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Year: 2011

(2011) 22 STR 342 (Tri.-Bang.) — MTR Foods Ltd. v. CCEx., Bangalore.

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CENVAT credit of Service tax can be availed on CHA services engaged by the appellant for export of its products.

Facts:
? The appellants engaged services of Clearing House Agent (CHA) for export of their goods. They were disallowed availment of CENVAT credit of Service tax paid on services rendered by CHA on the ground that the said service does not fall under the category of ‘input service’ and that the service does not relate to ‘business activities’. CHA services are rendered beyond the place of removal.

? Relying on the case of CCE, Nagpur v. UltraTech Cement Ltd., [2010 (20) STR 577 (Bom.)], the appellants inter alia contended that Service tax paid on services required for the activities relating to business could not be denied CENVAT credit. In the case of Rolex Rings (P) Ltd. 2008 (230) ELT 569 (Tri.), it was held that CHA and surveyors’ services are utilised at the time of export of goods and it could be concluded that the place of removal in case of exported goods is the port area. The ownership of the goods remains with the seller till the port area, it can be safely held that all the services availed by the exporter till the port area are required to be considered as ‘input service’ inasmuch as the same are clearly related to the business activities. Activities relating to business are covered by the definition of input service and admittedly CHA and surveyors services are relating to the export business.

Held:
The issue involved in the case is settled in many decisions which followed the decision in the case of Rolex Rings P. Ltd. (supra). Further, the judgment in the case of UltraTech Cement (supra) squarely covers the issue. Where the sale takes place at the destination point and the ownership of the goods remains with the seller till the delivery of the goods, the place of removal would get extended to the destination point and the credit of Service tax paid on the transportation up to such place of sale would be admissible. The Commissioner (Appeals) went beyond the scope of show-cause notice while concluding that some goods exported by the assessee were exempted goods and the appellants could not have availed CENVAT credit on the activities relating to such goods. Thus, the appeal was allowed.

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REINVESTMENT IN OVERSEAS PREMISES

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1. Issue for consideration:

1.1 Section 54 of the Income-tax Act grants an exemption from payment of tax on capital gains, arising on transfer of a residential house on fulfilment of the conditions specified therein. One of the conditions requires an assessee to re-invest the capital gains in purchasing or constructing a residential house within the prescribed period.

1.2 Section 54F of the Act grants a similar exemption from payment of tax on capital gains, arising on transfer of a capital asset other than a residential house on fulfilment of the conditions specified therein. This Section also amongst other conditions requires an assessee to re-invest the net consideration in purchasing or constructing a residential house within the prescribed period.

1.3 Both these provisions restrict the benefit of exemption to individuals and Hindu Undivided Families and grant exemption, irrespective of the residential status of the assessees. These provisions do not confer or deny the exemptions for tax on the basis of the location of the residential house.

1.4 In the advent of the globalisation, it is not uncommon, that the new residential house is acquired by an assesse at a place located outside India. Such overseas acquisitions have, in turn, triggered a controversy in taxation involving the eligibility of an assessee for exemption based on re-investment of capital gains outside India.

2. Leena J. Shah’s case:

2.1 The issue arose in the case of Smt. Leena J. Shah v. ACIT, 6 SOT 721 (Ahd.) where an assessee perhaps for the first time, contested the action of the CIT(A) in confirming the denial of exemption u/s.54F of the Income-tax Act, 1961 inter alia on the ground that the investment was made by the assessee in purchasing the residential house outside India.

2.2 The assessee, a non-resident sold some plots of land located in India for a total consideration of Rs.44,92,170 and earned the capital gains of Rs.43,80,454 after reducing the indexed cost of Rs.1,11,760. She claimed an exemption for investment in residential house and purchased a residential house in the USA, outside India. The AO denied the exemption by observing that the sale proceeds of the plot of land had not been utilised in acquiring the residential house in India and moreover, the residential house purchased/ constructed in the USA is not subject to tax in India within the meaning of section 54 of the Act. The AO therefore, did not allow the claim of deduction of Rs. 43,80,454 and brought the said amount to tax.

2.3 The CIT(A) confirmed the action of the AO by holding that section 54F was introduced in the Act by the Finance Bill, 1982 and the Memorandum explaining the provisions of the Finance Bill, 1982 explained that the exemption u/s.54F was granted with a view to encourage the construction of the house which naturally meant that the house was constructed in India and not outside India.

2.4 The assessee submitted before the Tribunal that; section 54F which was similar to section 54 did not make any distinction between a resident and a non-resident unlike several other sections in which the benefit was clearly and unambiguously denied to a non-resident; the benefit of section 54 and section 54F was intended to be available to both the categories of assessees without any discrimination; any interpretation which militated against the basic principle would not be a just and fair interpretation of the statute and would amount to doing injustice to all nonresidents in general and the appellant in particular who had invested the net consideration in a residential house, though outside India.

2.5 It was further explained that; there was no such stipulation u/s.54F that the new residential house must be located in India; wherever the Legislature found requirement of such stipulation, the same was provided in that section; the language of section was clear, the same was to be read accordingly. The decisions in the case of Padmasundra Rao v. State of Tamil Nadu, Kishore B. Setalvad v. CWT, and Orissa State Warehouseing Corpn. v. CIT were relied upon.

2.6 The honourable Tribunal concurred with the view that the legislative intent behind introduction of section 54F was to be gathered form the Notes, Memorandum and the Circular which in the Tribunal’s view provided that the investment was to be in the residential house located in India. The Tribunal cited several decisions in support of the view that the external aids like Notes, etc. were available for interpretation of the law and the meaning of the provision of section 54F could be gathered from such aids. In the light of the above settled rulings of interpretation of tax statutes, the Tribunal found appropriate that a residential house purchased/constructed must be in India and not outside India, in the USA. It noted that the interpretation put forth by it was strongly supported by the marginal note to section 54F.

3. Prema P. Shah’s case:

3.1 The issue again arose in the case of Prema P. Shah v. ITO, 100 ITD 60 (Mum.) where the question before the Tribunal was whether the exemption contemplated u/s.54(1) could be extended to the capital gains that was reinvested in a residential house purchased in a foreign country on selling the property that was situated in India.

3.2 In that case the brief facts available are that the assessee sold a jointly held residential property located in India for Rs.60 lakh on 4-4-1992 which was purchased for Rs.14 lakh on 29-3-1983. The capital gains was reinvested in purchasing residential house outside India, in London, the UK. The assessee claimed exemption u/s.54, showing long-term capital gains as Nil. The AO denied the exemption claimed on a few grounds including for the fact that the property was located outside India and in his opinion the same was required to be located in India for a valid claim of exemption from taxation.

3.3 The CIT(A) upheld the action of the AO and did not approve the view canvassed by the assessee. While disallowing the assessee’s claim, the CIT(A) observed:

(a) the assessee had taken loan from Barclays Bank and used the assessee’s foreign earning to purchase/lease the property. In other words, the receipts which gave rise to capital gains, were not utilised for the purchase of the property,

(b) the assessee had not purchased the property in India and the Income-tax Act extended to the ‘whole of India’ only,

(c) The lease for 150 years, though perpetual, the benefit of long-term lease obtained in the UK could not be treated as purchase under the Indian laws for the purpose of income taxation.

3.4 The assessee before the Tribunal contended that there was nothing in the statute to show that the property purchased should exist in India so as to claim the benefit contemplated under the Act; that the only stipulation for a valid claim of exemption was that the income should have arisen in India and it was not necessary that it should also be invested in India. For the above proposition, the assessee drew the attention to section 11 of the Income-tax Act, 1961 and it was further submitted that if the Legislature had such an intention, it would have been definitely and specifically mentioned, as it had been mentioned in section 11 which provided that any income from property held for charitable or religious purposes was exempt from tax u/s.11(1)(a) only to the extent it applied it to such purposes in India; if the Legislature wanted investment of the capital gains in India itself for exemption, the Legislature would have specifically stated so in the section itself.

3.5 The Tribunal on consideration of the submissions made by the parties was of the considered view that the assessee was entitled to the benefit of exemption form taxation under the Act which did not exclude the right of the assessee to claim the property purchased in a foreign country. The Tribunal held that if all other conditions laid down in the section were satisfied, merely because the property acquired was located in a foreign country, the exemption claimed would not be denied.

4.    Girish M. Shah’s case:

4.1 The issue recently arose in the case of ITO v. Dr. Girish M. Shah, ITA No. 3582/M/ 2009 before ‘G’ Bench of ITAT, Mumbai. In that case, the assessee, non-resident Indian settled in Canada since 1994, sold his flat in Mumbai in 2003, for Rs.16 lakh, that was purchased in April, 1984, for Rs.1,31,401. The assessee claimed the benefit of indexation and reported a net capital gain of Rs.797,801. The entire sale consideration was repatriated to Montreal for a joint purchase of a house for Rs.64.75 lakh. The benefit of section 54 was claimed on the ground that sale proceeds were utilised for purchasing property.

4.2 The AO held that the provisions of the Act were applicable to India only. When a non-resident could not be taxed in India in respect of income received outside India, deduction could in the AO’s view could not be granted in respect of an activity outside India. He also noted that there was no undertaking that capital gains would be paid should the new property be disposed of. The AO, placing reliance on the decision of the Ahmedabad Tribunal in the case of Leena J. Shah v. ACIT in ITA No. 2467 (Ahm.) (supra), denied the benefit of section 54 to the assessee and recomputed the long-term capital gains at Rs.13,51,803.

4.3 On appeal the CIT(A) found that the entire sale proceeds had been utilised in the purchase of the new asset and hence capital gains was not chargeable u/s.54 of the Act. He also held that section 54F did not specify that the new as-set should be situated in India. As there was no specific restriction on location of new asset, the benefit of section 54F could not be denied to the assessee who had satisfied all other conditions, observed the CIT(A). The CIT(A) relied on the decision of the jurisdictional Tribunal in the case of Mrs. Prema P. Shah v. ITO (supra) for allowing the exemption that was claimed by the assessee.

4.4 The Tribunal vide order dated 17-2-2010 relying on the decision in the cases of Mrs. Prema P. Shah and Sanjiv P. Shah v. ITO (supra) upheld the action of the CIT(A) by holding as follows: “In short, we are of the considered view, for the reasons stated hereinabove, that the assessee is entitled to the benefit u/s.54 of the Act. It does not exclude the right of the assessee to claim the property purchased in a foreign country, if all other conditions laid down in the section are satisfied, merely because the property acquired is in a foreign country”. The Tribunal noted that the jurisdictional High Court had dismissed the Revenue’s appeal against the above order of the Tribunal in the case of Prema P. Shah and Sanjeev P. Shah on account of the tax effect being less than Rs.4 lakh.

4.5 The Tribunal noted that in Leena J. Shah’s case, the issue was for the claim u/s.54F, while in the case before them, it was section 54. It noted that the decision of the jurisdictional Tribunal had a greater binding effect.

4.6 Lastly, the Tribunal observed that it was the settled law that if there were two views, the Court had to adopt the interpretation that favoured the assessee.

5.    Observations:

5.1 A bare reading of the provisions of sections 54 and 54F make it abundantly clear that there are no express conditions that require that the capital gains or the net consideration is reinvested in a residential house located in India. There are several provisions of the Income-tax Act which specifically require an investment to be made in India or for an act to be carried out in India. In the circumstances, for denying the claim of exemption, one will have to read the location-based condition in to these provisions, so as to insist on the new house being in India.

5.2 Section 54F was introduced by the Finance Act, 1982 for the purpose of conferring exemption from tax on capital gains in certain cases on investment of the consideration in residential premises. The said provision nowhere mandates that the exemption is conditional and is subjected to investment in residential premises located in India. The language of the law is very clear and does not leave any scope for ambiguity or misunderstanding.

5.3 It is the settled position in law that nothing is to be read in the provisions of the Act or added thereto where the language of the law is clear. In case of section 54 and section 54F the language in the context of location of the premises is clear and unambiguous leaving no scope for application of any external aids of interpretation like, FM’s speech or Notes to clauses or Memorandum explaining the provisions and the Circular explaining the same. It is significant to note that even the Circular, heavily relied upon by the learned AO, at no point or place requires that the construction of residential premises should be in India before an exemption u/s.54F is granted.

5.4 The main plank for denying the exemption is based on the Notes to Clauses, 134 ITR 106 (St.) Memorandum to the Finance Act, 1982, 134 ITR 128 (St) and the Circular of the CBDT bearing Circular No. 346, dated 30-6-1982 issued on introduction of section 54F by the Finance Act, 1982 The relevant paragraph of the Circular is reproduced as under:

“20.1 Under the existing provisions of the IT Act, any profits and gains arising from the transfer of a long-term capital asset are charged to tax on a concessional basis. For this purpose, a capital asset which is held by an assessee for a period of more than 36 months is treated as a ‘long-term’ capital asset.

20.2 With a view to encouraging house construction, the Finance Act, 1982, has inserted a new section 54F to provide that where any capital gain arises from the transfer of any long-term capital asset, other than a residential house, and the assessee purchases within one year before or after the date on which the transfer took place or constructs within a period of three years after the date of transfer, a residential house, the capital gains arising from the transfer will be treated in a concessional manner as under ……”

5.5 The Finance Minister’s speech on introduction of the Finance Act of 1982, 134 ITR (St.) 23, does not prescribe any such condition for exemption based on the location of the new asset-neither the speech suggest that the provision is introduced for promotion of the construction of houses, leave alone in India. The Circular No. 346 appears to have supplied the legislative intent without being authorised to do so.

5.6 Such an ‘Indian’ insistence by the authorities appears to be misplaced, more so when the language of these provisions is clear and leave no room for ambiguity. Even the Circular relied upon by the authorities does not mandate that the construction of houses sought to be promoted is India-specific. Significantly, even the analogy based on the said Circular is not available for rejecting the claim for exemption u/s.54 which provision surely is not handicapped by any Circular explain-ing the alleged intention behind its introduction.

5.7 The law undoubtedly overrides the Circular where the language of the law is clear. The unambiguous language of the law i.e., sections 54 and 54F does not restrict its scope based on the location of the asset. It is a sheer fallacy to read the condition of investment in India in the provisions and assume that exemption u/s.54F from capital gains is intended to give a boost to the construction of residential houses in the country and this objective will not be achieved if the property is acquired or constructed in a foreign country. It is clear that the Circular has presumed that section 54F is introduced for construction of house. Assuming that such presumption of the board is right, it nowhere requires that the house construction should be in India.

5.8 Section 54F is introduced mainly for facilitating purchase of house by the people on sale of other assets. Therefore the exemption at best can be said to be introduced to enable the purchase of house by an individual or HUF without payment of tax. Had it been for the promotion of construction industry, the exemption would have been conferred on all assessees and would not have been restricted to individual and HUF.

5.9 The decision in the case of Leena J. Shah, has been delivered without detailed reasons, in one paragraph, after citing several decisions of the courts to suggest that in interpretation of the law, it is permissible to rely on the external aids of interpretation including the Notes, Memorandum and the Circular. While there cannot be two opinions on this wisdom, what is perhaps overlooked, with full respect, is the established position in law which requires and permits the use of external aids only in cases where the language of the law is unclear and ambiguous and as noted the language here is clear. It is for this reason that the subsequent decisions of the Tribunal have chosen to not follow the ratio of the said decision in Leena J. Shah’s case and have proceeded to allow the exemption in cases of overseas investment. Moreover, the later decisions of the Mumbai Tribunal, being the latest shall prevail over Leena J. Shah’ decision, more so because the said decisions have not only considered the ratio of Leena J. Shah’s decision but have also analysed the law in detail in concluding that the benefit of exemption is available for overseas investment.

5.10 A resident assessee is entitled to and is not denied exemption u/s.54F on purchase of residential premises anywhere in the world. If that is so, in the absence of any specific or implied prohibition, such an investment any-where in the world by a non-resident cannot be denied.

5.11 Once the Income-tax Act, 1961 assumes the power to tax the Income of a non-resident, then the logical consequence of such a power is to confer upon such a person all the benefits that flow from the provisions of the Act unless specifically prohibited.

5.12 The Income-tax Act, wherever required has specifically stipulated in writing that the investment should be made in India, like in sections 10(20A) and 10(20B) 10(22) and 10(24), 10(26) and section 11(1)(a) which reads as under:

“11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income —

(a)    income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property; ……”

5.13 Likewise even Chapter XIIA, vide section 115C(f), clearly provides that the investment should be in specified asset of Indian company or Central Government for a person to claim exemption u/s. 54F. Similarly, section 54E to 54ED requires investment in Indian assets for claiming exemption.

5.14 In American Hotel and Lodging Association Educational Institute, 301 ITR 86 (SC), the Court confirmed that the words ‘in India’ could not be read into section 10(23C)(vi). Again, the Supreme Court in the case of Oxford University Press, 247 ITR 658 (SC), wherein the Court was required to examine whether for claiming exemption, it was necessary to carry out any activity in India, in the context, held that it was impermissible to read in the Act, the words ‘in India’ into section 10(22) of the Income-tax Act.

5.15 Article 26 of the Model Convention provide for non-discrimination. According to the said Article, persons who are non-residents of India, residing in the other contracting state, shall not be subjected to taxation provisions that are different or more burdensome than the provisions applicable to residents of India. It is clear that a non-resident Indian being resident of other state should not be discriminated while being taxed in India and should be conferred with the same benefits including of sections 54 and 54F as are available to a resident while being taxed in India under the Income-tax Act, 1961.

5.16 In cases where two views are possible, the benefit of doubt should be given to the assessee. sections 54 and 54F, being a beneficial provision, the Court has to adopt the interpretation that favours the assessee importantly where these provisions are incentive provisions.

(2011) 22 STR 282 (Tri.-Mumbai) — Indian Oil Corporation Ltd. v. CCE, Mumbai-II.

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Goods Transport Agency (GTA) service — Benefit of abatement of 75% under Notification No. 1/2006- ST cannot be denied to the appellant.

Facts:
The appellant being a service recipient has availed CENVAT credit on inputs, capital goods and input services and had taken benefit of Notification No. 1/2006. Benefit of Notification No. 1/2006-ST and 12/2003-ST was denied to the appellants on the ground that:

? Inadmissible exemption was availed under Notification No. 1/2006-ST.

? As per the Notification, 75% abatement of the taxable value under GTA service can be availed on the condition that the service provider has not availed CENVAT credit on inputs, capital goods and input services used for providing the service.

Held:
The Tribunal held that the restriction as to admissibility of abatement with respect to non-availment of CENVAT credit applies to the service provider. The assessee being service recipient of GTA service is entitled to abatement and hence, appeal was allowed.

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(2011) 22 STR 257 (Ori.) — Utkal Builders Ltd. v. Union of India.

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Constitutional validity of Service tax — Levy on renting of immovable property service held valid.

Facts:
The petitioner filed a writ application declaring the provisions, i.e., section 65(90a) read with section 65(105)(zzzz) of the Finance Act, 1994 as null and void and ultra vires the Constitution of India.

The arguments of the petitioner were as under:

(i) The petitioner relied on the case of Home Solution Retail India Ltd. v. Union of India and Others, 2009 (14) STR 433 (Del.) which stated that renting of immovable property was not a taxable service by itself. The amendment made to section 65(105)(zzzz) as amended by the Finance Act, 2010 does not remedy the constitutional infirmity as held by the Delhi High Court.

(ii) The contention of the petitioner clearly distinguished between ‘property-based service’ and ‘performance-based service’. Any service connected with ‘renting of immovable property’ would fall within the ambit of Service tax. However, whether renting would constitute a taxable service or not, especially when there was no value addition by the service provider, it could not be regarded as service.

(iii) The Revenue placed reliance on the judgment of the Punjab and Haryana High Court in the case of M/s. Shubh Timb Steels Ltd. v. Union of India and Another, wherein the challenge to the levy of Service tax on ‘renting activity’ was and turned down by the Court. They further contended that in Tamil Nadu Kalyana Mandapam Association v. Union of India and Others, (2004) 5 SCC 632 it was clearly held that services rendered by ‘mandap’ were termed as ‘property-based services’ and currently, renting itself is deemed as taxable services due to the retrospective amendment from 1st June, 2007 on renting of immovable property service.

Held:
The definition of ‘taxable service’ includes the activity of renting, for use in the course or furtherance of business or commerce with the introduction of the Finance Act, 2011. Although challenge is made to the amendment made by the Finance Act, 2010 with retrospective effect, the nature of transaction made by the petitioner with its tenant clearly amounts to renting of an immovable property for the purpose of business or commerce. Service tax is clearly leviable thereon. The Court held a considered view that the renting of immovable property itself is clearly covered by section 65(90a) of the Act and that the Delhi High Court did not discuss its scope and impact in the case of Home Solution Retail India Ltd.’s case (supra) and the entire focus was on the amendment of section 65(105(zzzz) of the Finance Act. It is a well-settled principle of law that if a judgment proceeds without taking note of the relevant provisions of law, it cannot be held to have correctly decided the case. The amendment is clearly clarificatory in nature and the Parliament possessed requisite competence to declare it retrospective. The writ was dismissed accordingly.

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DEDUCTIBILITY OF FEES PAID FOR CAPITAL EXPANSION TO BE USED FOR WORKING CAPITAL PURPOSES — AN ANALYSIS— Part II

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In the first part of this article we had discussed why fees paid to a syndicating agency for assisting capital expansion for the purpose of working capital needs would be allowed as a revenue expenditure in the hands of a companyassessee. In this part, we are discussing why the decisions of the Supreme Court in Punjab Industrial Development Corporation’s case 225 ITR 792 and Brooke Bond India’s case 225 ITR 798 are distinguishable where expenditure has been incurred for the purpose of working capital needs in connection with capital expansion.

Decisions in Punjab Industrial Development Corporation Ltd. and Brooke Bond India are distinguishable:

It is a trite law that a judgment has to be read in the context of a particular case. A judgment cannot be applied in a mechanical manner. A decision is a precedent on its own facts. In State of Orissa v. Md. Illiyas, AIR 2006 SC 258, the Supreme Court explained this principle in the following words:

“. . . . . Reliance on the decision without looking into the factual background of the case before it, is clearly impermissible. A decision is a precedent on its own facts. Each case presents its own features.”

In Goodyear India Ltd v. State of Haryana, 188 ITR 402, the Supreme Court held that a precedent is an authority only for what it actually decides and not what may remotely or even logically follow from it. The Supreme Court further held that a decision on a question which has not been argued cannot be treated as a precedent.

In CIT v. Sun Engineering Works P. Ltd., 198 ITR 297, the Supreme Court held as under:

“It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In H.H. Maharajadhiraja Madhav Rao Jiwaji Rao Scindia Bahadur v. Union of India, (1971) 3 SCR 9, this Court cautioned:

“It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.”

In Bharat Petroleum Corporation Ltd. v. N. R. Vairamani, 8 SCC 579, the Supreme Court held that “Courts should not place reliance on decisions, without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Elucid’s theorems nor as provisions of a statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgments of Courts are not be construed as statutes.” The Supreme Court quoted the following observations of Lord Morris in Herrington v. British Railways Board, 2 WLR 537 with approval:

“There is always peril in treating the words of a speech or a judgment as though they were words in a legislative enactment, and it is to be remembered that judicial utterances made in the setting of the facts a particular case.

11. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions of two cases. Disposal of cases by blindly placing reliance on a decision is not proper.

12. The following words of Lord Denning in the matter of applying precedents have become locus classicus:

“Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect, in deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one case against the colour of another. To decide therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.” . . . . .

Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches, else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it.”

The Full Bench of the Delhi Court recently in L.D. Bhatia Hingwala (P.) Ltd v. ACIT, 330 ITR 243 after quoting the above decisions of the Supreme Court held as under:

“From the aforesaid authorities, it is luculent that a judgment has to be read in the context, and discerning of factual background is necessary to understand the statement of principles laid down therein. It is obligatory to ascertain the true principle laid down in the decision and it is inappropriate to expand the principle to include what has not been stated therein.”

In Punjab Industrial Development Corporation Ltd. case and Brooke Bond India’s case, the question before the Supreme Court was whether filling fees paid to the Registrar of Companies for enhancement of capital constituted revenue expenditure? The Supreme Court was not concerned with a case where the object of capital expansion was to have working funds for carrying on business activities. In the former case, after quoting various contrary decisions of the High Courts, the Supreme Court held as under:

“We do not consider it necessary to examine all the decisions in extenso because we are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit-making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the opinion that the view taken by the different High Courts in favour of the Revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram (India) (P.) Ltd.’s case (supra). We, therefore, answer the question raised for our determination in the affirmative, i.e., in favour of the Revenue and against the assessee.”

In the latter case, viz., Brooke Bond India’s case, the Supreme Court placed reliance on its decision in Punjab Industrial Development Corporation Ltd. case to reiterate that fees paid to the Registrar of Companies for enhancement of capital constitutes capital expenditure. In this case the counsel raised an argument that the case of the assessee is not covered by the decision in Punjab Industrial Development Corporation Ltd. case as the object of capital expansion was to have more working funds for the assessee to carry on its business and to earn more profits. The Supreme Court while dealing with the said argument held that it is unable to accept the said argument for the reason that the statement of case sent by the Tribunal does not indicate a factual finding in that connection. The relevant portion of the decision is as under:

“Dr. Pal has, however, submitted that this decision does not cover a case, like the present case, where the object of enhancement of the capital was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as revenue expenditure. In this connection, Dr. Pal has invited our attention to the submissions that were urged by learned counsel for the assessee before the Appellate Assistant Commissioner as well as before the Tribunal. It is no doubt true that before the Appellate Assistant Commissioner as well as before the Tribunal it was submitted on behalf of the assessee that the increase in the capital was to meet the need for working funds for the assessee-company.

But the statement of case sent by the Tribunal does not indicate, that a finding was recorded to the effect that the expansion of the capital was undertaken by the assessee in order to meet the need for more working funds for the assessee. We, therefore, cannot proceed on the basis that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for working funds for the assessee to carry on its business. In any event, the above-quoted observations of this Court in Punjab State Industrial Development Corpn. Ltd.’s case (supra) clearly indicate that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit-making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company.” (emphasis supplied)

The decision of the Supreme Court in Brooke Bond India’s case (wherein principle laid down in Punjab Industrial Development Corporation Ltd. case has been reiterated), has to be seen in the light of the context and questions involved. It is a settled proposition that a decision takes colour from the questions involved in the case in which it is rendered. [Refer among others Prakash Amichand Shah v. State of Gujarat, AIR 1986 SC 468 (SC), Union of India v. Dhanwanti Devi, (1996) 6 SCC 44] The question before the Supreme Court was whether fees paid to the Registrar of Companies in relation to expansion of capital base is in the nature of revenue expenditure? The Supreme Court was called upon to render its verdict without an occasion to consider the aim or object for which the expenditure had to be incurred. In fact, the Supreme Court was concerned with the fees paid to the Registrar of Companies for increasing the authorised capital as a prelude to infusion of funds. There was no actual receipt of funds during the year. The expenditure towards the increased ability to raise capital was in these circumstances held to be capital. The Supreme Court had no occasion to examine the ‘two stages’ of deployment of funds. In fact the Supreme Court was concerned with a stage anterior to both the stages as funds had not yet been raised/received; such a potential only had been created. The decision of the Supreme Court therefore has to be seen in that context and cannot be extended beyond.

One may note that the Supreme Court in these decisions had not referred to its earlier decisions wherein principles with respect to characterisation of an expenditure into revenue or capital have been outlined. Some of the decisions are of larger Bench viz., Assam Bengal Cement’s case 27 ITR 34 etc. In such circumstances, it is the principles laid down by the larger Bench of Supreme Court which have to be kept in mind while characterising the nature of any expenditure into revenue or capital. The ratio of the decisions of the Supreme Court in Punjab Industrial Corporation Ltd.’s case and Brooke Bond India’s case should therefore be limited to facts similar as in these two cases.

In Lakshmi Auto Ltd. v. DCIT, 101 ITD 209, the Chennai Tribunal had an occasion to explain the scope of the decision in Brooke Bond India’s case; especially the observations made by the Supreme Court in the context of the argument made by Dr. Pal. In the case before the Chennai Tribunal, the assessee claimed deduction u/s. 37(1) towards expenditure on issuance of right shares. The Assessing Officer processed the return u/s. 143(1)(a). The assessee’s claim was disallowed on the grounds that the said expenditure was capital in nature. On appeal to the Commissioner (Appeals), the assessee raised a specific plea that expenses incurred on rights issue was for raising working capital. The Commissioner (Appeals) held that the decision of the Supreme Court in Brooke Bond (India) Ltd. v. CIT (supra) squarely applied to the case of the assessee and, therefore, the prima facie adjustment was held to be valid.

On further appeal to the Tribunal, the Judicial Member held that the Supreme Court in Brooke Bond India Ltd.’s case (supra) had not decided the issue as regards the expenditure incurred on increase of capital to meet the need for more working funds. The Judicial Member further held that the Assessing Officer was not correct in making prima facie adjustment on the grounds that the expenditure was capital in nature as no facts were available on record as to whether the assessee required the funds to increase capital to meet the need of work-ing capital or not. Not agreeing with the conclusions and findings of the Judicial Member, the Accountant Member held that the Assessing Officer was within his jurisdiction to make adjustment as no debate was involved after pronouncement of the decision in case of Brooke Bond (India) Ltd. (supra). The third Member on reference concurred with the views of the Judicial Member. The relevant observations of the third Member are as under:

“9. Having heard both the parties on the point and after perusing the various precedents relied upon, I find that the issue in question is a debatable issue. It is not directly covered by the decision of the Apex Court rendered in the case of Brooke Bond (India) Ltd. v. CIT, (1997) 225 ITR 798.    In this case the Supreme Court has held that expenditure incurred by a company in connection with issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit-making. It was contended before the Supreme Court that where the enhancement was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as revenue expenditure. On this the Supreme Court has held that the statement of case sent by the Tribunal did not record the finding to the effect that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for more working funds for the assessee to carry on its business.

From this it can be concluded that if the expansion of capital is in order to meet the need for more working funds, in that eventuality the expenditure could partake the nature of revenue expenditure. De hors examination in this regard, it is not possible to apply the ratio.

Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation as said by Cordozo by matching the colour of one case against the colour of another. I am reminded of Heraclitus who said “you never go down the same river twice”. What the great philosopher said about time and flux can relate to law as well. It is trite that a ruling of superior Court is binding law. It is not of scriptural sanctity, but is of ratiowise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors the milieu we cannot impart eternal vernal value to the decision, exalting the doctrine of precedents into a prison house of bigotry, regardless of varying circumstances and myriad developments. Realism dictates that a judgment has to be read subject to the facts directly presented for consideration.

I have considered the entire conspectus of the case. In my opinion, the decision of the Apex Court in the case of Brooke Bond (India) Ltd. (supra) can be applied only after examining the object of the capital enhancement. This decision is not applicable if enhancement of the capital was made for gearing up funds for working capital. The object of gearing up of the capital was not looked into. Total amount was disallowed without examining the details. Even applicability of section 35D was not considered. In my opinion, this is not correct. I have gone through the reasoning adduced by the ld. Judicial Member. In my opinion he took a correct view in the matter. I concur with his decision on this issue.” (emphasis supplied)

In view of all the above, one may argue that the expenditure incurred in connection with issuance of shares for augmenting working capital needs should be allowed as deduction u/s. 37(1) of the Act. The decisions of the Supreme Court in Punjab Industrial Corporation case and Brooke Bond India case (supra) would not be applicable to cases where the object of enhancement of the capital expansion is to have more working funds. As a result, fees paid to XY bank by ABCL in the present case should be allowed as revenue expenditure u/s. 37(1) of the Act.

Partner’s interest — On capital:

Interest paid on partner’s capital by a partnership firm is allowed as a business deduction subject to the limit specified u/s. 40(b) of the Act. Under the Act, a partnership firm is regarded as a taxable entity distinct and separate from partners constituting it. Interest paid is deducted while computing the total income of the firm. Such deduction is admissible, irrespective of whether the capital is used for acquiring an asset or for working capital purposes. The admissibility of interest on partner’s capital account is in one sense a measure of avoiding double taxation on the same income. It is also an acknowledgement of separate existence of the firm and the partners.

A company is also regarded as a separate and distinct person from its shareholders. A company and a partnership firm thus stand on the same pedestal on this count. If in the eyes of Legislature expenditure connected with capital of a firm (viz., interest on capital introduced by a partner into a partnership firm) is allowable as a business deduction, it would be unreasonable to disallow expenditure incurred by a company in connection with share capital of a company. This is especially in view of the fact that there are no specific provisions in the Act restricting the admissibility of such an expenditure; the disallowance only being sustained on the premise of it being a capital expenditure u/s. 37.

What could be/is ‘working capital/funds’:

In Advance Law Lexicon 3rd edition 2005, the term ‘working capital’ is defined as ‘the funds available for conducting day-to-day operations of an enterprise; the money in circulation, acquired through cash balances, daily cash sales or short-term borrowings and used to run day-to-day affairs of a business organisation; capital available for day-to-day running of a company, used to pay expenses such as salaries, purchases, etc.’. The word web defines it as assets available for use in the production of further assets. In CIT v. IBM World Trade Corporation, 161 ITR 673, the Bombay High Court held that working capital is that which is utilised in a business and is another expression for circulating capital. In CIT v. Modern Theatres Ltd., 50 ITR 548, the Madras High Court held that circulating capital is a capital which is turned over and in the process of being turned over yields profit or loss. The Kerala High Court in Kerala Small Industries Development Corporation Ltd. v. CIT, 270 ITR 452 held that ‘Circulating capital’ means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursement. The term ‘working capital’ thus implies funds which an organisation must have to finance its day-to-day business operations. It is that part of the total capital which is employed in the trading/current assets.

What could be a trading/current asset for a particular business may be a fixed/capital asset for another business. There are no fixed rules with regard to characterisation of assets into current asset and fixed asset. One has to determine under what circumstances the asset has been acquired? What is the purpose for which the assets are acquired? If the asset is related to day-to-day business operations, then it would be regarded as current asset. It would be part of the circulating capital. Expenses incurred in connection with such acquisitions are to be allowed as business deduction. In this connection one may refer to the decision of the Supreme Court in Bombay Steam Navigation Co. v. CIT (supra). In the said decision, the Supreme Court held that if transaction of acquisition of the asset is closely related to carrying on of the assessee’s business, the expenditure incurred in connection therewith is to be regarded as revenue expenditure. The Supreme Court in CIT v. Bombay Dyeing and Mfg. Co. Ltd., 219 ITR 521 applying the ratio of Bombay Steam Navigation Co. v. CIT (supra) held that ex-penses incurred in connection with amalgamation of companies could be characterised as revenue expenditure if amalgamation is essential for smooth and efficient conduct of business.

The expense under discussion (viz., fees paid to XY bank) is incurred in connection with raising of funds for working capital purposes and for securing distribution rights, licences and brands in European, African and Asia-pacific countries. Securing distribution rights, licences and brands are essential for running business in such countries. ABCL acquires these intangibles for smooth and efficient conduct of business in such countries. It is on such rationale [and following rationale of the Supreme Court’s decision in Bombay Dyeing and Mfg Co.’s case (supra)] that associated expenses may be argued to be revenue in nature. Otherwise, it would be argued that licences, brands, etc. are intangible assets (see the definition of ‘block of assets’) necessitating the branding of associated expense as capital in nature.

PROSECUTION UNDER SERVICE TAX

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Preliminary

Sections 88 to 92 of the Finance Act, 1994 (the Act) provided for prosecution for certain offences, such as failure to furnish prescribed returns, false statement in verification, abetment of false return, etc. These provisions were omitted by the Finance (No. 2) Act, 1998 w.e.f. 16-10-1998. However, through the Finance Act, 2011, amendments have been made to introduce prosecution provisions by enacting a new section 89 under FA. Further, sections 9A, 9AA, 9B, 9E and 34A of the Central Excise Act, 1944 (‘CEA’) have been made applicable to Service tax. These provisions together constitute the provisions relating to prosecution under Service tax, which are discussed hereafter.

Prosecution provisions Offences punishable

The punishable offences specified in section 89(1) of the Act are as under:

(a) Provision of taxable services or receipt of any taxable services where the recipient is liable to pay Service tax, without an invoice issued in accordance with the provisions of the Act or the Rules made hereunder;

(b) availment and utilisation of credit without actual receipt of taxable service or excisable goods either fully or partially in violation of the Act or Credit Rules;

(c) maintenance of false books of account;

(d) failure to supply information or supply of false information;

(e) failure to pay to the Government any amount collected as Service tax beyond a period of six months from the date on which such payment became due.

2.2 Quantum of punishment

In absence of ‘special and adequate reasons’ to be recorded in the judgment of the Court the punishment mentioned in Sr. Nos. 1 and 3 above, cannot be reduced below six months. The following grounds would not be considered ‘special and adequate reasons’ in terms of section 89(3) of the Act:

(a) conviction of the accused for the first time for an offence under the Act;

(b) payment of penalty or any other action taken for the same act which constitutes the offence

(c) the fact that the accused was not the principal offender and was acting merely as a secondary party in the commission of the offence.

(d) The age of the accused.

Sanction

Prosecution can be initiated only with prior approval of the Chief Commissioner of Central Excise (CCCE).

Central Excise Sections provisions made applicable to Service tax

The provisions of sections 9A 9AA, 9B, 9E and 34A of CEA which have been made applicable to Service tax are briefly explained as under:

(a) The offences would be ‘non-cognisable’ i.e., an offence in which a police officer has no authority to arrest without a warrant. Further the CCCE is also empowered to compound the offences on payment of the compounding amount as may be prescribed (section 9A of CEA).

(b) If an offence is committed by a company (which includes a firm), the persons liable to be proceeded against and punished are:

(i) the company;
(ii) every person, who at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business, except where he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence; and
(iii) any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed. (section 9AA of CEA)

(c) The Court is empowered to publish the name, place of business, etc. of person convicted under the Act (section 9B of CEA)

(d) In case of a person who is less than 18 years of age, the Court, under certain circumstances, is empowered to release the accused on probation of good conduct u.s 360 of the Code of Criminal Procedure, 1973 or to release the offenders on probation under the Probation of Offenders Act, 1958. (section 9B of CEA)

(e) The imposition of penalty would not prevent infliction of other punishment on the offender. (section 34A of CEA)

Dept. clarifications vide Circular No. 140/9/2011-TRU, dated 12-5-2011

Relevant extracts from the Dept. Circular are given hereafter for reference:

Para 2
Prosecution provision was introduced this year, in Chapter V of the Finance Act, 1994, as part of a compliance philosophy involving rationalisation of penal provisions. Encouraging voluntary compliance and introduction of penalties based on the gravity of offences are some important principles which guide the changes made this year in the penal provisions governing Service tax. While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations. Accordingly, it is imperative for the field formations, in particular the sanctioning authority, to implement the prosecution provision keeping in view the overall compliance philosophy. Since the objective of the prosecution provision is mainly to develop a holistic compliance culture among the taxpayers, it is expected that the instructions will be followed in letter and spirit.

Para 4
Clause (a) of section 89(1) of the Finance Act, 1994 is meant to apply, inter alia, where services have been provided without issuance of invoice in accordance with the prescribed provisions. In terms of Rule 4A of the Service Tax Rules, 1994, invoice is required to be issued inter alia within 14 days from the date of completion of the taxable service. Here, it should be noted that the emphasis in the prosecution provision is on the non-issuance of invoice within the prescribed period, rather than non-mention of the technical details in the invoice that have no bearing on the determination of tax liability.

Para 5
In the case of services where the recipient is liable to pay tax on reverse-charge basis, similar obligation has been cast on the service recipient, though the invoices are issued by the service provider. It is clarified that the date of provision of service shall be determined in terms of the Point of Taxation Rules, 2011. In the case of persons liable to pay tax on reverse-charge basis, the date of provision of service shall be the date of payment, except in the case of associated enterprises receiving services from abroad where the date shall be earlier of the date of credit in the books of accounts or the date of payment. It is at this stage that the transaction must be accounted for. Thus the service receiver, liable to pay tax on reverse-charge basis is required to ensure that the invoice is available at the time the payment is made or at least received within 14 days thereafter and in the case of associated enterprises, invoice should be available with the service receiver at the time of credit in the books of accounts or the date of payment towards the service received.

Para 7
Clause (b) of section 89(1) of the Finance Act, 1994 refers to the availment and utilisation of the credit of taxes paid without actual receipt of taxable service or excisable goods. It may be noted that in order to constitute an offence under this clause the taxpayer must both avail as well as utilise the credit without having actually received the goods or the service. The clause is not meant to apply to situations where an invoice has been issued for a service yet to be provided on which due tax has been paid. It is only meant for such invoices that are typically known as ‘fake’ where the tax has not been paid at the so-called service provider’s end or where the provider stated in the invoice is non-existent. It will also cover situations where the value of the service stated in the invoice and/or tax thereon have been altered with a view to avail Cenvat credit in excess of the amount originally stated. While calculating the monetary limit for the purpose of launching prosecution, the value shall be the amount availed as credit in excess of the amount originally stated in the invoice.

Para 8

Clause (c) of section 89(1) of the Finance Act, 1994 is based on similar provision in the Central Excise law. It should be noted that the offence in relation to maintenance of false books of accounts or failure to supply the required information or supplying of false information, should in material particulars have a bearing on the tax liability. Mere expression of opinions shall not be covered by the said clause. Supplying false information, in response to summons, will also be covered under this provision.

Para 9


Clause (d) of section 89(1) of the Finance Act, 1994 will apply only when the amount has been collected as Service tax. It is not meant to apply to mere non-payment of Service tax when due. This provision would be attracted when the amount was reflected in the invoices as Service tax, service receiver has already made the payment and the period of six months has elapsed from the date on which the service provider was required to pay the tax to the Central Government. Where the service receiver has made part payment, the service provider will be punishable to the extent he has failed to deposit the tax due to the Government.

Para 11

Section 9C of the Central Excise Act, 1944, which is made applicable to the Finance Act, 1994, provides that in any prosecution for an offence, existence of culpable mental state shall be presumed by the Court. Therefore each offence described in section 89(1) of the Finance Act, 1994, has an inherent mens rea. Delinquency by the defaulter of Service tax itself establishes his ‘guilt’. If the accused claims that he did not have guilty mind, it is for him to prove the same beyond reasonable doubt. Thus “burden of proof regarding non-existence of ‘mens rea’ is on the accused.

Para 13

Sanction for prosecution has to be accorded by the Chief Commissioner of Central Excise in terms of the section 89(4) of the Finance Act, 1994. In accordance with Notification 3/2004 -ST dated 11th March 2004, the Director General of Central Excise Intelligence (DGCEI) can exercise the power of the Chief Commissioner of Central Excise, throughout India.

