Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Year: 2012

Nimbus Sport International Pte. Ltd. v. DDIT (2011) TII 178 ITAT-Del.-Intl. Articles 5, 7 & 12 of India-Singapore DTAA A.Ys.: 2002-03, 2003-04, 2004-05 Dated: 30-9-2011 Before K. D. Ranjan (AM) and R. P. Tolani (JM) Counsel for assessee/revenue: S. R. Wadhwa/A. K. Mahajan, A. D. Mehrotra

fiogf49gjkf0d
(i) On facts, the taxpayer had no fixed place PE or service PE in India.

(ii) Receipts of the taxpayer were in the nature of FTS and not business income.

(iii) FTS received by the taxpayer were taxable @10% in terms of Article 12(2) of India-Singapore DTAA.

(iv) As the taxpayer did not have PE in India, the advertisement revenue received in respect of matches played outside India which were telecast outside India was not taxable in India. The force of attraction also cannot apply merely because some viewers may be in India or advertisement may have some incremental value in India.

Facts:
The taxpayer was Singapore company (‘SingCo’) engaged in the business of sports coverage, production, distribution, event management, sponsorship, etc. SingCo was formed as a joint venture between two independent and unrelated companies, one was a Mauritius company and another was a BVI company. SingCo was a tax resident of Singapore and was wholly managed and controlled from Singapore. It had claimed that it did not have a fixed place PE, a service PE, an agency PE or any other type of PE in India. Pursuant to an International Bidding, SingCo entered into agreement with Prasar Bharti (‘PB’), a broadcaster owned by the Government of India for production of TV signals of international cricket events from February 2002 to October 2004 for which it received remuneration from PB. SingCo also received advertisement revenue outside India from certain advertisers in India.

The AO held: (i) that SingCo had a PE in India; (ii) its income was in the nature of FTS; and (iii) accordingly, in terms of section 44D read with section 115A, its gross receipts were taxable @20%. The AO further held that the advertisement revenue of SingCo was changeable to tax in India.

The issues before the Tribunal were as follows:

(i) Whether SingCo had a PE in India?

(ii) Whether receipts of SingCo from PB were business income of a taxpayer having no PE in India?

(iii) Whether gross receipts of SingCo from PB should be treated as FTS and taxed @10% as claimed by SingCo or @20% as held by AO?

(iv) Whether advertisement revenue received by SingCo in Singapore from Indian companies was taxable in India?

Held:
The Tribunal observed and held as follows.

(i) PE in India:

  • Contract was signed in Singapore and all activities relating to it were carried out from Singapore.

  • There was no evidence that the management and control of SingCo were not situated in India. Holding of mere one board meeting in India cannot lead to the conclusion that the control and management of SingCo was situated only in India.

  • On facts, affairs and management of SingCo were not carried out in India and SingCo was rightly held to be non-resident.

  • Further, SingCo had provided sufficient evidence to establish that while furnishing the services, the stay of its personnel in India was less than 90 days. Consequently, SingCo did not have a fixed place PE or service PE in India during the relevant years.

(ii) Nature of receipts:

The receipts of SingCo from PB were FTS as service of production and generation of live television signal rendered by SingCo was in the nature of technical service and SingCo had made available services which were based on technical knowledge, skill and know-how.

(iii) Applicable rate of tax:
In terms of Article 12(2) of the DTAA, taxability of FTS would be chargeable to tax @10% of the gross receipts.

(iv) Taxability of advertisement revenue:

  • The key fact is that SingCo did not have a PE in India, the advertisement revenue was in respect of the matches that were not played in India and the telecast of those matches was also not in India.

  • Hence, force of attraction cannot apply merely because some viewers may be in India and advertisement may have some incremental value in India.

  • As the dominant object of the Indian advertisers was advertising outside India, advertisement revenue cannot be attributed to India and in absence of PE, it was not taxable in India.
levitra

Section 253 of the Income-tax Act, 1961 — Direct stay application filed before Tribunal is maintainable and it is not a requirement of law that assessee should necessarily approach Commissioner before approaching Tribunal for grant of stay.

fiogf49gjkf0d
(2012) 49 SOT 333 (Pune)
Honeywell Automation India Ltd. v. Dy. CIT
A.Y.: 2006-07. Dated: 24-2-2011

Section 253 of the Income-tax Act, 1961 — Direct stay application filed before Tribunal is maintainable and it is not a requirement of law that assessee should necessarily approach Commissioner before approaching Tribunal for grant of stay.

The assessee filed separate application for stay of demand before the Deputy Commissioner, before Additional Commissioner and finally before the Commissioner. None of these officials disposed of the assessee’s applications for stay of demand. The assessee-company thereupon filed application before the Tribunal for stay against the demand of arrears by the Revenue. The Revenue raised an objection that Tribunal had no jurisdiction to entertain directly stay application (DSA) without waiting for decision of the lower authorities.

The Tribunal dismissed the objections raised by the Revenue. The Tribunal noted as under:

(1) The Act has conferred certain powers on the Income Tax authorities for discharging and 158 (2012) 44-A BCAJ 9 10 one such power relates to matters of stay of the demand. The assessee filed the stay application before the Assessing Officer, but the Assessing Officer did not take any action, be it a case of rejection or otherwise. The same is the fate of application lying with the Additional Commissioner. The Commissioner merely passed on the responsibility to his deputies instead of either staying the demand or rejecting the request for stay of the same or otherwise.

(2) While there is inaction on part of the Revenue on the applications for stay, the assessee is busy in making application for stay of demand from time to time fearing ultimate coercive action by the AO and its likely adverse effects on the business operations of the assessee.

(3) Regarding the DSA by the assessee before the Tribunal, the decisions of the Tribunal are in favour of the assessee for the proposition that it is not necessary that the assessee should necessarily approach the Commissioner of Income-tax before approaching the Tribunal for grant of stay.

(4) Therefore, DSA filed before the Tribunal is maintainable and it is not the requirement of law that the assessee should necessarily approach the Commissioner before approaching the Tribunal for grant of stay.

(5) It does not make any difference whether the assessee filed any application before the Revenue and not awaited their decisions before filing application before the Tribunal or directly approached the Tribunal without even filing the applications before the Revenue authorities when there exists threat of coercive action by the Assessing Officer.

levitra

Section 54F of the Income-tax Act, 1961 — Deduction allowable even if the building in which investment was made was under construction and assessee had paid entire amount as advance.

fiogf49gjkf0d
(2012) 49 SOT 90 (Mumbai)
ACIT v. Sudhakar ram
A.Y.: 2005-06. Dated: 31-10-2011

Section 54F of the Income-tax Act, 1961 — Deduction allowable even if the building in which investment was made was under construction and assessee had paid entire amount as advance.

The assessee earned long-term capital gain on sale of shares and claimed deduction u/s.54F in respect of investment in a new house. The Assessing Officer noted that the assessee had made investment in two new flats and the building was under construction stage and the assessee had chosen to pay the entire advance and, therefore, deduction u/s.54F could not be given.

The CIT(A) allowed the assessee’s claim. The Tribunal also held in favour of the assessee. The Tribunal noted that since the assessee has paid the full consideration before the statutory period of 2 years from the date of sale of shares and has acquired the right in the two flats which is being constructed by the builder, the benefit of deduction u/s.54F cannot be denied to the assessee.

levitra

Sections 147, 154 — Once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act — In the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

fiogf49gjkf0d
(2012) TIOL 193 ITAT-Mum.
Binani Cement Ltd. v. DCIT
A.Y.: 2007-08. Dated: 27-1-2012

Sections 147, 154 — Once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act — In the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.


Facts:

For A.Y. 2007-08, the assessment of total income of the assessee was completed vide order dated 23-3- 2007, passed u/s.143(3) of the Act. While assessing the total income, the Assessing Officer (AO) allowed a deduction of Rs.74,42,770 being the amount of interest on term loan from IDBI which was not paid as due, but was deferred by IDBI and such deferral was regarded as deemed payment.

Subsequently the Assessing Officer (AO) recorded the reasons which were supplied to the assessee vide letter dated 26-8-2009, and issued notice u/s.148. One of the reasons recorded was that on perusal of the assessment records it is noticed that in respect of the loan obtained by the assessee from IDBI, the assessee had not paid interest instalment amounting to Rs.74,42,770 which was deferred by IDBI. This had been treated as deemed payment of interest and was allowed as deduction. Upon receiving the copy of reasons recorded, the assessee objected to the issuance of notice u/s.148 on the ground that the time section 43B was amended after the assessee has filed its return of income, by Finance Act, 2006 with retrospective effect from 1-4-1989 to provide for disallowance of interest which has been converted into loan and also that since the amount under consideration has been paid in subsequent years it will not have any impact on the income-tax liability ultimately. The assessee consented that this can be rectified u/s.154 of the Act. The AO without disposing of the assessee’s objections proceeded to complete the reassessment and added the sum of Rs.74,42,770 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO in reopening the assessment u/s.147 r.w.s. 148 of the Act on the ground that the assessee has admitted one of the reasons recorded for reopening the assessment. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that in view of the retrospective amendment of section 43B of the Act by the Finance Act, 2006, subsequent to the filling of the return, certain disallowance under this provision was called for, which was consented by the assessee by filing rectification petition vide letter dated 30-9-2009. The amendment was on the statute even at the time when the AO completed assessment u/s.143(3) of the Act. On behalf of the assessee, relying on the decision of the Bombay High Court in the case of Hindustan Unilever Ltd. v. DCIT, (325 ITR 102) (Bom.) it was contended that proceedings u/s.147 were being objected to as there was no escapement of income.
The Tribunal held that:

(1) Mere fresh application of mind to the same set of facts or mere change of opinion does not confer jurisdiction even after amendment in section 147 w.e.f. 1-4-1989.

(2) When a regular order of assessment is passed in terms of section 143(3), a presumption can be raised that such an order has been passed on application of mind. A presumption can also be raised to the effect that in terms of section 114(e) of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take, benefit of its own wrong.

(3) Considering the ratio of the decisions of the Delhi High Court in the case of Jindal Photo Films Ltd. v. DCIT, 234 ITR 170 (Del.) and also the decision of the Full Bench of the Delhi High Court in the case of CIT v. Kelvinator India Ltd., (256 ITR 1) which has been affirmed by the Supreme Court in 320 ITR 561 (SC), in order to invoke the provisions of section 147, the AO is required to have some tangible material pinpointing escapement of income from assessment and in the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

(4) The amendment to section 43B was available to the AO while framing assessment, even otherwise, based on the ratio of the decision of the Bombay High Court in the case of Hindustan Unilever Ltd. (supra) it can be safely concluded that once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act.

The Tribunal held that the jurisdiction is to be assumed by the AO u/s.154 of the Act and not 148 of the Act. The Tribunal allowed this issue of the assessee’s cross-objections.

levitra

Section 255(4) — The opinion expressed by the Third Member (TM) is binding on the member in minority — Questions framed by the member in minority while giving effect to the opinion of majority are outside the purview of section 255(4) of the Act and have no relevance.

fiogf49gjkf0d
(2012) TIOL 188 ITAT-Mum.-SB
Tulip Hotels Pvt. Ltd. v. DCIT
A.Ys.: 2004-05 & 2005-06. Dated: 30-3-2012

Section 255(4) — The opinion expressed by the Third Member (TM) is binding on the member in minority — Questions framed by the member in minority while giving effect to the opinion of majority are outside the purview of section 255(4) of the Act and have no relevance.


Facts:

In an appeal filed by the assessee, the Tribunal was considering taxability of certain amounts as cash credits u/s.68 of the Act and also allowability of certain expenditure as a deduction. In the course of hearing before the Tribunal, the assessee filed certain additional evidence. After considering the evidence filed by the assessee before the lower authorities and also the additional evidence filed before the Tribunal, the Judicial Member (JM) decided both the issues in favour of the assessee, while the Accountant Member (AM) decided both the issues in favour of the Department. The members formulated questions to be referred by the President to the Third Member. The TM agreed with the JM and decided both the issues in favour of the assessee. At the stage of giving effect to the opinion of the TM, the JM passed an order in conformity with the order of the TM, whereas the AM observed that it is not possible to give effect to the order of the TM on the ground that the order of TM was contrary to the opinion expressed by the TM himself in his own order and that the TM had not considered various points of differences arising from the dissenting orders. He raised certain new questions on merits of the dispute and directed that the matter be referred back to the President. The JM did not agree and raised an issue whether the Members of the Bench could comment on the order of the TM instead of merely passing a confirmatory order in terms of section 255(4). The President on a reference made by the Division Bench referred the following question to the SB for its consideration:

“Whether on a proper interpretation of s.s (4) of section 255 of the Income-tax Act, the order proposed by the learned AM while giving effect to the opinion of the majority consequent to the opinion expressed by the learned Third Member, can be said to be a valid or lawful order passed in accordance with the said provision.”

Held:

(1) There is no doubt that the Accountant Member while agreeing with the questions formulated at the time of the original reference to the President of the ITAT has again framed three new questions at the time of giving effect to the opinion of the majority de hors the provisions of section 255(4) of the Act as he had become functus officio after he passed his initial draft order;

(2) The opinion expressed by the Third Member was very much binding on the Accountant Member. The Accountant Member who is in minority was bound to follow the opinion of the Third Member in its true letter and spirit. It was necessary for judicial propriety and discipline that the member who is in minority must accept as binding the opinion of the Third Member;

(3) On a difference of opinion among the two Members of the Tribunal, the third Member was called upon to answer two questions on which there was difference of opinion among the two members who framed the questions and the third Member in a wellconsidered order, answered the reference by giving sound and valid reasons agreeing with the views of the Judicial Member. Thus, the majority view was in favour of the assessee;

(4) The proposed order dated 18-2-2010 of the Accountant Member who is in the minority and had become functus officio wherein he has expressed his inability to give effect to the opinion of the majority and proceeded to frame three new questions to be referred to the President, ITAT again for resolving the controversy cannot be said to be a valid or lawful order passed in accordance with the provisions of section 255(4) of the Act. The SB held that the said order dated 18-2-2010 proposed by the Accountant Member to be not sustainable in law. It answered the question referred to it in favour of the assessee.

levitra

Merieux Alliance & Groupe Industrial Marcel Dassault, In re (Unreported) AAR Nos. 846 & 847 of 2009 Article 14(5) of India-French DTAA Dated: 28-11-2011 Counsel for assessee/revenue: Porus Kaka, Manish Kanth, B. M. Singh, Dominique Tazikawa, Rohan Shah, Rohit Jain, Parth Contractor, Kumar Visalaksh/Girish Dave, Gangadhar Panda

fiogf49gjkf0d
French residents transferred shares of a French company to another French resident. The only business/asset of the French company were shares comprising 80% equity shares in an Indian company. Since the transfer resulted in transfer of underlying assets and control of Indian company, on purposive interpretation, gains arising from the transfer were liable to tax in India.

Facts:
Merieux Alliance (‘MA’) & Groupe Industrial Marcel Dassault (‘GIMD’) (jointly referred to as the applicants) were French companies. MA incorporated wholly-owned subsidiary (‘ShanH’) in France. MA acquired 80% equity shares of an Indian company (‘Shantha’) from shareholders of Shantha in the name of ShanH. Due diligence, funding and payment of stamp duty for the purchase was done by MA. Subsequently, GIMD and a foreign individual acquired 20% of the shares in ShanH from MA. In 2009, MA and GIMD sold their holding in ShanH to Sanofi, another French company.

 On the basis of the information available with it, the tax authority initiated proceedings against Sanofi for failure to withhold tax from payment made to MA and GIMD. In view of the proceedings, the applicant approached AAR for its ruling on the following issues:

(i) Whether capital gains arising from transfer of shares of ShanH, a French company, were changeable to tax in India, either under the Act or under the DTAA?

(ii) Without prejudice to (i), whether transfer of controlling interest (assuming, while denying that it is a separate asset) is liable to be taxed in France under Article 14(6) of the DTAA?

The applicant contended as follows :

  • The shares transferred were of a French company and therefore, such transfer cannot be taxed either under the Act or under the DTAA.

  • Acquiring shares of Shantha through a subsidiary was a legitimate business route.

  • As per the Supreme Court in Azadi Bachao Andolan, the Revenue cannot go behind the transaction since it was not permissible to ignore the corporate structure, the tax residency certificate and the fact that the transaction was recognised by the Government of India.

  • As the capital gains from transfer of shares of a French company were taxable in France, there was no question of tax evasion or treaty shopping.

  • A taxing statute should be construed strictly and nothing is to be added and subtracted. The concepts of ‘underlying assets’ and ‘controlling interest’ cannot be reckoned while interpreting a taxing statute and transactions not directly hit by the taxing statute cannot be roped in based on presumed intention or purpose.

The tax authority contended as follows :

  • As the withholding tax proceeding against Sanofi were pending and the transaction was, prima facie, a tax avoidance scheme, in terms of section 245(4) of the Act, no ruling could be given by AAR.

  • ShanH had no substance, it was a front, a paper company, having no office, no employees, no business and no asset except the share in Shantha and was created only for dealing with the share of Shantha.

  • Alienation is a word of wide import. Alienation of shares coupled with a participation of at least 10% in a company implies that under Article 14(5) of the DTAA, such participation would attract tax in India if the participation interest is in an Indian company. ‘Participation’ would mean right to vote, to nominate directors, control and management, day-to-day decision making and right to get profits distributed. All these rights in Shantha were with MA and GIMD, which were transferred pursuant to the transfer of shares of ShanH.

  • The transfer of shares of ShanH involved alienation of assets and controlling interest of an Indian company, gains from which was taxable in India.

Held:
AAR observed and held as follows :

(i) Maintainability of application:

  • Initiation of proceedings u/s.195/197 of the Act or even final order passed were preliminary and were not conclusive and it was no bar on considering an application. ? Merely because there was no tax avoidance as the transaction was taxable in France, AAR can yet examine whether the scheme was designed, prima facie, for Indian tax avoidance.

(ii) Tax avoidance:

  • While the Supreme Court decision in Azadi Bachao Andolan is binding on AAR, it may not be the final word in a given situation. In considering the question of prima facie tax avoidance, AAR is not piercing the corporate veil, but examining whether the steps taken had any business purpose.

  • Usually adopted scheme can be treated as an attempt at avoidance of tax depending on the effect of the scheme in entirety on liability of the entity to be taxed.

  • The series of transactions commencing from formation of ShanH appears to be a preordained scheme to produce a given result, viz., to deal with assets and control of Shantha, without actually dealing with the shares of Shantha. A gain is generated by this transaction. If the transaction is accepted at face value, by repeating the process, control over Indian assets and business can pass from hand to hand without incurring any tax liability in India.

(iii) Corporate veil and controlling interest:

  • Since ShanH had no business or assets other than shares in Shantha, the transaction resulted in transfer of underlying assets, business and control of Shantha.

  • Based on literal construction of Article 14(5) of the DTAA, the transfer of shares in ShanH can be taxed only in France. However, since the transaction involved alienation of assets and controlling interest of an Indian company, on purposive construction of Article 14(5), capital gains arising from the transaction would be taxable in India. The question as to whether controlling interest is an asset taxable in France under Article 14(6) of the DTAA is not required to be answered.
levitra

Poonawalla Aviation Private Limited, in re (Unreported) AAR No. 953 of 2010 Article 12(3)(b) of India-France DTAA; Section 195 of Income-tax Act Dated: 5-12-2011 Counsel for assessee/revenue: Rajan Vora, Rahul Kashikar, Siddharth Kaul, Arijit Charkravarty/Mukundraj M. Chate

fiogf49gjkf0d
(i) Although ‘insuring’ of the loan is not equivalent to ‘endorsing’, having regard to the MFN clause and corresponding provision in other DTAAs, exemption under Article 12(3)(b) would apply.

(ii) Exemption under Article 12(3)(b) would apply even if the interest was paid into a bank account outside France since the interest was beneficially owned by a French resident.

Facts:
The applicant was an Indian company. It entered into an agreement with a French company (‘FrenchCo’) for purchase of aircraft for which price was deferred and was to be paid over 6 years’ time. Subsequently, COFACE (an agency of France Government) agreed to insure credit facility to be extended by FrenchCo. The applicant executed promissory notes covering principal and interest in favour of FrenchCo. FrenchCo irrevocably and unconditionally assigned the promissory notes to a French bank. Thereafter, the applicant made payments into the account of the PE of the French bank in the USA. The issues before AAR were as follows:

(i) Whether interest payable to FrenchCo was taxable in view of Article 12(3)(b) of the DTAA?

(ii) Whether interest payable to the French bank (after assignment of promissory note by FrenchCo to French bank) would be taxable in view of Article 12(3)(b) of the DTAA?
(iii) Whether the applicant was required to withhold tax u/s.195 of the Income-tax Act in respect of the interest paid to FrenchCo or French bank?
The applicant contended that Article 12(3)(b) of the DTAA provides for exemption in respect of interest beneficially owned by a French resident in connection with a loan or credit extended or endorsed by COFACE. Hence, the applicant contended that the interest paid, was exempt since the loan was insured by COFACE. The word ‘endorse’ was of wide amplitude and also covered providing of insurance cover on loan. The applicant also claimed benefit of MFN clause in the Protocol to the DTAA.

The tax authority contended that the interest was not derived in connection with a loan or credit intended by or endorsed by COFACE, but COFACE had only provided export credit insurance and further, as the instalments were payable in the USA and not in France, the DTAA was not applicable.

Held:
AAR observed and ruled as follows:

(i) Mere fact of COFACE having ‘insured’ the credit extended to the applicant does not mean ‘endorsement’ of credit. The DTAA between France and other countries mentioned ‘guaranteed or assured’ or ‘guaranteed or insured’ by COFACE. However, the DTAA with India has not used such expression. Accordingly, mere extending of insurance cover by COFACE does not amount to ‘extending or endorsing’ the loan or credit by COFACE as required in Article 12(3)(b) to quality for exemption.

(ii) India’s DTAA as with Canada, Hungary, Ireland (which were entered into after the DTAA) include loans or credits ‘insured’ for the purpose of exemption. Therefore, based on MFN clause, the protection is understood as extended to loan or credit ‘insured’ by COFACE and hence, it would come within the purview in exemption of Article 12(3)(b). Accordingly, payment of interest to FrenchCo is exempt under Article 12(3)(b).

(iii) The beneficial ownership of the French bank is not endorsed or assigned to its branch in the USA. Accordingly, interest payable to French bank pursuant to the endorsement of the promissory note by FrenchCo is exempt under Article 12(3)(b) as interest beneficially belongs to French resident.

(iv) In view of the exemption of interest, withholding obligation u/s.195 will not arise.

levitra

Fes for Technical Services — Exclusions provided in Section 9(1)(vii)(b)

fiogf49gjkf0d
Taxation of Fees for Technical Services (FTS) has assumed great significance in the Indian context. In this Article, we wish to highlight and discuss the issues concerning the exclusions provided in section 9(1)(vii) (b), which are of very practical utility and relevance.

It is important to note that in this article we have not dealt with the exclusions contained in the definition of the term ‘Fees for Technical Services’ given in Explanation 2 to section 9(1)(vii), relating to noninclusion of consideration for any construction, assembly, mining or like project undertaken by the recipient of such consideration.

We invite the readers to provide their useful comments and feedback in respect of the same.

