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Year: 2011

NEW SEBI TAKEOVER REGULATIONS — important changes

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Part 1
SEBI has notified the substantially rewritten Takeover Regulations — the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘the Regulations’) — to come into effect from 22nd October 2011.

Takeover Regulations hit the front pages of newspapers for wrong reasons. Takeover of companies in India is relatively lesser in number but takeovers have a glamour attached to them, hence changes to law relating to takeovers get disproportionate attention. At the same time, the manner in which the Regulations are framed ensure that not only the listed company and its promoters are affected but even the shareholders are affected. Promoters and other specified persons have to carry out certain regular or ad hoc compliances, reporting, etc., though even at that stage there is no takeover involved. Non-compliance of these requirements can result in stiff penalties and even an open offer. Further, many corporate restructuring transactions are structured keeping these Regulations in mind.

Now that SEBI has notified the long-awaited revised Regulations last month, listed companies, their promoters and those concerned with legal aspects of corporate laws relating to listed companies need to examine them closely.

In this article, some important changes are highlighted. It must be emphasised though that the Regulations are substantially rewritten and hence it is not as if there is a list of specified amendments that can be identified and discussed. And though the outline of the Regulations remains the same, there have been changes, major and minor, at several places. To begin with, it is worth reviewing generally what the Regulations are concerned with. The Regulations essentially intend that if there is a change of control of a listed company, whether through acquisition of controlling interest or otherwise or even a substantial acquisition of its shares, the public shareholders should be given an option to exit. This usually happens when a new promoter acquires the controlling stake from the existing promoter(s). However, the acquirer may simply acquire substantial shares in the company. The public shareholders are required to be paid a minimum price which is not less than what the outgoing promoters get, but the price for public shareholders can be higher. There are requirements of disclosure when a person acquires substantial quantity of shares and generally many other related requirements to ensure that this basic intent is achieved.

The Takeover Regulations were originally issued in 1994 and then revised in 1997. Several amendments were made from time to time and, recently, a committee was set up to recommend draft new Regulations under the leadership of Late Shri C. A. Achuthan who gave a detailed and elaborate report (‘the Committee Report’) but, sadly, left the world soon thereafter.

The new Regulations should be seen in the light of this Report. However, care should be taken since some of the recommendations have not been accepted or accepted only partially.

The most significant change is that the minimum threshold for making an open offer has been increased from 15 to 25%. The link of 25% with the percentage required to block a special resolution is obvious. Taking into account the fact that, in most Indian companies, the Promoters hold much more than 25%, even this 25% limit may sound low. For strategic investors, this higher limit would help and thus this increase would help the Company, its Promoters and shareholders since the Company can accept higher strategic investments without such investors having to make an open offer.

The other major change is that the minimum open offer percentage has been increased from 20 to 26%. Again this 26% can be logically understood as if we add 25 and 26%, we get a majority holding of 51%, though one could have argued that 1 share above 50% is sufficient to have a majority. Public shareholders would be rightly disappointed as the Committee Report recommending making an open offer for 100% of the public holding has not been accepted. This, in my view, is unfair as while the whole of the holding of the Promoters is usually acquired, only partial acquisition of public holdings is made. The argument made is that this would make the open offers unduly expensive for an acquirer. However, this can not be a sufficient reason to deprive public shareholder of getting a price that the Promoters receive. If an acquirer seeks to acquire, say, 51%, he can simply acquire such percentage from all shareholders including the Promoters by offering to acquire 51% of each person’s holdings. It is sad that the main purpose of these Regulations of protecting the interest of the public shareholders has been sidelined.

Certain regular and ad hoc compliances are required to be made under the Regulations. They mainly serve the basic objective of protecting shareholders’ interests in case of significant change in shareholding. Thus, an early intimation system provides that if a person acquires more than 5% shares, he should inform the Company and the stock exchanges immediately. Such person should thereafter keep informing if his holding changes by 2% in either direction. This provision has been substantially maintained. However, it is now made explicit — which was otherwise confirmed by court decisions under the 1997 Regulations — that it is the holding of the acquirer along with persons acting in concert as a whole that would be counted and not just the separate holding of an individual acquirer.

Creeping acquisition is a popular term, though not a legal one, to refer to the slow and gradual increase in holding allowed by law to a substantial holder of shares without being required to make an open offer. A substantial shareholder consolidates its holding by acquiring more shares and the law believes that such consolidation should also require an open offer under certain situations. The 1997 Regulations allowed 5% increase per financial year for acquirers who held more than 15% shares provided that the cumulative holding is not more than 55%. Beyond 55%, an additional 5% can be acquired in specified manner but no further without an open offer. The amended law allows creeping acquisition of the same 5% every financial year but all the way up to the maximum holding they can hold without reducing the minimum public holding required under law. Thus, for example, where minimum public holding is prescribed to be 25%, an acquirer can make creeping acquisitions up to 75% by acquiring 5% each financial year.

There was a minor controversy as to whether the 5% incremental acquisition was allowed as a net or gross increment. For example, if an acquirer acquires 7% in a year but sells 3%, has he acquired 4% or 7% ? The Regulations now specifically clarify that it will be the gross acquisition and not net and thus in the above example, the acquisition will be considered as 7% and thus beyond the 5% limit.

It is also clarified that in case of acquisition by issue of fresh shares (e.g., preferential allotment) where the capital of the Company also expands, the percentage in the expanded capital will be considered.

This leaves one group of existing promoters in a strange situation. There are Promoters, albeit small in number, who hold between 15% and 25%. As explained above, the 1997 Regulations allowed creeping acquisition of 5%. However, as the minimum threshold of 15% has been raised to 25%, such Promoters now would have to make an open offer if they cross 25% even if they are holding, say, 23% and acquire another 3%. Under the 1997 Regulations, they would not have been so required. Of course, the other side is that a person holding, say, 14% can acquire another about 11% without being required to make an open offer.

An important concept of Takeover Regulations is of ‘persons acting in concert’. This concept is a part of the Regulations to ensure that if a group of persons acquires shares with a common understanding or agreement, all such acquisitions are counted together to check whether the Regulations are attracted or not. Further, reporting of shareholding is also to be made of the total holding of such group. The question then is whether transfers within such group should be allowed or should such inter se transfers be considered as acquisitions. Logically, a transfer within the group is a zero sum transaction if the group as a whole is considered. Even the wording — of the 1997 Regulations as well as the 2011 Regulations — on the face of it should not apply since the holding of the acquirer along with persons acting in concert does not increase in such a case. However, SEBI has, by curious reasoning, which is upheld in appeal, taken a view that since inter se transfers are exempt under certain circumstances, then it must be held that inter se transfers otherwise amount to acquisition ! This reasoning is likely to continue even under the new Regulations though it would have been more elegant in law if the Regulations had expressly provided for this. However, what has been now changed is that inter se transfers, to qualify for exemption, need to comply with stricter conditions. For example, inter se transfers between persons acting in concert or Promoters will require that both parties should have been declared in relevant filings as such for at least three years. The exemption to inter se transfers within the ‘group’ has been dropped.

Earlier, there was an exemption from open offer for acquisition of control, without the minimum acquisition of shares, of a company if such acquisition was approved by the shareholders by a special resolution. Now this exemption is dropped. Perhaps this was necessary as the threshold limit has been increased from 15 to 25%.

A change worthy of appreciation is that non-compete fees are now to be counted as part of the acquisition price paid by an acquirer to the existing promoters. Earlier, the law allowed an acquirer to pay up to 25% of the acquisition price as non-compete fees to existing promoters and such amount was not to be counted as part of the acquisition price. To give an example, say, an acquirer pays Rs.100 as price for acquisition of shares and Rs.25 as non-compete fees to the Promoters. The law, which otherwise requires that the open offer should be made at a price that is at least the price paid to the Promoters, allows in such a case the open offer to be made at Rs.100. This resulted in cases where on the face of it, an exact non -compete fee of 25% was paid and was excluded from the open offer price. The new Regulations have rightly dropped this exemption to non-compete fees.

A major new feature is the voluntary open offer that is allowed. Normally, an acquirer is required to make a minimum open offer of 26% if he crosses the specified threshold limit or creeping acquisition. However, if a person, who is already having 25% shares and desires to increase his holding by more than 5% a year can now make a voluntary open offer of at least 10% to all the shareholders. This also ensures that all shareholders are able to participate and not just a selected few.

Then there is an infrequent but interesting situation that arises which earlier SEBI handled it a little arbitrarily. This is a situation where a Company carries out a buyback of shares. Simple mathematical calculation will show that if a Company carries out buyback of shares, the shareholding of a person who did not participate in the buyback increases though he has not acquired a single share. For example, if the Company’s share capital is Rs.10 crore and a person is holding Rs.2.40 crore. If the Company carries out a buyback of 20% with such person not participating, his new percentage holding would be higher at 30% (Rs.2.40 crore as a % of Rs.8 crore) without he having acquired a single share. SEBI took a view that open offer was required to be made by such person. This was of course absurd and even if SEBI intended that an open offer should be required, it should have provided for it. The new Regulations now provide that such an increase will not result in open offer provided certain conditions are satisfied failing which the differential percentage of shares should be sold within 90 days.

(2011) 39 VST 302 (Bom.) Commissioner of Sales Tax, Maharashtra State, Mumbai v. Cadila Healthcare Limited

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Rate of tax — Table margarine — Not hydrogenated vegetable oil or vegetable oil — Taxable at 12.5% under residual Entry E-1 — Schedule Entry C-100, 102 and E-1 of Maharashtra Value Added Tax Act, 2002.

Facts:
The Commissioner of Sales Tax filed appeal against the decision of the Tribunal, dated August 2, 2008, holding that Nutralite table margarine sold by the dealer is covered by Schedule C-Entry 102 of the MVAT Act and taxable at 4%. Entry 100 of Schedule C covers vanaspati (hydrogenated vegetable oil), whereas Entry 102 of Schedule C covers vegetable oil. It was argued before the Tribunal by the dealer that Nutralite table margarine is vanaspati and if it is not vanaspati, then it is vegetable oil covered by Schedule Entry C-102 taxable at 4%. The Tribunal held that Nutralite table margarine is vegetable oil taxable at 4% under Entry 102 of Schedule C of the MVAT Act. The High Court allowed the appeal filed by the Commissioner of Sales Tax and held against the dealer that Nutralite table margarine is not vanaspati and not a vegetable oil and taxable at 12.5%.

Held:
(i) Margarine is used for baking, cooking and Nutralite table margarine sold by the dealer is used for cooking and as a spread. Palm oil is subjected to process of emulsification and the resultant product that emerges is Nutralite table margarine. Admittedly, table margarine is considered to be a distinct marketable commodity under the Central Excise Act.

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US Foreign Corrupt Practices Act — A Curtain Raiser

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Introduction

There is a famous quote that “Corruption is the most infallible symptom of constitutional liberty”. In the recent past, there has been quite a lot of awareness and activism about corruption and its prevention worldwide and specifically in India. The U.S. Foreign Corrupt Practices Act, 1977 (FCPA) is the single largest, widely recognised piece of legislation in the world which deals with the issue of various corrupt practices and contains the legislative provisions specifically to prevent such practices. Recently, the UK Bribery Act, 2010 was passed on the similar lines of FCPA.

This article deals with the salient features of the FCPA, FCPA settlements, the global legislative framework relating to prevention of corrupt practices, the Indian scenario and the key considerations for ensuring FCPA compliances.

For Accounting Professionals, an awareness of this important piece of legislation is the need of the hour especially when global companies are setting up shops in India and also Indian companies are expanding their wings globally necessitating the compelling need for a high level of awareness of the FCPA and other corruption prevention legislations.

Essence of FCPA

FCPA generally prohibits U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or any person acting while in the U.S., from corruptly paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business. Prohibition under FCPA also extends to making and offering to make payments to foreign public officials, including members of political parties, to further business interests. The FCPA also requires ‘issuers’, including foreign companies, with securities traded on a U.S. exchange or otherwise required to file periodic CANCEROUS CORRUPTION reports with the Securities and Exchange Commission (SEC), to keep books and records that accurately reflect business transactions and to maintain effective internal controls.

The above provisions can be analysed under two broad categories, namely,

  •  Anti-bribery provisions and
  •  Provisions relating to maintenance of books of account.

 The first part is generally enforced by the Department of Justice (DOJ) and it prohibits U.S. persons and U.S. firms, or those listed on a U.S. stock exchange, from making and offering to make payments to foreign government officials to obtain, or retain, business or a business advantage. The antibribery provisions make it illegal to directly or indirectly make payments of money or give anything of value to any foreign government official to influence a decision that will result in obtaining or retaining business or secure an improper business advantage. The anti-bribery provisions apply to domestic concerns, issuers (listed entities in the U.S.) and any person while in the territory of the U.S.

The second part relating to books of account is enforced by the SEC. The FCPA’s Books and Records and Internal Control provisions (which apply only to issuers) require:

 (i) that books, records and accounts are kept in reasonable detail to accurately and fairly reflect transactions and dispositions of assets, and

(ii) that a system of internal accounting controls is devised

(a) to provide reasonable assurances that transactions are executed in accordance with the authorisation of the management;

(b) to ensure that assets are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets;

(c) to limit access to assets to management’s authorisation; and

(d) to make certain that recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. In many instances, improper payments to a foreign official to obtain or retain business result not only in anti-bribery charges, but also books and records and internal control charges, given that improper payments are often falsely characterised by giving a different colour in the company’s books and records such as payments towards liaisoning services, commissions, miscellaneous expenses, etc. and given the enforcement agencies’ view that the improper payments would not have been made if the company had effective internal controls.

Under FCPA, the organisation can be held responsible for any improper payments made by their subsidiaries, associates, joint-venture partners, directors, agents, employees, associates or third-party intermediaries and representatives as well. FCPA settlements The past few years have seen a tremendous increase in the settlement of FCPA charges by both corporations and individuals. Violations of the FCPA can result in criminal and/or civil liability for companies, and for their individual officers, directors, employees, and agents. The significant point to be noted in ensuring FCPA compliance is that there is no minimum threshold for the dollar amount of infractions, and even what might be considered as a small bribe can result in big penalties, especially if FCPA problems are systemic. Details of the top 10 FCPA settlements in the recent past are given in the table below; The magnitude of the above settlement amounts indicate the gravity of the problem and the need for enhanced monitoring in ensuring strict compliance with the FCPA provisions. Global legislative framework for prevention of corrupt practices Corruption is like a ball of snow, once it’s set rolling, it must increase !

The magnitude of corruption issue has increased manifold in the recent past and has posed serious challenges in establishing and ensuring a good governance framework globally. Hence, the regulators world-wide have taken up various initiatives to prevent the corrupt practices. Under the OECD Convention, government officials are considered to be a particular risk with regards to corruption, because they have the ability to award valuable contracts, or grant favours, and yet are often paid relatively little. The definition of government officials is also broader and it covers ministers and civil servants, government employees including doctors, law enforcement and military, employees of any enterprise majority-owned or controlled by the state and also the tax authorities and local government officials. As a written international agreement, the OECD Convention specifically sets forth the basic, model elements of a foreign corrupt practices statute that each signatory country has agreed to enact into law soon after each country’s ratification of the Convention. Thus, the Convention has particular significance for all U.S. businesses that operate internationally in the signatory countries.

Due to ever-increasing corruption risks, one of the most important trends in FCPA enforcement is the increased aggressiveness of government. The law enforcement authorities are increasingly focussing on global companies. The US regulators are probably very active in this area, but those in other countries are also catching up fast. Regulators around the world are cooperating with each other, sharing information and levying increasingly punitive fines. The other interesting feature in monitoring corrupt practices is the increased attention of the regulators towards individuals responsible, rather than just the companies. They also focus on the extent of companies’ anti-corruption measures when considering fines.

Other than the FCPA of the United States, very recently, the British Parliament has passed the UK Bribery Act, 2010, which is perceived to be more stringent than the FCPA. Under the UK Bribery Act, companies doing any form of business in the UK are covered by these provisions. Thus, any foreign company with operations in the UK that might have engaged in commercial or government-related corrupt activities anywhere in the world could be prosecuted in the UK. In this regard, it may be noted that FCPA covers only bribing foreign government officials, whereas the UK Bribery Act is very exhaustive in nature and has got extended scope and it does not allow any carve-out for facilitation payments or sponsored delegation visits by government officials.

The need for fighting corruption has forced several countries to come up with a separate piece of legislation to fight this evil and also to continuously fine-tune and improve the existing legislations to put in more and more detective and preventive mechanisms in view of the ingenuity with which the corrupt practices are resorted to.

Indian scenario

Implementation of the FCPA in India poses serious challenges for corporates. Though India has anti-corruption and anti-fraud laws, such as the Prevention of Corruption Act, the Prevention of Money Laundering Act and Rules thereunder, as well as various checks under the SEBI Prohibition of Fraudulent and Unfair Practices Regulations, addressing the risk of corruption has become one of the serious challenges for corporations. The recent episode of corruptions and scandals in India has raised concerns in the country and around the globe.

One of the other major challenge in India is providing gifts, hospitality, entertainment, etc. that step over the dividing line from relationship building and good manners, into attempts to influence key decision-makers. This has been the main focus of anti-bribery legislations. The key point to be noted here is what may be regarded by the industry as normal business development practice could well be seen by a regulator as a bribe!

Transparency International — a reputed NGO and the global anti-corruption organisation — publishes a ‘Bribe Payers Index’, which identifies industry sectors which are most likely to have the practice of bribing the public official. In its report on Corruption Perception Index (CPI) 2010, it has placed India at 87th in the list of corrupt nations with a score of 3.3 on a scale of 10 (very clean) to 0 (highly corrupt). Considering this low score, doing business in India is perceived to have high risk from the perspective of corruption risk.

Similarly, according to TI’s Global Corruption Barometer 2007, which details how individuals rate their country’s corruption levels, 25% of respondents in India said they had paid bribes and 90% expect corruption in India to get worse over the next three years. This assessment carried out in FY 2007 is proving to be true in the light of the recent corruption scandals.

In view of the prevailing challenging environment in India, there is an urgent need for creating greater awareness amongst the public at large in India regarding various corrupt practices, strengthening the existing regulatory framework dealing with such corruptive practices, and vigorous implementation of statutory requirements relating to prevention of corrupt practices, etc.

Key considerations for ensuring FCPA compliances

The FCPA has a far-reaching effect and it does not stop only with the entity under consideration. Parent entities can be held responsible for the actions of their subsidiaries also even when the subsidiary has gone to great lengths to conceal the illegal activity and the parent company is unaware of the activity. Further, parent entities can be held responsible for behaviour prior to an acquisition, joint-venture, or merger, especially if a prior payment has led to ongoing profits.

Keeping the provisions of the FCPA in mind to ensure compliance with the FCPA, the entity management could consider the following;

  Risk assessment relating to FCPA compliances

Periodic risk assessment by the entity, suo motu, as regards FCPA compliances would help in identifying the weak spots and the exposures, if any, and the corrective action to be taken. Such an exercise would help in identifying the risks which are pervasive in nature as well as specific to a particular activity or a transaction.

    Conducting periodic health checks/due diligences

A system should be put in place to assess the health of the entity from the FCPA compliance point of view. Such an exercise should ideally be carried out by an independent person/third party.

    Establishing strong internal audit functions

Having a strong and powerful internal audit system is a boon for fighting FCPA non-compliances. By way of timely identification, the internal audit can escalate the matters to those charged with governance and can also help in putting proper controls in place to prevent such non-compliances.

    Anti-corruption programmes/policies and creating awareness

The entities should design their own anti-corruption programmes, policies and procedures. Further, it should arrange for dissemination of knowledge amongst all the employees by way of training programmes and other education programmes. Such an awareness exercise will go a long way in ensuring FCPA compliances.

    Regular monitoring of intermediaries/third parties

Since the primary responsibility of ensuring compliance with the FCPA provisions vest with the entity, it should monitor intermediaries/third parties who are doing business for the entity on a continuous basis. Their activities, compliances, etc. need to be on the radar of the entity on a continuous basis. Further, it should also carry out the required background checks before appointing such intermediaries to represent the entity.

   Reasonability assessments of payments made to various intermediaries

The amounts paid to the various intermediaries and third parties for the services rendered should be reviewed from the perspective of reasonability. Large sums of money paid to intermediaries which are disproportionate to the services rendered by them to the entity could trigger concerns of FCPA non-compliances which need to be investigated in detail.

    Establishment of a system of identifying opportunities for corruption

The management should continuously work toward identifying various opportunities for corruption, so as to plug the loop holes by way of putting appropriate controls in place. Such an activity would help in identifying specific non-compliances of FCPA.

    Periodic evaluation of performance targets and its achievements

The entities should review the process of achieving performance targets by various business heads keeping in mind the corruption risks. The pressure of achieving targets could force the employees to resort to incorrect/corruptive practices which need to be monitored and timely efforts have to be taken to prevent such non-compliances.

    Self-declarations from all the employees for FCPA compliances

There should be a system of obtaining periodic self-declarations from all the employees of the company regarding FCPA compliances. This declaration should not be a form filling exercise, but should facilitate identification of FCPA non-compliances, if any, in letter and spirit.

   Dedicated anti-corruption cell

Entities could have a dedicated anti-corruption cell which focusses on identification of FCPA non-compliances. Their mandate could also include closer review of the commercial decisions keeping in mind the anti-corruption requirements, review of the decentralised business models, greater automated surveillance of e-mails, data, and transactions, evaluation of existing sanctions to prevent corruption, etc.

    Periodic interactions of the senior management with the employees

The senior management should have a streamlined process of interacting with all the levels of the employees on a periodic basis to identify any issues related to non-compliances of FCPA. Such an interaction could help the senior management in assessing the ground-level situations, obtaining first-hand information regarding FCPA compliance status.

    Ethics hotline/helpline and whistle-blower mechanism

Establishing a dedicated ethics hotline/help line and setting up a fool proof whistle-blower mechanism are the pillars for having an effective FCPA compliance framework. All the referrals made to these hotlines/forums should be carefully reviewed to identify any FCPA related non-compliances and their implications.

    Other techniques

The entities could also resort to the following other techniques for ensuring FCPA compliances.

  • Wide publicity for the action taken against corrupt practices

  • Conducting ethical compliance surveys amongst employees

  • Mandatory evaluation of employees in dealing with ethical dilemmas

  • Anti-corruption handbook

Depending on the size and the nature of the entity, one or more of the above mentioned techniques may be introduced by the entities to effectively ensure compliance with the provisions of the FCPA. Needless to add that the success of the monitoring mechanism is purely dependent on the involvement and support of the senior management.

Conclusion
When the greed of the person increases, it is bound to result in quite a lot of irregularities and related consequences and would naturally lead to various corrupt practices. Irrespective of the legislations and the regulatory actions to prevent and fight corruptive practices, the success of their implementation and their enforcement is purely dependent on the setting of the right culture and tone from the top of each and every organisation. When an organisation suspects or uncovers an FCPA violation, its response can be crucial in preventing repeat offenses. Leadership should carefully consider each situation, including asking people to leave the organisation or terminating certain relationships with vendors. When the awareness about the legislation relating to prevention of the corrupt practices increases and the compliance is monitored meticulously, the legislations, be it in the form of FCPA or the Bribery Act, will serve their real purpose. As indicated by Swami Vivekananda, “Arise ….! Awake…..! and Stop not…. till the goal is reached”. The greater level of awareness and the awakening of people about eradication of corruptive practices and fighting corruption through enhanced professional activism, would certainly help in reaching the goal of a corruption-free society.

(2011) 39 VST 257 (SC) Hyderabad Engineering Industries v. State of Andhra Pradesh

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Inter-State sale/stock transfer — Dispatch of goods to branch outside the State — Against the ‘Forecasts’ for delivery of goods to the buyer — Under sale agreement — Is inter-state sale — Liable to tax u/s.3(a) and 6A of the CST Act, 1956.

Facts:
The assessee claimed inter-State Stock transfers to its various depots situated outside the State as per ‘Forecasts’ to be delivered to M/s. Usha International Ltd. (UIL), under an agreement for sale entered with it. The sales tax authorities disallowed the claim of inter-State stock transfer and levied tax @10% under the CST Act. The Company filed appeal before SC against the judgment of the High Court confirming levy of CST on disputed inter-State stock transfers treated as inter-State sales by the assessing authorities.

Held:
(1) The consistent view of this Court appears to be that even if there is no specific stipulation or direction in the agreement, for an inter-State movement of goods, if such movement is an incident of that agreement or if the facts and circumstances of the case denote it, the conditions of section 3(a) would be satisfied.

(2) In the instant case, the movement of goods from the assessee’s factory to its various godowns situated in different parts of country was pursuant to ‘Sales agreements’ coupled with ‘Forecasts’ which are nothing but ‘indents’ or firm orders. It does not matter how much goods were delivered to the branch office, which just acted as a conduit pipe before it ultimately reached the purchasers’ hands. All that matters is that the movement of the goods is in pursuance of the contract of sale or as of necessary incident to the sell itself.

(3) After considering the facts of the case, finding of fact by the assessing authorities duly confirmed by the Tribunal, SC held that impugned delivery of goods by the dealer’s factory to its various depots situated outside the State for delivery of goods to UIL against ‘Forecasts’ and ultimate delivery of goods to UIL by its depots to UIL is an inter-State sale liable to tax under the CST Act in the State of AP.

Accordingly the appeal filed by the dealer was dismissed.

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(2011) 23 STR 276 (Tri.-Chennai) — UCAL Fuel System Ltd. v. Commissioner of Central Excise, Chennai.

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Cenvat Credit of Service Tax — Services in respect of preparation of documents for pre-shipment and post-shipment of export goods — Eligible claim of CENVAT credit.

Facts:
The appellants, M/s. UCAL Fuel System Ltd. were availing services in respect of preparation of documents for pre-shipment and post-shipment of export goods and were claiming credit of services paid on the same. The appellants were denied Cenvat credit of service tax of Rs.1,28,914 as the service provider did not mention the nature of the taxable services in any of the documents, on the basis of which appellants claimed the credit. The appellants argued that the services rendered had direct nexus with the business of the manufacture of the assessee’s final product and hence were in the nature of business auxiliary service.

Held:
After observing bills and other documents of the appellants, the Tribunal held that services availed by the appellants were business auxiliary services in nature and they were entitled to avail Cenvat credit of service tax paid on such services as per Rule 2(1) of Cenvat Credit Rules, 2004.

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Increase in Filing Fee for Name Availability.

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The Ministry of Corporate Affairs has vide General Circular No. 48/2011, dated 22nd July 2011, revised the Name Availability Guidelines and the Form 1A pertaining to the Availability of Name for Company and increased the fee to Rs.1000 w.e.f. 24th July 2011.

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Shipping business of non-residents: Section 172 of Income-tax Act, 1961: A.Y. 1987-88: Tug towing ship which could not sail by itself: No carriage of goods: Section 172 not applicable.

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[CIT v. Oceanic Shipping Service of M. T. Suhail, 334 ITR 132 (Guj.)] A merchant vessel came to an Indian port for discharging cargo. While at the Indian port it developed engine trouble and hence it had to be towed away. It entered into an agreement with the assessee, a non-resident for towing away the ship. The agreement was made outside India and payment was also made outside India. The assessee received US $ 1,00,000 as towing charges. The Assessing Officer held that the towing charges was assessable u/s.172 of the Income-tax Act, 1961. The Tribunal held that section 172 was not applicable. On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under: “(i) Section 172 requires in the first instance that a ship should belong to or be chartered by a non-resident; secondly, the ship should carry passengers, livestock, mail or goods; and thirdly, such cargo of passengers, etc., should be shipped at a port in India. (ii) The provision stipulates a ship which carries passengers, livestock, mail or goods. Therefore, the term ‘goods’ has to take colour from the preceding words/terms and one cannot visualise either passengers or livestock or mail being towed away and they have to be carried by a ship aboard a ship. Thus, goods also have to be carried by ship aboard a ship. (iii) The term ‘goods’ as used in the provision has to be understood in ordinary commercial parlance and usage, i.e., as articles or things which can be bought and sold. A vessel which due to mechanical fault that it has developed, cannot propel itself on its own, does not become ‘goods’ for the purpose of being carried by a ship for the purpose of trade. Therefore, it cannot be stated that a tug, though a vessel/ship for a limited purpose, carries goods when it pulls a ship by way of tow. (iv) The Tribunal was right in law in holding that the provisions of section 172 were not applicable and hence tax was not leviable u/s. 172(2) in respect of US $ 1,00,000 received by the assessee for towing away the merchant vessel.”

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TDS: Disallowance of business expenditure: Sections 40(a)(ia) and 194C of Income-tax Act, 1961: A.Y. 2006-07: Assessee-firm engaged in transportation business, secured contracts with oil companies for carriage of LPG, executed the contracts through its partners retaining 3% commission as charges: Sections 194C and 40(a)(ia) not applicable.

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[CIT v. Grewal Bros., 240 CTR 325 (P&H)]

The assessee, a partnership firm, was engaged in the business of transport. It entered into contracts with oil companies for carriage of LPG. From the payment made to it, the companies deducted tax. The assessee firm passed on the transportation work to its partners and made the payment received from the said companies to its partners after deducting 3% commission as charges for the firm having secured the contract. The Assessing Officer held that in giving the contract of transportation by the firm to the partners there was a sub-contract and the firm was liable to deduct TDS [u/s.194C(2)] out of the payment made to the partners. Since the tax was not deducted at source on payments made to the partners, the Assessing Officer disallowed the amounts paid by the firm to the partners resulting in addition to the income. The CIT(A) and the Tribunal accepted the assessee’s plea and deleted the addition.

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

“(i) No doubt the firm and the partners may be separate entities for income-tax and it may be permissible for a firm to give a contract to its partners and deduct tax from the payment made as per section 194C, it has to be determined in the facts and circumstances of each case whether there was any separate sub-contract or the firm merely acted as agent as pleaded in the present case.

(ii) The case of the assessee is that it was the partners who were executing transportation contract by using their trucks and payment from the companies was routed through the firm as agent. The CIT(A) and the Tribunal accepted this plea on facts.

(iii) Once this plea was upheld, it cannot be held that there was a separate contract between the firm and the partners in which case the firm was required to deduct tax from the payment made to its partners u/s.194C.

(iv) The view taken by the Tribunal is consistent with the view taken by the Himachal Pradesh High Court in CIT v. Ambuja Darla Kashlog Mangu Transport Co-operative Society, 227 CTR 299 (HP) and the judgment of this Court in CIT v. United Rice Land Ltd., 217 CTR 332 (P&H).

(v) The matter being covered by earlier judgment of this Court, no substantial question of law arises.”

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Search and seizure: Interest u/s.132B(4) of Income-tax Act, 1961: Period for which interest is payable on seized amount: Search assessment resulting in no additional tax liability: Interest payable up to the date of refund and not up to the date of the assessment order.

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[Mohit Singh v. ACIT, 241 CTR 244 (Delhi)]

In the course of search u/s.132 of the Income-tax Act, 1961 on 11-9-2003, an amount of Rs.17 lakhs was seized. Block assessment order for the block period 1998-99 to 2003-04 was passed on 23-3-2006 which resulted in no additional tax liability. The seized amount of Rs.17 lakhs was paid on 15-4-2008. Thereafter on 16-5-2008, interest amount of Rs.1,91,704 was paid covering the period from 7-5-2004 to 23- 3-2006. No interest was paid for the period from 23-3-2006 to 15-4-2008 i.e. date of refund.

On a writ petition filed by the assessee the Delhi High Court directed the Revenue to pay the interest at the rate of 7.5% for the period from 23-4-2006 to 15-4-2008 i.e., the date of the refund.

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Loss return: Carry forward of unabsorbed depreciation: Section 32(2), section 80 and section 139(3) of Income-tax Act, 1961: A.Ys. 2000-01 and 2001-02: Section 80 and section 139(3) apply to business loss and not to unabsorbed depreciation covered by section 32(2): Period of limitation for filing loss return not applicable.

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[CIT v. Govind Nagar Sugar Ltd., 334 ITR 13 (Del.)]

For the A.Y. 2001-02, the assessee filed loss return belatedly on 31-3-2003. The AO computed the loss at Rs.6,03,14,560, but did not allow the assessee to carry forward the loss including the depreciation by relying on the provisions of sections 80 and 139(3) of the Income-tax Act, 1961. The Tribunal allowed the carry forward of the depreciation of the relevant year and also of the A.Y. 2000-01.

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

“(i) Sections 80 and 139(3) of the Act apply to business losses and not to unabsorbed depreciation which was exclusively governed by section 32(2) of the Act. That being so, the period of limitation for filing loss return as provided u/s.139(1) would not be applicable for carrying forward of unabsorbed depreciation and investment allowance.

(ii) U/s.32(2), unabsorbed depreciation of a year becomes part of depreciation of subsequent year by legal fiction and when it becomes part of the current years depreciation it was liable to be set off against any other income, irrespective of whether the earlier years return was filed in time or not.”

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Capital gain: Exemption u/s.54E of Incometax Act, 1961: A.Y. 2007-08: Long-term capital gain on transfer of depreciable asset: Investment of net consideration in Capital Gains Deposit Account Scheme: Assessee entitled to exemption u/s.54F.

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[CIT v. Rajiv Shukla, 334 ITR 138 (Del.)]

In the A.Y. 2007-08, the assessee had long-term capital gain on transter of depreciable assets. The assessee invested the net capital gain in the Capital Gains Deposit Account Scheme and calimed exemption u/s.54F of the Income-tax Act, 1961. The AO disallowed the claim on the ground that the capital gain arising from transfer of a depreciable asset shall be deemed to be capital gain arising from transfer of a short-term capital asset. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “The income earned by the assessee on sale of depreciable asset was to be treated as long-term capital gain, entitling him to the benefit of section 54F.”

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Business expenditure: Deduction only on actual payment: Section 43B of Income-tax Act, 1961: A.Y. 1989-90: Excise duty paid in advance: Assessee entitled to deduction: AO not right in holding that deduction allowable only on removal of goods from factory.

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[CIT v. Modipon Ltd., 334 ITR 106 (Del.)]

For A.Y. 1989-90, the assessee had claimed a deduction of Rs.14,71,387 as business expenditure on account of excise duty paid in advance. Reliance was placed on section 43B of the Income-tax Act, 1961. The Assessing Officer disallowed the claim holding that the deduction can be claimed only on removal of goods from the factory. The Tribunal allowed the assessee’s claim.

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

“(i) With regard to the deduction of Rs.14,71,387 on account of excise duty paid in advance as business expenditure, the procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods were removed from the factory premises. The duty, thus, already stood deposited in the accounts of the assessee maintained with the treasury and the amount, thus stood paid to the State.

(ii) The submission of the Department that it was only on removal of goods that the amount credited to the personal ledger account could be claimed as deductible u/s.43B of the Act, could not be accepted.”

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Appeal to Commissioner: Tax recovery by auction sale of property: Income-tax Act, 1961 Sch. II, RR. 63, 65 and 86: TRO confirming sale in recovery proceedings: Order confirming sale is not conclusive: Appeal is maintainable: Period of limitation runs from the date of knowledge of the order.

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[Vijay Kumar Ruia v. CIT, 334 ITR 38 (All.)]

A property belonging to one I was sold by auction on 22-3-1988 by the TRO for recovery of tax dues. The auction was confirmed by the TRO by order dated 25- 4-1988 and certificate of sale was issued in favour of the auction purchaser on the same day. The executor of the will of I preferred an appeal before the Commissioner purporting to be u/r. 86 of Schedule II to the Income-tax Act, 1961. The appeal was dismissed as not maintainable and being barred by time.

The Allahabad High Court allowed the writ petition challenging the order of the Commissioner and held as under:

“(i) An appeal u/r. 86 lies against the original order of the TRO, provided such an order was not conclusive in nature. The relief claimed in the appeal was to cancel and set aside the sale of property. Rule 63 did not contemplate the order of confirmation of sale to be conclusive order. The appeal was maintainable.

(ii) The intention was to challenge the order of sale confirmation and the order issuing the sale certificate. What was intended to be challenged was the sale of the immovable property also and not only the sale certificate. Mere mentioning of a wrong provision in appeal would not take away the statutory right of the petitioner, if the appeal was otherwise provided under the statute and was maintainable.

(iii) The limitation for filing appeal u/r. 86(2) was 30 days from the date of the order. The petitioner acquired the knowledge of the auction sale, the order of sale confirmation and issuance of sale certificate for the first time on 18-8-1988. The appeal was filed on 19-9-1988, within limitation from the date of knowledge.

(iv) If the party aggrieved was not made aware of the order it could not be expected to take recourse to the remedy available against it. Therefore, the fundamental principle was that the party whose rights were affected by an order must have the knowledge of the order. Thus, the appeal was within limitation both from the date of knowledge of the order and its service.”

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NBFCs not to be partners in partnership firms

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RBI has noticed that some NBFCs have made large investments in the capital to partnership firms. In view of the risks involved in NBFCs associating themselves with partnership firms, RBI has now decided to prohibit all NBFCs from contributing capital to any partnership firm or to be a partner in partnership firms. In cases of existing partnerships, NBFCs may seek early retirement.

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IFRS developments.

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The IFRS Foundation has published a set of 12 illustrative examples in XBRL for the IFRS Taxonomy, 2011. The examples are intended to help preparers of financial statements to understand how to apply the taxonomy to create instance documents and entity- specific extensions using both block tagging and detailed tagging, and also XBRL and Inline XBRL.

Visit the IASB website for a list of the illustrative examples and the IFRS Taxonomy 2011 guide.