Para 14

The Board has decided that monetary limit for prosecution will be Rupees Ten Lakh in the case of offences specified in section 89(1) of the Finance Act, 1994 to ensure better utilisation of manpower, time and resources of the field formations. Therefore, where an offence specified in section 89(1) involves an amount of less than Rupees Ten Lakh, such case need not be considered for launching prosecution. However the monetary limit will not apply in the case of repeat offence.

Para 15

Provisions relating to prosecution are to be exercised with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched merely on matters of technicalities. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The sanctioning authority should record detailed reasons for its decision to sanction or not to sanction prosecution, on file.

Para 16

Prosecution proceedings in a Court of law are to be generally initiated after departmental adjudication of an offence has been completed, although there is no legal bar against launch of prosecution before adjudication. Generally, the adjudicator should indicate whether a case is fit for prosecution, though this is not a necessary pre-condition. To launch prosecution against top management of the company, sufficient and clear evidence to show their direct involvement in the offence is required. Once prosecution is sanctioned, complaint should be filed in the appropriate court immediately. If the complaint could not be filed for any reason, the matter should be immediately reported to the authority that sanctioned the prosecution.

Para 17

Instructions and guidelines issued by the Central Board of Excise and Customs (CBEC) from time to time, regarding prosecution under Central Excise law, will also be applicable to Service tax, to the extent they are harmonious with the provisions of the Finance Act, 1994 and instructions contained in this Circular for carrying out prosecution under Service tax law.

4.    Guidelines for launching prosecution issued by CBEC under Central Excise (Circular No. 33/80 CX 6. Dated 26-7-1980 read with CBEC Circular No. 15/90 – CX 6, dated 9-8-1990.)

(i)    Prosecution should be launched with the final approval of the Principal Collector after the case has been carefully examined by the Collector in the light of the guidelines.

(ii)    Prosecution should not be launched in cases of technical nature, or where in the additional claim of duty is based totally on a difference of interpretation of law. Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual had guilty knowledge of the offence, or had fraudulent intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt. It follows, therefore, that in the case of public limited companies, prosecution should not be launched indiscriminately against all the Directors of the company but it should be restricted to only against such of the Directors like the Managing Director, Director in charge of Marketing and Sales, Director (Finance) and other executives who are in charge of day-to-day operation of the factory. The intention should be to restrict the prosecution only to those who have taken active part in commit-ting the duty evasion or connived at it. For this purpose, the Collectors should go through the case file and satisfy themselves that only those Chairman/Managing Directors/Directors/Partners/ Executives/Officials against whom reasonable evidence exists of their involvement in duty evasion, should be proceeded against while launching the prosecution. For example, Nominee Directors of financial institutions, who are not concerned with day-to-day matters, should not be prosecuted unless there is very definite evidence to the contrary. Prosecution should be launched only against those Directors/Officials, etc., who are found to have guilty knowledge, fraudulent intention, or mens rea necessary to bind them to criminal liability.

(iii)    In order to avoid prosecution in minor cases, a monetary limit of Rs. 10,000 was prescribed in the instructions contained in Board’s letter F. No. 208/6/M-77-CX 6, dated 26-7-1980. Based on experience, and in order not to fritter away the limited man-power and time of the Department on too many petty cases, it has now been decided to enhance this limit to Rs.1 lakh. (See Note Below) But in the case of habitual offenders, the total amount of duty involved in various offences may be taken into account while deciding whether prosecution is called for. Moreover, if there is evidence to show that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.

(iv)    One of the important considerations for deciding whether prosecution should launched is the availability of adequate evidence. Prosecution should be launched against top management when there is adequate evidence/ material to show their involvement in the offence.

(v)    Persons liable to prosecution should not normally be arrested unless their immediate arest is necessary. Arrest should be made with the approval of the Assistant Collector or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Collector, who will consider whether the case is a fit one for prosecution.

(vi)    Decision on prosecution should be taken immediately on completion of the adjudication proceedings.

(vii)    Prosecution should normally be launched immediately after adjudication has been completed. However, if the party deliberately de-lays completion of adjudication proceedings, prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.

(viii)    Prosecution should not be kept in abeyance on the ground that the party has gone in appeal/revision. However, in order to ensure that the proceedings in appeal/revision are not unduly delayed because the case records are required for purposes of prosecution, a parallel file containing copies of the essential documents relating to adjudication should be maintained. It is necessary to reiterate that in order to avoid delays, the Collector should indicate at the time of passing the adjudication order itself whether he considers the case is fit for prosecution so that it should be further processed for being sent to the Principal Collector for sanction.

Applicability of prosecution provisions
Section 89 of the Act has become operative upon enactment of the Finance Act, 2011 on 8-4-2011. Hence, it would appear that prosecution provisions would apply to offences committed on or after 8-4-2011.

In this regard, useful reference can be made to precedents under income tax. In the context of section 276C which was inserted w.e.f. 1-10-1975, it has been held in a number of cases that the said section would not apply to an offence committed prior to that date.

Time limit for launching prosecution
The Economic Offences (Inapplicability of Limitation) Act provides that there is no time limit for launching prosecution in case of offences under some specified Acts. Further, limitation bar contained in Criminal Procedure Code, is not applicable to offences under Central Excise, Service Tax and Customs Law.

It would appear that there is no time limit for launching prosecution under Service tax.

Note: The monetary limit has been enhanced to Rs.25 lakh vide CBEC Circular dated 12-12-1997.

Few judicial considerations are as under:

?    In Devchand Kalyan Tandel v. State of Gujarat, 89 ELT 433 (SC) it was held that in case of economic offences, the Courts should not take lenient view, as stringent measures are necessary in case of economic offences. (In this case, there was lapse of 13 years between the occurrence and the date of judgment.)

?    In V. K. Agarwal v. Vasantraj, (1988) 3 SCC 467 and A. A. Mulla v. State of Maharashtra, 1997 AIR SCW 63, the Supreme Court declined to stop further proceedings on the matter though the matters had become very old. (In this case, the case was already filed long ago i.e., in 1969).

Procedures relating to prosecution

The CBE&C has clarified that prosecution can be approved only by the CCCE in terms of section 89(4) of CEA throughout India.

Some judicial and other considerations are as under:

?    Appeal against sanction of prosecution cannot be filed with CEGAT — [Jagatjit Industrial Ltd. v. CCE, (1993) 67 ELT 878 (CEGAT)]

?    Decision to grant sanction for prosecution is merely an administrative act. No hearing is necessary. Prima facie, authority sanctioning prosecution should be satisfied that an offence is committed. Even exoneration by disciplinary authority (in excise and customs matters, it means departmental adjudication) is also not relevant [Supdt. of Police (CBI) v. Deepak Chowdhary, (1995) 6 SCC 225, the same view in State of Maharashtra v. Ishmal Piraji Kalpatri, AIR 1996 SC 722.]

?    Opportunity of personal hearing is not required to be given before grant of sanction of the Commissioner to file criminal prosecution — [Assistant Commissioner v. Velliappa Textiles, (2003) 157 ELT 369 (SC 3-member Bench).]

?    Decision to prosecute does not involve ex-ercise of any quasi-judicial power, [Praveen Kumar R. Jain v. Chief Judicial Magistrate, Dindigul, 1995 (79) ELT 353 (Mad. HC).]

?    Specific approval for launching prosecution is required. Mere signing on file by the Chief Commissioner would not mean that he has applied his mind and granted approval. If prior approval of the Chief Commissioner is not obtained, prosecution cannot continue and accused has to be acquitted. – [UOI v. Greaves Ltd., (2002) 139 ELT 34 (CEGAT)].

?    In CIT v. Camco Colour Co., (2002) 254 ITR 565 (Bom. HC), it was held that monetary limit prescribed is a policy decision with a view to reduce litigation and the same is binding on the Revenue.

?    The CBE&C has clarified that when action is launched under the Central Excise Act, action under Indian Penal Code, 1860 should also be launched, wherever found feasible — [CBE&C Circular No. 178/12/1996, dated 28-2-1996.]

Compounding of offences
Section 9A(2) of CEA, provides that any offence under CEA can be compounded by the CCCE. Such compounding can be done either before or after the institution of prosecution. Procedure for compounding has been prescribed in the Central Excise (Compounding of Offences) Rules, 2005 and Guidelines for Compounding have been issued vide MF (DR) Circular No. 54/2005-Cus, dated 30-12-2005. Since, section 9A of CEA has been made applicable to Service tax, the Rules/Guidelines and precedents under Central Excise would be relevant for Service tax.

Some judicial considerations are as under:

?    In Vinod Kumar Agarwal v. UOI, (2008) 223 ELT 19 (Bom HC DB), it was held that compound-ing under the Customs Act cannot result in discharge of offences under other Acts like IPC.

?    In Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Company, (2004) 52 SCL 224 (Bom HC DB), it was held that if the offence is compounded, it is as if no offence had even been committed in the first place.

?    In P. P. Varkey v. STO, (1999) 114 STC 251 (Ker. HC), it was held that once the offence is compounded, penalty or prosecution proceedings cannot be taken for the same offence.

?    In S. Viswanathan v. State of Kerala, (1999) 113 STC 182 (Ker HC DB), it was held that once the matter is compounded, neither the Department nor the assessee can challenge the compounding order.

?    A person having agreed to the composition of offence is not entitled to challenge the said proceedings by filing appeal. [S. V. Bagi v. State of Karnataka, (1992) 87 STC 138 (Karn HC FB) — followed in Sakharia Bandhu v. ADCCT (1999) 112 STC 449 (Karn HC DB).]

9.    Conclusion
Service tax law has evolved as a law based on voluntary compliance. In this backdrop, re-introduction of prosecution provisions is a retrograde step. One does understand that there may have been many cases of tax evasion detected by the Tax Dept. However, the same is no justification for re-introduction of prosecution provisions, inasmuch as there are wide powers for the tax administration under the existing tax structure and other laws to deal with such cases and impose stiff penalties.

Overall, the provisions are too harsh, and are likely to be misused by the authorities causing severe harassment to taxpayers. In particular, non-issue of tax invoice by a service provider being specified as an offence, is totally unjustified. Further, non-issue of tax invoice as per the Service Tax Rules by a service provider based outside and its non-issue to be treated as an offence at the end of service recipient in India, is unprecedented and needs to be done away with.

It is suggested that a monetary limit of tax evaded amount of Rs. 1 crore need to be prescribed for a judicious implementation of prosecution provisions and minimise hardships to small and medium taxpayers.

Improving service delivery time of approval of company’s registration and critical services (Registration in 24 hours)

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The Ministry has given highest priority for the approval of the following e-forms: Form Nos. 1, 1A, 18, 32, 37, 39, 44 and 68 which are connected with incorporation services.

Now all Registrars of Companies have to first approve the above critical services before attending any other forms. The Ministry would also ensure that all other critical e-forms are also processed within the service delivery parameters as given in the citizen charter.

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(2011) 22 STR 529 (Tri.-Chennai) — Commissioner of Service Tax, Chennai v. E-Care India Pvt. Ltd.

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Refund of unutilised CENVAT credit in relation to export of services — Refund denied on the ground that the claim pertained to period prior to registration — Lower Appellate Authority held that non-registration not a ground for rejection of refund claim — Appeals rejected.

Facts:
The respondents claimed refund of unutilised credit of service tax in relation to export of services on the basis of Rule 5 of the CENVAT Credit Rules, 2004 as laid out in the Notification No. 23/2004. The claim was rejected on the following grounds:

The respondent took registration later on;

The refund claim pertained to the period prior to the date of registration.

The lower Appellate Authority set aside the order of the original authority on the ground that registration is merely required for the purpose of maintenance of accounts and that non-registration cannot be the ground for enforcing a demand or denying a refund.

Held:
The Tribunal held that the relevant rules required only those assessees to take registration who are required to pay service tax. The respondents were not liable to pay service tax and hence, the order passed by the Appellate Authority did not require interference.

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Companies (Director Identification Number) Amendment Rules, 2011.

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The Ministry of Corporate Affairs has with effect from 27th March 2011 simplified the procedure for issue of DIN. By this amendment now no physical documents are required to be sent. In the revised procedure the DIN 1 form has to be submitted electronically along with the scanned documents duly verified by a practising professional. Where the form is digitally singed by a practising Chartered Accountant, Company Secretary or Cost accountant, the number will be immediately given online. In other cases the application will be examined by the Central Government and disposed of in two to three days.

Similarly, the DIN 4 is also to be filed electronically.

Refer F. No. 02/01/2011-CL V dated 26th March 2011 and Circular No. 11/2011 dated 7th April 2011.

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(2011) 22 STR 609 (Bom.) — Commissioner of Service Tax, Mumbai v. WNS Global Service (P) Ltd.

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Refund of CENVAT credit on exports — Whether the provider of output service is entitled to claim the refund of unutilised CENVAT credit in respect of exports effected prior to the substitution of Rule 5 with effect from 14-3-2006.

Facts:
The assessee applied for refund of credit in respect of exports effected prior to the substitution of Rule 5 of the CENVAT Credit Rules, 2004 by Notification No. 4/2006 on 14-3-2006 on the ground that the credit could not be utilised. The Revenue raised the dispute that Rule 5 of the CENVAT Credit Rules, 2004 as it stood prior to 14-3-2006 permitted refund of unutilised CENVAT credit only to a manufacturer and not to a provider of output service. The Revenue further contended that substituted Rule 5 states that the rule applies only in respect of the exports made after 14-3-2006.

Held:
The Court observed that the substituted Rule 5 made no distinction between the exports made prior to 14-3-2006 and those made post the said date. Concurring with the decision of the CESTAT, the Court held that the assessee was entitled to the refund of credit, even for exports made before the substitution of Rule 5.

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Prosecution of Directors.

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The Ministry of Corporate Affairs has issued a General Circular No. 2/13/2003/CL-V regarding the prosecution of independent directors of listed companies, nominee directors of the Central Govt. or of the public financial institutions. The circular states that the Registrar of Companies should take extra care in examining the cases where above directors are identified as officer in default.

Such directors should not be held liable for any act of omission or commission by the company or by any officers of the company which constitute a breach or violation of any provision of the Companies Act, 1956, and which occurred without their knowledge and without their consent or connivance or where they have acted diligently in the Board process. The Board process includes meeting of any committee of the Board and any information which the director was authorised to receive as a director of the Board as per the decision of the Board.

The Circular also specifies compliances to be verified by the Registrar of Companies before taking penal action against directors.

Also the list of persons who can be treated as Officers in default has been listed for prosecution u/s.209(5), 209(6), 211 and 212 is given.

For the complete text of the Circular visit

http://www.mca.gov.in/Ministry/pdf/Circular_08-2011 _25mar2011.pdf

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(2011) 22 STR 517 (Kar.) — Commissioner of Service Tax, Bangalore v. Vee Aar Secure

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Penalty — Non-payment of service tax in respect of security services — Bona fide belief that head office was paying service tax — separate registration obtained and entire tax paid with interest before issue of SCN when pointed out by Department — No intention to evade — Case for waiver of penalty made out.

Facts:
The appeal was preferred by the Revenue against the order of the Appellate Tribunal cancelling the order passed by Revisional Authority levying penalty. The assessee, a security agency, was operating in India at more than one place. The assessee was under the impression that their head office at Delhi paid the service tax on a demand issued to the assessee. On realising that the head office had not paid the service tax, the assessee got themselves registered at Bangalore and paid the service tax and interest thereon for the delayed payment.

Held:
It was held that there was no intention on part of the assessee to avoid payment of service tax and no substantial question of law was involved in the appeal for consideration and accordingly a case of waiver being made out, the appeal was dismissed.

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Circular No. 136/5/2011, dated 20-4-2011.

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By this Circular, Accounting Codes have been allotted for the new taxable services introduced vide the Finance Act, 2011.
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Circular No. 134/3/2011, dated 8-4-2011.

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By this Circular, it has been clarified that when whole of service tax is exempt, the same applies to education cess & secondary and higher education cess as well. Since education cess is levied and collected as percentage of service tax, when and wherever service tax is Nil by virtue of exemption, education cess would also be Nil.
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SAT directs Mutual Fund to compensate unitholders — for loss in NAV on account of changes to Scheme

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The essential issue raised recently was, if a mutual fund raises money under certain terms and then it changes them, what is the recourse available to the investor? What do the SEBI (Mutual Funds) Regulations, 1996 (‘the Regulations’) provide for this? When do such changes amount to change in ‘fundamental attributes’ which would require giving exit to the unit holder at the prevailing NAV? Can SEBI limit and define by a circular what are ‘fundamental attributes’? What are the implications of SEBI’s circular explaining what are ‘fundamental attributes’? If the mutual fund changes ‘fundamental attributes’ without following the prescribed procedure, what relief does the law provide to the investor? What if the mutual fund does not provide such relief? Is the only recourse available to investors to file a civil suit to obtain relief? These and other issues are dealt with in the recent decision of the Securities Appellate Tribunal (‘SAT’) in (Appeal No. 111 of 2010, decision dated 3rd May 2011, unreported but available on SEBI’s website).

The primary facts of this case as detailed by SAT are as follows. The appellants (husband and wife) had invested almost the whole of their life’s savings (about Rs.2.50 crores) in an open-ended Gilt scheme (called the ‘HSBC Gilt Fund’ or ‘the Scheme’) of the HSBC Mutual Fund (‘the Fund’). The appellants had chosen to invest in the Short- Term Plan which the offer document stated was suitable for investors seeking to obtain returns from a plan investing in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding seven years and modified duration of the portfolio normally not exceeding five years. The investment was made between October 2008 and November 2008.

In around February 2009, on receipt of the statement from the fund, they found that the Net Asset Value (NAV) had inexplicably and substantially depreciated by 10% and that too (as they later came to know) within a span of three days. On further inquiries, they came to know that the fund had wound up its ‘Long-Term Plan’ and modified the ‘Short-Term Plan’ by increasing the existing time frame of five to seven years to not exceeding 15 years. The benchmark index was also changed.

The appellants complained that these changes were changes in ‘fundamental attributes’ of the Scheme and were made without following the Regulations, which require informing the unit holders and, more importantly, giving them a chance to exit at the prevailing NAV before the proposed change. The relevant clause (5A) of Regulation 18 of the Regulations provides as follows:

“18. (15A) The trustees shall ensure that no change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme and affects the interest of unitholders, shall be carried out unless, —

(i) a written communication about the proposed change is sent to each unit holder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the mutual fund is situated; and

(ii) the unit holders are given an option to exit at the prevailing NAV without any exit load.”

The unit holders were not informed through direct communication or through advertisement, nor were they given an option to exit at the prevailing NAV without any exit load.

The appellants, who feared further depreciation in the NAV, exited the Scheme and lodged complaints with the distributor, the fund, etc. and the Securities and Exchange Board of India (SEBI).

SEBI investigated the matter and passed an Order. Though the Order does refer to the complaints made by unit holders, the unit holders were not given an opportunity to be parties to the proceedings. Of course, the allegations made were violations of the Regulations and hence SEBI can proceed independently and directly against the person who allegedly violated them. However, this is emphasised, because when the appellants appealed against this Order of SEBI, the respondents — and even SEBI — claimed that the appellants did not have any locus standi to appeal!! Of course, SAT rejected this contention (as discussed later), but it is strange that even SEBI raised such a technical objection.

SEBI investigated the matter and heard the fund and its related parties. SEBI did find that there were substantial changes adversely affecting the unit holders. However, strangely, it took a stand that since it had issued a circular in 1998 explaining what fundamental attributes are and even gave a list of them, the fund is not guilty since the changes were not given in that list. This aspect is discussed in more detail later.

SEBI, however, did find the fund guilty on certain other charges and issued a warning to the fund, etc. to strictly comply with the law. This obviously left the appellants without any relief from their loss.

The appellants appealed against the Order of SEBI before the SAT. The fund — and even SEBI — as per the SAT Order, first raised a preliminary objection that the appellants had no locus standi to appeal. The SAT rejected these contentions firmly. I find it strange and even unjust that SEBI, after not having granting relief to the unitholders who suffered from the changes made to the Scheme, and after having passed such Order without directly hearing them, raises this technical objection that the appellants could not appeal against such Order! I wonder then who, if at all, would appeal against such Order?

Anyway, the more substantive issue was whether the changes made in the Scheme were changes to the ‘fundamental attributes’ of the Scheme. Also, even if they were, whether the changes can be limited only to those specified in a clarification by SEBI.

The term ‘fundamental attributes’ has not been defined in the Regulations. SEBI, however, had issued a circular dated 4th February 1998. In the circular, certain changes were specified as ‘fundamental attributes’, but apparently the changes made to the Scheme as per the facts in the present case were not specifically covered.

The SAT held that the changes made to the Scheme as discussed earlier were indeed changes to the fundamental attributes observing as follows:

“10. Having regard to the changes made in the scheme by which the duration of the investments therein was altered from five to seven years to a period not exceeding 15 years, we are of the considered opinion that this change is one which affects the fundamental attributes of the scheme and also modifies the same affecting the interest of the unit holders. The words ‘fundamental attributes’ have not been defined in the regulations and, therefore, they have to be understood according to their ordinary dictionary meaning. Fundamental is something which is basic or serves as a foundation or goes to the root of the matter. In the context of an investment scheme, one of the important factors that an investor looks at is the duration for which the investments are going to be made in that scheme. In this sense, the duration of the investment constitutes one of the fundamental attributes thereof. In the instant case when the scheme was launched it had two plans — short-term plan and long-term plan the duration of both was different and the investors took an informed decision in investing in one or the other plan . ….what respondents 2 to 5 did was…. they increased the duration of the short-term plan to a long-term without informing the investors. This was most unfair. Since the duration of the investments was substantially increased, we have no doubt in our mind that one of the fundamental attributes of the scheme was altered. Even the whole-time Member has recorded a finding in the impugned order that the change in the duration virtually modified the short-term plan into a long-term plan and this is what he has observed:

“The sudden change in investing substantial funds of the scheme in long-term gilt instruments from short-term instruments had in turn changed the average maturity and the modified duration of the scheme portfolio, drasti-cally varying them, so as to modify the scheme virtually into a Long-Term Plan.”

Interestingly, note also the following observations of the SAT with regard to the findings of SEBI itself in its Order:

“The whole-time Member himself has recorded a finding that the changes affect the interest of the unit holders of the scheme. It is pertinent to refer to this finding in his own words:

“The change in the duration of the scheme is a change which certainly affects the interest of the unit holders of the scheme. Any fund house making any changes so as to modify the scheme which affects the interests of the unit holders would be liable for the contravention of Regulation 18(15A) of the Mutual Funds Regulations, if they had effected such changes without complying with the procedure mentioned therein.”

Can SEBI limit the list of changes that amount to ‘fundamental attributes’ by means of a Circular? In any case, does the Circular limits the list? The SAT observed and held as follows:

“Having recorded the aforesaid findings, the whole-time Member holds that the aforesaid changes in the scheme did not alter its fundamental attributes merely because they did not fall within the clarifications issued by the Board as per its Circular of 4th February, 1998. We cannot agree with him. The Circular was issued giving clarifications in regard to some of the fundamental attributes of a scheme. What is elaborated therein is only illustrative and in the very nature of things it cannot be exhaustive. Apart from the attributes referred to in the Circular, there could be other fundamental attributes of a scheme like the duration of a scheme as in the present case. We agree with the learned senior counsel for the respondents that if the nature of the investments were to change, the fundamental attributes of a scheme would get altered. He was right in contending that if investments were to be made in equity or money market instruments instead of Government securities as originally stipulated, the fundamental attributes of a scheme would undergo a change. But those could not be the only fundamental attributes of a scheme. As already observed, there could be other attributes as well, depending upon the nature of the scheme.

11. We are really amazed that the whole-time Member after recording a finding that respondents 2 to 5 had changed the scheme which affected the interest of the unit holders without complying with Regulation 18(15A) of the Regulations failed to issue directions to these respondents for complying with the provision. The finding recorded in this regard has already been reproduced above and we agree with the whole-time Member that respondents 2 to 5 had brought about changes in the scheme which affected the interest of the unit holders. This being so they were obliged to comply with the provisions of Regulation 18(15A) which they have not and the grievance of the appellants is justified that the Board failed to issue appropriate directions in this regard.”

SEBI had also held that adverse directions against the fund could not be passed since, according to SEBI, no such allegation was made in the show-cause notice issued to the respondents. SAT, however, found otherwise and held as follows:

“The reason given by the whole-time Member for not issuing the necessary directions is that there was no such allegation in the show-cause notice dated 7th August, 2009 that was issued to the respondents. This reason, to say the least, is most untenable. The details of the changes made in the scheme have been elaborated in the show-cause notice and there is a clear allegation in para 16 thereof that the respondents had violated, among others, Regulation 18(15A) of the Regulations. It is this Regulation which required the respondents to give an exit route to all those who were the unit holders on the date of the change including the appellants. We are satisfied that the whole-time Member grossly erred in not issuing the appropriate directions in this regard.”

The final contention was that the disclosure was made in the offer document that the fund manager could make changes as market conditions warrant. The SAT held that such a disclosure does not permit making of fundamental attributes without following the prescribed procedure and giving the prescribed relief under the Regulations.

Accordingly, the SAT set aside the Order of SEBI and directed that, subject to due verification, etc. that the appellants be compensated for the loss suffered by them for the amount being the difference between the relevant NAV and the sale price of their units.

In my view, it is also sad though that no costs were given and the investors were merely restored to the NAV which they were otherwise entitled to. The investors had of course at stake a large loss of around Rs.25 lakh and could fight till SAT for relief. However, though their claims were clearly upheld, they had to bear the costs out of their pockets. The issue is: Is this fair?

Port Trust Land

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Introduction:

One of the largest landlords in the island city of Mumbai is the Board of Trustees of the Port of Mumbai or the Bombay Port Trust or the BPT as it is popularly known. BPT had let out large parcels of land (e.g., the Ballard Estate area of South Mumbai) on a rental basis. The area of land leased out by BPT is around 300 hectares. However, since the past few years, with real estate becoming a very scarce commodity in the city of Mumbai, there has been a spate of litigation between BPT as a landlord and the tenants on the other hand. In this scenario, it is important to understand the nature of the lease arrangement with BPT and the consequences of the same.

Nature of BPT:
The Bombay Port Trust was first constituted under the Bombay Port Trust Acts of 1873 and 1879. BPT is an Authority constituted for the administration, control and management of the port in Mumbai (which was and is a major port of India). Subsequently, a nationwide Act, called the Major Port Trusts Act, 1963 (‘the Act’) was enacted for all the major ports of India. This Act was made applicable to the Bombay Port Trust in the year 1975. Hence, now BPT is governed by the Major Port Trusts Act. The property owned by BPT absolutely vests in the Board by virtue of the provisions of the Act.

BPT is a State within the meaning of Article 12 of the Constitution of India and hence, it cannot act in an arbitrary or unjust manner. Its actions must be reasonable and always taken in public interest. This principle has been laid down by a host of Supreme Court decisions, such as, Dwarkadas Marfatia v. Board of Trustees of the Port of Bombay, (1989) 3 SCC 293, Maneka Gandhi v. UOI, (1978) 1 SCC 248, etc.

Land leased out by BPT:
As discussed earlier, BPT is involved in several disputes where it wants tenants to vacate in cases where lease is expiring or has expired. A majority of the disputes pertain to: whether BPT is bound to renew leases which have expired since it is a State and hence, it must act in public interest. Further, whether or not BPT can increase the rent significantly also forms a part of this dispute.

The decision of the Bombay High Court in the case of Omprakash Tulsiram Aggarwal, 1993 Mh LJ 1725 is significant in this respect. In this case, the renewal of the lease was refused by BPT. The lessees filed a writ stating that such a refusal was an arbitrary and unilateral decision of BPT and was not keeping with the conduct expected from a State. The High Court dismissed the writ petition and held that since BPT genuinely required the land for its own use, as was evident from its correspondences and it had also passed a resolution to that effect, there were ample reasons for refusal to renew the lease. Further, the acquisition was just fair and reasonable and did not suffer from the vice of Article 14, i.e., an arbitrary and unjust action. This judgment was subsequently affirmed by the Apex Court in Kumari Shri Lekha Vidyarthi v. State of UP, AIR 1991 SC 537.

In the case of Jayantilal Dharamsey, 2001 (1) Bom CR 44 it was held that BPT cannot act capriciously and arbitrarily and would have to fix the lease rent in accordance with fairness and reasonableness. This was a very path-breaking decision and ultimately went to the Supreme Court.

The Supreme Court in the case of Jamshed Hormusji Wadia v. BPT, 2004 (3) SCC 214 had an occasion to consider Jayantilal’s decision and a bunch of other cases, all of which dealt with the issue of whether or not BPT can increase the rent significantly and terminate leases in the case of illegal sub-letting by lessees. This famous decision of the Supreme Court laid down the all-important compromise proposal in this respect. BPT proposed a compromise formula to tide over the litigation and the same was accepted by the Supreme Court with some modifications. The important principles laid down by this decision were:

(a) After 1-4-1994, revision in rents shall be @ 10% for non-residential uses and @ 8% for residential uses; Interest chargeable by the Board of Trustees of the Port of Mumbai in respect of arrears of rent for the period commencing 1-4-1994 up to the date of actual payment shall be calculated @ 6% per annum.

(b) In the case of expired leases, fresh lease on new terms shall be at the sole discretion of the Board. The grant of fresh leases may be considered taking into account restructuring requirements for the City’s Development Plan, BPT’s Master Plan and the Development Control Regulations.

(c) Where a fresh lease is granted, arrears may be recovered in the form of premium at the applicable letting rate for respective use with simple interest at 15% per annum from the date of expiry of lease till grant of fresh lease.

(d) In the case of expired leases without a renewal clause, additional premium may be recovered at 12 months’ rent at the applicable letting rate.

(e) In the case of subsisting leases, assignments and consequent grant of lease on new terms would be at the prevailing letting rate at the relevant time and in relation to use. Where the lessee is already paying rent at the prevailing letting rate, assignment would be permitted on a levy of revised rent at 25% over the applicable letting rate or on levy of premium at 12 months’ rent at the applicable letting rate as may be desired by the lessee/tenant.

(f) Subletting, change of user, transfer, occupation through an irrevocable power of attorney and any other breaches may be regularised by levy of revised rent at the applicable letting rate at the time of such breach from the date of breach. Where the lessee/tenant is already paying rent at the prevailing letting rate, such regularisation be permitted on levy of revised rent at 25% over the applicable letting rate or a levy of premium at 12 months’ rent at the applicable letting rate as may be desired by the lessee/tenant.

(g) The Bombay Port Trust is an instrumentality of State and hence an ‘authority’ within the meaning of Article 12 of the Constitution. It is amenable to writ jurisdiction of the Court. The consequence which follows is that in all its actions, it must be governed by Article 14 of the Constitution. It cannot afford to act with arbitrariness or capriciousness. It must act within the four corners of the statute which has created and governs it. All its actions must be for the public good, achieving the objects for which it exists, and accompanied by reason and not whim or caprice.

(h) In the field of contracts, the State and its instrumentalities ought to so design their activities as would ensure fair competition and non-discrimination. They can augment their resources but the object should be to serve the public cause and to do public good by resorting to fair and reasonable methods. The State and its instrumentalities, as the landlords, have the liberty of revising the rates of rent so as to compensate themselves against loss caused by inflationary tendencies. They can and rather must also save themselves from negative balances caused by the cost of maintenance, and payment of taxes and costs of administration. The State, as landlord, need not necessarily be a benevolent and good charitable samaritan. However, the State cannot be seen to be indulging in rack renting, profiteering and indulging in whimsical or unreasonable evictions or bargains.

(i) The ‘Compromise Proposals’ so modified shall bind the parties and all the lessees, even if not parties to the proceedings before the Supreme Court.

Consequent to the above Supreme Court decision, the Estate Department of BPT issued a Circular in November 2006 which laid down the following important provisions:

(a)    It is obligatory on the part of lessees/tenants to obtain prior consent in writing of BPT for any assignment/transfer, subletting, under letting in any manner or parting with possession of the premises or any part thereof whether on leave and licence basis or otherwise.

(b)    Further, BPT was not bound to accord its sanction to a proposal for the above breaches which take place without its prior consent and if they proceed any further with such breaches, they shall be doing so at their own risk, cost and consequences.

(c)    It fixed 10-3-2004 as the cut-off date for the purpose of regularising past breaches, subletting, etc. Breaches committed after 10-3-2004 would attract application of revised rent/compensation prospectively i.e., from 1-9-2006 calculated based on 6% per annum return on the rates prescribed in the Stamp Duty Ready Reckoner for the year 2006 with 4% per annum increase every October, pro rata to the area of breach.

(d)    It was also decided by the Board that in future, changes in lease terms like additional construction, change of user, etc. should be with prior approval.

(e)    In case of subletting/assignment without prior approval, the Board reserves the right to resume possession and failure to obtain prior approval will attract, in addition to revised rent/compensation, a penalty of 12 months’ rent/compensation at the revised rates for every year of delay without prejudice to the Board’s rights and remedies including eviction and recovery of arrears, etc.

Even after the above-mentioned Supreme Court decision, several lessees are yet locked in a fierce battle with BPT, since not all issues have been resolved. A very famous club in Mumbai is currently locked in a fierce litigation with BPT which may threaten its very existence if BPT wins the ultimate battle. Its lease expired in 1990. BPT has been demanding possession of the land and premises constructed thereon. Several lessees of South Mumbai have filed an appeal in the City Civil Court which is pending. By virtue of this appeal, BPT’s order demanding possession has been stayed. It is also challenging the levy of rent from 2006 to 2010 on the grounds that it tantamount to an exorbitant enhancement of rent.

Applicability of other laws:

Another  issue  which  arises  is  whether  the provisions of the Maharashtra Rent Control Act, 1999 apply to land leased by BPT?

In the case of Jamshed Hormusji Wadia v. BPT, 2004 (3) SCC 214, the Court held that the issue as to the applicability of the Maharashtra Rent Control Act, 1999 to the Port of Mumbai and the property held by it is left open to be decided in appropriate proceedings.

Section 3(1) of this Act provides that it does not apply to any premises belonging to the Government or a local authority. Under the previous Rent Control Act of 1947, the definition of local authority was not given in the Act and hence, various decisions such as Ram Ugrah Singh, (1983) Mah LJ 815 had held that the BPT is a local author-ity. However, now Section 7(6) of the 1999 Rent Act expressly defines the term local authority in an exhaustive manner and does not include BPT within its definition. Hence, now BPT is not a local authority and accordingly, it is not exempt from the provisions of the Rent Act.

The Public Premises (Eviction of Unauthorised Occupants) Act, 1971 would also apply to property held by BPT — Ashoka Marketing Ltd. v. PNB, AIR 1991 SC 855.

Auditor’s duty:

The Auditor should enquire of the auditee, in case the auditee is dealing in property which is under lease from the BPT, whether the covenants of the lease deed, such as rent increases, renewal, etc. have been duly complied. Non-compliance with this could have serious repercussions for the buyer/lessee.

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’.

SHARES WITH DIFFERENTIAL VOTING RIGHTS — A USER’S PERSPECTIVE

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Concept:
Shares with differential voting rights (DVR shares) are like ordinary equity shares but with differential voting rights. They are listed and traded in the same manner as ordinary equity shares. However, they mostly trade at a discount as they provide fewer voting rights compared to ordinary equity shares. Companies generally compensate DVR investors with a higher dividend.

Background:
In India since 2001, issue of DVR shares has been allowed. These can be used to thwart hostile takeovers, as for all practical purposes, they decouple economic interest and voting rights. Shares with DVR are mainly targeted at passive investors. In most cases, small or retail investors hardly exercise their voting rights, nor do they have an understanding of corporate affairs to an extent that they can influence corporate actions. They invest in shares only for economic returns. Therefore, they give away their voting rights in favour of those investors who run the company and have management control. Thus, this mode offers investors an avenue to acquire shares at lower prices with prospects of higher dividends in return for surrendering their voting rights.

Importance:
DVR shares offer investors an opportunity to earn better returns in lieu of surrendering their voting rights and also allow a company to dilute its equity without matching dilution in the promoters’ stake. At times companies issue DVR shares to fund new large projects. This also helps strategic investors who do not want control but are looking at a reasonably big investment in a company.

Legal requirement:
Section 86 of the Companies Act permits the issue of equity shares with DVRs, subject to conditions prescribed under the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2002.

Conditions:
Rule 3 provides that every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if apart from specified procedural compliances, it conforms to the following:

  • It has distributable profits in terms of section 205 of the Companies Act, 1956 for three financial years preceding the year in which it was decided to issue such shares.
  • It has not defaulted in filing annual accounts and annual returns for three financial years immediately preceding the financial year in which it was decided to issue such shares.
  • The issue of such shares cannot exceed 25% of the total issued share capital of the company.

Global perspective:
A large number of global giants have raised funds through DVR issues, prominent among them are Google, NewsCorp and Berkshire Hathaway.

Indian scenario:
While DVR is a well-accepted instrument used by blue-chip companies in international markets to raise funds, even after a decade of the government’s Notification, the concept is yet to gain wide currency in India.

Pantaloons Retail India Ltd. Bonus Issue:
In July 2008, PRIL, India’s leading retailer, was the first to issue bonus shares with a DVR option. The company made a bonus issue of 1: 10 shares with differential voting rights and 5% additional dividends as well. Although there is no fund-raising involved in a bonus issue of shares, the idea was to get the markets familiar with such instruments and create another alternative to raise funds in the future. “Differential voting rights (DVR) has become a widely used innovative instrument in global markets and by coupling a bonus issue with a DVR, we believe in enhancing alternatives for our shareholders,” Kishore Biyani, MD of PRIL had stated in a press release.

Gujarat NRE Coke Ltd. DVR:
In September 2009, the company issued B Equity Shares of the Company with Differential Voting Rights (DVR Shares) with lower voting rights (1/100th of the voting right of ordinary equity share). The same were issued as bonus shares in the ratio of 1 B equity shares for every 10 equity shares held.

The above illustrates the past one year relative performance of the ordinary equity share (512579) vis-à-vis the DVR share (GUJNREDVR) and the broader markets (BSE Sensex). We find that while both the ordinary as well as the DVR share have moved in a direction opposite to the BSE and have witnessed reduced share prices; the magnitude of the fall for DVR (29%) is less than that of the ordinary share (39%).

(Source: Google Finance)

Tata Motors DVR:

In October 2008, Tata Motors became the first Indian company to make a rights issue of shares carrying differential voting rights (DVR) (issue size: Rs.1960.42 crores). DVR shares have 1/10th of voting rights of ordinary shares and offer a 5% higher rate of dividend over the normal shares. It issued these shares at Rs.305 i.e., about 10% lower than the issue of normal rights at Rs.340.

The diagram shown alongside illustrates the past one year relative performance of the ordinary equity share (500570) vis-à-vis the DVR share (TATAMTRDVR) and the broader markets (BSE Sensex). We find that while both the ordinary as well as the DVR

share have outperformed the BSE; the magnitude of the gain for DVR (39%) is less than that of the ordinary share (48%).

(Source: Google Finance)

Conclusion:
For an investor, who believes in being a part of the company’s decision processes, DVR shares are not attractive due to limited voting rights.

However, if one is a minority investor and isn’t concerned much with voting rights per se, then investing in the DVR would certainly be an attractive proposition. DVRs mostly trade at a discount, largely due to the fewer voting rights they enjoy. However, at times, the gap between DVR and ordinary shares is large, providing good opportunity to investors. (Globally, the discount between shares with DVRs and ordinary shares is about 10%.) Not only does an investor stand to gain from capital appreciation in a scenario where the price difference between the ordinary and the DVR share reduces over a period as a result of rising awareness about the product, he will also be entitled to higher dividends. Furthermore, he can always invest back in ordinary shares by exiting DVRs once the differential narrows. Thus, the riskreward ratio of investing in DVRs looks somewhat skewed towards the latter. The only caveat is that before investing in a DVR, investors need comfort about the company’s fundamentals and prospects, and more importantly, its management.

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The basics of cloud computing

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Part 3

About this article:
In the previous write-up on this issue we discussed certain important aspects about cloud computing including key terminology and some offerings. This write-up focusses on certain issues which would require consideration before one decides to opt for cloud services.

Background:
Cloud computing basically refers to providing the means through which everything i.e., from computing power to computing infrastructure, applications, business processes to personal collaboration, can be delivered to you as a service wherever and whenever you need. This model is fast emerging as the choice of several large and small businesses. The choice is quite natural considering the (assured) cost savings. Such savings can be either in the form of lower capital expenditure on hardware, software licence, infrastructure or in the form of lower operational expenditure i.e., operation and maintenance expense or reducing idle time, downtime, etc. (refer to the write-up titled Cloud computing basics — part I published in BCAJ April 2011 issue).

Businesses, large and small, have several options, between whether to opt for private or public or hybrid clouds (refer to the write-up titled Cloud computing basics — part II published in BCAJ May 2011 issue). Having several options itself, sometimes, becomes a hurdle while making strategic investments. Cloud computing also brings to the fore certain unique concerns, concerns which are more significant from the ‘enterprise’ point of view.

Primary objective of moving to the cloud:
As organisations evaluate how cloud computing can achieve these advantages, they are faced with numerous choices. While moving to the cloud has definite advantages such as — improving business agility, reducing management complexity and controlling costs, etc., one needs to appreciate that simply moving towards a service-oriented cloud computing model does not automatically deliver benefits. To derive maximum benefit and Return on Investment (ROI), cloud computing needs to be considered as part of a larger move towards more effective management and integration. Needless to say inadequate planning and half-baked cloud computing solutions may add complexities rather than reduce them.

Some myths and some clarifications:
While there are several myths and misconceptions associated with the topic of cloud computing, the ones that the readers of this journal are more likely to identify with are:

Myth 1:

Data security: Will the cloud service provider guarantee security?

One common concern amongst businesses looking to move to cloud computing is data security. Primarily, moving to the cloud entails — parking your data with the service provider, this can be a discomforting thought. The very possibility of threat to confidentiality and security of the data is the source of discomfort.

From a practical standpoint, public cloud datacentres are amongst the most secure premises on the planet. Yet, at the logical level, a cloud provider with every security certification still can’t guarantee the integrity of specific servers, applications, and networks, if your applications are poorly written, set up and secured. Similarly, all the security practices of a cloud provider are meaningless if a customer organisation’s security practices are weak.

The key take-away here is that there are several layers of security to protect your data, but there is always a possibility of chinks in the armour.

Myth 2:

Data control: My organisation will be locked into one vendor and lose control of its data, if it moves to the cloud:

Almost every organisation would acknowledge that businesses need to store shared files securely. This would assume more importance when the organisation is engaged in providing medical, legal and financial services. These organisations are subject to strict local laws.

If one believes that the best way to keep your data a secret is to manage it yourself, then the moot question would be why stash your precious data offsite?

