav Shah

Exemption to specific services provided to GTA —Notification No. 1/2009 — Service Tax, dated 5-1-2009.

New Page 1

Part B :
INDIRECT TAXES

Service Tax Update

37 Exemption to specific services provided
to GTA —Notification No. 1/2009 — Service Tax, dated 5-1-2009.

This Notification supersedes earlier Notification No.
29/2008-Service Tax, dated 29-6-2008, exempting taxable services provided by
following persons :

Clearing and forwarding agent

Manpower recruitment or supply agency

Cargo handling agency

Storage or warehouse keeper

In relation to :

business auxiliary service

packaging activity

support services of business or commerce

supply of tangible goods.

To a goods transport agency, in relation to transport of
goods by road, subject to the condition that the invoice issued by such service
provider, for providing services should mention the name and address of the
goods transport agency and also the name and date of the consignment note, by
whatever name called.

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Nirav Shah

E-filing of Returns — Notification No. VAT/AMD-1007/IB/Adm-6, dated 20-12-2008.

New Page 1

Part B :
INDIRECT TAXES

MVAT Update

MVAT Notifications

36 E-filing of Returns — Notification No.
VAT/AMD-1007/IB/Adm-6, dated 20-12-2008.

E-filing of MVAT returns made applicable to dealers required
to file half-yearly returns under sub-clause (i) of clause (a), clauses (b), (c)
and (d) of sub-rule (4) of Rule 17 in respect of the period starting on or after
1st October 2008 and deemed dealers required to file annual return under
sub-clause (ii) of clause (a) of sub-rule (4) of Rule 17 in respect of the
period starting on or after 1st April 2008.

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Nirav Shah

More items added to medical devices — Notification No. VAT.1508/CR-5/Taxation-1 dated 27-11-2008

New Page 1

Part B :
INDIRECT TAXES

MVAT Update

MVAT Notifications

35 More items added to medical devices —
Notification No. VAT.1508/CR-5/Taxation-1 dated 27-11-2008.

This Notification amends the Notification for medical devices
No. VAT-1505/CR-233/Taxation-1 issued on 23-11-2005 by adding some more items to
the list of medical devices under sub-entry (8) of entry 107 of Schedule ‘C’.

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Nirav Shah

Composition rate for a drug retailer —Notification No. VAT/1507/CR-55/Taxation-1, dated 27-11-2008

New Page 1

Part B :
INDIRECT TAXES

MVAT Update

MVAT Notifications

34 Composition rate for a drug retailer
—Notification No. VAT/1507/CR-55/Taxation-1, dated 27-11-2008.

Composition rate of 6% is notified for drug retailers. This
rate is applicable for retailers whose at least ¾th of the turnover of sales of
goods is of drugs covered under Entries 29 and 29A of Schedule C appended to the
MVAT Act, 2002.

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Nirav Shah

Trade Circular 1T of 2009, dated 12-1-2009

New Page 1

Part B :
INDIRECT TAXES

MVAT Update

Mandatory filing of E-Returns.

33
Trade Circular 1T of 2009, dated 12-1-2009 :

It has been decided to extend the provisions of filing of
electronic returns to all the registered dealers in Maharashtra under MVAT and
CST Acts from the 1st October, 2008 onwards. Thus, now the filing of e-return
becomes mandatory for all the dealers for the period ending March, 2009 onwards.

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Nirav Shah

Change in procedure for payments in the absence of TIN.

New Page 1

Part B :
INDIRECT TAXES

MVAT Update

MVAT Circulars

32 Change in procedure for payments in the
absence of TIN.

Trade Circular 42T of 2008, dated 26-12-2008 :

To avoid hardships in the absence of TINs, w.e.f. 1st January
2009 applicants seeking registration, voluntary or non-voluntary, would pay fees
and deposit by separate DDs. Fee of Rs.25 for registration under the C.S.T. Act
is to be paid in the form of court fee stamps.

Unregistered employers deducting tax at source, on payments
made to contractors, who are required to file returns in Form No. 405 shall pay
the TDS amount by DDs only.

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Nirav Shah

VAT Audit Report for the year 2007-08 can be in Old Form or New Form.

New Page 1

Part B :
INDIRECT TAXES

MVAT Update

MVAT Circulars

31 VAT Audit Report for the year 2007-08 can
be in Old Form or New Form.

Trade Circular 41T of 2008 dated 18-12-2008 :

Dealers have been allowed the option to file Form-704 in Old
Form or in New Form in respect of the (financial) year 2007-08. It has been
further clarified that even after 10th November, 2008 the Old Form No. 704 can
be filed in respect of the said year and that option is only for the year
2007-08. The Circular emphasises that the due date for filing Form 704 for the
year 2007-08, which is 31st January, 2009 will not be extended in any
circumstances. The Circular mentions that in the context of several important
issues raised by the WIRC of ICAI and other professional organisations regarding
the New Form 704 seeking clarifications, the required clarifications will be
issued separately.