1. Introduction

1.1 Section 5 of the Act dealing with scope of total income provides that both in the case of a resident as well as non-resident, total income would include all income from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during such year.

1.2 Section 9 of the Act contains the provisions relating to income deemed to accrue or arise in India.

Section 9(1)(vii)(b) of the Act reads as under:

“(1) The following income shall be deemed to accrue or arise in India:

(vii) income by way of fees for technical services payable by —

(b) a person who is resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or”

Thus the exclusionary part of clause (b) makes it clear that in order to be eligible for the benefit provided, the following conditions needs to be fulfilled:

(a) amount is paid as fees for technical services.
(b) such services are utilised:

(i) in a business or profession carried on by such person outside India, or

(ii) for the purpose of making or earning any income from any source outside India.

1.3 The language of the second limb of the exclusionary part of section 9(1)(vi)(b) of the Act providing source rule for royalties, is almost identical and accordingly, the discussion in respect of second limb of the exclusionary part of section 9(1)(vii)(b) relating to FTS would equally apply to royalties also.

1.4 From the plain reading of the provisions of section 9(1)(vii)(b), it is evident that if any payment of fees falls within the exclusionary portion of the clause (b), then the payment of such fees made by a person who is resident, would not be deemed to accrue or arise in India and accordingly would not be taxable in India.

1.5 The exclusionary portion of the clause (b) contains two important limbs which are as follows:

(a) where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India, or

(b) for the purposes of making or earning any income from any source outside India.

1.6 In the first limb of exclusionary part of clause (b) mentioned above would apply in a case where the FTS are payable by a resident in respect of services utilised in a business or profession carried on by such person outside India.

Thus, for example, A Ltd., an Indian company, has a branch in Dubai and makes payment of FTS to a third party in London for the services which are utilised in the business carried by the Dubai branch of the Indian company. Such payment would be covered by the first limb of exclusionary clause (b) mentioned above and the same would not be deemed to accrue or arise in India.

It is important to note that the services have to be utilised in a business or profession carried on by such a person outside India. In this connection, two important questions arise which are as follows:

(a) The first question in this context would be as to when can a resident be said to be ‘carrying on a business or profession outside India’?

In the view of the authors, if the business is carried on outside India by a branch, liaison office, project office or Permanent Establishment (PE) in any form of the person resident in India, then it could be assumed that the resident is ‘carrying on a business or profession outside India’. It is difficult to think of a situation where without a branch, liaison office, project office or PE, a resident could be said to be ‘carrying on a business or profession outside India’.

It is an open question whether business carried on by a person resident in India through the means of e-commerce can be considered to be carried on outside India for the purposes of the first limb of the exclusionary part of clause (b)?

(b) The second question arises which is very relevant is: What is the meaning of the words ‘such person’ appearing in the first limb of exclusionary clause (b)? Does the same refer to the payer of the fees or the recipient of the fees?

On a plain reading of the opening part of the clause (b) along with the first limb of the of exclusionary clause (b), it would be apparent that the words ‘such person’ should refer to the payer of the fees.

However, the Bombay High Court in the case of Grasim Industries Ltd. v. S. M. Mishra, CIT (Bombay High Court), (2011) 332 ITR 276, while disposing of the writ petition, has held that the words ‘such person’ would mean the recipient of the fees and not the payer of the fees. The aforesaid case is discussed below.

1.7 The second limb of exclusionary part of clause (b) mentioned above would apply in a case where the FTS is payable by a resident in respect of services utilised for the purposes of making or earning any income from any source outside India. In this connection also, two important questions arise as follows:

(a) Firstly, for the purposes of second limb of exclusionary clause (b), it is extremely important to determine the true meaning of the words ‘source outside India’. For this purposes it is very important to determine: What is meant by the word ‘source’ and when can a ‘source’ be said to be ‘outside India’? Can the ‘export of goods and services’ to customers out side India be said to be ‘source outside India’?

(b) The second question which arises for consideration is: Whether the ‘source’ has to be an ‘existing source’ or it could be even for a ‘future source’ of income?

(c) Various judicial pronouncements in this regard are discussed in the paragraphs given below.

2. Judicial pronouncements

A. Judicial pronouncements relating to first limb of exclusionary part of clause (b)

2.1 332 ITR 276 — Grasim Industries Ltd. v. S. M. Mishra, CIT (Bombay High Court)

(a) Nature of payment

Receipt of Fees for Technical services rendered by a non-resident outside India

(b) Brief facts

The assessee company was a company incorporated in India in which public was substantially interested and had its principal place of business at Mumbai. The petitioner No. 2 was a company incorporated under the laws of Delaware and had its principal place of business in Pennsylvania, USA. The U.S. company did not have any office or place of business in India and was not resident in India.

The Indian company being desirous of setting up a sponge-iron plant approached the U.S. company for technical assistance. By a basic engineering and training agreement the U.S. company agreed to render to the Indian company outside India certain engineering and other related services in relation to the sponge-iron plant.

By another agreement (the supervisory agreement), the U.S. company agreed to provide certain supervisory services to the Indian company in India. By the basic engineering and training agreement, the U.S. company was to prepare basic engineering drawings specifications, calculations and other documents and design and also prepare monthly schedule of non-Indian activities outside India.

The U.S. company was to deliver to the authorised representative of the Indian company the designs, drawings and data outside India. The U.S. company also agreed to train outside India a certain number of employees of the Indian company in order to make available to such employees scientific knowledge, technical information, expertise and technology necessary for commissioning, operation and maintenance of the sponge-iron plant.

As a consideration, the Indian company agreed to pay to the U.S. company a sum of US $ 16,231,000, net of Indian income-tax, if any, leviable. In accordance with the basic engineering and training agreement, the U.S. company delivered the total basic engineering package to the representative of the Indian company in Pennsylvania (USA) between November 1989 and August 1990. The U.S. company also imparted training to 22 key personnel of the Indian company at the plant in Mexico as provided in the basic engineering and training agreement.

The Assessing Officer charged the consideration received by the U.S. company to tax. The U.S. company did not dispute that the services under supervisory services were rendered in India and as such the income received therefrom was liable to income-tax. The dispute related only to the amount paid by the Indian company to the U.S. company under the basic engineering and training agreement dated October 22, 1989.

    c) Key issue in relation to section 9(1)(vii)(b)

Does the expression ‘by such person’ appearing in section 9(1)(vii)(b) refers to the recipient of income and not to the person making the payment?

    d) Decision

The Bombay High Court held in the assessee’s favour as follows:

“Section 9(1)(vii) of the Act says that the income by way of fees for technical services payable by three classes of persons shall be deemed to have accrued or arisen to the recipient in India. The three classes of payees are described in three sub-clauses, viz. (a), (b) and (c) of clause (vii). Sub-clause (a) is in respect of an income received by way of fees payable by the Government. Sub-clause (b) is regarding the income by way of fees payable by a person who is a resident in India and sub-clause (c) is in respect of an income by way of fees payable by a person who is a non-resident.

So far as sub-clause (a) is concerned, it admits of no exception and every rupee received as an income by way of fees for technical services paid by the Government to him is deemed to have accrued or arisen to the recipient in India.

So far as sub-clause (b) is concerned, income by way of fees for technical services payable by a person who is a non-resident (should be read as ‘Resident’) is deemed to have accrued or arisen to the recipient in India ‘except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India.’

The expression ‘by such person’ appearing in section 9(1)(vii)(b), in our opinion, refer to the recipient of the income and not to the person making the payment. This would be clear if one looks to the opening words of s.s (1) of section 9 which reads ‘the following income shall be deemed to accrue or arise in India’. Section 9(1) refers to the income which is deemed to have accrued or arisen in India by the recipient of the income. The expression ‘such person’ appearing in sub-clause of section 9(1)(vii) therefore refer to the recipient, because one has to consider whether the income received by him (the recipient) is deemed to have accrued or arisen in India. Section 9 does not contemplate taxing the payer but contemplates taxing the recipient for the income received by him. In our considered view, the expression ‘such person’ appearing in sub-clause of section 9(1)(vii) refers to the recipient of the income and not to the payer. If we were to construe the expression ‘such person’ appearing in section 9(1)(vii)(b) as to the person who makes the payment for technical services it would give rise to a startling results.

We would demonstrate this by means of an illustration. Take a case where a resident Indian goes abroad, falls sick, and avails services of a pathological laboratory for testing his blood and pays the fees to the laboratory for the technical services of blood analysis performed by it. Obviously, the payment made by the Indian resident for the technical services payable to the owner of the laboratory who is a non-resident would fall in the first part of sub-clause (b) of section 9(1)(vii) of the Act and the fee received by the owner of the laboratory would be subject to the Indian income-tax unless it falls within the exception provided under sub-clause (b) itself. If we were to read the expression ‘such person’ in sub-clause (b) to refer the person making the payment i.e., the resident Indian, then obviously the case would not fall within the exception, because the fees were not payable in respect of any business or profession carried on by ‘such resident Indian’ outside India. Consequently, the income received by the owner of the pathology laboratory would be subject to Indian income-tax. By no stretch of imagination, the owner of the pathology laboratory who is a non-resident Indian can be subjected to income-tax because Parliament obviously would have no legislative competence to tax him in respect of services rendered by him (who is a non-resident and non-citizen) outside Indian territory. However, if the expression ‘such person’ appearing in sub-clause (b) of section 9(1)(vii) is construed to refer to the recipient of the fees, then he would be covered by the exception and not liable to pay Indian income-tax.

If we apply sub-clause (b) of section 9(1)(vii) of the Act so construed to the facts of the case at hand, the fees received by petitioner No. 2 for technical services from petitioner No. 1 would fall within the exception carried out by sub-clause (b) of section 9(1)(vii) of the Act and not taxable in India.”

Thus, the Bombay High Court has provided a completely new perspective to the interpretation of the words ‘such person’ appearing in section 9(1) (vii)(b). In the authors’ humble opinion, on a holistic view of the purpose and intention of insertion of section 9 and also of the exclusionary provisions contained in section 9(1)(vii)(b), the view taken by the Bombay High Court appears to be erroneous and the same may have to be tested in the Supreme Court.

Further, it is important to note that while disposing of the writ petition, the Bombay High Court did not consider the implications of the Explanation inserted by the Finance Act, 2010 at the end of section 9.

    B. Judicial pronouncements relating to second limb of exclusionary part of clause (b)

2.2 (2002) 125 Taxman 928 (Mad.) — CIT v. Aktiengesellschaft Kuhnle Kopp and Kausch W. Germany by BHEL

    a) Nature of payment

Royalty paid to a non-resident in respect of export sales.

    b) Brief facts

Pursuant to a collaboration agreement with an Indian company the assessee, a non-resident company, received payment on account of royalty. The Tribunal held that the royalty payable on export sales could not be regarded as deemed to have accrued in India within the meaning of section 9(1) (vi).

    c) Key issue in relation to section 9(1)(vii)(b)

Whether royalty could not be said to be deemed to have accrued or arisen in India u/s.9(1)(vi) as the same was paid out of ‘exports sales’ and hence the source for royalty was the sales outside India?

    d) Decision

The Madras High Court held that as far as royalty on export sales is concerned, that amount is also exempt u/s.9(1)(vi). Though the royalty was paid by a resident in India, it cannot be said that it was deemed to have accrued or arisen in India as the royalty was paid out of the export sales and hence, the source for royalty is the sales outside India. Since the source for royalty is from the source situated outside India, the royalty paid on export sales is not taxable. The Appellate Tribunal was therefore correct in holding that the royalty on export sales is not taxable within the meaning of section 9(1)(vi).

2.3 Lufthansa Cargo India (P.) Ltd. v. DCIT, (2004) 91 ITD 133 (Delhi)

    a) Nature of payment

Payments to a non-resident for aircrafts overhauling and repairs

    b) Brief facts

The assessee, a domestic company, had acquired four boeing cargo aircrafts from a foreign company and obtained licence from licensing authority to operate those aircrafts on international routes only. It also engaged crew, technical personnel, engineers and other ground staff and wet-leased aircrafts to a foreign cargo company. Under wet-lease agreement, responsibility for maintaining crew and aircrafts in airworthy condition was that of the assessee and the lessee was to pay rental on basis of number of flying hours during period subject to minimum guarantee. The assessee periodically made payments to a non-resident company on account of overhaul, repairs of its aircrafts, engines sub-assemblies and rotables (components) in workshops abroad. The assessee did not deduct tax at source on such payments.

    c) Key issue in relation to section 9(1)(vii)(b)

Whether the payments for repairs and maintenance charges would not be chargeable to tax in India as they were made for earning income outside India and therefore the would fall within the purview of exclusionary part of section 9(1)(vii)(b)?

    d) Decision

The ITAT held that the sources from which the assessee has earned income are outside India as the income-earning activity is situated outside India. It is towards this income-earning activity that the payments for repairs have been made outside India. The payments therefore fall within the purview of the exclusionary clause of section 9(1)(vii)(b).

Thus, even assuming that the payments for such maintenance repairs were in the nature of fees for technical services, it would not be chargeable to tax.

These payments are not taxable for the reason that they have been made for earning income from sources outside India and therefore fall within exclusionary clause of section 9(1)(vii)(b).

2.4 Titan Industries Ltd. v. ITO, (2007) 11 SOT 206 (Bang.)

    a) Nature of payment

Payment of Professional Fees in Hongkong for patent registration

    b) Brief facts

The assessee-company was engaged in the manufacture of watches and was selling the same under its patent name ‘Titan’. An associate company of the assessee, incorporated in Singapore, was engaged in promoting the sales of ‘Titan’ watches in the Asia Pacific region. The assessee from the business point of view got its patent name registered in Hongkong through ‘C’ , a firm of professionals of Hongkong and paid to ‘C’ certain fees for technical services rendered by it. The assessee claimed that since the services had been utilised in its business abroad, the payment made to ‘C’ was covered in exception provided in section 9(1)(vii)(b) and, hence, it was not required to deduct tax at source in respect of the payment made to ‘C’.

    c) Key issue in relation to section 9(1)(vii)(b)

Can the payment made for registration of a patent outside India for the purposes of exports, be considered as for the purposes of making or earning income from a ‘Source outside India’?

    d) Decision

The Tribunal held that carrying on business means having an interest in a business at that place, a voice in what is done, a share in the gain or loss and some control, if not over the actual method of working, at any ratio, upon the existence of business.

The carrying on of a business is a bundle of activities and marketing is one of such activity. If the products are marketed outside India, then it cannot be said that there is no business activity.

Patent was registered outside the country for making an income from a source outside the country. The amounts paid are covered in exception provided in section 9(1)(vii)(b).

2.5 Income-tax Officer (IT) TDS-3 v. Bajaj Hindustan Ltd., (2011) 13 taxmann.com 13 (Mum.)

    a) Nature of payment

Payment of Advisory Fees to a non-resident for acquisition of sugar mills/distilleries in Brazil

    b) Brief facts

The assessee-company is engaged in the business of manufacturing of sugar. It engaged the services of KPMG, Brazil to advice and assist it in acquisition of sugar mills/distilleries in Brazil. In connection with the services rendered by KPMG for the said purpose, the assessee had made payment to KPMG. The Assessing Officer was of the view that the assessee ought to have deducted tax at source on the payment made to KPMG. According to him the amount received from the assessee by KPMG was in the nature of fees for technical services rendered. He was also of the view that in terms of section 9(1) income by way of Fees for Technical Services (FTS) payable by a person who is a resident shall be income deemed to accrue or arise in India.

    c) Key issue in relation to section 9(1)(vii)(b)

Whether application of section 9(1)(vii)(b) is restricted only to an ‘existing source’ of income outside India or whether the same could be applied even in relation to a ‘future source’ of income?

    d) Decision

The ITAT held that the payment in question made by the assessee to KPMG is in respect of services which otherwise fell within the definition of FTS as given in the Act. The dispute is whether the exceptions mentioned in clause (b) to section 9(1)(vii) would apply so that it can be said that the fees in the nature of FTS has not accrued or arisen to KPMG in India. As far as the first exception in section 9(1)(vii) clause is concerned viz., ‘where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India’, it is found that the assessee carried on business in India and has utilised the services of KPMG in connection with such business. Therefore, the case of the assessee would not fall within the first exception, notwithstanding the fact that services were rendered only in Brazil. As far as the second exception mentioned in section 9(1)(vii) clause (b) is concerned viz., ‘for the purposes of earning any income from any source outside India’, the undisputed facts are that the assessee wanted to acquire sugar mills/distillery plants in Brazil and for that purpose also wanted to set up a subsidiary company. In fact, the assessee had set up a subsidiary company on 8-8-2006 in Brazil. Thus the assessee was contemplating to create a source for earning income outside India. It is no doubt true that the source of income had not come into existence. But there is nothing in section 9(1)(vii) clause (b) to show that the source of income should have come into existence so as to except the payment of fees for technical services. The expression used is ‘for the purpose of earning any income from any source outside India’. There is nothing in the language of section 9(1)(vii) clause (b), which would go to show that the same is restricted only to an existing source of income. It was held that the payment by the assessee of fees for technical services rendered by KPMG was outside the scope of section 9(1)(vii). Hence, it cannot be considered as income deemed to have accrued in India and not chargeable to tax in India and hence the assessee was not liable to deduct tax u/s.195.

2.6 Havells India Ltd. v. ADCIT, (2011) 13 taxmann. com 64 (Delhi)

    a) Nature of payment

Payment to a non-resident for Testing & Certification Services used in relation to Export Sales

    b) Brief facts

The assessee-company paid certain amount to a foreign company incorporated in the USA, namely, ‘C’, for getting testing and certification services and claimed deduction of the same as business expenditure. It had not deducted tax at source from payment made to ‘C’. The Assessing Officer referring to provisions of section 9(1)(vii)(b) and
further taking view that testing and certification services provided by ‘C’ were utilised in manufacture and sale of products by the assessee in India, held that section 195 was applicable to payment made to ‘C’. He, therefore, disallowed impugned payment invoking provisions of section 40(a)(i). The assessee contended before the Tribunal that in order to invoke provisions of section 40(a)(i) amount paid should be chargeable to tax under the Income-tax Act, and that fee for technical services paid by it to ‘C’ was not chargeable to tax in India, due to exception contained in section 9(1)(vii)(b).

    c) Key issue in relation to section 9(1)(vii)(b)

Whether payments made for the testing and certification services provided by a non-resident and utilised by the assessee only for its ‘exports’ activities were not chargeable to tax in India in view of section 9(1)(vii)(b)?

    d) Decision

The Tribunal held in the assessee’s favour as follows: “In order to fall within exception of section 9(1)(vii) (b), the technical services, for which, the fees have been paid, ought to have been utilised by a resident in a business outside India or for the purposes of making or earning any income from any source outside India.

The KEMA certification obtained by the assessee from ‘C’ for enabling exports of its products was unassailed. The sole stand of the Department was that this service of testing and certification had been applied by the assessee for its manufacturing activity within India.

The initial onus u/s.9(1)(vii)(b) lay squarely on the assessee to prove that the exemption available thereunder was in fact available to it. The assessee had maintained throughout that the testing and certification services provided by ‘C’ were utilised only for its export activity and that the same were not utilised for its business activities of production in India. Thus, the assessee had discharged the onus, which lay on it u/s.9(1)(vii)(b). Therefore, the impugned payment made by the assessee to ‘C’ was not chargeable to tax in India.”

2.7 (2008) 305 ITR 37 — Dell International Services (India) P. Ltd., in re v. (AAR)

    a) Nature of payment

Bandwidth charges paid to non-resident telecom service provider for use in relation to data processing and information technology support services provided to group companies abroad.

    b) Brief facts

The applicant, a private company registered in India, was a part of the Dell group of companies. It was mainly engaged in the business of providing call centre, data processing and information technology support services to the Dell group companies. The applicant’s parent company had entered into an agreement with BT, a non-resident company formed and registered in the USA, under which BT, the non-resident company, provided the applicant with two-way transmission of voice and data through telecom bandwidth. While BT was to provide the international half-circuit from the USA/Ireland, the Indian half-circuit was provided by VSNL, an Indian telecom company. Apart from installation charges payable initially, fixed monthly recurring charges for the circuit between the USA and Ireland and for the circuit between Ireland and India were payable by the applicant to BT, and this was net of Indian taxes. BT raised its invoice directly on the applicant and the applicant made the payment directly to BT. The applicant was paying tax in India in relation to the recurring charges in accordance with section 195 of the Income-tax Act, 1961. There was no equipment of BT in the applicant’s premises and the applicant had no right over any equipment held by BT for providing the bandwidth. Fibre link cables and other equipment were used for all customers including the applicant. The bandwidth was provided through a huge network of optical fibre cables laid under seas across several countries of which BT used only a small fraction. There was no dedicated machinery or equipment identified or allowed to be used in the hands of the applicant; a common infrastructure was being utilised by various operators to provide service to various service recipients and the applicant was one among them receiving the service. The landing site was at Mumbai, and the Indian leg thereof to Bangalore, including the last mile connectivity to the premises of the applicant, was catered to by Bharti Telecom. On these facts the applicant sought the ruling of the Authority on questions relating to the tax liability of BT and the applicant’s duty to deduct tax at source.

    c) Key issue in relation to section 9(1)(vii)(b)

What is the true meaning and ambit of the phrase ‘for the purposes of making or earning any income from any source outside India’ occurring in section 9(1)(vi)(b)/9(1)(vii)(b) of the Act?

    d) Decision

The AAR observed and held as follows: “Sub-clause (b) of clause (vi) of section 9 carves out an ‘exception’ to the taxability of royalty paid by a resident. According to the ‘exception’, the royalty payable in respect of any right, property or information used or services utilised (a) for the purpose of business or profession carried out by such person outside India, or (b) for the purpose of making or earning any income from any source outside India is not an income that falls within the net of section 9. The applicant is relying on the second part of the exception i.e., ‘for the purposes of making or earning any income from any source outside India’. It is the case of the applicant that its business principally comprises of export revenue in the sense that it provides data processing and information technology support services to its group companies abroad and receives payment in foreign exchange against such exports. Therefore, although its business is carried out from India, the income it gets is from a source outside India and the payment it makes to BTA is for the purpose of earning income from a source outside India. Hence, according to the applicant, the benefit of exception envisaged by section 9(1)(vii)(b) will be available to it. In the context of this argument, it is pointed out by the learned counsel for the applicant that the two limbs of clauses (a) and (b) supra are distinct and the mere fact that the business is carried on in India and not outside India does not come in the way of invoking the exception provided by the latter limb, i.e., for the purpose of earning income from a source outside India.

We find it difficult to accept the applicant’s contention. No doubt, the factum of the applicant carrying on business in India does not come in the way of getting the benefit of the exception. It is possible to visualise the situations in which the business is carried on principally in India, whereas a particular source of income is wholly outside India, but, that is not the situation here. The income which the applicant earns by data processing and other software export activities cannot be said to be from a source outside India. The ‘source’ of such income is very much within India and the entire business activities and operations triggering the exports take place within India. The source which generates income must necessarily be traced to India. Having regard to the fact that the entire operations are carried on by the applicant in India and the income is earned from such operations taking place in India, it would be futile to contend that the source of earning income is outside India i.e., in the country of the customer. Source is referable to the starting point or the origin or the spot where something springs into existence. The fact that the customer and the payer is a non-resident and the end product is made available to that foreign customer does not mean that the income is earned from a source outside India. As aptly said by Lord Atkin in Rhodesia Metals Ltd. v. Commissioner of Taxes, (1941) 9 ITR (Suppl.) 45 “‘source’ means not a legal concept, but something which a practical man would regard as a real source of income”.”