It is relevant to point out that the essence of cloud services is ‘flexibility’. One application may call another on a different cloud service, and data may be stored anywhere, including your own network, but still be accessible to cloud applications. No cloud provider offers a service that completely takes control of your environment. The best cloud solutions will be a combination of on and offpremise services.

The key take-away is that while the service provider may control the infrastructure, the data is not entirely in his control. Sure!!! he controls your access to your own data, but his primary interest is merely optimal utilisation of his resources (just like you).

Myth 3:

Cost savings: An organisation must move all its applications to a cloud service to be able to benefit fully from cloud computing:

Moving an entire datacenter to the cloud is a tall task. Practically, no cloud provider would recommend this, at least not at one go (if you ask me — you are inviting trouble). Ideally, one should adopt a step-by-step approach. One should start by identifying applications in his pipeline that can benefit his organisation by being in the cloud. Look for applications where resources are used intensely for a short period each month then left idle for the rest of the time, or applications where a moderate level of resources are used continuously, but experience ‘periods’ of very high activity.

Such applications are ideal cloud candidates. This is so, because the cloud can scale up and down resources on demand. The cloud is built for flexible access to resources that can be allocated to other applications, or even other customers, when idle.

The key take-away is that one should do a cost benefit analysis of all activities undertaken and gauge the advantages/disadvantages of shifting to the cloud. A proper evaluation would also ensure that you minimise disruptions and costs associated thereto. Who knows, the sum of all parts may be greater than the whole.

Myth 4:

IT role changes: Do I still need an IT administrator?

The role of the Exchange Administrator does not become obsolete due to the cloud. There are still many tasks that remain on-premise. You still have to manage your users and their mailboxes. Industry-specific data retention compliance, as well as implementing custom workflows, is still your responsibility. While some tasks may no longer reside on-premise, managed cloud services free up your time to engage in more strategic roles, providing you with new opportunities.

Apart from patching those servers and physically maintaining them, all other aspects of managing applications remain in the IT administrator’s hands. Monitoring, updating, integration with services such as Active Directory, security and network monitoring — these task are still required within organisations utilising cloud services.

The key take-away is that the all powerful IT administrator’s role is impacted, but the role does not get diminished. The IT administrator’s role will evolve as the availability of compute cycles and networked storage increase — that is a given, just as the IT role has evolved in the past. The question IT administrators must ask themselves is, ‘Am I prepared to play a more strategic role in my organisation?’

Myth 5:

Getting started: All you need is your credit card to start cloud computing:

You can begin using cloud computing services with just a credit card. This is a good way to get experience with this new frontier of services, in fact some of the basic services may be available free. Most cloud services provide an environment designed for getting started and developing applications.

It is important that one gets used to the concept and gain comfort. Post this one may evaluate the advantages/disadvantages of moving to the cloud.

The key take-away is take small, measured steps. Learn from experience before betting it all.

In summary:

There are pros and there are cons, also there are hyped stories of success and spiced-up stories of failure. Readers may well be cautioned to do their own research and allay their fears of this emerging service. While the service provider may promise you the moon, one should pare his expectations and make investments only upon realising measured benefits. In short, look before you leap!!!!!!!

Computer-Assisted Audit Tools (CAATs) — Use of CAATs for Ope rational Rev iew of Plant Maintenance

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Preface:

Nancy is Director — Analytics with GRC Analytics Inc. GRC Analytics Inc. are market leaders in the field of governance, risk management and control analytics for the last decade and pioneers in the implementation of audit process and data analytical tools. In a short span of time this bellwether firm had managed to establish a footprint in the accounting, finance and business assurance segment which were the erstwhile arena for large accounting and audit majors. This fast-paced growth was fuelled by a group of techno-finance professionals who delivered consistent value propositions to all their clients by riding on the backbone of contemporary assurance technology.

GRC Analytics Inc. leveraged audit technology like general audit softwares, data mining tools, work paper administration tools, reporting applications, enterprise continuous control monitoring applications and enterprise risk management applications to deliver value-added, high-return valuefor- money results to all the clients from retail to manufacturing, to information technology and healthcare.

GRC Analytics Inc. was solely responsible for overseeing all data analytic projects and applied knowledge management research projects for the firm.

In a recent Internal Audit — Engineering & Technology conclave, Nancy was presenting on the role of ‘Use of CAATs for Operational Audits and Assurance’.

Introduction:
Nancy began by providing the backdrop to the use of CAATs for the operational review of central plant maintenance activities at an engineering industry.

The Central Maintenance Cell (CMC) of a manufacturing company was entrusted with breakdown maintenance and preventive maintenance for ten plant centres in the company. The COO of the company was interested in studying and reviewing problem areas and potential threats in the maintenance process. He instructed the Head-CMC, to provide Nancy and her team with maintenance data for undertaking specialised business analysis.

The Head-CMC in turn provided Nancy with an electronic dump containing the following file layout:

Presentation on operational review of plant maintenance through CAATs:

Nancy wanted to drive home the efficacy of general audit tools to the conclave of participants comprising internal auditors, technical auditors, investigators, risk managers, IT security professionals and more. She decided to help the participants visualise the utility of audit tools (GAS) through a few live plant maintenance case studies and discussions. These case studies served as a primer for a general awareness and appreciation amongst the participants.

Case studies presented were:

(a) Plants experiencing frequent Breakdown Maintenance (BM):

Nancy summarised the electronic dump on the plant code and plant description along with filtered criteria to extract all maintenance codes containing ‘BM’.

She performed this summarisation to arrive at count of breakdown maintenance instances for each plant centre.

With the summarisation file in place she finally performed a top records filter to capture the ‘Top 5’ plant centres by highest frequency of breakdown maintenance.

Armed with this information, the Head-CMC was able to investigate and diagnose the reasons for high breakdowns on specific plant centres by looking at the age, usage, history of maintenance, nature of maintenance, plant output quality and allied details.

(b) Plants experiencing Breakdown Maintenance (BM) immediately after Preventive Maintenance (PM) in the same month:

Nancy appended a new field to the electronic dump and captured the month of maintenance against each maintenance transaction activity.

She then went on to perform a duplicate (exclusion) test on the plant code, plant description and month with the field that must be different being maintenance code.

The resultant report provided a listing of plants being halted for ‘BM’ immediately after ‘PM’ in the same month.

With the instances generated, the Head-CMC was able to investigate and diagnose the reasons for sudden breakdowns after preventive maintenance by studying the nature of preventive maintenance undertaken and the quality of maintenance spares used.

(c) Plants halted for Breakdown Maintenance (BM) beyond 24 hours:

Nancy appended a new field to the electronic dump and captured the time taken to complete each maintenance activity by simply arriving at the difference between the ‘Maintenance start time’ and ‘Maintenance end time’.

She then applied a filter to list plants under ‘BM’ for more than 24 hours.

Finally Nancy converted the filtered report of ‘Above 24 Hour BM cases’ into a frequency distribution as below:

This frequency distribution allowed the Head-CMC to focus on pain areas in the plant maintenance process.

Conclusion:
Nancy culminated her presentation by reiterating that general audit tools are time-tested, stable, robust, powerful, internationally acclaimed and user-friendly applications designed by auditors for auditors.

She added that no tool is a ready substitute for the internal and technical auditor’s acumen and judgment, but is a powerful, cost-effective facilitator.

She encouraged all the internal and technical auditors present to embrace tools and reap the benefits of an idea whose time has come.

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Need for optimal choice of accounting policies under Ind-AS

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With its press release dated 25th February 2011, the Ministry of Corporate Affairs (MCA) notified 35 Indian Accounting Standards converged with IFRS (Ind-AS), thereby eliminating the speculation on the contents of the final standards. However, the press release does not contain the date of implementation of the converged standards. The MCA has clarified that the date of implementation shall be notified at a later date.

The final standards notified by the MCA are substantially similar to the current IFRS standards. However, there are certain changes made to the Ind-AS standards as part of the convergence (rather than adoption) process to make them suitable to the Indian environment. These changes can be classified into the following categories:

  • Mandatory differences as compared to IFRS;
  • Removal of accounting policy choices available under IFRS;
  • Additional accounting policy options provided, which are not in compliance with IFRS requirements;
  • Certain IFRS guidance to be adopted with separate (deferred) implementation dates.

Our previous article explained the first category of carve-outs i.e., mandatory differences with IFRS and their impact on the financial statements. This article attempts to cover the other categories of carve-outs, whose primary focus is on accounting policies.

I. Removal of accounting policy choices available under IFRS:

This category of carve-outs pertain to several areas where IFRS offers multiple policy choices while Ind- AS restricts these policy choices.

This category of carve-outs do not result in deviations from IFRS, as they represent permitted policy choices. However, while following the policies prescribed under Ind AS will result in conformity with IFRS, these carve-outs could pose a challenge for Indian companies, if global peers follow other alternative policies (such as fair value model for investment property); if such companies are a part of a global group that follows other alternative policies; or if the Indian company has previously followed other alternative policies for IFRS reporting to overseas stakeholders.

Presentation of profit and loss account based on single statement or two-statement approach:

Position under IFRS:

IFRS provides entities with an accounting policy choice in relation to the presentation of income statement. The reporting entity can present comprehensive income as:

  • a single statement of comprehensive income (which includes all components of profit or loss and other comprehensive income); or
  • in the form of two statements i.e., an income statement (which displays components of profit or loss) followed immediately by a separate ‘statement of comprehensive income’ (which begins with profit or loss as reported in the income statement and discloses components of other comprehensive income aggregating to total comprehensive income for the period).

Position under Ind-AS:

Ind-AS requires entities to present the profit and loss account based on the single-statement approach. The two-statement approach is not permitted under Ind-AS.

Presentation of expenses based on nature or function:

Position under IFRS:
Expenses in the profit and loss account are classified according to their nature or function.

When expenses are classified according to function, expenses are generally allocated to cost of sales, selling, administrative or any other functions of the reporting entity.

There is no guidance in IFRS on how specific expenses are allocated to functions. An entity establishes its own definitions of functions such as cost of sales, selling and administrative activities, and applies these definitions consistently. Additional information based on the nature of expenses (e.g., depreciation, amortisation and staff costs) is disclosed in the notes to the financial statements.

When classification by nature is used, expenses are aggregated according to their nature (e.g., purchases of materials, transport costs, depreciation and amortisation, staff costs and advertising costs).

Position under Ind-AS:

Ind-AS permits presentation of expenses based on the nature of expenses only. As such, presentation of expenses based on function is not permitted.

Presentation of dividend/interest received and paid in the cash flow statement:

Position under IFRS:

Interest paid/received and dividends received are usually classified as operating cash flows for a financial institution. For other entities, IFRS provides entities with an accounting policy choice whereby:

  • Interest paid and interest and dividends received may be classified as operating cash flows, because they enter into the determination of profit or loss.
  • Alternatively, interest paid and interest and dividends received may be classified as financing cash flows and investing cash flows, respectively, because they are costs of obtaining financial resources or returns on investments.

Position under Ind-AS:

Ind-AS requires interest paid and interest and dividends received to be classified as financing cash flows and investing cash flows, respectively.

Investment property: Cost model and fair value model:

Position under IFRS:

All investment properties are initially measured at cost. Subsequent to initial recognition, an entity chooses an accounting policy to be applied consistently, either to:

  • measure all investment property using the fair value model; or
  • measure all investment property using the cost model.

Where an entity has adopted a fair value model, all changes in fair value subsequent to initial recognition are recognised in the profit and loss account.

Position under Ind-AS:

Ind-AS prohibits use of fair value model for investment property.

Actuarial gains and losses:

Position under IFRS:

Under IFRS, actuarial gains and losses on defined benefit plans can be recognised using various acceptable policy choices. Thus, such actuarial gains or losses can either be recognised in other comprehensive income; or recognised immediately in the profit and loss account; or amortised into the profit and loss account using the corridor approach (or any other systematic method which results in faster recognition than the corridor approach).

Position under Ind-AS:

Ind-AS does not permit immediate recognition of actuarial gains or losses in the profit and loss account or amortisation through the profit and loss account. It requires actuarial gains or losses to be recognised directly in other comprehensive income.

Presentation of government grants related to assets:

Position under IFRS: Two methods of presentation in financial statements of grants related to assets are regarded as acceptable alternatives:

  • grants presented as deferred income and recognised in profit or loss on a systematic basis over the useful life of the asset.
  • grants adjusted against the carrying value of the asset. The grant is recognised in profit or loss over the life of a depreciable asset as a reduced depreciation expense.

Position under Ind-AS:

Ind-AS requires government grants related to assets to be presented in the balance sheet by setting up the grant as deferred income. Recognition as a reduction from the asset is not permitted.

Measurement of non-monetary grants:

Position under IFRS:

A government grant may take the form of a transfer of a non-monetary asset, such as land or other resources, for the use of the entity. If a government grant is in the form of a non-monetary asset, then an entity chooses an accounting policy, to be applied consistently, to recognise the asset and grant at either the fair value of the non-monetary asset or at the nominal amount paid.

Position under Ind-AS:

In case of non-monetary grants, the fair value of the non-monetary asset is assessed and both the grant and the asset are accounted for at that fair value.

II.    Additional accounting policy choices:

This category of carve-outs represent an area where a company can either elect to follow policies aligned to IFRS, or alternate policies that diverge from IFRS.

This category of carve-outs represents an area where each individual company needs to apply careful thought and consideration. Thus, if companies want to achieve full compliance with IFRS, they would need to elect accounting policies that are aligned to IFRS. On the other hand, if compliance with IFRS is not relevant for the company, it may elect other policies that are divergent with IFRS. While assessing these policy choices, companies need to evaluate not just their current environment, but future plans (for instance, plans for a future overseas listing or fund-raising).

Such carve-outs include the following:

Exchange differences on long-term foreign currency monetary items:

Position under IFRS:

Foreign exchange gains and losses generally are recognised in the profit or loss.

Position under Ind-AS:

Ind-AS has retained the above position under IFRS. Additionally, it has provided an option to recognise unrealised exchange differences on long-term monetary assets and liabilities to be recognised directly in equity and accumulated in a separate component of equity. The amount so accumulated shall be transferred to profit or loss over the period of maturity of such long-term monetary items in an appropriate manner.

Deemed cost exemption for Property, Plant and Equipment (PPE):

Position under IFRS:

On transition to IFRS, an entity has the following choices with respect to PPE for computing deemed cost under IFRS:

  •    Revalue individual, some or all items of PPE to its fair value as at the transition date.

  •     In case assets are revalued under the previous GAAP, then those revalued amounts can be considered as a deemed cost, provided that that revalued amounts are broadly comparable (i) to the fair values as at the date of revaluation, or (ii) cost or depreciated cost in accordance with IFRS adjusted to reflect, for instance, the changes in the general or specific price index.

  •     Event-driven (such as on account of IPO or Privatisation) fair values may be considered as deemed cost.

Position under Ind-AS:

Apart from the options provided under IFRS, Ind-AS provides an additional option to continue Indian GAAP carrying values of all items of PPE as at the transition date without any modification, except for recognising asset retirement obligations. This exemption, if exercised, is required to be applied to all items of PPE without exception.

III.    Certain guidance to be adopted with separate (deferred) implementation dates:

The Ind-AS standards currently notified defer the application of guidance on accounting for embedded lease arrangements and service concession arrangements. It is expected that such guidance will become mandatory at a later date.

Similarly, the Ind-AS on accounting for exploration and evaluation of mineral resources shall be notified at a later date.

Summary:

While Ind-AS financial statements presented for the first transition period cannot be fully compliant with IFRS (since comparatives would not be presented), Ind-AS financial statements for subsequent years can be made fully compliant with IFRS, if a company chooses optimal accounting policies and does not adopt the diluted alternatives available under Ind-AS. This is assuming that a company is not impacted by the mandatory deviations.

It is advisable for the companies to continue the process of estimating the exact impact of the convergence on their business, especially in the light of mandatory carve-outs and other non-mandatory differences with IFRS that are now clear on account of the notification of the final standards. Companies that otherwise need to fully comply with IFRS issued by the IASB (for example, because their securities are listed in overseas markets that require IFRS) need to carefully evaluate the impact of such carve-outs.

Independent assurance statement

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Infosys Technologies Ltd. — (31-3-2010)

Introduction:
Det Norske Veritas AS (DNV) has been commissioned by the management of Infosys Technologies Limited (Infosys) to carry out an assurance engagement on the Infosys Sustainability Report 2009-10 (the Report). This engagement focussed on qualitative and quantitative information provided in the report, and underlying management and reporting processes. It was carried out in accordance with the DNV protocol for Verification of Sustainability Reporting (VeriSustain).

The intended users of this assurance statement are the readers of the Infosys 2009-2010 Sustainability Report. The Management of Infosys is responsible for all information provided in the Report as well as the processes for collecting, analysing and reporting that information. DNV’s responsibility regarding this verification is to Infosys only, in accordance with the scope of work carried out. DNV disclaims any liability or responsibility to a third party for decisions, whether investment or otherwise, based on this Assurance Statement.

Scope of assurance:
The scope of work agreed upon with Infosys included the verification of the content, focus and quality of the information presented in the report, against the moderate level assurance requirements in VeriSustain, covering the period April 2009 to March 2010. In particular, this assurance engagement included:

  • Review of the policies, initiatives and practices described in the Report as well as references made in the Report to the Annual Report and corporate website;
  • Review of the Report against Global Reporting Initiative Sustainability Reporting Guidelines Version 3.0 (GRI G3) and confirmation of the Application Level;
  • Review of the processes for defining the focus and content of the report;
  • Verification of the reliability of information and performance data presented in the Report;
  • Visits to the Infosys’ head-office in Bangalore and development centres in Bangalore, Mysore and Chennai, India.

Verification methodology:
This engagement was carried out between August and September 2010 by a multidisciplinary team of qualified and experienced DNV sustainability report assurance professionals. DNV states its independence and impartiality with regards to this engagement. DNV confirms that throughout the reporting period there were no services provided which could impair our independence and objectivity and also maintained complete impartiality towards people interviewed during the assignment.

The Report has been evaluated against the principles of Materiality, Stakeholder Inclusiveness, Completeness, Responsiveness, Reliability and Neutrality, as set out in VeriSustain, and the GRI G3 Application Levels.

During the assurance engagement, DNV has taken a risk-based approach, meaning that we concentrated our verification efforts on the issues of high material relevance to Infosys’ business and stakeholders. As part of the engagement we have challenged the sustainability-related statements and claims made in the Report and assessed the robustness of the underlying data management system, information flow and controls. For example, we have:

  • Examined and reviewed documents, data and other information made available to DNV by Infosys;
  • Conducted interviews with three members of the board including Chairman of the board and Chief Operating Officer;
  • Conducted interviews with 39 representatives of the Company (including members of the Infosys Sustainability Council, data owners and representatives from different divisions and functions);
  • Performed sample-based reviews of the mechanisms for implementing the Company’s own sustainability-related policies and stakeholder engagements as described in the Report, and for determining material issues to be included in the Report;
  • Performed sample-based audits of the processes for generating, gathering and managing the quantitative and qualitative data included in the Report;
  • Reviewed the process of acquiring information and economic-financial data from the 2009-10 certified consolidated balance sheet.

Conclusions:
In our opinion, the Report is an appropriate and reliable representation of the Infosys sustainability- related policies, management systems and performance for the period 2009-10. The Report, along with the referenced information in the Annual Report and on the Company website, meets the general content and quality requirements of the GRI G3, and DNV confirms that the GRI requirements for Application Level ‘A+’ have been met. We have evaluated the Report’s adherence to the following principles on a scale of ‘Good’, ‘Acceptable’ and ‘Needs Improvement’:

Materiality: Acceptable. Infosys has strengthened the materiality determination process with the identified three key focus areas of Social Contract, Resource Efficiency and Green Innovation. But the process needs to be implemented across each division and location with due consideration of short, medium and long-term impacts.

Stakeholder Inclusiveness: Good. The Company has established a process of collating inputs from various stakeholders. A multi-stakeholder based, objective-oriented engagement approach is also evident in the field of adoption of cleaner energy and higher education.

Completeness: Acceptable. The reporting boundary is limited for many parameters (page 9) and does not cover the entirety of Infosys. Infosys shall incrementally improve to aid reporting to reflect the global organisation’s footprint. But within the reporting boundary defined by Infosys, we do not believe that the Report omits relevant information that would influence stakeholder assessments or decisions.

Responsiveness: Acceptable. Infosys has responded to the material issues and to its stakeholders through its policies, management systems and processes. However, this can be improved by expanding the goal setting process to cover more material issues and appropriate performance indicators.

Reliability: Good. No systematic or material errors have been detected for data and information verified. The identified minor discrepancies were corrected. However, there is scope for improving the process to reduce potential for errors.

Neutrality: Acceptable. The information contained in the Report is presented in a balanced manner, in terms of content and tone. Overall the Report is transparent, but can be further improved by more detailed disclosures in the employee sections.

Recommendations:
In addition to the improvement opportunities stated above, DNV recommends that Infosys:

  • Identifies sustainability indicators beyond those available in the GRI, drawing from the materiality process and incorporating them with measurable targets in future reports to remain in line with international practices.
  • Formalises the functioning of the Sustainability Council and integrates the same to existing and relating governance mechanisms.
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GapS in GAAP — Accounting for Jointly Controlled Entities that have Minority Interest

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Background:

Entities A, B and C have equal ownership (33.33%) in Entity D, which they all account for as an interest in an associate (commonly known as equity method). Now A and B, enter into an arrangement under which they will form a Newco (a newly formed shell company), in which they will each have a 50% interest in return for contributing their shares in Entity D. Consequently, after completion of the transaction, Newco has a 66.7% controlling interest in Entity D and, in its consolidated financial statements (CFS), will record minority interest for investor C’s interest in Entity D.

Entities A and B when exchanging their shares in Entity D for shares in Newco, also enter into a contract which results in them having joint control (as defined in AS-27 ‘Financial Reporting of Interests in Joint Ventures’) over Newco. A and B both apply proportionate consolidation for Jointly Controlled Entities (JCE) in the CFS.

Question:
In the CFS of A and B, should the proportionate consolidation be restricted to the effective interests (33.33%) that Entities A and B each have in Entity D, or to 50% of all line items in Newco’s financial statements (including the minority interest) ?

View 1:
Entities A and B will recognise only their effective interests (33.33%) in Entity D. Proponents of this view use the definition of proportionate consolidation to support the argument. As per AS-27 Proportionate consolidation “is a method of accounting and reporting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer’s financial statements.” This definition refers only to the venturer’s share of each of the assets, liabilities, income and expenses of a JCE, and that minority interest does not meet the definition of any of these items. Further, paragraph 30 of AS-27 may also support this view, “When reporting an interest in a jointly controlled entity in consolidated financial statements, it is essential that a venturer reflects the substance and economic reality of the arrangement, rather than the joint venture’s particular structure or form. In a jointly controlled entity, a venturer has control over its share of future economic benefits through its share of the assets and liabilities of the venture. This substance and economic reality is reflected in the consolidated financial statements of the venturer when the venturer reports its interests in the assets, liabilities, income and expenses of the jointly controlled entity by using proportionate consolidation.”

View 2:
Proponents of view 2 (50% proportionate consolidation) point out to paragraph 31 of AS-27 ‘. . . . Many of the procedures appropriate for the application of proportionate consolidation are similar to the procedures for the consolidation of investments in subsidiaries, which are set out in AS-21 Consolidated Financial Statements’. Therefore, it is considered that this results in a requirement for the inclusion of all line items, including those relating to minority interest, for the purposes of proportionate consolidation.

View 3:
Entities A and B have an accounting policy choice, as the accounting guidance is not definitive.

Author’s view:
If the formation of Newco has no substance other than to house the JV and to achieve a gross-up presentation in the CFS of Entity A and B that includes minority interest, then view 1 (33% consolidation) may be a more appropriate accounting treatment. If however, the Newco did have substance (for example, it may be planned to raise funds or list NewCo) then view 2 (50% consolidation) could be favorably argued. In other words, substance over form should prevail.

Nevertheless, this is an issue that ultimately the standard-setters should resolve.

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A.P. (DIR Series) Circular No. 43, dated 4-11-2011 —Foreign Direct Investment — Transfer of shares.

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Presently, transfer of shares from a Resident to a Non-Resident requires the prior approval of RBI in the following cases:

(i) The transfer does not conform to the pricing guidelines as stipulated by the Reserve Bank from time to time; or

(ii) The transfer of shares requires the prior approval of the FIPB as per the extant Foreign Direct Investment (FDI) policy; or

 (iii) The Indian company whose shares are being transferred is engaged in rendering any financial service; or

(iv) The transfer falls under the purview of the provisions of SEBI (SAST) Regulations. Similarly, transfer of shares from a Non-Resident to a Resident which does not conform to the pricing guidelines as stipulated by the RBI also requires prior approval of RBI.

This Circular provides that prior approval of RBI will not be required in the following cases:

A. Transfer of shares from a Non-Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met, provided that:

(i) The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation, etc.

(ii) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations/guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/substantial acquisition/ SEBI SAST, buyback).

(iii) Chartered Accountants’ Certificate to the effect that compliance with the relevant SEBI regulations/guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank. B.

Transfer of shares from Resident to Non- Resident:

(i) Where the transfer of shares requires the prior approval of the FIPB — provided that:

(a) The requisite approval of the FIPB has been obtained; and

(b) The transfer of share adheres with the pricing guidelines and documentation requirements as specified by the RBI from time to time.

(ii) Where SEBI (SAST) guidelines are attracted — subject to the adherence with the pricing guidelines and documentation requirements as specified by RBI from time to time.

(iii) Where the pricing guidelines under the Foreign Exchange Management Act (FEMA), 1999 are not met provided that:

(a) The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation, etc.

(b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations/guidelines (such as IPO, book building, block deals, delisting, exit, open offer/ substantial acquisition/SEBI SAST).

(c) Chartered Accountants’ Certificate to the effect that compliance with the relevant SEBI regulations/guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

(iv) Where the investee company is in the financial sector provided that:

(a) NOC are obtained from the respective financial sector regulators/regulators of the investee company as well as transferor and transferee entities and such NOC are filed along with the form FC-TRS with the AD bank.

(b) The FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation etc., are complied with.

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A.P. (DIR Series) Circular No. 42, dated 3-11-2011 — Foreign investment in India by SEBI registered FIIs in other securities.

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Presently, Foreign Institutional Investors (FII) are allowed to invest up to INR1,545 billion in in nonconvertible debentures/bonds issued by Indian companies in the infrastructure sector, provided the said instruments had a residual maturity of five years and the investments would have a lock-in-period of three years. Similarly, Qualified Foreign Investors (QFI) are allowed to invest in units of Mutual Funds debt schemes up to a limit of INR185 billion within the overall limit of INR1,545 billion for FII investment in non-convertible debentures/ bonds issued by Indian companies in the infrastructure sector.

This Circular has relaxed the requirements as under:

FII:

(i) FII would, in addition to investment in infrastructure companies, also be allowed to invest in non-convertible debentures/bonds issued by Non-Banking Financial Companies categorised as ‘Infrastructure Finance Companies’ (IFC) by the Reserve Bank of India within the overall limit of INR1,545 billion.

(ii) The lock-in-period of three years for FII investment stands reduced to one year up to an amount of INR309 billion within the overall limit of INR1,545 billion. This lock-in-period shall be computed from the time of first purchase by FII.

(iii) The residual maturity of five years would now onwards refer to the original maturity of the instrument at the time of first purchase by an FII.

QFI:

(i) QFI would, in addition to investment in Mutual Fund debt schemes, also be allowed to invest in non-convertible debentures/bonds issued by Non-Banking Financial Companies categorised as ‘Infrastructure Finance Companies’ (IFC) by the Reserve Bank of India within the overall limit of INR185 billion.

(ii) The residual maturity of five years would now onwards refer to the original maturity of the instrument at the time of first purchase by a QFI.

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A.P. (DIR Series) Circular No. 41, dated 1-11-2011 — Memorandum of Instructions governing money changing activities.

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Presently, applications from Authorised Money Changers for additional offices in metropolitan cities are considered only if the total offices in metropolitan and non-metropolitan cities (including proposed offices) of the applicant are in the ratio 1:1 i.e., the applicant has one non-metropolitan office for every office in a metro.

 This Circular has done away with the criteria of 1:1 ratio between metro and non-metro branches.

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This Circular clarifies that: (a) In terms of s.s 4 of section (6) of FEMA, 1999, a person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was: (i) Acquired, held or owned by such person when he was resident outside India or (ii) Inherited from a person who was resident outside India. (b) An investor can retain and reinvest overseas the income earned on invest<

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Presently, the relaxation in period of realisation and repatriation to India of the amount representing the full export value of goods or software exported, from six months to twelve months from the date of exports was available for exports made up to September 30, 2011.

This Circular has extended the relaxation for a further period of one year i.e., up to September 30, 2012. Hence, export proceeds representing the full export value of goods or software exported, can be realised and repatriated to India within twelve months from the date of exports made up to September 30, 2012.

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A.P. (DIR Series) Circular No. 37, dated 19- 10-2011 — (i) Repatriation of income and sale proceeds of assets held abroad by NRIs who have returned to India for permanent settlement (ii) repatriation of income and sale proceeds of assets acquired abroad through remittances under Liberalised Remittance Scheme — Clarification.

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This Circular clarifies that:

(a) In terms of s.s 4 of section (6) of FEMA, 1999, a person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was:

(i) Acquired, held or owned by such person when he was resident outside India or

(ii) Inherited from a person who was resident outside India.

(b) An investor can retain and reinvest overseas the income earned on investments made under the Liberalised Remittance Scheme.

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A.P. (DIR Series) Circular No. 36, dated 19-10-2011 — Opening Foreign Currency (Non-Resident) Account (Banks) Scheme [FCNR(B)] account in any freely convertible currency — Liberalisation.

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Presently, FCNR(B) accounts can be opened in the following foreign currencies — Pound Sterling, US Dollar, Japanese Yen, Euro, Canadian Dollar and Australian Dollar.

This Circular states that FCNR(B) accounts can now be opened in any freely convertible currency.

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Recovery of tax: Certificate proceedings: Section 222: Assessee’s leasehold property (DDA lessor) auctioned by TRO for recovery of tax: DDA demanded 50% unearned increase for mutation: Not a condition of auction notice: Amount payable by Department and not by the purchaser.

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[CIT v. Monoflex India (P.) Ltd., 12 Taxman.com 499 (Del.)]

The assessee’s leasehold property was put to auction by the TRO for realisation of income-tax dues. The DDA was the lessor. The purchasers called upon the DDA to mutate the property and called upon the TRO to get the sale certificate registered. The DDA demanded 50% unearned increase for mutation of the property in favour of the purchasers. Disputes arose as to the liability to pay unearned increase and whether the same was payable by the purchasers or by the Income-tax Department or by the original sub-lessee, i.e., the defaulter assessee. As the disputes could not be resolved, the purchasers filed writ petition which was allowed by the Single Judge of the Delhi High Court by issuing a direction that the Department would deposit unearned increase with the DDA.

On appeal by the Revenue the Division Bench of the Delhi High Court held as under:

“(i) The deed of the sub-lease clearly stipulates that 50% unearned increase is payable on the transfer of the leasehold rights in the property and the decision of the lessor in respect of market value shall be final and binding. The second proviso gives pre-emptive right to the lessor to purchase the property after deducting 50% unearned increase. Unearned increase is also payable in case of involuntary sale or transfer, whether it is by or through an executing or insolvency Court.

(ii) The terms of the lease are binding upon the lessor and the lessee. Under section 108(j) of the Transfer of Property Act, 1882 a lessee is entitled to transfer leasehold right, which he enjoys, to a third party, subject to a contract to the contrary. However, the lessee continues to be liable for the terms and conditions of the lease.

(iii) Rule 4 of the Second Schedule to the Act permits and allow the TRO to recover the arrears of tax by attachment and sale of defaulter’s immovable property. Thus, what can be sold and attached is a defaulter’s immovable property, i.e., the interest of the defaulter in the immovable property and not interest of a third person in the immovable property. Obviously, DDA’s interest could not have been sold or transferred for recovery of the defaulter’s dues. The right of the defaulter in the immovable property could be sold and transferred.

(iv) What the Act permits and allows is that the TRO can sell the right, title and interest of the defaulter assessee and nothing more. If the said right, title and interest is hedged with the conditions or fetters, the sale will be made subject to the said conditions/fetters. The rights of the lessor do not get affected. Thus, unearned increase is payable. (v) The second question is who is liable to pay the unearned increase. The plea of the Department is that 50% unearned increase is payable by the original sub-lessee and not by the Department or the TRO.

(vi) The Single Judge has, in the impugned judgment, specifically referred to and has quoted the public notice by which sale was made. The terms and conditions of said notice did not stipulate that the bidder would have to pay 50% unearned increase or bear such burden. There was no such stipulation. The sub-lease deed or copy thereof was with the Department and it had finalised the terms of sale. In case 50% unearned increase was to be paid separately by the purchaser, it should have been so indicated and mentioned. This would have resulted in a lower bid amount. It is not the case of the Department that sale consideration paid by the purchasers was less than the market price.

(vii) The terms of auction did not stipulate that the original sub-lessee shall pay 50% unearned increase. The TRO had agreed and promised to issue sale certificate to the auction purchaser, whose bid was accepted. It is only on payment of 50% unearned increase that an effective transfer can be made by the said sale certificate. In these circumstances, it is for the Department to make payment of unearned increase. Of course, in case its dues are still payable, it is open to them to take appropriate proceedings against the defaulter assessee in accordance with law.”

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Delegation u/s. 637 of the Companies Act by the Central Government of its powers and functions under Act — Powers and functions delegated to Registrars of Companies for specified provisions of the Act — Supersession of Notification G.S.R. No. 506(E), dated 24-6-1985.

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The Central Government vide Notification [F.No. 5/07/2011-Cl-V], dated 17-3-2011 has delegated to the Registrars of Companies, the powers and functions of the Central Government under the following provisions of the Companies Act, namely:

  • Section 21 pertaining to Change of Name of Company.
  • Section 25 pertaining to Power to dispense with ‘Limited’ in name of Charitable or Other Company.
  • Proviso to Ss.(1) of section 31 pertaining to change in the articles having effect of converting a public company into a private company.
  • Ss.(1D) of section 108 relating to extension of period within which instrument of transfer is to be submitted to the company.
  • Section 572 relating to change of name of a company seeking registration under Part IX of the Companies Act.

Powers and functions delegated to the Regional Directors for specified provisions of the Act — Supersession of Notification G.S.R. No. 288(E), dated 31-5-1991.

The Central Government vide Notification dated 17-3-2011, F. No. 5/07/2011-CL-V has delegated to the Regional Directors at Mumbai, Kolkata, Chennai, Noida and Ahmedabad, the powers and functions of the Central Government under the following provisions of the said Act, namely:

  • Section 22 relating to rectification of name of the company.
  • Ss.(3), (4), (7) and clause (a) of Ss.(8) of section 224 relating to the appointment, remuneration and removal of auditors in certain cases.
  • Proviso to section 297(1) Proviso relating to approval of the Central Government for contracts by a company with certain parties where paid up share capital of the company is not less than Rs. one crore.
  • Section 394A pertaining to notice to be given of for applications u/s. 391 for compromise or arrangements with creditors and members and section 394 for reconstruction and amalgamation of companies.
  • Section 400 relating to notice to be given of applications under sections 397 and 398 for relief in cases of oppressions and mismanagement.
  • Second proviso to Ss.(5) of section 439 and Ss.(6) of the said section relating to applications for winding up.
  • Clause (a) of Ss.(1) of section 496 and Clause (a) of Ss.(1) of section 508 relating extension of time for calling general meeting of company and of the creditors of the company by the liquidator at end of each year.
  • Ss.(1) of section 551 relating to exemption from filing information as to pending liquidations.
  • Clause (b) of Ss.(7) of section 555 and the proviso to clause (a) of Ss.(9) of the said section relating to certain powers regarding unpaid dividends and undistributed assets to be paid into the Companies liquidation Account and claims in respect thereof.
  • Provisos to Ss.(1) of section 610 relating to inspection, production and evidence of documents delivered to the Registrar with prospectus; and
  • Section 627 relating to production and inspection of books where offences suspected.
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A.P. (DIR Series) Circular No. 35, dated 14-10-2011 — Processing and settlement of export-related receipts facilitated by Online Payment Gateways — Enhancement of the value of transaction.

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Presently, banks are permitted to offer the facility of repatriation of export-related remittances up to INR30,902 per transaction by entering into standing arrangements with Online Payment Gateway Service Providers (OPGSP).

This Circular has increased this limit per transaction from INR30,902 to INR185,413 with immediate effect.

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(2011) TIOL 330 ITAT-Mum. DCIT v. Telco Dadajee Dhackjee Ltd. MA No. 509/Mum./2010 A.Y.: 1998-1999. Dated: 11-3-2011

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Sections 254(2), 254(4) and 255 — No miscellaneous application lies against the order of the Third Member since as per the scheme of Sections 254(1), 254(2) and 255 every case adjudicated by the Third Member should go back to the regular Bench for final decision.

Facts:
The appeal filed by the assessee was originally heard by the Division Bench. Upon there being a difference of opinion between the two Members who originally heard the appeal, the points of difference were referred to the Third Member u/s. 255(4) of the Act. The Third Member answered both the questions referred to him in favour of the assessee.

Against the order of the Third Member, the Revenue filed a miscellaneous application on the ground that there were mistakes apparent from the record which require rectification.

Held:
(1) The decision rendered by the Third Member is one which does not finally dispose of the appeal till the point or points are decided according to the opinion of the majority of the Members for which another order is to be passed by the Tribunal and it is this order which finally disposes of the appeal. An application u/s.254(2) would lie only when that order is passed and not before.

(2) When there is a difference between the Members while disposing of the appeal it cannot be said that the appeal has been finally disposed of. The point of difference has to be referred to the President of the Tribunal for nominating a Third Member. The Third Member hears the parties on the point of difference and renders his decision. His decision creates the majority view, but it is not a final order disposing of the appeal because he is not seized of the other points in the appeal, if any, on which there was no difference of opinion between the Members who heard the appeal originally. Even if there were no other points in the appeal, still his order is not one finally disposing of the appeal. S/s. (4) of section 255 requires that after the opinion of the Third Member, the point of difference ‘shall be decided’ according to the majority opinion and this clearly suggests that a final order has to be passed disposing of the appeal in its entirety which order alone would be an order passed by the Tribunal u/s.254(1).

(3) In the present case the Revenue has missed the distinction between a finding on a point of difference and the final order of the Tribunal u/s.254(1).

(4 ) The decision of the Third Member is not a final order disposing of the entire appeal as contemplated by section 254(1), it is difficult to appreciate how an application would lie u/s. 254(2) against his decision.

The miscellaneous application filed by the Revenue was held to be not maintainable.

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In absence of ‘test of cohesiveness, interconnection and interdependence’ for the contracts being met, time spent on each contract executed in India cannot be aggregated for the purpose of determination of Construction PE under Article 5(3) of India-Singapore DTAA. Each contract needs to satisfy time threshold of 183 days in the relevant financial year to constitute a PE under the DTAA.

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Tiong Woon Project & Contracting
Pte. Limited
A.A.R. No. 975 of 2010
Article 5(3) of India-Singapore DTAA Justice P. K. Balasubramanyan (Chairman)
V. K. Shridhar (Member) Present for the applicant: K. Meenakshi Sundaram Present for the respondent: K. R. Vasudevan

In absence of ‘test of cohesiveness, interconnection and interdependence’ for the contracts being met, time spent on each contract executed in India cannot be aggregated for the purpose of determination of Construction PE under Article 5(3) of India-Singapore DTAA.

Each contract needs to satisfy time threshold of 183 days in the relevant financial year to constitute a PE under the DTAA.

Facts

  •  Applicant, a company incorporated in Singapore (FCO), executed the following contracts in India in the relevant financial years: 

Financial year  Particulars  Duration
        

 2009-10       Contract 1       136
                     Contract 2        99
2010-11        Contract 3        62
                     Contract 4        83
  •  For the purpose of the contracts, FCO deputed four to five employees from Singapore along with local manpower to India. The scope of work under each of the four contracts was similar and comprised the following: n Erection and installation of heavy equipments at the site of customers. The equipments to be installed are fabricated and provided by the customers at installation sites n Organisation of load movement test on a crane n Holding of equipment after erection and before completion of welding of column section n Setting up, fitting, placing, positioning of the fabricated equipment at the site.
  •  FCO contended that the activities carried out were installation projects and determination of PE would fall under the Construction PE rule of the DTAA. The contracts were independent of each other and were secured through independent work orders. Further, a Construction PE under the DTAA would trigger only if each of the four contracts continued for a period of more than 183 days individually, in any financial year.
  • Tax Authority contended that the activities carried on by FCO were in the nature of services; the DTAA specifies a shorter time threshold for PE trigger as long as, inter alia, such services are not supervisory services in connection with the Construction PE; and accordingly, service PE of FCO was constituted under Article 5(6) of DTAA. 

Held:

  • Activities in the nature of erection, installation 9 of heavy equipments, organisation of crane testing, holding of equipment after erection, etc., undertaken by FCO would constitute installation or assembly project. The activities would not amount to supervisory activities in connection with installation and assembly project.
  •  An Indian company had given two orders to FCO in separate financial years. Each order was for carrying out different work. Thus, for both the financial years, it can be said that the parties were different and the projects are independent projects without any interconnection and interdependence amongst them.
  •  There was no extension of one contract to another. The duration test of 183 days under the Construction PE rule cannot be construed to be read for all the contracts that do not pass the ‘test of cohesiveness, interconnection and interdependence’. Therefore, an aggregation of time periods for the contracts cannot be made.
  •  Since each of the contracts does not cross the threshold of 183 days in the relevant financial year, it would not constitute a PE under the DTAA. In absence of PE of FCO in India, income earned by FCO from Indian contracts would not be liable to tax in India.
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Integration of Director’s Identification Number (DIN) issued under Companies Act, 1956 with Designated Partnership Identification Number (DPIN) issued under Limited Liability Partnership (LLP) Act, 2008.

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The Ministry vide General Circular No. 44/2011, dated 8th July 2011, has decided to avoid the duplication of issuing DIN and DPIN by integrating them with effect from 9th July 2011. Further, now no fresh DPIN will be issued and the DIN allotted shall be used as DPIN for all purposes under the Limited Liability Partnership Act, 2008 and vice versa. If a person has been allotted both DIN and DPIN, his DPIN will stand cancelled and his DIN will be used as DPIN.

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127 ITD 211 (Mum.) DDIT (IT) v. Stork Engineers & Contractors B. V. A.Y.: 1999-2000. Dated: 16-6-2009

Section 37(1) — Expenditure incurred from the date
of receiving contract till the grant of approval by RBI cannot be termed
as prior period expense — Such expense incurred is allowable as expense
incurred after the commencement of business.

