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Year: 2010

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

 

In Part-I of the Article published in November 2009, 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 and third parts of the Article published
in December 2009 and January 2010, we have analysed in brief some of the Indian
judicial decisions dealing with the subject. In the fourth part of the Article,
we are analysing in brief, the remaining Indian judicial decisions as of date
dealing with the subject.



A.
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. A gist of some of the
relevant cases was given in Parts II & III of the Article published in the
December, 2009 and January 2010 issues of BCAJ. A gist of the remaining relevant
cases as of date is given below. It is important to note that in the gist of
cases given below, we have only considered and analysed the aspect relating to
the ‘Make Available’ concept. Other aspects relating to royalty, PE, etc. have
not been discussed or analysed here. For this, the reader should consider
and refer to the text of
the decisions.

Sr.   No.


Decisions/Citation/Tax  Treaty

Gist of the
decision relating to              concept of ‘Make Available’ aspect

32.  

Raymond Ltd.
vs. DCIT

 

[2003] 86 ITD 791 (Mum.)

 

 

DTAA – UK

  

Nature of services and
payments :

 

Payment of management
commission, underwriting commission and selling commission in respect of GDR
issues.

 

Issue(s) :

 

 

(i) Is the selling
commission, underwriting commission and management commission paid by the
assessee to Merrill Lynch “fees for technical services”; and whether the
same is chargeable as income in India with reference to the provisions of
Section 9(1)(vii) of the Income-tax Act and the provisions of the double
tax agreement with UK?

(ii) Assuming that the
services fall within the above mentioned Section, can they be considered
as “technical services” within the meaning of the relevant article in the
Double Tax Agreement with UK?

 

Held :

 

Whereas Section 9(1)(vii)
stops with the ‘rendering’ of technical services, the DTA goes further and
qualifies such rendering of services with words to the effect that the
services should also make available technical knowledge, experience, skills,
etc., to the person utilizing the services. The ‘making available’ in the
DTA refers to the stage subsequent to the ‘making use of’ stage. The
qualifying word is ‘which’ and the use of this relative pronoun as a
conjunction is to denote some additional function the ‘rendering of
services’ must fulfil. And that is that it should also ‘make available’
technical knowledge, experience, skill, etc. Thus, the normal, plain and
grammatical implication of the language employed 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 technical knowledge, experience,
skills, etc., from the person rendering the services to the person utilising
the same is contemplated in 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, skills, etc.

In the instant case, after
the services of the managers came to an end, the assessee-company was left
with no technical knowledge, experience, skill, etc., and still continued to
manufacture cement, suitings, etc., as in the past.

For the above reasons, the
DTA with UK applied to the instant case, and no technical knowledge,
experience, skills, know-how or process, etc., was ‘made available ‘to the
assessee-company by the non-resident managers to the GDR issue within the
meaning of article 13.4(c).

Since the DTA was held
applicable then, no part of the fees for ‘managerial services’ could be
considered as fees for technical services, since the word ‘managerial’ does
not find a place in the article concerned. Therefore, the ‘management
commission’ could not be charged to tax in the hands of MLI, to whom the
same was paid. MLI, to whom the same was paid. The assessee-company, consequently, was under no obligation to deduct tax under Section 195.As regards the ‘underwriting commission’, since no technical knowledge, etc., was made available to the assessee company by the rendering of the underwriting services, the definition in the DTA was not applicable. As regards selling concession or selling commission relying on Circular No. 786 dated 7-2-2000, it was contended that it was not income in the hands of the recipient. In view of the import of words ‘make available’ appearing in the DTA with UK, it was unnecessary to dilate on the circular further. Therefore, neither the management commission nor the underwriting commission or even the selling commission/concession would amount to fees for technical services within the meaning of the DTA with UK and, consequently, there was no obligation on the part of the assessee-company to deduct tax under Section 195.

 

[ 2002]
82 ITD 239

Payment
for installation and commissioning of machines purchased

(Kol.)

DTAA –
France

Issue(s)

 

 

Whether
such payments for installation and commissioning are liable for

 

TDS u/s
195?

 

Held

 

Installation
and commissioning of machineries constituted services that

 

were
ancillary and subsidiary, as well as inextricably and essentially

 

linked
to the sale of the machines. Therefore, these services, rendered to

 

the
assessee, were not covered by the scope of ‘fees for technical services’

 

referred
to in Article 13 of the India France DTAA. Hence, installation

 

and
commissioning fees, on the facts of the present case, were not exigible

 

to tax
in India.

 

Note

 

It is
important to keep in mind that contrary to the popular belief, the

 

ITC’s
case does not deal with the ‘make available’ clause of the treaty,

 

and
instead deals with the importance and relevance of the Protocol to the

 

India
French Treaty for application of the restricted meaning of FTS.

 

 

34.   Pro-Quip Corpora-

Nature of services and payments

tion
vs. CIT (AAR)

Payment
for supply of engineering drawings and designs for the setting

[2002]
255 ITR 0354

up of
the plant.

DTAA –
US

Issue(s) Involved

 

 

Whether
the applicant is liable to tax on the amount received towards

 

consideration
for the sale of engineering drawings and designs received.

 

Whether
the payment is to be treated as fee for included service covered

 

by
clause (b) paragraph 4 of Article 12.

 

Held

 

The facts of this case are very similar to the
facts of the first part of ex–

 

ample 8
given in the MoU to the India-US Tax Treaty. The engineering

 

services
were being rendered as a part of the purchase agreement as a

 

composite
whole. This service was essentially linked with the sale of

 

drawings
and designs. It is not an agreement for long-term service to be

 

rendered
after the sale of the machinery. The case is a case of out and

 

out
sale of property.

 

The AAR
held that the payments made to the American company will

 

not
fall within the ambit of Article 12 of the Indo-US Treaty for Double

 

Taxation.

 

 

 

 

 

 

 

 

 

 

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

 

No.

Treaty

 

 

 

 

 

 

 

 

 

35 .

Sahara
Airlines Ltd.

Nature of services and payments

 

 

vs. Dy
CIT

Payment
for providing training to the crew members

 

 

[2002]
83 ITD 11

 

 

 

 

 

 

(Delhi)

Issue(s)

 

 

DTAA –
UK

 

 

 

 

 

 

 

 

Whether such payments amounted to fee for
technical services as defined

 

 

 

 

in
Explanation 2 of Section 9(1)(vii) of the Act, as well as Article 13(4) of

 

 

 

 

DTAA
with UK.

 

 

 

 

Held

 

 

 

 

The
ITAT was of the view that it was an agreement for training of asses-

 

 

 

 

see’s
personnel and not for mere use of simulator. Training can be given

 

 

 

 

to the
trainees either directly or through customer’s instructors. Clause 14

 

 

 

 

of the
agreement clearly provides for free training to assessee’s instructors,

 

 

 

 

who, in
turn, had provided the same to its personnel. Since training to

 

 

 

 

assessee’s
instructors was free of charge, the payment in the invoice was

 

 

 

 

shown
for use of simulator alone but that does not mean that technical

 

 

 

 

knowledge
was not provided by the UK company. The simulator is a

 

 

 

 

highly
sophisticated machine which cannot be operated unless requisite

 

 

 

 

technical
knowledge is given to the user of the machine. Therefore, we

 

 

 

 

are
unable to accept the main contention of assessee’s counsel that no

 

 

 

 

technical knowledge was given. Apart from
this, flight training personnel

 

 

 

 

are experts
and experienced persons, who have shared their experiences

 

 

 

 

with
the assessee’s instructors and, therefore, on this account also, it would

 

 

 

 

fall within the definition of technical
services as provided in Article 13

 

 

 

 

of DTAA
with UK, in as much as it not only includes making available

 

 

 

 

of
technical knowledge but also the experience. Therefore, it is held that

 

 

 

 

the
agreement was for providing of training to assessee’s personnel and

 

 

 

 

consequently,
the payment for the same was fee for technical services and,

 

 

 

 

therefore,
chargeable to tax in the hands of the recipient under section 9(1)

 

 

 

 

(vii)
of the Act as well as under the provisions of DTAA with UK.

 

 

 

 

 

 

 

36.

P. No.
28 of 1999 In

Nature of services and payments

 

 

re vs.
(AAR)

Payment
for services to make available executive personnel for develop-

 

 

[2000]
242 ITR 0208

 

 

ment of general management, finance and
purchasing, service, marketing

 

 

DTAA –
USA

 

 

and
assembly/manufacturing activities under the management provision

 

 

 

 

agreement.

 

 

 

 

Issue(s)

 

 

 

 

Whether
any part of the amount invoiced by the foreign company in terms

 

 

 

 

of the
management provision agreement is liable to tax in India.

 

 

 

 

Held

 

 

 

 

These
clauses envisage transfer of information by “XYZ” [Foreign Com-

 

 

 

 

pany]
to “AB” [Indian JV Company] (whether independently of or through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

 

 

 

 

 

 

 

 

 

 

 

the
personnel employed) and also confer on “AB” the right to use and

 

 

 

disclose
the technology and knowledge developed by the employees in

 

 

 

the
course of their work. Reference has also been made to the letter of

 

 

 

approval
of the Government of India which shows that the government

 

 

 

was
informed that these personnel were being deputed for a period of

 

 

 

up to
three years for providing management and technical service to the

 

 

 

joint
venture, so that the services of these employees could eventually

 

 

 

be replaced by Indian personnel. It is,
therefore, difficult to accept the

 

 

 

plea
that no technology, information, know-how or processes were made

 

 

 

available
to “AB” by “ XYZ”.

 

 

 

The AAR
concluded that the services of the nominees of “XYZ” are “mana-

 

 

 

gerial”
and not “technical or consultancy” services within the meaning of

 

 

 

Article 12, and in the result, the Authority
finds, on the facts available to

 

 

 

it, that the services of the five nominees of “XYZ”
are not covered by the

 

 

 

expression
“included services” in Article 12.

 

 

 

 

 

37.

Bovis  Lend
Lease

Nature of services and payments

 

(India)
Pvt. Ltd. vs.

Assistance
with respect to administrative matters between the appellant

 

ITO(IT), Bangalore

 

 

 

and
LLAH [Foreign Company based in Singapore]; Assistance with respect

 

2009-TIOL-666-ITAT-

to personal matters, legal matters, finance
and accounting information,

 

marketing
support, insurance matters; Assistance in operation of the busi-

 

Bang

 

ness;
Treasury Management; Information Technology.

 

 

 

 

DTAA –
Singapore

Issue(s)

 

 

 

 

 

 

(a)  Whether the reimbursements made to the
foreign company be not

 

 

 

 

considered
as fees for technical services or income chargeable to tax

 

 

 

 

in
India;

 

 

 

(b) At
any rate, since the in situs of the services was outside India, no

 

 

 

 

part of
the payment be held as deemed to accrue or arise in India.

 

 

 

Held

 

 

 

The
ITAT, in respect of the payment to be considered as reimbursement

 

 

of
expenses, laid down the following tests:

 

 

 

a)

The actual liability to pay should be of the
person who reimburses

 

 

 

 

the
money to the original payer.

 

 

 

b)

The liability ought to have been clearly
determined. It should not be

 

 

 

 

an
approximate or varying amount.

 

 

 

c)

The liability ought to have crystallized. In
other words, payments

 

 

 

 

which
were never required to be done, but were done just to avoid

 

 

 

 

a
potential problem, may not qualify.

 

 

 

d)

There should be a clear ascertainable
relationship between the

 

 

 

 

paying
and reimbursing parties. Thus, an alleged reimbursement by

 

 

 

 

an
unconnected person may not qualify.

 

 

 

e)

The
payment should first be made by somebody else whose liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

 

No.

Treaty

 

 

 

 

 

 

 

 

 

 

 

 

it never
was, and the repayment should then follow to that person to

 

 

 

 

square
off the account.

 

 

 

 

f)  There should be clearly three parties
existing: the payer, the payee

 

 

 

 

and the
reimbursing party.

 

 

 

 

The
transactions tested, fail to meet the criteria that would enable the

 

 

 

 

payments
to be treated as reimbursements.

 

 

 

 

The
dictionary meaning of the word ‘make available’ is ‘able to use or

 

 

 

 

obtain’.
It does not mean that the recipient should equally use the tech-

 

 

 

 

nology.
In a case like this where a group owns a number of companies

 

 

 

 

and
certain companies provide services to the companies belonging to

 

 

 

 

the
group, then it becomes the policy of the group to get services of that

 

 

 

 

company
though other group companies might be able to perform the same

 

 

 

 

functions
on the basis of the services already provided to them. Therefore,

 

 

 

 

in the
instant case, Section 195 will b e applicable because reimbursement

 

 

 

 

of
expenses relates to the fee for technical services. Hence, we hold that

 

 

 

 

the authorities below were justified in
holding that tax was not required

 

 

 

 

to be
deducted on the ground that the appellant company reimburse the

 

 

 

 

expenses,
as the amounts payable were to be taxed in the hands of the

 

 

 

 

recipient
as fees for technical services as per DTAA.

 

 

 

 

The
jurisdictional High Court, in the case of Jindal Thermal Power Company

 

 

 

 

vs.
DCIT, had an occasion to consider the taxability of income deeming to

 

 

 

 

accrual
and arising in India as mentioned in section 9(1)(vii). The Hon’ble

 

 

 

 

High
Court has considered the explanation introduced in Section 9(2) of

 

 

 

 

the I T
Act. Before the Hon’ble High Court it was argued that the ratio of

 

 

 

 

Supreme
Court in Ishikawajma Harima Heavy Industries Ltd. vs Director

 

 

 

 

of
Income Tax 288 ITR 408 regarding twin criteria of rendering of services

 

 

 

 

and its
utilization in India has not been done away with by the incorpo-

 

 

 

 

ration
of Explanation to section 9(2). It was also argued that the objects

 

 

 

 

and
reasons stated in introducing explanations are only external aids, to

 

 

 

 

be used
only when the text of the law is ambiguous. After considering

 

 

 

 

the
submission, the Hon’ble High Court held that “however, in respect

 

 

 

 

of
technical services, the rendering of services being purely off-shore and

 

 

 

 

outside
India, the remuneration, whatever paid towards technical services,

 

 

 

 

does
not attract tax liability”. In the instant case, from the perusal of the

 

 

 

 

certificate from the auditor, it is clear that
services have been provided

 

 

 

 

offshore.
Hence, in view of the decision of the jurisdictional High Court,

 

 

 

 

the
appellant will not incur any liability to deduct tax towards the amount

 

 

 

 

paid in
respect of the services. Hence, it is held that the appellant was not

 

 

 

 

required
to deduct tax at source in respect of the payments.

 

 

 

 

 

38.

Federation of Indian

Nature of services and payments

 

 

Chambers
of  Com-

Non-resident
service provider acting as a facilitator and technical consultant

 

 

merce and Industries

 

 

(FICCI) in re AAR

for the purpose of commercialisation of
identified technologies; screening

 

 

2009-TIOL-30-ARA-IT

and
assessment of technologies by deploying the expertise and resources

 

 

and
preparing technical reports including market analyses.

 

 

DTAA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

 

 

 

 

 

 

 

 

 

 

Issue(s)

 

 

 

Whether
on the facts and circumstances of the case, the non-resident is

 

 

 

not
liable to pay income tax in India out of the payments received by it

 

 

 

from
FICCI in instalments.

 

 

 

Held

 

 

 

Explaining
broadly the principles involved in technology commercializa-

 

 

 

tion
and making the participants familiar with various aspects of the

 

 

 

programme,
does not prima facie amount to making available technical

 

 

 

knowledge
or expertise possessed by the instructors of University of Texas

 

 

 

[UT].
At any rate, it seems to be merely incidental to the implementation

 

 

 

of the programme which does not fall within
the definition of ‘included

 

 

 

services’.
It is not possible to split up this segment of service and appor-

 

 

 

tion a part of consideration received to ‘training’,
even if it has the flavour

 

 

 

of ‘included
services’.

 

 

 

Expression
of opinion, formulation of recommendation, and rendering

 

 

 

assistance
to DRDO in connection with ATAC programmes do not really

 

 

 

make
available the technical knowledge or know-how to DRDO, except

 

 

 

perhaps
in an incidental or indirect manner. UT’s services and the con-

 

 

 

sideration
received, therefore, cannot be brought within the ambit of Art

 

 

 

12.4 of
DTAA.

 

 

 

 

 

39.

International
Tire

Nature of services and payments

 

Engineering

Granting
a perpetual irrevocable right to use the know-how as well as to

 

Resources LLC. in

 

Re AAR

transfer
the ownership in tread and side-wall designs and patterns required

 

2009-TIOL-25-ARA-

for the
manufacture of radial tyres for a lump sum consideration.

 

 

 

 

IT

Issue(s)

 

DTAA –
USA

 

 

 

 

 

 

Whether
on the stated facts in the “Technology Transfer Agreement” en-

 

 

 

tered
into between the applicant and M/s. CEAT Limited, and in law, the

 

 

 

consideration
for the transfer of documentation payable by M/s. CEAT

 

 

 

Limited
to the applicant is exigible to tax under the Act, in the hands of

 

 

 

the
applicant.

 

 

 

Whether
on the stated facts, and in law, the consideration for consultancy

 

 

 

and assistance
receivable by the applicant from M/s. CEAT Limited is

 

 

 

taxable
in the hands of the applicant in India under the Act.

 

 

 

Held

 

 

 

Whether or not the first limb of Art 12(4)
applies, undoubtedly, the second

 

 

 

limb is
attracted in the instant case. The consultancy, assistance and train-

 

 

 

ing
services make available to CEAT the technical knowledge, experience,

 

 

 

know-how
and processes, so that transferee CEAT will be able to derive

 

 

 

full
advantage from the know-how supplied by the applicant and equip

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

 

No.

Treaty

 

 

 

 

 

 

 

 

 

 

 

 

itself
with the requisite knowledge and expertise so that the transferee

 

 

 

 

will be
able to utilize the same even in future ventures on its own and

 

 

 

 

without
reference to the transferor. The importance of consultancy and

 

 

 

 

assistance
services is highlighted by an express declaration in the ‘Agree-

 

 

 

 

ment’
which we may, at the risk of repetition, notice at this stage. The

 

 

 

 

“transferor
acknowledges that the transferee will not be able to use the

 

 

 

 

know-how
unless the transferor trains the transferee’s personnel in the

 

 

 

 

plant
in order to be capable of designing, developing and manufacturing

 

 

 

 

the
products in accordance with the know-how.” In the MOU concerning

 

 

 

 

fees for included services appended to
US-India Treaty, it is thus clarified:

 

 

 

 

“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 knowl-

 

 

 

 

edge,
skills, etc., are made available to the person purchasing the service,

 

 

 

 

within the meaning of paragraph 4(b).” This
test is satisfied in the instant

 

 

 

 

case.
The fee received by the applicant under clause 8 of the Agreement,

 

 

 

 

therefore, falls within the scope of fee for
included services as defined in

 

 

 

 

paragraph
4 of the Art 12 of the ‘Treaty’. The position, in regard to the

 

 

 

 

liability under the Act, is equally clear. The
definition of fee for technical

 

 

 

 

services
in Explanation 2 to clause (vii) of Section 9(1) is even wider in

 

 

 

 

its
scope and amplitude than the corresponding provision in the ‘Treaty’.

 

 

 

 

The
restrictive phrase “make available” is not there in the Act. In fact, the

 

 

 

 

learned
counsel for the applicant has not disputed that the fee received

 

 

 

 

by
virtue of clauses 7 and 8 of the Agreement constitute fee for technical

 

 

 

 

services
or included services as per the Act and the Treaty.

 

 

 

 

Thus,
for more than one reason, the AAR held that paragraph 5 of Art

 

 

 

 

12 of
the Treaty cannot be invoked by the applicant.

 

 

 

 

The
consideration received for consultancy, assistance and training as per

 

 

 

 

clauses
7 and 8 of the Agreement is liable to be taxed as fee for included

 

 

 

 

services
under the Treaty, and as fee for technical services under the

 

 

 

 

Income-tax
Act, 1961.

 

 

 

 

 

40.

ADIT
(IT), Mumbai

Nature of services and payments

 

 

vs.
McKinsey & Co

Strategic
consultancy and other services; Advisories do not include any

 

 

Inc., UK & others

 

 

2009-TIOL-728-ITAT-

transfer
of technical know-how or specialised knowledge.

 

 

Mum

Issue(s)

 

 

DTAA –
USA

 

 

 

 

 

 

 

 

Whether
such payments made can be considered as fees for included

 

 

 

 

services
as per the India-USA Treaty.

 

 

 

 

Held

 

 

 

 

The assessing officer should not be prevented
from calling for details,

 

 

 

 

under
the pretext of “the world knows what McKinsey & Co, Inc does”.

 

 

 

 

Even if the burden is on the assessing officer
to prove that a particular

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

 

 

 

 

 

 

 

 

 

 

item of
income is taxable, and at the same time the assessee does not

 

 

 

co-operate
or give any information or documentation whatsoever when

 

 

 

specifically asked for and when it is
undisputed that these documents

 

 

 

are in
its exclusive possession and only relies on its history and facts that

 

 

 

were submitted in the earlier assessments, the
assessing officer can draw

 

 

 

an
adverse inference.

 

 

 

Nobody
can refuse to furnish any information which is exclusively in

 

 

 

its possession
and then argue that the revenue has not discharged the

 

 

 

burden
of proof. The onus is also on the assessee to lead the evidence to

 

 

 

prove
that the receipt is not taxable because it falls within a provision or

 

 

 

it is
exempt.

 

 

 

Accepting
the assessee’s plea that the case be decided on the basis of in-

 

 

 

formation
furnished in 1997, would amount to laying down a very wrong

 

 

 

precedent.
The departmental representative was correct in pointing out that

 

 

 

if such
a view is taken by the Tribunal, in future also the assessees would

 

 

 

not produce any document before any assessing
officer on the argument

 

 

 

that
the facts are same as in the earlier years and the proposition for the

 

 

 

law
laid down by the Tribunal in earlier years should be followed.

 

 

 

Note

 

 

 

Please
also refer to the decision of the ITAT Mumbai in the case of McK-

 

 

 

insey
and Co., Inc (Philippines) vs. ADIT (IT) (ITAT-Mum) [2006] 284 ITR

 

 

 

(A.T.)
0227 discussed at Sr. No. 20 of the Part III of the Article.

 

 

 

 

 

41.

ITO vs.
Sinar Mas

Nature of services and payments

 

Pulp
& Paper (India)

Fees
for preparing feasibility study on the project to be used for  presen-

 

Limited

 

ITAT –
Delhi

tation of the project to the foreign investors
and financial institutions.

 

 

 

 

2003-TIOL-19-ITAT-

Issue(s)

 

DEL

 

 

 

DTAA –
Singapore

Whether
payment for said services liable to tax in India as “Fees for

 

 

 

Technical Services” as defined in Article 12
of India-Singapore Double

 

 

 

Taxation
Agreement?

 

 

 

Held

 

 

 

Held
that the payment made, clearly and unquestionably comes under

 

 

 

clause
(b) of Para 4 of the Article 12. The ITAT have taken note of the fact

 

 

 

that
the concerned party has clearly made available technical knowledge,

 

 

 

experience,
skill by way of the ‘Project Report’ which was used to woo

 

 

 

the
foreign investors, and the detailed project report not only provides

 

 

 

the
rough road map but virtually provides the entire detailed design and

 

 

 

map
work. At the cost of reiteration, the project report not only lays down

 

 

 

the
mill site and infrastructure but also deals with mill organization and

 

 

 

training;
it takes care of the grades to be produced; and the markets which

 

 

 

will supply fibre to the mill.  The technology and environment aspects

 

 

 

 

 

 

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

 

No.

Treaty

 

 

 

 

 

 

 

 

 

 

 

 

memorandum
of understanding, is `communication through satellite or

 

 

 

 

otherwise`,
and relying on the same, learned special counsel for the Rev-

 

 

 

 

enue
has contended that the interface between the reservation system of

 

 

 

 

the
assessee-company and that of the Indian hotels/clients was covered

 

 

 

 

in this category.” We, however, find it
difficult to agree with this conten–

 

 

 

 

tion of
the learned special counsel for the Revenue. First of all, it is the

 

 

 

 

area which has been specified in the
Memorandum of Understanding for

 

 

 

 

ascertaining
the services relating thereto being of technical and consultancy

 

 

 

 

nature
making technology available, whereas the services rendered by the

 

 

 

 

assessee
in the present case are in the hotel industry and such services

 

 

 

 

are in
relation to advertisements, publicity and sales promotion which are

 

 

 

 

not in
the nature of technical and consultancy services involving making

 

 

 

 

of
technology available. Secondly, the interface between the computerized

 

 

 

 

reservation
system of the assessee and the computerized reservation system

 

 

 

 

of the
Indian hotels/ clients was provided to facilitate the reservation of

 

 

 

 

hotel
rooms by the customers worldwide as an integral part of the inte-

 

 

 

 

grated
business arrangement between the assessee and the Indian hotels/

 

 

 

 

clients.
This interface thus was not separable from and independent of

 

 

 

 

the
main integrated job undertaken by the assessee-company of render-

 

 

 

 

ing
services in relation to marketing, publicity and sales promotion; and

 

 

 

 

the
same, in any case, was not in the nature of technical and consultancy

 

 

 

 

services,
making any technology available to the Indian hotels/clients in

 

 

 

 

the field/area of communication through
satellite or otherwise. Moreover,

 

 

 

 

as pointed
out by the learned counsel for the assessee before us, no com-

 

 

 

 

munication
through satellite was involved in the interface between the

 

 

 

 

computerized
reservation system of the assessee and that of the Indian

 

 

 

 

hotels/clients.

 

 

 

 

What is
transferred to the Indian company through the service contract

 

 

 

 

is
commercial information and the mere fact that technical skills were re-

 

 

 

 

quired
by the performer of the service in order to perform the commercial

 

 

 

 

information
services does not make the service a technical service within

 

 

 

 

the
meaning of paragraph (4)(b) of article 12. Since the facts of the present

 

 

 

 

case
are almost similar to the facts of this case given in Example 7 of the

 

 

 

 

Memorandum of Understanding, it leaves no doubt
that the payment in

 

 

 

 

question
received by the assessee-company from the Indian hotels/clients

 

 

 

 

or any
part thereof could not be treated as ` fees for included services`

 

 

 

 

within
the meaning of paragraph (4)(b) of Srticle 12.”

 

 

 

 

For the
sake of ready reference, we shall provide in the next part of the

 

 

 

 

Article,
the list of various comprehensive DTAAs entered into by India

 

 

 

 

with
all other countries. We shall also indicate those countries which are

 

 

 

 

members
of OECD and the date of coming into effect of the treaties and

 

 

 

 

protocols
with countries having the restricted scope in respect of Fees for

 

 

 

 

Technical
Services by incorporating the ‘make available’ clause, and also

 

 

 

 

discuss
other relevant aspects.

 

 

 

 

 

 

 

 

 

 

 

 

GAPs in GAAP

Accounting Standards

The implementation of IFRS required a well coordinated
approach among various regulators. Understanding this need, the Ministry of
Company Affairs (MCA) set up a high powered group comprising of various
stakeholders such as NACAS, SEBI, RBI, IRDA, ICAI, IBA and CFOs. The core group
was supported by two sub-groups. The sub-groups will have further meetings with
regard to the roadmap for banking and insurance companies which is still under
discussion.


The author completely supports the roadmap. This is a
historic event — one that would catapult India, its entities and finance
professionals to much greater heights.

Under the roadmap, there would be two separate sets of
Accounting Standards u/s 211(3C). The first set would comprise of standards that
are converged with IFRS and would apply to specified companies in phases. The
second set, comprising of existing Indian accounting standards, would apply to
all other companies, including SMEs.

Phase 1 companies will prepare their opening IFRS balance
sheets on 1 April, 2011. Phase 1 would apply to listed and non-listed companies
with a net worth of greater than Rs 1000 crores, and to companies whose
securities are listed on a foreign stock exchange. If one has a calendar year,
then the opening IFRS balance sheet will be prepared not on 1 April, 2011 but 1
January, 2012. The listing requirement will be with regard to securities and
will include a lot of listings in addition to shares, such as ADR, GDR, FCCB,
etc.

Phase 2 companies will prepare their opening IFRS balance
sheets on 1 April, 2013. Phase 2 would apply to listed and non listed companies
with a net worth of greater than Rs 500 crores.

Phase 3 companies will prepare their opening IFRS balance
sheets on 1 April, 2014. Phase 3 would apply to all other listed companies. IFRS
standards will not apply to non-listed companies with a net worth of less than
500 crores and to SMCs, though they can voluntarily apply to IFRS.

The draft of Companies (Amendment) Bill proposing changes to
the Companies Act is under preparation. The amendment is required to make the
Companies Act consistent with the requirements of IFRS. These changes include
section 391, 394, 78, 100, Schedule VI, Schedule XIV, etc. A new section will
also be introduced to make consolidation mandatory under the Companies Act, even
for non-listed companies.

IFRS standards will be notified by 30 April, 2010. The author
does not expect any carve-ins or carve-outs, and it would be possible for Indian
entities to provide a dual statement of compliance both under IFRS, as adopted
by India, and IFRS, as issued by IASB. However, one should be prepared for any
elimination of alternate accounting treatments provided under IFRS standards.
For example, in the case of long-term employee benefits, it is possible that
actuarial gains and losses may have to be recognized in the P&L account in full,
and the corridor approach or full recognition in ‘Reserves’, allowed under IFRS
of IASB, is not allowed under IFRS as adopted in India.

Net worth has not been defined, but probably it means what we
have always been used to: share capital and free reserves. It would include
securities premium but not fixed asset revaluation reserve. P&L debit balance
should be subtracted from share capital and reserves. Net worth would be based
on Indian GAAP stand-alone account of the entity.

To determine applicability, the net worth for which balance
sheet date should be considered? Theoretically, it could be 31 March 2009, 2010
or 2011 or all three. It is unlikely to be 31 March, 2011 for practical reasons.
Doing the net worth test based on the balance sheet date of 31 March, 2011, will
leave entities with little or no time to prepare for IFRS for the year 2011-12
(actually the first quarter of 2011-12 for listed entities). Therefore, in the
author’s view, the test should be done based on the balance sheet on 31 March,
2009. The MCA should confirm this by way of guidance.

Questions have been raised on whether IFRS comparative
numbers are required from 2010-11. Whilst this will be clarified in further
guidance, it would make enormous sense to prepare IFRS comparatives for the
following reasons:


1. IFRS comparatives (2010-11), instead of Indian GAAP
comparatives, would make 2011-12 IFRS financial statements meaningful to all
stakeholders

2. Preparing IFRS from 2010-11 will enable one to be ready
for robust IFRS reporting in the first quarter of 2011-12

3. The 2011-12 IFRS financial statements will be compliant
both with Indian law and IFRS, as issued by IASB. Hence dual statements of
compliance can be made by entities.

4. If 2010-11 IFRS comparatives are not prepared, then
effectively 2011-12 IFRS statements become comparatives for 2012-13 IFRS
statements. Under IFRS 1 framework, the comparative year’s accounting policy
should be consistent with the first IFRS financial statements. This may mean
that the already prepared and published numbers of 2011-12 IFRS financial
statements may undergo a change subsequently to make them consistent with the
2012-13 IFRS accounting policies.


Therefore, from practical considerations, the transition date
should be 1 April, 2010, instead of 1 April, 2011.

There may be good news for early preparers, but one that
needs endorsement by further guidance from the MCA. If an entity has already
prepared/published IFRS financial statements, then on 1 April, 2011 one does not have to reconvert again. In other words under IFRS,
an entity can be a first time adopter only once.

Another related question is whether entities not covered at all in any of the phases can adopt IFRS or those covered in later phases can apply IFRS in earlier phases. The roadmap is clear that a company which is not covered under any of the phases may adopt IFRS on a voluntary basis. The author believes that similarly, a company covered in later phases should be allowed to apply IFRS early. Since the issue is an important one, the MCA should provide guidance on the matter as soon as possible. Allowing voluntary adoption of IFRS will help a subsidiary, joint- venture or associate of a company covered under the roadmap to use their IFRS accounts prepared for group reporting and consolidation purposes, and for stand-alone statutory financial reporting also.

Changes in various other legislations would be required, e.g., SEBI will need to change the require-ments relating to interim financial statements to make them compliant with IAS 34. The RBI will need to look at its prudential norms, incorporate appropriate prudential filters, etc., as and when IFRS becomes mandatory for banks and so on.

A key concern has been the IFRS implications with regard to income-tax. Recently a committee has been set up by CBDT to look into the impact of IFRS on income tax computation and income tax legislation. The Indian tax authorities will certainly need some time to look into this whole aspect as well as to make appropriate changes to the Income Tax Act, if required. It is, therefore, likely that for some years Indian GAAP may continue as the base for determining taxable income. Besides, it is almost unlikely that some assessees in India will be taxed based on IFRS numbers and others on Indian GAAP numbers. In simple words, for some years to come, an entity’s ERP system should enable generation of both Indian GAAP and IFRS numbers: IFRS for statutory reporting and Indian GAAP for income -tax purposes. Similarly, there would be indirect tax issues. For example, under IFRS, revenue numbers would change and that may have impact on the license fees that telecom companies pay or VAT, etc.

The MCA should provide immediate guidance on these various issues. There will be many challenges, but they come with exciting opportunities. With IFRS, India can aspire to become the accounting hub of the world. Finally, a quote from Charles Darwin: “It is not the strongest of the species that survives, nor the most intelligent, but the most responsive to change”.

Tech Update

Computer Interface

Most of you may have read the various news reports about
results of the financial stress review recently concluded in the European Union.
The primary aim of the review was to assess the strength (or weakness) of banks
to meet the challenges prevailing currently. Fortunately, the results brought a
fair amount of cheer for all and the sundry. All but 5 of the banks passed
(quite opposite to the recently announced CA final results in which less than 5%
passed). But while the various members of the finance ecosystem were doing an
assessment exercise, members of the mobile ecosystem were doing some
housekeeping themselves. The media was filled with reports of certain emerging
trends, setbacks, projects / ventures being shelved.


Emerging trends :

The word ‘trend’, in general, means the popular taste at a
given time, a general tendency to change, a general line of orientation or a
general direction in which something tends to move and then again it
also means to turn sharply, change direction abruptly. It’s funny
when you stop to think about it, how the same word conveys different messages,
in this case more or less opposite meaning. Trends for some is the most
obvious thing which makes choice easy and then there are others who would say
they never saw it coming. Not convinced ? Look at the state of the US financial
system and the arguments on the current scenario . . . . many say we went hoarse
shouting bloody murder and the Feds says we never saw it coming.

Coming back, here are some fairly interesting developments
(trends) that may interest you:

Broadband service a legal right in Finland :

Apparently, Finland is the first country in the world to make
access to broadband services a legal right for its 53 lakh citizens. Under the
new law, which came into effect earlier this month, telecommunications companies
will be obliged to provide all citizens with broadband lines that can run at a
minimum of 1 Mbps (megabites per second). While making this announcement, the
Finnish Ministry said “Internet was part of everyday life for Finnish people and
it was the government’s priority to provide high speed Internet access to all.
Internet services are no longer just for entertainment, Finland has worked hard
to develop an information society and a couple of years ago we realised not
everyone had access”. It is believed up to 96% of the Finnish population are
already online and that only about 4,000 homes still need connecting to comply
with the law. The government has also promised to connect everyone to a 100 Mbps
connection by 2015.

You may recall, the Indian Government had also made certain
promises (among others) when it unveiled India’s broadband policy in 2004.
Instead, all we’ve got so far is more dug-up roads and the ever-increasing
frequency (not to mention duration) power outages. Suffice to say we have a long
way to go for now.

E-reader Kindle outpaced sales of hardcover books on Amazon :

Earlier this month Amazon.com, one of US’ largest
booksellers, announced that for the past three months, sales of books for its
e-reader, the Kindle, outnumbered sales of hardcover books. In that time, Amazon
is said to have sold 143 Kindle books for every 100 hardcover books (including
hardcovers for which there is no Kindle edition). Amazon.com added that in the
past four weeks sales rose to 180 digital books for every 100 hardcover copies.
Apparently the pace is quickening. It may interest you that Amazon has 630,000
Kindle books, which is a small fraction of the millions of books sold on the
site.

Meanwhile, Penguine launched the first electronic book with a
video tie-in. Penguin Group and Liberty Media’s Starz Media began selling the
first version — for Apple’s iPad — of a novel with accompanying video from a TV
mini-series based on the same tome. News reports suggest that the deal may serve
as a model for other cross-media partnerships. Priced at $ 12.99, above the
$ 9.99 industry norm for e-books (read Kindle books), Penguin’s iPad
version of Ken Follett’s 12th century England epic ‘The Pillars of the Earth’
will let users read the novel and watch scenes from the mini-series.

While book lovers mourning the demise of hardcover books with
their heft and their musty smell, publishers may need a reality check. Here’s
why. A CEO of media company, which advises book publishers on digital change
said that “This was a day that was going to come, a day that had to come”. He
even predicted that within a decade, fewer than 25% of all books sold would be
print versions. Another CEO commented that “the shift at Amazon is
astonishing when you consider that we’ve been selling hardcover books for 15
years, and Kindle books for 33 months”. (there you have it, the obvious
and the oblivious — and they coexist in the same business).

India unveils prototype of $ 35 tablet computer :

It looks like an iPad, only it’s 1/14th the cost : India has
unveiled the prototype of a $ 35 basic touchscreen tablet aimed at students,
which it hopes to bring into production by 2011. “This is our answer to MIT’s
$ 100 computer,” Human Resource Development Minister Kapil Sibal told the media
when he unveiled the device.

In 2005, Nicholas Negroponte — co-founder of the
Massachusetts Institute of Technology’s Media Lab — unveiled a prototype of a
$ 100 laptop for children in the developing world. India rejected that as too
expensive and embarked on a multiyear effort to develop a cheaper option of its
own. Negroponte’s laptop ended up costing about $ 200, but in May his
non-profit association, One Laptop Per Child, said it plans to launch a basic
tablet computer for $ 99.

News reports indicate that the tablet can be used for
functions like Word processing, web-browsing and video-conferencing. The tablet
doesn’t have a hard disk, but instead uses a memory card, much like a mobile
phone. The tablet design cuts hardware costs, and the use of open-source
software also adds to savings. It has a solar power option too, though that
add-on costs extra. Without discounting the cost, it seems like a real blessing
when one considers the ever-increasing frequency, not to mention the duration,
of power blackouts in India. A Ministry spokesperson, said falling hardware
costs and intelligent design make the price tag plausible. Apparently, several
global manufacturers, including at least one from Taiwan, have shown interest in
making the low-cost device, but no manufacturing or distribution deals have been
finalised.

India plans to subsidise the cost of the tablet for its students, bringing the purchase price down to around $?20. Kapil Sibal turned to students and pro-fessors at India’s elite technical universities to develop the $?35 tablet after receiving a ‘lukewarm’ response from private sector players. The stated goal is to get the cost down to $?10 eventually.

If the Government can find a manufacturer, the Linux operating system-based computer would be the latest in a string of “world’s cheapest” innovations to hit the market out of India, which is home to the 100,000 rupee ($?2,127) compact Nano car, the 749 rupees ($?16) water purifier and the $?2,000 open-heart surgery. But given the past, one doesn’t know whether this project will die a quick death within this year, or a painful government-funded one over the next two.

Tax returns on Twitter:

Before you jump to any conclusions, it ain’t happening in India yet. Savvy politicians are no strangers to Twitter and Facebook, using it for their own political ends (Obama, Shashi Tharoor, Lalit Modi to name a few of the celebrated users).

Incidentally, Filipinos are among the most prolific users of social networking and text messaging in Asia. Earlier this month, the Philippines’ new government turned to social networking, using it to meet some serious social and economic ends for the country. When most nations are fretting about their fiscal deficits, Manila thought of an innovative way out to bridge the gap: enlisting Twitter and Facebook to boost tax collections. Honest citizens will be allowed to complain about tax evasion and corruption, by posting an update on Facebook or Twitter, when they smell a tax cheat.

No prizes for guessing if this would work in India. After all, India is not just growing to be the land of enthusiastic tweeters, but also the very land of tax evaders and Swiss bank account holders. The question that begs to be answered is, are Indians morally outraged enough about cheating the government that they start telling on their neighbours or will they continue to remain mute spectators? (Jaago re!!!…….)

(The concluding part of this write-up will be printed in the next issue of the Journal)

Social Networking: boon or bane

Computer Interface

For the uninitiated, initially, social networks were networks
or meeting places set up by people who wanted to ‘keep in touch’ or team up
after starting their career. Facebook as we know it today, was akin to a
school/college yearbook — a photo album, the only difference being that it was
in the form of an electronic billboard, where one could look up old colleagues
and exchange information. With added impetus from technological advancement,
developments in networking technology and mobile phones, over time this
electronic billboard evolved to social networks as we know them today.
Presently, social networks, among other things, are :

à Forums for sharing materials;




à Virtual market places — to meet like-minded people,
share videos, pictures, thoughts, etc.


Social networks are unique in the sense that, while they
serve ones personal needs, they are equally useful in meeting one’s business or
professional needs. The following examples would illustrate this :



à
Social networks allow you to keep in touch with family members staying in a
different city (Yes, I am aware that we have the old & faithful postcard,
telegram, and yes the telephone rentals have dropped drastically so we can
always call our friends or send an sms or chat with them on the net, but
imagine reaching out to all your friends and relatives at one go with added
interactivity);


à
Social networks give you an impression of being in a space of your own. They
allow you to mingle with like-minded communities
(discussing ideas or experiences on your latest trek, purchase of new
camera, car, etc.);


à
Enhance social and political communications (Apparently social networking
contributed significantly to President Obama’s campaign);


à B-
Schools using it to send out information to its students

(IIM Calcutta took its first step in Dec. 2008, from
breaking news, blog links to CAT and campus-placement updates, the tweets on
‘IIMC’ reflect a broader use of Twitter than most celebrity users seem able
to comprehend).




Having understood this background, lets get on with the
basics.

There are various types of online social media — from social
networks of friends and professionals, to microblogging services, to video
sharing sites. To name a few:

Online friends networks:

Facebook:

The world’s largest social network, with hundreds of million
users, began when a small group of Harvard students, led by Mark Zuckerberg,
decided to keep in touch with each other. It soon opened out to other US
campuses and eventually in 2006, to everyone.

Orkut:

At one time Orkut India’s most popular social network, this
Google-owned service was set up by former Google engineer Orkut Büyükkökten in
his spare time. Once a hit with users, it is far behind in the global popularity
stakes. Orkut has faced some issues because of its previously open nature. After
legal problems in 2007, Orkut substantially cleaned up the network, but by then,
the damage was done — ‘high-end’ users had begun switching over to Facebook.
(Incidentally have you tried google buzz ?)

MySpace:

Quite popular with musicians and actors, who use the site to
host music and movie clips, this site was picked up by Rupert Murdoch’s NewsCorp
a few years ago and its immense popularity made Google give it a lucrative
advertising deal.

Video sharing:

YouTube:

YouTube has started a video revolution — it’s as simple as
that. The service — which allows anyone to upload video clips on to the net —
from your baby’s first steps to a music video that you recently shot — commands
a big chunk of Internet traffic today. According to estimates, every minute of
the day, over 10 minutes of content is being uploaded on to the service. (In
fact, you can watch IPL3 matches on this network).


Other video sharing services:

Hulu is a video service promoted by US TV network NBC and has
high-quality online broadcasts of their shows. Apparently, users from India
cannot access Hulu.

Other sites include Vimeo and DailyMotion.

Online professional networks:

LinkedIn:


According to last year’s statistics (current number would be
higher), there are 41 million users on LinkedIn, of which two million are from
India (the second-largest user base after the US). Virtually every large company
and executive has a LinkedIn account and there are examples galore of how India
Inc. is using LinkedIn to find talent and do more. Extremely popular among India
Inc. and growing by the day. This site is possibly unique among social networks,
in the sense that it claims to be profitable (i.e., Linkedin is showing profits)
through advertising and ‘premium’ membership.

Blogging:

Most blogging sites are also ‘social media’ by definition —
they allow anyone and everyone to create a blog. Also, if the blogger allows it,
anyone with net access can post a comment on the blog, which can be moderated.
Blogging is the oldest form of ‘read-write’ online social media, but has now
reached a stable phase. The most popular free blogging services online where
anyone can set up a blog are :

  • Blogger/Blogspot


  • WordPress


  • LiveJournal

Microblogging :

Twitter :

This is a blazingly fast-growing service : one estimate put Twitter’s growth at a staggering 1,382% a month with an estimated 100 million users. (A Harvard study estimated that 10% of these users, by and large, cre-ated 90% of the content.) Twitter essentially allows users to send out their thoughts in 140 characters or less. Only a third of Twitter users are active, though, and India has an active ‘Twitterati’ of an estimated 10,000 people. Several Indian companies are now embracing the service. Immensely popular and highly useful during breaking news events such as 26/11. Some of the users who have left their indelible mark using this tool — Sashi Tharoor and of course Apro SRK.

While some dismiss them as a waste of time, Internet sites such as Facebook, Twitter, and LinkedIn have exploded in popularity, giving easy access to a potentially huge amount of new business.

Business and social media :

The ultimate transformation that is taking place today is within the business landscape, worldwide— and increasingly so in India — where compa-nies are beginning to leverage informal social net-works to engage customers, soothe ruffled feath-ers, strengthen their brands and even hire people. For companies in India, the reasoning is simple : While Indian PC and Internet penetration rates are relatively lower than the West, India has one of the largest Internet population in the world — some 60 million regular users (not including mobile access). Moreover, these users are the most sought-after customers with high disposable incomes, and companies with clear online media plans are waking up to the fact that they can reap the benefits of engag-ing with this audience. Those that don’t, risk losing the customers that they already have or slipping behind their more savvy competitors.

Here is a real life instance of how social media can influence change :

Take a look at the interactive digital marketing site that Tata Motors built when the Nano was launched. This site had games built into it, where people could customise colours and pick their favourite ones —thereby (ahem) sneakily helping the car company figure out which ones to use on the Nano. (A clever idea, but far removed from a social media forum.) However, when Tata Motors did launch the Nano, there was no mistaking its intention to use a full-fledged social media strategy. The company set up groups on Facebook and Orkut hoping to target the numerous official ‘Nano’-centric groups that had parked themselves on the site. To its complete surprise, it found that one unofficial group on Orkut dwarfed the official ones — and it would have been a fatal mistake to ignore members not under the official Nano fold. A spokeperson for the company said “We engage with people on these sites, too. We react to criticism of our car and try to explain our position. Also, we often find that before we can react to the criticism, there are other members who come up to defend the car.” As a matter of fact even presently, the official groups on these two sites, at around 17,000 members, are much smaller than the largest un-official group on Orkut with around 52,000 members.

Here’s another example :

Maruti Suzuki India is, strangely enough, a pioneer in online social marketing. Realising that there are several online communities for the highly popular Swift, it has created an online platform to bring together the 2,500 disparate online Swift users’ clubs in India. Earlier this year, the company actively enlisted bloggers and talked to the community during pre-launch activities for its latest Ritz.

There are others — Herseys, Dominos, Apollo Hospitals, Nokia — to name a few.

Avoiding traps :

Its important to understand that social media isn’t for everyone and should not be used for everything. For instance, the Chief Marketing Officer of a large corporate group shared his experience saying online social media is not an ideal platform for business to business (B2B) interactions. “It is a great way of getting messages about your company across, but I would neither buy nor I would sell anything using social media,” she says. Also, having a presence in online social media or running ads there doesn’t mean that the company will emerge an overnight success. In fact, far from it. “It is a misconception among many that this is a procedural thing, which it’s clearly not. It is a highly creative space that requires that marketers identify the space, the nature of stakeholders involved, what makes people tick within that space and, importantly, to listen to people—and not try and sell things to them.” According to experts, the biggest mistake that anyone can make is to use the medium to push their products.

Another problem is that of measuring success. Even though there are advanced analytical tools available on the Internet, classifying a ‘successful campaign’ in social media is extremely difficult and can also be manipulated using something called ‘click fraud’. There are few benchmarks to measure success online unlike television adverts. A company can claim any number of sign-ups for a digital campaign, but never release how many were translated into sales. Also, beware of social media experts. The landscape is littered with them, many of whom have no legitimate professional experience in the field. Much like the Internet company era, social media is the new in-thing and these hucksters are simply surfing the next big wave, hoping to get rich.

The second part of this article will be printed in the next issue of the BCAJ. Watch this space for the pitfalls and the dark side of social marketing.



Tech update

Computer Interface

(This is the concluding part of this write-up. It has been
continued from previous month’s Journal)

 

Other recent developments in the mobile ecosystem :

iPhone 4’s antennae problem. Apple Inc received a lot of bad
press this month. There were several customer complaints about the design of its
phone antennae.
Some complained that the smart phones, which were launched a week ago with
block-buster sales, when cupped in a way that covers the lower left corner,
strangles telecom service signal strength.

Apple Inc, had to (publicly) accept that its iPhones
overstate wireless network signal strength. Apple apologised to customers in an
open letter and said it was “stunned to find that the formula” it uses to
calculate network strength “is totally wrong” and that the error has existed
since its first iPhone. The letter also said that “Users observing a drop of
several bars when they grip their iPhone in a certain way are most likely in an
area with very weak signal strength, but they don’t know it because we are
erroneously displaying 4 or 5 bars,”. Apple shot down users and outside
engineers who said the signal problems were due to faults in its new antenna
system. The antenna is incorporated in the casing. The company stated that “big
drop in bars is because their high bars were never real in the first place”.
Further adding that when users were noticing a dramatic drop in the number of
signal strength bars on their phone’s display, it was likely due to weak network
coverage in that area.

The company said the incorrect formula was present in the
original iPhone — released in 2007 — and promised to fix it by conforming to
AT&T guidelines for signal strength display through a free software patch that
would be issued within a few weeks. The software update will also be available
for the iPhone 3GS and iPhone 3G. Apple maintained the iPhone 4’s wireless
performance remains “the best we have ever shipped.” It also reminded user
they could return their smart phones within 30 days of purchase for a full
refund.



A direct result of this issue is that






  •   a suit has been filed against Apple for the poor reception.



  •   Another class action suit has been admitted on the issue of restrictive
    trade practice—Apple and AT&T’s marketing tie-up.



  •   A major (reputed) consumer goods publication in the US refrained from
    giving iPhone 4 the much coveted ‘Buy’ recommendation.



  •   A senior member of the team (directly) responsible for the antenna has put
    in his papers. Its being called Applegate’s first casualty.

An indirect consequence of this issue is that


  •   Apple has “earned” the dubious tag #fail on twitter.



  •   Sales of Android phones are picking up.


As per latest reports, they are higher than iPhone 4.





Microsoft discontinues Kin after 48 days. Just 48 days
after Microsoft began selling the Kin, a smart phone for the younger set, the
company discontinued it because of disappointing sales. The swift turnabout for
the Kin, which Microsoft took two years to develop and whose release was backed
with a hefty ad budget, is the latest sign of disarray for Microsoft’s recently
reorganised consumer product unit. While neither Microsoft nor Verizon Wireless,
which sold the phone exclusively, disclosed the sales figures, media reports
suggest that sales were disappointing. In fact, Verizon is said to have slashed
the prices of the phones to $50 from $200 for the higher-end model and to $30
from $150 for a stripped-down version. Microsoft said it would cancel the
pending release of the Kin in Europe and would work with Verizon Wireless to
sell existing inventories. Microsoft indicated that it would shift employees who
worked on the Kin to the team in charge of Windows Phone 7, a coming revision of
Microsoft’s operating system for smart phones, which is due in the fall.

Kin, according to the grapevine, was dubbed an absolute
failure. It surprised many that Microsoft, often regarded as a company known to
sticking with new products and improving them over time, killed a product so
quickly. Microsoft’s consumer products unit has been struggling to offer a
credible competitor to other Apple products. It has chased the iPod with its
Zune for several years with little effect. Apple’s iPhone, as well as an array
of smart phones powered by Google’s Android software, are more recent
challenges. Microsoft also recently cancelled a project to develop a tablet
computer that would compete with Apple’s popular iPad.


IBM endorses Firefox as in-house web browser.

New York State-based IBM, known by the nickname “Big Blue,”
has a corporate history dating back a century and now reportedly has nearly
400,000 workers. Firefox is the second most popular web browser in an
increasingly competitive market dominated by Internet Explorer software by
Microsoft. Despite this fact, technology giant IBM wants its workers around the
world to use free, open-source Mozilla Firefox as their window into the
Internet. All new computers for IBM employees will have Firefox installed and
the global company “will continue to strongly encourage our vendors who have
browser-based software to fully support Firefox”.

Making Firefox the default browser means that workers’
computers will automatically use that software to access the Internet unless
commanded to do differently. Rumour has it, that going forward, any employee who
is not using Firefox will be strongly encouraged to use it as their default
browser. The feeling with the management is that while other browsers have come
and gone, Firefox is now the gold standard for what an open, secure, and
standards-compliant browser should be. Open-source software is essentially
treated as public property, with improvements made by any shared with all.


While Firefox is the second most popular web browser, Google Chrome has been steadily gaining market share. Last week, it replaced Apple Safari as the third most popular web browser in the United States. The take away from this is that we will continue to see this or that the browser become faster or introduce new features, but then another will come along and be better still, including Firefox.

At the cost of repeating myself …. (refer to BCAJ Jan 2010 issue) the survival in the new mobile ecosystem is going to be really very tough. The losses listed in this battlefield as of now :

  •     Kin — Microsoft’s smart phone
  •     Google is planning to hang up on Nexus 1 and plans to shelve Wave
  •     Nokia is looking for a new CEO
  •     Applegate’s first casualty
  •     Blackberry is battling shrinking market share (losing to iPhone and Android phones) and is trying to crawl back in to the limelight has recently launched Blackberry Torch.

The hunter is now the hunted.

C’est la vie.

Social Networking: Boon or Bane

Computer Interface

Part-2

(I would like to clarify at the outset that this write-up
does not seek to malign or discredit anyone/any site in particular. My
observations and comments are merely a reflection of what is already available
in public domain.)

In part 1 of this write-up, we briefly discussed the growing
importance of social media and networking in today’s business and personal
environment. While there are many who swear by this recent (and a highly potent)
phenomenon, there is a growing number of users who after having burnt
themselves, speak in hushed tones about the disasters that have already struck
and the ones that are waiting to happen.

The hype :

Notwithstanding the perils, most people are happy to join the
bandwagon. In general, if you ask anyone the real reasons for him or her joining
Facebook or Twitter, the responses you get will range between the standard of
“keeping in touch with friends”, “it’s hip”, “you have got to be in the groove”,
etc. Many are on the network for the heck of it (which in reality translates to
— due to peer pressure). Largely the popularity is due to the hype about social
media (including “if you are not on it, you are toast” types), and the fact
remains that most new joiners are clueless about what they are signing up for.

Interestingly, one recent statistic (which was proudly
reported in all leading forms of news media) suggests that teenagers, who (for
the record) are the most prolific users of social networking sites, post as many
as 100 status updates on their social networks.

Hmmm ! ! ! . . . 100 status updates . . . Considering that in
a day you have 24 hours, out of these 24 hours you eliminate 8 hours for your
natural instincts for food and sleep and . . ., the remainder is 16 hours.

In these balance 16 hours the user would have 960 minutes to
post these 100 odd messages. If that is the case, to send out 100 updates, the
required (run rate) frequency would be one update every 9.6 minutes. Wow ! ! ! !
That calls for an ‘AWESOME ! ! ! !’

No wonder these teenagers turn around and question the very
existence of life beyond Twitter and Facebook. There just isn’t any time left
for them to do anything else.

Any sane person would equate this awesome feat with
obsession. You may not believe this but do a search on Google (or Bing or Yahoo
for that matter) and you will find reports about the death of a toddler (there
could be more). Apparently the toddler died due to malnourishment. Apparently a
Japanese couple was so busy raising their virtual child on a social
network game that they forgot to feed their child in the real world. Surely now
the only word coming to your mind would be ‘SHOCKING’.

The perils :

Here’s another example : Hordes of people while registering
with such sites, part with personal details (and that to in amazing detail mind
you). Details which by any rate are sensitive and of a personal nature. These
sites ask you who you are, where you live, what you do, when you do it. They
want to know how-when-where — with who . . . . blahblahblah . . . . They want
details of all your friends, relatives, acquaintances, etc. They will even do
the good thing of asking the same from all your connections. Without these you
are not ‘assimilated’ (sounds like the Blog in Star Trek — NG) or not a
‘part of the gang’. The depth of the information sought is more detailed than
some of the best KYC (know your
customer) checklists I have seen in the recent past.

You know what the best part of this is . . . . the user
concedes with most of these details (which are very sensitive personal)
willingly. So whats wrong with that ? ? ? ? Well for starters, nobody reads the
disclaimers, even worse most people can’t comprehend the perils of not doings so
before signing up . . . . yes It’s the part where the users accept the terms and
conditions without reading (let alone understanding the consequences). If you
ask me its only a matter of time before this information falls in the hands of
all those wrong sorts of people. Mind you this information in one form or the
other, at one time or the other, can fall in the hands of telemarketers,
scamsters, your boss or bosses and ofcourse (since this magazine is read by a
lot of tax practitioners) u know who. You’re thinking “THAT’S IMPOSSIBLE” or
“THAT’S EXAGGERATING IT A BIT TOO MUCH” . . . . is it ? ? ? ?

Lets take a simple example, say, Mr. A is also Mr. Popular on
the social network. He starts updating (speaking his mind). All the updates
instantly reach all the people connected to him. Similarly there would be other
people on his network who update their status. The natural response would be
that . . . . That’s the intention, they are my friends, colleagues, family . . .
. they wouldn’t do me any harm.


That, my friends, is the proverbial weakest link in the
chain. While Mr. A may have some control who is connected to his network
and who accesses his information, but the same cannot be said about the people
on his network. It may be that he is not very friendly with someone (could even
be his boss) and that someone is very chummy with someone else on A’s
‘controlled’ network. Mr. A may or may not be aware or might not even approve
(or for that
matter disapprove) of this. Needless to say that even a single slip-up by Mr. A
or his connection, would (very harshly) change their opinion about ‘the theory
of six degrees of separation’. Still don’t believe me, do you ? ?

OK here goes nothing . . . . if you read all the recent
reports on the ongoing spat between a certain Member of Parliament and the head
of a popular sport venture. Several media reports suggest that the entire
episode would never have assumed the proportions that it did, had it not been
for the ‘tweets’ between the two parties. Whats more these tweets (and many more
related to the other alleged misdemeanours) are likely to be used as evidence
against them (as I recall, one of the articles cited a similar spat about a
decade ago and how the parties involved could get away by denying everything,
but not this time, all due to the provisions of the Information Technology Act,
2000). The OUTCOME — the media now calls one a twit who tweeted too much while
the other party is waiting for the decision of the third umpire.

The scams :

As stated earlier, depending on who has access to this
information, the user can be scammed, used and abused, taken advantage of, taken
to task —or all of above. Here’s another instance :

I’ve Been Robbed ! Western Union Me Money !

When you accept someone as your friend on the
net-work, he has access to most of your updates, your profile, your
pictures, adventures, friends, etc. Surely you trust someone as a friend
when you accept his invitation on Facebook or Twitter or else why would
you give an absolute stranger or an acquaintance access to your
personal information— you cant be that naïve ! ! ! ! Then one fine day,
you’re browsing around social networking site and suddenly one of your
friends IMs you to tell you that they’re stuck in another country,
they’ve been robbed, don’t have a wallet, and need money to get out of
the country. It’s a horrible situation, but what are the odds that they
found a computer to log on to in order to in-stant message you ?

So
what do you do . . . . you ask him for the details and do the good
thing (ahem ! ! ! not the smartest thing) and wire him the money. At
that moment you could be singing praises about how social net-working is
a boon, but it is more likely that when the true picture is revealed
the you may horrified by the fact that it was your folly due to which
you were scammed (i.e., scammed in one of the oldest scams on the
Internet).

How is it possible ? ? ? ? Its fairly simple actually.
All the scammer needs to do is (a) access to one account on the social
network, (b) collate all possible personal information, (c) list out all
the (gullible) ‘friends’ and then he can start the ball rolling.

In
this instance a hacker/scammer gains access to the account of a
(trusted) friend. He would know through the frequent status updates what
you and your friend are up to and how he can exploit you. The scammer
would thereafter, using one of the most common ways, manipulate others
for financial gain. This also called the London scam, or Western Union
scam. In most cases, users get fooled because the scammer (being
proficient in his art) will portray a very convincing picture about his
predicament. The scammer uses all the personal information (available on
the hacked user account as well as your account) to gain your
confidence (and not to mention. . . . your money).

Don’t believe me ? Run a search on Facebook or google, you will find that there are lots more like you.

While
these were limited examples, news reports are littered with other
‘disasters’ (reset password, sign up for contests, etc.) — you can
search Google for Facebook and Twitter scams to learn about more scams.
There are several examples of successful businesses shooting themselves
in the foot with social networking if one is really seriously
considering investing money on social media-based marketing.

Having
digested the above reality (not a reality show mind you or is it
reality show — cant tell the difference these days), the moot question
is whether social media and networking is as good as its cracked out to
be or is there something more than what meets the eye ? ? ? Is it really
worth all the time and energy or is this a big scam ? ? ?

While I
don’t have any definite answers, I do have these glaring instances
which force me to think twice (no connection to a book with the same
title— published by Havard Business Press) which bring out the darkside
of social networking and provide some basis as to why one should be
cautious of the brouhaha that’s being raised about social media and
networking.

GAPs in GAAP

Accounting Standards

Revenue Recognition for Telecommunication Operators


The Research Committee of the Institute of Chartered
Accountants of India has issued an Exposure Draft – “Technical Guide on Revenue
Recognition for Telecommunication Operators” for comment. In this article, we
take a look at some of the contentious issues, and inconsistencies with
International Financial Reporting Standards (IFRS), particularly keeping in mind
that India will adopt IFRS from 2011-12 and onwards.

Whether revenue should be recognized on a gross basis or net
basis could be a very challenging issue for many telecom companies. For example,
a telecom operator may provide share price coverage via SMS as part of its
service offering. The stock exchange provides the data to the telecom operator.
Assuming revenue is Rs100 and payment to the stock exchange is Rs60, a question
arises as to whether the operator recognizes revenue of Rs100 and a cost of
Rs60, or merely recognizes Rs40 as its revenue. The answer to this question
depends on whether the operator acts as a principal or an agent in this
transaction. US GAAP provides guidance on this subject, which has been used in
the Technical Guide. As per the guidance, this decision is based on a cumulative
assessment of a number of factors such as: (a) whether the operator is the
primary obligor in the arrangement? (b) whether the operator has the ability to
control the selling price? (c) whether the operator changes the product or
performs part of the service? (d) who bears the credit risk? (e) whether the
product or service specification is determined by the operator?, etc. It may be
noted that the above criteria are not the same as those contained in IAS 18.
Hence, the answer arrived at based on the Technical Guide/US GAAP may not be the
same as the one arrived at under IFRS.

For most operators, interconnect charges represent the
largest single operating cost and second largest source of revenue. Mobile
operators enter into a number of interconnect agreements with other operators.
These agreements allow them to terminate a particular call or transit the
traffic on another operator’s network. This, essentially, uses network of
contracting parties to facilitate and provide the end-to-end connections
required by customers. The Technical Guide states that accounting of revenue on
gross basis may not be appropriate where net settlement and the legal right of
offset exists between operators. However, in the authors’ view, this is contrary
to industry practice. Industry practice is that interconnect revenues are booked
gross on the basis that the carriers are exposed to the gross risk of the
transaction. Interconnect agreements usually allow carriers to settle on a net
basis, which does not normally change the appropriateness of
recognizing transactions gross, even if periodic cash settlement may be made on
a net basis. For example, the operator may bear the gross credit risk for
non-payment and be obliged to make payments under interconnect arrangements,
irrespective of the level of reciprocal revenues due.

The term Indefeasible Rights of Use (IRU) is very common in
the telecom business. IRU means an exclusive, unrestricted, and indefeasible
right to use the relevant capacity (including equipment, fibres or capacity).
Under Indian GAAP, in many cases, these type of contracts may have been
accounted for as service contracts between the buyer and seller rather than
lease contracts. The technical guide requires evaluation of the IRU contract as
to whether it contains a lease arrangement based on AS-19. Unfortunately, AS-19
does not contain any guidance on the same. Under IFRS standards, this issue is
separately covered under IFRIC 4
Determining whether an
arrangement contains a lease.
Therefore, in the authors’ view, the technical guide with regard to this matter
can be practically implemented, if and only if an IFRIC 4 interpretation is
issued under Indian GAAP. Also it would be inappropriate to apply the
requirements of IFRIC 4 selectively to telecom companies. It may be noted that
IFRIC 4 has a wider application – for example, it would have impact on
outsourcing contracts, power purchase agreements, etc.


Multiple element contracts are pretty common in the case of
telecom business. For example, in the case of mobile operators, the package may
include hand set, talk time, SMS, ring tones, etc. The technical guide basically
requires the allocation of the consideration to the various components based on
the relative fair values of the components. It may be noted that currently, IFRS
does not have any detailed guidance on accounting for multiple element
contracts. However, IASB has recently issued a discussion paper (DP) on the
proposed new standard on revenue recognition – “Discussion
Paper – Preliminary views on Revenue Recognition in contract with customers“.
As per this DP, customer consideration is allocated to the vendor’s contractual
performance obligations on a relative standalone selling price basis, and
revenue is recognized as each performance obligation is satisfied. Where the
standalone selling price is not observable, an entity would estimate them. As
per the DP, suitable estimation methods include (but not limited to) (a)
expected cost plus margin (b) adjusted market assessment approach. Consequently
the Technical Guide and the proposed IFRS standard may result in significant
difference in accounting for multiple element contracts. Telecom operators that
may be required to follow the Technical Guide for Indian GAAP purposes and
subsequently IFRS, will have to unnecessarily undergo change in revenue
recognition accounting twice. This clearly appears unwarranted.

The Technical Guide prohibits recognition of revenue on a
component if the same is contingent upon delivery of additional items. This is
explained using the following example in the Technical Guide.


Example:
A customer purchases an annual contract, offering a free handset and 1,000
minutes (fair value is Rs. 1,500 per month) and 150 free texts (fair value is Rs.
300 per month), for a monthly fee of Rs. 1,500. The handset could be purchased
separately for Rs. 15,000. The allocation of revenue for the entire contract
period should be as follows:

 

 

Cash

Total
FV

Relative
FV

FV restricted by contingent

 

 

 

 

 

 

 

consideration

 

Handset

–

15,000

7,377

–

 

Airtime
contract

18,000

 

 

 

 

 

Talk time

 

18,000

8,852

15,000

 

Text

 

3,600

1,771

3,000

 

Total

18,000

36,600

18,000

18,000

 


The relative fair value of the equipment is Rs. 7,377. However, the recognition of this amount should be limited to the amount which is not contingent upon the delivery of additional items (i.e. airtime contract). As a result, the relative fair value allocable to the equipment is reduced to Rs. nil, being the cash consideration, and the difference reallocated to the elements within the airtime contract. It may be noted that under IFRS, there is no such restriction and it is possible to recognize revenue on the handset.

In another example, the Technical Guide prohibits recognition of revenue on hand set in certain circumstances. For example, consider a customer enters into a 12 month tariff plan priced at Rs 2400/- and includes 200 minutes of talk time per month and   free hand set worth Rs 2000/-. The Technical Guide prohibits recognition of any revenue on the delivery of the handset, since it is provided free and requires recognition of revenue of Rs 200/-per month for the talk time. In this example, it is unclear from the Technical Guide as to how the accounting is done, if the company would have stated that Rs 2,400/- is received for both the talk time and the handset. Will the accounting change? Under IFRS, it would be possible to recognize revenue on handset, even if the company claims that the same is provided free of cost. This is because under IFRS, the entire consideration would be allocated to different components – in this example, it would be allocated to the handset and the talk time irrespective of the operators’ claim that some of the components are provided free of cost (basically there is no free lunch).

The Technical Guide is more based on US GAAP and may provide results that are different from those under existing or proposed IFRS standards.

Given that India is adopting IFRS, and US itself is looking at IFRS seriously, it does not make any sense to base the Technical Guide on US GAAP. It is recommended that standard setters start a dialogue with the IFRS standard setters and influence the IFRS exposure drafts, rather than rock the boat. It is also inappropriate to have any guidance that is inconsistent with IFRS, since that may require Indian entities to change revenue recognition accounting twice in a short span of time, ie, once to comply with Indian GAAP and in 2011-12 when adopting IFRS.

Tech update

Computer Interface


Computer Interface

Samir Kapadia
Chartered Accountant

Tech
update

While change is inevitable, keeping up with change is also a
challenge. This month I have chosen three hot topics (while there were many more
to choose from) I thought would interest you more than the others. The topics
are :

(1) Social networking

(2) 3G auction and rollout

(3) Microsoft launches Office 2010

Social media and networking — To be or not to be :

“To be or not to be — that is the question”. While many would
immediately recall these words quoted straight out of Shakespeare, some (movie
buffs like me) would think about Mel Brookes performing on the stage and
delivering his version of Shakespeare in the movie “To be or not to be”. The
scene where he repeats these words (over and over again) is one of my all-time-favourites.
No matter how many times I watch the movie, I keep coming back for more. But for
many netizens, this is a very peculiar question to ask when one is discussing
the merits and demerits of social media and networking tools.

While there is no doubt that social media and networking have
changed the very face of marketing, recently (particularly last month) social
media and networking have been at the receiving end. Popular sites like Facebook
and You tube faced a lot of flak, in some cases faced bans.

Facebook was in the media for all the wrong reasons last
month. Here are a few instances

  • Facebook faced public
    lash-back and was banned in Pakistan and in Bangladesh over a controversy
    related to a certain drawing. The fallout began in Karachi (Pakistan) where
    people took to the streets protesting against the social networking site.
    These protests culminated to a ban being imposed on the site. Bangladesh was
    quick to follow suit. Needless to say that emotions ran high that week. In
    fact six tech-savy Pakistanis following the furore launched a halal version of
    the Facebook by the name Millatfacebook.com. The question that many are now
    asking is — do we really need another Facebook and what’s next gender
    seggregation ?


  • Facebook was also under
    the spotlight on account of privacy concerns. Facebook’s growth as an Internet
    social networking site has met criticism on a range of issues, especially the
    privacy of their users, child safety, the use of advertising scripts, data
    mining, and the inability to terminate accounts without first manually
    deleting all the content. Facebook Chief Executive Mark Zuckerberg had to
    respond by saying that the Internet social network would roll out new privacy
    settings for its more than 400 million users, amid growing concerns that the
    company is pushing users to make more of their personal data public. A google
    search on this issue gave some very interesting insights related to this
    controversy.


  • May 30-31 went down in
    history as the “quit Facebook day”. There has been a lot of angst amongst
    users on account of the privacy issues, frequent changes in personal settings,
    etc. While the response was hardly noteworthy (some 27000 people quit facebook),
    it appears in India it passed almost unnoticed.


  • Limit on number of
    friends. For many the lucky number is 7, for others the lucky number is 5000
    (Yes, it is Facebook). In case you didn’t know, you cannot have more than 5000
    Facebook friends. While there has been some amount of outcry against this
    ‘arbitrary’ limit, recent news reports suggest that the popular site is likely
    to enforce the limit, much to the disappointment of its loyal followers.


To summarise, while social media continues to grow as a
popular medium, there are questions being raised regarding its unintended
consequences. Hence the question that begs to be answered — “To be or not to be
?”

3G auction and rollout plans :

The recently concluded auction for 3G spectrum has brought in
a lot of cheer for many parties —the winners of the auction, the Government (the
budget deficit may be more manageable) and the subscribers. There is a lot of
excitement about the rollout plans. Equipment manufacturers have already started
dolling out 3G-ready phones and the consumers are lapping the new models. The
noteworthy issues which need to be considered are :

  • In spite of the amounts
    being so large, the entire licence fee was paid by the winners, in one
    instalment. In fact none of the winners asked for an extension (that includes
    MTNL and BSNL — however there are reports of BSNL asking for a refund). A lot
    is at stake. One could say that it is a make-or-break scenario, especially for
    the telcom service providers.


  • When one pays such high
    licence fee, it is natural that the cost of the service is likely to be
    impacted. There are concerns regarding the pricing strategy and how the
    winners would recover these amounts. The pricing strategy is being watched
    very closely. Unfortunately for the subscribers, it is likely to take at least
    6-9 months before any of the winners launch the 3G service.


  • In the meanwhile
    subscribers are going about upgrading their phones. As mentioned, equipment
    manufacturers have already started dolling out 3G-ready phones. The price of
    the new instruments ranges from (as low as) Rs.3500 to (as high as) Rs.35000.
    Naturally, one needs to be aware about what is being offered. While these
    phones may be 3G-ready, performance i.e., download speed, quality of the
    content (picture, sound), battery life, memory can vary significantly. Hence
    be careful, all that glitters may not be gold.


  • As expected (read my
    columns for January-March 2010), the investments and developments in mobile
    technology ecosystem have started gaining momentum. There are a lot of media
    reports about tie-ups for content, new investment in R&D, etc.


There is a lot more action waiting to happen, just wait and
watch.

Microsoft launches Office 2010 :

While I have not been able to check the new offering myself, I did some digging. News reports on this product say the following :

    Microsoft Office 2010, brings a set of important incremental improvements to the office suite. Among them : making the Ribbon the default interface for all Office applications, adding a host of new features to individual applications i.e., video editing in PowerPoint, improved mail handling in Outlook, introducing a number of Office-wide productivity enhancers, photo editing tools and a much-improved paste operation.

    What is being touted as the most important change to Office in years — a Web-based version for both enterprises and consumers and access to Office for mobile phones and other mobile clients. Reportedly, Microsoft has also strengthened the links between Office and various Microsoft communication server products. Apparently, if you use Microsoft Office Communications Server 2007 R2 and Microsoft Office Communicator 2007 R2 with Office 2010, you’ll be able to see the availability status of other people with whom you work and ways to contact them, such as e-mail and instant messaging. SharePoint is even more intimately tied to Office, and lets people collaborate on Office documents.

    The Ribbon feature was introduced in Office 2007, but in Office 2010 a major change has been made to Office’s interface — it has replaced the old menus and submenus with a graphical system that groups buttons for common tasks together in tabs. But apparently, Microsoft didn’t go whole hog with it back then; Outlook, among other applications, was not given the full Ribbon treatment. In this version of Office, all applications now share the common Ribbon interface, including Outlook, OneNote and all other Office applications, and SharePoint. Love it or hate it, the Ribbon is here to stay.

    Email/Outlook users are most likely be pleased with the new version of Outlook, which adds a variety of features designed to help solve the most common productivity problem — e-mail overload. One of the most useful new features is called Quick Steps, which speeds up mail handling considerably. Right-click on a message, and you can choose from a variety of actions to take on it — moving the mes-sage to a specific folder, forwarding it to your manager, setting up a team meeting with its recipients, sending e-mail to an entire team and so on. This new version of Outlook also tackles one of Outlook’s perennial problems

— how poorly it follows threads of messages. There’s a related feature that helps cut down on e-mail clutter — the ability to ‘clean up’ a conversation. When you do this, you delete all of the unnecessary quoted and previous text in long e-mail threads; only unduplicated versions remain. However, once you do that, all of the quoted and previous text and e-mails are actually deleted, not just hidden, so use this feature carefully. It would be more useful if you were given the option of hiding the text, not completely deleting it.

    Not much new in Excel though! Excel hasn’t been touched as much as the other major applications in Office 2010, but its not a total loss, there have been some useful additions. The most important is called ‘Sparklines’ — small cell-sized charts that you can embed in a worksheet next to data to get a quick visual representation of the data. For example, if you had a worksheet that tracked the performance of several dozen stocks, you could create a Sparkline for each stock that graphed its performance over time, in a very compact way. Conditional formatting — the ability to apply a format to a range of cells, and then have the formatting change according to the value of the cell or formula — has been improved as well, including the addition of more styles and icons.

    PowerPoint apparently has entered the video age. 2010 introduces a slew of enhanced video features, although in the Technical Preview not all were working properly. Key among the new features is a set of basic video editing tools built directly into PowerPoint. They’re not as powerful as full-blown video editing software, but work well for common tasks such as trimming and compressing videos and adding fade-ins and fade-outs. Highlight a video you’ve embedded in a presentation, and the tools appear in the Ribbon. Also useful is a set of video controls you can use during the presentation to pause, rewind, fast-forward and so on — something that the previous version of PowerPoint did not have.

I am hoping that I get an opportunity to test this new product soon.

Miscellaneous

From Published Accounts

1 Change in Accounting Policy for Toolings Pursuant to
Opinion of EAC of ICAI


Vesuvius India Limited — (31-12-2009)

From Significant Accounting Policies :

Fixed Assets :

(a) Cost :

Fixed assets are stated at cost of acquisition (net of CENVAT)
less accumulated depreciation/amortisation. Cost of acquisition includes taxes,
duties, freight and other costs that are directly attributable to bringing
assets to their working condition for their intended use. Spares that can be
used only with particular items of plant and machinery and such usage is
expected to be irregular are capitalised.

During the year, the Company has changed its accounting
policy for toolings to comply with the opinion of the Expert Advisory Committee
of the Institute of Chartered Accountants of India in this regard. Consequent to
such change, toolings used for the production of finished goods have been
recognised as fixed assets. Depreciation for the year on such toolings have been
provided for based on their estimated useful lives of 3 years. Hitherto, such
toolings were considered as inventories and were being amortised over their
estimated useful lives of 3 years. Consequently, during the year :

— Cost of acquisition aggregating Rs.140,561 (previous year
Rs.106,886) of toolings that had not been fully amortised till the previous
year-end has been added to gross block of fixed assets as at the beginning of
the year.

— Amortised Cost aggregating Rs.92,644 (previous year
Rs.65,751) of toolings that had not been fully amortised till the previous
year-end has been added to accumulated depreciation at the beginning of the
year.

— Cost of acquisition of toolings purchased during the year
aggregating Rs.18,005 (previous year Rs.33,675) has been recognised as addition
to fixed assets

— Depreciation for the year on toolings Rs.27,904 (previous
year Rs.26,893) has been provided for based on their aforesaid useful lives.

Had the Company continued to recognise toolings as inventory
:

— inventory of toolings at the year-end would have been
higher by Rs.38,018 (previous year Rs.47,917) and net block of fixed assets at
the year-end and at the previous year-end would have been lower by corresponding
amounts.

— toolings consumed during the year would have been higher by
Rs. 27,904 [previous year Rs.26,893] and depreciation charge for the year and
the previous year would have been lower by corresponding amounts.

The above reclassification had no impact on profit after tax
for the year.

2 Approval pending for transactions covered u/s.297 of
Companies Act, 1956

Castrol India Limited — (31-12-2009)

From Notes to Accounts
:

The Company has
entered into transactions for rendering of services and secondment of personnel
with two private limited companies incorporated in India, which are a part of
the BP group of companies worldwide. The said agreements attracted the
provisions of Section 297 of the Companies Act, 1956 as there were common
Directors between the Company and the two private limited companies. The Company
is applications to the Regional Director (Ministry of Corporate Affairs) for
necessary approvals. The Regional Director (Ministry of Corporate Affairs) has
sought clarifications and requested the Company to make fresh applications with
additional information. The Company has made fresh applications in relation to
both the private limited companies to the Regional Director (Ministry of
Corporate Affairs) and is currently awaiting approval.


Non-provision of impairment loss

Ciba India Limited — (31-3-2009)

From Notes to Accounts :

13. The Company has fixed assets on the leased
premises at Goa. The carrying value of the fixed assets at the said leased
premises Rs.120,633 including the assets which cannot be moved is Rs.70,177 as
at the year-end. The lease of the premises expired on August 31, 2008 and
pending the final outcome of the Company’s negotiations in respect of the same,
no impairment is assessed on the fixed assets at the leased premises and
depreciation on these assets is provided as per the Company‘s policy. The
company has relied on independent valuation report of January, 2008 and as the
value of assets is more than the carrying value, no impairment is deemed
necessary.

From Auditors’ Report

5. As more fully described in Note 13 to the
financial statements, pending the final outcome of the Company’s negotiations in
respect of premises leased to it, the Company has not assessed the fixed assets
at the said premises for impairment, if any. The carrying value of fixed assets
at the said leased premises is Rs.120,633 thousands including immovable assets
of Rs.70,117 thousands as identified by the Company. We are unable to comment
the effect of adjustments, if any, had such assessment for impairment been
carried out.

6. Further to our comments in the Annexure referred
to in para 3 above, and except for matter referred to in para 4 above, we report
that :

(vi) In our opinion and to the best of our
information and according to the explanations given to us except for matter
referred to in para 4 above, the said accounts give the information required by
the Companies Act 1956, in the manner so required and give a true and fair view
in conformity with the accounting principles generally accepted in India

levitra

Miscellaneous

4. Revenue recognition for income from wind mills

    Madras Cements Ltd. — (31-3-2009)

    Significant Accounting Policies :

    1. Under wheeling and banking arrangement :

    Units generated from windmills are adjusted against the consumption of power at our factories. The monetary value of the units so adjusted, calculated at the prevailing EB rates net of wheeling charges has been included in power and fuel. The value of unadjusted units as on the Balance Sheet date has been included in Advances recoverable in cash or in kind under the schedule loans and advances.

    2. Under power purchase agreement :

    Units generated from windmills are sold to State Electricity Board at agreed rates and the income is included in value of power generated from wind mills.

   5. CFS not prepared since subsidiary held for taking over for a specific purpose

    Kirloskar Oil Engines Ltd. — (31-3-2009)

From Notes to Accounts :

    The Company has promoted and incorporated a wholly-owned subsidiary in the name of Kirloskar Engines India Limited on 12 January 2009. The said Company will be used for the purpose of taking over the Engine and Auto Component business of demerged company on a going-concern basis pursuant to the proposed Scheme of Arrangement.

    As such investment in subsidiary is held exclusively for such a purpose, in view of para 11(a) of Accounting Standard (AS-21) ‘Consolidated Financial Statement’ prescribed by the Companies (Accounting Standards) Amendment Rules, 2009, the consolidated accounts have not been prepared.

    Moreover, first financial year of the subsidiary company is from 12 January 2009 to 31 March 2010. In view of the extended financial year of the subsidiary, its accounts are not attached in this Annual Report as required under Section 212 of the Companies Act, 1956.

  6.  Scheme for Demerger of Passive Infrastructure at Nil value to a subsidiary, and loss arising therefrom adjusted against ‘Reserve for Business Restructuring’

    IDEA Cellular Ltd. — (31-3-2009)

    From Notes to Accounts :

    A Scheme of Arrangement was filed with the High Court of Gujarat at Ahmedabad to de-merge Passive Infrastructure (PI) assets in the telecom service areas of Andhra Pradesh, Delhi, Gujarat, Uttar Pradesh (both East & West including Uttaranchal), Harayana, Kerala, Rajasthan and Mumbai at nil consideration with an appointed date of 1st January 2009 to Idea Cellular Towers Infrastructure Limited (ICTIL), a 100% subsidiary of Aditya Birla Telecom Limited (ABTL). ABTL is a 100% subsidiary of the company. The High Court of Delhi at New Delhi and the High Court of Gujarat at Ahmedabad approved the scheme on 3rd August 2009 and 31st August 2009, respectively. The scheme became effective on 29th September 2009. As per the scheme :

    (i) PI assets having book value of Rs.16,227.76 Mn. as on 31st December 2008 has been debited to the Profit & Loss Account.

    (ii) Investment in ABTL has been increased by the book value of PI assets vested with ICTIL as part of this scheme, by creating ‘Reserve for Business Restructuring’.

    (iii) An amount equal to net book values of PI assets as per point (i) above, has been withdrawn from ‘Reserve for Business Restructuring’ recognised as per point (ii) above.

    Had the scheme not mandated the above accounting treatment, the value of investment in ABTL would not have included the book values of Rs.16,227.76 Mn. of the PI assets de-merged to ICTIL but would have remained at Rs.100.00 Mn. Consequently, there would have been no creation of ‘Reserve for Business Restructuring’ of Rs.16,227.76 Mn. and withdrawal of the same to the credit of P&L.

 

  7. Disclosures regarding changes due to Migration to ERP system

    BEML Ltd. — (31-3-2009)

    From Notes to Accounts :

    ERP System :

    (i) Change in costing methodology consequent to introduction of ERP

    With the introduction of ERP system, stage level production orders are opened vis-à-vis batch work orders under the Legacy system. The valuation of such stage level production orders is done on standard cost basis. There is a provision to review the cost and revise the same to bring it as close as possible to actual cost. Thus the closing stock of work-in-progress and finished goods though valued at standard cost are adjusted to nearly the actual cost and the difference, if any, is not material. Variances arising on account of difference between standard cost and the actual cost, on account of change in the nature of inputs from bought-out to internally manufactured or vice versa, timing difference between standard cost and actual occurrence during the financial period and fluctuations in the material prices and the exchange rate, is adjusted in the Cost of Production in order not to carry forward period variances to subsequent financial period. Cost redistributions between work orders have been made to reduce the impact of material variances between standard cost and actual cost.