The IFRS Foundation has announced that it will publish supplementary tags for the IFRS Taxonomy that reflect disclosures that are commonly reported by entities in their IFRS financial statements.

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Clarification regarding easy-exit schemes.

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The Ministry of Corporate Affairs has notified the simplified procedure for dealing with the applications received under Easy-Exit Scheme for striking off the name of a company u/s. 560 of The Companies Act, 1956 vide its general Circular No. 12/2011, dated 7th April 2011.

For complete text of the Notification visit:

http://www.mca.gov.in/Ministry/pdf/Circular_12- 2011_7apr2011.pdf

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Whatsap

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About this article:
WhatsApp is an instant
messaging app (application software for phones). For many this app is a
cheap substitute for SMS text messaging and can be called a
non-Blackberry version of the Blackberry messenger. This app works
across platforms and is easy to use. Readers may find this write-up
informative.

I still remember the day when a close friend of
mine kept pushing me to install this app on my phone. All the while,
trying to convince me that this app was really worth a shot. I was a bit
reluctant and the simple reason was that I would have to pay money to
purchase the app. An unpalatable thought at the time, it would be a
first for me (so far I have installed as many as 91 apps on my phone and
the ratio of paid vs free apps is 2:89). My friend kept chiding me that
the cost in comparison to the benefit was negligible, but I just
couldn’t swallow the thought of paying for an app.

While you may
say that I am tight-fisted, I would prefer the name frugal. But trust
me I am not the only one. If you are not convinced, check out the Maruti
Suzuki ad — where the salesman is trying to sell a luxury yacht to a
‘rich man’, the scene begins with the salesman praising one feature
after another . . . impressive one would say . . . instead the ‘rich
man’ asks ‘kitna deti hai’ (meaning how much mileage does it give) and
then comes the tag line — “for a country obsessed with mileage, we
produce the most fuel-efficient cars”. Just like the ‘rich man’ in the
ad, there are countless number of cell phone users (many of whom own
pretty fancy smart phones), who find SMSing an expensive mode of
communication. And they should, after all you can speak to one another
for as low as 1p per second, then why pay such a high price for a lowly
SMS, more so when you know that the phone companies are making a fast
buck on the SMS. Well now you have an alternative — WhatsApp.

WhatsApp
provides an alternative texting service that closely resembles standard
SMS text messaging. Simply put, WhatsApp messenger is a smart-phoneto-
smartphone messenger. I guess this is where I take the role of the
salesman trying to sell you the yacht (dont worry, your time will come
and you can ask kitna deti hai). Here are a few reasons why you should
install and use this app:

  • This app works on iPhone (IOS),
    Blackberry (Blackberry OS), Nokia (Symbian) as well as Samsung
    (Android). Arguably, that’s much better than the Blackberry Messenger
    (‘BBM’) which is limited to Blackberry devices.

  • Unlike standard
    text messaging, though, you can set a status message which other
    WhatsApp users can see, both in the Favourites page and in the main
    contact list.

  • And not only can you send photos, but you can also
    attach audio and video notes, and even your geographic location to
    WhatsApp messages. Plus, it provides an easy way to save your message
    history as a text file (see pic).

  • You could send a million
    messages, but pay a pittance. The messages can be sent to friends and
    family across the world (just like BBM) for the same cost.

  • The
    BBM requires you to know your friends’ PIN, well you can say goodbye to
    that now. Once you and your friends have installed WhatsApp, you don’t
    need anything else. This is actually one of the best parts — WhatsApp
    almost automatically identifies who all in your phonebook have installed
    WhatsApp and lets you chat with them instantly. In fact they will
    automatically appear in your Favourites.

  • WhatsApp gives you the
    option to remain on always/to remain connected with your buddies. If you
    choose to go offline, don’t worry the messages will be stored on the
    server and will be pushed to your phone as soon as you log on.

  • Messages
    are usually received very quickly and notifications appear via push,
    which you can configure in the phone’s settings if you want.

  • Like BBM it allows you to form groups (up to 10 people) where you can share messages with a group of friends.

  • Overall,
    WhatsApp Messenger is a huge benefit to the iPhone community and to
    smartphone users in general, because it lets you keep the text messages
    flowing to your friends for free . . . . . . arguably, for the same
    price that they cost cell phone providers to deliver. Come to think of
    it, you have nothing to lose but your expensive texting plans.

Well!!!!! Now’s the part where you ask kitna deti hai?

To
begin with, it will cost you US $1 (for the iPhone that is, for the BB,
Nokia and Samsung you can use it for free for one full year).

Unlike
standard SMS messaging, WhatsApp uses your phone’s data plan to send
and receive messages. So if you use the app a lot, then your data usage
will increase. (You can monitor these stats from within the app).
Similarly, if you travel outside of your phone carrier’s supported area,
it’s possible that you’ll incur data roaming charges if you leave that
option enabled. Staying attached to a Wi-Fi connection should alleviate
most of those concerns (but as a side effect, constant pinging to the
Wi-Fi network will drain your battery power very fast).

For
those of you who are extra security-conscious, you might be concerned
that your phone number is known to the app’s developer and that all
messages go through its servers. The privacy page on the WhatsApp
Website states that the company will Do No Evil with your data and the
developer lets you know that messages are stored on its system only
until they have been retrieved, at which point they are deleted.
WhatsApp also confirmed that WhatsApp text messages, like most e-mail
messages, are sent across the Internet unencrypted (contact data is
encrypted, however). That’s not necessarily a problem; just something
certain types of users may need to be aware of.

The only other
limitation is the requirement that your friends also have WhatsApp
Messenger app installed on their phones. However, if you’re the early
adopter within your circle and none of your friends have downloaded the
app yet, then you’re not going to have anyone to talk with. Luckily, the
app makes it easy to invite your friends to download the app, either by
sending them an e-mail or a standard text message.

If you liked
what you’ve read above and want to try this app, you can visit
(itunes/blackberry world/ OVI/android mart) and download this software.
The whole process is fairly simple. The app walks you through the quick
set-up process the first time you open it. You register your phone
number with the WhatsApp service. It verifies your identity by sending a
code (ironically, via a standard text message) that you then enter into
the set-up screen. After that, the app asks for permission to look
through your address book for contact numbers that are already
registered with WhatsApp and then places them into your your list of
Favourites. Then you’re finished and ready to start texting with your
friends. Once you and your friends have gone through this short
procedure, texting via WhatsApp Messenger is similar to standard SMS
messaging . . . . only much cheaper.

I would love to hear about your experience after using this software. You can send your emails to sam.client@gmail.com

Disclaimer:
This
write-up is not intended to promote or malign any particular product,
feature or any company. Further the write-up should not be considered as
an endorsement of any one product over the other. The sole purpose of
this write-up is to share knowledge and user experience.

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Joint Ventures: No more proportionate consolidation under IFRS

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On 12th May 2011, the International Accounting Standards Board (IASB) issued its new consolidation and related standards, replacing the existing accounting for subsidiaries and joint ventures (now joint arrangements), and making limited amendments in relation to accounting for associates.

In our previous article we had covered IFRS 10, the new standard on consolidated financial statements.

In this article we focus on IFRS 11, Joint Arrangements and IAS 28 (2011), Investments in Associates and Joint Ventures, giving our perspectives on the requirements that are modified and that are expected to have an impact on the preparers and users of IFRS financial statements.

The primary changes introduced under IFRS 11 are:

  • It carves out from IAS 31 on jointly controlled entities, those cases in which although there is a separate vehicle, that separation is ineffective in certain ways. These arrangements are treated similar to jointly controlled assets/ operations and are now called joint operations; and

  • Eliminates the free choice of equity accounting or proportionate consolidation for accounting for investments in joint ventures. These must now be accounted always using the equity method.


Identifying joint arrangements

A joint arrangement is an arrangement over which two or more parties have a joint control, being contractually agreed sharing of control i.e., unanimous consent is required for decisions about the relevant activities.

In order to identify a joint arrangement, IFRS 11 requires a two-step analysis to be performed: (1) assess whether collective control exists of an arrangement; and (2) then assess whether the contractual arrangement gives two or more parties joint control over the arrangement.

What is the meaning of control?

IFRS 11 does not define the term ‘control’. As such, reference may be had to the definition of ‘control’ under IFRS 10. As discussed in detail in our last article on IFRS 10, the assessment of control may undergo a change under IFRS 10 as compared to IAS 27 (2008). For instance, only substantive rights held by the investor and others are considered in assessing control. To be substantive, rights need to be exercisable when decisions about the relevant activities need to be made, and their holders need to have a practical ability to exercise the rights. It may be noted that the ‘rights that need to be exercisable when decisions about the relevant activities need to be made’ is different from the current requirement under IAS 27 (2008) of ‘rights that are currently exercisable’.

De facto control in case of joint arrangements

Joint control exists only when it is contractually agreed that decisions about relevant activities require the unanimous consent of the parties that control the arrangement collectively. When, for instance, the parties can demonstrate past experience of voting together in the absence of a contractual agreement to do so, this will not satisfy that requirement. However, it is possible to establish a joint de facto control i.e., control is based on de facto circumstances and the parties sharing control have contractually agreed to share that control.

For instance, A and B hold 24.5% each in Company C, while the remaining 51% shares are held by numerous shareholders, none of them holding more than 1% shares each and do not have any shareholder agreement amongst them. If A and B contractually agree that on decisions relating to the relevant activities of Company C, the casting of their combined voting power of 49% requires their unanimous consent; it may be concluded that A and B have joint control over Company C on a de facto basis.

Key differences from IAS 31

IFRS 11 does not modify the overall definition of an arrangement subject to joint control, although in a few cases, the joint control evaluation may undergo a change on account of application of control definition under IFRS 10.

Classifying joint arrangements

After determining that joint control exists, joint arrangements are divided into two types, each having its own accounting model, defined as follows:

  • A joint operation is one whereby the jointly controlling parties, known as the joint operators, have rights to the assets and obligations for the liabilities, relating to the arrangement;

  • A joint venture is one whereby the jointly controlling parties, known as the joint venturers, have rights to the net assets of the arrangement.

The key to determining the type of arrangement, and therefore the subsequent accounting, is the rights and obligations of the parties to the arrangement. For instance, two parties set up a separate entity, whereby the main feature of its legal form is that the parties (and not the entity) have rights to the assets and obligations for the liabilities of the entity, and the contractual arrangement between the parties establishes the parties’ rights to the assets, responsibility for all operational or financial obligations and the sharing of profit or loss. Though the arrangement is structured through a separate entity, as the legal form of the separate vehicle does not confer separation between the parties and the vehicle, the joint arrangement is a joint operation.

An entity determines the type of joint arrangement by considering the structure, the legal form, the contractual arrangement and other facts and circumstances.

Structure of joint arrangements

A joint arrangement not structured through a separate vehicle can be classified only as a joint operation. A separate vehicle is a separately identifiable financial structure, including separate legal entities or entities recognised by statutes, regardless of whether those entities have a legal personality.

A joint arrangement structured through a separate vehicle can be either a joint venture or a joint operation. As such, a separate vehicle is necessary but not a sufficient condition for a joint venture. If there is a separate vehicle, then the remaining tests are applied.

Legal form of the arrangement

If the legal form of the separate vehicle does not confer separation between the parties and the separate vehicle i.e., the assets and liabilities placed in the separate vehicle are the parties’ assets and liabilities, then the joint arrangement is a joint operation.

Contractual arrangement

When the contractual arrangement specifies that the parties have rights to the assets and obligations for the liabilities relating to the arrangement, then the arrangement is a joint operation.

It may be noted that in relation to ‘obligations for the liabilities’, it seems that the contractual obligation for liabilities is something that needs to reflect a primary obligation, rather than a secondary one; and something that represents a non-contingent, ongoing obligation, rather than an obligation that will be settled if and when a certain event occurs (say, a default in case of guarantees issued or calling of uncalled capital).

Other facts and circumstances

The test at this step of the analysis is to identify whether, despite the legal form and contractual arrangements indicating that the arrangement is a joint venture, other facts and circumstances give the parties rights to substantially all of the economic benefits relating to the arrangement and cause the arrangement to depend on the parties on a continuous basis for settling its liabilities, and therefore the arrangement is a joint operation.

In practice, most joint arrangements in India, which are structured as separate companies, may meet the separation criteria and hence qualify as a joint venture and not as a joint operation.

Financial statements of joint venturers

IFRS 11 prescribes accounting treatment for joint operators, whereas IAS 28 (2011) prescribes the accounting treatment for joint venturers.

In its consolidated financial statements, a joint venturer accounts for its interest in the joint venture using the equity method in accordance with IAS 28 (2011), unless under IAS 28 (2011), the entity is exempted from applying the equity method.

Under the equity method, the investment in a joint venture is recognised initially at cost, and subsequently adjusted for the post- acquisition changes in the share of the joint venture’s net assets. The joint venturer’s share of profit or loss and other comprehensive income of the joint venture are included in its profit or loss and other comprehensive income, respectively.

In its separate financial statements, a joint venturer accounts for its interest in the joint venture in accordance with IAS 27 (2011) Separate financial statements i.e., at cost or in accordance with IFRS 9/IAS 39. Such a choice is available even if the joint venturer is exempted from preparing consolidated financial statements. This requirement is in line with the existing requirements.

Key differences from IAS 31

IAS 31 provides an accounting policy choice for a joint controller’s interest in a jointly controlled entity, whereby either the equity method or pro-portionate consolidation can be used. In future, only the equity method shall be permitted. As such, the joint co ntroller’s share of net income and net assets that are adjusted against the individual items of income/expenses/assets/liabilities shall now be presented as a single line item in the statement of financial position and statement of comprehensive income. In other words, a single line ‘Investment in Joint Venture’ and a single line ‘equity profit pick-up’ adjustment on such investments will be recorded.

Financial statements of joint operators

In both its consolidated and separate financial statements, a joint operator recognises its assets, liabilities and transactions, including its share of those incurred jointly. These assets, liabilities and transactions are accounted for in accordance with the relevant IFRS.

Transactions between a joint operator and a joint operation

When a joint operator sells or contributes assets to a joint operation, such transactions are in effect transactions with other parties to the joint operation. The joint operator recognises gains and losses from such transactions only to the extent of the other parties’ interests in the joint operation. The full amount of any loss is recognised immediately by the joint operator, to the extent that these transactions provide evidence of impairment of any assets to be sold or contributed.

When a joint operator purchases assets from a joint operation, it does not recognise its share of the gains or losses until those assets have been sold to a third party. The joint operator’s share of any losses is recognised immediately, to the extent that these transactions provide evidence of impairment of those assets.

Other parties to the joint arrangement
Other parties to the joint venture

For the purpose of consolidated financial statements, the other parties to the joint venture first determine whether they exercise significant influence. If significant influence exists, then the interest is recognised in accordance with IAS 28 (2011); else it is recognised in accordance with IAS 39/IFRS 9.

For separate financial statements, other parties to a joint venture account for their interest in the joint venture in accordance with IAS 39/IFRS 9. If significant influence exists, then the interest may also be recognised at cost.

Other parties a joint operation

The other party to a joint operation accounts for its investment in the same way as a joint operator if it has rights to the assets and obligations for the liabilities. If such a party does not have such rights and obligations, then it accounts for its interest in accordance with the IFRS applicable to that interest for instance IAS 28 (2011) or IAS 39/IFRS 9 as the case may be.

Summary

Overall, the implementation of IFRS 11 will require significant judgment in several respects, while the requirement to apply equity method of accounting to account for interests in joint ventures may have a significant impact on the entity’s financial statements. While the standard is not mandatorily effective until periods beginning on or after 1 January 2013, it is expected that preparers will want to begin evaluating their involvement with joint arrangements sooner than that, as the changes under the new standard generally will call for retrospective application.

At this moment, it is unclear by when the corresponding changes will be introduced under the Ind-AS framework. However, it is advisable for Indian companies to evaluate the impact of this new standard, as it is inevitable that Ind-AS will ultimately incorporate the changes due to the new standard.

Tata Consultancy Services Ltd. — (31-3-2011)

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From Significant Accounting Policies

The Company uses foreign currency forward contracts and currency options to hedge its risks associated with foreign currency fluctuations relating to certain firm commitments and forecasted transactions. The Company designates these hedging instruments as cash flow hedges applying the recognition and measurement principles set out in the Indian Accounting Standard 39 ‘Financial Instruments: Recognition and Measurement’ (Ind AS-39).

The use of hedging instruments is governed by the Company’s policies approved by the Board of Directors, which provide written principles on the use of such financial derivatives consistent with the Company’s risk management strategy.

Hedging instruments are initially measured at fair value, and are re-measured at subsequent reporting dates. Changes in the fair value of these derivatives that are designated and effective as hedges of future cash flows are recognised directly in shareholders’ funds and the ineffective portion is recognised immediately in the profit and loss account.

Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the profit and loss account as they arise.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time for forecasted transactions, any cumulative gain or loss on the hedging instrument recognised in shareholders’ funds is retained there until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in shareholders’ funds is transferred to the profit and loss account for the period.

From Notes to Accounts The Company, in accordance with its risk management policies and procedures, enters into foreign currency forward contracts and currency option contracts to manage its exposure in foreign exchange rates. The counter-party is generally a bank. These contracts are for a period between one day and eight years.

The Company does not have any outstanding foreign exchange forward contracts, which have been designated as Cash Flow Hedges as at 31 March, 2011 and as at 31 March, 2010.

The Company has the following outstanding derivative instruments as at 31 March, 2011:

The following are outstanding currency option contracts, which have been designated as Cash Flow Hedges, as at:

Net gain on derivative instruments of Rs.20.20 crores recognised in Hedging Reserve as of 31 March, 2011 is expected to be reclassified to the profit and loss account by 31 March, 2012.

The movement in Hedging Reserve during the year ended 31 March, 2011, for derivatives designated as Cash Flow Hedges is as follows:

In addition to the above Cash Flow Hedges, the Company has outstanding foreign exchange forward contracts and currency option contracts with notional amount aggregating Rs.4432.67 crores (31 March, 2010: Rs.3316.41 crores) whose fair value showed a gain of Rs.27.45 crores as at 31 March, 2011 (31 March, 2010: Rs.4.67 crores). Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting and accordingly these are accounted as derivative instruments at fair value with changes in fair value recorded in the profit (Previous year: exchange gain Rs.91.46 crores) on foreign exchange forward contracts and currency option contracts have been recognised in the year ended 31 March, 2011.

As of the balance sheet date, the Company has net foreign currency exposures that are not hedged by a derivative instrument or otherwise amounting to Rs.857.03 crores (31 March, 2010: Rs.764.85 crores).

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Readers View

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Sir,

It is always a pleasure reading BCAJ which is full of new views and findings.

In the April issue I read the decision in the case of Frontier Offshore on page 35 of the Journal. The conclusion drawn is that withholding tax as per section 44BB does not lead to any violation of section 40(a)(i) of the Income-tax Act. Reading of the judgment leads to opposite view, what I feel.

It is requested to please look into it and give feedback as to the correct finding. Please take this in a positive manner with no intention to counter the view of the Journal.

— Japan Yagnik Chartered Accountant

Authors’ response
The decision of Frontier Offshore which is digested in April 2011 issue (ITA Appeal No. 200/ Mds/2009) at page 35 has concluded that provisions of section 40(a)(i) are not applicable when the payer has deducted tax at source after taking into account presumptive computation provisions of section 44BB.

It is true that at para 7, the ITAT has rejected the contention of the taxpayer that section 40(a)(i) is not applicable to the cases of short deduction and are restricted only to the cases of absolute failure. Please note that this was only the alternative argument of the taxpayer. The ITAT has accepted the primary argument of the taxpayer to the effect that section 40(a)(i) is not applicable to the cases where TDS has been deducted after taking into account presumptive tax provision.

Also, as is clarified in the gist appearing in April 2011 issue, the earlier decision of the Madras Tribunal in the case of the same taxpayer was decided against and after elaborate discussion, the ITAT has explained as to why after the SC decision in GE India’s case, the earlier decision was no longer a good law. The ITAT has gone to the extent of observing that perpetuating error is not a heroic deed, but to correct the mistake at the right opportunity is wisdom.

Trust we have been able to satisfactorily explain the concern of the reader.

— Geeta Jani, Dhishat Mehta Chartered Accountant

Sir,

Re : Income-tax Refunds — Need to revisit TDS Threshold Limits

This is with the reference to media reports to the effect that the Income-tax Department has granted tax refunds of Rs.78,000 crores to about 85 lakh assessees during the year 2010-11 and that during the first half of April, 2011, the IT Department refunded Rs.6,183 crores to 8,23,101 assessees and all the remaining refunds shall be settled during the remainder part of April, 2011. The CBDT Chairman has stated that the IT Refunds in 2010- 11 are about 70% higher than Rs.50,000 crores made in the previous year and that despite making such huge refunds, the direct tax collection will be in the range of Rs.4.5 lakh crores. The Tax Department needs to be sincerely complimented for expeditiously making such huge refunds which constitute about 20% of net collection and making life easier for the taxpayers.

To reduce such huge workload, the Tax Department needs to analyse what is causing such huge tax refunds; causing huge blockage of capital. Is it on account of excess advance tax paid or excess tax deducted at source? Or is it due to refund of tax pursuant to Appellate proceedings?

My own guess is that vast majority of such huge refunds is due to excess TDS deducted due to very low threshold limits prescribed under various TDS provisions. Now due to operation of section 206AA, most taxpayers/income-earners have obtained PAN. Therefore, there is an urgent need to revisit various TDS threshold limits and increase them substantially so that claims of refunds can go down significantly. The Department also needs to study and adopt Withholding Tax (TDS) practices followed in advanced western countries. Further, the Department need to liberalise self-declaration provisions as it is very difficult, time-consuming, inefficient and costly affair to obtain a Nil or Low TDS Certificate from the Tax Department u/s.197 of the Act.

— Tarun Singhal Chartered Accountant

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Tata Steel Ltd. — (31-3-2011)

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From Significant Accounting Policies

Foreign currency transactions

Foreign Currency Transactions (FCT) and forward exchange contracts used to hedge FCT are initially recognised at the spot rate on the date of the transaction/contract. Monetary assets and liabilities relating to foreign currency transactions and forward exchange contracts remaining unsettled at the end of the year are translated at year-end rates.

The company has opted for accounting the exchange differences arising on reporting of longterm foreign currency monetary items in line with Companies (Accounting Standards) Amendment Rules 2009 relating to Accounting Standard 11 (AS- 11) notified by Government of India on 31 March, 2009. Accordingly the effect of exchange differences on foreign currency loans of the Company is accounted by addition or deduction to the cost of the assets so far it relates to depreciable capital assets and in other cases by transfer to ‘Foreign Currency Monetary Items Translation Difference Account’ to be amortised over the balance period of the long-term monetary items or period up to 31 March, 2011, whichever is earlier.

The differences in translation of FCT and forward exchange contracts used to hedge FCT (excluding the long-term foreign currency monetary items accounted in line with Companies (Accounting Standards) Amendment Rules 2009 on Accounting Standard 11 notified by Government of India on 31 March, 2009) and realised gains and losses, other than those relating to fixed assets are recognised in the Profit and Loss Account. The outstanding derivative contracts at the balance sheet date other than forward exchange contracts used to hedge FCT are valued by marking them to market and losses, if any, are recognised in the Profit and Loss Account.

Exchange difference relating to monetary items that are in substance forming part of the Company’s net investment in non-integral foreign operations are accumulated in Foreign Exchange Fluctuation Reserve Account.

From Notes to Accounts

Profit and Loss Account

The Company has opted for accounting the exchange differences arising on reporting of longterm foreign currency monetary items in line with Companies (Accounting Standards) Amendment Rules 2009 relating to Accounting Standard 11 (AS- 11) notified by Government of India on 31 March, 2009 which allows foreign exchange difference on long-term monetary items to be capitalised to the extent they relate to acquisition of depreciable assets and in other cases to amortise over the period of the monetary asset/liability or the period up to 31 March, 2011, whichever is earlier.

As on 31 March, 2011, Rs. Nil (31-3-2010: Credit of Rs.206.95 crores) remains to be amortised in the ‘Foreign Currency Monetary Items Translation Difference Account’ after taking a credit of Rs.261.44 crores (2009-10: Charge of Rs.85.67 crores) in the Profit & Loss Account and Rs 2.07 crores (net of deferred tax Rs.3.57 crores) [2009-10: Rs.47.35 crores (net of deferred tax Rs.24.38 crores)] adjusted against Securities Premium Account during the current financial year on account of amortisation. The Depreciation for the year ended 31 March, 2011 is higher by Rs.0.48 crore (2009-10: Rs.0.41 crore) and the Profit before taxes for the year ended 31 March, 2011 is higher by Rs.208.99 crores (2009-10: Lower by Rs.561.60 crores).

Other Disclosures

25. Derivative Instruments (I) The Company has entered into the following derivative instruments:

(a) The Company uses foreign currency forward contracts to hedge its risks associated with foreign currency fluctuations. The use of foreign currency forward contracts is governed by the Company’s strategy approved by the Board of Directors, which provide principles on the use of such forward contracts consistent with the Company’s Risk Management Policy. The Company does not use forward contracts for speculative purposes.

Outstanding Short-Term Forward Exchange Contracts entered into by the Company on account of payables:

Outstanding Short-Term Forward Exchange Contracts entered into by the Company on account of receivables:
(Forward exchange contracts outstanding as on 31 March 2011 include Forward Purchase of United States Dollars against Indian National Rupees for contracted imports.)

Outstanding Long-Term Forward Exchange Contracts entered into by the Company:

(Long-Term Forward Exchange Contracts outstanding as on 31 March, 2011 have been used to hedge the Foreign Currency Risk on repayment of External Commercial Borrowings and Export Credit Agency Borrowings of the Company.)

(b) The Company also uses derivative contracts other than forward contracts to hedge the interest rate and currency risk on its capital account. Such transactions are governed by the strategy approved by the Board of Directors which provide principles on the use of these instruments, consistent with the Company’s Risk Management Policy. The Company does not use these contracts for speculative purposes.

Outstanding Interest Rate Swaps to hedge against fluctuations in interest rate changes:

All the above swaps and forward contracts are accounted for as per accounting policies stated in Notes on Balance sheet and Profit and Loss Account, Schedule M 1(f).

(II) The year-end foreign currency exposures that have not been hedged by a derivative instrument of otherwise are given below:

26. Previous year’s figures have been recast/ restated where necessary.

27. Figures in Italics are in respect of the previous year.

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GAPs in GAAP Monetary v. Non-monetary Items

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Issue raised in GAPS in GAAP — July 2007 Under revised AS-11 The Effects of Changes in Foreign Exchange Rates, the accounting treatment for monetary items and non-monetary items is different. Monetary items are revalued at each reporting date and the gain or loss is recognised in the income statement. Non-monetary items are reported at the exchange rate at the date of the transaction. They are not revalued at each reporting date and hence there is no exchange gain/loss. Thus the classification of an item as monetary or non-monetary is critical.

Monetary items have been defined as ‘are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money’. Nonmonetary items are defined as ‘assets and liabilities other than monetary items.’ Paragraph 12 of the standard briefly elaborates what monetary and nonmonetary items are, as follows: “Cash, receivables and payables are examples of monetary items. Fixed assets, inventories, and investments in equity shares are examples of non-monetary items.”

The Expert Advisory Committee (EAC) of the ICAI has opined on the issue of monetary and non-monetary items (EAO-VOL-19-1.13). This opinion was given in the context of the pre-revised AS-11, but is relevant under revised AS-11 as well. The issue was whether foreign exchange advances received (and converted into Indian rupees) for export of a fixed quantity of goods, which are adjusted against future supplies, are monetary or non-monetary items.

The EAC noted the definition of ‘monetary items’ as ‘money held and assets and liabilities to be received or paid in fixed or determinable amounts of money’. The EAC was of the view that the words ‘received or paid’ do not necessarily envisage receipt or payment in cash. What is of essence in the definition of monetary items is that the value of the asset or liability should be fixed or determinable in monetary terms. In the present case, the EAC felt that the liability of the company in respect of the advance taken from the foreign customer is fixed in monetary terms, though it will be discharged through exports rather than through payment in cash. As such, the EAC was of the view that the advance received from the foreign customer is a monetary liability. Consequently monetary items denominated in a foreign currency should be revalued at each reporting date and exchange gain/ loss is recognised in the income statement.

Under IAS-21 The Effects of Changes in Foreign Exchange Rates, monetary items are defined as ‘Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.’ Paragraph 16, of IAS-21 provides further elaboration as follows.

Monetary items Paragraph 16 “The essential feature of a monetary item is a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. Examples include: pensions and other employee benefits to be paid in cash; provisions that are to be settled in cash; and cash dividends that are recognised as a liability. Similarly, a contract to receive (or deliver) a variable number of the entity’s own equity instruments or a variable amount of assets in which the fair value to be received (or delivered) equals a fixed or determinable number of units of currency is a monetary item. Conversely, the essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. Examples include: amounts prepaid for goods and services (e.g. prepaid rent); goodwill; intangible assets; inventories; property, plant and equipment; and provisions that are to be settled by the delivery of a non-monetary asset.”

Therefore as can be seen from the above, though the definition of monetary items and non-monetary items is the same under IAS-21 and AS-11, they have been interpreted differently. The interpretation in paragraph 16 of IAS 21 and that contained in the EAC opinion take the exact opposite position. If one were to apply paragraph 16 above, one would conclude that advance received for future export of goods, is a non-monetary item. However, based on EAC opinion, this would be a monetary item.

Given that Indian GAAP is attempting to converge with IFRS, such interpretation differences would create unnecessary GAAP differences. In the given instance, intuitively, it appears that the right answer is not to revalue the advances received, which has been fully converted into Indian rupees. The advance has been received for future supply of fixed quantities of goods; has been fully converted into Indian rupees, and hence revaluing them at each reporting date and recognising exchange gain/loss is inappropriate. Such exchange gain/loss is merely a book entry that is reversed in the future (as sales in this example). If the recommendation of EAC were to be followed in this instance, it would give rise to a theoretical gain or loss in one period and an opposite effect when the transaction is concluded. This would substantially distort the profit and loss account between two periods.

A similar issue was raised (Query 37, Vol. XXVIII) much later with regards to treatment of advance paid in foreign currency for acquisition of fixed assets. This time the opinion of the EAC is in line with the interpretation in IAS-21. The Committee opined “the words received or paid in the definition of the term monetary items do not necessarily envisage receipt or payment in cash. What is of essence is that the value of the asset or liability should be fixed or determinable in monetary items. Accordingly, where the advance is related to a fixed price contract for the receipt of a specified quantity of goods, it will be a non-monetary asset, since it represents a claim to receive a specified quantity of goods and not a right to receive money.”

The change in the point of view by the EAC in this case, is a step in the right direction and will align the interpretation on this issue with global practice.

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Single-Window Registration — a new approach

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Presently, most of the Indians think that corruption is a problem bigger than pollution, poverty, poor infrastructure, delayed judgments, etc. It seems true to a great extent because we would have been in a better condition, had there not been corruption.
It is a known truth that bureaucrats or politicians work only when they have some personal interest. Likewise it is also well known that we the public make bureaucrats or politicians corrupt for our personal benefits. The result is that the two parties involved are benefited, but India suffers.
The public becomes a part of corruption willingly or unwillingly due to unnecessary legal requirements and tedious procedures at government departments, which lead to the need of a mediator, hence corruption.
If we take a look at working in our field i.e., chartered accountancy, we will find that to set up a business a client needs to get various permissions from government departments in the form of registrations, licences, NOCs, etc.

 To be more specific, to start a business as a private limited company, a client has to apply for the following registrations, licences and numbers:

  •  Registration — Company registration, Industry registration, Service tax registration, VAT & CST, Gumashta or Nagar Nigam, STPI registration, etc.

  •  Numbers —Director Identification Number, Permanent Account Number and Tax Account Number.

  •  Codes and Certificates — Import export code, Digital signature certificate. The main problems in getting the above are:

  •  All these are government agencies, but act as independent to each other.

  •  Most of the documents needed by the various government departments are the same and the businessman has to resubmit them again and again to these departments/agencies. A businessman collects registration from one department and submits it to another department for further registration or licensing.

  •  The businessman also has to fill registration forms in various formats and deposit the registration fees in various challan forms with typical challan number system at pre-nominated deposit centres or banks.

  •  This is a tedious process and leads to birth of agents or mediators, which in turn leads to bribery or corruption.
It will be a repetition to say that technology can control or stop corruption in the government departments. The government has already taken successful steps by making Income tax, service tax, and registration of company work (MCA) online. A solution can come if a centralised system can be designed:

  •  where documents once submitted or generated by one government agency can be used again and again by various departments.

  •  where available information can be automatically used to fill various registration forms and challans.

  •  where a businessman can amend his details and they are automatically intimated to various authorities.

  •  where a businessman can himself apply for registration and pay the required fee online through credit card or online bank account.

In my view all the above are possible through a single-window (SW) registration website. This Single Window Registration website will be an attempt to expedite and simplify information flows between trade and the government and bring meaningful gains to all parties.

In practical terms, an SW environment will provide one entrance (either physical or electronic) for the submission and handling of all data and documents related to the release and clearance of a transaction. This entry point is managed by one agency (may be like NSDL) which informs the appropriate agencies and/or performs combined controls. Centralised registration server may work in the following way :
It is important to mention here that many state governments have worked and are already working through single-window registration. So, the new website will be an attempt to link all departmental websites with single-window registration website. In turn the new website will provide all necessary details directly to the concerned government department.
Public key and private key concept may also be implemented. Public key will be given to various departments to view business details and private key will be given to business for alterations or modifications in its details.

 (Paper formalities for registrations, licensing, etc. in the proposed system is illustrated in Annexure.)

Conclusion:
If this suggestion is implemented, then in my opinion this would be a great relief to businessmen and will lead to lesser dependency on mediators, resulting in less corruption.
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IFRS introduces framework for measuring fair values

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On 12 May 2011, the International Accounting Standards Board (IASB) issued IFRS 13 Fair Value Measurement that is intended to replace the fair value measurement guidance contained under various standards with a single authoritative pronouncement on fair value measurement.

In this article we focus on the guidance provided under IFRS 13 in relation to the definition of fair value, the framework for measuring the fair value and certain disclosure requirements, giving our perspectives on the requirements that are modified and that are expected to have an impact on the preparers and users of IFRS financial statements.

 IFRS 13 provides elaborate guidance on how to measure the fair value when required or permitted under IFRS. It neither introduces new requirements to measure assets or liabilities at fair value, nor does it eliminate the exceptions to fair value measurements on the grounds of practicality in line with guidance contained under certain standards.

Scope of IFRS 13

The IFRS 13 guidance shall be applied to items of assets, liabilities and equity that are permitted or required to be measured at fair value. However, the guidance contained therein does not apply to the measurement and disclosure requirements in certain cases, such as:

  •  share-based payment transactions within the scope of IFRS 2 Share-based Payment;
  • leasing transactions within the scope of IAS 17 Leases; and
  • measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.

Further, the fair value measurement guidance also does not apply to the disclosure requirements in certain cases, such as:

  • plan assets measured at fair value in accordance with IAS 19 Employee Benefits;
  • retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting and Reporting by Retirement Benefit Plans; and
  •  assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36.

Measurement principles
Definition of fair value

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Measurement of asset or liability

A fair value measurement of an asset or liability considers the characteristics of that asset or liability (e.g., the condition and location of the asset and restrictions, if any, on its sale or use), if market participants would consider those characteristics when determining the price of the asset or liability at the measurement date.

The transaction

A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. The hypothetical transaction is considered from the perspective of a market participant that holds the asset or owes the liability, i.e., it does not consider entityspecific factors that might influence an actual transaction. Therefore, the entity need not have the intention or ability to enter into a transaction on that date. An orderly transaction is a transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities i.e. it is not a forced transaction, e.g., a forced liquidation or distress sale.

Principal or most advantageous market

The hypothetical transaction to sell the asset or transfer the liability is assumed to take place in the principal market. This is the market with the greatest volume and level of activity for the asset or liability.

 In the absence of a principal market, the transaction is assumed to take place in the most advantageous market. This is the market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after considering transaction costs and transport costs. Because different entities may have access to different markets, the principal or most advantageous market for the same asset or liability may vary from one entity to another.

Market participants

 Fair value measurement uses assumptions that market participants would use in pricing the asset or liability. Market participants are buyers and sellers in the principal (or most advantageous) market who are independent of each other, knowledgeable about the asset or liability, and willing and able to enter into a transaction for the asset or liability.

 Price

Fair value is the price that would apply in a transaction between market participants whether it is observable in an active market or estimated using a valuation technique.

Transaction cost and transportation cost

Although transaction costs are taken into account in identifying the most advantageous market, the price used to measure the fair value of an asset or a liability is not adjusted for transaction costs. This is because they are not a characteristic of the asset or liability and are instead characteristic of a transaction. However, if location is a characteristic of an asset e.g., crude oil held in the Arctic Circle, then the price in the principal or most advantageous market is adjusted for the costs that would be incurred to transport the asset to that market, e.g., costs to transport the crude oil from Arctic Circle to the appropriate market.

 Application to non-financial assets — highest and best use and valuation premise

A fair value measurement considers a market participant’s ability to generate economic benefit by using the asset or by selling it to another market participant who will use the asset in its highest and best use. Highest and best use refers to the use of an asset that would maximise the value of the asset, considering uses of the asset that are physically possible, legally permissible and financially feasible. Highest and best use is determined from the perspective of market participants, even if the reporting entity intends a different use. However, an entity need not perform an exhaustive search for other potential uses if there is no evidence to suggest that the current use of an asset is not its highest and best use. The concept of highest and best use is relevant only to the valuation of non-financial assets and does not apply to the valuation of financial assets or liabilities.