Section 37(1) —
Percentage completion method – the figure of opening work-in-progress
cannot be termed as ‘prior period expense’ — Opening work in progress
needs to be taken into consideration to ascertain correct profits.

Facts:
The
assessee-company was incorporated in the Netherlands. It was awarded a
contract by the Indian Oil Corporation for Engineering Procurement and
Construction (EPC) on 24-2-1998. The approval for the setting up of the
project office in India was granted by the RBI in on 16-6-1998, but the
actual work of basic engineering had already commenced during the year
ending March 1998. During the intervening period i.e., 1-4-1998 to
16-6-1998, the assessee had incurred expenditure for the purpose of
execution of its project.

The return of income was filed
claiming a loss of Rs.3.24 crore. The assessee had further mentioned in
the notes to accounts of the Audit Report that expenses of
Rs.1,76,20,000 debited to profit and loss account were the ones incurred
by the head office before setting up project office in India. The
Assessing Officer noted that the expenditure was incurred before setting
up project in India and should be thus disallowed as prior-period
expenses.

Held:
1. The expenditure was incurred after
1-4-1998 i.e., during the year itself. Hence, it is wrong to call it as
prior-period expenditure.

2. Relying on the decision of CIT v.
Franco Tosi Ingenerate, (241 ITR 268) (Mad.), the ITAT noted that the
assessee was awarded contract on 24-2-1998. Any expense incurred after
this date relates to period after commencement of business. Hence, the
expenses would be allowable.

Facts:
The assessee was
following percentage completion method. It had an opening work in
progress of Rs.78,88,526. The assessee submitted that various expenses
were incurred during financial year 1997-98 for the purpose of bidding
for the aforesaid contract. The above-mentioned amount also included
various expenses incurred for basic engineering during the period ending
31-3-1998. The AO observed that the assessee had not filed any return
of income for the A.Y. 1998-99. It was therefore disallowed on the
ground that they were prior-period expenses.

Held:
1.
It is wrong to disallow the first year’s brought forward expenditure in
the second year by branding it as ‘prior-period expenditure’. The
profit cannot be finally determined unless the entire expense is
considered.

2. If the figure of the opening work-in-progress is
not taken into consideration, then the resultant figure of the profit
will be fully distorted. If the income and expenditure of the current
year is only considered, then there will arise difficulty in computing
the ultimate profit on completion of the project.

3. As regards
the requirement of filing return of income, it gets activated only when
there is any income chargeable to tax. As per AS-7, no profit is to be
recognised unless the work has reached a reasonable extent. As the
assessee had completed a very small percentage of the total work in the
preceding year, which is far below the prescribed percentage, there was
no requirement for it to offer any income for taxation in that year.

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(2010) 127 ITD 160 (Chennai) (TM) Hemal Knitting Industries v. ACIT A.Y.: 2001-02. Dated: 30-8-2010

Section 253 r.w.s. 147 — When the disposal of a particular ground is not on merit, the matter cannot be said to have achieved finality — Issue of jurisdiction goes to the very root of proceedings and can be agitated any time.

Facts:
The original assessment was completed on 30-3- 2004, determining the total income at Rs.9,16,870 after allowing deduction u/s.80HHC. Gross bank interest was treated as income from other sources. The assessee filed an appeal against the same to the CIT(A) who dismissed the assessee’s appeal vide order dated 3-12-2004.

The assessee then appealed to the Tribunal. The matter was remanded back to the file of AO. Pursuant to this, the Assessing Officer passed the second assessment order.

In the course of second round, it was contended before the AO that the time limit for issue of notice u/s.143(2) was available to the AO during the first round and thus the AO could not resort to reopening u/s.147. The AO held that the issue of reassessment was raised in the first appeal and the same was rejected by the CIT(A) by observing that no material was brought on record. Further the AO observed that the present assessment was only to give effect to the Tribunal’s order and so the question as to the validity was out of the purview.

There was a difference of opinion between the members. The Accountant Member was of the opinion that the question of jurisdiction goes to the root of the matter and can be raised at any point of time. The Judicial Member was of the view that the assessee did not challenge the validity of reassessment before the CIT(A) or Tribunal. The issue of jurisdiction had thus obtained finality.

On reference to the third Member, the following was held:

Held:
1. The CIT(A) order rejecting the assessee’s ground on reassessment has not discussed any argument on merits of the matter. The assessee can, at best be said to be not to have pressed the ground. But the disposal was never on merit.

2. This issue was never raised before the Tribunal in the first round of litigation. Hence, the Tribunal did not have any opportunity to decide on this matter. Finality cannot be conferred to such an order in a manner that in the second round doors of justice are closed. In the opinion of the third Member, the matter had not reached any finality. The jurisdiction to the authorities cannot be conferred by acceptance or negligence of the parties to the dispute. To shut doors at the threshold on the grounds of technicalities is not within the spirit of the Apex Court’s decision in the case of Improvement Trust.

3. The action of the Assessing Officer in reassessing u/s.147 when time limit for issue of notice u/s.143(2) was available is impermissible in the light of the decision of CIT v. Qatalys Software Technologies Ltd., (308 ITR 249) (Mad).

4. The matter had not reached finality and therefore it was open to the assessee to take up the issue in the second round of litigation.

(2010) 127 ITD 133 (Chennai) (TM) V. Narayanan v. Dy./ACIT A.Ys.: 1987-88 & 1990-91. Dated: 27-8-2009

Section 263 r.w.s. 143 and 153 of the Income-tax
Act — AO cannot be directed by CIT to re-do the assessment when no valid
notice was issued within the given time limit.

Facts:
The
assessee was a managing director of Ponds (India) Limited (‘PIL’). M/s.
Chesebrough Ponds Inc, USA (CPI) had a controlling interest in PIL.
Later on, after coming into force of regulations under FERA the CPI’s
holding was reduced to 40%. Thereafter PIL was sold to Unilever Ltd. The
assessee continued to be the MD of PIL and when the shares were diluted
CPI started representative office in India in 1988. The assessee was to
look after the interest of CPI’s representative office for which
necessary facilities were to be provided to him.

CPI provided a
Mercedes car and an amount of USD 1 lakh to the assessee. Since the
customs authorities did not allow import of car in the name of the
assessee, the car was imported in the name of CPI.

The return
was processed u/s.143(1) of the Act on 27- 1-1989 accepting the
assessee’s claim for exemption of USD 1 lakh and the value of Mercedes
Benz car amounting to Rs.8,10,104. The CIT later on initiated
proceedings u/s.263 and passed an order on 22-3- 1991 directing the AO
to re-do the assessment. The CIT further found that the assessee held
power of attorney for the CPI authorising him to do several acts on its
behalf and that he had the status of head of its representative office.
So, CIT held that the value of car and USD 1 lakh should be taxed
u/s.17(iii). The assessee contended that there was no employeremployee
relationship, nor had he offered any services to CPI, USA and he was
full-time employee of M/s. Ponds India Ltd. He had received it as a gift
from CPI for which gift tax was paid by CPI.

Held:
The
Tribunal held that section 143(1) permits only certain arithmetical
adjustments while making the assessment and that the taxability of the
amount received from the US company (i.e., CPI) and the value of Benz
car cannot fall in the category of those adjustments. The CIT can invoke
the provisions of section 263 only when there is a failure on the part
of AO to make an enquiry u/s.143(2). Section 263 cannot be invoked when
only an intimation u/s.143(1) was sent to the assessee.

At the
most a fresh assessment should be made u/s.143(3) and if this is so, the
AO can make the assessment under this provision only if valid notice
u/s.143(2) had been issued to the assessee on or before 31-3-1990.
However, since that date had elapsed when the CIT passed the order (on
22-3- 1991) it is not possible to either issue such a notice or make an
assessment u/s.143(3). The position would have been different if the AO
in the first place completed the assessment u/s.143(3) after issuing
notice u/s.143(2). In that case the AO can be directed by the CIT to
make fresh assessment. The order of the CIT can be primarily challenged
on the ground that his direction to the AO to re-do the assessment would
result in an assessment being made after the period of limitation and
thus would be contrary to law. Section 153(2A) (as the sub-section stood
at that time) of the Act states that fresh assessment order may be
passed at any time before the expiry of two years from the end of the
financial year in which order u/s.263 is passed. Since the order u/s.263
was passed on 22-3-1991 the AO could pass the fresh assessment order on
or before 31-3-1993. But this sub-section cannot be applied to this
case as section 153(2A) does not confer jurisdiction upon the AO, which
does not exist in him prior to passing of the order of section 263.

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(2011) 50 DTR (Mumbai) (Trib.) 158 Yatish Trading Co. (P) Ltd. v. ACIT A.Y.: 2004-05. Dated: 10-11-2010

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Facts:
The assessee-company was engaged in the business of trading in shares and securities as well as in investment in shares and securities. During the relevant previous year the total income credited by the assessee to the P & L A/c was Rs.39.03 crores which included dividend income of Rs.2.99 crores. The assessee also debited an amount of Rs.10.68 crores which includes administrative expenses, interest and financial charges, etc.

The Assessing Officer disallowed the proportionate interest and financial charges u/s.14A. Upon further appeal, the CIT(A) directed to recompute the disallowance u/s.14A keeping in view the principles laid down in Rule 8D.

Held:
Since the assessment year under consideration is A.Y. 2004-05, the provisions of Rule 8D cannot be applied.

When the real purpose and intent to use the borrowed funds were for trading activity and if incidentally it resulted some dividend income on the shares purchased for trading, then the same would not change the purpose, nature or character of the expenditure. Thus, when the said expenditure incurred for trading activity, then the same cannot be said to have been incurred for earning the dividend income. As per the basic principle of taxation only the net income i.e., gross income minus expenditure incurred is taxed. Accordingly, the expenditure which was incurred for earning the taxable business income has to be allowed against the taxable income and the question of apportionment of the said expenditure does not arise. The expression ‘in relation to’ used in section 14A means dominant and immediate connection or nexus. Thus, in order to disallow the expenditure u/s.14A there must be a live nexus between the expenditure incurred and the income not forming part of the total income. Disallowance cannot be made on the basis of presumption and estimation of the AO. No notional expenditure can be apportioned for the purpose of earning income unless there is an actual expenditure ‘in relation to’ earning the income not forming the part of the total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then as such no disallowance can be made u/s.14A merely because some tax-exempt income is received incidentally. In case of dealer in shares and securities the primary object and intention for acquisition of the shares is to earn profit on trading of shares. The income on sale and purchase of shares of a dealer is chargeable to tax. Therefore, if the said activity of purchase and sale also incidentally yields some dividend income on the shares held by him as stock-in-trade, such dividend income is not intended at the time of purchase of such shares and accordingly there is no live connection between the expenditure incurred and dividend income.

As held by the jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, section 14A is implicit within it a notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible business which receives taxable and non-taxable income. However, the principle of apportionment is applicable only in the cases where it is not possible to determine the actual expenditure incurred ‘in relation to’ the income not forming part of the total income. But when it is possible to determine the actual expenditure ‘in relation to’ the exempt income or no expenditure has been incurred ‘in relation to’ the exempt income, then the principle of apportionment embedded in section 14A has no application.

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(2011) 135 TTJ 663 (Mumbai) ACIT v. Delite Enterprises (P.) Ltd. ITA No. 4813 (Mumbai) of 2006 A.Y.: 2003-2004. Dated: 20-10-2010

Section 14A r.w.s 36(1)(iii), section 10(2A) and section 28(v) — Since there was direct/one-toone nexus between the funds borrowed on which interest was paid and the funds invested in the firm on which interest was received, such interest had to be deducted u/s.36(1)(iii) against the interest income assessable as business income u/s.28(v) and no disallowance of interest expenditure is called for u/s.14A.
Facts: For the relevant assessment year, the assessee earned interest of Rs.2.34 crores on capital invested in a partnership firm (SE) and also share of profit from the firm [exempt u/s.10 (2A)]. The assessee paid interest of Rs.1.82 crores on funds borrowed from R. Ltd. for investing in the partnership firm. The AO assessed the interest income under the head ‘Income from Other Sources’ as against ‘Business Income’ shown by the assessee. Further, he did not allow any deduction for the interest paid by the assessee.
The CIT(A) held in favour of the assessee on both counts. In further appeal, the Revenue also invoked the provisions of section 14A for proportionate disallowance of interest on borrowed funds invested in the partnership firm. The Departmental representative stated that the assessee company not only earned interest income of Rs.2.34 crores from the partnership firm in the shape of interest, but also received the share in the profits of the firm to the tune of Rs.8.54 crores, which is exempt u/s.10(2A) and, therefore, the proportionate interest on the amount borrowed and invested in the firm to the extent it related to the share in the profits of the firm, should have been disallowed u/s.14A. In other words, the contention was that the interest paid amounting to Rs.1.82 crores should be bifurcated into two parts, that is, as relatable to the earning of the share in the profits of the firm and earning of interest income in the capacity of partner in the partnership firm and, thereafter, the part as is relatable to share in the profits of the firm should be disallowed by invoking the provisions of section 14A.
Held: The Tribunal upheld the assessee’s claim on both issues. The Tribunal noted as under:
1. From the facts it is clearly noticed that the assessee borrowed funds from R. Ltd. and the same funds were invested in SE. One-toone nexus between the borrowed funds as invested in partnership firm was proved by the assessee.
2. Interest income from the firm always has a direct and immediate relation with the capital contribution. Interest is allowed on the capital contributed by a partner in firm irrespective of the profit-sharing ratio. If some funds are borrowed and invested in the firm as capital, it is only the relation between the interest paid on such borrowed funds and interest earned from the firm that exists.
3. The interest paid by the assessee at Rs.1.82 crore has direct and sole relation with the interest income of Rs.2.34 crores. When the interest income of Rs.2.34 crores is taxable u/s.28(v) as business income, it cannot be bifurcated into two parts viz., towards interest received and share of profit from firm.
4. Even though an amount is deductible under the regular provisions of the Act, including section 36(1)(iii), disallowance can be made u/s.14A if the expenditure is in relation to exempt income. Thus, it becomes obvious that the provisions of section 14A have an overriding effect. In such a situation the applicability of section14A on the otherwise deductible interest expenditure of Rs.1.82 crores u/s.36(1) (iii) has to be examined. The question is whether any part of interest expenditure of Rs.1.82 crores can be correlated to the share of the assessee in the profits of the firm, which is otherwise exempt u/s.10(2A). [Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT & Anr., (2010) 234 CTR (Bom.) 1, (2010) 43 DTR (Bom.) 177].
5. No part of interest expenditure, which is sought to be disallowed u/s.14A, relates to share in profits of partnership firm which is otherwise exempt u/s.10(2A).
6. As there is direct nexus between the funds borrowed on which interest is paid and the funds invested in the firm on which interest is received, such interest has to be deducted u/s.36(1)(iii) against the interest income in entirely. Therefore, no disallowance of interest expenditure is called for u/s.14A, as it does not relate to any exempt income.

(2011) 135 TTJ 419 (Mumbai) Digital Electronics Ltd. v. Addl. CIT ITA No. 1658 (Mum.) of 2009 A.Y.: 2005-2006. Dated: 20-10-2010

Section 72 — Income earned by the assessee in the
relevant year on sale of factory building, plant and machinery, although
not taxable as profits and gains of business or profession, is an
income in the nature of income of business though assessed as capital
gains u/s.50 and, therefore, assessee is entitled to set-off of brought
forward business losses against the said capital gains.

Facts:
For
the relevant assessment year, the assessee set off brought forward
business loss against shortterm capital gains arising on sale of factory
building and plant and  machinery assessable u/s.50. The AO declined to
accept the assessee’s claim. The CIT(A) upheld the stand of the AO.

Held:
The
Tribunal, relying on the decision of the Supreme Court in the case of
CIT v. Cocanada Radhaswami Bank Ltd., (1965) 57 ITR 306 (SC), upheld the
assessee’s claim. The Tribunal noted as under:

1. Section 72
provides that where, for any assessment year, the net result of the
computation under the head ‘Profits and gains of business or profession’
is a loss to the assessee, not being a loss sustained in a speculation
business, and such loss cannot be or is not wholly set off against
income under any head of income in accordance with the provisions of
section 71, so much of the loss as has not been so set off is to be
carried forward to the following assessment year and is allowable for
being set off ‘against the profits, if any, of that business or
profession carried on by him and assessable for that assessment year’.

2.
Therefore, for setting off the income, while the loss to be carried
forward has to be under the head ‘Profits and gains of business or
profession,’ the gains against which such loss can be set off, has to be
profits of ‘any business or profession carried on by him and assessable
in that assessment year’.

3. In other words, there is no
requirement of the gains being taxable under the head ‘Profits and gains
of business or profession’ and thus, as long as gains are ‘of any
business or profession carried on by the assessee and assessable to tax
for that assessment year’ the same can be set off against loss under the
head profits and gains of business or profession carried forward from
earlier years. The income earned in the relevant year, although not
taxable as ‘profits and gains from business or profession’, was an
income in the nature of income of business nevertheless.

4. The
assessee was, therefore, justified in claiming the set-off of business
losses against the income of capital gains assessable u/s.50.

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EXEMPTION U/S.54F IN CASES WHERE SECTION 50C APPLICABLE

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Issue for consideration:
Section 50C provides for substituting the full value of consideration with the value adopted or assessed by the stamp valuation authorities, in computing the capital gains arising on transfer of land or building or both. Where the value of the property assessed or adopted for stamp duty purposes is higher than the sale consideration as specified in the transfer documents, then such higher value is deemed to be the full value of consideration for the purposes of computation of capital gains u/s.48, by virtue of the provisions of section 50C.

Capital gains on sale of an asset other than a residential house, in the hands of an individual or a Hindu Undivided Family, is eligible for an exemption u/s.54F on purchase or construction of a residential house within the specified period, subject to fulfilment of other conditions. The assessee enjoys a complete exemption from tax where the cost of the new asset is equal or more than the net consideration of the asset transferred and he will get a pro-rated exemption where the cost of the new asset is less than the net consideration.

A question has arisen, in the above facts, as to how such exemption u/s.54F is to be computed in a case where the provisions of section 50C apply. Should one take the sale consideration recorded in the documents of transfer, or should one take the stamp duty value as per section 50C, is an issue which is calling our attention.

To illustrate, if a plot of land is sold for Rs.50 lakhs with its stamp duty valuation being Rs.75 lakhs, and if the cost of the new residential house is Rs.50 lakhs, would the entire capital gains be exempt from tax u/s.54F or would only two-thirds of the capital gains be exempt from tax under this section?

While the Lucknow and the Bangalore Benches of the Tribunal have taken a view that for the purposes of computation of exemption u/s.54F, the stamp duty value being the deemed full value of consideration as per section 50C is to be considered, the Jaipur Bench of the Tribunal has held that it is the actual sale consideration recorded in the document of transfer which is to be considered and not the stamp duty value.

Mohd. Shoib’s case:
The issue first came up before the Lucknow Bench of the Tribunal in the case of Mohd. Shoib v. Dy. CIT, 1 ITR (Trib.) 452.

In this case, the assessee sold 7 plots of land, which had been subdivided from a larger plot of land, for a total consideration of Rs.1.47 crore. In respect of 4 plots of land sold for Rs.83 lakh, the consideration was lower than the valuation adopted by the stamp duty valuation authorities, such valuation being Rs.1,00,61,773. The assessee had purchased a residential house out of a part of the total sale consideration, and claimed exemption u/s.54F which was calculated with reference to the consideration recorded in the documents of transfer by ignoring the difference of Rs.17,61,773 between the stamp duty value and the recorded consideration.

The Assessing Officer enhanced the returned capital gains by Rs.17,61,773, by invoking the provisions of section 50C. In appeal before the Commissioner (Appeals), the assessee challenged the applicability of the provisions of section 50C, which was rejected by the Commissioner (Appeals).

In further appeal to the Tribunal, besides challenging the applicability of section 50C, the assessee claimed that once the assessee had reinvested the net consideration in purchasing the new residential house as per section 54F, then no capital gains would remain to be computed for taxation and therefore provisions of section 50C could not be invoked. It was argued that once the exemption was claimed u/s.54F, there was no occasion to charge capital gains and therefore provisions of section 45 could not be invoked as no capital gains could be computed. Reliance was placed on the use of the words ‘save as otherwise provided in section 54, 54B, . .’ in section 45 for the argument that once the charging section failed, substitution of the sale consideration by the stamp duty valuation would not arise. It was further argued that investment in new asset could be made only of real sale consideration, and not of the notional sale consideration. Once there was no real sale consideration, there could not be any capital gains on notional sale consideration.

On behalf of the Department, it was argued that neither section 45 nor section 50C would fail if the assessee had made investment in exempted assets as per section 54, 54F, etc. According to the Department, section 54F only provided the method of computation of capital gains and did not provide exemption from the charging section 45. It was submitted that if an assessee did not invest the full consideration into a new asset, then he would be required to compute the capital gains in the manner laid down in sections 48 by applying the provisions of section 50C, and the exemption from capital gains was available only to the extent of investment made by the assessee in the new asset. Where a part investment was made in the new asset, then capital gains would be charged with respect to the sale consideration not invested. It was argued that the provisions of section 54, 54F, etc. followed the charging section 45, and that the charging section 45 did not follow the exemption provisions. It was submitted that merely because the assessee did not get an opportunity to invest the difference between the notional sale consideration as per section 50C and sale consideration shown by the assessee, the charging of capital gains on the basis of notional sale consideration as per section 50C could not be waived. According to the Department, there were many provisions where a notional income is taxed without giving any occasion to the assessee to make investment out of such notional income and claim deductions under Chapter VIA, etc. It was thus claimed that the charging section could not be made otiose merely because the assessee did not get an opportunity to claim deduction or make investments for claiming deduction in respect of additional income assessed.

While upholding the applicability of section 50C to the facts of the case, the Tribunal observed that section 45 provided a general rule that profits or gains arising from the transfer of a capital asset would be chargeable to income-tax under the head capital gains, except as provided in section 54, 54F, etc. According to the Tribunal while charging capital gains on profits and gains arising from the transfer of a capital asset, one had to see and take into account section 54F, and to the extent provided in section 54F and other similar sections, capital gains would not be chargeable. The moment there was a profit or gain on transfer of a capital asset, capital gains would be chargeable within the meaning of section 45, except and to the extent it was saved by section 54F and like sections.

Analysing the provisions of section 54F, the Tribunal noted that it was not the case that merely because provisions of section 54F were applicable to an assessee, that the entire capital gains would be saved and that no capital gains be chargeable. Saving u/s.54F depended upon investment in new asset of net consideration received by the assessee on sale of old asset. The quantum of net consideration was the result of transfer of the old asset, charge of the capital gain was only on the old asset, and investment in new asset did not and could not nullify or take away the case from the charging section 45. According to the Tribunal, first it was section 45 which came into operation, then it was section 48 which provided computation of capital gains, and thereafter it was section 54F which saved the capital gains to the extent of investment in the new asset.

The Tribunal observed that once section 45 came into operation as a result of transfer of capita

Taxation of Payments for Technical Plan or Technical Design

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Part V In the first part of the article published in December 2010 issue of BCAJ, we discussed broadly the issues which arise while making payments for designs and drawings acquired from foreign entities for diverse business purposes, definitions of the terms Royalty and Fees for Technical Services (FTS) under the Income-tax Act, 1961 (the ACT), under Model Conventions and under some important Indian DTAAs.

In the second, third and fourth parts of the article published in January, February and March 2011, we discussed taxability of the payments for technical plans and technical designs with reference to various judicial pronouncements with a view to understand how the case law has developed over the years and to cull out guiding principles.

In this final and concluding part, based on our earlier discussion and analysis of various judicial pronouncements and other available material, we have attempted to cull out few general guiding principles/broad propositions in respect of taxability or otherwise of the payments for technical design and technical plans, which could be applied in various practical situations, depending upon the facts and circumstances of each case. It is important to note that we have only considered and analysed the aspect relating to taxation of payments for Technical Plan or Technical Design. Other aspects relating to PE, etc. have not been discussed or analysed here.

Appropriate meaning of the word ‘design’ as appearing in Article 12 relating to Royalties and section 9(1)(vi) of the Act, in contrast with the word ‘Technical Design’ appearing in FTS/FIS Article in certain Indian treaties:

As pointed out in part I of the article, definition of the term ‘Royalty’ in the Act as well as definition of ‘Royalties’ under the Model Conventions consider payments of any kind received as a consideration for the use of, or the right to use, any ‘design’, as royalty.

Similarly, in respect of DTAAs entered into by India with various countries where the word FTS has been given a restricted meaning, the typical definition of FTS provides that the term ‘fees for technical services’ means, inter alia, payments of any kind to any person in consideration for the rendering of any technical or consultancy services which make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical ‘design’.

Therefore, in respect of DTAAs entered into by India with various countries where the word FTS has been given a restricted meaning and which also have relevant article regarding royalties containing the word ‘design’, a question arises as to what is meaning of the same term ‘design’ appearing in two different definitions of the term Royalty and FTS, in the same article of the same treaty.

In this connection, attention is invited to para 10.2 of the Commentary on Article 12 of the OECD Model Tax Convention (July, 2010), which reads as under:

“10.2 A payment cannot be said to be ‘for the use of, or the right to use’ a design, model or plan if the payment is for the development of a design, model or plan that does not already exist. In such a case, the payment is made in consideration for the services that will result in the development of that design, model or plan and would thus fall under Article 7. This will be the case even if the designer of the design, model or plan (e.g., an architect) retains all rights, including the copyright, in that design, model or plan. Where, however, the owner of the copyright in previously-developed plans merely grants someone the right to modify or reproduce these plans without actually performing any additional work, the payment received by that owner in consideration for granting the right to such use of the plans would constitute royalties.” (Emphasis supplied)

It is important to note that the above para 10.2 provides that in a case where the payment is made in consideration for the services that will result in the development of that design, model or plan, the same would fall under Article 7, as the OECD Model Tax Convention does not contain FTS article.

From the above, it clearly emerges that only in those cases where a design or plan already exists and any payment is made for use of or right to use the same, then only the same could be considered as ‘Royalty’ and not otherwise.

Hence, in cases where the payment is made for the development of a design or for development and transfer of a design, the same cannot be construed or characterised as royalty but the same would fall within the meaning of the term FTS.

It is important to note that, there is no FTS clause in 16 treaties signed by India i.e., in DTAAs with Greece, Bangladesh, Brazil, Indonesia, Libya, Mauritius, Myanmar, Nepal, Philippines, Saudi Arabia, Sri Lanka, Syria, Tajikistan, Thailand, United Arab Emirates, United Arab Republic (Egypt). In such cases, in respect of development and transfer of designs, the payment would fall under Article 7 relating to Business Profits and in the absence of any PE in India, the same would not be taxable in India.

It is, therefore, advisable to minutely look in various clauses of the relevant agreements and also to properly know the nature of payment in relation to designs, to determine whether the same would be taxable as royalties or not.

Payment for customised designs/designs supplied in connection with/along with the supply of plant and machinery, equipments etc. — Not to be taxable as royalties:

In many cases, payment for customised designs is made in connection with supply of plant and machinery, equipments, etc. which is necessary for proper supply, erection and commissioning of plant and machinery.

In this connection, courts have taken consistent view that in such circumstances, the payment of designs shall not be considered as royalties. In this connection, the following observations of the Madras High Court in the case of (2000) 243 ITR 459 CIT v. Neyveli Lignite Corporation Ltd. are very important:

“The term ‘royalty’ normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of a machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as ‘royalty’.

In a contract for the design, manufacture, supply, erection and commissioning of machinery which does not involve licence of the patent concerning the machinery, or copyright of its design, mere supply of drawings before the manufacture is commenced to ensure that the buyer’s requirements are fully taken care of and the supply of diagram and other details to enable the buyer to operate the machines, and also to assure the buyer, that the machines will perform to the specification required by the buyer, such supply is only incidental to the performances of the total contract which includes design, manufacture and supply of the machinery.
The price paid by the assessee to the supplier is a total contract price which covers all the stages involved in the supply of machinery from the stage of design to the stage of commissioning. The design supplied is not to enable the assessee to commence the manufacture of the machinery itself with the aid of such design. The limited purpose of the design and drawings is only to secure the consent of the assessee for the manner in which the machine is to be designed and manufactured, as it was meant to meet the special design requirements of the buyer.

There is no transfer or licence of any patent, invention, model or design. The design referred to in the contract is only the design of the equipment required to be manufactured by the supplier abroad and supplied to the purchaser. The information concerning the working of the machine is only incidental to the supply as the machinery was tailor-made for the buyers. Unless the buyer knows the way in which the machinery has been put together, the machinery cannot be maintained in the best possible way and repaired when occasion arises. No licence of any patent is involved. Sub-clause (vi) and also of section 9(1) would have no application as the design was only preliminary to the manufacture and integrally connected therewith. The other three sub-clauses also in the circumstances of the case are not attracted.” (Emphasis supplied)

In this connection useful reference may also be made to the cases of ITO v. Patwa Kinariwala Electronics Ltd., (2010) 40 SOT 148 (ITAT Ahd.) and CIT v. Mitsui Engineering and Ship Building Co. Ltd., (2003) 259 ITR 248 (Delhi).

Therefore, in cases where customised designs/ drawings are supplied in connection with supply, erection and commissioning of machinery and equipments, etc., on the facts of any given case, it would be possible to argue that the same does not constitute Royalty or FTS.

Payment for designs considered as part of Cost of capital equipment:

In certain circumstances, on the facts of the given case, the ITAT has held that the payments for de-signs would constitute part and parcel of the cost of the capital equipments/machineries supplied.

In this connection, reliance could be placed on the following decisions of the ITAT:

    ACIT v. King Taudevin and Gregson Ltd. (Bang.) (2002) 80 ITD 281

    Skoda Export VO Ltd. v. DCIT, (2003) TII 18 ITAT

    ADIT v. Zimmer AG, (2008) TII 21 ITAT-Kol.

In King Taudevin’s case (supra), the ITAT held that the documentation services comprising of technical drawings, designs and data could be treated as book and constituted ‘plant’ or ‘tools of trade’. What was received by the Indian company in the instant case from the foreign company was capital asset and the remittance to the foreign company was by way of payment of purchase price for the capital goods imported from abroad.

Similarly, in Skoda Exports’ case, it was held that the receipt by the non-resident assessee for import of drawings and designs and technical documents is in the nature of plant and machinery and hence cannot be considered as FTS.

In Zimmer AG’s case, the ITAT held that the sup-ply of engineering drawings and designs together with supply of plant and equipments constituted one composite supply, which enabled ‘S’ to erect, commission, set up, operate and maintain the plant for manufacture of bottle-grade PET resins. Without the supply of engineering drawings and designs, ‘S’ could not have been able to set up, operate and maintain the plant at Haldia and, therefore, engineer-ing documentation formed an integral part of the plant and machinery supplied by the assessee.

The ITAT further held that the assessee did not supply any secret formula, processes, patents, engineering know- how developed by it which would enable ‘S’ to start business of manufacture of plant and machinery or any other product. Supply of engineering, drawing and designs was incidental to selling of plant and equipment which was tailor-made to suit specific requirement of ‘S’ for setting up a petro-chemical project at Haldia. Therefore, the supply of engineering drawings and designs was integral part of supply of plant and equipment and it could not be viewed in isolation and, therefore, payment made by ‘S’ was not for acquiring mere right to use engineering documentation, so as to constitute royalty.

In appropriate cases, based on the facts and circumstances, it could be possible to gainfully use the ratios laid down by the aforesaid decisions and contend that the payment for drawing would be part of supply of plant and equipment and would not constitute royalty or FTS and hence not taxable in India.

Payment for ‘Outright Purchase/Sale’ of designs and drawings, not taxable:

In many cases, based on the facts of the given cases, the ITAT/AAR/High Courts have held that the payments for designs and drawing are for the outright sale of designs and drawings to the Indian entity and the same would be covered by Article 7 relating to Business profits and in absence of a PE in India, would not be taxable in India.

In this connection, useful reference may be made to the following cases, which have been summarised in earlier parts of the article:

    CIT v. Davy Ashmore India Ltd., (Cal.) (1991) 190 ITR 626

    The Indian Hotels Company Ltd. v. ITO — Un-reported, ITA No. 553/Mum./2000

    Munjal Showa Ltd. v. ITO, (2001) 117 Taxman 185 (Delhi) (Mag.)

    Pro-Quip Corporation v. CIT (AAR), (2002) 255 ITR 354

    DCIT v. Finolex Pipes Ltd., (2005) TIL 25 ITAT Pune-Intl.

    Abhisek Developers v. ITO, (2008) 24 SOT 45 (Bang.) (URO)

    Parsons Brinckerhoff India Pvt. Ltd. v. ADIT, [2008]-TII-27-ITAT-(Del)-Intl

    CIT v. Maggtonic Devices Pvt. Ltd., (2009) TII 21 HC HP-Intl.

    International Tire Engineering Resources LLC (2009) TII 25 ARA-Intl.

In this regard, for considering whether a particular transaction of payment for design and drawings would constitute ‘Outright Sale’, the following important points should be kept in mind:

    a) In all cases, where the non-resident supplier of designs and drawings, does not retain any property or ownership rights in the designs and drawings, the same could constitute outright sale of designs and drawings. (CIT v. Davy Ashmore India Ltd.)

    b) Wherever the purchaser is entitled to use the designs and drawings, as he likes and he is entitled to sell or transfer the designs and drawings as per his wish, then in those cases it could constitute outright sale.

    c) If the agreement vests only a limited right and places restrictions as to the use of designs and drawings, then it cannot be said that there has been an out-and-out sale or transfer of the designs and drawings.

    d) In any alienation of right or property is made for consideration and such consideration is payable contingent upon productivity, use or disposition, then the same would not consti-tute ‘outright sale’, but the same could be considered as royalty.

    e) If the agreement has a secrecy/confidentiality clause, which prohibits the Indian party from disclosing the information received from the foreign party, the logical inference would be that there is no outright transfer of the designs/drawings/plans.

    f) Similarly, if the agreement restricts the Indian party from selling the designs, drawing and plan to the third party, the logical inference would be that there is no outright transfer in the property of the designs and drawings.

    g) Where the agreement for the supply of designs is for a limited period of the agreement and not for all times to come, the conclusion should be that there is no outright transfer of designs.

    h) Where the transfer is on ‘Non-exclusive’ basis, it conveys the idea that the designs and drawings that the seller owns and possesses are not transferred absolutely to the purchaser and that the seller is not divested of the proprietary rights and interest in the designs and drawings and hence the same cannot be considered as outright sale.

It would, therefore, be extremely important to minutely study and understand the facts and circumstances of each case and based on the relevant parameters, examine as to whether the payment is being made for outright purchase/sale of designs and drawings. If the payment is actually made for the outright purchase of designs, then based on the various judicial precedents cited above and the principle laid down by the courts, it should be possible to successfully contend that the same should not be taxable in India.

Meaning of the word ‘transfer’ in the words ‘development and transfer of a technical plan or technical design’:

A question arises for consideration as to what is the meaning of the word ‘transfer’ appearing in the words ‘development and transfer of a technical plan or technical design’. Does the word ‘transfer’ refer to absolute transfer of rights of ownership or mere use of such design by the person of other contracting state?

As pointed out above, absolute transfer of rights of ownership or transfer of all rights, title and interest, would generally make the transaction an outright sale and the same would not fall within the meaning of the term FTS.

In the context of the phrase ‘development and transfer of a technical plan or technical design’, the word transfer, in our view, would mean de-velopment of design and transfer of the same for the use of such developed design. In that event it would be FTS. Mere transfer of existing design, without any further development, would generally fall with in the definition of term royalty.

This question came up for consideration in the case of Gentex Merchants (P.) Ltd. v. DDIT (IT), (2005) 94 itd 211 (Kol.). In this regard, the ITAT held as under:

“From the agreement between the assessee and the American company it is apparent that the latter was to deliver the technical draw-ings and designs to the former for its own use and benefit in India. The term transfer as used in Article 12(4) does not refer to the absolute transfer of rights of ownership. It refers to the transfer of technical drawing or designs to be effected by the Resident of one State to the Resident of other State which is to be used by or for the benefit of Resident of other state. The said Article 12(4)(b), in our opinion, does not contemplate transfer of all rights, title and interest in such technical design or plan. Even where the technical design or plan is transferred for the purpose of mere use of such design or plan by the person of other contracting state and for which payment is to be made, Article 12(4)(b) will be attracted. The facts on record clearly indicate that under the agreement the American company was required to deliver such technical designs or plan for the sole use by the assessee-company in India. In fact, the assessee did use these technical plans and drawing for constructing and/or installing the Water Feature at 22 Aurangazeb Road, New Delhi. In the above circumstances we are of the opinion that the payments effected under the agreement with the American company squarely fell within the defini-tion of ‘fees for included services’ and therefore the assessee was liable to deduct tax @ of 15% of the amount payable, u/s.195 of the Act.”

Thus, it is very important to examine the factual position, in any given case and then determine the character of the income i.e., as to whether any such transfer would tantamount to FTS, royalty or outright sales.

Whether the concept of ‘make available’ be applied to ‘development and transfer of a technical plan or technical design’:

It is important to note that neither of the three model conventions i.e., OCED, UN and US Model Convention, contain separate Article relating to FTS. Thus, the concept of FTS appears to have originated from Indian DTAAs.

As of now, India has signed 79 DTAAs with various countries. Out of these, DTAAs with nine countries have FTS Article containing the concept of ‘make available’. These countries are: Australia, Canada, Cyprus, Malta, Netherlands, Portuguese Republic, Singapore, UK and USA.

In addition, due to existence of ‘Most Favoured Nation’ (MFN) clause in the protocols to the seven DTAAs providing for restricted scope of the FTS Article, it is possible to apply the concept of ‘Make Available’ in those cases. These countries are: Belgium, France, Hungary, Israel, Kazakstan, Spain and Sweden. In case of Swiss Confederation, the MFN clause in the protocol provides for further negotiations, but does not provide for automatic application of the restricted scope and of the concept of ‘make available’. Hence, practically as of now, the benefit of Swiss DTAA, the MFN clause is not available until the negotiations actually take effect and the same is made effective.

In case of DTAAs abovementioned 8 countries (except Singapore) having ‘make available’ concept in the FTS Article, the typical language of the Article e.g., India-USA DTAA reads as under:

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

However, in case of India-Singapore DTAA, the same article reads as under:

“(b)    make available technical knowledge, experi-ence, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or

    c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.

For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.”

A question, therefore, arises as to whether the concept of make available could be applied in the case of second limb of the clause i.e., ‘or consist of the development and transfer of a technical plan or technical design.’

This question came up for consideration in the case of SNC -Lavalin International Inc. v. DDIT, IT, Delhi (2008) 26 SOT 155 (Delhi). The ITAT in this case held as under:

“Thus, if the payment for rendering any technical or consultancy service is ‘fees for included services’, if such services either make available technical knowledge, experience, skill, know-how or process or consists of the development and transfer of a technical plan or technical design. When the payment is for development and trans-fer of a technical plan or technical design, it need not be coupled with the condition that it should also make available technical knowledge, experience, skill, know-how or process, etc. The words ‘make available’ go with technical know-how, experience, skill, know-how or process, etc. but do not go with “constraints of the development and transfer of a technical plan or a technical design”. The second limb in clause (b) of sub-article (4) of Article 12 of DTAA can be invoked when the amount is paid in consideration for rendering of any technical or consultancy services and if such services consists of the development and transfer of a technical plan or a technical design also. By the way, the condition of mak-ing available technical knowledge is not sine qua non for considering the question as to whether the amount is fees for included services or not particularly when the payment is only where the technical or consultancy services consists of development and transfer of a technical plan or technical design only. This will be considered as ‘fees for included services’ within the meaning of Article 12(4) of the Act and hence, in terms of Article 12(2) tax rate should be charged.” [Emphasis supplied]

However, it is important to note that in case of India-Singapore DTAA, the portion relating to development and transfer of design and draw-ings have been made in to a separate clause (c) instead of keeping the same in the same clause as is the case with 8 other DTAAs mentioned above. On a proper reading of the Article 12(4)(c) of India-Singapore DTAA, as mentioned above, it would appear that in the case of Singapore, due to the peculiar language of the clause (c), concept of make available would be applicable even in case of development and transfer of a technical plan or technical design. This proposition is yet to be tested before a judicial forum.

Architectural designs and drawings:

The issue of taxability of architectural designs and drawings is a contentious one. The issue which arises is whether the contracts between the parties is a contract of service and whether the payment made by the assessee constituted a purchase consideration for the transfer of title in the drawings? There is a cleavage of judicial opinion in the matter.

In Abhishek Developers’ case (BCAJ March, 2011 Sr. No. 21 page 61), the ITAT, Bangalore bench held, on the facts of the case, following the un-reported decision of the Mumbai Bench of ITAT in the case of Indian Hotels Company Ltd. v. CIT, (BCAJ, January 2011, Sr. No. 7 page 43), that the transaction in question was a transaction of sale and not a case of rendering technical services as contemplated u/s.9(1)(vii).

However, in the following cases, a contrary view had been taken and the payment has been held to be in the nature of FTS/FIS:

    a) Gentex Merchants (P.) Ltd. v. DDIT (IT), (2005) 94 ITD 211 (Kol.)

    b) HMS Real Estate Pvt Ltd., (2010) 190 Taxmann 22 (AAR)

    c) GMP International GmbH, (2010) 188 Taxmann 143 (AAR).

Fees for Technical Services:

In the following cases, the payment for designs and drawings was held to be in the nature of FTS:

    a) AEG Aktiengesellschaft v. CIT, (2004) TII 05 HC Kar.-Intl (BCAJ, February, 2011 page 53)

    b) Rotem Company v. DIT, (2005) 148 Taxmann 411 (AAR)

In this case, the AAR held that the contract comprises of elements of fees for technical services within the meaning of DTAAs with Japan and Korea and the same is not in the nature of business profits.

    c) Mangalore Refinery and Petrochemicals Ltd. DCIT, (2007) TII 49 ITAT Mum-Intl. (BCAJ, February, 2011, pages 54-55)

    d) SNC — Lavalin International Inc. v. DDIT, (2008) 26 SOT 155 (Delhi)

    e) Worley Parsons Services Pty. Ltd. (2009) 179 Taxman 347 (AAR)

It may noted that in the India-Australia DTAA, FTS are covered under Article 12(3) and described as ‘Royalty’ and the term ‘Fees for Technical Services’ has not been used.

However, in ITO v. De Beers India Minerals (P.) Ltd., (2008) 115 ITD 191 (Bang.), the payment for certain services was held not to be in the nature of ‘Fees for technical services’ as the payments were not in consideration for the development and transfer of technical plan and technical design under Article 12(5) of the India-Netherlands DTAA.