The applicant’s counsel placed reliance on the decision of the Income-tax Appellate Tribunal in Synopsis India (P.) Ltd. v. ITO, [IT Appeal No. 919 (Bang.) of 2002] and that of the Madras High Court in CIT v. Aktiengesellschaff Kuhnle Kopp & Kausch W. Germany by BHEL, (2002) 125 Taxman 928.

The AAR distinguished these decisions as follows:

“In the case of Synopsis India (P.) Ltd. (supra), the assessee made payments to a foreign company which provided down-linking service to the assessee in connection with the transmission of data through satellite communications. The Tribunal found that the entire turnover of the company was export of software devices/products for which international connectivity was provided by a US company Datacom-Inc. The Tribunal held that the assessee, though carried on business in India, earned income from the sources outside India and the payments made to Datacom-Inc. were to earn income from a source outside India. The Tribunal apparently relied on two factors (i) the entire turnover of the assessee-company is derived from export of software, and (ii) such export activity was undertaken after ‘obtaining the data from international connectivity’. There is no reasoned discussion on the point whether the source of income was located outside India. The Tribunal proceeded on the premise that in the given set of facts the income was derived from sources outside India. In the second case, the Madras High Court found that the royalty was paid out of export sales and therefore the source for royalty was the sales outside India. It was on such finding of facts that the conclusion was drawn. The ratio of this decision also cannot be applied to the present case.”

  3.  Conclusion
  3.1  From the above discussion, it is evident that there is a divergence of judicial opinion on interpretation of the second limb of the exclusionary part of clause (b) of section 9(1)(vii).

  3.2  In the opinion of the authors, technically, the interpretation of the AAR in Dell International’s case (supra) of the words ‘source outside India’ occurring in the said second limb of section 9(1)(vii)(b) in respect of export of goods and services, appears to represent a better view as compared to the view taken by the Madras high Court in the case of (2002) 125 Taxman 928 (Mad.) —  CIT v. Aktiengesellschaft Kuhnle Kopp and Kausch, W. Germany by BHEL (supra) in the context of royalties in respect of exports sales.

  3.3  In view of above, the moot question then arises is: What is the true scope and ambit of the words ‘source outside India’? Does it mean that it will apply only to sources of income outside India other than relating to business income, such as income from house property, capital gains and income from other sources?

  3.4  The true intention of the Legislature in providing the exclusionary limbs of section 9(1)(vii)(b) is not clear form the Memorandum explaining the provisions of the Finance Bill, 1976 or the Notes on Clauses relating to the Finance Bill, 1976. Even the Circular No. 202, dated 5-7-1976 explaining the amendments made by the Finance Act, 1976 does not explain the true nature and purpose of the exclusionary limbs of section 9(1)(vii)(b).

  3.5  In the interest of clarity, certainty and to avoid litigation and to effectively reduce cost of export of goods and services, it would be prudent for the Government/CBDT to make necessary amendments and/or clarify that the payment of FTS/royalties for the purposes of exports of goods and services is covered by the exclusionary limbs of section 9(1)(vi)(b)/9(1)(vii)(b).

Correction of mistakes made by the dealers — Miscellaneous refunds of excess payment of taxes — Trade Circular 17T of 2011, dated 25-11-2011.

fiogf49gjkf0d
This Circular lays down the procedure for correction of mistakes made while making e-payment of taxes by dealers due to mention of wrong TIN or wrong Act or wrong period. It also lays down procedure for miscellaneous refunds due to double payment of taxes or excess payment of taxes.
levitra

(2011) 40 VST 72 (P&H) Swastik Pipes Ltd. v. State of Haryana

fiogf49gjkf0d
Assessment — Dealer participated in assessment — Failure to issue Notice — Not aausing any prejudice — Not a ground for invalid assessment — Section 28(5) of Haryana General Sales Tax Act, 1973.

Facts
The assessment was finalised with co-operation of dealer upon furnishing of information by him, after giving reasonable opportunity of hearing. The dealer raised objection that without issuing statutory notice purchase tax assessment cannot be finalised. The dealer filed reference before the High Court against the decision of the Tribunal confirming the assessment to decide whether second/ separate show-cause notice is mandatory for the levy of purchase tax u/s.28(5) of the Act.

Held
U/s.28(5) of the Act, the assessing authority is obliged to serve notice to the dealer for framing assessment. In this case, the assessment was finalised with the co-operation of the dealer, who had supplied all the relevant information necessary for the quantification of purchase tax liability to the assessing authority. A reasonable opportunity of being heard was given to the dealer. The requirement of section 28(5) of the Act extends only to grant reasonable opportunity of hearing, which is satisfied in this case. Non-issue of notice or mistake in the issue of notice or defect in service of notice does not affect the jurisdiction of the assessing authority, if otherwise reasonable opportunity of being heard is granted. In this case neither any prejudice is caused, nor have the provisions of section 28(5) of the Act been violated. Therefore the High Court answered the reference in favour of the Revenue.

levitra

(2011) 39 VST 581 (Bom.) Jay Shree Tea and Industries v. Commissioner of Sales Tax and Others

fiogf49gjkf0d
Limitation — Reassessment — Issue of notice — Barred by limitation — Reassessment order — Set aside — Section 35 of the Bombay Sales Tax Act, 1959.

Facts
The dealers filed writ petition against issue of notice of reassessment dated February 3, 1999 on the ground of limitation and other legal grounds. The original assessment order for the period 1991- 92 was passed on 31-3-1995. The appeal order was passed on 29-10-1996. The revising authority issued notice in Form 40 for revision of appeal order on 22-1-1997, which was subsequently dropped upon submission made by the dealer on 23-4-1997. Thereafter, enforcement branch of the Sales Tax Department visited the place of business of the dealer and based upon documents found at that time, issued notice for reassessment on 3-2-1999. This notice in Form 28 issued by the enforcement branch for reassessment for the period 1991-92 was challenged by the dealer by filing writ petition before the Bombay High Court being barred by limitation.

Held
The notice for reassessment was issued on 3-2-1999 for the period 1991-92. U/s.35 of the BST Act, no notice for reassessment can be issued after expiry of five years from the end of the financial year. The period of limitation for reassessment starts from 31- 3-1992 i.e., the end of the financial year for which the reassessment is sought. If, one calculates five years from 31-3-1992, the period of limitation expires on 31-3-1997. Under the circumstances the notice for reassessment dated 3-2-1999 is clearly barred by limitation. Accordingly, the High Court quashed and set aside the impugned notice for reassessment.

levitra

Sections 4, 28(i), 36(1) (iii) and 37(1) — Gross interest received from the Income-tax Department and not the net interest remaining after the set-off of the interest paid to the Income-tax Department is to be included in assessable income.

fiogf49gjkf0d
(2012) 143 TTJ 528 (Pune) (TM)
Sandvik asia Ltd. v. Dy. CiT
A.Y.: 1992-93. Dated: 13-9-2011

Sections 4, 28(i), 36(1) (iii) and 37(1) — Gross interest received from the  income-tax Department and not the net interest remaining after the set-off of the interest paid to the income-tax Department is to be included in assessable income.

The assessee had credited only the net interest received from the Income-tax Department i.e., the interest paid to the Income-tax Department was deducted from the interest received on income-tax refund. This claim was made by the assessee on the basis of the following two Tribunal decisions:

(1) R. N. Aggarwal v. ITO, [ITA Nos. 3913 & 3914 (Delhi) of 1980 and 620 (Delhi) of 1981, dated 21-8-1981].

(2) Cyanamide India Ltd. v. ITO, [ITA No. 4561 (Bom.) of 1982, dated 23-5-1984].

The Assessing Officer rejected the assessee’s claim. He was of the view that interest charged on late payment of tax by the Department is not a business expense deductible for the purpose of computing income under the Income-tax Act and, therefore, interest charged by the Department was added to the income of the assessee. The CIT(A) directed the Assessing Officer to tax only the net interest in view of the above Tribunal decisions. Before the Tribunal, there was a difference of opinion between the two Members and the matter was referred to the third Member u/s.255(4). The third Member, did not concur with the decisions of the Tribunal (stated above) and relying on the decisions in the following cases, held that the assessee is assessable to tax on the gross interest received from the Department:

(1) Bharat Commerce and Industries Ltd. v. CIT, (1998) 145 CTR (SC) 340/(1998) 230 ITR 733 (SC).

(2) CIT v. Dr. V. P. Gopinathan, (2001) 166 CTR (SC) 504/(2001) 248 ITR 449 (SC).

(3) Aruna Mills Ltd. v. CIT, (1957) 31 ITR 153 (Bom.).

The third Member noted as under:

(1) Interest paid cannot be allowed u/s.36(1) (iii) because there is no borrowing by the assessee. There can be no two opinions on the same.

(2) The interest cannot also be claimed as a deduction u/s.37(1). Thus, the interest paid to the Income-tax Department under the provisions of the Act cannot be deducted while computing the business income of the assessee.

(3) The assessee’s argument based on the theory of real income has to be rejected. The rule of netting does not apply to the instant case and the assessee is assessable on the gross interest.

levitra

Sections 80, 139(1), 139(3) and 139(5) — Where the assessee had filed original return u/s.139(1) declaring positive income and claim for carry forward of long-term capital loss was made only in the revised return filed u/s.139(5), carry forward of loss cannot be denied.

fiogf49gjkf0d
(2012) 143 TTJ 166 (Mumbai)
Ramesh R. Shah v. ACIT
A.Y.: 2005-06. Dated: 29-7-2011

Sections 80, 139(1), 139(3) and 139(5) — Where the assessee had filed original return u/s.139(1) declaring positive income and claim for carry forward of long-term capital loss was made only in the revised return filed u/s.139(5), carry forward of loss cannot be denied.
The assessee filed original return of income showing positive income on 28-10-2005.
This return was processed u/s.143(1) on 15-12-2005. Thereafter, on 28-3-2006, he filed a revised return claiming longterm capital loss Rs.182.27 lakh which he claimed was to be carried forward u/s.74. The Assessing Officer, relying on the decision in the case M. Narendranath (Indl.) v. ACIT, (2005) 94 TTJ 284 (Visakha) and as per the provisions of section 80, declined to allow carry forward of the long-term capital loss.

The CIT(A) upheld the order passed by the Assessing Officer. The Tribunal allowed the carry forward of the long term capital loss claimed by the assessee in the revised return of income. The Tribunal noted as under:

(1) Correct interpretation of section 80, as per the language used by the Legislature, is that condition for filing revised return of loss u/s.139(3) is confined to cases where there is only a loss in the original return filed by the assessee and no positive income and assessee desires to take benefit of carry forward of the said loss.

(2) Section 80 is a restriction on the right of the assessee when the assessee claims that he has no taxable income but only a loss, but does not file the return of income declaring the said loss as provided in s.s (3) of section 139.

(3) The Legislature has dealt with two specific situations (i) u/s.139(1), if the assessee has a taxable income chargeable to tax, then he has a statutory obligation to file the return of income within the time allowed u/s.139(1) and (ii) so far as section 139(3) is concerned, it only provides for filing the return of loss if the assessee desires that the same should be carried forward and set off in future. As per the language used in s.s (3) of section 139, it is contemplated that when the assessee files the original return, at that time, there should be loss and the assessee desires to claim the said loss to be carried forward and set off in future assessment years.

 (4) Ss. (1) and (3) of section 139 provide for the different situations and there is no conflict in applicability of both the provisions as both the provisions are applicable in different situations.

(5) Once the assessee declares positive income in the original return filed u/s.139(1), but he subsequently finds some mistake or wrong statement and files a revised return declaring loss, then he cannot be deprived of the benefit of carry forward of such loss.

(6) In the present case, the assessee filed the return of income declaring the positive income and even in the revised return the assessee has declared positive income since the loss in respect of the sale of shares could not be set off inter-source or inter-head u/s.70 or 71.

(7) As per the provisions of s.s (5) of section 139, in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time-limit prescribed and, subsequently, files the revised return, then the revised return is treated as valid return.

(8) In the present case, as the assessee filed its original return declaring positive income and hence, subsequent revised return is also valid return and the assessee is entitled to carry forward of long-term capital loss. Therefore, there is no justification to deny the assessee the carry forward the loss.

levitra

Waiver of interest: Section 220(2A) of Income-tax Act, 1961: A.Y. 1989-90: Power to waive should be exercised judiciously: Finding that all conditions for waiver were satisfied: Waiver of part interest is not valid.

fiogf49gjkf0d
[E. M. Joseph v. CCIT, 342 ITR 379 (Ker.)]

For the A.Y. 1989-90, the assessee made an application for waiver of interest of Rs.1,95,570 u/s.220(2A) of the Income-tax Act, 1961. The Chief Commissioner gave the finding that all the three conditions regarding genuine hardship to the assessee, default in tax being not due to the circumstances attributable to the assessee and the co-operation of the assessee were satisfied. However, the Chief Commissioner limited the waiver to an amount of Rs.24,408 which was the balance amount due from the assessee.

The Kerala High Court allowed the writ petition filed by the assessee and held as under: “

(i) The Commissioner had found that all the three conditions were satisfied. In the order, the Commissioner merely said that “payment of further interest will cause hardship to them” and did not state any reason for limiting or reducing the waiver.

(ii) The discretion has not been properly exercised by the Commissioner. His order was liable to be quashed to the extent it failed to consider waiver of the amounts already paid.

(iii) The Chief Commissioner was to pass fresh order in accordance with the observations.”

levitra

Speculative loss: Section 73: A.Y. 1996-97: Service charges Rs.2.25 crore, share trading loss Rs.2.23 crore and dividend income Rs.4.7 lakh: Exception in Explanation to section 73 applicable: Assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).

fiogf49gjkf0d
[CIT v. Darshan Securities (P) Ltd., 249 CTR 199 (Bom.)]

For the A.Y. 1996-97, the assessee returned an income of Rs.2.25 crore from service charges, share trading loss of Rs.2.23 crore: and dividend income of Rs.4.7 lakh. The assessee claimed that in computing the gross total income for the purpose of Explanation to section 73 of the Income-tax Act, 1961, the income from service charges have to be adjusted against the loss in share trading. The Assessing Officer did not accept the claim and disallowed the share trading loss as speculation loss. The Tribunal accepted the assessee’s claim.

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

(i) Explanation to section 73 is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that s.s (1) of section 73 can apply.

(ii) In computing the gross total income the normal provisions of the Income-tax Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation. In the present case, both the income from service charges of Rs.2.25 crore and the share trading loss of Rs.2.23 crore, would have to be taken into account in computing the income under the head business, both being sources under the same head.

(iii) The assessee had a dividend income of Rs.4.7 lakh. The Tribunal was therefore justified in coming to the conclusion that the assessee fell within the purview of the exception carved out in the Explanation to section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).”

levitra

Set-off of loss of EOU: Exemption or deduction: Sections 10B, 70, and 80-IA(5) of Incometax Act, 1961: A.Y. 2005-06: Section 10B as amended w.e.f. 1-4-2001 is not a provision for exemption but a provision for deduction: Loss sustained from such an eligible unit can be set off against business income from other units.

fiogf49gjkf0d
[CIT v. Galaxy Surfactants Ltd., 343 ITR 108 (Bom.); 249 CTR 38 (Bom.)]

In the previous year relevant to the A.Y. 2005-06, the assessee’s EOU which was eligible for deduction u/s.10B of the Income-tax Act, 1961 incurred loss. The assessee claimed the set-off of the said loss against the profits of the other units. The Assessing Officer disallowed the claim for set-off of the loss holding that the loss sustained by the eligible units cannot be set off against the profits of the other units. The Tribunal allowed the assessee’s claim.

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

(i) Section 10B as it stands after substitution by the Finance Act, 2000 w.e.f. 1-4-2001, is not a provision for exemption, but a provision which enables an assessee to claim a deduction.

(ii) The loss which is sustained by an eligible unit can be set off against the income arising from other units under the same head of profits and gains of business or profession.”

levitra

Revision: Section 263 of Income-tax Act, 1961: A.Y. 1996-97: Limitation: Order of assessment does not merge in orders of reassessment as regards issues not forming subject-matter of reassessment: Limitation for revision of assessment in respect of those issues runs from date of original assessment order and not from date of reassessment orders.

fiogf49gjkf0d
[CIT v. ICICI Bank Ltd., 343 ITR 74 (Bom.)]

For the A.Y. 1996-97, the assessment order u/s.143(3) of the Income-tax Act, 1961 was passed on 10-3-1999 allowing the deduction claimed u/ss. 36(1)(vii) and (viia) and the foreign exchange rate difference. Subsequently, a reassessment order u/s.147 was passed on 22-2-2000 reworking the deduction u/s.80M. An appeal against the order u/s.143(3) was decided by the Commissioner (Appeals) on 28-3-2001. Thereafter, another reassessment order u/s.147 was passed on 26-3-2002, for reworking of the deduction u/s.36(1) (viii). On 28-3-2003, the Commissioner passed an order u/s.263 for disallowance u/s.36(1)(vii) and (viia) and in respect of foreign exchange rate difference. The Tribunal set aside the order as barred by limitation.

On appeal by the Revenue, it was contended that when the Assessing Officer passed the reassessment order on 26-3-2002, the Explanation to clause (vii) of section 36(1) had been introduced on the statute book and the Assessing Officer was duty bound to apply the law as amended, which he failed to do, and that Explanation 3 to section 147 of the Act having been amended to provide that the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment and coming to his notice subsequently in the course of the proceedings.

The Bombay High Court upheld the decision of the Tribunal and held as under: “

(i) Where the jurisdiction u/s.263(1) is sought to be exercised with reference to an issue which is covered by the original assessment order u/s.143(3) and which does not form the subject-matter of reassessment, limitation must necessarily begin to run from the order u/s.143(3).

(ii) Neither in the first reassessment, nor in the second reassessment was any issue raised or decided in respect of the deductions u/s.36(1) (vii), (viia) and the foreign exchange rate difference. The order of the Commissioner u/s.263(2) had not been passed with reference to any issue which had been decided either in the order of the first reassessment or in the order of second reassessment, but sought to revise issues decided in first order of assessment u/s.143(3) dated 10-3-1999.

(iii) The order dated 10-3-1999, did not merge with the orders of reassessment in respect of issues which did not form the subject-matter of the reassessment. Consequently, Explanation 3 to section 147 would not alter that position. Explanation 3 only enables the Assessing Officer, once an assessment is reopened, to assess or reassess the income in respect of any issue, even an issue in respect of which no reasons were indicated in the notice u/s.148(2). This, however, will not obviate the bar of limitation u/s.263(2). The invocation of the jurisdiction u/s.263(2) was barred by limitation.”

levitra

Export profit: Deduction u/s.80HHC: A.Y. 2001-02: Assessee purchasing goods from one foreign country and transporting it to another foreign country: No condition that exports must be from India: Receipt on sale proceeds in convertible foreign exchange: Assessee entitled to deduction u/s.80HHC.

fiogf49gjkf0d
[Anil Kumar v. ITO, 343 ITR 30 (Karn.)]

The assessee was engaged in purchase and sale of non-ferrous metals, etc. The purchases were made from one country and exported to another country at a margin of profit by arranging direct shipment from the selling country to the purchasing country. The bills were settled through Bank of Baroda in India. The proceeds were through convertible foreign currency and payments were made on convertible foreign currency. For the A.Y. 2001-02, the assessee claimed deduction u/s.80HHC of the Income-tax Act, 1961 in respect of such exports. The Assessing Officer and the Tribunal held that the assessee was not entitled to the deduction. The Tribunal held that to be eligible for the benefit of section 80HHC, foreign exchange is to be earned by exporting goods from India.

On appeal by the assessee, the Karnataka High Court reversed the decision of the Tribunal and held as under: “

(i) Section 80HHC is an incentive to an assessee to carry on export business so that in turn, the country earns foreign exchange. While interpreting this provision, if two views are possible, it is settled law that the view which is favourable to the assessee is to be preferred by the courts.

(ii) Now section 80HHC provides that to an assessee who is engaged in the business of export out of India of any goods or merchandise, to which the section applies deduction to the extent of profits referred to in s.s (1)(b) is allowed. In the entire provision, there are no express words which provide that the export of such goods is to be from India.

(iii) The Explanation read with the main section does not in any way indicate that, to be eligible for the benefit of deduction u/s.80HHC, the goods or merchandise has to emanate from India. In section 80HHE the words used are ‘export out of India’. But to be eligible for deduction under the aforesaid provision mere export out of India is not sufficient. What is to be exported out of India should be from India to a place outside India by any means. Such a wording is conspicuously missing in section 80HHC.

(iv) The stress in section 80HHC is only on earning of foreign exchange, not the goods and merchandise to be exported out of India. They do not necessarily have to be from India. Therefore, the law does not require the goods to be physically exported out of India. There need not be a two-way traffic of bringing the goods from a foreign country into the Indian shores and thereafter exporting those goods from Indian shores.”

levitra

Export of computer software: Exemption/ deduction u/s.10A r.w.s 80-I: A.Ys. 1995-96 to 1998-99: No material to show that assessee indulged in arrangement with foreign buyer so as to produce higher profits to assessee: AO not entitled to presume such arrangement and determine reasonable profits.

fiogf49gjkf0d
[CIT v. H. P. Global Soft Ltd., 342 ITR 263 (Karn.)]

The assessee company carried on the business of manufacture of hardware and software and exported its products. For the A.Ys. 1995-96 to 1998-99, the assessee claimed exemption u/s.10A in respect of two units. The Assessing Officer took the view that the exemption claimed in respect of the two units involved in creation of software was not merely unusually high in comparison to the assessee’s other business, but having regard to the close relationship between the assessee company and its foreign buyer the provisions of section 80-I(9) were to be applied in terms of 10A(6) of the Act. He, therefore, allowed exemption at the percentage of profit in respect of the entire turnover of the assessee inclusive of the export turnover. The Tribunal allowed the assessee’s claim.

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

(i) While there did exist a close connection between the assessee and the foreign buyer the other requirement as to the nature of the arrangement and the manner of rejection of the profits margin due to export sales as inflated profits attributable to export activities, had not been disclosed by the Assessing Officer.

(ii) The finding of the Appellate Authority was that the profit margin as revealed by the assessee was a reasonable profit margin in comparison to other similar units.

(iii) There being no material to indicate that the course of business had been so arranged as to inflate profits, i.e., to show a higher profit margin to the two export units of the assessee, the Tribunal was justified in holding that the Assessing Officer could not presume the existence of close connection or arrangement for the purpose of invoking section 80-I(9) of the Act.”

levitra

Business expenditure: Section 37(1): A.Y. 1997-98: Expenditure on higher education of two directors: Disallowance on ground that directors are children of managing director: Not proper.

fiogf49gjkf0d
[Krishna Fabrications Ltd. v. JCIT, 343 ITR 126 (Karn.)]

The assessee company was engaged in the business of manufacture and supply of automobile components. The assessee sponsored two of its directors for higher education in connection with the specialised intensive training in the field of general management, marketing, finance and information technology, including project strategy, with a condition that after securing higher education, they should serve the assessee as directors. The claim for deduction of the expenditure was disallowed by the Assessing Officer and the Tribunal on the ground that they were the children of the managing director.