Liabilities and equity instruments

The fair value of a liability or an entity’s own equity instrument is measured using quoted prices for the transfer of identical instruments. When such prices are not available, an entity measures fair value from the perspective of a market participant holding the identical item as an asset. If quoted prices in an active market for the corresponding asset are also not available, then other observable inputs are used, such as prices in an inactive market for the asset. Otherwise, an entity uses another valuation technique(s), such as a present value measurement or the pricing of a similar liability or instrument. IFRS 13 retains the principle in IAS 39 that the fair value of a financial liability with a demand feature is not less than the present value of the amount payable on demand.

 Fair value at initial recognition

The price paid in a transaction to acquire an asset or received to assume a liability, often referred to as the ‘entry price’, may or may not equal the fair value of that asset or liability based on an exit price. If an IFRS requires or permits an entity to measure an asset or liability initially at fair value and the transaction price differs from fair value, then the entity recognises the resulting gain or loss in profit or loss unless the specific IFRS requires otherwise. Therefore, the recognition of a ‘day one’ gain or loss when the transaction price differs from the fair value will be determined by the particular standard that prescribes the accounting for the asset or liability.

Valuation techniques

The objective of using a valuation technique is to determine the price at which an orderly transaction would take place between market participants at the measurement date. An entity uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. IFRS 13 identifies three valuation approaches: income, market and cost.

Fair value hierarchy

IFRS 13 establishes a fair value hierarchy based on the inputs to valuation technique used to measure fair value to increase consistency and comparability. The inputs are categorised into three levels, with the highest priority given to unadjusted quoted price in active markets for identical assets or liabilities and lowest priority given to unobservable inputs.

The level into which a fair value measurement is classified in its entirety is determined by reference to the observability and significance of the inputs used in the valuation model. The valuation technique often incorporate both observable and unobservable inputs, however the fair value measurement is classified in its entirety into either level 2 or level 3, based on the lowest level input that is significant to the fair value measurement.

The availability of relevant inputs and their relative subjectivity might affect the selection of appropriate valuation techniques. However, the fair value hierarchy prioritises the inputs to valuation techniques, not the valuation techniques used to measure fair value. For example, a fair value measurement developed using a present value technique might be categorised within level 2 or level 3, depending on the inputs that are significant to the entire measurement and the level of the fair value hierarchy within which those inputs are categorised.

Level 1 Inputs

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. A quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value.

An active market is a market in which transactions for the asset or liability takes place with sufficient frequency and volume for pricing information to be provided on an ongoing basis.

Level 2 Inputs

The determination of whether a fair value measurement is categorised into level 2 or level 3 depends on whether the inputs used in the valuation techniques are observable or unobservable and their significance to the fair value measurement.

Level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

Observable inputs are inputs that are developed using market data, such as publicly available information about actual events or transactions, and that reflect the assumptions that market participants would use when pricing the asset or liability.

Level 3 Inputs

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.

Inputs into valuation techniques

When selecting the inputs into a valuation technique, an entity selects inputs that are consistent with the characteristics that market participants would take into account in a transaction. A premium or discount, such as a control premium or a discount for lack of control, may be appropriate if it would be considered by market participants in pricing the asset or liability based on the unit of account.

Using quoted prices provided by third parties

IFRS 13 does not preclude the use of quoted prices provided by third parties, such as brokers or pricing services, provided that the prices are developed in accordance with IFRS 13.

Markets that are not active and transactions that are not orderly

IFRS 13 describes factors that may indicate that a market has seen a decrease in the volume or level of activity. An entity evaluates the significance and relevance of factors to determine whether, based on the evidence available, there has been a significant decrease in the volume or level of activity; however, the standard stresses that even if a market is not active, it is not appropriate to conclude that all transactions in that market are not orderly, i.e., are forced or distress sales.

Quoted prices derived from a market that is not active may not be determinative of fair value. In such circumstances, further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to measure fair value.

Disclosures
The objective of the disclosures is to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs (level 3), the effect of the measurements on profit or loss or other comprehensive income.

To meet this objective, an entity provides certain minimum disclosures for each class of assets and liabilities. For non-financial assets and non-financial liabilities that are measured at or based on fair value in the statement of financial position, IFRS 13 requires fair value disclosures that are similar to existing fair value disclosures for financial assets and financial liabilities in IFRS 7. This disclosure is also required for non-recurring fair value measurements (e.g., an asset held for sale). The requirement to disclose a fair value hierarchy and information on valuation techniques is also extended to assets and liabilities which are not measured at fair value in the statement of financial position, but for which fair value is disclosed pursuant to another standard.

In addition, a description of the valuation processes used by the entity for level 3 measurements is required to be disclosed. This includes, for example, how an entity decides its valuation policies and procedures and analyses changes in fair value measurements from period to period. An entity should disclose a narrative description of the sensitivity of level 3 measurements to changes in unobservable inputs, including the effect of any interrelationships between unobservable inputs, as well as quantitative information on significant unobservable inputs used in measuring fair value.

Effective date and transition

An entity should apply IFRS 13 prospectively for annual periods beginning on or after 1 January 2013. Earlier application is permitted with disclosure of that fact.

The disclosure requirements of IFRS 13 need not be applied in comparative information for periods before initial application.

Summary
Overall, the implementation of IFRS 13 will require significant judgment while preparing the entity’s financial statements. The standard is neither mandatorily effective until periods beginning on or after 1st January 2013, nor does it require retrospective application. As such, the comparative disclosures and measurements are not required in line with IFRS 13 in the first period of application.

At this moment, it is unclear by when the corresponding changes will be introduced under the Ind AS framework. However, it is advisable for Indian companies to evaluate the impact of this new standard, as it is inevitable that Ind AS will ultimately incorporate the changes due to the new standard.

Section A: Disclosures Under Revised Schedule VI

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Compiler’s Note:

The Ministry of Company Affairs notified Revised Schedule VI on 28th February 2011. The same is applicable for all companies for financial statements prepared for the financial year commencing from 1st April 2011 onwards.

Paragraph 10 of AS-25 ‘Interim Financial Reporting’ as notified by the Companies (Accounting Standards) Rules, 2006, states that “If an enterprise prepares and presents a complete set of financial statements in its interim financial report, the form and content of those state-ments should conform to the require-ments as applicable to annual complete set of financial statements.” Accordingly, if a company following April-March as its accounting year, prepares complete set of financial statements, it will have to present the same in the Revised Sched-ule VI as applicable for 2011-12.

Infosys Limited follows the practice of preparing full set of financial state-ments for each quarter. In terms of the above, Infosys Limited (which follows April-March as its accounting year) has prepared its financial statements for the quarter ended 30th June 2011. Important extracts from these financial statements prepared in accordance with Revised Schedule VI are being published in two parts.

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GAPs in GAAP — What is substantial period of time?

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What is substantial period of time?

Borrowing costs are capitalised during the construction of a qualifying asset, which is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The explanation to the definition of the term ‘qualifying asset’ in AS-16 ‘Borrowing Cost’, notified by the Central Government under the Companies (Accounting Standards) Rules, 2006, provides as follows:

Explanation

“What constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.”

Let us see how this explanation was interpreted in the context of the example below.

Example

Salon Ltd. provides health and beauty solutions through its various salons across the country. From the time of acquiring the premises to the development of the salon, a period of three to five months is required and a substantial cost including capital cost on leasehold improvement is incurred on creating the right aesthetic and ambience. The period of three to five months is representative of the time required for similar construction of assets. The amount to be capitalised (if permitted) is material.

Position prior to EAC opinion (which was finalised on 30-5-2008)

In light of the explanation in AS-16, a period of three to five months was considered far below the 12-month threshold level, and hence in many similar situations companies may not have capitalised the bor-rowing expenses to comply with the explanation.

Position after EAC opinion (which was finalised on 30-5-2008)

The above position has changed completely vide an EAC opinion that was finalised on 30-5-2008 but was only published and available recently in Compendium Volume XXVIII. Paragraph 14 of the opinion states: “The committee is of the view that ordinarily, three to five months cannot be considered as a substantial period of time. The company should itself evaluate what constitutes a substantial period of time considering the peculiarities of facts and circumstances of its case, such as nature of the asset being constructed, etc. In this regard, time which an asset takes, technologically and commercially to get it ready for its intended use should be considered. Accordingly, the assets concerned may be considered as qualifying asset as per the provisions of AS-16.”

EAC opined that the borrowing costs could be capitalised by Salon Ltd.

Author’s comments

It may be noted that IAS 23 Borrowing Costs contains similar principles of capitalisation on qualifying asset. Like AS-16, substantial period of time has not been defined but unlike AS-16, there is no 12-month threshold level in IAS 23. Under IAS 23 there is no consensus globally on what constitutes a substantial period of time, though literature suggests a period of six months or more, to be substantial. Under FAS 34 interest cost is capitalised for all assets that require a period of time (not necessarily substantial) to get them ready for their intended use. However, in many cases, the benefit in terms of information about enterprise resources and earnings may not justify the additional accounting and administrative cost involved in providing the information. The benefit may be less than the cost, because the effect of interest capitalisation and its subsequent amortisation or other disposition, compared with the effect of charging it to expense when incurred, would not be material. In that circumstance, FAS 34 does not require interest capitalisation.

The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing immaterial interest cost for purposes of capitalisation. This aspect is very clear under FAS 34. Therefore if the interest cost is very material the same may be capitalised even if the asset has taken less than 12 months to complete, provided other factors indicate capitalisation is appropriate.

The explanation to AS-16 requires assessing the time which an asset should take technologically and commercially to be ready for its intended use. In fact, under present circumstances where construction period has reduced drastically due to technical innovation, the 12-month period should at best be looked at as a general benchmark and not a conclusive yardstick. It may so happen that an asset under normal circumstances may take more than 12 months to complete. However an enterprise that constructs the asset in 10 months should not be penalised for its efficiency by denying it interest capitalisation and vice versa.

Seen from this perspective, and the mixed practice under IAS 23, the EAC opinion is a step in the right direction as it clarifies that the 12-month period should not be seen as a strict benchmark, and other facts and circumstances should be kept in mind. In that sense, it is more aligned to global practice.

However additional guidance is required with regards to the following issues:

1. The EAC opinion changes the existing thought and practice in this area. In similar situations, if a company had not capitalised borrowing cost in earlier years, would they have to apply the correct treatment retrospectively (from the date AS-16 came into force)?

2. Would retrospective adjustment constitute a change in accounting policy or a rectification of prior period error?

3. Can such change be applied prospectively, given that the EAC opinion establishes a new principle?

4. If it is applied on a prospective basis, should it from the date the EAC finalised the opinion or the date when such an opinion was made public?

More importantly, given that it is intended that India will converge to IFRS, it may be worthwhile for the Institute of Chartered Accountants of India to raise this issue with the International Accounting Standards Board.
levitra

XBRL — FUTURE FINANCIAL LANGUAGE

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The Ministry of Corporate Affairs (MCA) has by its Circular No. 9/2011, dated 31st March, 2011, Circular No. 25/2011, dated 12th May, 2011 and Circular No. 37/2011, dated 7th June, 2011. MCA has mandated certain class of companies to file Balance Sheet and Profit & Loss Account along with Directors’ Report and Auditors’ Report for the year 2010-2011 by using XBRL Taxonomy. In the Phase I of its implementation, the following classes of companies have to file the Financial Statements in XBRL form from the year 2010-2011:

  •  All companies listed in India and their Indian subsidiaries;

  •  All companies having a paid capital of Rs.5 crore and above;

  •  All companies having a turnover of Rs.100 crore and above.

However, banking companies, insurance companies, power companies and NBFCs are exempted for XBRL filing, till further orders. Also, vide its Circular No. 26/2011, dated 18th May, 2011, Circular No. 43/2011, dated 7th July, 2011 and Circular No. 57/2011, dated 28th July, 2011 MCA has made it mandatory that the Financial Statements prepared in the XBRL mode shall be certified by a Chartered Accountant or Company Secretary or Cost Accountant in whole-time practice from the year 2010-2011 onwards. The introduction of XBRL filing and its certification by MCA has opened a new avenue for practice for professionals like us. Therefore, it has become necessary that we gear ourselves up for this upcoming challenge. For this what is necessary is the knowledge about XBRL. Let us discuss about XBRL in great depth in the following paragraphs.

What is XBRL?
XBRL stands for eXtensible Business Reporting Language. It is a language for electronic communication of business and financial data which is revolutionising business reporting around the world. It provides major benefits in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data. It is one of a family of ‘XML’ languages which is becoming a standard means of communicating information between businesses and on the Internet. XBRL is being developed by an international non-profit consortium of approximately 650 major companies, organisations and government agencies. It is an open standard, free of licence fees. It is already being put to practical use in a number of countries and implementation of XBRL is growing rapidly around the world.

A simple explanation

The idea behind XBRL is simple. Instead of treating financial information as a block of text, as in a standard Internet page or a printed document, it provides an identifying tag for each individual item of data. This is computer-readable. For example, company’s net profit has its own unique tag. The introduction of XBRL tags enables automated processing of business information by computer software, cutting out laborious and costly processes of manual re-entry and comparison. Computers can treat XBRL data ‘intelligently’. They can recognise the information in an XBRL document, select it, analyse it, store it, exchange it with other computers and present it automatically in a variety of ways for users. XBRL greatly increases the speed of handling of financial data, reduces the chance of error and permits automatic checking of information.

Companies can use XBRL to save costs and streamline their processes for collecting and reporting financial information. Consumers of financial data, including investors, analysts, financial institutions and regulators, can receive, find, compare and analyse data much more rapidly and efficiently if it is in XBRL format. XBRL can handle data in different languages and accounting standards. It can flexibly be adapted to meet different requirements and uses. Data can be transformed into XBRL by suitable mapping tools or it can be generated in XBRL by appropriate software. How XBRL works? XBRL is a member of the family of languages based on Extensible Markup Language (XML), which is a standard for the electronic exchange of data between businesses and on the Internet.

Under XML, identifying tags are applied to items of data, so that they can be processed efficiently by computer software. XBRL is a powerful and flexible version of XML which has been designed specifically to meet the requirements of business and financial information. It enables unique identifying tags to be applied to items of financial data, such as ‘net profit’. However, these are more than simple identifiers. They provide a range of information about the item, such as whether it is a monetary item, percentage or fraction. XBRL allows labels in any language to be applied to items, as well as accounting references or other subsidiary information. XBRL can show how items are related to one another. It can thus represent how they are calculated. It can also identify whether they fall into particular groupings for organisational or presentation purposes.

Most importantly, XBRL is easily extensible, so companies and other organisations can adapt it to meet a variety of special requirements. The rich and powerful structure of XBRL allows very efficient handling of business data by computer software. It supports all the standard tasks involved in compiling, storing and using business data. Such information can be converted into XBRL by suitable mapping processes or generated in XBRL by software. It can then be searched, selected, exchanged or analysed by computer, or published for ordinary viewing. However, the use of XBRL does not imply an enforced standardisation of financial reporting.

On the contrary, the language is a flexible one which is intended to support all current aspects of reporting in different countries and industries. Its extensible nature means that it can be adjusted to meet particular business requirements even at the individual organisation level.

Differences between XML and XBRL
XML (Extensible Markup Language) uses tags to identify the meaning, context and structure of data. XML is a standard language which is maintained by the World Wide Web Consortium (W3C). It is a complementary format that is platform independent, allowing XML data to be rendered on any device such as a computer, cell phone, PDA or tablet device. It enables rich, structured data to be delivered in a standard, consistent way. XML provides a framework for defining tags (i.e., taxonomy) and the relationship between them (i.e., schema).

XBRL is an XML-based schema that focusses specifically on the requirements of business reporting. XBRL builds upon XML, allowing accountants and regulatory bodies to identify items that are unique to the business reporting environment. The XBRL schema defines how to create XBRL documents and XBRL taxonomies, providing users with a set of business information tags that allows them to identify business information in a consistent way. XBRL is also extensible in that users are able to create their own XBRL taxonomies that define and describe tags unique to a given environment.

Benefits and uses for business
All types of organisations can use XBRL to save costs and improve efficiency in handling business and financial information. Because XBRL is extensible and flexible, it can be adapted to a wide variety of different requirements. All participants in the financial information supply chain can benefit, whether they are preparers, transmitters or users of business data.

By using XBRL, companies and other producers of financial data and business reports can automate the processes of data collection. For example, data from different company divisions with different accounting systems can be assembled quickly, cheaply and efficiently if the sources of information have been upgraded to using XBRL. Once data is gathered in XBRL, different types of reports using varying subsets of the data can be produced with minimum effort. A company finance division, for example, could quickly and reliably generate internal management reports, financial statements for publication, tax and other regulatory filings, as well as credit reports for lenders. Not only can data handling be automated, removing time-consuming, error-prone processes, but the data can be checked by software for accuracy. Small businesses can benefit alongside large ones by standardising and simplifying their assembly and filing of information to the authorities.

Users of data which is received electronically in XBRL, can automate its handling, cutting out time-consuming and costly collation and re-entry of information. Software can also immediately validate the data, highlighting errors and gaps which can immediately be addressed. It can also help in analysing, selecting, and processing the data for re-use. Human effort can switch to higher, more value-added aspects of analysis, review, reporting and decision-making. In this way, investment analysts can save effort, greatly simplify the selection and comparison of data, and deepen their company analysis. Lenders can save costs and speed up their dealings with borrowers. Regulators and government departments can assemble, validate and review data much more efficiently and usefully than they have hitherto been able to do.

In a nutshell, XBRL can be applied to a very wide range of business and financial data. It can handle:

  •     Company internal and external financial reporting.
  •     Business reporting to all types of regulators, including tax and financial authorities, central banks and governments.
  •     Filing of loan reports and applications; credit risk assessments.
  •     Exchange of information between government departments or between other institutions, such as central banks.
  •     Authoritative accounting literature — providing a standard way of describing accounting documents provided by authoritative bodies.
  •     A wide range of other financial and statistical data which needs to be stored, exchanged and analysed.

XBRL in action


Organisations benefitting from XBRL

Various specific types of organisations can benefit from XBRL. They are as follows:

  •     Companies in general;
  •     Regulators;

  •     Stock Exchanges;

  •     Investment analysts;

  •     Loan and credit management departments of banks;

  •     Companies in financial information industry;

  •     Accountants;

  •     Companies in information technology industry.

XBRL taxonomies
XBRL makes the data readable with the help of two documents — the taxonomy and the instance document. Taxonomies are dictionaries that contain the terms used in the financial statements and their corresponding XBRL tags (i.e., electronically readable codes for each item of financial statements). Thus, taxonomies define the elements and their relationships based on the regulatory requirements. Instance document is a file that contains business reporting information and represents a collection of financial facts and reports — specific information using tags from one or more XBRL taxonomies. The instance document is a computer file that contains entity’s data and other entity specific information and is generally not intended to be read by the human eye.

XBRL taxonomies are the reporting-area specific hierarchical dictionaries used by the XBRL community. They define the specific tags that are used for individual items of data (such as ‘Net Profit’), their attributes and their interrelationships. Different taxonomies will be required for different business reporting purposes. Some national jurisdictions may need their own reporting taxonomies to reflect local accounting and

other reporting regulations. Many different organisations, including regulators, specific industries or even companies, may require taxonomies or taxonomy extensions to cover their own specific business reporting needs.

A special taxonomy developed and recommended by XBRL International has also been designed to support collation of detailed, drill-down data focussing on internal reporting within organisations. This is the Global Ledger (GL) taxonomy. The XBRL GL taxonomy allows the representation of anything that is found in a chart of accounts, journal entries or historical transactions, financial and non-financial. It does not require a standardised chart of accounts to gather information, but it can be used to tie legacy charts of accounts and accounting detail to a standardised chart of accounts to improve communications within a business. XBRL GL is reporting-independent, system-independent, permits consolidation of data from multiple departments and provides flexibility overcoming the limitations of other approaches such as Electronic Data Interchange (EDI).

The IASB is developing a taxonomy which reflects IFRS. National XBRL jurisdictions will extend this taxonomy to reflect their particular local implementation of IFRS. Taxonomies will thus be available to enable those reporting under IFRS in different countries to use XBRL, enhancing efficiency and comparability as adoption of IFRS expands around the world.

Taxonomies for Indian companies are developed based on the requirements of:

  •     Schedule VI to the Companies Act, 1956;

  •     Accounting Standards notified under the Companies Act, 1956;

  •     SEBI Listing Agreements.

Taxonomies can be extended to accommodate items/relationship specific to the owner of the information. Taxonomy extension can be in the following forms:

  •     Modification in the existing relationships;

  •     Addition of new elements in the taxonomy;

  •     Combination of above.

It is to be noted that the U.S.A. allows extension of the taxonomies by the users while the U.K. does not allow extension of the taxonomies by the users. Taxonomies issued by the MCA for the Financial Year 2010-2011 cannot be extended/ modified by the users. However, this inconvenience will be removed from the Financial Year 2011-2012 onwards.

Creation of financial statements in XBRL
There are a number of ways to create financial statements in XBRL:

  •     XBRL-aware accounting software products are becoming available which will support the export of data in XBRL form. These tools allow users to map charts of accounts and other structures to XBRL tags.
  •     Statements can be mapped into XBRL using XBRL software tools designed for this purpose.

  •     Data from accounting databases can be extracted in XBRL format. It is not strictly necessary for an accounting software vendor to use XBRL; third party products can achieve the transformation of the data to XBRL.

  •     Applications can transform data in particular formats into XBRL.

XBRL is a format for exchanging information between applications. Therefore each application will store data in whatever form is most effective for its own requirements and import and export information in XBRL format, so that it can be readily imported or exported in turn by other applications. In some applications, for example, the XBRL formatted information being used may be mostly tabular numeric information, hence easily manipulated in a relational database. In other applications, the XBRL information may consist of narrative document-like structures with a lot of text, so that a native XML database may be more appropriate. There is no mandatory relationship between XBRL and any particular database or other processing or storage architecture.

The route which an individual company may take will depend on its requirements and the accounting software and systems it currently uses, among other factors.

Role of Chartered Accountants vis-à-vis XBRL financial statements

After understanding what is XBRL, let us now have a look upon our role as a Chartered Accountant in respect of certification of financial statements in XBRL mode.

The Standards on Audit (SAs) issued by the ICAI apply to an audit of general purpose financial statements. The term general purpose financial statements has been defined in the Preface to the Statements on Accounting Standards, issued by the ICAI as including “Balance Sheet, Statement of Profit and Loss, a Cash Flow Statement (wherever applicable) and statements and explanatory notes which form part thereof, issued for the use of various stakeholders, Governments and their agencies and the public.” In fact, the references to financial statements in the said Preface and the Accounting Standards issued by the ICAI and notified under the Companies Act, 1956, are construed to refer to the general purpose financial statements. Clearly, the XBRL financial statements are out of the purview of the general purpose financial statements as envisaged in the said Preface. The current SAs issued by the ICAI, therefore, do not require the auditor to perform procedures on XBRL data as part of the financial statement audit. Accordingly, the auditor’s report in accordance with these SAs on the financial statements does not cover the process by which XBRL data is tagged or the XBRL data that results from this process, and thus, no assurance is given on the accuracy, consistency and completeness of the XBRL data itself.

Insofar as the SA 720, The Auditor’s Responsibilities relating to Other Information Contained in Audited Financial Statements is concerned, it may be noted that XBRL data does not construe ‘other information’ as envisaged in SA 720, because it is only a machine-readable rendering of the data within the financial statements. Since the filing of this XBRL data is not a discrete document, the requirement of SA 720 to ‘read the other information’ for the purposes of identifying material inconsistencies or material misstatements of fact would not be applicable to XBRL-tagged data.

The Chartered Accountants engaged to certify XBRL financial statements in terms of the aforementioned MCA’s Circulars of 7th July, 2011 and 28th July, 2011, can draw guidance from the principles enunciated in the Guidance Note on Audit Reports and Certificates for Special Purposes, issued by the Institute of Chartered Accountants of India. The Chartered Accountants’ procedures in respect of certification of XBRL financial statements would be as follows:

  •     Completeness — A Chartered Accountant would need to assess whether all the information has been formatted at the required levels as defined by the applicable reporting requirements in the instance document and related files and that only permitted information selected by the entity is included in the XBRL files.

  •     Mapping — A Chartered Accountant needs to examine whether the elements selected are consistent with the meaning of the associated concepts in the source information in accordance with the requirements of the company’s financial reporting framework.

  •     Accuracy — A Chartered Accountant should examine whether the amounts, dates, other attributes (for example, monetary units), and relationships (order and calculations) in the instance document and related files are consis-tent with the source information in accordance with the requirements of the entity’s reporting environment.

  •     Structure — It is essential to structure instance documents and related files in accordance with the requirements to which the entity’s XBRL files are subject.

As the regulatory requirement of certifying the financial statements in XBRL mode has an immediate impact on our profession, the ICAI should issue a Guidance Note on the certification of the financial statements in the XBRL mode, also giving factors to be taken care of while issuing a certificate along with an illustrative format of the certificate to clarify the situation.

Conclusion
To conclude, the usage of XBRL technology will lead to more information exchanges that can be effectively automated by use. XBRL will lead to the best interest of the company or more so for the international business interest globally that warrants the accuracy of all the financial data for the end-users and early collaborative decisions by the companies or those whose interest is involved for acquisition/rights, etc.

XBRL is set to become the standard way of recording, storing and transmitting business financial information. It is capable of use throughout the world, whatever the language of the country concerned, for a wide variety of business purposes. It will deliver major cost savings and gains in efficiency, improving processes in companies, governments and other organisations.

International Ruling — An Indian Perspective

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Dell Products (NUF) v. Tax East (12 ITLR 829) (Oslo District Court of Norway)

Facts of the case

A US multinational corporation manufactured and sold computers, etc. In the Norwegian market, its products were sold through an indirectly owned subsidiary (Norway Co.), which acted as a commissionaire for the Irish group company (Ireland Co.).

Tax audit was carried out by Norwegian Tax Authorities on Norway Co. At the time of the audit, Ireland Co. had no employees, but procured all necessary services from another group company in Ireland.

Norway Co. had a margin of about 1% of the turnover in the years that were covered by the tax audit. All agreements with customers were concluded on standard terms and conditions set out by Ireland Co. Ireland Co., as the principal, prepared marketing strategies, had access to the products, was responsible for the freight and logistics, customer followup, technical assistance, administrative tasks, etc. Ireland Co. did not regard itself as taxable in Norway and therefore did not report any income to Norwegian tax authorities. After the tax audit of Norway Co.,

Ireland Co. was considered to have a permanent establishment (PE) in Norway.

A schematic representation of arrangement is as follows:


Issues involved

  •  Whether the expression ‘authority to conclude contracts in the name of the enterprise’ in English version of tax convention between Ireland and Norway or the expression ‘authority to conclude contracts on behalf of the enterprise’ in the Norwegian version requires that the contract entered into by an agent is ‘legally binding’ on the principal or it is sufficient that the contract ‘in reality binds the agent’ to trigger Agency PE?

  •  Whether Norway Co. was a dependent agent of Ireland Co.?

  •  If there is an agency PE, what is the profit attributable to the PE? Relevant provisions in the Double Tax Avoidance Agreement (DTAA) The relevant Article of Ireland-Norway DTAA was based on OECD Model. Article 5(5) of the OECD Model reads as follows: “Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.”

The Norwegian version of DTAA uses the expression ‘authority to conclude contracts on behalf of the enterprise’ instead of ‘an authority to conclude contracts in the name of the enterprise’ as used in the English version. Main contentions of the taxpayer For the condition of Agency PE to be satisfied, the contract must be legally binding on the principal. If it is not legally binding, it cannot be regarded as concluded on behalf of or in the name of the principal. Under the civil law of the UK, an agent could legally bind the principal, regardless of the fact whether contract was entered in the name of principal or not.

To clarify that such agents were covered, a paragraph 32.1 was added in OECD Commentary to the effect that the paragraph applies equally to an agent who concludes contracts which are binding on the principal even if those contracts are not in the name of the principal. This supports the argument that the phrase ‘authority to conclude contracts in the name of the enterprise’ only means that it must be legally binding on the principal.

However, under Norwegian law, an agent cannot enter into contracts that are binding on the principal. This was also a term in the contract between Ireland Co. and Norway Co. that Ireland Co. is not bound towards Norway Co.’s customers and hence, conditions of agency PE are not satisfied. Since Ireland Co. is an empty company, it cannot instruct and control Norway Co.

Control as a result of group connection, board representation, daily management, and integrated accounting system is not relevant for determining dependency. The agency contract states that the agent is an ‘independent contractor’, neither party shall have the power to direct or control the daily activities of the other and that Norway Co. is free to involve itself in contracts with other parties. Norway Co. also sells additional products from other supplier/s.

Main contentions of tax authority

Under Vienna Convention of Law of Treaties, a purposive interpretation should be given to tax conventions.

OECD Commentary is important for interpretation since Ireland-Norway DTAA is modelled on the lines of OECD. The expression ‘on behalf of’ in Norwegian text or the expression ‘to conclude contracts in the name of enterprise’ in the English text does not indicate that contract should be legally/statutorily binding on the principal. One should interpret the phrase having regard to its functional impact. Since agent draws the principal into the national economy of Norway, it should be taxed in Norway.

OECD Commentary also supports functional interpretation when it states in para 32 that agent must involve the principal to a particular degree in the country concerned for trigger of permanent establishment. The addition of paragraph in OECD Commentary should not be looked as a consequence of difference between common law and civil law of the UK.

The phrase ‘in the name of’ should not be interpreted strictly, but one must understand it as synonymous with ‘on behalf of’. A substance over form approach must be adopted. The decisive factor is whether the agent in reality binds the principal. An internal administrative circular by the Ministry of France also asserts that one has an agency structure where the agent in reality binds the principal.

The following factors show that Norway Co. was binding Ireland Co. in reality

  •  All sales took place under the brand name of Ireland Co. without showing that Ireland Co. was not behind the sales.

  •  A large number of contracts entered into took place on standard conditions within detailed limits where Ireland Co. could not refuse to meet its obligation.

  •  Sales on conditions other than standard terms could be made only with prior approval of Ireland Co.

  •  In practice, Ireland Co. did not review the contract entered into by Norway Co.

  •  here was no instance demonstrated by Ireland Co. where sale undertaken by Norway Co. was not approved by Ireland Co. Norway Co. was a dependent agent of Ireland Co. on account of the following factors

  •  Norway Co. was subject to Ireland Co.’s instruction and control.

  •   Norway Co. could only sell allowed products on approved contract conditions and at fixed prices terms of which were fixed by Ireland Co.

  •  There was an overlap of board members and management of Norway Co. and Ireland Co.

  •  There was an integrated accounting system which gave Ireland Co. full insight into Norway Co.’s financial status.

  •  Ireland Co. had access to Norway Co. premises under the agency contract.

  •   Norway Co. acted only for one principal as an agent. Though, formally under the contract, Norway Co. was not prevented from entering into contract with outsiders, in reality it was so prevented.

  •     Sale of third-party products was marginal.


High Court Ruling

On the question of PE

The wordings of the Norwegian and English texts are reasonably open and the wordings in itself do not provide a basis for concluding the matter.

Para 32.1 of the OECD Commentary reads as fol-lows:

“32.1 Also, the phrase ‘authority to conclude contracts in the name of the enterprise’ does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. Lack of active involvement by an enterprise in transactions may be indicative of a grant of authority to an agent. For example, an agent may be considered to possess actual authority to conclude contracts where he solicits and receives (but does not formally finalise) orders which are sent directly to a warehouse from which goods are delivered and where the foreign enterprise routinely approves the transactions.”

While the latter part of the first sentence in the OECD Commentary reading ‘the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise’ in the OECD Commentary supports the appellant, the third sentence (namely, lack of active involvement of principal being indicative of agent’s authority) and the example following it reading ‘For example, an agent may be considered to possess actual authority to conclude contracts where he solicits and receives (but does not formally finalise) orders which are sent directly to a warehouse from which goods are delivered and where the foreign enterprise routinely approves the transactions’, support tax authority’s contention that it is sufficient that the contract is binding on the principal in reality. Commentaries by authors Avery Jones & Skaar also support this interpretation.

The purpose of the agency rule is to avoid eva-sion of tax obligation. The presence of a local representative within defined characteristics is at par with a business through permanent establishment. In order to realize this purpose one must look at the realities in the relationship between the agent and principal. It is sufficient that the agent effectively binds the principal.

Accordingly, the Court held that there is an agency PE and for this purpose, the Court noted as follows:

  •     Norway Co. enters into contracts directly with the Norwegian customers and sells Dell Products to them.

  •     The sales take place within clear guidelines for the activity and authority.

  •     It is absolutely unthinkable that Ireland Co. would change a signed customer contract in Norway between Norway Co. and the customer, and factually, also this has not happened.

  •     The formal organisation of the sale through an agency relationship where the agent may not be able to bind the principal formally (either according to an agency contract or according to the applicable Agency Act) cannot be the only decisive factor in evaluation of emergence of a permanent establishment.

On the question of independence

Independence is a fact-based exercise to be examined applying same criteria as applicable to unrelated parties. The fact that there is an overlap of board members and management is not in itself a decisive factor.

However, in the present facts, Norway Co. was financially and legally dependent on Ireland Co. in view of the following factors:

  •    Norway Co. could not have existed without right to sell.

  •    Norway Co. could only sell permitted products on standard terms and conditions and at fixed prices — all provided by Ireland Co. as the principal.

  •    Norway Co. did not have an independent accounting system and the principal had full access to Norway Co. accounts.
  •     In terms of the Commissionaire Agreement, Ireland Co. had access to Norway Co.’s premises.
  •     Norway Co. acted as commissionaire for only one principal, namely, Ireland Co.
  •     Third-party sale was marginal.
  •     The provisions in the agency contract that the agent shall act as an independent party and that none of the parties shall be able to control one another, were self-proclaimed paper provisions which did not reflect reality of conduct between the parties.

On apportionment
The main rule for attribution of PE profit is the direct method indicated in Article 7(2). This entails that the permanent establishment shall be viewed as an entirely independent enterprise which carries out the same activity under the same conditions. Thereafter, on principle, each individual item of income and expense has to be evaluated and view needs to be taken to decide whether it can be attributed to PE.

However, Article 7(4) also allows use of indirect method (formulary approach) where total result of the enterprise between the head office and establishment is apportioned by adopting relevant allocation key (e.g., turnover, income, expenses, number of employees and capital structure).

When separate accounts are not kept for the Norwegian activity, it will not be possible to apply the direct method. The company’s function, business equipments and risk connected to the permanent establishment need to analysed. Nor-wegian tax authorities must then undertake an estimation based on these parameters, and decide a part of the profits that shall be attributed to the permanent establishment.

This estimation lies outside the Court’s authority for judicial review as long as the estimation is not unjustifiable or extremely unreasonable. The Court has no reason to see that this is the case.

The taxpayer’s argument that a large part of the value creation takes place outside Norway as Ire-land Co. undertakes market analysis, etc. is duly considered in apportionment of 60% of the profits to Norway and 40% to Ireland.

Since the main part of the income from sales of the products in Norway is generated in this country, and since the tax authorities have attributed to Ireland Co. (which does not even have employees) with 40% of the profits, apportionment method adopted by the lower authorities is irrefutable.

The Court is in agreement with the tax authority that there is no requirement for an evaluation to be undertaken of whether income from commission is market related — and in that case no further apportionment of the profits can be made to Norway.

Indian perspective
Substance over form

The High Court observed that in deciding whether there is an agency PE or not, one must look at the realities in the relationship between the agent and principal and it is sufficient that the agent effectively binds the principal. The Court also observed that the provision in the contract that the agent shall act as an independent party and that none of the parties shall be able to control one another was a pure paper provision which did not express reality between the parties.

The aforesaid observations are in line with the Indian judicial trend, a summary of which is given below:

?    ACIT v. DHL Operations BV (2005) 142 Taxman 1 (Mum.) (Mag) — The Tribunal observed that in determining agency relationship one has to consider the substance of the agreement between the parties rather than its form.

?    The verification of participation in the conclusion of contracts must not only be conducted from the formal standpoint, but also from a substantial standpoint [ABC, In re (2005) 274 ITR 501 (AAR) citing Ministry of Finance v. Phillip Morris GmbH 4 ITLR 903 (Supreme Court of Italy)].

?    An agency-principal relationship may be con-stituted notwithstanding

(a)    Denial of agency in the agreement [Morgan Stanley & Co., In re (2006) 284 ITR 260 (AAR); Galileo International Inc. v. DCIT, (2009) 116 ITD 1 (Del.) para 17.3].

(b)    Description in the agreement as independent contractor [ABC, In re (2005) 274 ITR 501 (AAR), para 16].

(c)    Provision in the agreement that neither party has any authority to bind or to contract in the name of the other [ABC, In re (2005) 274 ITR 501 (AAR), para 16; Morgan Stanley & Co., In re (2006) 284 ITR 260 (AAR)].

(d)    Description in the agreement as independent consultant and not an employee of the com-pany [Sutron Corpn., In re (2004) 268 ITR 156 (AAR), para 13].

(e)    Specification in the agreement that services would be rendered on a principal-to-principal basis [ACIT v. DHL Operations B.V. (2005) 142 Taxman 1 (Mum.) (Mag), para 33].