    (ii) Provision towards Obsolescence is made as per provisioning norms consistently followed and is based on ageing of inventory as per ERP.

iii) Physically verified and reconciled inventory balances have been uploaded in ERP at the time of migration to ERP. Physical verification has been done on a perpetual basis while reconciliation of the physical balance with ERP balance could not be online. No significant discrepancies have been noticed on subsequent reconciliation of physical balances as per stock verification with ERP balances to the extent identified.

iv) Balances with Government Departments are subject to reconciliation and consequential adjustment, if any.

v) Consequent to migration from Legacy to ERP system covering all Regional offices, District offices and Marketing divisions at KGF and Mysore during Financial year 2008-09, the date of entry of transactions including sale of spares in certain cases is after 31-3-2009 though the transactions have occurred on or before 31-3-2009.

Miscellaneous

From Published Accounts

1 Disclosures in respect of
derivative losses, corporate debt restructuring, winding up petitions, etc.

WOCKHARDT LIMITED — (15
months ended 31st March 2010)

From Significant Accounting
Policies :

Derivative Financial
Instruments :

The Company uses derivative
financial instruments such as option contracts and interest rate swaps to hedge
its risk associated with foreign currency fluctuations and interest rates.

As per the Institute of
Chartered Accountants of India (ICAI) Announcement, accounting for derivative
contracts, other than those covered under AS-11, are marked to market on a
portfolio basis, and the net loss is charged to the income statement. Net gains
are ignored.

From Notes to Accounts :

32. Corporate Debt
Restructuring (CDR) Scheme is effective from April 15, 2009. The outstanding
liabilities of the Company are being restructured under the aegis of Corporate
Debt Restructuring (CDR) Scheme. As required under the Scheme, the Master
Restructuring Agreement (MRA) and other necessary documents have been executed
and effected. The CDR Scheme comprehensively covers the FCCB liabilities and
crystallised derivatives/hedging liabilities.

35. CONTINGENT LIABILITIES
NOT PROVIDED FOR :

(e) Certain
derivative/hedging contracts have been unilaterally cancelled by the banks. The
Company has treated the demand of ‘8,483.22 million (previous year — ‘4,895.24
million) as a contingent liability and has not acknowledged the same as debt,
since the liability cannot be currently ascertained even on a best-effort basis
till the final outcome of the matter.

The Company is of the view
that these are contingent liabilities as these arise from past events and
existence of which will be confirmed only by the occurrence or non-occurrence of
one or more uncertain future events not wholly within control of the Company and
therefore, has not acknowledged these claims against Company as debts.

36. Winding-up petitions are
filed by certain lenders/banks in the Bombay High Court and the Company has
filed affidavit in reply. ICICI Bank, as empowered by CDR and Employee Union
have filed intervention application against the winding-up. The matter is sub-judice
and outcome of which cannot be currently ascertained.

From Auditors’ Report :

5. Without qualifying our
opinion, we draw attention


(a) to Note 32 of the
financial statements, wherein as explained, the Company’s outstanding
liabilities are being restructured under the aegis of Corporate Debt
Restructuring Scheme (CDR) with effect from April 15, 2009 and as required
by the Scheme, the Master Restructuring Agreement (MRA) and other necessary
documents have been executed and are effective.

(b) to Note 36 of the
financial statements, wherein as explained, certain lenders have filed
winding-up petitions against the Company in the Bombay High Court and the
Company has filed affidavit in reply. The matter is sub-judice and outcome
of which cannot be currently ascertained.


The Company’s ability to
continue as a going concern is dependent on the Company being able to
successfully implement the actions proposed in the CDR Scheme and outcome of the
winding-up petitions in favour of the Company.


6. (a) With regard to
outstanding derivative contracts as on March 31, 2010, the premiums
aggregating ‘1,843.79 million are unconfirmed and we are informed that the
relevant documents are being put in place. The consequential effect of
subsequent adjustment/s — if any — on relevant assets and liabilities and
loss for the period is not ascertainable.

(b) In respect of
crystallised derivative losses of ‘11,303.80 million forming part of
‘exceptional items’, we have relied on appropriate written representations.


7. As explained in Note
35(e) to the financial statements, the Company had, on certain derivative
contracts with banks, stopped payment of margins called by the banks. The banks,
based on the Early Termination clause in the agreement, terminated these
contracts and claimed an amount of ‘8,483.22 million, being the loss incurred on
termination of such contracts, which the Company has disputed and not
acknowledged as debt. No provision has been made in the accounts for the above
amount, which has been considered as contingent liability. The consequential
impact upon relevant assets and liabilities and loss for the period is not
ascertainable.

8. In our opinion, and to
the best of our information and according to the explanations given to us,
subject to the matter included in paragraph 6 and 7 above, the effect of which
cannot be currently ascertained, the said accounts give the information required
by the Act in the manner so required and also give a true and fair view in
conformity with the accounting principles generally accepted in India.

From Annexure to Auditor’s
Report :




(vii) In our opinion,
the Company has an internal audit system commensurate with the size and
nature of its business, except that scope needs to be enlarged in respect of
Treasury Operations.

    (ix)(a) In our opinion and according to the information and explanations given to us, considering the loan liabilities being re-structured under the aegis of Corporate Debt Restructuring (CDR) Scheme and Master Restructuring Agreement being signed by lenders, as per the terms of CDR Scheme, there has been no default in repayment of principal and interest to CDR lenders.

    b) With respect to Foreign Currency Convertible Bonds aggregating ‘4,464.02 million which were due for repayment in October 2009, no repayment has been made and as informed, CDR Scheme comprehensively covers FCCB liabilities.

    c) As informed, the Company is in dispute with certain lenders whose liabilities as per books of accounts aggregate ‘1,490.70 million. Further, as stated in Note 35(e), the Company has not acknowledged as debt the demand raised on account of unilateral termination of certain derivative contracts. We are unable to comment in respect of such liabilities whether there has been any default in view of the dispute.

From Directors’ Report?:

With regard to qualification and emphasis of matter contained in the Auditors’ Report, explanations are given below?:

    a) Point 5(a) of Auditor’s Report — Note 32 of Notes to Accounts to the financial statements?:
Corporate Debt Restructuring (CDR) Scheme is effective from April 15, 2009. The Outstanding liabilities of the Company are being restructured under the aegis of Corporate Debt Restructuring Scheme. As required under the Scheme, the Master Restructuring Agreement (MRA) and other necessary documents have been executed and effective. The CDR Scheme comprehensively covers the FCCB liabilities and crystallised derivatives/ hedging liabilities.

    b) Point 5 (b) of Auditor’s Report — Note 36 of Notes to Accounts to the financial statements?:
Winding-up petitions are filed by certain lenders/banks in the Bombay High Court and the Company has filed affidavit in reply. ICICI Bank, as empowered by CDR and Employee Union have filed intervention application against the winding-up. The matters are sub-judice and outcome of which cannot be currently ascertained.

    c) Point 6 of Auditor’s Report?:
The Company has charged the crystallised derivative losses to the Profit & Loss Account and some of the documentation trail is being corelated, for which the Company has formed a task force and necessary actions are being taken.

    d) Point 7 of Auditor’s Report?:
Certain derivatives/hedging contracts have been unilaterally cancelled by banks. The Company has treated the demand of ‘8,483.22 million as a contingent liability and has not acknowledged as debt, since the liability cannot be currently ascertained even on a best-effort basis till the final outcome of the matter. The Company is of the view that these are contingent liabilities as these arise from past events and existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within control of the Company and therefore, has not acknowledged these claims against the Company as debts.

    e) Point (vii) of Annexure to Auditor’s Report?:
The Company has an internal audit system which it believes to be commensurate to the size of its operations. The Company has already commenced the process of further strengthening the internal audit system to enlarge its scope in respect of Treasury Operations. Further, as per the CDR Scheme the Company cannot execute any new derivative transactions (excluding forwards strictly for hedging purposes for a maximum period of 180 days) without prior approval of CDR Empowered Group and accordingly the treasury operations of the Company have been significantly reduced.

ICAI And Its Members

1. Disciplinary case :

    Case of ICAI v. Shri Deepak Parti and Anr. is reported on page 1424 of C.A. Journal for March, 2010. In this case, the complainant alleged that the member, in his capacity as Vice-Chairman, promoted an NBFC (M/s. Schematic Finance Ltd.). The complainant and her son were regularly investing funds in this NBFC. The NBFC used to give post-dated cheques for redemption money and interest. One of the deposits for Rs.6.70 lacs was made and NBFC gave post-dated cheque for this amount and interest due. This cheque when deposited in the bank, was returned unpaid. On inquiry, the complainant found that the NBFC company had closed its office. The matter was referred to the Company Law Board. The CLB fixed dates for repayment in instalments, but the CLB order was not complied with.

    When the matter was referred to the disciplinary committee, it held that the member was guilty of ‘other misconduct’. The Council accepted this finding and referred the matter to the High Court with a recommendation that the name of the member be removed from the Register of Members for a period of six months.

    The member did not appear before the Delhi High Court. On consideration of the report of the disciplinary committee and the finding of the Council, the High Court held that the name of the member be removed from the Register of Members for a period of six months.

2. Some ethical issues :

The Ethical Standards Board has considered some ethical issues and given its views on page 1406 of CA Journal for March, 2010. Some of the issues as decided by ESB are as under :

    (i) Whether communication with previous auditor is necessary in case of appointment as statutory auditor by nationalised and other banks ?

    Ans. : Clause (8) of Part I of the First Schedule to the CA Act is equally applicable in case of nationalised and other banks and also to Government agencies and, therefore, such communication is necessary.

    (ii) Whether communication by the incoming auditor is mandatory with the previous auditor in respect of various audit assignments, like the concurrent audit, revenue audit, tax audit and special audits, etc. ?

    Ans. : The requirement for communicating with the previous auditor would apply to all types of audits viz., statutory audit, tax audit, internal audit, concurrent audit or any other kind of audit. The Council has laid down detailed guidelines in this regard and the same are appearing at pages 166–168 of the Code of Ethics, 2009.

    (iii) Whether a Chartered Accountant will be deemed to be guilty of professional misconduct if he accepts his appointment as an auditor immediately after intimating his appointment over the phone to the previous auditor ?

    Ans. : The member would be held guilty of professional misconduct for the following reasons :

(a) That he had failed to communicate with the retiring auditor in writing; and

(b) That he did not wait for a reasonable length of time for a reply to be received from him.

(iv) Whether a Chartered Accountant can accept an appointment as auditor of a company without first ascertaining from it whether the requirements of S. 225 of the Companies Act, 1956 in respect of such appointment have been duly complied with ?

    Ans. : As per clause (9) of Part I of the First Schedule to the CA Act, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of S. 225 of the Companies Act, 1956 in respect of such appointment have been duly complied with. In this regard, the Council has laid down detailed guidelines that are appearing at pages 188–196 of the Code of Ethics, 2009.

    (v) Whether a statutory auditor can be appointed in the adjourned meeting in place of existing statutory auditor where no special notice for removal or replacement of the retiring auditor is received at the time of the original meeting ?

    Ans. : If any annual general meeting is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the company, since in terms of S. 190(1) of the Companies Act, 1956, special notice should be given to the Company at least fourteen clear days before the meeting in which the subject matter of the notice is to be considered. The meeting contemplated in S. 190(1) is undoubtedly the original meeting.

    (vi) Whether a Chartered Accountant in practice is entitled to accept teaching assignment ?

    Ans. : A Chartered Accountant in practice is allowed to accept teaching assignment in university, affiliated colleges, educational institution, coaching organisation, private tutorship under a specific permission of the Council, provided the direct teaching hours devoted to such activities taken together do not exceed 25 hours a week.

        3. Treatment of preliminary expenses incurred on incorporation of a company:

        i) Facts:

    A company was incorporated in May, 2008 as a wholly-owned subsidiary of a Government of India enterprise under the administrative control of the Ministry of Oil & Natural Gas to implement city gas distribution by participating in the bidding process of the Petroleum & Natural Gas Regulatory Board (PNGRB) and also to set up CNG stations across the National Highway Corridor. The company spent an amount of Rs.1.26 crore towards incorporation expenses (preliminary expenses) during the period May 27, 2008 to March 31, 2009.

    As the company had not started the commercial production, the ‘Statement of Incidental Expenditure During the Construction’ (IEDC) had been prepared instead of profit and loss account, complying with the specific requirements of Part II of Schedule VI to the Companies Act, 1956, giving suitable disclosure of specific items of expenditure.

    The company had also incurred other pre-operative expenses. It had shown the preliminary expenses and pre-operative expenses in the statement of IEDC. The expenditure under the head IEDC was allocated to capital work-in-progress to be capitalised in future as part of Fixed Assets (AS-10). The company was of the view that the ‘start-up’ cost included expenses incurred for formation expenses of the company (preliminary expenses) as per para 56 of AS-26.

        ii) Query:

    The question before the Expert Advisory Committee (EAC) was whether the accounting treatment of pre-liminary expenses adopted by the company was in compliance with existing Accounting Standards and other generally accepted accounting principles?

        iii) EAC opinion:

    The committee, after considering paragraph 56 of AS-26 — ‘Intangible Assets’ and paragraph 9(3) of AS-10

    — ‘Accounting for Fixed Assets’, came to the conclusion that the start-up costs of the nature of incorporation expenses (preliminary expenses) incurred for bringing the enterprise into existence in its corporate form cannot be said to be attributable to bringing an asset/project into existence. The requirements of AS-26 would apply to the expenditure incurred on incorporation of the company and not the requirements of AS-10. Accordingly, in accordance with AS-26, such preliminary expenditure should be expensed by way of a charge to the profit and loss account in the period in which these are incurred. Therefore, the committee was of the view that for this purpose profit and loss account will have to be prepared by the company even before the commencement of commercial operations. Since, the company has treated incorrectly the said expenditures in the year of incurrence, it should rectify this mistake in the next year as prior period items in accordance with AS-5. “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.

    (Please refer pages 1425–1426 of C.A. Journal of March 2010)

        4. New Committees of the Council:

    The Council of ICAI has formed 6 statutory commit-tees and 28 non-statutory committees on 12-2-2010 for one year. Names of chairmen and vice-chairmen of these committees are as under:

        i) Statutory Committees:

        a) Chairman and Vice-Chairman of Executive, Examination, Finance and Disciplinary Committee (under old regulation) are

    Shri Amarjit Chopra (President) and Shri G. Ramaswamy (Vice-President), respectively.

        b) Board of Discipline —

    Chairman Shri Amarjit Chopra
    Disciplinary Committee (Under New S. 21B)— Chairman Shri G. Ramaswamy.

        ii) Non-Statutory Committees — (Some Names)

        a) Accounting Standards Board

    CA Manoj Fadnis (C) and CA S. Santhanakrishnan (VC)

        b) Auditing & Assurance Standards Board

    CA Abhijit Bandyopadhaya (C) and CA R. S. Adukia (VC)

        c) Audit Committee

    Shri K. P. Shashidharan (C) and CA S. K. Agarwal (VC)

        d) Board of Studies

    CA Vinod Jain (C) and CA V. Murali (VC)

        e) Direct Taxes Committee

    CA J. P. Gokhale (C) and   CA M. Devaraja Reddy (VC)
        f) Indirect Taxes Committee

    CA Bhavana Doshi (C) and CA M. N. Hiregange (VC)

        g) Ethical Standards Board

    CA Jaydeep Shah (C) and CA K. Raghu (VC)

        h) Expert Advisory Committee

    CA S. K. Maheshwari (C) and CA Anuj Goyal (VC)

        i) International Taxation Committee

    CA M. P. Sarda (C) and CA Dhinal A. Shah (VC)

        j) Professional Development

    CA Pankaj Jain (C) and CA C. S. Nanda (VC)

    (For details please refer P. 1493-1497 of C.A. Journal for March, 2010)

        5. Auditing Standards:

        a) The following Revised Standards on Auditing (SA) have been published in C.A. Journal for March, 2010 at pages stated below. They will apply to Financial Statements for periods beginning on or after 1-4-2010.

        i) SA 200 (Revised) — Overall objectives of the Independent Auditors and the Conduct of Audit in Accordance with Standards on Audit-ing (P. 1508–1520).

        ii) SA 220 (Revised) — Quality Control for Audit of Financial Statements (P. 1521–1527).

        iii) SA 501 (Revised) — Audit Evidence — Specific Considerations for Selected Items (P. 1528– 1530).

        iv) SA 505 (Revised) — External Confirmations (P. 1531–1535).

        v) SA 520 (Revised) — Analytical Procedures (P. 1536–1539).
        vi) SA 620 (Revised) — Using the Work of an Auditor’s Expert (P. 1540-1545)

        b) The following Exposure Draft is published on Standard on Assurance Engagements (SAE) 3000:

    Assurance Engagements other than Audits or Reviews of Historical Financial Information (P. 1546– 1553).

        6. ICAI News:

    (Note : Page Nos. given below are from C.A. Journal for March, 2010)

        i) New Branches of ICAI:

    The following new Branches have been opened by ICAI on 13-1-2010 (P. 1505–1506):

        a) Tirupati (SIRC)

        b) Bhavnagar (WIRC)
        c) Pali (CIRC)

        d) Shri Ganga Nagar (CIRC)

        e) Ratlam (CIRC)

        ii) ICAI New Publications (P. 1498-1500):

        a) e-learning CD on Windows, Network & Wi-Fi Security — An Intro.
        b) e-learning CD on IS Security, Cyber Threats & Review — An Intro.
        c) Technical Guide on IT Migration Audit.

        d) Study on Compliance of Financial Reporting Requirements.
        e) Technical Guide on Internal Audit of Treasury Functions in Banks.

        iii) CA Examinations (P. 1501-1502):

        a) PE II, PCE, IPCE and Final Examinations — 3rd to 17th May, 2010.
        b) CPT — 20th June, 2010.

ICAI And Its Members

1. Know Your Ethics :

The Ethical Standards Board of ICAI has discussed some ethical issues on pages 554 and 556 of the CA Journal of October, 2010, as under :

(i) Can a Member share profits with the widow of his deceased partner?

    Ans. : When there are two or more partners and one of them dies, the widow of the deceased partner can continue to receive a share of the profit of the firm. A legal representative, say, widow of a deceased partner, would be entitled to share the profits only where the partnership agreement contains a provision that on the death of the partner, his widow or legal representative would be entitled to such payment by way of sharing of fees or otherwise for the specified period.

(ii) Can there be sharing of fees between the widow or the legal representative of the proprietor of a single member firm and the purchaser of the goodwill of the firm on the death of the sole proprietor of the firm ?

    Ans. : There could not be any sharing of fees between the widow or the legal representative of the proprietor of a single member firm and the purchaser of the goodwill of the firm on the death of the sole proprietor of the firm. Payment of goodwill to the widow or legal representative is permissible in such cases and to enable such payments to be made in installments, the agreement of the sale of goodwill should contain such a provision. These payments, even if they are spread over the specified period, should not be linked up with participation in the earnings of the firm.

(iii) Can the details of a student passing examination be published in the local press ?

    Ans. : It is usual for local papers to publish details of the examination success of local candidates. Some biographical information is often included. The candidate’s name and address, school and local background, examination passed with details of any prize or place gained, the name of the principal, firm and town in which the principal practices may be published.

(iv) Can a member act as Tax Auditor and Internal Auditor of an entity ?

    Ans. : The Council has decided that the Tax Auditor cannot act as Internal Auditor or vice versa for the same financial year.

(v) Can a concurrent auditor of a bank undertake the assignment of quarterly review of the same bank?

    Ans. : The concurrent audit and the assignment of quarterly review of the same entity cannot be undertaken simultaneously as the concurrent audit is a kind of internal audit and the quarterly review is a kind of statutory audit. It is prohibited in terms of the ‘Guidance Note on Independence of Auditors.’

(vi) Is a member holding certificate of practice entitled to own agricultural land and continue agricultural activity ?

    Ans. : Member holding certificate of practice can own and hold agricultural land and continue agricultural activity through hired labour.

2. Basis of calculation of future cash flows — EAC Opinion :

(i) Facts :

    A public sector company engaged in the business of mining of bauxite, manufacturing of alumina and aluminum as well as generation of power at the captive power plant for use of smelter plant. At alumina refinery, the company has set up two value added plants for (i) special grade hydrate and (ii) special grade alumina (SGA). Both the units have been identified as cash generating units for the purpose of Accounting Standard (AS) 28, Impairment of Assets.

    The company has stated that estimate of future cash flows over the useful life of the SGA plant, i.e., up to the financial year 2022-23, was made in line with the provisions of paragraphs 26(a), 26(b), 27, 28, 29, 30, 31(a), 31(b) and 31(c) of the AS-28. For the SGA plant, calcined alumina, which is internally transferred, is the only raw material. While calculating the cash flows, cost or production of calcined alumina was considered as the cost of raw material.

    During the course of scrutiny/checking of cash flow statement, C&AG auditors agreed to each and every assumption taken, except the cost of raw materials. In the opinion of the C&AG, auditors, market price of calcined alumina should have been taken as the cost of raw material instead of cost of production.

(ii) Query :

    Based on the facts stated above, the opinion of the Expert Advisory Committee has been sought by the company on the issue as to whether the raw materials’ cost (internally transferred) should be taken at ‘cost of production’ or ‘market price’ for the purpose of calculating future cash flows for ascertaining impairment as per AS-28 ?

    iii) EAC opinion:

The Committee is of the view that paragraph 31 of AS- 28 lays down the composition of the estimates of future cash flows. Paragraph 31(b) of AS-28 only lays down that the projections of cash flows for an asset; should include cash outflows required to generate cash inflows. The paragraph further requires that cash outflows should include, among other expenses, overheads and other related charges that can be directly attributed or allocated on a reasonable and consistent basis to the asset.

The Committee is of the view that, on the other hand, paragraph 68 of AS-28 lays down the payments for identification of the cash-generating unit in case when an active market exists for the output produced by the asset or a group of assets even if the output is used internally. This paragraph requires that in such a situation, that is, when an active market exists for the output of an asset or a group of assets which is used internally, that asset or group of assets should be identified as a separate cash generating unit. This paragraph further requires that in such a situation, it is the management’s best estimate for future market price of the output that should be used for determining the cash inflows even from internal use of the output. Similarly, for determining the cash outflows of the cash generating unit that uses the output of this CGU as its raw material, it is the management’s best estimate of future market prices of the product that should be used for determining cash outflows.

The Committee is of the view that paragraph 31(b) is a general paragraph which details with what cash outflows should be taken into account while determining future cash flows; whereas, paragraph of AS-28 contains specific requirements with respect to, inter alia, the price at which the raw material which is transferred internally, should be taken for the purpose of determining cash outflows. Thus, in the view of the Committee, there is no contradiction between paragraphs 31 and 68 of AS-28.

On the basis of the above, the Committee is of the opinion that for the purpose of calculating future cash flows for determining impairment as per AS-28, the cost of the internally transferred raw material should be taken at the management’s best estimate of future market prices of the output (raw material).

(Refer pages 575 to 577 of C.A. Journal for October, 2010)

    3. Interview with Shri Mukesh Ambani:
Shri Mukesh Ambani gave an exclusive interview to the C.A. Journal, which is published on pages 578-580 of C.A. Journal of October, 2010. Some of the answers given by him are as under:

    Would you like to say something about the chartered accountancy profession? How is your experience with chartered accountants?? Would you like to give any feedback on their knowledge, skills, training, etc.
Ans.: Chartered accountancy as a profession has very effectively helped business, because it has created high standards of accounting and rigorous systems that only allow the best to get certification. At RIL, we have a large number of chartered accountants who have made significant contribution to the organisation’s success and corporate governance.

    ii) Would you like to give any message to the members of the chartered accountancy profession to inspire and enable them to fully tap opportunities and face the ever-changing dynamic world of business?
Ans.: I think chartered accountancy can benefit by expanding its horizons to encompass global standards prescribed by well-renowned courses such as the CPA, especially because our best students are brighter, can work harder and are mathematically inclined. I would also like to encourage them to maintain excellence.

    iii)What are the areas ICAI and Reliance can jointly work for development of chartered accountancy as a profession with a focus on the economical and social development of our country?

Ans.: I believe ICAI can help evolve a standard template with the help of leading corporate houses to ensure minimum standards of corporate governance. An institution like ICAI can also align with our future initiatives in education to take the profession to the smaller towns of India.

    4. Scheme for Secondment of Articled Trainees:

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

    ii) The articled trainee shall be seconded only to a member who is entitled to train one or more articled trainees 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 trainee is seconded will not be entitled to train more than two such trainees on secondment at a time.
    iv) The aggregate period of secondment shall not exceed one year, provided that the period served on secondment with any one member or his partner shall not exceed six months.
    v) Where an articled trainee is seconded to a member in industry, the total period spent in industry by the articled trainee including the period of industrial training under the Chartered Accountants Regulations, shall not exceed one year.

    vi) During the period of secondment, the Principal shall pay the stipend as provided under the Chartered Accountants’ Regulations.

    vii) The Principal shall keep a record of the training undergone during secondment and include its particulars in the report to the Council under Regulation 64.

(C.A. Student Journal for October, 2010 — page 21)

    5. ICAI News:

(Note: Page Nos. given below are from the C.A. Journal of October, 2010)

    i) New ICAI Chapter in UAE:

ICAI has added the 22nd International Chapter at RAS AL KHAIMAH, UAE, (page 546).

    ii) International Conference on Accountancy:
ICAI is organising the International Conference on Accounting at New Delhi from 4th to 6th January, 2011. Many delegates from the Asia-Pacific Region will attend this conference. Subjects such as Financial Re-engineering, Governance, Harmonisation of Standards, Issues relating to SMP Accountants, and Millennium Developmental Goals, etc. will be discussed at the conference. (page 547).

    iii) Group to Resolve Dispute for Members:

A new group has been constituted by ICAI to examine the matter of development of an alternate dispute resolution machinery (arbitrator) for dealing with disputes of member v/s member and member v/s student and make recommendations to the Central Council (page 549).

    iv) Unique Code Numbers:

It is reported that ICAI has decided to introduce a Unique Code Number (UCN) for use of members and C.A. firms. It is believed that use of UCN will check the increasing instances of forged attestations of certificates issued by our members and CA firms. According to ICAI President, there are many instances reported where the financial statements produced before tax authorities, banks, etc. are different from those certified by our members and CA firms. To curb this practice it is proposed that ICAI will issue UCN which will have to be used by the members and CA firms. (Source: Business Standard of 7-10-2010).

    v) New publications of ICAI:

The following new publications have been issued by ICAI (pages 663 & 666):
    a)Compendium of Standards and Statements on Auditing (Vol. I & II).
    b) Compendium of Guidance Notes on Auditing (Vol. III) as on 1-7-2010.
    c) Technical Guide on Internal Audit of BPO Industries.
    d) Technical Guide to Cenvat Credit.

From The President

From The President

Dear BCAJ Lovers,

Every month, I ponder over what to write about in the
President’s Page. I am conscious of the fact that my illustrious predecessors
have been writing on academic matters and on technical subjects of interest to
members. On the other hand, I have deliberately stayed away from such topics.
The reason for this is that I believe I have got an excellent opportunity to
share my thoughts on other important topics with thousands of professionals in
and outside the country and by writing on topics or issues other than tax,
accounting, auditing etc., I am bringing to the fore issues of importance on
which very little discussion otherwise takes place amongst our profession. The
response that I have so far received from a large number of members has
encouraged me to continue this trend. I sincerely thank all the readers who have
been writing to me and sharing their views.

This month, I happened to attend a very impressive event in
Mumbai. The Business India Award function for the Businessman of the Year 2009
was held on 22nd February. Mr. Aditya Puri, the Managing Director of HDFC Bank,
was the recipient of this prestigious award this time. I learnt a few very
interesting facts about this man, who heads one of the most successful banks of
our country. He does not wear a watch, he does not carry a mobile phone, and
lastly, he leaves office every evening by 5.30. This is an amazing revelation
for all of us. If a poll is taken, I doubt if any CA would be leaving his office
by 5.30 every evening. Whether we are in practice or in industry, we are all
bogged down by our work and consider it mandatory to sit late hours at work. And
here is a man who heads the second largest private sector bank in India and this
gentleman can manage to go home at decent hours every day. Can there be a better
example of time management and also of delegation? Can there be a better person
to emulate than Mr. Puri? The BCAS has been conducting a course on self
development, which includes a session on time management. I invite our readers
to take these matters more seriously.

Another event that I attended was a fund raiser by the Terry
Fox Foundation. This organization, aided by many others in India and across the
world, has raised millions of dollars of funds for cancer research. Terry Fox,
as many of you would know, was a keen sportsman who, at the age of 18, was
diagnosed with bone cancer and had to have one of his legs amputated. Despite
this, he decided to run across Canada to raise funds for other cancer patients.
He ran more than 5,300 kms before he was forced to stop running due to further
spread of cancer in his body. He died at the age of 22. This spirit of being
alive while dying teaches all of us to give more than take. Even in his death,
Terry left a ray of hope for so many other cancer patients like him. He proved
that nothing is impossible if there is a will to achieve the seemingly
impossible. The BCAS Foundation, which is a charitable trust floated by the BCAS
and its leaders, has been conceived to do noble work. This year, we propose to
raise funds for providing educational loans/scholarships to financially weak CA
students. This proposal is still under finalization. I urge readers to loosen
their purse strings and to contribute generously to this cause. Let us spread
education far and wide and particularly amongst the financially weak. Recently,
we have funded the CA course fees for a young and enthusiastic son of a
vegetable vendor. There will be many such deserving cases. Do you have it in you
to come out and do something concrete for such people?

A member of BCAS happened to forward me an interesting
e-mail. It contained an excerpt from an article written by a professor of IIM
Bangalore. It spoke of how the fundamentals of business environment are changing
completely. There are several examples of how completely unheard of business
ideas/products have, virtually overnight, become competitors of well known and
well entrenched products. Such new ideas/products have displaced ideas/products
which were once considered irreplaceable. Thus, for example, it is reported that
the company that sells the largest number of cameras in India is not Sony or
Canon or Kodak but Nokia (through its mobile phones). Similarly, the biggest
name in the music industry today is not HMV or Sa-Re-Ga-Ma but Airtel, which
sells caller tunes that play for 30 seconds. An even more vivid example is the
one about who was the toughest competitor to British Airways in India in 2008?
Singapore airlines? Better still, Indian Airlines? Maybe, but there are better
answers. There are competitors that can hurt all these airlines and others not
mentioned. The answer is videoconferencing and telepresence services of HP and
Cisco. Travel dropped due to recession and people started communicating over
internet and other electronic media – thereby avoiding travel altogether. All
these examples, the author said, lead one to a gem of a question – “who is my
competitor?” Chartered Accountants also need to pay heed to this question. Who
could be a competitor to a CA? Is it an MBA? Is it a CFA? Or is it someone else?
Who knows, the answer could be something as out of the box as “the Internet”.
After all, don’t we have so many web sites offering tax return filing services
at rates which we CAs would not even pay our office boys? So, is it possible
that the internet will replace a CA one day? Possible. At least for compliance
related services. The point that I am trying to drive home is that nobody can
afford to remain complacent and bask in past glory. One can never anticipate the
direction from where competition can come and of what type it would be. At such
times, one needs to have a broad vision. I am reminded of a very illuminating
statement attributed to Swami Vivekananda, who was asked by a blind person, “Can
there be anything worse than losing our sight?” The Swami promptly replied,
“Yes, losing your Vision.” If any of you are interested in reading the mail
referred to above, do write to me and I will forward it to you.

The Budget has been presented to the country by the Finance
Minister and all of you would have already had an overdose of material written
on and about the budgetary provisions. I, therefore, do not intend to add
anything to what the Editor of BCAJ has written.

Encouraged (nay, virtually prodded) by some of the young and
enthusiastic members of the BCAS, I have plunged headlong into social and
professional networking web sites. We now have a presence on some of the popular
networking sites such as Twitter, Linkedin and Facebook. I have also started a
blog on wordpress. I invite readers to join us in the cyber world. I find it
much easier to keep in touch with my contacts there than personally. Also, I
have heard that soon e-mails may go out of fashion! That being the case, I am
preparing myself for the changed environment well in advance! Join me if you
desire.

Sincerely yours,

Ameet Patel

levitra

From The President

From The President

Dear BCAJ Lovers,

I begin writing this month’s message while sitting in a hotel
room in another country after a very hectic day full of meetings. I felt that if
I begin the message in a completely new environment, maybe, I will get some
fresh ideas to write about.

At the outset, let me begin by congratulating the
Vice-President of the BCAS CA Mayur Nayak on his unopposed election as the next
President of the BCAS. He is joined by CA Pradip Thanawala who has been elected
as the next Vice-President. The new managing committee too has been elected. The
new team will take charge at the conclusion of the next AGM on 6th July. I must
confess that the thought of having only a few weeks left in office as your
President is a sad thought and I am already wondering how life would be after I
lay down office. But more about that next month.

I am continuing to write this message after returning to
India and flying off straight for a holiday with my family and a few friends.
Sitting in a tranquil place surrounded by mountains, valleys, forests and clouds
floating around, I feel I am in a different world altogether, compared to the
hustle bustle of daily grind in Mumbai. This much-needed break has given me time
to pause and think of the importance of relaxing and taking life easy. The
stress of routine work and constant fight against deadline-driven professional
life does tend to take its toll on one’s physical health. We all need to learn
to take compulsory holidays with our family members. We owe that to our own
selves and to our family members.

At the BCAS, though the year is drawing to an end, there is a
flurry of activities planned for the next few weeks. Responding to the
suggestions received from a few members in pursuance of my request for feedback,
our Indirect Taxes and Allied Laws Committee has planned the 4th Residential
Study Course on Service Tax in the first week of July. I hope that members will
take advantage of this unique course. The HR Committee too has gone ahead with
its annual programme for CA students. Members are requested to motivate and
encourage their students to participate in this very lively event. The
Information Technology Committee has, for the first time, arranged a half-day
seminar on Social and Professional Networking. Personally, I am an avid fan of
networking sites and I strongly believe that going forward, these sites will
become the centre point of communication amongst people. The various networks
created by the BCAS on different sites have met with very heartening response
and we have a reasonably large following on these networks. Therefore, this
seminar could not have come at a more opportune time. I invite readers to
participate in all our activities.

In my last communication, I had touched upon the concept of
networking and mergers amongst practising CAs. I have received responses from a
few members seeking advice on how to go forward with that idea. I intend to work
on this concept with our HR Committee and come up with a useful seminar very
soon.

During my visit to Mauritius recently, I met the Deputy Prime
Minister of that country and also a director of the Investment Board. The
difference in their approach and attitude towards investors and industry as
compared to our country’s red tapism and the bureaucratic approach of our Babus
was so obvious. The Deputy Prime Minister is a Chartered Accountant and was in
practice before he joined politics. The passion with which he spoke about how
their country was going out of the way to create an investor-friendly
environment conducive to the economic growth of the country was something which
I will not forget. I wish we had such people in our Government and public sector
bodies. Citizens would feel much more comfortable and confident of doing
business here. The ever-changing laws of our country make it difficult to plan
ahead. Retrospective amendments to the law seeking to overrule judicial
decisions send a very negative signal to investors and foreigners wanting to do
business in India. One hopes that our economist Prime Minister is able to bring
about much-needed change in India. Also, drawing inspiration from the Deputy PM
of Mauritius, I feel that more and more professionals and educated people ought
to join the mainstream politics so as to help cleanse the corrupt system. It is
not enough for all of us to merely sit back and complain all the time about the
ills of our society. We must do something about it.

Finally, the President-elect of the BCAS Mayur Nayak has
requested me to chair the Information Technology Committee of the BCAS next
year. I am looking forward to this exciting opportunity and hope to be able to
make a meaningful contribution to the BCAS and its members through increased use
of sophisticated technology in the months to come. I can assure you that you
will see much more of the BCAS on the Internet than ever before.

Yours sincerely,

Ameet
N. Patel




President, BCAS

levitra

From The President

From The President

Dear BCAJ Lovers,

had a dream many years ago — it was to head the BCAS as its
President. About 12 months ago, that dream became a reality for me. For that
dream to turn into reality, I had to work hard. I also had to work smart. As
they say, it is not enough to place a ladder against the wall to climb higher —
the wall that is chosen must be the right wall or else you would be headed in
the wrong direction. The past decade and more have been well spent by me in the
service of the BCAS. This august organisation has given me what I could never
have dreamt of in the normal course. I am grateful to all the members of the
BCAS for elevating me to the top position and for reposing confidence in me for
leading the organisation in the year that has flown by. Throughout the year, I
have received overwhelming response from many of you in terms of feedback to my
messages, words of appreciation for some of the initiatives that we were able to
take and also lots of suggestions for improvements. The latter have been taken
up by the office bearers in right earnest and wherever possible, have been
implemented too. As I prepare to lay down office at the AGM on 6th July, I must
place on record my deep sense of gratitude to everyone who touched my life
during this year. Every core group member, every staff member, every person who
wrote to me or who spoke to me — to all of you, my heartfelt thanks.

During the year that has passed by, your office bearers and
other managing committee members have made every effort to bring about
substantial changes in the functioning of the Society. The various initiatives
taken by us were more attuned to raising the bar in terms of quality rather than
quantity. I am acutely aware of the various shortcomings at the Society. We have
a long way to go before we can proclaim that ours is an organisation that runs
smoothly in all respects. But the journey continues and I am optimistic about
the future. Here, I am reminded of a line — “It’s funny about life — if you
refuse to accept anything but the very best, you will very often get it. There
are no speed limits on the road to excellence.”

My fellow office bearer and current Vice-President Mayur
Nayak will be the next President of BCAS. I wish him and the other members of
the managing committee all the very best for a very successful and fulfilling
year. The ethos and the ethics at the BCAS are such that at all times, the
President stands fully supported by a large number of people around who are all
working selflessly and sincerely for a common goal — to serve the BCAS and its
members. I am sure that in the years to come, the BCAS will be steered into
uncharted territories with great finesse by its future leaders. BCAS is known
for its innovation and for its forward thinking. Our visionaries of the past
have drilled this into the minds of the younger members. Such an organisation
must succeed and should succeed. At the same time, we cannot afford to allow
complacency and arrogance to seep into our functioning. The future leaders must
ensure that the BCAS adapts itself to changing times and is flexible enough to
respond to the need of the hour and is also in a position to provide newer
services to the members. Without the will to change, no organisation can sustain
itself in the dynamic environment that we all are living in today.

This is my last communication to you through the BCAJ by way
of the President’s Page. It has been my privilege and honour to have been able
to communicate my ideas, thoughts and views with all of you. The responsibility
of writing for this journal was a very heavy one. I am acutely aware of the wide
reach of this journal and how, in the past, the illustrious Presidents of the
BCAS have adorned these pages with words of wisdom. I hope that I have done
justice to the position that I have occupied and all of you have found at least
something of merit in the messages that I have written.

I cannot proceed further without paying my respect to the
memory of late CA Hiten C. Shah, one of the BCAS managing committee members who
expired suddenly on 14th June. His quiet, selfless and commendable work — in
professional organisations like BCAS as well as social work in remote tribal
areas of Dharampur in Maharashtra — will be remembered by all of us for a long
time to come. We will miss him at the BCAS. May God grant everlasting peace to
the departed noble soul and may his family members get the strength to bear this
loss with fortitude.

The year ahead promises to be a very exciting and challenging
one for Chartered Accountants. Several new laws are expected to come into effect
in the next 12 months. The new Direct Tax Code, the GST Act and the IFRS all
would come into effect soon. The ICAI and bodies like the BCAS would need to
play a very important role in helping their members in coping with this change.
Unlearning the old law and learning the new law will be a challenge for all. At
the same time, the complex question of whether to allow foreign CA firms to
practice in India will also, in all probability find an answer in the coming
months. This too will provide new challenges to Indian CAs. On the other hand,
the increasing importance of India as an emerging economic power and the growing
recognition of the talent, skill and knowledge of Indians in all spheres of life
around the globe herald the oncoming boom in the demand for Indian CAs. Time
will tell how well we are able to respond to all these phenomena.

One aspect in which I feel that CAs are lagging behind and
where we need to focus upon is the use of information technology. The world has
made enormous progress in this direction. The kind of technological tools that
are available for each and every kind of business or profession are mind
boggling. We need to imbibe information technology in our daily lives. Today,
the speed with which young children — even infants — are able to start using
latest gadgets is amazing. If the older generation does not even start to use
latest technology, then the divide between the different generations would be
more stark and wide. As the Chairman of the Information Technology Committee of
the BCAS for the next year, it would be my mission to create an IT wave amongst
the BCAS members. I seek your support and assistance in this regard. The
committee will come up with a detailed action plan soon. And I promise that the
next year will bring with it lot of changes on the IT front as far as our
members are concerned. And you will definitely see more of BCAS on the Internet
and on the various professional and social networking sites.

Finally, as I put down my pen (actually, it’s the keyboard
that I am putting away), I am left with a sense of emptiness in my stomach. I
will miss writing these pages and I will miss receiving your feedback and your
words of appreciation and criticism. These had become a way of life for the past
12 months. But, all good things must come to an end and so must my tryst with
destiny. I am sure that life holds many more peaks for me to climb. I close this
page with an inspiring quote that I read — “That first peak is the best place to
pause and look back, to see if you took the easiest route, to learn the lessons
from the first climb. And it is the best place to examine the terrain ahead, to
change your plans and goals, to take a deep breath and
begin climbing again.” — Michael Johnson.

So, Sayonara friends ! I need to take a deep
breath before beginning my climb again.

From The President

Dear BCAJ Lovers,


    Christmas is round the corner as I begin writing this month’s President’s Page and New Year would have begun by the time you read this page. My colleagues at the BCAS join me in wishing all of you a very Happy New Year. Hopefully, 2010 will be more cheerful, less stressful and will bring with it good health and peace to everyone.

    Once again, readers have continued to respond to my messages and I have received several mails from members of BCAS echoing the sentiments that I convey through these pages. I am glad that members are spending time in sharing their thoughts. Receiving feedback is very important for us.

    The ICAI elections are finally over and the results are also informally known to us. The unfortunate incident of booth capturing is indicative of the state of affairs. Can things get worse than this? One hopes that the newly elected Council members will readily and expediently work towards improving the image of the Institute as well as our profession. Members of the ICAI are eagerly looking forward to the new team making perceptible changes in the manner in which the organisation is run both with respect to members as also students and in the cleansing operation as far as the image of the organisation is concerned. Let us not forget that the media too is now watching closely the developments at the ICAI.

    At the BCAS, the IFRS Residential Study Course held recently was very well received by the members and other participants. The structure of the programme, the efforts of the paper writers and the excellent group leading by the various group leaders contributed immensely to the value addition that BCAS offered to the participants. One of the participants also voluntarily guided interested participants in doing Yoga in the early morning at the scenic and serene venue. The Indian Merchants’ Chamber had joined with us for this programme and so, we also had a few members of IMC participating in the event. We have also received requests from members from other cities to organise similar courses in their cities. The Accounting and Auditing Committee will take a decision in the matter shortly. We now eagerly look forward to the annual RRC scheduled to begin on 10th January at Gandhinagar in Gujarat. Apart from this, there are a large number of important and interesting programmes planned in the coming months.

    On the economic front, the alarming increase in prices of vegetables, grains and other food materials is very worrying. When even the economically well-to-do citizens are feeling the pinch, one shudders to think about the plight of the less fortunate poor people. One wonders how they would be making both ends meet. Let us hope the Government wakes up to this problem soon and takes corrective action. Similarly, water shortages that are already visible in several parts of the country are going to become worse as days go by. It’s high time we all seriously started conserving water and curbing excess usage. The same applies to electricity and petroleum products also. Global warming alarms are sounding on a daily basis. Is anyone listening?

    The Govt. finally notified the amended Rule 3 of the Income-tax Rules, 1962 with a view to guiding employers in computing the value of taxable perquisites in the hands of employees. The new Rule was long overdue. Having waited so long for this, employers were expecting substantial changes particularly in view of the fact that under the FBT regime, there were a number of items of expenses which were considered as fringe benefits. The new Rule, however, is almost a copy of the old Rule as it stood before the introduction of FBT. This may be interpreted to say that the Govt. clearly erred in taxing several expenses under FBT despite the fact that employees never got any benefit from such expenses. I wonder whether someone can take the Govt. to a court of law for wrongfully taxing employers on such expenses for the past few years. In any case, it’s a matter of great relief that FBT is gone and employees would have to pay tax only on those perquisites on which they were originally paying tax before FBT was introduced.

    Recently, I had the occasion to visit Bangalore for a CPE Conference organised by the Bangalore Branch of SIRC. I met many members of BCAS and was happy to hear good words about the BCAS from them. The goodwill that our founders and past presidents have built over the years is so strong that members from across the country eagerly await our programmes and our publications. The BCAJ, of course, continues to be one of the best professional magazines in the country.

    By the time you would be reading this page, the incumbent team at BCAS would have completed about 6 months in office. We took charge on 10th July, 2009. The six months that have passed have simply flown by. Various initiatives have been taken during this period to improve the administration of the Society. Conscious efforts are being made to make our response time shorter and our staff members are being gradually trained in the various aspects of serving members. Technology is being harnessed aggressively to improve our services. Efforts are also being made to bring about innovation in terms of the subjects and speakers at our programmes. New talent is being proactively discovered and groomed. This also applies with equal force to the future leadership at the BCAS. I invite you to let us know whether you have found any difference in our functioning.

    Finally, I read an interesting news item recently on an international website. It spoke of how the manager of the Hip Hop group “Black-Eyed Peas” seems to have missed a minor detail… for the last ten years or so, he has neglected to file income tax returns on the group’s income of $10 million ! Looks like tax evasion is not restricted to one country alone!

    All the best for a great year ahead.

    Sincerely yours,

    Ameet Patel

From The President

From The President

Dear BCAJ Lovers,

I began writing this page immediately after returning from
the 43rd RRC of the Society. This year, as you are aware, we went to Gujarat for
the first time and assembled at Gandhinagar in a beautiful resort. There were
about 250 of us from all over the country. The camaraderie among all our members
and the excellent rounds of group discussions and general assembly were the
highlights of the RRC. The excellence achieved by our Seminar & PR Committee
members in organisation of such mega events was very much in evidence
throughout. The RRC was attended by several Regional Council members and two
newly elected members of the Central Council of the ICAI. We also had
participation of several members of various Branches of Regional Councils of the
ICAI. We also had a record turnout from cities other than Mumbai. I welcome all
the new members, who became our members recently, who attended the RRC. I am
sure that they will be our members for a long time to come. A full report on the
RRC, accompanied by photographs is printed in this journal. The Seminar and PR
Committee is now looking at organising more activities in the months to come.

It is said that time flies. I entirely agree with this
statement. It is now six months since I took over as the President of BCAS.
These six months have been very satisfying and the wonderful co-operation that I
have received so far from all our members is very touching. I look forward to
the next six months with the same amount of enthusiasm and vigour that I began
my term with.

Recently, I watched two Bollywood movies, which I felt were
very meaningful. The first was “Paa” and the second was “3 idiots”. The first
movie brought out the best in one of the most successful actors the world has
seen. At the age of nearly 67, he has enacted the role of a 13 year old and that
too with a fatal disease. The extraordinary efforts of Mr. Bachchan are worth
emulating. They tell us that nothing is impossible in this world and that one is
never too old to try out new roles in life. The stories doing the rounds about
the time taken to put on his special make-up and to remove it and the pains that
he took to play this particular character teach us that hard work and total
dedication are what bring success. On the other end of the spectrum, the Vidhu
Vinod Chopra movie saw another brilliant actor conveying an excellent message to
one and all. Aamir Khan exhorted viewers to pursue excellence rather than
success. The entire educational system today has moved in the direction of
pushing students towards a very high pressure life. There is constant peer
pressure and the fear of failure is very strong. The recent news reports of
suicides by several school and college going children are shocking and are a
rude awakening call for all of us. In such a scenario, this movie could not have
come at a better time. The importance given by coaching classes to passing the
exams rather than focussing on gathering knowledge is a malaise that is
destroying the very fabric of India’s strong educational system. Today, if India
is considered a strong economic force, it is because of our past educational
system, which has consistently been producing a large force of intelligent,
English speaking graduates, engineers, doctors, lawyers, accountants and other
professionals. Regrettably, in my opinion, looking at the quality of the current
crop of graduates, I am not sure how long India can be perceived to have an
advantage. The film, “3 idiots” is trying to awaken us. It’s for us to open our
eyes. I do hope our students have seen these films and have appreciated and
understood the socially powerful messages. If they have, then we can all say
with conviction that “all izz Well!”

The BCAS is proposing to lead an initiative to reduce the
consumption of paper. For this, we propose to encourage our members to receive
our communication by e-mail instead of physically. This will substantially
reduce the consumption of paper. As we are all aware, every sheet of paper
manufactured results in destruction of large tracts of forest land. This is
resulting in hazardous global warming, which has become a major international
problem. At present, we have a print order of about 8,000 copies of newsletters.
To begin with, even if we are able to reduce this by 20%, we would be saving
considerable quantity of paper. Therefore, our members will shortly receive a
request to permit us to discontinue sending printed newsletters. This of course,
is entirely optional and we will continue to send printed newsletters to those
who do not reply to us or those who do not wish to discontinue the receipt of
printed copies. Thereafter, we will replicate the process for notices and for
annual reports. I believe that every revolution has a humble beginning. I invite
you to join the BCAS in this noble initiative of reducing the consumption of
paper. Let us try to go paperless to the furthest extent possible.

Like last year, this year too, I participated in the Dream
Run, which is a part of the Mumbai Standard Chartered Marathon, along with a few
other members of the BCAS. The experience is truly exhilarating. Seeing
thousands of Mumbaikars spiritedly turning out in bright colours and holding
flags and placards and participating with such a fantastic spirit of
togetherness, is a heart warming experience. Many of our members even
participated in the full Marathon and in the half Marathon. My heartiest
congratulations to all of them for running this gruelling race.

The Finance Minister is preparing for the annual Budget and
so is BCAS. Our budget lecture meeting to be addressed by Mr. S.E. Dastur and
the budget publication are already planned out. The lecture meeting will be on
3rd March at Dadar in Central Mumbai in the evening. We once again look forward
to the solid support that our members have given us in the past for the same.

Sincerely yours,

Ameet Patel

levitra

From The President

From the President

From the President

Dear Esteemed Readers,

This year’s Deepawali was remarkable, with President Barrack
Obama visiting India. There were many firsts associated with his visit. He is
the first US President to visit India in his initial term, first to spend so
much time in India, first to visit Mani Bhavan in Mumbai and the first US
president to say "Jai Hind" in the Indian Parliament. Tonnes of paper have been
used up by newspapers and hundreds of hours of discussions have been aired by TV
channels in analysing what were the takeaways for India on Obama’s visit. In my
view, the biggest takeaway for India is President Obama provoked us to realise
our own intrinsic strength, as he rightly regarded India as the "rising global
power".

He said: "India is an ancient civilisation of science and
innovation. A fundamental faith in human progress. This is the sturdy
foundation upon which you have built ever since that stroke of midnight, when
the Tricolour was raised over a free and independent India. And despite the
skeptics who said that this country was simply too poor, too vast, too diverse
to succeed, you surmounted overwhelming odds and became a model to the world.
India has succeeded, not in spite of democracy; India has succeeded because of
democracy."

I think this revelation is the biggest-ever gain for India.
Is it not an irony that outside observers can perceive our strength better than
us? I am reminded of Dr. Abdul Kalam who said, "Why are we in India so
embarrassed to recognise our own strengths, our achievements? We are such a
great nation. We have so many amazing success stories but we refuse to
acknowledge them. Why? India must stand up to the world. Because I believe that
unless India stands up to the world, no one will respect us. Only strength
respects strength. We must be strong not only as a military power but also as an
economic power." The Indian leadership must recognise this and negotiate
with other nations from a position of strength; be it talks with neighbours or
trade negotiations with other countries of the world.

After the stupendous success of the Commonwealth Games, India
broke its own performance record at the 16th Asiad Games in Guangzhou, ranking
6th and bagging 64 medals, including 14 gold.

However, with the dazzling opening and spectacular closing,
together with a record win of 416 medals including 199 gold, China proved that
it is simply super in playing games as well as organising them. The major
reasons for such a poor performance by India in contrast with a one billion plus
population are the lack of good sports facilities and recognition of merit.
Consequently, parents do not encourage children opting for a sports career. A
majority of our sports persons are part-timers, with some other main occupation,
resulting in a lack of professionalism. The handful of people pursuing sports as
their career become victims of corruption and red-tapism. I hope that the way
the states have started competing with each other in good governance; they will
compete in sports as well. If corporate India patronises sports in a big way, a
lot can still be achieved.

The recent results of the Assembly elections in Bihar have
proved that "Good Governance is Good Politics". Earlier, Governments in Gujarat
and Chhattisgarh returned to power, surmounting anti-incumbency sentiments, by
securing positive votes as a reward for development and good governance. The
restraint shown by people, post the Ayodhya verdict, and the use of the Right

to Information Act to unearth scams and bring accountability in administration
shows that people are rising above the politics of caste, creed and religion.
The people of India are interested in peace and prosperity.

We are living in an era of scams. Each day a new scam
surfaces — bigger than the preceding one. First CWG, then Adarsh, 2G spectrum,
Cidco Land deal and now, "loan-mela" by LIC Housing Finance and others.

In a path breaking development, India has revised its
bilateral tax treaty with Switzerland whereby Indian authorities would be able
to obtain information about account-holders in Swiss banks from January 2011.
Under the revised pact, India will be able to obtain information not only in
case of tax frauds, but also in cases of tax evasion.

In respect of activities by the Society last month, members
can refer to the section "Society News". Nonetheless, the more notable amongst
them were the number of webinars on XBRL, the first ever three-day intensive
study course on XBRL from 12th to 14th November 2010, and the two-day course on
Direct Taxes Code on 26th and 27th November 2010. All the programs elicited
overwhelming participation.

The DTC course began with homage to the people who lost their
lives in the ghastly terror strike on Mumbai on 26th November 2008. A lot needs
to be done not only to heal the wounds of those who were afflicted but also to
prevent their recurrence. The solution is aptly found in the BCAS logo which
reads, "uk Ò¸ke pLrh txzr" meaning "the vigilant have no fear". We must be
vigilant not only in making our leaders accountable and working towards safety
and security of the masses but also by contributing our might in helping them
achieve this. Then and only then we would be able to see India as dreamt by the
great poet Rabindranath Tagore who wrote:

Where the mind is without fear and the head is held high

Where knowledge is free

Where the world has not been broken up into fragments

By narrow domestic walls

Where words come out from the depth of truth

Where tireless striving stretches its arms towards
perfection

Where the clear stream of reason has not lost its way

Into the dreary desert sand of dead habit

Where the mind is led forward by thee

Into ever-widening thought and action

Into that heaven of freedom, my Father, let my country
awake

Let this be our prayer and motto for the ensuing decade.

Last but not the least, season’s greetings and best wishes
for a prosperous 2011!

Regards,


Mayur Nayak

levitra

From The President

From The President

Dear Esteemed Readers,

It is indeed a matter of pride and pleasure for me to put
across my thoughts as the newly elected President of this august body. I
visualise your expectations, having been addressed by some of the luminaries in
the profession in the past through this column. Well, it is my privilege to
communicate with you for the next twelve months and I shall strive my utmost to
meet with your expectations.

It is heartening to have received so many compliments from
all over the country upon assumption of office as President of BCAS redounding
to the credit, reputation and popularity that the Society enjoys in the
profession. I sincerely thank one and all for their expression of love,
affection and consideration to me and the BCAS.

Communication is complete when it is well received, so I look
forward to your feedback and suggestions for improvement not only in respect of
my writings but also in respect of any branch of activity of the Society. You
are also at liberty to raise issues concerning the profession as well as social
causes and macro issues concerning citizens at large that you would like to be
addressed by the Society. I believe that intellectuals generally carry greater
responsibility of Nation-Building. Swami Chinmayananda had said : “This Nation
suffers more from the passiveness of good people than aggressiveness of bad
people”. The result is evident in the quality of our national leaders (if at all
they can be called as such). We, therefore, need to become aggressively good. We
must not take injustice lying down. We must take lead in restoring peace and
communal harmony, spreading education amongst the poor and prevent mother earth
from the hazards of global warming by turning it green. We intend to take up
this year many such initiatives which could provide our members opportunities to
participate in nation-building activities along with members of their families.

One area where professionals need to contribute their mite is
in eradication of corruption. Lack of accountability on the part of Government
employees is one of the reasons for this cancerous growth. The Society has
represented to the Government on several occasions to bring about accountability
in the Income-tax Department and has repeated its demand, especially in the
context of the proposed Direct Tax Code. The DTC proposes to introduce General
Anti Avoidance Rules (GAAR) with wide powers to officers. Gandhiji said, “Power
corrupts, and absolute power corrupts absolutely”. Indeed, there is a need for
matching accountability with bestowal of authority. Lack of accountability
coupled with wide powers would worsen the vulnerability of the hapless
taxpayers. The need is to address the issue from the other side of the coin,
i.e., taxpayers must not be lost sight of. To quote Gandhiji again, “There is
enough in the world for man’s need, but not for man’s greed”. According to one
estimate, if only the black money parked abroad by Indians (politicians
included) can be brought back to the country, it can wipe out our external debt.
There can be no two views that tax evasion should be dealt with severely.
However, it should not be at the cost of innocent taxpayers. More often than
not, tax- payers indulge in corruption to buy peace of mind. Given an
opportunity of clean administration and fair assessment, the majority of the
taxpayers would not encourage corruption. In this regard professionals also
carry the responsibility to encourage and support ethical practices. However,
the tug of war is on between the Income-tax Department to extract more from
taxpayers on the one hand, owing to unreasonable targets set for tax collection,
and the inclination of the taxpayers to save more due to greed/provision for the
rainy day on the other. In this context, the approach and transparent
functioning of the Reserve Bank of India is to be appreciated. It is one of the
finest institutions of India. How I wish this culture spreads to every
department of Government.

Computerisation and use of related technology may well be one
of the ways to reduce corruption. Recently a newspaper covered a report about
the wonders wrought by the Government of Chhattisgarh by computerising the
Public Distribution System (PDS). This is how the miracle worked. Chhattisgarh
first created a network of computers across the State, which covered 146
development blocks in 18 districts where details of every beneficiary are put
online. Each beneficiary can also keep track of food stocks through SMS, which
is sent immediately after a PDS shipment is sent from a distribution centre to a
local fair-price shop. SMS informs the beneficiary of everything, including the
date, time, the vehicle number and the stock.

The fair-price shop owners received incentives to stop
pilfering food stocks, and commission for each shop was increased from Rs.8 to
Rs.30 per quintal, with shipments tracked online.

The Public Distribution System is one of the largest leakages
of public money fuelling corruption. It is estimated that there are 23 million
fake ration cards eligible for subsidised food and civil supply. Each fake card
guzzles Rs.8500 of the annual subsidy. With computerisation, regular reviews and
frequent verification, the Government of Chhattisgarh cancelled 1.3 lakhs (below
poverty line) cards during 2002-09. Thus, the reforms in PDS have resulted in a
whopping saving of Rs.100 crore plus, for the State Government so far.

This clearly shows what technology can do or achieve with
political will. Dr. Raman Singh, the Chief Minister of the Chhattisgarh is an
Ayurvedic Doctor and has been re-elected for his good work. The motto of his
Government is aptly reflected on the official website of the State : ‘http://cg.gov.in’ :
“Our focus is on two areas — good governance and good infrastructure. If we can
provide these two, the rest will follow.”

On the ensuing 65th Independence Day, let us all resolve to
contribute our mite to rebuilding India.

Coming back to brass tacks, one of the focal areas this year
would be to bring BCAS to your doorstep by organising various programmes for the
benefit of members in the far-flung suburbs of Mumbai and other important towns
in India. We also intend to organise focussed programmes for members in Industry
and to this end, a Focus Group on ‘Corporate Affairs and Members in Industry’
has been formed. We wish that the benefit of the Society’s activities and the
Journal reach to more and more members, which is why I hereby appeal to our
readers to inform their friends, colleagues and peers about BCAS and its
activities. I am happy to inform you that members from Ahmedabad, Hyderabad,
Indore, Nashik and Surat (who attended the recently concluded Residential Study
Course on Service Tax) have promised to induct new members in order to spread
the activities of the Society. The Study Course was attended by about 80
participants and the level of discussion and bonding amongst members were simply
unparalleled.

I do not wish to deal with other focal areas as the same have
been dealt with in my inaugural address to members published elsewhere in this
Journal.

On the BCAS’s Founding Day Celebrations held on 6th July 2010, the Chief Guest, CA Keki Mistry, Vice-Chairman and the CEO of HDFC Ltd., addressed our members on ‘Lessons from the Global Financial Crisis and the Role of Housing in the Indian Economy’. He shared his optimism for India’s growth in housing sector over the next decade or so, resulting from, inter alia, the demographic advantages and strong banking norms for lending in the housing sector. The lecture was webcast and people around the world watched it live.

The first lecture meeting of the Society for 2010-11 was addressed by the past President of the Society, CA Pinakin Desai on 14th July 2010 on the subject of ‘Recent Developments in Direct Taxation’. It received an overwhelming response, with many members returning home for want of space. I sincerely regret the inconvenience caused to them, but members can simply resort to listening to this lecture from the Society’s website.

By the time you would receive this edition of the Journal, the hectic schedule of July must have been over and the festive August must have made its entry.

It is said, “Coming together is a beginning, keeping together is progress and working together is success”. Let us work together to make BCAS a more powerful force to be reckoned with, comprising proactive, pragmatic and progressive chartered accountants determined to make a positive difference to the profession and the country for a better tomorrow, God willing.

In conclusion, let me wish you all —

A Happy Independence Day, for this memorable day is yonder and it is fitting that we dedicate ourselves — thought, word and deed at the altar of freedom, liberty and independence we all cherish.

So be it.

ICAI And Its Members

ICAI and Its Members

1. Disciplinary Case


In the case of ICAI vs Shri Lokesh Dhawan (reported on page
1230 of C.A. Journal, February, 2010 issue), the member was a partner of a firm
of Chartered Accountants which was appointed as a statutory auditor of a public
sector bank. In the complaint filed by this bank, it was alleged that: (i) the
member had demanded and collected from the bank large sums of money as advance
for T.A. and other expenses. He had claimed expenses beyond the entitlement as
per the RBI guidelines, and did not refund the excess amount to the bank; (ii)
He had canvassed for procuring a computer business for his sister concern from
the bank by using his position as a statutory auditor; and (iii) He had hired
the services of a C.A. who was not his partner or employee, to conduct audit of
the bank.

The disciplinary body, after examining the evidence produced
by the parties, held that the member was guilty of “other misconduct”. The
council accepted this finding and referred the matter to the High Court to award
punishment to the member by removing his name from the Register of Members for
three months.



The Delhi High Court has held that there is no definition of
the expression “other misconduct” in the C.A. Act. Therefore, the High Court
held that the interpretation of this expression should be left to the council of
ICAI. The council is the disciplinary body comprised of peers who have several
years of experience. Further, the High Court held that in this case, the member
was unable to demonstrate that the above decision of the council and its
recommendation for punishment was either procedurally flawed or that on merits
it was perverse or mala fide. Therefore, the High Court accepted the finding of
the council and ordered that the name of the member be removed from the Register
of Members for a period of three months.


2. Some Ethical Issues


The Ethical Standards Committee of ICAI has clarified some
issues for the benefit of its members on page 1216 of C.A. Journal, February
2010 issue. Some of the issues are listed
below.




(i) If a member is a partner in more than one firm, is it
permissible to print the names of all the firms on visiting cards,
letterheads, stationery, etc.?

A. There is no prohibition under Clause (7) of Part I of
the First Schedule to the C.A. Act.

(ii) Is a Chartered Accountant / Firm permitted to use logo
on letterheads, stationery, etc.?

A. The use of logo/monogram of any kind/form/style/design/colour
whatsoever on any display material or media, e.g., paper stationery,
documents, visiting cards, magnetic devices, internet or signboard by a
Chartered Accountant or a firm of Chartered Accountants is prohibited.
Use/printing of member/firm name in any other manner tantamount to a
logo/monogram is also prohibited. However, a common CA logo has been allowed
to members, provided it is used in the correct manner within the terms of the
council’s guidelines.

(iii) Is the office of a Chartered Accountant permitted to
go in for ISO 9001: 2000 certification or other similar certifications?

A. There is no bar for a member to go in for ISO 9001 :
2000 certification or other similar certifications. However, the member cannot
use the expression like “ISO Certified” on his professional documents,
visiting cards, letterheads or sign boards, etc.

(iv) If a member has passed any additional course of the
ICAI, is he permitted to print such qualification on visiting cards,
letterheads and other stationery ?

A. Under Clause (7) of Part I of the First Schedule to the
CA Act, a member is permitted to print such qualification on his visiting
cards, letterheads and other stationery. However, he cannot use the
designation “Information System Auditor’ or the like.

(v) Can a Chartered Accountant in practice accept audit in
case the audit fee of the previous auditor remains unpaid?

A. In case the undisputed audit fees for carrying out the
statutory audit under the Companies Act, 1956 or various other statutes have
not been paid, the incoming auditor should not accept the appointment unless
such fees are paid. In respect of other dues, the incoming auditor should, in
appropriate circumstances use his good office in favour of his predecessor to
have the dispute as regard the fees settled.


The council has taken the view that the provision of audit
fee made in the accounts signed by both the auditor and the auditee shall be
considered as ‘undisputed’ audit fees. In this connection, attention of members
is invited to the Council General Guidelines, 2008, dated 08.08.2008 (also
published on page 686 of the October 2008 issue of C.A . Journal). Under this
notification, a member in practice shall be deemed guilty of professional
misconduct if he accepts the appointment as an auditor of an entity in case the
undisputed audit fee of another Chartered Accountant for carrying out statutory
audit, under the Companies Act, 1956 or various other statutes, has not been
paid.

3. Accounting for foreign
exchange variation prior to commencement of commercial operation




Facts

A company is in the process of setting up a refin-ery in the state of Madhya Pradesh. It is procuring items relating to its plant and machinery for the construction of the refinery from foreign vendors. The transaction is recorded at the rate prevailing on the transaction date. The difference in foreign exchange variation between the transaction date and the settlement date is booked under ‘pre-operative expenditure pending capitalization’, on the ground that the company is yet to commence its commercial operations. No profit and loss account has been prepared by the company and only the necessary details, as per Part II of Schedule VI to the Companies Act, 1956 have been disclosed as ‘pre-operative expenditure pending capitalization’.

Based on the above facts, the company had sought the opinion of the Expert Advisory Committee regarding accounting for foreign exchange differences arising on settlement of liability for procurement of items of plant and machinery from abroad, prior to commencement of operation.

EAC  Opinion

The committee noted that Standard AS-11 was notified by the central government under the Companies (Accounting Standards) Rules, 2006 which came into effect in respect of accounting periods commencing on or after December 07, 2006. The notified AS-11 contains a footnote that ‘the accounting treatment of exchange differences contained in this Stan-dard is required to be followed irrespective of the relevant provisions of Schedule VI to the Companies Act,1956’.

On the basis of the above, the committee opined that in respect of transactions in foreign currencies entered into on or after April 01, 2004, but before March 31, 2007, the exchange difference arising on settlement of monetary liability (letter of credit) incurred for procurement of items of plant and ma-chinery from abroad should be adjusted to the cost of the related fixed assets. However, in accordance with AS-11 (revised 2003), the foreign exchange dif-ferences arising on or after April 01,2007 should be charged/credited to the profit and loss account of the period in which the same arise. While applying the above accounting treatment, the requirements of Para 4 (e) (read with its explanation) of AS – 16 “Borrowing Costs” should also be taken into con-sideration. Therefore, the committee is of the view that for this purpose, a profit and loss statement will have to be prepared by the company even during the construction phase. Hence, the foreign exchange differences should not be treated as indi-rect expenses relating to the project and, therefore, not be accumulated as pre-operative expenditure pending capitalization for allocation over the assets of the refinery. [Refer pages 1246 to 1247 of C.A. Journal, February, 2010 issue]


4. Implementation of  IFRS in  India

The Ministry of Corporate Affairs has issued a press note dated 22.1.2010 in which the roadmap for implementation of IFRS in India has been given as follows:

    i) There will be two separate sets of Accounting Standards u/s 211 (3C) of the Companies Act.
The first set would comprise of Indian Ac-counting Standards which are converged with the IFRS’s and which shall be applicable to the specified class of companies. The second set of Accounting Standards will comprise of the existing Indian Accounting Standards and will be applicable to other companies, includ-ing small and medium companies.

    ii) The first set of Accounting Standards (i.e., converged accounting standards) will be applied to specified classes of companies in phases as below:

    Phase – I : The following categories of companies will convert their opening balance sheets as on the first day of the financial year, commencing on or after 1st April, 2011, in compliance with the notified accounting stan-dards which are converged with IFRS. These companies are: (i) Companies which are part of NSE – Nifty 50; (ii) Companies which are part of BSE – Sensex 30; (iii) Companies whose shares or other securities are listed on stock exchanges outside India; and (iv) Companies, whether listed or not, which have a net worth in excess of Rs.1,000 crores.

    Phase – II : Companies, whether listed or not, having a net worth exceeding Rs. 500 crores but not exceeding Rs. 1,000 crores, will convert their opening balance sheet on the first day of the financial year commencing on or after 1st April, 2013, in compliance with the notified accounting standards which are converged with IFRS.

    Phase – III : Listed companies which have a net worth of Rs.500 crores or less will convert their opening balance sheet as on the first day of the financial year commencing on or after 1st April, 2014, in compliance with the notified accounting standards which are converged with IFRS.

    Companies which fall in the following categories will not be required to follow the notified
 accounting standards which are converged with the IFRS (though they may voluntarily opt to do so), but need to follow only the notified accounting standards which are not converged with the IFRS. These companies are:

    a) Non-listed companies which have a net worth of Rs. 500 crores or less and whose shares or other securities are not listed on Stock Ex-changes outside India.

    b) Small and Medium Companies (SMCs).

    iv) Separate roadmaps for banks and insurance companies will be announced at a later date. Necessary amendments in the Companies Act as well as Schedule VI of the Companies Act will be introduced during the next budget session of the Parliament.

5. Accounting and Auditing Standards

The following accounting and auditing standards have been issued by ICAI. The texts of these standards have been published in the February, 2010 issue of the C.A. Journal, on the pages mentioned below. It may be noted that the ‘Standards on Auditing’ will come into force for audit of financial statements for periods beginning on or after 1.4.2011. Other accounting and internal audit standards are recommendatory at present.

(i) Standard on Auditing (SA) 700 (Revised)
– Forming an Opinion and Reporting on Financial Statements (P. 1327 – 1338).

    ii) Standard on Auditing (SA) 705 – Modifications to the Opinion in the Independent Auditor’s Report. (P. 1339 – 1348).

    iii) Standard on Auditing (SA) 706 (Revised) – Emphasis of Matter Paragraphs and other Matter Paragraphs in the Independent Audi-tor’s Report (P.1349 – 1352).

iv)    Standard on Internal Audit (SIA) 17 – Consideration of Laws and Regulations in an Internal Audit (P.1353 – 1357).

v)    Accounting Standard for Local Bodies (ASLB) 5 – Property, Plant and Equipment (P.1358 – 1367).
(vi)    Accounting Standard for Local Bodies (ASLB) 6 – Events after the Reporting Date (P.1368– 1371).

    6. ICAI News

(Note: Page Nos. given below are from the C.A. Journal, February, 2010 issue)
 

    iii) CA Final Results

Results of the CA Final Examination, held in No-vember, 2009, were declared in January, 2010. It has been reported that the performance of students in the final examination has been very poor as compared to last four examinations. ICAI will have to study the reasons for this fall in the performance of students and take remedial steps to improve the position. The figures, as reported, are as hereunder:
    
i) CA T.N. Manoharan awarded PADMA SHRI
CA T.N. Manoharan, President of ICAI, 2006– 07, has been awarded the title of ‘PADMA SHRI’ by the President of India. It is a great honour and recognition for our profession. Shri Manoharan is from the BCAS family and a regular faculty member in most of BCAS’s programmes. Our greetings and best wishes to him on his achievement!

    ii) Branches of ICAI

    a) A new branch has been opened on 16.12.2009 at Gandhidham (WIRC). Further, branches will be opened at Ratlam, Pali, Ganganagar, Bhavnagar and Tirupati (Refer P. 1205 and 1310).

    b) New branch buildings (ICAI Bhavans) in-augurated at Vapi on 1.12.2009, Baroda on 13.12.2009, Ranchi on 15.12.2009, Guwahati on 18.12.2009, Vijaywada on 25.1.2010, Belgaum on 26.1.2010, Hubli on 26.1.2010, Pune on 26.1.2010, and Nashik on 27.1.2010. (Refer P. 1210).
 

    iv) Signature on Audit Reports

ICAI has decided that members should include the Registration No. of the firm, as allotted by ICAI in the audit reports and signed by them, in addition to other requirements relating to the signature on the audit report as prescribed under the relevant standard on auditing. Further, the auditor should ensure that the resolution passed by the company for appointment of the statutory auditor u/s 224 of the Companies Act, contains the Registration No. of the C.A. Firm. These requirements will come into effect from 1.4.2010 (P. 1312).


    v) Submission of Form112 by students for taking other courses

As a measure of amnesty, ICAI has decided that students who have not filed Form No.112 so far, can file the same on or before 31.3.2010. No request for condonation of delay in submitting Form No. 112 will be considered after 1.4.2010. (P. 1312)

    vi) Results of Elections to Central and Regional Councils

Details of members elected to the Central and Regional Councils for three years from February 2010 – 2013 have been published on P. 1314 – 1316.

    vii) New Office Bearers of WIRC

The following members have been elected as of-fice bearers of WIRC for one year from February 2010.

(a) Shri  Sanjeev  Lalan, Mumbai    – Chairman

(b) Shri Makrand Joshi, Nagpur    – Vice Chairman

    c) Shri Mangesh Kinare, Mumbai  – Secretary

    d) Shri Parag Rawal, Ahmedabad – Treasurer
 

Our greetings and best wishes to them for a successful term of office!

    viii) Our New President and Vice President

At the election held on 12.2.2010, the council has elected:

    Shri Amarjeet Chopra, New Delhi as our New President; and
    Shri G. Ramaswamy as our New Vice President

We convey our greetings and best wishes for their successful terms in office. We hope they will be able to provide better leadership to our profession during the year.

ICAI And Its Members

ICAI and Its Members

1. ICAI News :

(Note : Page Nos. given below are from C.A. Journal
for May, 2010)

(i) Multipurpose Empanelment Application Form (MEF) for the
year 2010-11 for empanelment for audit assignments has been hosted on
www.meficai.org on 1-5-2010. Last date for submission of MEF is 15-6-2010. Hard
copy of the declaration is to be sent to ICAI, New Delhi before 30-6-2010. Out
of the total applications up to 10% applicants will be called upon to submit (a)
Financial Statements of the Firm, (b) Partnership Deed effective on 1-1-2010,
and (c) copies of acknowledgement of latest Income-tax Returns, computation of
income and the latest assessment orders of the Firm and Partners. (Page 1736).

(ii) SEBI has issued a Circular on 5-4-2010 whereby the
listing agreements of all listed companies are amended. Some of the new
requirements, concerning auditors, as per the Circular are as under :

(a) Auditors of the company will have to give certificate
for accounting treatment under schemes of arrangement on account of
amalgamation/merger/reconstruction, etc. of listed companies to be submitted
to the concerned stock exchange. The auditors will be required to issue a
certificate to the effect that the accounting treatment contained in such
schemes is in compliance with all the applicable accounting standards.

(b) In relation to the requirement of a valid peer review
certificate for statutory auditors, in respect of all listed entities, limited
review/statutory audit reports submitted to the concerned stock exchanges
shall be given only by those auditors who have subjected themselves to the
peer review process of the ICAI and who hold a valid certificate issued by the
‘Peer Review Board’ of the ICAI.

(c) Limited review report and statutory auditor’s reports
are modified to make it clear that disclosures pertaining to details of public
shareholding and promoters’ shareholding, including details of
pledged/encumbered shares of promoters/promoter group, contained in the format
have been traced from disclosures made by the management; and

(d) In order to ensure that the CFO has adequate accounting
and financial management expertise to review and rectify the financial
statements as required under Clause 49 of the Listing Agreement, the
appointment of the CFO is approved by the Audit Committee before finalisation
of the same by the management and the Audit Committee, while approving the
appointment, shall assess the qualifications, experience and background, etc.
of the candidate. (Pages 1753-54)





(iv) Special Placement Programme for experienced CAs :


Special Placement Programme for experienced and fresh
Chartered Accountants has been organised by ICAI in the month of June, 2010 as
under :

Centre Dates
(a) Mumbai and New Delhi
 25-26 June, 2010
(b) Bangalore, Chennai,
Kolkata and Hyderabad 		23-24 June, 2010
(c) Jaipur and Pune 22 June, 2010

CAs who have qualified before 10-5-2010 as well as those who
have experience of more than one year can participate in this programme. (Page
1862)

(v) Campus Placement Programme :


In the last issue of BCA Journal (Page 124) results of the
First Phase of the campus placement programme organised by ICAI in Feb-Mar, 2010
were given. Now results of the Second Phase of this programme are published. The
highlights of this phase are as under :

(a) Brief summary for both phases of the programme :


No. of candidates registered — 2931

No. of interview teams — 99

No. of organisations — 94

No. of jobs offered — 1411

% of jobs offered — 48.11%

(b) Phase II — Important Centres :


Centres 		Candidates registered No. of interview teams No. of jobs offered

Ahmedabad		 158  8 29

Chandigarh		 337 5 24

Hyderabad 		201 19 106

Jaipur 		370 9 51


Note?: Annual salary offered — Highest (international) $ 1.5 lacs (about Rs.70 lacs), Highest (Indian) Rs.10.82 lacs, Minimum Rs.3.24 lacs and Average Rs.6.58 lacs. (Page 1870)

    2. Non-compliance with reporting obligations:

Financial Reporting Review Board (FRRB) has observed some discrepancies in compliance with Accounting Standards in published Financial Statements of some of the companies. In brief some of the important observations of the committee are as under. Members may note these observations.

    i) AS 1 — Disclosure of Accounting Policies:

    a) Certain enterprises merely state in their accounting policy relating to revenue recognition that the revenue has been recognised on the basis as stipulated under AS-9, Revenue Recognition. Such disclosure cannot be considered as adequate disclosure under AS-1. The accounting policy as adopted by the enterprise with respect to timing of recognition of revenue arising from sales revenue, interest income, royalty income and dividend income should be considered as one of the most important accounting policies for any organisation and it should be disclosed separately.

    b) Paragraph 24 of the AS-1 requires that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. The financial statements of the enterprises provide a detailed note on accounting policies as adopted by them. However, they often omit to disclose accounting policies with regard to the borrowing costs, valuation of inventories, accounting for investments, impairment of assets, provisions, contingent liabilities and contingent assets. It was felt that enterprises normally, borrow funds, hold inventories as well as investments and also possess certain assets which may be subject to impairment. Further, there is always a need to carry certain provision to meet their future liabilities. Accordingly, subject to circumstances, enterprises are expected to also disclose the accounting policies as adopted by them with regard to borrowing costs, valuation of inventories, accounting for investments, impairment of assets and provisions, contingent liabilities and contingent assets.

    ii) AS-2 — Valuation of inventories:
Some enterprises recognise the customs duty on inventory as and when the goods are cleared from customs warehouse. As such, no provision for customs duty is made on the goods lying in the warehouse. It is contrary to the requirement of the AS-2. It may be noted that as per paragraph 6 of the AS-2, the cost of inventories should comprise all costs of purchases, costs of conversion and other costs incurred in brining the inventories to their present location and condition. Since the customs duty is a cost incurred in bringing the goods to its present location and condition, therefore, the liability to pay such duty should be recognised as and when the goods enter the territorial waters of the country. (Page 1871)

    3. Deferred tax assets — What is virtual certainty?

Expert Advisory Committee (EAC) has given the following opinion on this subject on Pages 1755-1757.

    i) Facts:

A public sector company is engaged in construction of ships and ship repair activities. The company has an accumulated loss of Rs.847.42 crore as on 1-4-2008 and a deferred tax asset of Rs.102.36 crore. As per the Income-tax Returns filed by the company and income-tax assessments, the amount of unabsorbed depreciation and carried forward losses of the company is Rs.255.51 crore. The company has also realised deferred tax asset to the extent of Rs.6.66 crore in the financial year 2007-08.

The Auditors have taken the view that there is no virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which deferred tax assets (DTA) can be realised. The company has given several reasons to support its stand that sufficient income will be available in future years against which a DTA can be adjusted.

    ii) Query:

The company referred the following query to EAC for its opinion.

The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting for deferred tax assets by the company is in compliance with AS-22, based on the inputs as stated above in respect of virtual certainty of future taxable income.

(iii) Opinion:
The EAC has considered the above facts, views of the Auditors and the submissions of the company. It has also considered para 17 and 18 of AS-22 dealing with ‘Accounting for Taxes on Income’. In particular, reference is made to Explanation below para 17 of AS-22 (ASI-9) and stated in para 11 of the opinion as under.

On the basis of the above, the Committee is of the view that the orders secured by the company, as mentioned by the querist in paragraph 3(a) to (c) above, may be considered while creating deferred tax asset provided these are binding on the other party and it can be demonstrated that they will result in future taxable income. However, mere projections made by the company indicating the earning of profits from future orders contemplated in paragraphs 3(a) and above, or financial restructuring proposal under consideration of the Government of India or the fact that the books of account of the company are prepared on ‘going concern’ basis as mentioned by the querist in paragraphs 3(d) and (e), respectively, may not be considered as convincing evidence of virtual certainty as contemplated in the ‘Explanation’ to paragraph 17 of AS-22 reproduced above. Further, the mere fact that the items covered u/s.43B of the Income-tax Act, 1961, the provision for liquidated damages, doubtful advances, guarantee repairs and other contingencies, and unabsorbed depreciation can be carried forward for unlimited number of years, can also not be a ground for recognizing a deferred tax asset, as mentioned by the querist in paragraphs 3(f), (g) and (h), respectively, since paragraph 17 of AS-22 read with its ‘Explanation’, requires virtual certainty supported by convincing evidence at the date of the balance sheet. The Committee also wishes to point out that a deferred tax asset can be created to the extent that future taxable income will be available from future reversal of any deferred tax liability recognised at the balance sheet date. To that extent, it would not be necessary to consider the level of virtual certainty supported by convincing evidence.

On the above reasoning the opinion of the Committee is that accounting of DTA by the company is in compliance with AS-22 to the extent stated in para 11 of its opinion.

    4. Accounting Standards:

Accounting Standards Board (ASB) has issued further exposure drafts revising the following Accounting Standards and also issued two exposure drafts of New Accounting Standards after convergence with the International Financial Reporting Standard (IFRS) and International Accounting Standards (IAS) for public comments.

    A. Revised Standards:

    i) AS-9 (Corresponding to IAS-18) — Revenue
    ii) AS-15 (Corresponding to IAS-19) — Employees Benefits.
    iii) AS-17 (Corresponding to IFRS-8) — Operating Segments.
    iv) AS-18 (Corresponding to IAS-24) — Related Party Disclosures.
    v) AS-20 (Corresponding to IAS-33) — Earnings per share.
    vi) AS-26 (Corresponding to IAS-38) — Intangible Assets.
    vii) AS-29 (Corresponding to IAS-37) — Provisions, Contingent Liabilities and Contingent Assets.

    B. New Standards:

    viii) AS-38 (Corresponding to IAS-41) — Agriculture.
    ix) AS-39 (Corresponding to IFRS-4) — Insurance Contracts.

    5. Standards on Review Engagements:

The following Standards on Review Engagements (SRE) have been published at pages stated below. These apply to Financial Statements for periods beginning on or after 1st April, 2010?:

    i) Standard on Review of Engagements (SRE) 2400 (Revised) — Engagements to Review Financial Statements. (Pages 1879-1884)

    ii) Standard on Review of Engagements (SRE) 2410 — Review of Interim Financial Information performed by the Independent Auditor of the Entity. (Pages 1885-1897)

ICAI And Its Members

ICAI and Its Members

1. ICAI News :


(Note : Page Nos. given below are from C.A. Journal
for June, 2010)

(i) A New Grievance Resolution Mechanism (e-sahaayataa)
:


‘e-sahaayataa’ is the only e-channel for the entire base of
members and students of the Institute and other stakeholders of the profession,
wherein all their queries/complaints/grievances pertaining to the day-to-day
working shall be catered to and be resolved in a time-bound and transparent
manner. This service is available on ICAI website (htpp://www.icai.org/help).

Objectives :


  • To provide timely
    services to all the stakeholders of the profession throughout the globe.

  • To resolve the
    query/complaint/grievance within 3-7 days from the date of submission of the
    same.

  • To eliminate the
    operational bottlenecks and smoothen the flow of the education process of
    Chartered Accountancy.

Key statistics :

Total
queries/complaints/grievances submitted till May 20,2010 		1742
Total
queries/complaints/grievances resolved till May 26, 2010 		1689
Total
queries/complaints/grievances under the process 		53

Scope :

‘e-Sahaayataa’ caters only to the
queries/complaints/grievances pertaining to the day-to-day working of the
Institute which are general in nature. This facility is not meant for
registering or making allegations, personal observations and personal comments.
(Page 1918)

(ii) Implementation of S. 51A of Unlawful Activities
(Prevention) Act, 1967 :


ICAI has issued the following announcement on Page 2046.