On appeal by the assessee, the Karnataka High Court reversed the decision of the Tribunal and held as under: “

(i) Just because the two directors were the children of the managing director of the company, that could not be the ground for the Assessing Officer to reject the claim of the assessee, until and unless it was established that these two children of the managing director, sponsored to acquire higher education were not connected with the business of the assessee, even though they were directors.

(ii) Since the issue had not been considered by the Assessing Officer and such a mistake was committed by the Commissioner (Appeals) as well as the Tribunal, the matter was remanded to the Assessing Officer for fresh consideration.”

levitra

Business expenditure: Bad debts: Section 36(1)(vii) and 36(2) of Income-tax Act, 1961: A.Y. 1998-99: Assessee share-broker: Nonrecovery of amount receivable from clients against purchase of shares: Non-recoverable amount is bad debt deductible u/s.36(1)(vii) r.w.s 36(2).

fiogf49gjkf0d
[CIT v. Shreyas S. Morakhia, 249 CTR 30 (Bom.); 19 Taxman.com 64 (Bom.)]

The assessee was a share-broker. For the A.Y. 1998-99, the assessee claimed deduction of Rs. 28.24 lakh representing an amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf, u/s.36(1)(vii) claiming that the amount has become irrecoverable. The Assessing Officer disallowed the claim. The CIT(A) allowed the assessee’s claim. The Revenue filed appeal before the Tribunal and contended that since the assessee had credited only the amount of the brokerage to the P&L a/c, the amount of bad debts claimed was not taken into account in computing the total income of the relevant previous year or any earlier previous year and accordingly, the condition stipulated in section 36(2) was not satisfied. The Tribunal upheld the decision of the CIT(A).

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

(i) Brokerage from the transaction of the purchase of shares has been taxed in the hands of the assessee as its business income. Brokerage as well as the value of the shares constitute a part of the debt due to the assessee, since both arise out of the same transaction.

(ii) Value of the shares transacted by the assessee as a stock-broker on behalf of his clients is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. Brokerage having been credited to the P&L a/c of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. Since both form a component part of the debt, the requirements of section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee.

(iii) The assessee was therefore entitled to deduction u/s.36(1)(vii) if the Act.”

levitra

Assessment: Change of status: Validity: A.Y. 1972-73: If the status of the assessee is required to be modified, the only option is to assess the income in the appropriate status, if permitted by law: CIT(A) modifying the status of assessee: Not valid.

fiogf49gjkf0d
[Gutta Anjaneyulu v. CIT, 249 CTR 106 (AP)]

For the A.Y. 1972-73, assessment was made in the status of AOP consisting of 3 persons.

 In appeal, the CIT(A) modified the status from AOP to BOI comprising 2 persons. The Tribunal upheld the decision of the CIT(A). On appeal by the assessee, the Andhra Pradesh High Court reversed the decision of the Tribunal and held as under:

“If the status of the assessee is required to be modified, the only option available to the ITO is to assess the income in the appropriate status, if permitted by law, by issuing a notice to the assessee in that particular status. The CIT(A) was not justified in modifying the status from AOP to BOI.”

levitra

Appeal to CIT(A): Additional ground: A.Y. 2001-02: Claim for benefit of proviso to section 112(1) not made in the return: Could be accepted by CIT(A): Assessee is entitled to raise the legal issue before the first Appellate Authority, which possessed co-terminus powers similar to the AO.

fiogf49gjkf0d
[Smt. Raj Rani Gulati v. CIT, 249 CTR 51 (All.)]

For the A.Y. 2001-02, the assessee had not made the claim for the benefit of proviso to section 112(1) , while computing the capital gains tax. The claim was first time made before the CIT(A). The CIT(A) allowed the assessee’s claim. By relying on the ratio laid down by the Supreme Court in the case of Goetze India Ltd. v. CIT, (2006) 204 CTR 182 (SC); (2006) 284 ITR 323 (SC) the Tribunal allowed the appeal filed by the Department and set aside the order of the CIT(A).

On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under: “

(i) Needless to mention that the proviso to section 112(1) was introduced w.e.f. 1-4-2000 by the Finance Act, 1999. In other words, it was introduced during the assessment year under consideration and the assessee was not aware about latest amendment introduced by the Finance Act, 1999 w.e.f. 1-4-2000.

(ii) Though ignorance of law has no excuse, but it can be excused in tax matters. It is not expected that the Department shall take the advantage of the assessee’s ignorance as per CBDT Circular No. 14(XL-35) of 1955, dated 11- 4-1955. Even under the bona fide belief, the assessee has shown the long-term capital gain @ 20%, but it was expected from the Assessing Officer to know the latest amendment.

(iii) The mistake might have been corrected by passing an order u/s.154. The question of law which arose from the fact as found by the IT authority and legal issue can be raised at any stage. The assessee was entitled to raise the legal issue before the first Appellate Authority, which possessed co-terminus powers similar to the Assessing Officer.

(iv) The CIT(A) has rightly adjudicated the statutory right of the assessee and directed to allow the longterm capital gain at 10%.”

levitra

Export — Deduction u/s.80HHC — Only ninety percent of the net amount of any receipt of the nature mentioned in clause (1), which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining ‘profits of the business’ of the assessee under Explanation (baa) to section 80HHC.

fiogf49gjkf0d
[ACG Associated Capsules P. Ltd. v. CIT, (2012) 343 ITR 89 (SC)]

For the A.Y. 2003-04, the assessee filed a return of income claiming a deduction of Rs.34,44,24,827 u/s.80HHC of the Act. The Assessing Officer passed the assessment order deducting 90% of the gross interest and gross rent received from the profits of business while computing the deduction u/s.80HHC and accordingly restricted the deduction u/s.80HHC to Rs.2,36,25,053. The assessee filed an appeal against the assessment order before the Commissioner of Income-tax (Appeals), who confirmed the order of the Assessing Officer excluding 90% of the gross interest and gross rent received by the assessee while computing the profits of the business for the purposes of section 80HHC. Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). The Tribunal held, relying on the decision of the Delhi High Court in CIT v. Shri Ram Honda Power Equip, (2007) 289 ITR 475 (Delhi), that netting of the interest could be allowed if the assessee is able to prove the nexus between the interest expenditure and interest income and remanded the matter to the file of the Assessing Officer. The Tribunal also remanded the issue of netting of the rent to the Assessing Officer with the direction to find out whether the assessee has paid the rent on the same flats against which rent has been received from the staff and if such rent was paid, then such rent is to be reduced from the rental income for the purpose of exclusion of business income for computing the deduction u/s.80HHC. Against the order of the Tribunal, the Revenue filed an appeal before the High Court and the High Court has directed that on remand the Assessing Officer will decide the issue in accordance with the judgment of the High Court in CIT v. Asian Star Co. Ltd., (2010) 326 ITR 56 (Bom.) in which it has been held that while determining the profits of the business as defined in Explanation (baa) to section 80HHC, 90% of the gross receipts towards interest and not 90% of the net receipts towards interest on fixed deposits in banks received by the assessee would be excluded for the purpose of working out the deduction u/s.80HHC of the Act.

Against the order of the High Court, the assessee filed a Special Leave Petition before the Supreme Court wherein leave was granted. The Supreme Court observed that Explanation (baa) states that ‘profits of the business’ means the profits of the business as computed under the head ‘profits and gains of business or profession’ as reduced by the receipts of the nature mentioned in clauses (1) and (2) of Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the heads ‘profits and gains of business or profession’ in accordance with the provisions of sections 28 to 44D of the Act. In the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business u/s.28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable u/s.30 to u/s.44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head ‘profits and gains of business or profession’ from which deductions are to made under clauses (1) and (2) of Explanation (baa).

Under clause (1) of Explanation (baa), 90% of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head ‘profits and gains of business or profession’. The expression ‘included any such profits’ in clause (1) of Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt, which are included in profits of the business as computed under the head ‘profits and gains of business or profession’.

The Supreme Court therefore held that only 90% of the net amount of any receipt of the nature mentioned in clause (1), which is actually included in the profits of the assessee is to be deducted form the profits of the assessee for determining ‘profits of the business’ of the assessee under Explanation (baa) to section 80HHC. For this interpretation of Explanation (baa) to section 80HHC of the Act, the Supreme Court relied on its judgment of the Constitution Bench in Distributors (Baroda) P. Ltd. v. Union of India, (1985) 155 ITR 120 (SC).

Since the High Court had set aside the order of the Tribunal and directed the Assessing Officer to dispose the issue in accordance with the judgment of the Bombay High Court in CIT v. Asian Star Co. Ltd., (2010) 326 ITR 56 (Bom.), it examined the reasons given by the High Court in its judgment and noted the fallacies therein.

In the result, the Supreme Court allowed the appeal and set aside the impugned order of the High Court and remanded the matter to the Assessing Officer to work out the deductions from rent and interest in accordance with this judgment.

levitra

International Arbitration — Jurisdiction of Indian Court — Parties agreed for final settlement of disputes under International Chamber of Commerce.

fiogf49gjkf0d
[Progressive Construction Ltd. v. The Louis Berger Group Inc. & Ors., AIR 2012 AP 38]

The appellant, namely, M/s. Progressive Construction Ltd., is a Public Limited Company. It is engaged in the business of and carrying out construction activities throughout the world, including India. The appellant stated that the Government of Sudan received assistance from the United States Agency for International Development under Sudan Infrastructure Services Project, which was being administered by respondent No. 1, namely, M/s. Louis Berger Group Inc. For execution of the said project, the respondent No. 1 issued notification inviting applications.

The respondent No. 1 invited bid by dividing the contract into packages. Thereafter, the respondent No. 1 entered into an agreement with the appellant on 30-4-2009 for execution of contract work. According to the appellant, the respondent No. 1 to cover up its latches and to avoid payment to the appellant has resorted to issuing the impugned notice of expulsion dated 21-10-2009 expelling the appellant from the site. The appellant, pending initiation of arbitration proceedings, filed the petition u/s.9 of the Arbitration & Conciliation Act, 1996 to declare the action of the respondent No. 1, in issuing notice of expulsion dated 21-10-2009 to the appellant and the consequences following therefrom as illegal and arbitrary, and to grant injunction restraining the respondent No. 1 from issuing letter of demand to the respondent Nos. 3 and 4 (Banks) in order to invoke/encash the bank guarantee and also restrain them from demanding any amount from the appellant pursuant to invocation of bank guarantee.

The respondent Nos. 1 and 2 having received the notice in the petition, filed counter inter alia stating that as per Clause 67.3 of the agreement, the parties have agreed to settle the disputes arising out of the agreement finally under the rules of American Arbitration Association. Therefore, the Civil Courts in India, which includes the Courts at Hyderabad, have no jurisdiction to entertain petitions in respect of the disputes arising out of the agreement. It was contented by the appellant that since it is an International arbitration, and as part of cause of action has arisen at Hyderabad, the appellant was entitled to invoke the jurisdiction of the Courts at Hyderabad in India. The lower Court granted status quo to be maintained, however ultimately dismissed the petition.

On appeal the High Court observed that the arbitration proceedings u/s.9 of the Act cannot be equated with proceedings in a regular suit. The application u/s.9 is legislated to protect the interest of parties before initiation of arbitration proceedings or during the pendency of the proceedings. It is never the intention of the Legislature to by-pass the arbitration clause totally. While determining the application u/s.9 of the Act, it is required to determine the need to protect the property pending before the arbitration. Once the Court finds that it has no territorial jurisdiction to entertain the matter, the only course open to the Court is to reject the application to enable the parties to go before the competent Court, instead of making a decision on merits. In case it proceeds and records the findings on merits, it would affect the rights of the parties on merits. The law is well settled that any finding or observations made by a Court, which has no jurisdiction to entertain a suit or application, would be Coram non judice (a Court which has no jurisdiction to decide the matter). In view of the above, the findings recorded by the lower Court that the appellant has no prima facie case in his favour for grant of interim relief u/s.9 of the Act and other findings recorded on merits, cannot be sustained and accordingly was set aside.

levitra

Hindu law — Gift of undivided share by coparcener — Held to be void.

fiogf49gjkf0d
[Subhamati Devi (Smt.) & Ors. v. Awadhesh Kumar Singh & Ors., AIR 2012 Patna 45]

The plaintiffs had filed the suit for declaration that the deed of gift dated 27-1-1989 executed by Ambika Singh in favour of the defendants was an illegal document and not binding upon the plaintiffs. One Bharosa Singh had executed a gift of deed in favour of Rashari Singh who was the predecessor of the plaintiffs. As the said gift of deed of the year 1919 was exclusively in the name of Rashari Singh, the plaintiffs asserted that Ramdhari Singh and his son Ambika Singh did not acquire any right, title and interest in the property covered by the said gift deed. The plaintiffs also stated that Ambika Singh had filed title suit No. 10 of 1989 for partition of the joint family property, including the properties covered by the gift of deed of 1919, and simultaneously he had executed a gift deed dated 27-1-1989 in favour of defendant Nos. 1 to 7, which is a void document as a coparcener in his status as such he could not have executed or alienated the joint family property by way of gift. However, the defendants have contended that there was separation and Ambika Singh had separated from the joint family in the year 1982-83 and as such he was fully competent to execute the gift deed in question.

The Trial Court after considering the evidence had come to the finding that the gift deed dated 27-1-1989 by Ambika Singh was a valid and legal document. However, in appeal by the plaintiffs, the Appellate Court reversed the finding of the Trial Court and came to hold that the gift deed of Ambika Singh, who was a coparcener, was not a valid document with regard to coparcenary property.

On further appeal the Court observed that a mere assertion of separation is not sufficient to entitle a coparcener to alienate the coparcenary property by gift. In the present case this aspect is further fortified by the admitted fact of filing of title suit No. 10 of 1989 for partition by Ambika Singh accepting unity of title and jointness of possession over the suit land between parties to the suit in which the defendant/respondents of the present appeal were defendants and the property subject-matter of the gift deed had also been included in the suit property. The said suit was abandoned as per the submission of the counsel for the appellants, after the death of Ambika Singh. There is no evidence on record to establish the partition in the joint family of the appellant and the respondents. The Apex Court in (T. Venkat Subbamma v. T. Rattamma) AIR 1987 SC 1775 after taking notice of the authoritative texts on Hindu law and different decisions on the issue has affirmed the view and held:

“There is a long catena of decision holding that a gift by a coparcener of his undivided interest in the coparcenery property is void.”

For the reasons it was held that Ambika Singh had no right to gift the joint family property and as such has rightly reversed the decree of the Trial Court.

levitra

Chartered Accountants can practice in LLP Format

fiogf49gjkf0d
Limited Liability Partnership Concept

The Limited Liability Partnership Act, 2008 (LLP Act) was passed by the Parliament in December, 2008. Some sections of this Act came into force on 31-3- 2009. Some of the other sections have come into force on 31-5-2009. The LLP Rules, 2009, have come into force on 1-4-2009. Limited Liability Partnership (LLP) is a new form of statutory organisation which is gaining its importance and opening new opportunities for practising Chartered Accountants. Section 3 of the LLP Act provides that LLP formed under the Act is a body corporate and is a legal entity separate from its partners. It is also provided that LLP shall have perpetual succession and any changes in its partners will not affect the existence, rights or liabilities of the LLP. In other words, the concept of LLP is akin to a partnership firm with the liabilities of the partners being limited to the amount of capital contributed by the partners. It is a better alternative to a private limited company. The status of the LLP under the Income-tax Act is that of a ‘Firm’. After the amendment of the Chartered Accountants Act, w.e.f. 1-2-2012, the status of LLP formed by Chartered Accountants in practice is also that of a ‘Firm”. Government Notification dated 23-5-2011 provides that for the purposes of section 226(3)(a) of the Companies Act, LLP formed by Chartered Accountants in practice will not be considered as a corporate body. In this article the features of the LLP Act with special reference to eligibility of Chartered Accountants to use LLP format for their audit and tax practice are discussed.

Formation of LLP

Any two or more persons can form an LLP for the purpose of carrying on any business, profession or occupation. Even the LLP can also be a partner in another LLP. It is necessary that at least one of the partners in LLP should be a resident in India. Every LLP should have two designated partners who are individuals, one of whom should be a resident in India. The restriction of 20 partners which is applicable to a partnership firm does not apply to LLP. In other words, LLP with any number of partners can be formed for carrying on any business or profession. It may be noted that u/s.10 (23) of the Income-tax Act the definition of ‘Firm’ includes LLP and all the provisions relating to a partnership firm apply to LLP.

The partners of LLP will have to select a name and apply to the Registrar of Companies (ROC) in Form No. 1 with prescribed fees for approval of such name. The ROC will approve the name only if it is not the same or similar to the name of a limited company, an LLP or a firm. After getting the approval for a name, the partners will have to file the following Forms with ROC with the prescribed fees and follow the following procedure for incorporation of LLP.

(i) Form No. 2 — Form of incorporation document to be signed by all partners who have to join LLP as partners.

(ii) Form No. 3 — Form for filing LLP Agreement. For this purpose LLP agreement will have to be executed.

(iii) Form No. 4 — Notice of appointment and cessation of partners, designated partners, consent of partners/designated partners or any changes in their particulars to be filed by LLP with ROC.

(iv) Form No. 6 — Particulars of names and addresses of partners or changes therein to be intimated by partners to LLP.

(v) Form No. 7 — Application for allotment of Designated Partner Identification Number (DPIN).

(vi) Form No. 9 — Consent to act as designated partner to be filed by such partner with LLP.

(vii) When the above forms are submitted to ROC, he will give certificate of incorporation in Form No. 16. The LLP will be deemed to have been incorporated on that day. It can start its business or profession from that date.

Relationship of partners

Upon registration of LLP, the partners will have to enter into a partnership agreement in writing. This agreement will determine the mutual rights and duties of the partners and their rights and duties in relation to the LLP. Persons who have signed the incorporation document as partners along with other partners, if any, can execute this partnership agreement. The information of this partnership agreement is required to be filed with ROC with Form No. 3. Whenever there are changes in the terms and conditions of the partnership, LLP has to file the details of the change in Form No. 3 with ROC and pay the prescribed fees for the same. If the partnership agreement is executed before registration of LLP, the partners will have to ratify this agreement after incorporation of LLP and file the details in Form No. 3 with ROC.

If the partners do not execute the partnership agreement, the relationship between the partners will be governed by the First Schedule to the LLP Act. This schedule provides that mutual rights and duties of partners of LLP shall be determined as stated in this schedule in the absence of a written agreement. Even if there is a written agreement, but there is no specific mention about any of the specified matters, such matters will be governed by the provisions of First Schedule to the LLP Act.

Any person may join the LLP as a partner if all partners agree to admit him as a partner. Similarly, a partner will cease to be a partner on his death, retirement or on winding up of the LLP in which he is a partner. For this purpose, the partners will have to execute a fresh partnership agreement recording the terms and conditions of the partnership with revised constitution. Intimation about admission of new partners or retirement of a partner will have to be given to the ROC in Form No. 3 and Form No. 4 within 30 days.

The rights of a partner to share profits or losses of LLP are transferable either in whole or in part. Such transfer will not mean that the partner has ceased to be a partner or that the LLP is wound up. Such a transfer will not entitle the transferee or assignee to participate in the management or conduct of the activities of the LLP. Similarly, the transferee will not get right to any information relating to the transactions of LLP.

The partnership agreement may provide for payment of interest on amount contributed by partner in LLP or remuneration payable to the partners. Further, the agreement will have to provide the share of each partner in profits or losses of LLP. The partnership agreement should also provide for the voting rights of each partner. The conditions relating to payment of interest, remuneration or share in profits or losses can be changed by amendments in the partnership agreement. It may be noted that under the Income-tax Act interest and remuneration paid to the partners is allowable as deduction from business or professional income of LLP if it does not exceed the limits provided in section 40(b). The provisions of section 40(b) of the Income-tax Act are applicable to an LLP since its status under the Income-tax Act is that of a ‘Firm’.

 Limited liability of partners

A partner of LLP is not personally liable, directly or indirectly, for any debts or obligations of LLP. However, a partner will be personally liable for any liability arising from his own wrongful act or omission. If such liability arises due to wrongful act or omission of any partner, the other partners will not be personally liable for the same. Each partner of LLP will have to contribute such amount for the business of LLP as may be determined by the partnership agreement. The liability of each partner will be limited to the extent of the amount as specified in the partnership agreement.

Designated partners

As stated earlier, at least two partners (individuals) have to be appointed as designated partners. It is also necessary that at least one of the designated partner is a resident of India. Appointment of such partners will be governed by the partnership agreement. In the event of any vacancy due to death, retirement, or otherwise, LLP has to appoint another partner as a designated partner within 30 days. Particulars of designated partners or changes therein have to be filed with ROC in Form No. 4. If LLP does not appoint at least two designated partners or if the number of designated partners fall below two, all partners shall be considered as designated partners. It may be noted that the designated partner has to give consent in writing to the LLP in the prescribed Form No. 9 of his appointment. LLP has to file this consent letter with ROC in Form No. 4 within 30 days of his appointment.

The following will be the obligations of designated partners.

(i)    They are responsible, on behalf of LLP, for compliance with the provisions of the LLP Act and Rules, including filing of any document, return, statement, etc. as required by the Act and the Rules.

(ii)    They are liable for all penalties imposed on the LLP for any contravention of LLP Act and the Rules.

(iii)    Every designated partner will have to sign the annual financial statements and annual solvency statement.

(iv)    Each designated partner will have to obtain a ‘Designated Partner Identification Number’ (DPIN). For this purpose, the application is to be made in Form No. 7.


Accounts and audit

LLP has to maintain such books of accounts as prescribed in Rule 24 of the LLP Rules. These books should be retained for 8 years. Such books may be maintained either on cash basis or accrual basis of accounting. It may be noted that the accounting year of each LLP will have to end on 31st March. LLP cannot choose accounting year ending on any other date. LLP has to prepare a statement of accounts and a solvency statement on or before 30th September each year. These statements have to be signed by the designated partners of LLP. The accounts of LLP have to be audited by a Chartered Accountant in accordance with Rule 24 of the LLP Rules. Under this Rule, such audit is compulsory if the turnover of LLP exceeds Rs.40 lac or contribution of partners in LLP exceeds Rs.25 lac. Rule 24 provides for procedure for appointment, removal, resignation, remuneration, disqualification, change of auditors, etc. There is no specific form of Audit Report which is required to be given. ICAI will have to issue guidance in this respect. The particulars of statement of accounts and solvency statement have to be filed with ROC in Form No. 8 on or before 30th October each year with the prescribed fees. LLP has to file an annual return with ROC on or before 30th May each year in Form No. 11 with the prescribed fees.

Conversion of partnership firm into LLP

Section 55 of the LLP Act provides that an existing Partnership Firm (Firm) can be converted into LLP by following the procedure laid down in the Second Schedule. Briefly stated, this procedure is as under.

(i)    A firm may apply to convert into an LLP if and only if the partners of the LLP to which the firm is to be converted, comprise all the partners of the firm and no one else.

(ii)    The firm will have to comply with the provisions of the Second Schedule to the Act.

(iii)    The firm will have to follow the procedure for getting the name of LLP approved and procedure for incorporation of LLP as stated above.