  •     The question (regarding agency PE) must be decided not only with reference to private law but must also take into consideration the actual behavior of the contracting parties. An approach relying solely on aspects of private law (the law of contracts) would make it easily possible to prevent an agent from being deemed a PE even where he is engaged most intensively in the enterprise’s business [Prof. Klaus Vogel in Treatise on Double Taxation Convention cited in Motorola Inc. v. DCIT, (2005) 95 ITD 269 (Del.) (SB), para 132].

  •    There is an agency PE if despite specific terms of contract, agent habitually concludes contracts on behalf of the principal without any protest or dissent from the principal. If the agent habitually exceeds his authority and concludes contracts, such ‘illegal’ exercise should be regarded as an approval by the principal on account of its conduct and the agent should be deemed to have the authority [TVM Ltd., In re (1999) 237 ITR 230 (AAR), para 14, 16].

  •    Amadeus Global Travel Distribution S.A. v. DCIT, (2008) 113 TTJ 767 (Del.) — The Tribunal held “The phrase ‘authority to conclude con-tracts on behalf of the enterprise’ does not confine to application of para 4 to an agent who enters into contract literally in the name of the enterprise. The para applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. Lack of activity involved by the enterprise in the transactions may suggest of an authority being granted to the agent.”

  •    Jebon Corporation India Liaison Office v. CIT, (2010) 125 ITD 340 (Bang.) — In this case, based on peculiar facts, the Tribunal held that the activities carried on by the Liaison Office (LO) were not confined to liaison work, but LO was actually carrying on commercial activities of procuring purchase orders, identifying the buyers, negotiating with the buyers, agreeing to the price, thereafter requesting them to place a purchase order and to forward the same to HO. Material was then dispatched to cus-tomer and then LO followed up with customer regarding the payments and also offerred after sales service. Tribunal further held that “merely because the buyers place orders directly with the Head Office and make payment directly to the Head Office and it is the Head Office which directly sends goods to the buyers, would not be sufficient to hold that the work done by the liaison office is only liaison and it does not constitute a permanent establishment as defined in Article 5 of DTAA.”

The High Court, affirming the above decision of the Tribunal observed — “Once the material on record clearly established that the liaison office is undertaking an activity of trading and therefore entering into business contracts, fixing price for sale of goods and merely because the officials of the liaison office are not signing any written contract would not absolve them from liability.”

Dependent agent

One of the facts which influenced the Court in holding that Norway Co. was a dependent agent of Ireland Co. was that though, formally in terms of agency contract Norway Co. was not prevented from entering it to contract with outsiders, in reality it was so prevented and it acted as an agent for only one principal. Again, it could sell permitted products only on standard terms and conditions and at fixed prices, provided by Ireland Co.

Some of the Indian precedents which have consid-ered such features in connection with independent agent are as follows:

  •    In Dassault Systems KK, In re 2010 TIOL 02 ARA-IT, in determining economic dependence, the AAR was influenced by the fact that the number of principals were more than one.

  •     An agent could be dependent notwithstanding a resolution by the board of directors that the company can deal with third parties, when otherwise the company was legally and economically dependent only on one enterprise from whom it earned its entire revenue [Morgan Stanley & Co., In re (2006) 284 ITR 260 (AAR)].

  •     Brokers and bankers in India through whom an FII, a non-resident, carried on transactions on stock exchanges in India were agents of independent status vis-à-vis the FII [Morgan Stanley & Co. International Ltd., In re (2005) 272 ITR 416 (AAR), para 11].

  •     A custodian in India, which was providing custodial services to an FII, a non-resident and also a number of other local and international companies on a routine basis was an independent agent, both legally and economically vis-à-vis the FII [Fidelity Advisor Services VIII, In re (2004) 271 ITR 1 (AAR), para 23 ].

  •     K, an Indian company, was engaged in pro-moting professional examinations/certification programmes of foreign institutes, societies, professional bodies, etc. of international repute. K signed or was in the process of signing agreements with US non-profit-making bodies (foreign entities) for conducting certification programmes. K was to collect registration forms and fees from individuals in India, who wished to register themselves for the examinations; and pass them on to the foreign entity after deducting its administrative cost and commission. The foreign entity would conduct examinations either through K or through other entities in India. The evaluation of answer sheets and award of certificates was to be done by foreign entities who would also send certificates to K for local distribution to the successful candidates. The Authority observed that there was no financial, managerial or any other type of participation between K and foreign entities. K carried on a variety of is activities besides promoting examinations of foreign entities. It had engaged itself into business relationship with foreign entity and was in the process of forging such relationship with other foreign entities it was open for K have such relationship with other foreign entities. He was not subject to any control of foreign entity with regard to the manner in which it will carry out its activities with regard to promotion of the examinations. On these facts, the Authority held that K was enjoying an independent status [KnoWerX Education (India) (P) Ltd., In re (2008) 301 ITR 207 (AAR)].

Profit attributable to the PE

The High Court observed that direct method of apportionment cannot be applied since no separate accounts are kept by Ireland Co. in respect of Norwegian activity. Therefore, apportionment of profits should be based on an indirect method. The Court also observed that there is no requirement for an evaluation to be undertaken on whether income from commission is market related and in that case no further apportionment of profits can be made to Norway. However, unfortunately, the Court did not provide any reasoning behind this observation.

It is pertinent that the Court rejected application of direct method of apportionment since no separate accounts were maintained, and it was not possible to conduct FAR analysis (functions performed, assets used and risks assumed), which the Court held was an essential requirement for application of direct method of apportionment. Likewise, for evaluation as to whether commission is market related, it is necessary to conduct FAR analysis, which perhaps, the Court felt that was not possible. Hence, it may perhaps be on account of the feature that the aforesaid observations relevant evaluation of commission were made and not as a general proposition of law.

However, if the observations are read to mean that the Court held that payment of commission at ALP to agent would not exhaust further apportionment of profit, then it deviates to that extent from the Indian position. In DIT v. Morgan Stanley & Co., (2007) 292 ITR 416 (SC), it was observed that if a PE is remunerated on arm’s-length basis (ALP) taking into account all the risk-taking functions of the enterprise, then there is no further requirement to attribute profit. The Supreme Court further observed that if transfer pricing analysis does not adequately reflect the functions performed and risks assumed by the enterprise, then in such situation, there would be a need to attribute further profits to PE.

The Supreme Court decision was explained in eFunds Corporation v. ADIT, (2010) 42 SOT 165 (Del.) and Rolls Royce Plc v. DDIT, (2009) 34 SOT 508 (Del.). The Tribunal, after taking note of the Supreme Court observations, stated that the as-sessment of PE gets extinguished only if the following two conditions are cumulatively met:

(i)    The associate enterprise has been remunerated on arm’s-length basis and

(ii)    Having regard to FAR analysis, nothing more can be attributed to PE.

Both the decisions of Tribunal observe, if remuneration to the agent does not take into account all the risk taking functions of the non-resident enterprise, then in such case there would be a need to attribute profits to the PE for those functions/risks of principals which are not covered by the agent’s remuneration.

Press Release — Central Board of Direct Taxes — No. 402/92/2006 (MC) (17 of 2011) dated 26-7-2011

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Press Release — Central Board of Direct Taxes — No. 402/92/2006 (MC) (17 of 2011)
dated 26-7-2011.

The Double Tax Avoidance Agreement is signed between India and Lithuania on 26th July, 2011.

CBDT Instructions No. 8, dated 11-8-2011 regarding streamlining of the process of filing appeals to ITAT.

Copy of the Instructions available on www.bcasonline.org

Annual detailed Circular on Deduction of tax from salaries during the Financial Year 2011-12 — Circular No. 5 of 2011

[F.No.275/192/2011-IT(B)], dated 16-8-2011. Copy available for download on www.bcasonline.org

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Registration charges and handling charges vis-à-vis ‘sale price’

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Under any Sales Tax Law the tax is leviable on the valuable consideration received from buyer for sale of goods. This is referred to as ‘sale price’. This term is normally defined in the Sales Tax Laws. Under the Maharashtra Value Added Tax Act, 2002, the said term is defined in section 2(25) as under:

“(25) ‘sale price’ means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged . . . .”

Thus the definition speaks about consideration received till the delivery given as ‘sale price’. Sometime the contentious issue arises while interpreting the above definition. Particularly when selling dealer collects certain amounts separately on ground of separate subject-matter, the issue arises whether such charges are part of sale price or not.

Similar issue arose in relation to registration charges and handling charges recovered separately by the motor vehicle dealer from its customers. The dealer issues sale invoice for price of the motor vehicle. He also prepares separate debit note for recovering insurance charges, road tax, incidental and handling charges, registration fees etc. The charges recovered towards specific taxes etc. are paid to respective authorities. The handling charges are retained by the motor vehicle dealer for himself as his service charges. The Sales Tax Department sought to consider the above charges as part of sale price and levied tax on the same. The periods involved were 2005-2006 to 2007-08 under the MVAT Act, 2002.

Tribunal judgment

When the issue came before the Tribunal, the position was scrutinised as to when the sale is complete, when the delivery is given and the nature of separate charges collected through debit notes, i.e., whether post delivery or prior to delivery, etc. The Tribunal came to the conclusion that the separate charges are post-delivery charges and cannot be included in ‘sale price’.

Bombay High Court judgment

Additional Commissioner of Sales Tax v. Sehgal Autoriders Pvt. Ltd., (Sales Tax App. No. 5 of 2011 dated 11-7-2011)

The issue was taken by the Department to the Bombay High Court by way of appeal under the MVAT Act, 2002. The High Court has now decided the issue.

Before the High Court the main argument of the Department was that the delivery is to be seen in light of effective delivery. It was contended that as per Motor Vehicle Act/Rules the motor vehicle cannot be plied on road unless registered. It was argued that the customer can drive away the vehicle from the dealer’s place when it is registered in his name and since the charges mentioned above are prior to the above event they are taxable.

On behalf of the dealer it was contended that the registration is the responsibility of the buyer who becomes owner of the vehicle. It is only the owner who gets it registered. The sale note is issued for the said purpose which completes sale and delivery. The further activities of registration, etc. are on behalf of the buyer as agent and the handling charges are towards such services, a separate transaction and it is a post-sale transaction. It was also contended that the provisions of the Motor Vehicles Act are for separate purpose and cannot be brought in for interpretation of the MVAT Act. The provisions of sale of the Goods Act, 1930 were also relied upon.

The High Court referred to Rule 47 of the Mo-tor Vehicle Rules and observed that as per the said rule the dealer has to issue a certificate of giving delivery to the buyer, so as to enable the registration of the vehicle under the Motor Vehicle Act. The High Court on the above facts observed as under:

“15 The contention of the Revenue, however, is that delivery cannot be granted to the owner by the holder of a trade certificate under Rule 42 unless the motor vehicle has been registered. Rule 42 however does not as it cannot override the obligation which section 39 imposes on the owner of obtaining registration. Moreover, Rule 42 cannot be construed in isolation from the other provisions which have been made in Chapter III of the Central Motor Vehicles Rules, 1989.

Rule 41, for instance, specifies the purposes for which the holder of a trade certificate may use a vehicle in a public place. Among the purposes is for proceeding to and from any place for the registration of the vehicle. Similarly, under clause (d) of Rule 41, the holder of a trade certificate may use a vehicle in a public place for proceeding to or returning from the premises of the dealer or of the purchaser for the purpose of delivery. Rule 42 provides that no holder of a trade certificate shall deliver a motor vehicle to a purchaser without regis-tration, whether temporary or permanent. It is evident that an application for registration is required to be made in accordance with Rule 47. Rule 47, as a matter of fact, stipulates that an application for registration has to be made within a period of seven days from the date of taking delivery of the vehicle. The application has to be accompanied by a sale certificate. The statutory form for the sale certificate stipulates that delivery has been handed over to the purchaser. The Tribunal, in the present case, has found, as a matter of fact, that upon receipt of the price of the goods, the respondent issues a gate pass in the name of the purchaser and issues a sale certificate in the prescribed form showing delivery of the motor cycle. The sale is complete and transfer of property in the motor cycle takes place to the purchaser coupled with the delivery thereof. The obligation to obtain registration is that of the purchaser. When a dealer facilitates the obtaining of a registration certificate, he acts for and on behalf of the purchaser, because the obligation under the law to obtain a registration certificate is cast upon the owner of the vehicle. The application for the issuance of a registration certificate and the grant of a registration certificate are both post-sale events. The charges that are levied by the appellant and recovered as handling charges are in respect of a service rendered to the purchaser upon the completion of the sale of the motor cycle. Handling charges cannot be regarded as forming part of ‘the valuable consideration paid or payable to a dealer for any sale made.’ The handling charges cannot be regarded as ‘any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof.’

Observing as above the High Court held that the holding of the Tribunal that registration/handling charges is not part of sale price was correct and did not not require any interference.

Conclusion

The judgment, amongst others, will be a guiding judgment in understanding the nature of charges before delivery, which can be part of sale price and also nature of charges post delivery, which cannot be part of sale price.

(2011) 39 VST 102 (All.) Shiv Nath Singh Yadav v. Assistant Controller (Grade I)/Sub-Divisional Magistrate, Bharatana and Ors. Trade tax — Recovery of tax — Limitation — When no time limit prescribed, recovery to be within reasonable time — Recovery proceedings taken twenty years after date of recovery certificate unreasonable.

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Interest — Not to be charged after twelve years — UP Trade Tax Act.

The petitioner, represented by his widow, was in arrears of sales tax dues for assessment years 1972- 1973 to 1975-1976 for which recovery certificate was issued on 16th February, 1985. After 20 years, the Sales Tax Officer wrote a letter dated August 20, 2004 to The Deputy Post Master, for payment of balance dues of Rs.755498, which includes interest payable till 26th August, 2004, from the petitioner’s P. O. Monthly Scheme Accounts,. The asseessee filed writ petition before the High Court against issue of recovery certificate.

Held:

(1) When no time limit is prescribed for recovery of dues, the State is also expected to be vigilant and to make the recovery of its dues from whatever means or manner within the time-frame. Considering the limitation of 12 years for instituting of suit relating to immovable property, a period of 12 years from the date of issuance of recovery certificate can be constructed to be a reasonable period for recovery of dues, though not as an absolute rule. But, the period of 19 years is certainly not a fair and reasonable time.

(2) Considering facts of the case, the High Court issued direction to the sales tax authority to prepare statement of account showing the principal amount of tax due with interest and payment thereof, etc. In preparing statement of account no interest on interest accrued shall be charged and further no interest even on the principal amount, if any, after 12 years of issuance of recovery certificate shall be levied. Any excess amount recovered shall be refunded with interest at the same rate at which it has been charged. The deficient amount, if any, as per the statement shall be recovered from the petitioner only after affording opportunity of hearing to her subject to the satisfaction that she has inherited property in excess of the amount now sought to be recovered as the balance.

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Inter-state stock transfer — Production of F Form — Goods returned or goods transferred on jobwork — Decision of SC that where F Form not produced by dealer without his fault, transactions to be assessed on merit — Direction by High Court — Section 6A of the Central Sales Tax Act, 1956.

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The petitioners had challenged the assessment order, reassessment orders and notices u/s.21(2) of the U. P. Trade Tax Act, 1948 for levy of CST on the transactions of job work and goods — returned transactions by treating as inter-State sales for non-production of ‘F’ forms.

Following the judgment in case of Ambica Steels Limited v. State of U.P., (2009) 24 VST 356 (SC), the Commissioner of Trade Tax issued Circular dated June 26, 2009 to the effect that where the trader/dealer of the State of U.P. had not received ‘F’ form the transferee in the other State, or where form F is not issued without any fault on the part of trader/dealer in the State of UP, the Assessment Authority shall examine the transactions between the parties, and will complete the assessment on merits. In view of the later development, the issue was raised before the High Court to consider applicability of section 6A, for production of F form, only with regard to transactions involving job work and goods return. The High Court without deciding on merit of the case issued directions.

Held:

(1) In all cases of assessment and reassessment in which the transactions of job work and goods returned are involved, the assessment/ re-assessment orders are set aside only to the extent that the tax was imposed on such transactions for want of form F.

(2) The petitioners were directed to appear before the authorities to decide the case on its merits after examining the transactions between parties, keeping in mind findings recorded earlier in assessment on such transactions and also that the asseessee is not in a position to obtain form F, for no fault of his.

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Rate of tax — Entries in Schedule — Battery chargers supplied with cell phone — Attracts same rate of tax applicable to cell phone — Punjab Value Added Tax Act, 2005.

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Facts:

The Company sold cell phone in a composite package, without any extra charge for supply of battery charger, which is a part of cell phone. The entry 60(6)(g) of Schedule B to the Punjab VAT Act, 2005 covers parts of the products mentioned therein. The Assessing Authority levied tax @12.5% on differential amount for supply of battery charger and not at concessional rate applicable to cell phone. This view of Assessing Authority was upheld by the Tribunal also. The company filled appeal to the Punjab and Haryana High Court against the decision of the Tribunal.

Held:

(1) When a cell phone is sold in a composite package, without any extra charge for the battery charger, the battery charger is a part of cell phone. Mere fact that the battery charger was not affixed to the cell phone will not mean that it is a different item. The entry in question cannot be read as excluding the battery charger which is necessary for use of the cell phone.

(2) Compared to the value of the cell phone, value of the charger is insignificant. Cell phone cannot be used without charger. On these undisputed facts the charger cannot be excluded from the entry for concessional rate of tax which applies to cell phones and parts thereto. Accordingly the appeal was allowed.

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Sudhir Thackersey Charitable Trust v. DIT ITAT ‘H’ Bench, Mumbai Before Pramod Kumar (AM) and R. S. Padvekar (JM) ITA No. 5031/Mum./2010 Decided on: 26-8-2011 Counsel for assessee/revenue: A. H. Dalal/ V. V. Shastri

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Section 12AA — Registration of Trust — Delay in application for registration — Refusal to grant registration on the ground that the trust was claiming exemption u/s.11 even though it was not registered — Whether the refusal was on the valid ground — Held, No.

Facts:
The assessee trust came into existence vide trust deed dated 24th August, 2006. It had not applied for registration till 30-10-2009. However, all along the trust was carrying on its activities and duly filing its return of income with claims for exemption u/s.11. The DIT refused to grant registration for the reason that the assessee was claiming exemption u/s.11 even though it had not complied with the mandatory provisions of registration. According to him the assessee had concealed its income by claiming exemption which otherwise it was not entitled to.

Held:
According to the Tribunal the reason for refusal to grant registration as given by the DIT was not relevant to the consideration on which an application for registration of a trust or charitable institution is to be examined. Further, it also noted that the assessee had admitted an inadvertent lapse in nonfiling of registration application and also the fact that the trust had not accepted any donation, other than corpus donation at the time of formation of the trust. According to it, the lapse by the assessee cannot be visited with the consequence of its being declined registration later also, which approach was not supported either by any specific legal provisions or plain logic or rationale. The DIT was only required to examine if the objects of the trust were charitable and the activities were bona fide. Further noting that the assessee had placed enough relevant details and supportive evidences in support of the trust objects being charitable and the activities being bona fide, the Tribunal directed the DIT to grant registration.

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Krishna Land Developres Pvt. Ltd. v. DCIT ITAT ‘G’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and Asha Vijay Raghavan (JM) ITA No. 1057/Mum./2010 A.Y.: 2005-06. Decided on : 12-8-2011 Counsel for assessee/revenue: Rakesh Joshi/ A. K. Nayak

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Sections 22, 28 — Rental income for letting out premises, which are duly notified as IT Park and can be used only for a specific purpose along with provision of complex service facilities and infrastructure for operation such business is chargeable to tax under the head ‘Income from Business’.

Facts:
The assessee had let out on leave and licence basis for a period of 33 months property purchased by it along with the infrastructure, equipment and facilities, which were prescribed both by the Ministry of Commerce as well as the CBDT. The I.T. Park was duly notified by the Ministry of Commerce and also by the CBDT. The assessee offered licence fees in respect of this activity, for taxation, under the head ‘Income from Business’. The Assessing Officer (AO) relying on the decision of the Apex Court in the case of Shambhu Investments P. Ltd. v. CIT, 263 ITR 143 (SC) held that the income is assessable under the head ‘Income from House Property’. Aggrieved the assessee preferred an appeal to the CIT(A).

The CIT(A) upheld the action of the AO. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the property in question was not a simple building but an I.T. Park with all infrastructure facilities and services. It observed that the Ministry of Commerce and Industries, notifies certain buildings as I.T. Park only if various facilities and infrastructure, as specified by the Department, are provided. It noted that all the technical requirements, infrastructures, facilities and services were being provided for in the building and it was for this reason that not only the Ministry of Commerce & Industries but also the CBDT notified the same as an I.T. Park which entitles the assessee to earn certain incentives. It also observed that the intention of the assessee while purchasing the property is to participate in the I.T. Park and it cannot be said that the intention is only to invest in property. The Tribunal observed that:

“The assessee is offering complex services by way of providing operation place in a notified I.T. Park, with all services and amenities such as infrastructure facilities, waiting room, conference room, valet parking, reception, canteen, 24 hours’ securities, internal facilities, high-speed lift, power back-up, etc. Just because a sister concern incurred this expenditure and claims reimbursement from the assessee, it cannot be said that the facilities are not provided for by the assessee. Whoever maintains them, the fact remains that it is the assessee who ultimately bears such expenditure for the services and undertakes to provide such services. The facilities are made available by the assessee to the person occupying the premises.”

The Tribunal noted that the Gujarat High Court has in the case of Saptarshi Services Ltd. 265 ITR 379 (Guj.) held that the income earned from business centre is to be assessed under the head ‘Income from Business and Profession’ and SLP filed by the Revenue against this judgment was rejected by the Supreme Court [264 ITR 36 (St)]. It also noted that the Mumbai Bench of ITAT has in the case of ITO v. Shanaya Enterprises, (ITA No. 3648/Mum./2010, A.Y. 2006-07, order dated 30th June, 2011) held that when the property is used for specific purposes and in the nature of providing complex services, the income is taxable under the head ‘Income from Business’.

Applying the propositions laid down in the abovementioned decisions, the Tribunal held that since the property can be used only for a specific purpose i.e., I.T. operation and the assessee has provided complex service facilities and infrastructure for operating such business, the income in question be assessed under the head ‘Income from Business & Profession’. It set aside the order passed by the CIT(A) and allowed this ground of the assessee’s appeal.

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A.P. (DIR Series) Circular No. l8, dated 9-8-2011 — Investment in units of Domestic Mutual Funds.

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Presently, a SEBI-registered Foreign Institutional Investor (FII) and a Non-Resident Indian (NRI) can purchase on repatriation basis, subject to such terms and conditions, units of domestic Mutual Funds (MFs). This Circular has now created a new category of Non-Resident Investors — ‘Qualified Foreign Investors’ (QFI). QFI are non-resident investors, other than SEBI-registered FII and SEBI-registered FVCI, who meet the Know Your Ctomer (KYC) requirements prescribed by SEBI.

A QFI can purchase, on repatriation basis:

(1) Up to INR620 billion in Rupee-denominated units of equity schemes of SEBI-registered domestic Mutual Funds.

(2) Up to INR186 billion in units of debt schemes which invest in infrastructure (‘Infrastructure’ as defined under the extant ECB guidelines) debt of minimum residual maturity of five years, within the existing ceiling of 25 billion for FII investment in corporate bonds issued by infrastructure companies.

They can invest under two routes:

(i) Direct Route — SEBI-registered Depository Participant (DP) route.

(ii) Indirect Route — Unit Confirmation Receipt (UCR) route.

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A.P. (DIR Series) Circular No. 2, dated 15-7-2011 — Regularisation of Liaison/Branch Offices of foreign entities established during the pre-FEMA period.

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Presently, prior approval of RBI is required for establishing a Liaison Office (LO)/Branch Office (BO) in India by a person resident outside India. This Circular advices persons resident outside India who have established LO/BO in India and have not obtained permission from RBI to do so within a period of 90 days from the date of issue of this Circular, for regularisation of establishment of such offices in India, in terms of the extant FEMA provisions.

Similarly, foreign entities who may have established LO or BO with the permission from the Government of India, must also approach RBI along with a copy of the said approval for allotment of a Unique Identification Number (UIN).

These applications/requests must be submitted to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Fort, Mumbai-400001 in form FNC and should be routed through the bank where the account of such LO/ BO is maintained. A.P. (DIR Series) Circular No. 3, dated 21-7- 2011 —Facilitating Rupee Trade — Hedging facilities for non-resident entities.

This Circular permits non-resident importers and exporters to hedge their currency risk in respect of exports from India and import to India, respectively, where invoices are raised in Indian Rupees. The operational guidelines, terms and conditions, etc. are annexed to this Circular.

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PROPOSED CONSOLIDATED REGULATIONS FOR PRIVATE INVESTMENT FUNDS — Draft Regulations for Alternate Investment Funds issued by SEBI

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SEBI has issued, on 1st August 2011, fairly comprehensive draft Regulations to regulate all private funds that invest in any type of securities whether registered outside India or in India and whether their investors are from outside India or within India. These Regulations thus are intended to be very broad and will cover all funds that are not specifically governed by existing Regulations on certain funds. The possible concern is that certain private investment vehicles may get covered unintended though the purpose is to cover only the funds that raise monies for investment, albeit privately. A more serious concern is that the funds are categorised and restrictions are put on each category on their investment pattern, etc.

One of the stated purposes is of course that such comprehensive Regulations covering all types of funds will help them being granted exemptions from other statutes. However, the detailed control over them as proposed seems disproportionate to the needs of the exemptions. The other benefit of registration and regulation stated is that such control and supervision of SEBI may increase the credibility of such funds in the eyes of the investors in such funds.

Alternative Investment Fund (‘AIF’) means funds other than which are governed by specific Regulations such mutual funds, Collective Investment Schemes, etc. Many of such AIF are specifically identified, such as private equity funds, real estate funds, private pooled investment vehicle (‘PIPE’), etc. But generally, it is an inclusive definition covering all such funds except those specifically excluded.

Importantly, new venture capital funds will be covered by the AIF Regulations. Existing venture capital funds shall continue to be governed by the present Regulations till they are wound up.
What is an AIF? Regulation 3 gives a primary definition stating that it (i) invests in securities markets, (ii) having domicile anywhere, whether in India or abroad and (iii) (a) collects its funds from institutional or high net worth investors in India or (b) the manager of such fund is in India. Some points are worth highlighting. The AIF should invest in securities markets. This of course is required since this gives jurisdiction to SEBI that is a securities regulation body. However, it is not clarified as to whether the investments would be within India or abroad and the better view seems to be that the investment can be anywhere. Strangely, the AIF may invest in assets other than securities too.  For example, real estate funds are also covered though their investments may be wholly in real estate projects.
The other important aspect is that the fund could be based abroad or even have its investors abroad. However, it appears that some Indian link is necessary. It is not sufficient that the investment is made in India. Either the funds should be raised from India or the manager of such AIF should be in India. While an Indian link has been retained, this is an area to which many funds have a primary objection. It may be noted that the SEBI Regulations relating to foreign venture capital funds will continue to apply on such funds, though these Regulations are much tamer.
Another requirement is that the funds should be collected from institutional or high net worth investors. While the term institutional investors’ is not defined (though this term can be interpreted from other SEBI Regulations), the term HNI does not mean that the investor should have a high net worth — rather it is an entity or individual that invests at least Rs.1 crore in the AIF. The intention seems to be that the funds that accept investments by smaller retail investors should be covered by other Regulations such as the mutual fund regulations, while AIFs should be restricted to large or institutional investors subject to a different set of regulations.
All existing AIFs, whether registered or not, will be required to register themselves when the Regulations are notified. New AIF will not be able to start business without prior registration.
The AIF may be formed as a company, an LLP or as a Trust.
The minimum fund size is to be Rs.20 crore. Interestingly, at least 5% of such amount should be invested by the Sponsors, etc. and this minimum shall be locked in till the fund is fully wound up and all investors are paid off. Minimum investment size by investors has to be 0.1% of the Fund size or Rs.1 crore, whichever is higher.
Unlike corresponding laws abroad, under the proposed Regulations as the introductory note to the proposed Regulations itself suggests, there is no exemption based on minimum size. Thus, the Regulations abroad do not apply to AIF of a minimum size and above. But the proposed Regulations apply to all entities that carry on business of AIF. The minimum fund size works as a minimum entry barrier. No AIF can function below the minimum fund limit of Rs.20 crore. Thus, unlike the prevailing laws abroad, though they significantly form the basis of the proposed SEBI Regulations, there is mandatory registration for all AIFs and detailed regulation and control over them.
The number of investors if the fund is structured as a company or LLP is limited to fifty.
This number is obviously derived from the limit under the Companies Act, 1956, for private companies and for private placement. But this could be restrictive. This also seems to be inconsistent with the minimum investment size of 0.1% of the fund size. By this percentage, the maximum number of investors should be 1000. In fact, the introductory note to the draft Regulations states that the maximum number of investors shall be 1000, but the Regulations provide for a low number of fifty.
Another important policy aspect is that that every AIF shall have only one Scheme. Thus, a fresh Scheme would require a fresh AIF with fresh registration and a totally fresh process.
The minimum term of the AIF shall be five years. Again, this seems to be an arbitrary provision, interfering with what parties may contractually decide.
The AIF is prohibited from investing more than 25% of its fund in one investee company. This is yet another legislature-mandated arbitrary policy interfering with discretion of the fund even if the investors support it.
Another requirement that can create practical problems is that the manager, etc. cannot coinvest in any investee company and that the whole of the equity investment should be through the fund. However, it is often seen that a form of sweat equity is given, quite transparently, to the manager, etc. of a small portion of the amount invested in a company which helps the manager/ key employees to participate in the appreciation of the investment. This reduces the fund costs also since the fund can pay lesser cash remuneration and at the same time motivates the manager, etc. Such co-investment should have been permitted with a requirement that it is transparent.
For each of the categories of AIFs, detailed requirements have been laid down. How much minimum percentage shall be invested in certain types of industries, in what type of investment such investment shall be made, etc. are specified. The aim seems to be that each category should specialise in a particular type of investment. At the same time, investment in some industries are barred. Certain types of instruments are also restricted for investment. Take the example of the proposed framework for Venture Capital Funds. The total fund size shall not be more than Rs.250 crore. Investment is permitted only in companies at an early stage of their business life by way of seed capital or minority stake in new ventures using new technology or innovative business ideas. Investment is not permitted in any company promoted by any of the 500 top listed companies or their promoters. At least 2/3rd of the investments shall be in equity shares of unlisted companies.
For each of the categories of AIFs, detailed requirements have been laid down. How much minimum percentage shall be invested in certain types of industries, in what type of investment such invest-ment shall be made, etc. are specified. The aim seems to be that each category should specialise in a particular type of investment. At the same time, investment in some industries are barred. Certain types of instruments are also restricted for investment.

Take the example of the proposed framework for Venture Capital Funds. The total fund size shall not be more than Rs.250 crore. Investment is permitted only in companies at an early stage of their busi-ness life by way of seed capital or minority stake in new ventures using new technology or innovative business ideas. Investment is not permitted in any company promoted by any of the 500 top listed companies or their promoters. At least 2/3rd of the investments shall be in equity shares of unlisted companies. There are further restrictions regarding investments of the remaining 1/3rd. Investment in Share Warrants is not permitted.

Debt Funds need to invest at least 60% of its corpus in debts of unlisted companies and not more than 25% of which shall be in convertible For each of the categories of AIFs, detailed requirements have been laid down. How much minimum percentage shall be invested in certain types of industries, in what type of investment such investment shall be made, etc. are specified. The aim seems to be that each category should specialise in a particular type of investment. At the same time, investment in some industries are barred. Certain types of instruments are also restricted for investment.

There are similar quite rigid conditions on what should be the investment mix for various types of funds. Further, an AIF cannot change the nature/ category of its fund mid-way. Thus, a set of fairly rigid conditions apply to each AIF even though the funds are raised from large and knowledgeable investors and on a private-placement basis after due disclosure.

Unfortunately, there is no free category in which, even if agreed between the AIF and its investors, the AIF could invest in any type of securities in any mix/proportion it desires.

It is stated in the introductory note to the proposed Regulations that portfolio managers who pool their clients’ assets would also be required to be registered as an AIF. However, this is not part of the Regulations. Apparently, this provision will come through separately by an amendment to the Regulations relating to portfolio managers.

The AIF Regulations will also give relief from certain possibly unintended technical violations of law by some funds. For example, having access to inside information during diligence process by PIPE funds shall not be deemed to be violation of the SEBI Regulations prohibiting insider trading. However, an important condition is that the investment made pursuant to such diligence shall be locked in for five years.

An interesting category is of Social Venture Funds. These are for those types of investments where a useful social purpose, rather than merely profit, is the theme of the fund. The nature of such social purposes is left for the AIF to decide with the investors.

A    glaring omission is of the so-called art funds where investments are made in paintings, antiques, etc. These have come under scrutiny in recent years for various reasons. It is not one of the specific categories of AIF under the Regulations. It is not totally clear whether they would be governed under the SEBI Regulations for Collective Investment Schemes (‘CIS’) or whether SEBI intends to cover them under these AIF Regulations. Earlier, SEBI had taken a view that these are governed under the SEBI CIS Regulations. However, there is a residuary category for registration and perhaps under such category, they may be required to be registered. However, the conditions of investment, etc. of such funds are not specified.

To conclude, the draft Regulations show the tendency to overregulate. Without any need, all funds, without a basic exemption are sought to be covered. The control over investment pattern is perhaps too restrictive and in some aspects even too minute. The Regulations instead could have provided an overseeing role for SEBI to ensure transparency as well as avoidance of systemic risks. That has not happened and one hopes that the final Regulations achieve these objectives instead of micro-regulating this sector.

Mahalaxmi Sheela Premises CHS Ltd. v. ITO ITAT ‘B’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and Vijay Pal Rao (JM) ITA Nos. 784, 785 & 786/Mum./2010 A.Ys.: 2000-01 to 2002-03 Decided on: 30-8-2011 Counsel for assessee/revenue: Hiro Rai/ P. C. Maurya

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Sections 22, 28 and 58 — Income received on lease of a portion of terrace of the building and a wall of the building for the purpose of fixing of hoarding, neon sign, etc., is assessable under the head ‘Income from House Property’.

Facts:
The assessee leased out portion of terrace of the building and a wall of the building to one Mrs. Sudha Vora, for the purpose of fixing of hoarding, neon sign, etc. The Assessing Officer, while assessing the total income for A.Y. 2000-01, assessed the income under the head ‘Income from Other Sources’ on the ground that the amount received by the assessee was not for letting of a building or terrace or any land appurtenant thereto but on account of allowing Mrs. Sudha Vora to display the advertisement of neon sign, illuminated hoarding, of a size 60 ft x 20 ft on the terrace and also illuminated hoarding of size 20 ft x 50 ft on a vertical wall of a building facing Pedder Road. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) held that the terrace has not been let out but merely permission has been granted to use the terrace only to set up the hoarding and to display the hoarding. He also observed that the lessee could use only a portion of the terrace and the purpose of utilisation was not for stay, etc. He upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
Before the Tribunal, the assessee relied on the following case laws:

(1) ITO v. Cuffe Parade Sainara Premises Co-op. Society Ltd., (ITA No. 7225/Mum./2005, order dated 28-4-2008)

(2) Dalamal House Commercial Complex Premises Co-op. Society Ltd. v. ITO, (ITA No. 2286/ Mum./2008, order dated 29-5-2009)

(3) Sharda Chambers Premises Co-op. Society Ltd. v. ITO, (ITA No. 1234/Mum./2008, order dated 1-9-2009)

(4) Matru Ashish CHS Ltd. v ITO, (ITA No. 316/ Mum./2010, order dated 27-8-2010)

(5) S. Sohan Singh v. ITO, (16 ITD 272) (Del.); and

(6) CIT v. Bajaj Bhavan Owners Premises Co-op. Society Ltd., (ITA No. 3183 of 2010/Mum.).

The Tribunal noted that in the case of Bajaj Bhavan Owners Premises Co-op. Society Ltd. v. ITO, Mumbai ‘B’ Bench of the Tribunal in ITA No. 5048/Mum./2004, A.Y. 2001-02 and ITA No. 1433/Mum./2007, for A.Y. 2002-03 and ITA No. 1434/Mum./2007, for A.Y. 2003- 04, order dated 4-11-2009, the facts were that the assessee had allowed a telecom company to erect the tower on their terrace in consideration of an amount of Rs.5,93,700 and claimed it as being chargeable under the head ‘Income from House Property’. The Tribunal following the decision in the case of Sharda Chamber Premises v. ITO, (supra) and ITO v. Cuffe Parade Sainara Premises Co-op. Society Ltd. held such income to be chargeable under the head ‘Income from House Property’.

The Tribunal further noted that the jurisdictional High Court in ITA No. 3183 of 2010 in para 3 of judgment dated 16th August, 2011 confirmed the findings of the Tribunal in the case of Bajaj Bhavan Owners Premises Co-op. Society Ltd.

In view of the aforesaid binding judgment of the jurisdictional High Court, the Tribunal set aside the impugned order of the CIT(A), allowed the ground raised by the assessee and directed the AO to assess the income in question under the head ‘Income from House Property’.

The Tribunal allowed the appeal filed by the assessee.

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A.P. (DIR Series) Circular No. 52, dated 6-4-2011 — A.P. (FL/RL Series) Circular No. 14 — Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT) Standards — Cross Border Inward Remittance under Money Transfer Service Scheme.