Royalties:

In the following case, the payment was held to be in the nature of royalty:

    a) Leonhardt Andra Und Partner, GmbH v. CIT, (2001) 249 ITR 418

In this case, payment was made to the German company in connection with design of the bridge to be built. In absence of definition of the term royalty under the old India-Germany DTAA, the court held it to be royalty u/s.9(1)(vi) of the Act.

    b) DCIT v. All Russia Scientific Research Institute of Cable Industry, Moscow (2006) 98 ITD 69 (Mum.) [BCAJ, January 2011, Page 44, Sr. No. 8]

    c) DCIT v. Majestic Auto Ltd., (1994) 51 ITD 313 (Chd.) (BCAJ, February 2011, Page 49-50, Sr. No. 10)

    d) International Tire Engineering Resources LLC (2009) 185 Taxmann 209 (AAR) (BCAJ, March 2011, Page 69-71, Sr. No. 10)

In this case, part of the payment i.e., payment relating to non-exclusive right to use the know-how, was held to be in the nature of royalty.

India-USA DTAA — Memorandum of Understanding (MoU):

In the context of technical plan, Example 5 of the MoU is relevant and the same reads as under:

“Example (5):

Facts:

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

Analysis:

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

It is a moot point whether ‘modification of a computer software’ results in transfer of technical plan, in all circumstances. This Example 5 of the MoU relating to article 12 of the India-USA DTAA, has not been subject matter of judicial scrutiny as yet.

The above example seems to support the ratio of the decision of the ITAT in the case of SNC-Lavalin International Inc. v. DDIT, IT, Delhi (2008) 26 SOT 155 (Delhi), wherein it was held that the words ‘make available’ go with technical know-how, experience, skill, know-how or process, etc. but do not go with the phrase ‘development and transfer of a technical plan or a technical design’.

Conclusion:
In view of the broad propositions emerging from the above discussion of various judicial pronouncements and statutory provisions, the reader would be well advised to minutely study and analyse the relevant contracts/agreements and all the relevant facts of the matter on hand and apply appropriate legal propositions discussed in the article. The law on the subject is still developing and has not attained finality on various aspects. The readers are advised to keep themselves updated with various developments on the topic.

Capital or revenue receipt — Non-competition fee is a capital receipt — Not exigible to tax prior to amendment of Finance Act, 2002.

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[Gufic Chem P. Ltd. v. CIT, (2011) 332 ITR 602 (SC)]

During the A.Y. 1997-98 the assessee received Rs.50,00,000 from Ranbaxy as non-competition fee. The said amount was paid by Ranbaxy under an agreement dated 31st March, 1997. The assessee was a part of the Guffic group. The assessee had agreed to transfer its trade marks to Ranbaxy and in consideration of such transfer the assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it on the terms and conditions appearing in the agreement. The assessee was carrying on the business of manufacturing, selling and distribution of pharmaceutical and medical preparations including products mentioned in the list in schedule A to the agreement. The agreement defined the period, i.e., a period of 20 years commencing from the date of the agreement. The agreement defined the territory as territory of India and rest of the world. In short, the agreement contained prohibitory/ restrictive covenant in consideration of which a non-competition fee of Rs.50 lakh was received by the assessee from Ranbaxy. The agreement further showed that the payment made to the assessee was in consideration of the restrictive covenant undertaken by the assessee for a loss of source of income.

On perusal of the said agreement, the Commissioner of Income-tax (Appeals) while overruling the decision of the Assessing Officer observed that the Assessing Officer had not disputed the fact that Rs.50 lakh received by the assessee from Ranbaxy was towards non-competition fee; that under the said agreement the assessee agreed not to manufacture, itself or through its associate, any of the products enlisted in the schedule to the agreement for 20 years within India and the rest of the world; that the assessee and Ranbaxy were both engaged in the business of pharmaceuticals and to ward off competition in manufacture of certain drugs, Ranbaxy had entered into an agreement with the assessee restricting the assessee from manufacturing the drugs mentioned in the schedule and consequently the Commissioner of Income-tax (Appeals) held that the said sum of Rs.50 lakh received by the assessee from Ranbaxy was a capital receipt not taxable under the Income-tax Act, 1961 during the relevant assessment year. This decision was affirmed by the Tribunal. However, the High Court reversed the decision of the Tribunal by placing reliance on the judgment of the Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. v. CIT, (1964) 53 ITR 283. Against the said decision of the High Court the assessee went to the Supreme Court by way of petition for special leave to appeal.

The Supreme Court held that the position in law was clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt, whereas the compensation attributable to a negative covenant is a capital receipt. The above dichotomy is clearly spelt out in the judgment of this Court in Gillanders’ case (supra).

The Supreme Court observed that this dichotomy had not been appreciated by the High Court in its impugned judgment. The High Court misinterpreted the judgment of this Court in Gillanders’ case (supra). In the present case, the Department had not impugned the genuineness of the transaction. In the present case, the High Court had erred in interfering with the concurrent finding of the fact recorded by the Commissioner of Incometax (Appeals) and the Tribunal. According to the Supreme Court one more aspect needed to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt prior to the A.Y. 2003-04. It is only vide the Finance Act, 2002 with effect from 1st April, 2003 that the said capital receipt was made taxable [see section 28(va)]. The Finance Act, 2002 itself indicated that during the relevant assessment year compensation received by the assessee under non-compensation agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1st April, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-compensation agreement was in the nature of a capital receipt and not a revenue receipt. The said section 28(va) was amendatory and not clarificatory.

For the above reasons, the Supreme Court set aside the impugned judgment of the Karnataka High Court dated 29th October, 2009, and restored the order of the Tribunal. Consequently, the civil appeal filed by the assessee was allowed with no order as to the costs.

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DEDUCTIBILITY OF FEES PAID FOR CAPITAL EXPANSION TO BE USED FOR WORKING CAPITAL PURPOSES — AN ANALYSIS, Part I

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Background :
The Supreme Court in Punjab Industrial Development Corporation Ltd v. CIT, (1997) 225 ITR 792 held that the amount paid to the Registrar of Companies as filing fee for enhancement of capital constitutes capital expenditure. Relying on this decision, the Supreme Court in Brooke Bond India Ltd. v. CIT, (1997) 225 ITR 798 held that expenditure incurred in connection with issuing shares for increasing capital by a company is capital expenditure. Since then one is a witness to these two decisions being mechanically applied by tax authorities as a ground for disallowing any and every expenditure associated with share capital. These include expenses not only directly related but also incidentally connected to capital expansion. The question for consideration is whether any and every expenditure relatable to capital expansion is capital expenditure? Whether the above-mentioned decisions of the Supreme Court are all-pervasive? To put it differently, could there be occasions when these Supreme Court decisions become distinguishable? This write-up discusses one such occasion — in two parts. The first part outlines the law applicable for allowing any expenditure as business expenditure under the head income from business or profession. The second part would cover why the ratio of above-mentioned decisions of the Supreme Court cannot be regarded as all-pervasive as also other connected matters.

Assumed facts:
ABC Limited is a public company (hereinafter referred to as ‘ABCL’ for brevity) engaged in the business of manufacture and sale of pharmaceuticals products. ABCL has presence in various countries across the globe. The success of the business of ABCL is dependent upon marketing of its products. During financial year 2010-11, ABCL undertook certain strategic initiatives (including organisational restructuring) to re-align its business activities for entering into European, African and Asia-pacific countries. The objective was to capture trading opportunities available in such countries. ABCL was thus in need of funds for various business purposes viz., working capital for carrying out business, funds for securing distribution rights, licences, brands.

In view of the above, ABCL engaged the services of a commercial bank (say, XY bank) which assisted it in raising funds through foreign investors. With assistance from XY bank, ABCL managed to raise funds by issuing preference shares to three foreign investors. The funds raised by ABCL were utilised for the above purposes. In consideration of all the services provided, ABCL paid a consolidated fee to XY bank. The question for consideration is whether fees or any portion thereof paid to XY bank would be deductible as business expenditure under the provisions of the Income-tax Act, 1961 (‘Act’ for short hereinafter).

Applicable law — Introduction:
Chapter IV-D contains provisions relating to computation of ‘Profits and gains from business or profession’. Section 28 is the charging section. Section 29 enjoins that profits and gains referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D. Sections 30 to 36 and 38 outline the law relating to specific deductions. Section 37 deals with expenditure which is general in nature and not covered within sections 30 to 36.

The payment by XY bank would not qualify for deduction under sections 30 to 36. Even section 35D would not have relevance. This is for the reason that the section would apply when expenses are incurred under specified heads prior to incorporation or after incorporation in connection with the extension of the industrial undertaking. The expenses under consideration are not pre-incorporation expenses. No extension of any existing undertaking is involved. Section 35D therefore would not be relevant. The deductibility of the said expenditure under section 37(1) of the Act remains for consideration.

Deductibility under section 37(1):
Section 37(1) of the Act enables a general or residual deduction while computing profits and gains of business or profession. Section 37(1) reads as under: “(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.

(Explanation — For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.)

In order to be eligible for an allowance under section 37, the following conditions should be cumulatively satisfied:
(i) The impugned payment must constitute an expenditure;
(ii) The expenditure must not be governed by the provisions of sections 30 to 36;
(iii) The expenditure must not be personal in nature;
(iv) The expenditure must have been laid out or expended wholly and exclusively for the purposes of the business of the assessee; and
(v) The expenditure must not be capital in nature.

(i) The payment must constitute an expenditure:
The first and foremost requirement of section 37 is that there should be an expenditure. The term expenditure is not defined in the Act. The Supreme Court in Indian Molasses Company (P) Ltd. v. CIT, (1959) 37 ITR 66 (SC) defined it in the following manner:
“ ‘Expenditure’ is equal to ‘expense’ and ‘expense’ is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another’s expense. But the idea of ‘spending’ in the sense of ‘paying out or away’ money is the primary meaning and it is with that meaning that we are concerned. ‘Expenditure’ is thus what is ‘paid out or away’ and is something which is gone irretrievably.”

A definition to a similar effect is found in section 2(h) of the Expenditure Act, 1957. This definition reads as : “Expenditure : Any sum of money or money’s worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee. The term includes any amount which, under the provision of the Expenditure Act is required to be included in the taxable expenditure.”

In CIT v. Nainital Bank Ltd., (1966) 62 ITR 638, the Supreme Court held : “In its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’, i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’ : it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, there is expenditure.”

Expenditure for the purposes of section 37 includes amounts which the assessee has actually expended or which the assessee has provided for or laid out in respect of an accrued liability. In the case under discussion, ABCL has paid fees to XY bank as consideration for services. The amount paid to XY bank constitutes ‘expenditure’ for the purpose of section 37(1) of the Act.

(ii) The expenditure must not be governed by the provisions of sections 30 to 36:
As already stated, the payment under discussion viz., fees paid to XY bank is not covered by any of the provisions of sections 30 to 36 of the Act. The payment would also not qualify for deduction under section 35D as the same has not been incurred prior to incorporation of business of ABCL or in connection with extension of the undertaking or setting up a new u

FINANCE ACT, 2011

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1. Background:

1.1 The Finance Minister, Shri Pranab Mukherjee, presented the third Budget of UPA-II Government in the Parliament on 28-2-2011. The Finance Act, 2011, has now been passed by both Houses of the Parliament on 24-3-2011, without any discussion. It has received the assent of the President on 8-4- 2011. There are only 35 sections in the Finance Act amending some of the provisions of the Income tax and Wealth tax Act. This year’s amendments in our Direct Tax Laws are very few, probably because the Direct Taxes Code Bill, 2010 (DTC), introduced in the Parliament is under discussion and will replace the existing Income tax Act and Wealth tax Act hopefully from 1-4-2012.

1.2 Part ‘B’ of the Budget Speech deals with proposals relating the Direct Taxes, Excise Duty, Customs Duty and Service tax. In para 139 and 140 of his Budget Speech the Finance Minister has stated as under:

“139. In the formulation of these (tax) proposals, my priorities are directed towards making taxes moderate, payments simple for taxpayers and collection of taxes easy for the tax collector.”

“140. As Government’s policy on direct taxes has been outlined in the DTC which is before the Parliament, I have limited my proposals to initiatives that require urgent attention.”

After presenting his budget proposals, he has concluded his speech as under:

“197. As an emerging economy, with a voice on the global stage, India stands at the threshold of a decade which presents immense possibilities. We must not let the recent strains and tensions hold us back from converting these possibilities into realities. With oneness of heart, let us all build an India, which in not too distant a future, will enter the comity of developed nations.”

1.3 The various important amendments made in the Income tax Act and Wealth tax Act can be briefly stated as under:

(i) Slabs for tax payable by Individuals/HUF/ AoP/ BoI have been revised and the tax burden on these assessees have been reduced to some extent.

(ii) MAT on Corporate Bodies has been marginally raised and surcharge on income of companies is reduced.

(iii) Alternate Minimum Tax (AMT) will be levied on Limited Liability Partnership (LLP).

(iv) Certain exemption and deduction provisions have been relaxed.

(v) Provisions relating to taxation of international transactions have been made more strict.

(vi) Scope of cases which can be referred to the Settlement Commission has been widened.

(vii) Some procedural changes have been made.

1.4 In this article some of the important amendments made in rates of taxes and in some of the provisions of the Income tax and Wealth tax Acts have been discussed.

2. Rates of taxes, surcharge and education cess:

2.1 Rates of Income tax:

(i) For Individuals, HUF, AoP, BoI and Artificial Juridical Persons the threshold limit of basic exemption has been revised upwards for A.Y. 2012-13. Age limit for resident senior citizens has been lowered to 60 years from the present limit of 65 years. Further, a new category of ‘VERY SENIOR CITIZEN’ who is a resident and 80 years and above has been created. The revised tax rates for A.Y. 2012-13 as compared to A.Y. 2011-12 are as under:

(a) Rates in A.Y. 2011-12
(Accounting Year ending 31-3-2011):

Note: There is no surcharge but Education cess at 3% (2 + 1) of tax is payable.
(b) Rates in A.Y. 2012-13 (Accounting Year ending 31-3-2012):

Note: No surcharge is payable but Education cess @ 3% (2 +1) of tax is payable.
(ii) The impact of these changes can be noticed from the following charts.

(a) Tax payable in A.Y. 2011-12 (Accounting Year ending 31-3-2011):

The above tax is to be increased by 3% of tax for Education cess.

(b) Tax payable in A.Y. 2012-13 (Accounting Year ending 31-3-2012):

The above tax is to be increased by 3% of tax for Education cess.

(iii) Other assessees: There are no changes in the rates of taxes so far as other assessees are concerned. Therefore, they will have to pay taxes in A.Y. 2012-13 at the same rates as applicable in A.Y. 2011-12.

(iv) Rate of tax u/s.115JB (MAT): The rate of tax on book profits u/s.115JB i.e., MAT has been increased from 18% in A.Y. 2011-12 to 18.5% in A.Y. 2012-13. This is to be increased by surcharge of 5% of tax if the Book Profit is more than Rs.1 cr. Education cess at 3% of tax is also payable.

(v) Rate of tax on dividends from foreign companies:
A new section 115BBD is inserted for A.Y. 2012- 13. This section provides for concessional rate of tax payable by an Indian company on dividend received by it from any Foreign company in which the Indian company holds 26% or more of the equity capital. The rate of tax on such dividend income will be 15% plus applicable surcharge and education cess. This concessional rate of tax on foreign dividend income is applicable only for one year i.e., dividend received during the year ending 31-3-2012 (A.Y. 2012-13). It is also provided in this section that no expenditure shall be allowed against this dividend income. Therefore, an Indian company which controls a Foreign company by holding 26% or more of equity capital in such a company can consider repatriation of profits accumulated in the foreign company to avail of this concessional rate of tax during the current year before 31-3-2012.

(vi) Rate of Alternate Minimum Tax on LLP (AMT):
Limited Liability Partnership (LLP) will now have to pay Alternative Minimum Tax (AMT) at the rate of 18.5% on its gross total income as computed under new section 115JC. No surcharge is payable, but education cess is payable @ 3% of tax. This is discussed in para 8 below.

2.2 Surcharge on Income tax:
(i) No surcharge is payable by non-corporate assessees i.e., Individuals, HUF, Juridical person, AoP, BoI, Firm, LLP, Co-operative Society and Local Authority. In the case of a company, if the total income is more than Rs.1 cr. the surcharge on tax payable in A.Y. 2011-12 is 7.5%. This is now reduced to 5% for A.Y. 2012-13. Similarly, rate of surcharge on tax payable by a company u/s.115JB (MAT) is also reduced to 5% for A.Y. 2012-13 if the Book Profits amount is more than Rs.1 cr. So far as Dividend Distribution and Income Distribution Tax payable u/s.115O and u/s.115R by companies and Mutual Funds is concerned the rate of surcharge on tax is reduced from 7.5% to 5% w.e.f. 1-4-2011.

(ii) In the case of a Foreign company the rate of surcharge on tax is also reduced from 2.5% to 2% w.e.f. A.Y. 2012-13 if the taxable income of such a company is more than Rs.1 cr. Similarly, for deduction of tax at source u/s.195 from the income of a foreign company the Income tax has to be increased by surcharge at the rate of 2% (instead of 2.5%) w.e.f. 1-4-2011 if the income from which tax is deducted at source is more than Rs.1 cr.

(iii) It may be noted that no surcharge on tax is required to be charged on tax deducted at source from payments to resident assessees.

2.3 Education cess:
As in earlier years, Education cess of 3% (including 1% for higher education cess) of Income tax and Surcharge (if applicable) is payable by all assessees (Residents and Non-residents). No Education cess is to be deducted or collected from TDS or TCS from payments to all resident assessees, including companies. However, if the tax is deducted from payments made to (a) Foreign companies, (b) Non- Residents or (c) on Salary payments, Education cess at 3% of tax and surcharge (if applicable) is to be applied.

2.4 TDS on interest:
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HIGHLIGHTS OF THE MAHARASHTRA STATE BUDGET 2011-12

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26% increase in Sales Tax (VAT) collection in 2010-11 over 2009-10. Original target of Rs.35896 crore now increased to Rs.40415 crore. Estimated revenue for 2011-12 is set at Rs.46000 crore.

31% increase in Stamp Duty collection in 2010- 11 over 2009-10. Original Budget estimates of Rs.10478 crore now increased to Rs.14140 crore. Revenue for 2011-12 is estimated at Rs.15677 crore.

Revenue from State Excise Duty is estimated at Rs.5800 crore for 2010-11 and Rs.8500 crore for 2011-12.

Revised estimates of revenue from Motor Vehicle Tax for 2010-11 are at Rs.3471 crore, almost 21.36% higher than the original Budget estimates of Rs.2,860 crore. The Budget estimates for 2011-12 are pegged at Rs.4,000 crore.

Devolution from Central Government also increased substantially. As per the recommendations of the 13th Finance Commission, Maharashtra’s share in sharable taxes (other than service tax) has been increased from 4.997 % to 5.199%. The share in service tax has been increased from 5.063% to 5.281%. The total transfers for the year 2011-12 including devolution and grants is Rs.16593.9 crore.

Total tax receipts, including devolution, are estimated at Rs.84914 crore in revised estimates for 2010-11, about 13.64% higher than the original Budget estimates of Rs.74721 crore. The Budget estimates for 2011-12 are at Rs.97404 crore.

Rate of tax on ‘declared goods’ proposed to be increased from 4% to 5%.

No change in standard rate of VAT, continue to remain @ 12.5%.

Extension of time limit to exemption of essential commodities such as rice, pulses and their flours, turmeric, chillies, tamarind, gur, coconut, cumin seeds, fenugreek and parsley (Suva), papad, wet dates, Solapuri chaddars and towels, etc., up to 31st March 2012.

Fabrics and sugar continue to remain tax free.

Domestic LPG shall also continue to be tax free.

Concessional rate of tax on tea, i.e., 5%, proposed to be continued till 31st march 2012.

Tax on aviation turbine fuel, sold from places in Maharashtra other than Mumbai and Pune districts, is charged at the concessional rate of 4% up to 31-3-2011. This concession is now extended up to 31-3-2012.

Pre-fabricated domestic biogas units are proposed to be tax free.

No tax shall be levied on transfer of copyrights of films relating to their exhibition in theatres.

Telecasting rights of various entertainment and sports events are proposed to be included in the list of ‘intangible goods’, attracting tax @ 5%.

Rate of tax on dry fruits proposed to be reduced from 12.5% to 5%.

Rate of tax on carbonated soft drinks to be increased from 12.5% to 20%.

Sale of goods to electricity generating, transmission, distribution units, telecom, industry, defence and railways, etc., which was attracting concessional rate of tax @ 4% is now proposed to increased to 5%.

Rate of tax on goggles proposed to be increased to 12.5%.

Turnover limit of Composition Scheme for Bakers to be increased from Rs.30 lakh to Rs.50 lakh.

E-services to the dealers to be strengthened by using TINXSYS network. Business intelligence tools and data warehouse are also proposed to be adopted for quicker analysis of data.

Some amendments, in the MVAT Act and Rules are proposed, including amendments regarding certain procedures in respect of filing of returns, grant of refunds, voluntary registration and penalties, etc.

Stern actions are proposed to be taken against Hawala dealers.

The present procedure for payment of sugarcane purchase tax is proposed to be changed by amending the Sugarcane Purchase Tax Act.

Amnesty Scheme for sick sugar factories.

Proposal to waive interest and penalty to soap industry certified by Khadi & Village Industry Board.

Proposal to change the scheme of levying tax on sale of liquor. First-point tax proposed in the hands of manufacturers/importers. Once tax is paid by the manufacturer or importer, subsequent dealers will not be required to pay any tax. However, the rate of tax on liquor served in hotels having 4-star or higher rating shall be 20%, while in other bars, restaurants and clubs is proposed to be @ 5% (without set-off benefits).

Rate of excise duty on manufacture of country liquor an IMFL is proposed to be increased.

Uniform rate of Stamp Duty to be charged @ 0.005% on transactions taking place at stock and commodity exchanges, including transactions of securities, futures, delivery-based, non-delivery-based whether for clients or on own account.

Transactions of transfer of long-held tenancy rights of house properties to attract Stamp Duty.

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(2011) 38 VST 33 (Delhi) Metalite Industries v. Commissioner of Sales Tax, Delhi

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Central Sales Tax — Section 2(c) and section 14, Delhi Sales Tax Act — Schedule II, Entry 3 — Declared goods — Whether cable trays manufactured from iron and steel is a different commodity and, therefore, does not fall in the category of declared goods?

Facts:
The assessee, a dealer in iron and steel, sold cable trays without charging tax from the purchasing dealers. The Department took the view that the same could not be sold without charging tax from the purchaser on the ground that the goods were not covered by the term ‘iron and steel’ within the meaning of section 14((iv)(vii) of Central Sales Tax Act, 1956. Reassessment was made and additional demand of certain amount as tax along with interest u/s.27(1) of Delhi Sales Tax Act, 1975, was raised. Appeals filed before the Additional Commissioner as well as the Tribunal were dismissed. On references:

Held:
That it could not be said that the cable trays — perforated as well as ladder types continued to remain iron and steel plates. Both types of plates were manufactured out of mild steel sheets of 2mm thickness. The types of processes involved brought an ultimate product which was distinct and different. There could not be any doubt that the plates have undergone transformation into cable trays and the process involved was manufacturing. These were sold in the market to meet different mechanical and engineering needs as distinct from the plain or chequered plates. Therefore, the ‘cable trays’ sold by the dealer could not fit in the category of ‘iron and steel plates’ as specified in clause (vii) of sub section (iv) of section 14 of the CST Act.

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(2011) 38 VST 1 (SC) Saraf Trading Corporation v. State of Kerala

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Central Sales Tax Act — Section 5(3), Kerala General Sales Tax Act — Section 44 — Refund of tax paid can be claimed by the dealer, who has paid tax to the Government and not by the purchaser, who has purchased the goods in auction without specifying that such purchase is for the purpose of export but later exported the same.

Facts:
The appellant purchased tea, from the tea planters, directly in open auction and thereafter exported the same to foreign countries. They were allowed exemption of tax on export sale. The auction purchase price was inclusive of sales tax. The tea planters, being liable to pay tax to the State Government paid due taxes. Appellant claimed refund of taxes paid on the basis that the sale by tea planters was penultimate sale, u/s.5(3) of CST Act, as they have collected tax from the appellant the same should be refunded to him.

Held:
The phrase ‘sale in the course of export’ used in section 5(3) of Central Sales Tax Act, comprises three essentials viz., (i) there must be a sale of goods, (ii) those goods must be actually exported, and (iii) the sale must be part and parcel of export.

To ‘occasion export’ there must exist such a bond between the contract of sale and actual export. Each link is inextricably connected with the one immediately preceding, without which a transaction cannot be called a sale ‘in the course of export’.

In the facts and circumstances of the case it was not clear that the sale and purchase between the parties was inextricably linked with the export of goods. At the time of purchase of goods, in auction, there was nothing on record to show that the purchase was for the purpose of export. Since no such claim was made at that stage, sales tax was rightly realised by the sellers and paid to the Government.

Under section 44 of Kerala General Sales Tax Act, 1963, it was clear that it was only the dealer of tea on whom assessment had been made could claim refund of tax and no one else. Therefore, refund of tax could not be made to the appellants.

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(2011) 21 STR 445 (Tri.-Bang) – Country Club (India) Ltd. vs. Comm. Of Cus., C. Ex.& S.T., Hyderabad

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Cost of land paid to sister concern deducted by the assessee club from the consideration received from members includible in value in terms of CBEC Circular dated 27/07/2005 subject to actual finding of facts.

Facts:
The appellant was providing membership to general public with or without land and was discharging service tax on the membership charges after deducting cost of land under “club or association services”. The appellant transferred amount collected from members as cost of land to its sister concern and the said sister concern allotted plots to the members. The cost of land was deducted since such amount was not towards facilities or advantages given to a member. However, the Department demanded service tax on gross value charged without allowing deduction of cost of land on the ground that the amount received towards cost of land, is for an advantage that could accrue to a member relying on Board’s Circular dated 27/07/2005. Moreover, the Department contended that the appellant could not offer evidences for the amount apportioned towards the cost of land to its sister concern.

Held:
The matter was remanded back to the adjudicating authority to ascertain whether any amount towards cost of land was transferred to sister concern. If the answer was in affirmative, the amount apportioned towards sale of item i.e. sale of land in present case, would be excludible from gross value for service tax levy based on the Board’s Circular dated 27/07/2005 which is binding on the department.

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(2011) 21 STR 234 (Tri – Bang) – United Telecom Ltd. vs. CCEx., Hyderabad

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Extended period of limitation found not applicable when Department had knowledge of activity of assessee – The Tribunal further observed that SCN did not mention statutory provision for demanding tax.

Facts:
The lower authorities passed order demanding service tax of Rs.1.06 Cr. under business auxiliary services for the period from 2003 to 2007 and levied penalty of Rs.1.10 CR under sections 76, 77 and 78 of Finance Act, 1994. However, the sub-clause under which service tax was required to be paid was not mentioned. Appellant had intimated as to their activities to Department in December, 2005. Moreover, on the identical issue for earlier years in case of the appellant itself, the lower authorities had accepted the order of the appellate authority.

Held:
Extended period of limitation was not invoked when the appellant had intimated its activities to the Department. The demand could not be confirmed when the show cause notice did not specify the specific statutory provision. Demand of service tax, interest and penalty was set aside.

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(2011) 21 STR 289 (Tri. Chennai) – Textech International (P) Ltd. vs. CCE, Chennai

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Rebate claim by exporter not deniable on the ground of non-registration – Remanded for fresh adjudication.

Facts:
Department denied the rebate claim of the appellant, an exporter, on the ground that the same pertained to the period prior to registration under the service tax law.

Held:
Only a person liable to pay service tax needs to take registration under the service tax law. The exporter was not required to take registration mandatorily. Moreover, penalty for non-registration was only Rs.1,000/- as against rebate claim of over Rs.3,50,000/-. Tribunal remanded the rebate claim to the adjudicating authority for fresh adjudication.

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(2011) 21 STR 378 (Tri.-Chennai) – CCEx. vs. Grasim Industries

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CENVAT credit on repairs/maintenance services of staff colony, security services, gardening services etc. not eligible for CENVAT credit in absence of nexus with ‘manufacture’ – Ratio of Maruti Suzuki followed.

Facts:
CENVAT credit on repairs and maintenance services received for staff colony, gardening services, security services in the wind farms, swimming pool maintenance and civil work for auditorium, shopping complex etc. were denied since the services received did not have any nexus with the manufacture of final product. The lower authorities allowed it on the basis of judgment in the case of CCE, Nagpur vs. Manikgarh Cement (2009) (16 STR 171). The Department preferred an appeal and claimed that the said judgment was reversed by the Bombay High Court vide CCE, Nagpur vs. Manikgarh Cement (2010) (20 STR 456). The respondent defended that since the factory was located in remote area, these services were essential to run the factory.

Held:
The Bombay High Court in Manikgarh Cement (supra) had applied the ratio of Maruti Suzuki Ltd. vs. CCE 2009 (240 ELT 641) (SC) and held that nexus needs to be established between the services received and the business of the assessee. Moreover, the Tribunal, in case of Sundaram Break Linings 2010 (19 STR 172) had examined the identical issue in light of Maruti Suzuki case (supra). Therefore, in absence of nexus with the business activity, CENVAT credit was denied.

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(2011) 21 STR 546 (Tri.-Chennai) — CCEx., Madurai v. Tata Coffee Ltd.

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Service tax paid on transport of empty containers from yard to factory for stuffing export goods is eligible for refund.

Facts:
The question to be considered was whether service tax paid on goods transported from factory to port of export is alone eligible for refund or the same also extends to service tax paid on transport of empty containers from yard to factory for stuffing export goods.

Held:
The Notification granting refund contains ‘in relation to transport of export goods’ phrase, which is wide enough to cover service tax paid on transport of empty containers from yard to factory for stuffing export goods.

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(2011) 135 TTJ 357 (Mumbai) Bhumiraj Constructions v. Addl. CIT ITA No. 3751 (Mum.) of 2009 A.Y.: 2006-2007. Dated: 12-4-2010

Section 249(4) — If appeal is filed without payment of tax on returned income, but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and taken up for hearing.

Facts:
Against the appeal filed by the assessee, the CIT(A) noted that self-assessment tax on the income returned by the assessee was not paid. Ten days’ time was given by the CIT(A) to the assessee to make the payment. The assessee expressed its inability to pay the tax. The CIT(A) passed the order u/s.249(4) dismissing the appeal as not maintainable. Against this, the assessee filed further appeal.

Held:
The Tribunal noted as under: 1. It is sine qua non that the assessee must have made the payment of tax on the income returned. If no payment of tax on the income returned is made at all and the appeal is filed, it cannot be admitted.

2. If, however, the appeal is filed without the payment of such tax, but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and taken up for hearing.

3. The objective behind section 249(4) is to ensure the payment of tax on income returned before the admission of appeal. If such payment is made after filing of the appeal but before it is taken up for disposal validates the defective appeal, then there is no reason as to why the doors of justice be closed on a poor assessee who could manage to make the payment of tax at a later date.

4. The stipulation as to the payment of such tax before the filing of first appeal is only directory and not mandatory. Although the payment of such tax is mandatory, the requirement of paying such tax before filing appeal is only directory.

5. The distinction between a mandatory provision and a directory provision is that if the non-compliance with the requirement of law exposes the assessee to the penal provisions, then it is mandatory, but if no penal consequences follow on non-fulfilment of the requirement, then usually it is a directory provision.

6. It is a trite law that omission to comply with a mandatory requirement renders the action void, whereas omission to do the directory requirement makes it only defective or irregular. On the removal of such defect, the irregularity stands removed and the status of validity is attached.

7. When the defect in the appeal, being the nonpayment of such tax, is removed, the earlier defective appeal becomes valid. Once we call an appeal as valid, it is implicit that it is not time-barred. It implies that on the removal of defect the validity is attached to the appeal from the date when it was originally filed and not when the defect is removed.

8. In the instant case, it is found that the assessee paid the tax due on income returned, although after the disposal of the appeal by the CIT(A). On such payment, the defect in the appeal due to non-compliance of a directory requirement of paying such tax before filing of the appeal stood removed. Therefore, this appeal should have been revived by the first Appellate Authority. Under such circumstances the impugned order is set aside and the matter restored to the file of the CIT(A) for disposal of the appeal on merits.

Kumarpal Amrutlal Doshi v. DCIT ITAT ‘G’ Bench, Mumbai Before P. M. Jagtap (AM) and N. V. Vasudevan (JM) ITA No. 1523/Mum./2010 A.Y.: 2006-07. Decided on: 9-2-2011 Counsel for assessee/revenue: B. V. Jhaveri/ S. K. Singh

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Section 54EC — Exemption from capital gains tax if investment is made within six months from the date of transfer of a capital assets in the specified assets — Date of investment — Is it the date when cheque was delivered or encashed or the date of allotment of the bonds — Held the relevant date is the date when the cheque was delivered — Whether NABARD bonds were the specified assets — Held, Yes.

Facts:
The assessee sold a property on 9-8-2005 and earned long-term capital gain of Rs.19.16 lac. He invested Rs.20 lac in NABARD bonds and claimed exemption u/s.54EC. The lower authorities rejected the assessee’s claim on the following two grounds:

The investment was not made within the prescribed period of 6 months from the date of sale; and

NABARD bonds were not the long-term specified assets prescribed under the provisions. The assessee claimed that the application for the bonds and cheque were sent to NABARD by courier on 7-2-2006 which was received by NABARD on 9-2-2006. The bonds were allotted to him by NABARD on 15-2-2006. According to him the date of investment should be considered as the date when the cheque was sent to NABARD. According to the Revenue, the assessee was not able to prove that NABARD had received the application and encashed the cheque before 9-2-2006. As per the bank statement produced by the assessee, the cheque was encashed on 13-2-2006.

As regards whether or not NABARD bonds were long-term specified assets prescribed under the provisions, it was contended by the Revenue that by the Finance Act, 2006, the provisions of section 54EC were amended and NABARD bonds were no longer eligible for exemption.

Held:
The Supreme Court in the case of CIT v. Ogale Glass Works Ltd., (25 ITR 529) had held that payment by cheque realised subsequently relates back to the date of the receipt of the cheque and as per the law, the date of payment is the date of delivery of the cheque. Applying the said principle, the Tribunal held that since the assessee had delivered the cheque to NABARD by 9-2-2006, the date of payment would be the date of delivery of the cheque. The date when the cheque was encashed by NABARD cannot be said to be the date of investment.

As regards whether or not NABARD bonds were long-term specified assets prescribed under the provisions — the Tribunal noted that by the Finance Act, 2006, the clause (b) below Explanation to section 54EC(3) was substituted w.e.f. 1-4-2006, whereby the NABARD bonds were made in-eligible for exemption u/s.54EC. However, the Tribunal pointed out that till 31-3-2006, the said bonds were one of the eligible specified assets. Accordingly, it held that since the assessee had made investment on 9-2-2006, the contention of the Revenue that the law as on the 1st day of the assessment year should be applied cannot be accepted. For the purpose, it also relied on the decision of the Gujarat High Court in the case of CIT v. Nirmal Textiles, (224 ITR 378). It further observed that if the Revenue’s contention was accepted, then the assessee could never claim deduction u/s.54EC, because the period of 6 months would expire well before the 1st day of assessment year.

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(2011) 21 STR 297 (Tri – Mumbai) – CCEx., Nagpur vs. Ultratech Cement Ltd.

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Input services used outside factory eligible for CENVAT credit if nexus with ‘manufacture’ is established.

Facts:
A manufacturer of cement claimed CENVAT credit on repairs and maintenance services of river pump used for generation of electricity outside the factory. Such electricity was used in the manufacture of final product. CENVAT credit was denied on the basis that the services are received outside the factory premises and did not have nexus with the manufacture of final products.

Held:
The definition of “input services” does not deny credit if services are utilised outside the factory premises. The nexus in this case with manufacture of final product is established indirectly. In the case of the appellant for the similar issue, the Tribunal had allowed CENVAT credit. Input services used outside factory premises were eligible.

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Loss return: Condonation of delay in filing: Power of CBDT: Section 119 of Income-tax Act, 1961: A.Ys. 2000-01 and 2002-03: Genuine hardship to an assessee: Meaning of: Loss of about Rs.1,500 crores, if not allowed to be carried forward, it would cause genuine hardship to it in successive assessments: Order of CBDT for fresh adjudication.

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[Madhya Pradesh State Electricity Board v. UOI, 197 Taxman 238 (MP)]

The assessee, an organisation fully-owned and aided by the Government of Madhya Pradesh, was engaged in business of power. For the relevant assessment years, it filed its returns of income declaring certain loss after a delay of 16 months and filed an application before the CBDT for condonation of the delay, contending that as per the provisions contained in the M.P. Re-organisation Act, 2000, the erstwhile State of Madhya Pradesh and the assessee-Board, both were bifurcated and because of that reason, returns could not be filed in time. The CBDT rejected the assessee’s contention and declined to condone the delay.

On a writ petition filed by the assessee challenging the order of the CBDT, the Madhya Pradesh High Court set aside the order of the CBDT for fresh determination and held as under:

“(i) In the instant case, as per the return filed by the assessee, there was a loss of Rs.1,500 crores in the accounting year 1999-2000. If the return filed by the assessee was not accepted by the Department, then the loss suffered by it could not be carried forward and it would cause hardship to it in successive assessments.

(ii) From the perusal of the impugned order, it was apparent that the CBDT had not considered that aspect of the matter which was having a material bearing in the matter and ought to have been considered by the CBDT while considering the question of condonation of the delay in filing the return. Though there was a delay of nearly 16 months in filing returns by the assessee before the Department, but in the peculiar facts of the case, the delay ought to have been dealt with by the CBDT in proper perspective, but it appeared that the said aspect had escaped from the notice of the CBDT.”

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Professional ethics — It is duty of lawyer to defend, irrespective of consequences.

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[ A. S. Mohammed Raf v. State of Tamil Nadu & Ors., AIR 2011 SC 308]

The Bar Association of Coimbatore passed a resolution that no member of the Coimbatore Bar will defend the accused policemen in the criminal case against them. While dealing the case the Court observed that several Bar Associations all over India, whether High Court Bar Associations or District Court Bar Associations have passed resolutions that they will not defend a particular person or persons in a particular criminal case. Sometimes there are clashes between policemen and lawyers, and the Bar Association passes a resolution that no one will defend the policemen in the criminal case in Court. Similarly, sometimes the Bar Association passes a resolution that they will not defend a person who is alleged to be a terrorist or a person accused of a brutal or heinous crime or involved in a rape case. Such resolutions are wholly illegal, against all traditions of the Bar, and against professional ethics. Every person, however, wicked, depraved, vile, degenerate, perverted, loathsome, execrable, vicious or repulsive he may be regarded by the society has a right to be defended in a court of law and correspondingly it is the duty of the lawyer to defend him. When the great revolutionary writer Thomas Paine was jailed and tried for treason in England in 1792 for writing his famous pamphlet ‘The Rights of Man’ in defence of the French Revolution, the great advocate Thomas Erskine (1750-1823) was briefed to defend him. Erskine was at that time the Attorney General for the Prince of Wales and he was warned that if he accepts the brief, he would be dismissed from the office. Undeterred, Erskine accepted the brief and was dismissed from office.

The Court observed that disturbing news was coming from several parts of the country where Bar Associations were refusing to defend certain accused persons.

Chapter II of the Rules framed by the Bar Council of India states about ‘Standards of Professional Conduct and Etiquette’, as follows :

“An advocate is bound to accept any brief in the Courts or Tribunals or before any other authorities in or before which he proposes to practise at a fee consistent with his standing at the Bar and the nature of the case. Special circumstances may justify his refusal to accept a particular brief.”

Professional ethics require that a lawyer cannot refuse a brief, provided a client is willing to pay his fee, and the lawyer is not otherwise engaged. Hence, the action of any Bar Association in passing such a resolution that none of its members will appear for a particular accused, whether on the ground that he is a policeman or on the ground that he is a suspected terrorist, rapist, mass murderer, etc. is against all norms of the Constitution, the Statute and professional ethics. It is against the great traditions of the Bar which has always stood up for defending persons accused for a crime. Such a resolution is, in fact, a disgrace to the legal community. The Court declared that all such resolutions of Bar Associations in India were null and void and the right-minded lawyers should ignore and defy such resolutions if they want democracy and rule of law to be upheld in this country. It was the duty of a lawyer to defend no matter what the consequences, and a lawyer who refuses to do so is not following the message of the Gita.

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Interpretation — Indian Succession Act, 1925.

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[ Sadaram Suryanarayana & Anr. v. Kalla Surya Kanthan & Anr., AIR 2011 SC 294] The appellants (original defendants) were are the sons of late Smt. Sadaram Appalanarasamma, while the respondents (original plaintiffs) were are her daughter and son-in-law. The property in dispute was originally owned by late Smt. Kalla Jaggayyamma, who passed away leaving behind four sons besides two daughters, named : Smt. Sadaram Appalanaras-amma and Smt. Sadaram Ramanamma. It is not in dispute that in terms of a Will dated 4th September, 1976 executed by the deceased Smt. Kalla Jaggayyamma, the property mentioned in the Will was bequeathed in favour of her two daughters mentioned above with a stipulation that the same shall after their death devolve upon their female offsprings. The case of the plaintiffs is that defendants 1 to 6 i.e., sons of late Appalanarasamma took possession of suit property comprised in the Will executed by Smt. Kalla Jaggayyamma which had devolved upon plaintiff no. 1 in her capacity as the daughter of late Appalanarasamma and the stipulation contained in the Will executed by Smt. Kalla Jaggayyamma.

The defendant (appellants in the appeal) contested the suit, inter alia, taking the plea that late Smt. Sadaram Appalanarasamma had acquired absolute title in the property under the Will executed in her favour and that in terms of a Will dated 5th January, 1981, she had bequeathed the property in question to the defendant which they were entitled to retain in possession as owners thereof.

The Trial Court held that the execution of the Will by Smt. Kalla Jaggayyamma had been proved and that according to the said Will the property would devolve absolutely upon the legatee Smt. Sadaram Appalanarasamma. The plaintiffs’ claim to the property based on the stipulation that upon the death of Sadaram Appalanarasamma the property would devolve upon her female offsprings was thus negatived. Aggrieved, the plaintiffs appealed to the High Court of Andhra Pradesh who reversed the view taken by the Trial Court and decreed the suit.

The question raised for consideration before the Apex Court was whether the testatrix Smt. Kalla Jaggayyamma, had made two bequests, one that vests the property absolutely in favour of her daughters and the other that purports to vest the very same property in their female offsprings. If so whether the two bequests can be reconciled and if they cannot be, which one ought to prevail.