The provisions of the Unlawful Activities (Prevention) Act,
1967 were amended in 2008, by inserting S. 51A which was notified on 31-12-2008
by the Government of India. S. 51A reads as under :

“51A. For the prevention of, and for coping with terrorist
activities, the Central Government shall have power to :

(a) freeze, seize or attach funds and other financial
assets or economic resources held by, on behalf of or at the direction of the
individuals or entities listed in the Schedule to the Order, or any other
person engaged in or suspected to be engaged in terrorism;

(b) prohibit any individual or entity from making any
funds, financial assets or economic resources or related services available
for the benefit of the individuals or entities listed in the Schedule to the
Order or any person engaged in or suspected to be engaged in terrorism; and

(c) prevent the entry into or the transit through India of
individuals listed in the Schedule to the Order or any person engaged in or
suspected to be engaged in terrorism.”

In order to implement the provisions of S. 51A effectively,
the Ministry of Home Affairs, Govt. of India requested the Ministry of Corporate
Affairs to issue an appropriate order to ICAI, ICSI and ICWAI to sensitise their
members to the provisions of S. 51A of the Unlawful Activities (Prevention) Act,
1967. Accordingly the Ministry of Corporate Affairs vide its letter dated
22-3-2010 asked the ICAI to advise its members to act as per mandate of the
Ministry of Home Affairs.

Accordingly, all members of ICAI are informed that as and
when any member comes across any such fact which is connected with the
violation(s) of provision(s) of the Unlawful Activities (Prevention) Act, 1967,
he must take action forthwith for the implementation of S. 51A as per procedure
laid down in the Office Memorandum dated 22-2-2010 issued by the Ministry of
Home Affairs, Government of India.

In other words, the members of ICAI must ensure that in case
any of their client match with the particulars of designated individual/entity,
as per Order dated 8-7-2009, wherein the list of such designated
individual/entities have been given, they shall immediately, not later than 24
hours from the time of finding out such client, inform full particulars to the
Joint Secretary (IS.I), Ministry of Home Affairs, at Fax No. 011-23092569 and
also convey over telephone on 011-23092736. The particulars apart from being
sent by post should also be conveyed on e-mail id:isis@nic.in.

(iii) ICAI publications :


The following Technical Guides are issued by ICAI :

(a) Technical Guide on Internal Audit of Construction
Industry

(b) Technical Guide on Internal Audit of Educational
Institutions

(c) Technical Guide on Accounting for Development
activities of SEZs. (Pages 2048-2049)





2. Accounting Standards :

The Accounting Standards Board has issued further exposure drafts revising the following Accounting Standards and also issued exposure drafts of New Accounting Standards after convergence with the IFRS/IAS for public comments :

    i) Revised Standards :

    a) AS-22Income Taxes(corresponding to IAS-12)
    b) AS-24Non-Current Assets held for Sale and Discounted Operations (corresponding to IFRS-5)
    c) AS-27Interests in Joint Ventures(corresponding to IAS-31)
    d) AS-28 Impairment of Assets(corresponding to IAS-36)

    ii) New Standards :

    a) AS-33 Share-based Payment (corresponding to IFRS-2)

    b) AS-36 Accounting and Reporting by Retirement Benefit Plans (corresponding to IAS-26)

    3. Capitalisation of expenditures in re-spect of projects under construction (EAC Opinion) (Pages 1937-1938) :

Facts :

A government company is engaged in the construction and operation of thermal power plants in the country. The company has also diversified into hydro-power generation, coal mining and oil & gas exploration, etc. The company is an electricity generation company and is governed by the provisions of the Electricity Act, 2003. The company prepares its annual financial statements as per the provisions of t h e Companies Act.

The company has three-tier organisation structure consisting of projects/stations, regional headquarters and corporate office. The company is undertaking constructions of a number of new power projects at the greenfield sites as well as expansion of existing projects. Some of the key activities related to the construction projects, such as design & engineering, award of major contracts, post-award contract management, project monitoring, etc. are performed centrally at the corporate office. The expenditure of engineering, contracting, project monitoring, hydro region head-quarters, coal mining and finance concurrence departments were considered as expenditure during construction and allocated through the project under construction/expansion on systematic basis i.e., capital expenditure incurred during the year at these projects. Expenses of other departments providing common services were charged to the statement of profit and loss. Further, administration and general overhead expenses attributable to construction of fixed assets incurred till they were ready for their intended use were identified and allocated on a systematic basis to the cost of related assets. However, the government auditor observed that administration and other general overhead expenses were usually excluded from the cost of fixed assets since they did not relate to a specific fixed assets, while the company has allocated expenses relating to the divisions on the ground that they perform functions relating to construction only. Hence according to Auditors the allocation of expenses was not in accordance with AS-10.

Query :

On these facts, the company has sough the opinion of the Expert Advisory Committee (EAC) as to whether allocation and capitalisation of expenses related to the identified departments of corporate office and the regional headquarters which were engaged in project engineering, designing, contract management and project monitoring activities, etc. to/at the project under construction/expansion was correct.

EAC Opinion :

After considering paragraphs 9.1, 9.2 and 10.1 of AS-10 the Committee observed that the basic principle to be applied while capitalising an item of cost to a fixed asset/project under construction/ expansion is that it should be directly attributable to the construction of the project/fixed assets for brining it to its working condition for its intended use. The costs that are directly attributable to the construction/acquisition of a fixed asset/project for bringing it to its working condition are those costs that would have been avoided if the construction/acquisition had not been made. These are the expenditures without the incurrence of which, the construction of project/asset could not have taken place and the project/asset could not be brought to its working condition, such as site preparation costs, installation costs, salaries of engineers engaged the construction activities, etc. The avoidance of costs has the basis of identifying directly attributable cost for the purpose of capitalisation is also supported by Accounting Standard (AS ) 16, ‘Borrowing Costs’. In the present case, the Committee is of the view that it should be seen that whether the expenses incurred on the activities of the various departments are directly attributable to the construction as discussed above. Accordingly, if expenses incurred at various departments are directly attributable to construction, these can be capitalised with the cost of concerned fixed asset(s)/project(s).

In view of the above, the capitalisation of expenses related to various departments of corporate office and the regional headquarters to the projects/assets under construction/expansion would be correct provided the expenses incurred on the activities of these departments can be considered to be directly attributable to the constriction of project(s)/fixed asset(s) for bringing them to their working condition as discussed above.

[Refer pages 1937 to 1940 of C.A. Journal]

ICAI And Its Members

1. Disciplinary case :

    In the case of ICAI v. Shri M. K. Sachdeva, the member was concurrent auditor of one of the branches of Punjab National Bank. The Bank filed a complaint against the member alleging that while conducting concurrent audit of branch he got opened a current account with that branch in the name of a finance company in which he was a director. The account was introduced by him in his capacity as partner of his audit firm. The Bank purchased 3 cheques of Rs.1.97 lacs, 1.92 lacs and 1.97 lacs on different dates from the finance company which were returned unpaid. At the behest of the member these cheques were not debited to the account of the finance company. The finance company later on deposited two cheques of Rs.1.97 lacs and 2.00 lacs in its account which were also returned unpaid. It was alleged that the above-mentioned transactions of purchase of cheques were entered into by the branch under the influence of the member who was a director of the finance company and was also a concurrent auditor of the branch of the Bank.

    The Disciplinary Committee found that the member was guilty of ‘Other Misconduct’. This finding of the committee was accepted by the Council and it recommended to the Delhi High Court that the member be awarded punishment by removal of his name for 3 months from the Register of Members.

    The High Court while accepting the above recommendation of the Council observed that the allegations made against the member are quite serious in nature and his acts show that he is guilty of misconduct and had acted in a manner unbecoming of a chartered accountant. The High Court also 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 it is not part of his duty to misappropriate the money belonging to his client. The Court also noted that a criminal case had also been registered against the member and he was absconding. Under the circumstances, the Court was of the view that the punishment awarded to the respondent was not at all harsh.

    (Refer page 910 of C.A. Journal, December, 2009)

2. Some ethical issues :

    The Ethical Standards Committee of ICAI has clarified whether a Chartered Accountant can advertise his professional attainments or services as under.

    As per Clause (7) of Part-I of the First Schedule of the CA Act read with S. 11, a member shall be deemed to be guilty of professional misconduct, if he advertises his professional attainments or services. Now the Act has been amended and a proviso has been inserted in the Clause (7). The proviso says that a member in practice may advertise through a write-up setting out the services provided by him or his firm and particulars of his firm, subject to such guidelines as may be issued by the Council. Thus, due to addition of this proviso now a Chartered Accountant in practice is allowed to advertise. But it has to be as per the Guidelines of the Council. Here attention is drawn to Clause (6) of Part-I of the First Schedule which says that if a Chartered Accountant solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means, it would be treated as professional misconduct. So, if proviso to Clause (7) and wordings of Clause (6) are compared, it appears that an impossible situation is created since Clause (6) prohibits advertisement and Clause (7) allows advertisement. However, there is no contradiction as in Clause (6) only the advertisement for soliciting of clients or professional work is prohibited. Thus other advertisements which do not solicit clients or professional work are not covered under this Clause. Whereas Clause (7) prohibits a Chartered Accountant from advertising his professional attainments or services, but the proviso permits to advertise through a write-up setting out the services provided by him or his firm and particulars of his firm, subject to such guidelines as may be issued by the Council. Thus, advertisement, in a limited way through a write-up, as per the Council guidelines and not soliciting of clients or professional work is permitted. Details are clarified in Advertisement Guidelines issued by ICAI on 14-5-2008 as reproduced at pages 890-891 of C.A. Journal for December, 2009.

3. Determination of current liabilities — EAC opinion :

    A company has interest in energy segment both in India and overseas, like liquid fuel, thermal, hydro, stake in coal mines, etc. The company is also having various business plans/strategies to diversify further into segments like transmission, etc. The company made bids for various transmission bids announced by the Government of India through its various bodies corporates.

    In order to qualify as a successful bidder for any transmission/power project, etc., all bidders have to fulfil various financial and technical criteria as per the requirements of the respective bid documents. Among others, some common financial criteria are to meet the minimum requirement of Internal Resources Generation (IRG) and net worth of the bidder either solely or in combination of consortium members as per the conditions of the bid documents.

    The company shows, as per Schedule VI of the Companies Act, 1956, all working capital facilities, bill discounting facilities and short-term loans under the head ‘secured loans’/’unsecured loans’ even though they are in the nature of current liabilities as per the Guidance Note on Terms used in Financial Statements issued by ICAI.

    Recently, the company sought an opinion of the Expert Advisory Committee of ICAI on the question whether the working capital facilities, bill discounting facilities and short-term loans shown under the heads ‘secured’ and ‘unsecured’ loans are to be considered as ‘current liabilities’ while working out net current assets of the company.

    After considering the definition of the term ‘current liability’ as contained in para 3-35 of the above Guidance Note, the committee has given its opinion that all liabilities including loans, whether secured or unsecured, payable within a time period of twelve months should be considered for calculating ‘current liabilities’, irrespective of the fact that the same are not shown under the head ‘current liabilities’ in the balance sheet as per the requirements of Schedule VI of the Companies Act, 1956.

    (Refer pages 911 to 912 of C.A. Journal, December, 2009)

4. Some instances of non-compliance with reporting obligations :

The Financial Reporting Review Board (FRRB) has, during their review of some published accounts have come across the following instances of common non-compliances of Reporting Obligations of our Members. These are published on P. 979-980 of CA journal of December, 2009.

    i) AS 2 — Valuation of inventories :

It was observed that according to the policy of the company, inventories of raw materials, work-in-progress, stores and spares parts, goods-in-progress and by products were valued at cost. The policy indicates that apparently the enterprise is not considering the net realisable value (NRV) in the valuation of raw materials and work-in-progress. This is not as per AS 2. Paragraph 5 of AS 2 requires all inventories, including raw materials, work-in-progress to be valued at the lower of cost and net realisable value.

    ii) AS 6 — Depreciation accounting :

It was observed that some of the enterprises adopt depreciation rates, for certain assets, that are different from the rates as specified in Schedule XIV to the Companies Act, 1956. Further, the enterprises also do not disclose the useful lives or the depreciation rates that have been adopted for such assets. It is in non compliance of the Companies Act, 1956 as well as AS 6.


    iii) AS 9 — Revenue recognition :

Some enterprises include two amounts of excise duty, relating to both opening stock as well as closing stock, in the statement of profit and loss but fail to give any explanatory note in the note to accounts to explain their nature. It may be mentioned that as per paragraph 3 of ASI 14 of Accounting Standard 9, Revenue Recognition, requires that “The excise duty related to the difference between the closing stock and opening stocks should be recognised separately in the statement of profit and loss, with an explanatory note in the notes to accounts to explain the nature of two amounts of excise duty”.

    iv) AS 10 — Accounting for fixed assets :

Some enterprises include in the Schedule of Inventory those items of fixed assets which have been retired from active use and are held for disposal as an inventory item. It is not in line with para 14.2 of Accounting Standard (AS) 10, Accounting for Fixed Assets and para 3 of Accounting Standard (AS) 2, Inventory Valuation.

    v) AS 13 — Accounting for investments :

Accounting Standard (AS) 13, Accounting for Investments, require provision to be created to recognise a decline, other than temporary, in the value of long-term investments. Some enterprises use the term ‘permanent diminution’ instead of ‘other than temporary’, which is contrary to the requirement of AS- 13. It may be noted that there is a difference between ‘permanent diminution in the value of investments’ and ‘other than temporary diminution in vale of investments’ and normally, no diminution in value of investments may be termed as ‘permanent’.

5. ICAI News :

Note : Page Nos. given below are from CA Journal for December, 2009

i. Late Shri Rahul Roy :

Shri Raul Roy who was the youngest President of ICAI in 1998- 99 died at Kolkata on 19-11-2009 at a very young age of 46 years. We pay our sincere homage to the departed soul and pray that his soul may rest in peace. (page 878)

ii. Exposure drafts :

The following exposure drafts are published for comments by Members :

    a) Accounting Standard 25 — Interim Financial Reporting (page 999)

    b) Standard on Review Engagements (SRE) 2410 dealing with Review of Interim Financial Information performed by the Independent Auditor of the Entity. (page 1010)

iii. Empanelment with C & A.G. :

Applications are invited online from firms of Chartered Accountants who intend to empanel with C & A.G. for 2010-11 for appointment of Auditors of Government companies/corporations. The last date is 10-3-2010. The application forms will be available on ICAI website from 1-1-2010 to 15-2-2010. (page 988)

iv. Regular classroom teaching for students :

Regulations and policies are changing on a regular basis and with the new direct taxes code, the imminent induction of the GST and other laws, the pressure on members and the C.A. profession is increasing day by day. Students too are bearing the brunt of this changing world and the need of the hour is to help them see through these difficult times with ease. To help students get a clear understanding of concepts which will help them clear all their written exams, ICAI has decided to step forward and launch regular classroom teaching classes. These classes will cover the entire CA curriculum from A to Z. Students will reap the benefits of attending these classes which have been specially structured to provide personalised attention and help them prepare for all exams from CPT to Final with peace of mind. On an experimental basis the first series of classes are launched at the Western Regional Office on November 30, 2009. (page 874)

v. Know your clients :

With increasing incidence of economic offences in the Country and threat of terrorism and money laundering looming large over the society, it has become of utmost importance to know the credentials of our clients. As a watchdog of financial sector, it is our national duty and social responsibility to report about our ambiguous clients and their unscrupulous activities to the authorities concerned. To facilitate this, ICAI proposes to formulate and put in place ‘Know Your Client’ norms, having through checklist and guidelines, for CA profession on the lines of ‘Know Your Customer’ norms in place in banking industry. (page 875)

6. ICAI Elections :

The elections for Central Council and Regional Councils were held on 4-5 December, 2009. It is reported that following members are elected to Central Council from Western Region for 3 year term from 2010-2012. Results of election to WIRC is awaited.

Sarvashri (i) R. S. Adukia, (ii) Atul Bheda, (iii) Jayant Gokhale, (iv) Pankaj Jain, (v) Sanjeev Maheshwari, Mahesh Sarda, (vii) Dhinal Shah, (viii) Jaydeep Shah, (ix) Nitesh Vikamsey, (x) S. B. Jaware and (xi) Bhavna Doshi.

7. CPE hours :

ICAI has, by notification dated 15-12-2009, announced that the time limit for compliance with the requirement of CPE hours for structured learning for members holding Certificate of Practice for 2009 has been extended from 31-12-2009 to 31-1-2010. Members may note this change.

ICAI And Its Members

ICAI and Its Members1.
Disciplinary Case :

In the case of ICAI V/s Shri K.K. Gupta, a complaint was
filed by the RHO Welfare Association against the member. It was alleged that the
member was grossly negligent in the conduct of the audit of books of the
association on the following counts:

(i) The member had written the books of accounts for the
two years under audit and also audited and given audit reports for these two
years. This was against the code of conduct of ICAI.

(ii) In spite of several requests, he did not return the
books of accounts, vouchers, statements, etc., to the association.

(iii) The member did not give effect to various decisions
of the General Body of the Association while preparing and auditing the
accounts.

(iv) When the association managed to collect the books of
accounts for one of the years, it was noticed that some of the balances, as
per the accounts, did not tally with the figures in the audited accounts.

(v) The member did not come forward to explain the above
discrepancies in the accounts and audited statements.

(vi) No provision was made in the accounts for outstanding
liabilities for salaries, wages, electric charges, water charges, etc., and
the audit report was not qualified for this non-provision.

The Disciplinary Committee, after examining the evidence,
held that the member was grossly negligent in the performance of his
professional duties and was also guilty of other misconduct. He had not complied
with the requirements of the Code of Conduct. The council accepted this decision
and recommended to the High Court that the name of the member be removed from
the Register of Members for one year.

The Delhi High Court has held that the member was guilty of
professional misconduct and other misconduct and confirmed that his name be
removed from the Register of Members for a period of one year.

(Refer P. 1065
of the C.A. Journal for January, 2010)




2.
Some Ethical Issues :


The Ethical Standards Committee of the ICAI has clarified
about the publication of a CA’s expertise, specialisation and knowledge in any
particular field when he is appointed as a director on the Board of Directors of
a company as hereunder:

The Council’s attention has been drawn to the fact that more
and more companies are appointing chartered accountants as directors on their
boards. The prospectus or public announcements issued by these companies often
publish descriptions about the chartered accountant’s expertise, specialization
and knowledge in any particular filed or add appellations or adjectives to their
names. Attention of the members in this context is invited to the provisions of
Clause (6) and (7) of Part I of the First Schedule to the CA Act.

In order that the inclusion of the name of a member of the
institute in the prospectus or public announcements or other public
communications issued by the company in which the member is a director, does not
contravene the above noted provisions, it is necessary that members take
necessary steps to ensure that such prospectus or public announcements or public
communications do not advertise his professional attainments; and also that such
prospectus or public announcements or public communications do not directly or
indirectly amount to solicitation of clients for professional work by the
member. While it may be difficult to lay down a rigid rule in this respect,
members must use their good judgement, depending on the facts and circumstances
of each case, to ensure that the above noted provisions are complied with both
in letter and spirit.

It is advisable for a member that as soon as he is appointed
as a director on the board of a company, he should specifically invite the
attention of the management of the company to the aforesaid provisions and
should request that before any such prospectus or public announcements or public
communication mentioning the name of the member concerned is issued, the
material pertaining to the member concerned should, as far as is practicable, be
approved by him.

(Refer P.1052 of the C.A. Journal for January, 2010)



3.
Some instances of non-compliance with reporting obligations



The Financial Reporting Review Board (FRRB) has, during their
review of some published accounts, come across the following instances of common
non-compliance of reporting obligations by our members. These are published on
P. 1158 – 1160
of the C.A. Journal of January, 2010.


(i) AS – 22 – Certain enterprises disclose advance income
tax paid (current tax asset) and provision for income tax (current tax
liability) separately in their balance sheets, i.e., they do not offset the
amounts. This is contrary to AS 22, Accounting for Taxes on Income. Paragraph
27 of AS 22 requires that an enterprise should offset assets and liabilities
representing current tax if the enterprise:

(a) Has a legally enforceable right to set off the
recognised amounts ; and

(b) Intends to settle the asset and the liability on a net
basis.

(ii) AS – 22 – It has been observed in the case of a few
enterprises that the balances of unabsorbed depreciation and/or losses are
being carried forward under tax law, due to which the deferred tax asset has
been recognised in the financial statements. However, it omits to disclose the
nature of evidence that supports the recognition of such deferred tax assets
with virtual certainty.

(iii) As – 22 – In case of the financial statements of a
few enterprises, it is observed that it has disclosed only the opening
balance, addition during the year and the closing balance of the deferred tax
assets and liabilities,. Also thereis no disclosure of the break-up of the
deferred tax assets and liabilities into their major components which is not
as per the requirements of AS 22.

(iv) Schedule VI to the Companies Act

    a) In case of the financial statements of a few enterprises, it was noted that the opening balance of certain specified reserves do not tally with their closing balance of the last year. Neither the notes to accounts nor the schedules contain any information regarding the
 

differences in such balances. It may be noted that pursuant to the instructions given in Part I of Schedule VI to the Companies Act, 1956, under the head “Liabilities”, the additions and deductions since the last balance sheet are to be shown under each of the specified heads. Therefore, such differences should not arise in the financial statements.

    Paragraph (xi) of Part II of Schedule VI of the Companies Act, 1956 requires that the amount of income tax deducted from the gross income from investments and interests should be disclosed. Some enterprises in their financial statements do not disclose the amount of income tax deducted from the gross income from investment and the interest. This is not in compliance with the requirements of Schedule VI of the Companies Act, 1956.

    Paras 10 and 11 of the above note relate to some discrepancies noticed in audit reports on financial statements. The requirements, AAS28
(The Auditors’ Report on Financial Statements), have been explained.

    Paras 12 to 15 of the above note relate to some discrepancies noticed in reporting under CARO
– 2003.

Members are requested to take note of these discrepancies and ensure that they are not repeated.

  4.  Corporate Governance Task Force Report

The CII had appointed a “Task Force” under the chairmanship of Shri Naresh Chandra on Corporate Governance Code. The Task Force has submitted its draft report to the Corporate Affairs Ministry. The ministry has published this report for the comments of the general public. (Refer the Chartered Secretary Journal for December, 2009, Pages 1768 – 1778). In dealing with “Role of Directors”, this report states:

   i) Auditor – Company Relationship

The report of the Naresh Chandra Committee on Corporate Audit and Governance has suggested that auditors refrain from providing non-audit services to their audit clients. It has also recommended an explicit list of prohibited non-audit services. The Task Force noted that the recommendation has been endorsed by the Ministry of Corporate Affairs and has also been proposed under the Companies Bill, 2009. It concurred with the recommendation that the legislation should expressly prohibit auditors from rendering certain services to their audit clients. Audit firms should have to mandatorily disclose network agreements between audit firms and non-audit companies, pecuniary interests exceeding 2% between the audit firm and its affiliate  non-audit

service firm or company, and Chinese wall and data protection /confidentially measures that are in place between them. The Task Force noted the existing practice in this regard and found it to be sufficient.

ii)    Auditors’ Revenues from  the Audit Client

Not more than 10% of the revenues of an audit firm, singly or taken together with its subsidiaries, associates or affiliated entitles, should come from a single corporate client or group with whom there is also an audit engagement.

iii)    Certificate of Independence

Every company must obtain a certificate from the auditor certifying the firm’s independence and an arm’s length relationship with the client company. The Certificate of Independence should certify that the firm, together with its consulting and specialized services, affiliates, subsidiaries and associated companies or network or group entities have not /has not undertaken any prohibited non-audit assignments for the company, and are independent vis-à-vis the client company, by reason of revenues earned and the independence test are observed.

   iv) Audit Partner Rotation

The Task Force considered the on- going debate on the requirements of rotation of audit versus rotation of audit partner after a specified period of time. The view that audit firms should be changed after 9 or 10 years was discussed. In line with the international practice, the Task Force considered it expedient to recommend mandatory rotation of audit partners after two terms of three years each. This would help discourage creation of any affinity between auditors and controlling shareholders or promoters or the management and may help to prevent “capture” of the audit process by corporate insiders. An initial experience of the impact of rotation of the audit partner should be studied. If this measure does not improve or prevent “capture of audit process by corporate insiders”, then the alternative of rotation of auditor’s after nine years should be made mandatory. Therefore, it is recommended that:

    The partners handling the audit assignment of a listed company should be rotated after every six years. The partners, and at least 50% of the audit engagement team responsible for the audit, should be rotated every six years.

    A “cooling-off” period of three years should elapse before a partner can resume the same audit assignment.

   v) Auditor’s Liability

The firm, as a statutory auditor or internal auditor, has to confidentially disclose its net worth to the listed company appointing it. Each member of the audit firm is liable to an unlimited extent.

vi)    Appointment of Auditors

The Audit Committee of the Board of Directors shall be the first point of reference regarding the

appointment of auditors. The Audit Committee should have regard to the entire profile of the audit firm, its responsible audit partner, his or her previous experience of handling audit for similar sized companies and the firm and the audit partner’s assurance that the audit clerks and/or understudy chartered accountants or paralegals appointed for discharge of task for the listed company, shall have done a minimum number of years of study of Accounting Principles and have a minimum prior experience as audit clerks.

In order to discharge the Audit Committee’s duty, the Audit Committee shall:

  •     Discuss the annual work programme and the depth and detailing of the audit plan to be undertaken by the auditor, with the auditor;

  •     Examine and review the documentation and the Certificate for Proof of Independence of the audit firm, and

  •     Recommend to the board, with reasons, the appointment / reappointment or removal of the external auditor, along with the annual audit remuneration.

   vii) Qualifications introduced by Statutory Auditors or Internal Auditors in their Audit Reports, Tax Audit Reports or CARO Reports

The Task Force recommended that the ICAI appoint a committee with a significant membership of government directors, and invited management professional and lawyers having an understanding of accounts to standardise the language of disclaimers or qualifications permissible to audit firms. Anything beyond the scope of such permitted language should require the auditor to provide a sufficient explanation and should not create a new escape route for avoiding responsibility for discharging the audit function diligently, as the public relies upon them to do a thorough job.

    5. WIRC – Elections

The following members have been elected to WIRC for a 3-year term, from 2010 to 2012.

Sarvashri (i) Agarwal VK, (ii) Apte DM, (iii) Bhandari AS, (iv) Chhaira JA, (v) Gandhi DB, (vi) Hegde NC, (vii) Joshi MM , (viii) Joshi SY, (ix) Kabra DK, Khandelwal DK, (xi) Kinare MP, (xii) Lalan SD, Majithia NP, (xiv) Patel BK, (xv) Patodia SK, Pawar CV, (xvii) Raval PR, (xviii) Shah JM, Shah RN, (xx) Shah SD, (xxi) Shah SJ, and Sharma UR.

    ICAI News

(Note : Page nos. given below are from the C.A. Journal of January, 2010)

    Accounting Standard (AS – 4) (Revised) Exposure Draft – Events after the Reporting Period

The Exposure Draft of this Standard has been published from Pages 1188 – 1192. Members are requested to send their comments by 1.2.2010. This standard corresponds to IAS 10. When finalized, this standard will supersede existing AS – 4 dealing with “Contingencies and Events Occurring After the Balance Sheet Date”.

  ii)  Campus Placement Programme

A Campus Placement Programme for newly qualified CAs has been organized by ICAI for those members who have passed the final CA Examination held in May, 2009 and November, 2009. The dates for the programme as reported on Page 1176 are as follows:

 iii)   Admission of IA & AS Officers in CA Profession

The ICAI Council has decided that Indian Audit and Accounts Service (IA & AS) officers working in C & AG offices can take up the CA course by complying with the prescribed requirements. Any IA & AS officer desiring to acquire CA membership will have to pass CPT, IPCC & CA Final Examination. He will also have to undergo three years Articleship. His service with C & AG office for one year will be considered as industrial training and he will have to undergo two years of Articleship with a practicing CA. (Refer Page 1038)

 iv)   New Guidelines for opening new branches of ICAI

At present, a branch of ICAI can be opened at a city if there are 150 members or more in that city or within a distance of 50 kms. from the city limits. Now, a new branch can be opened if there are more than 100, but less than 150 members, and there are more than 250 students in the city or within 50 kms. from the city. Further, if there is no branch in any district, a branch can be opened in any city of that district if there are at least 100 members in that district. (Refer Page 1038)


    ICAI New Publication

Compendium of Opinions of EAC – Vol. XXVI. (Page 1171).

ICAI And Its Members

ICAI and its Members

1.
Companies Bill, 2009 — Accounts and Audit :


Companies Bill, 2009, was
introduced in the Parliament on 3-8-2009. It was referred to the Standing
Committee for Finance on 9-9-2009. The Report of the Finance Committee dated
26-8-2010 was presented to the Parliament on 31-8-2010. Based on this report the
Companies Bill is being modified by the Ministry of Corporate Affairs. The
modified Bill is likely to be discussed and adopted by the Parliament in the
Budget Session in February-May 2011. Some important changes, relating to
accounts and audit, as suggested by this Committee, are as under.

(i) Clause 117(3) of the
Bill provides that the accounts of subsidiary companies should be consolidated
in cases of all companies. The committee has suggested that unlisted companies
be exempted from this requirement.

(ii) Clause 118 of the Bill
provides that the Central Government shall constitute ‘National Advisory
Committee on Accounting and Auditing Standards’ (NACAAS) to advise the
Government on accounting and auditing polices and standards for adoption. The
committee has welcomed this provision and observed that NACAAS should be
institutionalised not only as a body for setting up auditing standards, but also
as a quasi-regulatory body for generally supervising the quality of audit
undertaken. Under clause 126(10), the Central Govt. has been given authority to
notify the auditing standards in consultation with NACAAS and the auditors will
have to comply with these standards. This provision, if implemented, will
restrict the authority of ICAI to issue the auditing standards.

(iii) The committee has
suggested that a new clause be added in the Bill to provide for appointment of a
Chartered Accountant or a Cost Accountant for conducting Internal Audit of the
books of accounts of specified classes of companies. The Government should
prescribe the Rules about the manner in which Internal Audit should be conducted
and reported.

(iv) Clause 123 of the Bill
provides that a company shall appoint an individual or a firm as an auditor at
the annual general meeting. The committee, in its report, has suggested the
following far-reaching changes in this clause, which will affect the entire
auditing profession :

    (a) An individual Chartered Accountant or a firm of Chartered Accountants shall be appointed as auditor for not more than five consecutive years.

    (b) An Individual auditor who has completed a five year term, shall not be reappointed as auditor for the next three years in that company.

    (c) A firm of auditors who has completed a five years’ term, shall not be reappointed as auditor in the same company for the next five years.

    (d) In the case of the firm, being auditor of a company, the auditing partner should be rotated every three years. The auditing partner rotated, as above, shall not be eligible to be the auditing partner for audit of the same company for the next three years.

    (e) NACAAS should be entrusted to develop and prepare a comprehensive list of audit firms over a period of three years. Once this list is ready, it will be mandatory for any company to appoint an auditor from this list only. During this interim period, companies can appoint their auditors on their own.

(v) The Audit Committee has
to ensure and monitor that the independence criteria has been fulfilled by the
auditor of the company throughout the year.

(vi) The auditor who has
resigned or is proposed to be removed before the expiry of his term will have to
file with the company and the ROC the prescribed form giving reasons and other
relevant facts. The matter about resignation or removal of the auditor, with
reasons recorded by him, will have to be first considered by the Audit
Committee. The Board of Directors shall consider the recommendation of the Audit
Committee, and thereafter, with the approval of the General Meeting accept the
resignation of the auditor and appoint another auditor. In case of removal of
auditor, before expiry of his term, special resolution of General Meeting will
be required.

(vii) Clause 125 of the Bill
provides for remuneration of Auditors. It is suggested by the committee that the
notice for the General Meeting shall give justification for payment of the
amount of remuneration proposed. Further, the shareholders, while approving the
remuneration of Auditors, will have to take into consideration the net worth and
turnover of the company. If this suggestion is implemented, the present practice
in some companies to provide in the resolution that the audit fees payable to
Auditors will be fixed by the Board of Directors will have to be discontinued.

(viii) Clause 127 of the
Bill provides that a statutory Auditor of the company shall not render any other
services viz. (i) Accounting, cost accounting and book keeping, (ii) Internal
Audit, (iii) Design and implementation of any financial and cost information
system, (iv) Acturial services, (v) Investment advisory services, (vi)
Investment banking services, (vii) Rendering of outsourced financial services
and (viii) Management services. As regards other services, relating to tax
audit, tax representation, tax advisory services, etc. approval of Board of
Directors or Audit Committee will be required. The committee has suggested that
the statutory auditor of holding company also should not render the above
services listed in Clause 127 to a subsidiary company.

(ix) The committee has
suggested that Secretarial audit report should be attached to the financial
statements by companies exceeding certain threshold limit of paid-up share
capital.

(x) Clause 130 of the Bill,
after suggestion of the committee, provides for the following punishment for
contravention of certain provisions by the Auditors :

(a) If the auditor contravenes the provisions of Clauses 126, 127 and 128 dealing with powers and duties of auditors and compliance with auditing standards, rendering other services and signing of audit report, he shall be punishable with imprisonment for a term up to one year and with fine ranging from Rs.50,000 to Rs.25 lacs or with both.

(b)    On conviction as above, the auditor will be liable to refund the remuneration received by him to the company and also pay damages for loss arising out of incorrect or misleading statements in the audit report.

(c)    In the case of audit by a firm, if it is proved that the audit partner or partners have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, or by, the company or its directors or officers, the civil or criminal liability in any law shall be of the audit partner or partners as well as the firm jointly and severally.

(xi)    As regards cost audit, the committee has suggested that Clause 131 of the Bill should be suitably amended and a Cost Auditor should be appointed by the shareholders at the AGM in the same manner as statutory auditors.

Some of the above suggestions of the committee, if accepted by the Government and enacted by the Parliament, will have far-reaching consequences on the practising members of our profession. Some of the provisions undermine the autonomy of our Institute granted to us six decades ago. It is surprising that no serious protest has been made by our Institute or the elected representatives in the Council. No public debate has been generated and our members are not aware about the implications of these far-reaching changes likely to be made in the company law in the next year.

2.    Special Loan Scheme of Corporation Bank for our Members:

The Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI, has taken a major initiative to arrange financial assistance to all members in practice/firms in the form of specially designed loan scheme through Corporation Bank. Under this scheme, eligible Chartered Accountants can avail finance for setting up offices, including cost of furniture/ fixture/office equipments — computers and other accessories. The scheme would also enable Chartered Accountants to finance a part of working capital for building their profession and would also take care of the needs of fresher (CAs with experience below three years).

Members and firms are requested to avail the benefits of this loan scheme. For further details, please contact the nearest branch of Corporation Bank.

    3.    Special programme through video conferencing mode:

    The Committee for Members in industry of the Institute of Chartered Accountants of India provides opportunity to employers to interact with newly qualified Chartered Accountants providing a cost effective mode of recruiting newly qualified Chartered Accountants.

    Special placement programme is a step ahead as an extension to the same programme, but with a different objective. For the first time, CMII has taken an initiative to organise a separate special placement programme through video conferencing mode for Chartered Accountants for getting placed, not only within the country, but also for taking up jobs abroad. Many CAs are providing their services to organisations in Gulf Council Countries/Middle East. To facilitate employment of Chartered Accountants in the GCC/Middle East, CMII of ICAI is organising a special placement programme.

    This programme would enable corporates working in Gulf Council countries (GCC)/Middle East to recruit Chartered Accountants through video conferencing mode from Chennai, Kolkata, Mumbai and New Delhi centres. (Refer P. 807 of C.A. Journal for November, 2010).

    4.    Online Articles Placement Portal:

    The Board of Studies has introduced an optional campus placement scheme for selection of Articled Assistants by CA firms. The pilot campus placement programme was held in Delhi in August 2010 for the CA firms having their HOs/Branch Offices in Delhi/New Delhi and for eligible students who would like to service their articles in CA firms in Delhi/ New Delhi. Considering the good response, positive feedback and requests received from both CA firms and students, it has been decided to start an Online Articles Placement Portal — http://bosapp.icai. org from 5th October, 2010 to facilitate placement of Articles in CA firms on an all-India basis. Eligible candidates and CA firms can avail of this facility and register themselves online through the portal. The candidates shortlisted by CA firms would be informed by email through the portal, to appear for interviews/interactions at their respective offices, on the designated date and time. (Refer P. 690 of C.A. Journal for November, 2010).

ICAI And Its Members

ICAI and Its Members

1. ICAI News :


(Note : Page Nos. given below are from C.A. Journal
for July, 2010)

(i) Invitation to join CFO Guild/Members in Industry
Guild :


The Committee for Members in Industry of ICAI has invited
members of the ICAS to join two guilds.

1. CFOs Guild (Corporate Accountants Guild) :


This guild is for members who are occupying high positions
(CEO/CFO/Treasury Head/Head of Analyst, GM or above) in industry. The primary
objective of setting up such a guild is to develop a platform where highly
intellectual and talented pool of people from various organisations can discuss
various issues concerning the profession in general and Members in Industry in
particular.

2. Members in Industry Guild :


Members in Industry Guild is for Members serving in
Industries. The primary objective of setting up such a guild is to develop and
maintain an industrywise database of the members of our Institute serving in
industries.

They can plan, formulate and strategise policies for
improving the image of Chartered Accountants in the eyes of the industry.
Industry-specific seminars/conferences/round table meetings can also be
organised to discuss the matters pertaining to the industry and make them the
brand ambassadors of the profession. The Members shall also be appraised of the
various happenings of the Institute, from time to time.

(ii) Formation of CPE Study Circles for Members in
Industry of ICAI :


29 CPE Study Circles for Members in Industry have already
been formed so far by the CMII. A separate helpline for forming CPE Study for
Members in Industry has been established at the Headquarters of our Institute
with Email : cmii_events@icai.in.

(iii) Retention of period of audit documentation :


The Council of the Institute of Chartered Accountants of
India had in August 2009, pursuant to the provisions of Rule 12 of the Chartered
Accountants (Procedures of Investigations of Professional and Other Misconduct
and Cases) Rules, 2007 had amended the audit documentation retention period
appearing as ten years in paragraph 83 of Standard on Quality Control 1 to seven
years.

(iv) For the attention of the candidates who aspire to
appear in various Chartered Accountancy (CA) examinations scheduled during
November, 2010 :


In order to reduce the time taken in processing the OMR
application forms and also to ensure accuracy in the data pertaining to name,
registration No., group/centre/medium opted, it has been decided to make the
filing of examination application forms online at the url http://icaiexam.icai.org/
as the only mode of application for various CA examinations with effect from
May, 2011.

(v) Invitation for articles on XBRL :


To create awareness about XBRL by developing a pool of
knowledge and sharing it, ICAI invites articles on XBRL from members and others
with knowledge/experience in XBRL for publishing in the Chartered Accountant
Journal. Articles may pertain to relevant topics such as basics of XBRL; its
benefits and uses to various users, such as chartered accountants, banks,
income-tax department, financial analysts and others; challenges in implementing
XBRL, etc.

(vi) Recognition to profession :


Our member CA Piyush Goel has been elected to Rajya Sabha
from Maharashtra recently, and our Past President Kamlesh Vikamsey has been
appointed as the Member of Audit Advisory Committee of United Nations
Development Programme. Our heartiest congratulations to them.

(vii) Non-submission of Form 112 :


The following course of action be adopted for dealing with
the cases of condonation of Regulation 65 w.e.f. 1st April, 2010.

It is clarified that the cases for condonation of breach of
Regulation 65 and 78 received up to 31st March, 2010 would be dealt with in
terms of the Announcement dated 8th January, 2010 i.e., general amnesty.

In case a breach of regulation 65 is noticed at the time of
enrolment as a member, the decisions are as follows:

(viii) ICAI publications :


The Committee on Public Finance and Government Accounting is
coming out with a publication ‘Issues on Public Finance’.

(see pages 200 to 203)

2. Transfer price for the purpose of segment reporting (EAC
Opinion) :


Facts :

A company is a public sector enterprise under the
administrative control of the Ministry of Mines, Government of India and is
engaged in mining of bauxite, manufacturing of alumina and aluminum, generation
of power at a captive power plant for use in smelter, and selling of alumina and
aluminum both in domestic and international market.

Cost of power constitutes about 30% of cost of production of
aluminum. The captive power plant is set up exclusively to supply uninterrupted
power to smelter. It is also connected to State grid to take care of the supply
of emergency power to smelter in case of any breakdown or failure at the captive
power plant. Any surplus power after meeting the requirement of smelter is
automatically transmitted to State grid and treated as sale, as per agreement
with company ‘G’, which is a State Government undertaking.

As per the querist, even though the cost of generation of
power is higher, transfer price of power of the purpose of segment reporting is
considered only at 110 paise/kwh, which results in segment loss in case of the
captive power plant (even though the unit is functioning efficiently and up to
the satisfaction of the management) and higher revenue for chemical and aluminum
segments.

Segment report for the quarter ended December 31, 2008 was
examined by the statutory auditors at the time of limited review and they were
of the opinion that though the unit is performing well, as a result of
compliance with the provisions of AS-17 for inter-segment transfers, as stated
hereinbefore, the power segment reveals loss, which does not appear to be a
proper disclosure.

As per the querist, in case the company is allowed to sell
power to parties other than company ‘G’, revenue earned will be at least three
to four time more. However, since the company is largely dependent upon company
‘G’ for emergency power and back-up power, it will not be practicable to delink
from company ‘G’.

From the aforesaid facts, according to the querist, it is
revealed that the circumstances have arisen only because of non-remunerative
sale price and will continue to be the same till the rate charged from company
‘G’ is revised.

Query :

The querist has sought the opinion of the Expert Advisory Committee as to whether in the circumstances explained above, the loss disclosed in the segment report can be explained by way of giving a note with reference to the provision of Accounting Standard or whether any other formula for transfer pricing can be adopted, which may necessitate revision of AS-17 ?

The Committee noted that the basic issue raised by the querist relates to pricing of inter-segment transfers for segment reporting under Accounting Standard (AS-17) Segment Reporting.

The Committee observed that inter-segment transfer pricing is an accounting policy which relates specifically to segment reporting and that inter-segment transfers should be measured on the basis of the enterprise actually used to price those transfers. In other words, the price that is actually used in the books of accounts to reflect the transactions between different segments and the price that is used to reflect segment results for the purpose of segment reporting under AS-17, should be the same. The Committee further observed that AS-17 neither requires nor recommends that inter-segment transfers should be priced in any particular manner, such as competitive markets prices charged to unaffiliated customers for similar goods as stated by the querist.

EAC opinion :

On the basis of the above, the Committee is of the opinion that the company is free to choose any appropriate pricing policy for inter-segment transfers. Thus, the question of explanation of the loss with reference to any provision/requirements of AS-17, if the existing policy of transfer pricing is continued to be followed, by way of a note to the segment report, does not arise. However, if the company chooses, the loss may be explained by way of a note to the segment report, the note should not state that AS-17 requires adoption of that particular pricing policy. Further, revision to AS-17 with respect to the issue raised by the querist is not required.

(see pages 183 to 185)

From The President

FROM THE PRESIDENT

Dear BCAJ Lovers,

I am beginning to understand
the true meaning of the phrase “the pen is mightier than the sword”. With every
passing month, the feedback and responses to my page appear to be increasing in
frequency and in the amount of positive energy that they convey to me. I am very
thankful to all those who have continually sent me their views.

As I begin writing this month’s
page, we have just had an extraordinary event that the BCAS organized on 25th
March. At the Late Dilip N. Dalal Oration Fund Lecture meeting, we felicitated
some of the Mumbai based rank holders at the last CA Final examinations. We also
released the updated RTI publication authored by our past president Mr. Narayan
Varma. The highlight of the evening was BCAS’ felicitation of CA T.N. Manoharan,
past president of the ICAI on his being conferred the Padma Shri Award by the
Government of India. He then spoke on “Satyameva Jayate – Learning from the
Satyam Experience”. Every word he spoke came straight from his heart and touched
a chord in the hearts of everyone present. When he sat down, he got a standing
ovation – something which I have not witnessed during my long association with
BCAS. We at BCAS are proud of our member Mr. Manoharan and wish him many more
such achievements in future.

All of you would, by now, be
well aware that the IPL cricket matches are going on in full swing in various
corners of the country. I would like to talk about cricket at this time. And now
that I have your attention (considering what a cricket crazy nation we are), let
me clarify that it’s not the runs and wickets that I ant to talk about. But the
lessons that we all must learn from the IPL and its promoters.

Cricket, as you know, is an old
game. The basic objective of each team is to make more runs than the other team.
There are set rules of the game. What has IPL done for the game and for others
that is different? Cricket was once ruled by 5-day test matches. As the years
passed, test matches were replaced in terms of popularity by One Day
Internationals with 50 overs. Later, we graduated to day and night matches and
today, we have T-20 matches. Is there a difference? Has life changed for
everyone concerned (and also for those not concerned)? The answer is a loud and
clear YES! Let us see what changes have come about.

People no longer have the time
and the patience to watch 5-day test matches and, in many cases, even ODIs. They
want shorter matches so that their working hours do not get affected
substantially. Then, someone thought – why should the clothes worn by cricketers
be plain-jane white clothes? Why can’t they wear colourful clothes? So, IPL got
bright designer clothes for cricketers. What’s more, the colour of the balls,
bats and stumps too have changed to livelier ones as compared to before. Now we
have large screens in the stadium and spectators can see action replays there
too. Similarly, in order to help umpires take the right decision, we now have
third umpires. This reduces the possibility of unfair decisions.

How are the players affected?
They get tons of money, first of all to be selected in any team and then when
they play, they get money to endorse products. Secondly, because there are so
many teams, there is a requirement for so many more cricketers. This gives more
youngsters a chance to play. This, in turn, allows the selectors a larger pool
of cricketers to choose from while deciding on the national teams. Ultimately,
this raises the bar as far as performance is concerned. Even foreigners get to
play in the matches.

What do the spectators get?
They get complete entertainment. Every match gives a result so there is no
chance of a disappointing draw. There is ample scope for being innovatively
dressed and painted up to catch the cameraman’s eyes. There are event managers
at the stadium entertaining the people with songs, music and what not! People at
home get to watch Bollywood and other celebrities talking about and cheering
their teams.

The popularity of cricket
matches has started wooing people away from movies. This, in turn, has lured
movie stars to cricket and we now have several stars owning various teams. Even
industrialists are taking interest in the game. A classic example of multi
disciplinary partnership! Both professions stand to gain from this merger.

I can go on and on. But this
page is not allotted to me to talk about cricket. Let me come to the point. What
can we CAs learn from the IPL phenomenon? What can BCAS as an organization
learn? What can ICAI learn?

The most important lesson to be
learnt is to understand that people change over the years and so do their
preferences and wants. Every new generation thinks and acts differently. We have
got to understand that and learn to adapt to those changing needs. We cannot
afford to provide our services in the same manner as we used to do 20 years ago
or the way our senior CAs used to do. We need to understand the changing market
dynamics and try to latch onto the same. We also need to understand that loyalty
is fast becoming a thing of the past. Today, just as we have fans switching
loyalties from one team to another (and so also cricketers going from one team
to another when they are paid more), the time has come when our new clients
(especially the foreign ones) too don’t get emotionally attached to their CA or
the firm. The same is also the case with our staff. Time and again, we have read
news items bout high profile members moving from one reputed organization to
another. Is this not a reflection of the times that we are living in today?
Today, salary is the deciding factor in many cases while selecting a career. Let
us accept it and be prepared to pay what the market is offering. If we don’t, we
have no business to complain that we are not getting good staff. And why don’t
we offer higher salaries? Because, we complain that we don’t get higher fees.
And why don’t we charge higher fees? Maybe, we are afraid of losing our clients.

IPL tickets cost thousands of rupees today. That was not the case with test match tickets and ODI tickets. Yet, people pay these kind of charges. Why does that happen? It happens because they perceive a certain value for money when they go for such matches. The game is the same, the rules are the same, the objective is the same. But the value has gone up. Do we CAs know and understand our own value? Are we able to position our services well in the eyes of the public? I don’t need to spell out the answer to this one. The value of a profession is directly proportionate to the value of its members. We individuals are responsible for what our profession as a whole is perceived to be by others. We elect our leaders and our leaders decide our policies and our code of conduct and our rules and regulations and we follow these rules. How others see us depends on what face we show them. Have we bothered to take a look at our faces in the mirror to find out what others are seeing?

The marriage between Bollywood and sports has helped both. This classic merger is staring us in the face. Have we taken a step to create such win-win situations with other professions? We have only been reading about it but nothing concrete has emerged.

IPL has used latest technology to the fullest extent for marketing itself. Virtually, all the popular ways of communication have been used to the advantage of Brand IPL. This has, in the words of Mr. Lalit Modi, made the IPL a billion dollar enterprise. Have we, as CAs, whether personally or collectively as an organization, used technology effectively? IPL has been eminently successful in magnetically pulling all strata of people to it. If someone did not go to the IPL, then IPL reached out to that person. That is a clear message for organizations like the BCAS. We must reach out to people. If they don’t come to us, we have to reach out to them. We need to find out what the members of our profession want and also how far they are willing to travel to get what they want. If our members live in the suburbs of Mumbai, then we have to go to the suburbs. If not, be ready to accept falling numbers at our programs. This holds true not only for BCAS but for all other organizations. Today, IPL has become a symbol all over the cricketing world. Mr. Modi is known and respected by cricketers across the globe. Can BCAS become such an organization? Do we have it in us to capture the imagination of young CAs all over the world? Can we become a catalyst in changing the face of the profession? Do we have a Lalit Modi amongst us who can turn the picture on its head or the world on its head? Only time will tell!

I am aware that this message is highly debatable and many of you may not agree or may not want to agree. As always, I am open to discussion. I look forward to your feedback. In the meantime, we can all keep guessing and hoping and praying as to who will win IPL Season 3!

From The President

From The President



Dear Esteemed Readers,

July and August were
eventful months not only for the Chartered Accountancy profession but also for
the world at large. In so far as our profession is concerned, the deadline for
filing income tax returns kept most of our fraternity busy till July 31, which
was extended by four days up to August 4, 2010.

The results of the CA
examinations were released in the last week of July, of which the outcome is
“Thodi Khushi, Jyaada Gam”, with the overall passing percentage falling
below double digits. The results were tough as seen from the trend of the past
few years; worse, it was toughest in recent years. Many bright students meet
with failure in CA examinations for the first time in their life. Examination
results invariably cause frustration, depression and a crisis of confidence. In
order to motivate students and help them take examinations in the right
perspective, an inspirational talk by renowned film and stage actor, Anupam Kher,
on the topic “The Power Within” was organized at K. C. College on 16th August
2010, which elicited a very good response.

Students are our future and
we, members of the profession, should shoulder the collective responsibility to
make them first and foremost good human beings, responsible citizens and better
Chartered Accountants. A sense of longing to contribute to the society what one
receives therefrom must be inculcated in students early in their career. It was
heartening to read the news in the Times of India dated 25th August 2010, that
Mr. Asit Koticha, Chairman and Founder Promoter of ASK Group and ex-student of
Poddar College donated Rs. 32 crores to the University of Mumbai and promised to
raise a further Rs.70 crores to help the University build a world-class
Convention Centre and other facilities.

It is said, there are two
certitudes in life; namely, death and taxes. Taxes are levied and collected from
times immemorial. However, the origin of income tax law is found in the Bill
passed by the Legislative Council of India for imposing duties on profits
arising from property, professions, trades and offices. It received assent from
the Governor General of India on 24th July, 1860. Mr. James Wilson, Privy
Council Member and Founder of the world-acclaimed magazine, “The Economist” was
the architect of taxation in India.

On 24th July 2010, the
Income tax Department celebrated the 150th anniversary of Tax Laws in India. On
that occasion, the Finance Minister, Mr. Pranab Mukherjee, dedicated to the
nation the revised Citizen’s Charter. While the Charter expects Indian citizens
to be truthful, prompt and regular in paying taxes, it reaffirms that there
shall be equity and transparency in tax administration. The Finance Minister in
his address on the occasion remarked as follows:

“One area of concern is
litigation with taxpayers. Department is filing appeals in a routine manner
without careful thought and examination, leading to the Department earning the
dubious distinction of being the biggest litigant within the Government of
India.”

The aforenoted comment says
it all.

The Chairman CBDT, Mr. S.S.N.
Moorthy, unveiled the Service Quality Policy and has expressed commitment to
promote voluntary compliance with Direct Tax Laws through quality taxpayer
service and fair and firm administration. He also conveyed that the Department
would endeavour not only to be transparent but also fair in its processes. Let
us hope that both, the Income tax Department and the Citizens at large would
comply with the revised Charter, both in letter and in spirit.

Some other disturbing
developments were the flash floods in many states of Northen India, agitations
in the Kashmir valley and the rising inflationary trend. We need to learn that
the environmental imbalances are causing floods in deserts and heat waves in
cold climes such as Eastern Europe – a topsy-turvy condition of sorts. The
uproar in Kashmir Valley needs to be dealt with firmly. It is high time that all
political parties rise as one to the occasion and find an acceptable and
practical solution to the problem. The time is ripe to deal firmly with our
neighbour in the matter of Kashmir, which is the root cause after all. The
goodness of India is seen as its incompetence. Even Gandhiji said: “I would
prefer violence any day to cowardliness.” Non violence and peace should be
practised from a position of strength.

The rising inflation is a
matter of concern for one and all. It is widening the divide between the “haves”
and the “have nots”. A major chunk of the Indian population live below the
poverty line, which would prove that prosperity of economic development has not
penetrated down to the grass root level. The need of the hour is “inclusive
growth” i.e. growth and prosperity for all sections of the society. When our
Members of Parliament find it difficult to survive and unabashedly unite to
increase their pay three times, what about poor people across the country? In
good old feudal days when subjects were in difficulty or facing hunger, the then
Kings used to practise austerity and donate generously for the welfare of the
suffering masses. Today, it is the opposite. Our MPs and MLAs rush to increase
their emoluments at the cost of poor. In the recently concluded 14th ITF
Conference at Udaipur, the Keynote address was delivered by Sriji Arvind Singhji
Mewar, the descendent of the Royal Dynasty of Udaipur. He regards himself as the
76th custodian of the House of Mewar. The moot point here is that Sriji and his
predecessors regarded themselves as custodians or trustees as Gandhiji said and
not owners. According to them, the real owner is Lord Eklingji (Shiva), their
Ishta Devata (ancestral deity) and they were merely trustees. The principle of
“trusteeship” was enunciated by Gandhiji. If every wealthy person lives by this
philosophy, nobody would be poor on this earth. A small beginning has been made
at BCAS. Through the efforts of the Past President Shri Pradeep Shah, members
donated a dialysis machine to the Muljibhai Patel Society for Research in
Nephrology which costs Rs. 5 Lakhs. BCAS would be instrumental in organizing two
free eye camps for cataract operations at Vansda, Dist. Valsad, Gujarat, whereby
100 plus villagers would be benefited. Efforts are on to raise funds to fund
community service projects for the Matunia village in fond memory of the Late
Shri Hiten Shah, who had a dream of transforming this backward village. Any
member who is willing to contribute to such good projects is always welcome.

The panel discussion on Service Tax went off very well. More than 85 members attended. The seminar on NBFC on 14th August was also well attended with participation from across the country. The 14th ITF Conference at Udaipur set new standards both academically and administratively. The feedback for all programmes is very encouraging.

I conclude my message with New Year greetings to the Parsis and best wishes to readers from different faiths during the oncoming festive seasons of Ramadan, Paryushan and Ganesh Utsav.

JAI HIND

From The President

From The President

Dear Esteemed Readers,

Well, by the time you receive this message, the majority of
you folks will be relaxing from post September tax work. We, especially CAs,
need to learn to relax. After a day’s hard work (often putting in more than 10
hours), it is not uncommon to find a CA carrying some work to do at home. The
reason for this state of affairs is that we are unable to work in water-tight
compartments. In my childhood, I had learnt a poem, “Work while you work,
play while you play, it is way to be happy and gay”. Unfortunately, we not only
take work home but also whilst on vacation. As a result, we return home
exhausted despite the vacation. Let us stop being workaholics and start living,
which is all about balancing. In the words of Brian Dyson, CEO of Coca
Enterprises (1959-1994), “Imagine life as a game in which you are juggling five
balls in the air. You name them – work, family, health, friends, and spirit –
and you’re keeping all of these in the air. You will soon understand that work
is a rubber ball. If you drop it, it will bounce back. But the other four balls
– family, health, friends, and spirit are made of glass. If you drop one of
these, they will be irrevocably scuffed, marked, nicked, damaged, or even
shattered. They will never be the same. You must understand that and strive for
balance in your life”.


It reminds me of one of the seven habits of highly effective
people, as discussed by Stephen Covey, i.e. “Begin with the end in mind”. Let us
work toward our goals in different areas of life rather than concentrating on
only one area of life.

Generally, CAs and taxmen are perceived to be practical,
being occupied with so-called boring figure work. They are perceived to be
non-creative, being away from art and culture. Labeling a class of people one
way or the other is not appropriate. Art and culture is a matter of individual
traits and tastes. The Income tax Department is celebrating 150 years of its
existence, to commemorate which, a unique Art Exhibition was organized at the
Prince of Wales Museum in Mumbai during 24-27 Sep. 2010. I had the privilege of
witnessing the creativity of the IT officials. The Art Exhibition displayed
paintings, essays, books and poetry— all the work of taxmen. It was heartwarming
to see the different facets of the taxmen’s collective personality. We were
already aware of the word picture (by delivering well-articulated assessment
orders) by some smart taxmen; this Art Exhibition showed the picture painted.
Our compliments to one and all artistic taxmen and also to the Income tax
Department.

Today, we are living in an era of all-pervading negativity.
Television channels, in their quest to beat each other, are sensationalizing
news and scaring people. For TV Channels, every news is breaking news. Most of
the news is picked up from police files resulting in more of a crime reporting.
Flood or drought, fire or earthquake, any small or big incident is projected as
the beginning of an end of the world i.e. Pralay, in 2012. As it is,
India is struggling with floods in North India, unrest in the Kashmir valley,
attacks by Maoists, terror threats and epidemics such as Malaria, Dengue and
Swine Flu. To add to this, irresponsible TV Channels, and some newspapers are
thoughtlessly adding fuel to the fire. More than natural calamities, this
country suffers from perverted TV serials, which tend to sully our
national/social fabric. The aam junta tries to find solutions to their problems
through TV serials; what is worse is that they (especially teenagers) identify
themselves with the stars of these serials. This is dangerous, as extra marital
affairs, cheating and betraying in families are the corner stones of most of the
prime time TV serials. In the name of reality shows, all unreal things are
projected which is socially detrimental. It is a patent misuse of freedom of
expression. Well, if the power of media is rightly and wisely used, it can make
politicians and bureaucrats accountable and provide good entertainment to tired
souls. The media being the most powerful medium of communication and capable of
influencing the masses, should exercise restraint of the highest order and
discharge its social responsibility.

We must contribute our might to spread positivity. The Right
to Information Act is a powerful weapon in the hands of ordinary citizens to get
justice and instil accountability in public servants.

The much awaited Direct Tax Code (DTC) was introduced in
Parliament on 30th August, 2010 in its new avatar. Critics say it is old
wine in a new bottle. After a lot of hue and cry about the first version, the
second version of the DTC seems to be taking care of many
objections/representations made in the first draft. However, the amendments are
falling short of expectations. Any way, the law is unfolding and the Government
would welcome suggestions. Let us hope that representations from professional
bodies and trade associations are given due consideration before the DTC becomes
the law. Stringent General Anti Avoidance Regulations (GAAR) should not be
introduced without proper checks and balances lest they become a handle to
harass innocent tax payers. Provisions relating to Safe Haven and the likes
should be embedded in GAAR to provide relief to Micro, Small and Medium
Enterprises (MSMEs). “Place of effective Management” should be clearly defined
in order to avoid litigation in respect of determination of residential status
of foreign companies. Notwithstanding these irritants, CBDT deserves kudos for
simplification of the tax law (DTC) to be effective from 1st Aril 2012.

Coming back to the BCAS, last month, there was a lull in the
society’s activities as it was busy season. However, a few notable events took
place such as the workshop on “How to Conduct a Tax Audit”, addressed by Messrs
Anil Sathe and Himanshu Kishnadwala, and a Lecture Meeting on Transfer Pricing
by Vispi Patel. Two Webinars were held on the subject of “Introduction to XBRL”
on 11th and 22nd September 2010. The Webinars elicited good participatory
response from local and outstation members as well as those staying overseas.
The Webinars were conducted by Vinod Kashyap. It was the first time such a
Webinar was organised, thanks to the painstaking efforts by the “Infotech and 4i
Committee”. XBRL stands for Extensible Business Reporting Language, which is a
language for electronic communication of business and financial data, which is
revolutionising business reporting around the world. It offers major benefits to
all those who have to create, transmit, use or analyse such information. XBRL
India is facilitated by the Institute of Chartered Accountants of India (ICAI).
Members of XBRL India include various regulators such as RBI, IRDA, SEBI, MCA,
BSE and NSE. CAs can play a role in the implementation of XBRL and this may well
be a new avenue of practice.

Last but not the least, the countdown has begun for the
Commonwealth Games. Let us hope that our athletes bring back to India its lost
glory.

And now that the verdict on the Ayodhya dispute is finally
out, let us pray that people will respect it and maintain communal harmony – the
core essence of India’s cultural heritage.

Tathastu! Amen! So Be
It!


From The President

From The President

Dear Esteemed Readers,

At the outset, my greetings to all of you on the ensuing
happy occasion of Deepawali – the festival of lights, which we celebrate to mark
the victory of ‘Good’ over ‘Evil’. The Ramayana notes that the people of Ayodhya
celebrated ‘Deepawali’ by lighting lamps and distributing sweets to mark the
victory of Rama over Ravana. Later, during King Vikram’s reign, this celebration
was linked with the New Year, which is why it has become a popular festival for
millions in India.

The war within the Ramayana is symbolic. Every person has a
battlefield within, where there is a constant fight between good and evil. We
have to conquer all our negative emotions with a positive attitude and courage.

On a positive note, India can take pride in the successful
organisation of the Commonwealth Games. The world was stunned by the spectacular
opening as well as by the scintillating closing ceremony. The depiction of
cultural and traditional India, marking the opening ceremony, was one of the
most creative ways which the world would never forget. The Commonwealth Games (CWG)
“aerostat”, unveiled at the inauguration ceremony, was another star attraction.
Our athletes and sports persons brought pride to the country by winning
sufficient number of gold medals to keep India at second position. The power of
creative visualization was evident as India achieved its targeted second
position. India is now poised to make its mark at the forthcoming Asiad Games in
China between 12th and 27th November 2010.

However, the huge expenditure of about Rs. 70,000 crores for
the CWG is mired in allegations of massive corruption. I think India did a
fantastic job in CWG but for the corruption, which has not only tarnished the
image of our country, but has also made the life of the aam aadmi
miserable to the core. Isn’t it an irony that the apex court had to comment that
“it is high time that the Government fixes price tags of bribes for getting work
done from the Government Department?” In spite of such severe strictures, our
spineless politicians remain unruffled. The gravity of “corruption” is aptly
shown in the Marathi film, “Ek Cup Chya”. This film, with English
subtitles, screened at BCAS for the benefit of its members on 6th
October 2010 is about an honest bus conductor who receives an abnormally high
electricity bill and how he fights the mighty system and the “babus”
through the weapon of “Right to Information Act”. He succeeds ultimately, but
the amount of hardships and sacrifices that he and his family have to endure for
treading the path of truth and honesty is memorable indeed. Mrs. and Mr. Julio
Ribeiro (Ex Police Commissioner) were amongst the distinguished guests at this
movie screening.

India is a land of paradoxes. On the one hand, tonnes of food
grains get spoiled due to improper storage facilities. On the other hand, almost
one third of its population is starving. Several orders and directions from the
Supreme Court to distribute food grains to the poor and needy have not
fructified. Another area of concern is conversion of thousands of hectares of
agricultural land into non agricultural use in the name of development. With a
one billion plus population and low productivity, India would find it extremely
difficult to feed its teeming populace in future, unless such conversion is
halted forthwith.

On 1st October, 2010, BCAS, jointly with IMC, had
an interactive meeting with the Commissioners of Service Tax department S/s
Ravichandran and K. K. Sharma, at which several issues concerning service tax
compliances and policy matters, including implementation of e-filing, etc. were
discussed. The meeting was a step towards co-operation and discussions between
professionals and revenue authorities which would go a long way in developing an
atmosphere of mutual trust and support. At the end of the meeting, both parties
felt the need to meet more often and exchange views as everyone is in the
learning curve, the law being in the developing and unfolding stage.

On 12th October, 2010, the BCAS Foundation,
jointly with the Public Concern for Governing Trust and IMC, celebrated the 5th
anniversary of the Right to Information Act at the IMC. Hon’ble Justice Suresh
Hosbet, former Judge of the Mumbai High Court, was the chief guest of the
evening. In his keynote address, he emphasized on the need for well informed
citizens such that they can participate in the affairs of the country. He
referred to various decisions of the Supreme Court, which are helpful in better
understanding of the RTI Act. Amongst other notable speakers were S/s Suresh
Joshi, retired Chief Information Commissioner, Maharashtra, Julio Ribeiro and
Narayan Varma. An educative and instructive street play on the RTI Act was
enacted by young artists of the “Umang” Group.

On the unique day “20102010”, a lecture meeting on the topic
of “Taxation of Real Estate – Some Important Aspects including Project
Completion Method, S. 50C, development and Redevelopment & 80-IB (10)” addressed
by Past President, Mr. Pradip Kapasi, elicited an overwhelming response with
about 400 members attending at the IMC.

A study course on FEMA organized by the International
Taxation Committee of the Society on 22nd and 23rd October
2010 also received a very good response, with more than 100 members attending
and benefiting therefrom.

It is said that October heat is worse than summer. Mumbai
experienced unprecedented heat this month, contributing to epidemics such as
Malaria and Dengue. Widespread construction and consequent debris and filth have
only added fuel to the fire. BCAS lost one of its dedicated and hardworking core
group members, Mr. Manesh Gandhi, on 10th October 2010. He succumbed
to Dengue after a brief illness of just two days. In him, the Society has lost a
committed member of the Taxation Committee and Convenor of the Study Circle on
Direct Tax Laws. May his soul rest in eternal peace!

The much awaited Residential Refresher Course has been
finalized at the picturesque and lush green hill station of Maharashtra, namely,
Matheran, during 22nd to 25th January 2011.

The Noble Peace Prize for 2010 has been awarded to Mr. Liu
Xiaobo, who is a political prisoner in China. He believes that freedom of
expression is the foundation of human rights. In China, he fought for this right
and got imprisoned, whereas in India, we not only enjoy this right but often
times, abuse it and get away with it. In life, we don’t value a thing which we
get easily. It is high time that we realise the value of freedom of expression
and use it wisely. This applies to every walk of life, be it professional,
political or personal. Someone has aptly said, “As per Biological Science, the
hurt on tongue gets healed very fast, but as per Science of Knowledge, hurt
caused by tongue never gets healed.”

I conclude wishing the readership a happy Deepawali and a
prosperous New Year, once again.

From The President

From The President

Dear BCAJ Lovers,

Over the past 9 months, through these pages, I have been able
to share thoughts that have convinced many members to spare some time in writing
to the BCAS with suggestions and feedback. The mails received by me in the past
one month have brought many constructive ideas. Due to the sheer numbers, it has
not been possible to reply to each person individually. However, members may
rest assured that BCAS is taking note of the various suggestions and efforts are
being made to translate the suggestions/feedback into action. Some of the
responses are being reproduced in the journal under the title “Members Speak”.

Recent press reports said that at a campus placement
conducted by ICAI, a fresh CA was hired by a foreign company at a staggering
starting salary of Rs.70 lakhs per annum. There was also another news item which
contended that many companies now prefer MBAs over CAs.

Both these pieces of news are important and interesting for
CAs. What remuneration a person is able to command depends on the perceived
value of that person in the eyes of the payer. The value of an individual CA is
also dependent on the value of the profession at large. Over the years, there
has been raging discussion on how CAs get less remuneration than other
professionals and how one category of professionals is perceived to be scoring
over CAs. I believe that we CAs are responsible for the state of affairs that we
find ourselves in today. Have we ever paused to reflect on why one firm of CAs
gets double (or many times more) the fees for what seems to be the same
service ? Have we ever tried to analyse the reasons why one firm is able to get
higher hourly rate of fees as compared to another ? Why is that many highly
intelligent CAs earn far lesser than less qualified business persons ? Let us
ask ourselves why, despite the fact that the total number of CAs in the country
is a minuscule percentage of the total population and therefore, there is a
limited availability of CAs in India; despite the tremendous amount of client
loyalty that we enjoy and despite the fact that we have so much work that the
Govt.’s policies and laws generate for us and despite the fact that we are able
to add substantial value to our clients, why is it that most of the times, many
CAs feel that the financial returns that we get are not commensurate with the
efforts that we put in and with the value that we bring to the table for the
clients ?

This apart, there is also the fact that one firm of CAs or
one CA stands out as compared to other firms or other CAs. Most CA firms or most
practising CAs are rendering the same type of services to their clients. Yet,
there is a perceptible difference between what one CA/firm achieves in terms of
revenues, type of clients, quantum of work, quality of work, quality of staff,
etc. What is it that makes each of us different ?

Traditionally, many CAs were not accustomed to charging fees
based on the number of hours spent for an assignment. Then, spurred by the
growth of the larger firms and their system of charging by the hour, many
smaller firms too started charging fees on hourly basis. Even our Institute has
recommended a certain scale of fees for certain types of assignments based on
hourly rates.

My personal view is that hourly basis of charging is a very
inefficient way of charging. It breeds inefficiency since the focus is on the
number of hours spent and not on bringing in efficiency to reduce the number of
hours spent. Also, it does not factor in the value that a CA adds to his client.
Therefore, I humbly suggest to readers to consider the concept of value pricing.
One must charge fees based on the value that one feels he/she is adding to the
client. We need to educate our client about the value of the work that we do for
them. Unless the client is aware of what are the repercussions of a CA’s work
not being done properly, that client will never understand the value of the CA’s
efforts. For this reason, it would be a good idea for a CA to create well
thought-out presentations on important areas of one’s practice and show such
presentations to a prospective client. There are a number of websites devoted to
value pricing which may be of interest to some of you.

Another area of practice management that I feel very strongly
about is the need for CAs to network amongst each other and to build their
capacities. The ICAI has been strongly advocating the concept of mergers and
networks amongst CAs. Unfortunately, the members have been slow in adapting to
this. Considering the high costs of running a practice in terms of real estate
and salaries, the complexities of today’s ever-changing laws and the resultant
need to focus on a few (if not one) areas and specialise in the same instead of
trying to be a jack of all trades etc., there is a crying need for smaller
entities to get together and form a larger entity.

In a large metro like Mumbai, we have, for the past few
years, witnessed large-scale consolidation amongst various firms. There have
been many mergers amongst smaller firms and many “take overs” by the Big 4.
However, whenever I meet members from smaller cities (as I did recently in
Lucknow, Kanpur, etc.), I learn that CAs continue to practise there as smaller
entities. The concepts of mergers and networking have not yet become very
popular there. Merger of CA firms does involve many complex issues. However, I
believe that if a person is willing to, for a moment, let go of the attachment
to one’s own name and focus on future growth, everything else is likely to fall
in place. As the larger firms grow in strength, it will become more and more
difficult for smaller firms to cope with the increased volumes of work, complex
and frequently changing laws, shortage of good staff and growing requirement
from clients for a one-stop shop for diverse services. Those who are content
with their current quality of practice may continue with their existing size and
set-up. But circumstances beyond their control will definitely continue to
affect their functioning and, maybe, their survival. The BCAS has offered
networking and merger prospects to many of its active members. I hope that other
members too see the merit in looking beyond their own turf and joining hands
with like-minded professionals.

On other fronts, the Icelandic volcano disrupted more than
90,000 flights to/from Europe resulting in what seems to be a greater financial
impact than even the 9/11 attacks. One hopes that life will return to normal
very soon. The IPL saga has turned into a very ugly tamasha. Every day we hear
of new developments. In the context of what I had written last month, many
members have now questioned my choice of comparison of IPL with our profession.
I may only say that it was only the concept of change that I had tried to
highlight and not the concept of IPL. Let us all try to imbibe change without
the dishonesty, corruption and all other ills that seem to have got attached to
the present drama that is unfolding before our eyes.

As usual, I look forward to receiving your views and feedback
on what I have written. I hope that all of you whose children have appeared for
school/college examinations are now breathing easy and that the children will
fare very well in the exams. Do enjoy the summer holidays with your family members and have a great time.

Miscellaneous

From Published Accounts

Section B : Miscellaneous

9 Non disclosure of items in companies wherein Joint Control
is exercised (as required by AS 27)

Electrosteel Castings Ltd. — (31-3-2009)

From Notes to Accounts

26(a)The Company has invested in equity shares of Domco
Private Limited (DPL), a Company incorporated in India and has joint control
(proportion of ownership interest of the Company being 50%) over DPL along with
other venturers (the Venturers). The Venturers had filed a petition before the
Company Law Board, Principal Bench, New Delhi (CLB) against the Company on
various matters, including for forfeiture of the Company’s investment in equity
shares of DPL. The Company had inter alia filed a petition before the Hon’ble
High Court of Jharkhand at Ranchi. The Hon’ble High Court of Jharkhand at Ranchi
upheld the Company’s appeal and decided that the matter would have to be
referred for Arbitration. The Venturer has challenged the aforesaid judgment in
the Divisional Bench of the Hon’ble High Court of Jharkhand at Ranchi. Pending
final outcome of the matter and since, the other Venturers are not providing the
financial statements of DPL, disclosures as regards contingent liability and
capital commitments, if any, aggregate amounts of each of the assets,
liabilities, income and expenses related to the Company’s interest in DPL have
not been made in these accounts.



10 Change in accounting policy on account of change of
management estimates for warranty provision and depreciation

MRF Ltd — (30-9-2009)

From Notes to Accounts

Changes in Accounting Policies

i) The warranty provision has been recognised based on
management estimates regarding possible further outflow on servicing the
customers during the warranty period, on the sales affected during the year.
These estimates are computed on a scientific basis, as per past trends of such
claims, which hitherto were accrued and recognised based on claims preferred.
Due to this change, the profit for the year is lower by Rs.21.25 Crore.

ii) The Company has hitherto been charging depreciation on
windmills on the Straight Line Method, as Continuous Process Plant at the rates
and on the basis specified in Schedule XIV to the Companies Act, 1956. The
management has thought it prudent to switchover from the Straight Line Method to
the Reducing Balance Method to follow a uniform practice and has re-calculated
the depreciation from the date of such assets coming into use. As a result, the
charge for depreciation is more by Rs. 15.75 Crore (including Rs. 8.11 Crore net
for Deferred Tax of Rs. 4.17 Crore for the earlier years) and the profit for the
year is lower by the said amount.

From the Auditors’ Report

In our opinion and to the best of our information, and
according to the explanations given to us, the said accounts, read with Note No.
I (Q) in the notes forming part of the accounts, in respect of changes in
accounting policies relating to provision for warranty and change in the basis
of providing depreciation, resulting in the profit for the year and the reserves
being stated lower by Rs. 37 Crore and read together with other notes thereon,
give the information required by the Companies Act, 1956, in the manner so
required and also give a true and fair view, in conformity with the accounting
principles generally accepted in India;

Nature of Provisions


Warranties


Sales Tax / VAT


Excise Duty

 

2008-09

2007-08

2008-09

2007-08

2008-09

2007-08


Carrying amount at thebeginning of the year

26.09

15.06

18.14

7.00

1.82

Nature
of Provisions

Liquidated damages

Other Litigation Claims

 

Total

Carrying
amount at the

2008-09

2007-08

2008-09

2007-08

2008-09

2007-08

 

 

 

 

 

 

beginning
of the year

11.88

9.09

–

–

57.93

31.58

Additional provision

 

 

 

 

 

 

made
during the year

–

2.79

1.98

–

27.98

32.27

Amounts used

 

 

 

 

 

 

during
the year

–

–

–

–

2.49

1.77

Unused amount reversed

 

 

 

 

 

 

during
the year

–

–

–

–

9.18

4.15

 

 

 

 

 

 

 

Carrying amount at the

 

 

 

 

 

 

end of
the year

11.88

11.88

1.98

–

74.24

57.93
11. Disclosures for nature of and movement in provisions as per AS 29
Crompton Greaves Ltd — (31-3-2009)
From Notes to Accounts
(a)Movement in provisions:

(b)Nature of Provisions:

  •     Product Warranties: The Company gives warran-ties on certain products and services in the nature of repairs / replacement, which fail to perform satisfactorily during the warranty period. Provi-sion made represents the amount of the expected cost of meeting such obligation on account of rec-tification / replacement. The timing of outflows is expected to be within a period of two years.

  •     Provision for sales tax represents sales tax liability on account of non-collection of declaration forms and other legal matters which are in appeal under the Act / Rules.

  •     Provision for excise duty represents the differen-tial duty liability that is expected to materialise in respect of matters in appeal.

  •     Provision for liquidated damages has been made on contracts, for which delivery dates are exceeded and computed in a reasonable and prudent manner.

  •     Provision for litigation related obligations represents liabilities that are expected to materialise in respect of matters in appeal.


(c)Disclosure in respect of contingent liabilities:
Refer Schedule 19.

12. Forfeiture of advance received against sale of immovable property not recognised in the Profit and Loss account
Crompton Greaves Ltd— (31-3-2009)

From Notes to Accounts

Other liabilities include Rs. 8.30 Crore received as ad-vance against sale of immovable property of the Com-pany. As per agreements with buyers, the Company is entitled to forfeit the said amounts, if the buyers do not comply with the conditions of sale within the stipulated time. Since, the buyers have failed to comply with the conditions and hence, the Company has forfeited these amounts received in accordance with the terms of the agreements. The buyers have filed suits in the Courts for recovery of the advances paid by them. The Com-pany contends that as per the force majeure clause of the agreements is not required to be refunded. Pending disposal of the cases by the Courts, the Company, as a measure of prudence, has not recognised the said

amount in the profit and loss account.

ICAI And Its Members

1. Know your ethics :
The Ethical Standards Board of ICAI has discussed some of the ethical issues at page 232 of C.A. Journal for August, 2010 as under :
(i) Whether a member who is carrying out statutory audit and also rendering management consultancy services to his auditee clients can receive fees for such other services, which are in excess of the audit fees ?
A. In exercise of the powers conferred by Clause (1) of Part II of the Second Schedule to the CA Act, the Council of the Institute has issued Guidelines which specify that a member of the Institute in practice shall be deemed to be guilty of professional misconduct, if he accepts the appointment as statutory auditor of Public Sector Undertaking/Government Company/Listed Company and other Public Company having turnover of Rs.50 crore or more in a year and accepts any other work or assignment or service in regard to the same Undertaking/Company on a remuneration which in aggregate exceeds the fee payable for carrying out the statutory audit of the same Undertaking/Company.
Provided that in case appointing authority/regulatory body specify more stringent condition/restriction, the same shall apply instead of the conditions/restrictions specified under the Guidelines.

Explanation :
1. The above restrictions shall apply in respect of fees for other work or service or assignment payable to the statutory auditors and their associate concern put together;
2. For the above purpose,
The term ‘other work’ or ‘service’ or ‘assignment’ shall include Management Consultancy and all other professional services permitted by the Council pursuant to S. 2(2)(iv) of the C.A. Act, but shall not include :
(a) Audit under any other statute;
(b) Certification work required to be done by the statutory auditors; and
(c) Any representation before an authority.
(ii) The term ‘associate concern’ means any corporate body or partnership firm which renders the Management Consultancy and all other professional services permitted by the Council, wherein the proprietor and/or partner of the statutory auditor firm and/or their ‘relative’ is/are director or partner and/or jointly or severally hold ‘substantial interest’ in the said corporate body or partnership;

(ii) Is there any ceiling on the number of tax audit assignments that can be taken up by a member in practice ?
A. In exercise of the powers conferred by Clause (1) of Part II of the Second Schedule to the C.A. Act, the Council of the Institute of Chartered Accountants of India has issued General Guidelines, 2008 which specify that a member of the Institute in practice shall be deemed to be guilty of professional misconduct, if he accepts, in a financial year, more than the specified number of tax audit assignments u/s.44 AB of the Income-tax Act, 1961. The number specified for tax audit is 45.
(iii) Whether the audits conducted u/s.44AD, u/s. 44AE and u/s.44AF of the Income-tax Act, 1961 shall be taken into account for the purpose of reckoning the specified number of tax audit assignments ?
A. No. Please refer Chapter VI of Council General Guidelines, 2008 (P. 316 of Code of Ethics, 2009).

2. Opinion of EAC :


Determination of depreciation in case of revaluation and revision in the useful life of land and buildings :

Facts :
A nationalised bank purchased freehold land and building in the year 1950 costing Rs.50 lakh (land Rs.20 lakh and building Rs.30 lakh) and accounted for the same separately as ‘freehold land’ and ‘bank’s own premises’, respectively. On ‘bank premises’ component, the bank is charging depreciation @ 5% on written-down value basis. In the year 2008, the property has been revalued at Rs.100 lakh (land Rs. 80 lakh and building Rs.20 lakh) and the revaluation reserve has been created for Rs.60 lakh towards land and Rs.18.50 lakh towards building, assuming the written-down value of building at Rs.1.5 lakh. The valuer has estimated the useful life as 25 years.
The bank also purchased a leasehold land in the year 1990 with lease period of 99 years and paid Rs.99 lakh. The bank subsequently constructed building thereon in June, 1992 costing Rs.50 lakh. The cost of land is debited to ‘leasehold land’ and construction cost to ‘the bank’s own premises’. The bank is amortising lease rent at Rs.1 lakh per annum and charging depreciation @ 10% on building since 31-3-1993 on written-down value basis. The property has been revalued at Rs.140 lakh (land Rs.100 lakh and building Rs.40 lakh).
The bank has also informed that the bank owns more than 200 properties purchased in different years and all the properties have been revalued in the year 2008.

Query :
On these facts, the bank has sought the opinion of the Expert Advisory Committee on the following issues :
(i) What should be the applicable rate of depreciation in respect of building purchased in 1950 ?
(ii) What should be the applicable rate of depreciation on both original cost and revalued portion, in respect of property constructed in 1992,
(a) If the valuer has estimated the remaining useful life as 40 years ?
(b) If the valuer has not given any useful life and the management, as a policy, is not determining the useful life of the land and buildings ?
(iii) Whether different rate of depreciation will be applicable on the 200 properties purchased in different years and revalued in the year 2008. If yes, what is the mechanism to be followed for implementation ?

Opinion :
The Committee, after considering the introduction paragraph and the definition of the term ‘depreciable assets’ as contained in Accounting Standards (AS-6) ‘Depreciation Accounting’, has observed that as per the GAAPs prevalent in India, freehold land is considered to be having an unlimited life and, therefore, cost thereof is not depreciated. In the context of the leasehold land which is recognised as a fixed asset by the bank, keeping in view of the existing practice of reflecting leases of land in the balance sheets of the lessees, as such leases are scoped out of Accounting Standard (AS-19), ‘Leases’, the Committee noted that the land in question has a lease period of 99 years. Thus, it has a limited useful life for the bank. Accordingly, the upfront amount of Rs.99 lakh paid by the bank for the same should be amortised over its useful life i.e., 99 years, on a systematic basis. The Committee also noted that in this case, the life of the leasehold land is predetermined by the lease agreement, therefore, there is no question of revision of its estimated useful life unless the lease agreement is renewed or the lease terms undergo a change.

Further, after considering AS-6, the Committee opined that :

    In respect of property purchased in 1950 the rate of depreciation on building should be determined on the basis of the depreciable amount and its remaining useful life. In case the building has been revalued, the depreciable amount would be the value assigned to the building upon revaluation less its estimated residual value, provided revaluation has been done in accordance with AS-10. The useful life of a depreciable asset is a matter of estimation and is normally based on various factors, including experience with similar types of assets. In case of building constructed on the leasehold land, the useful life of the building cannot exceed the remaining lease period of land.

With respect to the depreciable amount of an asset, the Committee is of the view that ordinarily, the depreciable amount would be the cost thereof less the estimated residual value. In the context of revaluation of buildings the depreciable amount after revaluation would be revalued amount less the estimated residual value of buildings.

(ii)  In respect of property constructed in 1992 with respect to determination of rate of depreciation of the building constructed on leasehold land, the principle stated in (i) above would apply. The cost of the leasehold land acquired on lease for 99 years should be amortised over its lease term on a systematic basis.

    The rate of depreciation of a building depends on the depreciable amount of the building and its expected useful life. The useful life may vary in case of each building. The depreciable amount may also vary depending on its cost of purchase/construction of its revalued amount, as the case may be, and its estimated residual value. Accordingly, the rate of depreciation may vary for each of the buildings and therefore, should be determined individually for each property.