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This Circular advices banks to consider the information in respect to implementation of action plan by jurisdictions listed in the Statement issued on 22nd October, 2010 by FATF in respect of Cross Border Inward Remittance under Money Transfer Service Scheme while dealing with them.

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(2011) 38 VST 142 (P&H) M/s. Jaibharat Gum and Chemicals Ltd. v. State of Haryana and Others

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VAT — Quantification of refund as per appeal order — No power to consider merit of case.

Facts:
The petitioner, the manufacturer of ‘guar gum’, exported ‘guar gum’. The petitioner claimed refund of tax paid on purchase of raw material ‘guar’ which was disallowed in assessment but in appeal it was granted. Thereafter, while quantifying refund as per appeal order, the revisional authority disallowed the refund on merit. The Tribunal confirmed the order of revisional authority disallowing refund. The petitioner filed petition before the Punjab and Haryana High Court against the order passed by the Haryana Tax Tribunal.

Held:
The High Court, following its earlier order in case of Raghbar Dass Hukam Chand & Co v. State of Haryana, (2009) 25 VST 574, allowed the petition. The relevant observations of the Court in the said case are as under:

“Therefore, we are of the view that on principle as well as on precedent, it stands established that an officer exercising power of determining the amount of refund cannot exercise the power of review or appeal or revision. Such an officer has to respect the order of assessment and then is required to proceed to determine the amount of refund. The provisions of section 43 read with Rule 36 postulates limits of their power as already noticed and, therefore, the orders passed by the Deputy Excise and Taxation Commissioner are liable to be set aside.”

However, the Court made clear that this will not affect the merits of liability of the petitioner in pending appeal.

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(2011) 22 STR 56 (Tri.-Chennai) — SMP Steel Corporation v. CCE, Madurai.

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Power of revision not exercisable when an appeal is pending before the Commissioner (Appeals).

Facts:
The penalties were set aside by the Commissioner (Appeals) vide his order dated 25-2-2010. Since, a revised order was passed by the adjudicating authority in June 2010, subsequent to the order of the Commissioner (Appeals); the appellants were in appeal against the revised order.

Held:
Power of revision cannot be exercised in respect of any issue which is appealed before the Commissioner (Appeals). In the present case, the order was revised after the appeal before the Commissioner (Appeals) was decided. The revision was bad in law and appeal was allowed in favour of the appellants.

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(2011) 22 STR 20 (Tri.-Chennai) — Anil Kumar Yadav v. CCEx., Pondicherry.

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Section 80 of the Finance Act cannot be invoked to waive penalty under some sections and to impose penalty under some other sections.

Facts:
The original authority had imposed penalty u/s. 78 of the Finance Act, but had not imposed any penalty u/s. 76 and 77 of the Finance Act invoking section 80 of the Finance Act. On appeal against the order of the original authority for waiver of penalty u/s. 78, penalty amount was reduced to 25%. However, the appellant appealed that full penalty shall be waived as he had paid the entire Service tax amount along with interest, proving bona fide interest. The respondents appealed that since the penalty amount of 25% was not paid within one month, full penalty shall be imposable.

Held:
Section 80 is applicable in respect of penalties imposable u/s.s 76, 77 and 78 of the Finance Act. Once it is accepted that there was a reasonable cause for such failure to pay Service tax, penalties u/s.s 76, 77 and 78 all are to be waived. More so since the Department had not appealed against waiver of penalty u/s.s 76 and 77 r.w.s 80 of the Finance Act. Section 80 does not authorise authorities to waive the penalty under some sections and impose penalty under some other sections. Therefore, penalty imposed u/s. 78 could not be sustained.

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(2011) 22 STR 215 (Tri.-Bang.) — KPIT Cummins Infosystems Ltd. v. CCEx., Bangalore.

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Enhancement of penalty by the same authority cannot be permitted when adjudication order is already passed.

Facts:
The Commissioner issued a show-cause notice dated 18-6-2008 and after following the principle of natural justice, passed an order for enhancement of penalty. The appellants argued that the order being issued by the Commissioner, it cannot be reviewed by the Commissioner himself and the same is in violation of Appellate processes under the Finance Act. 

Held:
The Tribunal held that once an adjudication order is passed, show-cause notice issued by the same authority cannot hold good for the same issue and the Revenue should exercise other available alternative options in the statute.

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(2011) 22 STR 513 (P & H) — Commissioner of Central Excise v. Shiva Builders.

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Revision by Commissioner — Whether the Commissioner can pass order-in-revision when issue is pending in appeal.

Facts:
The assessee, who were builders, preferred an appeal against the suo motu revision order passed by the Commissioner u/s. 35G after passing of the order by the Commissioner (Appeals). The same was allowed by the Appellate Tribunal. On appeal to High Court, the Revenue contended that issue in appeal before the Commissioner (Appeals) was different from the issue which was considered during revisionary proceedings and therefore the revision order by the Commissioner was to be considered valid.

Held:
In view of the provisions as laid out u/s. 84(4) of the Finance Act, 1994, the Court held that even if the issue before the Commissioner (Appeals) was different than the one raised by the Commissioner in revision jurisdiction, exercise of revisional jurisdiction u/s. 84(4) of the Finance Act, 1994 on another issue also was not permissible. Revenue’s appeal was dismissed.

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FCRA Act 2010 comes into force

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The Foreign Contribution (Regulation ) Act 2010 has come into force with effect from 1st May 2011, The Foreign Contribution (Regulation ) Rules 2011 have also been notified. For full text of the Act and Rules please visit the website of the Ministry of home affairs http://mha.nic.in/

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A.P. (DIR Series) Circular No. 53, dated 7-4-2011 — Overseas forex trading through electronic/internet trading portals.

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This Circular reiterates that remittances under the Liberalised Remittance Scheme are allowed only in respect of permissible capital or current account transactions or a combination of both. All other transactions, which are otherwise not permissible under FEMA, 1999, including the transactions in the nature of remittance for margins or margin calls to overseas exchanges/overseas counterparty, are not allowed under the Scheme.

This Circular advices banks to exercise due caution and be extra vigilant in respect of remittances under scheme so as to avoid payments towards margin money for online foreign exchange trading transactions as these derivative transactions can only be undertaken by persons resident in India based on the presence of an underlying price risk exposure.

Further, any person resident in India collecting and effecting/remitting such payments directly/indirectly outside India would make himself/herself liable to be proceeded against with for contravention of FEMA, 1999 besides being liable for violation of regulations relating to Know Your Customer (KYC) norms/Anti Money Laundering (AML) standards.

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A.P. (DIR Series) Circular No. 51, dated 6-4-2011 — A.P. (FL/RL Series) Circular No. 13 — Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT) Standards — Money-changing activities.

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This Circular advices banks to consider the information in respect to implementation of action plan by jurisdictions listed in the Statement issued on 22nd October, 2010 by FATF in respect of Money changing activities while dealing with them.

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A.P. (DIR Series) Circular No. 50, dated 6-4-2011 — A.P. (FL/RL Series) Circular No. 12 — Know Your Customer (KYC) norms/ Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 — Cross-Border Inward Remittance under Money Transfer Service Scheme.

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The Financial Action Task Force (FATF) has issued a statement dividing the strategic AML/CFT deficient jurisdictions into two groups as under:

(a) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/FT) risks emanating from the jurisdiction: Iran

(b) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Democratic People’s Republic of Korea (DPRK).

This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.

This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.

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A.P. (DIR Series) Circular No. 49, dated 6-4-2011 — A.P. (FL/RL Series) Circular No. 11 — Know Your Customer (KYC) norms/ Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 — Money-changing activities.

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The Financial Action Task Force (FATF) has issued a statement dividing the strategic AML/CFT deficient jurisdictions into two groups as under:

(a) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/ FT) risks emanating from the jurisdiction: Iran

(b) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Democratic People’s Republic of Korea (DPRK).

This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.

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A.P. (DIR Series) Circular No. 48, dated 5-4-2011 — Acquisition of credit/debit card transactions in India by overseas banks — payment for airline tickets.

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Foreign airline companies are permitted to repatriate the surplus arising from sale of air tickets through their agents in India only after payment of the local expenses and applicable taxes in India. However, in some cases where the payment for the tickets are made by the residents using credit/ debit card, card companies have been providing arrangements to the foreign airlines operating in India to select the country and currency of their choice, in respect of transactions arising from the sale of the air tickets in India in Indian Rupees (INR).

This Circular clarifies that this practice adopted by foreign airlines is not in conformity with the provisions of the Foreign Exchange Management Act, 1999 and foreign airlines are advised to immediately discontinue the same.

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Government of India, Ministry of Commerce & Industry Department of Industrial Policy & Promotion (FC Section) — F. No. 5(1)/2011-FC, dated 31-3-2011 — Circular 1 of 2011 — Consolidated FDI Policy.

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Circular 1 of 2011 is the third edition of the Consolidated FDI Policy. This Circular will take effect from 1st April, 2011. The following major changes have been incorporated in the latest consolidation:

(i) Pricing of convertible instruments:

Instead of specifying the price of convertible instruments upfront, companies will now have the option of prescribing a conversion formula, subject to FEMA/SEBI guidelines on pricing.

(ii) Inclusion of fresh items for issue of shares against non-cash considerations:

The existing policy provides for conversion of only ECB/lump-sum fee/Royalty into equity. This Circular now permits issue of equity, under the Government Route (Approval Route), in the following cases, subject to specific conditions:

(a) Import of capital goods/machinery/equipment (including second-hand machinery)

(b) Pre-operative/pre-incorporation expenses (including payments of rent, etc.)

(iii) Removal of the condition of prior approval in case of existing joint ventures/technical collaborations in the ‘same field’:

With a view to attract fresh investment and technology inflows into the country and to also reduce the levels of Government intervention in the commercial sphere the Government has decided to abolish this condition of obtaining prior approval in case of existing joint ventures/technical collaborations in the same field.

(iv) Guidelines relating to down-stream investments:

The guidelines have been comprehensively simplified and rationalised. Companies will now been classified into only two categories — ‘companies owned or controlled by foreign investors’ and ‘companies owned and controlled by Indian residents’. The earlier categorisation of ‘investing companies’, ‘operating companies’ and ‘investingcum- operating companies’ has been done away with.

(v) Development of seeds:

In the agriculture sector, FDI will now be permitted in the development and production of seeds and planting material, without the stipulation of having to do so under ‘controlled conditions’.

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A.P. (DIR Series) Circular No. 47, dated 31-2-2011 — Export of goods and software — Realisation and repatriation of export proceeds — Liberalisation.

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Generally, export proceeds in respect of export of goods and software (except in cases of exports from units in SEZ or exports to exporters’ own warehouses outside India) are required to be realised and repatriated within six months from the date of export. However, this period of six months was enhanced to twelve months in case of exports up to 31st March, 2011.

This Circular has relaxed the six months’ rule for a further period up to 30th September, 2011, subject to review. Hence, export proceeds in respect of export of goods and software (except in cases of exports from units in SEZ or exports to exporters’ own warehouses outside India) up to 30th September, 2011 can be realised and repatriated within twelve months from the date of export.

However, there is no change in the provisions in regard to period of realisation and repatriation to India of the full export value of goods or software exported by a unit situated in a Special Economic Zone (SEZ) as well as exports made to exporters’ own warehouses outside India.

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SERVICES OF AIR-CONDITIONED RESTAURANTS

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Introduction and background Service tax is introduced on services provided by air-conditioned restaurants having a licence to serve liquor with effect from 1st May, 2011. The restaurants predominately serve food and as such, the dominant nature of the transaction is that of sale and the service is built-in or an integral part thereof and it is already subject to the levy of VAT. Whether a transaction is a sale or a service is determined with reference to facts of each case. At times, there may be a composite transaction consisting of both sale and service. The debate over this issue is ongoing and often a transaction is looked upon as ‘sale’ as well as ‘service’ under different statutes in India. There has been ongoing debate in relation to taxation of software, intellectual property rights or goods of incorporeal nature, telecommunication service, etc. as to whether these should be taxed as goods or services. Mutual exclusivity of service tax and VAT was recognised and a composite contract was distinguished from an indivisible contract in the case of Imagic Creative Pvt. Ltd., 2008 (9) STR 337 by the Supreme Court and accordingly held to the effect that the element of sale would attract VAT and element of service would attract service tax. In the context of provision of broadband connectivity, in the case of Bharti Airtel Ltd. v. State of Karnataka, 2009 TIOL 99 HC Kar-VAT, the High Court upheld the order of the Assessing Authority that activity of providing connectivity to the subscribers amounted to sale of light energy and taxable under the Karnataka VAT Act, whereas the company had paid due service tax. On filing SLP however, the Supreme Court set aside the order and directed the company to file statutory appeal and further passed an order to dispose of the appeal on merits. The controversy thus is not closed. It is however relevant to note that in the context of supply of food and beverages on board trains in the case of Indian Railways C&T Corporation Ltd. v. Govt. of NCT of Delhi 2010 (20) STR 437 (Del.), the Delhi High Court held that the said transaction did not amount to service of outdoor catering as passengers have no choice of articles served or time and place of service of food. The element of service is incidental and bare minimum of heating food and serving it. The state was empowered to levy VAT on the transaction and incidental element of service was not relevant and the petitioner was at liberty to challenge the levy of service tax. Further citing the case of Bharat Sanchar Nigam Ltd., 2006 (2) STR 161 (80), it was observed that in respect of composite transactions other than those covered by Article 366(29A) of the Constitution, if no intention is found to segregate the element involving sale of goods from the element involving providing of service or if the transaction does not involve two distinct contracts, one for sale of goods and the other for providing of service, it is not permissible to disintegrate such composite contract so as to levy VAT/sales tax and service tax. In the context of outdoor catering service, distinguishing it from food served in a restaurant, the Supreme Court in Tamil Nadu Kalyana Mandap Assn. v. UOI, 2006 (3) STR 260 (SC) noted, “In the case of an outdoor caterer, the customer negotiates each element of catering service including the price to be paid to the caterer. Outdoor catering has an element of personalised service provided to a customer. Clearly the service element is more weighty, visible and predominant in the case of outdoor catering, it cannot be considered a case of sale of food and drink as in restaurant”. Amidst the controversy as to whether food served in a restaurant is an indivisible contract where dominant objective is sale of food or a composite contract of sale of food and providing services of ambience of air-conditioning, furniture, etc. and other personalised services, service tax is introduced on the service provided by restaurants.

Services provided by restaurants Statutory provisions in relation to the new levy, as contained in the Finance Act, 1994 (the Act) are reproduced below: Section 65(105)(zzzzv) of the Act “ ‘Taxable service’ means any service provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises.”

Criteria for taxability The definition in relation to a restaurant indicates the following criteria for taxability:

  •  Services provided by a restaurant or any establishment providing such services and known by any name such as a fast-food centre, a lunch home, a dhaba, a coffee-shop, a club, etc. The term ‘restaurant’ is not defined in the Act, therefore only the common parlance meaning of the term is to be applied. Any establishment or an eating house serving food and/or beverages whether in a hotel or otherwise to public or a class of public for consumption on the premises is known as a restaurant and is covered in the scope.

  •  Air-conditioning facility may be available for the whole or partial premises of the restaurant or the establishment and at any time during a financial year.

  •  The other concurrent requirement is having a licence to serve alcoholic beverages. However, there is no requirement as to the actual servicing of alcohol using the said licence. The existence of licence to serve is the requirement and any kind of alcoholic beverage such as beer, rum, gin, vodka, whisky, wine, etc. if licensed to serve is covered in the scope.

  •  Service is to be provided to any person in relation to food or beverages including any alcoholic beverages.

  •  The food and/or beverages are served on the premises of the restaurant.

The Government Instruction vide DOF No. 334/3/2011-TRU, dated 28-2-2011 has clarified as follows:

“1. Services provided by a restaurant 1.1 Restaurants provide a number of services normally in combination with the meal and/ or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalised service by indicating his preference for certain ingredients, e.g., salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP. 1.2 In certain restaurants the owners get into revenue-sharing arrangements with another person who takes the responsibility of preparation of food, with his own materials and ingredients, while the owner takes responsibility for making the space available, its decoration, furniture, cutlery, crockery and music, etc. The total bill, which is composite, is shared between the two parties in terms of the contract. Here the consideration for services provided by the restaurants is more clearly demarcated.

1.3 Another arrangement is whereby the restaurant separates a certain portion of the bill as service charge. This amount is meant to be shared amongst the staff who attend the customers. Though this amount is exclusively for the services, it does not represent the full value of all services rendered by the restaurants.

1.4    The new levy is directed at services provided by high-end restaurants that are air-conditioned and have licence to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided may assume predominance over the food in many situations. It should not be confused with mere sale of food at any eating house, where such services are materially absent or so minimal that it will be difficult to establish that any service in any meaningful way is being provided.

1.5    It is not necessary that the facility of air-conditioning is available round the year. If the facility is available at any time during the financial year, the conditions for the levy shall be met.

1.6    The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick -up or home delivery, as also goods sold at MRP. The Finance Minister has announced in his budget speech 70% abatement on this service, which is, inter alia, meant to separate such portion of the bill as relates to the deemed sale of meals and beverages. The relevant Notification will be issued when the levy is operationalised after the enactment of the Finance Bill.”

Further to the above, the Circular No. 139/8/2011-TRU, dated 10-5-2011, clarified the following issues as summarised below:

  •     When there are more than one restaurant belonging to a common entity in a complex and if they are demarcated by separate names, service tax would be levied on the restaurant which is air-conditioned in any part of the establishment and has a licence to serve alcohol and as such, satisfies both the conditions for its coverage.

  •    Taxable services provided by a restaurant in other parts of the hotel such as swimming pool or an open area attached to the restaurant also attract service tax as they are extension of the restaurant.

  •     When food is served as a part of ‘room service’ of a hotel, no service tax is leviable as service is not provided in the premises of air-conditioned restaurant with a licence to serve liquor. It is not chargeable even under short-term accommodation service if the bill for the food is raised separately and does not form part of the declared tariff.

  •     For the levy of service tax, State Value Added Tax (VAT) charged in the invoice would be excluded from the taxable value.

Food picked up at counter or delivered at home

Many a time, food is picked up at the counter of the restaurant and not consumed while sitting in the restaurant or is delivered at home as most food chain outlets or even speciality restaurants provide home delivery service. In these situations, only food is sold and the facility of restaurant not enjoyed. DOF letter dated 28-2-2011 reproduced above has clarified this point.

Valuation of restaurant service

In the context of catering service provided by outdoor caterers and/or mandap-keepers, the Hon. Supreme Court in the case of Tamil Nadu Kalyana Mandapam Association (supra) observed “it is well settled that the measure of taxation cannot affect the nature of taxation and therefore the fact that service tax is levied as a percentage of gross charges for catering cannot alter or affect the legislative competence of the Parliament in the matter”. In the said backdrop, exemption Notification No. 34/2011-ST of 25-4-2011 has amended Notification 1/2006-ST and granted abatement of 70% on the gross value of taxable service provided by a restaurant. The Ministry vide its Circular dated 25-4-2011 has also clarified that the exemption is available on the gross price charged by the restaurant for the taxable service including any portion shown separately, for instance some restaurants recover service charge separately. This would also form part of the value for determining service tax. However, any amount paid ex-gratia e.g., tip to any staff does not amount to consideration paid for the service of the restaurant and therefore would not be included in the value.

Some issues

(i)    A non-air-conditioned restaurant having a licence to sell alcoholic beverage is partly being made air-conditioned and will be functional from 1st January, 2012. Whether and when would service tax be attracted? Whether the entire sale i.e., even the non-air-conditioned part sale would attract tax liability?

Ans. (i) Service tax would be attracted from 1st January, 2012 and on the entire value of billing including billing for serving meals and/or drinks in the non-a/c part of the restaurant. The use of the words ‘at any time during the financial year’ makes it clear. However, prior to 1st January, 2011, the food was served without the facility of air-conditioning, therefore service tax would not be attracted. It may also be noted that service tax is introduced for the first time on the restaurant service from 1st May, 2011 and therefore threshold exemption would be available to the restaurant, subject to other conditions of threshold exemption of rupees ten lakh under Notification 6/2005-ST, dated 1-4-2005.

(ii)    Mr. A went to Restaurant M, a state-of-the art air-conditioned restaurant which would also service alcoholic beverages, but Mr. A does not have alcohol. Whether Mr. A can insist on not charging service tax in the invoice as he did not consume alcohol?

Ans. (ii) Consumption of alcohol is not envisaged in the definition of restaurant service. So long as the restaurant is air-conditioned and has a licence to servce alcoholic beverages, the restaurant is liable to pay service tax.

(iii)    Whether air-conditioned liquor shops having a licence to sell alcohol would be covered by the above provisions?

Ans. (iii) Liquor shops are not restaurants. They sell alcohol but do not serve the same in their premises. It is the service of restaurant facility i.e., having tables, chairs and other furniture along with a bar and/or waiters, etc. along with food and/or beverages including non-alcoholic beverages or both, is covered by the service tax provisions and not the shops selling alcohol.

(iv)    Are coffee-shop chain of restaurants with state-of-the art ambience in air-conditioned halls liable for service tax?

Ans. (iv) If the coffee-shop does not have licence to serve alcoholic beverages, it is not covered by the service tax provisions.

(v)    Whether a restaurant having a mere beer bar where only that part is air-conditioned would be liable for service tax?

Ans. (v) The part of the restaurant is air-conditioned and beer is an alcoholic beverage. Therefore, the value of the food and all beverages served in any part of the restaurant is liable for service tax.

(vi)    An air-conditioned restaurant in Mahabaleshwar uses air-conditioning facility only during the months of March – May. Rest of the year being very cool, air-conditioning is not operated. If the restaurant’s value of taxable sale during May, 2011 was well below the threshold limit of 10 lakh, would it be out of the scope of the levy till March 2012 or so.

Ans. (vi) No. The restaurant would be liable for service tax when it crosses the limit of Rs.10 lakh, even if it does not operate air-conditioning as it has used it for some part of the year. The condition is to have a facility of air-conditioning at anytime during the financial year is satisfied.

Press Release — Central Board of Direct Taxes — No. 402/92/2006-MC (15 of 2011) dated 24-6-2011.

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The Governement of India has signed a protocol amending the DTAA with the Government of Singapore for effective exchange of information in the tax matters.
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Salaried employees exempted from filing tax returns — Notification No. 36/2011, dated 23-6-2011.

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Salaried employees having total taxable income of less than Rs.5 lac have been exempted from filing the tax returns for A.Y. 2011-12, subject to the fulfilment of the following conditions:

  •  The only source of income is salary and income from savings bank interest does not exceed Rs. 10,000.

  •  The PAN of the employee is available with the employer and is mentioned in the Form 16 issued by the employer.

  •  The bank interest income is disclosed to the employer, and is included in employee’s total income, and tax is duly deducted thereon and paid to the Government.

  •  Total tax liability of such person is discharged by way of TDS deducted by the employer which has been duly paid to the Government.

  •  The employee does not derive salary from more than one employer.

  •  The employee has no claim of refund.

  •  No specific notice is issued under the Act to the employee for filing a return of income.
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Requirement to file digitally signed tax returns in certain cases — Notification No. 37/2011, dated 1-7-2011.

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The CBDT has notified that partnership firms filing return in ITR-5 or individuals and HUFs filing returns in ITR-4 and subjected tax audit u/s.44AB would require to digitally sign and submit their income tax returns for A.Y. 2011-12 and onwards.
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IS IT FAIR TO EXPECT AN INDIVIDUAL TO DO TDS (EVEN WITH PRESENT EXEMPTIONS)?

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Introduction It is an accepted fact that the provisions relating to tax deduction at source (TDS) under the Income-tax Act, 1961 (the Act) are very cumbersome, ambiguous and irrational. No amount of input can give you an assurance that the compliances are flawless. There would hardly be any organisation that can claim perfection in compliance with these provisions. As regards the Government organisations — including statutory corporations, nationalised banks, etc., the less said the better.

The law-makers in their wisdom have by and large exempted individuals and HUFs from complying with these provisions. However, there is still much to desire in this respect.

The unfairness In sections 194A (Interest), 194C (Contracts), 194H (Commission), 194I (Rent) and 194J (Professional fees), there are clear provisions that ordinarily, an individual and HUF are not required to deduct tax at source. However, either a sub-section or a proviso in these sections makes an exception that if the individual or the HUF is required to get his/its accounts audited u/s.44AB for the preceding financial year, on the basis of turnover-criterion, then the said individual/HUF would be required to comply with the provisions of TDS.

Again section 194C and 194J provide that if the individual/ HUF is making a payment for personal purpose, then TDS provisions are not applicable. Thus, when a businessman is making a payment to a doctor/ lawyer, etc. for personal matters (non-business), no tax needs to be deducted.

The unfairness lies in not providing similar exemption in section 194A, 194H, 194I. Therefore, if a businessman with tax audit makes personal borrowings for buying a house, he may be required to deduct tax on interest. So also, on brokerage for sale/purchase of house. The same difficulty may arise for rent.

Difficulties in respect of section 195 are too well known. A typical case of an individual buying a house from a non-resident — entails so much of a nightmarish exercise! Either to comply with all formalities for just one single transaction or to obtain exemption u/s.195(2)/ 195(3), involves tremendous hardship.

It can be well understood that the main intention of the statute, to exclude individual and HUF from complying with the requirements for TDS u/s.194C and 194J, was to cover only business transactions and to exclude personal transactions from the ambit of TDS. However, the same logic is not made applied in case of sections 194A, 194H and 194I.

Nevertheless, there is some solace to the individuals and HUF viz. non-applicability of the provisions of section 40(a)(ia). The provisions of section 40(a)(ia) are applicable to any business expense, thus saving the personal expense. But there is an exception to this solace — section 25 which disallows the deduction of interest on housing loan made to a non-resident if TDS requirements are not fulfilled.

The test for deciding, whether individuals and HUFs have to comply with the provisions of TDS, is based on the turnover of the business or professional receipts (same limit as for tax audit u/s.44AB) (i.e., 60 lakh for business and 15 lakh for profession)? However, is it fair that this turnover must be a conclusive criterion for deciding TDS requirement?

Further even compliance procedure of TDS viz. taking TAN, deducting and making TDS payment, filing quarterly returns, issuing TDS certificates, can prove to be extremely cumbersome for individuals and HUFs.

Solution:
One solution that can be thought of may be to lay down a separate criterion which is not based on limits laid down in section 44AB for deciding the TDS compliance by individual or HUF. For instance, the monetary limit for applicability of TDS can be gross payments of Rs.1 crore for individuals and HUFs.

Also, similar exclusion (as in section 194J and 194C) should be provided in case of section 194A, 194H, 194I. Hence, in case of personal expenses none of the provisions dealing with TDS should not apply to individuals and HUFs.

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Raman Gupta Prop. M/s. Raman & Co. v. ACIT ITAT Amritsar Bench, Amritsar Before C. L. Sethi (JM) and Mehar Singh (AM) ITA No. 05/ASR/2010 A.Y.: 2003-04. Decided on: 31-1-2011 Counsel for assessee/revenue: P. N. Arora/ Tarsem Lal

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Section 271D r.w.s 269SS — Penalty for acceptance of loan/deposit otherwise than by account payee cheque/draft — Assessee’s bona fide belief and conduct established a sufficient and reasonable cause — Penalty deleted.

Facts: The assessee had taken cash deposit from three persons amounting to Rs.2.5 lakh from each, aggregating to Rs.7.5 lakh. In response to showcause notice, the assessee explained that on account of urgency, as otherwise the cheque issued by him to the third party would have bounced, he took the cash deposit. Further it was pleaded that he was under the genuine impression that the provisions of section 269SS applied only to the business transactions and not to the personal transactions. However, according to the ACIT, the cheque issued to the third party by the assessee was not for payments to a creditor or discharge of any liability, but the same was issued for payment of a loan to the third party. The ACIT further did not agree with the assessee that the personal transactions were not covered and pointed out that the provisions of section 269SS do not make such distinction. Thus, he imposed a penalty u/s.271D of Rs.7.5 lakh.

According to the CIT(A) none of the exceptions provided u/s.269SS apply to the case of the assessee and the assessee had no compelling reasons to violate the provisions of section 269SS. Accordingly, he confirmed the order imposing penalty.

Held:
The Tribunal noted that the assessee was under bona fide belief that the provisions of section 269SS do not apply to the personal transactions and this belief had not been found to be false or untrue. Secondly, it was noted that the loan so taken was immediately deposited in the bank account and the transactions were duly recorded by the assessee in his books of accounts. According to the Tribunal, the assessee had not consciously disregarded the provisions of section 269SS of the Act. Therefore, relying on the decisions of the Punjab & Haryana High Court in the case of CIT v. Speedways Rubber Pvt. Ltd., (326 ITR 31), it held that the assessee had been able to establish a sufficient and reasonable cause for not accepting the loan by account payee cheque/ draft, and accordingly the penalty imposed was deleted.

Note:
In Hemendra Chandulal Shah v. ACIT, (ITA No. 1129/Ahd./2010), where on a direction of the bank a father had taken cash loan from his son to clear the debit balance in his bank account, according to the Ahmedabad Tribunal, there was reasonable cause and penalty u/s.271D could be imposed. The full text of the decision is available in the office of the Society.

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Vineetkumar Raghavjibhai Bhalodia v. ITO ITAT Rajkot Bench, Rajkot Before A. L. Gehlot (AM) and N.R.S. Ganesan (JM) ITA No. 583/RJT/2007 A.Y.: 2005-06. Decided on: 17-5-2011 Counsel for assessee/revenue: Manish Shah/ N. R. Soni

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Explanation to proviso to clause (v)/(vi) of subsection (2) of section 56 — Gifts from relatives exempt from tax — Whether the gift received from HUF is exempt from tax — Held, Yes — Also held that the amount is exempt u/s.10(2) of the Act.

Issue: The issues before the Tribunal were as under:

1. Whether gift received from HUF by a member of HUF falls under the definition of ‘relative’ as provided in the Explanation to clause (vi) of sub-section (2) of section 56 of the Act?

2. Whether amount received by the assessee from his HUF is covered by section 10(2) of the Act?

The Assessing Officer was of the view that HUF is not covered in the definition of ‘relative’. Therefore, the gift received from the HUF was taxable. On appeal, the CIT(A) confirmed the view of the AO and further observed that if the Legislature wanted, it would have specifically mentioned so in the definition of ‘relatives’. According to him, the exemption u/s.10(2) was available only if the amount was received on partial/total partition and secondly to the extent of share in the assessed income of the current year. Before the Tribunal, the Revenue supported the orders of the lower authorities.

Held:
The Tribunal noted that a Hindu Undivided Family is a person within the meaning of section 2(31) of the Income-tax Act and is a distinctively assessable unit under the Act. Further, it observed that the Act does not define the expression ‘Hindu Undivided Family’, hence, it must be construed in the sense in which it is understood under the Hindu Law. According to it, HUF constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. All these persons fall in the definition of ‘relative’ as provided in Explanation to clause (vi) of section 56(2) of the Act. It did not agree with the views of the CIT(A) that HUF is as good as ‘a body of individuals’ and cannot be termed as ‘relative’. According to it, an HUF is ‘a group of relatives’. Further, from a plain reading of section 56(2)(vi) along with the Explanation to that section and on understanding the intention of the Legislature from the section, the Tribunal found that a gift received from ‘relative’, irrespective of whether it is from an individual relative or from a group of relatives is exempt from tax as a group of relatives also falls within the Explanation to section 56(2) (vi) of the Act. It pointed out that the Act does not provide that the word ‘relative’ represents a single person. Accordingly, the Tribunal held that the ‘relative’ explained in Explanation to section 56(2)(vi) of the Act includes ‘relatives’ and as the assessee received gift from his ‘HUF’, which is ‘a group of relatives’, the gift received by the assessee from the HUF should be interpreted to mean that the gift was received from the ‘relatives’ and therefore, the same was not taxable u/s. 56(2) (vi) of the Act.

As regards the alternative claim for exemption u/s.10(2) — the Tribunal did not agree with the CIT(A) and held that the assessee was entitled to exemption u/s.10(2). According to it, the assessee was a member of HUF and had received the amount out of the income of the family. There was no material on record to hold that the gift amount was part of any assets of HUF. It was out of income of family to a member of HUF, therefore, the same is exempt u/s.10(2) of the Act.

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(2011) 128 ITD 345 (Mum.) Smt. Bharati Jayesh Sangani v. ITO A.Y.: 2005-06. Dated: 4-11-2010

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Section 50C — AO is bound to apply the valuation given by DVO in the valuation report.

Facts:
The assessee purchased a flat for Rs.30,00,000 on 22-10-2003. This property was then sold on 29- 9-2004 for a total consideration of Rs.35,00,000. The stamp duty valuation of the said flat was Rs.1,18,07,180. The assessee was asked to show cause as to why the provisions of section 50C should not be applied. The assessee explained that the value of the property sold within a period of less than one year could not be expected to be as high as 1.18 crore. Further, the building was an old one and in dilapidated condition. The members of the society had resolved to construct a new building by demolishing the old one. Accordingly, the construction contract was entered with builders. As per the contract, the members were to pay certain amounts towards the construction cost and purchase of TDR. Since the assessee did not have money, she sold the flat to a third party with an agreement that the purchaser shall pay the construction cost and purchase cost of TDR to the builder. Further, the assessee explained that when the flat was sold, the building was already demolished and only the plinth was laid for the purpose of construction of new building.

Without prejudice to this main argument, the assessee also requested the Assessing Officer to refer the matter to the Valuation Officer. The DVO valued the said flat at Rs.46.48 lakh. The AO did not concur with the view of DVO as according to him the valuation done by the DVO was very low and further no deduction was required towards TDR. Further, according to the AO, section 50C(2) and section 16A of the Wealth-tax Act, 1957 do not bind the AO to follow the valuation done by the DVO.

Held:
Sub-section (2) of section 50C states that “……..where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A of wealth tax shall apply, with necessary modifications.

Sub-section (6) of section 16A of the Wealth-tax Act states that on receipt of order from the Valuation Officer, the Assessing Officer shall “proceed to complete the assessment in conformity with the estimate of the Valuation Officer”. Hence the AO has no option but to go by the estimate of the Valuation Officer.

The DVOs are experts in the matter of valuation by virtue of special qualification held by them in this field. The AO cannot ignore the report of the DVO.

The words used in sub-section (2) of section 50C that where reference is made to the DVO the provisions of sub-section (6) of section 16A of the Wealth-tax Act shall apply with necessary modifications. The ambit of expression ‘with necessary modifications’ implies striking out the inapplicable fractions of the provision which align strictly with the specifics of the Wealth-tax Act. This will not enable the AO to completely disregard the valuation report by the DVO.

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(2011) 56 DTR (Ahd.) (Trib.) 89 Valibhai Khanbhai Mankad v. DCIT A.Y.: 2006-07. Dated: 29-4-2011

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Section 40(a)(ia) — Payment of hire charges to sub-contractors after obtaining Form 15-I cannot be disallowed u/s.40(a)(ia) on the ground that Form 15J was not filed in time as per Rule 29D.

Facts:
The assessee had made payment of Rs.7,93,34,193 to sub-contractors to whom it awarded subcontract for hiring and from whom he obtained Form 15-I and hence TDS was not deducted. The AO, however, noted that even though the Forms 15-I were obtained from the transporters, the same were not furnished to the CIT in Form 15J as per Rule 29D of the IT Rules, 1962. He therefore, quoting from section 194C(3) as applicable to the relevant assessment year, held that once the assessee failed to furnish Form 15J enclosing therewith Form 15-I to the CIT before 30th June, 2006, he failed to fulfil the conditions laid down u/s. 194C(3)(ii). He accordingly added back the sum paid without TDS u/s.40(a)(ia).

The learned CIT(A) confirmed the addition by holding that responsibility after non-deduction does not stop just at collecting Forms 15-I from the sub-contractors, but also extends to requiring the contractor to furnish Form 15J to the CIT on or before 30th June of the following financial year. It was contended before the learned CIT(A) that Form 15J was submitted to the CIT on 26th February 2009 i.e., after the completion of assessment. The learned CIT(A) rejected this contention holding that such delay defeats the very purpose of the section.

Held:
Once the assessee has obtained Forms 15-I from the sub-contractors, and contents thereof are not disputed or whose genuineness is not doubted, then the assessee is not liable to deduct tax from the payments made to sub-contractors. Once the assessee is not liable to deduct tax u/s.194C, then addition u/s.40(a)(ia) cannot be made.

Non-furnishing of Form 15J to the CIT is an act posterior in time to payments made to subcontractors. This cannot by itself, undo the eligibility of exemption created by second proviso. Third proviso to section 194C(3)(i) which requires the assessee to submit Form 15J is only a procedural formality and cannot undo what has been done by second proviso.

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(2011) 22 STR 177 (Tri.-Mumbai) — Affinity Express India Pvt. Ltd. v. CCEx., Pune-I.

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Refund of Cenvat credit — Export of business auxiliary service — Service was taxable after May 2006 — Assessee entitled to take credit at the time of availment — Even prior to May 2006. Refund of Cenvat credit — Export of business auxiliary service — Service tax paid on local travel and medical insurance services, outdoor catering and meal coupons — Credit admissible.

Facts:
The appellants had filed a refund claim of Cenvat credit availed on input services used for export of business auxiliary service, for the period starting from April 2006. However, the claim for local travel and medical insurance was rejected by the lower authorities and the claim for outdoor canteen/meal coupons was allowed. Thereby, the appellants and the Revenue both were in appeal for disallowance and allowance of refund claim by the lower authorities.