The Apex Court referred to the provisions of the Indian Succession Act, 1925, Chapter VI which deals with Construction of Wills and observed that where the intention of the testatrix to make an absolute bequest in favour of her daughters in earlier part of the Will was unequivocal, use of the expression ‘after demise of my daughters the retained and remaining properties shall devolve on their females children only’ in subsequent part of Will would not strictosensu amount to a bequest contrary to the one made earlier in favour of the daughters of the testatrix. The expression extracted above does not detract from the absolute nature of the bequest in favour of the daughters. All that the testatrix intended to achieve by the latter part was the devolution upon their female offsprings all such property as remained available in the hands of the legatees at the time of their demise. There would obviously be no devolution of any such property upon the female offsprings in terms of the said clause if the legatees decided to sell or gift the property bequeathed to them as indeed they had every right to do under the terms of the bequest. Thus, there was no real conflict between the absolute bequest which the first part of the Will makes and the second part of the said clause which deals with devolution of what and if at all anything that remained in the hands of the legatees. The two parts operate in different spheres, namely, one vesting absolute title upon the legatees with rights to sell, gift, mortgage, etc. and the other regulating devolution of what may escape such sale, gift or transfer by them. The latter part is redundant by reason of the fact that the same was repugnant to the clear intention of the testatrix in making an absolute bequest in favour of her daughters. It could be redundant also because the legatees exercised their rights of absolute ownership and sale, thereby leaving nothing that could fall to the lot of the next generation females or otherwise. The stipulation made in the latter part did not in the least affect the legatees being the absolute owners of the property bequeathed to them. The corollary would be that upon their demise the estate owned by them would devolve by the ordinary law of succession on their heirs and not in terms of the Will executed by the testatrix. The appeal was allowed.

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Evidence – Admissibility of Document not duly stamped – Agreement to sell – Karnataka Stamp Act, 1957.

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[G. Raghavendra & Anr. v C. Harish & Etc. AIR 2011 Karnataka 1]

A suit was filed by one Sri Raghavendra against Sri C. Harish and three others for permanent injunction in respect of certain property.

The first respondent sought to produce as evidence an agreement to sell dated 26-5-95 and a general power of attorney dated 30-5-95. An objection was raised by the plaintiff against admitting these documents as evidence on the ground that they were not duly stamped. The trial court held that there was no possession of the immovable property delivered under the agreement to sell dated 26-5-1995 and as such it was admissible in evidence and it was also held stamp duty paid on agreement to sell was proper and sufficient. It further held that power of attorney dated 30-5-1995 is to be impounded with a direction to pay proper stamp duty and penalty as required under Article 41(ea) of the Karnataka Stamp Act, 1957.

The Hon’ble Court, while considering the admissibility of the documents as evidence, observed that difference between section 34 of the Karnataka Stamp Act and section 49 of the Registration Act would have to be borne in mind. Section 34 of the Karnataka Stamp Act mandates that no instrument chargeable with duty should be admitted in evidence for any purpose by any person having by law or by consent of parties authority to receive evidence if instrument is not duly stamped. In effect it would mean that a document which is not duly stamped cannot be admitted at all in evidence for any purpose if not duly stamped. Thus, under sec. 34 of the Stamp Act there is an absolute bar for the document being received in evidence itself.

Section 49 of the Registration Act deals with the effect of non-registration of a document and provides that if a document which requires to be registered under law is not registered, then such document shall not affect any immovable property comprised therein, nor can it confer any power to adopt or be received as evidence of any transaction affecting such property or conferring such power. However, proviso to Section 49 provides that an unregistered instrument may be received as evidence of a contract in a suit for specific performance or as evidence as part performance of a contract for the purpose of Section 53A of the Transfer of Property Act or as evidence of any collateral transaction not required to be effected by a registered instrument. The only area of controversy in regard to the use of such documents lies in determining whether the purpose for which it is sought to be used is really a collateral purpose.

Even when a document is inadmissible for want of registration, the same is admissible to show the character of the possession of the person in whose favour it is executed. There is therefore no gainsaid that the unregistered sale deed relied upon by the petitioner could for the limited purpose of proving the nature of his possession be let into evidence notwithstanding the fact that the deed was compulsorily registrable u/s. 17, but had not been so registered. So long as an instrument is chargeable with duty, the provisions of section 34 would render it inadmissible in evidence for any purpose unless the same is duly stamped. It can be seen that the under the agreement in question the vendor has agreed to handover vacant possession of the property agreed to be sold therein even before the execution of the sale deed in favour of the purchasers. Hence, the agreement to sell dated 26-5-1995 is admissible in evidence, only after payment of appropriate stamp duty as required under Article 15(e)(i) of the Karnataka Stamp Act 1957.

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Compensation — Gratuitous passenger — Liability of insurer — Motor Vehicles Act.

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[ National Insurance Co. Ltd. v. Smt. Bimala Dy & Ors., AIR 2011 (NOC) 2 (Gau.)]

The deceased was travelling in a goods carriage vehicle as a gratuitous passenger. The risk of such gratuitous passenger was not covered by policy. In such a case insurer cannot be made liable to pay compensation.

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Compensation — Bona fide passenger — Railway Act.

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[ Mummidi Durga & Ors. v. UOI, AIR 2011 (NOC) 1 (AP)]

The deceased while travelling in a passenger train fell from the train and died when the train was in motion. Evidence of witness and investigating officer clearly established that the deceased had boarded the train in question. The deceased was a bona fide passenger when he slipped from the train. It was quite natural that no part of his luggage would be with him when he slipped from the train. Factum of the deceased being a bona fide passenger cannot be doubted on the ground that no luggage was found on his dead body. The railway authority would be liable to pay compensation.

The claimants were held entitled to interest at 6% per annum on compensation awarded from the date of presentation of the claim petition till the date of award and thereafter at 9% per annum till the date of realisation.

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Y. H. Malegam Report on MFI Sector — A summary

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Microfinance has been always seen as an economic development tool for the downtrodden and poorest section of society. In its social objective, it is one of the most useful tools to battle poverty and give an equal chance to those who can contribute to the economy, but need help. In its simplest sense, it helps a financially backward person with no or little collateral to set up his own business by providing finance at convenient rates and repayment tenure. Over time it had moved on to many more services for financial inclusion and literacy.

For this reason, the Microfinance sector was in high regard. The Microfinance sector has seen an upheaval in recent times. However, since the advent of new Micro Finance Institutions (MFIs) with a more profit-linked and lesser social incentive, the sector has seen changes. The sector which was in limelight for its rapid growth and success in financial inclusion was suddenly seen in a bad light because of its alleged coercive practices. These practices got highlighted with suicides by certain borrowers in Andhra Pradesh, the state that has the largest chunk of MFIs. Andhra Pradesh passed an Ordinance bill and followed it up with a State Act to regulate the working of these MFIs. The Reserve Bank of India also set up a Committee under the chairmanship of Mr. Y. H. Malegam to study the issues and concerns in the Micro-finance sector. This Committee tabled its report on the 19th January 2011. This article summarises the main points coming out from this Report.

Introduction: The Committee has come out with a detailed report on the Microfinance sector — the reasons for the current crisis and possible redressal provisions. The Committee had the following objectives:

(i) To review the definition of ‘micro-finance’ and ‘MFIs’;
(ii) To examine the alleged malpractices conducted by these MFIs especially with respect to interest rates and means of recovery;
(iii) To specify the scope of regulation by RBI of these MFIs and suggest a proper regulatory framework;
(iv) To examine the prevalent money-lending legislation at the state level and other relevant laws;
(v) To analyse what role the associations and bodies of MFIs can play in enhancing transparency of MFIs;
(vi) To suggest a redressal machinery;
(vii) To examine the conditions for allowing priority- sector lending to MFIs.

The sub-Committee had confined itself to only the lending aspect of MFIs and not the other services like insurance, money transfers, etc. Further, the report commented on the unique characteristics of loans given by this sector, namely, that the borrowers are low-income groups, amounts are small, there is no collateral, the tenure is short and repayments are frequent.

The main players in the Microfinance sector are the Self-Help Groups (SHG) linked with the banks and Joint Liability Groups (JLG) linked with NBFCs. Both these types of groups are created by individuals who create savings, act as supporters as well as put peer pressure on each other in the group for effective utilisation of loans given by banks.

The need for regulation: Most of the NBFCs were non-profit organisations which had started the work with a purely social objective. However, over time some of these turned into for profit NBFCs. This attracted purely business-oriented entities to enter into the sector as they saw that there was a profit to be made from these activities. Such NBFCs also attracted a lot of private equity.

The Committee brings out the fact that though these NBFCs were handling a large amount of loan portfolio, no specific regulations were present. The Committee in its report has therefore stressed on the need for regulation of such NBFCs as a separate category of NBFCs operating in the MFI sector. The main reasons for this suggestion were that the borrowers were a particularly vulnerable section of society; the NBFCs compete against both the established SHG-Bank linkage programme and other NBFCs; credit to the MFI sector is important for financial inclusion; and banks have a significant exposure to loans given to such NBFCs.

For all the above reasons, the Committee has suggested a creation of a separate category for such NBFCs to be designated as ‘NBFC-MFI’ with a specific definition:

“A company (other than a company licensed u/s.25 of the Companies Act, 1956) which provides financial services predominantly to low-income borrowers with loans of small amounts, for short terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf.”

Conditions to be met: The Committee has also specified quite a few conditions which an NBFC has to meet for it to be classified as a ‘NBFC-MFI’. These conditions have been put in place after the Committee went through certain statistics and ground realities prevalent in this sector. The conditions are:

(i) 90% of the assets of an NBFC-MFI should be in the form of loans to the Microfinance sector.
(ii) These loans are to be given to a borrower whose annual household income does not exceed Rs.50,000.
(iii) The amount of loan and total outstanding of the borrower should not exceed Rs.25,000.
(iv) The tenure of the loan should be more than 12 months in case of loans lesser than Rs.15,000 and more than 24 months other cases.
(v) There should be no penalty on the borrower for pre-payment of these loans.
(vi) The loan is to be without collateral.
(vii) The total amount of loans given for non-income generating activities should not exceed 25%.
(viii) The repayment schedule would be at the choice of the borrower.
(ix) Other services provided by the MFIs should be regulated.
However, fulfilling all these conditions would mean a change in the existing business model of the MFIs. Therefore, these conditions are the main bone of contention for existing MFIs, who find them to be quite draconian.

Alleviation of other main concerns: The above conditions would essentially regulate the kind of loans given by such MFIs and the types of incomes earned by them. However, the main areas of concern with respect to MFIs are not yet addressed. Therefore the Committee has listed down each of these areas and suggested redressal provisions:

Pricing of interest: The very high rates of interest charged by certain MFIs were the main reason for the current upheaval. Therefore, the Committee has noted that interest rates should tread a fine balance between affordability of the clients and sustainability for the MFIs. Looking at the vulnerability of the borrowers, the Committee felt it necessary to put down a controlling rate of interest to be charged by such MFIs. However, instead of a fixed rate, the Committee has suggested for a margin cap which would regulate the difference in the cost of funds for the MFI and the rate of interest charged to the borrower. For deciding the cap, the Committee has gone into the financials of certain large and small MFIs and analysed several parameters and costs. It has suggested a margin cap of 10% for MFIs with a loan portfolio exceeding Rs.100 crores and 12% for those within. This cap would be applicable at an aggregate level and not for individual loans. The MFI would be free to decide the individual loan rate within an overall limit of 24%.

Transparency:


The Committee noticed that MFIs, apart from a base interest charge, also levy a variety of other charges in the form of an upfront registration or enrolment fee, loan protection fee, etc. The Committee has suggested that MFIs should only charge an insurance premium and an upfront fee not exceeding 1% of the gross loan amount apart from the base interest.
Further, it has suggested that for effective transparency, every borrower should be presented with a loan card which shows the effective rate of interest and other terms to the loan. The effective rate of interest should also be prominently displayed in all the offices, literature and website of the MFI. It has also denied charging of any upfront security deposit and standardised loan agreements.

Ghost borrowers:

Because of competition amongst MFIs, a deluge of loans are available to the borrower. This results in multiple lending and over-borrowing. This is exacerbated by the fact that loans disbursed have inadequate moratorium period before re-payment starts. Therefore, the repayment would start before the income is generated. This would prompt the borrower to either go in for additional borrowing, or repay from the loan amount itself. Further, MFIs use existing SHGs to reduce transaction costs. Thus the borrowers are tempted to take additional loans.

To alleviate these concerns the Committee has proposed that MFIs should only lend to group members; the borrower must not be a member of another group; not more than two MFIs should lend to the same borrower; and there must be a minimum period of moratorium. Where loans are borrowed in violation of these conditions, recovery of the loan should be deferred till all existing loans are repaid.

To reduce the problem of ghost borrowers, the Committee further recommends that all sanctioning and disbursement of loans should be done only at a central location under close supervision.

Another important tool necessary in the prevention of multiple lending is the availability of information of outstanding loans of an existing borrower. Therefore, a database to capture all outstanding loans as also the composition of existing SHGs and JLGs is recommended.

Coercive recovery practices:

The Committee has noticed the reports made of coercive methods exercised by the MFIs, their agents or employees for recovery of loans. It maintains that the main reasons for use of such coercive methods are linked with the issues of multiple lending, uncontrollable growth and employment of recovery agents.

The Committee has proposed several measures to resolve this issue:

   i.  Primary responsibility that coercive methods are not used should rest with the MFI. In case of default, the MFI should be charged with severe penalties.

    ii. The regulator must monitor whether the MFIs have a proper code of conduct and system for training of field staff. The MFI should have a proper Grievance Redressal Procedure.

   iii. Filed staff should be allowed to make recoveries only at a group level at a central place to be designated.

    iv. An appropriate mechanism to introduce independent Ombudsmen should be examined by RBI.

Apart from the above, the Committee has recommended that the regulator should publish a Client Protection Code for MFIs and mandate its acceptance and observance not only by the MFIs themselves, but also by the credit providing banks and financial institutions. This Code should incor-porate the relevant provisions of the Fair Practices Guidelines prescribed by the RBI for NBFCs.

Improving efficiency:

The Committee has gone beyond recommending measures to alleviate only the main concerns of the MFI sector. It has also suggested some steps for improving the overall efficiency of the MFIs.

The key areas highlighted to improvement in efficiency are operating systems, documentation and procedures, training and corporate governance.

To this end, it has called for increased investment by MFIs in information technology to achieve bet-ter control, simplify procedures and reduce costs. Further, it has suggested inculcation of profes-sional inputs in the formation of SHGs and JLGs, imparting of skill development and training, and in handholding of the group after it is formed.

To decrease transaction costs by achieving better economies of scale and to improve control it was felt by the Committee that MFIs should obtain optimal size of operation. For this if consolidation in the sector may be inevitable.

On the basis of a capital adequacy ratio of 15% on a basic investment portfolio of Rs. 100 crores, the Committee has suggested for a minimum net worth of Rs.15 crores.

The Committee has underscored the importance of alleviation of the poor along with reasonable profits to investors in the MFI sector. These twin objectives call for a fine balance and therefore all MFIs should have a good system of corporate governance.

The Committee has recommended inclusion of independent board members; monitoring by the board of organisational level policies; and relevant disclosures in the financial statements.

The Committee has also recognised the fact that MFIs have a very large exposure to the banking system. More than 75% of their funds are sourced from banks. Therefore, adequate safeguards must be in place to maintain solvency.

The Committee has recommended appropriate prudential norms which should be different from other NBFCs looking at the unique nature of loans disbursed by MFIs. The Committee has suggested specific rates for provisioning of outstanding loans. Further, it has recommended maintenance of a higher capital adequacy ratio of 15% as compared to the existing 12% considering the high-gearing and high rate of growth.

It has been appreciated that interest rates can be lowered only if greater competition both from within the MFIs and without from other agencies should be encouraged. To this end, the Committee has recommended that bank lending to this sector should be significantly increased.

Currently all loans to MFIs are considered as prior-ity sector lending. As there is no control on end use and there is significant diversion of funds, it had been suggested to the Committee that MFIs should not enjoy the priority sector status.

However, the Committee has pointed out in its report that removal of this status may not be required if other recommendations made by it are implemented. In fact, competition within banks for meeting targets for lending to priority sector could reduce interest rates. But, those MFIs which do not comply with the proposed regulations should be denied the priority sector lending status.

The Committee has noted that in addition to direct borrowing the MFIs had assigned or securitised sig-nificant portions of the loan portfolio with banks, mutual funds and others. It has asked for full disclosure of such assignments and securitisations to be made in the financial statements of MFIs. Further, for the calculation of capital adequacy, wherever the assignment or securitisation is with recourse, full value should be considered as risk-based assets; and where the same are without re-course, value of credit enhancement given should be deducted from the net-owned funds. Banks should also ensure, before acquiring assigned or securitised loans, that loans have been made by the MFIs in accordance with the regulations.

The Committee mentions that a widening of the funding base for MFIs is needed. This is because there is a huge demand for MFIs. However, non-profit entities could not meet this demand. When for profit entities emerged, venture capital funds were not allowed to invest in MFIs and private equity rushed in. This has resulted in demand for higher profits with consequent higher interest rates and other areas of concern.

Therefore, the Committee has recommended establishment of a ‘Domestic Social Capital Fund’ targeted towards social investors who are willing to earn lesser returns of around 10 to 12%. This fund would invest in MFIs satisfying the social performance norms laid down by the fund.

For all the above measures towards alleviation of the areas of concern and improving efficiency, the Committee has noted that success would depend on the extent of compliance. To this end, it has suggested monitoring of compliance with the regulations will have to be borne by four agencies.

The primary responsibility would rest with the MFI itself and the management should be penalised in the event of non-compliance. The next level of monitoring would be by the industry associations which would prescribe penalties for non-compliance with their Code of Conduct. Banks can also play part with surveillance through their branches. The Committee has called on the RBI for considerably enhancing its existing supervisory organisation dealing with such NBFCs. It should also have the power to remove from office the CEO and/or director in the event of persistent violation of the regulations.

The Committee has also provided for certain suggested reliefs for MFIs.

Several states have money-lending Acts which are several decades old. These Acts do not specifically exempt NBFCs unlike banks and cooperatives. These NBFCs are already regulated by the RBI. The Committee has therefore recommended for exemption of these MFIs from the provisions of the money-lending acts.

The Central Government has drafted a ‘Micro Finance (Development and Regulation) Bill, 2010’ which will apply to all microfinance organisations except for banks, co- operatives, etc. The Committee has suggested some changes in the bill for exemption of smaller entities, functioning of NABARD as a regulator and market player, and disallowance of business of providing thrift services by MFIs.

As mentioned in the beginning, the Andhra Pradesh Government has enacted a specific legislation to regulate the MFIs operating with the state. The Committee has expressed that as most of the conditions set by this Act are already recommended by the Committee, a separate Act may not be needed.

Finally, the Committee has recommended that 1st April 2011 should be kept as the cut-off date for implementation of their recommendations. They have insisted that the recommendation as to the rate of interest should in any case be made effective to all loans given by MFIs after 31st March 2011. Certain relaxation as to other arrangements can be given by RBI, especially where MFIs may have to form separate entities confined to only microfinance activities.

Conclusion:

As can be seen, the Committee has gone in-depth on the issues faced by the Microfinance sector and has called for far-reaching changes. These changes, if accepted by the RBI, would materially alter the operation of MFIs in India. As would be expected, MFIs have strongly criticised the provisions suggested by the Committee. The specification of maximum interest rates that can be charged has irked the MFIs in particular. Mr. Malegam has mentioned in interviews that a limit is necessary. What this limit should be, can be decided by the RBI. The decision on these recommendations now lies with the RBI. As per news reports, the RBI is expected to give its view on the report by end of April 2011.

Rajeev Sureshbhai Gajwani v. ACIT ITA No. 1807 & 1978/Ahd./2006 & 3111/Ahd./2007 (SB) (Unreported) Article 26 of India-US DTAA; Section 80HHE

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US resident carrying on business activity through PE in India is to be treated at par with resident Indian enterprises carrying on similar business activity for the purpose of taxation.

US resident can invoke PE non-discrimination clause of the treaty and is entitled to claim tax holiday u/s.80HHE for export of software outside India.

Facts:
The taxpayer was an individual tax resident of the USA and a non-resident (NR) in India. The taxpayer was engaged in the business of software export through its Permanent Establishment (PE) situated in India.

Relying on the PE non-discrimination clause under Article 26(2) of the DTAA, the taxpayer contended that PE of an American enterprise cannot be treated less favourably than Indian resident enterprise and thus, claimed deduction u/s.80HHE in respect of the profits earned by PE.

The Tax Department rejected the contention of the taxpayer and held:

Tax holiday u/s.80HHE specifically permitted deduction only to residents or Indian companies. As the taxpayer was a NR, such deduction was not permissible.

In the case of Automated Security Clearance Inc4 (Automated), Pune ITAT has held that NR taxpayers were not entitled to tax holiday provisions as they were restricted to resident Indian enterprises. Such differentiation was reasonable as section 80HHE deduction was granted to augment foreign exchange reserves and while residents will receive and retain export proceeds in India, a non-resident will be able to remit funds outside India.

The OECD Model Convention Commentary too supports that NRs are not entitled to tax advantages attached to activities which are reserved on account of national interest, defense, protection of the national economy to resident Indian enterprises and that there can be a reasonable discrimination.

The taxpayer contended that: (a) If a US tax resident carried on business in India in the same line in which a resident Indian enterprise carried on business and if tax holiday was available to the Indian enterprise, then the US tax resident too should be permitted to claim the tax holiday.

(b) Once US enterprise is permitted to carry on business through PE, US enterprise cannot be denied the deduction on any count. In fact, sections 10A/10B benefits are extended to all assessees including non-residents. Also, OECD model commentary relied on by tax authority supports that non-discrimination is restricted only to critical activities of national importance where NR cannot even carry on the business.

Considering divergent views taken by Mumbai5 and Pune ITAT6 on PE non-discrimination, ITAT constituted a Special Bench to examine whether taxpayer was entitled to invoke the PE non-discrimination clause under Article 26(2) of the DTAA.

Held:
The Tribunal held as follows:

Article 26(2) of the DTAA provides that taxation of PE of an American enterprise shall not be less favourable than the taxation of resident Indian enterprise carrying on the same activities. It follows automatically that exemptions and deductions available to Indian enterprises would also be granted to the US enterprises if they are carrying on the same activities.

The fact that the taxpayer has been allowed to export software shows that the business does not fall in the prohibited category. Accordingly, the taxpayer’s case has to be compared with the case of an Indian enterprise engaged in the business of exporting software. If this is done, the taxpayer would be entitled to deduction/ tax holiday under the Act on the same footing and in the same manner as the deduction is admissible to a resident taxpayer.

The decision of the Pune ITAT in the case of Automated is not in conformity with the provisions contained in Article 26(2) as more importance was placed on the Commentary of the OECD MC and the Technical Explanation. The plain meaning of the provisions was not considered.

The decision of the Mumbai ITAT in Metchem, though rendered in the context of HO expenses, harmonised the provisions of the Act and the relevant DTAA. Similar exercise is involved in the current case as the provisions of the Act and the DTAA are required to be interpreted in a harmonious manner. Therefore the ratio of the decision is applicable to the facts of the present case.

As a result, taxpayer is entitled to deduction/ tax holiday u/s.80HHE of Act on the same footing as it is available to a person resident in India.

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Toshiba Plant Systems and Services Corporation v. DIT (2011) TII 1 ARA-Intl. Section 44BBB Dated: 22-21-2011

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Consideration received by holding and subsidiary companies for independent contracts in respect of power projects, respectively, for offshore supply of equipments and for erection of equipments, cannot be clubbed for the purpose of section 44BBB of the Act.

Consideration received for offshore supply of machinery is not taxable in India.

Facts:
The applicant was a Japanese company. It was a subsidiary of TC, another Japanese company. An Indian company setting up a power project, which was approved by the Government, had invited bids in respect of two projects in connection with the power project. Pursuant to the bid contract, the applicant and its holding company were awarded two different projects. The parent company was to undertake offshore supply of plant and machineries and the applicant (subsidiary company) was to undertake installation and erection of the plant, depute personnel for execution of project and for turnkey completion and commencement of the power project. The respective roles and responsibilities were as per the following diagram:

The applicant raised the following issues before AAR:

Whether consideration received by the applicant is eligible for presumptive rate of taxation in terms of section 44BBB, and accordingly whether 10% of the contract amount would be deemed to be profits chargeable under the head Profits and Gains from Business or Profession.

If the applicant engages services of a related party or third party for supply of labour for executing the work under the contract with the condition that overall responsibility would remain with the applicant, would the applicant be eligible for presumptive taxation u/s.44BBB of the Act.

The Tax Authority contended that though the two contracts were separately awarded to the holding company and the applicant, they represented a composite contract and hence its taxability should be determined by clubbing transactions of supply and erection of machines.

As regards the second question, the applicant contended that, in essence, the applicability of section 44BBB would be conditional upon verification of master documents along with the facts as to whose employees would render services to the applicant. The applicability of section 44BBB would also depend on whether skilled labour or employees would work under the control and supervision of the applicant.

The applicant contended that:

(a) Both contracts represented two distinct and independent contracts for which separate considerations were fixed.

(b) Applicant was engaged in the business of erection of plant in connection with turnkey power projects. Income of the applicant was taxable u/s.44BBB of the Act.

(c) Parent company merely supplied the equipments which were installed as per required specifications. Consideration for offshore supply was not taxable in view of the Supreme Court’s decision in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT3.

Held:
The AAR held as follows:

The Indian company had executed two contracts, one with the parent company (for supply of plant) and the other with the applicant (for erection of plant and machinery) for the turnkey power project in India.

Consideration received by parent company is not taxable in India as it pertains to offshore supply and reliance on the Supreme Court’s decision by the applicant to that extent is valid.

Section 44BBB was applicable as the applicant was in the business of erection of plant and machinery in approved turnkey power project.

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Income: Salary: Accrual: A.Y. 2005-06: Salary earned by non-resident for services performed on board a ship: Does not accrue in India: Not taxable in India.

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[DIT v. Prahlad Vijendra Rao, 239 CTR 107 (Kar.)]

The assessee is a non-resident individual. For the A.Y. 2005-06, the Assessing Officer added an amount of Rs.10,00,131, treating the same as income deemed to have been received in India as per section 5(2) (b) of the Income-tax Act, 1961. The said amount is the salary earned by the assessee for services performed on board a ship outside the shores of India. The Commissioner (Appeals) and the Tribunal deleted the addition.

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

“(i) The Revenue does not dispute that the assessee had worked on board a ship and during the relevant period the assessee had stayed outside India for a period of 225 days and the salary that was earned by him was on account of the work discharged by him on board during the said period which is outside the shores of India.

(ii) The criteria of applying the definition of section 5(2)(b) would be such income which is earned in India for the services rendered in India and not otherwise. U/s. 15 even on accrual basis salary income is taxable i.e., it becomes taxable by implication. However, if services are rendered outside India such income would not be taxable in India.

(iii) The number of days worked by the assessee outside India as extracted in the assessment order when taken into consideration it would emerge that assessee was working outside India for a period of 225 days and the income in question earned by assessee has not accrued in India and is not deemed to have accrued in India.”

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Export profits: Deduction u/s.80HHC of Incometax Act: A.Y. 1992-93: Interest income assessed as business income: Such income could not be excluded from business profit while calculating deduction u/s.80HHC.

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[Sociedade de Fomento Industrial Ltd., 9 Taxman.com 113 (Bom.)]

For the A.Y. 1992-93, the assessee-company had declared the interest income as business income. The Assessing Officer assessed the interest income as income from other sources. Accordingly, he excluded the interest income from the business profit while calculating deduction u/s.80HHC of the Income-tax Act, 1961. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

(i) The Commissioner (Appeals) had held that though the main object of the assesseecompany was to extract iron ore and export the same, yet it was not barred from carrying on activity like the instant one, i.e., business of placing various deposits and earning interest from the same. The activity carried on could be definitely held as business activity and, hence, any income earned therefrom was to be taxed as business income only.

(ii) That showed that the authorities below, on the basis of the evidence on record, had held that the activity carried out by the assessee was a part of its business activity. That conclusion of the fact could not be interfered with by the Court in an appeal u/s.260A.

(iii) In any event, the Revenue had failed to advance any submission to the effect that the said findings of the fact were contrary to the evidence on record or that the same were in any way perverse.

(iv) In the instant case, the authorities below had held that the income from the interest received by the assessee was a part of the business profit and, as such, in view of the judgment in the case of Alfa Laval India Ltd. v. Dy. CIT, (2003) 133 Taxman 740 (Bom.) the same could not be excluded from the business profit while calculating the deduction u/s.80HHC.

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Transworld Garnet Company Ltd. v. DIT (2011) TII 02 ARA-Intl. Article 24 of India-Canada DTAA; Sections 48, 90(2), 197 of Income-tax Act Dated: 22-2-2011

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Residence-based discrimination is not prohibited under Article 24 of India-Canada DTAA.

Facts:
Taxpayer, a Canadian company (CanCo) held 74% shares in TGI, an Indian company. Shares of TGI were acquired by CanCo in various lots and at different points in time by remitting foreign currency. CanCo transferred shares of TGI to VV Minerals (VV) a partnership firm registered in India and made significant profits. There was no dispute that:

(a) Shares were long-term capital asset in the hands of CanCo.
(b) Income arising on transfer of shares was income chargeable to tax in India.

CanCo computed capital gain by applying both the provisos to section 48. Capital gain in terms of the first proviso to section 48 (i.e., neutralising exchange fluctuation gain), worked out to Rs.14 crore and in terms of the second proviso it worked out to Rs.7 crore (i.e., considering indexation benefit). Since indexation benefit was more beneficial, CanCo claimed that:

(a) Resident taxpayers under comparable circumstances are provided benefit of indexation for the cost of acquisition, whereas non-residents are denied such benefit;

(b) Such treatment results in discrimination of a Canadian National vis-à-vis Indian National, which is violative of provisions of Article 24(1). The Tax Department contended that: (a) The second proviso to section 48 of the Act provides that benefit of indexation is not available to ‘non-resident’ covered by the first proviso. (b) The non-residents stand protected from the vagaries of exchange fluctuation under the first proviso to section 48 of the Act. (c) Hence, in terms of clear language of the sections, no benefit of indexation can be granted.

Held:
The AAR held as follows: Discrimination is understood to be unequal treatment in identical situations. Different treatment does not constitute discrimination unless it is arbitrary. Article 24(1) of DTAA seeks to prevent differentiation solely on the ground of nationality and against nationals as such. Discrimination on account of nationality alone may be prohibited but a discrimination based on residence is permitted.

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Export profit: Deduction u/s.80HHC of Income-tax Act: A.Ys. 1995-96, 1997-98, 1998-99 and 2000-01: Exclusion of mineral oil: Calcined petroleum coke derived from crude petroleum is not mineral oil: Assessee is entitled to deduction.

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[Goa Carbon Ltd. v. CIT, 332 ITR 209 (Bom.); 239 CTR 354 (Bom.)

The assessee was engaged in manufacture and export of calcined petroleum coke. For the relevant years the assessee’s claim for deduction u/s.80HHC of the Income-tax Act was allowed by the Assessing Officer. However, the Commissioner withdrew the allowance by exercising the powers u/s.263 of the Act. The Tribunal upheld the decision of the Commissioner holding that the calcined petroleum coke was a form of mineral oil and in view of Ss.2(b) of section 80HHC, the provision for deduction u/s.80HHC(1) was not applicable to the calcined petroleum coke manufactured by the assessee.

On appeal filed by the assessee, the Bombay High Court reversed the decision of the Tribunal and held as under:

“(i) The expression ‘mineral oil’ is not defined in the Act. The expression ‘minerals’ is used primarily for substances found on the earth or below the land and does not denote a product manufactured from the minerals found on the land or below the land. The word ‘oil’ ordinarily means a substance which is in liquid form and does not include a rock or solid substance or crystallised substance. For a substance to be regarded as mineral oil, it must ordinarily be a substance in liquid form and derived or extracted from the earth or land, from the surface of the earth or from below the earth.

(ii) Although calcined petroleum coke is a product which is derived from crude oil, no trader in the market would call the calcined petroleum coke a crude oil or a mineral oil. In common parlance, nobody would mistake calcined petroleum coke for a crude oil. Though the initial raw material used for manufacture of the calcined petroleum coke is petroleum crude oil extracted from the earth, the product which is manufactured is an entirely different product commercially known and regarded as different from petroleum crude and which is different from that derived by mere distillation of the petroleum crude which is a mineral oil. Calcined petroleum coke cannot be regarded as a mineral only because the original raw material is mineral oil.

(iii) The calcined petroleum coke was not a mineral oil within the meaning of section 80HHC.”

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Export profit: Company: MAT: Section 80HHC and section 115JB of Income-tax Act: When income of company is assessed u/s.115JB, assessee is entitled to deduction u/s.80HHC computed in accordance with Ss.(3) and (3A) of section 80HHC: Restriction contained in section 80AB or section 80B(5) cannot be applied and carried forward business loss or depreciation cannot be first set off leaving gross total income nil.

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[CIT v. Kerala Chemicals & Proteins Ltd., 239 CTR 24 (Ker.) (FB)]

Dealing with the scope of computation of amount deductible u/s.80HHC of the Income-tax Act, 1961, while assessing the income of a company u/s.115JB, the Full Bench of the Kerala High Court has held as under:

“(i) The short question arising for consideration is whether the assessees, whose gross total income after setting of business and depreciation carried forward from previous years is nil, are entitled to deduction u/s.80HHC in the computation of book profits u/s.115JB(2) (iv) of the Act?

(ii) After hearing both the sides and after going through the decisions, particularly that of the Supreme Court [Ajanta Pharma v. CIT; 327 ITR 305 (SC)], we feel that the assessees are entitled to deduction u/s.80HHC computed in accordance with Ss.(3) and (3A) of section 80HHC of the Act because it is expressly so provided under clause (iv) of section 115JB(2) of the Act.

(iii) All what the Supreme Court has held is that the ceiling contained in section 80HHC(1B) is not applicable for the purposes of granting deduction under clause (iv) above in the computation of book profits. However, there is nothing to indicate in the Supreme Court decision that eligible deduction of export profit under clause (iv) above in the computation of book profit can be computed in any other manner other than what is provided in Ss.(3) and (3A) of section 80HHC of the Act. What is clearly stated in clause (iv) is that deduction of export profit in the computation of book profit is the same ‘amount of profit eligible for deduction u/s.80HHC’ computed under clause (a) or clause (b) or clause (c) of Ss.(3) or Ss.(3A) of the said section.

(iv) So much so, computation of export profits has to be done only in accordance with the method provided u/s.80HHC, which is in fact done in the computation of the business profit if the assessment was on the total income computed under the other provisions of the Act. MAT assessment is only an alternative scheme of assessment and what is clear from clause (iv) above is that even in the alternative scheme of assessment u/s.115JB, the assessee is entitled to deduction of export profit u/s.80HHC. In other words, export profits eligible for deduction u/s.80HHC is allowable under both the schemes of assessment. So much so, the assessees are certainly entitled to deduction u/s.80HHC, but it is only by following the method provided under Ss.(3) and (3A) of section 80HHC.

(v) However, by virtue of the above-referred decision of the Supreme Court, we feel the restriction contained in section 80AB or section 80B(5) could not be applied inasmuch as carry forward of business loss or depreciation should not be first set off leaving gross total income nil, which disentitles the assessees for deduction under other provisions of Chapter VIA-C which includes section 80HHC also.

(vi) But the assessees’ contention that export profit has to be computed with reference to the P&L a/c prepared under the Companies Act is equally unacceptable, because there is no such provision in section 80HHC to determine export profit with reference to P&L a/c maintained under the Companies Act.”

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Income from generation of power: Deduction u/s.80-IA of Income-tax Act, 1961: Assessee in the business of generation of electricity: Assessee is entitled to deduction u/s.80-IA in respect of notional income from generation of electricity which was captively consumed by itself.

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[Tamilnadu Petroproducts Ltd. v. ACIT, 328 CTR 454 (Mad.)]

Dealing with the scope of section 80-IA(4)(iv) of the Income-tax Act, 1961, the Madras High Court held that the assessee, which is in the business of generation of electricity is entitled to deduction u/s.80-IA in respect of notional income from generation of electricity which was captively consumed by itself.

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Income: Deemed to accrue or arise in India: Section 9(1)(i) and (vi) of Income-tax Act, 1961: A.Y. 1997-98: Assessee, a non-resident company leased out transponder capacity on its satellite to foreign TV channels to relay their signals for Indian viewers: Provisions of section 9(1)(i) and 9(1)(vi) not applicable: No income accrues or arises in India.

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[Asia Satellite Telecommunications Co. Ltd. v. DI, 238 CTR 233 (Del); 197 Taxman 263 (Del.)] The assessee, a non-resident company was carrying on the business of private satellite communications and broadcasting facilities. The assessee was the lessee of a satellite called AsiaSat 1 and was the owner of a satellite called AsiaSat 2. These satellites neither use Indian orbital slots, nor are they positioned over Indian airspace. The foot prints of AsiaSat 1 and AsiaSat 2 extend over four continents, viz., Asia, Australia, Eastern Europe and Northern Africa. AsiaSat 1 comprises of a South Beam and a North Beam and AsiaSat 2 comprises of the C Band and Ku Band. The territory of India falls within the footprint of the South Beam of AsiaSat 1 and the C Band of AsiaSat 2. The assessee enters into agreements with TV Channels, communication companies or other companies who desire to utilise the transponder capacity available on the assessee’s satellite to relay their signals. The customers have their own relaying facility, which are not situated in India. The assessee has no role to play either in the uplinking activity or in the receiving activity. The assessee’s role is confined in space where the transponder which it makes available to customers performs a function which it is designed to perform. The only activity that is performed by the assessee on earth is the telemetry, tracking and control of the satellite. This is carried out from a control centre at Hong Kong. In the relevant year the assessee had no customers who were residents of India. In response to a notice u/s.142(1) of the Income-tax Act, 1961 issued by the Assessing Officer, the assessee filed the return of income claiming that no part of income of the assessee is taxable in India. The Assessing Officer held that the assessee had a business connection in India and, therefore, was chargeable to tax in India. He held that the revenues would have to be apportioned on the basis of countries targeted by the TV channels who were the assessee’s customers. On this basis, he estimated that 90% of the assessee’s revenue was attributable to India. After arriving at the income of the assessee, he held that 80% thereof was apportioned to India as most of the channels were India-specific and their advertisement revenue was from India. The Tribunal held that the provisions of section 9(1)(i) are not attracted, but the provisions of section 9(1)(vi) are attracted and accordingly a portion of the income of the assessee is taxable in India.

On appeal, the Delhi High Court held that neither the provisions of section 9(1)(i), nor the provisions of section 9(1)(vi) are attracted and accordingly, no portion of the assessee’s income is taxable in India.

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Income: Deemed to accrue or arise in India: Section 9 of Income-tax Act, 1961: A.Y. 2002-03: Assessee, a Korean company, was awarded two contracts by Indian company ‘PGCIL’; first involving onshore services including erections/installations, testing and commissioning, etc., of fibre cable system; and second for offshore supply of equipment and offshore services: Income from second contract accrued outside India and, hence, no portion of such income was taxable in India.

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[DI v. L. G. Cable Ltd., 197 Taxman 100 (Del.)] The assessee was a Korean company. It was awarded two contracts by Indian company PGCIL; the first for onshore execution of the fibre optic cabling system package project under the system coordination and control project involving onshore services, including erection/installation, testing and communicating, etc., of the fibre of the cabling system; and the second for offshore supply of equipment and offshore services. As regards offshore supply contract, the assessee claimed that the income was not liable to tax in India as the entire contract was carried out in Korea and was subject to income-tax in Korea. The Assessing Officer did not accept the claim of the assessee and held the income accruing to the assessee from the offshore supply contract was taxable in India. The Tribunal accepted the assessee’s claim and held that the income from the offshore contract was not taxable in the hands of the assessee.

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

“(i) The offshore supply of equipment related to the supply of specified goods discharged from Korea for which the PGCIL had opened an irrevocable letter of credit in the name of the assessee with a bank in South Korea. The consignor of the equipment who supplied the same from Korea to Indian Port was the assessee while the importer was the PGCIL. The equipment was delivered to the shipping company named in the Bill of Lading and the Bill of Lading and other documents were handed over to the nominated bank. Accordingly, with the delivery of the Bill of Lading to the bank, the property in the goods stood transferred to PGCIL. The cargo insurance policy was obtained by the assessee and it named the PGCIL as co-insurer. The contract unequivocally clarified that the assessee and PGCIL intended to transfer the title/property in the goods as soon as the goods were loaded on the ship at the port of shipment and the shipping documents were handed over to the nominated bank where the letter of credit was opened. The sale was complete and unequivocal. There was no condition in the contract which empowered the assessee to keep control of the goods and/or to repossess the same. With the completion of the sale, the income accrued outside India. There was neither any material to show that accrual of such income was attributable to any operations carried out in India, nor any material to show that the permanent establishment of the assessee had any role to play in the offshore supply of the equipments.

(ii) Furthermore, the scope of work under the onshore contract was under a separate agreement and for a separate consideration. There was, therefore, no justification to mix the consideration for the offshore and onshore contracts. None of the stipulations of the onshore contract could conceivably postpone the transfer of property of the equipments supplied under the offshore contract, which, in accordance with the agreement, had been unconditionally appropriated at the time of delivery, at the port of shipment. When the equipment was transferred outside India, necessarily the taxable income also accrued outside India and, hence, no portion of such income was taxable in India.

(iii) The contention of the Revenue that offshore supplies were not taxable only in the case of sale of goods simpliciter, and that the contract was a turnkey contract split/divided into offshore and onshore supplies at the instance of the assessee, was not sustainable in view of the authoritative pronouncement of the Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd. v. DIT, (2007) 288 ITR 408/158 Taxman 259, wherein it has been held that offshore supplies are not taxable even in the case of a turnkey contract as long as the title passes outside the country and payments are made in foreign exchange.

(iv) Applying the law enunciated by the Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd., (supra), there could be no manner of doubt that the offshore supplies in the instant case were not chargeable to tax in India. The instant case, in fact, was on a better footing as two separate contracts had been entered into between the parties, albeit on the same day, one for the offshore supply and the other for the onshore services, but even assuming that both the contracts needed to be read together as a composite contract, the issue in controversy was nevertheless squarely covered by the decision of the Supreme Court in Ishikawajma Harima Heavy Industries Co. Ltd.’s case (supra).

(v) Then again, undue importance could not be attached to the fact that the agreement imposed on the assessee the obligation to handover the equipment functionally completed. That obligation had been rightly construed by the Tribunal to be in the nature of a trade warranty.

(vi) Viewed from any angle, the fact situation in the instant case was almost identical to that in the case of Ishikawajma (supra) and the law as enunciated by the Supreme Court in the said case would squarely apply to the facts of the instant case.