[Refer pages 266 to 268 of C.A. Journal of August, 2010]

3. ICAI News :

(Note : Page Nos. given below are from C.A. Journal for August, 2010)

    i) Special Placement Programme — June, 2010 (page 346) :

Special Placement Programme for new CA Members was organised by ICAI at major centres from 22nd to 26th June. Following was the response.

l   (a)

No. of candidates reported

1148

(b) No. of organisations who

 

 

participated

39

(c)

No. of interview teams

65

(d)

No. of jobs offered

198

(e)

No. of jobs accepted

184

 

and

 

(f)

Percentage

16.3
    Highest salary offered :
— International posting — Rs.21 lacs p.a.
— Indian posting    — Rs.12 lacs p.a.
    
Minimum salary offered :
— Fresh C.A.    — Rs. 5 lacs p.a.
— Experienced C.A.    — Rs. 6 lacs p.a.

    Average salary offered :
— Rs. 7 lacs p.a.

    ii) Transfer  or  Termination  of  Articleship (page 354) :

Regulation 56(1) of C.A. Regulations has been modified as under :

    a. Transfer/Termination of Articles is permitted without any restriction during the first year of articles.

    b. During rest of the articleship period on satisfying any one or more of the conditions as stated below :

    Medical grounds requiring discontinuance of articles for a minimum period of three months, on production of a medical certificate issued by a government hospital.

    Transfer of parent(s) to another city.

    Misconduct involving moral turpitude.

    Other justifiable circumstances/reasons.

    iii) ICAI publications :

    a) A study on Foreign Contribution Regulation Act, 1976.
    b) GST in India & Role of Chartered Accountants.

    iv) New Branch in Western Region :

ICAI has opened a new branch in Western Region at Latur w.e.f. 1-7-2010 (P. 358).

(v) e-Journal :

New Hi–Tech Journal has been launched by ICAI. In this Journal one can ‘listen’ the contents of C.A. Journal every month (P. 9).

    C.A. Examination results :

    CPT (June, 2010) :
 

 

A

P

%

 

 

 

 

Boys

83,664

21,218

25.36

 

 

 

 

Girls

43,979

13,950

31.72

 

 

 

 

Total

1,27,643

35,168

27.55

 

 

 

 

               
    
    PEE-II, PCE AND IPCE (May, 2010) :

 

 

PEE-II

 

 

PCE

 

 

IPCE

 

 

 

 

 

 

 

 

 

 

 

 

A

P

%

A

P

%

A

P

%

 

 

 

 

 

 

 

 

 

 

Both Groups

4,338

85

1.96

44,687

6,065

13.57

20,135

2,473

12.28

 

 

 

 

 

 

 

 

 

 

Gr. I

6,912

819

11.84

11,384

2,442

21.45

52,923

8,730

16.49

 

 

 

 

 

 

 

 

 

 

Gr. II

9,357

841

8.98

17,774

6,024

33.89

22,416

3,804

16.97

 

 

 

 

 

 

 

 

 

 

         
    Final (May 2010) :

 

Final
(Old course)

Final (New course)

 

 

 

 

 

 

 

 

A

P

%

A

P

%

 

 

 

 

 

 

 

Both Groups

13,242

458

3.46

7,424

487

6.56

 

 

 

 

 

 

 

Gr. I

20,049

2,897

14.45

8.840

1,166

13.19

 

 

 

 

 

 

 

Gr. II

26,517

2,552

9.62

8,670

683

7.88

 

 

 

 

 

 

 

                              
The pass percentage in Final Examination (old course) in previous years was as under :
    

 

Both Groups

Gr. I

Gr. II

 

 

 

 

May 2010

3.46

14.45

9.62

 

 

 

 

Nov. 2009

7.86

19.87

10.11

 

 

 

 

June 2009

13.85

32.42

15.03

 

 

 

 

Nov. 2008

20.27

27.82

24.15

 

 

 

 

From the above, it is evident that the trend of pass percentage in Final (old course) is declining in successive examinations. This is a grave cause for concern when Nov. 2010 is the last chance for students appearing under the old course. If this trend continues, over 50,000 students who have studied under the old course will have to appear from May, 2011, for Final examination under the New Course.

ICAI And Its Members

1. Tax audit provision :

    (i) The threshold limit of total sales/turnover/gross receipts for the purposes of tax audit u/s.44 AB in case of business has been increased from `40 lac to `60 lac from A.Y. 2011-12. In case of the profession, the said limit has been increased from `10 lac to `15 lac.

    (ii) The Direct Tax Code Bill, 2010, proposes to provide in S. 88 that the threshold limit of total sales/turnover/gross receipts for business for tax audit shall be increased from `60 lac to `1 crore. In case of the profession, the said limit is proposed to be increased from `15 lac to `25 lac. The new provision will come into force from F.Y. 2012-13 if the DTC Bill is passed by the Parliament with the above provision.

    (iii) U/s.314(86) of DTC, 2010, the due date for filing the return of income by an assessee, who does not have business income, is proposed to be advanced from the existing 31st July to 30th June. Similarly, the due date for filing the return in cases of companies and other assessees is proposed to be advanced from 30th September to 31st August. Therefore, from 2013 the Tax Audit Report will have to be given by 31st August, 2013.

    (iv) S. 271B provides for levy of penalty for non-compliance with the provisions of S. 44AB at the rate of ½% on total sales, turnover or gross receipts. The maximum penalty has been increased from `1 lac to `1.50 lac from A.Y. 2011-12.

    (v) Proposed S. 232 of the Direct Tax Code Bill, 2010, provides that the minimum penalty shall be `1 lac and the maximum penalty will be `2 lac w.e.f. F.Y. 2012-13 for non-compliance with the provisions of S. 88 to get the tax audit report before the due date.

2. Know your ethics :

The Ethical Standards Board of ICAI has discussed some ethical issues at page 394 of September, 2010, issue of C.A. Journal as under :

(i) Whether a member of the Institute in practice is liable for professional misconduct if he does not follow the direction given by the Council or an appropriate Committee or on behalf of any of them, to the incoming auditors not to accept the appointment as auditors, in the case of unjustified removal of the earlier auditors ?

Ans. : In exercise of the powers conferred by Clause (1) of Part II of the Second Schedule to the CA Act, the Council of ICAI issued General Guidelines, 2008 which specify that a member of the Institute in practice shall follow the direction given by the Council or an appropriate Committee or on behalf of any of them, to him being the incoming auditor(s) not to accept the appointment as auditor(s), in the case of unjustified removal of the earlier auditor(s).

(ii) Can the auditor revise his audit report ?

Ans. : The Council has issued a ‘Guidance Note on Revision of the Audit Report’ in booklet form. The auditor can revise his audit report in the situations and circumstances mentioned therein.

(iii) What is the status of a Chartered Accountant who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants ?

Ans. : An associate or a fellow of the Institute who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of article assistants. He may hold Certificate of Practice, but he is not entitled to perform attest functions w.e.f. 1-4-2005.

(iv) Can a member in practice be Promoter/Promoter Director of a company ?

Ans. : There is no bar to a member in practice becoming a promoter/signatory to the Memorandum and Articles of Association of any company. For becoming such promoter/signatory, members are not required to obtain specific permission of the Council.

(v) Can such a Promoter/Promoter Director of a company be Director Simplicitor of that company ?

Ans. : There is also no bar for such a Promoter/Signatory becoming Director Simplicitor of that company, irrespective of whether the objects of the company include areas which fall within the scope of the profession of Chartered Accountants. In this case also, specific permission of the Council is not required.

(vi) Can a member in practice be a sleeping partner in a family business concern ?

Ans. : A member in practice can be a sleeping partner in a family business concern, provided he takes specific permission from the Council in terms of Regulation 190A of CA Regulations.

(vii) Can a member who is in part-time/full-time employment apply for Certificate of Practice and perform audit ?

Ans. : He cannot perform the audit although he can apply for Certificate of Practice.

(viii) What should be the size of the signboard for the office ?

 Ans. : With regard to the size of the signboard for his office that a member can put up, it is a matter in which the members should exercise their own discretion and good taste. The size of the signboard should be reasonable. Use of glow signs or lights on large-sized boards as is used by traders or shopkeepers would not be proper. A member can have a name board at the place of his residence with the designation of a Chartered Accountant, provided it is a name plate or name board of an individual member and not of the firm.

3. EAC Opinion: Treatment of liquidated damages payable for delay in commissioning of plant :

    Facts :

A limited company having its registered office in India is a group member of a transnational player in the global gases and engineering industry. The company’s gases division is engaged in the manufacture and sale of industrial, medical and special gases to customers across industries.

The company has entered into one such Long Term Agreement (LTA) dated 31st May, 2006 for supply of industrial gases to a customer by installing an air separation plant (the plant) at the customer’s steel works premises on Build-Own-Operate (BOO) basis. As per one of the clauses of the ‘general conditions’ of the agreement, the company is liable to pay ‘late start liquidated damages’ to the customer if there is a delay in the commencement of gas supply from the plant after the target commencement date due to the company’s fault and the customer is ready to consume gas at its expanded steel-making facility.

As per the agreement, the target commencement date was 31st March, 2008, being the date on which the company estimated that it would be able to start fulfilling its obligation to supply gas from the plant. However, due to delay by the main equipment supplier of the plant and other related problems at site, the company was not ready to commission the plant and commence supplies on the target commencement date and instead, was ready for supply for gases only in November 2008. At this stage, due to the economic downturn, the customer requested to further delay the start-up of the plant which was finally commissioned in February 2009.

The company is now in the process of negotiating a settlement with the customer for the delays in plant commissioning on both its own as well as on the customer’s part. As a result of such negotiation, the company will have to pay ‘late start liquidated damages’ to the customer for the delayed commissioning of the plant due to its inability to have the plant ready for supply of gases on the appointed target commencement date of 31st March, 2008.

    Query:

Based on the facts stated above, the querist has sought the opinion of the Expert Advisory Committee, on the following issue:

“Whether the amount to be paid by the company on account of liquidated damages due to delay in commencement of supply of gases to the customer consequent upon delay in bringing the plant to its working condition on the appointed target commencement date can be capitalised in its books of account as additional cost attributable to the project (capitalised in March 2009) in accordance with the provisions of AS-10 and any other related Accounting Standard or statute, or whether the liquidated damages payable can be treated as deferred revenue expenditure to be amortised over a period of 3 to 5 years after the commencement of commercial production, or whether the company can charge off the amount of liquidated damages as an expense in the profit and loss account?”


    Opinion:

The Committee noted that the basic issue raised in the query relates to the treatment of liquidated damages payable by the company for delay in the commissioning of the plant.

After considering paragraphs 9.1, 20 and 21 of Ac-counting Standard (AS) 10 — Accounting for Fixed Assets, the Committee noted from the facts of the case that the ‘late start liquidated damages’ are payable by the company on account of delay in the commencement of gas supply from the plant on the target commencement date. The Committee is of the view that such expenditure cannot be said to be attributable to bringing the plant to its working condition for its intended use. Such expenditure is not attributable to construction activity. It is also not in the nature of price adjustment on account of which cost of a fixed asset may undergo a change subsequent to its construction. The Committee is of the view that the liquidated damages are of the nature of a penalty resulting from non-fulfilment of the terms of the agreement, in this case, the target date of commencement of gas supply. The amount of liquidated damages is compensation to the customer for loss of revenue on account of non-supply of gas by the company. Accordingly, the Committee is of the view that such expenditure cannot be capitalised and should be expensed by way of charge to the profit and loss account as no future benefit is expected from the same.

    [Refer pages 418 to 420 of C.A Journal of September, 2010]

        4. Important announcements for PE-II and PCC
    Students:

The following important announcement is made by the President, ICAI, in his communication on page 386 of C.A. Journal for September, 2010.

The Council has considered the case of PE-II stu-dents especially in order to mitigate their hardship vis-à -vis their joining the CA course through PCC/IPCC route. PE -II students having joined the course through all streams can now commence articled training in case they have passed any of the groups of PE-II examination instead of earlier requirement of passing both the groups. They will also be eligible to appear in the final examination during the last 12 months of articled training. In addition, such students shall be exempted from undergoing the Orientation Programme, on switching over to IPC course. Further, they shall not be charged any fee for switching over to IPC course, except `1,500 to cover the cost of study material and administrative charges, instead of `4,000 at present.

With a view to bringing overall uniformity, students registered for Professional Competency Course (PCC) shall now be eligible to appear in the final examination during the last six months of the three and a half year period of articled training as against the earlier requirement of appearing in the final examination after completion of articled train-ing. Further, realising the difficulties faced by the students to complete the Information Technology Training (ITT) and Orientation Programme before appearing at the examination, it has now been decided that all students would now be permitted to submit proof of their successful completion of ITT to the Examination Section before the commencement of the article training, instead of earlier requirement of submitting the said proof before appearing in the examination. However, this would not be applicable to the PCC students. However, it has also been observed that many students are withdrawing their registration from ITT centres and they wish to complete the ITT and Orientation Programme before the commencement of the article training. All such students are advised to undergo ITT and Orientation Programme as early as possible, because this would not only help them in solving the questions posed in examinations in the IT paper but also release the pressure on the training centres.

        5. ICAI News:

    (Note: Page Nos. given below are from September, 2010, issue of C.A. Journal)

    (i) ICAI job portal:
The ICAI job portal has been developed to provide a platform for industry to fill their vacancies for Chartered Accountants and Accounting Technicians. The recruiting organisations as well as experienced Chartered Accountants and Accounting Technicians can avail the benefit of this job portal. For this purpose, they can contact the Secretary to CMII by E-Mail placements@icai.org or ssuneja@icai.org (Tel No. 011-30110450/491) (refer page 498).

        ii) ICAI publication:
        a) Accounting Reforms in India — A Bird’s-eye View.

        b) Technical Guide on Internal Audit of Sugar Industry
    (pages 499-500)

        iii) Peer review of audit firms of listed companies:

The Peer Review Board of ICAI is in the process of updating the status of the firms. Accordingly, the Peer Review Board has desired to know the status regarding whether your firm has been peer reviewed in the past or whether the peer review certificate has already been issued to your firm for updation of the latest position regarding the status due to the migration of firms from the Stage II to Stage I and vice-versa. In view of this, it is requested that the latest status of your firm may kindly be sent at email id peerreviewboard@icai.org so as to expedite the peer review of the firms doing the audit of the listed companies which has been mandatory as per the Circular dated April 5, 2010 issued by SEBI. Further, the firms doing the audit of the listed companies who’s peer review process is not initiated by the Board may also send a request for voluntary peer review to the Peer Review Board. (pages 501-502)

        iv) Assurance Reports on Contacts at a Service Organisation:

Auditing and Assurance Standards Board has issued an Exposure Draft of Standard on Assurance Engagements (SAE) 3402 of ‘Assurance Reports on Control at a Service Organisation’ for comments by Members. (Refer pages 507 to 522)

        v) Status of convergence with IFRS:
The latest position of finalisation of Accounting Standards after convergence with IFRS is explained by the President of ICAI in his communication (page 383).

        vi) Training for members for ICAEW membership:

Members of ICAI who desire to become members of the Institute of Chartered Accountants England and Wales have to appear in one paper on Advanced Case Study (4-hour final paper) and undergo training. The ICAI has made arrangements for this training as stated in the President’s Communication. (page 385)

        vii) Disciplinary cases:
It is reported that since February, 2010, onwards the Disciplinary Committee has passed orders u/s. 21D in 60 cases and u/s.21B in 20 cases. Further, 10 old disciplinary cases have also been completed. So far as Board of Discipline is concerned, it has disposed of 34 cases u/s.21A. It is understood that prior to February, 2010, several other similar cases have been decided by the Disciplinary Committee as well as Board of Discipline. (page 385)

    However, the ICAI has not published decisions taken by these two committees under the new provisions and therefore, members of ICAI are not aware as to what are the decisions of these two committees on various provisions of the two Schedules of the CA Act.

ICAI And Its Members

1. ICAI News :

(Note : Page
Nos. given below are from C.A. Journal for April, 2010)

(i) The Council
of ICAI has constituted four new groups to make the Institute more responsive,
progressive, robust and member/student-friendly. These groups are as under.

(a) The
Central Grievance Redressal Cell :

This cell will
mainly work to effectively and speedily resolve the grievances received from
members and students across the nation centrally.

(b) Codification
of Regulations, Directions of Council regarding functions of Branches of
Regional Councils Group :

This group will
study and examine the provisions of existing regulations, directions of the
Council regarding the functions of Regional Councils or their Branches and
various decisions of the Council/the Executive Committee in place and suggest
suitable changes therein, so as to make such provisions more effective and
members/students-friendly and improve overall functioning of the Branches,
including the aspect of staff and technology requirements.

(c) The
Infrastructure Acceleration Group :

This group will
mainly prioritise various infrastructure projects of ICAI and study, consider
and suggest ways and means of accelerating the ongoing projects besides
ensuring efficient management and maintenance of ICAI properties.

(d) The
Information Technology Initiatives Group :

This group will
see to it that the Institute becomes more hi-tech to the ultimate benefit of
its members and students. (Refer pages 1564-1565)

(ii) Campus
Placement Programme

February-March
2010 :

The first phase
of the interview process for new members of ICAI under the above programme has
been held in February-March, 2010 in 16 major cities. 94 companies participated
in this programme seeking placement for more than 1600 Chartered Accountants.
2906 candidates registered for the above campus interviews. In the first phase,
1032 candidates have been offered jobs. It is reported that this year’s
response far exceeded the response in 2009. It is interesting to know about
some details given on pages 1691-1692 of jobs offered by various companies.

(i) Remuneration
offered :

(a) International
posting :

Name of company

CTC offered

Total job offers made

Olam International

1,50,00 US $ (approx.Rs.70 lacs per annum)

11

Tolaram Corporation Pvt. Ltd.

Rs.20.75 lacs per annum

7

Topaz Energy and Marine

Rs.12 lacs per annum

4

(b) Domestic
posting :

Name of company

CTC offered

Total job offers made

Axis Bank

Rs.10.82 lacs per annum

1

ITC Limited

Rs.10.61 lacs per annum

8

BPCL

Rs.9.5 lacs per annum

15

 

    Summary of job offers and acceptance at selected places?:


  

 Some ethical issues :

The Ethical Standards Board has considered some ethical issues and given its views on page 1572. Some of these issues are as under :

    i) Can a practising Chartered Accountant accept a position as auditor previously held by some other Chartered Accountant in such conditions as to constitute undercutting ?

Ans. : A Chartered Accountant in practice can accept a position as auditor previously held by some other Chartered Accountant in such conditions as to constitute undercutting (vide amendment in the CA Act in 2006).

    ii) Whether a member of the Institute will be guilty of professional misconduct, if he, not being a fellow, styles himself as a fellow ?

Ans. : As per Clause (1) of Part III of the First Schedule to the CA Act, a member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct if he, not being a fellow, styles himself as a fellow.

    iii) Can a Chartered Account in practice disclose information acquired in the course of his professional engagement ?

Ans. : As per Clause (1) of Part I of Second Schedule to the CA Act, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force.

    iv) Whether an auditor is required to provide the client or other auditor of the same enterprise access to his audit working papers ?

Ans. : Working papers are the property of an auditor. An auditor is not required to provide the client ac-cess to his audit working papers. The main auditors of an enterprise do not have right to access to the audit working papers of the branch auditors, except in case it is required by the regulatory norms.

    v) Whether a joint auditor will be responsible for the work done by other joint auditor ?

Ans. : Council direction under Clause (2) of Part I of the Second Schedule to the CA Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. However, on the other hand, all the joint auditors are jointly and severally responsible for the work which is not interse divided among the auditors, and also for compliance of requirements of relevant statues.

    vi) Can a member in practice express his opinion on financial statements of any business or enterprises in which he, his firm or a partner in his firm has a substantial interest ?

Ans. : As per Clause (4) of Part I of the Second Schedule to the CA Act. A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a partner in his firm has substantial interest. (Vide amendment in the CA Act in 2006, even after disclosure of interest by the member, expression of opinion is not allowed.)

(For this purpose, ‘Substantial Interest’ means 20% or more interest held by the member or his relatives in the concern. (Refer Appendix-9 of CA Regulations)

    vii) Whether a member in practice will be held liable for failing to keep moneys of his client in a separate banking account or to use such moneys for purposes other than they are intended for ?
Ans. : As per Clause (10) of Part I of Second Schedule to the CA Act, a member in practice shall be deemed to be guilty of professional misconduct, if he fails to keep moneys of his client other than fees or re-muneration or money meant to be expended in a separate banking account or uses such moneys for purposes other than they are intended for.

    viii) Whether a statutory auditor can accept the system audit of the same entity ?

Ans. : The statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

    3. Disclosure in Cash Flow Statement of Borrowings, etc. in the case of a financial institution :

    i) Facts :
A company is recognised as a Financial Institution. The company is engaged in financing of power sec-tor in India. The company prepares its Cash Flow Statement using the indirect method as per AS–3 dealing with ‘Cash Flow Statements’. While preparing financial statements, the company disclosed the net cash outflows/inflows from loan disbursements made to/principal repayments received from the borrowers under the head ‘cash flow from financing activities’. The company also disclosed the net in-flows/outflows from loans borrowed from/principal repayments made to lenders under the head ‘cash flow from financing activities’.

The auditors of the company objected to this presentation. They were of the view that the above amount should be shown under ‘cash flow from operating activities’. The company is of the view that AS-3 defines the operating activities as “the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities”.

    ii) Query :
The company sought opinion of Expert Advisory Committee (EAC) on the following issues :

    a) Whether it is correct to classify the amounts of loans disbursed to and the repayments received from the borrowers under the head ‘cash flows from operating activities’, and the amounts of loans raised from and the repayments made to the lenders under the head ‘cash flows from financing activities’, as per the indirect method of preparation of cash flow statement as per AS-3.

    ii) If not, what is the correct method of disclosure of the amounts of loans disbursed to and the repayments received from the borrowers, and the loans raised from and the repayments made to the lenders, as per the indirect method of preparation of cash flow statement as per AS-3.

    iii) EAC opinion :
While giving this opinion EAC has considered paras 5, 14, 17 and 20 of AS-3 and given its opinion as under :

    a) It is correct to classify the amounts of loans raised from and the repayments made to the lenders under the head ‘cash flows from financing activities’ and the amounts of loans disbursed to and the repayments received from the borrowers under the head ‘cash flows from operating activities’, as per the indirect method of preparation of cash flow statement as per AS-3. For the purpose of the preparation of cash flow statement, the aforesaid amounts would be arrived as increased/decrease in the borrowings and loans & advances outstanding in the two balance sheets relevant for the Cash Flow Statement.

    b) Since the answer to (a) above is not in the negative, this question does not arise.

    Accounting Standards :
Accounting Standards Board (ASB) has issued expo-sure drafts revising the following accounting standards and also issued some exposure drafts of new accounting standards after convergence with Inter-national Financial Reporting Standards (IFRS) for public comments.

    Revised Standards :
    i) AS-4 (Corresponding to IAS-10) — Events after Reporting Period.
    ii) AS-5 (Corresponding to IAS-8) — Accounting Policies, Changes in Accounting Estimates and Errors.

    iii) AS-7 ( Corresponding to IAS-11) — Construction Contracts.
    iv) AS-10 (Corresponding to IAS-16) — Property, Plant and Equipment.
    v) AS-11 (Corresponding to IAS-21) — The Effects
    vi) AS-19 (Corresponding to IAS-17) — Leases.
    vii) AS-21 (Corresponding to IAS-27) — Consolidated and Separate Financial Statements.
    viii) AS-23 (Corresponding to IAS-28) — Investments in Associates.

    ix) AS-25 (Corresponding to IAS-34) — Interim Financial Reporting.

    New Standards :
    x) AS-34 (Corresponding to IAS-29) — Financial Reporting in Hyper Inflationary Economies.
    xi) AS-35 (Corresponding to IFRS-6) — Exploration for Evaluation of Mineral Resources.
    xii) AS-37 (Corresponding to IAS-40) — Investment Property.

    5. Auditing Standards :
The following Standards on Auditing (SA) have been finalised and published at pages stated below. This will apply to Financial Statements for periods begin-ning on or after 1st April, 2011 :

    i) SA-710 (Revised) — Comparative Information — Corresponding Figures and Comparative Financial Statements. (pages 1693-1698)
    ii) SA-800 — Special Considerations — Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks. (pages 1699-1702)
    iii) SA-805 — Special Considerations — Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement. (pages 1703-1708)
    iv) SA-810 — Engagements to Report on Summary Financial Statements. (pages 1709-1716)

Miscellaneous

From Published Accounts

2. Deferral of Income of
Restructuring Fees received

Tech Mahindra Limited —
(31-3-2010)

From Notes to Accounts :

During the year, a customer
has restructured long-term contracts with the Company from April 1, 2009, which
involves changes in commercial, including rate reduction, and other agreed
contract terms. As per the amended contracts the customer has paid the Company
restructuring fees of Rs.9,682 million. The services under the restructured
contracts would continue to be rendered over the life of the contract. The
restructuring fees received would be amortised and recognised as revenue over
the term of the contract on a straight-line basis. An amount of Rs.2,005 million
has been recognised as revenue for the year from April 1, 2009 to March 31, 2010
and the balance amount of Rs.7,677 million has been carried forward and
disclosed as deferred revenue in the Balance Sheet.

3. Non availability of
financial statements of step-down associate for consolidation purposes

Tech Mahindra Limited —
(31-3-2010)

From Notes to Accounts to
Consolidated Financial Statements :

TML through Venturbay
Consultants Private Limited, a wholly-owned subsidiary has acquired stake in
Satyam Computer Services Limited (SCSL), on May 5, 2009 through preferential
allotment, representing 31% of equity share capital. Thereafter the share
holding has further increased to 42.70% by July 10, 2009 through a combination
of open offer and a further preferential allotment. As per the share
subscription agreement dated April 13, 2009, these investments have a lock-in
period of three years from the date of allotment. As a result of this investment
SCSL has become an associate of TML as per Accounting Standard 23 ‘Accounting
for Investments in Associates in Consolidated Financial Statements’. Venturbay
Consultants Private Ltd. holds 42.67% of the shareholding of SCSL as of March
31, 2010.

SCSL is in the process of
restating its financial statements. The Honourable CLB vide its order dated
April 16, 2009 has given extension of time till December 31, 2009 to SCSL for
filing of the documents with various statutory authorities already due or to
become due, the same is further extended till June 30, 2010 vide the Honourable
CLB order dated October 15, 2009.

In the absence of audited
financials the amount of goodwill/capital reserve in the investment value as at
March 31, 2010 could not be computed and the investment in SCSL as at March 31,
2010 has been accounted for at cost. TML’s share of profit/loss in SCSL and its
subsidiaries for the year ended March 31, 2010 in accordance with Accounting
Standard 23 ‘Accounting for investments in associates in consolidated financial
statements’ has not been accounted in the consolidated financial statements of
the Company.

From Auditors’ Report :

4. As stated in Note 23 to
the consolidated financial statements, Venturbay Consultants Private Limited
(100% subsidiary of the Company) has acquired 31% stake in Satyam Computer
Services Limited (SCSL) on 5th May 2009 and subsequently increased the stake to
42.70% on 10th July 2009. SCSL is in the process of restating its financial
statements. The Honorable CLB vide its order dated October 15, 2009 has given
extension of time till June 30, 2010 to SCSL for filing of the documents with
various statutory authorities already due or to become due. We are informed that
the Accounts of SCSL are not available for consolidation and in the absence of
financial statement of SCSL we are unable to comment on the impact of
post-acquisition profit/loss of SCSL on ‘share of profit of associate’,
investment in associates and reserve and surplus in the consolidated financial
statement of the group.

5. . . . . . .

6. Based on our audit and on
consideration of the separate audit reports on individual financial statements
of the Company, its aforesaid subsidiaries and to the best of our information
and according to the explanations given to us, subject to our
observations in Para 4 above, in our opinion, . . . . . .

4. Adoption of Exposure
Draft of AS-10 (revised) for change in the method of accounting of costs on
major repairs and maintenance of its engines.

Kingfisher Airlines Limited
— (31-3-2010)

From Notes to Accounts :

During the year, the Company
has adopted the exposure draft on Accounting Standard-10 (Revised) ‘Tangible
Fixed Assets’ which allows such costs on major repairs and maintenance incurred
to be amortised over the incremental life of the asset. The Company has extended
the same treatment to costs and maintenance for engines pertaining to aircrafts
acquired on operating lease. Earlier, the Company used to charge off the cost of
such repairs and maintenance of its engines to the Profit and Loss Account as
and when incurred. Had the Company not changed its method of accounting, the
loss before and after tax for the year would have been higher by Rs.16,390.25
lacs and Rs.10,945.82 lacs, respectively. This revised accounting policy has
been confirmed by an independent expert and in the opinion of the management,
this accounting treatment has resulted in a fair depiction of the working
results and the state of affairs of the Company.

From Statement of
Significant Accounting Policies :

Fixed assets and Intangible
assets :

Fixed assets and intangible assets are stated at cost of acquisition less accumulated depreciation/ amortisation and impairment losses (if any). Cost comprises the purchase price and any attributable cost of bringing the asset to its working condition for its intended use and also includes cost of modification and improvements to leased assets.

Borrowing costs relating to acquisition of fixed assets are also included to the extent they relate to the period till such assets are ready to be put to use.

Advances paid towards the acquisition of fixed assets and the cost of fixed assets not ready for intended use as of the balance sheet date are disclosed under capital work-in-progress.

Depreciation:

Depreciation on fixed assets, except non-compete fees, trademarks, design — aircraft interiors, software, leasehold improvements, is provided on a straight-line basis at the rates prescribed under Schedule XIV to the Companies Act, 1956 which are estimated to be the useful life of fixed assets by the management. Additions are depreciated on a pro-rata basis from the date of installation till the date the assets are sold or disposed.

— Non-compete fees are amortised over the period of agreement (i.e., five years).

— Trademarks are amortised over the period of four years.
— Design — Aircraft Interiors are amortised over the period of seven years.
— Software is depreciated over a period of 1-4 years, based on estimated useful life as ascertained by the management.
— Leasehold improvements on operating leases are depreciated over the shorter of the period of the lease and their estimated useful lives.
— Cost of major maintenance and overhaul of the engines are amortised over the period of estimated useful life of the repairs.
— Movable cabins and mobile phones are depreciated over the period of five and two years, respectively, on a straight-line method.

From Auditors’ Report:

…….

Attention is invited to Note 29 of Schedule 21 regarding change in the method of accounting of costs incurred on major repairs and maintenance of engines of aircrafts taken on operating lease during the year aggregating to Rs.20,700.76 lacs which have been included under fixed assets and amortised over the estimated useful life of the repairs. In our opinion, the revised accounting treatment is not in accordance with current accounting standards.

From Directors’ Report:
……

As regards the observations in para 6 of the Auditors’ Report, your Company has adopted the Exposure draft on Accounting Standard-10 (Revised) ‘Tangible Fixed Assets’, which allows such costs on major repairs and maintenance incurred to be amortised over the incremental life of the asset. Your Company has extended the same treatment to costs incurred on major repairs and maintenance for engines pertaining to aircrafts acquired on operating lease.

Miscellaneous

From Published Accounts

Section B: Miscellaneous



4 Qualification regarding non-provision of disputed statutory
liabilities

Sterlite Technologies Ltd. — (31-3-2010)

From Notes to Accounts :

The Company had in an earlier year received an order of
CESTAT upholding the demand of Rs.188 crores (including penalties and excluding
interest) (Rs.188 crores as at March 31, 2009) in the pending excise/custom
matters on various grounds. The Company’s appeal with the Honourable High Court
of Mumbai was rejected on the grounds of jurisdiction. The Company preferred an
appeal with the Honourable Supreme Court of India against the order of CESTAT,
which has been admitted. The Company has reevaluated the case on admission of
appeal by the Supreme Court. Based on their appraisal of the matter, the legal
advisors/consultants are of the view that under the most likely event, the
provision of Rs.5 crores made by the Company against the above demand is
adequate. The management is confident of a favourable order and hence no further
provision is considered against the said demand.

From Auditors’ Report :

As stated in Note No. 8 of Schedule 21, the Company had in an
earlier year received an order of CESTAT upholding a demand of Rs.188 crores
(including penalties and excluding interest) (Rs.188 crores as at March 31,
2009) in a pending excise/customs matter. The Company’s appeal against this
order with the Supreme Court has been admitted. Based on the current status and
legal advice received, provision for liability as recorded in the accompanying
financial statements is considered adequate by the management. In the event the
decision of the Supreme Court goes against the Company on any of the grounds of
appeal, additional provision against the said demand may be required. Pending
disposal of the matter by the Supreme Court, the amount of excise/customs duty
payable, if any, is currently unascertainable. Our audit report on the financial
statements for the year ended March 31, 2009 was qualified in respect of this
matter.

In our opinion and to the best of our information and
according to the explanations given to us, the said accounts give the
information required by the Companies Act, 1956, in the manner so required and
subject to the effect of the matter referred to in paragraph vi above give a
true and fair view in conformity with the accounting principles generally
accepted in India.

5 Provisions made in earlier year towards loss of inventory,
expected higher sales returns and expected reversal of export benefits partly
reversed during the year

Ranbaxy Laboratories Ltd. — (31-12-2009)

From Notes to Accounts :

On 16 September 2008, the Company received two warning
letters and an Import Alert from the United States of America (USA) FDA,
covering 30 generic drugs being manufactured at its Paonta Sahib and Dewas
manufacturing facilities in India. The issue raised in the warning letters
relate to ‘Current Good Manufacturing Practice’ being followed at the said
plants and does not in any way raise questions on product’s quality, safety or
effectiveness.

In 2008, consequent to Import Alert, the Company was not able
to sell the products covered under Import Alert, and accordingly, it had
recorded a


provision of Rs.2,631.11 million in that year, towards inventory, expected sales
return and related exports benefits.

On 25 February 2009, the Company received a letter from the
US FDA indicating that the Agency had invoked its Application Integrity Policy
(‘AIP’) against the Paonta Sahib facility (the ‘facility’). The management of
the Company believes that there was no falsification of data generated at the
facility and also believes that there is no indication of a pattern and practice
of submitting untrue statements of


material facts and there was no other improper conduct. Accordingly, the
Company, based on opinion from its legal council, believes that there is no


incremental present obligation existing at the balance sheet date on account of
these notices.

The Company continues to fully cooperate with the concerned
authorities for their final clearance, pending which there would be delays for
new


product approvals and sale of existing products in the United States of America.
During the current year, the Company has performed a re-assessment of the amount
of provisions created in 2008 and reversed a provision of Rs.937.81 million
which is included in unclaimed balances/excess provisions written back, which in
view of the Company is no longer required now.

In the year 2008, the Department of Justice (DOJ), USA had
filed certain charges against the Company citing possible issues with the data
submitted by the Company, in support of product filing. The Company continues to
work diligently with the concerned authorities towards resolution of the issue.

From Auditors’ Report :

Without qualifying our opinion, we draw attention to Note 2
on Schedule 23 of the financial statements. Consequent to the Food and Drug
Administration (FDA) of the United States of America import alerts and the FDA
letter dated 25 February 2009 imposing the Application Integrity Policy, the
Company had recorded provision of Rs.2,631.11 million during the year ended 31
December 2008 towards loss of inventory in hand, expected higher sales returns
and, expected reversal of export benefits. The basis and assumptions used by the
management in calculating these provisions were based on significant judgment
and estimates due to involvement of uncertainty, and actual result could have
been different from the management’s estimate.


6 Non-provision of diminution in Consolidated Financial
Statements (CFS) for fall in value of loan given by Joint Venture company to
ESOP Trust

Godrej Consumer Products Ltd. — (31-3-2010)

From Notes to Accounts to CFS :


Stock options have been granted to eligible
employees of the Joint Venture of the Company under an ESOP scheme instituted
by the Joint Venture company. The equity shares of Godrej Industries Ltd. are
the underlying equity shares for the stock option scheme. The ESOP is
administered by an independent ESOP trust created with IL&FS Trust Company
Limited which acquires by subscription/purchase or otherwise, the shares of
Godrej Industries Ltd. equivalent to the number of options proposed to be granted.
The Joint Venture Company has given a loan of Rs.5,940.00 lac to the ESOP trust
to finance the purchase of such equity shares. As at March 31, 2010, the market
value of the equity shares of Godrej Industries Ltd. are lower by Rs.2,239.69
lac as compared to the cost of acquisition of these equity shares. The
repayment of the loan granted to the ESOP trust is dependant on the exercise of
the options by the employees and the market price of the underlying shares of
the unexercised options at the end of the exercise period. The fall in the
value of the underlying equity shares is on account of current market
volatility and the loss, if any, can be determined only at the end of the
exercise period. In view of the aforesaid, provision for diminution of
Rs.2,239.69 lac has not been considered necessary in the accounts of the Joint
Venture. The Group’s 40% share in the above diminution amounts to Rs.1097.45
lac.

 

From Auditor’s Report on CFS :

We draw attention to Note 15(i), Schedule
15 : Notes to Consolidated Accounts, where it has been stated that a Joint
Venture company has given a loan of Rs.5,940.00 lac to its ESOP trust to
finance the purchase of the equity shares of Godrej Industries Ltd., being the
underlying equity shares for the stock option scheme. As at March 31, 2010, the
market value of the equity shares of Godrej Industries Ltd. are lower by
Rs.2,239.69 lac as compared to the cost of acquisition of these equity shares.
The repayment of the loan granted to the ESOP trust is dependant on the
exercise of the options by the employees and the market price of the underlying
shares of the unexercised options at the end of the exercise period. The fall
in the value of the underlying equity shares is on account of current market
volatility and the loss, if any, can be determined only at the end of the
exercise period. In view of the aforesaid, provision for diminution of
Rs.2,239.60 lac has not been considered necessary in the accounts of the Joint
Venture. The Group’s 49% share in the above diminution amounts to Rs.1,097.45
lac.

Some Recent Judgments

I. Supreme Court :

    1. The date of 18-4-2006 for applicability of reverse charge achieves finality :

    UOI & Ors. v. Indian National Ship Owners, 2009 TIOL 129 SC – ST

    Special Leave Petition filed by the Government against the Mumbai High Court’s decision in the case of Indian National Ship Owners’ Association v. UOI, 2009 (18) STT 212 (Bom.) to the effect that prior to the date on which S. 66A was introduced in the Finance Act, 1994 viz. 18-4-2006, services provided outside India would not attract service tax is dismissed by the High Court. As such, the pending cases at various levels for dispute as to the applicable date for levying service tax on services provided outside India would stand settled.


II. High Court :

2. Pre-deposit of Rs.70 crores directed by Tribunal upheld :

    Microsoft Corporation (India) Pvt. Ltd. v. CST, 2009 (16) STR 545 (Del.)

(i) Background :

    The Delhi CESTAT passed a stay order in the case of Microsoft Corporation (India) Pvt. Ltd. v. CST, New Delhi, 2009 (15) STR 680 (Tri. Del.) directing pre-deposit of Rs.70 crores on the grounds that the marketing services covered under business auxiliary service which is a recipient-based service as classified under Rule 3(1)(iii) of the Export of Services Rules 2005) (the export Rules) provided by Microsoft India to its Singapore or US-based entities did not qualify as exports. The denial was on the ground that since services were provided in India and consumed by the customers of the Singapore/US entities in India, the benefits of the services were to the customers in India. The CESTAT interpreted the terms ‘delivered outside India’ and ‘used outside India’ used in the conditions in the Export Rules for treating the services as exports to mean physical performance to take place outside India. The Tribunal heavily relied on the judgment of the Supreme Court in All India Federation of Tax Practitioners & Ors. v. UOI & Ors., 2007 (7) STR 625 wherein it was held that services fall in two categories viz. property-based services and performance-based services and as per prima facie view of the Tribunal, the place of performance of a service is decisive for determining the event of taxability and incidence of tax.

    (ii) The petitioner cited before the Tribunal Circular No. 111/05/2009-ST, dated 24-2-2009 and various decisions wherein it was decided on similar facts that services were exported. This inter alia included decisions in the cases of Blue Star v. CCE, Bangalore 2008 (11) STR 23 and ABS India Ltd. v. CST, Bangalore 2009 (13) STR 65. Further, the petitioner pointed out that in cases viz. M/s. Gap International Sourcing India Pvt. Ltd. v. CST, Delhi 2009 (15) STR 270 (T) and Hitachi Home & Life Solution (I) Ltd. v. CST, Ahmedabad 2009 (16) STR 341 (Tri. Ahd.), unconditional stay was provided on similar facts considering prima facie case in favour of the appellants.

    (iii) As against the above, the Revenue’s case was that the Tribunals or Courts were not bound by the clarificatory Circulars of the Government since the Tribunal had found the Circular No. 111 (supra) to be contrary to the decision in the case of All India Federation of Tax Practitioners’ case (supra). The Revenue further contended that the Court should not be influenced by the stay orders granted by the Co-ordinate Benches of the Tribunal as the issue involved was plain import of goods, whereas the instant case was radically different as it involved peculiar term of agreement between Microsoft India with its foreign counterparts.

    (iv) The Court, although found contentions of the appellant to be convincing, concluded that only prima facie view has to be considered at the stage of stay and the Tribunal having fully considered all the relevant parameters required to be gone into including the principle that based on prima facie case interim order of protection should not be passed. Therefore, it was not province of the Court to finally pronounce on the aspects of whether or not the services were extinct in India or abroad. The Court took a view that both the sides had arguable case and the final determination was first to be done by the Tribunal. Further the order being equitable was found not fit for interference, the petition was dismissed granting 4 weeks’ time to the petitioner to make compliance with the pre-deposit.

III. Tribunal :

    3. CENVAT Credit :

(a) Repairs & maintenance service — whether an input service ?

    CCE, Vadodara v. Danke Products, 2009 (16) STR 576 (Tri. Ahd.)

    The issue involved related to whether or not service tax paid on the bill of repairing and maintenance raised on the respondent by an outsourced service provider company called DEL was a correctly availed CENVAT credit. Considering that repairs of transformer during warranty period provided by the respondent through outsourced services of DEL could be said to be an activity relating to the business, it stood concluded that the Commissioner (Appeals) had rightly treated the service as input service and held it entitled for CENVAT credit by relying on the Larger Bench’s decision in the case of ABB Ltd. v. Commissioner, 2009 (15) STR 23 (Tri.-LB) wherein it was held that the expression ‘activity relating to business’ was of large import and would take into its ambit all types of activities.

(b) Security in off-factory residential colony — Whether input service ?

    CCE, Nagpur v. UltraTech Cement Ltd., 2009 (16) STR 611 (Tri. Mum.)

The short question for consideration was whether the lower authority rightly allowed CENVAT credit of service tax paid on security service received at the off-factory residential colony of the assessee. Considering the service to be ‘input service’ for Rule 2(1) of the CENVAT Credit Rules, 2004. The respondent’s contention of allowability was based on the fact that the definition of input service included security service in its inclusive part. The Revenue, on the other hand contended relying on the decision in the case of Ponds India Ltd. v. Commissioner, 2008 (227) ELT 497 (SC) that the words ‘means and includes’ used in the definition would afford an exhaustive explanation to the meaning which must invariably be attached to the word or expression. Therefore The Tribunal accordingly observed that services mentioned in the inclusive part of the definition of input service have also to satisfy the parameters laid down in the main part of the definition as the two parts were not independent of each other and as such, the security service used for residential activity was neither a service received prior to the commencement of manufacture, but the value of which got absorbed in the value of goods, nor was it the case of a service received after the clearance of goods where the service is received up to the stage of clearance of goods. It was also not the case of a service like advertising which was not directly related to manufacture but is related to sale of manufactured goods and as such, the credit was ineligible. However, at the end of interpretation in favour of the Revenue, the assessee would not be penalised and penalties would be set aside.

c) Service tax on mobile phones and maintenance of vehicles entitled to the extent of allocated unit :

Force Motors Ltd. v. CCE, Pune-1, 2009 (16) STR 616 (Tri.-Mum)

The appellant in this case had not been able to produce evidence of use of vehicles and mobile phones for business purposes only and there was no check on use for the personal work of employees. Based on the decision in the case of Conzerve Systems (P) Ltd. 2009 (16) STR 195 (Tri.-Mum.) wherein it was held that mobile phones standing in the name of the company and used by the employees in relation to work only and incidentally used for personal work by itself was no ground for denial of credit, the Tribunal allowed the appeal by way of remand to the adjudicating authority to ascertain the quantum of taxable service beyond the allotted limit of use of mobile phones and vehicles and allowed credit availed to the extent of allotted limits and directed to follow the principle of natural justice to pass appropriate order.

d) Garden maintenance service not eligible for CENVAT credit and penalty also sustained. Outdoor catering service to factory workers considered eligible input service :
 

GKN Sinter Metals Ltd. v. CCE, Aurangabad, 2009 (16) STR 615 (Tri. Mum.)

On the issue of allowability of CENVAT credit of service tax paid to outdoor catering service used for the supply of food to factory workers, the Tribunal relying on the Larger Bench’s decision in the case of CCE, Mumbai v. GTC Industries Ltd., 2008 (12) STR (Tri.-LB) held that such credit could not be denied to a manufacturer where the cost of such supply of food was reflected on the cost of production of the final product. However, in the case of CENVAT credit of service tax taken by the assessee on garden maintenance service, relying on the decision in the case of Kirloskar Oil Engines Ltd. v. CCE, 2009 (241) ELT 474, it was held that garden maintenance service had no nexus even remotely to the manufacture or clearance of excisable goods. It further held that the matter being very clear, the assessee could not take undue benefit of pending clarificatory decisions and therefore, penalty maintained was also sustainable.

Some Recent Judgments

I    High Court:

1  CENVAT credit:

Whether outdoor catering service is ‘input service’?


CCE, Nagpur v. Ultratech Cement Ltd., 2010 TIOL 745 HC Mum.-ST

Substantive question of law raised by the Revenue was, whether CESTAT was correct in considering outdoor catering as input service when catering service does not fall under ambit of the definition of input service. Based on Larger Bench’s decision of CESTAT in the case of CCE v. GTC Industries Ltd., 2008 (12) STR 468 (Tri.-LB), wherein it was held that cost of food borne by the factory would form part of the cost of product and credit of duty paid thereon was allowable, the appeal was allowed by the Commissioner (A) and upheld by the Tribunal. According to the Revenue, decision of GTC (supra) ought not to have been applied to this case as in that case, duty was paid on assessable value whereas in the instant case, the duty on cement was payable on tonnage basis and therefore, it was distinguishable. Further, the more recent Apex Court’s decision in Maruti Suzuki Ltd. v. CCE, 2009 (240) ELT 641 (SC) squarely applied and therefore the Revenue had a case.

Detailed submissions were provided and analysis of wide scope of ‘input service’ and the expression ‘in relation to’ were made by the assessee. Meaning of the words ‘such as’ and which was followed by an illustrative list also was discussed at length citing and relying on various decisions which inter alia included, Federation of Tax Practitioners Association v. Union of India, 2007 (7) SCC 527 and Division Bench judgment in Coca Cola India P. Ltd. v. CCE, 2009 (242) ELT 268 (Bom.).

The Court observed that the Apex Court in Maruti Suzuki’s case (supra) considered the expression ‘used in relation to the manufacture of final product’ in the definition of ‘input’ and held that the ratio laid down by the Apex Court equally applied while interpreting ‘activities relating to business’ in Rule 2(1) of the CENVAT Rules. However, there lay difference as inclusive part of the definition of ‘input’ was restricted to inputs used in or in relation to ‘manufacture of final products’, whereas inclusive part of the definition of ‘input service’ extended to services used prior, during the course of and after the manufacture of final products and that the definition of ‘input service’ was wider than that of ‘input’. However, there was no difficulty found in applying the ratio laid in the said case of Maruti Suzuki (supra) and held that services having integral connection with manufacture as well as business of manufacture of final product would qualify to be ‘input service’.

The Revenue’s contention that not only the ratio but the decision in the case of Maruti Suzuki (supra) must be applied ipso facto to the instant case was not accepted. It was further observed by the Court that the definition of ‘input service’ read as a whole made it clear that it not only covered services used directly/indirectly in relation to manufacture, but also other services integrally connected with the business of manufacturing final product and as such, credit of service tax paid as outdoor catering service would be allowable and the question of law raised was answered in affirmative in favour of the assessee.

2    Mandap keeper’s service:

(i)    Can letting out lawn by a members’ club to its member be taxable under ‘Mandap Keeper Services’?
(ii)    Is ‘member’ a ‘client’ of the club?


Karnavati Club Ltd. v. Union of India, 2010 (20) STR 169 (Guj.)

The appellant is a members’ club registered under the provisions of the Companies Act, 1956. It does not have any shareholders. It makes available facilities to its members and their guests and recovers the expenses. Persons are made members against payment of subscription.

The Court observed the following:

To make the activity of the above club taxable under ‘Mandap Keeper Services’, the members of the club should fall within the definition of ‘client’.

After referring to various definitions of ‘client’, the Court inferred that a client is a one who applies for service or advice or who retains a solicitor in the management of his suit. Since the principle of mutuality is squarely applicable in the current case, a member cannot be said to be a ‘client’ of the club.

Held that the activity of the club cannot be taxable under ‘Mandap Keeper Services’.

(P.S.?: The above case pertains to the period prior to 16-5-2008. With effect from 16-5-2008, the word ‘client’ has been replaced with ‘any person’ vide Circular 334/1/2008)

3    Rebate:

Whether a procedural lapse could result denial of rebate claim?


Commissioner of Service Tax v. Convergys India Pvt. Ltd., 2010 (20) STR 166 (P & H)

The question before the Tribunal was that whether the Department was justified in rejecting the rebate claim for want of declaration prior to making exports as provided in Notification No. 12/2005 ST, dated 19th April 2005. The High Court noticed that delay in filing of declaration, in the present case, was due to the respondents considering many options after introduction of such Notification and also delay in obtaining management’s approval for the same. The Supreme Court in the case of Mangalore Chemicals & Fertilisers v. Deputy Commissioner, [1991 (55) ELT 437] has held that the procedural requirement can be condoned for valid reasons and as such dismissed the appeal of the Revenue.

4    Registration:

  •    Whether centralised registration is deemed to be granted within seven days?
  •     Can the Department grant registration under the category other than what the assessee applied for?
  •     Whether Circulars, which are challenged but the outcome is pending, are binding on the Department?

Karamchand Thapar & Bros. v. Union of India, 2010 (20) STR 3 (Cal.)

The petitioner applied for registration under ‘business auxiliary services’ under which he was covered with effect from 16th June 2005. Further, it also applied for a centralised registration to the Commissioner in November 2005. However, the Department granted centralised registration under the category of ‘clearing and forwarding agent’ on 11th September 2007.

The issues before the High Court were whether registration certificate is deemed to be granted within seven days, whether the Circulars, which were challenged by the Department, were binding on the Department. The High Court observed as follows:

  •     Rule 4(5) of the Service Tax Rules, 1994 which portrays such deeming fiction is applicable only to the Superintendent and the same was not applicable to the Commissioners in case of centralised registration under Rule 4(2). Therefore, the centralised registration could not be deemed to be granted within seven days.

  •    Further, there was no such time limit prescribed for the Commissioners to issue centralised registration certificate. However, the registration should be granted within a reasonable time. In the present case, in view of Circulars, seven days was a reasonable time.

  •     The High Court also made a note that although S. 69 requires all registration applications to be submitted to the Superintendent, it does not dilute the authority of the Commissioner to grant such registration under Rule 4.

  •     There are no provisions under the Service Tax Rules to refuse application for registration. Circular No. 72/2/2004 ST, dated 2nd January 2004 provides that the jurisdictional officer cannot question the correctness of declaration made by the applicant.

  •    As held in various judgments, the Circulars are binding on the Department. Though the Supreme Court in the case of CCE, Bolpur v. Ratan Melting and Wire Industries [2008 (12) STR 416] has held that the Circulars can be challenged by the Department, the said judgment did not apply to facts of the case since neither there were contrary decisions nor was the Circular contrary to the statute.

  •     Even when the Circular is challenged, the binding effect continues until the challenge succeeded.

  •     Therefore, the registration should be granted under the category of ‘Business Auxiliary Services’ and the Commissioner did not have power to grant registration on his own without receiving any application for registration under that specific category.

  •     There are no provisions in the service tax laws which lay down the consequences of delay in application for registration. Therefore, though there was a delay in application for registration by the petitioner, the Department could not reject the application, nor could he grant registration under a different category. However, recovery and/or penal proceedings might be initiated for non-payment of service tax.

II.    TRIBUNAL:

5 Applicability of Service Tax:

Whether executory work like false ceiling, partitions, flooring, etc. undertaken without any advice, consultancy or technical assistance be covered as interior decorator services?

Spandrel v. Commissioner of C. Ex., Hyderabad/Kochi, 2010 (20) STR 129 (Tri.-Bang.)

The appellants were engaged in executing interior works such as pest control, demolition and dismantling, masonry work, wall preparation, partition of banks, firms, etc. The said work was intended to be taxed as ‘Interior Decorator Services’ by the Department.

The appellants put forth the claim that interior decorator means any person engaged in the business of providing by way of advice, consultancy and technical assistance. Further, the appellants referred to Circular No. B1/6/2005 TRU, dated 27th July 2005 and contended that execution of the above work falls under the category of ‘Commercial or Industrial Construction Services’ introduced from 16th June 2005. The appellants relying on various judgments claimed that these services were notified from 16th June 2005 and therefore, were not taxable earlier.

The Department argued that the scope of interior decorator was not only restricted to advice, consultancy or technical assistance, but also extends to beautification of spaces.

The Tribunal held as follows:

The Department did not have findings that the appellants were engaged in advice, consultancy and technical assistance or planning work and designing. The executory work of the appellants was specifically covered by commercial or industrial construction services and therefore, the same could be held to be covered under any other category prior to introduction of commercial or industrial construction services and allowed the appeal.

6 Appeal:

Whether legal representative can file the appeal on behalf of deceased assessee?

Abhay Intelligence & Security Service v. Commissioner of C. Ex., Vadodara, 2010 (20) STR 204 (Tri.-Ahmd.)

The appellants challenged the levy of penalty on dissolved proprietorship firm after death of the proprietor and relied on various decisions. The Tribunal observed that the ratio laid down in those decisions is that the appeal filed by a legal representative against penalty on deceased is not maintainable. However, the penalty being personal in nature can be recovered only from the person on whom it was imposed and as such it could not be recovered from a legal representative.

7 CENVAT Credit:

7.1 Whether CENVAT credit be allowed on Garden Maintenance Services?

ISMT Ltd. v. Commissioner of C. Ex. & Cus., Aurangabad, 2010 (20) STR 68 (Tri.-Mumbai)

The limited issue before the Tribunal was whether CENVAT credit was allowed on garden maintenance services. The appellants relied on Millipore India Ltd. v. CCE, Bangalore II [2009 (13) STR 616 (Tribunal); 2009 (236) ELT 145 (Tri-Bang.)], which held that modernisation, renovation and repairs, etc. of office premises and landscaping, the surroundings of factory can be considered as input services.

The Department relied on Kirloskar Oil Engines Ltd., [2009 (241) ELT 474 (Tribunal)] which held that ‘garden maintenance services’ do not have any nexus with the manufacture or clearance of final product. They also relied on the decision given in Maruti Suzuki Ltd. v. CCE, Delhi III [2009 (240) ELT 641] (SC) and stated that ‘input’ and ‘input services’ were identical and therefore, CENVAT credit was not admissible.

The Tribunal observed as follows:

  •     Mumbai High Court in case of Coca Cola [2009 (15) STR 657] has held that input services include services used in relation to business. The Tribunal would look whether garden maintenance was related to business activities. It was also observed in the said case that the term ‘activities relating to business’ used in ‘input services’ widens the scope of such definition and conceptually any input service which forms part of the assessable value of final product should be eligible for CENVAT credit.

  •     Maruti Suzuki case cited by the Department relates to definition of ‘input’. The definitions of ‘input’ and ‘input service’ are not comparable at all. Therefore, ratio of such judgment cannot be considered for the present case. The intention of the Legislature is very clear to have different definitions of ‘input’ and ‘input service’. The words ‘used in or in relation to manufacture of final product’ deployed in ‘input’ are not used in the definition of ‘input service’. Further, the Revenue has relied on the judgment of this Tribunal in the case of Kirloskar Oil Engines (supra) and Vikram Ispat (2009 (16) STR 195), but both these cases did not take a note of Coca Cola case (supra) delivered by the Mumbai High Court.

  •     In Force Motors Ltd. v. CCE, Pune [2010 (18) STR 150], the Tribunal had observed that the definition of ‘input service’ should be considered in two parts, one inclusive and another exclusive part. Further, the activities specified after the phrase ‘such as’ are only illustrations and there fore the activities other than those illustrated may get covered.

  •     A good garden increases the working efficiency and consumer also feels good and therefore, garden maintenance services are in relation to business activity. CENVAT credit was, therefore, allowed.

Kirloskar Oil Engines Ltd. v. Commissioner of C. Ex., Aurangabad, 2010 (20) STR 30 (Tri.-Mumbai)

The issue before the Tribunal again related to CENVAT credit on garden maintenance services. The Department put forth that there were contrary judgments on the disputed issue and therefore, the same should be referred to the Larger Bench. The Tribunal observed that the contrary judgment was given in case of the appellants itself and such matter was remanded back for fresh adjudication but the law was already settled in Coca Cola India Pvt. Ltd. v. CCE, [2009 (151) STR 657, 2009 (242) ELT 168]. The Tribunal allowed the CENVAT credit on garden maintenance following the decision given in ISMT Ltd. case discussed above.

7.2 Whether interest is leviable for wrong avail-ment of CENVAT credit?


Commissioner of C. Ex., Pondicherry v. Superfil Products, 2010 (20) STR 279 (Tri.-Chennai)

The manufacturer availed but not utilised CENVAT credit of inputs and capital goods and also availed benefit of exemption Notification No. 30/2004, dated 9th July 2004. However, the CENVAT credit on inputs lying in the factory and inputs in process etc. was not reversed.

The Department claimed that interest was payable even on wrong availment of CENVAT credit in view of Rule 14 of the CENVAT Credit Rules, 2004. However, the respondents alleged that there was sufficient balance in the CENVAT credit account and therefore, it has not got any pecuniary benefit. The respondents also relied on the judgment delivered by P & H High Court in the case of CCE, Delhi-III v. Maruti Udyog Ltd., (2007 (214) ELT 173) which was affirmed by the Apex Court in (2007 (214)    ELT A50) wherein it has been held that in the absence of utilisation of CENVAT credit, interest shall not be leviable.

The Tribunal observed that for interpreting Rule 14 of the CENVAT Credit Rules, 2004, the words ‘taken or utilised’ should be construed as ‘taken and utilised’. It was held that in the present case, interest is not justifiable. However, in case when the CENVAT credit balance is less than the credit to be reversed, then the balance should be paid in cash with interest.

7.3 Whether CENVAT Credit is allowed on capital goods received in the factory before the assessee becoming liable to service tax?

ABC Engineering Works v. Commissioner of C. Ex., Guntur, 2010 (20) STR 145 (Tri.-Bang.)

The appellants were engaged in providing site formation and clearance, excavation and earth-moving and demolition services. The appellants took CENVAT credit on excavators during 30th September 2005 and 31st March 2006. However, such excavators were purchased prior to 16th June 2005 i.e., prior to the introduction of the above service in the service tax net.

The appellants submitted that the excavators were purchased after introduction of the CENVAT Credit Rules, 2004 and put to use after introduction of service. Such capital goods were not used in providing exempted services and therefore, CENVAT should be allowed. The appellants relied on the Tribunal’s judgment in the case of ACE Timez v. CCE, Bangalore, [2004 (170) ELT 371]. The Tribunal observed and held that in case of Spenta Interna-tional Ltd., [2007 (216) ELT 133], the Larger Bench of Tribunal held that eligibility of CENVAT credit has to be determined based on dutiability of final product on date of receipt of capital goods in the factory, instead of date of utilisation of CENVAT credit. Further ACE Timez case (supra) is based on different facts and ratio thereof cannot be applied to the present case. The assessee therein was availing exemption and therefore, provisions of Rule 6(4) of the CENVAT Credit Rules, 2004 did not apply to the assessee. The ratio laid down by the Board’s Circular No. 137/120/2008-CX-4, dated 24th June, 2008 relied on by the Commissioner provides that the CENVAT credit of CVD paid on the aircrafts before introduction of such services cannot be available to assessee even when the same is included in the definition of capital goods in view of Rule 6(4). Eventually, the Tribunal denied the CENVAT credit on excavators. However, since the question related to interpretation of law, the penalty was waived.

7.4 Whether CENVAT credit is available for input services utilised outside the factory premises?


Atul Auto Ltd. v. Commissioner of C. Ex., Rajkot, 2010 (20) STR 275 (Tri.-Ahmd.)

The appellants were denied CENVAT credit on erection, installation and commissioning services of wind mills for generation of electricity outside the factory premises.

The?Tribunal?observed?that?the power generated at the wind mills was not directly used by the appellants. It also relied on the decision given in Rajhans Metals (P) Ltd., [2007 (8) STR 498] and held that wind mill firm unit being not a part of the appellant’s factory premises, CENVAT credit cannot be allowed.

7.5 Whether CENVAT credit is allowed on agricultural work, on levelling of children park and tree plantation and construction of toilet in village?


Commissioner of C. Ex., Salem v. ITC Ltd., 2010 (20) STR 141 (Tri.-Mumbai)

The Tribunal held that service tax paid on agricul-tural work is allowed relying on the decision given in the case of Millipore India Ltd. v. CCE, [2009

(13)    STR 616, 2009 (236) ELT 145). However, since levelling of children park and tree plantation and construction of toilet in village are not relating to business of the respondent, CENVAT credit was held to be disallowed.

8  Export of services:

Whether procuring orders for parent company abroad be considered as export of services?

Lenovo (India) Pvt. Ltd. v. Commissioner of C. Ex., Bangalore, 2010 (20) STR 66 (Tri.-Bang)

The appellants were procuring orders for their foreign parent company classifiable under ‘Business Auxiliary Services’ and were receiving commission for such services. Rebate was claimed under Rule 5 of the CENVAT Credit Rules, 2004 for service tax paid on such commission. The Department rejected the rebate claim on the ground that the appellants promote the product of Singapore-based parent company in India, therefore the said services are rendered in India and they do not qualify to be considered exports. Further, it also claimed that services are rendered to its own concern and the appellant’s office can be considered as office of foreign parent company. Therefore, the recipient of service is not located outside India.

The appellants claimed that they and the parent company were separate entities. Moreover, the recipient was located outside India and parent company does not have an office in India. Therefore, they argued that the services were utilised abroad. The appellants also took support of Blue Star v. CCE, Bangalore, [2008 (11) STR 23] and ABS Ltd. v. CCE, Bangalore, [2009 (13) STR 65] delivered by the Bangalore Tribunal. Since the issue was squarely covered by the said judgments, the ap-peal was allowed.

9 Refund of CENVAT:

9.1 Can Refund of CENVAT credit be denied if it is not filed in the same month?

Can it be disallowed as the invoices were raised on a person acting as Pure Agent and paid by such Agent?

Can credit on input services received for consultancy on acquisition of a business be disallowed because that business is not yet acquired? Whether credit can be disallowed in the absence of specified evidence as to why the credit was not admitted?

Commissioner of Central Excise, Mysore v. Chamundi Textiles (Silk Mills) Ltd., 2010 (20) STR 219 (Tri.-Bang.)

The respondent is a 100% EOU engaged in the business of manufacturing and exporting silk and allied fabrics. They had availed CENVAT credit of service tax paid on services received by them. But the Revenue rejected the claim of refund of the above CENVAT credit on the following grounds:

  •     CENVAT credit was taken on the goods which were not manufactured in the month in which the claim was made.
  •    The invoices were raised on a person acting as a Pure Agent, credit could not be allowed.
  •    The commission received for acquisition of business outside India would not qualify as input service as the business was not acquired till that date.
  •     The assessee failed to prove the nexus of invoices that were addressed to the Head Office but actually related to the Mysore Unit.

The Tribunal’s observations were as follows:

  •     If some credit is admissible in a particular month, it shall be admissible in the succeeding month too. It is natural that there will be a time lag between availment of credit on the goods manufactured and the export of those goods. CBEC has prescribed a time limit of one year for filing the refund claim and the refund should be filed on a quarterly basis. Hence, it is natural that if an exporter is claiming refund after 9 months, it would not be relating to the goods of that month.

Thus, the claim of refund cannot be denied on this ground.

  •     The invoice had been raised on a person acting as Pure Agent on account of the appellant. The Pure Agent had discharged liabilities which would otherwise have been discharged by the appellant.

Thus, the credit cannot be denied on this ground also.

  •     In regard to the Consultancy Service (Commission) received for acquisition of business outside India, it was observed that the company was yet to be acquired and pending such acquisition, it could not be concluded if the consultancy received has been used in the business activity. Hence, CENVAT credit on the said service was not admissible.

  •     The Tribunal also perused the invoices that were raised on the Head Office. It was found that they related to the activities of Mysore Unit. The respondent also submitted that no explanation was given by the Revenue regard-ing the inadmissibility of credit relating to such invoices. The Court thus dismissed the appeal of the Revenue on the grounds that there was no special evidence as to why the credit could not be allowed.

9.2 Whether airfreight services received by appellants till goods are loaded onto aircraft are eligible for CENVAT credit? Whether Department is justified in denying refund in months of no export?

Fine Care Biosystems v. Commissioner of C. Ex., Ahmedabad, 2010 (20) STR 193 (Tri.-Ahmd.)

The Department rejected the refund claim for the months where no export took place. Further, it also rejected the refund claim for the CHA and airfreight services.

The Tribunal made the observations that in Delhi Tribunal’s decision in case of Philco Exports v. CCE, New Delhi [2009 (234) ELT 568] it was held that the time lag between the date of receipt of inputs, the date on which they are used and the date of export are not relevant. The issue to be looked into is whether the input services were used in relation to manufacture of export goods. Accordingly, there is no restriction on availment of CENVAT credit for exporters and only when adjustment is not permissible, Rule 5 allows for refund of CENVAT credit. Therefore, for the months where no export sales were made, CENVAT credit cannot be denied. Further, in case of export sales made on FOB or CIF basis, the place of removal has to be the port of export. Therefore, the Com-missioner rightly allowed CENVAT credit on CHA services. Taking the same analogy, CENVAT credit on airfreight services till load port is allowable.

9.3 Whether Department justified in denying claim of refund on the basis of declaration in ARE-1 that the CENVAT credit was not availed by the assessee?

Fine Care Biosystems v. Commissioner of C. Ex., Ahmedabad, 2010 (20) STR 241 (Tri.-Ahmd.)

The Department denied refund claim to the ap-pellants, a 100% EOU, on the basis that the appellants had declared in ARE -1 that it has not availed CENVAT credit and such declaration should be treated as final. The Tribunal held that Rule 5 of the CENVAT Credit Rules, 2004 requires that goods should have been exported, the CENVAT credit taken should be eligible CENVAT credit and credit could not have been utilised for payment of duty of finished goods by way of adjustment. Further, there is no requirement under Rule 5 for giving any declaration in ARE-1. The declaration requirements are made to facilitate exporters to have their legitimate export benefit entitlement without delay and the same should not be used to deny the legitimate entitlement.

10 Remand:

Whether Commissioner (Appeals) has power to remand back the service tax cases? Commissioner of Service Tax, Delhi v. World Vision, 2010 (20) STR 49 (Tri.-Delhi)

The Tribunal held that the Commissioner (Appeals) can remand the matter u/s.85(4) and the provisions of S. 35, S. 35A and S. 35B of the Central Excise Act were not made applicable to service tax vide S. 83 of the Finance Act, 1994. It also concluded that S. 85(5) related to procedural aspects only and it cannot be interpreted to restrict the powers of the Commissioner (Appeals).

11 Unjust enrichment:

Whether booking of space or time in media are ‘Advertising Agency services’?? Whether unjust enrichment is applicable in case when Department does not have clear finding?

C.S.T., Ahmedabad v. Poornima Advertising & Pro-motion Pvt. Ltd., 2010 (20) STR 107 (Tri.-Ahmd.)

The assessee claimed refund of excess service tax paid without considering discount. The Commissioner (Appeals) held that though the assessee is eligible for refund on merits, refund cannot be allowed in the present case applying doctrine of unjust enrichment. The Tribunal held that refund is eligible on merits on the grounds that:

  •    The Department contended that the scope of ‘Advertising Agency Services’ covers services in connection with advertisement including services connected with display or exhibition of advertisement and the services. However, Master Circular was against such interpretation. Therefore, merely canvassing advertisement for public on commission basis is classifiable under ‘Business Auxiliary Services’ and not under ‘Advertising Agency Services’. In respect of unjust enrichment, the Tribunal observed that the issue of credit note was sufficient to prove repayment of excess service tax and further that the Department did not have clear finding that such amount was not refunded. Thus, the appeal was allowed.

ORDERS OF CIC

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Right to Information


S. 4(1)(c) :

S. 4(1)(c) reads as under :

Obligation of public authority — “4(1) every public authority
shall —

(C) publish all relevant facts while formulating important
policies or announcing the decisions which affect the public;”

Shri Venkatesh Nayak had filed 2 RTI applications with PIO of
two departments of Government of National Capital Territory of Delhi (GNCTD)
asking for proactive disclosure of contents of the Delhi Police (Amendment)
Bill, 2010 (DP Bill) as required u/s.4(1)(c) of the RTI Act. He received no
reply. Mr. Nayak then filed a complaint u/s.18 of the RTI Act with the
Commission.

Subsequently Mr. Nayak was informed that the DP Bill had been
placed on the website of the Delhi Police, GNCTD and the Ministry of Home
Affairs, Govt. of India and comments from the citizens, media persons, etc. were
invited.

CIC, Shailesh Gandhi in the decision wrote as :

“A plain reading of S. 4(1)(c) of the RTI Act suggests that
every public authority is required to publish or disclose all facts and
circumstances, which are relevant and taken into account while formulating
policies and taking decisions that would affect the public. S. 4(1)(c) of the
RTI Act requires proactive disclosure of proposed laws/policies and amendments
thereto or to existing laws/policies to enable citizens to debate in an
informed manner and provide useful feedback to the government, which may be
taken into account before finalising such laws/policies.

Given that the DP is a significant legislative change, the
relevant public authorities involved in drafting of the said bill had a duty
to proactively disclose its contents u/s.4(1)(c) of the RTI Act. The concerned
public authority, however, acted only after the complainant approached the
Commission and filed a complaint u/s.18(1) of the RTI Act. The public
authority should have disclosed the contents of the DP Bill suo motu and by
omitting to do so, the very purpose of S. 4(1) of the RTI Act stands defeated.
The Commission has further observed that at present, the GNCTD is not fully
complying with S. 4 of the RTI Act and therefore, is of the view that citizens
must be provided with means to debate legislative and policy changes, which
are likely to affect public lives as contemplated by the GNCTD. The citizens
individually are the sovereigns of the democracy and they delegate their
powers in the legislature. The RTI Act has recognised this and S. 4(1)(c) is
meant to ensure that the citizens would be kept informed
about proposals for significant legislative and policy changes.

In view of the aforesaid, the Commission, under the powers
vested in it vide S. 25(3)(g) and S. 25(5) of the RTI Act hereby directs the
Chief Secretary, GNCTD to develop a credible mechanism in all departments for
proactive and timely disclosure of draft legislations/policies and amendments
thereto or to existing laws/policies in the public domain, as required
u/s.4(1)(c) of the RTI Act, during the process of their formulation and before
finalisation.”

[Mr. Venkatesh Nayak v. Chief Secretary, Government of
National Capital Territory of Delhi, Decision No. CIC/SG/C/2010/000345+000400/8440,
decided on
7th July, 2010.]

?
Secret Accounts of Indian citizens in Swiss banks :


Very significant decision of the Full Bench (4 members) of
Information Commission on the subject in National debate since long viz. money
of Indian citizens lying in Swiss banks.

Shri V. R. Chandran had sought the following information from
the PIO of Directorate of Enforcement :

(1) Whether the Ministry of Finance/GOI is aware of the
existence of secret accounts of Indian citizens in Swiss banks amounting to
1456 billion US dollars?

(2) If yes, has any action been taken to find the identity
of the account holders ?

(3) If the list of depositors is available, please provide
a copy of the same, with complete information about the depositors,

(4) Are the transactions legitimate ?

(5) If the deposits are illegal, what action has been
contemplated on them ?

(6) Has the GOI/MOF addressed the Swiss authorities for
repatriating the illegal money ? If
not, why ?

(7) Are there such accounts in any other
countries ?

(8) If all or any of the actions mentioned above have not
been done, please furnish the reason therefor,

(9) If MOF/GOI holds the view that the said media reports
are not to be trusted, what action has been taken or proposed to be taken on
them for false propaganda ?

The CPIO and the first Appellate Authority held that the
Directorate has been exempted u/s.24 read with the Second Schedule of the RTI
Act.

Before the Commission, some of the submissions of the
applicant were :

The Enforcement Directorate cannot dispute that exporting
Indian currency to foreign countries was illegal. It was possible only because
of failure of officers of the Government of India under the Enforcement
Directorate or I.T. Department. Because of non-exercising of the powers and
duties by the above-said officials, Indian citizens who deposited money in
secret accounts got pecuniary advantage to the extent of tax liability of the
said amount. Therefore, non-exercising of the powers by the officers would be
nothing but the abuse of power to cause pecuniary advantage to those persons who
deposited in secret accounts, which is nothing but a criminal misconduct as
defined by u/s.13(1)(d) of the P.C. Act. Further, the corruptive attitude is
glaringly evident that in spite of exposure by the news media the authorities
failed to initiate meaningful action to retrieve the money and even did not
enlighten the taxpaying citizens to know what was happening by furnishing
information under the RTI Act. Therefore, the whole episode involves corruption
and violation of human rights of all citizens, specifically the 30 crore
citizens living in undignified condition in India. As such, the applicant
satisfies the stipulations under the first proviso to S. 24 of the RTI Act, 2005
and hence the applicant is entitled to get information sought for and the
Enforcement Directorate is duty bound to furnish the same along with costs.

The Full Bench took assistance of the Ministry of Finance, Department of Revenue, Department of Banking and Ministry of Law and Justice in the matter. Their comments were invited. The Ministry of Law & Justice and Department of Banking did not give any comments on technical grounds. However, the Department of Revenue in brief stated as under :

    The general impression that all accounts of Indian citizens in foreign banks are illegal is not correct.

    Indian citizens, who are NRIs, can maintain and operate foreign accounts and there is no requirement to get permission or even inform the tax authorities or RBI in India.

    The restriction is only for Indian residents. However, FEMA permits opening of accounts abroad with the knowledge or permission of competent authority. Thus, all foreign accounts of resident Indians are also not illegal.

    Movement of funds from India to outside and vice versa are now permitted liberally under the FEMA regime.

    The details of bank accounts of individuals are protected from disclosure even under the RTI Act, etc. As far as foreign accounts are concerned, the foreign banks do not come under the jurisdiction of Indian authorities.

    In order to get the information from the foreign governments on bank accounts suspected to contain proceeds of crime/tax evasion, the Indian authorities have to indicate the name, a/c. No., crime/tax evasion and the jurisdiction for seeking the information.

    Therefore, none of the agencies hold the full details of such accounts. There will be only the details of specific cases, which are under investigation, adjudication, prosecution, etc.

    ‘The Income Tax Authorities’ and ‘the Directorate of Enforcement’ are 2 agencies under the Department of Revenue, which deal with the illegal money of Indian residents lying abroad.

    In order to bring back illegal Indian money lying abroad, the following actions have been initiated/taken :

    a) The Income-tax Act, 1961 has been amended through the Finance (No. 2) Act, 2009, and it would enable the Central Govt. to enter into Agreement for the Exchange of Information and Assistance in Collection of Taxes (AEI&ACT) with non-sovereign jurisdictions.

    b) In this regard, they have written to the Ministry of External Affairs with respect of 19 prioritised countries/jurisdictions, for taking up the matter with them for entering into such agreements.

    c) Since the existing tax treaty with Switzerland does not provide for exchange of bank-related information, etc., the renegotiation of the tax treaty with Switzerland is being undertaken. The first round of negotiations was held on 10-12 Nov., 2009. Once the protocol amending the tax treaty is notified, India would be able to obtain bank-related information in specific cases from Switzerland.

    d) MEA has also been approached to renegotiate the remaining tax treaties, which are in force, but do not specifically provide for exchange of bank-related information.

    e) India has been actively taking part in building global consensus for taking action against those jurisdictions/countries, who are not transparent or cooperative in exchanging information with other countries.

    ‘The Directorate of Enforcement’ is listed in the Second Schedule of the RTI Act and therefore, in terms of S. 24 it is an exempted organisation. Assuming but not admitting that information about Indian money lying in foreign bank accounts is available with the Directorate, no disclosure need be made by the Directorate.

[My reaction to above 10 point reply : It appears that the Department of Revenue has diverted its reply to generality of the subject. It has not provided but avoided to give the information sought.]

Besides the above, the Directorate made submissions discussing DTAA with Switzerland, OECD standards on exchange of information as contained in Article 26 of the OECD model tax convention. He further stated that the Government of India has taken steps to collect authentic and accurate information about the black money stashed away. The Directorate of Enforcement also brought to the notice of the Commission writ petition (Civil) No. 176/2009 pending in the Supreme Court on the similar subject matter.

After considering the above submissions of both the parties, the Full Bench gave the following decision in 4 para, 14 to 17 of the order :

    14. The issues, which have been raised in this RTI application, are serious and have understand-ably raised public concern. The Enforcement Directorate — the principal agency of the Government to check and undo illegal stashing away of money from the country — has taken a rather technical position about disclosure of the information relating to it. Their position, briefly stated, is that they cannot either confirm or deny the media reports about the likely volume of black money stashed away in foreign banks illegally by Indian nationals. While this position is, doubtless, defensible, it leaves unanswered the perennial question as to what resources the country has lost to the evil of money laundering. We would like this matter to be taken beyond technicalities and to address the larger issue related to transparency in this vital field, about which the citizens of our country are keen for answers.

    15. While the Enforcement Directorate may take the position that they have no way of assessing the total volume of illegally held money by Indians in foreign banks, they can surely provide an estimate of the total volume of such money involved in the investigations they are presently conducting. In other words, the Enforcement Directorate can let the country know as to how much is the total sum of such money they are dealing with in their current investigations. This figure can be arrived at through the simple contrivance of aggregating the sums of money in all such investigations currently underway. The Enforcement Directorate need not disclose the nature of such investigations or the parties’ names. Surely, it is within its power to disclose the total amount of monies covered by these investigations.

    16. The Enforcement Directorate had strenuously argued before us that they stand exempted from disclosure obligation under the RTI Act by virtue of their inclusion in the Second Schedule, u/s.24 of the RTI Act. We would like to dwell upon this aspect of argument in the context of a proviso built into the S. 24 itself, i.e., that these exemptions are subject to their not being matters of ‘human rights violations’ or ‘allegations of corruption’. In our view, all matters now investigated by the Enforcement Directorate in the matter of stashing away of Indian money in foreign banks, come within the definition of allegations of corruption in S. 24. There is eminent and compelling reason why this exception must be applied in the present case.

    17. We direct the Enforcement Directorate to provide the information on Point Nos. (1) and (8) as per the direction in the preceding paragraphs. Point Nos. (2), (3) and (5) have been answered extensively in the foregoing discussions. Point Nos. (4) and (9) are questions which are in the form of seeking views and opinions and cannot be the subject-matter of RTI applications. Point No. (7) has been answered before us by the Department of Revenue.

[Shri V. R. Chandran v. Directorate of Enforcement, Appeal no. CIC/AT/A/2009/000353 decided on 28-9-2010]

                                                    PART B : THE RTI ACT 2005

In the last issue of BCAJ, the keynote remarks of Shri Gopalkrishna Gandhi at the CIC’s 5th annual convention held on 13th and 14th September 2010 was covered under this part. Now hereunder is covered the extracts from the speech of Shri Nandan Nilekani at the said convention :

A defining period for the country:

As a developing nation, the RTI Act was a decisive step for India. In most developing countries, citizen interaction with government is a Rubik’s cube of confusing procedure and requirements, and the asymmetry of power citizens face in interacting with governments encourage corruption and reduce the effectiveness of public services. The passing of the Right to Information Act in India was a big step away from this culture. The Act mandated that all citizens shall have the right to information, thus making it both a legal and justifiable right. It is a law that acknowledged that information can be a potent empowering force and critical to improving governance, and the public must have access to it.

A twin vision : bringing greater accountability in governance:

The Aadhaar Project, I believe, intensifies this movement. The RTI Act and the Aadhaar Project have a similar vision at their heart : that the government must be accountable to the people it governs.

While the RTI brings more accountability to governance by enabling better access to information, the UIDAI hopes to do this through the Unique Identification Number — the Aadhaar, it will issue to individuals across India. The number will allow individuals to clearly establish their identity to any agency in the country. This will be critical in combating the anonymity that impedes access for many of the poor to public benefits and services.

By authenticating their identity — either through biometrics or demographics — with the Aadhaar number in real time, individuals will also be able to verify whether they have received a particular service or benefit. This will bring last mile transparency to delivery of public services, and would also enable individuals to hold governments accountable when their wages and benefits are denied to them.

Such confirmation of benefit delivery is a particularly urgent requirement across social welfare schemes, since diversion and non-delivery of benefits has been a challenge across India.

The demand at the grassroots:

The Right to Information movement was driven by the passion of grassroot activists, and concerned citizens. From that local movement for ‘poora kaam, poora daam’ it became the national, visionary legislation we see now. The constitution of the UIDAI has a less romantic back-story, but has nevertheless, evolved into a project with similar transformational potential. There has long been a grassroot need for identity among India’s underprivileged, especially among the poorest and the most marginalised. Whether it is the anonymous migrants working and living in urban slums from Pune to Kanchipuram to Delhi; poor families unable to get BPL cards; or ordinary villagers who cannot open a bank account since they lack documentation, the demand for identity is palpable across the country, and the lack of it is deeply felt among the millions who work in the shadows of our institutions.

Building a bigger window:
accessing more information:

Since the Right to Information Act and the Aadhaar number have similar objectives for India’s residents, it is reasonable to consider that one can strengthen the other.

The vision of the RTI Act is a monumental one. In practice however, the Act has not been employed to the full extent that is possible. The RTI is most used today when a citizen applies for information from a particular public agency. We have been relatively less successful, however, in seeing the provisions of S. 4 enforced. S. 4 of the Act surrounds proactive disclosures — it states that public agencies and departments must release detailed information on operations and service delivery regularly to the public, and computerise records where possible for easier access. It requires public authorities to publish the matter of execution of subsidy programmes, including amounts allocated and the details of beneficiaries. In addition, it states that public authorities must maintain records as far as possible, in a computerised format, and connected by network all over the country to enable easy access for the public. For most public agencies and departments in India, however, computerising and releasing vast amounts of data, which now largely remain on paper, has proven to be a difficult task. Most departments, therefore, simply don’t do it.

The spirit behind S. 4 and proactive disclosure is that individuals should have to resort, as little as possible, to the Act in order to access information on public schemes. The Aadhaar-enabled applications the UIDAI envisions can turbo-charge the enforcement of these S. 4 provisions across our subsidy and welfare schemes, particularly within programmes such as the Public Distribution System and the NREGS. The availability of electronic records within such programmes would be a natural outcome of the applications that the UIDAI would implement in the coming years.

In the PDS, for example, public access to records through the RTI have been largely limited to the stock and sale registers of PDS outlets. The Aadhaar application in PDS would help enable broad-based computerisation of the PDS supply chain, making much of the available information across the various stakeholders electronically available. The Aadhaar application would enable every PDS beneficiary to confirm that they’ve received the grain by verifying their identity through Aadhaar. Such verification would be linked to an online MIS system. This would bring end to end accountability for every bag of grain — information on the movement of food grain that could be tracked online and in real-time, and published.

Petitioning the state:
enabling the underprivileged:

An important vision of the Right to Information Act was that it would bring the power of information to people most deprived of it in the country. However, the RTI application requires paperwork as well as follow-up in case it is rejected at the first level of appeal, which many of the poorest find difficult to do, due to the travel and additional filings that are required. BPL applicants face additional encumbrances — in order to waive the RTI application fees, they must provide documentation to prove that they are below the poverty line, which many of the poor don’t have.

Aadhaar could enable a mobile-based application, through which individuals could file an Aadhaar-linked RTI application through a mobile phone. Money could be debited either through the mobile phone or through an Aadhaar-linked bank account. The Aadhaar number could also be used to verify whether an individual falls into the BPL category. Follow-up of RTI requests and appeals could also be done remotely through mobile, reducing the travel and other practical constraints that the individual has to face. In addition, the status of the Aadhaar-linked RTI application could be tracked on a centralised, online database. Such a database would also enable the public and independent organisations to view the number of RTI applications that are pending, information that has been released, and so on.

Easing up the RTI process through Aadhaar applications would make the Act more accessible to millions across the country, particularly the poor.

The access to information is in itself a message : by enabling this, governments acknowledge that they are answerable to the people that elect them. By easing such information access to include the poor we would strengthen the objectives of the Act, help further reduce the inequalities that now exist between the ‘information rich’ and the ‘information poor’, and give the poor the tools to ensure that they receive better, fairer services.

Transforming India’s state-resident relationship:

What is perhaps the most defining feature of poverty is not just the absence of good housing and sufficient food, but the lack of access the poor have to the resources they need to change their circumstances — resources such as education, health, information and employment.

The RTI and Aadhaar are most fundamentally, about empowering the individual, and enabling such access for the poor. They do this by building a stronger, clearly acknowledged and accountable relationship between the state and the citizen. They give people the opportunity to form a direct relationship with their governments : through which they can request information necessary for them, demand individual recognition, get access to the services they need, and confirm to governments when they received an entitlement, and when they did not.