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Nirav Shah

TDS time limit under Rule 37A revised — Income-tax (Fourth Amendment) Rules, 2009 dated 21-1-2009.

New Page 1

Part A : DIRECT TAXES

30 TDS time limit under Rule 37A revised —
Income-tax (Fourth Amendment) Rules, 2009 dated 21-1-2009.

The CBDT has amended Rule 37A pertaining to TDS returns for
non-residents. The TDS return, in case of tax deducted at source from payments
to non-residents, shall now be furnished on or before the 15th July, the 15th
October, the 15th January in respect of the first three quarters of the
financial year, and, on or before the 15th June, for the last quarter of the
financial year instead of the existing time-limit of fourteen days from the end
of each quarter.

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Nirav Shah

Depreciation on new commercial vehicles @ 50% : Income-tax (Third Amendment) Rules, 2009, dated 19-1-2009.

New Page 1

Part A : DIRECT TAXES

29 Depreciation on new commercial vehicles @
50% : Income-tax (Third Amendment) Rules, 2009, dated 19-1-2009.

The CBDT has provided accelerated depreciation @ 50% to new
commercial vehicles which are acquired on or after 1-1-2009, but before
1-4-2009, and put to use before 1-4-2009.

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Nirav Shah

DTAA between India and Tajikistan notified — Notification No. 58/2009-FT and TR-II [F.No. 503/10/95-FT & TR-II], dated 16-7-2009.

New Page 1

DTAA between India and Tajikistan notified — Notification
No. 58/2009-FT and TR-II [F.No. 503/10/95-FT & TR-II], dated 16-7-2009.

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Nirav Shah

Extension of time limit to file ITR V in case E-return filed without digital signature — Press Release, dated 13-8-2009.

New Page 1

Extension of time limit to file ITR V in case E-return
filed without digital signature — Press Release, dated 13-8-2009.

In case an E-return has been filed which has not been
digitally signed, the ITR V needs to be sent via Ordinary Post to Bangalore
office within 30 days from the date of uploading such return. This time limit
of 30 days has been extended till 30 September 2009 or within 60 days from the
date of uploading, whichever is later.

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Nirav Shah

Finance Bill (No. 2) of 2009 gets Presidential Assent on 19 August 2009 — [Act No. 33 of 2009]

New Page 1

Finance Bill (No. 2) of 2009 gets Presidential Assent on 19
August 2009 — [Act No. 33 of 2009]

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Nirav Shah

Sanction and disbursement of Industrial Promotion Subsidy (IPS) to Mega Projects and Non-Mega Projects under PSI-2001 & PSI-2007, Reconciliation of IPS by Sales Tax Department & Procedure to be followed by the Department.

New Page 2

Part B : INDIRECT TAXES

51 Sanction and disbursement of Industrial
Promotion Subsidy (IPS) to Mega Projects and Non-Mega Projects under PSI-2001 &
PSI-2007, Reconciliation of IPS by Sales Tax Department & Procedure to be
followed by the Department.

Trade Circular 8T of 2009, dated 7-2-2009 :

In this Circular detailed procedure has been laid down for sanction and
disbursement of the IPS as per two Government Resolutions No.
PSI-2108/CR-36/Ind-8, dated the 3rd December 2008 and No.
PSI-2108/CR-s278/Ind-8, dated the 4th December 2008.

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Nirav Shah

Take evidences to the bank while making payments.

New Page 2

Part B : INDIRECT TAXES

50 Take evidences to the bank while making
payments.

Trade Circular 7T of 2009, dated 5-2-2009 :

Dealers should carry photocopies of TIN Certificate/TIN
Allotment Letter/E-services Enrolment Acknowledgment/Certificate of Registration
/Certificate of Enrolment/Courtesy Letter/Any Order issued by the Department
along with the returns/challans henceforth for verifying the relevant details
before recording entries.

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Nirav Shah

Mandatory Filing of E-returns.

New Page 2

Part B : INDIRECT TAXES

49 Mandatory Filing of E-returns.

Trade Circular 6T of 2009, dated 30-1-2009 :

It has been now made mandatory for all dealers to file VAT
returns electronically. The Commissioner has advised dealers to file fresh,
revised returns for the previous defaulting period in the electronic form.

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Nirav Shah

Tax Treatment of Goods sent to other States.