(iv)    Further, the firm has to apply for conversion into LLP to ROC in Form No. 17 with prescribed fees. The firm has to attach documents listed in that Form.

(v)    The ROC will then give certificate of conversion into LLP in Form No. 19.

(vi)    Thereafter, the LLP will have to inform the Registrar of Firms about conversion of firm into LLP in Form No. 14. The Registrar of Firms will then remove the name of the firm from his records. Thus, the firm will be deemed to have dissolved.

Effect of conversion of firm into LLP

If an existing partnership firm is converted into a LLP and registered as such, as stated above, u/s.55 of the LLP Act, the effect of such registration shall be as under. This is provided in Second Schedule.

(i)    On and from the date of registration specified in the certificate of registration —

(a)    all tangible and intangible properties vested in the firm all assets, interests, rights, privileges, liabilities, obligations, relating to the firm and the whole of the undertaking of the firm shall be transferred and shall vest in LLP without further assurance, act or deed, and

(b)    the firm shall be deemed to be dissolved and removed from the records of the Registrar of Firms.

(ii)    If any of the above properties is registered with any authority, LLP shall, as soon as practicable, after the date of registration, take all necessary steps as required by the relevant authority to notify the authority of the conversion and of the particulars of LLP in such medium and form as the authority may specify. If any stamp duty is payable under the relevant law, the same will have to be paid.

(iii)    All proceedings by or against the firm which are pending in any court, tribunal or any authority on the date of registration shall be continued, completed and enforced by or against LLP.

(iv)    Any conviction, ruling, order or judgment of any court, tribunal or other authority in favour of or against the firm shall be enforced by or against LLP.

(v)    All deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements subsisting, immediately before the date of registration of LLP, relating to the firm or to which the firm is a party, shall continue in force on or after that date as if they relate to LLP and shall be enforceable by or against LLP as if LLP was named therein or was a party thereto instead of the firm.

From the above discussion, it will be noticed that a partnership firm, with unlimited liability of partners, can now be converted into limited liability partnership (LLP) by following the above procedure. Such partnership firm after such conversion will not be required to comply with the provisions of the Partnership Act.

Taxation of LLP

The Finance (No. 2) Act, 2009, provides for taxation of LLP. In the definition of the term ‘Firm’ and ‘Partnership’ in section 2(23) of the Income-tax Act, it is stated that the term ‘Firm’ or ‘Partnership’ will include any LLP w.e.f. 1-4-2009. Further, the definition of a ‘Partner’ will include a partner of LLP. Therefore, all the provisions for taxation of ‘Firm’ will apply to LLP. The tax will be payable by the LLP at 30% plus Education Cess. No surcharge will be payable by LLP from A.Y. 2010-11. In view of this provision, no Minimum Alternate Tax (MAT) will be payable by LLP. Similarly, no dividend distribution tax will be payable by LLP. As discussed above, the remuneration paid to working partners and interest to partners, subject to the limits prescribed in section 40(b), will be allowed in computing taxable income of LLP.

The return of income of LLP will have to be signed by a designated partner of LLP. If for some reason he is not able to sign the return, any partner can sign. New section 167 C is added to provide that each partner of LLP is jointly and severally liable to pay tax due from LLP if it cannot be recovered from LLP. If such partner proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of LLP, he will not be liable to discharge this liability. Similar provision exists in section 188A which applies to partners of a ‘Firm’. It may be noted that to this extent liability of partners LLP is unlimited.

Position under Chartered Accountants Act

The C.A. Act, 1949, has been amended by the Chartered Accountants (Amendment) Act, 2011 in December, 2011. This Amendment has come into force from 1-2-2012.

The following provisions are made by the Amendment Act.

(a) ‘Firm’ is defined in section 2(1)(ca) as under.

“(ca)    ‘Firm’ shall have the meaning assigned to it in section 4 of the Indian Partnership Act, 1932, and includes —

(i)    The Limited Liability Partnership as de-fined in clause (n) of s.s (1) of section 2 of the Limited Liability Partnership Act, 2008.

(ii)    The sole proprietorship registered with the Institute”

(b)    ‘Partner’ is defined in section 2(1)(eb) as under.

“(eb)    ‘Partner’ shall have the meaning assigned to it in section 4 of the Indian Partnership Act, 1932, or in clause (q) of s.s (1) of section 2 of the Limited Liability Partnership Act, 2008, as the case may be.”

(c)    ‘Partnership’ is defined in section 2(1)(ec) as under.

“(ec)    ‘Partnership’ means —

A.    a partnership as defined in section 4 of the Indian Partnership Act, 1932, or

B.    a limited liability partnership which has no company as its partner.”

(d)    Further, the Explanation to section 2(2) is amended to clarify that “a firm of such chartered accountants” shall include a firm or LLP consisting of one or more chartered accountants and members of any other professional body having prescribed qualifications.

Hitherto, the terms ‘Firm’, ‘Partnership’ or ‘Partner’ were not defined. The Amendment Act of 2011 now defines these terms. Therefore, LLP in which partners are Chartered Accountants holding CoP and members of other recognised professions, as may be prescribed, are also partners will be entitled to practice as Chartered Accountants if LLP is registered by ICAI. Such LLP can undertake any audit or attest function.

Conversion of a CA Firm into Limited Liability Partnership (LLP)

ICAI has issued detailed guidelines for conversion of CA Firm into LLP on 4-11-2011. These guidelines are published on pages 939-941 of CA Journal for December, 2011. Some of the salient features of these guidelines are as under.

(i)    All existing CA firms who want to convert themselves into LLPs are required to follow the provisions of Chapter-X of the Limited Liability Partnership Act, 2008 read with Second Schedule to the said Act containing provisions for conversion from existing firms into LLP.

(ii)    In terms of Rule 18(2)(xvi) of the LLP Rules, 2009, if the proposed name of LLP includes the words ‘Chartered Accountant’ or ‘Chartered Accountants’, as part of the proposed name, the same shall be referred to ICAI by the Registrar of LLP and it shall be allowed by the Registrar only if the Secretary, ICAI approves it.

(iii)    If the proposed name of LLP of CA firm resembles with any other non-CA entity as per the naming Guidelines under the LLP Act and its Rules, then the proposed name of LLP of CA firm which includes the word ‘Chartered Accountant’ or ‘Chartered Accountants’, in the name of the LLP itself, the Registrar of LLP may allow the same name, subject to compliance with Rule 18(2)(xvi) of LLP Rules as referred above.

(iv)    For the purpose of registration of LLP with ICAI under Regulation 190 of the Chartered Accountants Regulations, 1988, the partners of the firm shall apply in ICAI Form No. ‘117’ and the ICAI Form No. ‘18’ along with copy of name registration received from the Registrar of LLP and submit the same with the concerned regional office of the ICAI. These Forms shall contain all details of the offices and other particulars as called for together with the signatures of all partners or authorised partner of the proposed LLP.

(v)    The names of the CA firms registered with the ICAI shall remain reserved for the partners as one of the options for LLP names subject to the provisions of the LLP Act, Rules and Regulations framed thereunder.

(vi)    There are provisions relating to seniority of firms.

(vii)    These guidelines will apply to conversion of proprietary firm into LLP.

(viii)    There are similar provisions for formation of new LLP by Chartered Accountants in practice.

Position for statutory audit under the Companies Act

In July, 2011 issue of CA Journal, the President has, in his letter to the members, specifically stated that LLP will not be treated as Body Corporate for the limited purpose of appointment of statutory auditors. Following is the extract from the President’s letter which clarifies that the Ministry of Corporate Affairs have clarified by Circular No. 30A of 2011, dated 26-5-2011 that LLP of Chartered Accountants will not be treated as Body Corporate and MCA has taken the view that LLP can be appointed as a statutory auditors of the company.

“Important Clarifications

LLP will not be treated as Body Corporate for Limited Purpose of Appointment as Statutory Auditors:

Limited Liability Partnership (LLP) has now become a new form of statutory organisation which is gaining its importance and opening up new opportunities for the practising Chartered Accountants. The practising Chartered Accountants can now take the advantage in forming/realigning their firms as Limited Liability Partnership. As per section 3(1) of the Limited Liability Partnership Act, 2008, since a limited liability partnership is a body corporate, it is precluded from appointment as Statutory Auditors of the company u/s.226(3)(a) of the Companies Act, 1956 which provides by way of disqualification for appointment of auditor of a company that a body corporate cannot be appointed as an Auditor. To remove this lacuna, on a representation made by us, the Ministry of Corporate Affairs has clarified vide its Circular No. 30/2011, dated 26-5-2011 that Limited Liability Partnership of Chartered Accountants will not be treated as body corporate and has taken the LLP out of the purview of the definition of Body Corporate u/s.2(7)(c) of the Companies Act, 1956 and therefore, LLP can be appointed as Statutory Auditors of the company.”

It may be noted that in the Companies Bill, 2011, which is pending before the Parliament, section 139 dealing with appointment of auditors provides that any individual Chartered Accountant holding CoP or any firm of Chartered Accountants can be appointed as auditors of a company. Explanation to section 139(4) clarifies that a firm of Chartered Ac-countants shall include LLP practising the profession of Chartered Accountants. In view of the above, it is now evident that with effect from 1-2-2012, when the C.A. (Amendment) Act, 2011, has come into force, Chartered Ac-countants can join as partners and practice in LLP format. Such LLP will be eligible to be appointed as statu-tory auditors of a company under the Companies Act. Similarly, such LLP can also undertake tax audit assignment u/s.44AB of the Income-tax Act. Such LLP can also undertake any attest function under other laws as the definition of ‘Firm of Chartered Accountants’ in the C.A. Act now includes ‘Limited Liability Partnership’ registered with the Institute.

Taxation on conversion of a C.A. firm in LLP

As stated earlier, the C.A. Act has been amended with effect from 1-2-2012 to permit Chartered Accountants to practise in LLP format. ICAI has issued guidelines on 4-11-2011 for conversion of C.A. Firms into LLPs. ICAI is making all efforts to encourage those in business or profession to adopt LLP form of organisation. However, the Income-tax Act does not contain any specific provision granting exemption from tax on conversion of a Firm into LLP.

Since ‘Partnership Firm’ and ‘LLP’ are separate entities, on conversion of C.A. Firm into CA LLP the tax authorities are likely to treat such conversion as transfer of assets of the Firm to LLP. The tax authorities may treat this as transfer, as the firm will stand dissolved u/s.55 read with Second Schedule of the LLP Act, as discussed above. They may invoke the provisions of section 45(4) dealing with transfer of firm’s assets on dis-solution of the firm and levy capital gains tax on the difference between the market value of the assets of the firm on the date of such conversion and the cost of the assets of the firm.

It may be noted that section 47(xiii) and 47(xiv) of the Income-tax Act provides for exemption from capital gains tax on conversion of a firm or a proprietary concern into a limited company, subject to certain conditions. Further, the Finance Act, 2010, has inserted section 47(xiiib) to provide for exemption from capital gains tax on conversion of an unquoted limited company into LLP, subject to certain conditions. No such exemption is provided in the Income-tax Act when a firm is converted into LLP.

Explanatory Memorandum attached to the Finance (No. 2) Bill, 2009, stated that since a partnership firm and LLP is being treated as equivalent, the conversion from partnership to LLP will have no tax implication, if the rights and obligations of the partners remain the same after conversion, and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of section 45 will apply and capital gains tax will be payable. This is a very vague statement and does not specify any conditions in clear terms. There is no specific provision made in the Income-tax Act for granting exemption when conversion of a partnership firm is made into LLP and all assets and liabilities of the firm are transferred to LLP.

It may be noted that the Standing Committee on Finance, while considering Clause 47 of the Direct Taxes Code, Bill, 2010 in para 4.14 of their report has recommended that the Ministry should modify this Clause so that conversion of a partnership firm into LLP does not attract any tax liability.

If the LLP format is to be made popular for Chartered Accountants and others, it is necessary that ICAI and various chambers, representing the business community, should strongly represent to the Government to amend section 47 of the Income-tax Act. This can be achieved by inserting a new clause similar to section 47(xiii), granting exemption from capital gains tax, to any firm, which is converted into LLP under the provisions of section 55 read with the Second Schedule of the LLP Act.

Mobile Payments — the future trend

fiogf49gjkf0d
This write-up discusses some of the prevailing trends and products available for making payment by using a mobile phone. While there is a lot of similarity in the payment process, there are subtle differences in technologies used and accompanying advantages/ disadvantages. This write-up seeks to highlight some of the differences.

To say that the advent of mobile telephony in India has changed the lives of countless millions would be stating the obvious. Today, mobile phones are not just a means of communication, but they are much more. I am sure, neither Alexander Graham Bell (who invented the telephone in 1875) nor did Dr. Martin Cooper (who is credited with designing the first practical mobile phone back in 1973) ever imagined that one day in the future their invention would be used to:

  • Flash1 one’s status (funky, snooty, VFM)
  • Collect memories (photos)
  • Stay connected (Facebook & Twitter)
  • Keep updated (news, alerts)
  • Entertain (music, video)
  • Transact (m-commerce)
  • Influence people (Obama’s election campaign) 

Be that as it may, today, mobile phones are an integral part of our day-to-day environment and (at the cost of repeating myself2), their importance/ our dependence on this marvel of technology is growing by the day. Today, the phone has become the hub for all our activities, from e-mailing and browsing to paying bills and transferring money. In fact, mobile phones are fast replacing your credit/ debit/ATM cards (Plastic money) as a convenient mode of transacting. For the uninitiated, please watch the recent ads put up by Airtel, Indusind Bank. There are several active players3 and they offer the same or similar services, for a charge (of course). Here it is important to understand what is on offer, and then pare down expectations accordingly.

How does a mobile banking/wallet work?

Mobile banking (not to be confused with phone banking) allows you to conduct financial transactions on your phone just as you would at a bank branch or through Net banking. Banks are now evolving this facility as they launch innovative products (this sometimes entails installing an app on your phone). In the mobile banking segment, all telecom companies have tie-ups with different banks that allow you to avail of banking services.

  • The process is pretty simple, and the steps could be something like: Register with the service provider: Open an account with the concerned bank or telecom company.
  •  In case of a bank — register for Net banking.
  • Use a Java-based phone4.
  • Activate GPRS services on your connection, so that you can access the Net5.
  • Install the banks phone app.

To transfer funds, you will have to:

  • Log in using the bank’s app menu and input the mobile phone number or bank account number of the beneficiary.
  •  Message the PIN you receive from the bank to the beneficiary who will also receive a secret number.
  • The recipient will have to log in with both PINs at the ATM to withdraw the money.
  • If the funds are being transferred to a bank account, it will take about four working days.

Practical applications:

IndusInd Bank’s cash-to-mobile service enables customers to transfer money to anybody, including those who do not have an Indusind Bank account. A bank customer is required to download the bank’s app on his phone, and then put in the phone number of the person to whom he wants to send the money, along with the transaction amount. The bank sends a message to the remitter and the beneficiary, along with different PINs to each. The remitter is required to message his PIN to the beneficiary, who can then use both PINs and his mobile number to withdraw cash from an IndusInd Bank ATM. The service is free, but operator charges would apply. Also, the sender will need a Java-enabled handset. Airtel Money has a different offering.

Airtel Money can be used on any mobile phone, and you can register for it by dialling *404# or at an authorised Airtel Money retailer. There are two types of accounts. The first one is an express account, wherein you can load Rs.10,000, and use it to pay utility bills or for booking rail/flight tickets on travel portals. The upgraded version is called a power account, which can be loaded with amount up to Rs.50,000. This can be done through Net banking or an Airtel Money retailer.

Charges?

There is a minimum fee for each transaction. For instance, a transfer of up to Rs.500 will cost Rs.5, while higher transactions and up to Rs.10,000 will entail a fee of Rs.10. Under mobile banking, apart from the transaction charge, one also pays Internet charges and SMS charges to the service provider.

Other considerations:

The Reserve Bank of India (RBI) has capped the transaction limit to Rs.10,000 for all essential services like ticketing, utility bill payments, etc. For non-essential transactions, the limit is set at Rs.5,000. There is also a ceiling of Rs.50,000 for loading the wallet.

While online banking has picked up pace, mobile banking is currently subdued. One reason for this is that whenever a new technology is introduced in the market, it takes time for people to familiarise themselves with it, which is why the growth is slow. Phone technology is another problem area, as there are different platforms of mobile banking for different phones. Also, let us not forget the whole business of bandwidth — all these applications need secure and good connections.

 Presently, most banks have decided to take one step at a time. They are not pushing hardcore banking services, but only presenting mobile banking as an enquiry tool to entice customers to carry out transactions. For example, SMS alerts for bill payment may tempt you to pay the bill through the phone itself.

What’s in store for the future?

Notwithstanding the above, the advent of smart phones has definitely spelt good news for the mobile banking segment. Why? For starters, the younger generation today prefers to use mobiles more than PCs. Secondly, statistics7 suggest that there are approximately 13 million Internet users in the country, as against 911 million mobile phone users. Obviously, the numbers would justify future trends and investments.

This decade belongs to mobile telephone, and the use of phones (smart or otherwise) is going to be the trend of the future. Until then, bon chance.

1    On April 3, 1973 Dr. Martin
Cooper did show off to his rival Joel Engel, head of research at AT&T’s
Bell Labs by placing a call to him while walking the streets of New York City
talking on the first Motorola DynaTAC prototype.

 2    Refer to this feature in the BCAJ March 2010.

 3    Airtel, Oxicash, Paymate, ICICI, Citi, Indusind,
etc.

 4    Not required for Airtel Money.

  5    Not required for Airtel Money.

6     This is based on the
information available in public domain, there may other charges/conditions.
Readers are expected to do their own due diligence before subscribing to the
service.

   7  Released by TRAI in February 2012.


levitra

Section B : Miscellaneous

fiogf49gjkf0d
The Company had initiated a voluntary recall of certain products as a precautionary measure against possible contamination due to the packaging integrity of such recalled products. The provision for loss due to products recalled is based on estimates made by the management by applying principles laid down in Accounting Standard – 29 ‘Provisions, Contingent Liabilities and Contingent Assets’. Further it is not possible to estimate the timing/uncertainty relating to the outflow. The movement in the provision during the period is as under:
levitra

Day one fair valuation of financial instruments

This article
illustrates the accounting implications of day one fair valuation of assets and
liabilities on initial recognition and its subsequent measurement. When a
financial asset or financial liability is recognised initially in the balance
sheet, the asset or liability is measured at fair value (plus transaction costs
in some cases). Fair value is the amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in an
arm’s-length transaction.

In other words, fair value is an actual or estimated transaction price on the
reporting date for a transaction taking place between unrelated parties that
have adequate information about the asset or liability being measured.

The following are certain transactions where fair value on initial recognition
may be different than their transacted amounts.

1. Low-interest or interest-free loans Where a loan or a receivable is
transacted at market interest rates the fair value of the loan will equal the
transaction value. If a loan or a receivable is not based upon market terms,
then it is accounted for in accordance with IAS 39 which states that “the fair
value of a long-term loan or receivable that carries no interest can be
estimated as the present value of all future cash receipts discounted using the
prevailing market rate(s) of interest for a similar instrument (similar as to
currency, term, type of interest rate and other factors) with a similar credit
rating. Any additional amount lent is an expense or a reduction of income
unless it qualifies for recognition as some other type of asset.” In assessing
whether the interest charged on a loan is below market rates, consideration
should be given to the following factors:

  • Credit worthiness of the
    counter-party
  • The terms and conditions of the
    loan including whether there is any security
  • Local industry practice
  •  Local market circumstances.

In particular, the entity would
consider the interest rates currently charged by the entity or by others for
loans with similar maturities, cash flow patterns, currency, credit risk,
collateral and interest basis.

Initial recognition

A. Repayable on demand: A loan repayable on demand is not required to be
discounted, as the fair value of the cash flows associated with the loan is the
face value of the loan (due to it being repayable on demand).

B. Repayable with fixed maturity: The fair value of the interest-free loan is
the present value of all future cash flows discounted using the market-related
rate over the term of the loan. The rate used to discount an interest-free loan
is the prevailing market interest rate of a similar loan. Any difference
between the cost and the fair value of the instrument upon initial recognition
is recognised as a gain or a loss, unless it qualifies to be recognised as an
asset or liability. Subsequent measurement If the loan is classified by the
lender as a ‘loan and receivable’, the loan is measured at amortised cost using
the effective interest rate method. The fair value of the loan will increase
over the term to the ultimate maturity amount. This accretion will be
recognised in the income statement as interest income.

 For the borrower that measures the financial liability at amortised cost,
the liability will increase over the life of the loan to the ultimate maturity
amount. This accretion in the liability will be recognised in the income
statement as interest expense. Illustration — Nil interest loan between common
control parties When low-interest or interest-free loans are granted to
subsidiaries, in the separate financial statements of the investor, the
discount should be recognised as an additional investment in the subsidiary. In
the separate financial statements of the investee, the effect would be given in
the shareholders’ equity.

Illustrative examples

Assume the face value of the loan is Rs.100,000 and the fair value of the loan
is Rs.80,000 at the initial recognition date.

Case 1: Parent grants interest-free loan to the subsidiary

Case 2: Subsidiary grants an interest-free loan to its parent

Case3: Subsidiary grants an interest-free loan to another fellow subsidiary




Note: Deferred tax entries have been ignored

Accounting entries in the books of the

 

 

Parent in Case 3

Dr.

Cr.

Deemed Investment in
borrowing subsidiary

20

 

 

 

 

To deemed dividend
income from lending

 

 

subsidiary

(20)

 

 

 

 


2. Low-interest or interest-free loans to employees

Loans given to employees at lower than market interest rates generally are
short-term employee benefits. Loans granted to employees are financial
instruments within the scope of IAS 39 Financial Instruments. Therefore,
low-interest loans to employees should be measured at the present value of the
anticipated future cash flows discounted using a market interest rate. Any
difference between the fair value of the loan and the amount advanced is an
employee benefit. If the favourable loan terms are not dependent on continued
employment, then there should be a rebuttable presumption that the interest
benefit relates to past services, and the cost should be recognised in profit
or loss immediately. If the benefit relates to services to be rendered in
future periods (e.g., if the interest benefit will be forfeited if the employee
leaves, or is a bonus for future services), then the amount of the discount may
be treated as a prepayment and expensed in the period in which the services are
rendered. If the services will be rendered more than 12 months into the future,
then the entire benefit is a long-term benefit.

The above accounting treatment would not hold good if the loans are repayable on demand. This is because in absence of a fixed tenure and the feature of repayable on demand, the fair value of the loan would correspond with the amount of the loan.

3.    Interest-free security/lease deposits

Initial recognition

In case of the provider of the deposit, the deposit should be recognised at fair value. The difference between the fair value and transaction amount would be considered as a prepaid rent under IAS 17 for the provider.

Subsequent measurement
The loan is classified by the provider of the deposit as a ‘loan and receivable’; the loan is measured at amortised cost using the effective interest rate method. The fair value of the deposit will increase over the term to the ultimate maturity amount. This accretion will be recognised in the income statement as interest income and prepaid rent will be amortised on a straight-line basis as rent expense under the principles enunciated in IAS 17.