In the last few years, we have received a clear message in the recent policy efforts and reforms : that the path to development must be an inclusive, pro-poor one. The RTI and Aadhaar are potent, indispensable parts of this effort. Together, they can have a powerful impact on our broader reform movement : one that aims for a developmental agenda that is fairer, more equitable, and acknowledges and enables access for even its weakest citizens.

                                             

                                                Part C?: Information On & Around

    Political influence rules over merit :

Political interference at the highest level has been a common feature of the selection of staff at the Tamil Nadu Dr. MGR Medical University for three years between November 2006 and 2009, an RTI plea has found out. Documents obtained by TOI indicate the role of the Raj Bhavan and office of the State Health Minister in influencing the selection process in favour of certain applicants, thereby denying meritorious candidates a chance.

    Errant taxi drivers of Mumbai :

There has been a rise in the number of errant taxi drivers being punished for rigged meters or inflated readings in Mumbai’s suburbs in the past three years. This was revealed in the official statistics provided by the RTO to civic activist Anil Galgali under the Right to Information Act. The RTO said in its RTI reply that the action was taken by the flying squads based on complaints lodged by commuters. “But why should RTO officials wait for us (commuters) to complain ? Why can’t these flying squads have surprise checks? I am sure they can catch several autos overnight if they go on a surprise round across the suburbs,” Galgali pointed out.

    Maximum RTI applications in Maharashtra:

Statistics show that most queries raised under the Right to Information Act pertained to the State Urban Development Department. Of the nearly 4.5 lakh applications, clarity on issues related to the Department, which is considered crucial to the space-starved city. The data was provided by Chief Information Commissioner Suresh Joshi who addressed a press conference on his last day in office on 11-10-2010. According to Joshi, 12,5418 applicants sought information on matters involving the UD Department, followed by 72,393 info seekers who wanted the Revenue Department to answer their questions.

    CIC rescued:

Recently, the Supreme Court has rescued CIC the nodal body for smooth implementation of RTI from slipping into administrative chaos. On May 21, the Delhi HC had quashed the CIC (management) Regulations, 2007, framed by the Chief Information Commissioner for smooth functioning of CIC. The HC had also held that the Chief Information Commissioner had no power to constitute benches of CIC. The Bench, after brief arguments, stayed only that part of the HC order which restrained CIC from constituting benches for distribution of work. This means, the Chief Information Commissioner can now allot work to other Information Commissioners, for speedy disposal of RTI appeals.

ORDERS OF CIC

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Right to Information

                                         PART A: ORDERS OF CIC

  • Section 18 of the RTI Act




A very sad and no doubt unusual and unprecedented case has
come up before CIC Shailesh Gandhi.

The appellant, Mr. Surinder Puri of Delhi, sought certain
information from the Municipal Corporation of Delhi (MCD) regarding one
property, all around which there had been encroachment.

The PIO did not provide the information. First, the AA
directed the PIO to provide the requisite information as available on record.

In the second appeal, Mr. Surinder Puri had stated:

Correct and complete Information not provided within the
stipulated time. The PIO tried to shift the onus for providing the information
on some other public authorities and if the onus for providing this
information lay on them, why this application was not transferred to them.

In the decision dated 29.12.2009, the CIC directed the PIO
to give the appellant the length and breadth of the said plot after obtaining
it from the building department before 12 January 2010.The Commission also
directed the PIO to arrange a joint inspection of the area with MCD House Tax,
Building Department and Engineering Department with a copy of the sanctioned
building plan on 12 January 2010.

On 12.01.2010, the inspection became unruly. The Commission
received a letter dated 28.01.2010 from the Appellant Mr. Puri wherein he
alleged physical assault and brutal manhandling of two office bearers of the
Public Grievance and Welfare Society (PGWS), who were among the other members
who accompanied the Appellant for the joint inspection. In the letter, it has
been stated that the inspection was initiated in the presence of MCD
officials. According to the letter, there were seven police constables of
Sarai Rohilla Police Station who were also present at the inspection site. The
MCD officer is said to have only allowed two of the society members to inspect
the property site. Therefore, only two office bearers of PGWS went in for the
inspection on the Appellant’s behalf. It has been alleged that while the
inspection was on, Municipal Councilor Mr. Satbir Singh, along with his
accomplices (reportedly son and nephew), came with a mob of 30 people and
inflicted a brutal physical assault with an iron rod on one office bearer,
which is said to have caused him a fracture on the nose bone and that the
second office bearer was slapped and bullied. Furthermore, it has been alleged
that when an attempt was made to file a FIR (First Information Report) against
the said attack, the case was only registered after the society lodged a
complaint with the CMM (North).

On the basis of the above letter, the Commission registered
a complaint in accordance with Section 18(1)(f) of the RTI Act.

The Commission writes:

If the allegations made by the Complainant were true, it
meant that persons lawfully exercising their rights under the Right to
Information Act were being unduly harassed and physically assaulted. The
allegations that the assault was carried out in the presence of police and MCD
officials led to suspicion of a probable collusion. The Commission has been
given the powers to initiate an enquiry in a complaint under Section 18(2) of
the RTI Act, when enquiring into a complaint under Section 18(1). Section
18(3) of the RTI Act also confers the powers of a Civil Court on the
Commission when it is inquiring into any matter under Section 18.

Considering the gravity of the matter, the Commission wrote
letters dated 18.02.2010 to the Commissioner of Police (CP) and Commissioner
of the Municipal Corporation of Delhi (MCD), informing them about the matter
and requesting them to inquire into the matter and submit a report to the
Commission before 24.02.2010.

The CP instead of inquiring into the matter and submitting
a report, filed a writ petition in the High Court against the direction of the
Commission. In the writ petition, the CP has challenged the power of the
Commission, stating that the Commission has ‘over reached the powers’
conferred on it under the RTI Act and the letter sent by the Commission to the
CP is bad-in-law. The Commissioner of MCD did not care to reply even despite
telephonic reminders to his office.

The Commission decided to call some of the people present
to understand whether a RTI Applicant was deliberately obstructed from
undertaking inspection, which had been ordered by the Central Information
Commission and whether the assault on the two persons was with the intention
of preventing them from undertaking inspection. It summoned 7 different
officers who were present on 12.01.2010 and the appellant and his
representatives.

During the inquiry, each person deposing before the
Commission was asked to come in one at a time and once they had finished their
account, they were allowed to sit and listen to the deposition of the others.
Each person was asked to narrate the sequence of events on the day of
inspection, starting from the time that they all met at the MCD Office and
then proceed to the inspection site and subsequent events. At the end, the
persons who had deposed were allowed to give their clarifications or
contradict the statements of the others.

The statements of 6 persons who were present were recorded
and two more were called in later, so 8 in all. The CIC made the following
observations on points common to the deposition of all:

  • as some tension was
    anticipated, both parties had requested the Police to be present during the
    inspection.


  • crowd had gathered
    before the Inspection could be completed and persons were asking questions
    to the representatives of the Appellant.


  • some level of
    altercation took place either at the inspection site or just away from it on
    the Main Road. Even the MCD officials have admitted that there was some
    pushing around and arguments.


  • the inspection could
    not be completed due to the presence of the crowd. It was completed at a
    later point in the absence of the Appellant or his representatives but in
    the presence of a larger Police force.

    •     Mr. Ajay Kumar (one representative of PWGS) had sustained injuries and had been taken to Hospital by the Police.

    The Commission made the following Decision:

    The Commission finds from the statements that Po-lice personnel were present during the whole epi-sode and were either unable to or unwilling to take any action to intervene and disperse the crowd. This points to a very sorry state of affairs in terms of law and order. Trouble had been anticipated at the site and when it did start, the Police was unable or un-willing to take any action. The incident took place on 12 January, 2010. The Commission requested for a report on the incident before 24.02.2010, which the Police has not submitted. Now it is over ten weeks since the incident occurred, but the police did not give a report but instead deemed it a fit case to op-pose in a writ petition.

    Complaint is allowed.

    The appellant was prevented from carrying out the inspection to arrive at the facts. MCD officers and police officers were present but could not ensure that the inspection could be carried out.

    With regard to the allegations of physical assault, the Commission finds that offences under the Indian Penal Code may have been committed in the pres-ent case against the representatives of the Appel-lant. However, the Commission as a statutory body does not have the powers to investigate allegations against offences under the Indian Penal Code or take action under the Code of Criminal Procedure. When such incidents are brought to the notice of the Com-mission, the Commission can initiate an inquiry at its level under Section 18(2) of the RTI Act and it has to rely on external agencies such as the Police and the MCD to undertake part of the inquiry and assist the Commission. As a statutory body, the Commission can work effectively only if it gets cooperation from other Departments of the Government, especially those which are trained in investigative methods. If statutory bodies such as the Delhi Police and the Municipal Corporation of Delhi decide not to assist the Commission in the performance of its statutory functions, the Commission will find it difficult to dis-charge its duties under the RTI Act.

    Neither the Commissioner, MCD, nor the Commis-sioner, Delhi Police, have extended cooperation in the conduct of this inquiry. The Commission expresses the hope that the Police and the MCD will do their duty and help statutory authorities in performing their functions, failing which it would not be possible for citizens to exercise their fundamental right to information to ‘contain corruption and to hold Governments and their instrumentalities accountable to the governed’, which is the objective and promise of the Right to Information Act 2005.

    Citizens rightly expect that the Information Commission must ensure their protection when they are using Right to Information to unearth and challenge illegal activities. It is with deep concern that I admit that I am unable to take any further action as my powers under the Act have now been rendered completely ineffective by the non-cooperation of the Police and the MCD. I hope that all statutory agencies will cooperate to ensure that the rule of law prevails.

    (Mr. Surinder Puri, Delhi vs. PIO, MCD, Delhi: Decision No. CIC/SG/C/2010/000163/7237 dated 25.03.2010)

        Section 4 of the RTI Act

    As stated often in my articles, Section 4 of the RTI Act is the mother of all Sections in the Act. If the obligations on public authorities cast therein are complied with, the need to furnish RTI applications can get considerably reduced. In this case, even the State Bank of India, the largest bank of the country, has not complied with its obligation under this Section.

    The Order states:

    During the hearing, it was brought to our notice that the State Bank of India as a public authority has not yet published details about the monthly remuneration received by each of its officers and employees, including the system of compensation as provided in its regulations in terms of the mandatory obligations cast on it under Section 4(1)(b)(x) of the RTI Act. If it is true, it is unfortunate; a major public authority like the SBI is expected to be a trendsetter in implementing RTI Act. We direct the CPIO to bring it to the notice of the authorities in the SBI immedi-ately to ensure that such details about each of its officers and employees are immediately put up in the public domain through its website at all lev-els and certainly not later than a month from the receipt of this Order.

    The Order also directs the PIO to furnish information on the following points to the applicant, Shri Chetan Kothari, which was denied by the PIO and the AA:

        Monthly salary and wages paid to each employee, by name, in the State Bank of India, Mumbai Zone as at the end of 31st March 2009; [This information should be given in electronic form in a CD as the number of employees might be too large]

        Total number of safe deposit lockers in the Mumbai Zone as on the above date; and

        A categorical statement to the effect that the names of the CPIO and the Appellate Authority have been duly displayed in every branch of the Mumbai Zone.

    It may be of interest to the readers that CIC conducts many appeals by video conferences. This one was heard through video conferencing. The Appel-lant was present in the Mumbai studio of the NIC whereas the Respondents were present in the Bandra (Mumbai) studio.

    (Shri Chetan Kothari, Mumbai vs. CPIO, State Bank of India, Bandra Kurla Complex, Mumbai: CIC/SM/ A/2009/001479 decided on 01.04.2010)

        Postal Order

    In spite of such a mode prescribed in the Rules, the CPIO of UCO Bank refused to accept the application since it was accompanied with a postal order by way of application fee and declined to provide the information. The AA endorsed the decision of the CPIO. CIC Satyananda Mishra in his Order writes:

    “We strongly object to the decision of the CPIO sup-ported by the order of the Appellate Authority that the Indian postal order is not an accepted mode of payment of application fee under the RTI Act. The rules framed by the Government of India in this regard are quite clear and it is unfortunate that nearly 3* years after the Indian postal order was introduced as a method of payment, these authorities should be rejecting an application from a citizen by disal-lowing his postal order. During the hearing, the Respondents expressed regrets on behalf of the CPIO and the Appellate Authority but that hardly helps. The rejection of his application and, later; his appeal on the sole ground that he had decided to pay his application fee by postal order has caused avoidable harassment and financial loss to the Appellant. We, therefore, direct the CPIO to explain in writing if he has reasonable cause for his decision to disallow the application of the Appellant. If we do not receive his explanation within 15 working days from the receipt of this order, we will proceed to consider impos-ing the maximum penalty of Rs. 25,000 on him for having denied the information on thoroughly wrong grounds.

    The appellant in this appeal had also submitted that the UCO Bank had only one Appellate Authority lo-cated in their corporate office in Kolkata and very few CPIOs in the field making it extremely difficult for information (* Actually it is nearly 4 years) seek-ers to approach these authorities for information. Besides, it appears that the Appellate Authority does not give any opportunity of hearing to the Appellants before deciding the appeals. The Respon-dents admitted that indeed there was only one Appellate Authority for the entire Bank having thou-sands of branches all over India and that the Appellate Authority decided appeals without providing any opportunity of hearing to the Appellants. This is both unfortunate and unacceptable; nearly 5 years into the implementation of the Right to Informa-tion (RTI) Act, a responsible public authority like the UCO Bank must not treat this law with such casual abandon. Section 5 (1) of the Right to Information (RTI) Act clearly mandates every public authority to appoint as many CPIOs in all administrative units or offices under it as may be necessary to provide information to persons requesting for the information under this Act. Similarly, Section 19(1) requires that such officers senior in rank to the CPIOs should be identified as Appellate Authority for receiving and deciding appeals. We expect that the UCO Bank shall, within a month from the receipt of this Order, designate larger number of CPIOs to cater to the information need of the citizens and designate more appellate authorities, preferably, in the Zonal offices, so that Appellants do not have to go all the way to its corporate office for filing appeals. We also direct the Appellate Authority to provide an opportunity of hearing to the Appellants before passing any order on their appeals.

                                     Part B: The RTI ACT

    On January 20, 2010, the Ministry of Personnel, Public Grievances and Pensions [Department of Personnel & Training (DoPT)] issued one Office Memorandum (OM) on the subject of maintenance of records in consonance with Section 4 of the RTI Act.

    In part A, I have summarised one Order on Section 4 and commented on its importance. In Part 3, the letter of SCIC talks of Section 4. I request all readers to bring this OM of DoPT to the notice of public authorities they are connected with such as PSUs, Nationalised Banks, Government-owned insurance companies and so on. Said OM reads as under:

    The Central Information Commission in a case has highlighted that the systematic failure in maintenance of records is resulting in the supply of incomplete and misleading information and that such failure is due to the fact that the public authorities do not adhere to the mandate of Section 4(1)(a)of the RTI Act, which requires every public authority to maintain all its re-cords duly catalogued and indexed in a manner and form which would facilitate the Right to Information. The Commission also pointed out that such a default could qualify for payment of compensation to the complainant. Section 19(8)(b) of the Act gives power to the Commission to require the concerned public authority to compensate the complainant for any loss or other detriment suffered.

        Proper maintenance of records is vital for the success of the Right to Information Act but many public authorities have not paid due attention to the issue despite instructions issued by this Department. The undersigned is directed to request all the Ministries/Departments, etc,. to ensure that requirements of Section 4 of the Act in general and clause (a) of sub-section (1) thereof in particular are met by all the public authorities under them without any further delay.

    At this stage, I may also refer to THE PUBLIC RE-CORDS ACT, 1993 (PRA), which regulates the man-agement, administration and preservation of public records of the Central Government, Union Territory Administrations, public sector undertakings, statutory bodies and corporations, commissions and committees constituted by the Central Govern-ment or a Union Territory Administration and mat-ters connected therewith or incidental thereto. The rules (THE PUBLIC RECORDS RULES, 1997) are also enacted under this PR Act.

    Under the said Act and Rules also duty is cast on all entities as referred to above (and which are also entities covered under the RTI Act) to regulate etc. of the public records (extensively and in inclusive manner defined) and to furnish an Annual Report to the Director General or head of the Archives in the pre-scribed form.

    It may be noted that this Act also provides the regulations for destruction of Public Records. Very often, in response to the request to the PIO to provide some records, the reply is received that the same are destroyed. The applicant then should ask whether compliance is made to the PR Act and the PR Rules. It may be noted that penalty for contraventions is very heavy provided in Section 9 of PR Act as under:

    Whoever contravenes any of the provisions of Section 4 or Section 8 shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to ten thousand rupees or with both.

                                  
                                 Part C: OTHER NEWS

        Important Pronouncements by the Commission:

    (Continuing from January 2010)

    When Shailesh Gandhi, CIC, was in the BCAS of-fice some months ago addressing RTI activists and journalists, he distributed a compilation of 8 important and profound pronouncements by the Central Information Commission. Herewith 7 & 8 (the last two) thereof:

     7.   Third Party

    It is clearly stated in Section 11 (1) that ‘submission of third party shall be kept in view while taking a decision about disclosure of information’. Section 11 gives a third party an opportunity to voice its objections to disclosing information. The PIO will keep these in mind and denial of information can only be on the basis of exemption under Section 8 (1) of the RTI Act.

    The test of public interest is to be applied to give information, only if any of the exemptions of Section 8 apply. Even if any exemption applies, the Act enjoins that if there is a larger public inter-est, 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 require-ment to establish larger Public Interest, unless an exemption is held to be valid. Insofar as looking at the credentials of the applicant are concerned, the lawmaker has categorically stated in Section 6 (2), ‘An applicant making a 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.’ Since the law categorically states as above, it is clear that the credentials of the applicant are of no relevance, and are not to be taken into account at all when giving the information. The truth remains the truth and it is not important who accesses it. If there is a larger Public Interest in disclosing a truth, it is not relevant who gets it revealed.

    If the third party objects to giving the information, the Public Information Officer must take his objec-tions and see if any of the exemption clauses of Sec-tion 8 (1) apply. If any of the exemption clauses ap-ply, the PIO is then obliged to see if there is a larger Public interest in disclosure. If none of the exemp-tion clauses applies, information has to be given.

      8.  Assets of Public Servant

    The Commission can allow denial of information only based on the exemption listed under Section 8 (1) of the Act.

    Under Section 8 (1) (j), information which has been exempted is defined as:
     “Information which relates to personal information, the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the cause may be, is satisfied that the larger public interest justifies the disclosure of such information:”

    To qualify for this exemption, the information must satisfy the following criteria:

       1. It must be personal information

    Words in a law should normally be given the meanings given in common language. In common lan-guage we would ascribe the adjective ‘personal’ to an attribute which applies to an individual and not to an Institution or a Corporate. From this it flows that ‘personal’ cannot be related to Institutions, organisations or corporates. (Hence we could state that section 8(1)(j) cannot be applied when the in-formation concerns institutions, organisations or corporates).

        2. The phrase ‘disclosure of which has no relationship to any public activity or interest’ means that the information must have some relationship to a public activity.

    Various Public Authorities in performing their func-tions routinely ask for ‘personal’ information from Citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a Public Authority as an employee, or asks for a permission, license or authorisation, all these are public activities. The information sought in this case by the appellant has certainly been obtained in the pursuit of a public activity.

    We can also look at this from another aspect. The State has no right to invade the privacy of an individual. There are some extraordinary situations where the State may be allowed to invade the privacy of a Citizen. In those circumstances, special provisos of the law apply, always with certain safe-guards. Therefore it can be argued that where the State routinely obtains information from Citizens, this information is in relationship to a public activity and will not be an intrusion of privacy.

    Therefore we can state that disclosure of information such as assets of a Public Servant, which is routinely collected by the Public Authority and routinely provided by the Public Servants, – cannot be construed as an invasion of the privacy of an individual. There will only be a few exceptions to this rule, which might relate to information which is obtained by a Public Authority while using ex-traordinary powers such as in the case of a raid or phone-tapping. Any other exceptions would have to be specifically justified. Besides, the Supreme Court has clearly ruled that even people who aspire to be public servants by getting elected have to declare their property details. If people who aspire to be public servants must declare their property details, it is only logical that the details of assets of those who are public servants must be considered to be disclosable. Hence the exemption under Section 8(1)(j) cannot be applied in such a case.


        RTI Act amendments:

    Very interesting and significant exchange of corre-spondence has taken place between PM and Mrs. Sonia Gandhi: Times of India on April 10, 2010 has made following report:

    Against PM wish, Sonia stood ground on ‘no RTI changes’

    Congress Chief Sonia Gandhi firmly resisted changes to the RTI Act despite the government wanting to tinker with the transparency legislation, an RTI query reveals.

    Amendments to the RTI Act have been in the news for some time with activists protesting against the government’s move to exempt disclosure of Cabinet papers, internal discussions and judiciary. Sonia, in a letter dated November 10 had voiced this concern and said the government should “refrain from accepting or introducing changes in the legis-lation… in my opinion there is no need for changes or amendments”.

    The letter, accessed under RTI by activist S C Agar-wal, said, “It will of course take time before the momentum generated by the Act makes for greater transparency and accountability in the structures of the government. But the process has begun and it must be strengthened… It is important, therefore, that we adhere strictly to this original aims and re-frain from accepting or introducing changes in legislation on the way it is implemented that would dilute its purpose. In my opinion, there is no need for changes or amendments. The only exceptions permitted, such as national security, are already well taken care of in the legislation.”

    In response, the PM on December 24 stood his ground that certain issues could not be dealt with without changes in the Act. Among the issues cited by the PM were that the CJI had pointed out that the “independence of the higher judiciary needs to be safeguarded in the implementation of the Act. There are some issues relating to disclosure of Cabinet papers and internal discussions”.

    The PM assured that while the government was tak-ing steps to improve dissemination of information and training of personnel, “there are some issues that cannot be dealt with, except by amending the Act”. “The Act does not provide for the constitution of benches of the CIC though this is how the busi-ness of commission is being conducted,” the PM had said.

        Editorial in Times of India of India of April 14, 2010

    The RTI Spectre

    The act is working. Don’t tamper with it

    Few of our public institutions foster a culture of transparency and accountability. The Right to In-formation (RTI) Act was enacted in 2005 to change tradition of opacity and make governance a trans-parent process. The Act’s been working reasonably well and has become useful tool for a large cross-section of civil society to examine the workings of government. Since in the process institutional failings get exposed as well, there is resistance to the RTI culture from various quarters including the government.

    Many public institutions that come under the ambit of the Act now want its radical edge blunted. Many state information commissions are starved of funds and personnel, which may lead to a collapse of the institution itself. Pleas to amend the Act must be seen in this context and handled with caution. As Congress president Sonia Gandhi wrote in her letter to the prime minister, “It is important that we adhere strictly to its (RTI Act) original aims and re-frain from accepting or introducing changes in the legislation on the way it is implemented that would dilute its purpose.” Sonia’s intervention has come in the wake of a letter written by the Chief Justice of India (CJI) to the Prime Minister. The letter states that information concerning the functioning of the judiciary should be exempted from the scope of the Act to safeguard its independence.

    The CJI’s apprehensions about possible misuse of in-formation of “a highly confidential and sensitive nature” are valid. But should, for example, information on in-house inquiry proceedings regarding allegations against sitting judges or appointment of judges in high court be considered sensitive and barred from the public eye? Should not the apex court be in the forefront of an initiative to make the working of public institutions transparent? The push to amend the RTI Act came first from the government itself. Last year, the government proposed amendments to the Act so that “frivolous and vexatious” applications could be discarded and disclosure of file notings exempted. The amendments failed to pass muster with state information commissioners, but they could be revived at any time.

    To give teeth to the RTI legislation, the government must beef up infrastructure at the information commissions. More personnel and infrastructure must be created fast at the commissions to avoid a break-down. There are already more than 11,000 cases pending with the Central Information Commission. The situation is worse in many states. The focus must be on a climate of openness, rather than trying to restrict the scope of RTI Act.

        Right to Information – A route to good Governan    ce

    The book under above title was published by BCAS Foundation in 2007. Its updated, enlarged and re-vised edition authored and compiled by Narayan Varma was launched by BCAS on 25th March by Shri TN Manoharan, former president of ICAI and the director of Satyam Computer Services Ltd and now Padma Shri.

    Same was re-released by Public Concern for Governance Trust (joint publishers of this edition) on 7th April through the hands of Dr. Suresh Joshi, the Chief Information Commissioner, Maharashtra. The function was extensively covered by the Press. Hereunder is what DNA reported on 08.04.2010:

    •     RTI replies may soon be at your doorstep in 7 days State information commissioner will write to CM for faster disposal of cases


    If State information commissioner Suresh Joshi has his way, information sought under the Right to Infor-mation (RTI) Act will be made available to citizens in seven days, and not the stipulated 30 days.

    Speaking at the launch of RTI activist Narayan Varma’s book Right to Information – A Route to Good Governance on Wednesday, Joshi said he will be writing to the chief minister and the chief secre-tary asking for a change in the Act to ensure faster dissemination of information.

    Joshi said that in only 15% of the total applications, information officers may need more than a week to respond. “There is no reason for all applicants to wait for a month to get a reply,” Joshi said, adding, “I will also ask the chief minister and chief secretary to compliment officers who give information within seven days.”

    Talking about the success of the RTI Act, Joshi said corruption has gone down by 20%, “The RTI Act has increased accountability and transparency. Bureau-crats cannot shirk their responsibilities anymore.”

    He said the government needs to appoint senior officers as first appellant authorities (FAA). “If there is better work at that level, 50% of our work will re-duce,” he sad.

    Talking about Varma’s book, Joshi said it was a one-stop guide for all RTI related queries. The book contains information on prominent cases and judgments given by various commissioners. “The idea is not only to create awareness, but also to help peo-ple understand the Act,” Varma said.

        Information under RTI now in just 15 days

    True to his words as reported in above, Dr. Joshi wrote to CM on April 8. Hereunder news item in In-dian Express of 22.04.2010:

    CITIZENS now may not have to wait for 30 days to get details under the Right to Information Act. In a bid to make Maharashtra progressive by setting a good trend in RTI, State Information Commissioner Suresh Joshi has requested Chief Minister Ashok Chavan to issue a resolution to make information available in 15 days.

    With the State receiving 4.4 lakh applications from citizens – considered higher than in the US and Mexico – and disposal rate of more than 95 percent Joshi said it was about time that Maharashtra moves to giving information earlier than the 30-days limit.

    In 2002, before the Central Government accepted the Act, Maharashtra had its own RTI Act, which required providing information within 15 days.

    Therefore, there shouldn’t be a problem in going back to the original process. “It is not difficult to give details or documents in 15 days as everything is available in the department itself. Officials can send letters to applicants in seven days time to take the information after paying necessary amount and by the 15th day they can hand over the detail,” Joshi said.

    The letter – a copy of which is available with The Indian Express written to Chavan on April 8 – states that a Government Resolution should be issued urging officials to try hard and give information in 15 days. Chavan is expected to reply to the letter in the next few weeks.

    Although officials doing so cannot be given monetary incentive, head of departments could be suggested to take this note while considering promotions, the letter states.

    “There are Confidential Reports prepared for officers by their seniors and they can mention that due to exemplary services in disposing RTI queries he could be considered for accelerated promotion,” Joshi said. While amendment to this extent in the act will require Center’s approval, Joshi said that Maharashtra can experiment and see if the effort is successful.

    “If information could be given in 15 days and all departments follow the rule instead of waiting for 30 days, then the state can set an example and then central government could take the lead and make a similar suggestion for other states,” Joshi said.

    While Joshi is happy with the massive use of the RTI by citizens he has expressed dissatisfaction in section 4 of the act which requires voluntary disclosure of information on part of government.

    NSE is a Public Authority

    High Court of Delhi in a decision dated 15th April, 2010 have held that NATIONAL STOCK EXCHANGE OF INDIA LIMITED is a “public authority” as it is an “authority or institution of self government’ constituted or established by notification or order issued by the appropriate Government. It is also held that the petitioner is controlled by the appropriate Government.

    Detailed reporting of this landmark decision will be made in the next month’s article. In Mumbai, we are moving Bombay High Court, where Writ petition is pending, to decide similarly in the matter of BSE.

Orders of The Court

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Right to Information

Part A: Orders of The Court


Public Authority : S. 2(h)


Only Public Authorities are obliged to provide information to
the citizens under the RTI Act. In January 2010 under the same title, I had
written :

“Many bodies operate primarily as service to the citizens of
India, though some of them may even be commercial or business bodies. When RTI
application is received by them, they take a view that RTI Act does not apply to
them. They contend that they are not ‘Public Authority’ (PA) as defined u/s.2(h)
the Act. Basically, such bodies need to be transparent and accountable not only
to those they deal with, but to the citizens at large.”

Matter came before the High Court of Delhi in writ petition
(civil) No. 4748 as to whether National Stock Exchange of India Ltd. is Public
Authority or not. The Full Bench decision of CIC as reported earlier in this
feature, had decided that NSE, BSE and all other stock exchanges are PA.

The definition of ‘public authority’ u/s.2(h) reads as under
:

‘public authority’ means any authority or body or institution
of self-government established or constituted :

(a) by or under the Constitution;
(b) by any other law made by Parliament;
(c) by any other law made by State Legislature; (d) by notification issued or
order made by the appropriate Government, and includes any :

(i) body owned, controlled or substantially financed;

(ii) non-Government organisation substantially financed,
directly or indirectly by funds provided by the appropriate Government.

S. 2(h) of the Act consists of two parts. The first part
states that public authority means any authority or body or institution of
self-government established or constituted by or under the Constitution, by any
enactment made by the Parliament or the State Legislature or by a Notification
issued or order made by the appropriate Government. The second part starts from
the word ‘includes’ and states that the term ‘public authority’ includes bodies
which are owned, controlled or substantially financed directly or indirectly by
funds provided by the appropriate Government and non-Government organisations
substantially financed directly or indirectly by funds provided by the
ap-propriate Government.

It is obvious that the term ‘public authority’ has been given
a broad and wide meaning not only to include bodies which are owned, controlled
or substantially financed directly or indirectly by the Government, but even
non-Government organisations, which are substantially financed directly or
indirectly by the Government. The idea, purpose and objective behind the
beneficial legislation is to make information available to citizens in respect
of organisations, which take benefit and advantage by utilising substantial
public funds. This ensures that the citizens can ask for and get information and
know on how public funds are being used and there is accountability,
transparency and openness. Even private organisations, which are enjoying
benefit of substantial funding directly or indirectly from the Governments, fall
within the definition of ‘public authorities’ under the Act.

The Court then has extensively discussed the meaning of words
such as ‘authority’, ‘substantially financed’, ‘body’, ‘institution’, etc. While
interpreting ‘establish’ the Court noted : “Thus, it cannot be said that the
only meaning of the word ‘establish’ to be found in the sense in which an
eleemosynary or another institution is founded. The word ‘established’ need not
mean the initial foundation and it includes creation, confirmation or
recognition.

Then interpreting the word ‘constituted’, the Court stated
that the word ‘constituted’ is wider than the ‘established’. The word
‘constituted’ in S. 2(h) of the Act not only refers to the first act/acts by
which a body or organisation is set up, but a subsequent act or acts which will
have the effect of conferring on an organisation or a body, a special status and
constitute a ‘body’ with status of an ‘authority’ or institution of
‘self-government’ for the purpose of S. 2(h) of the Act. A private institution
or a body may be incorporated or formed by acts of private persons, but
subsequent statutory enactment or an order or Notification issued by the
appropriate Government can result in constitution and conferring upon the said
body, status of an ‘authority’ or an institution of ‘self-government’.

National Stock Exchange (NSE) is a company incorporated on
27-11-1992. Reading from the objects as per its Memorandum, it is noted that NSE
was incorporated for the purpose of establishing a stock exchange for which it
was necessary and required that they should be registered and/or recognised
under the Securities Act. It is only after the registration or recognition under
the Securities Act that NSE could carry out any of the functions or objects for
which it was incorporated.

Once a body or an institution has got its
recognition/registration under the Securities Act, it can operate and function
as a stock exchange and perform the said public functions. Registration or
recognition u/s.4(3) of the Securities Act by the Central Government has the
effect of constituting or establishing an ‘authority’ or an institution of
‘self-government’ as defined u/s.2(h).

NSE also satisfies requirements of the second part of the S.
2(h) of the Act. It is a ‘body’ which is controlled by Central Government. It is
not possible to accept that the control exercised is merely regulatory and is
not a pervasive and deep control.

The Court then writes :

“The Apex Court in Unni Krishnan J.P. v. State of Andhra
Pradesh held that when a private body carries on public duty, as in the case of
an institution whereby recognitions and affiliations are to be granted with
conditions, Stock Exchanges are also recognised subject to various conditions.
Unlike the companies registered under the Indian Companies Act, the bye-laws of
a Stock Exchange can be amended. Even for amendment in bye-laws, the Stock
Exchange requires approval of the Central Government. The Central Government,
having regard to the provisions of the 1956 Act, as noticed hereinbefore, can
interfere in the functions of the Stock Exchanges at every stage.”

The Court finally ruled :

In view of the aforesaid findings, it is held that the
petitioner is a public authority as it is an authority or institution of
self-government constituted or established by Notification or order issued by
the appropriate Government. It is also held that the petitioner is controlled by
the appropriate Government. The writ petition accordingly has no merit and is
dismissed. However, in the facts and circumstances of the case, there will be no
order as to costs.

The above is a single-Member judgment. The same is now
challenged.

    Senior advocate Abhishek Manu Singhvi, appearing for NSE, contended that the single-Judge Bench had erred in bringing it within the ambit of the RTI Act, as it is neither a Government body nor financed by the Government.

    A Division Bench headed by acting Chief Justice Madan B. Lokur stayed the operation of a single-Bench order which had on 15th April held that stock exchanges are ‘quasi’ governmental bodies which are bound to disclose information to the public under the transparency law.

    Learned counsel accepts notice on behalf of the respondents 2 to 4. Notice may now be issued to the respondent No. 1. returnable on 3rd August, 2010.

[Writ Petition (Civil) No. 4748 of 2007 : National Stock Exchange of India Ltd. v. Central Information Commission & Others, decision dated 15-4-2010]

                                                  Part B: The RTI ACT

    Fourth Annual Report of 2009 of Maharashtra State Information Commission

Some salient features of the Report :

    The number of applications received in the State in the year 2006 were 1,23,000, in the year 2007, 3,16,000, in the year 2008, 4,16,090 and in the year 2009, 4,40,728. The number of applications in other big States is less than one lakh. At the international level the number of applications received in Britain are 90,000 and in Mexico 1,25,000, whereas the number of applications received by the Central Government are three and a half lakh. This indicates an overwhelming response to the RTI Act amongst the people of Maharashtra.

    The Right to Information Act has brought about transparency, accountability and a sense of participation with the administration. It is necessary that administration, civil services, media, non-government organisations and all other sections of society accept these newer concepts. With these objectives we can attain good governance. The RTI Act is not only limited to administrative reforms, but it is seen as an instrument for upholding constitutional fundamental rights and human rights on a larger scale. Transparency and openness have now become acceptable principles. Supplying information is the rule, whereas denying information is the exception. Similarly the desire to eradicate corruption and fight against injustice is increasing amongst citizens. The Act has been successful in curbing corruption to some extent. This is not a small achieve-ment. The feeling of helplessness of the citizen has been reduced to some extent on account of this Act. The feeling that people’s representatives and Government officers are accountable is now a well-recognised fact amongst the general public. This Act has made available a level playing field to youth, old and retired persons. Many enlightened citizens, non-government organisations are prevailing on the Government to follow policies of public interest with the help of this Act. It can be said that this Act has given birth to a new era of proactive disclosure.

    Supportive to S. 4 of the RTI Act where a public authority is required to suo moto declare certain specified information, there is a provision in the Chapter-III of the Maharashtra Government Employees Transfer Regulations and ‘Prevention of Delay in Discharging the Duties by Government Employees Act-2005’ to perform their duties as laid down in the Citizens Charter, laying down the levels of supervision and completing the Government work within the prescribed time schedule. There is also a penal provision for delay. If all these laws are read together it can be seen that legal framework has come in place in the State for good governance.

It was the first step to evolve the institutional mechanism for implementing the RTI Act. As a measure to reach more people as a part of this institutional frame work, the Government has set up Benches of the Commission at the regional level. Maharashtra is the only State in the country to take up such initiative. The Information Commissioners are deciding the cases at the district level, with a view to reach more and more citizens. As a part of this exercise Dr. Joshi, State’s Chief Information Commission-er, has personally heard 1200 appeals at Dhule, Jalgaon & Nashik.

The Commission has undertaken hearing of appeals through video conferencing. In 2009, S.I.C. Greater Mumbai has heard 913 appeals through video conferencing. The regionwise distribution is as follows :

Pune Region

…

…

…

274

Aurangabad Region

 

…

…

390

Nagpur Region

…

…

…

173

Amravati Region

…

…

…

76

Total

…

…

…

913

    State Information Commission is of the view that RTI should be a part of syllabus also.

Some statistics :

 

In respect of 36
departments in Maharashtra Mantralaya :

 

   
There are 76747 PIOs and 19016 AAs

 

   
Number of RTI applications

received
by PIOs in 2009

440728

pending
as on 1-1-2009

57107

disposed
in 2009 and

 

information provided

439061

rejected

10893

Amount collected for

 

providing
information

 

in
2009

Rs.1,23,04,361

Number of first appeals
in 2009

 

Received
in 2009

43848

Pending
as on 1-1-2009

8694

Disposed
of in 2009

45953

Disposed
positively

40908

Rejected

5045

Pending
as on 31-12-2009

6589

                                                Part C: OTHER NEWS

    Marathi film on RTI : ‘Ek Cup Chya’

One can’t believe that two hours’ film in Marathi language with English subtitle on RTI can be so interesting and absorbing that one enjoys every minute thereof while watching it.

It is Ek Cup Chya, a movie about the Right to Information Act (RTI) as an effective tool against injus-tice (the cup of tea, a symbol of hospitality being the metaphor for corruption here).

The storyline is simple : a humble state bus conductor is slapped with a heavy electricity bill. Humiliated by the bureaucracy, the family embarks on their quest for justice using RTI. “The film operates at two levels,” informs the producer. “As a family drama and as pure information. A lot of research has gone into it with inputs from activists like Aruna Roy, Arvind Kejriwal etc.”

I was the chief guest at its screening at SP Jain Insti-tute of Management on April 28. Hopefully, I shall arrange its screening in due course for all interested in watching it.

    Assets disclosure by MPs :

At least 70 Lok Sabha MPs, including former Prime Minister HD Deve Gowda, Rashtriya Janata Dal (RJD) chief Lalu Prasad and cricketer-turned-politician Navjot Singh Sidhu, have not yet disclosed details of their assets, a Right to Information (RTI) application has revealed.

The information was obtained in reply to an application filed by RTI activist Subhash Chandra Agarwal with the Lok Sabha Secretariat, seeking names of the members who have not disclosed details of their assets and wealth to the speaker.

“No action has so far been taken against defaulting members . . . . the reason for not taking any action against those Lok Sabha members who have not submitted details of assets and liabilities to the Lok Sabha speaker is the non-receipt of any complaint from any other member or any citizen of India in this regard as required under Rule 5(1) of the members of the Lok Sabha (Declaration of Assets and Liabilities) Rules, 2004.”

    Legalising alterations to the buildings :

All is not fine with the fines collected by various civic authorities in Mumbai as an RTI application filed by activist Aaftab Siddique reveals.

The building proposal department in ward H West has collected over Rs.32.25 crore between 2007 and 2009 as fine to legalise alterations, after submitting the floor plans and drawings for approval. The health department has collected fines of Rs. 33.72 lakhs only between 2000 and 2009 while the licence department has collected barely Rs.3 lakhs in the same period.

    Dues to retirees at BMC :

Data procured under RTI from various departments of the Brihanmumbai Municipal Corporation (BMC) show that dues to the tune of Rs.30.41 crore is yet to be paid to those who retired over the past four years.

RTI activist, Mr. Milind Mulay, had filed a query under RTI. When he checked with many officers at the ward level, they were not even aware of the number of people who have retired from their office in the last four years. He writes : “My mother, Vijaya Mulay retired as a nurse from the Marol Maternity Home, but the BMC made her run around for almost one year and a half and even after that, she did not get her dues. She then used the RTI Act to get her file moving.”

    Red tape at BMC :

One Mr. Sharad Jadhav has been complaining about the irregularities in awarding a licence to a café located in one of the by-lanes of Dongri in south Mum-bai. Not getting a response, Jadhav finally wrote to the state Anti-Corruption Bureau (ACB). The bureau forwarded the complaint to the Municipal Commissioner for verifying the ‘allegation’ that the civic officials had turned a Nelson’s Eye to Sadguru Café’s illegal construction.

When no action was forthcoming from BMC, Jadhav filed an RTI application to find out about the status of his complaint. Reply received stated : “The BMC cannot give information on the subject as it never received any such letter from the ACB office.” After much criticism in the media, the police officials finally claimed that they had ‘found it’.

Right to Information

Part A : Decisions of CIC

 S. 2(h) of the RTI Act :

    Many bodies operate primarily as service to the citizens of India, though some of them may be even commercial or business bodies. When RTI application is received by them, they take a view that RTI Act does not apply to them. They contend that they are not ‘Public Authority’ (PA) as defined u/s.2(h) the Act.

    Basically, such bodies need to be transparent and accountable not only to those they deal with, but to the citizens at large. Such bodies include co-operative societies, NGOs, various educational and medical institutions and so on.

    One may appreciate if the RTI application is mischievous in nature or is for harassment, and the body takes the view that it is not a PA, but not when citizen requests for information which leads the body to become more transparent and accountable.

    Matter came before Central Information Commission in respect of (1) LIC Housing Finance Ltd. (LICHF) (2) LIC Mutual Fund Asset Management Co. Ltd. (LICMF) and (3) G.I. Housing Finance Ltd. (GIHF). Applications and complaints are filed by 10 individuals and the decision is given by 3-member bench of Chief IC and two other ICS.

    All above 3 bodies took the view that they are not PA and refused to provide the information sought.

    Facts of the above three bodies are as under :

    LICHF : It is a Public Ltd. Company. 45.918% of shares are owned by LIC (40.497 %) and three other PSUs.

    LICMF : It is a Public Ltd. Company. LICMF made detailed submissions and based on 16 submissions made, stated that it is not PA. The same included : It is purely a business/commercial entity, it is not a Government Company as defined u/s.617 of the Cos. Act and the shares held by LIC in it are not even 50%.

    GIHF : Government-owned companies hold 47.7% of total shares, directorship on its Board is linked to the tenure of the respective Director with a Government-owned or controlled organisation.

    Decision :

    CIC held that the above facts are sufficient enough to bring these three bodies within the definition of the term ‘substantially financed’ as in S. 2(h)(d)(ii).

    CIC also noted that ‘Substantially financed’ does not mean more than fifty percent financed or majority shareholding by the Appropriate Government.

    It also held that :

  •      It can be inferred that the control of LIC over LICHFL is explicit and effective.

  •      LICMF is administratively controlled by the LIC of India.

  •      GICMF is controlled by six Public Authorities.

    Hence, it held : “In view of the above observations and findings, we decide that all the three respondents, LIC Housing Finance Limited, LIC Mutual Fund Asset Management Co. Limited & GIC Housing Finance Limited are ‘Public Authorities’ under the RTI Act. All of them are, therefore, obliged to take all necessary steps to carry out their duties and responsibilities assigned by the Act. Insofar as these appeals/complaints are concerned, the Commission directs the respondents to provide the requested information to the concerned applicants within a period of three weeks from the date of receipt of this decision.

    [10 Appellants & Complainants v. LIC Housing Finance Ltd., LIC Mutual Fund Asset Management Co. Ltd. and G.I. Housing Finance Ltd. decided on 28-10-2009]

Travel and medical expenses of the President of India : S. 7(9) of the RTI Act :

    The appellant, Shri Chetan Kothari of Mumbai, in four different appeals sought information regarding travel and medical expenses of (a) the President of India (b) Vice-President of India, and (c) The Prime Minister of India.

    Hereunder are covered two appeals re. (a) above. He had sought the above information not just for the incumbent but also for the earlier Presidents with break-up of each covering 11 Presidents starting with Dr. Rajendra Prasad and ending with Smt. Pratibha Patil. Also break-up for the period when they were not serving as President of India.

    CPIO responded as under :

    “The information asked for would have to be compiled and would disproportionately divert the resources of public authority and will be detrimental to the normal functioning of the office.”

    CIC while deciding the matter read out the contents of S. 7(9) to CPIO of the President’s Secretariat and asked him to identify under what clause of the Act he was authorised to actually refuse information sought, since this clause deals only with the option of providing information in a form other than that asked for. CPIO Shri F. A. Kidwai submitted that according to his understanding this clause entitled the CPIO to refuse the information if it would disproportionately divert the resources of the public authority or would be detrimental to the safety or preservation of the record in question.

    Decision Notice :

    Ss.(9) of S. 7 does not authorise a CPIO to refuse information under the RTI Act, but only allows him to provide the information sought in a form other than that sought. The best way of doing this is to interact with the appellant and provide him the information in alternative form. The decision of the CPIO in both applications to the President’s Secretariat is, therefore, invalid and inasmuch as it is supported in the order of the Appellate Authority, both orders of the Appellate Authority Ms. Chaube are set aside.

    In the normal course, the orders of the President’s Secretariat would have been set aside and it would have been directed to consider the appellant’s two RTI applications of 9-2-2008 and 29-5-2008 afresh. However, since the Ministries holding information sought are different to the President’s Secretariat as elaborated by Ms. Rasika Chaube in her order of 14-7-2008, the applications are now transferred to the CPIOs of Ministry of Health, Ministry of External Affairs and Ministry of Defence who will process these applications in response to the RTI applications made to them directly by Shri Chetan Kothari. Appeals concerning the President’s Secretariat are, therefore, allowed, but without cost.

    (Note : The above reporting covers decision on two out of four appeals. Other two for the expenses on the VP of India and on the PM of India are not covered in this issue.)

Part B : The RTI Act

Continuing from October to December BCAJ, the summary of two reports :

One study by PricewaterhouseCoopers (PWC) as appointed by the Department of Personnel and Training (DOPT), titled ‘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’. Its interim findings are published in October 2008.

DOPT-PWC Report :

Improving efficiencies at Information Commission :

The appeal process is a key component of the RTI Act. It is one of the controls established to ensure that the information is provided to common citizens.

Key issues observed :

Any person who does not receive a decision within the time specified in Ss.(1) or clause (a) of Ss.(3) of S. 7, or is aggrieved by a decision of the Public Information Officer may, within thirty days from the receipt of decision, appeal to an officer who is senior in rank in each Public Authority — commonly referred as the First Appellate Authority [S. 19(1)]. A second appeal against the decision shall lie within ninety days from the date on which the decision should have been made or was actually received, by the Central/State Information Commission [S. 19(3)]. However, there are significant challenges observed at the Information Commission. The findings of the study were as follows :

  •  Large pendency of cases with a wait time of 4-12 months existed in most of the States. This discouraged people from filing appeals.

  • Information seeker survey pointed out that 47% of the citizens did not receive replies to their RTI application with 30 days.

  • Appellants had to incur expenses to attend the hearing of second appeals at Information Commission. As per S. 19(8)(b), the Information Commission may require the Public Authority to compensate the complainant for any loss or other detriment suffered. However whether this clause can be invoked for compensating the travel expenses of the appellants is an area of contention and was not observed during the study.

The adjudicatory role of the Appellate Authority is critical in making this Act a success. As per the estimates, projected numbers of the secondary appeals would grow to 2.5-3.0 lakhs by the year 2011. This would require developing innovative ways to dispose of cases, without diluting the rights of either party.

Recommendations :

Improving the disposal rate of complaints/appeals by the Information Commission through the following recommendations :

  • Hearings through video conferencing : Since the Information Commissions are situated in State capitals (with exceptions like Maharashtra), it is inconvenient for applicants to be present during the scheduled hearing. This problem assumes significance in cases of matters pertaining to the Central Government, where the appellant has to travel to New Delhi. It is proposed that the Information Commissions use video conferencing (VC) as a mode of communication for such hearings. VC facility is available at each district headquarter which may be used for this purpose.

  •  The CIC, as per S. 12(7) and SIC, as per S. 15(7), with the approval of the appropriate Government should open offices at other locations, so as to reach out to the masses.

  •  Passing order on merit of the case without hearing. This would address issues of rescheduling the hearing, in case of absence of the appellant or the PIO.

  •  Usage of software application for managing the processes at the Information Commission. This application  should  assist  in  improving productivity/efficiency in disposal of cases, drafting of orders, day-to-day office administration etc.

Further the recommendations on other important issues are as follows :

  •  Composition of Information Commissions : As per the S. 12(5) and S. 15(5), the composition should be such that it should have people with wide knowledge and experience in law, science and technology, social service, management, journalism, mass media or administration and governance. To implement these sections in spirit, it is recommended that the people who have worked in Government should be restricted to 50% (if not less) as recommended in the ARC report.

  •  To facilitate the induction of the new Commissioner, where he/she does not have a back-ground of law/quasi-judicial role, he/she should go through an induction period before assuming full charge.

  •  Usage of RTI-compliant standard templates should ensure quick and reasoned orders to the appellant. It may be noted that the templates have a strong linkage to the Act and leave little room for errors.

Raag & NCPRI Report :

Current status and preliminary findings :

4) RTI case studies :

RAAG has now collected some 5,000 case studies from across the country in a further effort to understand who is using the Act, to what end, and what the outcomes have been. While thus far, case studies have been culled primarily from the national Hindi and English press, and by looking at relevant websites, mailing lists and blogs, attention is now turning to collecting more stories from the vernacular press as well.

These case studies show myriads of citizens using the Act in previously unknown ways, disproving the misperception that only RTI activists use the Act. Since the Act was born from people’s needs, it has been branching out continually as more and more people use it. For example, while it may strengthen some people’s Right to Life by helping them answer ration-related questions; it also helps others close down a polluting factory. In some cases, applicants faced threats, not all of which were ‘paper tigers’. In others, a larger group came forward to support an individual’s application. There are even interesting cases of Internet users forming their own online RTI support groups to help each other fill applications.

Similarly, there are extremely encouraging stories of RTI success by individuals or groups that are generally stonewalled by the Government, such as women, SCs and STs, people coping with physical challenges. Examples include economically-weaker sections using it to get school admissions for their children, a visually-challenged person using it to question his village panchayat, a ninety-year-old woman to get her passport, and supposed beneficiaries of the Indira Awas Yojna to avail of this scheme.

Other stories are emanating directly from field groups throughout the country. Many people’s movements, citizens’ groups, and non-governmental organisations now rest their work heavily on the Right to Information Act, using it for broader societal purposes.

In other words, RTI activism does not stand in isolation, but is being used as a potent instrument to improve governance and transparency across a variety of issues, including the Public Distribution System, municipalities, elections, trade unions, genetically-modified foods, dams, and the National Rural Employment Guarantee Act.

Cases of particular interest are being culled out and sent for rewriting, to make them more readable from the human interest angle. These will then be compiled into a compendium to be released in January. The RAAG team is also hoping to commission an author to write a novel featuring the Right to Information Act. These case studies will also become the basis for a play on the Right to Information Act, to be performed in January.

5) Website survey of S. 4 compliance :

As mentioned earlier, the departmental websites of the 240 state and district-level Public Authorities covered in the urban survey are also being evaluated for S. 4 compliance. This is to ascertain whether Public Authorities have begun to ‘pro-actively’ report the detailed operational, financial, and service-related information the Act requires of them.

The website survey of all 240 state and district-level sample Public Authorities is now half-way done.
 
One of the major findings of this ‘work in progress’ is that most S. 4-related information is not found on the website of the Public Authority itself as would be most logical, but on the State or Central RTI portal. Many websites also have frequent connectivity problems, making it difficult for citizens to use them to find the information they are seeking. There are also significant differences in the quality and depth of websites across States, with some providing extremely detailed and insightful information to citizens, while others provide almost nothing. However, a general pattern is that State Government websites tend to contain more information than District Government websites.

6) Survey of RTI coverage by the media :

As mentioned earlier, the People’s RTI Assessment is analysing the role that the print media has played as a disseminator and user of the Act. Leading newspapers and magazines in over ten states (Bihar, Goa, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Uttarakhand, Tamil Nadu), as also leading national English and Hindi publications are being analysed. Each state analysis is being undertaken by a partner organisation or individual.

This national analysis of the media is intended to answer the following questions :

  •  How much coverage have different publications given to RTI-related issues and cases ?

  • What role have different publications played in raising public awareness about the RTI Act and its use ?

  •  What tone and approach have different publications assumed vis-à-vis the RTI Act ?

  • Have newspapers, magazines and other publications used the RTI as a tool for investigative journalism, and have they found it useful ?

  •  What does the Indian media establishment (i.e., owners, editors and journalists) think of the RTI Act ?

  •  Has the Indian media establishment begun to internalise the RTI in letter and/or spirit by enhancing the transparency of their own functioning ?

Additionally, State partners are collecting clippings of all RTI coverage in their States, and RAAG intends to upload this entire collection onto a national People’s RTI Assessment portal.

Status — This analysis is now half-way done, and State partners are beginning to send in the first draft for their analysis reports. From a cursory review of these, it appears that RTI coverage of the media is not as intense as might be assumed, and that many journalists are still learning how to use the RTI for investigative purposes.

State media survey consultants will now begin the process of interviewing editors, journalists, and media house owners to determine their perceptions about the RTI and its potential impact in India. The final analysis report should be complete by late December 2008.


Part C : Other News

Important pronouncements by the Commission :

When Shailesh Gandhi, CIC was in BCAS office addressing RTI activists and journalists, he distributed compilation of 8 important profound pro-nouncements by the Central Information Commission.

In this part, the first is being covered, others to be followed in subsequent issues :

1. No imagined exemptions :

This Commission is conscious of the fact that it has been established under the Act and being an adjudication 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 is stated explicitly. There is absolutely no ambiguity in the Act and tinkering with it in the name of larger public interest is beyond the scope of the adjudicating authorities. Creating new exemptions by the adjudicating authorities 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 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.

Undiplomatic disclosures :

Soli Sorabjee under ‘Soli LOQUIES’ writes in Sun-day Express of 25-10-2009 (extracts) :

Thanks to the freedom of Information Act in the UK, there have been startling revelations in the release of letters written by British ambassadors about foreign governments and the people of the country where they had been stationed.

The most devastating assessment was in a 1967 memo by Roger Pinsent, Britain’s ambassador to Nicaragua, stating that “the average Nicaraguan is one of the most dishonest, unreliable, violent and alcoholic of Latin Americans”. The letters are brutally frank but certainly not diplomatic. A successful application under our RTI Act for disclosure of assessments made by our diplomats about countries where they were posted would be very illuminating. The problem is that any disparaging criticism, even if true, would be withheld by timorous babus because of likely potential damage to foreign relations with other countries. Unfortunately, satyameva jayate has no place in these matters.

Unauthorised alterations in the flat :

One, Ms. Kanika Golder, was put in the dock by her housing society after she made unauthorised alterations in her flat purchased on the 20th floor of the storeyed Shivalaya Residency Co-operative Housing Society in Thakur Complex, Kandivli (E). She took the RTI route to find out that almost every neighbour of hers had also made such unauthorised constructions. But after follow-ups with the BMC failed to yield any result, she approached the Bombay High Court.

A report submitted by the BMC to the Court admit-ted that almost every flat holder had illegally encroached upon the corridor up to the lift door. There was an amalgamation of flats and major alteration inside the flats. The refuge area has also been encroached upon. Even though the BMC tried to argue that the illegalities cropped up at the time of construction, a Division Bench of Justices Ranjana Desai and Mridula Bhatkar ruled, “We are not concerned with the question as to whose instance the encroachment is done. If there is any encroachment, it should be removed immediately, because if the area outside the lift is encroached upon, in case of fire or other such calamity, it may prove hazardous. If the refuge area is occupied, it is also dangerous to the housing society,” the order said.

When the Court came down heavily on the civic body, the BMC begun action by demolishing certain portions in the tower.

RTI helps retired Government employees to get their dues :

RTI activist, Milind Mulay, was prompted to file the RTI query as his mother, Vijaya S. Mulay, who re-tired as a nurse from Marol Maternity Home, did not get her dues for over one and a half years. “I was made to run from pillar to post, but they found a new excuse every day,” Mulay said.

RTI replies had revealed that the leave encashment dues of many employees had remained unpaid.

In a Circular dated November 10, the State Finance Department ordered that full payment should be made to the retired government employees. The Circular also said that excuses like not having full details (like the revised pay) should not be used to delay payments.

The payment should be made in full and at one stroke. If there is any difference in the amount because of revised dues, even that should be given in the lump sum instead of in part payments, the Circular said.

In the Fire Brigade alone, 41 firemen had not been paid leave encashment dues for three years.

The RTI replies revealed that around Rs.6.81 crore have been pending in dues to the 787 employees. Fourteen municipal wards alone are sitting on the files of 308 employees.

A senior fire officer who won the President’s Gallantry Award for meritorious service said that “for around one and a half year he was curtly asked to call up later. Many Fire Officers and firemen like me did not take leave for months together, working seven days a week. But this is the way the department has rewarded us”.

RTI and emails at BMC :

BMC is trying to make it easier for citizens to file online complaints to officers. RTI reply showed that only 40% of BMC personnel used their official email IDs.

The Chief Minister has now in the Circular dated November 9, instructed personnel in all government departments, including the civic corporation, to use their official email IDs for departmental communication, especially in instances where files get stuck for months together.

The BMC now plans to make all official IDs according to the officer’s post (or office) and not his or her name. These way complaints from the public will reach the new officer even if the old one is transferred. BMC officials admitted that the civic corporation has done little to promote the use of online facilities among employees or citizens. There are now plans to bring out pamphlets with the details of all official email IDs. “We will also provide the email IDs in the civic guide,” an official said.

RTI replies on BMC employees Internet usage pat-terns had revealed that in a 20-day period only around 40% of personnel actually used their official e-mail IDs. Data provided by the BMC’s IT cell showed that while 2,897 official IDs were created by the department, an average of only 1,172 emails were sent daily. Further,

  • An average of 312 e-mails bounced back and 47 were rejected from official IDs every day;

  • A senior BMC official has said that only 1% of civic Public Information Officers have official e-mail IDs.


Rs.5, 000 demanded for reply in about 45 pages to RTI application :

The Delhi University (DU) seems to be taking sides when it comes to answering queries through the Right to Information Act. Months after Amitabh Amit, a civil servant and ex-DU student, alleged that two DU professors — including PM Manmohan Singh’s daughter Upinder — victimised him for objecting to an ‘anti-culture’ essay in the course, the varsity has sent him a bill of Rs.5, 000 to cover costs incurred to answer the question.

In reply to a fresh RTI application filed by Amit, District Information and Public Information Officer, DU said they spent the sum on typing and photo-copying information to answer his earlier query about Professor Singh, and only after receiving the amount due for the previous query, will it be pos-sible to entertain further questions.

DU’s late realisation has surprised Amit. “I am being victimised because I dared to question the PM’s daughter. Even if you consider all the answers sent to me, they will not be more than eight to nine replies of four to five pages each. I don’t know how they charged me Rs.5,000,” he said.

According to RTI activist, the usual charge for an RTI reply is Rs.2 per page. Therefore, Amit should not have been charged more than Rs.90.

Details on Judges’ appointment :

The Supreme Court on December 4 stayed an order of the Central Information Commission (CIC) to the Apex Court to make public details of discussions in the collegium relating to appointment of Judges and the correspondence between the Chief Justice of India and another Judge relating to alleged interference of a Union Minister in a pending case.

Accepting Attorney General G. E. Vahanvati’s suggestion that the matter was of grave importance and required threadbare scrutiny, a Bench issued notice to RTI applicant S. C. Agrawal and posted the matter for hearing after five weeks.

This marks the beginning of the SC’s maiden judicial journey to examine the impact of the RTI on the happenings in the inner sanctum of the highest echelon of judiciary relating to administration of justice, which had been traditionally kept away from public knowledge.

An important clarification came from the Bench before it embarked on the journey — “there is no backtracking on right to information”. Probably, it was hinting at the recent decision of Judges of the Apex Court to put their assets and liabilities on the official SC website.

Appearing for the RTI applicant, Counsel Prashant Bhushan said it was the SC which had got the ac-colades for pushing the right of a citizen to access information. But, a perception is gaining ground that when it came to enforcing the right to information on judiciary, the SC was backtracking.

A firm assurance came from the Bench that the judiciary was not against the citizen’s right to information. It said : “You can take it from us that there is no backtracking on the right to information. We will examine the issue threadbare”.

Assailing the direction to make public information which was available only with the CJI, the SC, in its two petitions, said the CJI held the information pertaining to the appointment of Judges in a fiduciary capacity. So it should be exempted from the public under the RTI Act.

Endorsement of food products of Pepsi :

A RTI battle by a doctor against his colleagues for endorsing two Pepsi products had made the Central Information Commission (CIC) sit up and direct the Medical Council of India (MCI), a statutory body to regulate standards of medical practice in the country, to take up the issue with their Ethics Committee.

The Indian Medical Association (IMA) had, under a cloud of controversy, gone ahead and given its seal of approval to Pepsi’s Tropicana fruit juices and Quaker cereals. Dr. K. V. Babu, a native of Kannur district in Kerala and a life member with the IMA, chose to stand back from his fellowmen to question how ethical is it for doctors to support Pepsi’s commercial products. He took his queries right up to the CIC after the MCI and later the Ministry of Health and Family Welfare passed the buck from one to the other. “IMA is endorsing food products of Pepsi and that such endorsement is unethical,” Information Commissioner Annapruna Dixit voiced Babu’s questions in a recent hearing, later recorded in her order.

“He requests clarification since he is an IMA member. He wants to know whether endorsement of a commercial product by a medical organisation is unethical or not,” the Commissioner explained.

She directed the Medical Council “to place the issue before the Ethics Committee at its next meeting and to inform Dr. Babu the decision taken by the committee” by December end 2009. The Commission ordered the Public Information Officer, IMA, to furnish necessary information to the doctor by December 15.

Right to Information

Part A: Decision of CIC

Section 8(1)(b), (d), (e), (h) and (j)
    Mr. Rakesh Kumar Gupta of Delhi has sought information regarding matters relating to the income tax of eight parties: (a) Three limited companies including Escorts Ltd (b) Three centers of Escorts Heart Institutes & Research, and (c) Mr. Rajan Nanda and Dr. Naresh Trehan.

    Both the PIO and FAA refused to grant information, holding that the information related to third parties, and the third parties, in reply to the notice issued to them, had strongly objected the disclosure of information relating to their income tax records.

    According to the PIO, the applicant was not able to substantiate as to what the overriding public interest in disclosing the information relating to third parties is, and that unless the case of public interest is established, the disclosure would lead to an invasion of privacy of the assessees.

    It was easy for the Commission to take the decision that clauses (b)(d), (e) and (h) do not apply to this case. The said clauses cover (b) Information forbidden to be published by any court of law, etc. (d) Information which is in the nature of trade secrets, intellectual property, etc. (e) Information held in a fiduciary relationship, etc. (h) Information which would impede the process of investigation, etc.

    However, as to applicability of clause (j), the ‘order’ discusses the issue in detail and takes a view contrary to the view taken by many earlier decisions of the Commission. The said clause 8 (1)(j) provides the following: Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen information, which relates to personal information, the disclosure of which has no relation to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information. Provided that the information which cannot be denied to the Parliament or a State Legislature shall not be denied to any person.

    As the subject matter of this case is of interest to the profession and as it is a landmark decision, I reproduce this part of the decision almost completely:

    “The final exemption claimed by the Department as in the case of Dr. Naresh Trehan and three other third parties is under the Section 8(1)(j). The three other third parties are the Escorts Heart Institute and Research Centre, Delhi, Escorts Heart Institute and Research Centre, Chandigarh, and Escorts Heart Institute and Research Centre Ltd. Section 8(1)(j) is with regard to personal information and, therefore, it can only be claimed by natural persons and not by corporate entities. The three institutes cannot claim to have ‘personal’ information. There is a difference between having a personality, i.e., a legal personality, and owning ‘personal information’. Personal information is information relating to a natural person, not a legal person. Words in a law should normally be given, including the meanings, in common language. In common language, we would ascribe the adjective ‘personal’ to be an attribute, which applies to an individual and not to an institution or a corporate body. From this, it flows that ‘personal’ cannot be related to institutions, organisations or corporates. Hence Section 8(1)(j) cannot be applied when the information concerns institutions, organisations or corporates. Therefore, the Commission is of the opinion that Section 8(1)(j) cannot be relied on by these three third parties, as they are not natural persons.

    With regard to the information relating to Dr. Naresh Trehan, it has been argued by his representative that the information sought is personal as it contains personal financial information of the assessee, including various assets, income and expenditure and the disclosure of this information has no relationship with any public activity or interest. It has been alleged that the information has been sought with ill will and malice, with the motive to harass and blackmail the assessee. Furthermore, the Appellant is likely to misuse the information and could endanger the life and property of the assessee if the information goes in the hands of unsocial elements. There is no larger public interest served in disclosing this information to the Appellant.

    The Commission has considered the submissions made by the Appellant, the Department and the representative of Dr. Naresh Trehan. To qualify for this exemption, the information must satisfy the following criteria:

    1. It must be personal information.

    There is no doubt that information with regard to Dr. Naresh Trehan is personal information.

    2. It must not have been disclosed to the public authority as part of a public activity

    The phrase ‘disclosure of which has no relationship to any public activity or interest’ means that the information must have been given in the course of a public activity. Various public authorities, in performing their functions, routinely ask for ‘personal’ information from citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a public authority as an employee, or asks for permission, licence or authorisation, all these are public activities. Also when a citizen provides information in discharge of a statutory obligation, this too is a public activity. Therefore, information provided by an assessee to the department for purposes of income tax assessment is information disclosed in relation to a public activity and therefore this part of Section 8(1)(j) is inapplicable in the present case..

    3. The disclosure of the information would lead to unwarranted invasion of the privacy of the individual.

    Certain human rights such as liberty, freedom of expression or right to life are universal and therefore, would apply uniformly to all human beings worldwide. However, the concept of ‘privacy’ is a cultural notion, related to social norms, and different societies would look at these differently. Therefore referring to laws of other countries to define ‘privacy’ cannot be considered a valid exercise to constrain the citizen’s fundamental Right to Information in India.

    Parliament has not codified the right to privacy so far, hence in balancing the Right to Information of Citizens and the individual’s Right to Privacy, the Citizen’s Right to Information would be given greater weightage.

    The State has no right to invade the privacy of an individual. There are some extraordinary situations where the State may be allowed to invade the privacy of a citizen. In those circumstances, special provisions of the law apply; usually with certain safeguards.

    Therefore, where the State routinely obtains information from citizens, this information is in relationship to a public activity and will not be an intrusion on privacy. As this information has been provided by the assessee to meet his legal obligations, there is no unwarranted invasion of his privacy by the state. Therefore the disclosure of the same information to another person cannot be construed as being an unwarranted invasion of the privacy of the individual.

    Given our dismal record of misgovernance and rampant corruption which conspires to deny citizens their essential rights and dignity, it is in the fitness of things that the Citizen’s Right to Information is given greater primacy with regard to privacy.

    Hence information provided by individuals in fulfillment of statutory requirements will not be covered by the exemption under Section 8 (1) (j).

    It has come out during the hearing before the Commission, – and through the submissions made by the various parties, – that the Appellant is an informer for the Department. Escorts has also raised the matter in its written submissions of 17 September 2009, and asked the Commission to decide, ‘Whether an informer of the I.T. department can seek information in respect of the records of a third party for an ulterior motive?’ The ulterior motive being referred to appears to be the reward money, which the appellant might get.

    The Appellant has given a list of additions made by various Tax evasion officers relating to the information being sought by him”

    The Order then gives details of such additions (same are not reproduced here) running into crores of rupees.

    Thus, the appellant has pointed out that Assessing officers have added hundreds of crores as additional income and CIT (A) has also confirmed some of them. He fears that a lot of alleged tax evasion will go unpunished, leading to a loss of revenue and perhaps his reward money. If citizens monitor this through RTI, it could be a major gain for public revenue and perhaps a good check on corrupt officials.

    Based on above, Commission directed PIO to provide the inspection of the records and also the other information sought by the appellant before 15th January 2009.

    [Mr. Rakesh Kumar Gupta vs. The PIO c/o CIT (Central)-2 New Delhi: No. CIC/ LS/A/2009/000647/SG/5887 of 14-12-2009]

Part B:  The RTI Act
Continuing from October to January BCAJ, the summary of two reports:

One
study by PricewaterhouseCoopers (PWC) as appointed by the Department of
Personnel and Training (DOPT), titled “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 a number of other social
bodies including TISS, Mumbai under the title “Safeguarding the Right to
Information”.

    DOPT-PWC Report:

Institutionalising third party audit

It
is strongly felt that in the absence of a strong review mechanism,
there is a high probability that the level of RTI implementation would
regress to lower levels.

Key issues observed

Some of the key facts observed during the study:

  
 Limited infrastructure/processes with SIC to carry out
responsibilities under Sections 19(8) (a), 25(1), 25(2), 25(3f) 25(3g)
and 25(5), leading to non-compliance by PAs with regard to RTI
provisions.
 

    No/inadequate mechanism for monitoring
proactive disclosure, resulting in low compliance to Section 4(1b) of
the RTI Act (65% of the PAs have not published their proactive
disclosure on the websites).

    Non-adherence to service levels of 30 days causing delay in providing information to the RTI applicant.

    Recommendations

  
 To ensure better service delivery by authorities and officials, third
party audits should be institutionalized to support the Information
Commission in carrying out responsibilities under Sections 19(8)(a),
25(1), 25(2), 25(3f), 25(3g) and 25(5). Institutionalising regular
audits would facilitate the Public Authorities’ compliance with the RTI
Act (through the audit findings made available by Information
Commission). In this context, it is recommended to have a third party
audit (at least annually) to support the Information Commissions and RTI
Implementation Cell to monitor the performance of Public Authorities
and to take appropriate action in case of any deviation.

  
 Moreover, it is also suggested that the SIC website should have a list
of all the Public Authorities within the jurisdiction of the Information
Commission. The website should have a feature for citizens to report
noncompliance (through tick-mark options) for a Public Authority. The
reports generated through this application, would be helpful for a
Public Authority and the Information Commission to take appropriate
actions.

    Raag & NCPRI Report:

Current status and Preliminary Findings:

(7) RTI and the Courts

This
component is compiling data on court cases, in which appellants have
challenged State or Central Information Commissions. Analysis is being
driven by the following questions:

    What types of CIC and SIC rejections are being taken to the High Court and to the Supreme Court?

    What types of appellants are tending to do this?

    How quickly is the higher judiciary resolving these cases?

  
 Have judicial rulings, by and large, upheld the spirit of the RTI? In
which cases have judicial rulings tended to be in favour of appellants,
and in which against?

    Has the referral of such cases to the
court influenced the offending public authority to provide requested
information, even if there is a judicial ruling?

Preliminary findings

Status
– This analysis has commenced with a review of RTI cases in the Delhi
High Court. Since many of the appeals heard by the Central Information
Commission are referred to the Delhi High Court, this makes it potential
representative of the RTI cases being heard by other High Courts as
well. Additionally, many Delhi Right to Information Act cases are
currently also lying before the Delhi High Court.

While 18
RTI cases have been located in the Delhi High Court records so far, only
15 of these have been selected for examination for analysis for the
Interim Report. These were filed before the Delhi High Court and Supreme
Court of India from 2006 to 2008.

In most of these cases,
the applicant—and not the Government—has taken the case to Court. Only
in four cases has the Union of India (UOI) approached the Courts. Even
though the sample size is small, a preliminary analysis reveals that the
Courts have shown sensitivity by admitting Writ petitions that
challenge the decisions of the Central Information Commission. However,
it must be pointed out that it is premature to comment upon the normal
outcome of such cases given that very few have as yet been decided.

But
given the way cases have been progressing, it can be inferred that many
RTI cases are pursued much like regular cases, in a “run of the mill”
manner. In one pending case, in which the applicant sought information
about the responsibilities of MCD officials charged with cleaning public
places of a certain village of Delhi, the judiciary has ignored the
public cause involved and MCD threats to the applicant and his family.
The case has lain before court for more than 1.5 years.

However,
in other cases, landmark judgments have been made, and that too
expeditiously, pointing to the beginning of systemic change in the
judiciary’s approach to RTI. One such is the Bhagat Singh vs. CIC &
Income Tax Department of Dec 2007, in which the judgement is liberal. It
interprets the exemption to information disclosure under Sec 8 (1) (h)
that disallows disclosure on the ground that “information which would
impede the process of investigation or apprehension or prosecution of
offenders”. The judgment is particularly important as it sets a
precedent and strongly supports the spirit and underlying principles of
the Right to Information Law. Further, the judgment was delivered within
8 months of its filing.


    RTI and International Donors

Background:
While international donors fund social, infrastructural, and
institutional capacity -building activity, they have historically only
been required to report to the Indian Government. Resultantly, citizens
often have little information or say in how these programmes work or the
impact they have.

This component of the study is studying donor
disclosure policies to understand what kinds of information they require
donors to share directly with the Indian public, how these policies
compare with the requirements that the Right to Information Act places
upon Indian public authorities, and how the Right to Information Act is
shaping donor thinking on this issue. The analysis will also examine
donor disclosure policies in practice, and whether donors are sharing
the maximum information permissible or just their minimum requirement.
Also being studied is donor spending on RTI programmes in India, to
understand the manner in which they are attempting to influence the RTI
regime in the country.

Eleven international donors are being
studied, including nine of the largest multilateral and bilateral
government donors to India (World Bank, Asian Development Bank, Japanese
Bank for Inter-national Cooperation, GTZ, Russians, United Nations
Development Programme, European Union, DFID and USAID) and two of the
world’s largest private grant -giving foundations with operations in
India (Bill and Melissa Gates Foundation, Ford Foundation).

Research
comprises a desk review of the public information disclosure policies
and practices of the selected international donors, complemented by
face-to -face interviews with key stakeholders (including international
donors’ governance and accountability advisors in India, government
officials, beneficiaries, and members of the public).

Research is
still at a preliminary stage, although the desk review of information
disclosure policies and practices of all donors is now almost complete.

Early findings

  •   
     UNDP, ADB and World Bank disclosure policies were easily available on
    the Internet; other donors’ disclosure policies were not so easily found

  •   
     While UNDP’s, ADB’s and the World Bank’s public disclosure policies
    have undergone a series of revisions, ADB was the first to revise its
    policy following stakeholder consultations.

  •     With respect to information that is exempt from disclosure:

 UNDP – Broad definition of exceptions

 ADB – well defined list

 WB – everything else apart from documents about WB strategies and programmes is denied / discretionary

 UNDP,
ADB and the World Bank all provide a list of documents related to their
operations (strategies, programmes and projects), but only ADB’s policy
appears to have a presumption in favour of disclosure.

Part C : Others News

Important Pronouncements by the Commission :

When
Shailesh Gandhi, CIC, was in the BCAS office addressing RTI activists
and journalists, he distributed compilation of 8 important and pro-found
pronouncements by the Central Information Commission (Continuing from
January 2010)

2. Alternative routes to access information

No
Claim has been made by the PIO of any exemption under the RTI Act to
deny the information. If a public authority has a process by a Citizen
other than the route provided by the Right to Information Act, it is the
Citizens’ right to decide which route he wishes to use. The existence
of another method of accessing information cannot deny the Citizen his
freedom to use his fundamental right codified under the Right to
Information Act. If Parliament wanted to restrict his right, it would
have been stated in the law. Nobody else has the right to constrain the
rights of the Citizen.

There is no Provision in the Right to
Information Act, which restrains the Citizen’s right to use it, if
another route to access information has been of-fered or is available.
It is a Citizen’s right to use the most convenient and efficacious means
avail-able to him.

    Section 2(h) of the RTI Act

In
the last issue of BCAJ, under Part A, was cov-ered the Order of CIC on
section 2(h). I had there mentioned that many bodies operate primarily
as service to the citizens of India but they take a negative view that
they are not covered under section 2(h) and hence RTI Act does not apply
to them.

    It is reported that following bodies disputing
application of RTI to them are now held by Delhi H.C to be covered under
RTI Act.

  •     Indian Olympic Association

  •     The  Commonwealth  Games  Organizing Committee

  •     Sanskriti School

Justice Bhat stated:

The
RTI Act recognizes that non-state actors may have responsibilities of
disclosing information which would be useful and necessary for the
people they serve as it furthers the process of empowerment, assures
transparency and makes democracy respon-sive and meaningful.

  
 CIC has ruled that the Bar Councils are covered under the RTI Act and
they have been directed to set-up a mechanized for operation of RTI.
CIC’s decision is based on the fact that Bar Councils are set-up under
the Advocate Act 1961, Passed by Parliament.

    Against above rulings, it is interesting to note what happened in the Supreme Court early in January’10

The
Supreme Court stayed the Orissa high court order, which had upheld a
2006 order of Naveen Patnaik government bringing Reliance Power owned
two power distribution companies under the purview of RTI Act.

The
advocate of the power distribution companies argued before the Supreme
Court that the RTI Act was applicable only to “public authority”, the
meaning of which was erroneously expanded by the government and agreed
to by the HC to include the power distribution companies under the RTI
Act.

In this connection remarks of Hon. Justice Chandra-chud as
reported in BCAJ of Dec 09 (Page 117) are very relevant. He said:
“Definition of ‘Information’ given in the Act, covers information
relating to any private body which can be accessed by a Public Authority
under any other law for the time being in force”. Thus, what can be
accessed by Public Authority can be accessed by any individual citizen
also. Therefore, though the implementation is presently focused on
Public governance or Public officials, it has to be extended to private
governance in course of time.


    Missing File
 

nine
applicants got jobs with various central government organisations,
1,993 applicants got placement in state government offices,
quasi-government and local bodies affiliated to the state and the
central government provided placement to 1,265 applicants and 1,115
placements came from private sector.

“The exchange does not give
jobs to lakhs of educated youngsters. Only a lucky few get placements.
They have become irrelevant in today’s privatised economy,” said RTI
economist Chetan Kothari who had filed a query.

    The Judgement of the Courts

The
Supreme Court ruled that the judge cannot be asked under the RTI Act as
to why and how he came to a conclusion in a judgement.

Said the
bench of Chief Justice K G Balakrishnan and Justice B S Chauhan: ‘A
judge speaks through his judgments and he is not answerable to anyone as
to why he wrote the judgement in a particular manner’.

    Renaming of High Courts
 

The
BMC has lost the file of a controversial South Mumbai building, which
was in the name of Dawood Ibrahim’s wife. This information was revealed
in a reply to the RTI application filed with the municipal
commissioner’s office. In his reply dated December 22, 2009, T M Bhatia,
assistant engineer-building and factories (C ward), said the file
papers pertaining to the building were not traceable/available.

    Disclosure of assets held by Public servants

After
politicians and judges of the Supreme Court, now the assets of babus
have also been prised open to public scrutiny by RTI. In a landmark
order, the Central Information Commission (CIC) has said that disclosure
of information such as assets of public servant, routinely collected by
the public authority, should be made available to the public under the
Right To Information Act.

    Employment Exchanges – how they operate!

In
reply to an RTI query, it is gathered that only 4,532 of the total
number of 30 lakh-plus job-seekers, who went through the Maharashtra
employment exchanges last year, got jobs. One hundred and fifty

In
reply to the RTI query, the ministry of law and justice has stated that
it has received the proposal to change names of four high courts.

  
 The proposal to change the names of Bombay HC to Mumbai HC, Calcutta
HC to Kolkata HC, Gauhati HC to Guwahati HC and Madras HC to Chennai HC
is under consideration of the government.

    RTI Act and Consumer Protection Act (CPA)

Very
interesting and a landmark judgement both for the RTI Act and the CP
Act has been delivered under the CP Act. Issue is whether failure to
furnish information without valid reason constitutes a deficiency in
service for which compensation can be sought by a consumer complaint.

The
applicant, Dr. Rao won the matter before the District Consumer Forum
but lost it before the Karnataka State Commission. The issue has now
been decided by the National Commission in a trend setting judgement.

The
National Commission observed that the settled law was that even if a
particular law barred the jurisdiction of courts, a complaint could
still be filed under the provision of the CPA as it provided an
additional remedy. The RTI Act did not bar the jurisdiction of the
consumer fora. Also, the provisions for appeal under the RTI Act were
restricted to the failure to furnish the information sought, but there
was no provision to claim compensation for deficiency in service. An
applicant under the RTI Act has to pay fees for getting the information,
and hence he acquires the status of a consumer. If there is any
deficiency in service in respect of providing such information, a
complaint could be filed under the CPA for claiming compensation.

ORDERS OF CIC

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Right to information

 S. 2(f) :

S. 2(f) defines the word ‘Information’ :

Sunil Kumar had asked Department of Revenue a series of
questions aimed at eliciting from the Department of Revenue their interpretation
of the provisions of the Budget, the Finance Act and the notifications issued
thereof.

Citing certain decisions of the Commission and the definition
of information u/s.2 (f) of the RTI Act as well as on the basis of the
confidentiality of the Budget and its provisions including the Finance Act,
respondents declined to disclose the information through CPIO’s communication
dated 25-3-2010 and the decision of the Appellate Authority, dated 23-4-2010.

Central Information Commissioner (CIC), A. N. Tiwari, held
that ‘given the nature of the queries appellant had included in his RTI
application, it is obvious that he has been seeking from the respondents their
interpretation of various provisions of the Budget, the Finance Act and the
notifications thereof. This cannot qualify to be information u/s.2(f) and hence
has been rightly declined by the respondents.’

During the hearing, it was stated on behalf of the
respondents that on the basis of the feedback received from the citizens and
various trade and financial organisations, government, from time to time, issues
clarifications regarding specific points in various Acts, Rules, notifications,
etc. One such clarification has been issued by the Ministry of Finance covering
most of the grounds and the points mentioned in appellant’s RTI application.
Respondents were willing to provide a copy to the appellant for his reference
and use. They however reiterated their point that it was not open to any private
citizen to use the RTI Act to seek from the respondents their specific comments
about interpretation of laws, Acts, Rules and notifications. CIC held that
respondents’ contention is valid and was upheld.

[Sunil Kumar v. Department of Revenue, No. CIC/AT/A/2010/00342
dated 3-9-2010]

  •  Co-operative
    Bank

— whether Public Authority : S. 2(h) :

CIC Mr. M. L. Sharma has ruled that Co-operative Banks are
not Public Authority in the matter of two appeals by Preeti Goyal.

CIC stated that a bare reading of clause (h) of S. 2 of the
RTI Act would indicate that a private body or a co-operative society can be said
to fall in the domain of this clause, if it is substantially financed, directly
or indirectly, by the funds provided by the appropriate Government. Admittedly,
the society in question has not received any funds either from the Central
Government or the Government of Union Territory of Chandigarh. By this logic, it
cannot be said to be a public authority. Needless to say, once it is held that
the society in question is not a public authority, it has no liability to
provide any information under the RTI Act.

General Manager Mr. Dhillon of Chandigarh State Co-operative
Bank Ltd. appeared before the Commission and in a written representation relied
on certain decisions, the ratio whereof is that Co-operative Banks do not fall
in the ambit of S. 2(h) of the RTI Act.

The relevant para of the representation is extracted below :

“In the latest judgment reported as 2009 (5) RCR (Civil) 394
— Bidar District Central Co-operative Bank Ltd., Bidar v. The Karnataka
Information Commission, Bangalore and another and 2009 (5) RCR (Civil) 833;
Dattaprasad Co-operative Housing Society Ltd. v. The Karnataka Information
Commission, Bangalore and another, it has been held by the Karnataka High Court
that co-operative society does not fall within the purview of S. 2(h) of the RTI
Act. Similar view has been taken by the Bombay High Court in a judgment reported
as AIR 2009 Bombay 75, wherein it has been held that a Co-operative Bank
registered under the Maharashtra Co-operative Societies Act is not a public
authority.”

Based on above CIC held that the Chandigarh State
Co-operative Bank Ltd. is not a public authority.

[Preeti Goyal v. Chandigarh State Co-operative Bank Ltd.,
Appeals No. CIC/LS/A/2010/000657 & 658, decision dated 16-9-2010]

PART B : THE RTI ACT, 2005

In the last two issues of BCAJ, I had covered talks by Gopal
Krishna Gandhi and Nandan Nilekani at the inaugural and concluding sessions
respectively at CIC’s 5th annual convention held on 13th & 14th September 2010.
Hereunder is the brief summary of talks at the inaugural session by Mr. Veerappa
Moily and at four technical sessions in between :

Dr. Veerappa Moily agreed RTI has caught our imagination.

Right to Information has the key to strengthening
participatory democracy and ushering in people centred governance. For creation
of a global information society, it is essential to safeguard plurality of
opinions, and to promote ‘open access to networks for service and information
suppliers’ and ‘free expression of ideas’.

The 1st technical session ‘RTI and Public Private
Partnership Projects’ was chaired by A. N. Tiwari, CIC (now Chief Central
Information Commissioner).