The Revenue submitted that the services exported by the appellants had come under Service tax net with effect from 01-05-2006, therefore, any input service availed before 1-5-2006 is not eligible for credit.

However, as per the Cenvat Credit Rules, the appellants were entitled to take credit at the time of availment and not at the time of provision of service. This means that the appellants were entitled to avail the input service credit of services availed in the month of April 2006.

In support of availment of credit on local travel and medical insurance, reliance was placed on the Bombay High Court’s decision in case of Ultratech Cement, 2010 (20) STR 577 (Bom.) wherein it was held that the input service availed by the assessee in the course of business is entitled for Cenvat credit.

Apart from this, with regard to outdoor catering and meal service, the appellants stated that credit on outdoor catering service is available if the cost of food is borne by the employer. However, the appellants were denied credit on the amount recovered from employees against subsidised food.

Held:
The appeal was allowed to the appellants in respect of availment of credit for the month of April 2006 and for availment of credit of Service tax paid on local travel and medical insurance. On the other hand, the Revenue’s appeal was partly allowed by denying credit of Service tax paid on outdoor catering and meal service, for the amount which was recovered by the assessee from the employees.

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(2011) 55 DTR (Mumbai) (Trib.) 241 Porwal Creative Vision (P) Ltd. v. Addl. CIT A.Ys.: 2006-07 & 2007-08. Dated: 18-3-2011

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Section 272A(2)(k) — Penalty for failure to file TDS return is leviable only for the delay from the date of payment of taxes by the assessee.

Facts:
There was delay in submitting quarterly statement in Form No. 26Q and for such delay the AO imposed penalty u/s.272A(2)(c) and (k) @ Rs.100 per day of delay. Before the CIT(A), the assessee contended that it was incurring losses and there was financial crisis and therefore due to non-availability of funds there were delays in making the payments and filing the returns. However, the CIT(A) confirmed the penalty levied.

Held:
The clause (c) of section 272A(2) is not applicable as the same related to return/statement u/s.133, 206 and 206C. The case of the assessee is that it had deducted the TDS at the time of crediting amounts in the books of account and the payment could not be made due to financial difficulties and since the payments had not been made, the TDS returns could not be filed, as the same required data relating to payment of TDS.

As regards the default in not paying the tax to the Central Government in time or for non-deducting the tax at source, there are other provisions for ensuring compliance. In case the assessee fails to deduct tax at source or after deducting fails to pay the same to the Central Government, the assessee is deemed to be in default u/s.201(1) and is liable for penalty. The assessee is also liable to pay interest for the period of default till the payment of tax u/s.201(1A). Therefore, the period for levying the penalty has to be counted from the date of payment of tax, because the delay in filing the return till the date of payment of tax is already explained on the ground that the assessee could not pay the taxes for which separate penal provisions exist.

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Part A: ORDERs of SIC & CIC

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RTI Act and RTI Rules: RTI Rules of Bombay High Court

In the September issue of BCAJ, I covered a decision of three-member Bench of Maharashtra State Information Commission. In this issue, I cover one more.

Under the RTI Act, there are two types of authorities to which the Act is applicable: Public Authority and Competent Authority. The latter is defined u/s.2(e) as under:

“Competent authority means —

(i) the Speaker in the case of the House of the People or the Legislative Assembly of a State or a Union Territory having such Assembly and the Chairman in the case of the Council of States or Legislative Council of State;
(ii) the Chief Justice of India in the case of the Supreme Court;
(iii) the Chief Justice of the High Court in the case of the High Court;
(iv) the President or the Governor, as the case may be, in the case of other authorities established or constituted by or under the Constitution;
(v) the Administrator appointed under Article 239 of the Constitution;
This case deals pertains to the Bombay High Court, Mumbai. It is the decision of three-member Bench comprising the then State Chief IC (Shri Vilas Patil), SIC, Amravati (Shri M. L. Shah) and SIC, Aurangabad (Shri D. B. Deshpande).

Shri Anandnatraj submitted an RTI application to PIO, in the office of the Registrar, Bombay High Court (BHC) seeking the information in respect of writ petition Nos. 2650 of 95 and 2689 of 95. He asked for photocopies of all papers filed and orders issued in respect of the petition.

The PIO expressed his inability to furnish the information, stating that “the application was not complete in all respects as received as per the Bombay High Court Right to Information Rules, 2006. As per the said Rules, a Court Fee Stamp of Rs.12 is required on the application, however, Rs.10 Court Fee Stamp is affixed. Hence there is deficit of Court Fees of Rs.2. As per the said Rules, the applicant has to submit the application in prescribed format. Please see High Court website ‘bombayhighcourt.nic.in’ for the said Rules. Moreover, in view of the provision to Rule 9 and Rule 19 of the Bombay High Court Right to Information Rules, 2006 the information in respect of judicial proceeding or records cannot be supplied under Right to Information, but you may obtain the said Information as per the procedure prescribed in the Bombay High Court Rules and Orders”.

The applicant preferred an appeal to the First Appellate Authority (FAA). The grounds of appeal were: “the BHC RTI Rules, 2006 are not consistent and in agreement with the provisions of the Right to Information Act, 2005. As provided in Rule 9 of the said Rules, that is, Rule 9 in para 1 obtaining information in respect of third party is permissible by submission of application in Form ‘A’ as per Rule 3, the same rule in para 2 forbids the information of 3rd party in respect of judicial proceedings and records. The said contradiction in clause 9 needs proper interpretation/classification by the Public Information Officer in his reply.”

FAA responded “it is clear that the reply sent by the Public Information Officer cannot be faulted with. The information sought is relating to record of judicial proceedings and copies of the same can be obtained by applying at the facilitation centre of the High Court.” The appeal was disposed of accordingly.

The applicant then furnished the second appeal to Maharashtra Information Commission. First the appeal was heard by a single member by one SIC, Shri Ramanand Tiwari. However he passed on order that “since the issues involved are very important, I suggest that the case should be heard by the full Bench of the Commission or least a Bench consisting of three Commissioners and directed to the Secretary of the Commission to obtain the orders of the CIC and do the needful.”

Accordingly a three-member Bench heard the matter on 14-3-2011. The appellant submitted his written statement and argued also as briefly noted hereinafter.

The respondent PIO also submitted written statement and argued that the PIO and FAA have acted according to BHC RTI Rules which are made by the Chief Justice of the HC, being the ‘Competent Authority’ u/s.28 of the RTI Act.

The main contention before the Commission was that “rules framed by the Competent Authority u/s.28 of the Act, can only be for giving effect to and for carrying out the provisions of the Right to Information Act and cannot be contrary to the provisions of the Right to Information Act. They would be ultra vires and illegal and consequently unenforceable in view of the provisions of section 22 of the Act”.

“The Chief Justice of the Bombay High Court cannot negate the provisions of the Right to Information Act, since neither section 8, nor section 24 gives exemption in respect of providing information related judicial proceeding and records.”

The Commission made the following decision:

“Hence, it is necessary to examine the rules of Interpretation of the statutes.

Once the Legislature has passed the Act, it is subject to judicial review in respect of the constitutionality and the implementation of the provisions of the said Act.

No doubt, the rules made in exercise of the powers delegated under the principal Act, for carrying out the purpose laid down in the principal Act, cannot travel beyond the scope of the Act, nor can they, themselves, enlarge the scope of statutory provisions. They cannot also militate against the provision under which they were made (AIR 1956 SC, AIR 1957 SC 532).

However, the Rules framed under the Act have the force of the Law. (AIR 1954 All 639).

Therefore, the function of the Court is to apply the law as it stands. It is not for the Court to re-write the law, even though the Court notices anomalies and omission and considers the provision as they stand unreasonable (AIR 1982 Ker. 126).

In view of such principles of interpretation of statutes, the Commission has to give the decision as per the rules framed by the Chief Justice High Court of Judicature of Bombay as a Competent Authority u/s.28 of the Act.

Therefore, the decision of the First Appellate Authority is upheld and there is no necessity to interfere with the order of the First Appellate Authority.

However, in view of the points raised by the appellant, the Commission, in view of provisions of section 25(5) of the RTI Act, recommends to the Public Authority, that is the High Court to examine judicially the rules framed by the Chief Justice of the Bombay High Court, whether they are in conformity with the provisions or spirit of the RTI Act, and if found not to be in conformity with the provisions or spirit of the Act, then take such steps to promote such conformity”.

[Shri S. Aanandnatraj, Mumbai v. FAA and PIO of High Court of Mumbai, decision dated 29-4-2011 under Appeal No. 5842/02]

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Diageo India Pvt. Ltd. v. DCIT (2011) 13 taxmann.com 62 (Mum.) Section 92A(1) & 92A(2)(g) of Income-tax Act A.Y.: 2006-07. Dated: 5-9-2011

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Unrelated party wholly dependent on use of trademarks of taxpayer is an AE u/s.92A(2)(g) by virtue of effective control on decision making and hence, its transactions with other AEs of the taxpayer are deemed to be transactions between AEs.

Facts
The taxpayer was an Indian company engaged in the business of marketing alcoholic beverages in India. It procured the beverages either by getting them manufactured from Contract Bottling Units (‘CBUs’) or by importing them from its associated enterprises (‘AEs’). The CBUs were unrelated parties. The CBUs imported concentrates and other inputs from the AEs of the taxpayer. As per the agreement between the taxpayer and a CBU, the CBU was required to meet all costs, realise sale proceeds and if the sale proceeds exceeded the costs and the agreed margin of profit, the CBU was to credit the surplus to taxpayer.

The following is the diagrammatic presentation of the abovementioned arrangement.

The taxpayer reported all the transactions with AEs including purchase of concentrates and inputs by CBUs from AEs.

The AO made reference to the TPO for determination of ALP in respect of all transactions reported by the taxpayer. The TPO noted that the CBU was dependent on the trademarks owned by Diageo Group and accordingly, u/s.92A(1)(a) as also the deeming fiction in section 92A(2)(g) of Income-tax Act, the CBU was effectively controlled by Diageo Group. Hence, the CBU, the taxpayer and other Diageo Group entities are AEs. Therefore, TPO made adjustment in respect raw material purchases by CBU from the AEs of the taxpayer.

The taxpayer contended that: the CBU was an unrelated party; merely because a transaction with an independent enterprise is reported in Form No. 3CEB out of abundant caution, such transaction does not become a transaction with an AE; the CBU had entered into arrangement with the taxpayer and hence, the relationship of AE could at best be between the taxpayer and the CBU and cannot extend beyond that; also, there was nothing on record to suggest that the AEs from whom the CBU had imported raw materials participated in control or management or capital of the CBU.

Held
The Tribunal observed and held as follows. The true test of AEs is control by one enterprise over the other, or control of two or more AEs by common persons. Essentially, such control is effective control in decision making. The CBU is wholly dependent on the use of trademarks in which the taxpayer has exclusive rights. Hence, this relationship meets the test of de facto control of decision making as set out in section 92A(2)(g). The taxpayer, in turn, is controlled by way of capital participation by Diageo PLC, which also controls other entities in Diageo Group including those from whom the CBU imported raw materials. Therefore, the CBU, the taxpayer and Diageo Group entities supplying the raw material are all AEs. Since, the costs of all raw materials are effectively borne by the taxpayer, the transaction is actually between the taxpayer and the Diageo Group entities. Since the taxpayer as well as the CBU is under the control of Diageo PLC, the transactions are between AEs.

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ADIT v. Star Cruise India Travel Services (P) Ltd. (2011) 12 taxmann.com 242 (Mum.) Sections 5 & 9 of Income-tax Act A.Y.: 2006-07. Dated: 22-7-2011

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Even if a non-resident had a business connection in India, no income can be deemed to have accrued or arisen in India if no business operations were carried on in India.

Facts
Star Group operates, manages and charters cruises. Star Cruise Management Limited is a company registered in Isle of Man (‘Star Isle of Man’). Star Isle of Man was providing sales, marketing and promotional services for Star Group cruises. Star Isle of man appointed Star Cruise India Travel Services Pvt. Ltd. (‘taxpayer’) as its canvasser in India for canvassing business. Taxpayer was responsible to remit all monies received by it to Star Isle of Man without any deduction and to advise Star Isle of Man on all relevant laws and regulations. Star Isle of Man was to pay 3% of the net cruise charges as retainer fees to the taxpayer.

While making assessment, the AO held that Star Isle of Man had a ‘business connection’ in India through the taxpayer. Consequently, in terms of section 9(1) (i) read with section 5(2)(i), Star Isle of Man was taxable in India. The AO relied on CIT v. R. D. Aggarwal & Co., (1965) 56 ITR 20 (SC) and Anglo-French Textile Company Ltd. v. CIT, (1953) 23 ITR 101 (SC). Based on certain assumptions, the AO determined 5% of the net cruise charges as income of Star Isle of Man.

In appeal, the CIT(A) held that the services rendered by the taxpayer were general in nature and they could not be interpreted to constitute ‘business connection’ u/s.9(1)(i) and concluded that Star Isle of Man had no tax liability in India.

Held
The Tribunal observed and held as follows. As per the source rule of taxation the income is taxed in the jurisdiction in which it is earned. However, the Income-tax Act also covers income which is deemed to accrue or arise in India if a non-resident has a ‘business connection’ in India. However, even under such situation, tax in India can never exceed beyond income attributable to operations carried out in India. Thus, where a non-resident has a business connection through an agent, and the agent is fully compensated for his services, no further income of non-resident can be taxed u/s.9(1)(i) r.w.s 5(2)(b).

Supreme Court decision in R. D. Aggarwal & Co. supports that for business connection trigger, a greater nexus of operation in taxable territories with core operations of business is essential. Further, the Supreme Court held that the scope of ‘business connection’ does not cover mere canvassing for business by an agent.

Since Star Isle of Man had no tax liability in India, the taxpayer had no obligation to deduct tax u/s.195.

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Master Circular for Prosecution of Officer in Default. [Circular_1-2011_28july2011.pdf]

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Master Circular regarding the Prosecution of Directors. i.e., in identifying the ‘Officer in default’. In supersession of all earlier Circulars, it is clarified that the Registrar of Companies should take extra care to identify the Officer in default based on the Form 32, Din3 and Annual Return. Director cannot be held liable for any act of omission or commission by the company or by any officer of the company which constitute a breach or violation of any provision of the Companies Act, 1956, and which occurred without his knowledge attributable through Board process and without his consent or connivance or where he has acted diligently through the Board process. Full Circular can be accessed on http://www.mca.gov. in/Ministry/pdf/

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Exemption of R&D Cess to Consulting Engineer & Holder of the Intellectual Property right — Notification Nos. 46/2011-ST & 47/2011-ST both, dated 19-9-2011.

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As per existing Notification No. 18/2002, dated 16-12-2002 service tax on ‘Consulting Engineer Service’ and as per existing Notification No. 17/2004, dated 10-9-2004 service tax on ‘Intellectual Property Service’ are exempted to the extent of R&D Cess payable under Research & Development Cess Act, 1986.

These existing Notifications are now amended by the Notification No. 46/2011 & 47/2011, respectively to reduce service tax to the extent of R & D Cess subject to the fulfilment of the following cumulative conditions :

(a) R&D Cess is paid within 6 months of booking of invoice;
(b) R&D Cess is paid within 6 months of date of credit in books in case of associated companies;
(c) In any case R&D Cess should be paid before payment for the service.

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CONTROVERSY: WHETHER RENTING OF IMMOVABLE PROPERTY A SERVICE?

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Issue for consideration:

Section 65(105)(zzzz) read with section 65(90a) of the Finance Act, 1994 (the Act or the service tax law) contains provisions relating to taxable service of renting of immovable property for use in the course of or for furtherance of, business or commerce. The service was introduced with effect from 1-6-2007 in the service tax law. The activity of renting an immovable property per se was not perceived as a transaction of service. When airport services were introduced, the Government vide its Circular No. 80/10/2004-ST, dated 17-9-2004 (para 5) also clarified to such effect:

“However, in case a part of airport/civil enclave premises is rented/leased out, the rental/lease charges would not be subjected to service tax, as the activity of letting out premises is not rendering a service.”

The introduction of the category gave rise to resistance to pay service tax chiefly by various retail outlets selling goods and occupying licensed/ leased premises and some other licensees/lessees, engaged in business activity as they do not have the potential to claim CENVAT credit of service tax on licence fees payable for the use of commercial premises. Consequently, writ petitions were filed in various High Courts across the country challenging the levy and constitutional validity thereof. The Delhi High Court first took a position in the case of Home Solution Retail India Ltd. v. Union of India, 2009 (14) STR 433 (Del.) and held a view that in terms of section 65(105)(zzzz) of the Finance Act, 1994 (the Act), renting out of immovable property for use in the course or furtherance of business or commerce would not constitute a taxable service and as a result, the Notification dated 22-5-2007 and Circular dated 4-1-2008 were held ultra vires the Act.

In service tax law, the term ‘service’ is not defined but every taxable service introduced in the tax net is separately defined. Therefore, the issue has been that while an immovable property is rented or licensed or leased, whether there is any value addition or whether there exists any element of service?

Background of Home Solutions’ writ petition:
In this writ, the petitioner challenged the legality, validity and vires of Notification No. 24/2007, dated 22-5-2007 and Circular No. 98/1/2008-ST, dated 4-1- 2008 issued by the Government.

It was further alleged that because of the incorrect interpretation of law by the said Notification and the Circular, service tax was sought to be levied on renting of immovable property as opposed to service tax on a service provided in relation to the renting of immovable property.

The petitioners also took an alternative plea that in case it is held that such a tax is envisaged, then the provisions of section 65(90a), section 65(105) (zzzz) and section 66 insofar as they relate to the levy of service tax on renting of immovable property would amount to a tax on land and would therefore fall outside the legislative competence of the Parliament as the subject was covered under Entry 49 of List II of the Constitution of India and would fall within the exclusive domain of the State Legislatures and therefore the same be declared unconstitutional.

It was, inter alia, submitted that the impugned Notification and the Circular which proceeded on the assumption that the renting of immovable property was itself a service, were contrary to and inconsistent with the charging provision and therefore ultra vires the Act. Since service tax is a value-added tax and can only be levied on the value addition, the words ‘in relation to’ in section 65(105)(zzzz) of the said Act are of great significance. The value addition of service in the present context could be an improvement or the betterment of the property provided by the owner to the lessee or licensee. It is that betterment alone which could qualify as a service. The act of renting of the immovable property by itself does not provide any value addition to any person and therefore cannot be treated as a service. To support this contention reference was made to the various entries falling within the scope of ‘taxable service’, which would reveal that it is only the value addition which is taxable.

The Court held that in terms of section 65(105) (zzzz) of the Finance Act, 1994, renting out of immovable property for use in the course or furtherance of business or commerce would not constitute a taxable service and as a result, Notification dated 22-5-2007 and Circular dated 4-1-2008 were ultra vires the Act. The Court distinguished the observations made by the SC in the case of Tamil Nadu Kalyana Mandapam’s case [2004 (167) ELT 3 (SC)], on which the respondent had placed reliance to the effect that “making available a premises for a period of a few hours for the specific purpose of being utilised as a mandap whether with or without other services would itself be a service and cannot be classified as any other kind of legal concept”. The Court also referred to the observations made by the SC in the case of All India Federation of Tax Practitioners [2007 (7) STR 625 (SC)] wherein the SC, inter alia, had observed that “service tax is a value added tax and that just as excise duty is a tax on value addition on goods, services tax is on value addition by rendition of services. A distinction was also sought to be made between property-based services and performance-based services. The property-based services cover service providers, such as architects, interior designers, real estate agents, construction services, mandap keepers, etc. Whereas the performance-based services are those provided by persons, such as stock-brokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents, etc.” Applying the same to renting of immovable property service, the High Court observed “There is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. Service tax is a value added tax. It is a tax on the value addition provided by some service providers. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, any value addition could not be discerned. Consequently, the renting of immovable property for use in the course or furtherance of business or commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service.” (emphasis supplied). The Delhi High Court however did not examine alternative plea of constitutional validity. The Government filed an SLP against the said ruling which is admitted, but no stay has been granted against the Delhi HC Ruling. The same is pending for disposal.

The amendment by the Finance Act, 2010:
To overcome the above ruling, the Finance Act, 2010 redefined ‘taxable service’ with retrospective effect from 1-6-2007 as under :

“(105) ‘taxable service’ means any service provided or to be provided –

(zzzz) to any person, by any other person, (*by renting of immovable property or any other service in relation to such renting) for use in the course of or, for furtherance of business or commerce.”

* Words substituted for (in relation to renting of immovable property).

As a result, a service provided by renting of immovable property or a service ‘in relation to’ such renting of immovable property, is brought within the tax net. TRU, Circular No. 334/1/2010 — TRU dated 26-2-2010 clarified the amendment as under:

Para 9.2:

“In order to clarify the legislative intent and also bring in certainty in tax liability the relevant definition of taxable service is being amended to clarify that the activity of renting of immovable property per se would also constitute a taxable service under the relevant clause. This amendment is being given retrospective effect from 1-6-2007.”

Thus, renting of immovable property by itself is considered to be a taxable service. In the Finance Act 2010, it has been declared:
“No act or omission on the part of any person shall be punishable as an offence which would not have been so punishable had this amendment not come into force.”

Recently, the Bombay High Court and Gujarat High Court have delivered their judgments on this burning issue and have decided the scope of powers of the Parliament to enact the activity of renting of premises for the use of or for furtherance of business or commerce, as service. Earlier, during F.Y. 2010-11 the other High Courts viz. Orissa High Court, in Utkal Builders Limited v. UOI, [2011 (22) STR 257 (Ori)] and P&H High Court in Shubh Timb Steels Ltd. v. UOI, [2010 (20) STR 737 (P&H)] have also held to the effect that renting of property for commercial purpose was certainly a service and had a value for the service receiver. While the Bombay High Court has extended the interim order to remain in force till September 30, 2011 and some of the petitioners have decided to knock the door of the Supreme Court, hopes of getting a decision in favour of retailers in the special leave petition filed before the Supreme Court against UOI v. Home Solutions Retail India Ltd., [2009 (15) STR J23 (SC)] appears to have dimmed. Both the decisions are briefly analysed below:

Retailers Association of India & Other v. UOI’s case, 2011 (23) STR 561 (Bom.):

The petitioners had in their petition, inter alia, challenged the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. The constitutional challenge to the legislative competence of the Parliament was premised on the submission that:

  •     The tax which has been imposed on a taxable service which is defined to mean renting of immovable property is a tax on lands and buildings within the meaning of Entry 49 of List II of the Seventh Schedule.

  •    All four judgments of the Supreme Court, referred to later herein, did not deal with a situation where the legislation would fall within the purview of a specific entry in List II.

  •     Article 246 of the Constitution empowers the State Legislature to make laws “with respect to any of the matters enumerated in List II”.

  •     In consequence, the power of the State Legislature is not only to make laws imposing taxes on lands and buildings, but to enact legislation with respect to taxes on lands and buildings;

  •     Entry 49 of List II must receive the broadest possible interpretation and amplitude.

  •     Especially when read in the context of Entry 97 of List I, the width and ambit of Entry 49 of List II cannot be curtailed with reference to the residuary power of the Parliament; and

  •     A tax whether levied on the basis of rent, annual value, or capital value would constitute a tax on lands having regard to the ambit of Entry 49 of List II. A tax based on leasing of a land and computed by rental value cannot be rested on Entry 97 of List I, because it is in substance, a tax on a transaction of letting of land and Entry 49 of List II would preclude a levy by the Parliament of a service tax on letting.

Relevant legal provisions:

Article 246 of the Constitution of India:

“246. Subject-matter of laws made by the Parliament and by the Legislatures of States.

(1)    Notwithstanding anything in clauses (2) and (3), the Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the Union List).

(2)    Notwithstanding anything in clause (3), the Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the Concurrent List).

(3)    Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the ‘State List’).

(4)    The Parliament has power to make laws with respect to any matter for any part of the territory of India not included (in a State) notwithstanding that such matter is a matter enumerated in the State List.”


Seventh Schedule of the Constitution of India:

List I — Union List — Entry 97 — Residuary power:

97.    Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.

List II — State List — Entry 49:

49.    Taxes on lands and buildings.

In order to address the constitutional challenge in the above petitions, the Court briefly traced the evolution of judicial thought on the issue of imposition of service tax (paras 5 to 10) by referring to the following four Supreme Court decisions in which the controversy was analysed:

(i)    Tamil Nadu Kalayana Mandapam Association v. UOI, 2004 (167) ELT 3 (SC)

(ii)    Gujarat Ambuja Cements Ltd. v. UOI, 2005 (182) ELT 33 (SC)

(iii)    All India Federation of Tax Practitioners Associa-tion v. UOI, 2007 (7) STR 625 (SC) and

(iv)    Association of Leasing and Financial Service Companies v. UOI, 2010 (20) STR 417 (SC).

The Court, based on the analysis of the legislative provisions contained in (i) Article 246 of the Constitution of India read with respect to any of the matters enumerated in List II read with Entry 49, and (ii) residuary powers under Entry 97 of List I, noted that “If the subject on which the Parliament has enacted legislation is found, upon determining its true nature and character not to fall within the purview of a field reserved to the States, the Parliament would have legislative competence in any event under Entry 97 of List I read with Article 248. The essential question that falls for determination in the present case is whether the levy of a service tax on a taxable
service which the Parliament defined to be the renting of immovable property falls within the exclusive province of the State Legislatures under Entry 49 of List II.”

The Court referred to the following judgments of the Supreme Court where the scope and ambit of Entry 49 of List II has been interpreted:

  •    Ralla Ram — AIR 1949 FC 81:

In this case, the Federal Court held that merely because the Income- tax Act adopted annual value as the standard for determining income, it would not necessarily follow that if the same standard were to be employed as a measure for any other tax (in the given case — an annual tax on buildings and lands situated in the rating areas as stipulated in the Schedule at a particular rate), that tax also became a tax on income. The Court distinguished between the nature of tax and nature of machinery quantifying the tax and the Bombay High Court averred that Ralla Ram’s case is an authority for the proposition that it is the essential nature of the tax and not the nature of the machinery, which must be looked at in determining the validity of the impost.

  •    Sudhir Chandra v. Wealth Tax Officer

— AIR 1969 SC 59:

This case dealt with a challenge to the constitutional validity of the Wealth Tax Act of 1957 on the ground that it transgressed upon a field reserved to the State Legislature under Entry 49 of List II. The Bombay High Court noted that while explaining the scope of Entry 49, the Supreme Court held:

“But the legislative authority of the Parliament is not determined by visualising the possibility of exceptional cases of taxes under two different heads operating similarly on taxpayers. Again Entry 49, List II of the Seventh Schedule con-templates the levy of tax on lands and buildings or both as units. It is normally not concerned with the division of interest or ownership in the units of lands or buildings which are brought to tax. Tax on lands and buildings is directly imposed on lands and buildings, and bears a definite relation to it. Tax on the capital value of assets bears no definable relation to lands and buildings which may form a component of the total assets of the assessee.”
(emphasis supplied).

  •     Second Gift Tax Officer, Mangalore v. D. H. Hazareth — AIR 1970 SC 999:

In this case, the constitutional validity of the Gift Tax Act, 1958 was considered. The Court ruled that however wide a taxing entry in the State List may be, it would still not authorise a tax which is not expressly mentioned. If the pith and substance of the law did not fall within the purview of Entry 49 of the State List, the Parliament, it was held, would undoubtedly possess that power under Article 248 and Entry 97 of the Union List. While holding that the Gift Tax Act, 1958 was not a tax on lands and buildings, the Constitution Bench came to the conclusion that Entry 49 postulates a tax resting upon the general ownership of lands and buildings and a tax which is imposed directly upon lands and buildings.

  •    D. G. Gose & Co. v. State of Kerala — 1980 2 SCC 410:

The Bombay High Court noted that in this case the above principle was reiterated by the Constitution Bench of the Supreme Court holding that a tax on buildings is “a direct tax on the assessee’s buildings as such, and is not a personal tax without reference to any particular property”.

  •     India Cement Ltd. — AIR 1990 SC 85:

Referring to the observation by the Supreme Court in this case to the effect that “there is a clear distinction between tax directly on land and tax on income arising from land” and held that the tax levied under the Income-tax Act, 1961 on income “though computed in an artificial way from house property” was levied on the income and not house property and therefore, did not fall within the purview of Entry 49 of List II. The Bombay High Court also noted that a principle was enunciated (in a judgment of two learned Judges of the Supreme Court in Bhagwan Dass Jain v. Union of India) that a tax on lands and buildings would not comprehend within its purview a tax on income arising from land or building.

The Bombay High Court observed that the above judgments of the Supreme Court clearly indicate that the settled principle of law is that a tax on lands and buildings is a tax on the general ownership of lands and buildings. In order that a tax must fall under Entry 49 of List II, the tax must be one directly on lands and buildings. A tax which is levied on the income which is received from lands or buildings is not a tax on lands or buildings.

The petitioners’ submission was that a tax on land within the meaning of Entry 49 of List II can take into account the use to which the land is put. The service tax imposed by the Parliament on renting of immovable property takes account of the user of the land or building and, hence, the service tax on renting of immovable property is a tax which the State Legislatures could conceivably impose under Entry 49 of List II. In support of the contention, it was urged that the judgment of the Supreme Court in Ajoy Kumar Mukherjee v. Local Board of Barpeta, (AIR 1965 SC 1561) is an authority for the proposition that in order to be a tax on land, the charge under the legislation must be on the land as a unit. In that case, a tax was imposed u/s.62 of the Assam Local Self Government Act, 1953. Section 62(1) stipulated that the local Board may order that no land shall be used as a market otherwise than under a licence to be granted by the Board. U/ss.(2) which was the charging provision, it was stipulated that on the issue of an order u/ss.(1), the Board may grant a licence for the use of any land as a market and impose an annual tax thereon. While upholding the validity of the tax, the Supreme Court noted that the tax was, in substance, a tax on the land but the charge only arises on land which was used for a market.

Reliance was also placed on the decision of the Supreme Court in Goodricke Group Ltd. v. State of W.B., [1995 Supp (1) SCC 707] which dealt with a challenge to the validity of a cess imposed under the West Bengal Rural Employment and Production Act, 1976. The levy was challenged in Goodricke on the ground that it was not a tax on lands and buildings. The Supreme Court held that the subject -matter of the tax and the levy was land on the premise that the entire land covered in the tea estate was treated as a separate category of land as a unit for the purposes of the levy of tax. Merely because a tax on lands or buildings is imposed with reference to the income or yield of lands or buildings, it would not cease to be a tax on lands or buildings.


Residuary power of the Parliament to legislate: Referring to observations made by the SC in the cases of:

  •     UoI v. H. S. Dhillon — AIR 1972 SC 106,
  •     Assistant Commissioner of Urban Land Tax — AIR 1970 SC 169,
  •     Sat Pal & Co. — AIR 1979 SC 1550,
  •     International Tourist Corp. — 1981 2 SCC 318, and few of the above-referred judgments, the Bombay High Court noted that “while the Court must give a broad and liberal interpretation to Entry 49 of List II, the interpretation to be placed on that entry must nevertheless be meaningful. In each case, the Court must have regard to the true nature and character of the levy in determining as to whether in pith and substance, the tax is a tax on land and buildings. If the essential nature of the levy is the imposition of a tax on land and buildings, it would fall within Entry 49 of List II. If on the other hand, the essential nature and character of the levy is not a tax on land and buildings, then the exercise of interpretation would not bring within its purview a tax which is not one on land and buildings.”

To determine the character of the levy under challenge, analysis of section 66 (charging section), section 65(105)(zzzz), section 65(90a) and section 67 of the Finance Act, 1994 was made and it was held that:

(a)    The charge of tax is not on lands or buildings.
(b)    The charge of tax is on a taxable service.
(c)    The measure of tax is the gross amount charged by the service provider.
(d)    The charge of tax is not on lands or buildings as a unit nor is the tax on lands or buildings.
(e)    To be a tax on lands and buildings under Entry 49 of List II, the tax must be directly a tax on lands and buildings. That is not the true character of an impost on taxable services.

On behalf of the petitioners reliance was placed on the judgment of the Supreme Court in the State of West Bengal v. Kesoram Industries Limited, [(2004) 10 SCC 201] in support of the submission that the law in the present case is a law which imposes a tax on land and buildings. It was urged that in paragraph 129 of the judgment the Supreme Court, inter alia, has laid down the following principles regarding:

“(6) ‘Land’, the term as occurring in Entry 49 of List II, has a wide, connotation. Land remains land though it may be subjected to different user. The nature of user of the land would not enable a piece of land being taken out of the meaning of land itself. Different uses to which the land is subjected or is capable of being subjected provide the basis for classifying land into different identifiable groups for the purpose of taxation. The nature of user of one piece of land would enable that piece of land being classified separately from another piece of land which is being subjected to another kind of user, though the two pieces of land are identically situated except for the difference in nature of user. The tax would remain a tax on land and would not become a tax on the nature of its user.

(7)    To be a tax on land, the levy must have some direct and definite relationship with the land. So long as the tax is a tax on land by bearing such relationship with the land, it is open for the Legislature for the purpose of levying tax to adopt any one of the well-known modes of determining the value of the land such as annual or capital value of the land or its productivity. The methodology adopted, having an indirect relationship with the land, would not alter the nature of the tax as being one on land.”

In this frame of reference, the Bombay High Court noted that though as per this decision the expression ‘land’ in Entry 49 of List II has a wide connotation, the judgment in Kesoram Industries (supra) does not mark a departure from the ambit and content of Entry 49 of List II which has been laid down in the previous decisions of the Court including the judgments of the Constitution Bench in Nawn’s case and in Hazareth’s case (supra) or for that matter the decision of the Bench of seven learned Judges in Dhillon’s case (supra) and held that service tax that has been legislated upon by the Parliament is not a tax on land. The true nature and character of the levy is not a tax on land or buildings. The charge of tax is a taxable service which the Parliament regards as being rendered. The renting of immovable property is an activity which in the legislative wisdom of the Parliament involves a conferment of service and it is in that legislative exercise that the Parliament has proceeded to impose a levy of service tax. The measure of tax u/s.67 is the gross amount charged by the service provider for the service which is provided or which is to be provided by him. In the case of renting of immovable property, the measure is the rental. The measure of the tax does by no means indicate that the tax is a tax imposed on land or buildings.

The Bombay High Court noted that the decision in Godfrey Philips [(2005) 2 SCC 515] is not a decision which elucidates the scope of Entry 49 of List II to the Seventh Schedule. Whereas, the ambit of Entry 49 has been explained in several judgments of the Constitution Bench of the Supreme Court as well as in the judgment of the Bench consisting of seven Judges in Dhillon (supra).

The Bombay High Court reiterated that since properly construed a tax which has been imposed by the Parliament is not in essence and in its true character a tax on land and buildings, the tax cannot nonetheless be held as a tax within the meaning of Entry 49 of List II in spite of the true nature and character of the levy. The essential nature and character of the levy is one which is referable to the residuary power of the Parliament under Article 248 of the Constitution read with Entry 97. The Parliament, it may be noted, introduced Entry 92C into List I by the Constitution (Eighty Eighth Amendment) Act, 2003 to specifically deal with taxes on services. That provision has still not been enforced. In the circumstances, the true nature and character of the levy of service tax in the present case is a levy under the residuary power which has been conferred upon the Parliament.

Whether renting of immovable property has an element of ‘service’?

The Court did not accept the submission of the petitioners that there is no service involved in letting out of the immovable property and, there-fore, it was not open to the Parliament to impose service tax on the supposition that taxable service is involved on the premise that “The submission cannot be accepted for more than one reason. As a matter of constitutional doctrine, the Parliament when it legislates upon a matter is entitled to make an assessment of fact on the basis of which the legislation is designed and drafted. An underlying assessment of fact by the Parliament on the basis of which a law has been enacted cannot be amenable to judicial review absent a case of manifest arbitrariness. That apart, it is equally well settled that the Legislature in enacting a law is entitled to provide for a deeming fiction …….. The fact that the service which is provided may not, to the petitioners, accord with what is commonly regarded as a service would not militate against the validity of the legislation…….. In the affidavit in reply that has been filed in these proceedings it has been stated that renting of property is considered to add value to the activity of the person who has rented the property. When a person has a property at a particular location, he is able to charge a higher sum for the merchandise sold therefrom than he would be able to charge if he were to sell the same merchandise from a place which does not have the same locational advantage. Renting of a property, it has been submitted, adds value to the activities of a person renting the property.” The Court also referred to the judgment of the SC in the case of Navnitlal C. Jhaveri v. K. K. Sen, Assistant Comm. of I. Tax AIR 1965 SC 1375. [refer paras 28 to 31].

The Court finally decided “Therefore in our view, looked at from either standpoint, the legislative basis that has been adopted by the Parliament in subjecting taxable services involved in the renting of property to the charge of service tax cannot be questioned. The assumption by a legislative body that an element of service is involved in the renting of immovable property is certainly not an assumption which can be regarded by the Court as being so manifestly absurd or perverse as to lead to an inference that the Parliament had treated as a service, an item which in no rational sense could be regarded as involving service. But more significantly, even if the Court were to proceed on the basis, suggested by the petitioners that no element of service is involved, that would not make the legislation beyond the legislative competence of the Parliament. So long as the legislation does not trench upon a field which has been reserved to the State Legislatures, the only conclusion that can be drawn is that the law must be treated as valid and within the purview of the field set apart for the Parliament. There is, it must be emphasised, no violation set up of any provision in Part III of the Constitution, (save and except on the issue of retrospectivity which would be considered subsequently).”