New Page 2

Part B : INDIRECT TAXES

48 Tax Treatment of Goods sent to other
States.

Trade Circular 5T of 2009, dated 29-1-2009 :

It appears that the question whether S. 6A deals only with transactions
between agent and principal or whether it deals with transactions which are on
a principal-to-principal basis was not raised before the decision dated 17th
August 2007 in the case of M/s. Ambica Steels Ltd. v. the State of Uttar
Pradesh (All.) It is, therefore, decided that in such cases, declaration
in Form F will be issued as per normal procedure.

There is no change in the views expressed in Trade Cir. 16T of 2007, dated
20th February 2007 that S. 6A will have no application as regards transactions
on principal-to-principal basis.

In the aforesaid Trade Circular dated 20th February 2007, a view has been
taken that when goods are sent to another State for job work or for
manufacturing, etc., the transaction will normally be on a principal to
principal basis with an independent operator and not on a principal to agent
basis.

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Nirav Shah

Enrolment for E-services.

New Page 2

Part B : INDIRECT TAXES

47 Enrolment for E-services.

Trade Circular 4T of 2009, dated 23-1-2009 :

E-enrolment has been made mandatory for all dealers.

Copy of the acknowledgement of E-enrolment generated by computer system will
have to be submitted to the Department.

Procedure for E-enrolment is explained in this Circular.

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Nirav Shah

Submission of Audit Report — Form No. 704 for the year 2007-08 extended up to 2-3-2009.

New Page 2

Part B : INDIRECT TAXES

MVAT CIRCULARS

46 Submission of Audit Report — Form No. 704
for the year 2007-08 extended up to 2-3-2009.

Trade Circular 3T of 2009, dated 23-1-2009 :

Extension is given for submission of Audit Report in respect of the period
2007-08 up to 2nd March 2009 with a condition that the dealer will have to
submit copy of an acknowledgement of e-enrolment along with Audit Report.

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Nirav Shah

Procedure for online submissions for the statutory Forms C/F/H/E I/E II under the CST Act, 1956 : Trade Circular 2T of 2009, dated 23-1-2009 :

New Page 2

Part B : INDIRECT TAXES

MVAT CIRCULARS

45 Procedure for online submissions for the
statutory Forms C/F/H/E I/E II under the CST Act, 1956 : Trade Circular 2T of
2009, dated 23-1-2009 :

Online applications for CST Declarations C/F/H/E I/E II made applicable
to all locations of Central Repository Offices in the State from 2nd February
2009.

The new procedure provides time-bound programme for decisions of approval,
rejection, etc. via e-mail or sms within 7 working days and thereafter the
dealer should get declaration in another 10 days by post or courier. The new
procedure is available for the declarations pertaining to period from 1-4-2008
onward.

Applications for prior periods would be administered as per the existing
manual system and such application shall be made prior to 31-3-2009.
Declarations for prior periods shall not be issued after 31-3-2009.

No change in the procedure for cancellation, rectification and issuance of
duplicate declarations.

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Nirav Shah

Adjudication of cases by Chief Commissioners Central Excise — Notification No. 6/2009 — Service Tax, dated 30-1-2009.

New Page 2

Part B : INDIRECT TAXES

SERVICE TAX UPDATE

44 Adjudication of cases by Chief
Commissioners Central Excise — Notification No. 6/2009 — Service Tax, dated
30-1-2009.

The powers exercisable by the Central Board of Excise and
Customs under the provisions of S. 83A read with the Notification of the
Government of India in the Ministry of Finance (Department of Revenue) No.
16/2007-ST, dated 19th April 2007 [G.S.R. No. 303(E) dated the 19th April 2007],
shall also be exercised by the Chief Commissioner of Central Excise for the
purpose of assigning the adjudication of cases, under the provisions of the said
Finance Act or rules made thereunder, within his jurisdiction.

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Nirav Shah

Service Tax Return Preparer Scheme —Notification No. 7/2009 — Service Tax dated 3-2-2009.

New Page 2

Part B : INDIRECT TAXES

SERVICE TAX UPDATE

43 Service Tax Return Preparer Scheme
—Notification No. 7/2009 — Service Tax dated 3-2-2009.

Service Tax Preparer Scheme has been launched by this Notification.

An individual who has successfully completed education up to senior secondary
level, under 10+2 education system and above the age of 35 years on the 1st
October immediately preceding the day on which applications are invited and
Income Tax Return Preparer shall be eligible to become a Service Tax Return
Preparer.

The age restriction shall not apply to any person who has
superannuated/retired from the Department of Customs and Central Excise. This
Notification also gives the Scheme details.

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