For the receiver of the deposit, the deposit shall be classified as a financial liability at amortised cost; the liability will increase over the life of the loan to the ultimate maturity amount. This accretion in the liability will be recognised in the income statement as interest expense and advance rent received will be amortised on a straight-line basis as rent income. The amortisation would be similar to the prepaid salary as illustrated above.

Illustration

Assume Rs.1,000,000 lease deposit has been given — interest-free for a term of 5 years. Assuming market rate of borrowing is 10% for the lessee and market rate for investments is also 10% for the lessor. The fair value on the first day of the lease would be Rs.620,931 (i.e., fair value as discounted).

The accounting would be as follows:

 

Accounting
entries

Dr.

 

 

Cr.

 

 

 

 

 

 

 

 

 

In
the books of entity

 

 

 

 

 

 

 

giving
the deposit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction
date —

 

 

 

 

 

 

 

Initial
recognition of

 

 

 

 

 

 

 

deposit
at fair value

 

 

 

 

 

 

 

and
difference treated

 

 

 

 

 

 

 

as
prepayment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease deposit receivable

620,921

 

 

 

 

 

 

Prepaid rent

379,079

 

 

 

 

 

 

To bank

 

1,000,000

 

 

 

End
of first period —

 

 

 

 

 

 

 

1.  Accretion of interest

 

 

 

 

 

 

 

on
deposit using

 

 

 

 

 

 

 

original
discount rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease deposit receivable

62,092

 

 

 

 

 

 

To Interest income on

 

 

 

 

 

 

 

deposit

 

62,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounting
entries

Dr.

Cr.

 

 

 

2.  Amortisation
of

 

 

notional
prepaid rent

 

 

 

 

 

Rent expense

 

 

(i.e., 379079/5 years)

75,816

 

To prepaid rent

 

75,816

 

 

 

In
the books of entity

 

 

receiving
the deposit

 

 

 

 

 

Bank

1,000,000

 

To lease deposit payable

 

620,921

To rent received in advance

 

379,079

 

 

 

End
of first period —

 

 

1.  Accretion of interest on

 

 

deposit
using original

 

 

discount
rate

 

 

 

 

 

Interest expense on

 

 

deposit

62,092

 

To lease deposit payable

 

62,092

 

 

 

2.  Recording
additional

 

 

notional
rental income

 

 

Rent received in advance

75,816

 

To rent income

 

75,816

 

 

 

The aforesaid accounting principles would not apply if the lease is a cancellable lease, since then the security deposit would be repayable on demand and as explained above would need to be accounted at the transaction value.

Section A : Accountin g Treatment for Share Issue and IPO-related expenses

fiogf49gjkf0d
Bajaj Corp. Ltd. (31-3-2011)
From Significant Accounting Policies:

Initial Public Offer (IPO) Expenses: All the IPO expenses amounting to Rs.1,896.25 lac are written off during the year and shown as exceptional item in the Profit & Loss Account.

IndoSolar Ltd. (31-3-2011)

From Significant Accounting Policies and Notes to Accounts:

Miscellaneous expenditure: Until 31st March 2010, the Company had an accounting policy to amortise share issue expenses over a period of 5 years. The share issue expenses amounting to Rs.308,863,060 incurred during the year and the balance of Rs.26,960,927 remaining unamortised as at 31st March 2010, has now been adjusted against the Securities Premium Account as permitted u/s.78 of the Companies Act, 1956, on account of a change in the accounting policy in the year ended 31st March 2011. Had the Company continued to follow the same accounting policy, the miscellaneous expenditure written off and the net loss would have been higher by Rs.34,778,485 for the year ended and miscellaneous expenditure would have been higher by Rs.301,045,502 as at 31st March 2011.

Subex Ltd. (31-3-2011)

From Significant Accounting Policies:

Preliminary and Share Issue Expenses: Expenses incurred during the Initial Public Offer, follow on offer and issue of Bonus Shares are amortised over 5 years. Other issue expenses are charged to the securities premium account.

 Kingfisher Airlines Ltd. (31-3-2011)

Deferred revenue expenses: Share issue expenses are amortised over a period of three years on a straight-line basis following the year of incurring the expenses.

levitra

GAPS in GAAP — Guidance Note on Accounting for Real Estate Transactions (Revised 2012) is in no-man’s land

Introduction

On account of the diverse practices, the ICAI felt it necessary to issue a revised Guidance Note titled Guidance Note on Accounting for Real Estate Transactions (Revised 2012) to harmonise the accounting practices followed by real estate companies in India. The revised Guidance Note should be applied to all projects in real estate which are commenced on or after April 1, 2012 and also to projects which have already commenced but where revenue is being recognised for the first time on or after April 1, 2012. An enterprise may choose to apply the revised Guidance Note from an earlier date, provided it applies it to all transactions which commenced or were entered into on or after such earlier date. The revised Guidance Note (2012) supersedes the Guidance Note on Recognition of Revenue by Real Estate Developers, issued by the ICAI in 2006, when this Guidance Note is applied as above. Though apparently the Guidance Note on accounting for real estate transactions is drafted in a simple and lucid manner, but when implemented, can throw a lot of implementation issues. Particularly, there are several requirements in the Guidance Note, which some may argue conflict with the accounting standards notified under the Companies (Accounting Standards) Rules.

 Scope of the Guidance Note

One of the big challenges is with respect to scope of the Guidance Note, which is not very clear on several aspects. The Guidance Note scopes in development and sale of residential and commercial units. Would that mean that if a customer were to hire a real estate developer to construct a villa on the land owned by the customer and in accordance with the customer’s specification, that transaction would be covered under the Guidance Note? In the author’s view, this seems like a typical construction contract, to which AS-7 and not the Guidance Note would apply. The Guidance Note applies to construction-type contracts, for example, construction of a multi-unit apartment to be sold to many buyers. It is pertinent to note that though percentage of completion is applied under AS-7 and the Guidance Note, there are other significant differences which would give different accounting results. Consider another example. A real estate developer sells villas to customers. It enters into two agreements with each buyer: one for sale of land and other for construction of building. Can the company treat these two agreements separately and recognise revenue accordingly?

In a practical scenario, three possibilities may exist with regard to construction of villa. These possibilities and likely views are:

(1) Customer owns land and it hires real estate developer to do the construction according to its specifications. In this case, the arrangement seems like a typical construction contract to which AS-7 and not the Guidance Note will apply.

(2) Real estate developer sells land and constructed villa together as part of one arrangement in a manner that customer cannot get one without the other. In this case, it seems appropriate that the developer will apply Guidance Note to land and building together.

(3) Real estate developer sells land. The buyer has an option of getting construction done either from the developer or any other third party. Both the land sale and construction element are quoted/ sold at their independent fair values.

The Guidance Note does not specifically deal with this scenario. However, the author believes that the more appropriate view will be to treat the sale of land and construction of building as two separate contracts and apply revenue recognition principles accordingly. The Guidance Note applies to redevelopment of existing buildings and structures. This scope is very confusing. For example, very often existing housing societies may ask a developer to reconstruct a property, with detailed specification on structure and design and the right to change that specification before or during the construction. The developer (who is hired like any other contractor) in return is remunerated by a fixed amount or a part of the constructed property or land. The author’s view is that in these circumstances, AS-7 should apply, rather than the Guidance Note. This is because the said contract is a construction contract which is covered under AS-7 and not a construction-type contract which is covered under the Guidance Note. But consider another example of a SRA project in Mumbai. The real estate developer evacuates existing tenants, constructs a huge property to be sold to customers, and adjacently constructs a small building that will house the existing tenants. All through the builder acts as a principal. In such a scenario the Guidance Note will apply.

Can the Guidance Note be applied by analogy to construction and sale of elevators or windmills, etc.? Therefore, applying the guidance note by analogy, can entities manufacturing elevators or windmills, which are of a standardised nature, use the percentage of completion method? The scope of the Guidance Note is very narrow.

The Guidance Note should not be applied by analogy to any other activity other than real estate development. Depending on the facts and circumstances, either AS-7 or AS-9 should apply to construction and sale of elevators, aircraft, windmills or huge engineering equipments. The Guidance Note scopes in joint development agreements, but provides no further guidance on how joint development agreements are accounted for. Joint development agreements may take various forms. The accounting for joint development agreement will be driven by facts and circumstances. They could be joint venture agreements or they could represent the typical scenario where land development rights are transferred to the real estate developer by the land owner, and the legal transfers take place much later, for reasons of stamp duty or indirect taxes. Transfer of development rights on land is like effectively transferring the land itself. Where development rights are transferred, the author has seen mixed accounting practices. Some developers treat the transaction as a barter transaction and record the development rights acquired as land purchased with the corresponding obligation to pay the landowner at a future date. The payment to the landowner could either be in a fixed amount or a fixed percentage of revenue or a portion of the constructed property. Many developers do not account for the barter transaction.

A third option is to record the acquisition of the development rights at the cost of constructed property to be provided to the land owner. This option can be justified on the basis that the Guidance Note requires TDRs to be recorded at lower of net book value or fair value. Though there is no impact on the net profit on the overall contract, whichever method is followed, it would impact the grossing up of revenue and costs. It will also result in the grossing up of the balance sheet. Further though the overall profit is the same over the project construction period, due to the manner of computing POCM, year-to-year profit may vary under the three options. For better clarity the three options are enumerated below. (Figures in all tables are in CU=Currency Unit, unless otherwise stated)

Balance sheet

Particulars Option 1 Option 2 Option3
Share capital 100 100 100
Reserves 500 500 500
Equity 600 600 600
Loan liability 2,000 2,000 2,000
Liability to landowners
(to be paid by way of
transfer of constructed
property — long term) — 2,000 1,500
Total liabilities 2,000 4,000 3,500
Total funds 2,600 4,600 4,100
Land (acquired thru JDA) — 2,000 1,500
Other assets 2,600 2,600 2,600
Total assets 2,600 4,600 4,100
Debt/equity ratio 3.33 6.66 5.83
Particulars Option 1 Option 2 Option 3
Sale of flats to outsiders  8,000 8,000 8,000
Transfer of flat to
land owners — 2,000 1,500
Total revenue 8,000 10,000 9,500
Land cost — 2,000 1,500
Construction cost 7,500 7,500 7,500
Total cost 7,500 9,500 9,000
Profit 500 500 500
% profit on turnover 6.25% 5% 5.26%


Is the Guidance Note in conformity with the Companies (Accounting Standards) Rules?

AS-9, Revenue Recognition, applies to sale of goods and services. AS-7, Construction Contracts applies to construction contracts which are defined as “contracts specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose of use”. In respect of transactions of real estate which are in substance similar to delivery of goods, principles enunciated in Accounting Standard (AS) 9, Revenue Recognition, are applied. For example, sale of plots of land without any development would be covered by the principles of AS-9. These transactions are treated similar to delivery of goods and the revenues, costs and profits are recognised when the goods are delivered. In case of real estate sales, which are in substance construction-type contracts, a two-step approach is followed for accounting purposes.

Firstly, it is assessed whether significant risks and rewards are transferred to the buyer. The seller usually enters into an agreement for sale with the buyer at initial stages of construction. This agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to the buyer. After satisfaction of step one, the second step is applied, which involves the application of the POCM. Once the seller has transferred all the significant risks and rewards to the buyer, any acts on the real estate performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue in such cases is recognised by applying the POCM. Once the revenue recognition conditions as per the Guidance Note are fulfilled, the POCM is to be applied mandatorily. In circumstances where the revenue recognition conditions are fulfilled, completed contract method is not permissible.

Accounting standards are notified under the Companies Accounting Standard Rules. The standards that deal with revenue recognition contract are AS-7 & AS-9. Accordingly the entire population of revenue contracts should either fall under AS -7 or AS-9. For example, a strict interpretation of a construction contract under AS-7 will lead one to the conclusion that a real estate sale is a product sale rather than a construction contract. By carving a new category in the Guidance Note, namely, in substance construction contract, for purposes of real estate development; some may argue that this Guidance Note falls in no -man’s-land and is not in accordance with the law. This line of thinking may be of particular interest to private companies that may find completed contract method more attractive for tax reasons.

Volatility in earnings

The Guidance Note imposes several conditions before a company can start applying the percentage of completion method on the real estate project. One of the conditions is that at least 25% of the construction and development costs should have been completed. One interesting aspect of the Guidance Note is that land cost is not included to determine if the 25% construction cost trigger is met. However, once the revenue recognition trigger is met, all costs including land cost is added to the project cost to determine percentage completion and the corresponding revenue and costs. This is likely to bring about a lot of volatility in the reported revenue and profit numbers. For example, let’s assume that land cost is 60% and development cost is 40%. As soon as 25% development cost is incurred, POCM commences. In this example, 70% of the costs (land cost of 60% and 25% of 40 on development), and corresponding revenue would be recognised at the point 25% development cost criterion is met. This would result in significant spike in the revenue and profit numbers. One of the main criticisms of the completed contract method is that it resulted in lumpy accounting. The manner in which POCM is applied as per the revised Guidance Note, it would fall into the same trap.

The examples below will explain more clearly how the revised Guidance Note results in volatility and how one could have avoided the volatility in the pre-revised Guidance Note.

RE Ltd. undertakes construction of a new real estate project having 20,000 square feet saleable area. The project will take 2 years to complete. Half the project is sold on day 1, and there are no further sales. All critical approvals are received upfront and all other POCM conditions are fulfilled at the end of Year 1. The construction and development cost is evenly spread in the two years at CU 150 million each. The total sale value of the units sold is Rs.400 million. Assume 50% amount is realised on all executed contracts and there are no defaults from customer side.

Particulars Year 1 Year 2
Area sold (sq.ft) 10,000 10,000
Estimated land cost (a) 300 300
Estimated construction cost (b) 300 300
Total estimated cost (a+b) 600 600
Actual cost incurred on land (c) 300 NIL
Actual additional construction cost (d) 150 150
Actual cost incurred on cumulative
basis (c+d) 450 600
Total sale consideration as per
executed agreements 400 400

Revenue as per POCM under revised GN

Particulars Year 1 Year 2
Total estimated project cost 600 600
Actual cost incurred 450 600
Stage of completion (% completion) 75 100
Cumulative revenue to be recognised
(400 x % completion) 300 400
Revenue for the period (a) 300 100
Land cost charged to P&L (b)
(300 x 10,000/20,000) 150
Construction cost charged to P&L (c)
(Actual construction cost incurred x
10,000/20,000) 75 75
Particulars Year 1 Year 2
Profit for the period (a-b-c) 75 25
Inventory — land cost 150 150
Inventory — construction cost of
unsold area 75 150
Total inventory 225 300

As stated earlier, consider that under the revised Guidance Note land cost is not included to determine the revenue trigger; but once the revenue trigger is achieved, land cost is included to determine percentage completion and the corresponding revenue and costs. As one can see in the above table this Guidance Note results in significant volatility in the revenue and profit recognised in Year 1 and Year 2, though the construction activity was evenly spread in the two years. This is because the land costs and the associated revenues get recognised in Year 1.

Revenue as per POCM under pre-revised GN

Particulars Year 1 Year 2
Total estimated project cost
(excluding land) 300 300
Actual cost incurred (excluding land) 150 300
Stage of completion (% completion) 50% 100%
Cumulative revenue to be recognised
(400 x % completion) 200 400
Revenue for the period (a) 200 200
Land cost charged to P&L (b)
(300 x 10,000/20,000 x % completion) 75 75
Construction cost charged to P&L (c)
(Actual construction cost incurred x
10,000/20,000) 75 75
Profit for the period (a-b-c) 50 50
Inventory — Land cost 225 150
Inventory — construction cost of
unsold area 75 150
Inventory 300 300

In the pre-revised Guidance Note the practice many companies followed was to allocate the land cost and revenue proportionately over the development activity. As one can see in the above table, one of the practices under the pre-revised Guidance Note results in a more stable recognition of revenues and profits. This is because the land cost and corresponding revenues are recognised in proportion to the development activity.

Revenue as per POCM if only 24% construction is completed under revised GN

Particulars Year 1 Year 2
Total estimated project cost 600 600
Actual cost incurred 372 600
Stage of completion for revenue
recognition threshold* 24% 100%
Stage of completion (% completion) NIL 100%
Cumulative revenue to be recognised
(400 x % completion) NIL 400
Revenue for the period (a) NIL 400
Land cost charged to P&L (b)
(300 x 10,000/20,000) NIL 150
Construction cost charged to P&L (c)
(Actual construction cost incurred x
10,000/20,000) NIL 150
Profit for the period (a-b-c) NIL 100
Inventory — land cost 300 150
Inventory — construction cost
(sold — no revenue recognised
+ unsold area) 72 150
Total inventory 372 300

Assumptions

  •    Same facts as POCM example except actual construction cost incurred
  •     Assume company has incurred CU72 million of construction cost in Year 1

*    First year POC = 72/300 = 24% (actual construction cost/total estimated construction cost)

In a slightly tweaked example (as seen in the above table), assume in Year 1 that construction cost of CU 72 million is incurred. This works out to 24% of the total construction costs. Hence revenue recognition trigger is not satisfied in Year 1. All of the revenue and costs get recognised in Year 2. This example demonstrates two things. One is that the Guidance Note would result in significant volatility in the revenue and profit numbers. Secondly, this example demonstrates how a rule-based standard can be abused. For example, by incurring a little more cost and crossing the 25% threshold, the developer could have recognised significant revenue and profits in Year 1.

What is a project?

The application of the POCM under the Guidance Note is done at the project level. The Guidance Note defines project as the smallest group of units/plots/ saleable spaces which are linked with a common set of amenities in such a manner that unless the common amenities are made available and functional, these units/plots/saleable spaces cannot be put to their intended effective use. The definition of a project is very critical under the Guidance Note, because that determines when the threshold for recognising revenue is achieved and also the manner in which the POCM is applied. The definition of the term ‘project’ in the Guidance Note is somewhat nebulous. Firstly, it is defined as a smallest group of dependant units. This is followed by the following sentence in the Guidance Note “A larger venture can be split into smaller projects if the basic conditions as set out above are fulfilled. For example, a project may comprise a cluster of towers or each tower can also be designated as a project. Similarly a complete township can be a project or it can be broken down into smaller projects.” Once the term ‘project’ is defined as the smallest group of dependant units, it is not clear why the word ‘can’ is used instead of ‘should’. Does it mean that there is a limitation on how small a project can be, but no limitation on how big a project could be?

The definition is nebulous. Consider an example where two buildings are being constructed adjacent to each other. Both these buildings would have a common underground water tank that will supply water to the two buildings. As either of the building cannot be put to effective use without the water tank, the project would be the two buildings together (including the water tank). Consider another example, where each of those two buildings have their own underground water tank and other facilities and are not dependant on any common facilities. In this example, the two buildings would be treated as two different projects. Consider a third variation to the example, where each of those two buildings have their own facilities, and the only common facility is a swimming pool. In this example, judgment would be required, as to how critical the swimming pool is, to make the buildings ready for their intended use. If it is concluded that the swimming pool is not critical to the occupancy of either of those two buildings, then each of those two buildings would be separate projects. Where it is concluded that the swimming pool is critical to put the two buildings to its intended effective use, the two buildings together would constitute a project. In the example, where two buildings are being constructed adjacently, and each have their own independent facilities and are not dependant on common facilities, one may argue that there is a choice to cut this as either a project comprising two buildings or two projects comprising one building each. If this is indeed the case, the manner in which this choice is exercised is not a matter of an accounting policy choice, but rather a choice that is exercised on a project-by-project basis. In the author’s view, a company should exercise such choice at the beginning of each project and not change it subsequently.

Recognition criteria — Some practical issues

Query
For the purposes of applying the POCM risks and rewards should be transferred to the buyer. Real estate construction involves various types of risks, such as the price risks, construction risks, environmental risks, ability of the real estate developer to complete the project, political risks, etc. There could be situations where the political or environmental risks may be very significant and put to doubt the developers ability to complete the project. Clearly both under the 2006 Guidance Note and the 2012 Guidance Note revenue should not be recognised. But in normal scenario’s how much weightage one would provide to price risks in determining the transfer of risks and rewards?

Response

As per the 2006 Guidance Note, the important criteria were the legal enforceability of the contract, the transfer of price risks to the buyer and the buyer’s legal right to sell or transfer his interest in the property. In contrast paragraph 3.3 of the 2012 Guidance Note states as follows: “The point of time at which all significant risks and rewards of ownership can be considered as transferred, is required to be determined on the basis of the terms and conditions of the agreement for sale. In the case of real estate sales, the seller usually enters into an agreement for sale with the buyer at initial stages of construction. This agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to the buyer, provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real estate is not given to the buyer.” As can be seen the 2012 Guidance Note is nebulous, and is not explicit like the 2006 Guidance Note which clearly sets out the price risk as being most critical to the transfer of significant risks and rewards. At this stage it is not clear how this difference will impact accounting of the real estate sales. For example, a company may decide the construction, environment and regulatory risk as being more critical than the price risk. In those circumstances, would the company apply the completed contract method instead of the POCM? Therefore this will be a significant area of judgment, and could lead to diversity in practice if companies interpret this term differently. However, if a project has become highly uncertain because of political and environmental issues, revenue should not be recognised under either Guidance Note.

Query

Is payment of stamp duty and registration of the real estate agreement necessary to start applying POCM?

Response

In certain jurisdictions, one needs registered docu-ments for the purposes of obtaining a bank loan. In other cases, a customer may decide to register the documents later at the time of possession to save on the interest element on the stamp duty amount. It is important to understand this. POCM can be applied only when there is a legally enforceable contract. It is a matter of legal interpretation and the applicable legislation, whether an unregistered document is legally enforceable. If the agreement is legally enforceable, POCM can be applied. If the agreement is not legally enforceable, POCM cannot be applied. The same also holds true in the case of MOU or letter of allotment given by the builder to the customer instead of a complete legal agreement. The question to be answered invariably is whether the arrangement is legally enforceable.

Query

Very often real estate companies to protect the valuation of the property impose a lock-in restriction on a buyer for a reasonable period, which generally does not extend beyond the project completion period. Would lock-in restrictions preclude the application of the POCM till such time the lock-in rights exist?

Response
In the author’s view, such reasonable restrictive provision does not materially affect the buyer’s legal right. Accordingly, it can be argued that in such instances risks and rewards are transferred to the buyer. Hence POCM can be applied.

Query
In rare cases, real estate developers provide price guards to customers as an incentive to buy properties. For example, a guarantee is provided that should the real estate developer sell the property to subsequent buyers at a rate lower than the previous buyer, the real estate developer would reimburse the previous buyer for the fall in price. Would this preclude application of the POCM?

Response

If these restrictions are substantive, then it may be argued that price risks are not transferred and hence POCM should not be applied. In some situations the price guards may not be substantive, for example, a guarantee by the developer that subsequent sales would not be made at a price lower than 40% charged to the previous buyer may be irrelevant in a rising property market. In such cases POCM can be applied. In the author’s view if there are repurchase agreements or commitments, or put-and- call options, between the developer and the customer, which are substantive in nature, POCM cannot be applied in those circumstances.

Query

One of the conditions for POCM is environment clearance and clear land title. In few cases, this could be a highly judgmental area. Auditors may have difficulty in auditing the same.