Retrospectivity:

The Court did not accept the challenge to the legislation on the ground that it is retrospective is lacking in substance by referring to (i) the plenary power of the Parliament to enact legislation, (ii) the Delhi High Court’s judgment in the case of Home Solutions and further observing that: “The provision was given retrospective effect so as to cure the deficiency which was found upon interpretation by the Delhi High Court”, (iii) the affidavit in reply by the UOI, (iv) the SC’s judgment in the case of Bakhtawar Trust v. M. D. Narayan, 2003 5 SCC 298, and (v) to the judgments in the cases of Shubh Timb Steels Limited v. Union of India, 2010 (20) STR 737 (P&H) and Utkal Builders Limited v. Union of India, 2011 (22) STR 257 (Ori.) wherein the constitutional validity of the provision has been upheld.

Cinemax India Limited’s case — 2010 TIOL 535 HC AHM-ST:

Petitioners in these petitions challenged the levy of service tax on renting of immovable property on the grounds that:

(i)    The amendment is unconstitutional being beyond legislative competence of the Parliament.
(ii)    The Delhi High Court having held that renting of immovable property is not a service in absence of any value addition, the Union of India can never change the nature of tax by changing the event of transaction.
(iii)    The amendment not being clarificatory cannot be retrospectively enforced.

The Union of India, on the other hand took the ground that renting of immovable property is taxable service if such renting is for use in the course of or for furtherance of business or commerce.

The petitioners inter alia contended that renting of immovable property does not amount to service as it is a transaction whereby rights in or in relation to immovable property is transferred for a certain period for consideration based on market value of the property. It is not an activity involving performance, skill or knowledge on behalf of petitioners, it was also contented that end- use i.e., the use which the licensee/lessee puts the property to cannot be determinative of the nature of transaction or can create a taxable event. At the most, it can bring about valid classification for taxation. The act of the consumer is not value addition for considering an activity a ‘service’. The value addition must be done by the service provider and in this context reliance was placed on All India Federation of Tax Practitioners & Others v. UOI & Others, 2007 (7) STR 625 (SC) and Association of Leasing and Financial Service Companies v. UOI, 2010 (20) STR 417 (SC). Further, with reference to an example it was discussed that when a landlord/licensor has property capable of being used both for residence and/or for commercial purpose, it is an irrational proposal to contend that if it is licensed for commercial use, there is value addition and therefore taxable ‘event’ occurs and no taxable event occurs when provided for residential use. There is no difference per se in the activity.

Whereas, the Revenue inter alia contended that the Legislature defined immovable property for the purpose of taxing event and only when it is used for furtherance of business or commerce, it is taxed and thus it made a class different from what is defined under other enactment like Transfer of Property Act. There is always a value addition when an immovable property is provided for furtherance of business and commerce to the recipient of service. Relying on Tamil Nadu Kalyan Mandap Association v. UOI, 2004 (167) ELT 3 (SC), it was contended that definition of taxable service includes renting in the course of furtherance of business. Like in the case of catering contracts, for the fact that tax on sale of goods is involved does not mean that service tax cannot be levied on the aspect of catering which is a service. The event of making available business premises is rendition of service though it may be an event of leasing or licensing under the Transfer of Property Act and/or Easement Act. Reliance was placed on the case of Shubh Timb Steels Ltd., 2010 (20) STR 737 (P&H). For the purpose of validation of the Act for retrospective amendment relying on Gujarat Ambuja Cement v. UOI, 2005 TIOL 53 SC-ST, it was contended that the amendment cured defect and which was within legislative competence. Relying on All India Federation of Tax Practitioners, 2007

(7)    STR 625 (SC), it was contended that service tax is on value addition by rendition of services. Relying on similar view expressed in Moti Laminates P. Ltd. v. CCE, 1995 (76) ELT 241 (SC) wherein it was held that there is no difference between production and manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration.

The Gujarat High Court observed that in normal course of renting of immovable property, service tax is not attracted in absence of any activity in-volving performance, skill, expertise or knowledge. Renting of immovable property for use in the course of or for furtherance of business or commerce is an activity which amounts to rendition of service in the course of or for furtherance of business or commerce. Relying on the decisions of Association of Leasing and Financial Services v. UOI (supra), the Court observed that service tax is a tax on activity, whereas sales tax is a tax on sale of thing or goods. Taxable event under the service tax is each exercise/activity undertaken by the service provider and it is imposed every time service is rendered to customer/client, it is a value added tax. Citing Tamil Nadu Kalyan Mandapam (supra)’s case, it was held that service could not be struck down on the ground that it does not conform to a common understanding of the word, ‘service’ so long as it does not transgress any specific restriction contained in the constitution.

Thus, when a service recipient uses an immovable property in the course of or for furtherance of business or commerce, it can safely be stated that the service provider has rendered service enabling the service recipient in value addition. Meaning thereby that such activity undertaken by service provider for value addition in the course of or for furtherance of business or commerce i.e., to carry on the activity or business or commerce of the service recipient amounts to rendition of service and will fall within the meaning of the definition of ‘service tax’ and there was no case made out to declare section 65(105)(zzzz) as unconstitutional or ultra-vires any provision of the constitution.

Conclusion:

In summation, various petitions before both the Courts viz. the Bombay High Court and the Gujarat High Court, respectively, have been dismissed upholding the activity of renting/leasing/licensing of immovable property for use in the course of or for furtherance of business as service. In addition thereto, the constitution validity is also upheld as service tax on the activity of renting is not considered a tax on land or buildings. Also the Courts have concluded to the effect that there exists value addition for the recipient or consumer of service when premises are provided for the use of business. The grounds of rejection of petitions by the P&H High Court in Shubh Timb (supra) and the Orissa High Court in Utkal Builders (supra) are not discussed hereinabove. While the Orissa High Court has not dealt with whether or not value addition exists in renting of immovable property or whether it is a necessary ingredient for a transaction to be held as ‘taxable service’, the P&H High Court has observed that even if there is no value addition, the impugned provision cannot be held void. Whereas, all the four High Courts have upheld legislative competence of the Parliament and retrospectivity with a focus on different aspects, it appears that litigation at the level of the Apex Court may mainly revolve around the aspect of value addition and whether or not the tax levied as service tax could be considered a tax on land and buildings.

Exemption to Arbitration services under Legal Consultancy — Notification No. 45/2011 — Service Tax, dated 12-9-2011.

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With effect from 12th September, 2011 services provided by an arbitral Tribunal, in respect of arbitration, falling under item (iii) of sub-clause (zzzzm) of clause (105) of section 65 of the Finance Act, 1994 have been exempted by this Notification.
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Exemption to services provided to stockbrokers extended — Notification No. 44/2011 — Service Tax, dated 9-9-2011.

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Notification No. 31/20009-ST is amended to entitle ‘authorised persons’ to claim exemption in relation to services provided to stock-brokers in relation to sale or purchase of securities listed on registered stock exchange as presently available to the sub-brokers.
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Periodicity of Returns — Powers with Commissioner — Notification No. VAT 1511/CR 84/Taxation-1, dated 13-9-2011.

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By this Notification, Rule 17 for Submission of VAT Returns has been amended conferring powers upon the Commissioner inter alia to decide periodicity of filing of returns that is monthly, quarterly or half-yearly for every year and in respect of every dealer which will be final and will be displayed on the website. To determine the same the Commissioner may apply principles laid down in Rule 17(4).
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Bhumiraj Homes Ltd. v. DCIT ITAT ‘B’ Bench, Mumbai Before R. S. Syal (AM) and Asha Vijayaraghavan (JM) ITA No. 2170/Mum./2009 A.Y.: 2004-05. Decided on : 25-3-2011 Counsel for assessee/revenue: Pradip Kapasi/ Naresh Kumar Balodia

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Section 80IB(10) — Deduction in case of housing project — (1) For computation of built-up area for commercial purpose whether proportionate area covered by staircase, passage, lift area and liftroom, etc. is also to be considered — Held, No. (2) While considering the size of the plot whether the unbuilt-up area should be bifurcated in proportion to commercial as well as residential area — Held, No.

Facts:
The assessee, a builder developer had claimed a deduction of Rs.2.55 crore u/s.80IB(10) representing the profits of the housing project. In the original assessment deduction u/s.80IB(10) was disallowed to the extent it was relatable to profits of the commercial area. In the re-assessment proceeding u/s.147, the AO disallowed the remaining part of the deduction which was earlier allowed as in his opinion only the projects approved as ‘housing projects’ were eligible and not those approved as ‘residential as well as commercial projects’ by the local authority.

Before the Tribunal the Revenue contended that the commercial area exceeded 10% of the total built-up area computed on the following basis, hence, the order of the AO was to be upheld. It was submitted that:

  • Built-up area for commercial purpose should include proportionate area covered by staircase, passage, lift area and lift-room;
  • While considering the size of the plot, unbuiltup area should be bifurcated in proportion to commercial as well as residential area. Plot size so calculated was less than 1 acre. It also relied on the decision of the Kolkata Tribunal decision in the case of Bengal Abuja Housing Development Ltd. v. DCIT, (ITA No. 1595/Kol./2005, dated 24-3-2006).

Held:
The Tribunal did not agree with the Revenue’s contention that unbuilt-up area should be bifurcated in proportion to commercial as well as residential area. According to it, in any project there would always be some portion of the area which remains unbuilt and is required to be kept open as per the plans approved. According to the Tribunal the decision of the Kolkata Tribunal was not on the point advocated by the Revenue. As regards the contention to include proportionate area covered by staircase, passage, lift area and lift-room, the Tribunal noted that since all shops and commercial establishments were in the ground floor, such areas cannot be considered to compute built-up area for commercial purpose. Further, relying on the decision of the Bombay High Court in the case of Brahma Associates (ITA No. 1194 of 2010), it allowed the appeal of the assessee.

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(2011) 128 ITD 459/ 9 taxmann.com 121 (Mum.) ACIT v. Safe Enterprises A.Y.: 2005-06.

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Section 143 r.w.s. 133A — Assessee can retract the admission made during survey in respect of concealed income with sufficient evidence and hence no addition of the said amount can be made.

Facts:
The assessee-firm was engaged in the business of civil contracts. During the course of survey, it was noticed that three invoices amounting to Rs. 76,33,179 were not entered into the books of accounts. The AO hence concluded that the labour receipts were suppressed. The partner of the firm agreed to the above findings and offered Rs.76 lakhs as additional income on that account.

However, in the immediate post-survey proceedings, the assessee was able to produce all the related documents before the assessing authority, thus retracting his earlier admission. The Assessing Officer made addition of the impugned amount despite retraction by the assessee. On appeal to the CIT(A) by the assessee the learned CIT(A) considered the matter in great detail and ultimately deleted the said additions. Aggrieved the Revenue preferred an appeal before the Appellate Tribunal.

Held:
1. Survey is essentially an evidence gathering exercise. It is an established position of law that if a disclosure is made by the assessee either under mistaken belief of facts and law due to mental pressure from the survey party or under coercion, he can retract the statement and the admission so made.

2. Reliance was placed on the Supreme Court decision in Pullan Gode Rubber Produce Co. Ltd. v. State of Kerala that admission was an extremely important piece of evidence, but it cannot be said to be conclusive. It is open to the person who made the admission to show that it is incorrect.

3. Also it was held in CIT v. Ramdas Motor Transport and Jaikishin R. Agarwal v. ACIT that if the admission in the statement is not supported by any asset or document, the retraction may be genuine.

4. The assessee, in the post-survey proceedings as well as assessment proceedings had amply demonstrated through credible evidence the source of labour receipts.

Consequently, the ITAT upheld the order of the CIT(A).

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Recognised agent or pleader cannot appear as witness in place of principal — CPC order 3.

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[(Smt.) Kulshree & Anr. v. Smt. Shanta Meena, AIR 2011 Rajasthan 99]

It is a case where matter was fixed for the plaintiff’s evidence in which the plaintiff submitted affidavit. She could not appear in the Court for cross-examination. In her place, her husband filed affidavit in the capacity of power of attorney. Objection was taken by the respondents that her husband can be examined as a witness, but cannot be examined as the plaintiff. The application aforesaid was allowed. The only rider was that he should not be treated as the plaintiff. The Court observed that if the interpretation of Order 3, Rules 1 and 2 is to mean that appearance of recognised agents or pleader is permissible for all purposes including deposition of statement in place of the principal, then it would mean that the pleader can also depose for the principal.

The Court should give interpretation to the provisions which are not only harmonious, but remain applicable in all situations with same interpretation. If the interpretation of Order 3, Rules 1 and 2 is that power of attorney can depose in place of principal in all circumstances, then the same interpretation will apply to the pleader, in view of the heading of the provision.

The purpose of Order 3, Rule 1 is not for appearance of a recognised agent or pleader as witness in place of the principal. They are authorised to appear as representative of the party to the extent it is permissible, but not in the manner that they may replace the principal itself. If the power of attorney has acted in place of principal prior to filing of the suit, he can depose for the principal, but not in all circumstances.

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Slum Redevelopment part II

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Slum Rehabilitation Schemes

The
Slum Rehabilitation Authority (SRA) is empowered to prepare a Slum
Rehabilitation Scheme for areas within its purview. This would cover all
slums and hutment colonies within such area. The actual mechanics of
the Slum Rehabilitation Scheme are prescribed under the Development
Control Regulations of Greater Bombay, 1991 (‘DCR’) issued under the
Maharashtra Regional & Town Planning Act, 1956. Two types of Slum
Rehabilitation Schemes are permissible under the DCR and they are known
by the Regulations under which they are approved. These are:

33(10)
Scheme
In these schemes the slums are rehabilitated on the same site.
This is also known as an in-situ scheme. The salient features are as
follows:

  •  Slum inhabitants who are on the electoral rolls of 1st January 1995 or before are covered for rehabilitation.

  •  Actual inhabitants of the hutments are eligible for the rehabilitation
    and the actual structure owner is not eligible even if his name appears
    on the electoral rolls.

  •  The DCR defines the term slums as
    slums censed or declared and notified under the Act. 33(14) Scheme In
    this scheme, the landowner is allowed to consume the existing Floor
    Space Index (FSI) potential of the land, owned by him. The developer
    constructs transit tenements out of a prescribed part of this additional
    potential. The balance of the additional potential is allowed as free
    sale component. This is also known as transit scheme.

The salient features of a transit scheme are as follows:

  •  The FSI which can be exceeded for construction of transit camps is as
    follows: Suburbs and extended suburbs — 2.5 Anup P. Shah Chartered
    Accountant laws and Biness Difficult areas, such as Dharavi — 2.99
    Island City (only for government or public sector plots) — 2.33

  •  The normally permissible FSI on the plot may be used for the purposes
    designated in the Development Plan prepared under the DCR.

  •  The
    additional FSI could be used for constructing transit camp
    accommodations having which will be used for accommodating hutment
    dwellers in transit on account of Slum Rehabilitation Scheme for 10
    years on rent. After that period, the owner may use the tenements for
    any purpose.

  •  In the alternative, the additional FSI can also be used as specified in Table-A below:

  •  Once the transit camps are handed over free of cost to the SRA, the
    occupation certificate and water/electricity connection would be given
    for the free-sale component. 

Appendix IV to DCR

Appendix IV specifically
deals with Slum Rehabilitation Schemes. It applies to redevelopment/
construction of accommodation for hutment/ pavement dwellers through
owners/developers/ co-operative housing societies, such as MHADA, MIDC,
etc. The key features of this Appendix are summarised below:

  • Eligible hutment dwellers are entitled to, in exchange for their
    structure, a free of cost residential tenement having a carpet area of
    225 sq.ft. including balcony and toilet but excluding common areas.

  •  At least 70% of the slum dwellers must agree to a Scheme for it to be approved by the SRA.

  •  Provisions are made for slum dwellers who do not co-operate.

  •  Tenements obtained under the Scheme are nontransferable (other than succession by heirs) for 10 years.

  •  FSI ratio for sale component and rehab component is laid down.

The
ratio is as follows:

Suburbs and extended suburbs — the sale
component is equal to the rehab component
Difficult areas, such as
Dharavi — the sale component is 1.33 times the rehab component
Island
City — the sale component is 0.75 of the rehab component

  •   The
    maximum FSI which can be used on any slum site for the project shall be
    2.5. If a higher FSI is sanctioned, then the excess over 2.5 would be
    allowed as TDRs. TDRs can be used —(i) on any plot in the same ward as that in which the TDR originated but not in the Island City; (ii) on any plot north of the originating plot but not in the Island City; (iii)
    in any zone irrespective of the zone in which it was generated. TDRs
    cannot be used in areas under CRZ, NDZ, MMRDA areas, plots where slum
    rehabilitation is undertaken, areas where permissible FSI is less than
    1, notified heritage buildings.

  •  The minimum density of the
    rehab component on a plot shall be 500 tenements per net hectare, i.e.,
    after deducting all reservations. In case of the minimum number not
    being met, the balance shall be handed over free of cost to the SRA.

  •  Provisions are made for providing units to commercial/office spaces,
    shops which existed prior to 1st January 1995 in the slums. They are
    eligible for carpet area of 225 sq.ft.

  •  Concessions are provided in the building construction requirements which would have been otherwise applicable under the DCR.

  •  Slum rehab can also be taken up on Town Planning Scheme Plots if they have been declared as slums.

  •  If the slums are spread over more than one CTS/ CS number, then it is
    treated as a natural subdivision. Similarly, clubbing or more than one
    slum in the same zone is allowed.

  •  Slum pockets on BMC/MHADA
    lands, if adjoining to non-slum lands, can also be taken up for joint
    development under DCR 33(7) and 33(10).

  •  Welfare halls,
    balwadis, society offices, religious structures, etc. must be
    constructed free of cost and would form part of the rehab portion.

  •  An amount of Rs.20,000 per tenement for rehab component and Rs.840 per
    sq.mt for entire builtup area must be paid by the developer to the SRA
    in such instalments and such manner as may be decided by the SRA. These
    would be used by the SRA for the Schemes to be prepared for the
    improvement of infrastructure in slums.

  •  By a very recent
    Circular, the SRA proposes to do away with the height restrictions on
    buildings which are imposed in CRZ II Areas provided they are a part of a
    33(10) or a 33(14) Scheme. The SRA has invited suggestions/objections
    from the public to this proposal. Procedure under Slum Rehabilitation
    Schemes


A typical Slum Rehabilitation Scheme involves the following steps:

(a) All slum/pavement inhabitants on electoral rolls on or before 1st January 1995 and who are actual occupants are eligible.

 (b)
70% of such eligible occupants must come together to form a
co-operative housing society and pass a resolution appointing a chief
promoter who can apply for name reservation for the society. The chief
promoter can collect share capital of Rs.50 per member for slum
societies and Re.1 as entrance fees and to open a bank account in any
co-operative bank.

(c) The proposed society should get the plot surveyed and a map prepared showing the slum structures.

(d)
The proposed society must then take a decision to appoint a competent
developer for the society. He would act as the promoter.

(e) The
promoter can enter into an agreement with every eligible slum-dweller
while putting up a slum rehabilitation proposal to SRA for approval.

(f)
The Promoter has to appoint an architect to prepare the plans under DCR
33(10). He would submit the plans and proposal along with the scrutiny
fee. The SRA has recently decided that it would only permit contractors
registered with them to carry out slum rehabilitation schemes. The
decision follows complaints by slum-dwellers and non-government
organisations about the poor quality of construction in the
rehabilitation buildings.

(g) SRA would then scrutinise the plans and the proposal.

(h)    SRA would give the letter of intent conveying approval to the scheme, approval to the layout, building-wise plan approval (Intimation of approval) and commencement certification. Earlier, these 4 were issued in instalments but now to speed up the process, they are issued in one go at least for the rehab proposal. The approval is valid for three months.

(i)    The scheme must provide for temporary transit accommodation to the slum-dwellers, during the construction of rehab portion.

(j)    Transit camp accommodation is provided by drawing of lots. Slum-dwellers are shifted to transit camps and huts are demolished. If these members do not agree to participate within 15 days of the approval of the proposal, they are physically evicted from the site under the provisions of sections 33 and 38 of Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971, to ensure that there is no obstruction to the scheme.

(k)    After demolition of the structures, work up to plinth is completed. After checking the plinth dimensions, further permission to carry out construction beyond plinth is granted.

(l)    The architect submits the building completion certificate.

(m)    While applying for the occupation certificate of the rehab building, the architect is expected to give the details of tenement allotments done by the society by drawing lots in the joint names of the household head and his spouse. SRA issues computerised ID cards.

(n)    Sale building construction is taken up.

(o)    Separate property cards are issued for the rehab and sale portion.

(p)    Once all the buildings are constructed, the land is leased to the society of slum-dwellers.

In a very important decision in the case of Lokhandwala Infrastructure P. Ltd. & Others v. Om Omega Shelters & Others, Writ Petition No. 95 of 2011, the Bombay High Court has held that it was not open to the slum-dwellers’ proposed society to enter into agreements with developers as per their whims and fancies.

The High Court did not accept arguments made by two proposed societies of 500 slum-dwellers in Worli that they were entitled to enter into or terminate development agreements without scrutiny or regulation by government bodies. The Court held that “Such a proposition would lead to a chaotic situation in the implementation of slum rehabilitation schemes. Managing committee members of proposed societies would then be at liberty to pursue their private ends and switch loyalties between rival builders on considerations of exigency. Many slum rehabilitation projects land in Court with disputes over the appointment of rival builders by slum-dwellers, with each developer claiming majority. The HC said these development agreements are not purely private contracts and have a ‘public character’ to them as the aim is to rehouse slum-dwellers with dignity. “Often the land belongs to the state, the BMC or the housing board. The state has a vital public interest in ensuring that the schemes are not trammelled by private interests,” the court observed. “Once a developer has made a proposal to redevelop a slum, authorities have to scrutinise whether a proposal involving change of developer is in the interest of slum-dwellers and whether or not the new developer would fulfil the needs and requirements of the scheme and has the necessary capacity to do so and whether the new developer has the consent of 70% of slum-dwellers,” said the Judges, adding that the authorities have to determine if the new developer would be able to fulfil all the requirements. “The second developer cannot ride on the 70% consent given to the first developer as it would only lead to ‘misuse of the scheme.’ “The dispute between a society and the developer does not lie purely in the realm of a private contractual dispute. The dispute has an important bearing on the proper implementation of the slum rehabilitation scheme and its consequences go beyond the private interests of the society and the developer. The scheme involves other stakeholders, including public bodies which own the land, whose interest ought to be protected too.”

In the present case, the dispute was between Lokhandwala Infrastructure Pvt. Ltd. and Om Ome-ga Shelters. In 2002, Lokhandwala was appointed to redevelop a plot in Mumbai. 500 slum-dwellers, who resided on the plot, formed two societies. In 2003, it applied for sanction.

Nothing moved for six years. In 2009, the two societies issued a letter terminating their agreement with Lokhandwala. The SRA called for a meeting of the slum societies in February 2010. In November 2010, the two societies, at a general body meeting, claimed that 343 of 401 eligible slum-dwellers present had consented to Omega. Based on this, the SRA CEO approved Omega as the developer instead of Lokhandwala. Lokhandwala, which challenged the SRA order, as ‘perverse’ said its proposal had never been rejected. It argued, and the Court up-held, that the new developer cannot do away with the requirement of 70% majority consent. Omega said it had individual agreements with over 80% slum-dwellers. The slum-dwellers argued that they were entitled to make a proposal and that the “developer is merely an agent of the cooperative society” to provide tenements.

The Bombay High Court held that the SRA order left much to be desired and set aside the SRA’s order favouring Omega and asked the SRA to again hear both sides and decide whether Lokhandwala continues to enjoy the support of 70% slum-dwellers and, if not, whether Omega does.

Income-tax concession

Section 80-IB(10) of the Income-tax Act, 1961 provides for a deduction from the gross total income of profits derived by an undertaking from developing and building housing projects approved before 31st March 2008. The following two conditions which are normally applicable for claiming such a deduction are not applicable in the case of a slum rehabilitation project which has been notified by the CBDT:

(a)    such undertaking completes the construction in a case where a housing project has been, or, is approved by the local authority on or after the 1st day of April, 2004, within four years from the end of the financial year in which the housing project is approved by the local authority.

(b)    the project is on the size of a plot of land which has a minimum area of one acre.

Thus, the Act provides a relaxation to slum rehabilitation schemes.

The CBDT has by Notification No. 67/2010 [F.No. 178/37/2006-IT(A-I)]/SO 1898(E), dated 3-8-2010 notified the Scheme contained in Regulation 33(10) of Development Control Regulation for Greater Mumbai, 1991 read with the provisions of Notification No. TPB-4391/4080(A)/UD-11(RDP), dated 3rd June, 1992, as a scheme for the purposes of the said section subject to the following conditions, —

(i)    slum development falling in Category VII mentioned in Notification No. TPB-4391/4080(A)/UD-11(RDP), dated 3rd June, 1992 shall be excluded from the Scheme;

(ii)    slum development falling within clause 7.7 of the Appendix IV of regulation 33(10) which provides for joint development of slum and non-slum areas shall be excluded from the Scheme; and

(iii)    any amendment in the Scheme hereby notified shall be required to be re-notified by the Board.

The CBDT has by Notification No. 01/2011 [F. No. 178/35/2008-IT(A-I)]/SO 14(E), dated 5-1-2011 notified, the Scheme for slum redevelopment prepared by the Maharashtra Government under sub-section (2) of section 37 of the Maharashtra Regional Town Planning Act, 1966 and published vide Notification No. TPS-1893/973/CR-49/93A/UD-13, dated the 26-2-2004, as a scheme for the purposes of the said section subject to the condition that any amendment to the Scheme hereby notified shall be required to be re-notified by the CBDT.

By a subsequent Notification, the CBDT has clarified that as the provisions of section 80-IB(10) apply only to housing projects approved before 31st March, 2008, the above Notifications would also be deemed to apply to housing projects approved by a local authority under the aforesaid scheme on or after the 1st April, 2004 and before 31st March, 2008.

Stamp duty concession

Under the Bombay Stamp Act, 1958, the Maharashtra Government has reduced the stamp duty chargeable under Article 5(g-a) (Development Rights Agreement), Article 25 (Conveyance) and Article 36 (Lease) executed for the purpose of rehabilitation of slum-dwellers as per the Slum Rehabilitation Schemes. The duty is reduced to Rs. 100 instead of the ad valorem rates specified under these Articles. However, the reduction of duty is permissible only in respect of instruments relating to tenements allotted to the slum-dwellers for residential purpose under the Slum Rehabilitation Schemes and is not allowed for the sale/free component buildings.

Service tax concession

No service tax is payable on the taxable service of construction of residential complex referred to in section 65(105)(zzzh) of the Finance Act provided to the Rajiv Awaas Yojna. Thus, any construction for slum rehabilitation under the RAY is exempt from service tax.

FDI

Foreign Direct Investment in companies engaged in slum rehabilitation schemes is governed by the conditions specified in the Consolidated FDI Policy of 2011/ erstwhile Press Note 2 of 2005. No relaxations or concessions are provided from these conditions to a company engaged in slum rehabilitation and any FDI in a company engaged in slum redevelopment needs to comply with the following key conditions:

(a)    The minimum area to be developed under each project would be as under:

(i)    In case of development of serviced housing plots, a minimum land area of 10 hectares/25 acres.

(ii)    In case of construction-development projects, a minimum built-up area of 50,000 sq.mts

(iii)    In case of a combination project, any one of the above two conditions would suffice.

(b)    Minimum capitalisation of US$10 million for wholly-owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the company.

(c)    The original investment cannot be repatriated before a period of three years from the completion of minimum capitalisation.


Property tax concessions

The BMC has granted a concession in property taxes to any building constructed under a slum rehabilitation scheme under the Act. The concession was given in a phasewise manner. For the period of 2011 to 2015 the property taxes levied on such buildings would be 80% of the rate levied in a particular year.

Auditor’s duty

The Auditor should enquire of the auditee, in case the auditee is into slum rehabilitation, whether the terms and conditions of the Act have been duly complied. In case of any doubts, he may ask for a legal opinion. Non-compliance with this could have serious repercussions for the developer.

By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

(2011) TIOL 530 ITAT-Kol. ITO v. Rajesh Kr. Garg A.Y.: 2006-2007.

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Sections 40(a)(ia), 194C — When tax was not deducted at source on the basis of Form 15I received by the assessee from the payee and the assessee failed to file Form 15J with the jurisdictional CIT, disallowance cannot be made merely on the basis that the Form 15J was not filed in time with the jurisdictional CIT.

Facts:
The assessee, engaged in business of transportation of goods through hired trucks, made payments aggregating to Rs.28.01 lakhs in respect of 42 vehicles and actual payment was exceeding Rs.50,000 per vehicle, without deduction of tax at source since it had received declarations from the payees in Form 15I. However, the assessee did not file Form 15J within the prescribed time to the jurisdictional CIT. The Assessing Officer disallowed the sum of Rs.28.01 lakhs u/s.40(a)(ia), though the declarations were produced before him in the course of assessment proceedings, on the ground that the authenticity of receiving Form 15I is not discharged due to non-filing of Form 15J with the jurisdictional CIT. Aggrieved the assessee preferred an appeal to the CIT(A).

The CIT(A) stated that the Act does not say that Form 15I is to be treated as non-est due to non-filing of Form 15J by the assessee with the jurisdictional CIT. He held that Form 15I comes into effect before the actual payment or crediting to the account takes place, whereas the due date for furnishing the particulars in Form 15J is 30th June following the financial year. The appellant was to stop deduction of tax on payments as and when he received Form 15I from the sub-contractor. He also observed that the AO had not doubted the existence of Form 15I at the time of making the payment by the assessee. He deleted the addition made by the AO.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held:
Before the Tribunal, it was contended on behalf of the assessee that this issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai ‘F’ Bench in the case of Shri Vipin P. Mehta v. ITO, (ITA No. 3317/Mum./2010, A.Y. 2006-07, order dated 20th May, 2011) and also by the decision of Ahmedabad ‘A’ Bench in the case of Valibhai Khanbhai Mankad v. Dy. CIT, (OSD) (ITA No. 2228/Ahd./2009, A.Y. 2006-07, order dated 29-4-2011).

The Tribunal found that the assessee had obtained Form 15I and filed during the course of assessment proceedings but failed to file Form 15J with the jurisdictional CIT. The Tribunal found the issue to be covered in favour of the assessee by the decision of the Mumbai Bench of ITAT in the case of Vipin P. Mehta (supra). Following the ratio laid down by the said decision, the Tribunal confirmed the order of the CIT(A) and deleted the addition made by the AO.

The Tribunal decided this ground of appeal in favour of the assessee.

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Registration — Partition deed or memorandum of oral partition — Registration Act, 1908 section 17(1)(b), 49.

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[Pilla Muniyappa & Ors v. H. Anjanappa & Ors., AIR 2011 Karnataka 103]

The plaintiffs were residents of Bangalore. They claim that the suit properties were their joint family properties. The family consisted of over one hundred and twenty members. It was the case of the plaintiffs that in order to enjoy the family properties separately a ‘panchayath partition’ was effected and was reduced to writing on 20-2-1990. The particulars of the items of the property allotted to the plaintiffs’ branch forms the suit properties. The plaintiffs as well as the other members of the several branches of the family had subscribed their hand to the family arrangement and settlement and the respective parties had over a period of time enjoyed their respective shares. The revenue records were similarly effected in the names of the respective parties. It is the plaintiffs’ claim that they have secured one acre of land as their share. The defendant No. 4, who is a stranger to the family sought to interfere with the a part of land. It was found that the claim of the fourth defendant was that he had purchased the same from the first defendant without the knowledge or consent of the plaintiffs, though it was allotted to the share of the plaintiffs. The first defendant had no right or interest which he could convey in favour of the fourth defendant. It was in that background that the suit was filed for declaration in respect of the said item of land. The moot question was whether the document of panchayath partition was a memorandum of partition or it was to be construed as a partition deed, and whether it was invalid for want of registration, in which event, it could not be relied upon in evidence and could not be the basis for the appellant’s case.

The Court observed that as per the tenor of the document in question, it is not as if there was an oral arrangement between the parties several years prior to the execution of the document. Such an agreement preceded the execution of the document. Therefore it was a continuous process whereby the parties had discussed the terms of settlement and had reduced it into writing, dividing the properties amongst themselves and therefore, it was in the nature of a partition deed and cannot be construed as a memorandum of oral partition. If that position is accepted, the law of the land would require that the document be registered. Though partition amongst the Hindus may be effected orally, if the parties reduce it in writing to a formal document which is intended to be evidence of partition, it would have the effect of declaring the exclusive title of the coparcener to whom a particular property was allotted in partition and thus the document would be required to be compulsorily registered u/s. 17(1) (b) of the Registration Act, 1908. However, if the document did not evidence any partition by metes and bounds, it would be outside the purview of section 17(1)(b) of the Registration Act.

In view of the above, there is no substance in the contention put forth that the document in the case on hand was a mere record of a family arrangement that had taken place much earlier. It was a partition deed which was compulsorily registerable u/s. 17(1)(b) of the Indian Registration Act, 1908. Therefore, it was inadmissible in evidence for want of registration and could not have been relied upon as the basis to claim that there was an earlier partition.

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International Commercial Arbitration — Jurisdiction of Indian Court — Arbitration and Conciliation Act 1996 section 9.

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[ Videocon Indus. Ltd. v. UOI, AIR 2011 SC 2040]

A production sharing contract was executed between the 5 parties in regards to exploration of natural resources. As per the contract, the seat of arbitration was Kuala Lumpur (Malaysia). In 2000, disputes arose between the respondents and the contractor with respect to correctness of certain cost recoveries and profit. Since the parties could not resolve their disputes amicably, the same were referred to the Arbitral Tribunal as per the contract. The Arbitral Tribunal fixed the date of hearing at Kuala Lumpur (Malaysia), but due to outbreak of epidemic SARS, the Arbitral Tribunal shifted the venue of its sittings to Amsterdam in the first instance and, thereafter to London where on 31-3-2005 partial award was passed. The respondent No. 1 (Govt. of India) challenged the partial award by filing a petition in the High Court of Malaysia at Kuala Lumpur. The appellant questioned the maintainability of the case before the High Court of Malaysia by contending that in view of the contract, only the English Courts have the jurisdiction to entertain any challenge to the award. At that stage, the respondents filed a petition u/s. 9 of the Arbitration and Conciliation Act, 1996 in the Delhi High Court for stay of the arbitral proceedings. The High Court held that it had jurisdiction to entertain the petition filed u/s. 9 of the Act. The said order was challenged before the Supreme Court.

The first issue which arose for consideration was whether Kuala Lumpur was the designated seat or juridical seat of arbitration and the same had been shifted to London. The issue was important as the procedure for the conduct of arbitral proceeding would depend upon the procedural law of the country where the seat of arbitration is seated. The Court observed that as per the terms of the contract entered into by five parties, the seat of arbitration was Kuala Lumpur, Malaysia. However, due to outbreak of epidemic SARS, the Arbitral Tribunal decided to hold its sittings first at Amsterdam and then at London and the parties did not object to this. In the proceedings held at London, the Arbitral Tribunal recorded the consent of the parties for shifting the juridical seat of arbitration to London. Whether this amounted to shifting of the physical or juridical seat of arbitration from Kuala Lumpur to London?

As per the terms of agreement, the seat of arbitration was Kuala Lumpur. If the parties wanted to amend clauses of the contract they could have done so only by written instrument which was required to be signed by all of them. Admittedly, neither any agreement was there between the parties to the contract to shift the juridical seat of arbitration from Kuala Lumpur to London, nor was any written instrument signed by them for amending clause of the contract. Therefore, the mere fact that the parties to the particular arbitration had agreed for shifting of the seat of arbitration to London cannot be interpreted as anything except physical change of the venue of arbitration from Kuala Lumpur to London. Under the English law the seat of arbitration means juridical seat of arbitration, which can be designated by the parties to the arbitration agreement or by any arbitral or other institution or person empowered by the parties to do so or by the Arbitral Tribunal, if so authorised by the parties. In contrast, there is no provision in the Act under which the Arbitral Tribunal could change the juridical seat of arbitration which, as per the agreement of the parties, was Kuala Lumpur. Therefore, mere change in the physical venue of the hearing from Kuala Lumpur to Amsterdam and London did not amount to change in the juridical seat of arbitration.

The next issue for consideration was whether the Delhi High Court could entertain the petition filed by the respondents u/s. 9 of the Act. It was held that once the parties had agreed to be governed by any law other than Indian law in cases of international commercial arbitration, then that law would prevail and the provisions of the Act cannot be invoked questioning the arbitration proceedings or the award. The parties had agreed that the arbitration shall be governed by the laws of England. This necessarily implies that the parties had agreed to exclude the provisions of Part I of the Act. It was held that the Delhi High Court did not have the jurisdiction to entertain the petition filed by the respondents u/s. 9 of the Act and the mere fact that the appellant had earlier filed similar petitions was not sufficient to clothe that the High Court had the jurisdiction to entertain the petition filed by the respondents. The appeal was allowed.

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Professional conduct and Etiquette of Advocates — Duty of Advocate towards Court and client.

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[O. P. Sharma & Ors. v. High Court of P & H, AIR Dr. K. Shivaram Ajay R. Singh Advocates Allied laws 2011 SC 2101]

In a criminal matter an accused was remanded to police custody. When the order of the police remand was not found favourable, his advocate started hurling abuses and detrogatory remarks against the Magistrate. The advocate uttered unparliamentarily words and also threatened the Magistrate with dire consequences. The Magistrate requested fellow advocates who were called, also abused the Magistrate and wanted to assault him physically.