(vii) In view of aforesaid, the Tribunal was justified in holding that the contract in question was not a composite one and, therefore, the assessee was not liable to pay tax in India in respect of offshore services.”

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Depreciation: Section 32 of Income-tax Act, 1961: A.Y. 1998-99: Block of assets would include assets of closed unit: Assets of closed unit could not be segregated for purpose of allowing depreciation and depreciation had to be allowed on entire block of assets.

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[CIT v. Oswal Agro Mills Ltd., 197 Taxman 25 (Del.); 238 CTR 113 (Del.)]

For the A.Y. 1998-99, the assessee claimed depreciation on its various assets which included the claim of depreciation in respect of a closed unit at Bhopal. The assessee claimed that the depreciation was to be allowed on the assets of the closed units also as the assets of that unit remained part of the block of assets and were ready for passive use, which was as good as real use. The Assessing Officer, however, disallowed the claim for depreciation on the assets of the closed unit. The Tribunal allowed the assessee’s claim on two grounds, viz., (1) there was a passive user of the assets at Bhopal unit, which would be treated as ‘used for the purpose of business’, and (2) as it was a case of depreciation on block of assets, the assets of Bhopal unit could not be segregated for the purpose of allowing depreciation and depreciation had to be allowed on entire block of assets.

On appeal by the Revenue, the Delhi High Court held as under:

Whether the assets of the closed unit can be treated as ‘used’

(i) By catena of judgments, it stands settled that the assessee should have used the asset for the whole of assessment year in question to claim full depreciation. Passive user of the asset is also recognised as ‘user for purpose of business’. This passive user is interpreted to mean that the asset is kept ready for use. If this condition is satisfied, even when it is not used for certain reason in the concerned assessment year, the assessee would not be denied the depreciation.

(ii) In the instant case, the entire Bhopal unit came to a standstill and there was a complete halt in its functioning from the A.Y. 1997-98. In that year, the Assessing Officer still allowed the depreciation treating it to be a ‘passive user’. However, when it was found that even in subsequent year, the Bhopal unit remained non-functional, the Assessing Officer(s) disallowed the depreciation. Instant appeals related to the A.Y. 1998-99. In the process six years passed, but there was no sign of that unit becoming functional. The ‘passive user’, in those circumstances, could not be extended to absurd limits. Otherwise, the words ‘used for the purpose of business’ will lose their total sanctity. It cannot be the intention of the Legislature that the word ‘used’ when it is to be interpreted in a wider sense to mean ‘ready to use’, the same is stretched to the limits of non-user for number of year.

(iii) Thus, one should proceed on the basis that particular assets, viz., assets of Bhopal unit were not ‘used for the purpose of business’ in the concerned assessment year.

Depreciation on block of assets

(iv) The position concerning the manner in which the depreciation is to be allowed, has gone a sea change after the amendment of section 32 by the Taxation Laws (Amendment) Act, 1986. As per amended section 32, deduction is to be allowed — ‘In the case of any block of assets at such percentage on the writtendown value thereof as may be prescribed’. Thus, the depreciation is allowed on block of assets, and the Revenue cannot segregate a particular asset therefrom on the ground that it was not put to use.

(v) With the aforesaid amendment, the depreciation is now to be allowed on the written-down value of the ‘block of assets’ at such percentage as may be prescribed. With this amendment, individual assets have lost their identity and concept of ‘block of assets’ has been introduced, which is relevant for calculating the depreciation. It would be of benefit to take note of the Circular issued by the Revenue itself explaining the purpose behind the amended provision. The same is contained in the CBDT Circular No. 469, dated 23-9-1986, wherein the rationale behind the aforesaid amendment is described.

(vi) It becomes manifest from the reading of the aforesaid Circular that the Legislature felt that keeping the details with regard to each and every depreciable asset was time-consuming for both the assessee and the Assessing Officer. Therefore, it amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual asset. The block of assets has also been defined to include the group of assets falling within the same class of assets.

(vii) Another significant and contemporaneous development, which needs to be noticed, is that the Legislature has also deleted the provision for allowing terminal depreciation in respect of each asset, which was previously allowable u/s.32(1)(iii) and also taxing of balancing charge u/s.41(2) in the year of sale. Instead of these two provisions, now whatever is the sale proceed of sale of any depreciable asset, it has to be reduced from the block of assets. This amendment was made because now the assessees are not required to maintain particulars of each asset separately and in the absence of such particulars, it cannot be ascertained whether on sale of any asset, there is any profit liable to be taxed u/s.41(2) or terminal loss allowable u/s.32(1)(iii). This amendment also strengthens the claim that now only detail for ‘block of assets’ has to be maintained and not separately for each asset.

(viii) Having regard to this legislative intent contained in the aforesaid amendment, it was difficult to accept the submission of the Revenue that for allowing the depreciation, user of each and every asset was essential even when a particular asset formed part of ‘Block of assets’. Acceptance of this contention would mean that the assessee was to be directed to maintain the details of each asset separately and that would frustrate the very purpose for which the amendment was brought about. The Revenue is not put to any loss by adopting such method and allowing depreciation on a particular asset, forming part of the ‘block of assets’ even when that particular asset is not used in the relevant assessment year. Whenever such an asset is sold, it would result in short-term capital gain, which would be exigible to tax and for that reason, there is no loss to Revenue either.

(ix) Thus, though the reasoning of the Tribunal contained in the impugned judgment could not be agreed with, the conclusion of the Tribunal based on the ‘block of assets’ was to be upheld.”

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Charitable trust: Exemption u/s.11 of Incometax Act, 1961: Trust can be allowed to carry forward deficit of current year and to set off against income of subsequent years: Adjustment of deficit of current year against income of subsequent year would amount to application of income of trust for charitable purposes in subsequent year within meaning of section 11(1)(a).

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[DI v. Raghuvanshi Charitable Trust, 197 Taxman 170 (Del.)] In this case, the following question was for consideration before the Delhi High Court:

“Whether adjustment of deficit (excess of expenditure over income) of current year against the income of subsequent year would amount to application of income of the trust for charitable purposes in the subsequent year within the meaning of section 11(1)(a) of the Act?

The Delhi High Court referred to the following observations of the Bombay High Court in the case of CIT v. Institute of Banking Personnel Selection (IBPS); 264 ITR 110 (Bom.):

“Now coming to question No. 3, the point which arises for consideration is: whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in the subsequent year for charitable purposes? It was argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilisation of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes. In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground that in the case of a charitable trust, their income was assessable under selfcontained code mentioned in section 11 to section 13 of the Income-tax Act and that the income of the charitable trust was not assessable under the head ‘Profits and gains of business’ u/s.28 in which the provision for carry forward of losses was relevant. That, in the case of a charitable trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of the subsequent years. We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in the section 11 of the Act and that such adjustment will have to be excluded from the income of the trust u/s.11(1)(a) of the Act. Our view is also supported by the judgment of the Gujarat High Court in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal, (1995) 211 ITR 293. Accordingly, we answer question No. 3 in the affirmative, i.e., in favour of the assessee and against the Department.”

The Delhi High Court held as under:

“It is clear from the above that as many as five High Courts have interpreted the provision in an identical and similar manner. Learned counsel for the Revenue could not show any judgment where any other High Court has taken contrary view. Since we are in agreement with the view taken by the aforesaid High Courts, we answer these questions in favour of the assessee and against the Revenue.”

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Business expenditure: Interest on borrowed capital: Section 36(1)(iii) and section 57(iii) of Income-tax Act, 1961: A.Y. 1986-87: Assessee borrowed money from sister concern for interest at the rate of 18% and purchased preferential shares from sister concern which carried dividend at 4%: Legal effect of the transaction cannot be displaced by probing into the substance of the transaction.

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[CIT v. Rockman Cycle Industries (P) Ltd., 331 ITR 401 (P&H) (FB); 238 CTR 363 (P&H) (FB)]

The assessee borrowed money from sister concern for interest at the rate of 18% per annum and purchased shares from sister concern, which carried dividend at the rate of 4%. The Assessing Officer held that there was no justification to borrow funds at 18% interest for making investment in shares, which would give a dividend of 4% only. Having regard to the fact that the borrowing was made from sister concern and investment was also in another sister concern, the claim for interest was disallowed. It was held that investment of shares was not for business purposes or business consideration. The Tribunal allowed the assessee’s claim and held that the assessee could not be prevented from making investment only because the returns from shares was low. The investment was incidental activity of the business and there was no effect on the Revenue as the assessee and the sister concerns belonged to the same group. The transaction was bona fide and not sham.

In the appeal filed by the Revenue, the following question was raised:

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in allowing interest claimed by the assessee at a higher rate on the borrowings though the investment had been made by the assessee in the shares of a sister concern which gave a fixed return of income?”

The Division Bench of the Punjab and Haryana High Court referred the matter to the Full Bench which considered the following question of law:

“Whether having regard to relationship between different concerns, where a transaction which is patently imprudent, takes place, the taxing authority should examine the question of business expediency and not go merely by the fact that the assessee had taken a decision in its wisdom which may be wrong or right?”

The Full Bench of the Punjab and Haryana High court held as under:

“(i) The Assessing Officer or the Appellate Authorities and even the Courts can determine the true legal relation resulting from a transaction. If some device has been used by the assessee to conceal the true nature of the transaction, it is the duty of the taxing authority to unravel the device and determine its true character.

(ii) However, the legal effect of the transaction cannot be displaced by probing into the ‘substance of the transaction’. The taxing authority must not look at the matter from their own viewpoint, but that of a prudent businessman.

(iii) Each case will depend on its own facts. The exercise of jurisdiction cannot be stretched to hold a roving enquiry or deep probe.”

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Frontier Offshore Exploration (India) Ltd. v. DCIT ITA No. 200/Mds./2009 (Unreported) Sections 40(a)(i), 44BB, 195 of Income-tax Act (Act) A.Y.: 2004-05. Dated: 4-2-2011

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Since payment to non-resident is covered under the special regime of section 44BB, withholding of appropriate tax by payer without approaching the AO does not lead to any violation of withholding tax provisions, expenses cannot be disallowed u/s.40(a) (i) on the ground of short deduction of tax.

Facts:
ICO (ICO), an oil field services provider, took drilling units on bareboat hire from two Norwegian companies. ICO was advised that bareboat charges were covered under special regime of presumptive taxation of section 44BB of the Act. Accordingly, ICO deemed income at the rate of 10% of gross bareboat charges and withheld tax @ 4.1% on the same.

The AO held that there was short deduction of tax at source and hence payment was disallowable u/s.40(a)(i) by observing that:

(a) Once amount is chargeable to tax, the payer is obligated to make an application to the Tax Department for determination of appropriate proportion of income chargeable to tax.

(b) The payer cannot on its own decide the proportion of income chargeable to tax either by applying any special or general provisions stipulated under the Income-tax Act.

(c) In ICO’s own case1 for an earlier year, ITAT had held that the determination of the applicability of special provisions of section 44BB to a payee cannot be made by ICO itself while discharging its withholding obligation and that TDS w.r.t. 10% presumed income resulted in disallowance u/s.40(a)(i).

ICO contended that:

Section 40(a)(i) applied only to the cases of absolute failure and not to short deduction.

The obligation to deduct tax is to be limited to appropriate portion of income chargeable under the Act forming part of the gross amount payable to the non-resident.

In terms of non obstante provision in section 44BB, the maximum appropriated portion of income chargeable under the Act in the hands of recipient Norwegian company was 10%.

ICO had rightly deducted tax at source on such statutorily presumed income of 10%.

Held:
The Tribunal held as follows:

In terms of SC decision in case of Transmission Corporation2, if payment represents sum chargeable to tax, ordinarily, ICO is required to withhold tax on gross basis unless there is appropriate quantification of income by the AO.

Although normally the payer cannot quantify the income of a non-resident which is subjected to withholding, section 44BB being a presumptive taxation provision stands on a different footing as it overrides the provisions of sections 28 to 41 and 43.

The recipient need not file the return of income if he is not desirous of assessment lower than what is contemplated by presumptive rate of section 44BB.

Where the statute has provided a special provision for dealing with a particular income, such a provision would exclude general provisions for dealing with incomes accruing or arising out of any business connection.

ICO’s own case for the earlier year is no longer a valid precedent in view of SC decision in case GE India Technology, which held that TDS obligation is limited to appropriate portion of income chargeable under the Act.

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Depreciation: Intangible asset: Goodwill: Section 32(1)(ii) of Income-tax Act: A.Y. 2004-05: Purchase of hospital as going concern along with goodwill: Assessee entitled to depreciation on value of goodwill.

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[B. Ravindran Pillai v. CIT, 332 ITR 531 (Ker.)]

The assessee purchased a hospital as a going concern. The value of the goodwill which included the name of the hospital and its logo and trade mark was Rs.2 crores. For the A.Y. 2004-05, the assessee claimed depreciation on the goodwill. The Assessing Officer and the Tribunal disallowed the claim. On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“(i) Without resorting to the residuary entry the assessee was entitled to claim depreciation on the name, trade mark and logo under the specific head provided u/s.32(1)

(ii) which covers trade marks and franchise. (ii) Admittedly the hospital was run in the same building, in the same town, in the same name for several years prior to the purchase by the assessee. By transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was retention of continued trust of the patients who were patients of the previous owners.

(iii) When the goodwill paid was for ensuring retention and continued business in the hospital, it was for acquiring a business and commercial rights and it was comparable with trade mark, franchise, copyright, etc., referred to in the first part of clause (ii) of section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the assessee for depreciation.”

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Business expenditure: Disallowance u/s.40(a) (ia): Section 194C and section 194-I, read with section 40(a)(ia), of Income-tax Act: TDS u/s.194-I: A.Y. 2005-06: Assessee had paid hire charges for having hired millers and rollers, for purpose of carrying out road contract work: Section 194C and section 194-I not applicable: Disallowance of hire charges u/s.40(a)(ia) not justified.

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[CIT v. D. Rathinam, 197 Taxman 486 (Mad.)]

During the relevant assessment year, the assessee had paid hire charges for having hired millers and rollers for the purpose of carrying out road contract work. According to the Revenue, since the hire charges in respect of both, the millers and rollers, hired by the assessee contained a portion of labour charges incurred by the respective owners of the concerned vehicles/machineries towards operation of the respective vehicles/ machineries, it was a composite contract of hiring of vehicles/ machineries along with labour and, consequently, the provisions of section 194C would be applicable. On that basis, the Assessing Officer took the view that out of the total hire charges if 10 per cent was treated as charges paid towards labour element involved and the TDS not having been deducted, as required u/s.40(a)(ia), the whole of the sum was to be disallowed. The Tribunal found that the amount paid by the assessee was only by way of hire charges for the millers and rollers taken on hire and, therefore, the relevant TDS provision applicable had to be only of section 194-I and not 194C and since section 194-I providing for TDS even in respect of machinery/equipment was brought into the Statute Book with effect from 1-6-2007, the assessee had not committed any violation of section 40(a)( ia) during the relevant assessment year, i.e., 2005-06, and accordingly deleted the addition.

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

“(i) Hiring of the millers and rollers as a machinery/ equipment was apparently needed for the purpose of carrying out the contract of laying of the road. Both the equipments, viz., millers and rollers, had to be necessarily operated by the owner of the respective machineries/equipments. Therefore, that, by itself, could not be a ground to state that it was a composite contract for supply of labour in the course of hiring of machineries/ equipments. Inasmuch as the millers and rollers had to be necessarily operated and maintained by the respective owners, the engagement of the service of any person for operating those machineries/equipments was purely an incidental one.

(ii) In fact, there was no material evidence or statement of any one to say in definite terms that the supply of such millers and rollers was along with its respective operators. Therefore, in the absence of any such acceptable material, the conclusion of the Assessing Officer in treating the hiring of millers and rollers as one falling under the category of a sub-contract for provision of labour or the conclusion of the Commissioner (Appeals) and holding that at least 10 per cent of the total payment would have been incurred by way of labour chargers by the respective owners, could not be accepted.

(iii) Viewed in that respect, the conclusion of the Tribunal, in having held that the relevant section, which would be applicable to the case on hand in relation to the sum incurred by the assessee by way of hire charges would be section 194-I, was unassailable. Therefore, when indisputably section 194-I came to provide for making the TDS in respect of machinery/equipments only with effect from 1-6-2007 and the relevant assessment year was 2005-06, there was no scope at all to find fault with the assessee for any violation of section 40(a)(ia).”

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Foreign judgment — Decision on merits would be conclusive — Hence enforceable in India — CPC, section 13(b).

Foreign judgment — Decision on merits would be conclusive — Hence enforceable in India — CPC, section 13(b).

[Karnail Singh Sandhar v. M/s. Sandhar and Kang Ltd., AIR 2011 (NOC) 69 (P & H)]

The petitioner filed a claim against Sandhar & Kang Ltd. & Ors. in the High Court of Justice, Chancery Division, UK. The petitioner and defendant had establish a business partnership for trading in food retails. In or about 1986, the petitioner and defendants fell out, the petitioner resigned as a director and shareholder of the company and was paid £350,000 for his shareholding in the company. However, the petitioner remained registered as a holder of the legal estate in the property and the Chester Road property with defendants in equal shares. After his resignation, the petitioner left UK and settled at Canada and obtained Canadian citizenship. Without the knowledge and consent of the petitioner, the defendants sold the property. The petitioner returned to the UK and discovered the aforesaid transfers. The petitioner filed necessary proceeding against the defendants in respect of the property.

On 3-5-2007, the High Court of Justice issued a judgment by way of a minute of order whereby the petitioner was directed to pay the costs. On 14-2-2008, the Appellate Court dismissed the appeal by way of an order and directed the petitioner to pay costs incurred by the defendants in relation to the Court of Appeal proceedings related to the Court of Appeal order. That after the aforesaid orders passed by the Courts at UK, the respondent/decree-holder filed an execution in the Court at Ontario, Canada as the petitioner was a citizen of Canada. The said execution was pending but no recovery could be effected. Nothing could be recovered from the petitioner even in UK.

Litigation between the parties on execution in India.

On 11- 6-2008, the respondent filed an execution in the Court of learned District Judge, Sangrur for execution of the decrees to recover costs of £ 50,000 as the property of the petitioner is situated at Sangrur. The learned District Judge, Sangrur, vide its impugned order dated 26-2-2010 rejected the plea raised by the petitioner and held that the application for execution of the foreign judgments is maintainable.

The petitioner invoked the revisional jurisdiction of the Court under Article 227 of the Constitution of India to challenge the impugned order dated 6-2-2010 upholding the maintainability of the execution application filed by the respondent who had sought to execute foreign judgments at Sangrur in India.

The Court held that section 13(b) of the Civil Procedure Code (CPC) provides that a foreign judgment shall be conclusive as to any matter thereby directly decided between the parties, but there are certain exceptions which are provided in clause (a) to (f) in which clause (b) provides that a judgment shall not be conclusive if it is not rendered on the merits of the case.

It was held that the judgment passed by the High Court of Justice and the Court of Appeal of the U.K., which were sought to be executed in the present case, were judgments on merits and it is also held that in order to decide a case on merits in a case which is decided under a summary procedure after considering the evidence available on record led by the parties, it would be a decision on merits to be covered u/s.13(b) of the CPC.

Hence, in view of it was held that costs order imposing costs a foreign Court was a decree which could be executed in the Court in India u/s.44-A of the CPC. Simultaneous execution petition in India and Foreign Court not barred specially when decree holder has stated that nothing has been recovered from execution filed in other Court.

Appeal to High Court: Section 260A of Income-tax Act: A.Y. 1997-98: Power of High Court: Court has power to consider new question of law not formulated at the time of admission of the appeal.

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[Helios and Metheson Information Technology Ltd. v. ACIT, 332 ITR 403 (Mad.)]

The assessee had filed an appeal before the High Court u/s.260A of the Income-tax Act. When the appeal was taken up for the final hearing, the assessee sought consideration of an additional question whether reopening of the assessment was maintainable. The Madras High Court allowed the assessee’s request and held as under:

(i) The issue of notice u/s.148 in the case of the assessee was dealt with by the Tribunal in extenso. The issue relating to the validity of reassessment was contested by the parties before the Tribunal.

(ii) Therefore, merely because the question of reassessment was not specifically formulated as a substantial question of law while entertaining the appeal, it could not be held that the question should not be allowed to be agitated by formulating a substantial question of law.

(iii) The assessee was justified to seek for framing the issue of notice as one of the substantial questions of law to be considered.

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(2011) 21 STR 469 (All.) – CCEx., Ghaziabad vs. Ashoka Metal Decor (P) Ltd.

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CENVAT credit of excise duty payment taken and reversed before utilisation does not attract interest u/s.11AB of Central Excise read with Rule 14 of CENVAT Credit Rules.

Facts:
The respondent paid excess excise duty and took CENVAT credit of such excess excise duty suo moto. However, the CENVAT credit was reversed before its utilisation. The Department contended that once it is established that CENVAT credit is wrongly availed, liability of interest is automatic and it has no relation with non-utilisation of such CENVAT Credit.

Held:
The amount wrongly credited to the CENVAT Credit Account which is not utilised, does not cause any loss to revenue nor does it benefit the assessee. It does not amount to improper payment of duty or non-payment of duty or late payment of duty. In the present case, the assessee instead of claiming refund availed CENVAT Credit. Moreover, the same was reversed subsequently before its utilisation. Therefore, following the Apex Court’s decision in case of Bombay Dyeing & Manufacturing Co. Ltd. (2007) (215 ELT 3), the same amounts to “not taking credit”, and therefore Rule 14 of the CENVAT Credit Rules, 2004 (dealing with recovery of CENVAT credit wrongly taken or erroneously refunded) and section 11AB of the Central Excise Act, 1944 (providing for interest on delayed payment of duty) would not apply.

Comments: In view of the Supreme Court ruling in case of Ind Swift Labs vs. Union of India (reported above), the above judgment may not hold good. As per Hon’ble Supreme Court and subsequent Circular of the Board dated 14/03/2011, interest is payable even on CENVAT credit availed wrongly.

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(2011) 21 STR 324 (Kar.) – CCEx., Belgaum vs. Fluid Dynamics Pvt. Ltd.

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The Department does not have powers to file appeal on its own u/s. 35 of Central Excise – Department cannot be considered “aggrieved person”.

Facts:
The revenue filed appeal under section 35G of the Central Excise Act for demanding interest on differential liability on issuance of supplementary invoices. It had filed appeal to the Appellate Tribunal under section 35 of Central Excise Act, 1944.

Held:
The Department does not have power to prefer an appeal on its own u/s.35 of Central Excise Act since Department cannot be considered as an “aggrieved person”. Therefore, the appeal without being discussed was dismissed.

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(2011) 265 ELT 3 (SC) – Union of India vs. Ind. Swift Laboratories Ltd.

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CENVAT credit taken wrongly and utilised later attracts interest from the date of availment and not from the date of utilisation – Rule 14 of CENVAT Credit Rules being unambiguous does not require to be read down.

Facts:
The company manufacturing bulk drugs availed CENVAT credit based on invoices for inputs and capital goods issued allegedly without accompanying material. After receiving show cause notice and replying to the same, the company filed application for settlement of proceedings and deposited entire duty of Rs.5.71 crores. The Settlement Commission found that wrongful CENVAT credit was taken from the year 2001 to 31/03/2006 whereas the payments were made in February 2006 and on various dates in March 2006 and in November 2006. The Commission ordered the assessee to pay interest from the date of availment of credit till the date of payment. The company disputed calculation of interest from the date of availment instead of the date of utilisation. The Commission considered the final order as conclusive and rejected its application. The company did not pay interest in terms of the final order. Therefore the balance amount was called for by the authorities. Against the said demand, a writ in the P&H High Court was filed. Allowing it, the High Court held that mere availment of credit does not create any liability of payment of duty and further held that on a conjoint reading of section 11AB of the Tariff Act and that of Rules 3 and 4 of the Credit Rules, interest cannot be claimed from the date of wrong availment of CENVAT credit and it would be payable only from the date the CENVAT credit was wrongly utilised. The interference of the High court was challenged by the authorities.

The Supreme Court examined Rule 14 of the CENVAT Credit Rules dealing with interest to consider the finding recorded by the High Court by way of reading down the provision of Rule 14 as the issue before the Court was to decide whether the interest was leviable from the date of availment of credit or the date of utilisation.

Held:
Rule14 specifically provides for recovery of interest where CENVAT credit is taken or utilised wrongly by the manufacturer or the service provider or refunded erroneously to either of them. The High Court misunderstood this provision and wrongly read it down as statutory provision is generally read down only when the same is capable of being declared unconstitutional or illegal. No harmonious construction is required to be given to the aforesaid provision, which is unambiguous and exists all by itself. It is not permissible to import provisions in a taxing statute so as to supply any assumed deficiency. The order of the Settlement Commission thus was restored.

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(2011) 21 STR 353 (SC) – P. C. Paulose, Sparkway Enterprises vs. CCEx.

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An Agent appointed by Airport Authority of India for collection of admission charges is considered a provider of airport services – u/s. 65(105)(zzm), the assessee is liable to discharge service tax.

Facts:
The appellant entered into a license agreement with the Airport Authority of India (AAI) under which they were authorised to collect airport admission ticket charges and were granted space at the airport. All the expenses to provide services to passengers and visitors were to be borne by the appellant. Moreover, the appellant had to bear all rates, outgoings taxes etc. The revenue contended that as per the statutory definition of Section 65(105) (zzm) of Finance Act, 1994 and circular dated 17.09.2004, the appellant was responsible to discharge service tax liability whereas, the appellant were of the view that AAI, being the principal service provider, was liable for service tax.

Held:
The appellant is authorised by the Airport Authority of India to provide services and therefore, it steps into the shoes of the Airport Authority of India and is liable to pay service tax.

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Redevelopment of properties (commercial/ residential):

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Redevelopment of properties (commercial/ residential):

Background:
During the past decade, redevelopment of society/ properties has tremendously increased mainly in metropolitan cities like Mumbai. Increased redevelopment activities have inter alia attracted attention of the Preventive/Anti-Evasion Wing of the Service Tax Dept. and inquiry is initiated or show-cause notice is issued in this regard. Some of the significant implications impacting redevelopment activity are discussed hereafter.

Common features in redevelopment:

Some of the commonly found features redevelopment arrangements are listed below:

(i) Societies usually own buildings and are often lessees of the land owned by MHADA/other bodies on which the building is built;

(ii) These societies are entitled to additional FSI under relevant regulations or statute, which can be used for development upon payment of appropriate premium;

(iii) Such societies grant development right to the builders/developers to demolish existing building and construct new buildings. Builders/ developers pay the appropriate premium for additional FSI entitled to the society and utilise the same for additional construction and/or development;

(iv) Each existing occupant in the building of the society, is given a flat/office in the newly constructed building of a bigger area than the existing area free of cost or without any additional consideration;

(v) The entire cost of new building and other related cost is fully borne by the builders or developers;

(vi) Builder or the developer is fully entitled to the proceeds from sale of remaining flats/ shops/ commercial premises to be constructed by him on the society’s properties through sale in the open market; and

(vii) Existing occupants also receive a specified monetary compensation and reimbursement towards rentals for alternate accommodation during the period of demolition of old building and construction of new building.

Any redevelopment arrangement between a builder or a developer and the society is mutually beneficial to all the affected parties or can be described as a barter deal inasmuch as:

(i) In addition to monetary compensation and reimbursement of rentals, existing occupants get a flat/office of a higher area in a newly constructed building at no extra cost;

(ii) The society would get newly constructed property with enhanced area and improved or better facilities;

(iii) Builders/developers gain through realisation of sale/proceeds of additional flats/commercial premises at market price which far outweighs the cost of obtaining additional FSI, construction cost of the new building and payment of rentals to existing occupants, all put together.

Redevelopment: Whether a service by a builder or developer?

Service tax authorities have issued show-cause notices contending that the builders/developers do not own the property undertaken for redevelopment and ‘service’ is therefore provided by the builder/developer to the society. The issue therefore needs to be analysed in detail.

In order to be liable to service tax, it is essential that, ‘service’ is provided by a service provider. The term ‘service’ is not defined under the Finance Act, 1994 (‘Act’). However, some meanings attributed to ‘Service’ are as follows:

(i) ‘Service’ — Black’s Law Dictionary:

The act of doing something useful for a person or company for a fee.

A person or company whose business is to do useful things for others, a linen service.

An intangible commodity in the form of human effort, such as labour, skill, or advice, contract for services.

(ii) ‘Service’ — Magus Construction Pvt. Ltd. v. UOI, (2008) 11 STR 225 (Gau.)

In the said ruling, the following was observed by the Gauhati High Court:

Para 29 “In the light of the various statutory definitions of ‘service’, one can safely define ‘service’ as an act of helpful activity, an act of doing something useful, rendering assistance or help. Service does not involve supply of goods; ‘service’ rather connotes transformation of use/user of goods as a result of voluntary intervention of ‘service provider’ and is an intangible commodity in the form of human effort. To have ‘service’, there must be a ‘service provider’ rendering services to some other person(s), who shall be recipient of such ‘service’.”

(iii) Service — Jetilite (India) Ltd. v. CCE, (2011) 30 STT 324 (New Delhi — CESTAT)

An extract from the Tribunal’s observation is provided below:

Para 65 “Being so, taking into consideration the common understanding of the definition of the term ‘service’ as well as the definition of the term ‘taxable service’ under the said Act, it is evident that the service contemplated under section 65(19) is the one which relates to service rendered by the service recipient. It may be taxable service or may not be so. However, the situation invariably contemplates existence of two entities in order to bring the case within the scope of definition of business auxiliary service. One entity which provides service to others is called a service recipient. Another entity is one which provides service to the service recipient in relation to the service rendered by such service recipient to others, and such entity is called the service provider.”

Considering the fact that different types of redevelopment agreements are entered into between the societies and the builders/developers, it would be impossible to lay down any general proposition as to whether a redevelopment arrangement results in a service provided by a builder/developer to a society or not.

A redevelopment arrangement is usually for the mutual benefit of the affected parties to the contract. Though not described, it appears to be in the nature of a joint venture arrangement, wherein role of each party is specified and contracted for. Hence, there is a possibility of a view depending on the terms of an agreement that redevelopment arrangement does not result in any ‘service’ provided by builders/developers to the societies. At the most, services performed in pursuance of redevelopment arrangement by builders/developers, amount only to self-service which cannot be subjected to service tax.

In this regard the following observation of the Tribunal in Rolls Royce Industrial Power (I) Ltd. v. Commissioner, (2006) 3 STR 292 (Tribunal) may be noted:

“……………….. The terms of the contract do not envisage or involve providing any consulting or engineering help to the owner. The operator is fully autonomous and responsible for the performance of operation and maintenance. Whatever engineering issues are involved, it is for the operator to find solutions for, and attend to in the course of operation and maintenance. He is not required to render any advice or to take any orders from the owner. He cannot pass on the responsibility for operating the plant in any manner to the owner. Thus, there are no two parties, one giving advice and the other accepting it. Service tax is attracted only in a case involving rendering of service, in this case, engineering consultancy. That situation does not take place in the present case. Therefore, we are of the opinion that the duty demand raised is not sustainable”

Attention is also drawn to the following observation of the Bangalore Tribunal in Precot Mills Ltd. v. CCE, (2006) 5 STT 35 (Bang.-CESTAT)

“………………

M/s. Precot Mills Ltd. is a corporate entity. It has got various units which function as separate profit centres. When service is rendered by one unit to the other, debit note is raised for the value of service in order to evaluate the perfor-mance of a particular unit. Ultimately there is only one balance sheet for the legal entity for M/s. Precot Mills Ltd. and not for the separate unit. In other words, the appellants, M/s. Precot Mills Ltd. do not receive any valuable consider-ation for service rendered by one unit of the appellant to the other unit, in view of the fact that each unit is part of the same legal entity which is the appellant. To put it differently, when one renders service to oneself, as in the present case, there is no question of leviability of service tax.”

Although the facts in both the above cases are dissimilar, the ratio of the rulings is relevant to the issue of redevelopment arrangement.

Further, as regards the contention that there is no liability to service tax in case of self-supply of service, further support can be found from the following:

    Gauhati High Court Ruling in Magus Construction Pvt. Ltd. v. UOI, (2008) 11 STR 225 (Gau.)

    Dept. Circular dated 17-9-2004 on Estate Build-ers in regard to Construction Services

    Master Circular dated 23-8-2007 in regard to applicability of service tax on real estate builders

    Dept. Circular dated 29-1-2009 regarding im-position of service tax on builders

Nevertheless, it needs to be expressly noted that whether a particular redevelopment arrangement results in any service provided by a builder/devel-oper to a society or not would depend upon the facts and circumstances and in particular terms and structure of a redevelopment arrangement. Further, it is a highly contentious issue. If a view is adopted that there is no service provided by a builder/developer to a society, the same would have to satisfy the judicial test.

Applicable Service categories:
Service tax provisions do not contain any spe-cific category for redevelopment. Hence taxability would have to be determined on the basis of service categories relevant to construction activi-ties viz.:

    i) Commercial or industrial construction [section 65(25b)/65(105)(zzq) of the Act]

    ii) Construction of Complex [section 65(30a)/65(91a)/65(105)(zzzh) of the Act]

    iii) Works Contract [section 65(105)(zzzza) of the Act]

A substantial part of construction carried out in terms of a redevelopment arrangement would have to satisfy the essential taxability criteria specified in the definitions stated above in order to be made liable to service tax.

The scope of construction of complex/commercial or industrial construction liable to service tax has been expanded w.e.f. 1-7-2010 to tax advances received by builders/developers from prospective buyers for flats/offices which are under construction. The relevant extracts from Dept. Clarification clarifying the scope of expanded service in the Ministry’s Circular Letter D.O.F. No. 334/1/2010-TRU (Annexure B), dated 26-2-2010 was reproduced in February 2011 issue of BCAJ and therefore is not repeated here (refer para 2 on page 57)

In this context and as analysed in February Issue of BCAJ, Notification No. 36/2010-ST, dated 28-6-2010 provides that advances received by the builders/developers from prospective buyers prior to 1-7-2010 for flats/offices under construction have been exempted from the purview of expanded scope of construction of complex/commercial or industrial construction service. This exemption is extremely relevant inasmuch as, in many show-cause notices issued by the service tax authorities in the issue of redevelopment, the advances received by builders/developers from prospective buyers for the subsequent period is treated as value of taxable service, provided by a builder/developer to a society.


Redevelopment of flats/offices of existing occupants made prior to 18-4-2006 without any monetary consideration — Free of cost:

It is now a settled position that taxability to service tax is to be determined at the time when service is provided. In this regard, reliance can be placed on the Gujarat High Court ruling in Reliance Industries Ltd. v. CCE, (2010) 19 STR 807 (Guj.) and other rulings as well. Hence, in the context of construction services, taxability is to be determined based on the date on which relevant construction is completed.

Section 67 of the Act relating to valuation of a taxable service was significantly amended w.e.f. 18-4-2006. One of the more significant amendment relates to enactment of specific provisions for valu-ation of taxable services in cases where service is rendered for a consideration not determined in monetary terms (either fully or partly). This is discussed in para 1.6 below.

In terms of these provisions read with Rule 6 of the Service Tax Rules, 1994 as existed prior to 18-4-2006, no service tax is payable if services were rendered free or without any monetary consideration.

Vide, CBEC Circular No. 62/11/2003-ST, dated 21-8-2003, it was clarified that, even if a service is taxable, there will be no service tax if service is provided free, as value of service tax will be zero.

In the light of the foregoing, it would appear that in cases where flats/offices are allotted to existing occupants of a society in the new building (constructed prior to 18-4-2006) free of cost in pursuance of redevelopment agreement between a society and the builders/developers, there would be no liability to service tax in terms of the valuation provisions as they existed prior to 18-4-2006.

Redevelopment made for existing occupants after 18-4-2006:

Service tax is demanded in regard to flats/offices built and allotted to existing occupants free of cost by treating the entire sale proceeds of additional flats/commercial premises received by the builders/developers in the subsequent years as the value of taxable services. Hence this aspect needs a detailed discussion, more particularly after the introduction of the Valuation Rules w.e.f. 18-4-2006. The amended section 67 of the Act effective from 18-4-2006 has conceptually changed the provisions relating to valuation of service for the levy of service tax. In addition, Service Tax (Determination of Value) Rules, 2006 (Valuation Rules) have been notified to come into force from 19-4-2006.

Prior to its substitution, section 67 of the Act read as “For the purpose of this Chapter, the value of taxable service shall be the gross amount charged by service provider for such service provided or to be provided by him”. The newly introduced section 67 provides for ‘cost of service in the hands of recipient of service’ and ‘value of similar service’ as the basis for valuation, which is in complete departure from the earlier position in law which restricted itself to ‘gross amount charged’ by a service provider. Thus in the light of amended section 67 read with the Valuation Rules, the following is analysed.

Value of ‘similar’ service:

According to Rule 3(a) of the Valuation Rules, in case of a taxable service where consideration received does not consist wholly of money, then value is required to be determined, based on the gross amount charged by a service provider for similar service provided to any other person in ordinary course of trade.

Brief analysis of ‘similar’ — Some of the meanings attributed to ‘Similar’ are as under:

  •     ‘Similar’ means resembling or similar; having the same or some of the same characteristics— (Webster’s Online Dictionary)

  •     ‘Similar’ means ‘having a marked resemblance of likeness; of a like nature of kind — (Oxford English Dictionary)

On the basis of the foregoing, it would appear that the word ‘similar’, does not mean identical but there should be resemblance between two services in order to constitute the services as similar services. Various factors would have to be considered in order to determine whether two services are similar or not.

In the context of Central Excise, the Supreme Court has observed with reference to ‘electrical appliances normally used in the household and similar appliances used in hotels’ etc., that “the statute does not contemplate that goods classed under the words of ‘similar description’ shall be in all respects the same. If it did, these words would be unnecessary. These were intended to embrance goods not identical with those goods.” [Nat Steel Equipment v. Collector, (1998) 34 ELT 8 (SC) quoted and followed in CCE v. Wood Craft Products Ltd., (1995) 77 ELT 23 (SC)]

Valuation on the basis of equivalent money value of consideration:

Rule 3(b) of the Valuation Rules provides that where the value cannot be determined in accordance with clause (a) [i.e., Rule 3(a) on basis of value of similar service], the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

Thus, if the value of similar services cannot be ascertained, the ‘value’ will be ‘equivalent value of consideration’. Such ‘equivalent value’, to be determined by service provider himself, shall not be less that cost of provision of such service.

It is pertinent to note that Valuation Rules make no provision for method of calculation of ‘cost’ of the taxable services. No guidelines have been issued by CBEC prescribing methodology to be adopted for the purposes of valuation.

Implications in the context of redevelopment:

Under a redevelopment arrangement, flat/office is provided to an existing occupant free of cost, in pursuance of an agreement between a society and the builder/developer. Hence, immediate beneficiary of redevelopment is the flat/office occupant, whereas society would be a remote beneficiary of redevelopment in the existing sense that there would be enhancement of property value and increased/better facilities that would be available.

Whether or not there is a flow of consideration (monetary or otherwise) from a builder/developer to a society in terms of amended section 67 of the Act, is a highly complex and contentious issue for which there is no ready answer.

Assuming, there is flow of ‘consideration’ arising from the redevelopment arrangement between builders/developers to a society, the taxable value of service in terms of Valuation Rules would be determined as under:

    i) Option 1 — Amount equivalent to the gross amount charged by a builder/developer to any new buyer of flat/office for similar service provided in the ordinary course of trade and gross amount charged is the sole consideration.

This would have to be determined based on an examination of the facts of a given case duly supported by independent documentary evidences.

    ii) Option 2 — In case, value cannot be determined in accordance with Option 1 above, builder/developer would have to determine equivalent money value of such consideration, which shall not be less than the cost of provision of taxable service factoring mainly cost incurred for obtaining FSI, the en-tire cost of construction, rentals paid for the period during demolition and construction period, etc. This will differ depending on the facts of each case.

As yet, no methodology is prescribed by CBEC to determine equivalent monetary value of consideration in terms of the Valuation Rules. However, in this regard, recourse may be made to Guidelines issued by CBEC under Central Excise for computing cost of captive consumption liable to excise duty, on the basis of Cost Accounting Standard (CAS 4) issued by The Institute of Cost & Works Accountants of India. This basis has been approved by the Supreme Court in CCE v. Cadbury India Ltd., (2006) 200 ELT 353 (SC).

In case there is any liability to service tax on the builder/developer, it would appear that the same would be subject to various benefits available under the applicable exemption/abatement notifications granting full or partial exemption from payment of service tax.

Alternatively, benefits may also be available under the CENVAT Credit Rules, 2004 subject to compliance of stipulated conditions.

Conclusion:
Redevelopment of properties is a very complex subject and issues relating to service tax under re-development are equally complex. Issues involved are likely to be litigated extensively in due course of time. Till the time, there is a reasonable level of clarity on the complex subject, it would be in the interest of concerned builders/developers to factor service tax while finalising redevelopment arrangements.

Nobly Untruthful

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Two days back, a TV channel telecast an interview with Julian Assange the Editor-in-Chief and public face of Wikileaks. Julian Assange started hacking computers at the age of 16 under a pseudo-name Mendax meaning `nobly untruthful’. Wikileaks has released cables and tapes contents of which have embarrassed many a government. In the course of his interview he made many points. Some of those that were very relevant in the Indian context are:

• Political and corporate institutions actively try to suppress information from the public. They try to suppress because they believe that if the public knows it will try to change and reform these institutions.

• We have to first understand how our institutions behave before we can come up with programmes to reform them.

• If you want the Indian government to really address corruption then it must become the central issue of the nation.

• Wherever there’s a disclosure, there is a counter smear campaign which is directly proportionate to how impactful is the material in the disclosure.

• Governments, corporations are not scared of Wikileaks having the information, but they are scared of public knowledge.

• Governments have to be pushed and pushed until they see that there is an advantage in giving a proper response.

In India, we have seen the truth in these statements all along and more so in the recent times. Whenever there is a big scam the first reaction of the government is to deny it. Then start a systemic attempt to distract the attention from the central issue. It is surprising that when questioned the spokespersons of the ruling party take pride in talking about the so-called actions that the government has taken against the persons involved. But what is the reality? Has the government taken action on its own? Or is it only under substantial pressure from the public or directive from the judiciary that some action has been taken? Has the action been swift and effective?

Last month, Anna Hazare the RTI activist went on a fast demanding speedy enactment of a comprehensive law like Jan Lokpal Bill to tackle the menace of corruption. The fast motivated a very large number of persons to support the cause. While that was noteworthy, the reaction of the government at every stage left a lot to be desired. Actions of Anna Hazare were referred as blackmail. Initially, the government refused to involve representatives of Civil Society in drafting of Lokpal Bill. Mr. Kapil Sibal stated that to involve the public in preparing the draft of the Lokpal Bill would be undermining the democracy and its institutions. It’s only under public pressure that the government agreed to public participation in drafting the Bill.