Response

Past experience has been that some major projects were stalled mid-way in India, because of lack of environmental clearance, or the land title was questionable. The problem is further compounded because of myriads of clearances and complicated legislations. As an auditor, one would look at seeking clarity from the in-house legal department or an external law firm. Banks generally conduct due diligence on these projects before approving loan to the developer and the customer. Clearance of the project by various banks may provide additional evidence.

Query

One of the conditions for POCM is the 25% completion of construction and development costs. Whether borrowing cost capitalised would be included to determine if this 25% threshold is achieved?

Response

There is some confusion on this. In paragraph 2.2 of the Guidance Note borrowing cost is treated as a distinct category separate from construction and development costs. But paragraph 2.5 lists down borrowing cost as construction and development costs. Based on paragraph 2.2 borrowing costs will not be included to determine the trigger. Based on paragraph 2.5 borrowing costs will be included to determine the trigger. The best way to resolve this anomaly is to include borrowing costs relating to construction and development costs and exclude proportionate borrowing costs on land to determine the trigger.

The other issues around borrowing cost relate to allocation of borrowing cost and which borrowing cost qualify for capitalisation for the purposes of determining project cost and corresponding revenue. The EAC had earlier opined that borrowing cost relating to security deposit for the purposes of acquiring land or other assets is not eligible for capitalisation, because security deposit is not a project cost. Another question that arises when determining project cost for calculating POCM is whether proportionate borrowing cost on land should be included. One view is that land is ready for its intended use when acquired and hence borrowing cost should not be capitalised. Another view is that land and building should be seen as part of a project. If the project is considered as a unit of account, borrowing cost should be capitalised on the project which includes the land component till the project is ready for its intended use. The author believes that the latter is more appropriate given the emphasis on project as the unit of account in the Guidance Note.

Query

Real estate developers enter into innovative schemes with customers. A customer may pay the entire consideration upfront of CU 100 and receive the possession of the property after 2 years of construction. Alternatively the customer pays CU 121 after 2 years on receiving the possession of the property. Would the real estate developer consider time value of money and recognise an interest expense of CU 21 and revenue of CU 121 in the former case?

Response

Well, generally interest imputation is not done under Indian GAAP.

Query

Real estate developers usually pay selling commission to various brokers for getting real estate booking. Can a real estate company include such commission in project cost to apply POCM?

Response

The Guidance Note does not explicitly deal with selling commission paid to brokers. According to paragraph 2.4 of the Guidance Note, selling costs are generally not included in construction and development cost. This suggests a company cannot include selling commission in the project cost and it will need to expense the same to P&L immediately. However, some real estate companies may argue that this view is not in accordance with paragraph 20 of AS-7. Since the Guidance Note refers to AS-7 for application of POCM, implication of its paragraph 20 should also be considered. According to this paragraph “costs that relate directly to a contract and which are incurred in securing the contract are also included as part of the contract costs if they can be separately identified and measured reliably and it is probable that the contract will be obtained.” This is one more instance where the Guidance Note conflicts notified accounting standards. The ICAI should clarify this issue.

Query

With respect to onerous contract, at what level would the developer evaluate onerous contract – is it at the individual contract level or project level?

Response

At the project level, the overall project may be profitable, as the profitable contracts may outnumber the loss -making contracts. If the unit of account was the individual contract, then all contracts that are loss making, will require a provision for onerous contract. The Guidance Note requires such evaluation to be done at the project level rather than on each individual contract. Some may argue that this requirement of the Guidance Note is in contravention of the requirements of the notified accounting standard, namely, AS-29 which requires the provision to be set up at the individual contract level.

Query

How is warranty costs accounted for?

Response

Warranty costs are included in project cost. In practice there are different ways in which warranty costs are treated in the application of the POCM. Warranty costs are unique in the sense that they are incurred after the project is completed and can only be estimated. Firstly warranty is not a separate multiple element or service or sale of good or service. Rather it is part of the obligation of the developer to hand over the constructed property to the buyer. The author has seen mixed accounting practices for warranties. Some companies recognise warranty costs and the corresponding revenue when the project is completed, because that is the time, the warranty period effectively starts. Other companies recognise warranty costs and corresponding revenue throughout the construction period, on the basis that a percentage of the cost incurred would need reworking.

Assume the same facts as POCM example. Consider that RE also gives a 5-year warranty from water leakage and other structural defects. Based on past experience, RE estimates that it will incur warranty cost equal to 5% of total construction cost. Hence, additional warranty cost is CU 15 million (i.e., 5% of CU 300 million construction cost).

Option 1 — Consider warranty cost only when tower is handed over

Particulars Year 1 Year 2
Total estimated project cost
(excluding warranty) — (a) 600 600
Total estimated project cost
(including warranty) — (b) 615 615
Actual cost incurred
(excluding warranty provision) — (c) 450 600
Warranty provision — (d) NIL 15
Total cost including
warranty — (c + d) (e) 450 615
Stage of completion
(% completion) — (e)/(b) 73.17% 100%
Cumulative revenue to be
recognised (400 x % completion) 293 400
Revenue for the period 293 107

In this case, the company recognises warranty cost and related revenue only when tower is handed over. Warranty cost is factored in total estimated construction cost. Since no provision for warranty is made in Year 1, stage of completion is lower resulting in lower revenue being recognised in Year 1 (i.e., CU 293 million vis-à-vis CU 300 million in earlier scenario when there was no warranty cost). Lower revenue recognised in Year 1 gets recognised in Year 2 on completion of the project.

Option 2 — Consider warranty cost as and when revenue is recognised

Particulars Year 1 Year 2
Total estimated project cost
(excluding warranty) — (a) 600 600
Total estimated project cost
(including warranty) — (b) 615 615
Actual cost incurred (excluding
warranty provision) — (c) 450 600
Warranty provision (5% of actual
construction cost) — (d) 7.5 15
Total cost including warranty
(c + d) (e) 457.5 615
Stage of completion
(% completion) — (e)/(b) 74.39% 100%
Cumulative revenue to be recognised
(400 x % completion) 298 400
Revenue for the period 298 102

In this option, company follows a policy of recognising warranty as and when revenue is recognised. Hence company provides for warranty as and when work is carried out. In Year 1, company incurs actual construction cost of CU 150. Hence, it makes a warranty cost equal to 5% of actual construction cost incurred i.e., CU 7.5 in Year 1. Since warranty provision is made on an ongoing basis, stage of completion in Year 1 is higher vis -à-vis option 1. This results in higher revenue being recognised in Year 1.

Transfer of development rights

TDRs are recorded at the cost of acquisition; but interestingly in an exchange transaction, TDR is recorded either at fair market value or at the net book value of the portion of the asset given up, whichever is less. For this purpose, fair market value may be determined by reference either to the asset or portion thereof given up or to the fair market value of the rights acquired, whichever is more clearly evident. The principle of recording TDRs at lower of cost or fair value ensures that fair value gain on exchange of TDRs is not recognised in the financial statements but when fair value is lower than cost, it is recorded at fair value, so that impairment is captured upfront.

Typically under AS-26 and AS-10, recording of exchange transactions at fair market value is permitted. Under IFRS principles, exchanges that have substance are also recorded at fair market value. It is not clear why recording of exchanges with substance at fair market value is not permitted. By conjecture, the standard setters may be concerned about the possibility of abuse by recognising profits on exchanges that may not have substance.

Transactions with multiple elements

An enterprise may contract with a buyer to deliver goods or services in addition to the construction/ development of real estate. The Guidance Note gives example of property management services and rental in lieu of unoccupied premises as multiple elements. It further states that sale of decorative fittings is a separate element, but fittings which are an integral part of the unit to be delivered is not a separate element. Where there are multiple elements, the contract consideration should be split into separately identifiable components including one for the construction and delivery of real estate units. The consideration received or receivable for the contract should be allocated to each component on the basis of the fair market value of each component. For example, a real estate company in addition to the consideration on the flat, charges for property maintenance services for a period of two years, after occupancy. Such revenue is accounted for separately and over the two-year period of providing the maintenance services.

As already mentioned, the consideration received or receivable for the contract should be allocated to each component on the basis of the fair market value of each component. Such a split-up may or may not be available in the agreements, and even when available may or may not be at fair value. When the fair market value of all the components is greater than the total consideration on the contract, the Guidance Note does not specify how the discount is allocated to the various components. Under the proposed revenue recognition standard in IFRS, the allocation is done on a proportion of the relative market value. This in the author’s view is the preferred method. However, some may argue that the residual or reverse residual method may also be applied, in the absence of any prohibition in the Guidance Note. Under the residual method the entire discount is allocated on the first component and in the reverse residual method the entire discount is allocated to the last component.

Would one consider revenue on sale of parking slots as a multiple element? Unfortunately the Guidance Note does not elaborately define multiple elements. In the author’s view, parking slots are an extension of the construction and development of the real estate unit and hence should not be treated as a separate multiple element.

What about lifetime club membership fees? Will it be treated as a separate element? If the club is going to be transferred to the tenants or the housing society, then it should be treated as an extension of the real estate unit rather than a separate element. However, if the real estate developer will own and operate the club, it should be treated as a separate element.

Conclusion

As discussed at several places in this article, there are too many loose ends and too many matters of conflict between the notified accounting standards and this Guidance Note. Some may argue that the Guidance Note is ultra vires the law. These matters need to be appropriately addressed by the ICAI. In the author’s view, an appropriate response would have been to participate in the standard-setting process of the IASB; particularly with respect to the development of the new IFRS standard on revenue recognition, which requires the application of the POCM on real estate contracts.

Reality Check in Implementing the Revised Schedule VI

fiogf49gjkf0d
Introduction

The Revised Schedule VI is applicable for the financial statements prepared for the periods commencing on or after 1 April, 2011. Since the year end for the majority of the Indian companies happens to be 31 March, the real impact of the changes brought out in the format of financial reporting in the form of Revised Schedule VI is going to be felt by the corporate world only now! By way of introducing the changes in the reporting format of the financial statements which was prevailing for several years and introducing new concepts and disclosure requirements, the Regulator has posed an onerous obligation on the finance professionals serving the Indian corporates to understand the nuances of the reporting requirements and extract the information required to ensure appropriate reporting and compliance. Though the Revised Schedule VI itself contains several explanatory provisions for the various new reporting requirements at a macro level, there are several matters which need to be micro managed and addressed carefully. The Institute of Chartered Accountants of India (ICAI) has issued a Guidance Note on the Revised Schedule VI providing implementation guidance on various aspects of the Revised Schedule VI. In view of the extent of the changes and the complications involved in applying the changed concepts in practical business scenarios, the first year of reporting under the Revised Schedule VI will throw several questions/ implementation issues. This article is aimed at discussing some of the implementation issues that may arise in presenting the financial statements as per the Revised Schedule VI and the suggested approach for dealing with the same.

Backbone of the Revised Schedule VI

  • The essence of the changes brought out by the Revised Schedule VI could be broadly summarised as under from a macro perspective:Changing the presentation of the financial statements in line with the expectations of the international investor community. ? Bringing in clarity/standardisation in the formats.
  • Making explicit that the requirements of the Companies Act, 1956 and the Accounting Standards would override the reporting requirements.
  • Introducing the robust concept of current and non-current classification of assets and liabilities. In the light of the above, several new disclosure requirements have been introduced and similarly some of the redundant disclosures have been omitted. It is quite obvious that the extent of additions is comparatively more than the disclosures which have been discarded. A careful analysis of the Revised Schedule VI would also highlight that the disclosures required now do not imply a simple representation of the figures but also a careful compilation of the various information with sound business knowledge. 

Implementation challenges

Various implementation challenges arising out of the Revised Schedule VI could be broadly summarised under the following categories:

  • Issues relating to Applicability
  • Issues relating to Presentation
  • Issues relating to Interpretation of Concepts/ Terms
  • Other Issues

The above classification is intended for analysing the practical problems logically so as to better understand the issue and deal with the same. Needless to add that the issues identified are not exhaustive but representative only.

Issues relating to applicability

The issues that arise with respect to the applicability of the Revised Schedule VI are discussed below:

Applicability for the consolidated financial statements

As regards the applicability of the Revised Schedule VI for the consolidated financial statements, the current requirement of AS-21 stipulates that the consolidated financial statements have to be prepared in accordance with the format closer to the stand-alone financial statements. In this regard, since the standalone financial statements are expected to be prepared as per the Revised Schedule VI, it is but natural to prepare the consolidated financial statements also in accordance with the Revised Schedule VI requirements. However, to the extent the information is not relevant for meeting the AS- 21 requirements, the same need not be included. It is worth noting that the information as stipulated under the Revised Schedule VI relating to various subsidiaries including foreign subsidiaries needs to be obtained well in advance to facilitate the preparation of the consolidated financial statements.

Applicability for tax purposes

If a company has a reporting period which is different from the tax financial year which is based on April-March, there is a need for preparing a set of separate financial statements for the financial year to meet the tax requirements. There is an issue regarding the format to be used for such reporting in view of the changes made in the reporting format for the statutory accounts prepared under the Companies Act, 1956. Since there is no format prescribed as per the provisions of the Income-tax Act, 1961, the financial statements specifically compiled for the tax financial year may be prepared using the Revised Schedule VI to the extent feasible.

Applicability for Clause 41 of the Listing Agreement As regards presentation of the information for meeting the Clause 41 requirements with respect to the statement of assets and liabilities, the SEBI, recently vide its Circular No. CIR/CFD/DIL/4/2012 dated 16 April 2012, has introduced a new format for reporting the results for listed companies which is in line with the Revised Schedule VI.

Issues relating to presentation

The various issues related to presentation aspects in the Revised Schedule VI could be summarised as under:

Data relating to previous year to be provided for comparative purposes

The Revised Schedule VI stipulates that the corresponding amounts have to be provided in the financial statements for the immediately preceding reporting period for all items shown in the financial statements including notes. This would result in representing the previous year financial data as per the Revised Schedule VI which has introduced several new concepts/requirements. With respect to certain requirements where the information is not readily available with the company, suitable disclosures have to be made in the financial statements explaining the same along with the reasons. Further, wherever the previous year audited numbers are represented in accordance with the Revised Schedule VI requirements, it would be better to provide a detailed reconciliation of the reclassifications carried out for making them comparable with the current year presentation.

Cash Flow Statement presentation

The Revised Schedule VI does not stipulate any format for the Cash Flow Statement similar to that for the Balance Sheet and the State of Profit and Loss. This would imply that the Cash Flow Statement needs to be prepared based on the guidance provided in AS-3. Since majority of the companies would present the cash flow statement using the indirect method involving the derived movements between two Balance Sheets, for the purpose of presenting the movements of the previous year, the Balance Sheet of the year preceding the previous year is the starting base. If the cash flow movements have to be presented using the terminologies/principles stipulated as per the Revised Schedule VI (such as Trade receivables, trade payables with current and non-current break-ups, etc.), the exercise of identification/ regrouping of the relevant Balance Sheet items in the year preceding the previous year also needs to be carried out using the Revised Schedule VI in addition to the representation required for the previous year Balance Sheet.

Since there is no stipulated format for the Cash flow statements in the Revised Schedule VI, the possibility of presenting the Cash flow statements as per the terminologies used in AS-3 which may not be in line with the Revised Schedule VI terminologies may also be considered wherein the movements can be continued to be provided as in the case of the past for the current year as well as for the previous year.

Cash and Cash Equivalents

As per the Revised Schedule VI, Cash and Cash Equivalents have to be presented separately on the face of the Balance Sheet. Further, the term Cash and Cash Equivalents have been defined to include balance with banks, cheques and drafts on hand, cash on hand and others. However, the term cash and cash equivalent has been defined differently under AS-3 as per which, cash comprises cash on hand and demand deposits with banks and cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and that are subject to an insignificant risk of changes in value. In addition, the deposits can be considered as Cash Equivalent only when the original maturity period for the same is less than 3 months. Since the Revised Schedule VI clearly indicates that in the case of conflict, an Accounting Standard would prevail over the Schedule, there is a need for using the definition as per the AS-3 for Cash and Cash Equivalents with suitable disclosures for the other component which would imply suitable modification of the terminologies used in the Balance Sheet for presenting the Cash and Bank Balances. This view has been confirmed by the Guidance Note on Revised Schedule VI issued by the ICAI as well.

Another view could also be taken that the term Cash and Cash Equivalents defined as per AS-3 is applicable only for Cash Flow Statement preparation purposes and not necessarily for other purposes, which would imply that the reporting requirements as the per Revised Schedule VI may be presented as intended in the Revised Schedule VI with a suitable disclosure relating to the break-up of the Cash and Cash Equivalents as per AS-3 (for cash flow tie up purposes) and other items.

Issues relating to interpretation of concepts/ terms

Identification of Current Element

The Balance Sheet format in the Revised Schedule VI has been designed on the basis of classified Balance Sheet approach and hence requires all assets and liabilities to be categorised into current and non- current. One has to remember that while doing the categorisation, the term current will also include the current portion of the long-term assets and liabilities. Further, categorisations of employee benefit-related liabilities, provisions as current and non-current would pose practical difficulties and the same need to be planned upfront.

As part of this exercise of categorisation of the Balance Sheet, while applying the concept of operating cycle, identification poses practical challenges. In general, the term operating cycle is considered as the time required between the acquisition of assets for processing and their realisation in cash or cash equivalents. If a company has different operating cycles for different parts of the business, then the classification of an asset as current is based on the normal operating cycle that is relevant to that particular asset. In cases where the normal operating cycle cannot be identified, it is assumed to have duration of 12 months.

Materiality threshold for disclosure

As per the Revised Schedule VI, separate disclosure is required on the face of the Statement of Profit and Loss for (i) cost of materials consumed, (ii) purchases of stock-in- trade and (iii) change in inventories of finished goods, work-in-progress and stock-in-trade. In this regard, details of consumption of raw materials, purchases and work-in- progress are required to be given under ‘broad heads’.

The term ‘broad heads’ has not been defined under the Revised Schedule and the same needs to be decided taking into account the concept of materiality and presentation of a true and fair view of the financial statements. Such identification of broad heads requires careful consideration and exercise of professional judgment. Considering the general practice, application of a threshold of 10% of total value of purchases of stock- in-trade, work-in-progress and consumption of raw materials can be considered as acceptable for determination of broad heads. However, nothing prevents a company in applying any other threshold as well, duly considering the concept of materiality and presentation of a true and fair view of the financial statements. This position has also been reiterated by the ICAI in its Guidance Note on Revised Schedule VI in Para 10.7.

Identification of Other Operating Revenue

Revised Schedule VI requires specific classification of revenue into sale of products, sale of services and other operating revenue. Interpretation of the term Other Operating Revenue as required under the Revised Schedule VI would pose challenges to companies. This has to be carefully identified and differentiated from Other Income. Whether a particular income constitutes ‘Other Operating Revenue’ or ‘Other Income’ is to be decided based on the facts of each case and a detailed understanding of the company’s activities.

The term Other Operating Revenue would include revenue arising from the company’s operating activities, i.e., either its principal or ancillary revenue-generating activities, but which is not revenue arising from the sale of products or rendering of services.

Goods in transit for individual inventory items
Revised Schedule VI stipulates that the items of inventories of goods in transit need to be disclosed separately for each and every item of the inventory such as raw material, work -in-progress, finished goods, etc. (if any).

Other issues

Impact on ratios calculated for banking arrangements

The definitions for the terms current assets and current liabilities as per the Revised Schedule VI could lead to redefining the current ratios computed by the management and submitted for various banking and other arrangements. Similarly, the extent of cash and cash equivalents as per the Revised Schedule VI could be different from the liquid assets computed for various other purposes.

I GAAP v. Ind AS

Though the Revised Schedule VI is not expecting any change in the measurement yardstick used for accounting and reporting the financial results, there could be practical challenges in dealing with some of the disclosure aspects as per the Revised Schedule VI. For example, the stock options cost charged to the Statement of Profit and Loss needs to be disclosed separately as per the Revised Schedule VI; however, at present there is no accounting standard which deals with the accounting aspects of stock options. However, the ICAI has issued a guidance note on the subject. This poses challenges since basic accounting for stock options cost is not mandatory, whereas the disclosure requirements relating to the same are made mandatory through the Revised Schedule VI. This confusion would continue till the relevant Ind AS dealing with the accounting aspects of stock options becomes mandatory. Similar issues could arise with respect to other items as well where there is no accounting standard governing the basic accounting aspects but there is a disclosure requirement in the Revised Schedule VI.

Change in accounting policy for dividend income received from subsidiaries

As per the old Schedule VI, the parent company had to recognise dividends declared by subsidiary companies even after the date of the Balance Sheet if it pertains to the period ending on or before the Balance Sheet date. However, there is no such requirement as per the Revised Schedule VI. Hence, in line with the Accounting Standard 9 on Revenue Recognition such dividends will have to be recognised now as income only when the right to receive dividends is established.

This would also require a suitable disclosure in the financial statements regarding the change in the accounting policy followed by the company with respect to recognition of such dividend income from subsidiaries.

It is worth noting that though the Revised Schedule VI requires the disclosure of the proposed dividend as part of the notes, in view of the specific provisions of AS-4 ‘Contingencies and Events Occurring After the Balance Sheet date’ which specifically requires adjustment of the proposed dividend in the Balance Sheet, companies need to continue to adjust the proposed dividend in the Balance Sheet, though the declaration by the shareholders is pending. Till such time AS-4 is amended, this position would continue in view of the supremacy of the accounting standards over the Revised Schedule VI which has been stated specifically in the Revised Schedule VI itself.

Position regarding AS-30/31/32

As per the current position AS-30, 31, 32 on Financial Instruments have not been notified under the Companies (Accounting Standards) Rules, 2006; hence, early application of these standards by a company is encouraged only subject to compliance of the of the other notified Accounting Standards such as AS-11, AS-13 and other applicable regulatory requirements which would prevail over AS-30, 31 and 32. If a company has early adopted Accounting Standards AS-30, 31 and 32, it could have challenges in presenting the financial statements as per the Revised Schedule VI.

For example, for an entity which has early adopted AS-30, 31, and 32, presentation of preference shares and determination of its status as liability or equity based on the economic substance could be an issue for dealing with the presentation requirements of Revised Schedule VI. This has been clarified by the ICAI vide its Guidance Note on Revised Schedule VI (Para 8.1.1.4) that since Accounting Standards AS-30 Financial Instruments: Recognition and Measurement, AS-31 and AS- 32 Financial Instruments: Disclosures are yet to be notified and section 85(1) of the Act refers to Preference Shares as a kind of share capital, Preference Shares will have to be classified as Share Capital.

Considering the above and the legal status of Accounting Standards AS-30, 31 and 32 which is recommendatory pending Notification by the Government, careful consideration has to be given with respect to the conflicts, if any, in the presentation between the same and the Revised Schedule VI which is part of the Companies Act, 1956.

Dealing with the requirements from other statutes
If there are any disclosure requirements which emanate from other statutes, the same needs to be provided in addition to the other disclosure requirements stipulated under Revised Schedule VI. For example, the disclosure requirements related to outstanding dues to micro small and medium enterprises should be disclosed in accordance with the Micro Small and Medium Enterprises Development Act, 2006. The same position would continue in the case of disclosures required under the Listing Agreements with the stock exchanges.