The High Court initiated contempt proceedings. The High Court found the advocates guilty of criminal contempt and convicted them u/s. 12 r.w.s. 15 of the Contempt of Court Act, 1971. On appeal, the Supreme Court accepted the unconditional apology and discharged the contemnors.

The Court observed that a Court, be that of a Magistrate or the Supreme Court, is sacrosanct. The integrity and sanctity of an institution which has bestowed upon itself the responsibility of dispensing justice is ought to be maintained. All the functionaries, be it advocates, Judges and the rest of the staff, ought to act in accordance with morals and ethics.

An advocate’s duty is as important as that of a Judge. Advocates have a large responsibility towards the society. A client’s relationship with his/her advocate is underlined by utmost trust. An advocate is expected to act with utmost sincerity and respect. In all professional functions, an advocate should be diligent and his conduct should also be diligent and should conform to the requirements of law by which an advocate plays a vital role in preservation of society and justice system. An advocate is under an obligation to uphold the rule of law and ensure that the public justice system is enabled to function at its full potential. Any violation of the principles of professional ethics by an advocate is unfortunate and unacceptable. Ignoring even a minor violation/ misconduct militates against the fundamental foundation of the public justice system. An advocate should be dignified in his dealings to the Court, to his fellow lawyers and to the litigants. He should have integrity in abundance and should never do anything that erodes his credibility. An advocate has a duty to enlighten and encourage the juniors in the profession. An ideal advocate should believe that the legal profession has an element of service also and associates with legal service activities. Most importantly, he should faithfully abide by the standards of professional conduct and etiquette prescribed by the Bar Council of India in Chapter II, Part VI of the Bar Council of India Rules.

As a rule, an advocate being a member of the legal profession has a social duty to show the people a beacon of light by his conduct and actions rather than being adamant on an unwarranted and uncalled for issue.

Compilers Comment — The ratio is equally applicable to other professionals.

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Concession made by counsel on facts — Binds his client.

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[ Vimaleshwar Nagappa Shet v. Noor Ahmed Sheriff & Ors., AIR 2011 SC 2057]

An agreement was entered to sell a house by all co-owners except one. As the parties failed to execute the sale deed, a suit for specific performance by the plaintiff purchaser was filed. The co-owner who was not party to the agreement proposed to purchase shares of other co-owners. The counsel for the plaintiff gave consent to such purchase by the co-owner, not party to agreement, at reasonable market value within a stipulated period. The valuation of property at reasonable market value was agreed to, by both parties. Order was passed to execute sale deed in favour of the co-owner not party, by a consent order. Against this, an appeal was filed before the Supreme Court.

The Court observed that apart from both parties including the plaintiff-appellant had agreed for a reasonable market valuation. The statement made by the counsel before the High Court, as recorded in the impugned judgment and order, cannot be challenged before this Court. It was also clear that the High Court had recorded in the impugned judgment that the counsel agreed with instructions from the plaintiff. A concession made by a counsel on a question of fact is binding on the client, but if it is on a question of law, it is not binding.

It is a consent order. As per section 96(3) of the Code of Civil Procedure Code, no appeal lies from a decree passed by the Court with the consent of the parties. For all the reasons, more particularly, the statement of fact as noted in the impugned judgment under Article 136, the Apex Court would not interfere with the order of the High Court which has done substantial justice.

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(2011) TIOL 511 ITAT-Mum. Manali Investments v. ACIT A.Y.: 2005-06.

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Sections 2(29A), 2(29B), 2(42A), 2(42B), 48, 49, 50 and 74 — Brought forward long-term capital loss can be set-off against capital gain computed u/s.50 in respect of a long-term capital asset.

Facts:
The assessee, engaged in the business of finance and investments, sold meters and transformers, which were its depreciable assets, for a consideration of Rs.1,45,99,988. The gain arising on such sale was shown as long-term capital gain. The AO noticed that these meters and transformers were purchased in earlier years for a consideration of Rs.8,75,99,928 and on these 100% depreciation was claimed and allowed in the respective first year itself. The AO invoked the provisions of section 50 and regarded the gain to be short-term capital gain. The assessee, placing reliance on the decision of the Bombay High Court in the case of CIT v. Ace Builders Pvt. Ltd., (281 ITR 210) (Bom.) contended that such profit on sale of meters and transformers, which were otherwise long-term capital assets, was required to be considered as long-term capital gain for the purposes of set-off against brought forward loss arising on transfer of long-term capital assets. The AO rejected this contention of the assessee and treated the amount of Rs.145.99 lakhs as short-term capital gain on sale of assets which resulted into not allowing set-off against brought forward loss from the long-term capital assets.

Aggrieved the assessee preferred an appeal to the CIT(A) who upheld the order passed by the AO.

Aggrieved, the assessee filed an appeal to the Tribunal.

Held:
The effect of section 50 is that once depreciation has been allowed under this Act on a capital asset which forms part of a block of assets, then capital gain on the transfer of such assets shall not be computed in accordance with the provisions of sections 48 and 49, but the income so resulting shall be deemed to be the capital gains arising from the transfer of short-term capital assets in the manner provided in the latter section. Section 50 is a deeming provision and only by legal fiction income from the transfer of otherwise long-term capital assets (held for a period of more than 36 months) is treated as capital gains arising from the transfer of short-term capital assets. Such deeming provision has to be restricted only up to the point which has been covered within the provisions of section 50. The prescription of section 50 is to be extended only up to computation of capital gains. Once the amount of capital gain is determined in case of depreciable assets as per this section, ignoring the mandate of sections 48 and 49 which otherwise deal with the mode of computation of capital gains, the function of this provision shall come to an end and the capital gain so determined shall be dealt with as per the other provisions of the Act. If the assessee is otherwise eligible for any benefit under the Act which is attached to a longterm capital asset, the same shall remain intact. It cannot be denied simply for the reason that on the transfer of such a long-term capital asset, the short-term capital gain has been computed as per section 50.

There can be two stages, viz. firstly, the computation of capital gain on the transfer of otherwise longterm capital assets u/s.50 and secondly, when such capital gain has been so computed, the applicability of other provisions dealing with the short-term or long-term capital assets.

As has been held in the case of Ace Builders (supra), the view that by virtue of the operation of section 50, the capital gain so computed becomes that arising from the transfer of a short-term capital asset for all purposes is incorrect.

The effect of provision of section 74 is that the brought forward loss from long-term capital assets can be set off only against long-term capital gain within the period prescribed in s.s(2) of section 74.

In the instant case, capital gain has arisen from the transfer of an asset which was held for a period of more than three years and no long-term capital gain has entered into the computation of total income of the assessee on this transaction. This amount would also retain the character of long-term capital gain for all other provisions and consequently qualify for set-off against the brought forward loss from the long-term capital assets.

The appeal filed by the assessee on this ground was allowed.

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Insurance business: Section 44: A.Y. 2002-03: The amount set apart by insurance company towards solvency margin as per directions given by IRDA is to be excluded while computing actuarial valuation surplus: Pension fund like Jeevan Suraksha Fund would continue to be governed by provisions of section 44, irrespective of fact that income from such fund is exempted.

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[CIT v. Life Insurance Corporation of India Ltd., 201 Taxman 115 (Bom.); 12 Taxman.com 388 (Bom.)]

The assessee was engaged in the life insurance business. In its return of income for the A.Y. 2002-03, it computed actuarial valuation surplus by excluding the provision for reserve on account of solvency margin amounting to Rs.3,500 crores and loss in Jeevan Suraksha Fund. The Assessing Officer disallowed the claim of the assessee and passed the assessment order by adding the amount on account of the provision for solvency margin and loss from Jeevan Suraksha Fund, inter alia, on the ground that the provision for solvency margin was not an ascertained liability; and that income from Jeevan Suraksha Fund being exempt u/s.10(23AAB), the loss incurred from the said fund could not be adjusted against the taxable income. The Tribunal deleted the additions.

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

“(i) A plain reading of Rule 2 of the First Schedule to the Act, makes it clear that the annual average of the surplus from the insurance business has to be arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938.

(ii) In the instant case, the Chairman of IRDA had directed that the solvency calculations of the assessee did not conform to the requirements of the Regulations that have been stipulated by the Regulatory Authority. It was further directed that the deficiency in the solvency margin was to the extent of Rs.10,000 crores and the assessee was directed to set right the said deficiency over a period of three years by making a provision which would be kept apart in the policy-holders’ fund and no part of the said provision would be available for distribution either to the policy-holders or to the Government of India. Accordingly, the assessee had set apart Rs.3,500 crores towards solvency margin in the assessment year in question.

(iii) The Tribunal, after considering various decisions of the Apex Court as also, the High Court and section 64(VA) of the Insurance Act, 1938, held that the amounts set apart towards the solvency margin as per the directions given by the IRDA was ascertained liability which was required to be set apart as per the Regulations framed by IRDA and, hence, liable to be excluded while computing the actuarial valuation surplus.

(iv) In those circumstances, the decision of the Tribunal in holding that the funds set apart as solvency margin had to be excluded while determining the distributable profits of the assessee could not be faulted.

(v) So far as loss incurred by the assessee from Jeevan Suraksha Fund was concerned, the Jeevan Suraksha Fund is a pension fund approved by the Controller of Insurance appointed by the Central Government to perform the duties of the Controller of Insurance under the Insurance Act. The loss incurred in the Jeevan Suraksha Fund has been considered by the actuary as a business loss, as per the valuation report as on the last day of the financial year, allowable u/s.44 read with the First Schedule to the Act. The fact that the income from such fund has been exempted u/s.10(23AAB) w.e.f. 1-4-1997, does not mean that the pension fund ceases to be insurance business, so as to fall outside the purview of the insurance business covered u/s.44.

(vi) In other words, the pension fund like Jeevan Suraksha Fund would continue to be governed by the provisions of section 44, irrespective of the fact that the income from such fund is exempted, or not. Therefore, while determining the surplus from the insurance business, the actuary was justified in taking into consideration the loss incurred under Jeevan Suraksha Fund.

(vii) The object of inserting section 10(23AAB) as per the Board Circular No. 762, dated 18-2-1998 was to enable the assessee to offer attractive terms to the contributors. Thus, the object of inserting section 10(23AAB) was not with a view to treat the pension fund like Jeevan Suraksha Fund outside the purview of insurance business, but to promote insurance business by exempting the income from such fund.

(viii) Therefore, in the facts of the instant case, the decision of the Tribunal in holding that even after insertion of section 10(23AAB), the loss incurred from the pension fund like Jeevan Suraksha Fund had to be excluded while determining the actuarial valuation surplus from the insurance business u/s.44 could not be faulted.”

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IFRS — FAULTY FRAMEWORK?

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In the UK, the House of Lords report on audit published in March this year created headlines on competition and choice in the audit market and on the audit of banks. While their Lordships made many of their remarks specifically in respect of bank auditing and bank accounting, there were criticisms that were more generic, stemming from the rules-based nature of IFRS and the evidence suggesting that IFRS was an ‘inferior system’, which limited auditors’ scope to exercise ‘prudent judgment’. They went on to recommend that the use of IFRS should not be extended until the ‘long and uncertain process’ of achieving general agreement on IFRS was complete.

Considering that all publicly-held companies in the UK are required to report using IFRS, these are damning criticisms and ones that bear wider examination. While there is a general agreement that IFRS is a theoretically sound framework for financial reporting, practice suggests that all is not well. The reality is that companies are effectively using their own individual financial reporting frameworks when they communicate with the market. GAAP measures tend not to be broadcast, but frequent reference is made to ‘adjusted (EBITDA) (Earnings Before Interest, Taxes, Depreciation and Amortisation)’. The more cynical might suggest that everyone adjusts their EBITDA to suit themselves and that it forms a sort of ‘earnings before the bad stuff’. However, many auditors insist that GAAP figures have equal prominence with non- GAAP measures, the reality is that analysts and the media reflect other measures, such as free cashflow and maintainable earnings.

There are also a number of areas where business people intuitively distrust IFRS and those tend to relate to areas where the economics implicit in accounting judgments fail to reflect the business decisions behind them.

For instance, in IFRS, the excess of the acquisition cost over the individual net tangible asset values of a business acquired represents a number of intangible assets, whereas under UK GAAP it was all bundled together as goodwill. The values attributed to brands, customer lists and other such intangible assets, all require separate valuation exercises using theoretical models and a number of variable inputs.

The resulting values can vary greatly, depending on the inputs used. I have rarely met anyone in business who ascribes values to intangible assets in such a way, when considering a business acquisition or otherwise, and it is hardly surprising that doing so for accounting purposes causes a degree of the financial reporting outputs to be distrusted.

This distrust of formal financial reporting has contributed to the annual report becoming more a document of record than a live source of information. Companies are now more sophisticated and have a number of channels through which information is given to the market. When taken in conjunction with the blandness and sheer volume of narrative reporting and disclosures in annual reports, it is little wonder that some now see them as anachronistic.

What is to be done? On IFRS, I remain convinced that it is the nearest thing to a conceptual framework that can work globally and scalably for different sizes of companies. However, there are areas where it has become overly complex and produces results that just do not make sense to people in business. These need a long hard look, particularly around asset and liability valuation, impairment, intangibles, share options and deferred taxation. It should be fundamental that an accounting framework is scalable so that we can actually have comparability between companies that have different ownership characteristics, but which might otherwise be identical. IFRS can be put in this position if its complexities are resolved and if its rebalances use fundamental principles to give weight to prudence, comparability, reliability and understandability.

If the Lords’ report can start a sensible debate around IFRS and financial reporting more generally, it will have been worthwhile, irrespective of its sharp analysis of the competitive framework of audit.

[Source : James Roberts, Accountancy, May 2011 (excerpted)]

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Section 115F — Bonus shares received on account of original investments made in foreign currency are ‘foreign exchange asset’ covered by provisions of section 115F.

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Sanjay Gala v. ITO ITAT ‘L’ Bench, Mumbai Before P. M. Jagtap (AM) and V. Durga Rao (JM) ITA No. 2989/Mum./2008  A.Y.: 2005-06. Decided on : 15-7-2011 Counsel for assessee/revenue: Vijay Mehta & Umesh K. Gala/R. S. Srivastava

Facts:

For the A.Y. 2006-07, the assessee, a non-resident Indian, filed his return of income declaring the income of Rs.60,000. The Assessing Officer (AO) while assessing the total income u/s.143(3) of the Act did not treat the bonus shares as foreign exchange assets and denied the benefits available u/s.115C of the Act. He assessed the total income to be Rs.11,23,265. There was no dispute that the original shares in respect of which bonus shares were received were acquired with convertible foreign exchange. Aggrieved, the assessee preferred an appeal to the CIT(A). The CIT(A) held that the provisions of section 115(C)(b) define the term ‘foreign exchange asset’ to mean an asset which the assessee has acquired or purchased or subscribed to in, convertible foreign exchange. He held that the bonus shares were neither acquired nor purchased nor subscribed by the assessee and consequently the same were held to be not ‘foreign exchange asset’. He upheld the order passed by the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

(1) The assessee acquired the original shares by investing in convertible foreign exchange and, therefore, it cannot be said that the bonus shares are acquired in isolation without taking into consideration the original shares acquired by the assessee.

(2) The Tribunal observed that the Supreme Court and various High Courts have considered the issue with regard to value of the bonus shares and held that “the method of spreading over on both the bonus and original shares the cost of acquisition of the original shares would appear to be the proper method of determining the value of the asset. For, there is no doubt that on the issuance of the bonus shares, the value of the original shares is proportionately diminished. In simple language it is ‘split up’. As such, the cost of acquisition of the original shares and their value is closely interlinked and interdependent on the issue of bonus shares. Therefore, once the bonus shares are issued, the averaging out formula has to be followed with regard to all the shares.”

(3) In view of the above proposition, the bonus shares were held to be covered by section 115C(b) of the Act, and the same are eligible for benefit u/s.115F of the Act. The Tribunal allowed the appeal filed by the assessee.

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Project Completion Method, AS-7 — In the case of an assessee following project completion method of accounting, receipts arising from sale of TDR received, directly linked to the execution of the project, will go to reduce the cost of the project.

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(2011) TIOL 400 ITAT-Mum. ACIT v. Skylark Build ITA Nos. 4307 & 4308/Mum./2010 A.Ys.: 2006-07 and 2007-08. Dated: 17-6-2011

Facts:

The assessee, a builder, had
taken up a slum rehabilitation project at Worli, Mumbai. The project
started with the construction of a transit building on land provided by
Municipal Corporation of Greater Mumbai (MCGM) at Worli. In financial
year 2005-06, the MCGM came up with a proposal that if the assessee was
ready to handover possession of transit buildings it would grant TDRs.
In terms of the said scheme, the assessee received TDR measuring 15308
sq.mts. vide certificate No. SRA 526, dated 2-10-2005 and another TDR
measuring 46909 sq.mts. vide certificate No. SR 594, dated 3-6-2006.
These TDR were sold by the assessee for Rs.9,92,04,469 and
Rs.5,55,86,123, respectively. Both the TDRs were sold in the same
financial year in which they were received. Since the project was not
complete and the assessee was following project completion method, the
assessee had reduced these receipts against work-in-progress.

The
Assessing Officer (AO) did not accept the explanation given. He held
that TDR was nothing but FSI granted by SRA which could be used by
recipient for construction of flats/premises in Mumbai. Therefore, the
income had accrued to the assessee on account of TDR which was required
to be shown as income in the year of receipt. The AO rejected the method
followed by the assessee and assessed the amounts received on sale of
TDR as income of the respective years under consideration.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who observed that TDRs
were directly related to the project undertaken by the assessee,
therefore, sale proceeds could be taxed only in the year of completion,
which was A.Y. 2007-08. The CIT(A) also referred to the decision of the
Tribunal in the case of ITO v. Chembur Trading Corporation, (2009) in
ITA No. 2593/Mum./2006, dated 21-1-2009 in which it was held that TDRs
have to be recognised as revenue receipts in the year in which project
was completed. He, accordingly, deleted the addition made by the AO.
Aggrieved, the Revenue filed an appeal to the Tribunal.

Held:

The
approach adopted by the AO for assessing the income from TDR
independently without deducting the expenses incurred is not justified.
The assessee has been following project completion method which is an
accepted method of accounting in construction business and also
recommended as per AS-7 of ICAI. Therefore, in such cases the income
from the project has to be computed in the year of completion. The TDRs
received are directly linked to the execution of the project and
therefore, before the completion of the project the income from TDR or
any other receipt inextricably linked to the project will only go to
reduce the costs of the project. Therefore, the assessee had rightly set
off TDR received against work-in-progress. Even if TDR receipt is
assessed as an independent item, deduction has to be allowed on account
of the expenses incurred. The TDRs have been received in lieu of handing
over of constructed transit buildings and therefore, cost of those
buildings has to be deducted against income from sale of TDR. The cost
of the buildings is claimed to be more than income from TDR, full
details of which were given to the CIT(A) and therefore, even on this
ground no income can be assessed in case of the assessee. For A.Y.
2006-07, there was no dispute that the project was not complete.

The
Tribunal held that for A.Y. 2006-07, the receipts from sale of TDR have
to be reduced from WIP. The Tribunal noted that the AO had not given
any finding about the year of completion of the project. The CIT(A) had
held that the project was completed in A.Y. 2007-08, but had not given
any basis of such finding. The Tribunal restored the matter to the file
of the AO to verify the year of completion of the project and directed
the AO to compute income from project after taking into account entire
expenditure and the receipts from the beginning of the year including
TDRs as directed by the AO, if he comes to the conclusion that the
project was complete. In case he comes to a conclusion that the project
was not complete, then the AO shall set off TDR receipts against WIP and
no income will be assessed on account of TDR receipts separately.

The Tribunal dismissed the appeals filed by the Revenue.

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Sections 40(a)(ia), 194C — Service contracts have not been specifically included in Explanation III below section 194C. Provisions of section 194C are not applicable to the payments to C & F agents. Payments made by the assessee to C & F agents towards reimbursement of statutory liability paid by C & F agent on behalf of the assessee cannot be considered to be covered by section 194C as they are not for any work of the nature mentioned in Explanation III.

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(2011) TIOL 440 ITAT-Mum. ACIT v. P. P. Overseas ITA No. 733/Mum./2010 A.Y.: 2006-07. Dated: 18-2-2011

Facts:

The assessee had paid C & F agency charges to Vidhi Enterprises and Jayashree Shipping being their charges as agent of the assessee. These payments were made without deducting tax at source. Also, no tax was deducted from payments debited under the head ‘C & F Expenses; being reimbursement of expenses such as customs duty, food stuffing charges, DEPB licence/miscellaneous expenses, conveyance and other charges. The Assessing Officer rejected the contention of the assessee that considering the nature of payment, no tax was required to be deducted. He, accordingly, added a sum of Rs.4,02,252 to the total income by invoking the provisions of section 40(a)(ia) of the Act.

Aggrieved the assessee preferred an appeal to CIT(A) where relying on the decision of the Bombay High Court in the case of East India Hotels Ltd. v. CBDT, 179 Taxman 17 (Bom.) it was contended that section was not applicable to a service contract which is not specifically included in the section under Explanation III. Reliance was also placed on the decision of Visakhapatnam Bench of the Tribunal in the case of Mythri Transport Corporation v. ACIT, 124

TTJ 970, where it was held that when the risk of the main contract is not passed on to the intermediary, then the provisions of section 194C do not apply. The CIT(A) accepted these contentions and directed the AO to delete the disallowance of Rs.4,02,252. Aggrieved, the Revenue filed an appeal to the Tribunal.

Held:

 The contract between the assessee and the C & F agent is a service contract which has not been specifically included in Explanation III below section 194C. In this view of the matter, the provisions of section 194C are not applicable to the payments to C & F agents. If that is so, there was no obligation on the part of the assessee to deduct tax from the payment made to C & F agents.

In respect of payments to agents towards reimbursement of statutory liabilities such as customs duty, DEPB licence, etc., the Tribunal observed that these are actually the liabilities of the assessee and noted that the receipt for the payment is issued by the concerned authority only in the name of assessee. The C & F agents merely collected the payments from the assessee for payment to concerned authorities. The Tribunal held that such payments cannot be considered to be covered by section 194C as they are not for any work of the nature mentioned in Explanation III. These amounts are not subject to TDS, even if it is assumed that section 194C is applicable to the payments in question.

The Tribunal upheld the order of CIT(A) by observing that the basic question as to whether the payments of the nature made by the assessee are covered by Explanation III below section 194C has been answered in favour of the assessee by the judgment of the Bombay High Court cited above and on this ground alone the decision of the CIT(A) has to be upheld. The appeal filed by the Revenue was dismissed.

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Section 194C — As per explanation III(c) to section 194C(2) payment made by assessee for using facility for movement of goods should be categorised as payment for carriage of goods and not as technical fees u/s.194J.

(2011) 129 ITD 109 (Mum.) ACIT v. Merchant Shipping (P) Ltd. A.Y.: 2004-05. Dated: 24-11-2010

Section 194C — As per explanation III(c) to section 194C(2) payment made by assessee for using facility for movement of goods should be categorised as payment for carriage of goods and not as technical fees u/s.194J.

Section 201(1) & 201(1A) — Person responsible to deduct tax at source cannot be treated as assessee in default in respect of tax u/s.201(1), if payee has paid tax directly — However, payee is liable to pay interest u/s.201(1A), from date of deduction to actual payment of tax.

Facts

  •  Payment was made by the assessee to the NSICT for movement of containers to the vessel and from the vessel. On payment to NSICT the assessee deducted tax u/s.194C.

  •   However the AO rejected the same on the ground that services received by the assessee are in the nature of technical services. Therefore, tax should be deducted u/s.194J. Subsequently the AO raised the demand for short deduction u/s.194J of Rs.36,08,701 and interest u/s.201(1A) of Rs.24,90,004.

  • Aggrieved by the order of the AO the assessee filed the appeal before CIT(A).

  • The CIT(A) up held the contention of the assessee of deducting tax under 194C. However the CIT(A) upheld the order of AO u/s. 201(1) and 201(1A).

Held

  •  In order to be covered by sec 194J, there should be consideration for acquiring/using technical know-how provided/made available by human intervention. Section 194J is to be read with explanation 2 to section 9(1)(vii) which defines fees for technical services. Involvement of human element is essential to bring any service with in the meaning of technical service.

  •  In the present case payment was made by the assessee for using a facility and not for availing any technical service which may have gone into making of the facility.

  • In order to be covered by section 194J, there should be direct link between the payment and receipt of technical service/information. Technical service does not include service provided by machines/robots. (CIT v. Bharti Cellular Ltd.) Held that the assessee had rightly deducted tax u/s.194C and the AO had erred in applying provisions of section 194J.

Facts

  • The AO considering the deduction to be a short deduction of the raised demand for the interest u/s.201(1A) of Rs.29,00,004.

  • On appeal by the assessee to the CIT(A), the learned CIT(A) held that the assessees’s liability for deducting tax at source was not washed away by payment of tax by recipient. The CIT(A) upheld order of the AO passed u/s. 201(1) and 201(1A).

  • The assessee filed appeal before the ITAT for payment of interest u/s.201(1A) and for treating order of the AO u/s.201(1) and 201(1A) as time-barred.

 

Held

1.    Payment of interest u/s.201(1A) of Rs.2490004:

(a)    As there was no liability on the assessee to deduct tax u/s.194J, demand of interest u/s.201(1A) is incorrect.
(b)    However from a legal and academic point of view, the liability of payer to pay interest u/s.201(1A) exists for the period between the date on which tax was deductible till date of actual payment.
(c)    Any demand u/s.201(1) of the Act should not be enforced after the tax deductor has satisfied AO that taxes due have been paid by the payee.

2.    Treating order as time-barred:

(a)    Held that, time limit for initiating and completing the proceeding u/s.201(1) has to be at par with the time limit available for initiating and completing the reassessment. Thus the order passed by the AO is within the time limit.
(b)    Thus appeal of the Revenue was dismissed and cross-objection of the assessee was partly allowed.

Interbank foreign currency transaction exempted — Notification No. 27/2011, dated 31-3-2011.

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By this Notification taxable services provided in relation to interbank transactions of purchase and sale of foreign currency have been exempted.

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Units located in SEZs to get benefit — Notification No. 17/2011, dated 1-3-2011.

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Central Government has notified simplified measures for the benefit of units located in SEZs to enable them to obtain tax-free receipt of services to be consumed within the Zone and to get refunds through simplified procedures, subject to the fulfilment of the conditions specified in the said Notification.

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Educational institution: Exemption u/s. 10(23C)(vi): Assessee-society was running a school: Its application for exemption u/s. 10(23C)(vi) was rejected on ground that its objects, viz., to manage/maintain a library, reading-room, and conduct classes of stitching, embroidery, weaving, centre for adult education and to make necessary arrangements for overall development and growth of children when required, were non-educational in nature: Rejection not proper.

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[Little Angels Shiksha Samiti v. UOI, 199 Taxman 237 (MP)(Mag), 11 Taxman.com 37(MP)]

The assessee-society was running a school. Its objects were:

(a) establishment of a school for the intellectual development of children;
(b) to conduct the classes and activities for all the levels of study and education;
(c) to manage/maintain a library, reading-room, and conduct classes of stitching, embroidery, weaving centre for adult education and education in the field of entertainment, arts, etc.; and
(d) To make necessary arrangements for the overall development and growth of children when required.

For the A.Ys. 2005-06 and 2006-07, the assesseesociety had been granted exemption u/s. 10(23C) (vi). It filed application for grant of approval for exemption u/s.10(23C)(vi) for A.Y. 2007-08. The Commissioner rejected the assessee’s application on the ground that the objects of the society mentioned in clauses (c) and (d) of the object clause were non-educational and, thus, the society did not exist solely for educational purpose.

The Madhya Pradesh High Court allowed the writ petition filed by the assessee-society and held as under:

“(i) In view of the judgment of the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT, (1975) 101 ITR 234 the word ‘education’ used in clause (15) of section 2 means the process of training and developing the knowledge, skill, mind and character of the students by normal schooling.

(ii) In the instant case, clause (c) of the objects was to manage and maintain a library, reading-room and conduct classes of stitching, embroidery, weaving and schooling, adult education and education in the field of entertainment, arts, etc. The assessee-society had followed the instructions issued by the Board of Secondary Education in regard to practical examinations for home science and in the aforesaid instructions, stitching, embroidery, weaving subjects had been mentioned. The adult education is also a part of education. If the assessee-society introduced the aforesaid object, it could not be said that the object of the assessee-society was not of educational purpose.

(iii) Clause (d) of the objects was to make necessary arrangement for the complete development of the children. That object was also in consonance with the modern concept of education, because the education is not only to impart education through book reading, but it also includes sports activities and other recreational activities, dance, theatre and even having educational tour within the country and abroad, so that the children can develop their overall talent. It could not be said that the said object was not for educational purpose.

(iv) Apart from that, from the audited accounts of the society, it was clear that it had not used the amount and income for any other business activities. In such circumstances, rejecting the application of the assessee-society at threshold was arbitrary and illegal.

(v) It was also a fact that for prior two years, the assessee-society was granted exemption and after the year 2006-07, the assesseesociety had deleted the clauses (c) and (d) in its memorandum of association. In such circumstances, the order passed by the authority was illegal and against the provisions of section 10(23C)(vi).

(vi) Consequently, the petition was to be allowed. The impugned order was to be quashed. The application filed by the assessee for grant of approval u/s. 10(23C)(vi) was to be accepted.”

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25% abatement for transportation of coastal goods — Notification No. 16/2011, dated 1-3-2011.

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By this Notification, an abatement of 25% of the goods amount charged has been provided from the taxable value of service of transportation of costal goods, goods through National Gateway and transportation through inland water.

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Interest on delayed payment of service tax hiked to 18%. — Notification No. 14/2011, dated 1-3-2011.

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The interest rate on delayed payment of service tax has been increased from 13% to 18% p.a.

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Notification No. 10/2011 & 11/2011, dated 1-3-2011.

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By this Notification services provided in relation to execution of works contract have been exempted when such services are provided within a port/ other port/airport.

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Depreciation: Rate: Section 32: Gas cylinder including valves and regulators: Entry in schedule: Rate 100%: Liquefied petroleum gas cylinder mounted on chasis of truck: Gas cylinder entitled to depreciation at 100%: Cannot be treated as motor vehicle.

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[CIT v. Ananth Gas Supplies, 335 ITR 334 (AP)]

The assessee was dealing in liquefied petroleum gas which it transported in gas cylinders fitted to the chassis of transport vehicles. The assessee claimed depreciation on the cylinders at 100% as applicable to gas cylinders. The Assessing Officer held that the assessee was entitled to depreciation at 40% as applicable to transport vehicles on the ground that the vehicle on which the cylinder was mounted was registered as transport vehicle. The Tribunal allowed the assessee’s claim.

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

“(i) The container mounted on the chassis of the truck was nothing but a gas cylinder and it fits the description of gas cylinder in Appendix I, Part I, item III(ii)F(4) read with Rule 5 of the Rules as including valves and regulators.

(ii) The mere fact that the container was mounted on the chassis of the truck did not deprive it of the character of gas cylinder. It had all the attributes of the cylinder and was not divested of its basic character as cylinder on account of the fact that the item was registered as a transport vehicle.

(iii) The assessee was therefore entitled to claim depreciation at 100% on the liquefied petroleum gas cylinder mounted on the chassis of the truck.”

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Notification No. 09/2011, dated 1-3-2011.

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By this Notification, taxable service of transportation of goods by air has been exempted to the extent of air freight included in the custom value of goods.

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Business expenditure: TDS: Disallowance u/s.40(a)(i) r.w.s 194A: Assessee exporting goods: Bills of exchange discounted abroad: Discounting charges not interest: Tax not deductible at source: Discounting charges allowable as deduction.

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[CIT v. Cargill Global Trading P. Ltd., 335 ITR 94 (Del.); 241 CTR 443 (Del.)]

The assessee was in the export business. On the exports to its buyers outside India, the assessee drew bills of exchange on those buyers. These bills of exchange were discounted by the assessee from CSFA which on discounting the bills immediately remitted the discounted amount to the assessee. CSFA was a company incorporated in Singapore and a tax-resident of Singapore. The discount charges were claimed by the assessee as expenses u/s.37. The Assessing Officer disallowed the claim for deduction of the discount charges treating the same as interest on the ground that tax was not deducted at source from the amount. The Tribunal allowed the assessee’s claim.

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

“(i) It is clear from the definition in section 2(28A) of the Income-tax Act, 1961, that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred.

(ii) The discount charges paid were not in respect of any debt incurred or money borrowed. Instead the assessee had merely discounted the sale consideration. Tax was not deductible at source on the amount. The amount was deductible.”

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Business expenditure: TDS: Disallowance u/s.40(a)(i) r.w.s 195: Payment of interest by branch (PE) to head office abroad: By virtue of convention head office not liable to pay any tax in India: No obligation on branch to deduct tax at source: Interest to be allowed as deduction in the hands of branch.

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[ABN Amro Bank v. CIT, 241 CTR 552 (Cal.)]

The assessee-foreign company incorporated in the Netherlands had its principal branch office in India. Indian branch remits funds to head office as payment of interest. The Indian branch had not deducted tax at source on such interest payment to the head office. The following two issues were for consideration by the Calcutta High Court:

“(i) Whether interest payment made by the Indian branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant’s branch in India?

(ii) Whether in making such payment to the head office, the appellant’s said branch was required to deduct tax at source u/s.195 of the Income-tax Act, 1961?”

The Calcutta High Court held as under:

“(i) An unnecessary complication has been created by the interpretation made of section 40(a) (i) r.w.s 195 by both the appellant and the respondents. A proper meaning has to be ascribed to the expression ‘chargeable’ under the provisions of this Act. Section 195(1) says that if any interest is paid by a person to a foreign company, which interest is chargeable under the provisions of this Act, tax should be deducted at source. The word ‘chargeable’ is not to be taken as qualifying only the phrase ‘any other sum’, but it qualifies the word ‘interest’ also. Where the interest is not so chargeable, no tax is deducted.

(ii) In this case, by virtue of the convention, the head office of the appellant is not liable to pay any tax under the Act. Therefore, there was and still is no obligation on the part of the appellant’s said branch to deduct tax while making interest remittance to its head office or any other foreign branch.

(iii) Therefore, if no tax is deductible u/s.195(1), section 40(a)(i) will not come in the way of the appellant claiming such deduction from its income. Therefore, in the circumstances, the appellant would be entitled to deduct such interest paid, as permitted by the convention or agreement, in the computation of its income.”

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Qualification regarding overdue amounts from Customers

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Assam Company India Ltd. (31-12-2010)

From Notes to Accounts

Sundry Debtors include an overdue above one year of Rs.2,777.64 lacs, which in the opinion of the management is good and recoverable.

From Auditors’ Report

We draw your attention to Note no. 30 on Schedule no. 13, regarding overdue amounts, aggregating to Rs.2,777.64 lacs at the year-end, due from certain customers which, according to the Management, are recoverable. However, the Management could not provide sufficient and appropriate evidence as to the realisability of the aforesaid overdue amount for our examination and we are unable to concur with the Management’s assertion in this respect that adequate consideration has been given to the concept of prudence set out in Accounting Standard 1 — Disclosure of Accounting Policies. The amount of overdue debts that may be required to be provided for, and impact thereof on the reported profit before tax for the year, debtors’ balance and Reserves and Surplus balance at the year-end, could not be determined.
Further to our comments in the annexure referred to the paragraph 3 above, we report that:

(a) Except for the matter referred to in paragraph 4 above, we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit;

(b) In our opinion, except for the indeterminate effects of the matter referred to in paragraph 4 above, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books;

(c) The Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by this report are in agreement with the books of account;

(d) In our opinion, except for the matter referred to in paragraph 4 above, the Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by this report comply with the accounting standards referred to in sub-section (3C) of section 211 of the Act;

(e) On the basis of written representations received from the directors, as on 31st December, 2010 and taken on record by the Board of Directors, none of the directors is disqualified as on 31st December, 2010 from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Act;

 (f) In our opinion and to the best of our information and according to the explanations given to us, the financial statements, together with the notes thereon and attached thereto, give, in the prescribed manner, the information required by the Act, and, except for the indeterminate effects of the matter referred to in paragraph 4 above, give a true and fair view in conformity with the accounting principles generally excepted in India:

From Directors’ Report

Auditors’ observations
The remarks in the Auditors’ Report are already explained in the Notes to the Accounts and as such, does not call for any further explanation or elucidation.
The Board, however, deliberated at length with the Statutory Auditors suggestion to provide for export realisation amount which is overdue. Taking into account the 18 years-long association with the Debtors, their track record of making full payment of export dues in the past and considering their request to grant them further time to pay overdue amount the Board thought it prudent not to provide in these Accounts.
Non-Consolidation of Employee Welfare Trust while preparing CFS
Network 18 Media & Investments Ltd. (CFS) (31-3-2011)

From Notes to Accounts
The financials of Network 18 Group Senior Professionals Welfare Trust, a trust formed for the welfare of past and present employees (including directors) of the Company and its subsidiaries have not been consolidated since, as per the management, it is not likely that any economic benefit will flow to the group from that Trust.

From Auditors’

Report Attention is drawn to:

(a) Note 1(C) of Schedule 17 to the financial statements regarding the non-consolidation of Network 18 Group Senior Professionals Welfare Trust as the management does not expect any economic benefit will flow to the group from that Trust.

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