But let us not forget this is only the beginning. There are many hurdles at every stage. This was evident by the smear campaign against some of the prominent members of the committee constituted for drafting the Bill.

While one needs to be hopeful, a certain amount of cynicism is also justified. A strong Lokpal is only one of the instruments to move towards corruption free India. It is not an end in itself; it is not a magic wand. The draft presented by the Civil Society also needs to be critically examined. The institution of Lokpal, while having enough powers, must be accountable. Otherwise a well intended legislation will become a tool for harassment.

Julian Assange also mentioned that there are more Indian deposits in Swiss banks than any other nationality. There is no reason to disbelieve him on this. Even on this front the government seems to be doing precious little. The public perception, rather conviction, is that the government is dragging its feet because those who have money stashed it in Swiss bank accounts include big names from amongst politicians and other powerful personalities. While our government is reluctant to act, US and German governments have taken effective and unusual steps to bring back the money and bring offenders to book.

It is ironical that while Prime Minister Manmohan Singh himself is considered as an honest person, the present government presided over by him is regarded as the most corrupt government that independent India has had. But can the Prime Minister avoid the responsibility for what is happening? Is he `Nobly Untruthful’ in the wrong way? It will be a sad day if a person of his eminence has to retire with a tarnished image. On the other hand if the Prime Minister takes firm, swift and effective steps against the guilty in various scams and in the process has to leave the prime ministership, the nation will remember him with gratitude for a long time. Will he show that courage and conviction?

Sanjeev Pandit
Editor

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Prabodh Investment & Trading Company Pvt. Ltd. v. ITO ITAT ‘C’ Bench, Mumbai Before R. V. Easwar (President) and R. K. Panda (JM) ITA No. 6557/Mum./2008 A.Y.: 2004-05. Decided on: 28-2-2011 Counsel for assessee/revenue: P. J. Pardiwalla and Nitesh Josh/R. K. Sahu

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Section 50 — Capital gains arising on transfer of a capital asset (flat) on which depreciation was allowed for two years but thereafter the assessee stopped claiming depreciation and also gave the flat on rent is chargeable as long-term capital gains after allowing the benefit of indexation.

Facts:
The assessee, a private limited company, carried on business of investment. During the previous year 2003-04 it sold a flat for Rs.1,30,00,000. This flat was purchased by the assessee in the year 1987. Depreciation on this flat was claimed up till A.Y. 1991-92. In A.Ys. 1992-93 and 1993-94 the assessee claimed depreciation only in books of accounts but not in the return of income. For A.Y. 1994-95 and all subsequent years the assessee did not provide any depreciation in respect of the flat as the same was not used as office premises during the year. The flat was classified as a fixed asset in the balance sheet and was shown at cost less depreciation.

In the return of income the profit arising on transfer of this flat was shown as long-term capital gain. The long-term capital gain was computed after taking indexation benefit and also exemption u/s.54EC. The assessee relied upon the decision of the Bombay High Court in CIT v. Ace Builders P. Ltd., (281 ITR 210) for claiming indexation benefit even in respect of a depreciable asset. The Assessing Officer held that the decision of the Bombay High Court was not applicable to the case of the assessee and since the flat was the only asset in the block, the capital gain arising on sale of flat was taken to be short-term capital gain u/s.50(1).

Aggrieved the assessee preferred an appeal to the CIT(A) who held that the nature of asset continued to be a business asset in absence of anything to suggest that the assessee had taken a conscious decision to treat the flat as an investment. He distinguished the decision of the Cochin Bench of ITAT in Sakthi Metal Depot v. ITO, (2005) 3 SOT 368 (Coch.) on the ground that in the said decision the property was specifically treated by the assessee as an investment in the books of account. He upheld the order passed by the AO.

Aggrieved by the order of the CIT(A), the assessee preferred an appeal to the Tribunal.

Held:
The judgment of the Bombay High Court in Ace Builders was not concerned with the benefit of cost indexation. The decision is confined to relationship between section 50 and section 54E of the Act. The assessee cannot rely upon this decision to contend that the cost indexation benefit should be given even in the case of computation of short-term capital gains u/s.50 of the Act.

On facts, the decision of the Cochin Bench of the Tribunal in Sakthi Metal Depot is applicable, in which it has been held that if no depreciation had been claimed or allowed in respect of the asset, even though for an earlier period depreciation was claimed and allowed, from the year in which the claim of depreciation was discontinued, the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirtysix months from the date of sale, it would be a case of long-term capital gains. The Tribunal held that the moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent, it ceased to be a business asset. It noted that the order of the Cochin Bench of ITAT applies in favour of the assessee. The Tribunal observed that the principle of the order, dated 31-1-2007, of the Mumbai Bench of ITAT, in the case of Glaxo Laboratories (I) Ltd., though laid down in a different context, would support the assessee in the sense that it is possible for a business asset to change its character into that of a fixed asset or investment. The Tribunal directed that the capital gains be assessed as long-term capital gains after allowing the benefit of cost indexation as claimed by the assessee.

This ground was allowed. Cases referred to:
(i) CIT v. Ace Builders Pvt. Ltd., 281 ITR 210 (Bom.)
(ii) Sakthi Metal Depot v. ITO, (2005) 3 SOT 368 (Coch.) Compiler’s Note: The decision also deals with a small issue on MAT which has not been digested.

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NAMASKAR TO A BRAVE YOUNG GIRL

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Year 2004. A young graduate daughter of a village farmer aged around 22 years comes to Ahmedabad. She wants to be an IAS Officer. Passing the U.P.S.C. exam requires a lot of knowledge. She takes up further study in Journalism to acquire more general knowledge. She learns real life.

She gets a grant to study the tribals working in sugar mills. She goes to a village 20 km from Surat for a first-hand study of the tribal workers. (Do we, urbanites know what real India is? Let us see.)

The villagers do not allow the tribals to live in or near the village. The tribals stay in semi-arid areas away from civilisation. With considerable difficulties in searching and after walking for 4 km, she comes near a settlement. She wants to talk to the workers. But the tribals have a fear and suspicion of the non-tribals. The fear is built over past thousands of years. No tribal is ready to talk with her. Is their fear justified? Let us see.

While the young lady is in the settlement, there is a commotion. A young man — all covered with blood and bruises, carrying a two-year old child in his hands comes to the settlement. He is a tribal. He and his wife worked in a sugar mill as temporary workers. In the evening while they were returning home, some upper-caste goons came on two motor cycles. They beat up the husband mercilessly, threw the child in a cactus fence and kidnapped the wife and went away.

Our young lady enquires : “Why don’t you file a police complaint?” The tribals look at her with contempt and say — “Even the police will beat us.” This is the current state of India, current Gujarat. Now we know.

She returns to Ahmedabad and continues her study in Journalism. She visits a library and falls in love with a young boy.

She gets an internship assignment at a reputed news paper. She writes investigative stories for the paper. She is praised by the editor. Next day the story does not appear in the press because . . . . . someone paid the price (for not printing the news) to the editor.

The young lady, Mittal Patel scraps the idea of being an IAS officer, forgets journalism and decides single-handedly it necessary to fight for the cause of the oppressed nomads. One is reminded of the famous lines from Shri Rabindranath Tagore

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Our great modern India which is growing rapidly, badly treats 50% of the population — women. If any one has doubts let me remind that recently (March-April, 2011) two chartered accountant ladies have committed suicides due to atrocities of their own families.

Then there are scheduled tribes, scheduled castes and nomads. I do not know the percentage. But may be 45% of the people. Total 72.5% people (50% women and 22.5% underprivileged men) are exposed to the exploitation by the upper-caste men. (These percentages are generalisations. They do not apply to many families. At the same time, outside Mumbai, they do apply to many people.)

The young lady — Mittal (Now Mrs. Patel) has now established Vicharata Samuday Samarthan Manch (Nomadic People’s Support Organisation) (VSSM). She is now working for the most under privileged people of India. Most of the nomadic people have no homes. Hence no ration cards, no election cards, no BPL (Below Poverty Line) cards. They live away from the upper-caste and somehow survive.

They have survived from times, even before Ramayan.

Since they have no voter cards, politicians are not interested in them. Government welfare schemes do not reach them.

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Baba Farid Vidyak Society v. ACIT ITAT Bench, Amritsar Before C. L. Sethi (JM) and Mehar Singh (AM) ITA No. 180/ASR/2010 A.Y.: 2006-07. Decided on: 31-1-2011 Counsel for assessee/revenue: P. N. Arora/ Madan Lal

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Section 40(a)(ia) r.w.s. 194C and 194J — Disallowance of expenditure on account of non-deduction of tax at source — Whether the provisions applicable to the assessee-society engaged in charitable activities — Held, No.

Facts:
For non-deduction of tax at source from the payments made towards advertisement expenses, the AO disallowed the sum of Rs.5.10 lac and taxed the same as business income. Before the CIT(A) the assessee contended that since its income is not chargeable u/s.26 to section 44AD under the head ‘Business income’, the provisions of section 40(a)(ia) were not applicable. However, the CIT(A) upheld the order of the AO.

Held:
Relying on the Amritsar Tribunal decision in the case of ITO v. Sangat Sahib Bhai Pheru Sikh Educational Society, (ITA Nos. 201 to 203/ASR/2004, dated 31- 3-2006), which in turn was based on the Mumbai Tribunal decision in the case of CIT v. India Magnum Fund, (74 TTJ 620), the Tribunal accepted the contention of the assessee and allowed the appeal of the assessee.

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Raj Ratan Palace Co-op. Hsg. Soc. Ltd. v. DCIT ITAT ‘B’ Bench, Mumbai Before N. V. Vasudevan (JM) and J. Sudhakar Reddy (AM) ITA No. 674/Mum./2004 A.Y.: 1997-1998. Decided on: 25-2-2011 Counsel for assessee/revenue: S. N. Inamdar/Ajit Kumar Sinha

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Section 2(24), Section 45 — Mere grant of consent by the land owner to the developer to construct by consuming TDR purchased by the developer from third party does not amount to transfer of land/or any rights therein — Amount of compensation paid by the developer to the members of the society cannot be taxed in the hands of the society.

Facts:
The assessee, a co-operative housing society, having 51 members was the owner of the plot of land admeasuring 3316 sq. mts together with Raj Ratan Palace building in front and a bungalow and other structures thereon. The entire FSI of the said property was already fully consumed in the construction of the multistoried building and the bungalow/structures on the said property. The society invited offers from builders and developers for redevelopment of its property by construction of a new multistoried building behind the Raj Ratan Palace building by means of TDR from elsewhere and by consumption of available FSI of the said property after demolishing the existing bungalow. The offer of M/s. New India Construction Co. (‘the Developer’) was accepted by the society and the terms and conditions agreed upon by the society, the developer and the members of the society were recorded in an agreement dated May 18, 1996. The said agreement in clause 12 provided that the developer will pay compensation at Rs.1431 per sq.ft. to the society and its members. The sum was quantified at Rs.2,00,16,828. Of this only a sum of Rs.2,51,000 was paid to the assessee and the balance amount was to be paid to the members. Clause 13 provided that in case the developers desire to utilise more TDR than what is stated in clause 12, then the developers shall pay to the society and the individual members of the society proportionately additional compensation @ Rs.1341 per sq.ft. of net proposed built-up area and the amount was to be paid to the society and the individual members in the manner provided in their individual agreements. Accordingly, the developers paid a sum of Rs.2,51,000 to the assessee-society and the balance sum was paid to the individual members of the society under 51 different agreements.

The assessee-society in its return of income filed for A.Y. 1997-98 did not offer any sum for taxation. The Assessing Officer (AO) asked the assessee to show cause why the sum of Rs.3,02,16,828 (aggregate of amounts paid by the developer to the society and its members) should not be regarded as income of the assessee since the assessee was the owner of the land and the assessee had allowed the developer to construct multi- storied building on land belonging to it. The AO held that the agreements between the developer and the 51 members were only to facilitate the payment by the developer. He, accordingly, taxed Rs.3,02,16,828 as income of the society u/s.2(24).

Aggrieved the assessee preferred an appeal to the CIT(A) who held that the amount under consideration is chargeable to tax in the hands of the assessee, subject to grant of indexation and also credit for taxes paid by the individual members on the amounts received by them.

Aggrieved the assessee preferred an appeal to the Tribunal where it was contended that the right to use TDR, even assuming was a capital asset, did not have cost of acquisition; consideration received for assigning right to receive TDR was not liable to tax in view of the decisions of the Tribunal; in the case of 21 members of the assessee the Tribunal has upheld the taxability of amount received from the developer.

Held:
The Tribunal held that no part of the land was ever transferred by the assessee. The assessee did not part with any rights and did not receive any consideration except a sum of Rs.2,51,000. The sum so received was for merely granting consent to consume TDR purchased by the developer from a 3rd party. The assessee continues to be the owner of the land and no change in ownership of land has taken place. Mere grant of consent will not amount to transfer of land/or any rights therein. The Tribunal observed that “In such circumstances, we fail to see how there could be any incidence of taxation in the hands of the assessee.” It also noted that the order passed by the AO was vague and did not clarify whether the sum in question was brought to tax as capital gain or as income u/s.2(24). It was of the view that neither of the above provisions can be pressed into service for bringing the sum in question to tax in the hands of the assessee. It also noted that some of the individual members had offered the receipts from the developer to tax and the same has also been brought to tax in their hands. The Tribunal directed that the addition made to the income of the assessee be deleted.

The appeal filed by the assessee was allowed.

Facts:
For non-deduction of tax at source from the payments made towards advertisement expenses, the AO disallowed the sum of Rs.5.10 lac and taxed the same as business income. Before the CIT(A) the assessee contended that since its income is not chargeable u/s.26 to section 44AD under the head ‘Business income’, the provisions of section 40(a)(ia) were not applicable. However, the CIT(A) upheld the order of the AO. Held: Relying on the Amritsar Tribunal decision in the case of ITO v. Sangat Sahib Bhai Pheru Sikh Educational Society, (ITA Nos. 201 to 203/ASR/2004, dated 31- 3-2006), which in turn was based on the Mumbai Tribunal decision in the case of CIT v. India Magnum Fund, (74 TTJ 620), the Tribunal accepted the contention of the assessee and allowed the appeal of the assessee.

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Mehta Jivraj Makandas & Parekh Govindaji Kalyanji Modh Vanik Vidyarthi Public Trust v. DIT(E) ITAT ‘G’ Bench, Mumbai Before Rajendra Singh (AM) and V. D. Rao (JM) ITA No. 2212/M/2010 Decided on: 11-3-2011 Counsel for assessee/revenue: A. H. Dalal/A. K. Nayak

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Section 12A and section 80G — Registration of charitable institution and renewal of exemption certificate — Application for renewal of exemption certificate rejected for the reason that changes made in object clause of trust without following the required procedure, hence the trust became invalid — Whether Revenue was justified in refusing to renew exemption certificate — Held, No.

Facts:
The appellant-trust had been registered u/s.12A of the Income-tax Act and had also been granted exemption u/s.80G earlier. The assessee filed application for renewal of exemption u/s.80G. The DIT(E) noted that the original objects of the trust had been amended and new objects were inserted. According to him in view of the changes in the objects, the original registration u/s.12A did not survive and therefore approval u/s.80G could not be granted. For the purpose he relied on the decision of the Allahabad High Court in the case of Allahabad Agricultural Institute v. Union of India, (291 ITR 116) and of the Madras High Court in case of Sakthi Charities v. CIT, (149 ITR 624). Before the Tribunal the Revenue strongly supported the order of the DIT(E) and contended that:

the objects of the trust cannot be amended without the approval of the High Court. For the purpose, it relied on the decision of the Madras High Court in the case of Sakthi Charities;

the changes in the objects of the trust were not intimated to the Department as provided in form No. 10A;

the changes made in the objects of the trust were not legal, hence the trust had become invalid and therefore the registration already granted u/s.12A could not survive. Reliance was placed on the decision of the Allahabad High Court in the case of Allahabad Agricultural Institute & Others v. Union of India.

Held:
The Tribunal noted that:

the trust was already registered u/s.12A which had not been cancelled;

the original object of the trust of providing hostel accommodation to the ‘Modh’ students had not been deleted;

The object had only been modified so as to include other deserving students also in addition to the students of the Modh community;

There was only one addition in the object clause viz., to provide medical aid to the poor and deserving persons of any community;

even the amended objects remained charitable and had not caused any detriment to the original objects as students of the Modh community continued to be eligible for the benefits;

There was no statutory requirement of intimating the changes except the one mentioned in the form No. 10A. and even in the form No. 10A, there was no time limit prescribed;

The assessee had intimated the changes to the Department, though later.

As regards the applicability of the decision of the Allahabad High Court, the Tribunal observed that in the case of Allahabad Agricultural Institute there were wholesale changes in the objects. The number of objects had been increased to 14 from 6 objects in the original deed and the assessee in that case could not show that the revised objects were practically the same or were charitable. While in the case before it, the Tribunal observed that there were practically no changes in the objects. The original object of providing hostel accommodation remained the same. Only the scope was enlarged to cover all students. The only new object was medical aid to poor, which was also charitable. Therefore it was held that the decision of the Allahabad High Court in the case of Allahabad Agricultural Institute was distinguishable and cannot be applied to the facts of the present case.

Relying on the Supreme Court decision in the case of CIT v. Surat City Gymkhana the Tribunal agreed with the assessee that since the trust had already been registered and since the registration was not cancelled, the AO cannot probe the objects and declare the trust invalid.

In view of the above, the DIT(E) was directed to grant renewal of approval u/s.80G to the assessee.

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Foreign Satellite Operators – finally relieved?

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Modern technology has been posing challenges before the tax administrators time and again. May it be e-commerce, use of telecom circuits or Internet bandwith or transponder capacity for relaying over a footprint area; the emerging issues have left tax experts all over the world scratching their heads and compelled the judiciary across the globe to probe into the complicated technical facts to arrive at a fair conclusion.

One such issue, being leasing of transponder capacity in a satellite has been a matter of vexed litigation in India in the past decade. After having conflicting tribunal decisions, some resolution seems to have been now reached in this context with the recent decision of the Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications (AsiaSat). In the said decision, the Delhi High Court held that payments for use of transponder capacity to satellite operators by Television (TV) channels cannot be taxed as ‘royalty’ in India. This has rendered a sigh of relief to the satellite operators, given that the quantum of tax involved in these disputes is very large.

Here is a quick backdrop of the litigation history in this context and the key findings of the Delhi High Court also keeping in mind the OECD commentary and the Direct Taxes Code Bill, 2010.

Common Facts From a reading of the various tribunal decisions on this issue, it appears that the facts are almost the same in all cases where TV channels make payments for use of transponder capacity in a satellite. The facts in the case of AsiaSat were as follows:

AsiaSat, a Hong Kong based company, is engaged in the business of providing data and video transmission services to TV channels through its satellites (owned and leased) placed in the geostationary orbital slots at a distance of 36000km from the earth. These satellites neither use Indian orbital slots, nor are they positioned over Indian airspace.

In the transmission chain, the TV channels uplink their signals to the transponder in the satellite through ground stations which are located outside India. The signals are then amplified by the transponder and downlinked with a different frequency (without any change in the content of the programmes) over the footprint area covered by the satellite, which also included India amongst the four continents covered.

Under the arrangement, AsiaSat has complete control over the satellite (including the transponder) and the tracking, telemetering, and other control operations of the satellite are done by AsiaSat from its control centre located outside India.

The typical flow of activities in a transaction of leasing of transponder capacity is as in the diagram:

Issue The main issue in all the cases that came up before the Tribunal Benches was, whether the payments being made by the TV Channels to the satellite operator for the use of transponder capacity could be characterised and taxed as ‘royalty’ within its meaning u/s. 9(1)(vi) of the Income-tax Act, 1961 (‘the Act’) or under the relevant article of the relevant tax treaty (if applicable).

In order to conclude on the above issue, the important aspects that need to be decided upon are:

1. Whether the payments can be said to be for ‘use of’ or ‘right to use of’ the process involved in the transponder?

2. If the answer to the above is yes, whether to be characterised as ‘royalty’ u/s. 9(1)(i), the process needs to be ‘secret’ in nature?

3. If a tax treaty is applicable, whether the payments could be said to be covered within the definition of the term ‘royalty’, under the relevant article in such tax treaty?

Indian litigation history prior to Delhi High Court’s decision

(a) Raj Television Networks – Chennai Tribunal (unreported) (2001)

The Chennai Tribunal’s decision in the case of Raj Television Networks (unreported) was one of the initial decisions dealing with this issue. It was held that since the payments are not for use of any specified intellectual property rights or imparting any industrial, commercial or scientific information, the same cannot be said to be ‘royalties’ under the Act.

(b) Asia Satellite Telecommunications Co. Ltd. v. DCIT (2003)1

The Delhi Bench of the Tribunal, in the matter of AsiaSat held that the satellite company’s revenues fell within the purview of royalty u/s. 9(1)(vi) of the Act. In arriving at this conclusion, the Tribunal held that the TV channels were not merely using the facility, but were using the process as a result of which the signals after being received in the satellite were converted to a different frequency and after amplification were relayed to the footprint area. Further, it held that ‘process’ need not necessarily be a secret process, as the expression ‘secret’, as appearing in Explanation 2(iii) to section 9(1)(vi) of the Act, qualifies the expression ‘formula’ only and not ‘process’. The decision in the case of Raj Television Networks was considered and it was held that transponder was not ‘equipment’ and the payments cannot be regarded as for use of equipment.

Since AsiaSat was a Hong Kong based entity, the Tribunal did not deal with the arguments in connection with the treaty.

(c) DCIT v. PanAmSat International Systems Inc. (2006)2

In PanAmSat’s case, while the Delhi Tribunal, followed the conclusion in case of AsiaSat with respect to the definition of ‘royalty’ under the Act, it further carved out the distinction between the language in India-US Tax Treaty (‘tax treaty’) and the Act. It held that, in the definition under the tax treaty, the term ’secret‘ also qualifies ‘process’, unlike the Act. Since the process being used in the satellite was not ‘secret’, it was held that they are not taxable as ‘royalty’ under the tax treaty.

(d) ACIT v. Sanskar Info. T.V. P. Ltd. (2008)3

In this case, the Mumbai Tribunal placed heavy reliance on the AsiaSat decision and held that the payments are taxable as ‘royalty’ under the Act. The Tribunal does not seem to have considered the India Thailand Treaty as well as the decision in the case of PanAmSat in arriving at its conclusion.

(e) ISRO Satellite Centre [ISAC], In re4

In this case, ISRO had entered into a contract with a UK based satellite operator for leasing of a navigation transponder capacity for uplinking of augmented data and transmission by the transponder for better navigational accuracies. The Authority for Advance Ruling (‘AAR’) has made detailed observations regarding functioning and use of the transponder. It ruled that the payment by ISRO could not be regarded as one for the “use of” or “right to use” any equipment. It was held that the transponder and the process therein were utilised by the satellite operator to render a service to ISRO and ISRO neither uses nor is it conferred with the right to use the transponder. Hence, the receipts cannot be taxable as ‘royalty’ under the Tax Treaty or under the Act.

(f) New Skies Satellites N.V. v. ADIT (2009)5

The Delhi Special Bench constituted in light of inconsistent decisions in the cases of AsiaSat and PanAmSat, held in October 2009 that revenues earned by the satellite operators are taxable as ‘royalty’ both under the Act and various tax treaties, thereby reversing the PanAmSat decision. It held that the payments are for the ‘use’ or ‘right to use’ the process involved in the transponder and that for the purpose of determining the payments as ‘royalty’ it is not necessary for the ‘process’ to be ‘secret’ under the Act as well as the tax treaty.

Key findings of Delhi High Court in case of AsiaSat

    1. The High Court stated that merely because the footprint area includes India and the programmes are watched by the ultimate consumers/viewers in India, it would not mean that satellite operator is carrying out its business operations in India attracting the provision of section 9(1)(i) of the Act.

    2. The transponder is an inseparable part of a satellite and is incapable of functioning on its own and so is the case with the transponder’s process.

    3. The substance of the agreement between AsiaSat and the TV channels is not to grant any ‘right to use’ qua the process embedded in the transponder or satellite, since the entire control of the satellite and transponder remains with AsiaSat. It is observed that the process in the transponder is used by the satellite operator for rendering services to the TV channels, thus holding that the satellite operator itself was the user of the satellite and not the TV channels who were given mere access to the broadband available.

    4. The High Court has distinguished between transfer of ‘rights in respect of a property’ and transfer of ‘right in the property’. In case of royalty, the ownership of property or right remains with the owner and the transferee is permitted to use the right is respect of such property. A payment for the absolute assignment of and ownership of rights transferred is not a payment for the use of something belonging to another party and therefore not royalty.

    5. It has supported the illustration that there is distinction between hiring of a truck for a specified time period and use of transportation services of a carrier who uses a truck for rendering such services.

    6. Thus, relying upon the detailed observations in the AAR’s ruling in case of ISRO (mentioned above), the High Court held that the payments for the use of transponder capacity cannot be said to be for the use of a process or equipment by its customers.

    7. Though there was no treaty involved in this case, to support its view, the High Court has also referred to the OECD model commentary in this context. It observed that the OECD model commentary may be relied upon to understand the meaning of similar terms used in the Act.

    8. While, it did not get into a detailed comparison of the language of the definition of ‘royalty’ in the Act and treaty, it observed that the definition in the OECD model is virtually the same as the Act in all material respects. The High Court has made a mention of the OECD Commentary (para 9.1 of the commentary on Article 12) which suggests that payments made by customers under typical ‘transponder leasing’ arrangements (which is not a leasing of industrial, commercial or scientific equipment due to the fact that the customers do not acquire the physical possession of the transponder, but simply its transmission capacity) would be in the nature of business profits and not royalty.

Overall Comments
    1. The issue, whether the ‘process’ needs to be ‘secret’ remains unanswered, as the High Court did not comment on the same given that it concluded that the payments were not for use of process.

    2. There is no mention of the Special Bench’s ruling in the case of New Skies Satellite in the High Court decision.

    3. While the High Court has referred to the inter-pretation in paragraph 9.1 of Article 12 of the OECD Commentary which states that payment for transponder leasing will not constitute royalty, there is no mention of the specific reservation that India has made against the same. India, in its position on OECD commentary has mentioned that India intends to tax such payments as equipment royalty under its domestic law and many treaties. It has also expressly been mentioned that as per India’s position, the payment for use of transponder is a payment for use of a ‘process’ resulting in ‘royalty’ under Article 12.

DTC Scenario
Under the proposed Direct Tax Code (‘DTC’), the definition of royalty includes payments made for ‘the use of or right to use of transmission by satellite, cable, optic fibre or similar technology’. Hence the definition is wide enough to encompass payments for transponder capacity and hence, would be taxable under the DTC.

Notwithstanding the above, the taxpayer could always claim the benefit of the tax treaty.

Conclusion
The decision of the Delhi High Court would have a significant favourable impact on taxability of revenues earned by foreign satellite operators and other connectivity service providers. Of course, the High Court decision would serve as a strong precedent for such companies at lower Appellate levels for the past years. However the decision would be helpful only in the pre-DTC scenario and the impacting companies would need to make fresh representation for relief in the post-DTC scenario given the High Court ruling.

Digest of Recent Important Foreign Decisions on Cross- Border Taxation – part one

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1. Australia: Taxation in Australia of non-resident investment manager of acting for non-resident shareholders:

Federal Court holds non-resident manager of portfolio of Australian shares for non-resident companies liable to tax in Australia:

The Federal Court on 8th September 2010 handed down a decision in Leighton v. FCT, (2010) FCA 1086 that dealt with taxation in Australia of a non-resident manager who was managing a portfolio of Australian shares for two non-resident companies.

Briefly, Mr. Leighton was, during the relevant period, a resident of Monaco and was not a resident of Australia. He was engaged by two companies, who were not tax resident in Australia and were incorporated in the British Virgin Islands and the Bahamas, to manage a portfolio of Australian shares for them and to provide other services incidental to the management services. Mr. Leighton opened a bank account in Australia and engaged a number of Australian brokers and an Australian custodian. The trading instructions were given by Mr. Leighton, on behalf of the two companies, from Monaco. The trading activities generated taxable income during the relevant period.

Non-residents are subject to tax in Australia only on income sourced in Australia. The judgment does not discuss whether the relevant income has a source in Australia and, presumably, assumes that it does.

After considering the facts, the judgment concludes that Mr. Leighton, in acting as a manager, was, during the relevant period, a trustee of a trust for the non-resident companies as beneficiaries. As such, he is liable for tax for the taxable profits under former section 98(3) of the Income Tax Assessment Act, 1936.

2. France: Foreign Tax Credit:

Limitation or denial of FTC following repo transactions on shares — Administrative Supreme Court opinion:

The Administrative Supreme Court has recently disclosed in its annual report an opinion rendered on 31 March 2009 (No. 382545), in answer to a prejudicial question from the French Tax Authorities (FTA). It dealt with the treatment of foreign-sourced dividends, where the distribution is made in between a sale-repurchase transaction on shares (i.e., dividend stripping). The FTA asked the Court to clarify the legal basis on which, for corporate income tax purposes, the use by resident companies of FTC attached to such dividend coupons could be denied or limited. Key elements of the opinion are summarised below.

(a) Clarification on the limitation applicable to the use of foreign tax credits (FTC), the so-called ‘règle du butoir’. Under Art. 220 of the General Tax Code, the use of a FTC by a resident company is limited to the ‘amount of French corporate income tax assessed on the corresponding income’, i.e., the FTC may only be deducted from that portion of French tax which corresponds to the income sourced in that particular foreign country. No provision, however, specifies whether the foreignsource income, used for the computation of the above-mentioned limitation, should be assessed on a net or gross basis.

In respect of foreign-source dividends, the Court’s opinion is that the income should be assessed on a net basis. This rule covers only expenses that (i) are directly related to the foreign-source income, and (ii) do not increase the value of any asset of the resident company. As a result, foreign withholding taxes and collection expenses directly related to the dividend coupon are deductible. Conversely, loan interest related to the purchase of the foreign shares are not. As a result, such expense will not reduce the portion of ‘corresponding income’ which limits the resident company’s entitlement to FTC.

In addition, the Court rejected the FTA’s position that the capital loss incurred on the resale of the shares should be deducted from any related dividend derived in between the purchase-resale transactions. Such capital losses are not expenses directly related to the foreign-sourced income (i.e., the dividend coupon).

(b) Clarification on the application of the ‘beneficial ownership’ clause. The Court opined that the beneficial ownership clause under a tax treaty (i) enables the FTA to deny the application of the reduced withholding tax rates on outbound payments under certain conditions (see TNS:2007-01-30:FR-1), but (ii) does not allow the FTA to deny (or limit) the use of FTC attached to foreign-sourced dividend coupons. Only the domestic general anti-avoidance rule (GAAR) set forth by Art. L 64 of the Tax Procedure Code (abus de droit) may authorise, where the related buy-sell transaction is ‘artificial’ and/or ‘seek to benefit from a literal application of legal provisions or decisions in contradiction with the objective set forth by the author of such provisions’, such a denial.

Note: Recently, the Administrative Supreme Court rejected the application of the GAAR to tax motivated buy-sell transactions on shares, insofar as the dividend accrues to a taxpayer who actually bears the risk attached to the status of a shareholder (see Administrative Supreme Court, 7 September 2009, No. 305586 and No. 305596, Axa and Sté Henri Golfard, respectively).

3. Belgium: Fixed base under Article 14:

Treaty between Belgium and Luxembourg — Court of Appeal Ghent decides Belgian-rented dwelling of Luxembourg resident self-employed business trainer constitutes fixed base:

On 20th October 2009, the Court of Appeal Ghent decided a case (recently published) X. v. Tax Administration concerning whether a rented dwelling in Belgium of a Luxembourg resident self-employed business trainer constitutes a fixed base under Art. 14(1) of the Belgium-Luxembourg tax treaty on income and capital of 17 September 1970 (the ‘Treaty’). Details of the case are summarised below.

(a) Facts:

The taxpayer was a resident of Luxembourg, who carried out activities as a self-employed business trainer in Belgium, where he visited Belgian companies. He stayed in a rented dwelling in Brugge, which he used as his contact address. The Belgian Tax Administration regarded the dwelling as a fixed base, but the taxpayer took the opposite view.

(b) Legal background:

Art. 14(1) of the Treaty provides that income derived by a resident of one of the contracting states in respect of professional services or other independent activities of a similar character shall be taxable only in that state, unless he has a fixed base regularly available to him in the other state for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other state, but only so much of it as is attributable to that fixed base.

(c) Decision:

The Court followed the view of the Belgian Tax Administration.

The Court observed that the term ‘fixed base’ is neither defined in the Treaty, nor under Belgian domestic law. In addition, the Court considered that the term cannot be interpreted by means of the Commentary to Art. 7 (business profits) of the OECD Model Convention, because under the Treaty more detailed requirements apply for the existence of a permanent establishment than for a fixed base. Therefore, the term ‘fixed base’ has a wider scope.

The Court based its decision that the rented dwelling constitutes a fixed base on the presumption that the taxpayer does a substantial part of his study and preparation work in that dwelling. In this context, the Court held as decisive that the taxpayer has no other place to do his preparatory work and he used the dwelling as his contract address for his clients; moreover:

— the taxpayer receives specialist journals and documentation at, and had purchased office equipment for, that dwelling;

— the Belgian address was stated on his invoices, as a result of which the Court presumed that the administrative formalities wer

(2011) 38 VST 124 (Mad.) Sunder India Limited and others v. Commissioner of Commercial Tax, Ezhilagam, Chennai and others.

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Sales Tax — Interpretation of taxing statutes — Entries in Schedule — Clarification of Commissioner cannot have retrospective effect — Ambiguity in view of Department as to rate of tax applicable — Interpretation favouring dealer to be adopted.

Facts :
The petitioners were dealers in paper-based decorative laminated sheets, made of paper, and treated the same as ‘paper-based product’. The Commissioner of Commercial Taxes issued a clarification dated 17th August 2005, that the products were ‘decorative laminates’ and taxable @ 16%. According to the petitioners the rate of tax applicable on such goods was 10%, thus they sought for review of aforesaid clarification. On review, the Commissioner issued a clarification dated 23rd March 2006 and stated that the paper based laminated decorative sheets are taxable @ 10%. The said clarification was issued after taking note of an earlier order of Tamil Nadu Taxation Special Tribunal. However, later on based upon the Supreme Court’s decision in a matter under Central Excise, wherein the impugned product was held as falling under a different tariff entry than that of paper-based product, the Commissioner again issued a clarification, on 30th May 2008, that the impugned product is correctly liable to tax @ 16%. Thus, tax was sought to be levied at such rate for past periods and notices were issued to reopen the completed assessments also. On writ petitions;

Held :
(1) That the Tamil Nadu Taxation Special Tribunal delivered its decision on 12th April, 1996, which was based upon expert opinion received from the Joint Director of Industries regarding nature of product. The finding was accepted by the Department. The entry contained in the Schedule has not undergone any change. Thus, the Circular issued by the Commissioner, relying on the interpretation given by the Supreme Court in respect to Central Excise Tariff, could not be sustained. The Department was not justified in relying on the Circular for reopening assessments.

(2) That the clarification issued by the Commissioner could not be applied retrospectively.

(3) That since the Department was not firm in its view with regard to the percentage of tax, the benefit of doubt should be extended to the dealers.

(4) That the contention of the Department, that the writ petitions challenging the notices to reopen the assessments were premature in nature, could not be sustained. Similarly, the revised orders passed were also bad in law.

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(2011) 38 VST 45 (Mad.) State of Tamil Nadu v. A.N.S. Guptha and Sons

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Sales Tax Act — Tamil Nadu General Sales Tax Act — Sections 54, 54A, 55 — Assessing Officer is a quasi-judicial authority, refusal to allow the dealer to cross-examine witnesses is not proper.

Facts :
The respondent was a dealer under the Tamil Nadu General Sales Tax Act, 1959. An inspection was made by the Enforcement Wing Officer on which day the dealer did not produce manufacturing-cumstock register in the prescribed form. However the dealer produced all his accounts at the time of assessment, wherein he claimed certain items of sale as exempt from tax. To verify the claim with reference to bought note purchases, summons were issued to various sellers, out of which some of the summons were returned unserved with the endorsement ‘no such address’ and on the basis of this the Assessing Authority treated the bought note purchases as bogus and, therefore, the sale of such articles as taxable. The dealer came forward to produce the persons to establish its case, but the Assessing Officer refused to give opportunity for cross-examination to the dealer stating that he could not conduct a Court of law. The assessment orders were passed disallowing the bought note purchases of items exempt to tax and also levied penalty. The first Appellate Authority as well as the Tribunal allowed the appeal of the dealer. On a revision petition by the State;

Held :
(1) That an opportunity should have been given to the dealer and the refusal by the Department vitiated the order of assessment. When finding of facts had categorically been recorded by both the Appellate Authorities in favour of the dealer, there was no reason to interfere with the order of the Tribunal. The question of law sought to be raised by the Department was purely question of facts.

(2) That the Assessing Authority could not simply take into consideration the report of Enforcement Wing and should have decided the matter on the merits, independently unbiased and unaffected by any other subsequent factors. The Assessing Officer had basically committed a mistake in stating that he could not conduct a Court of law. Such an attitude of the Assessing Authority in totally rejecting the contentions of the dealer without applying the basic principles of law was not legal and bad in law.

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(2011) 21 STR 605 (Tri.-Mumbai) — Punjab State C & W.C. Ltd. v. Commissioner of S.T., Mumbai.

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Return filed in 2003 and based on scrutiny of return, service tax paid in 2004 but show-cause notice issued in 2006 invoking extended period — Ground of limitation raised but the same not considered by Commissioner (Appeals) — Impugned order set aside — Commissioner (Appeals) to first decide limitation and if appellant succeeds, merit not to be considered — Merits to be considered if appellant failed in limitation.

Facts:
The appellants filed their service tax return for the period April 2003 to September 2003 on 24- 10-2003.
A query received from the Department on 16-1-2004 to explain amount paid by them in the return, was explained by appellants vide letter dated 4-2-2004 and paid the service tax on 22-3-2004. On 4-10-2006, the appellants were issued show-cause notice for payment of service tax for the period 14- 5-2003 to 28-5-2003.

Held:
The Tribunal observed that the duty for the disputed period was paid along with interest on 22-3-2004 and show-cause notice was issued on 4-10-2006 which was beyond the statutory period of one year. The appellants took this ground before the Commissioner (Appeals) but it was not considered. Hence the impugned order was set aside and matter was sent to the Commissioner (Appeals) first to decide the limitation issue, if appellants succeeded on limitation issue, merits were not required to be considered. If limitation issue failed, then the case was to be decided on the basis of merits.

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(2011) 21 STR 621 (Tri.-Bang.) — Tata Motors Insurance Services Ltd. v. Commissioner of S.T., Bangalore.

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Personal hearing fixed on 25-1-2007 or 29-1-2007 or 31-1-2007 — Impugned order passed ex parte without hearing Noticee — Appellant stated that adjournment sought on 31-1-2007 by sending fax — Adjournment request rejected — Order passed on 13-2-2007 — Order set aside — Matter remanded for fresh decision.

Facts:
A company registered under the category ‘Authorised Service Station’, received commission from finance companies, commission from insurance companies and incentives from its principal for achievement of targets. The appellant-company was engaged in the said activities without intimating the Department about the same and without following statutory formalities including payment of tax, for the period July 2003 to September 2005. The appellant had paid Rs.6,84,254 towards the demand confirmed against them in the year 2005. The Commissioner sent showcause notice and fixed personal hearing at 1600 hrs. on either of three alternate dates viz. 25th January or 29th January or 31st January. The appellant sought adjournment of hearing on 31-1-2007.

The adjournment was rejected and ex parte order was passed.

Held:
The Tribunal observed that giving the choice of three dates is considered as one date for hearing and the appellants could appear before the Commissioner on any one of the dates. Statutorily, the appellants were entitled to request for three adjournments. The appellants sought adjournment of hearing fixed on the last date indicated in the notice which cannot be considered as adjournment of earlier two dates. Denial of personal hearing was violation of its statutory right and also violation of principles of natural justice. Hence the order of the Commissioner was vacated and the case was remanded to the Commissioner.

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(2011) 21 STR 626 (Tri.-Bang.) — Kerala State Beverages (Mfg. & Mktg.) Corp. v. CCEx., Trivandrum.

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Appellants, a State Government undertaking, engaged in procuring and selling liquor — Service tax demanded on charges collected for warehousing liquor in appellant premises — Revenue not rebutting service tax demanded on sale consideration collected from distillers — Prima facie case made out by showing that liquor purchased from distilleries — Pre-deposit waived — Recovery stayed.

Facts:
The appellant-corporation, an undertaking of the Kerala State Government, had the monopoly of procuring foreign liquor (Indian Made) manufactured in various private distilleries during the period of dispute. The appellant sold these products either through their own outlets or through independent dealers and paid sales tax thereon. Treating as commission income or revenue, service tax was demanded, whereas the appellant contended it as the case of sale and the income earned therefrom as trading profit. The Department was not able to rebut the claim of the appellants that service tax was demanded on the sale consideration.

Held:
The Tribunal observed that it was a prima facie case of purchasing liquor from the distilleries and where there is sale of goods, there can be no levy of service tax on its value. Hence, prima facie, no service tax was leviable on the amount collected. Waiver of pre-deposit and stay of recovery was granted.

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(2011) 21 STR 631 (Tri.-Ahmd.) — Jay Dwarkadish Engg. & Electricals Contractor v. CCex., Rajkot.

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Delay in payment of service tax — Tax paid with interest subsequently — Department informed of payment through ST-3 return — Show-cause notice was issued for levy of penalty by the Department — Penalty cancelled.

Facts:
The appellants were engaged in construction service. During the period from April 2007 to September 2007, there was delay of 20 to 47 days in making the payment of service tax. Delayed payment was made with interest. Penalty was imposed on the appellant u/s. 76 of the Finance Act, 1994. Instead of appearing the appellants filed the written representation stating the payment of tax along with interest was made and reliance on the Tribunal decision, in U.B. Engineering Ltd. v. Commissioner, 2010 (20) STR 818 (Tribunal), to support their contention that where an assessee pays service tax with interest and informs the Central Excise Officer, the Central Excise Officer shall not issue a show-cause notice.

Held:
The Tribunal observed that appellants paid the service tax with interest and the Department was informed of the same through ST-3, the provisions of section 73(3) of the Finance Act is applicable and in such cases no show-cause notice need to be issued. Allowing the appeal, the penalty u/s. 76 was held unsustainable.

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