He summarised the discussion and concluded that many
infrastructure projects on PPP mode satisfy the basic tenets of a Public
Authority as defined under the RTI Act. He also observed that in the years to
come the RTI may go a long way in operationalising the PPP more objectively. He
was of the opinion that the governments themselves should declare whether a
particular PPP project is a public authority under RTI Act or not.

The 2nd technical session : ‘Responsibility of Political
Leadership in Promoting RTI’ was chaired by V. Narayansamy, Hon’ble Minister
of State, Planning & Parliamentary Affairs.

Sri Narayansamy: Right to Information is a tool in the hands of citizens which keeps the bureaucracy on its toes. However, he stated that the citizens are suffering in getting the information, even though they fulfill all their obligations as required under the Act. They are given misleading, truncated and irrelevant information and some people misuse it as well. He commended the role of the Commissions and cited two decisions of CIC. In one of the cases the Commission directed the PMO to disclose the assets of the Ministers, which they complied and while in another case, the Commission, directed the DoPT to disclose file notings. The Hon’ble Minister expressed his grief over the killings/threats of RTI activists. He said that the Government is sensitive to the situation and is bringing about special legislation for whistle blowers protection and privacy Act. The role of the politicians, the law makers does not stop with the enactment, it includes efforts in ensuring implementation. Shri Narayansamy concluded that the Judiciary should be made accountable. All three wings of the government have to function under the provisions of the RTI Act.

The 3rd technical session : ‘RTI & Judiciary’ was chaired by Wajahat Habibullah. One of the panelists was Justice A. P. Shah. His conclusions were:

Conclusion : Demands for change to existing systems in the judiciary must be met rationally, bearing in mind the objectives sought to be achieved. Will the proposed changes promote public respect for the judiciary and the rule of law? Will they strengthen democratic principles ? How do they relate to the constitutional requirement of judicial independence? The guiding principle should always be accountability but let it always be commensurate with judicial independence and impartiality. The challenge is to develop mechanisms of accountability that do not undermine judicial independence.

The 4th Technical Session : ‘Challenges and Opportunities in RTI — Role and Responsibility of Media/CSO’ was chaired by Ms. Mrinal Pande, Chairperson, Prasar Bharti.

One of the panelists, Ms. Ravi Singh stated that RTI is as important as the right to food and right to education. Since constant vigilance is the price for freedom, the role of NGOs, the media, the courts and the civil society is important.

Another panelist, Shailesh Gandhi observed that all the stakeholders of the RTI have to work together to create a supportive environment for the Act to flourish.

                                      

                                            Part C: Information On & Around

   Ration offices in Mumbai and around:

Vigilance Committees play a crucial role in addressing the grievances of local residents against ration shops. But information obtained under the RTI has revealed that due to vacancies in these committees, several areas are under represented.

Anil Galgali, an RTI activist who procured this information, said, “A Vigilance Committee is supposed to meet once a month to redress the grievance of the residents. But the provision for a Vigilance Committee is meaningless if it does not have any members.”

The vigilance committee also ensures that commodities in rationing shops are sold as per the directives of the government. “An inefficient vigilance committee is a setback for below poverty line (BPL) ration card holders who rely heavily of essential items sold through ration shops. Absence of an efficient vigilance body means that there are no effective checks and balances on the public distribution system (PDS),” he added.

It has come to light that in five of the 53 rationing offices in Mumbai, Thane and Navi Mumbai, there is not a single member on the vigilance committee.

    University of Mumbai flouting RTI Act:

PIO of the University of Mumbai and also AA never responded to the RTI Application/Appeal filed by S. K. Nangia, RTI activist even after repeated reminders. However, on the application dated 15-3-2010, finally, AA fixed the hearing on 30-10-2010.

Now, the activist has written to Rajan Welukar, vice-chancellor at the University of Mumbai, highlighting the problems faced by citizens in seeking information from the university. He has also asked for reasons for the delay of more than six months for an appeal hearing to be held.

Senior official at the university states that they were tied up with other routine work in the university and shall write a regret letter to the applicant for the delay.

   Taxis in Mumbai:

According to the data provided by the RTO, from April 2009 to March 2010, 303 cases of refusals, 1,236 cases of meter tampering and over charging and 85 offences of rude behaviour were registered. In comparison, complaints launched between April and September shot up to 3,500, with the offence of drivers refusing multiplying eight times from 303 to 2,400 cases.

STOP PRESS

Information on selection of Judges:

A two-judge Bench of the Supreme Court wondered whether the time had come to make public the details of appointment of judges to the Supreme Court and High Courts. A Bench comprising Justices B. Sudershan Reddy and S. S. Nijjar referred to a constitution Bench, the crucial question on disclosing correspondence between the Chief Justice of India and the Law Minister on appointment of HC and SC judges under the RTI Act.

This is a significant development as 19 High Courts have opposed the order of the Delhi HC allowing disclosure of information on appointment of judges. Even the Delhi HC has opposed the pronouncement on administrative grounds. The sole exception is the Gauhati HC.

Echoing the views of the HCs, Attorney General G. E. Vahanvati told the Bench, “Information made available to the CJI in respect of appointment of judges of HCs as well as the SC is held by him in trust and in fiduciary capacity.”

Justice Reddy said, “The current debate is a sign of a healthy nation. This debate on the Constitution involves a great and fundamental issue.” Writing the judgment for the Bench, he said precedents relating to interpretation of the Constitution on this issue need not mean stagnancy. “The ultimate question must be, what do the words of the text (Constitution) mean in our time,” he said. The bench framed the following questions for the consideration of constitution Bench:

  •    Whether the concept of independence of judiciary requires and demands prohibition of furnishing of the information sought?
  • Whether the information sought amounts to interference in the functioning of judiciary?

  •     Whether the information sought cannot be furnished to avoid any erosion in the credibility of the decisions and to ensure a free and frank expression of honest opinion by all constitutional functionaries, which is essential for effective consultation and for taking the right decision ?

  •    Whether the information sought is exempt u/s.8(1)(j) of the RTI Act?

Very sensitive and crucial issue for RTI to get wide spectrum of coverage now awaits fill this judgment gets pronounced.

ORDERS OF CIC

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Right to information

Part A: ORDERS OF CIC


S. 8(1)(e) & (h), S. 11 and S. 22 :


The first time a multi–member Bench of the Central
Information Commission has not given a unanimous decision. It is a split
decision. Two Information Commissioners : Mr. A. N. Tiwari and Mr. Satyananda
Misra delivered one decision and Information Commissioner Mr. Shailesh Gandhi
delivered the counterdecision.

Mr. C. Seetharamaiah (Mr. CS) made an RTI application to the
Commissionerate of Customs and Central Excise (CCCE), in which he requested for
the correspondence, telephone conversations, etc. between the Central Bureau of
Investigation (CBI) and CCCE in connection with the prosecution under the
Prevention of Corruption Act launched
on his son who was working as an Inspector of Central Excise.

The CPIO and the AA denied the information stating that if
furnished, it would impede the process of prosecution, exemption being covered
u/s.8(1)(h).

Further, the AA stated that as the information sought for
includes the third party’s (CBI) investigation report, the matter was referred
to CBI and it had replied that the same may not be revealed as the case is under
trial and parting with these documents would impede the prosecution of
offenders.

Due to the fact that certain important points of law needed
to be decided, the matter was referred to a three-member Bench by Mr. A. N.
Tiwari.

In the proceedings of this matter, all 3 parties viz.,
Mr. CS, CCCE and CBI made extensive submissions: Mr. CS submitted that the very
purpose of the RTI Act would be defeated if such information is not furnished.
“The officers who are being prosecuted for matters pertaining to discharge of
their official duties, if innocent, have to go through the vexatious prosecution
for years together. Revealing of information, as provided under the Right to
Information Act, 2005, may hasten the judicial process and help the innocent. As
already held by the Central Information Commission, there cannot be misuse of
the truth and the information available to a prosecutor should be made available
to the alleged offender also. It would be appreciable for everyone if the pace
of the judicial process is increased with the help of information obtained under
spirit of democracy.”

The CCCE and CBI argued that an accused in an ongoing
prosecution should not be allowed to access any information which may be
evidence in that prosecution. An accused in ongoing prosecution is free to
demand such information from the Trial Court and it is a matter which is
entirely within the jurisdiction and the discretion of the Trial Court.

Two members stated that the word ‘impede’ used in
S. 8(1)(h) holds the key to whether information requested by the appellant
should be allowed to be disclosed.

It was also the two members’ view that information which is
evidence or is related to evidence in an ongoing prosecution comes under the
control of the Trial Court within the meaning of S. 2(j) of the RTI Act, which
states as follows :


‘ “right to information” means the right to information
accessible under this Act which is held by or under the control of any
public authority and includes the right to . . . . . .’


I now reproduce 3 paras (part or full) of the decision :

28. It is significant that this S. 2(j) uses two
expressions about the location of given information, i.e., ‘held’ and
‘under the control of’. In our view, expression ‘held’ implies that a public
authority has physical possession of given information. The word ‘under the
control of’ implies that the information, regardless of which public authority
holds it, is under the control of a specific public authority on whose orders
alone it can be produced in a given proceeding. In the present case, the
material sought by the appellant is undoubtedly related to an ongoing Court
proceeding and hence it can be rightly said to be under the control of the
Trial Court, who alone can decide how the information is to be dispensed. Any
action under the RTI Act or any other Act for disclosure of that information
to the very party who is arraigned before the Trial Court or to anyone
representing that party, would have the effect of interfering with the
discretion of the Court, thereby impeding an extant prosecution proceeding.

29. Since the Information requested by the appellant is
under the control of the Trial Court, it is open to the appellant to approach
that Court through an appropriate proceeding under the criminal laws or if he
so wishes, u/s.6(1) of the RTI Act. The Court can then take action u/s.2(f) of
the RTI Act in case it decides that the petitioner should be allowed access to
the information he had requested. The key point is that either of these two
actions has to be before the Trial Court and not the respondent-public
authority (viz. Office of Commissioner of Customs, Central Excise and
Service Tax) or the third party (viz. CBI) as in this case. We agree
with the respondents that the integrity of a criminal proceeding before a
Trial Court in matters of what to allow to be produced as evidence should be
taken by the Court itself and not otherwise. We also note the fact that under
criminal laws, a public authority is authorised not to produce a certain
information or record in the Trial Court unless so directed by the Court
itself. Forcing the public authority to part with any such information — which
it would otherwise not have disclosed before the Trial Court — through an RTI
— proceedings would amount to imposing on the prosecuting public authority,
obligations which it was not obliged to bear.

30. It is, therefore, important that all determinations
about disclosure of any information relating to an ongoing prosecution should
be through the agency of the Trial Court and not otherwise.

The two members further noted :

33. According to the preamble to the RTI Act, one of the
purposes the Act designed to sub-serve was to combat corruption. We look
askance at any effort to convert the RTI Act into a tool to weaken the edifice
of law which seeks to bring to book errant public servants, especially when
such public servants have all the means available to them to present their
case before the Trial Court and seek from it the very information they now
want them to be provided through the RTI Act.




34.       The two members also noted that their
decision is also backed by the fact that the whole matter falls within the
ambit of S. 11(1) read with S. 7(7) of the Act since “it relates to or has been
supplied by a third party and has been treated as confidential by that third
party…..”

 

CBI had argued
that its objection to disclosure of information u/s.11 can be ignored only if
“public interest in disclosure outweighs in importance any possible harm or
injury to the interests of such third-party”.

 

CBI had argued
that there was no public interest. On the contrary, public interest is
positively harmed when interested parties are given the privilege of
interrogating a prosecuting agency about its actions vis-à-vis that party
through an RTI — proceeding when the prosecution before a Trial Court is
already extant.

 

Based on the
above, two members took the view: “Neither the provisions of the RTI Act, nor
the canons of justice, or equity commend disclosure of information as requested
by this appellant.”

 

Dissenting
decision:

 

IC Shailesh
Gandhi came to the conclusion that the information sought must be disclosed,
since there are no reasons in law to deny the information. IC writes thus:

“The
Commission’s decisions have been unanimous so far, and I am hesitant to break
this tradition. But I believe when there are different views on transparency,
it is worthwhile to voice them. I am inspired by Justice Mathew who had said in
the Supreme Court in State of UP v. Raj Narain (1975), ‘in a government of
responsibility like ours, where all the agents of the public must be
responsible for their conduct, there can be but few secrets. The people of this
country have a right to know every public act, everything that is done in a
public way, by their public functionaries. They are entitled to know the
particulars of every public transaction in all its bearing. The right to know,
which is derived from the concept of freedom of speech, though not absolute, is
a factor which should make one wary, when secrecy is claimed for transactions
which can, at any rate, have no re-percussion on public security. To cover with
veil of secrecy, the common routine business, is not in the interest of the
public. Such secrecy can seldom be legitimately desired. It is generally
desired for the purposes of parties and politics or personal self-interest or
bureaucratic routine. The responsibility of officials to explain and to justify
their acts is the chief safeguard against oppression and corruption.” I
sincerely believe that India could benefit immensely from RTI which is but a
search for the truth as it exists on the records of public authorities. Denial
of information must be an exception, since it is a denial of the fundamental
right of the sovereign citizen of India, and must rigorously meet the
requirements of the exemptions of S. 8(1) of the RTI Act. I cannot agree to
views which I feel do not reflect the law in letter and spirit.

 

He first dealt
with submissions of CBI that S. 8(1)(e) and S. 8(1)(h) and S.11 are applicable.

 

He held that for
S. 8(1)(e) to apply, there must be a fiduciary relationship and the holder of
information must hold the information in his fiduciary capacity. All
relationships usually have an element of trust, but all of them cannot be
classified as fiduciary. In these relationships, the lawyer and the doctor act
on behalf and in the interest of their client and patient. But in the present
case the Department would not be considering the report on behalf of CBI or in
the interest of any particular entity or individual. Therefore exemption
u/s.8(1)(e) claimed by the CBI is not tenable under the Right to Information
Act.

 

Mr. Shailesh
Gandhi then referred the provisions of S. 22.

 

“S. 22
provides:

The provisions
of this Act shall have effect not-withstanding anything inconsistent therewith
contained in the Official Secrets Act, 1923, and any other law for the time
being in force or in any instrument having effect by virtue of any law other
than this Act.”

 

He quotes
Justice Sanjeev Khanna of the High Court of Delhi in ‘Union of India v. CIC’:

“S. 22 of the
RTI Act gives supremacy to the said Act and stipulates that the provisions of
the RTI Act will override notwithstanding anything to the contrary contained in
the Official Secrets Act or any other enactment for the time being in force.
This nonobstante clause has to be given full effect to, in compliance with the
legislative intent.”

 

The two members
had taken the view that S. 8(1)(h) applies. Two reasons were given for it.

 

One: Disclosing
names of the officials involved in the report would impede the prosecution. Mr.
Gandhi argued?: “The officials may claim exemption u/s.8(1)(g), but this would
again be open to judicial scrutiny by the Commission and would not be
necessarily accepted. Even if this were accepted, the Commission u/s.10 could
direct severance of the names of the officers mentioned in the report.”

 

Two: According
to Mr. Gandhi, no reasons have been advanced showing how the prosecution would
be impeded by disclosing the information. When denying a right to the citizen,
it has to be established beyond doubt that prosecution or apprehension of an
offender would be impeded. This has not been done. If the Parliament wanted to
exempt all information which was the subject matter of a prosecution, it would
have said this. The Parliament has specifically exempted only the information
which would ‘impede’ the process of investigation or prosecution.

 

Further, he
writes:

 

“The argument
that the information can be made available to the appellant’s son in
accordance with the provisions of the Criminal Procedure Code is in itself
self-defeating. This is because it establishes that CBI and the prosecuting
agencies have no objection in the appellant’s son accessing the information per
se. Their objection is to the route adopted and to the fact that the Commission
may order the disclosure of information. The majority decision appears to subscribe
to this. With regard to the Right to Information Act, the Commission is the
final decision-making body. The Trial Court has jurisdiction over matters
coming before it, but not over appeals and complaints under the Right to
Information Act. The Commission cannot abdicate its re-sponsibility and
authority in deciding about disclosure of information under the RTI Act to any
Court. The existence of an alternative route to access information, does not in
itself provide an exemption to disclosure u/s.8(1) of the RTI Act. Unless the
information sought is proven to be exempt u/s.8(1) or 9 of the RTI Act, the
Commission cannot accept any other exemption external to either of these
provisions. The CBI has not advanced any spe-cific argument to show how the prosecution
would be impeded to claim exemption from disclosure u/s.8(1)(h).

 

Mr. Shailesh
Gandhi contradicts the interpretation of the majority decision on S. 2(j)
referred to in para 28 (supra). He states:

 

“The word used
in the provision is ‘or’ and not ‘and’. Thus information may be sought either
from the public authority holding the information or the public authority
having control over the information. The Parliament has deliberately drawn this
distinction as in some cases these two public authorities may be two entirely
different entities. Therefore, if a public authority holds the information, it
must provide the same to the RTI applicant in accordance with the provisions of
the RTI Act. It is not at all necessary for that public authority to control
that information as well. In the present case, the Trial Court may have control
over the record, but the CBI is the public authority holding the SP report.
Therefore, the SP report can be sought from the Commissioner of Customs &
Central Excise or from the Trial Court. Since the appellant has sought it from
the Commissionerate, the public authority holding the information must provide
the same.”

 

As to arguments
advanced for application of S. 11,

Mr. Shailesh
Gandhi writes:

“It is clearly
stated at S. 11(1) that ‘submission of third party shall be kept in view while
taking a decision about disclosure of information’. S. 11 does not give a third
party an unrestrained veto to refuse disclosing information. It only gives the
third party an opportunity to voice its objections to disclosing information.
The PIO will keep this in view and take a decision about disclosure of
information. If the PIO comes to the conclusion that the exemptions of S. 8(1)
apply, he may refuse to disclose the information.”

 

 

“S. 11 of the
RTI Act is a procedural provision which requires the PIO to approach a third
party if the information sought relates to such third party. S. 11 is not a
substantive provision and therefore is not an exemption in addition to those
provided in S. 8(1) and S. 9. Once the PIO receives the objections, raised by
the third party, he must keep these in view while deciding whether to disclose
the information or not. This decision has to be in consonance with the other
provisions of the RTI Act and therefore exemptions claimed by the third party
have to be justified by the PIO u/s.8(1) or S. 9. The provision of S. 11(4)
gives the right to the third party to appeal against the decision of the PIO.
This would not have been relevant if the mere denial by the third party of
disclosure of information were to be considered to be final.

 

Then disagreeing
with the contention raised in para 33 (supra), he writes?:

“I most
respectfully disagree with this contention since it appears to propound a
principle that an accused in a corruption case can be denied his fundamental
right. Right to Information is a fundamental right of the citizens codified by
the RTI Act, 2005. A fundamental right cannot be curtailed arbitrarily and
without the sanction of law. It does not matter if the person accessing the
information or the person in relation to whom information is sought is a
convict or an accused. He cannot be denied his fundamental right. The duty of
the Commission is to ensure that the RTI Act is implemented properly and to ensure
that it does not take into account extraneous considerations while deciding on
appeals and complaints before it.”

 

Finally, paras
51 and 52 of his decision:

51.  To summarise:

 

(a)        The information sought is not exempt
u/s.8(1)(e) or (h) for reasons explained above.

(b)        The RTI Act clearly overrides all other
prior Acts in matters of disclosures of information as per S. 22.

(c)        Refusal of information can only be based
on the RTI Act, when an application is made under this Act. The Commission is a
creation of the RTI Act and can only agree to denial of information which is
expressly exempted u/s.8(1) or u/s.9 of the RTI Act.

(d)       If there are various routes by which a
citizen can access information, it is his prerogative to use one which he finds
convenient.

(e)        S. 11 is not a provision which can be
used to justify exempting information from being disclosed, unless it is
covered by S. 8(1).

 

 

52.       In view of the reasons stated above, I
find the arguments put forward for the denial of information to be untenable.
Hence I cannot agree with the majority decision, and it is my considered
opinion that the information sought by the appellant is not covered by the
exemptions of S. 8(1) of the RTI Act and hence should be disclosed.

 

Note?: Full
decision shall be posted on website of BCAS and PCGT for anyone interested in
reading these extremely well-reasoned two counter decisions.

 

[Mr. C.
Seetharamaiah v. Commissionerate of Customs & Central Excise (Third Party?:
Central Bureau of Investigation)?: Appeal No. CIC/ AT/A/2008/01238 dated
19-9-2008 — decision dated 7-6-2010]

 

 

PART B: THE
RTI ACT

 

Payment of
fee under the RTI Act, 2005:

 

S. 6(1), S. 7(1)
& S. 7(5) provide for fee payable for accessing information being
application fee and fee for information supplied in photocopies, print or in
any electronic format. Proviso to S. 7 states that the fee prescribed by the
rules shall be reasonable. DoPT of Persmin, Government of India vide office
Memorandum (No. 12/09/2009.IR) has issued some clarifications on this subject.
The same are summarised hereunder?:

 

  •        
    The Rules or the Act do not give power to the
    PIO to charge any fee other than prescribed in the Fee and Cost Rules.
  •    
    Attention is drawn to the common order of the
    CIC in one appeal and one complaint which reads as under:

            “Thus, there is provision for
charging of fee only u/s.6(1) which is the application fee: S. 7(1) which is
the fee charged for photo-copying, etc. and S. 7(5) which is for getting
information in printed or electronic format. But there is no provision for any
further fee and if any further fee is being charged by the public authorities
in addition to what is already prescribed u/s. 6(1), u/s.7(1) and u/s.7(5) of
the Act, the same would be in contravention of the Right to Information Act.
The ‘further fee’ mentioned in S. 7(3) only refers to the procedure in availing
of the further fee already prescribed under 7(5) of the RTI Act, which is
‘further’ in terms of the basic fee of Rs.10. S. 7(3), therefore, provides for
procedure for realising the fees so prescribed.”

 

·        
It is hereby clarified that where a Public
Information Officer takes a decision to provide information on payment of fee
in addition to the application fee, he should determine the quantum of such fee
in accordance with the fee prescribed under the Fee and Cost Rules and give the
details of such fee to the applicant together with the calculation made to
arrive at such fee. Since the Act or the Rules do not provide for charging of
fee towards postal expenses or cost involved in deployment of manpower for
supply of information, etc., he should not ask the applicant to pay fee on such
account.

 

 

Part 3 :
INFORMATION ON & AROUND

 

·        
Appointments of Information Commissioners

 

The Government
will be appointing 22 commissioners this year. Of the 22 commissioners who are
retiring, six are with the Central Information Commission, including its chief
Wajahat Habibullah.

 

In August 2008,
DoPT recommended its Secretary S. N. Mishra, Annapura Dixit, Ashok K.
Mohapatra, R. B. Shreekumar, M. L. Sharma and Shailesh Gandhi for appointment
as information commissioners in the Central Information Commission.

 

Except  Gandhi, 
whose  name  was 
proposed  by several RTI
activists, names of the others were not recommended by anyone. But their
bio-data got included in the proposal for appointment of information
commissioners.

 

On the other
hand, three persons — Ravi Shankar Singh, Sudhanshu Ranjan and Dr. Krishna
Kabir Anthony — who applied and were also recommended by politicians did not
find a place in the agenda for the selection committee headed by the Prime
Minister. There were 12 others like them.

 

Arvind Kejriwal
who got the above info under RTI query says:

“it appears the
DoPT has become the de facto selection committee and the selection committee
provided under the law has been reduced to an endorsement committee.”

 

·        
BMC employees not being transferred:

 

Months after
Bandra residents managed a landmark victory forcing the transfer of at least
eight engineers who had been tossed around in the H-West ward for 20 years, an
RTI query has revealed that a similar situation exists in Andheri as well. As
many as 50 employees, including peons, engineers and clerical staff, haven’t
been transferred, some since the 80s.

 

The RTI query
filed by activist Aziz Amreliwala revealed that despite the BMC Rules that make
rotation of officials mandatory every three years, at the K/East ward, 11
engineers, including sub, junior and assistant engineers, have enjoyed the same
post for several years. In fact, some of them have even been promoted. Experts
blame a nexus between officials and politicians that make the transfers of
employees impossible.

 

·        
Maharashtra Chief IC

 

Dr. Suresh
Joshi, Chief Information Commissioner retires on 12-10-2010 (exactly on the 5th
anniversary of RTI).

 

Political
activist Chandrashekar Prabhu, additional chief secretaries M. Rameshkumar and
Bhupati Prasad Pandey, retired bureaucrats Leena Mehandale, S. S. Hussain and
state human rights commission member Subhash Lala are prominent among the
150-and-odd persons competing for the post of the State CIC.

 

Dr. Joshi has
gone on leave and entrusted his task to the junior-most IC, Ramanand Tiwari.
Other Information Commissioners who are senior to Mr. Tiwari have taken
objection to the decision of Dr. Joshi.

 

Ever since the
appointment of retired IAS officers as info commissioners, a cold war is on
between IAS and non-IAS commissioners. When the process of appointment of
Information Commissioners was in progress, activist Anna Hazare had personally
called on the then CM and President of India, saying that the Government should
not appoint retired babus for such sensitive posts. Currently out of the 7
commissioners, 3 are retired IAS and 4 are non-IAS officers.

 

Meanwhile, over
42 serving and retired IAS officials and 89 individuals have applied for the
post of info commissioners. The Nashik Information Commissioner’s post is lying
vacant. Aurangabad IC died in July 2010.

 

·        
Panchayati Raj Ministry:

 

The Panchayati
Raj Ministry, responsible for decentralisation and local governance in states,
but more importantly, empowering the rural poor, has been spending crores every
year as rent on space acquired at a 5-star hotel in south Delhi being 5,500
sq.ft. space on the sixth floor of Samrat Hotel in Chanakyapuri.

 

This information
came to light in reply to an RTI application filed by a Delhi-based activist.
Rent per month was `190 per sq.ft., for a period of two years commencing from
September 1, 2006, to be extended further with an increase of 8% after expiry
of the tenure. After the period lapsed on August 30, 2008, the present rate of
rent became `210.60 per sq.ft., from September 1, 2008. The total adds up to
more than `5 crore spent as rent so far.

 

·        
Corruption Eradication Committees:

 

Maharashtra
State Government’s commitment to combating corruption is facing its real test
in Thane, where a citizen activist has put a spotlight on the District
Collectorate for failing to comply with rules concerning the setting up of
Corruption Eradication Committees (CEC) at the taluka and district level.

 

The watch-dog
committees, comprising 10 citizens, selected after police verification, besides
a team of administrative and police officials, have been armed with the authority
to inquire into complaints of corruption. The anti-graft panels, initiated in
1996 during the Shiv Sena-BJP regime, raised hopes of finally getting justice
among aggrieved citizens as non-official members would ensure redressal of
public issues during monthly meetings.

 

 

The Thane
Collectorate, however, seems to be an exception to the rule aimed at equipping
people with the authority to question the corrupt. Of the 15 talukas, none has
a fully constituted CEC. In fact, the district CEC has just three non-official
representatives as against the mandatory ten.

 

·        
Cost of getting the information:

 

Citizens and RTI
activists have a reason to cheer. Now, they can save thousands of rupees which
they pay fee to get ‘readily available’ information under the RTI Act,
According to the Information Commission, they will get the information for Rs 2
per page, as stipulated in the Act.

 

Several RTI
applicants had complained that they were made to pay through their nose,
particularly while seeking information from BMC’s property-related departments,
such as assessment. Also officers often did not sign or attest papers while
giving information. When they were asked to sign on the documents, they used to
ask applicants to pay as per the BMC rate card which existed before the RTI Act
came into existence. The practice continued despite the fact that the RTI Act
has a superseding effect on all prior rules.

 

For example,
certified copies were charged at `230 per property in the assessment
department. If the applicant had to ask property details or building details
for more than one property, they would pay in thousands. Apart from this, the
inspection of voluminous information that is free for the first hour and `5 for
every 15 minutes was being charged `150 per hour.

 

The order from
Information Commission comes after a sustained battle of over one and a half
year by NGO, Mahiti Adhikar Manch, and some active citizens. The State Chief
Information Commissioner, Dr. Suresh Joshi, who heard the matter in March 2009,
passed order dated July 9, 2010, after a series of meetings with additional
municipal commissioners.

OECD — RECENT DEVELOPMENTS — AN UPDATE

International Taxation

In March, 2008 issue of BCAJ, we had covered various
important developments at OECD till then. In this issue, we have attempted to
pick up further major developments after the publication of 2008 Edition of OECD
Model Tax Convention (‘MC’) and developments in the field of Transfer Pricing
and work being done at OECD in various other related fields and have included
the same in this update. We shall endeavour to update the readers on major
developments at OECD at shorter intervals. Various news items included here are
sourced from various OECD Newsletters.



A. Re : Amendments to OECD Model Tax Convention :


1. Discussion draft on the application of Article 17
(Artistes and Sportsmen) of the OECD Model Tax Convention (23rd April, 2010) :


The OECD invites public comments on draft changes to the
Commentary on Article 17 of the OECD Model Tax Convention, which deals with
cross-border income derived from the activities of entertainers and sportsmen.

Under Article 17 (Artistes and Sportsmen) of the OECD Model
Tax Convention, the State in which the activities of a non-resident entertainer
or sportsman are performed is allowed to tax the income derived from these
activities. This regime differs from that applicable to the income derived from
other types of activities making it necessary to determine questions such as
what is an entertainer or sportsman, what are the personal activities of an
entertainer or sportsman as such and what are the source and allocation rules
for activities performed in various countries.

The Committee on Fiscal Affairs, through a subgroup of its
Working Party 1 on Tax Conventions and Related Questions, has examined these and
other questions related to the application of Article 17. This public discussion
draft includes proposals for additions and changes to the Commentary on the OECD
Model Tax Convention resulting from the work of that subgroup, which have
recently been presented to the Working Party for discussion.

The Committee intends to ask the Working Party to examine
these proposed additions and changes to the OECD Model Tax Convention for
possible inclusion in the OECD Model Tax Convention (these changes will not,
however, be finalised in time for inclusion in the next update, which is
scheduled to be published in the second part of 2010). It therefore invites
interested parties to send their comments on this discussion draft before 31st
July 2010. These comments will be examined at the September 2010 meeting of the
Working Party.

Comments should be sent electronically (in Word format) to
jeffrey.owens@oecd.org.

2. Revised discussion draft of a new Article 7 (Business
Profits) of OECD Model Tax Convention (24th November, 2009) :


On 24th November 2009, the OECD approved the release, for
public comment, of a revised draft of a new Article 7 (Business Profits) of the
OECD Model Tax Convention and of related Commentary changes. The first version
of the new Article and Commentary changes was released on 7 July 2008, (the
‘July 2008 Discussion Draft’). As was explained at the beginning of that earlier
draft, the new Article and its Commentary constitute the second part of the
implementation package for the Report on Attribution of Profits to Permanent
Establishments that the OECD adopted in 2008.

Public comments were carefully reviewed and a consultation
meeting was held with their authors on 17th September 2009. The Committee’s
subsidiary body responsible for drafting the new Article 7 has concluded that
changes should be made to accommodate many of these comments. This revised
discussion draft (issued on 24th November 2009) includes the changes that have
been made
for that purpose as well as a few minor clarifications, editing changes and
corrections. All the changes made to the earlier draft are identified in the
revised draft.

The most important change proposed in this
revised draft is the replacement of paragraph 3, as it appeared in the July 2008
Discussion Draft, by a broader provision that provides a corresponding
adjustment mechanism similar to that of paragraph 2 of Article 9, which applies
between associated enterprises.

The revised draft was released for the purpose of inviting
comments from interested parties. It does not necessarily reflect the final
views of the OECD and its member countries.

It is expected that once finalised, the new Article and the
Commentary changes will be included in the next update to the OECD Model Tax
Convention, tentatively scheduled for the second part of 2010.

3. Comments on the public discussion draft ‘The Granting
of Treaty Benefits With Respect to the Income of Collective Investment Vehicles’
(10th February, 2010) :


On 9th December 2009, the OECD released for public comment a
Public Discussion Draft of a Report which contains proposed changes to the
Commentary on the OECD MC dealing with the question of the extent to which
either collective investment vehicles (CIVs) or their investors are entitled to
treaty benefits on income received by the CIVs. The OECD has now published the
comments received on this consultation draft on to the website. The reader who
wishes to study the comments may visit the OECD’s website.

4. Comments on the public discussion draft ‘Tax Treaty
Issues related to Common Tele-communications Transactions’ (10th February, 2010)
:


On 25th November 2009, the OECD released for public comments
a Draft Report which contains proposed changes to the Commentary on the OECD
Model Tax Convention dealing with tax treaty issues related to common
telecommunication transactions. The OECD has now published the comments received
on this consultation draft on its website.

5. Comments on the public discussion draft ‘The
application of tax treaties to state-owned entities, including Sovereign Wealth
Funds’ (10th February, 2010) :


On 25th November 2009, the OECD released for public comments
a Draft Report which contains proposed changes to the Commentary on the OECD
Model Tax Convention dealing with the application of tax treaties to state-owned
entities, including Sovereign Wealth Funds. The OECD has now published the
comments received on this consultation draft on its website.

6. Draft documentation for cross-border tax claims (9th
February, 2010) :


The OECD has released for public comment draft documentation (Implementation Package) for implementing a streamlined procedure for portfolio investors to claim reductions in withholding rates pursuant to tax treaties or domestic law in the source country. This release represents the continuation of work that was begun by the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross -Border Investors (ICG). The ICG was established in 2006 by the OECD’s Committee on Fiscal Affairs (CFA) to consider legal questions and administrative barriers that affect the ability of collective investment vehicles (CIVs) and other portfolio investors to effectively claim the benefits of tax treaties. On 12th January 2009, the OECD released two reports prepared by the ICG in fulfilment of this mandate. The ICG’s first Report, on the ‘Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles’, addresses the legal and policy issues relating specifically to CIVs. A modified version of that Report was released by the OECD for public comment on 9th December 2009.

The report by the ICG on ‘Possible Improvements to Procedures for Tax Relief for Cross-Border Investors’, discusses the procedural problems in claiming treaty benefits faced by portfolio investors generally and makes a number of recommendations on ‘best practices’ regarding procedures for making and granting claims for treaty benefits for intermediated structures. The Implementation Package was developed by the Pilot Group on Improving Procedures for Tax Relief for Cross-Border Investors (Pilot Group) to provide standardised documentation that could be used by countries that wish to adopt the ‘best practices’ described in the ICG’s report. The Pilot Group includes representatives of the tax administrations of some OECD member countries as well as representatives from the financial services industry.

The Implementation Package provides a system for claiming treaty benefits that allows authorised intermediaries to make claims on behalf of portfolio investors on a ‘pooled’ basis. One of the major benefits of such a system is that information regarding the beneficial owner of the income is maintained by the authorised intermediary that is nearest to the investor, rather than being passed up the chain of intermediaries. Although a source country may be willing to provide benefits on the basis of pooled information, it may want to maintain the ability to confirm that benefits that have been provided were in fact appropriate. In addition, when a residence country’s investor obtains income from abroad, the residence country has a compliance interest in knowing the details of that. For those reasons, the Implementation Package also recommends that those financial institutions that wish to make use of the ‘pooled’ treaty claim system be required to report on an annual basis directly to source countries (i.e., not through the chain of intermediaries) investor-specific information regarding the beneficial owners of the income.

The Implementation Package is the work of the Pilot Group; neither the views expressed in the ICG reports nor the ‘best practices’ reflected in the Implementation Package should be attributed to the OECD or any of its member states. The CFA will be deciding whether and how the work on improving procedures should be carried forward. Because the development of standardised documentation is useful only if the documentation is widely accepted by businesses and governments, the CFA has decided to invite comments from all interested parties before further consideration of the Implementation Package. Interested parties are therefore invited to send their comments on the Implementation Package before 31st August 2010. Comments should be sent electronically in Word format to : jeffrey. owens@oecd.org

    Amendments to OECD Transfer Pricing Guidelines :
On 9th September 2009, the OECD released for public comments a proposed revision of Chapters I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter ‘TPG’). This follows from the release in May 2006 of a discussion draft on comparability issues and in January 2008 of a discussion draft on transactional profit methods, and from discussions with commentators during a two-day consultation that was held in November 2008. This represents an important update of the existing guidance on comparability and profit methods which dates back to 1995. The main proposed changes are as follows :

  •     Hierarchy of transfer pricing methods : In the existing TPG, there are two categories of OECD-recognised transfer pricing methods : the traditional transaction methods (described at Chapter II of the TPG) and the transactional profit methods (described at Chapter III). Transactional profit methods (the transactional net margin method and the profit split method) currently have a status of last resort methods, to be used only in the exceptional cases where there are no or insufficient data available to rely solely or at all on the traditional transaction methods. Based on the experience acquired in applying transactional profit methods since 1995, the OECD proposes removing exceptionality and replacing it with a standard whereby the selected transfer pricing method should be the ‘most appropriate method to the circumstances of the case’. In order to reflect this evolution, it is proposed to address all transfer pricing methods in a single chapter, Chapter II (Part II for traditional transaction methods, Part III for transactional profit methods).

  •     Comparability analysis : The general guidance on the comparability analysis that is currently found at Chapter I of the TPG was updated and completed with a new Chapter III containing detailed proposed guidance on comparability analyses.

  •     Guidance on the application of transactional profit methods : Proposed additional guidance on the application of transactional profit meth-ods was developed and included in Chapter II, new Part III.

  •     Annexes : Three new Annexes were drafted, containing practical illustrations of issues in relation to the application of transactional profit methods and an example of a working capital adjustment to improve comparability.

3.2009 edition of OECD’s Transfer Pricing Guidelines (9th September, 2009) :

On 7th September 2009, the OECD released the 2009 edition of its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter ‘TP Guidelines’).

The TP Guidelines provide guidance on the application of the arm’s-length principle to the pricing, for tax purposes, of cross-border transactions between associated enterprises. In a global economy where multinational enterprises (MNEs) play a prominent role, governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm’s-length remuneration for their cross-border transactions with associated enterprises.

Since their adoption by the OECD Council in 1995, the TP Guidelines have been under constant monitoring by the OECD. They were complemented in 1996-1999 with guidance on intangibles, cross-border services, cost contribution arrangements and advance pricing arrangements. In this 2009 edition, amendments were made to Chapter IV, primarily to reflect the adoption, in the 2008 update of the Model Tax Convention, of a new paragraph 5 of Article 25 dealing with arbitration, and of changes to the Commentary on Article 25 on mutual agreement procedures to resolve cross-border tax disputes. References to good practices identified in the Manual for Effective Mutual Agreement Procedures were included and the Preface was updated to include a reference to the Report on the Attribution of Profits to Permanent Establishments adopted in July 2008.

The OECD is currently undertaking an important further update to the TP Guidelines, focussing on comparability issues and on the application of transactional profit methods3.

    4. Discussion Draft on the Transfer Pricing Aspects of Business Restructurings (19th September, 2008) :

The OECD has released for public comments a discussion draft on the Transfer Pricing Aspects of Business Restructurings4.

Business restructurings by multinational enterprises have been a widespread phenomenon in recent years. They involve the cross-border redeployment of functions, assets and/or risks between associated enterprises, with consequent effects on the profit and loss potential in each country. Restructurings may involve cross-border transfers of valuable intangibles, and they have typically consisted of the conversion of full-fledged distributors into limited-risk distributors or commissionnaires for a related party that may operate as a principal; the conversion of full-fledged manufacturers into contract-manufacturers or toll-manufacturers for a related party that may operate as a principal; and the rationalisation and/or specialisation of operations.

As evidenced by a January 2005 OECD Centre on Tax Policy and Administration Roundtable, these restructurings raise difficult transfer pricing and treaty issues for which there is currently insufficient OECD guidance under both the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the ‘TP Guidelines’) and the OECD Model Tax Convention on Income and on Capital (the ‘Model Tax Convention’) (see outcome of the January 2005 CTPA Roundtable). These issues involve primarily the application of transfer pricing rules upon and/or after the conversion, the determination of the existence of, and attribution of, profits to permanent establishments (‘PEs’), and the recognition or non-recognition of transactions. In the absence of a common understanding on how these issues should be treated, they may lead to significant uncertainty for both business and governments as well as possible double taxation or double non-taxation. Recognising the need for work to be done in this area, the Committee on Fiscal Affairs (‘CFA’) decided to start a project to develop guidance on these transfer pricing and treaty issues.

In 2005 the CFA created a Joint Working Group (‘the JWG’) of delegates from Working Party No. 1 (responsible for the Model Tax Convention) and Working Party No. 6 (responsible for the TP Guidelines) to initiate the work on these issues. At the end of 2007, having taken stock of the progress made to that point, the CFA referred the work on the transfer pricing aspects of business restructurings to Working Party No. 6 and the work on the PE threshold aspects to Working Party No. 1. The discussion draft released on 19th September, 2008 has resulted from the work done on the transfer pricing issues by the JWG and Working Party No. 6. Working Party No. 1 intends to consider PE definitional issues under Article 5 of the Model Tax Convention, both in the context of business restructurings and more broadly, as part of its 2009-2010 programme of work, which will result in a separate discussion draft.

This discussion draft only covers transactions between related parties in the context of Article 9 of the Model Tax Convention and does not address the attribution of profits within a single enterprise on the basis of Article 7 of the Model Tax Convention, as this was the subject of the Report on the Attribution of Profits to Permanent Establishments which was approved by the Committee on Fiscal Affairs on 24th June 2008 and by the OECD Council for publication on 17th July 2008. The analysis in this discussion draft is based on the existing transfer pricing rules. In particular, this discussion draft starts from the premise that the arm’s-length principle and the TP Guidelines do not and should not apply differently to post-restructuring transactions than to transactions that were structured as such from the beginning.

The discussion draft is composed of four Issues Notes.

In light of the importance of risk allocation in relation to business restructurings, the first Issues Note provides general guidance on the allocation of risks between related parties in an Article 9 context and in particular the interpretation and application of paragraphs 1.26 to 1.29 of the TP Guidelines.

The second Issues Note, “Arm’s-length compensation for the restructuring itself”, discusses the application of the arm’s-length principle and TP Guidelines to the restructuring itself, in particular the circumstances in which at arm’s length the restructured entity would receive compensation for the transfer of functions, assets and/or risks, and/or an indemnification for the termination or substantial renegotiation of the existing arrangements.

The third Issues Note examines the application of the arm’s-length principle and the TP Guidelines to post-restructuring arrangements.

The fourth Issues Note discusses some important notions in relation to the exceptional circumstances where a tax administration may consider not recognising a transaction or structure adopted by a taxpayer, based on an analysis of the existing guidance at paragraphs 1.36-1.41 of the TP Guidelines and of the relationship between these paragraphs and other parts of the TP Guidelines.

    5. The OECD pursues dialogue with the business community on comparability and profit methods for transfer pricing purposes (19th September, 2008) :

In May 2006 and January 2008, respectively, the OECD released for public comment a series of issues notes on comparability and a series of issues notes on transactional profit methods. These two discussion drafts6, which related to the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, attracted very detailed responses from the business community (see comments received on the May 2006 discussion draft on comparability and comments7 received on the January 2008 discussion draft on transactional profit methods).

Working Party No. 6, which is the OECD body responsible for the Transfer Pricing Guidelines, started discussing the comments received. Given the comments’ extent and complexity, delegates felt that the reviews of comparability and profit methods could greatly benefit from a face-to-face discussion with the commentators. Accordingly, it was decided to organise a consultation with the organisations that provided written comments.

C.   Tax Transparency and Exchange of Information Agreements :

1.  Tax Transparency — Global Forum launches country-by-country reviews (18th March, 2010)
The international fight against cross-border tax evasion has entered a new phase with the launch by countries participating in the Global Forum on Transparency and Exchange of Information of a peer review process covering a first group of 18 jurisdictions : Australia, Barbados, Bermuda, Botswana, Canada, Cayman Islands, Denmark, Germany, India, Ireland, Jamaica, Jersey, Mauritius, Monaco, Norway, Panama, Qatar, Trinidad and  Tobago.

The reviews are a first step in a three-year process approved in February by the Global Forum in response to the call by G20 leaders at their Pittsburgh Summit in September 2009 for improved tax transparency and exchange of information. In addition to a complete schedule of forthcoming reviews, the Global Forum also published three other key documents8 :

  •     the Terms of Reference explaining the information exchange standard countries must meet;
  •     the Methodology for the conduct of the reviews;
  •     the Assessment criteria explaining how countries will be rated.

Welcoming this new step forward for the international tax compliance agenda, OECD Secretary-General Angel Gurría said : “The Global Forum has been quick to respond to the G20 call for a robust peer review mechanism aimed at ensuring rapid implementation of the OECD standard on information exchange. This is the most comprehensive peer review process in the world, and it is based on decades of experience at the OECD of conducting reviews of this kind in many other areas of policy making. I look forward to seeing the first results later this year”.

The Global Forum brings together 91 countries and territories, including both OECD and non-OECD countries. At a meeting in Mexico in September 2009, participants agreed that all members as well as identified non-members will undergo reviews on their implementation of the standard. These reviews will be carried out in two phases: assessment of the legislative and regulatory framework (phase 1) and assessment of the effective implementation in practice (phase 2).

The review reports will be published once they have been adopted by the Global Forum, whose next meeting will take place in Singapore at the end of September 2010.

Mike Rawstron, chair of the Global Forum, stated :
“This is the most comprehensive, in-depth review on international tax co-operation ever. There has been a lot of progress over the past 18 months, but with these reviews we are putting international tax co-operation under a magnifying glass. The peer review process will identify jurisdictions that are not implementing the standards. These will be provided with guidance on the changes required and a deadline to report back on the improvements they have made”.

For more information, contact Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration, (jeffrey.owens@oecd.org) or Pascal Saint-Amans, Head of the Global Forum Secretariat (pascal.saint-amans@oecd.org or) or visit www.oecd.org/tax/transparency and www.oecd.org/tax/evasion.

  2.  Progress on exchange of information in the Caribbean (24th March, 2010) :
Saint Kitts and Nevis, Saint Vincent and the Grenadines and Anguilla, an overseas territory of the United Kingdom, have signed a total of 14 tax information exchange agreements. These signings bring the total number of agreements signed by each jurisdiction to at least 12 that meet the internationally agreed tax standard. Accordingly, Anguilla, St. Kitts and Nevis and St. Vincent and the Grenadines become the 23rd, 24th and 25th jurisdictions to move into the category of jurisdictions that are considered to have substantially implemented the standard since April 2009. Since that time almost 370 agreements have been signed or brought up to the internationally agreed tax standard.

St. Kitts and Nevis and St. Vincent and the Grenadines signed agreements with Faroe Islands, Finland,  Greenland, Iceland, Norway and Sweden. These agreements add to agreements St. Kitts and Nevis had already signed with Australia, Monaco, The Netherlands, The Netherlands Antilles, Aruba, United Kingdom, Denmark, Belgium, New Zealand and Liechtenstein, bringing their total to 16 agreements. St. Vincent and the Grenadines has now signed 16 agreements that meet the standard, including its existing agreements with Australia, Austria, Denmark, the Netherlands, Aruba, Liechtenstein, Belgium, Ireland, the United Kingdom and New Zealand.

Anguilla, which signed an agreement with Australia and Germany on 19th March, had previously signed 11 other agreements — including agreements with the United Kingdom, Ireland, the Netherlands, New Zealand and the seven Nordic economies — and this signing brings their total to 13 agreements that meet the internationally agreed tax standard.

Each of these jurisdictions is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and has agreed to participate in a peer review of their laws and practices in this area. According to the schedule of reviews published by the Global Forum, they will undergo reviews of their legal and regulatory framework for exchange of information in 2011 and reviews of their information exchange practices in 2013.

Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration said, “We continue to see a great deal of progress as jurisdictions move to sign agreements. With Anguilla, St. Kitts and Nevis and St. Vincent and the Grenadines now reaching this benchmark, almost all of the Caribbean jurisdictions have substantially implemented the standard, and we will be working with the remaining jurisdictions— both in the Caribbean and elsewhere — to encourage them to follow this trend and provide whatever assistance we can. The real test will come with the peer review process, when the Global Forum can evaluate the quality of these agreements and the extent of the implementation of the standards in practice.”

For further information visit www.oecd.org/tax/ transparency or www.oecd.org/tax and www.oecd.org/tax/evasion.

    D. Other Developments at OECD :

    1. Draft Guidelines on the application of VAT/ GST to the international trade in services and intangibles for public consultation (9th February, 2010) :

The OECD Committee on Fiscal Affairs invites public comments on the draft Chapter II of the International VAT/GST Guidelines that deal with customer location in the context of identifying the jurisdiction of taxation.

These draft Guidelines build on the consultation documents that were issued by the Committee in 2008. They consider which jurisdiction has the taxing rights in cases where services and intangibles are supplied internationally. The Committee has already agreed the principle that the jurisdiction with the taxing rights is the one in which consumption takes place but there frequently need to be proxies to determine consumption. The draft Guidelines propose that, as a Main Rule, the location of the customer is the most appropriate proxy to determine consumption for business-to-business supplies. The draft assumes that all supplies are legitimate and with economic substance and that there is no artificial tax avoidance or tax minimisation taking place. Further, the Guidelines address services and intangibles received by enterprises with a single location only.

The Committee, through its Working Party 9 on Consumption Taxes and the Working Party’s Technical Advisory Group (TAG) comprising government, academic and business representatives, will work on the development of further Guidelines on enterprises with multiple locations and will deal with artificial avoidance and minimisation issues later. It will also consider appropriate exceptions to the Main Rule. Given that this further work may require the Committee to review this current draft, these Guidelines should be regarded as provisional.

The Committee invites interested parties to send their comments on this draft before 30th June 2010. Comments should be sent electronically (in Word format) to jeffrey.owens@oecd.org.

2. OECD Global Forum consolidates tax evasion revolution in advance of Pittsburgh (2nd September, 2009) :

On the eve of the Pittsburgh G20 meeting, the Global Forum on Transparency and Exchange of Information dealing with tax matters, took major steps to confirm the end of the era of banking secrecy as a shield for tax evaders.

Hailing the breakthrough OECD Secretary General Angel Gurria said “what we are witnessing is nothing short of a revolution. By addressing the challenges posed by the dark side of the tax world, the campaign for global tax transparency is in full flow. We have equipped ourselves with the institutional means to continue the campaign. With the crisis, global public opinion’s expectations are high, their tolerance of non-compliance is zero and we must deliver”.

Representatives from the Forum which now numbers almost 90 jurisdictions around the world and a host of International Organisations gathering in Mexico, took concrete steps to empower the Global Forum to play the leading role in the global campaign to fight tax evasion.

Building on the extraordinary progress made in the last few months to incorporate the globally accepted standards developed by the OECD in both new and existing agreements, the Forum took the following key decisions :

  •     Teeth : to put in place a robust, comprehensive and global monitoring and peer review process to ensure that members implement their commitments; a Peer Review Group has been established to examine the legal and administrative framework in each jurisdiction and practical implementation of these standards. A first report on monitoring progress will be issued by end 2009.

  •     Extended Global Reach : to further expand its membership and to enshrine the principle that all members enjoy equal footing.

  •     Faster Agreements : to speed up the process of negotiating and concluding information exchange agreements including exploring new multilateral avenues.

  •     Developing country assistance : to put in place a coordinated technical assistance programme to assist smaller jurisdictions to implement the standards rapidly.

In its Assessment of Tax Co-operation in 2009 issued earlier (‘OECD assessment shows bank secrecy as a shield for tax evaders coming to an end’) the Global Forum highlighted that the standards on transparency and exchange of information pioneered by the OECD are now almost universally accepted and that extraordinary progress has already been made towards their full implementation.

The Forum also agreed on the need to convene regularly, with the next meeting scheduled for 2010.

Background :

The Global Forum on Transparency and Exchange of Information was created in 2000 to provide an inclusive forum for achieving high standards of transparency and exchange of information in a way that is equitable and permits fair competition between all jurisdictions, large and small, developed and developing. The initial group of jurisdictions numbered 32. It now brings together almost 90 jurisdictions. It has been the driving force behind the development and acceptance of these international standards. The 2009 Global Forum meeting was its fifth, the last taking place in 2005.

In 2002, Global Forum members worked together to draft a Model Agreement on Exchange of Information on Tax Matters which is now used as a basis for bilateral agreements. Since 2006, the Global Forum has published annual assessments of the legal and administrative frameworks for transparency and exchange of information in more than 80 countries.

Its most recent assessment, Tax Co-operation 2009
    Towards a Level Playing Field based on information available up until 31st July 2009, was published on 31st August 2009.

Since the London G20 meeting in April, 2009, over 50 new Tax Information Exchange Agreements have been signed (doubling the total number of Agreements signed since 2000) and over 40 double taxation conventions have been signed.

As a consequence, a further 6 jurisdictions have since substantially implemented the internationally agreed tax standards.

Some Recent Judgments

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Service Tax

I. High
Court :


1. Clearing
& Forwarding Agent :



CCE (Bangalore-I) v. Mahavir
Generics, 2010 (17) STR 225 (Kar.) The
Tribunal in this case had held that the assessee could not fall in the category
of C & F agent as their services did not include both clearing and forwarding
operations. The case is reported at Mahavir Generics v. Commissioner,
2006 (3) STR 276 (Tri.-Del.) and it was widely followed by the Tribunals in
various decisions subsequently. Consequently, the Revenue appealed to the High
Court.

The Revenue contended that while
interpreting the meaning the language employed in the statute itself shall
prevail over the dictionary meaning and submitted that in this regard, the
Tribunal ought not to have travelled beyond interpreting the Section and also
relied on Karnataka Power Transmission Corporation Ltd. & Another v. Ashok
Iron Works Pvt. Ltd., (2009 AIR SCW 1502). While the respondent referring to
Prabhat Zarda Factory (India) Ltd. v. CCE, Patna 2006 (2) STR 784
(Tribunal) contended that this decision was overruled by the Larger Bench in the
case of Larsen & Toubro v. CCE, Chennai 2006 (3) STR 321 (Tri.-LB) and affirmed
by the P&H High Court in the case of CCE v. United Plastomers,
2008 (10) STR 229 (P&H), the Tribunal was fully justified in allowing the
appeal.

The agreement of the party with
their principal was discussed in detail. In accordance with the agreement, the
assessee in addition to the other services also provided services of storage and
distribution and also decided the price of the goods on mutual consultation and
could also appoint stockists and dealers for the goods. The Court observed that
the assessee’s contentions were not acceptable mainly on account of the fact
that the assessee was named ‘consignment agent’ in the agreement and therefore
parties were ‘ad-idem’ when the contract was entered into as to what
their status would be and that the assessee was authorised by their principal to
appoint stockists, dealers and agents on their behalf and it was not a case of
mere commission agent but had responsibility of getting the goods stored by
clearing them and forwarding them to stockists, etc. If they were mere
commission agents, these charges would not have found place in the contract.

The Tribunal further observed
that in the case of L&T (supra) only the activity of procuring purchase
orders was involved and such activity was covered under BAS and would not fall
in the category of C & F agents. Similar facts existed even in the case of
United Plastomers.

The High Court also observed
that reliance could not be placed on the decision in the case of CCE,
Jalandhar v. Kulcip Medicines (P) Ltd. 2009 (20) STT 263 (P&H), as while
pronouncing the judgment of the said case reliance was placed on the Tribunal
order of the above case without consideration that the order of the Tribunal in
the above case was not final as the Revenue had preferred an appeal to the High
Court.

As regards the definition of C &
F agent, the Court ruled that even though the definition of Commission Agent is
defined under the Business Auxiliary Services, the interpretation of the clause
tantamount that the definition is also covered under C & F. Further it held that
the definition of C & F was an inclusive one and would cover activities rendered
by the assessee. Hence the appeal was decided in favour of the Revenue.

II. Tribunal :

2.
Auto dealer providing space to finance companies —
whether a BAS ?



M/s. Tribhuvan Motors Ltd. v.
Commissioner of Service Tax, Mangalore, 2010 TIOL 57 CESTAT
(Bang.)

The assessee, an authorised
automobile dealer, was registered under service tax. The Revenue contended that
he was also liable under the category of business auxiliary services (BAS) as he
was promoting the business of the financial institutions situated in his
premises. The assessee contended that no promotion was made by them and they
only gave a table space to the financial institutions and relied on the
decisions in the case of Silcon Honda v. CCE Bangalore, 2007 (7) STR 475
(Tri-Bang.) and CCE v. Chadha Auto Agencies, 2008 (11) STR 643
(Tri-Bang.).

Moreover the Tribunal observed
that there was no dispute with the fact that the assessee only provided table
space and was not promoting the business of the financial institution and
following the ratio in Chadha Auto Agencies (supra) allowed the appeal.



3. CENVAT
Credit :



HPCL v. CCE (Mangalore),
2010 (17) STR 426 (Tri- Bang.)

The assessee, engaged in the
business of refining crude and marketing of petroleum products, sought
registration under the category of storage and warehousing service. In
accordance with S. 3 of the Essential Commodities Act, oil companies are under
obligation to transport petroleum products in specified manner and area.
Pipelines are considered ideal for transportation of crude oil. The
transportation was done by PMHB, a joint venture company specifically promoted
for rendering services of transportation, which charged service tax to the
assessee. The assessee utilised such CENVAT credit for discharging the output
liability. The transportation for the crude oil was simultaneously done for
three other companies also along with the assessee. CENVAT was disallowed as it
was used for others as well.

The Tribunal held that as explained by the learned advocate, the transportation of the products of all the entities together was so done due to techno-logical necessity. Moreover, the Commissioner also stated that the transportation of goods belonging to the assessee in the pipeline was related to the business of the assessee. As the assessee’s case was strong, full waiver of pre-deposit was granted.

T. G. Kirloskar Automotive Pvt. Ltd. v. CCE (Bangalore), 2010 (17) STR 359 (Tri-Bang.)

The assessee was denied CENVAT credit of service tax paid on transportation provided to the employ-ees from their place of residence to factory and vice-versa, relying on the decision of M/s. Stanzen Toy-otestsu India Pvt. Ltd.

Accepting the assessee’s contention that the above-mentioned decision was set aside by the Divisional Bench in the case of M/s. Stanzen Toyotestsu India Pvt. Ltd. v. CCE as reported in 2009 (14) STR 316 (Tri-Bang.) and relying on CCE v. Cable Corporation of India Ltd., 2008 (12) STR 598 (Tribunal) 2008 (87) RLT 783 (CESTAT-Mum.), the assessee’s case was held covered and the appeal was allowed.

Skyline Builders v. CCE (Calicut), 2010 (17) STR 437 (Tri-Bang.)

The assessee rendered goods transport agency service and claimed the benefit of abatement under Notification No. 1/2006, dated March 1, 2006. The assessee was denied abatement on the ground that they had claimed credit also. It was contended by the assessee that CENVAT credit was later reversed. The Tribunal held that in the given circumstances, the abatement could not be denied and pre-deposit was granted.

CENVAT Credit : Whether any time limit applicable for taking credit ?

Pierlite India Pvt. Ltd. v. CCE (Ahmedabad), 2010 (17)
STR 237 (Tri-Ahmd.)

The assessee had taken CENVAT credit in November 2006 for the input services paid during the period January 2005 to October 2005 and plead-ed that no time limit has been prescribed for taking the credit and placed reliance on Coromandel Fertilisers Ltd. v. CCE (A), Visakhapatnam, 2009 (239) ELT 99 (Bangalore) and on Para 3.5 of the CBEC manual. Further the assessee at the time of taking the credit gave all the details of the transactions in writing in November 2006. The Revenue admitted that there was no time limit in the law for availment of credit but relied on the M/s. J. V. Strips Ld. v. CCE, Rohtak, 2007 (218) ELT 252 (Tri.-Del.) and CCE (Hyderabad) v. M/s. Mould-tek Technologies Ltd., 2006 (205) ELT 415 (Tri-Bang.) for extension of time limit for issuing the SCN.

The Tribunal held that the decision relied on by the Revenue in the case of J. V. Strips was pronounced by a Single Member, while the decisions relied on by the assessee are of Divisional Benches. Further the decision of Coromandel Fertilisers was pronounced on 26-8-2008, whereas the decision of J. V. Strips on 26-7-2007. It also observed that the decision of Mould-tek could not be followed as the same Bench had rendered the decision in Coromandel Fertilisers at a later date. In view of the above cases and that the assessee had written a letter in November 2006 clearly ruled out the invocation of extended period and allowed the appeal.

 4.   Consulting Engineer : Whether covers execution of processes ?

Ravi Paints & Chemicals v. Commissioner of Service Tax (Chennai), 2010 (17) STR 354 (Tri-Chennai)

The assessee provided the services of processing of raw material, periodical testing of raw materials, finished products, exercising quality control and maintaining machinery used for manufacturing of dry cement paints of M/s. Brilliant Coating Pvt. Ltd.

The Revenue contended that the assessee was covered under the Consulting Engineer’s service as noticing any defects and the requirement of pointing out them that has to be set right would involve advisory/consultancy services and reliance was placed on Nokia (I) Pvt. Ltd. v. Commissioner of Customs, Delhi (2006 (1) STR 233).

The Tribunal held that the nature of the services did not warrant any consultancy or advisory services. Moreover the Tribunal stated that the decision of Nokia should not be interpreted in narrow sense that in case the engineers are appointed for a certain job it has to be technical consultancy. Hence the assessee was held as not covered under the said service.

 5.   Construction of complex — (a) whether con-struction service or works contract service (b) whether entitled to 100% credit or 20% ?

M/s. Puravankara Projects Ltd. v. Commissioner of Service Tax, Bangalore, 2010 TIOL 28 CESTAT BA

The assessee was engaged in the activity of construction and was registered under the commercial or industrial services and construction of complex services and also registered under Works Contract for the purposes of VAT. The Revenue contended that the assessee should be registered un-der the category of Works Contract for service tax. The Tribunal following the ratio of the decision in the case of Die-bold Systems Pvt. Ltd. v. CST, Chennai 2008 TIOL 489 CESTAT Mad. held that the assessee was already discharging the liability under the existing category for the period prior to 1-6-2007, when the works contract category was introduced, hence was not required to take fresh registration under works contract. Further the Tribunal also ob-served that the main activity of construction of flats and sale by the assessee per se did not involve any taxable service and therefore any ancillary activity forming part of the main activity could not be subjected to tax as works contract service. The various other services rendered by the assessee and the Tri-bunal’s observation on the same were as under :

  1)  Health and Fitness service : The assessee also constructed a gym in the residential complex and had charged the owners of flats. The Revenue contended that such services were covered under the Health & Fitness service and attracted service tax. The Tribunal stated that the facility was owned by the flat-owners and the assessee did not render any health & fitness service. Hence the same could not be considered as liable for service tax.

2)    Real Estate Agent’s service : The assessee had entered into an agreement with the prospective buyers for the flats under construction.
The prospective buyers on their own accord would find other prospective buyers and sell the flat to them. In such a transaction the assessee collected transfer fee from the prospective buyers under the term of the agreement. The Revenue contended that the service pertained to real estate agency. The Tribunal stated that the consideration received as transfer fee could not be considered as real estate agent’s service.

3)    Maintenance of Repair service : The assessee maintained flats constructed till such time they were transferred to the association of owners of the flats. In order to maintain the flats the assessee recovered expenses from the flat owners. Relying on the CBEC Circular that the reimbursable expenditure cannot form part of the value, the Tribunal held that reimbursement of such expenses was not subject to service tax.

The Revenue had also disallowed the input credit on the ground that the assessee should be allowed only 20% credit as the assessee rendered exempt services. The Tribunal held that the consideration received for transfer of right could not be considered exempt services and as such, the assessee could claim 100% CENVAT credit.

In view of the above observations, the Tribunal granted complete waiver and stay.

 6.   Custom House Agent (CHA) : Whether freight forwarding activity a part of CHA service ?

DHL Lemuir Logistics Pvt. Ltd. v. CCE (Bangalore), 2010 (17) STR 266 (Tri-Bang.)

The assessee registered as CHA according to the Revenue did not pay service tax on certain revenue streams. The assessee contended that he rendered two kinds of services (a) consolidation of cargo activities, and (b) CHA activity. The assessee also submitted a flow chart describing in detail the flow of services rendered by him. The services that were not included were :

a)    Charge collect fees (CCX fees) : The fees pertain to collection and remittance of freight to in-ternational air and water carriers. It was held that the services so rendered are not covered by CHA’s services.

 b)   Break bulk fees : In case when cargo was transported from outside India to India, margin was paid to the assessee and in the case when cargo was transported from India to outside India the assessee would have paid the margin and hence this was not covered as CHA’s service.

c)    Profit share from origin : In case of imports/ exports transactions made through third party as done in break bulk fees, margin was paid. This also was not considered as CHA’s services as break bulk fee itself is not CHA’s service.

d)    Unallocated income : Charges collected for various services are accounted into respective revenue heads on raising of the invoice on the customer. Later in case of any modification, correction, reversal of charges the entries are passed through the unallocated income head. Hence the amounts under this head do not relate to CHA’s services.

 e)   Currency adjustment factor : This is collected as part of freight in order to cover the ex-change rate fluctuations and hence this does not pertain to CHA’s services.

 f)   Air/sea rebate : Air or ship carriers offer bulk space quota and the assessee is booked as the shipper and later the assessee collects the amount from the customers and the difference between the two rates is air/sea rebate. The nature of the amount is not covered as CHA’s services.

  g)  Commission/brokerage : IATA is a worldwide trade association of the international air transporters. The assessee being registered with IATA can sell the air cargo transportation to the passenger and receives commission as a percentage of freight booked. Similarly it renders services for shipping industry and these charges do not relate to CHA’s services.

  h)  Air freight incentive : Air carriers offer incentives in the quantum of cargo booked and hence the services are not related to CHA’s services.

i)   Expenses, reimbursement billing : Charges are collected for expenses such as delivery charges, priority handling charges, courier charges, break bulk fees, statistical charges, etc. In case of such charges if margin is charged they shall be included in CHA’s services.

Hence the order was remanded to the Original Au-thority for determining the liability in the light of observations made by the Tribunal on various services and further directed to obtain CA certificate.

(Note : Readers may note that any kind of commission or brokerage income would be taxable as business auxiliary service while acting on behalf of a client at relevant time).

  7.  Jurisdiction :

CCE (Guntur) v. Integral Construction Company, 2010 (17) STR 380 (Tri-Bang.)

The assessee was providing the services of blast hole drilling, blasting, excavation, loading, transportation, dumping, etc. in the mines in Madhya Pradesh and accordingly, the services were covered under the category of site formation and clearance excavating and earthmoving demolition services. The SCN, however, was issued by CCE, Guntur.

The assessee in this case did not have centralised registration and therefore, technically for his various premises, he required separate registration. In the instant case, the Tribunal dismissed the appeal on the issue of jurisdiction based on the decision in the case of Ores India Ltd. v. CCE, 2008 (9) STR 157 (Tri.-Kol.).

    8. Leasing of stalls : Whether taxable as Business Exhibition service ?

Karnataka Exhibition Authority v. CCE (Bangalore), 2010 (17) STR 296 (Tri-Bang.)

The assessee’s service of leasing of stalls during Dassera festival to the highest bidder was held taxable in revision order. Further, the assessee did not provide any direct service to the lessees of the stalls. The Tribunal held that the leasing of the stalls was not covered as Business Exhibition services and was allowed.

  9.  Management Consultancy : Whether ERP implementations covered ?

M/s. IBM India Pvt. Ltd. v. Commissioner of Service Tax, Bangalore, 2010 TIOL 167 CESTAT Bang.

The assessee provided services in relation to implementation and adoption of ERP software and did not pay service tax thereon. However in respect to their services of planning and advise relating to ERP, they discharged the liability under the category Management Consultancy services and the Revenue also agreed to this. In respect of services relating to implementation and adoption of ERP, according to the assessee they were covered under the Information Technology Software services effective from May 16, 2008 and the Revenue wanted to cover it under the Management Consultancy services. Reliance was placed on BCCI v. CST, [2007 (7) STR 384 (Mumbai-Tribunal)], Glaxo Pharmaceuticals [2005

    ELT 171 CESTAT] and inter alia stating that in case of introduction of a new category, it is implied that the service was not taxable earlier.

The reasons highlighted were that the services were not in connection with the management of the organisation, the services should not be covered in the inclusive definition of management service and moreover the services rendered being of executory were not covered. Reliance was inter alia also placed on CCE, Mumbai-IV v. AISCO Engineering Pvt. Ltd., 2006 (5) STJ 171 (Tri-Mum.). The assessee also contended that prior to September 20, 2004 these services were exempted from service tax and with effect from September 10, 2004 the services were specifically exempted from the definition of consulting engineer’s service and that the exemption was removed only on the introduction of the new ser-vice of information technology from May 16, 2008. Reliance was placed on the case of Federal Bank Limited (2009 TIOL 584 CESTAT Bang.). The Tribunal relying on this decision and other decisions held that the services of implementation and adoption of ERP was not covered under the category of management consultancy services but was squarely covered as IT software service introduced from 16-5-2008.

   10. Business Auxiliary Service : Money Transfer Service : Whether taxable ?

Muthoot Fincorp Ltd. v. CCE (Bangalore), 2010 (17) STR 303 (Tri-Bang.)

The assessee, an NBFC having network in vari-ous states entered into an agreement with Weiz-mann Forex Ltd., Cochin (WFL) which represented Western Union Financial Services Inc. (Western Union). The assessee provided money transfer service. The Revenue held that the service was a Business Auxiliary Service (BAS) and since it was rendered to a party in India there was no ‘export’.

The assessee contended that it was not covered under BAS as it did not promote the services of money transfer, but only displayed the publicity material given to them and it should be covered under the Banking and Financial services which covers transactions of money transfer with effect from May 01, 2006. Hence as the specific service came into force on May 01, 2006, the same could not be taxed from a prior date. Alternatively, if it was covered under the BAS, then Export Rules could exempt the service as one of the conditions stipulated by the Export Rules is that the services should be used outside India. The Tribunal ruled that even if the agreement was between the assessee and WLF, the beneficiary of the transaction was Western Union and the services so rendered by the assessee were utilised by Western Union outside India and hence this condition of the Export Rules was satisfied.

Further as regards the condition of receipt of consolidation in convertible foreign exchange, the Tribunal relied on Nipuna Services Ltd. v. CCE&ST, Hyderabad, 2009 (14) STR 706 (Tri-Bang.) that the condition was only applicable to Rules 3(1) and 3(2) of the Export Rules at given time. In case it was to be made applicable to Rule 3(3), then the Notification would have expressed so, but the Notification only mentioned Rule 3(1) and Rule 3(2) and the ap-peal was allowed accordingly.

   11.  Penalty : Not leviable when bona fide belief of non-taxability exists :

CCE (Ludhiana) v. Instant Credit, 2010 (17) STR 397 (Tri-Bang.)

The assessee acted as a Direct Sales Associate (DSA) and was therefore liable to service tax under the category of Business Auxiliary services and did not obtain registration as it had a belief as to non-taxability. However, on officers visiting the premises and insistence as to liability, the assessee paid service tax when the SCN was issued and pleaded for relief in penalty on bona fide belief. Since the Department did not have evidence of the assessee having intention of suppression, the Tribunal did not interfere with the decision of the Commissioner (Appeals) and held that no penalty was leviable.

Vista Infotech v. Commissioner of Service Tax, Bangalore, 2010 (17) STR 343 (Tri-Bang.)

The authorities noticed that the assessee, even though collecting service tax, did not deposit the same and pleaded financial hardship on account of non-payment by a major client. The assessee appealed against penalty and not against the confirmation of liability and interest and relied on the Board Circular No. 137/167/2006-cx-4, dated 3-10-2007 and further relied on the Tribunal’s decision in the cases of Essar Steel Ltd. v. CCE&C (Su-rat), 2009 (13) STR 579 (Tri-Ahmd.); Vee Aar Secure v. Commissioner of Service Tax, Bangalore, 2009

    STR 50 (Tri-Bang.) and V.S.T. Tillers Tractors v. Commissioner of Central Excise, Mysore, 2009 (14) STR 159 (Tri-Bang.).

Observing that the assessee regularly paid the tax for the earlier period and the fact that the liability was discharged before the end of the proceedings, the assessee was held entitled to relief u/s.73(3) and relying on the judgments cited above, no penalty was held leviable.

   12. Refund : Service tax paid on input services for period prior to 18-4-2006 :

Polyspin Ltd. v. CCE (Tirvunelveli), 2010 (17) STR 441 (Tri-Chennai)

The Commissioner (Appeals) upheld the order of the adjudicating authority for recovery of refund considering it as erroneously granted for input services not liable for service tax. The recovery proceedings were ordered for the refund of tax paid for the period prior to April 18, 2006, the date on which S. 66A came into effect when the assessee was not liable to tax. The Tribunal held that the refund could not be denied on the mere ground that the assessee was not liable to tax and hence the appeal was allowed.

    13. Valuation : Material sold by advertising agency :

CCE (Chennai) v. Elegant Publicities, 2010 (17) STR 263 (Tri-Chennai)

Scanning charges and publicity material charges collected from customers by an advertising agency were contended by the Revenue as part of taxable service.

The assessee contended that they had not done any preparation, visualisation or conceptualisation of the publicity material but only purchased and sold the same to the customer. Since this was not successfully rebutted by the Revenue, it was held that mere sale and of publicity material is not a taxable service and similarly scanning also is not covered under the advertisement services.

Valuation : Material supply :

Hindustan Aeronautics Ltd. v. Commissioner of Service Tax (Bangalore), 2010 (17) STR 249 (Tri-Bang.)

The assessee undertook repair and overhauling of various engines received from the Ministry of Defence and others. The adjudicating authority concluded that the assessee did not discharge the correct service tax liability and the documents did not reflect the payment of sales tax on the value of material. The assessee submitted that in an identical issue in their own case, a final order was passed by the Tribunal in 2010 (17) STR (Tri-Bang.), the only difference being it was in the case of their helicopter division. Further the assessee submitted that they had availed the benefit of Notification 12/2003 and the same could not be denied. The invoices captured the material and labour cost separately and the documentary evidence of payment of sales tax was also provided. The Tribunal after considering the documentary proof of payment of sales tax held that the assessee could not be denied the availment of benefit of Notification 12/2003 and consequential relief was granted.

Some Recent Judgments

I. Supreme Court :


    1. Penalty :

    Whether levy of penalty can be considered by Court while considering quantification of penalty under a civil appeal ?

    Commissioner of Central Excise, Haldia v. Exide Industries Ltd., 2010 (19) STR 291 (SC)

    The appellants tried to challenge the levy of penalty in the civil appeal filed for its quantification. The Supreme Court rejected the appeal observing that the Tribunal had rejected the appeal for levy of penalty against which the appellants did not appeal. The Court did not express any opinion on merits.

II. High Court :

2. Penalty :

    Whether penalties u/s.76 and u/s.78 can be imposed simultaneously for the same default ?

    Commissioner of C.Ex. Chandigarh v. City Motors, 2010 (19) STR 486 (P&H)

    The Adjudicating Authority levied penalty on the assessee u/s.76 and u/s.78 for the same default. In the first appeal, penalty u/s.78 was reduced and penalty u/s.76 was set aside and this decision was affirmed by the Tribunal. In the Revenue’s appeal to the High Court, it was held that penalty u/s.78 is sufficient to cover the default and two penalties for the same default cannot be imposed.

3. Import of services :

    Can service tax be levied on firms or body corporate under consulting engineer’s services prior to 1st May, 2006 ?

    Commissioner of Service Tax, Bangalore v. Araco Corporation, 2010 (19) STR 169 (Kar.)

    The Department, in appeal, claimed that the respondent providing technical assistance and know-how to an Indian company should be liable to service tax under the category of ‘consulting engineer’s services’ for the period from November, 1998 to December, 2000.

    The assessee contended that S. 65(31) dealt with the definition of ‘consulting engineer’ not the taxability thereof and the term ‘body corporate and any other firm’ in the said S. 65(31) was introduced only w.e.f. 1st May, 2006 and therefore, in the period prior to this date, the category applied only to individuals.

    Secondly, the assessee also claimed that S. 65(31) applied only to an Indian service provider and the foreign service provider is liable to service tax only after the introduction of S. 66A w.e.f. 18th April, 2006.

    According to the Court, reference to S. 65(31) being irrelevant was not acceptable and even on assuming its applicability, it applied only to services of Indian consulting engineers.

    Holding that during the disputed period, the definition did not apply to a firm or body corporates and reverse charge also did not apply prior to 18th April, 2006, the Department’s appeal was dismissed.

    [Author’s Note : The term ‘an engineering firm’ was always there in the definition introduced with effect from 7-7-1997. Therefore, the conclusion is based on misquoted legal provision. However, primarily reverse charge did not apply prior to 18-4-2006 and therefore, it would not impact the decision based on misquoted legal provision.]

4. Liability to pay service tax :

    Whether liable when the services are provided by the principal ?

    Commissioner of Central Excise v. P.C. Paulose, 2010 (19) STR 487 (Ker.)

    By an agreement with Calicut Airport Authority Ltd., a right to collect entrance fees from visitors was provided to the assessee and therefore, the service tax was demanded from them. The demand was confirmed in the first appeal. The Tribunal’s order that the Airport Authority was rendering service and not the respondent was challenged by the Department.

    The High Court held that once licence was given by the Airport Authority to the respondent to permit entry and allow enjoyment of services provided to the visitors, the respondent was a service provider though he was acting only as an agent and liable for service tax.

5. Recovery of dues :

    Can the Department directly recover dues from principal employer u/s.87 ?

    ONGC Ltd. v. Dy. Commissioner of Cus., C. Ex. & S.T., Rajahmundry 2010 (19) STR 164 (AP)

    The Department was of the view that even though no assessment order was passed, manpower supply agencies were liable for assessment and since ONGC made substantial payment to them, notice u/s.87 of the Finance Act, 1994 could be issued on principal employer directing it to remit the payment.

    ONGC Ltd. contended that it was not required to pay service tax in respect of payments made to manpower supply agencies and in absence of any assessment order, the question of directing the principal employer to pay service tax liability did not arise. The High Court observed that the authorities have the responsibility of collecting data and pass an assessment order. Only if there’s a failure or default in payment by the assessee, the Department has the option to call the principal employer in terms of S. 87 of the Finance Act, 1994. Without an assessment order in place, service tax was not crystallised and therefore, S. 87 could not be invoked.

6. Search & seizure :

    Whether Revenue could retain the amount collected during search or seizure in absence of liability being crystallised ?

    Naresh Kumar & Company v. Union of India, 2010 (19) STR 161 (Cal.)

    Search was carried out in the petitioners’ premises and various records and documents were seized. The petitioners claimed that they were compelled to handover cheque of Rs 15 lakh to protect against service tax liability.

    The High Court held that the trial judge did not decide the matter in the right direction and the actual issue was whether the Department could re-tain this amount under the provisions of law. While examining communication with the Department, it could be concluded that the payment was not voluntary and no provisions in the service tax law could justify compulsory payment of service tax in advance. Therefore, no amount could be withheld and the Department was bound to return the same with interest @ 9% per annum.

        7. Storage & warehousing:
    Whether service tax is applicable on compensation received from Government for storage of free-sale sugar?

    Commissioner of C. Ex., Chandigarh v. Nahar Industrial Enterprises Ltd., 2010 (19) STR 166 (P & H)

    A manufacturer of sugar was directed by the Gov-ernment to maintain buffer stock and was also compensated towards storage, interest, insurance charges, etc. by way of subsidy. The Revenue contended that buffer subsidy was taxable under ‘storage and warehousing services’.

    The High Court observed that the respondent stored its own stock in buffer and therefore, there is no service provider and service-recipient relationship emerging as one cannot provide service to his own self. Further, the subsidy was meant as compensation for loss of interest, insurance, etc. and not for rendition of any service. The respondent could not be construed as ‘storage and warehouse keeper’ and Government could not be held as its ‘client’ and accordingly, the appeal was dismissed.

    III. Tribunal:

        8. CENVAT credit:
        i)     Whether CENVAT credit is allowable fully to a service provider having a trading activity in view of Rule 6(3) of CENVAT Credit Rules, 2004?

    Orion Appliances Ltd. v. Commissioner of Service Tax, Ahmedabad 2010 (19) STR 205 (Tri.-Ahmd.)

    The appellant engaged in providing repairs and maintenance services and commissioning and installation services was taking full CENVAT credit on advertising, security, courier, telephone and banking services. However, these input services were being used for providing repairs and maintenance services and trading activities. The Department contended that the appellant is liable to pay service tax for excess CENVAT credit availed in respect of trading activities in terms of Rule 6(3) of CENVAT Credit Rules, 2004.

    The appellant contested that Rule 6, requiring maintenance of separate books of accounts, applies only to an assessee engaged in providing exempted as well as taxable services and trading activities cannot be considered as exempted services and therefore, Rule 6(3) did not apply to him.

    The Tribunal accepted that trading activity was not a service and therefore, Rule 6(3) did not apply. However, full CENVAT credit could not be availed by the appellant as CENVAT credit of input service requires one to one correlation with output services. Therefore, the appellant had to choose and segregate the quantum of input service attributable to trading activity and exclude the same from availment of CENVAT credit. Since the quantum could not be ascertained in advance, the appellant should calculate such amount once in a quarter or every six months. The matter was remanded for quantifying the amount of reversal, if required, after giving an opportunity to appellant.

        ii) CENVAT credit: Outward transportation up to the place of removal when sale is for destination at customer’s premises:

    L. G. Electronics (India) Pvt. Ltd. v. Commissioner of C. Ex., Noida 2010 (19) STR 340 (Tri.-Del.)

    The appellant availed CENVAT credit of service tax on GTA service in respect of outward transportation of finished goods from factory gate to the customer’s premises or from factory to depots and from depots to customer’s premises. However, the department contended that the outward transportation from place of removal i.e., factory gate or depot to customer’s premises was not covered within the definition of ‘input service’ under Rule 2(l) of CENVAT Credit Rules, 2004.

    The appellant contended that in all the cases, the sales to dealers, whether from factory gate or depots, was on FOR basis. Therefore, the goods were transported at the appellant’s risk and sale took place at customer’s premises and the customer’s price included the transportation cost.

    Since the words ‘place of removal’ are not defined in CENVAT Credit Rules, they must be understood as defined by S. 4 of the Central Excise Act where-under the customer’s premises are considered as the place of removal. The credit in respect of GTA services for transportation from factory gate to depots should not be denied as the sales are held to be made from depots. In terms of Circular No. 97/8/07-ST dated 23-8-2007, CENVAT credit of GTA services up to customer’s premises were available to the appellant. Even if duty was paid on MRP-based valuation, credit of GTA services could be taken in terms of Circular No. 137/3/2006-CX-4, dated 2-2-2006.

    The Department contended that in case of payment u/s.4A, Board’s Circular No. 97/8/07 ST, dated 23rd August, 2007 was irrelevant and CENVAT credit could not be availed by the appellant. U/s.37(2)(xvii) of the Central Excise Act, Central Government is entitled to make rules for credit of service tax as well as excise duty. Since there was no nexus between manufacture and input service, outward transportation from the place of removal could not be regarded as ‘input service’. The scope of CENVAT Credit Rules, 2004 could not travel beyond the scope of provisions of the Central Excise Act.

    The Tribunal in turn observed that the Department’s contention that input duty credit is available only in respect of services used in or in relation to manufacture in terms of S. 37(2) of the Central Excise Act and that “in case of conflict between provisions of the Act and provisions of Rule, provisions of the Act shall prevail” does not hold good for reasons that in Bombay Tyre International Ltd. 1983, the Supreme Court held that it was not acceptable that because the levy of excise was on manufacture, the value of excisable goods must be limited to manufacturing cost and profit only. Referring to the basic principle of value added tax and valuation aspect, since all expenses up to place of removal were included in assessable value, the Tribunal observed that the whole scheme of Central Excise levy is to be kept in mind rather than interpreting Rule 2(l) of CENVAT Credit Rules, 2004 and S. 37(2) of Central Excise Act in isolation. The contention of the Department that the duty was paid u/s.4A was found baseless as availability of credit and valuation for payment of duty were found to be two independent issues as explained vide Circular No. 137/3/2006. Since the matter was decided exparte, the case was remanded back to the Commissioner to examine whether the sale was on FOR destination basis and if this was found to be the fact, direction was provided to allow credit up to customer’s place.

        iii) Outdoor catering service used in the factory not an input service

    Commissioner of C.Ex., Chennai v. Sundaram Brake Linings, [2010 (19) STR 172 Tri-Chennai]

    There were 13 appellant manufacturers to the issue involving availment of CENVAT credit on outdoor catering service disallowed holding that they were not used for manufacturing excisable products. Applying decision of GTC Industries 2008 (12) STR 468, the appellate authority allowed the credit.

    The Department contended before the Tribunal citing the case of CCE, Nagpur v. Manikgarh Cement Works, 2010 (18) STR 275 that in order to fall in the definition of input service, the service must be used in or in relation to manufacture directly or indirectly and outdoor catering service had no nexus with the manufacturing activity.

    The appellants relied on the decision of GTC Industries (supra) and contended that it was rightly followed by the first Appellate Authority and since the value of catering service formed a part of cost of production, the same was to be considered as an input service. The Tribunal stated that the Central Government is empowered to frame rules for grant of credit of duty of service tax and held that outdoor catering service cannot be considered as input service and restored the original order deleting however, penalties imposed by the original authority.

        iv) Whether CENVAT credit allowable on invoices in the name of branch, not registered under service tax?

    Manipal Advertising Services Pvt. Ltd. v. CCE, Mangalore 2010 (19) STR 506 (Tri-Bang.)

    The appellant provider of advertisement services was disallowed credit on invoices addressed to branch offices both by original and Appellate Authorities.

    The appellant referred to Rule 4(2) of Service Tax Rules, 1994 which provided that in case of centralised billing or centralised accounting system, in respect of any services, the assessee had the op-tion to register the premises or offices from where centralised billing or central accounting system was located. Accordingly, the appellant got registered its premises on the ground that they had centralised billing or central accounting system. Reliance was placed on the case of Stadmed Pvt. Ltd. 1998 ELT 466 wherein credit of duty was allowed on invoices addressed to branch offices. However, according to the Department, in absence of centralised registration, credit in respect of inputs used at branches was not admissible.

    The Tribunal held that since the appellant discharged service tax liability, the benefit of CENVAT credit could not be denied on the ground that invoices were in the name of branch. The appeal was allowed.

        9. Stay of pre-deposit:

    Whether appellant is engaged in providing business auxiliary services?

    Jetlite (India) Ltd. v. Commissioner of C. Ex., New Delhi 2010 (19) STR 209 (Tri.-Del.)

    The appellant took over M/s. Sahara Airlines Ltd. (SAL) and added the category of ‘business auxiliary services’ in March, 2007 in service tax registration. The Department demanded `128 crore of service tax for the period from July, 2003 to January 2007 under the said category and interest and penalty of the same amount.

    The appellant had entered into an agreement with Sahara India Commercial Corporation Limited (SICCL) in 1995 to promote business of SICCL of housing and real estate projects through printing it on air tickets. Consideration was paid based on per ticket.

    SAL accounted the money received as ‘operational revenue’. However, SICCL recorded the same as ‘project work in progress’ as it was a capital expenditure.

    The Department contended that SAL being already registered with Service Tax authorities ought to have disclosed material facts in the ST-3 return. However, the appellant had taken opinion on 4th August, 2003 in regard to the present activity and therefore, was under a bona fide belief. Therefore, the appellant relisted invoking of extended period of limitation.

    According to the appellant, they merely used logo of SICCL and as per agreement, no brochures or other arrangements to popularise the business was carried out. The difference between promotion of sale of goods and use of brand was explained and the appellant claimed that the entire consideration was only towards display of logo.

    The Tribunal observed that:
    Levy and collection of tax is regulated by law and not by contract. The term ‘service’ has a variety of meanings, but has to be construed depending on the context in which it is used. An activity provided individually or integrally would not make any difference as to its charge. The character of service does not change with permutation or combination of services and the nature of services does not alter if certain clauses of agreement are not fulfilled. No evidence was led to prove that use of logo was not helpful to promote real estate business of SICCL. The information of SICCL’s projects was supplied purposely to air travel passengers.

    There was no case made out to show that undue hardship would be caused to the appellant if no full waiver was granted. Noting Ravi Gupta’s case 2009, wherein it was held that if prima facie it appears that the demand raised would not stand, the assessee should not be compelled to pay full or substantial part of the demand. The appellant was directed by the Tribunal to make pre -deposit of `100 crore within eight weeks of the date of receipt of the order staying the balance demand.

Some Recent Judgments

I.          HIGH
COURT :

 

1.         Applicability
of Service Tax :

 

Whether laying pipes in
wall/roof/floor, etc. or fixing cable trays and digging earth to lay cables,
etc. liable under ‘Erection, Commissioning or Installation service’.

 

Commissioner of C. Ex., Chandigarh v.
Rajeev Electrical Works, 2010 (18) STR (P&H)

 

The appellant, engaged in electrical
fittings obtained registration under ‘Erection, Commissioning or Installation
service’ on 30-11-2004. Since the service was taxable from 1-7-2003, a
show-cause notice was issued for recovery of tax with interest and penalty for
the period 1-7-2003 to 30-11-2004.

 

The appellant contended that they were
engaged in laying pipes in wall/roof/floor for crossing of wires, fixing the
junction box, etc. and were not involved in any services in relation to
installation of plant, commissioning, machinery and equipment for the period
under dispute.

 

In Department’s appeal, the High Court held
that laying pipes in wall/roof/floor for crossing of wires, fixing the junction
box, etc. would not amount to installation of plant, commissioning, machinery
and equipment, and therefore was not liable to service tax. A reference was
made to Circular No. 62/11/2003, dated 21 -8-2003 where it was clarified that
putting up electric wires and fitting in residential premises would not be
covered in the definition of taxable service and thus not liable to service
tax.

 

2.         Applicability
of Service Tax on Rent-a-cab :

 

Whether tourist permit is essential for
levying tax on tour operator under Rent-a-cab service.

 

Commissioner of C. Ex., Chandigarh v.
Kuldeep Singh Gill, 2010 (18) STR 708 (P&H)

 

The respondent was providing transport
service to Indian Oil Corporation (IOC) for which service tax was demanded
under ‘Rent-a-cab’ category.

 

The Commissioner (Appeals) upheld the levy
of tax and penalty u/s.76.

 

However, the Tribunal held that since the
cabs were not leased to IOC for use of the vehicles at its own discretion,
service tax was not leviable.

 

In Department’s appeal to the High Court,
relying upon the decision in Secretary Federation of Bus Operators v. Union of
India, 2006 (2) STR (Mad.), it was observed that S. 65 of service tax
articulates a tourist vehicle and not holding a permit under the Motor Vehicle
Act as necessity for levy of tax. Just because it is essential to hold a permit
under the Motor Vehicle Act, the same cannot be made squarely applicable to
service tax.

 

Hence, it was held that the respondent
provided transport service and was liable for service tax under Rent-a-cab service.

 

3.         Order
:

 

Whether a letter from Commissioner
can be treated as order.

 

Chief Commissioner, LTU, Bangalore v.
TNT India Pvt. Ltd., 2010 (19) STR 5 (Kar.)

 

The respondent engaged in door-to-door
international courier service, approached the Additional Commissioner
questioning the applicability of service tax on the service provided by them.
The Additional Commissioner confirmed that the service was not taxable vide
order dated 23-12-2004.

 

Subsequently the Revenue realised that the
said order was against the Circular No. 341/43/96 TRU dated 31-10-1996 and
hence the order of Commis-sioner was void-ab-initio. A letter dated 9-1- 2006
was issued in this respect. The respondent filed an appeal before the Tribunal
contending that the letter dated 9-1-2006 was an order and the same was
appealable. The order was passed without providing opportunity of being heard
and hence was bad in law. The Tribunal passed the order in favour of the
respondent.

 

The Revenue then preferred an appeal before
the High Court where the main issues involved were :

 

(a)        Whether
Tribunal was correct in concluding that the letter of Commissioner was an order
appealable u/s.86, even though same was not passed u/s.73, u/s.83A, u/s.84 or
u/s.85 of the Finance Act, 1994 ?

 

(b)        Whether
‘International Flight’ activity was taxable service ?

 

The Revenue asserted that the letter of
Commissioner was only a clarificatory letter and powers conferred u/s.73,
u/s.83A, u/s.84 or u/s.85 of the Finance Act, 1994 were not exercised and
consequently S. 86 for appeals to the Appellate Tribunal could not be made
applicable. Hence, the order passed by the Tribunal was not maintainable.

 

The respondent contended that the letter
issued by the Commissioner was a valid order u/s.84 and was passed without
providing opportunity of being heard. Similarly the letter issued to the
respondent was different from the letter issued to the lower authorities. The
letter was incomplete and did not contain footnote, which contained directions
to the lower authorities to issue a show-cause notice for recovery of service
tax and interest thereon.

 

The High Court examined S. 84 pertaining to
revision of orders by the Commissioner and affirmed that any exercise of power
u/s.84 was an order within the meaning of the Finance Act, 1994. The Court
opined that order of the Additional Commissioner was reviewed by the
Commissioner. Therefore, the Commissioner should have provided opportunity of
being heard.

 

Hence, the High Court held that the
Tribunal was correct in concluding that the letter of the Commissioner was an
order, it was appealable and directed the competent authority to pass a valid
order on the issue of taxability after providing opportunity of being heard.

 

 

4.         Powers
of Director General of Service Tax (DGST) :

 

Whether DGST has power to entertain
appeal against order of lower authorities?

 

Aircargo Agents Association of India v.
Union of India, 2010 (18) STR 715 (Bom.)

 

The High Court in its order against writ
petition directed the parties to approach the DGST and the DGST to grant a
hearing before passing an order.

 

 

However, the parties contended that the
DGST had no power to entertain appeal against order of the lower authorities
and pass order.

 

The High Court held that the DGST did not
have power to pass orders.

 

II.        TRIBUNAL
:

 

5.         Applicability
of Service Tax :

 

Whether secondary services provided
towards export of services are exempt ?

 

Ruth Shipping Agencies Pvt. Ltd. v.
Commissioner of C. Ex., Thirunelveli, 2010 (19) STR 39 (Tri-Chennai)

 

The appellant, a CHA received brokerage
from steamer agent for arranging containers on which service tax was demanded
as ‘Business Auxiliary Service’. The appellant contended that the service was
non-taxable and the same was accepted by the Assistant Commissioner. However a review
order was passed by the Commissioner who held that the appellant was liable to
tax.

 

In an appeal preferred to the Tribunal, the
appellant relying on Circular No. 56/5/2003, dated 25-4-2003 contended that
secondary service of arrang-ing a container were primarily used by exporter of
services and they get consumed/merged with exported services, they were not
liable to tax.

 

 

The Tribunal holding that the view of the
appellant was corroborated by Lee & Muirhead Pvt. Ltd. v. Commissioner of
Service Tax, Bangalore, 2009 (14) STR 348, the demand was set aside.

 

6.         Burden
of proof of suppression :

 

Whether Department owns the burden to
prove suppression of facts by the assessee ?

 

R. A. C. Steels v. Commissioner of
Central Excise, Salem, 2010 (18) STR 775 (Tri-Chennai)

 

The Department levied penalty u/s.76,
u/s.77 and u/s.78 of the Finance Act, 1994 invoking extended period of
limitation.

 

The appellant pleaded to the Tribunal of
their ignorance. However, their prayer that the burden to prove that there was
suppression of facts by the appellant was not discharged by the Department was
accepted and penalties were set aside.

 

7.         CENVAT
Credit :

 

Whether CENVAT credit on washing
machines used in factory allowable ?

 

Commissioner of C. Ex. & ST, LTU,
Bangalore v. Micro Labs Ltd., 2010 (18) STR 771 (Tri-Bang.)

 

The respondent utilised CENVAT credit on
indus-trial washing machines falling under Chapter 84 of CETA and used for
washing uniforms of employees. The Department denied the credit on the machines
contending that the same are not used in manufacture of final products.

 

The matter was decided in favour of the
respondent by the Deputy Commissioner, LTU as well as the Commissioner
(Appeals).

 

The appellant relied upon India Cements
Ltd. v. CCE, Trichy 2006 (205) ELT 170 (Tri-Chennai) where it was held that any
capital goods which do not take part in the process of manufacture are not
eligible for CENVAT credit.

 

According to the assessee, industrial
washing machines fall within the definition of ‘capital goods’ as defined in
Rule 2(a) of the CENVAT Credit Rules, 2004. Further, the Commissioner (Appeals)
found that requirement of clean clothes is mandatory as per Rule 5.4 of the
Drugs & Cosmetics Act, 1945. The assessee also relied upon the case of
Toyota Kirloskar Motor Ltd. v. CCE, Bangalore-III, 2002 (148) ELT 402
(Tri-Bangalore).

 

The Tribunal held that the industrial
washing machines fall within Rule 2(a) and as they are used in factory of
manufacture, credit was admissible.

 

8.         CENVAT
credit on construction :

 

Whether CENVAT credit on construction
of staff quarters allowable?

 

The Laxmi Vilas Bank Ltd. v.
Commissioner of Central Excise, Trichy 2010 (19) STR 40 (Tri-Chennai)

 

CENVAT credit on construction of staff
quarters was disallowed on the ground that the staff residential quarters
located within the bank premises cannot be construed as office relating to bank
premises.

 

The Tribunal held that construction
services used in staff residential quarters located within the bank premises
are covered under the definition of input service as per Rule 2(l) of the
CENVAT Credit Rules, 2004. So, the CENVAT credit on construction service was
allowed.

 

9.         Penalty
:

 

Whether penalty u/s.76 and u/s.78 is
mutually exclusive ?

 

AR. AS. PV. PV. Motors Erode (P) Ltd. v.
Commissioner of Central Excise, Salem, 2010 (18) STR 722 (Tri-Chennai)

 

The appellant was ordered to pay penalty
u/s.76 and u/s.78 of the Finance Act, 1994 where service tax and interest were
already paid prior to com-munication of adjudication order.

 

The appellant contended that the penalty
u/s.76 and u/s.78 was mutually exclusive and since they had paid the penalty
u/s.78 @25%, the penalty imposed u/s.76 was liable to be set aside.

 

The appellant relied upon S. 78(1) of
service tax and the Tribunal’s decision in the case of M/s. Safe Test
Enterprises v. Commissioner of Central Excise, Salem and argued that since
service tax and interest had been paid prior to communication of the order,
penalty u/s.78 was liable to be reduced.

 

 

The High Court agreed with both the
contentions and set aside the penalty u/s.76 and reduced penalty u/s.78 to 25%
of service tax demanded.

 

10.       Refund
:

 

Whether refund can be denied on the
grounds beyond the scope of show-cause notice ?

 

Caliber Point Business Solutions Ltd. v.
Commis-sioner of Service Tax, Mumbai, 2010 (18) STR 737 (Tri-Mumbai)

 

The appellant, a BPO service provider filed
refund claim under Rule 5 of the CENVAT Credit Rules which was rejected on
technical grounds like ab-sence of registration number on input invoices,
non-availability of original invoices and absence of nexus between input and
output services. How-ever, no explanation was provided for absence of nexus.

 

The appellant filed an appeal wherein
rejection was made on the ground of absence of nexus, non-utilisation of CENVAT
credit and difference between ST-3 and refund claim. The later two grounds were
not a part of the original show-cause notice.

 

Relying on Reckitt & Colman of India
Ltd. v. CCE, 1996 (88) ELT 641 (SC), it was held that the Tribunal cannot
travel beyond show-cause notice and favour the Revenue and require the
appellant to meet demands which were never required to be met before the
Revenue.

 

Regarding the absence of nexus in case of
rent-a-cab service, air travel service and BPO service, the appellant relied
upon CST, Delhi v. Conver-gys India Pvt. Ltd., 2009 (16) STR 198 (Tri-Del.)
wherein it was held that without questioning the CENVAT credit, its eligibility
for rebate cannot be questioned.

Further the refund claim was allowed as the
appel-lant proved the nexus between rent-a-cab service, air travel service and
BPO service.

 

 

Refund — GTA service :

 

Whether service tax on transport
service paid by GTA as well as consignor can be refunded to GTA ?

 

Commissioner of C. Ex., Cochin v. Garuda
Transport, 2010 (18) STR 773 (Tri-Bangalore)

 

The respondent filed refund claim of
service tax on transport service paid twice. The tax was paid by him and the
consignor also. The refund claim was rejected by the lower authorities on the
ground of inadequacy of records. An appeal to the Commissioner (Appeals) was
filed by the Revenue.

 

The Commissioner (Appeals) in his findings
record-ed that the respondent had submitted audited final accounts, freight
bills, challans, CA certificate as to absence of unjust enrichment and
certificate from the sole consignor and accepted double payment of service tax
and held refund claim as valid.

 

The Revenue contended that the Commissioner
(Appeals) did not verify the documents to prove absence of unjust enrichment.
However, the Tribunal held that findings in order of the Commissioner (Appeals)
indicate that he had verified all the relevant documents and hence the refund
claim was accepted.

 

11. Review order : Scope :

 

Whether a review order can be passed
after appeal is filed against the original order ?

 

Avery India Ltd. v. Commissioner of
Service Tax, Delhi, 2010 (18) STR 760 (Tri-Delhi)

 

A refund claim of the appellant was accepted
by the Department but was credited to Consumer Welfare Fund. The Commissioner
(Appeals) how-ever passed the order that refund be credited to the appellant’s
account.

 

On receipt of order from the Commissioner
(Appeals), the Commissioner issued a show-cause notice to review the original
order passed by the lower authorities and later passed an order rejecting the
claim of refund.

 

The appellant contended that the original
order of the lower authority got merged with the order of the Commissioner (Appeals).
They also claimed that an appeal was filed by the Revenue against the order of
the Commissioner (Appeals) before the date of review order by the Commissioner
and hence the review order and order of rejection of refund based on review
order were not established.

 

 

The Tribunal observed that revision powers
of the Commissioner u/s.84 of the Finance Act, 1994 are restricted. As per S.
84(4), “no revision order could be passed by the Commissioner if any issue in
the order was pending before the Commissioner (Appeals).” In the instant case,
the order of the Commissioner (Appeals) was also appealed before the Tribunal.
Hence, the review order was set aside.

 

12.       Show-cause
notice :

 

Whether an order, which is at
variance with show-cause notice, is sustainable in law

 

Glass Fibres v. Commissioner of Central
Excise, Cochin, 2010 (18) STR 726 (Tri-Bangalore)

 

The appellant was engaged in the activity
of receipt and stacking operation, loading, packing, repacking, storage, etc.
and was registered as ‘Cargo Handling’ agency. The client of the appellant
refused to pay tax on the activity relating to storage, as it was not covered
as ‘Cargo Handling’ service. The appellant filed a refund claim of
non-reimbursed tax.

 

The original authority rejected the plea on
the ground that it was covered as ‘Cargo Handling’ services. However, the
Commissioner (Appeals) held that the activities related to storage, stacking
and shifting should be more appropriately classifiable under ‘Storage and
warehousing’ services.

 

Being aggrieved with the order of
Commissioner (Appeals), the appellant filed an appeal before the Tribunal and
contended as follows :

 

The Commissioner affirmed the order on the
grounds not mentioned in the show-cause notice. The appellant relied on various
case laws for taking such stand and contended that the order should be seen in
the light of show-cause notice and order-in-original and that the order at
variance of show-cause notice is not sustainable in law.

 

The Tribunal held that the judicial
authorities amply support the case of the appellant and in facts of the case,
the appeal was allowed and that the appellant was held not liable for service
tax even though the activity was as such taxable for the reason that the demand
was not conformed to the services alleged in the show-cause notice.

ORDERS OF CIC

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Part A : ORDER OF CIC

In the last (August 2010) issue, I reported on one full-bench
(split) decision of CIC. In this issue, I report two full-bench decisions
pronounced, one in June and the other in July.

© S. 8(1)(e) and S. 2(f) :


An interesting matter came for decision in this case. The
appellants, Sri Manohar Parrikar of Goa and two other individuals, had made RTI
applications seeking all documents including correspondence, notings,
explanations between the office of AG (Audit) and certain bodies like Goa
Infrastructure Development Corporation, Government of Goa, etc.

The PIO furnished certain documents and denied some other
information sought, including the intermediary documents. FAA held that “the
intermediary documents are merely working papers and may not come within realm
of ‘information’ under the RTI Act and the same be furnished. The PIO did not
comply with the same.

The appellants then filed appeals before CIC. Before deciding
the matter, CIC sought the advice of the Secretary General of Lok Sabha and the
comptroller and the Auditor General of India. The Commission received the same.

In the view expressed by the C&AG, it held that “audit notes,
etc. are work papers and do not contain the final view of the Accountant
General. The information therein is based on the document obtained from the
auditee only. Such information would come within the scope of S. 8(1)(c)* of the
Act and disclosing such information may cause a breach of privilege of the
Parliament. This would be against the oath taken by the C&AG to uphold the
Constitution and the laws of the land.”

The C&AG also pointed out that based upon the Audit Report,
the CBI had launched a criminal proceeding against the appellant, Shri Manohar
Parrikar in Case No. RCO0015A/2007. It was, therefore, mentioned that any
disclosure at this stage would impede the process of ongoing
investigation/prosecution and thus bring the matter within the scope of S.
8(1)(h)** of the RTI Act.

The C&AG note also cited a passage from the U.K. Freedom of
Information Act, 2000, in which audit-related matters were exempt from
disclosure. It argued that the logic of the UK Act would also apply in the
Indian context as the United Kingdom and India were both parliamentary systems.

Appellant argued before the CIC that the C&AG’s
constitutional obligation to carry out specific mandate could not be treated as
a bar on the disclosure of the information, which undoubtedly is held in the
control either of itself or the office subordinate to it. Learned counsel for
appellant cited an order of the Delhi High Court, in which it was held that
authorities entrusted with constitutional obligations also carry a moral
responsibility of transparent conduct. He argued that the information given to
the Accountant General by the departments or the authorities under the
Government — Central or State — was neither fiduciary, nor was it confidential.
To call any information as immature, preliminary, intellectual input, unfinished
and so on, could not be a reason to withhold such information from disclosure
when S. 2(f) of the RTI Act defines all such items of information — and much
more as ‘information’ within the meaning of the Act. The stage of evolving
information was not a reason to bar its disclosure. The appellants’ counsel
further pointed out that this particular Accountant General’s Report was already
placed before the Legislative Assembly of Goa State and was thereby an open
document.

The C&AG’s representative also submitted that all reports
placed before the Parliament were in fact the property of the Parliament. As
such, all material connected with such a report should also be treated as the
property of the Parliament, which could be disclosed only if the Parliament so
authorised it. He pointed out that all Accountant General and C&AG Reports
placed before the Parliament are examined by the Public Accounts Committee,
whose deliberations are not open to public and thereby are confidential. All
material relating to the C&AG or the AG Reports are, therefore, inferentially
before the Public Accounts Committee and thereby become confidential as the
deliberations before the Committee are held to be confidential.

Decision Notice :

The Three-member bench held that provisions of S. 8(1)(c) of
the RTI Act are not attracted. The decision notes :


“As has been pointed out by the Secretary General of Lok
Sabha, the Constitution does not mention items such as draft reports, half
reports, half margins or draft audit notes and so on. If these are
information within the RTI Act, their disclosure liability has to be
determined in terms of the provisions of the Act. On the subject of whether
disclosure of this variety of information would constitute premature
revelation of matters before the Parliament or the State Legislature, the
Secretary General, Lok Sabha citing Kaul & Shakdher in ‘Practice and
Procedure of Parliament’, stated that premature publicity in the press to
notices of questions, adjournment motions, resolutions, answer to questions
and other similar matters connected with the business of the House did not
comprise breach of privilege, although it may be ‘improper’. It was no-doubt
breach of privilege to publish any part of the proceeding or evidence given
before a Parliamentary Committee before such proceedings or evidence or
documents had been reported before the House, unless the Committee itself
decides that either all or part of its proceedings may be publicised.
According to the Secretary General “it is doubtful whether the report of
C&AG qualifies to be treated as the report of a Parliamentary Committee or
evidence tendered before a Parliamentary Committee. Half margins, draft
audit notes, etc., as already stated, do not have any relevance insofar as
parliamentary papers are concerned.”

The Commission also went through clauses 1.4(XII) and
(XIV) of the parliamentary procedure. It then held :

“It is then obvious from a reading of the Secretary General’s note to the Commission as well as the extracts of the parliamentary procedure, that while all evidences and depositions before the Parliamentary Committees are no doubt held secret as well as proceedings before it, it cannot be stretched to mean that every single item of information, held anywhere, that may, now or in future, become part of the proceeding before the Parliamentary Committee, or may be required to be produced as evidence before it, should also come under the exemption from disclosure. While all evidence or material, which is part of a proceeding before a Committee of the Parliament, has to remain secret until the Committee wills otherwise, every other material, which does not answer that description, is beyond the bar. In other words, while the actual material in a proceeding before a Parliamentary Committee is prohibited from disclosure, such prohibition would not apply to such material, which is not yet part of an ongoing proceeding. The audit notes, marginal notes, etc. come decidedly in the latter category.”

The Commission was also not persuaded by the C&AG’s argument that these items of information were at a very preliminary stage and should not be allowed to be disclosed for that reason. According to the C&AG’s own averments, these are items of information within the meaning of S. 2(f) of the RTI Act. And if it were so, the only reason why it should be prohibited from disclosure, was that it attracted one of the exemption Sections of the RTI Act 2005. That is not the case in the present matter. Therefore, it held that these items of documents and records, being information in themselves, merit disclosure.

Based on above, the Commission directed the CPIO to disclose all information requested by the three applicants.

[(1) Shri Manohar Parrikar, (2) Shri Jayanta Kumar Routary, (3) Shri Gurbax Singh v. (1) Accountant General, Goa, (2) Accountant General (Civil Audit), Orissa, (3) Accountant General (Audit), Punjab : Appeal No. CIC/AT/A/2007/00274, CIC/AT/ A/2008/00726 and CIC/AT/A/2009/000732, decided on 10-6-2010]
    
S. 8(1)(j), S. 2(f), S. 2(j) and S. 2(n):

The three-member CIC decision in the application by Mrs. Bindu Khanna has significant implication. It is my view that media has wrongly interpreted this decision.

The appellant Ms. Bindu Khanna, a teacher in a private school, namely, Pinnacle School, wanted certain information relating to her employment, mainly her service records, leave and other statutory allowances, working hours, medical facilities, pension and gratuity benefits, etc. She made various oral as well as written requests to the school. When she did not get the said information, she approached the Directorate of Education by filing an RTI application dated 11-2-2008.

When in response to her RTI application, she did not get the information sought, she had made an appeal to the Commission, which directed the Directorate to secure the information from the school and provide to the applicant.

Pinnacle School which is third party in these proceedings approached the Delhi High Court by filing writ petition No. 6956/2008 and contended before the Court that the RTI Act was not applicable to the school, inter alia, for the following reasons :

    i) Pinnacle school is a private school;

    ii) The Delhi School Education Act and Rules framed thereunder do not provide for disclosure of information.

The School also contended before the H.C. that the Commission passed the impugned order without hearing them and without complying with the principle of natural justice. The High Court by order dated 15th September, 2009 set aside the impugned order dated 15th September, 2008 passed by the Commission on account of failure to comply with the provisions of S. 19(4) of the RTI Act and remanded the matter back to the Commission for fresh adjudication in accordance with law.

At the time of hearing before the full bench, the petitioner submitted that the Delhi School Education Act and Rules framed thereunder are a complete code governing all aspects of functioning of aided and unaided recognised schools. A combined reading of S. 2(f) of the RTI Act and the Delhi School Education Rules

[in particular Rules 50(xviii) and (xix)] shall conclusively establish that the respondent Directorate as the governing authority of the school, has the requisite powers vested in it to access the information sought by the appellant. The petitioner further submitted that the third party by denying the information u/s.8(1)(j) of the RTI Act has already conceded the applicability of the RTI Act and had not made any representation to the effect that the information sought could not be given as the provisions of the RTI Act were not applicable to them.

The third party submitted that the RTI Act is not applicable to the private schools and it is the Directorate of Education, which had to be approached in this connection. They further contended that the Delhi School Education Act and Rules framed thereunder do not provide for disclosure of information. This stand of the third party was in contradiction of the stand already taken before the PIO and the First Appellate Authority that the information sought by the appellant was exempted u/s.8(1)(j) of the RTI Act and cannot be disclosed.

The Commission came to the conclusion that the third party had conceded in all earlier proceedings that the RTI Act applies to it and now cannot contend that the RTI Act does not apply to it. Hence, that issue was not dealt with at all.

Hence the issue for determination was:

“Whether the third party, a private school performing public function, can refuse to furnish the information u/s.8(1)(j) of the Act, particularly when the FAA of the respondent has ordered to disclosure of information.”

The Commission analysed three items of definitions from S. 2, namely, ‘information’ (2f), ‘right to information’ (2j) and ‘third party’ (2n). The Commission also looked into The Delhi Education Act and the Rules, especially 2 clauses of Rule 50, reproduced hereunder :

“Rule 50 : Conditions for recognition — No private school shall be recognised, or continue to be recognised, by the appropriate authority unless the school fulfils the following conditions, namely :

    xviii) the school furnishes such reports and information as may be required by the Director from time to time and complies with such instructions of the appropriate authority or the Director as may be issued to secure the continued fulfilment of the condition of recognition or the removal of deficiencies in the working of the school;

    xix) all records of the school are open to inspection by any officer authorised by the Director or the appropriate authority at any time, and the school furnishes such information as may be necessary to enable the Central Government or the Administrator to discharge its or his obligations to the Parliament or to the Metropolitan Council of Delhi, as the case may be.”

Based on the above, the Commission held:

“The order passed by the First Appellate Authority directing the third party to provide complete information to the appellant and the decision of the Commission affirming the orders of the First Appellate Authority are perfectly in compliance with the provisions of the Act. The third party is hence obliged to comply with the said orders. The Commission, therefore, directs the respondent to seek compliance of the aforementioned order from the third party-Pinnacle School to provide information as sought by the appellant.”

The Commission also in the penultimate para stated as under:

“The issues relating to management and regulation of schools responsible for promotion of education are so important for development that it cannot be left at the whims and caprices of private bodies, whether funded or not by the Government.”

It is my view that the decision does not rule that the RTI Act ‘per se’ applies to the private unfunded schools. If the school concedes that the Act applies, then it cannot escape in furnishing information if under the combined definitions u/s. 2(f) and u/s.2(j) read with the rules of the relevant Education Act, the information is covered, then it is accessible and cannot be denied.

[Ms. Bindu Khanna v. Directorate of Education, Government of NCT of Delhi, (third party, Pinnacle School, New Delhi) : Decision No. 5607/IC(A)/2010 of 14-7-2010]

                                                       PART B : THE RTI ACT

Extracts from the Article of Antara Dev Sen, editor of the Little Magazine in the AGE of 24-7-2010.

Thinking allowed:

    Earlier this week, Amit Jethwa was shot dead in front of the Gujarat High Court. He was in his thirties, a caring, law-abiding citizen, committed to the environment, humanity and animal life. And like most dedicated souls, he believed that he could stem the rot in the system and make a difference by diligently using democratic tools of empowerment.

He relied heavily on the Right to Information Act to plug the holes in the system. Till the holes got him.

Amit Jethwa was fighting against illegal mining in the Gir forests, which hosts the world’s last Asiatic lions. But he was up against the mining mafia, the Forest Department and politicians involved in the racket. Not an easy fight for a lone ranger. Besides, he had made enemies by campaigning against corruption.

But he was losing faith in civil society. Barely a week before he was gunned down he had told a reporter about his disenchantment. “I know how risky it is for me and my family to wage war against mining mafia”, he lamented. “Without the support of people nothing is possible.”

Which is precisely where the power of the RTI lies. In the hands of the masses, it is a potent tool to chisel democracy with. But in the hands of a lone passionate soul, it may be a dangerous weapon ready to explode in your face.

Information is power only when you are allowed to use it. It works wonders in a free society, where people have justiciable democratic rights, where governance has not failed as miserably as in our country. The right to information can be a human right only where there has been a certain level of development, where certain democratic freedoms are protected. If the state cannot protect your right to life, it’s best not to exercise your right to information too much.

  •     Let’s look at some of the cases this year. In January 2010, Satish Shetty, 39, was hacked to death in Maharashtra. The activist had been battling land scams and government corruption, had received death threats and asked for police protection — which he didn’t get — and was killed while taking his morning walk.

  •     In February, also in Maharashtra, RTI activist Arun Sawant was shot dead near the Badlapur Municipal Office in Thane for fighting administrative corruption.

  •     Meanwhile in Bihar, RTI activist Shashidhar Mishra was gunned down in front of his home in Begusarai. A tireless crusader against corruption in welfare schemes and the local government, he was called ‘Khabri Lal’ for his dedication to information.

  •     Meanwhile  in  Gujarat,  Vishram  Laxman Dodiya, who had filed an RTI petition regarding illegal electricity connections by Torrent Power, was murdered.

  •     In April, RTI activist Vitthal Gite, 39, was killed in Maharashtra for exposing village education scams.

  •     And in Andhra Pradesh, Sola Ranga Rao, 30, was murdered in front of his home for exposing corruption in the funding of the village drainage system.

  •     In May, Dattatray Patil, 47, was murdered in Kolhapur, Maharashtra. A close associate of activist and RTI guru Anna Hazare. His fight against corruption had got some of the area’s top policemen removed and action initiated against local municipal corporators.

Besides murder, there are failed murder attempts, violent threats and fake police cases. Take Maharashtra:

  •     In March, environmentalists Sumaira Abdulali and Naseer Jalal were ruthlessly attacked by a politically backed sand mafia in Raigad, and survived only because journalists accompanying them used their influence and mobile phones. None of the accused was arrested. In April, Abhay Patil, advocate and RTI activist, had a mob clamouring for blood at his door. Apparently, they wanted him to withdraw all complaints of corruption against MLA Dilip Wagh. When his wife, a police constable, called the cops for help, they asked her to come to the police station and lodge a complaint. Later she faced fake charges and was suspended, allegedly at the behest of Home Minister R. R. Patil. Then in July, Ashok Kumar Shinde was attacked for his RTI and Public Interest Litigation (PIL) against a corruption racket in the Public Works Department linked to the Bombay High Court.

  •     Worse than physical assault is abusing the law to attack activists. Take the case of E. Rati Rao, senior scientist, activist and journalist, in Karnataka. In March she was charged with sedition and attempting to cause mutiny or communal discord for protesting against ‘encounters’ and atrocities on dalits, tribals, Muslims and other minorities. Meanwhile, in distant Orissa, another activist-journalist, Dandapani Mohapatra, was targeted by the police, his home raided and his books and magazines confiscated without a warrant. He was labelled as a suspected Maoist.

  •     An activist fighting for our rights cannot win without our muscle. Once an RTI activist is killed, civil society must force the police to investigate not just the murder, but all that he was unearthing. Only then will we be able to stop this murderous silencing of the activists.

  •     By not protecting the RTI activists, by allowing cases of harassment they file to be closed without punishing the perpetrators, the state is failing to uphold the spirit of the RTI Act. And weakening the spirit of democracy.

                                             

                                            Part C  : InformatIon on & around

    Info on funds of political parties:

An analysis of the Income-tax Returns of political parties accessed by the ADR under the RTI Act has revealed that the BSP had a maximum growth rate of 59% in total asset from 2002-03 to 2009-10, followed by the NCP (51%) and SP (44%).

It appears that all political parties are in the pink of financial health :

 

Income

Aggregate income :

 

for 2009-10

2002-03 to 2009-10

 

 

 

Congress

497

1518

BJP

220

—

BSP 182

—

 

CPI

1

7

RJD 4

15

 

SP

39

263

NCP 40

109

 

CPM 63

339

 

 

 

 

    Emergency period in India’s history:

An RTI query was made to get certain documents pertaining to emergency period 1975-77. Request was for correspondence between the then president Fakhruddin Ali Ahmed and the Government. Both the Ministry of Home Affairs and National Archives of India replied that they have no such records.

15 questions listed in the RTI application pertain to the competent authority’s duly attested copy of all relevant records or documents, including the noting portion, on causes leading to the declaration of emergency and its nature, on the proceedings, recommendation and resolution adopted by the Union cabinet to declare the state of emergency and the names of those who attended the cabinet meeting, on how the recommendation was conveyed to the President and by whom, orders, directions, guidelines, wireless, telex and telegraphic messages issued by the Government to impose the state of emergency.

The presumption is that they (the officers) have either destroyed them or they don’t want to give them.

The complaint u/s 18 of the RTI Act is made to Chief CIC, but so far he has not responded to the same.

    Assets disclosure by the Ministers of the Central Government:

All efforts under the RTI Act to get details of assets of the Ministers in the Central Government so far have brought no results.

When PMO was asked to furnish such information, it referred the matter to the Lok Sabha Secretariat (LSS) to get its nod to disclose the Ministers’ assets.

In reply LSS stated that there is no provision of such permission under the RTI Act and that the PMO itself has to take a call on such sensitive matter. Now PMO has to take a decision whether to disclose or deny.

Brihanmumbai Municipal Corporation (BMC):

If you wish to lodge a complaint with BMC, you no longer have to search for the name of the officer concerned. After an RTI query, the BMC has now decided to create 3,000 e-mail addresses based on officers’ designations instead of their names.

After pursuing the matter for a year, RTI activist Vihar Durve finally succeeded in getting general e-mail addresses created for the BMC officials.

“These days people are more comfortable writing e-mails than sending letters or going and meeting the officials personally. Though the BMC has a provision for mentioning e-mail addresses, it had not posted any e-mail address on website” said Durve.

The BMC has now created and posted e-mail addresses of top officials like the Commissioner and Additional Municipal Commissioners on its website. For the rest of the officers, the same are in the process of being created and posted on the website.

    An  interesting  write-up  in  MIDDAY(30 July, 2010) by Hemal Ashar:

    Once upon a time in Mumbai

Now that the movie ‘Once Upon a Time in Mumbai,’ about the city’s underworld has been released amidst much controversy, here is what actually happened Once Upon a Time in Mumbai.

We could go to the movies for Rs.20 a ticket and spend Rs.10 on samosas and Rs.10 on a popcorn packet while touts would murmur outside in a sinister, hush-hush manner, “70 rupees mein black.” Beggars would actually be happy with the Re.1 you gave them and not look like you are entitled to give them a blue-chip share instead.

Getting your children into school did not mean intense stress levels, high BP and cardiac conditions like blocked arteries resulting in an angioplasty as admission day neared.

A flat in the city’s toniest South Mumbai area would go for Rs.3 lakh and South Mumbai’s swish club like Willingdon offered the much-coveted life memberships at Rs.15,000, that too, payable in instalments. Page 3 was just another page in a book, newspaper or magazine and not a description of a person.

People thought that RTI always stood for Ratan Tata Institute on Hughes Road where you went to buy baby clothes and Parsi-style embroidered nightwear and not Right to Information to dig out dope on corrupt deals.

Your English teacher would scoff at this junk you are reading saying, “think of all the trees being chopped down to print the rubbish this columnist has written and here you are wasting time reading it” and you would hang your head in shame instead of laughing like you are doing now.

    Court’s view on ‘information’ under the RTI Act:

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 Commission’s direction on the declaration of assets by judges, the SC, in its petition before the Delhi HC earlier this year, had claimed the RTI’s definition “shows that the information which is required to be given must be information in the public domain.” Accordingly it argued that the application regarding declarations of assets by judges under a 1997 resolution of SC 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 statute 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.”

(Extracts from The Times of India of 14th August)

Limited Liability Partnerships

We continue our examination of various laws and the issues arising therein in respect to an LLP.

1. Infrastructure projects :

    1.1 Can an LLP be an SEZ Developer under the Special Economic Zone Act, 2005 ? S. 2(g) of this Act defines the term developer to mean a person who has been granted a letter of approval. S. 2(v) of the Act defines a person to include a company, a firm, an association of persons or body of individuals, whether incorporated or not. An LLP is none of the above but it is a ‘body corporate’. Again an amendment to the SEZ Act would be highly desirable to accommodate LLPs.

    1.2 Can an LLP be the entity for developing, operating, maintaining an infrastructure facility such as a road, port, rail, airport, industrial park, etc. ? S. 80-IA(4) of the Income-tax Act which provides for the income-tax deduction specifies that the infrastructure facility must be owned by a company or a corporation or a body established under a Central or State Act. An LLP is none of these. However, if one looks at the Industrial Park Scheme, 2008 and Form IPS-1, then there is no restriction in the Scheme that the entity must be only a company.

2. Consolidation of accounts :

    2.1 The LLP Act allows a company to become a partner in an LLP. What if the company owns more than 50% of the voting power of the LLP or controls the composition of the governing body of the LLP ? The issue is : Whether Consolidation of Accounts will be required ?

    2.2 Accounting Standard 21 on Consolidated Financial Statements prescribed under the Companies (Accounting Standard) Rules, 2006, speaks about control by a company over an enterprise which may or may not be a company. Hence, the accounts of any entity over which the company exercises control should be consolidated with that of the parent.

    2.3 The Expert Advisory Committee of the Institute of Chartered Accountants of India has given an opinion as regards investment by a company in a partnership firm. It opined that if a company is required to prepare consolidated financial statements (CFS) under any statute or it does so voluntarily, then the consolidation should be done in accordance with AS-21 by consolidating the financial statements of the firm with that of the company. The same EAC Opinion should hold good for an LLP.

3. Takeover regulations :

    3.1 Reg. 3(1)(k) of the SEBI Takeover Regulations, 1997, exempts an Acquirer from making a Public Announcement in the case of acquisitions of voting power in an unlisted company. However, if the unlisted company is in control of a listed company and by virtue of the acquisition of the unlisted company, the acquirer acquires shares/voting power/control over a listed company, then the acquirer is required to make an offer for the listed company’s shares.

    3.2 Now, if a person acquires ‘control’ over an LLP (by virtue of change of partnership in an LLP or otherwise) and the LLP owns shares/voting power/control over a listed company, whether any change in the Partners of the LLP would trigger the provisions of the Takeover Code ? As LLP is not expressly covered by the R.3(1)(k), as it talks about only a company, hence, it is a moot point whether any change in the control of an LLP leading to change in control of a listed company would require a Public Announcement.

4. SARFAESI Act :

    4.1 One of the aspects of SARFAESI Act is Enforcement of security interest by banks/financial institution for recovery of a secured debt from a borrower in case of default in repayment.

    4.2 An LLP can also be a borrower and if it fails to discharge its liability, the secured creditor may recover his debt in the manner prescribed by the Act, without intervention of the Court or Tribunal.

5. CCI for Mergers of LLP :

    5.1 The Competition Act also provides for the regulation of Mergers and Acquisitions to prevent an adverse effect on competition. The Competition Commission of India (CCI) is authorised to approve and regulate the M&A exceeding the prescribed networth and turnover limits. The Act applies to all enterprises including firm, AOP, etc. engaged in any activity relating to production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services and so on. Therefore, amalgamation of LLPs will also be covered under Competition Law and thereby would be regulated by CCI.

6. Related party transactions :

    6.1 S. 295 and S. 297 of the Companies Act, 1956 require the previous approval of the Central Government in case a company makes any loan/guarantee/security to, or enters into certain contracts with certain prescribed persons, being related to the directors of the lending company. The provisions of S. 370 of the said Act will also have to be complied with.

    6.2 The list of prescribed persons u/s.295 includes a body corporate in which not less than 25% of the voting power is exercised by one or more directors of the lending company as well as a body corporate which is accustomed to act on the instructions of the Board of Directors or one or more directors of the lending company. An LLP is a body corporate. Therefore, any loan/guarantee/security given by a public company to an LLP which acts as aforesaid would require previous approval of the Central Government.

    6.3 However, the approval u/s. 297 will not be required in case a company enters into the prescribed transactions with an LLP.

    6.4 Further, S. 299 on Disclosure of Interest by directors would require a director to give a general notice to the Board of Directors if he is a partner in an LLP. Also, if a director is directly or indirectly interested in any contract or arrangement entered into by the company with an LLP, the director should disclose the nature of his interest in the relevant Board Meeting.

7. Clause 49 requirements :

    7.1 Clause 49 of the Listing Agreement lays down certain compliances to be made in case of a material unlisted subsidiary of a listed company. These include appointing an independent director of the listed company on the board of such a subsidiary.

7.2 The term ‘material non-listed Indian subsidiary’ has been defined to mean an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year. Since the term subsidiary has not been defined under the Listing Agreement, one should refer to s.4 of the Companies Act. According to this section, only a company is covered within the definition of a subsidiary. Hence, an LLP cannot be a subsidiary of another company and accordingly it would not be covered within the ambit of Clause 49 of the Listing Agreement.

8. Security Interest on Conversion of a Company into LLP :

8.1 According to Para 2 of the Third Schedule to the LLP Act, a company can be converted into an LLP only if it does not have any security interest subsisting in its assets at the time of application.

8.2 It may be noted that this restriction is not laid down in case of conversion of a firm into an LLP.

8.3 The practical problem that arises in this regard is firstly that “Security Interest” has not been defined in the LLP Act. Secondly, if we take “Security Interest” to mean as understood in common parlance, hardly any company would be able to convert itself into an LLP. This cannot and should not be the intention of the legislature.

8.4 Let us analyse the meaning of the term ‘Security Interest’.

8.4.1 Definition under SARFAESI Act :

According to S. 2(zd) of the Securitisation and Re-construction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) —

“security interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in S. 31.”

S. 31 of this Act lays down the following cases wherein the provisions of SARFAESI Act shall not apply :

    a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872;

    b) a pledge of movables within the meaning of S. 172 of the Indian Contract Act, 1872;

    c) creation of any security in any aircraft as defined in clause (1) of S. 2 of the Aircraft Act, 1934;

    d) creation of security interest in any vessel as defined in clause (55) of S. 3 of the Merchant Shipping Act, 1958;

    e) any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;

    f) any rights of unpaid seller under S. 47 of the Sale of Goods Act, 1930

    g) any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso to Ss.(1) of S. 60 of the Code of Civil Procedure, 1908;

    h) any security interest for securing repayment of any financial asset not exceeding Rs. one lakh;

    i) any security interest created in agricultural land;

    j) any case in which the amount due is less than 20% of the principal amount and interest thereon.

8.4.2 Definition under Black’s Law Dictionary

Security Interest is a form of interest in property which provides that the property may be sold on default in order to satisfy the obligation for which security interest is given.

In other words, the term ‘security interest’ means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability.

8.5 Thus, from the above definitions, it is seen that the definition of ‘Security Interest’ is very wide. At the same time, one cannot conclude that the charge which is created on the assets of a company in order to avail loans especially loans from banks and financial institutions can be treated as security interest subsisting in the assets of the company for the purposes of LLP Act.

In this regard, it is important to note that under the LLP Act, all the liabilities of the private limited company become the liabilities of the LLP. Further, both the entities have limited liability. So there is no difference in the nature of liability of the private limited company and its shareholders on one hand and the LLP and its partners on the other hand. Moreover, Schedule II which provides for conversion from a firm (where its partners have unlimited liability) into an LLP, does not put any such restriction. Therefore, it is difficult to understand the real intention of legislature in putting this restrictive clause in case of conversion of company into an LLP. It would be advisable if the MCA issues a clarification in this respect since this is holding up the conversion by several companies into LLPs.

(Concluded)

ORDERS OF THE COURT

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Right to Information

Part A: ORDER OF THE
COURT


S. 8(1)(e) of the RTI Act :

8 writ petitions, including one
— The Institute of Chartered Accountants of India v. CIC [writ petition
(civil) No. 3607 of 2007], are decided by the High Court of Delhi on 30-11-2009.

As the judgment is of interest
to members of our profession, from the order which runs into 48 pages, I
reproduce verbatim the relevant four paras.

91. Respondent no. 2 herein —
Mr. Y. N. Thakkar had made a complaint alleging professional misconduct against
a member of the Institute of Chartered Accountants of India. The complaint was
examined by the Central Council in the 244th meeting held in July 2004 and was
directed to be filed as the Council was prima facie of the opinion that
the member concerned was not guilty of any professional or other misconduct. The
Council did not inform or give any reasons for reaching the prima facie
conclusion. In fact it is stated in the writ petition filed by the Institute of
Chartered Accountants of India that the Council was not required to pass a
speaking order while forming a prima facie opinion.

92. On 7th January, 2006
respondent no.2 filed an (RTI) application seeking details of reasons recorded
by the Council while disposing of the complaint. The information was not
furnished and was denied by the PIO and the first Appellate Authority on the
ground that the opinion expressed by the members of the Council was
confidential.

93. By the impugned order dated
31st January, 2007 the CIC has directed furnishing of information without
disclosing the identity of the individual members.

94. In the writ petition filed,
the Institute of Chartered Accountants of India has projected that respondent
no. 2 wants, and as per the impugned order, the CIC has directed furnishing of
deliberations and comments made by members of the Council while considering the
complaint, reply and the rejoinder. Respondent no. 2 has not asked for copy of
deliberation or the discussion and comments of the members of the Council. He
has asked for reasons recorded by the Council while disposing of his complaint.
During the course of discussion, members of the Council can express different
views. Confidentiality has to be maintained in respect of these deliberations
and furnishing of individual statements and comments may not be required in view
of S. 8(1)(e) and (j) of the RTI Act. However, I need not decide this question
in the present writ petition as the respondent no. 2 has not asked for copy of
the deliberation and comments. His application is for furnishing of reasons
recorded by the Council while disposing of the complaint. There is difference
between the reasons recorded by the Council while disposing of the complaint,
and comments and the deliberations made by individual members when the complaint
was examined and considered. Reasons recorded for rejecting the complaint should
be disclosed and there is no ground or justification given in the writ petition
why the same should not be disclosed. In fact, as per the writ petition it is
stated that the Council did not pass a speaking order rejecting the complaint
and it is the stand of the petitioner that no speaking order is required to be
passed while forming a prima facie opinion. It is open to the petitioner
to inform respondent no. 2 that no specific reasons have been recorded by the
Council. The consequence and effect of not recording of reasons is not subject
matter of the present writ petition and is not required to be examined here.
Writ petition is accordingly disposed of with the observations made above.

From the above, it will be
observed that it is important to seek information fully and properly. If the
applicant had asked for the comments and deliberations made at the Council
meeting of ICAI, he would have got it, but he had asked only the reasons
recorded by the Council. To make the reporting complete, I also reproduce the
Commission’s decision dated 31-1-2007 as referred to in para 93 of the above
order :

Commissions’ decision :

The CPIO has already furnished
partial information. He has, however, withheld the deliberations of the Council
on the ground that the opinion expressed by the Council members are
confidential. In the spirit of the RTI Act, which aims at creating conditions
for taking informed decisions, the views expressed by the public servants should
be put in public domain to prompt transparency in the decision-making process.
The CPIO is therefore directed to disclose the information sought, after due
application of S. 10(1) of the Act, within 15 working days from the date of
issue of this decision. The identity of an individual member, who may have
expressed his opinion on any issue of complaint should, however, be withheld,
lest the disclosure of identity should endanger his life and liberty.

Part B: THE RTI ACT

We have many RTI success stories
happening at clinics operating at BCAS Foundation and other places. But, we
never report them. However, when ‘The Miracle’ happened for Arvind Dalal, past
President of BCAS and ICAI, I thought it would be worth reporting. Hence, I
requested him to pen a few words and here they are :


The miracle that is RTI
by
Arvind Dalal

I am induced to write this
article on RTI of my personal experience prompted by Narayan Varma, so that it
may inspire others to resort to the unfailing remedy of RTI.

I have a small cottage in
Lonavala which I acquired in March 1993 and launched the document of sale deed
for registration with the seller and the advocate of both parties. I was
informed by the seller and the advocate that original sale deed duly registered
with the Registrar at Pune will be returned to me after ‘reasonable time’ duly
stamped on each page for registration.

Knowing as I do what is ‘reasonable time’ for income-tax proceedings, I did not bother about the registration for ten years even though that is an unreasonable period for registration of a document. But I started pursuing the matter since 2003 and for about four years I was given a stone-walling reply from the Registrar’s Office that the document is not received after registration, but it will take some more time and I will receive the same as soon as reasonable period is over.

Finally in 2007 I was told after several visits to the Registrar’s Office in Lonavala, that the document was received but for want of space in Lonavala office, it is sent to the Registrar’s office at Vadgaon-Maval about 20 miles away from Lonavala. I visited Vadgaon from time to time with my wife and with the advocate. Every time we were informed that the document will have to be searched out from a heap of documents and I must wait till evening to give them enough time to look for the same. My advocate also inquired several times at Vadgaon, but every time the reply was the same that it was not traceable.

I talked to Narayan Varma who suggested to make an application under the RTI Act and he helped me to prepare the application including questions there-in regarding how many documents were lodged for Registration in 1993, which were still pending in 2010 and how many were registered and returned to the applicants, what was the limit prescribed under the Act and more specifically when will my document, lodged in March 1993, be registered.

Within 15 days, I received a reply at my Mumbai address that my documents will be sent to me in due course but in the meanwhile, I could take inspection at Vadgaon by paying the necessary charges. I replied, thanking them for their letter sent after 17 years (Lord Ramachandraji’s vanvas was over in 14 years) and asking them to send original sale deed at the earliest. Lo and behold?! Within ten days, I get the original document in 2010 registered in 1993?!

The moral of the fairy tale is that one must invoke one’s rights as a citizen more frequently under the RTI Act, particularly when activist like Shri Narayan-bhai is out to help us and citizens must exercise their rights under statute given by the government by taking a little extra trouble?!


                                                            Part C: OTHER NEWS

    Significant pronouncements by the Commission?:
Some time ago, when Shailesh Gandhi, CIC was in BCAS office – Mumbai, addressing RTI activists and journalists, he distributed compilation of 8 important profound pronouncements by the Central Information Commission. Herewith 5 & 6 thereof?:

(Continued from January 2010)

  5.  Sub judice?:

The Appellate Authority had claimed exemption u/s.8(1)(e), but the PIO has given no reason to justify how S. 8(1)(e) can apply.

The CIC decision cited by the respondent states ‘The matter is sub judice. The Appellate Authority has cor-rectly advised that information in question could be obtained through the Court which is examining the matter.’ No reasoning has been offered as to which exemption clause of the RTI Act applies. The only exemp-tion of S. 8(1) which might remotely apply and under which information can be denied is S. 8(1)(b) states, ‘information which has been expressly forbidden to be published by any Court of law or Tribunal or the disclosure of which may constitute contempt of Court;’

This clause does not cover sub judice matters, and unless an exemption is specifically mentioned, information cannot be denied. Disclosing information on matters which are sub judice does not constitute contempt of Court, unless there is a specific order forbidding its disclosure. I respectfully have to disagree with the earlier decision cited by the appellant since it is per incuriam.

This Commission rules that a matter being sub judice cannot be used as a reason for denying information under the Right to Information Act.

    6. Privacy?:

U/s.8(1)(j) information which has been exempted is defined as?: “information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or State Public Information Officer or the Appellate Authority, as the case may be, is satisfied that the larger interest justifies the disclosure of such information?:” To qualify for this exemption the information must satisfy the following criteria?:

It must be personal information. Words in a law should normally be given the meanings given in common language. In common language we would ascribe the adjective ‘personal’ to an attribute which applies to an individual and not to an institution or a corporate.

From this it flows that ‘personal’ cannot be related to institutions, organisations or corporates. [Hence we could state that S. 8(1)(j) cannot be applied when the information concerns institutions, organisations or corporates.]

The phrase ‘disclosure of which has no relationship to any public activity or interest’ means that the information must have some relationship to public activity. Various public authorities in performing their functions routinely ask for ‘personal’ information from citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a public authority as an employee, or asks for permission, licence or authorisation, all these are public activities.

We can also look at this from another aspect. The state has no right to invade the privacy of an individual. There are some extraordinary situations where the State may be allowed to invade the privacy of a citizen. In those circumstances special provisos of the law apply, always with certain safeguards. Therefore it can be argued that where the State routinely obtains information from the citizens, this information is in relationship to a public activity and will not be an intrusion on privacy.

Certain human rights such as liberty, freedom of ex-pression and right to life are universal and therefore would apply in all countries uniformly. However, the concept of ‘privacy’ is related to the society and different societies would look at these differently. India has not codified this right so far, hence in balancing the right to information of citizens and the individual’s right to privacy, the citizen’s right to information would be given greater weightage.

Therefore we can accept that disclosure of informa-tion which is routinely collected by public authority and routinely provided by individuals, would not be an invasion on the privacy of individual and there will only be a few exceptions to this rule which might re-late to information which is obtained by a public au-thority while using extraordinary powers such as in the case of a raid or phone-tapping.

    From the Budget speech of Pranab Mukherjee, Minister of Finance on February 26, 2010?:
Inclusive development?:

    For the UPA Government, inclusive development is an act of faith. In the last five years, our Government has created entitlements backed by legal guarantees for an individual’s right to information and her/his right to work. This has been followed-up with the enactment of the right to education in 2009-10. As the next step, we are now ready with the draft of Food Security Bill which will be placed in the public domain very soon.

    RTI is the new tool in divorce mudslinging?:

An interesting report in MIDDAY of 11-3-2010?:

Case 1?:

Ritika Sharma and her father claimed in the police complaint that they had provided Rs.30 lakh in dowry (in jewellery, cash and kind) to Ritika’s husband Mohan Sharma. Facing the prospect of imprisonment, Mohan Sharma filed an RTI application, seeking the income-tax details of his father-in-law.

It was revealed that Ritika’s father had only declared nominal income. It then became apparent that the claims made by the father-daughter duo about the dowry payment were false. The matter is sub judice. (Names changed)

Case 2?:

A month ago, Visakha Malhotra filed an RTI application seeking details of her ex-husband’s income after she was denied rightful maintenance following her divorce. Her husband had claimed that he was a busi-nessman. “Her petition was based on her right to live with dignity,” said a senior I-T official, on condition of anonymity. (Name changed)

According to income-tax officials, the trend of seeking RTI for dowry and maintenance cases began after a Delhi High Court judgment. In a 2007 case, Bhagat Singh was denied information regarding the earnings of his wife (with whom he had a discord), by the Income-tax Department, on the ground that the matter was being investigated. Singh, who was accused by his wife Saroj Nimal of accepting a dowry of Rs.10 lakh from her, filed a request with the Income-tax Department for investigating into his wife’s sources of income in view of the fact that she was a primary school teacher. In a landmark judgment, the Court directed the Income-tax Department to provide the information sought by Bhagat Singh.

The trend seems to be really catching on now. “There are around 30 ranges in the National Capital Region and each of these ranges processes or receives around 3 to 4 RTI applications seeking Income-tax details and most of them are related to either dowry harassment or maintenance cases.”

    Tax refunds?:

At our RTI clinics, we assist many to make RTI application for the pending income-tax refunds. They invariably get the refund. The Times of India on March 15 reported on this subject and said?: Life just got better for millions who have ran from pillar to post for years to secure their tax refunds from the Income-tax (I-T) Department. In the landmark ruling, the Central Information Commissioner has passed an order which says “information on refunds is covered under the Right to Information (RTI) Act.”

M. L. Sharma, the Central Information Commissioner, while passing the order, said?:

“To deny the appellant information sought by him under clause (e) or clause (j) of S. 8(1) is nothing but misappreciation of law.”

“The information sought by the appellant is covered u/s.2(f) of the RTI Act and he has a right to seek information u/s.2(j) thereof. It is clarified that the appellant has not sought any information which the public authority is holding in fiduciary capacity.”

While directing the Income-tax Department to disclose information for the inordinate delay, he also ordered the issue of refunds within three months.

The CIC also rapped the Department for failing to appear in a hearing arranged by the Commission where the appellant was present.

    Cabinet’s advice to the President of India?:

Pushing the boundaries in its interpretation of the Right to Information Act (RTI), the Central Information Commission (CIC) said advice given by the Union Cabinet to the President is liable for disclosure under the information law.

Referring to SC ruling on Article 74(2) on the question of constitutional privilege, Chief Information Commissioner Wajahat Habibullah ruled that though the Constitution said the Cabinet’s advice to the President could not be ‘inquired into’, it did not mean that such advice could not be ‘disclosed’. “It does not mean the nature of this advice can’t be disclosed,” he said while directing the President’s Secretariat to al-low checking of files pertaining to communication between former President Shanker Dayal Sharma and ex-PM Narasimha Rao on the issue of extending SC status to Dalits who had converted to Christianity.

    Monitoring Govt. projects through the use of RTI?:

Although the State Chief Information Commissioner has asked alert citizens to monitor Government projects through the use of RTI, not many are satisfied with the way their efforts have found support.

The experience of Bhaskar Prabhu, an RTI activist and a member of Mahiti Adhikar Manch, an NGO that monitors Government spending, has not been good enough. Prabhu filed an application to monitor the money spent on grass beds at tree bases on Dr. Ambedkar Road in F/South ward, Mumbai. He also sought information on the expenses on iron guards around the trees. The details sought were for work orders worth Rs.7.26 lakhs that were passed in Octo-ber 2008 and January 2009. The work was to be completed by March 2009.

But the Public Information Officer (PIO) did not respond to his April 2009 application in time. After the hearing at the First Appellate Authority (FAA) in May 2009, the application got misleading and incomplete information.

“They did give information of grass beds, but not the locations of the work. It was impossible to see if the work was completed,” said Prabhu.

There was no information of the 164 iron grill tree guards for which money was already paid. The money set aside for the guards is 25% of entire amount. When he complained to the ward officer and deputy superintendent of gardens, it got known that around 20 guards were put and some petty penalty was imposed on the contractor. There is still no information to conduct the audit, a frustrated Prabhu said.

When contacted, H. Kale, Assistant Commissioner, F/ South ward, said, “The file is not in my hand anymore. It has been given to some other officers. We have slapped a fine of Rs.50,000 on the contractor.”

    Skywalks in Mumbai?:

Even as Mumbaikars question the need for so many sky-walks in the city, reply given to a query under the Right to Information Act is an eye-opener. Each of the 67 sky-walks in Mumbai have been proposed by an elected representative — an MP, MLA or a corporator. In fact, there are cases where work on skywalk stopped because the local representatives initially supported it and then changed their stance, following opposition from sane people. Nearly all the requests have been made orally by elected representatives, stated the RTI replies to the Grant Road citizen Arvind Dagha’s queries.

Construction of 67 skywalks at a cost of Rs.1.400 crore has been taken up. Initially, around 50 skywalks were to be constructed at the cost of Rs.600 crore. That number was later increased to 67. A. K. Pehal, in charge of the skywalk project, said they were being constructed only after carrying out a study.

    Stop attacks on RTI activists?:

In his Budget speech, Union Finance Minister Pranab Mukherjee said the weaknesses in government systems, structures and institutions posed a challenge to policy planners. He said our public delivery mechanisms prevented the country from realising its true potential. The analysis is spot on. So, how do we fix governance?? Transparency and accountability hold the key to good governance. Institutional reforms are necessary to achieve this. The Government plans to set up a financial sector legislative reforms commission and an independent evaluation office to assess public programmes. These are timely. Many enabling legislations have been passed in recent years to make administrators responsible to citizens. But laws alone aren’t enough. Mindsets also must change if the legal safeguards are to become effective.

The experience of the Right to Information (RTI) Act is instructive. The RTI Act has been a radical step to-wards making administration transparent and ac-countable. Civil society groups have used the RTI Act to expose corruption in public administration and ser-vices. But not all sections of society have reacted favourably to the Act. Often, bureaucrats refuse to part with information demanded under the RTI. A worse trend is to attack RTI activists physically. The latest case is from Maharashtra where a Thane-based RTI activist was shot at. The Government needs to curb such crimes. The message must go out that attacks on RTI activists will not be tolerated. Public delivery mechanisms can improve only if the State and civil society work together to plug loopholes in these systems.

(Editorial in The Times of India, dated 4-3-2010)

    Sonia forces PM to put RTI amendments on hold?:

Plans to amend the Right to Information (RTI) Act have been put on ice, with Congress bosses taking up with the Government the complaint of the activists that the proposed changes would lead to dilution of the information law. Senior sources said the amend-ments will have to wait till the time the Government dispels fears of rights activists.

Congress Chief Sonia Gandhi wrote to PM Manmohan Singh some time ago, drawing his attention to the fear of activists. The PM and virtually the entire Government feel the amendments are necessary for smooth functioning of the Government and to keep out frivolous complaints, but Singh has agreed to hold consultations with stakeholders (read activists).

According to some reports, Singh is also in favour of excluding the office of the CJI from the RTI Act ambit. The amendments proposed by the PM would keep the office of the CJI out of the purview of the Act. However, Sonia Gandhi has opposed any such amendments.

OECD — RECENT DEVELOPMENTS — AN UPDATE

International Taxation

In June, 2010 issue of BCAJ, we covered various important
developments at OECD till then. In this issue, we have covered further major
developments after publication of the last Edition of OECD Model Tax Convention
(‘MC’) and developments in the field of Transfer Pricing and work being done at
OECD in various other related fields and have included the same in this update.
We shall endeavor to update the readers on major developments at OECD at regular
intervals. Various news items included here are sourced from various OECD
Newsletters.

A. Amendments to OECD Model Tax Convention :


1. Draft contents of the 2010 update to the Model
Tax Convention — 21st May, 2010 :


The OECD Committee on Fiscal Affairs has just released the
draft contents of the 2010 update to the OECD Model Tax Convention prepared by
Working Party 1 of the Committee. The update will be submitted for approval of
the Committee in June and the OECD Council in July.

The 2010 update will include the changes that were previously
released for comments in the following discussion drafts :

  •  The
    granting of treaty benefits with respect to the income of Collective Investment
    Vehicles :


The draft report was released on 9th December 2009 (see
http://www.oecd.org/dataoecd/47/3/44211901.pdf). It was based on an earlier
report by the Informal Consultative Group on the Taxation of Collective
Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors,
which itself was released for comments on 12th January 2009 (see http://www.oecd.org/dataoecd/34/26/41974553.pdf).
The changes to the Commentary on Article 1 included in the report were slightly
modified, based on the comments received at the February 2010 meeting of Working
Party 1 (WP1) on Tax Conventions and Related Questions (the CFA subsidiary body
responsible for changes to the OECD Model Tax Convention).

  •  
    Revised discussion draft of a new Article 7 of the OECD Model Tax Convention :


The draft was released on 24th November, 2009 (see http://www.oecd.org/dataoecd/30/52/44104593.pdf).
That revised draft reflected a number of changes made to the first version of
the new Article released on 7th July, 2008 (see http://www.oecd.org/dataoecd/37/8/40974117.pdf).
A few additional changes were made, based on the comments received on the
revised draft, at the February 2010 meeting of WP1.

  •  
    Application of tax treaties to State-owned entities, including Sovereign Wealth
    Funds :


The draft was released on 25th November 2009 (see http://www.oecd.org/dataoecd/59/63/44080490.pdf).
The changes included in this note reflect a few modifications made at the
February 2010 meeting of WP1 in light of the comments received on the changes
proposed in that draft.

  •  Tax
    treaty issues related to common telecommunication transactions :


The draft was released on 25th November, 2009 (see http://www.oecd.org/dataoecd/59/62/44148625.pdf).
The changes included in this note reflect a few modifications made at the
February 2010 meeting of WP1 in light of the comments received on the changes
proposed in that draft.

  •  
    Revised changes to the Commentary on paragraph 2 of Article 15 :


The first draft of these changes was released in April, 2004
(see http://www.oecd.org/dataoecd/52/61/31413358.pdf). Based on the comments
received and a public consultation meeting with business representatives and
other interested parties held on 30th January, 2006, a number of modifications
were made and revised proposals were released for comments on 12th March, 2007
(see http://www.oecd.org/dataoecd/36/32/38236197.pdf). The final version of the
changes included in this note reflects a number of additional changes made
following the comments received on that second discussion draft.

As all the substantive contents of the 2010 update have
previously been released for comments through these discussion drafts, this
draft is released for information only and not for additional comments. The
introduction to the draft summarises how the main comments received on these
discussion drafts have been dealt with.

The update will also include a number of changes to OECD
countries’ reservations and observations and to non-OECD countries’ positions,
which will be added to the update in the next few weeks. Among these will be the
elimination of all reservations and positions on Article 26 (Exchange of
Information), which the OECD Council has already approved.

The Committee on Fiscal Affairs has been asked to discuss and
approve the draft update at its June, 2010 meeting. A revised version of the
Model Tax Convention that will incorporate the changes made through the update
is expected to be released in September, following the approval by the OECD
Council.

2. OECD Releases Report on Granting of Treaty
Benefits with respect to the Income of
Collective Investment Vehicles — 31st May,
2010 :


The OECD Committee on Fiscal Affairs has released a Report on
‘The Granting of Treaty Benefits with respect to the Income of Collective
Investment Vehicles’ which contains proposed changes to the Commentary on the
OECD Model Tax Convention dealing with the question of the extent to which
either collective investment vehicles (CIVs) or their investors are entitled to
treaty benefits on income received by the CIVs. These changes are expected to be
included in the 2010 update to the Model Tax Convention (the draft contents of
which were released on 21st May, 2010) and the Report would then be included in
volume II of the loose-leaf and electronic versions of the Model.

The Report is a modified version of the Report ‘Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles’ of the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors (‘ICG’) which was released on 12th January 2009. In that original Report, the ICG addressed the legal and policy issues specific to CIVs and formulated a comprehensive set of recommendations addressing the issues presented by CIVs in the cross-border context. The Committee referred the recommendations by the ICG to its Working Party 1 (‘WP1’) on Tax Conventions and Related Questions (the Committee’s subsidiary body responsible for changes to the OECD Model Tax Convention) for further consideration. The WP1 Report was issued as a discussion draft on 9th December 2009 and modified in response to public comments.

The main conclusions and recommendations of the Report are similar to those in the ICG Report, with some modifications that reflect the varied experiences of the tax authorities of the OECD countries. Like the ICG Report, the Report therefore analyses the technical questions of whether a CIV should be considered a ‘person’, a ‘resident of a Contracting State’ and the ‘beneficial owner’ of the income it receives under treaties that, like the OECD Model Tax Convention, do not include a specific provision dealing with CIVs (i.e., the vast majority of existing treaties). Further, the Report includes changes to the Commentary on the Model Tax Convention to reflect the conclusions of the Committee with respect to these issues.

Although these changes to the Commentary will clarify the treatment of CIVs, it is clear that at least some forms of CIVs in some countries will not meet the requirements to claim treaty benefits on their own behalf. Accordingly, the Report also considers the appropriate treatment of such CIVs under both existing treaties and future treaties.

With respect to existing treaties, the Report concludes that, if a CIV is not entitled to claim benefits in its own right, its investors should in principle be able to claim treaty benefits. The Report reflects different views regarding whether such a right should be limited to investors who are residents of the Contracting State in which the CIV is organised, or whether that right should be extended to treaty-eligible residents of third States. In any event, administrative difficulties in many cases effectively prevent individual claims by investors. Accordingly, the Report concludes that countries should adopt procedures to allow a CIV to make the claim on behalf of investors.

With respect to future treaties, the Report endorses the ICG recommendation that the Commentary on Article 1 of the Model Tax Convention should be expanded to include a number of optional provisions for countries to consider in their future treaty negotiations. Inclusion of one or more of these provisions in bilateral treaties would provide certainty to CIVs, investors and intermediaries. The favoured approach for such a provision would treat a CIV as a resident of a Contracting State and the beneficial owner of its income, at least to the extent that its investors would themselves be eligible for benefits from the source country, rather than adopting a full look-through approach. Because different views were expressed on the issue of whether treaty-eligible residents of third countries should be taken into account in determining the extent to which the income of a CIV should be entitled to treaty benefits, the proposed Commentary includes alternative provisions that adopt different approaches with respect to the treatment of treaty-eligible residents of third countries. The proposed Commentary also includes an alternative provision that would adopt a full look-through approach, under which the CIV would make claims on behalf of its investors rather than in its own name. The look-through approach would be appropriate in cases where the investors, such as pension funds, would have been eligible for a lower, or zero, rate of withholding had they invested directly in the underlying securities.

B.    Amendments to OECD Transfer Pricing Guidelines:

1.    OECD invites comments on the Transfer Pricing Aspects of Intangibles — 2nd July, 2010:

The OECD is considering starting a new project on the Transfer Pricing Aspects of Intangibles and is inviting comments from interested parties on the scoping of such a project. Comments should be sent before 15th September 2010 to Jeffrey Owens, Director, CTPA (jeffrey.owens@oecd.org).

The OECD’s Committee on Fiscal Affairs is now completing its work on two transfer pricing projects which the OECD Council will be asked to approve by the end of July in the form of revisions to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TPG)?: its review of Comparability and Profit Methods and its report on the Transfer Pricing Aspects of Business Restructuring.

In these two projects, transfer pricing issues pertaining to intangibles were identified as a key area of concern to governments and taxpayers, due to insufficient international guidance, in particular on the definition, identification and valuation of intangibles for transfer pricing purposes.

OECD guidance on the transfer pricing aspects of intangibles is currently found in the TPG, especially in Chapters VI and VIII. Further and updated guidance will be available in the revised Chapters I-III of the TPG and in the final report on the Transfer Pricing Aspects of Business Restructuring once those are approved by the Council and publicly released. Intangibles are also addressed in the July 2008 Report on the Attribution of Profits to Permanent Establishments and in the Commentary on Article 12 of the Model Tax Convention.

The OECD is now considering starting a new project on the Transfer Pricing Aspects of Intangibles which could result in a revision of Chapters VI and VIII of the TPG. Working Party No. 6 of the Committee on Fiscal Affairs is still at the stage of scoping such a possible new project and would welcome the views of interested parties on?: what they see as the most significant issues encountered in practice in relation to the transfer pricing aspects of intangibles; what shortfalls, if any, they identify in the existing OECD guidance; what the areas are in which they believe the OECD could usefully do further work; and what they believe the format of the final output of the OECD work should be. Comments should be sent before 15th September 2010 in Word format to Jeffrey Owens, Director, CTPA (jeffrey.owens@ oecd.org).

Selected business commentators will be invited to meet with Working Party No. 6 on 9th November 2010 in Paris.

C.    Tax Transparency and Exchange of Information Agreements:

1.    OECD updates — Brazil, Indonesia ranked as implementing International Information Standard — 3rd June 2010?:

As a result of details provided to the Global Forum on Transparency and Exchange of Information for Tax Purposes, Brazil and Indonesia are now ranked in the category of jurisdictions that have substantially implemented the internationally agreed tax standard.

The OECD said it had updated its progress report, first issued in conjunction with the G20 London summit in April 2009, to take account of communications from Brazil and Indonesia on their legal and regulatory frameworks for exchange of information.

According to the information provided, Brazil has more than 25 bilateral tax treaties that provide for exchange of information in tax matters to the internationally agreed standard while Indonesia has 53 agreements that meet the standard. The two countries joined the Global Forum last September.

A full description of the two countries’ legal and regulatory frameworks will be included in the Global Forum’s 2010 annual assessment to be published later this year. As with all members of the Global Forum, both the countries will undergo peer reviews of their exchange of information laws and practices, Brazil in 2011 and 2012 and Indonesia in 2011 and 2013. Brazil is a member both of the Forum’s Steering Group and of its Peer Review Group.

Since April 2009, more than 500 bilateral tax information exchange agreements have been signed worldwide, with 28 jurisdictions joining those ranked as having substantially implemented the internationally agreed standard.

For more information, visit the following sites:
www.oecd.org/tax
www.oecd.org/tax/transparency
www.oecd.org/tax/evasion

B.    Amendments to OECD Transfer Pricing Guidelines:

2.    A boost to multilateral tax cooperation: 15 countries sign updated Convention on Mutual Administrative Assistance in Tax Matters — 27th May, 2010:

In April 2009, the G20 called for action “to make it easier for developing countries to secure the benefits of the new cooperative tax environment, including a multilateral approach for the exchange of information.” In response, the OECD and the Council of Europe developed a Protocol amending the multilateral Convention on Mutual Administrative Assistance in Tax Matters to bring it in line with the international standard on exchange of information for tax purposes and to open it up to countries that are neither members of the OECD, nor of the Council of Europe.

On 27th May 2010, the updated Convention was presented to Ministers and Ambassadors attending the annual OECD Ministerial meeting held in Paris and was signed by 11 countries already Parties to the Convention (Denmark, Finland, Iceland, Italy, France, the Netherlands, Norway, Sweden, Ukraine, the United Kingdom and the United States). In addition, Korea, Mexico, Portugal and Slovenia signed both the Convention and the amending Protocol.

The Convention provides for a wide range of tools for cross-border tax co-operation including exchange of information, multilateral simultaneous tax examinations, service of documents, and cross-border assistance in tax collection, while imposing extensive safeguards to protect the confidentiality of the information exchanged (see background brief for more information). Once the Protocol has entered into force, the Convention will become a more powerful tool for multilateral tax cooperation as it will enable a wider group of countries to become parties and will require full exchange of information on request in all tax matters without regard to a domestic tax interest requirement or bank secrecy for tax purposes.

3.    Three Caribbean jurisdictions move up on OECD progress report — 19th May, 2010:

Dominica, Grenada and Saint Lucia have been moved into the category of jurisdictions considered to have substantially implemented the standard on transparency and exchange of information, having now all signed at least 12 exchange of information agreements conforming to the standard.

This brings to 28 the number of jurisdictions that have moved into this category since April 2009. The move affecting Dominica, Grenada and Saint Lucia follows the signature of a series of agreements involving these three jurisdictions plus Antigua and Barbuda, which had already reached 12 agreements on 7th December 2009, and the Nordic countries (Denmark, Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden).

Following these signatures, Antigua and Barbuda has now signed a total of 20 agreements meeting the international standard. Dominica and Grenada have now signed 13 agreements each, and Saint Lucia has signed 15 agreements.

As members of the Global Forum on Transparency and Exchange of Information for Tax Purposes, each of these jurisdictions agreed to participate in a peer review of their laws and practices in this area. According to a schedule published by the Global Forum, Antigua and Barbuda, Grenada and Saint Lucia will undergo reviews of their legal and regulatory framework for exchange of information in 2011 and reviews of their information exchange practices in 2013. Dominica’s peer reviews will take place in 2012 and 2014.

For more information, visit: www.oecd.org/tax/transparency/ www.oecd.org/tax and www.oecd.org/tax/evasion.

Some recent judgments

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Service Tax

1. CENVAT credit:

Whether CENVAT credit is available for air travel for
business?

i) CCE, Ahmedabad vs. Fine Care Biosystems 2009 (16) STR 701
(Tri.-Ahmd.)

Commissioner (Appeals) allowed CENVAT credit of service tax
on outward freight and commission on air tickets. It was held that availability
of CENVAT credit on outward freight is till the place of removal that is the
port from which the goods are loaded for export made on FOB was pronounced in
ABB Ltd vs. Commissioner 2009 (15) S.T.R. 23 (Tribunal-LB) and for CENVAT on air
tickets, it was held that the definition of input service was wide enough to
cover all services used directly or indirectly in the manufacture process, the
CENVAT was admissible. Further, the revenue did not submit any proof that the
travel was for other than business purpose.

Whether credit on mobile
phones is available as they are not installed in the factory premises?



ii) CCE & CUS, Nagpur vs. Ultratech Cement Ltd. 2009 (16) STR 611 (Tri.-Mum)


The company availed CENVAT on the mobile phones provided to
the employees. The adjudicating authority allowed the CENVAT and dropped the
demand. The appeal filed by the Department was also dismissed on merits. Then
the appeal was made to the Tribunal with the contention that mobile phone
service is not cenvatable, as the telephone is not installed in the factory
premises. The Department also referred to the pending appeal filed with the
Bombay High Court (Nagpur Bench) against the Tribunal Order No. S/263-264/C-IV/SMB/07
dated 01-06-2007 (in the case of Manikgrah Cement).

However, the company citied various decisions holding that
CENVAT on mobile services was available. The list interalia included:

(a) CCE, Chennai vs. Showa Engineering Ltd & Another 2009
(14) S.T.R. 840 (Tri)

(b) ITC Ld vs. Commissioner of Customs & Cen tral Excise,
Salem 2009 (14) S.T.R. 847 (Tri) = 2009-TIOL-439-CESTAT-MAD

(c) Finolex Cables vs. Commissioner of Central Excise, Mumbai
;I, 2009 (14) S.T.R. 303 (Tri-Mumbai)

(d) Commissioner of Central Excise vs. Excel Corp Care Ltd.
2008 (12) STR 436 (Guj)

(e) Commissioner of Central Excise (LTU), Chennai vs. Brakes
India Ltd., 2009 (13) S.T.R. 684 (Tri-Chennai)



Citing the Gujarat High Court in case of Commissioner vs.
Excel Corp Care (supra), it was held that CENVAT on mobile phones was allowable
and it was observed that the onus to prove that they were directly or indirectly
used in connection with business activity is on the manufacturer.

Is CENVAT credit available
on colony security service, transport for employees and guest house maintenance?



iii) CCE vs Hindustan Zinc Ltd. 2009 (16) STR 704 (Tri.-Bang)


The company was not allowed input credit for colony security
service, transport service for employees and guest house maintenance service.

It was held that for a company, it was the duty to provide
accommodation to the employees and the colony being the property of the company,
it was obligatory for them to provide security also. Hence it was input service,
the definition under 2(1) of CCR being wide to cover such services. In case of
transportation of employees, it was observed that the services were in relation
to the manufacturing of excisable goods and hence it was also an eligible input
service. Similarly, in the case of maintenance of guest house, it was utilized
for the stay of businessmen during their business visit and hence was in
relation to the business activities was considered eligible input service.

Reliance was placed inter alia on:

(i)
Manikgrah Cement vs. Commissioner of C. Ex. & Customs, Nagpur (2008) 9 S.T.R.
554 (Tri-Mum) and


(ii) Commissioner of C. Ex., Nashik vs. Cable Corporation of
India Ltd. (2008) 12 S.T.R. 598 (Tri-Mum)


Whether CENVAT credit on specified services mentioned in Rule
6(3) on capital goods are limited to 20%?


iv) Idea Cellular Ltd. vs. CCE, Ahmedabad 2009 (16) STR 712 (Tri.-Del)


The appellant is engaged in providing cellular mobile service
to their Clients and while rendering this service, they rendered services of
interconnectivity and permitted use of infrastructure to other telephone
services. The revenue contended these were not actually rendering such services
but it was cost sharing and the same was not defined under section 65(115) and
hence they were exempted services. The Tribunal observed that the services were
subsumed in the services rendered by the appellant to the client and hence they
were not exempt services.

Further according to revenue, the 17 specific services and
the CENVAT on capital goods is also restricted to 20%. It was held that the
Board Circular No. 137/203/2007-CX-4 dated 01-10-07 clearly stated that the rule
does not restrict either the specified services or the credit on the capital
goods and the Departmental Circular is binding, unless a contrary decision is
pronounced either by the High Court or the Honorable Supreme Court.

Some Recent Judgments

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Service Tax

Part B : Some Recent Judgments




I.
SUPREME COURT :




1.
Ranking of creditor and tax arrears :


Whether realisation of Central Excise duty has priority over
secured creditors :


Union of India v. SICOM Ltd., 2010 (18) STR 673
(SC) :

The respondents are State Financial Corporation and secured
creditor and the appellant, the Excise Department intended to recover arrears of
excise from the respondents. The matter involved in the case was whether
realisation of Central Excise duty has priority over secured creditors.

The appellants placed reliance on Mascon Marbles Pvt. Ltd. v.
Union of India, 2003 (158) ELT 424 (SC) wherein it was held that arrears of tax
have priority over all the other debts.

The respondents contended that Article 372 of the
Constitution of India on strict interpretation gives priority to arrears of tax
revenue above the unsecured debts only and the secured debts would prevail over
the tax arrears.

The respondents relied on cases like M/s. Builders Supply
Corporation v. Union of India & Others, [AIR 1965 SC 1061] and Bank of Bihar v.
State of Bihar & Others, [AIR 1971 SC 1210], where the Apex Court held that
arrears of tax revenue have priority over other debts but not over secured
debts.

Further reliance was placed on Sitani Textiles & Fabrics (P)
Ltd. v. Asstt. Commissioner of Customs & Central Excise, Hyderabad-I, [1999
(106) ELT 296 (AP)], where the AP High Court held that right of lien of a
secured creditor being statutory has a higher claim over tax dues even though
the property involved may have been attached or seized under other law.

The Apex Court opined that even recovery of Central Excise
duty is treated at par with recovery of arrears of land revenue. It held that on
perusal of S. 11 of the Central Excise Act, 1944 it appears that dues of Central
Excise can be treated as land revenue only when the dues are not fully recovered
from sale of excisable goods. The land revenues have priority over the dues of
unsecured creditors. However, the dues of secured creditors are in priority when
compared to arrears of land revenue. At length, decision in the case of Dena
Bank v. Bhikabhai Prabhudas Parekh & Co., 2000 (5) SCC 694 was discussed and
relied upon by the Court which observed — “It seems a Government debt in India
is not entitled to procedure and a prior security debt.”

Further relying on Periyar & Pareekanni Rubber Ltd. v. State
of Kerala, 2008 (4) SCALE 125, the Court held that non obstante clause under a
State Financial Act being statutory would not only prevail over any of the
signed contract but also over any other laws.

II. HIGH COURT :


2. Adjudication :


Can issue for determination of amount in SCN be considered in
writ proceedings ? :


Creative Infospace Pvt. Ltd. v. Additional Commissioner,
Chennai 2010 (18) STR 553 (Mad.) :

The writ petition was filed to quash a show-cause notice
issued by the Revenue as to why service tax and interest could not be demanded.
It was argued on grounds of principles of natural justice and that the authority
had already pre-decided the issue and that the tax was quantified.

The appellant relied on the case of Siemens Ltd. v. State of
Maharashtra and Others wherein it was held that writ petition is maintainable
against a show-cause notice if the respondent has already determined the
liability of the assessee.

The High Court held that quantification of tax in the
show-cause notice is a statutory requirement and cannot be stated that the
authority has pre-decided the issue. Therefore the decision cited by the
petitioner is not applicable to the present case. It was further held that the
question invoking extended period of limitation should be left to the
adjudicating authority and it could not be decided by filing a writ petition.
The appeal was dismissed.



3.
Classification :


(i) Whether del credere agent can be classified as
Clearing and Forwarding Agent :



Commissioner of Service Tax, Bangalore v. Sreenidhi
Polymers (P) Ltd., 2010 (18) STR 385 (Kar.) :


The assessee contented that it was an agent of M/s. IPCL, as
a del credere agent and not C & F agent.

A substantial question of law was raised before the High
Court whether service rendered can be classified as C & F agent.

Del credere agent is a mere surety and is liable to principal
only when purchaser defaults. Service rendered is in nature of indemnifier as
the assessee has to indemnify to the value of goods sold by the principal to its
customers and that the assessee shall ensure proper repayment of value of goods
sold.

Service rendered by del credere agent was included under
‘Business Auxiliary Service’ by way of amendment in the year 2005. By
introducing del credere agent as business auxiliary service provider, it is
implied that prior to amendment Del credere agent was not liable to pay service
tax. Therefore, service rendered by del credere agent cannot fall under
‘Clearing and Forwarding Agent service’.


Bangalore v. Raj Rajeshwari International Polymers (P) Ltd.,
2010 (18) STR 390 (Kar.) :

Following the decision in the above case of Sreenidhi
Polymers (supra), the Revenue’s appeal was dismissed in this case also holding
that Del credere agents were not C & F agents and not liable for service tax
before 16-6-2005.

(ii) If an amount is taxed under one category for an
assessee, can the same be taxed in the hands of another under another category ?


Speed and Safe Courier Service v. Commissioner, 2010 (18) STR
550 (Ker.) :

The assessee is engaged in rendering courier service which involves collection of letters, par-cels, etc. from customers and delivering to the addresses. In order to carry on this business, the assessee appointed several agents named as franchisees. The franchisees collect service charges from customers along with service tax for delivery of parcels, articles, letters, etc. The entire charges collected are passed on to the assessee and the assessee makes payment to franchisees at agreed rates. It implies that courier service operation leads to sharing substantial amount with the franchisee and assessee gets only the balance amount.

The Department assessed the net amount retained by the assessee towards value of taxable service un-der ‘Franchisee service’. In other words, the Depart-ment levied tax twice on the same amount — under courier service and under Franchisee service. The assessee had filed appeal against the Commissioner’s order, which was rejected by the Tribunal, so the assessee preferred an appeal to the High Court.

The High Court held that if a service falls under two heads, there is no provision in the Finance Act, 1994 to tax the same twice under two heads. Having regard to the definition of ‘franchise’ it is clear that under franchise agreement, franchiser gives a right to the franchisee to do business in a representative manner by using its trade mark or trade name. It was further held that agents were doing business on behalf of the assessee and as such, assessee was not rendering any service apart from accepting parcels for courier. The demand under another category being untenable the ap-peal was allowed.

    4. Penalty :

Whether penalty leviable, if amount involved is meager :
Commissioner of C.Ex., Jalandhar v. Ess Ess Kay Engg. Co. Ltd., 2010 (18) STR 393 (P & H) :

Penalty was imposed by the Commissioner for failure to deposit service tax within prescribed time limit. Appeal was filed in this regard by the assessee, which was partly allowed whereby period of payment of interest was modified and penalty order was set aside.

The amount of tax was not more than Rs.30,000. As the amount of penalty was meager, appeal of the Revenue was dismissed.

    5. Service tax applicability :

i) Whether service tax applicable as consulting en-gineer’s services for works contract prior to June 01, 2007 :

Commissioner of Service Tax, Bangalore v. Turbotech Precision Engineering Pvt. Ltd., 2010 (18) STR 545 (Kar.) :

The assessee was rendering services like design development, design review, installation and commissioning, technology transfer for study and design of oil-free compressor systems.

The Department contended that the above services were covered within ‘Consulting Engineer Services’ as per S. 65(13) of the Finance Act, 1994 and de-manded service tax, interest and penalty thereon and confirmed the same. The Commissioner of Central (Appeals) rejected the plea, but the CESTAT decided the case in favour of the assessee. There-fore, the revenue filed appeal in the High Court.

The High Court observed that prior to amendment in the definition of ‘Consulting Engineer’ by the Finance Act, 2006, the companies were not liable to pay service tax. Therefore, for the period prior to 1-5-2006, the assessee could not be considered as a consulting engineer.

The agreement entered into between the assessee and its employer falls under the definition of works contract. However, since the contract was for the period from 1997 to 2001, and works contract was introduced under service tax net with effect from 1-6-2007, it was held that the assessee cannot be compelled to pay service tax under the category of ‘Works Contract’.

[Note : Readers may note that the finding that the definition of consulting engineer did not cover ‘company’ prior to 1-5-2006 is in deviation from the law laid down by M. N. Dastur & Co. Ltd. v. UOI, 2002 (140) ELT 341 (Cal.) and Tata Consultancy Service v. UOI, 2001 (130) ELT 726 (Kar). The final conclusion that the contract is covered by works contract service and therefore no service tax can be demanded being on a different premise, does not give rise to much issue. However, the conclusion about the company’s exclusion cannot be relied upon, in our opinion.]

    6. Valuation :

i) Whether the value of materials consumed during provision of photography services be exempted under Notification No. 12/2003 :

Commissioner of C.Ex. v. Yahoo Colour Lab, 2010 (18) STR 548 (P&H) :

The assessee was engaged in services of photo-graphy developing and printing. The Revenue contended that the assessee has not sold the material/goods to the recipient of service and therefore, it cannot claim benefit of Notification No. 12/2003–ST, dated 20-6-2003.

The respondent explained that the photography films, printing papers, chemicals, etc. consumed during provision of photography services are the essential ingredients of their developing/printing job and without their use, the photography ser-vices cannot be provided. They further claimed that the material brought and sold was liable to Sales Tax which is a State levy and Central Gov-ernment does not have any power to levy tax on purchase or sale of goods under service tax, unless the same is in the course of inter-State trade.

The Adjudicating Authority relying on clarifica-tion dated 7-4-2004, dropped the proceedings. However, the Revisional Authority reviewed the order and confirmed the demand. However, the Appellate Tribunal restored the original order of the Adjudicating Authority and therefore, the Revenue filed the present appeal.

The High Court relying on the judgment delivered in BSNL v. UOI, 2006 (2) STR 161 (SC) held that in case of composite contract where both, service and sales components are discernible, service tax could not be levied on sale portion. Therefore, the impugned order of the Tribunal was maintained and the Revenue’s appeal was rejected.

    III. Tribunal :

    7. Adjudication :

    i) Unjust enrichment — Whether applicable when amount paid did not represent service tax :

Commissioner of Service Tax, Delhi v. Avery India Ltd., 2010 (18) STR 428 (Tri-Del.) :

The revenue demanded service tax under ‘Consult-ing Engineer Service’ for receiving services from overseas company and confirmed the same. Com-missioner (Appeals) set aside the order which was upheld by the Tribunal.

The assessee filed claim for refund of service tax and interest paid. The original authority passed an order for refund claim, but ordered to be depos-ited to Consumer Welfare Fund under principles of unjust enrichment. The Commissioner (Appeals) held that unjust enrichment did not apply and or-dered for cash refund. The Department preferred an appeal against the order of the Commissioner (Appeals).

The Department argued that the assessee availed credit and service tax factor was added to cost of goods manufactured and thus burden of tax was passed on to the customers.

The assessee contended that he being a recipient of service, paid service tax out of his own pocket and the credit taken was also reversed before is-sue of show-cause notice. It was argued that as a recipient of service, the question of passing the burden of service tax did not arise.

The Commissioner (Appeals) found that the prin-ciple of unjust enrichment and the burden of proving that service tax has not been passed does not arise as the service tax was not payable on technical know-how and the assessee paid service tax out of its own pocket. Further, after taking the credit on payment of tax, the assessee reversed the same, so it can be said that no unjust enrich-ment took place.

The Tribunal held that service tax was not appli-cable, therefore whatever amount was collected did not represent service tax. Therefore, provi-sions relating to refund of service tax, and unjust enrichment could not be made applicable and the refund was held admissible.

    ii) Delay in filing appeal : Whether condonable ?

Indo Colochem Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 615 (Tri-Ahmd.) :

The application for condonation for delay of 84 days was filed with the Commissioner (Appeals) was rejected. The application was delayed as the manager of the company was on leave and later he left the organisation, and therefore the appeal was filed by the Director of the company. The as-sessee filed stay application against this order.

The counsel of the assessee submitted that the Commissioner (Appeals) did not pass the order on merit but rejected the appeal as the delay was not condoned.

The Tribunal held that there being genuine reason for the delay, the Commissioner (Appeals) was directed to consider the appeal and stay applica-tion and pass the order on merit.

   iii) Extended period of limitation — Whether invokable in absence of suppression ?

Commissioner of C.Ex., Surat -II v. Haryana Sheet Glass Ltd., 2010 (18) STR 640 (Tri-Ahmd.) :

The assessee paid service tax on outdoor catering service. The Commissioner (Appeals) held that the assessee was eligible for credit by relying on the judgment of M/s. GTC Industries 2008 (12) STR 468 (Tri-Lb.) and that extended period of limitation was not invokable when there was no suppression of fact with intent to evade payment of duty.

According to the Department, in the case of GTC Industries (supra) it was held that credit of service tax would be admissible if cost of such service is included in assessable value of final product, whereas in the present case there was no evidence to show that value of catering service was included in assessable value of final product.

The assessee submitted chartered accountant’s certificate to prove that the value of cater-ing service was included in assessable value of the final product. The Tribunal agreed with the documents submitted by the assessee that the value of catering service was included in the value of the final product and held that since two views were possible, extended period of limitation could not be invoked.

    8. CENVAT Credit :

    i) Whether credit of additional tax paid by input service provider admissible :

L. G. Balakrishnan & Bros. Ltd. v. Commission-er of Central Excise, Trichy, 2010 (18) STR 432 (Tri- Chennai) :

The assessee took credit of additional tax paid by input service provider and subsequently recovered from the input service provider. Further, the al-legation of suppression of facts was established on input service provider. The credit of tax to the assessee was disallowed under Rule 9(1)(b) of the CENVAT Credit Rules, 2004.

The Tribunal held that Rule 9(1)(b) which relates to supplementary invoices, there is no mention of additional amount of service tax and there being no provisions to invoke provisions of Rule 9(1)(b), the demand was held unsustainable.

    ii) Whether credit admissible on plant housekeep-ing, factory garden maintenance, insurance and tours and travels expenses :

Balkrishna Industries Ltd. v. Commissioner of C.Ex., Aurangabad, 2010 (18) STR 600 (Tri-Mumbai) :

The assessee filed appeal to the Tribunal on denial of credit by lower authority on factory garden maintenance, plant housekeeping services. As regards insurance and tours and travels credit, it was denied on the grounds of non-availability of records.

The assessee pleaded that the case was covered by the decision of ISMT Ltd. v. CCE & Cus., Aurangabad (Tri-Mum.) with regard to plant house-keeping and garden maintenance service, where it was held that credit of such expenses was admissible. With regard to other two services, copies of invoices and records which were not placed before the lower authority were submitted and plea was made to remand the case to the adjudicating authority.

Based on the case of Chemplast Sanmar Ltd. v. CCE, Salem which stated that the definition of input services which includes activities in relation to business cannot be interpreted to include post-manufacturing activity, it was argued by the Revenue that credit was not admissible.

The Tribunal remanded the case back to adjudicat-ing authority in respect of Insurance service and tours and travels service. With regard to garden maintenance service, it was held that the garden creates better environment which increases work-ing efficiency of the factory and therefore credit is admissible.

    iii) Whether refund admissible when input service provider fails to deposit service tax :

Lason India Pvt. Ltd. v. Commissioner of Service Tax, Chennai, 2010 (18) STR 626 (Tri-Chennai) :

The assessee availed several input services which remained unutilised as services were exported. The original authority allowed refund of unutilised CEN-VAT credit. However, revision orders were passed disallowing part of the refund on the ground that input service provider did not deposit the amount to the Government. Rule 4(7) of the CENVAT Credit Rules, 2004 provides that credit in respect of input services shall be allowed on making payment of value of input service and service tax as indicated in the invoice. Based on Rule 4(7) (supra), it was held that credit was admissible.

    9. Classification :

    i) Whether repairs and maintenance done on job work taxable under ‘Management, maintenance, or repairs’ service :

Crimpson Electronics v. Commissioner of Central Excise, Kanpur, 2010 (18) STR 450 (Tri-Del.) :

The assessee registered under the Central Ex-cise Act, 1944 carried on the business as a job worker. The consideration received was towards job work and there were no records to show the consideration was received towards repairs and maintenance. The assessee challenged the order of the first Appellate Authority wherein it was held that assessee was providing service of repairs and maintenance. The Department argued that the activity carried out by the assessee was repairs and maintenance in guise of job work. The Com-missioner (Appeals) held that the activity was job work and not repairs and maintenance. As there was no records to prove the existence of service and in the absence of any contract, it was held that the activity was not liable to service tax.

    ii) Whether freight paid to owners is exigible to service tax under ‘Goods Transport agency service’ :

Bellary Iron & Ores Pvt. Ltd. v. Commissioner of C.Ex., Belgaum, 2010 (18) STR (Tri-Bang.) :

The assessee incurred freight for transportation of iron ore by trucks in private mines during 1-1-2005 to 31-3 -2006 and did not pay service tax under Goods Transport Agency (GTA) service. The Revenue confirmed the demand attracted in such cases and benefit of 75% abatement.

The assessee contended that the owners of trucks were not GTA and movement of iron ore within the mine during the processing or production or iron ore was not by ‘road’ as was commonly understood and hence the movement was not covered by GTA. Reference was made to CBEC Circular No. 232/02/2006–CX. 4 where it was clari-fied that the activity of handling and transportation of iron ore was liable to service tax under ‘Cargo handling service’ and export cargo was excluded from its definition. The supply of trucks by own-ers without transferring legal right of possession was taxable under ‘supply of tangible goods’. The amount paid was less than Rs.1,500 per trip and hence exemption was available.

The Minister of Finance while presenting the budget speech stated that there was no inten-tion to levy service tax on truck owners or truck operators.

The Commissioner held that the definition of GTA taxes only service provided in relation to transport of goods by road, mere transportation was not a taxable service. The owner of the goods carriage could not be said to be ‘goods transport agent of the owner.

In order to constitute service as GTA, there must be transport of goods by road. Here road is in-terpreted to mean as public road. As there were no roads in mines, provision of GTA service was held as not applicable.

    10. Export of Services :

    i) Whether conditions of Export of Services Rules fulfilled, if benefit accrues outside India :

KSH International Pvt. Ltd. v. Commissioner of C.Ex., Belapur, 2010 (18) STR 404 (Tri-Mumbai) :

The assessee procured purchase orders in India for suppliers of goods located abroad and transmit-ted the same by courier or electronic means to the said suppliers. Based on the purchase orders, the suppliers exported goods to buyers in India and directly collected payments from them. On receipt of sales proceeds, commission was paid to the assessee in convertible foreign exchange. Service tax was paid by the assessee on commis-sion income. Subsequently, claim for rebate was filed by the assessee under the Export Rules. The service rendered was classified under ‘Business Auxiliary Service’.

The lower authorities refused to accept the con-tention of the assessee that services provided by them to foreign suppliers were delivered outside India. Thus, the claim for rebate was rejected.

It was held that denial of refund of service tax was contrary to the express provisions of law as clarified in CBEC Circular No. 111/5/2009 where the phrase ‘delivery and use outside India’ is in-terpreted to mean that the benefit of the service should accrue outside India. Accordingly, since all the conditions of Export Rules were satisfied, the claim of rebate was held admissible.

    ii) Whether delivery of report outside India can be construed as part performance of service outside India :

Commissioner of Service Tax, Ahmedabad v. B. A Re-search India Ltd., 2010 (18) STR 439 (Tri-Ahmd.)

The assessee was engaged in the business of conducting clinical trial for clients in India and outside India which are classified under ‘Technical Testing and Analysis’. The assessee claimed exemp-tion under Export of Services Rules, 2005 when the report was delivered to the client outside India. The Department raised demand by issuing show-cause notice as the services were wholly performed in India. The assessee preferred an ap-peal with the Commissioner (Appeals) which set aside the demands and penalties imposed.

The Department argued that testing and analysis were performed wholly within India and report sent outside India is secondary aspect. Thus entire services were performed wholly within India and accordingly such services cannot be termed as ‘export outside India’.

On examining Export Rules, it was found that technical testing and analysis service is classified under Category II, wherein in order to constitute export, the service must be necessarily partly or fully performed outside India. The performance of service is not complete unless report is submitted to foreign clients, so it can be construed that service is partly performed outside India. Further, delivery of report is essential part of service and it is not complete unless report is delivered outside India. Accordingly, it was held that such service is not taxable and benefit under Export Rules is available.

    11. Refund :

Whether the Department was right in recovering refund granted erroneously without initiating re-view proceedings or filing an appeal :

Ogilvy & Mather Pvt. Ltd. v. Commissioner of Service Tax, Bangalore, 2010 (18) STR 502 (Tri-Bang.) :

The appellant paid excess service tax and had issued credit note to clients for extra service tax recovered and then filed a claim for refund. The Assistant Commissioner rejected the claim on the ground of limitation, but held that refund would not entail unjust enrichment. The said order was upheld by the Commissioner (appeals). However, the Tribunal allowed the assessee’s appeal by re-manding it back to the adjudicating authority in de novo proceedings. The Assistant Commissioner found that the refund claim was barred by limita-tion, but held that doctrine of unjust enrichment was not applicable.

The Commissioner (Appeals) held that the refund claim was filed in time. However, to examine the aspect of unjust enrichment the case was directed to the lower authorities who held that there was no unjust enrichment and the refund was granted to the assessee.

Subsequently, the Assistant Commissioner issued a show-cause notice u/s.11A to recover the refund sanctioned erroneously. The said order was confirmed and affirmed by the Commissioner (Appeals) and therefore, the present appeal by the appellant on the following grounds :

  •     The adjudication order was appealable and legal course open to the Department was to file an appeal.

  •     Since no review was undertaken, the order is illegal.

  •     Since refund claims were sanctioned by the Revenue, reopening of matter by issue of a show-cause notice without filing an appeal is not maintainable.

  •     The Commissioner passed such order relying on cases having dissimilar facts.

  •     The Tribunal in the case of Jindal Aluminium Ltd. [Order-In-Appeal No. 160/2002-CE of Com-missioner (Appeals), Bangalore] had held that refund should be granted if credit note was issued to the clients for excess service tax re-covered. The said decision was not challenged and therefore, the Department cannot take a different stand in the present case.

  •     The refund sanctioned could not be demanded as erroneous refund invoking S. 11A of the Central Excise Act without simultaneously invoking S. 35E of the Act. The quasi-judicial authority cannot review its own order, unless the power of review is expressly conferred by the statute.

  •     A refund made pursuant to an Appellate order could not be said to have been made erroneously.

    

  • The High Court judgment relied by the Department was distinguishable and was not squarely applicable to the present case.

The Department’s grounds were as under :

  •     Reliance was placed on the Tribunal’s decision in CCE v. Addison & Co., 1997 (93) ELT 429(T).

  •     Duty erroneously refunded could be validly recovered u/s.11A of the Central Excise Act, 1944 without filing an appeal against such order.

  •     The Apex Court in the case of M/s. Sangam Processors had held that if credit notes issued to customers after collecting excess amounts of duty at the time of clearance of goods, the assessee cannot validly claim refund and doc-trine of unjust enrichment was still attracted.

The Tribunal made the following observations :

  •     S. 73 of the Finance Act, 1994 deals with re-covery of service tax erroneously refunded and S. 11A of the Central Excise Act, 1944 are pari materia and therefore both the parties have relied on cases pertaining to S. 11A.

  •     Relying on the ratio laid by the Supreme Court in Indian Dyestuff Industries Ltd. v. Union of India, recovery of erroneous refund can be made u/s.11A of the Central Excise Act, 1944 without firstly filing an appeal against such an order.

  •     Principle of unjust enrichment is fully appli-cable in the present case as once the duty incidence is passed on to the customers at the time of clearance of goods, the assessee would not be entitled for refund.

  •     S. 11A and S. 11B are independent provisions and their effect cannot be taken away by resorting to the provisions of S. 356A or S. 35E.

  •     There being substantive provisions of S. 11A of the Central Excise Act, 1944, the argument that quasi-judicial authority cannot review its own order does not merit any stand. It was held that the order being in accordance with law, the appeal was dismissed.

    12. Service tax applicability :

i) Whether manufacture of alcohol-based perfumes and pharmaceutical products liable to service tax :

SPA Pharmaceutical Pvt. Ltd. v. Commissioner of C.Ex. & S.T., Aurangabad, 2010 (18) STR 421 (Tri-Mumbai) :

The assessee undertook activity of manufacturing alcohol on job work basis for various input sup-pliers and contended that it was excluded from the purview of ‘business auxiliary service’ as it amounted to manufacture.

The legal position being covered under Circular F. No. 249/1/2006–CX.4, dated 27-10-2008 and also that the issue was decided by the Tribunal in the case of Rubicon Formulations Pvt. Ltd. v. Commis-sioner of Central Excise, Aurangabad Final order No. A/281/2009-WZB/C-II/CSTB of 19/11/2009 wherein it was held that the appellants were not liable to service tax for this activity.

Based on this ratio, it was held that manufactur-ing was excluded from the purview of ‘business auxiliary service’ and as such, demand and penalty were not sustainable.

    ii) Whether Explanation given to a Section to be given retrospective effect :

B. A. Research India Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 604 (Tri-Ahmd.) :

The assessee was engaged in the activity of clinical research/testing and analysis for various phar-maceutical companies. The category of technical testing and analysis service was made taxable w.e.f. 1-7-2003. Explanation was introduced in the definition on 1-5-2006 by which testing and analysis for the purpose of determination of the nature of diseased condition, identification of disease, prevention of disease or disorder in human beings or animals was included.

    A show-cause notice was issued to the assessee for recovering service tax for the period 1-7-2003 to 1-5-2006. The issue which arose was whether Explanation was to be given retrospective effect. Relying on the case of Sedco Forex International Drill Inc. v. Commissioner of Income-tax, 2005 (12) SCC 717 and several other cases, the assessee contended that it could not be retrospective.

Citing the case of Epco India Pvt. Ltd., 2008 (84) RLT 428 (Tri.), the Department argued that since the explanation starts with ‘For removal of doubts’ it had retrospective effect.

The Tribunal held that the Explanation introduced by way of amendment was to make clear that the definition included testing and analysis undertaken for the purpose of clinical testing of drugs and formulations were earlier excluded in the original definition. The amendment expanded the scope of definition and therefore could not be given retrospective effect.

    iii) Whether turnkey contracts can be vivi-sected and service tax be levied on service portion involved in execution of such turnkey contracts :

Commissioner of Central Excise, Raipur v. BSBK Pvt. Ltd., 2010 (18) STR 555 (Tri-LB) :

The company entered into one single contract involving handing over of the plant in running condition to the principal, after completing vari-ous works including designing and engineering, civil works, steel structures, erection, testing and commissioning of the plant, etc. They contended that the dominant nature test should be applied for determining type of contract and only divis-ibility of contract cannot be a relevant consid-eration for taxing service tax on service part of such contract.

The Referring Bench had the following views :

  •     Daelim case is not in consonance with the BSNL case delivered by the Supreme Court, wherein it was held that a turnkey contract cannot be vivisected. However, the Revenue had filed appeal in the Supreme Court which was dismissed. However, the Bench observed that summary rejection of the SLP or appeal cannot be construed as affirmation of the judg-ment. It only means that the Supreme Court declined to interfere with the judgment.

  •     By 46th amendment to the Constitution of India, Article 366(29A) was inserted, to con-sider the following three kinds of composite contracts to be ‘deemed sale’ :

    Works contract

    Hire purchase contract and

    Catering contract

Of these three, first and third involve service and sale at the same time and splitting is permitted constitutionally. However, there is no other kinds of contract for which splitting is permitted, say, hospital services.

  •     In the case of ‘turnkey contract’, if sale portion is leviable to sales tax, the remaining portion constituting taxable service cannot go untaxed and the same would be liable to service tax.

  •     The test for composite contracts other than those mentioned in Article 366(29A) continues to be as per the ratio elucidated in Gannon Dunkerley’s case. i.e., to say, did the parties have in mind or intend separate rights arising out of the sale of goods ? If there was no such intention, there is no sale even if the contract could be disintegrated.

  •     It would thus follow that the dominant nature test cannot be applied in the case of works contract falling under clause (b) of Article 366(29-A). If ‘works contract’ can be split into sale contract and service contract, a different treatment may not be given to any works contract simply because the contract is on a turnkey basis.

The arguments put forward by the Revenue were as under :

  •     If taxable services are involved in a composite contract and such element can be discerned, then it is liable to service tax. The reason being service is service whether provided independently or in combination with other activities.

  •     After 46th Constitutional amendment, every con-tract whether indivisible, composite or turnkey involving goods and services are made divisible and would be leviable to sales tax on sale element and service tax on service element.

  •     There are no express provisions of law to exclude turnkey contracts from service tax levy and therefore, service tax should be levied on service element of such contracts.

  •     Daelim’s case had not followed the ratio laid down by the Supreme Court in BSNL and 46th amendment to the Constitution of India.

  •     The aspect theory would not apply to enable the value of services to be included in the sale of goods or price of goods in value of the service.

  •     In case of turnkey contracts, irrespective of percentage of service element involved, such element shall be taxable by the provisions of the Finance Act, 1994.

  •     In the judgment of BSNL v. Union of India, 2006 (2) STR-2006 (2) STR 161 (SC), the Supreme Court has held that if there is a composite contract and the transaction in truth represents two distinct and separate contracts and is discernible as such, it has become per-missible to separate agreement to sale from the agreement to render service.

The respondent argued as follows :

  •     Since the original order of the Tribunal was passed ex parte and when the case was referred to Larger Bench, the findings in ex parte order are baseless and the Larger Bench should not rely on the same.

  •     A turnkey contract is a contract which is indivisible and cannot be vivisected to determine the service tax liability due to dominant intention theory.

  •     Works contract is liable to service tax from June 2007 and therefore, prior to that, turnkey contract cannot be divided to determine the value of service if separate consideration is not paid for such service.

  •     The ratio of BSNL case is not practical to severe turnkey contract into supply contract and service contract to levy tax on minor portion of services involved, which is not dominant object.

  •     Fiction of law in Article 366(29-A) of the Constitution is application to only sale of goods and not to service elements involved in such a composite contract.

  •     Execution of turnkey contract is not complete until the assessee carries out its entire obligation imposed upon it under such contract.

  •     Circular No. 334/4/2006-TRU, dated 28-2-2006 has clarified that when a composite service, even if it consists of more than one service, should be treated as a single service based on the main or principal service and accordingly classified. Therefore it is impracticable to classify various services involved in turnkey contract. Accordingly predominant test does not bring services of turnkey contract into tax net.

  •     In case of Larsen & Toubro Ltd., 2006 (4) STR 63 (Tri-Mumbai) it was held that rendering of engineering and designing service in a turnkey contract is not covered under the category of ‘consulting engineering services’.

The observations of the Larger Bench are summarised hereunder :

  •     The validity of levy of service tax constitutionally may be decided only on the basis of laws laid down by the Apex Court in various decisions. Accordingly, it was observed that a new Entry 92C was introduced in the Union List for the levy of service tax.

  •     As held by the Apex Court in All India Federa-tion of Tax Practitioners, there is no difference between production or manufacture of sale-able goods and production of marketable/ saleable services.

  •     According to the aspect theory, there might be overlapping of taxes, but such overlapping must be in law and it is open to a Legislature or more than one Legislature to impose a tax on that particular ‘aspect’ of the transaction which is within its legislative competence.

  •     In case of divisible contract, after 46th amend-ment, it is possible to levy Sales Tax on goods price.

  •     Rule 2A of Service Tax (Determination of Val-ue) Rules, 2006 was introduced w.e.f. 1-6-2007 to precisely value service elements involved in contracts involving goods and services.

  •     For the purpose of interpretation of a taxing statute, principle of purposive construction should be applied to find out object of the Act and to seek reasonable result and it should not to be interpreted in a manner to defeat its spirit.

  •     Severability of composite and turnkey contract permitted by Article 366(29-A)(b) cannot be said to have been for the mere purpose of levy of sales tax.

  •     Turnkey contracts can be vivisected and dis-cernible service elements involved therein can be segregated and classifiable as well as valued for levy service tax under the Finance Act, 1994.

[Note : Since this decision overrules Daelim’s decision 2006 (4) STR 63 (Tribunal), there would be widespread implications on litigation process as Daelim’s decision (supra) has been followed by Tribunals in several cases.]

    iv) Whether once designs and drawings are imported and considered goods for customs purposes, can they be treated as service ? :

Mitsui & Co. Ltd. v. Commissioner of Central Excise, Jamshedpur, 2010 (18) STR 632 (Tri-Kolkata) :

The appellant entered into contract for supply of imported designs and drawings, provision of foreign technician’s services for supervision of detailed engineering in India, manufacture of indigenous equipment, erection, start-up, commissioning, demonstration of performance guarantee tests and training at supplier’s works.

The appellant contended that at the time of im-port, designs and drawings were assessed to the Customs Act as goods and therefore, the value of these cannot be taken into consideration for the purpose of service tax. Similarly, the drawings and designs originating in India are also considered as goods under the Central Excise Tariff and with respect to commissioning and erection services, it was introduced under the scope of service tax w.e.f. 1-7-2003. However, the present contract was for the period from April 1999 to November 2001.

The Department contended that supply of designs and drawings was a service liable to service tax under the category of ‘Consulting Engineering Services’ and though erection and commissioning service was made taxable w.e.f. 2004, the same was to be treated as part of consulting engineering service as this service included not only advisory consultative assistance but also implementation of such advice.

Finding that the designs and drawings as services not sustainable, the order was set aside and the matter was remanded to the adjudicating authority for de novo adjudication.

    v) Whether service tax could be levied on a works contract after 46th amendment but prior to introduction of ‘works contract’ under service tax net :

Commissioner of Central Excise, Raigad v. Indian Oil Tanking Ltd., 2010 (18) STR 577 (Tri-Mumbai) :

The assessee claimed refund of service tax paid under the category of ‘commissioning and instal-lation’ services for the month of September and October, 2003 on the ground that lump sum turn-key works contract could not be vivisected and part of it subjected to tax, the decision of which was delivered by the Tribunal in Daelim Industrial Company v. CCE, 2006 (3) STR 124 and upheld by the Apex Court and also in Larsen & Toubro Ltd. v. CCE, 2006 (3) STR 223 (Tri.-Del.).

On scrutiny, it was observed by the Department that the prices were separately quoted on ac-ceptance letter for detailed engineering, supply portion and construction and erection portion. However, the assessee claimed that the separation was made only for breaking up billing schedules and hardly 3% of the total contract value may be considered as price for detailed engineering and the assessee had carried out only certain residual process designs.

The Tribunal observed :

  •     The Daelim’s case held that the contract en-tered was a works contract on turnkey basis and not a consultancy contract and that the works contract could not be vivisected for a part of it to be subjected to service tax.

  •     The Tribunal consistently held as above.

  •     The Daelim’s case is not per incuriam and is binding on the Tribunal as the Apex Court while dismissing the Special Leave Petition (SLP) passed the order that ‘we see no reason to interfere the SLP is dismissed’. This order indicates that the merits of the Tribunal’s judg-ment were examined by the Supreme Court.

  •     In the case of Diebold Systems (P) Ltd., 2008 (9) STR 546 (T), it was held that there was no taxable event defined under the Finance Act, 1994 for levy of service tax in respect of indivisible works contract prior to 1-6-2007. The same was approved by the High Court and therefore, such decision has a binding effect on this Bench of the Tribunal.

  •     The Tribunal’s decision in BSBK Pvt. Ltd. v. CCE, 2007 (5) STR 124 has been set aside by the Apex Court on the ground that it was an ex parte order.

  •     The 46th amendment, in respect of Entry 54 of List II of the Seventh Schedule to the Constitution, is for levy of Sales Tax. However, there was no provision of law during the period in dispute for levy of service tax on deeming fiction since such a provision is introduced only w.e.f. 1-6-2007 under ‘works contract’ service.

  •     The High Court in the case of Indian National Shipowners Association (INSA) has held that the introduction of new Entry and inclusion of certain services in that Entry would pre-suppose that there was no earlier Entry covering the said services.

  •     The Builders’ Association case delivered by the Apex Court has been considered by the Tribunal. However, the same being in the context of sales tax, does not have any effect on the present case.

    

  • The Apex Court in the case of Associated Cement Companies Ltd. v. CC, 2001 (128) ELT 21 (SC) has held that subsequent to 46th amendment, the State would be empowered to levy sales tax on materials used in a contract of designs, drawings, manuals, etc.

  •     In the case of BSNL v. UOI, 2006 (2) STR 161(SC), it was held that the ratio of decision delivered in Associated Cement would not be applicable in respect of a composite contract and that the 46th amendment was to over-come the earlier decision of the Apex Court for transactions relating to deemed sales only.

  •     The intention of the Legislature was to tax only the labour portion under ‘Works Contract’ Service as envisaged under Rule 2A of the Service Tax (Determination of Valuation) Rules, 2006 and therefore, service tax cannot be levied on entire contract value.

  •     The Revenue’s contention that the activities are akin to ‘consulting engineering’ services does not hold good as it was clarified that charges for erection, installation and commissioning are not covered under the category of consulting engineering services and the same would be taxed separately.

It was held that there was no direct decision in favour of the Revenue for levy of service tax on service component of a works contract prior to 1-6-2007. On the contrary, the High Court decision in the case of Indian National Shipowners Associa-tion (supra) is directly against the Revenue and it has a binding effect on the Bench of the Tribunal, therefore, the appeal of the Revenue is rejected.

[Note : This decision and the above-cited reported Larger Bench decision in the case of BSBK at 12(iii) being contradictory would make the litigation process murkier on the subject matter].

    13. Valuation :

Whether value of free supplies is includible ?

Jaihind Projects Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 650 (Tri- Ahmd.)

The appellant, engaged in laying of pipelines, is covered by ‘Commercial or Industrial Construction Service’ availed abatement of 67% vide Notifica-tion No. 15/2004 and paid service tax on balance amount excluding value of free supplies. The abate-ment was denied on the ground of non-inclusion of value of free supplies of pipes by the service recipient used in construction services. Penalty also was levied u/s.76 and u/s.78. The appellant contested that the value of free supplies is not includible in gross amount charged, as appellants have not charged anything for free supplies.

Based on the decision in the case of Oblum Electri-cal Industries Private Limited v. CC, Bombay, 1997 ELT 449 (SC), the appellant contended that explanation cannot expand the scope of main operative part of Notification. The main operative part of Notification No. 15/2004 provides that tax will be charged on 33% of gross amount charged and its explanation reads ‘gross amount charged shall include the value of goods and services sup-plied or provided or used by the service provider for providing such service’. As such, the words, ‘supplied or provided’ given in the notification are to be read in context with supply of goods by service provider and not the service receiver. They also referred the decision of P. Chandran v. CCE, 2008 (12) STR 33 where CESTAT has held that the word ‘used’ is to be read as supplied and used by service provider and so the value of free supplies is to be excluded from gross amount charged. They also referred to Notification No. 12/2003 stating that it applied to goods sold to service recipient and did not cover free supplies by service recipient.

The CESTAT opined that the case was covered by Rule 3 of the Service Tax (Determination of Value Rules), 2006 providing for valuation of services. The said Rule provides that value of consideration would be the gross amount charged inclusive of monetary and non-monetary consideration and where such valuation is not possible, the gross amount charged would be money equivalent to consider-ation charged and in no case it would be less than the cost of provision of service. It also states that proviso to the Notification only explains when and how the benefit of this Notification can be taken. The explanation in current case is only explaining actual meaning of ‘gross amount charged’ and does not expand the scope of main operative part of Notification. So, the value of free supplies is to be included in the gross amount charged.

The Tribunal held that the case of P. Chandran (referred supra) was only a stay order and the matter would not have been considered in depth. So for the interpretation of word ‘used’, the case cannot be relied upon and the value of all supplies is to be included in the gross amount charged, irrespective of the source of supply if the goods are used in providing the service.

The Tribunal waived the penalty u/s.78 stating that the matter involved was of interpretation of law. However, the matter was remanded back to the adjudicating authority to revise the duty demanded and the penalty u/s.76 was also left to be decided by him.

A.P. (DIR Series) Circular No. 54, dated 26-5-2010 — Remittance towards partici-pation in lottery, money circulation schemes, other fictitious offers of cheap funds, etc.

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Part C : RBI/FEMA

60 A.P. (DIR Series) Circular No. 54, dated  26-5-2010 —
Remittance towards partici-pation in lottery, money circulation schemes, other
fictitious offers of cheap funds, etc.

This Circular reiterates that remittance from India in any
form towards participation in lottery schemes existing under different names,
like money circulation scheme or remittances for the purpose of securing prize
money/awards, etc. is prohibited under FEMA.

It also clarifies that any person resident in India
collecting and effecting/remitting such payments directly/indirectly outside
India will be liable for prosecution for contravention of FEMA as well as
regulations relating to Know Your Customer (KYC) norms/Anti Money Laundering
(AML) standards.

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Direct Tax Instruction No. 4, dated 25-5-2010 — F.No. 275/23/2007-IT(B) — Certificate of lower deduction for non-deduction of tax at source u/s.197 of the Income-tax Act — matter reg

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59 Direct Tax Instruction No. 4, dated 25-5-2010 — F.No.
275/23/2007-IT(B) — Certificate of lower deduction for non-deduction of tax at
source u/s.197 of the Income-tax Act — matter reg.

1. I am directed to bring to your notice on the subject of
issue of certificates u/s.197 that by Instruction No. 8/2006, dated 13-10-2006,
it was laid down that certificates for lower deduction or nil deduction of tax
at source u/s.197 are not to be issued indiscriminately and for issue of each
certificate, prior administrative approval of the concerned Range Head shall be
obtained by the AO. Subsequently, Instruction No. 7/2009, dated 23-12-2009 read
with letter F.No.275/23/2007-IT(B) dated 8-2-2010 has laid down monetary limits
for prior administrative approval of the CIT-TDS or DIT-Intl. Taxation, as the
case may be. Such certificates are normally being issued at present manually
rather than through the ITD system.

2. To maintain centralised data of issue of such certificates
and facilitate better processing of the TDS returns filed by the deductors and
in continuation to the above instructions, I am directed to communicate that
henceforth w.e.f. . . . . . . . the certificates u/s.197 shall be generated and
issued by the AO mandatorily through ITD system only.

3. In case due to certain reasons, it is not possible to
generate the certificate through the system on the date of its issue, the AO
shall upload the necessary data on the system within 7 days of the date of issue
(manually) of the certificate.

4. The manner of issue of certificate u/s.197 through the
system, uploading of data in situation covered in para 3 above and the prior
administrative approval by the Range Head and by the CIT-TDS/DIT-Intl. Taxation
is given in the enclosed Annexure for guidance of all concerned.

5. The content of the above Instruction may be brought to the
notice of all officers working in your charge for strict compliance.

Hindi version will follow.

Sd/-
Tajbir Singh
Under Secretary (Budget)

Annexure—Note for issue of certificate u/s.197 mandatorily
through the system – uploaded on website viz.
www.bcasonline.org


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Issuing of Tax Clearance Certificates:

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43 i. Issuing of Tax Clearance Certificates:

Trade Circular No.1T of 2010, Dated 05/01/2010

By this Circular procedure for applying and obtaining Tax
Clearance Certificates under the MVAT Act, CST Act, Profession Tax Act, etc. has
been standardized and explained.

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Revised Forms ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, ITR-7 and ITR-V, are notified — Notification No. 33/2010/ F.No.142/12/2010-SO(TPL), dated 11-5-2010.

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58
Revised Forms ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, ITR-7 and ITR-V, are notified —
Notification No. 33/2010/ F.No.142/12/2010-SO(TPL), dated 11-5-2010.

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Explanatory Notes to Finance (no. 2) Act, 2009—Circular No. 5, dated 3-6-2010.

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57 Explanatory Notes to Finance (no. 2) Act, 2009—Circular
No. 5, dated 3-6-2010.

Circular No. 5, dated 3rd June 2010 is issued containing
Explanatory Notes to the Provisions of the Finance (No. 2) Act, 2009.


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Revised Discussion Paper on DTC—

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56 Revised Discussion Paper on DTC—

The draft Direct Taxes Code (DTC) along with a Discussion
Paper was released in August, 2009 for public comments.

After considering the inputs given by various organisations
and individuals, major issues have been identified and Revised Discussion Paper
on DTC is released. This Revised Discussion Paper is available on finmin.nic.in
and incometaxindia.gov.in.


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Industrial Park Scheme, 2008 amended — Notification No. 37, dated 21-5-2010.

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Industrial Park Scheme, 2008 is amended to extend the last
date of commencement of the industrial park to claim deduction under clause
(iii) of Ss.(4) of S. 80-IA from 31st of March 2009 to 31st March, 2011.



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Income-tax (5th Amendment) Rules, 2010 — Notification No. 38, dated 21-5-2010.

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The date by which an industrial undertaking, claiming
deduction u/s.80IA(4)(iii) develops, develops and operates or maintains and
operates an industrial park has been extended from 31st March 2009 to 31st
March, 2011.


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Gratuity Exemption Limit Enhanced—Notification No. 43, dated 11-6-2010.

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The exemption limit under S. 10(10)(iii) is increased to ten
lakh rupees in relation to gratuity received by employees who retire or become
incapacitated prior to such retirement or die on or after the 24th day of May,
2010 or whose employment is terminated on or after the said date.


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Income-tax (6th Amendment) Rules, 2010 — Notification No. 41/2010, dated 31-5-2010.

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Rules 30, 31, 31A, 31AA, 37CA and 37D have been substituted,
which provide for time and mode of payment of TDS/TCS to the Government account,
issue of certificate of TDS/TCS and filing of quarterly statements thereof. The
said rules shall apply in respect of tax deducted/collected on or after 1st
April, 2010. The major amendments include :


  • Revised forms of TDS
    certificates to include the receipt number of TDS return filed by the tax
    deductor, which along with the PAN of the deductee and the TAN of the deductor
    would form the unique identification, based on which credit for TDS would be
    available.

  • Even the Government
    authorities are now required to furnish a monthly return electronically in new
    Form 24G.

  • The due date of filing
    the TDS return for the last quarter of the financial year has been pre-poned
    from 15th June to 15th May and the due dates for furnishing the TDS
    certificates have also been modified to 15th May for Form 16 to be furnished
    annually and fifteen days from the date of submitting TDS certificates for
    other non-salary TDS certificates to be issued quarterly.



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Smart phones a cyber security risk

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Computer Interface

Proliferation of smart phones :


To say that we are constantly surrounded by advanced
technologies would be a cliché. What would be even more clichéd is the fact that
every day we see, hear and read about some new development in the field of
information technology. This may be about the next generation televisions or the
newest Apple ‘i’ product or the latest handheld device or other
products/services. These developments have not only made our lives a little bit
easier (A LOT easier if you ask me), they have made us more efficient at the
things we do best (or ‘handicapped’ due to technological innovation as a
naysayer would prefer to say).

In this connection, mobile phones have become increasingly
popular and more affordable over the past few years and thanks to Android,
Blackberry and the iPhone, smart phones are in demand. In fact, a majority of
the mobile devices that are purchased worldwide are a type of smart phone.
People have now started realising that these smart phones are in fact miniature
computers. They run a variant of computer operating systems such as Linux
(Android), Mac (iPhone), and Windows (Windows Mobile), and can do pretty much
anything that a computer can do. Most smart phones also pack powerful
processors, a hefty amount of RAM and a lot of storage space — in some cases up
to 48 Gigs ! (it all depends on the size and depth of your wallet). The downside
is that even though a smart phone is a handheld computer, most users don’t treat
it the same way as their computer at office/home.

Duh ! ! ! ! So what’s the point ? ? ? ?.

Well, to start with, bet you didn’t know :



  • More than 54 million smart phones were shipped worldwide in the first three
    months of this year, a 57% jump from a year ago, according to research
    reports.



  • Less
    than 40% of the users (as per recent surveys) follow the practice of securing
    their smart devices. As a natural corollary, the vast majority doesn’t even
    bother securing their mobiles, PDAs or smart phones by using, and regularly
    changing, a password or PIN.



  • The
    information that many of us keep on our mobile phones : phone numbers,
    addresses, birthdays and even bank account numbers, is the just the kind of
    information which, in the wrong hands (half-robinhoods), can be used to
    perpetrate frauds (which would include re-creating your identity — please
    refer to my write-up on Facebook frauds — Stranded in London).



  • It
    isn’t just the user of the phone who is at risk, but also the organisations
    they work for (especially since many of us use the same device in both our
    work and personal life). The reality is that any gadget that has access to the
    Internet presents a risk to an organisation if the user doesn’t secure the
    device properly.




  • Smart phones are very susceptible to being hacked and catching viruses, in
    some ways even easier than a computer.



  • All
    of the above facts are not lost on cyber criminals.



If you still think the above is the stuff we see only in
Hollywood thrillers, then read on.

Smart phones the weak link :

Most people purchase their mobile devices solely based on the
number of ‘cool’ applications that it can run. The more apps the better,
right ? Wrong. Cyber criminals love this idea of an ‘Application
Market’, ‘Store’, or whatever one may want to call it, because now they can
transmit malware easily throughout the world without having to put forth any
effort at all. All you need to do is download an infected app and BAM ! Your
phone is infected.

In January 2010, a mobile application developer (who goes by
the name of ‘Droid09’) uploaded a malicious application to the Android App Store
that posed as the ‘Official First Tech Credit Union’ banking application. This
application was nothing more than a way to steal personal information like
banking logins and passwords. Eventually, the application was removed, but not
before a few customers felt the effect of this rogue application.

Similar to this a Trojan malware virus directed at smart
phones running Google’s Android operating system. The Trojan, named Trojan-SMS.AndroidOS.FakePlayer.a,
infected a number of mobile devices. Once installed on the phone, the Trojan
begins sending text messages, or SMS messages, to premium rate numbers — numbers
that charge a fee — without the owners’ knowledge or consent, taking money from
users’ accounts and sending it to the cyber criminals.

In both instances of a Trojan on the Android platform was
mainly affected only by spyware (a software that obtains information from a
user’s device without the user’s knowledge or consent), and phishing attacks (a
process used by cyber criminals to acquire a user’s personal information by
masquerading as a trustworthy entity in an electronic communication). Needless
to say that the motive behind this attack was profit.

(while I have cited 2 instances of Trojans on Android, let
me assure you there are equal or more on the other systems. Press reports
suggest that there are as many as 500 viruses and many which are capable of
attacking the all the popular platforms.)

News reports suggest the proliferation of smart phones is the primary contributor (thats like saying marriage is the root cause of divorce). And now with smart phone use becoming more widespread, the bad guys are looking at web browsing and the downloading of web applications (apps) as two ways to attack Android handsets, iPhones, BlackBerrys and Windows Mobile smart phones and spread those malicious web apps. Some of these viruses are rumoured to have the capability of harvesting or erasing stored phone numbers and text messages and retrieving information that can be used to disclose a user’s location.

The rising tide:

According to a well-respected security firm, the reason there haven’t been more mobile phone attacks is because Windows XP computers are still the easiest devices to exploit. And although Microsoft no longer supports it, the Windows XP operating system is still extensively used throughout the world. But as XP disappears, the cyber crooks will begin looking to smart phones, because it’s easy to make money exploiting them.

While smart phones running any operating system can be targeted, speculation is that those running the iPhone, Android and Symbian operating systems will be the targets of choice for the criminals. This is because they are the most commonly used. So far attacks on smart phones have mostly involved tricking users into clicking on a link and divulging personal information. But one can expect to see mobile smart phone worms, a form of malicious software, that replicate and automatically spread to everyone listed in a phone’s address book. Such a worm could spread an infection worldwide in only a couple of minutes.

Mainstream security firms are predicting that in 2011 smart phones are likely to be attacked by more malware, sophisticated data stealing Trojans. These attacks could be launched by targeting social networks, HTML 5, stealing digital certificate (like Stuxnet), among other things.

In conclusion one can say that viruses and other malware have long been a threat to computers only. But as smart phones become too smart (for their own good), the bad guys are likely to target them more and more with viruses. And as has already happened with computers, the smart phone assault is expected to be led by cyber criminals aiming to turn a profit. Characteristically, there seems to be a lag between adopting new technology and taking the appropriate action to secure it. Simply put, first we embrace it, then we become aware of the potential risks it may bring, and only after that do we make the effort to secure it in order to better protect ourselves. We went through the same cycle with the introduction of email and learning the value of anti-virus and anti-spam protection, and more recently with social networking (and the need to be careful about what information you make publically available). We are now going through that cycle with Internet-enabled mobile devices.

The risk increases significantly when you consider that a vast majority of employees in any company use at least one self-purchased technology device at work.

The sad part is that many organisations have not yet caught up with the security protection and policies that the latest mobile gadgets require.

As a parting shot, just think about it: There are more phones on the planet than computers. And it’s easier to steal money from phones. Are you prepared to deal with this eventuality?

A.P. (DIR Series) Circular No. 17, dated 16-11-2010 — Processing and settlement of export-related receipts facilitated by Online Payment Gateways.

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Part c : rbi fema


Given below are the highlights of certain RBI Circulars.

25. A.P. (DIR Series) Circular No. 17, dated 16-11-2010 —
Processing and settlement of export-related receipts facilitated by Online
Payment Gateways.

This Circular allows banks, subject to certain conditions, to
offer the facility of repatriation of export-related remittances by entering
into standing arrangements with Online Payment Gateway Services Providers
(OPGSP). Some of the important conditions are :


1. Banks offering this facility must carry out the due
diligence of the OPGSP.

2. This facility will only be available for export of
goods and services of value not exceeding US $ 500.

3. Banks providing such facilities must open a NOSTRO
collection account for receipt of the export-related payments facilitated
through such arrangements.

4. A separate NOSTRO collection account must be
maintained for each OPGSP or the bank must be able to delineate the
transactions in the NOSTRO account of each OPGSP.

5. Only the following debits will be permitted to the
NOSTRO collection account opened under this arrangement :

(a) Repatriation of funds representing export proceeds to
India for credit to the exporters’ account;

 

(b) Payment of fee/commission to the OPGSP as per the
predetermined rates/frequency/arrangement; and

 

(c) Charge back to the importer where the exporter has
failed in discharging his obligations under the sale contract.

 

6. Balances in the NOSTRO collection account must be
repatriated and credited to the respective exporter’s account with a bank in
India within seven days from the date of credit to the NOSTRO collection
account.

7. Banks shall satisfy themselves as to the bona fides of
the transactions.


8. OPGSP who are already providing such services as per the
specific holding-on approvals issued by the Reserve Bank shall open a liaison
office in India within three months from the date of this Circular. All new
OPGSP must open a liaison office with the approval of the Reserve Bank before
operationalising the arrangement.

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A.P. (DIR Series) Circular No. 16, dated 16-11-2010 — Reporting Mechanism — Data of Authorised Deler Category-I Branches.

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Part c : rbi fema


Given below are the highlights of certain RBI Circulars.

24. A.P. (DIR Series) Circular No. 16, dated 16-11-2010 —
Reporting Mechanism — Data of Authorised Deler Category-I Branches.

Presently, banks are required to inform RBI, via email, any
changes in the categorisation of their branches dealing in foreign exchange.
This Circular states that the path to the web directory has been changed from
www.rbi.org.in to http://dbie.rbi.org.in. The full details of the path and
options are given in Annex-II to this Circular.

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Mandatory digitally signed e-return for companies — Notification No. 49/2010, dated 9-7-2010.

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Part A : Direct Taxes


68 Mandatory digitally signed e-return for companies —
Notification No. 49/2010, dated 9-7-2010.

The CBDT vide Income-tax (Seventh Amendment) Rules, 2010 has
amended Rule 12 which prescribes the manner of filing the income-tax return for
A.Y. 2010-2011. It is now provided that companies need to file their income-tax
e-return digitally signed and hence the process of filing an e-return without
digital signature and sending the acknow-ledgement in Form ITR V has been done
away with. Further individuals and HUFs liable to tax audit u/s.44AB of the Act
are now mandatorily required to need to file the returns electronically with or
without digital signature. The Rule does not change for the firms subjected to
tax audit.

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Points for Company Law for the period 15th September 2010 to 15th October 2010.

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Spotlight

18. Points for Company Law for the period 15th September 2010
to 15th October 2010.


1. Computer-generated show-cause notices have been issued to
a number of defaulting companies that were not filing their documents in the
MCA21 system as a part of the drive to cleanse the MCA Registry by the Ministry
of Corporate Affairs. The Ministry notes that while migrating data from manual
registry into electronic registry under MCA21, certain inaccuracies might have
crept in; and as such computer-generated notices may contain some errors, like
wrong addresses/wrong names of companies, etc. Some directors who have already
resigned, or some companies which may have been merged or liquidated, might not
have been recorded in the electronic registry. In case any discrepancy is found
in such show-cause notice issued, the same may kindly be intimated to the
respective ROC, so that the electronic registry data is made up-to-date.

2. MCA is planning to introduce SMS alert facility for the
Annual Filing eForms. Stakeholders can register for this service using the ‘Register
for SMS alerts’ link after logging on to the portal. Presently, this
facility is applicable only for Annual Filing eForms i.e., 20B, 23AC, 23ACA, 66
and 21A.

3. The MCA can be contacted in case of any technical difficulty, at the
following numbers : North (011-64506000), East (033-23675242/033-64506000),
South (044-28152455/044-64506000), West (022-65161996/ 022-64506000) or an email
can be sent to appl.helpdesk@mca.gov.in. Details of the Certified Filing Centres
(CFC’s) and the ROC Facilitation Centre in major cities can be seen on the MCA
website.

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Exchange Earner’s Foreign Currency (EEFC) Account – Clarification

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 Part C:
FEMA

Given below are the highlights of certain RBI
circulars, press notes and notifications

32 A. P. (DIR Series) Circular No. 22, dated 
December 29, 2009

Exchange Earner’s Foreign Currency (EEFC) Account –
Clarification

This circular clarifies that all categories of
foreign exchange earners, including SEZ developers, are allowed to credit up to
100% of their foreign exchange earnings to their EEFC Accounts.

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Advance Remittance for Import of Rough Diamonds

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Part C:
FEMA

Given below are the highlights of certain RBI
circulars, press notes and notifications

31 A. P. (DIR Series) Circular No. 21, dated
December 29, 2009

Advance Remittance for Import of Rough Diamonds

Presently, advance remittances without any limit
and without a bank guarantee or standby letter of credit for import of rough
diamonds into India, can be made to eight mining companies by eligible
importers.

Average
Maturity Period
All-in-cost ceilings over six month Libor for the respective currency of
borrowing or applicable benchmark
3 years
and up to 5 years		 300
basis points
More
than 5 years		 500
basis points

Now, advance remittances can be made by eligible
importers without any limit and without a bank guarantee or standby letter of
credit for import of rough diamonds into India to Namibia Diamond Trading
Company (PTY) Limited (NDTC).

The names of the nine mining companies to whom
advance remittance as above can be made are: –

1. De Beers UK Limited

2. RIO TINTO, UK

3. BHP Billiton, Australia

4. ENDIAMA, E. P. Angola

5. ALROSA, Russia

6. GOKHARAN, Russia

7. RIO TINTO, Belgium

8. BHP Billiton, Belgium

9. Namibia Diamond Trading Company (PTY) Limited
(NDTC).


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External Commercial Borrowings (ECB) Policy

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 Part C:
FEMA

Given below are the highlights of certain RBI
circulars, press notes and notifications

30 A. P. (DIR Series) Circular No. 19, dated
December 9, 2009

External Commercial Borrowings (ECB) Policy

This circular has carried out the following changes
to some aspects of the ECB Policy: –

1.
All-in-cost ceilings

All-in-cost ceilings, applicable with effect from
January 1, 2010 under the approval route, will be as under: –

2.
Integrated township

Presently, companies engaged in the development of
integrated townships are permitted to avail ECB under the approval route only up
to December 31, 2009. This facility for availing ECB under the approval route is
being extended up to December 31, 2010.

3.
Buyback of Foreign Currency Convertible Bonds (FCCBs)

Presently, Indian companies are allowed to buy-back
their FCCB both under the automatic route as well as the approval route. This
facility will be available only up to December 31, 2009 and will be discontinued
on and from January 1, 2010.

4.
ECB for NBFC Sector

Presently, NBFCs, exclusively engaged in the
financing of infrastructure sector, are permitted to avail of ECB under the
approval route only from multilateral / regional financial institutions and
government-owned development financial institutions for on-lending to borrowers
in the infrastructure sector. These NBFCs have, with immediate effect, been
permitted to avail of ECB from any recognized lender under the approval route.

5.
ECB for Spectrum in the Telecommunication Sector

Eligible borrowers in the telecommunications sector
are now permitted to avail of ECB for the purpose of payment for ‘Spectrum’
allocation’.

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Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards / Combating of Financing of Terrorism (CFT) / Obligation of Authorized Persons under Prevention of Money-Laundering Act, (PMLA) 2002, as amended by Prevention of Money Laundering Act,

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Part C:
FEMA

Given below are the highlights of certain RBI
circulars, press notes and notifications

 

28 A. P. (DIR Series) Circular No. 15, dated
November 19, 2009

A. P. (FL/RL Series) Circular No. 2

Notification No. 13/2009/F. No. 6/8/2009 – ES,
dated November 12, 2009

 

Know Your Customer (KYC) norms / Anti-Money
Laundering (AML) standards / Combating of Financing of Terrorism (CFT) /
Obligation of Authorized Persons under Prevention of Money-Laundering Act, (PMLA)
2002, as amended by Prevention of Money Laundering Act, 2009 – Money changing
activities – Suspicious Transaction Reporting Format

 

This circular states that the Prevention of Money
Laundering (Amendment) Act, 2009 has brought
authorised persons within the definition of “Financial Institutions” under
Section 2(1) of the Prevention of Money-Laundering Act, 2002. As a result,
authorised persons are required to furnish information to the Financial
Intelligence Unit – India (FIU-IND) in the prescribed format. The procedure and
manner of maintaining records, etc., as notified by the Government of India, are
annexed to this circular.

Authorised persons / franchisees of authorised
persons are required to furnish Suspicious Transaction Report (STR) to FIU-IND
in respect of money changing activities within 7 days of arriving at a
conclusion that a transaction / attempted transaction, whether made in cash or
otherwise, or a series of transactions integrally connected are of a suspicious
nature. The formats of STR can be downloaded from the website of FIU-IND –
http://fiuindia.gov.in.

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Clarification F. No. 404/10/2009-ITCC issued by CBDT dated 1.12.2009

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27 Clarification F. No. 404/10/2009-ITCC issued by
CBDT dated 1.12.2009


 


Subject :
Clarification on Instructions
on Stay of Demand

 

Many queries have been received regarding the
applicability of Instruction number 95 dated 21.8.1969 vis-à-vis Instruction
number 1914 dated 2.12.1993. Many assessees are taking the plea that Instruction
No.1914 does not supersede Instruction No.95 dated 21.8.1969.

1. Instruction No.95 dated 22.8.1969 was an
assurance given by the then Deputy Prime Minister during the 8th Meeting of the
Informal Consultative Committee held on 13th May, 1969. The observations made by
the Deputy Prime Minister were as under :-

“Where the income determined on assessment was
substantially higher than the returned income, say twice the latter amount or
more, the collection of the tax in dispute should be held in abeyance till the
decision on the appeal provided there were no lapses on the part of the assessee”.

The above observations were circulated to the field
officers by the Board as Instruction number 95 dated 21.8.1969.

2. The matter has been considered by the Board and
the decision of the Board has been approved by the Finance Minister. It is
hereby clarified that subsequent to Instruction No.95, following
instructions/clarifications on the stay of demand were issued till 15th October,
1980 :



(i) Clarification to Instruction number 95 was
issued on 14/09/1970 stating that it relates to disputed demands only,

(ii) Instruction number 635 was issued on
12/11/1973 stating that stay should be granted only in those cases where
demands are attributable to substantial points of dispute.

(iii) Clarification to Instruction number 95
dated 13/07/1976 held that the Instruction becomes operative only in cases
where there are no lapses on the part of the assessee.

(iv) Instruction number 1067 dated 21/06/1977
held that the ITO can pass the necessary orders u/s.220(6) in all cases except
cases under section 144A or 144B where the approval of IAC is required.

(v) Instruction number 1158 dated 27th March,
1978 held that in suitable cases the assessee may be allowed to furnish
security.

(vi) Instruction number 1282 dated 4th October,
1979 held that requests should be made to CIT(A) and ITAT for early disposal
of appeals and constant watch should be kept on progress of appeals.

(vii) Instruction number 1362 was issued on
15/10/1980 in supersession of all the earlier Instructions. It was an
Instruction covering the issue in detail and in para 4 of the same there was a
clear reference to the proposition laid down in Instruction number 95 which is
as follows :-

In exercising this
discretion, the Income-tax Officer should take into account factors such as;
whether the points in dispute relate to facts; whether they arise from
different interpretations of law; whether the additions have been made as a
result of detailed investigation; whether the additions are based on materials
gathered through enquiry/survey/search and seizure operations; whether the
disputed addition to income has been assessed elsewhere by way of protective
assessment and the tax thereon has been paid by such person etc. The magnitude
of addition to income returned cannot be the sole determinant in this regard.
Each disputed addition will need to be considered to arrive at the quantum of
tax that may need to be stayed.

 


3. It is clear that the substance of the assurance
as laid down in Instruction number 95 dated 21.8.1969 was submerged in the
Instruction number 1362 dated 15/10/1980 which was issued in supersession of all
earlier Instructions on the subject. Instruction No.1914 dated 2.12.1993 was
issued subsequently in supersession of all the earlier Instructions on the
subject and the said instruction also covers unreasonably high pitched
assessment orders and genuine hardship cases.

 

4. It is therefore clarified that there is no
separate existence of the Instruction number 95 dated 21.8.1969. Instruction
number 95 and all subsequent Instructions on the issue ceased to exist from the
date Instruction No.1362 came into operation. In turn Instruction number 1362
and all subsequent Instructions on the issue also ceased to exist the day
Instruction number 1914 came into operation i.e. 2/12/1993. The Instruction
number 1914 holds the field currently and a copy of Instruction number 1914 is
enclosed for reference.

 

(Mona Singh)

Director (ITCC)

Annexure – Instruction No : 1914

The Board has felt the need for a comprehensive
Instruction on the subject of recovery of tax demand in order to streamline
recovery procedures. This Instruction is accordingly being issued in
supersession of all earlier Instructions on the subject and reiterates the
existing Circulars on the subject.

2. The Board is of the view that as a matter of
principle, every demand should be recovered as soon as it becomes due. Demand
may be kept in abeyance for valid reasons only in accordance with the guidelines
given below :

A. Responsibility

 


(i) It shall be the responsibility of the
Assessing Officers and the TRO to collect every demand that has been raised,
except the following :

(a) Demand which has not fallen due;

(b) Demand which has been stayed by a Court or
ITAT or Settlement Commission;

  c) Demand for which a proper proposal for write off has been submitted;

  d)  Demand stayed in accordance with para B & C below.

  ii)  Where demand in respect of which a Recovery Certificate has been issued or a statement has been drawn, the primary responsibility for the collection of tax shall rest with the TRO.

  iii)  It would be the responsibility of the supervisory authorities to ensure that the Assessing Officers and the TROs take all such measures as are necessary to collect the demand. It must be understood that mere issue of a show cause notice with no follow up is not to be regarded as adequate effort to recover taxes.

 B.   Stay petitions :

i)    Stay petitions filed with the Assessing Officers must be disposed of within two weeks of the filing of petition by the tax payer. The asses-see must be intimated of the decision without delay.

ii)    Where stay petitions are made to the authori-ties higher than the Assessing Officer (DC/ CIT/CC), it is the responsibility of the higher authorities to dispose of the petitions without any delay, and in any event within two weeks of the receipt of the petition. Such a decision should be communicated to the assessee and the Assessing Officer immediately.

iii)    The decision in the matter of stay of demand should normally be taken by Assessing Officer/TRO and his immediate superior. A higher superior authority should interfere with the decision of the AO/TRO only in exceptional circumstances e.g. where the assessment order appears to be unreasonably high pitched or where genuine hardship is likely to be caused to the assessee. The higher authorities should discourage the assessee from filing review petitions before them as a matter of routine or in a frivolous manner to gain time for withholding payment of taxes.

C.    Guidelines for staying demand

i)    A demand will be stayed only if there are valid reasons for doing so. Mere filing an appeal against the assessment order will not be sufficient reason to stay the recovery of demand. A few illustrative situations where stay could be granted are –

  a)  If the demand in dispute relates to issues that have been decided in assessee’s favour by an appellate authority or court earlier; or
 

    If the demand in dispute has arisen because the Assessing Officer had adopted an interpretation of law in respect of which there ex-ist conflicting decisions of one or more High Courts (not of the High Court under whose jurisdiction the Assessing Officer is working); or

 b)   If the High Court having jurisdiction has adopted a contrary interpretation but the Department has not accepted that judgment.

c) It is clarified that in these situations also, stay may be granted only in respect of the amount attributable to such disputed points. Further, where it is subsequently found that the assessee has not cooperated in the early disposal of appeal or where a subsequent pronouncement by a higher appellate authority or court alters the above situation, the stay order may be reviewed and modified. The above illustrations are, of course, not exhaustive.

  ii)  In granting stay, the Assessing Officer may impose such conditions as he may think fit. Thus he may.

  a)  require the assessee to offer suitable security to safeguard the interest of revenue;

  b)  require the assessee to pay towards the dis-puted taxes a reasonable amount in lumpsum or in instalments;

c)    require an undertaking from the assessee that he will co-operate in the early disposal of appeal failing which the stay order will be cancelled;

 d)   reserve the right to review the order passed after expiry of reasonable period, say upto 6 months, or if the assessee has not co-operated in the early disposal of appeal, or where a subsequent pronouncement by a higher appellate authority or court alters the above situations;

e) reserve a right to adjust refunds arising, if any against the damand;

 iii)   Payment by installments may be liberally allowed so as to collect the entire demand within a reasonable period not exceeding 10 months.

 iv)   Since the phrase ‘stay of demand’ does not occur in Section 220(6) of the Income-tax Act, the Assessing Officer should always use in any order passed under section 220(6) [or under section 220(3) of section 220(7)], the expression that occurs in the section viz, that the agrees to treat the assessee as not being in default in respect of amount specified, subject to such conditions as he deems fit to impose.

 v)   While, considering an application under Section 220(6), the Assessing Officer should consider all relevant factors having a bearing on the demand raised and communicate his decision in the form of a speaking order.

  D.  Miscellaneous :

  i)  Even where recovery of demand has been stayed, the Assessing Officer will continue to review the situation to ensure that the condi-tions imposed are fulfilled by the assessee failing which the stay order would need to be withdrawn.

  ii)  Where the assessee seeks stay of demand from the Tribunal, it should be strongly opposed. If the assessee presses his application, the CIT should direct the departmental representative to request that the appeal be posted within a month so that Tribunal’s order on the appeal can be known within two months.

   iii) Appeal effects will have to be given within 2 weeks from the receipt of the appellate order. Similarly, rectification application should be decided within 2 weeks of the receipt thereof. Instances where there is undue delay in giving effect to appellate orders, or in deciding rectification applications, should be dealt with very strictly by the CCITs /CITs.

  4.  The Board desires that appropriate action is taken in the matter of recovery in accordance with the above procedure. The Assessing Officer or the TRO, as the case may be, and his immediate superior officer shall be held responsible for ensuring compliance with these instructions.

  5.  This procedure would apply mutatis mutandis to demands created under other Direct Taxes enact-ments also.

Scheme for improving quality of assessments regarding – Instruction No. 6/2009 F. No. 225/11/2006-ITA.II], dated 18th December, 2009 –

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26 Scheme for improving quality of assessments regarding – Instruction No.
6/2009 F. No. 225/11/2006-ITA.II], dated 18th December, 2009 –

Copy available for down load on the website –
www.bcasonline.org

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Certificate of lower deduction or non-deduction of tax at source u/s 197 of the Act- matter reg. – Instruction No. 7/2009 F. No. 275/23/2007-IT(B)], dated 22nd / 23rd December, 2009

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25 Certificate of lower
deduction or non-deduction of tax at source u/s 197 of the Act- matter reg. –
Instruction No. 7/2009 F. No. 275/23/2007-IT(B)], dated 22nd / 23rd December,
2009 – Copy
available for down load on the website – www.bcasonline.org


CBDT vide the above Instructions have notified that prior
administrative approval of the CIT (TDS) is required before issuing certificate
u/s 197, where the cumulative amount of tax forgone by non-deduction/lower
deduction during the financial year for a particular assessee exceeds Rs. 50
lakh in Delhi, Mumbai, Chennai, Kolkata, Banglore, Hydrabad, Ahmadabad and Pune
and Rs. 10 lakh in other cities.

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CBDT F. NO. 275/70/2009-IT(B)], dated 22nd December, 2009 regarding tax deduction at source u/s 194 on commission/supplementary commission

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24 CBDT F. NO. 275/70/2009-IT(B)], dated 22nd December, 2009
regarding tax deduction at source u/s 194 on commission/supplementary commission


CBDT has clarified that tax should be deducted at source by
airlines under section 194H from the commission and supplementary commission
paid to their travel agents.

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Notification No. 2/2010 [F. NO. 142/25/2009-SO(TPL)], dated 12th January, 2010

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23 Notification No. 2/2010 [F. NO. 142/25/2009-SO(TPL)],
dated 12th  January, 2010


The new perquisite valuation rules – amendments to Rule 3
were recently notified by the CBDT vide Notification no. 94/2009 dated 18th
December, 2009. CBDT has issued Notification no 2/2010 dated 12th January, 2010
as a corrigendum to notification no. 94/2009 to rectify the drafting errors in
perquisite valuation rules notified earlier.

 

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Annual Detailed Circular on TDS on Salaries for the FY 2009-10 – Circular No. 1/2010 [F.No. 275/192/2009IT(B)], dated 11th January, 2010

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New Page 122 Annual Detailed Circular
on TDS on Salaries for the FY 2009-10 – Circular No. 1/2010 [F.No.
275/192/2009IT(B)], dated 11th January, 2010 –
Copy available
for down load on the website – www.bcasonline.org

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S. 264 and S. 246A — Appeal against assessment made consequent to order passed u/s.264 is maintainable u/s.246A, but only to the extent of issues which have not attained finality in order passed u/s.264.

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38 Dr. A. Naresh Babu v.
ITO
(2010) 124 ITD 28 (Hyd.)
A.Ys. : 1996-97 to 2003-04. Dated : 5-9-2008


 


S. 264 and S. 246A — Appeal against assessment made
consequent to order passed u/s.264 is maintainable u/s.246A, but only to the
extent of issues which have not attained finality in order passed u/s.264.


Facts :

The assessee’s case was scrutinised and the Assessing Officer
passed the assessment order. The assessee filed an appeal before the CIT(A).
Later on the appeal filed before the CIT(A) was withdrawn. Thereafter the
assessee filed petition before the CIT seeking revision u/s.264. The CIT set
aside the assessments and restored the matter with certain directions on various
issues to the Assessing Officer to re-do the assessments afresh. The Assessing
Officer completed the assessment afresh.

Being aggrieved by the additions made by the Assessing
Officer in the fresh assessment, the assessee preferred appeal before the
CIT(A). The CIT(A) held that the assessments made in consequence to the order
passed by the CIT, particularly when the assessee’s case has been decided
u/s.264 on merits, cannot be subject matter of appeal before the CIT(A).

Held :

Appeal from fresh order passed by the Assessing Officer to
give effect to the revisional order passed u/s.264 is maintainable, but only
such issues can be taken in appeal which have not attained the finality in the
order passed u/s.264 of the Act.

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Persons marketing lottery tickets exempted — Notification No. 50/2010-ST, dated 8-10-2010.

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Part B : INDIRECT TAXES


SERVICE TAX UPDATE

23. Persons marketing lottery tickets exempted — Notification
No. 50/2010-ST, dated 8-10-2010.

Persons appointed or authorised by the lottery organising
State for marketing lottery tickets, would be exempted from service tax if the
distributor or selling agent avails of optional composition scheme notified vide
Notification No. 49/2010-ST, dated 8-10-2010 in respect of such lottery during
the financial year.

 

 

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Optional Composition Scheme for Distributor/Selling Agent of Lottery Notification No. 49/2010-ST, dated 8-10-2010.

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Part B : INDIRECT TAXES


 

SERVICE TAX UPDATE

22. Optional Composition Scheme for Distributor/Selling Agent
of Lottery Notification No. 49/2010-ST, dated 8-10-2010.

Under the lottery or lottery scheme, where the guaranteed
prize payout is more than 80%, a distributor or selling agent can opt to pay
flat service tax of Rs.6000 and where the guaranteed prize payout is less than
80%, he can opt to pay flat service tax of Rs.9000, on every Rs.10 lakh of
aggregate face value of lottery tickets printed by the organising State for a
draw.

Such option will have to be exercised within one month of the
beginning of each financial year (for F.Y. 2010-11 by 7-11-2010) for the entire
financial year. A new service provider can exercise such option within one month
of providing such service.

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Profession Tax — E-Services Enrolment/Registration

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Part B : INDIRECT TAXES


 

PROFESSION TAX UPDATE

21. Profession Tax — E-Services Enrolment/Registration

Procedure and instructions for E-Services
Enrolment/Registration for Profession Tax RC holders (PTRC) displayed on sales
tax website.

Trade Circular has not yet been issued.

The Department through this instruction has specified the
procedure and has required all the employers paying profession tax, to register/enrol
for PTRC e-services immediately and latest by 31st December, 2010. This
enrolment process is not meant for PTEC holders.

Facility of e-return filing would be extended to PTRC holders
and thereafter e-payment facility.

 

 

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Press Release by the Press Information Bureau, Government of India, dated February 11, 2010

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55 Press Release by the Press Information Bureau,
Government of India, dated February 11, 2010

Review of cases requiring prior approval of the
Foreign Investment Promotion Board

The Cabinet Committee on Economic Affairs (CCEA)
has taken the following decisions with regard to cases of foreign investment
requiring prior government approval.

Presently, proposals with total project cost of up
to Rs. 600 crores require approval from the Finance Ministry, and proposals with
total project cost of up to Rs. 1,200 crores require approval from the CCEA.
Henceforth, only proposals involving total foreign equity inflow of more than Rs.
1,200 crores will require CCEA approval. And the Finance Ministry, based on the
recommendations of the FIPB, will consider proposals with total foreign equity
inflow of up to Rs. 1,200 crores.

In the following cases where prior approval of FIPB / CCEA
for making the initial foreign investment was taken, fresh approval will not be
required to be obtained from the FIPB / CCEA:

1. Cases of entities whose activities had earlier required
prior approval of FIPB / CCFI / CCEA, and who had, accordingly, earlier obtained
prior approval of FIPB / CCFI / CCEA for their initial foreign investment but
subsequently where such activities/sectors have been placed under the automatic
route.

2. Cases of entities whose activities had sectoral caps
earlier and who had, accordingly, earlier obtained prior approval of FIPB / CCFI
/ CCEA for their initial foreign investment, but subsequently where such caps
were removed or increased and the activity placed under the automatic route.

3. Cases where prior approval of FIPB / CCFI / CCEA had been
obtained with reference to activities / sectors requiring prior approval and
also from the angle of provisions of Press Note 18/1998 or Press Note 1 of 2005.


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A. P. (DIR Series) Circular No. 33, dated February 09, 2010

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54 A. P. (DIR Series) Circular No. 33, dated
February 09, 2010

External Commercial Borrowings (ECB) Policy –
Liberalisation

Presently, any change in the terms and conditions
of ECB after obtaining Loan Registration Number (LRN) requires prior permission
from the RBI.

This circular has delegated powers to authorized
banks, with immediate effect, to approve requests for changes in the following
cases, subject to specified conditions:

a) Changes / modifications in the drawdown /
repayment schedule

Changes / modifications in the drawdown / repayment
schedule of the ECB already availed, both under the approval and the automatic
routes, may be permitted subject to the condition that the average maturity
period, as declared while obtaining the LRN, is maintained. The changes in the
drawdown / repayment schedule should be promptly reported to the DSIM, Reserve
Bank through Form 83. However, any elongation / rollover in the repayment on
expiry of the original maturity of the ECB would require the prior approval of
the Reserve Bank.


b) Changes in the currency of borrowing

Change in the currency of borrowing, if so desired,
by the borrower company, in respect of ECB availed of both under the automatic
and the approval routes, may be permitted subject to all other terms and
conditions of the ECB remaining unchanged. Designated AD banks should, however,
ensure that the proposed currency of borrowing is freely convertible.

c) Change of the AD bank

Change of the existing designated AD bank by the
borrower company for effecting its transactions pertaining to the ECB may be
permitted subject to a No-Objection Certificate (NOC) from the existing
designated AD bank, and after due diligence.

d) Changes in the name of the borrower company

Changes in the name of the borrower company may be
permitted subject to production of supporting documents evidencing the change in
the name from the Registrar of Companies.


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A. P. (DIR Series) Circular No. 30, dated February 01, 2010

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53 A. P. (DIR Series) Circular No. 30, dated
February 01, 2010

Export and Import of Currency

Notification No. FEMA 195 / 2009-RB, dated July 7,
2009

Presently, a resident individual who is going on a
temporary visit outside India (other than to and from Nepal and Bhutan) is
permitted to take or bring back Indian currency notes issued by the Government
of India or RBI not exceeding Rs. 5,000.

This circular has raised this limit to Rs. 7,500.
Accordingly, a resident individual who is going on a temporary visit outside
India (other than to and from Nepal and Bhutan) is permitted to take or bring
back Indian currency notes issued by the Government of India or RBI not
exceeding Rs. 7,500.


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A. P. (DIR Series) Circular No. 28, dated January 25, 2010

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52 A. P. (DIR Series) Circular No. 28, dated
January 25, 2010

External Commercial Borrowings (ECB) Policy

Presently, eligible borrowers in the
telecommunications sector can avail of ECB for the purpose of payment for
spectrum allocation, under the automatic route.

This circular has made a one-time relaxation in the
end-use conditions of the ECB policy. As a result, successful bidders can
initially pay for spectrum allocation out of Rupee funds and can subsequently
avail ECB under the approval route to refinance the Rupee payments. This is
subject to the following conditions:

1. The ECB should be raised within 12 months from
the date of payment of the final instalment to the government.

2. The designated AD – Category I bank must
monitor the end-use of funds.

3. Banks in India cannot provide any form of
guarantees.

4. All other conditions of ECB, such as eligible
borrower, recognized lender, all-in-cost, average maturity, etc., will have to
be complied with.


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Procedure for allowing refund of excess credit to exporters made friendly :

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51 Procedure for allowing refund of excess credit to
exporters made friendly :

Circular No. 120/01/2010-ST dated the 19th January, 2010

By this Circular, procedure for granting refund of excess
credit has been made easy and the Department has been instructed to dispose all
pending claims in accordance with instructions contained in this Circular.

In the background, this Circular gives details of feedback
and representations received at meetings held with the refund sanctioning
authorities about the causes of delays in granting refund of excess credit to
exporters and the manner in which existing Notification No. 5/2006-CE(NT) dated
14.03.2006 is implemented by the Department and thereafter on consideration of
such feedback by this Circular instructions have been issued as follows :

(1) There cannot be different yardsticks for establishing
the nexus for taking of credit and for refund of credit. Even if different
phrases are used under different rules of CENVAT Credit Rules, they have to be
construed in a harmonious manner. The phrase “used in” mentioned in the
Notification to show nexus should be interpreted in a harmonious manner. The
test to be applied to check whether nexus exists or not is that in case the
absence of input/input service adversely impacts quality and efficiency of
provision of service exported, it should be considered as eligible input or
input service for taking credit.

(2) To address similar problems of co-relation and scrutiny
of a large number of documents faced in another scheme, Finance Act, 2009
(Notification No. 17/2009-ST) had provided for the procedure of
self-certification of invoices about the co-relation and nexus between
inputs/input services and exports by the exporter or by the Chartered
Accountant. To follow similar procedure here also, the exporters are also
advised to provide a duly certified list of invoices and the departmental
officers are only required to make a basic scrutiny of the documents and, if
found in order, sanction the refund within one month.

The exporter should, along with the refund claim, file a
declaration in the prescribed manner as notified in this Circular.

(3) Sometimes, it is possible that during certain quarters,
there may not be any exports and therefore the exporter does not file any
claim though he receives inputs/input services during this period. In this
regard, the Board has clarified that since no bar is provided in the
notification, there should not be any objection in allowing refund of credit
of the past period in subsequent quarters.

(4) In case of incomplete invoices, the Department should
take a liberal view in view of various judicial pronouncements by Courts i.e.
invoices are incomplete but are complying with Rule 5 which provides, (i) so
far as the nature of the service which has been received by the exporter can
be ascertained; (ii) tax paid therein is clearly mentioned; and (iii) other
details as required under rule 4(a) are mentioned, the refund should be
allowed if the input service has a nexus with the services/goods exported as
discussed earlier.


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Electronic Payment under MVAT Act, 2002 and CST Act, 1956:

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50 viii. Electronic Payment under MVAT Act, 2002 and CST Act,
1956:

Circular No.8T of 2010. Dated 06/02/2010

Procedure for optional E-payment of MVAT and CST has been
explained and the same is also placed on the Website of the Department.

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Clarification regarding Schedule Entry C-70 – Paper:

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49 vii. Clarification regarding Schedule Entry C-70 – Paper:

Circular No.7T of 2010. Dated 03/02/2010

Scope of Schedule Entry C-70 was earlier clarified by
Circular No.35-T of 2005 and Circular No. 1-T of 2006 but in consideration of
representations now, the said Circulars are withdrawn and from the date of
issuance of this Circular, the Scope of the said Schedule Entry C-70 covering
various types of papers has been clarified.

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Penalty w.r.t. Revised Return under MVAT Act :

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48 vi. Penalty w.r.t. Revised Return under MVAT Act :

Circular No.6T of 2010. Dated 02/02/2010

Since as per the periodicity determined by the Department,
date of filing of revised return has been extended from 31st January, 2010 to
15th March, 2010. Therefore, if the revised return is filed by 15th March, 2010,
penalty u/s.sec 29 (8) of MVAT Act, 2002 will not be levied.

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Extension of date for Submission of Audit Report for the year 2008-09:

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47 v. Extension of date for Submission of Audit Report for
the year 2008-09:

Trade Circular No.5T of 2010 Dated 28/01/2010

The last date for submission of Audit Report in Form-704 for
the period 2008-09 has been extended from 31st January, 2010 to 31st March, 2010
and statement of submission along with requisite documents would have to be
submitted by 10th April 2010.

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Filing of Audit Report in Form-704 for the periods 2005-06, 2006-07 and 2007-08:

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46 iv. Filing of Audit Report in Form-704 for the periods
2005-06, 2006-07 and 2007-08:

Trade Circular No.4T of 2010. Dated 18/01/2010

Earlier by Circular No. 27T of 2009 filing of MVAT Audit
Report after 01/10/2009 for any period was to be by E-Form and in new Form No.
704 only. By this Circular, it has been clarified that the dealer will have an
option to file Audit Report in Form – 704 in old format physically for the
periods 2005-06, 2006-07, 2007-08.

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Refund under MVAT and Bank Guarantee:

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45 iii. Refund under MVAT and Bank Guarantee:

Trade Circular No.3T of 2010, Dated18/01/2010

Parameters to be applied to different categories of dealers
willing to submit bank guarantee for early refund have been revised by this
Circular.

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Tax Treatment of Goods sent to other States:

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44 ii. Tax Treatment of Goods sent to other States:

Trade Circular No.2T of 2010, Dated 11/01/2010

Referred Trade Circulars issued explaining scope of section
6A of CST Act, 1956

In view of the Hon’ble Supreme Court judgment in case of M/s
Ambica Steels Ltd. vs. State of Uttar Pradesh (24 VST 356) upholding
applicability of mandatory F Forms to non-sale transactions like job work even
in respect of transactions from principal to principal basis, it is now
clarified by this Circular that F forms are mandatory for all transactions of
inter-state transfers (not by way of sale), including job work and goods return.
Consequently, Trade Circular 16T of 2007 dated 20th February 2007 and Trade
Circular 5T of 2009 dated 29th January 2009 are withdrawn.

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Implications of non-availability of PAN of the payee with effect from 1 April 2010 – Press Release No.402/92/2006-MC (04 of 2010) dated 20 January 2010

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40 Implications of non-availability of PAN of the payee with
effect from 1 April 2010 – Press Release No.402/92/2006-MC (04 of 2010) dated 20
January 2010


CBDT re-iterates the amendment with effect from 1 April 2010
pertaining to TDS at higher rate in absence of PAN of the payee. Further, the
certificate for lower / non deduction of tax at source would not be given
without PAN mentioned in the application. The law will apply to all including
non-resident assessees. PAN needs to be quoted in all the correspondences,
bills, vouchers and other documents sent to each other by deductor and deductee.

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Advance Fringe Benefit Tax paid to be treated as advance income tax for the FY 2009-2010 – Press Release No. 402/92/2006-MC (07 of 2010) dated 29 January 2010

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39 Advance Fringe Benefit Tax paid to be treated as advance
income tax for the FY 2009-2010 – Press Release No. 402/92/2006-MC (07 of 2010)
dated 29 January 2010


The CBDT has clarified vide the aforementioned Press Release
that advance tax paid in respect of fringe benefits would be treated as advance
income tax and accordingly, can be adjusted against the advance income tax
liability. The additional FBT advance tax if paid, can be claimed as a refund
while filing the tax return.

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