Conclusion

Introduction of the Revised Schedule VI is a path-breaking initiative for the Indian corporate world in the era of globalisation. The changes brought out in the financial reporting through the Revised Schedule VI cannot be considered as a simple exercise of representation of numbers in a different format, but requires careful consideration of various factors duly reflecting the business considerations and the investor expectations. There is no doubt that application of the Revised Schedule VI is intended to bring the disclosure requirements of the Indian corporate financial statements in line with the prevailing international practice. The Indian corporates are in the process of responding to the expectations of the Regulators swiftly by gearing themselves to adapt to the new environment of financial disclosures. In this process, there are bound to be various challenges and implementation issues and hence would naturally lead to enhanced learning/experience. By way of properly planning and navigating the financial reporting exercise with utmost care and attention, and taking best use of the available guidance, the implementation challenges can be well managed.

Income arising upon buy-back of shares by a whollyowned Indian subsidiary of a foreign company is taxable in accordance with section 46A and not section 47(iv).

fiogf49gjkf0d
RST in re
(2012) 19 taxmann.com 215 (AAR) Section 46A, 47(iv) of Income-tax Act Dated: 27-2-2012
Before P. K. Balasubramanyan (Chairman)
and V. K. Shridhar (Member)
Present for the appellant: Rajan Vora, Vinesh Kirplani, Srirupa Tandon
Present for the Department: V. S. Sreelekha

Income arising upon buy-back of shares by a wholly-owned Indian subsidiary of a foreign company is taxable in accordance with section 46A and not section 47(iv).


Facts:

The applicant, a German company (FCO), was a part of group of companies. FCO had a wholly-owned public limited subsidiary company in India (ICO). To comply with requirements of the Companies Act as regards the minimum number of members, one share each in ICO was held by six other companies as nominees of FCO. Also, FCO held shares in ICO as investment and not stock-in-trade. Subsequently, FCO received intimation from ICO for buy-back of shares at a price determinable in accordance with the RBI guidelines. FCO approached AAR on the issue whether transfer of shares in the course of the proposed buy-back by ICO was exempt u/s.47(iv) of the Income-tax Act. The Tax Department contended that upon buy-back, shares are extinguished and hence section 47(iv) has no application. Further, section 47 does not override section 46A. Also, section 46A was specifically introduced to deal with buy-back. Hence, the gain was taxable in India u/s.46A of the Income-tax Act or Article 13(4) of India-Germany DTAA. FCO contended that the charging section was section 45 and not section 46A. Section 46A was only clarificatory. Section 47(iv) and (v) apply generally to capital assets and to attract section 47(iv), it is enough if the share is a capital asset.

Ruling:

  • The AAR rejected FCO’s contention and held that income arising upon buy-back of shares by ICO would be taxable u/s.46A for the following reasons: Even if six other members of ICO are nominees of FCO, it cannot be postulated that FCO was holding all the shares in ICO. Section 45 is a general provision whereas section 46A is a specific provision dealing with purchase of its own shares by a company and hence, it should prevail over section 45.
  •  Speech of Finance Minister while introducing section 46A has made it clear that section 46A was enacted to deem that the amount received on buy-back was taxable as capital gain and not as dividend.
  • Since income is chargeable to tax under section 46A, the payment made by ICO would be subject to withholding tax.
levitra

Where the sale price of CCDs issued by subsidiary company was linked to the holding period; CCDs were guaranteed by parent company; directors of subsidiary company had no powers of management; difference between the sale price and purchase price of CCDs held by Mauritian company was ‘interest’ and not ‘capital gains’ in terms of DTAA.

fiogf49gjkf0d
‘Z Mauritius’, in re (2012) 20 taxmann.com 91 (AAR) Article 11, 13(4) of India-Mauritius DTAA; Section 2(28A) Income-tax Act Dated: 21-3-2012 Before P. K. Balasubramanyan (Chairman) and V. K. Shridhar (Member)
Counsel for applicant: Vinay Mangla, Gaurav Kanwin, Percy Pardiwala & Preeti Goel Counsel for Department: Poonam Khera Sidhu, R. K. Kakar

Where the sale price of CCDs issued by subsidiary company was linked to the holding period; CCDs were guaranteed by parent company; directors of subsidiary company had no powers of management; difference between the sale price and purchase price of CCDs held by Mauritian company was ‘interest’ and not ‘capital gains’ in terms of DTAA.


Facts:

  • The applicant (‘Z’) is a company incorporated in and tax resident of Mauritius. V Ltd. (‘V’) and S Ltd. (‘S’) are two Indian companies.
  • ‘V’ is parent company of ‘S’ and company ‘S’ was engaged in developing a real estate project in India.
  • The applicant, ‘V’ and ‘S’ jointly executed a Share Holders Agreement (‘SHA’) and Securities Subscription Agreement (‘SSA’).
  • Pursuant to SHA and SSA, the applicant and ‘V’ invested in ‘S’. The applicant subscribed to equity shares and CCDs.
  • As per SHA, CCDs were to be fully and mandatorily converted into equity shares after 72 months. The applicant had put option to sell certain shares and CCDs on specified dates to ‘V’ and ‘V’ had call option to purchase the said shares and CCDs from the applicant.
  • The respective options were to be exercised prior to the mandatory conversion date. ‘V’ exercised its call option to purchase shares and CCDs from the applicant.
  • The applicant contended that the capital gains arising from transfer was exempt from tax in India in terms of Article 13(4) of India-Mauritius DTAA. The contention of applicant was rejected by the Tax Department which held that:
  • The concept of optional conversion rate was incorporated in SHA to compensate for normal interest from debentures. Only small portion of investment comprised equity shares and balance was CCDs. To characterise the gain to have arisen from transfer of capital assets was improper. ? For interpreting agreements, its essence as a whole should be considered and not merely their form. Relying on LMN India Ltd., in re (2008)5, CCDs recognised the existence of debt till repaid or discharged. The two agreements were entered into to camouflage the true character of income from interest on loan to capital gains.
  • The applicant submitted that it was engaged in real estate business, but its only transactions in India were investment in ‘S’. Hence, alternatively, nature of income arising from the transaction should be business income.
  • As per current FDI Policy, optionally and partly convertible debentures and preference shares are to be treated as ECB. Debentures recognise the existence of a debt. It does not cease to be so simply because they are redeemed by conversion to equity shares and not payment. Thus, ECB is contrived to look like CCDs convertible into equity. A transaction where the parties have a common intention not to create the legal rights and obligations which they give appearance of creating, is sham6. Since the rate of return was predetermined 6 years before the exercise of option, there was no commercial purpose. Accordingly, the transaction was designed to avoid tax by taking advantage of Article 13(4) of India-Mauritius DTAA. It was the applicant’s contention that:
  • Investment through CCDs is not loan or advance and there is no lender-borrower relationship with ‘S’. Even if ‘S’ is assumed to be borrower, the consideration is received from ‘V’ for sale of assets. Any amount received over and above purchase price cannot be treated as interest7.
  • Gains on sale of CCDs have arisen because of the value of the underlying assets, namely, equity shares.
  • Applicant and ‘V’ are totally unrelated parties and hence, purchase of CCDs by ‘V’ cannot be regarded as redemption of CCDs.
  • Since the tax benefit would result to only one, there is no reason for parties involved to share a common intention to create legal facade.

Ruling The AAR observed and ruled as follows:

 (i) Reliance placed on CWT v. Spencer & Co. Ltd. and Eastern Investments Ltd. v. CIT8, to contend that a CCD creates or recognises the existence of a debt, which remains to be so till it is repaid or discharged.

(ii) Article 11(5) of India-Mauritius DTAA, includes any type/form of ‘income from bonds and debentures’ within the ambit of ‘interest’. Purchase price under call option was linked to the holding period. While CCDs were not to carry any interest, they gave option of conversion into shares at a different price. Conversion of debentures into equity shares at the end of the specified period amounts to constructive repayment of debt. While calculating the purchase price the conversion rates vary, depending upon the period of holding of CCDs. This is nothing else but ‘interest’ within the meaning of section 2(28A) of the Income-tax Act and Article 11 of India- Mauritius DTAA.

 (iii) To ascertain true legal nature of the transaction, and to appreciate true nature of the consideration received, ‘look at’ test needs to be applied by examining substance of the transaction, inter se relationship of the parties and the transaction as a whole. While ‘S’ and ‘V’ were two independent juridical persons, ‘S’ did not exercise any power in managing its affairs. The management powers of the directors of ‘S’ were taken away through various clauses of SHA. ‘V’ was developing and running real estate business of ‘S’. ‘V’ was the guarantor of investment made by ‘Z’. ‘V’ acknowledged CCDs as debt. Thus, ‘V’ and ‘S’ were different only on paper, but otherwise they were one and the same entity. ‘V’ had de facto control and management over ‘S’. Therefore the argument that the sale of CCDs is not to the debtor but to a third party and hence, what is realised cannot be said to include interest, cannot be accepted.

(iv) Article 11 is a specific provision dealing with treatment of income from debt claims of every kind, whereas Article 13 deals with capital gains. ‘V’ and ‘S’ are one and the same. ‘V’ has paid fixed pre-determined return to the applicant. Hence, the amount paid by ‘V’ is towards the debt taken by ‘S’ from the applicant and therefore, appreciation in value of CCDs is ‘interest’ under Article 11.

levitra

Usance interest which is directly related to the period for which purchase price was due, is ‘interest’ in terms of section 2(28A) and consequently, it is deemed to accrue or arise in India u/s.9(1)(v) of ITA.

fiogf49gjkf0d
Uniflex Cables Ltd. v. DCIT
(2012) 19 Taxmann 315 (Mumbai-ITAT) Section 2(28A), 40(a)(i) of Income-tax Act A.Ys.: 1999-2000 & 2002-03. Dated: 28-3-2012
Before R. S. Syal (AM) and N. V. Vasudevan (JM)
Present for the appellant: Rajan Vora
Present for the Department: Jitendra Yadav

Usance interest which is directly related to the period for which purchase price was due, is ‘interest’ in terms of section 2(28A) and consequently, it is deemed to accrue or arise in India u/s.9(1)(v) of ITA.


Facts:

The taxpayer, an Indian company (ICO), purchased raw material from several non-resident suppliers under irrevocable LCs payable within 180 days from the date of bill of loading. ICO was required to pay usance interest for the period of credit and the supplier raised a separate invoice in respect of such usance interest. During the years under consideration, on the ground that the usance interest was in the nature of interest and it had accrued and arisen in India, the Tax Department held it to be chargeable to tax in India. Further, as ICO had not deducted tax on such usance interest, the claim for deduction of such interest was disallowed u/s.40(a)(i) of the Income-tax Act. The disallowance was upheld by the CIT(A). Before ITAT, ICO contended that:

  • Interest within meaning of section 2(28A) of the Income-tax Act means interest payable in respect of moneys borrowed or debt incurred. Payment of interest for the time granted by non-resident supplier of raw material cannot be considered as payment in respect of money borrowed or debt incurred. Hence, such payment would not partake the character of interest as per section 2(28A) of the Income-tax Act.
  • The finance charges were for delayed payment of raw material purchases and hence would partake the character of money paid for purchase price of raw material. Therefore, no tax is required to be deducted. In support, ICO relied on various decisions3.
  • Reliance placed by the Tax Department on the Gujarat HC in the case of CIT v. Vijay Ship Breaking Corporation, (2003)4, where it was held that usance interest was not part of the purchase price, but was interest and the payer was required to deduct tax.

Held:

The ITAT rejected ICO’s contentions and held: Unlike certain cases cited by ICO, in ICO’s case, usance interest had no relation with the price of raw material purchased, but had direct relationship with the time when the payment became due. Hence, on facts, usance interest was in the nature of interest within the meaning of section 2(28A) of the Incometax Act. Consequently such interest would be deemed to have accrued or arisen in India u/s.9(1) (v)(b) of the Income-tax Act.

levitra

Payment for development of Balanced Score Card (BSC) management tool is Fees for Technical Services under Article 12 of the India-Singapore DTAA.

fiogf49gjkf0d
Organisation Development Pte. Ltd. v. DDIT TS 86 ITAT 2012 (CHNY)
Article 5, 7, 12 of India-Singapore DTAA; Section 9(1)(vi)/(vii)of Income-tax Act A.Y.: 2007-08. Dated: 9-2-2012
Abraham P. George (AM) and George Mathan (JM) Present for the appellant: Vikram Vijayaraghavan Present for the Department: K.E.B. Rangarajan

Payment for development of Balanced Score Card (BSC) management tool is Fees for Technical Services under Article 12 of the India-Singapore DTAA.


Facts:

Taxpayer, a company incorporated in Singapore (FCO), provided services to various clients around the world for development of BSC project. BSC is a strategic performance management tool which can indicate deviations from expected levels of performance. During the year under consideration, FCO rendered services to various companies located in India.

FCO contended that the receipts towards services were business profits under Article 7 of DTAA and in the absence of Permanent Establishment (PE) the same would not be taxable in India.

The Tax Department divided services for development of BSC into two segments viz. professional fees rendered to the clients and lump sum received for sale of software. The Tax Department held that the amount received towards the sale of software was taxable as ‘royalty’ for use of equipment, while the professional fees were taxable as ‘fees for technical services’ (FTS).

FCO contended that there was no ‘equipment royalty’ as the users had no domain or control over such software. Also the software downloaded by clients was not customised to suit any particular client. Furthermore, as FCO had not made available any technical knowledge, experience, skill, knowhow, etc. amount would not be taxable as FTS. The matter was referred before the Dispute Resolution Panel (DRP) which upheld the order of the Tax Department.

ITAT Ruling:

  • The ITAT held that the payments received by FCO would be taxable as FTS u/s.9(1)(vii) for following reasons: FCO had sent its team to help its clients in implementing licensed software which was required to develop BSC. The clients were required to make lump-sum payments for downloading such software from the designated sites and such software was to be used in various phases of developing the BSC system.
  •  In a BSC system each client has its own goals and different strategies to reach such goals. A team, which is evolving a BSC system necessarily, has to identify the measures that are relatable to the entity under study. This is not a type of service which can be used by any organisation by application of an off-the-shelf software.
  • Software is only a part of the total process for development of BSC. Fees received by FCO are linked to the downloading of software, but that is not sufficient to come to a conclusion that software is equipment from which FCO earned royalty. The Tax Department was not right in dividing the whole process into two parts one for the royalty and the other for FTS.
  • The provisions of DTAA with regard to the definition of the term ‘FTS’ are different from the definition provided u/s.9(1)(vii) of the Incometax Act. This is supported by AAR in the case of Bharti AXA General Insurance1. FCO is thus justified in availing benefit of treaty provisions and this is well supported by SC ruling in UOI v. Azadi Bachao Andolan2.
  • FCO made available technical knowledge and skill which enabled its clients to acquire the knowledge for using BSC system for their business and for meeting long-term targets.
  • Software was only a part of the management consultancy tool and was never considered as independent of the total system. The technical knowledge and skill provided by FCO remained with its clients. Thus, fees received for designing of BSC management tool falls within definition of FTS under Article 12(4) of the India–Singapore DTAA.
levitra

Amendments in Schedules A, C and D w.e.f. 1-4-2012 — Notification No. VAT.1512/ C.R.40/Taxation-1 of MVAT Act, 2002, dated 31-3-2012.

fiogf49gjkf0d

Vide this Notification amendments have been carried to entries in Schedule A, C & D.

levitra

Rate of reduction in set-off in case of branch transfer — Notification No. VAT-1512/CR-43/ Taxation-1, dated 31-3-2012.

fiogf49gjkf0d
From 1st April, 2012 in case of branch transfer that when goods are transferred from Maharashtra State to branch in other State then the set-off on the corresponding purchase of taxable goods will be reduced by 4% as against 2% till then.

levitra

Profession Tax Act, 1975 — Procedure for online submission of application for obtaining registration and enrolment — Trade Circular No. 5T of 2012, dated 31-3-2012.

fiogf49gjkf0d
From 1st April, 2012 application for registration (PTRC) and enrolment (PTEC) under the Profession Tax Act should be electronically uploaded in ‘Form I’ and ‘Form II’, respectively.

Remaining processes of obtaining registration/ enrolment such as verification of documents, etc. will remain the same. Manually filled forms will not be accepted on or after 1st April 2012 except for non-resident employer/person and Government departments. Procedure for online application has been explained in the Circular.

levitra

Electronic refund of service tax paid on taxable services used for export of goods — Circular No. 156/7/2012-ST, dated 9-4-2012.

fiogf49gjkf0d
By this Circular it has been announced that a Committee has been constituted to review the scheme for electronic refund of service tax paid on taxable services used for export of goods, made operational vide Notification 52/2011-ST, dated 30th December, 2011.

 The Committee has been instructed, as a part of the review, to

(a) evolve a scientific approach for the fixation of rates in the schedule of rates for service tax refund; and

(b) propose a revised schedule of rates for service tax refund, taking into account the revision of rate of service tax from 10 to 12% and also movement towards ‘Negative List’ approach to taxation of services. The Committee will submit its report before 20-6-2012. Views and suggestions may be posted at the e-mail address: feedbackonestr@gmail.com.

levitra

Point of Taxation Rules — Clarification reg. airline tickets — Circular No. 155/6/2012-ST, dated 9-4-2012.

fiogf49gjkf0d
In view of reports that some airlines are collecting differential service tax on tickets issued before 1st April 2012 for journey after 1st April 2012, causing inconvenience to passengers, this Circular clarifies that Rule 4 of the Point of Taxation Rules 2011 deals with the situations of change in effective rate of tax. In case of airline industry, the ticket so issued in any form is recognised as an invoice by virtue of proviso to Rule 4A of the Service Tax Rules 1994. Usually in case of online ticketing and counter sales by the airlines, the payment for the ticket is received before the issuance of the ticket. Rule 4(b)(ii) of the Point of Taxation Rules 2011 addresses such situations and accordingly the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier.

Thus the service tax shall be charged @10% subject to applicable exemptions plus cesses in case of tickets issued before 1-4-2012 when the payment is received before 1-4-2012. In case of sales through agents (IATA or otherwise including online sales and sales through GSA), when the relationship between the airlines and such agents is that of principal and agent in terms of the Indian Contract Act, 1872, the payment to the agent is considered as payment to the principal.

Accordingly, as per Rule 4(b)(ii), the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier. However, to the extent airlines have already collected extra amount as service tax and do not refund the same to the customers, such amount will be required to be paid to the credit of the Central Government u/s.73A of the Finance Act 1994 (as amended).

levitra

Point of Taxation Rules — Clarification reg. individuals or proprietorships, partnerships, eight specified services — Circular No. 154/5/2012-ST, dated 28-3-2012.

fiogf49gjkf0d
It has been clarified that for invoices issued on or before 31st March 2012, the point of taxation shall continue to be governed by the Rule 7 as it stands till the said date. Thus in respect of invoices issued on or before 31st March 2012 the point of taxation shall be the date of payment.

levitra

Deemed income: section 41(1): A.Y. 1995-96: Cheques not presented by creditors within validity period: No remission of liability: Amount not assessable u/s.41(1).

fiogf49gjkf0d
For the A.Y. 1995-96, the assessee credited to its profit and loss account a sum of Rs.5,02,646 as liabilities no longer required to be written back since the cheques for the amounts issued to the creditors were not presented within the validity period. The assessee claimed that the sum is liable to be excluded from the profit and could not be taxed u/s.41(1) of the Income-tax Act, 1961. The Assessing Officer treated the amount as the assessee’s income u/s.41(1) of the Act. The Commissioner (Appeals) and the Tribunal upheld the addition.

On appeal by the assessee the Calcutta High Court reversed the decision of the Tribunal and held as under:

“(i) The words ‘obtained, whether in cash or in any other manner, whatsoever, any amount in respect of such loss or expenditure’ incurred in any previous year in section 41(1)(a) of the Income-tax Act, 1961, refers to the actual receiving of cash of that amount. The amount may be actually received or it may be adjusted by way of any adjustment entry or a credit note or in any other form when the cash or the equivalent of the cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the Legislature when it used the words ‘has obtained, whether in cash or in any other manner, whatsoever, any amount in respect of such loss or expenditure in the past’.

(ii) The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone, but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of debt even after expiry of the normal period of limitation as provided in the limitation Act.

(iii) It has not been established that due to nonencashment of cheques in question, the money involved had become the money of the assessee because of limitation or by any other statutory or contractual right. The amount was not assessable u/s.41(1).”

levitra

Receipt — Whether sales tax incentive is a capital receipt is a substantial question of law which ought to have been considered by the High Court.

fiogf49gjkf0d
The assessee-company derived income from the manufacture of yarn, synthetic fabrics, etc. In the earlier assessment year, it had also commenced manufacture of polyester staple fibre in its unit in Patalganga. In the return of income filed by the assessee for the A.Y. 1986-87 in computing the total income a sum of Rs.14,70,40,220 was reduced from the net profit of Rs.71,33,74,748 being subsidy (notional sales tax liability) in the nature of capital receipt. According to the assessee, to encourage setting of new industrial units in backward areas of Maharashtra, the State Government instead of giving cash subsidy, allowed the assessee to retain sales tax payable to the State Government. The Assessing Officer disallowed the claim for the reasons given in the assessment order and first Appellate order for A.Y. 1984-85, in which it was held that the assessee had already got remission by way of exemption of sales tax and there was no ground for taking notional sales tax liability as notional receipt. On appeal, the Commissioner (Appeals) following his earlier order rejected the ground of appeal on the above issue. The Tribunal referred the matter to the Special Bench, since the Tribunal in the earlier orders in the assessee’s own case for the A.Ys. 1984-85 and 1985-86 had held that the sales tax incentive was a capital receipt, but thereafter after considering the above judgments, the Bombay Bench of the Tribunal, in the case of Bajaj Auto Ltd. (ITA Nos. 49 and 1101 of 1991, dated 31-12-2002) had rejected the assessee’s claim that the incentive was a capital receipt on various grounds. The Special Bench of the Tribunal held as under:

“The Scheme framed by the Government of Maharashtra in 1979 and formulated by its Resolution dated 5-1-1980 has been analysed in detail by the Tribunal in its order in RIL for the A.Y. 1985-86 which we have already referred to the extenso. On an analysis of the Scheme, The Tribunal has come to the conclusion that the thrust of the Scheme is that the assessee would become entitled for the sales tax incentive even before the commencement of the production, which implies that the object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area. The Tribunal has at more than one place, stated that the thrust of the Maharashtra Scheme was the industrial development of the backward districts as well as generation of employment, thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the Scheme was oriented towards and was subservient to the investment in fixed capital assets. The sale tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area.”

On appeal, the High Court noting the above held that a finding has been recorded that the object of the subsidy was to encourage the setting up of industries in the backward area by generating employment therein. In our opinion, in answering the issue, the test as laid down by the Supreme Court in Commissioner of Income-tax v. Ponni Sugars and Chemicals Ltd., (2008) 306 ITR 392 (SC) will have to be considered. The Supreme Court has held that the test of the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect of the purpose for which the subsidy is granted. The Supreme Court further observed that in such cases, what has to be applied is the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. Form of subsidy is material. The Supreme Court then proceeded to observe as under:

“The main eligibility condition in the Scheme with which we are concerned in this case is that the incentive must be utilised for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On these aspects there is no dispute. If the object of the subsidy Scheme was to enable the assessee to run the business more profitably than the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit than the receipt of the subsidy was on capital account.”

The High Court applying the purpose test based on the findings recorded by the Special Bench observed that the object of the subsidy was to set up a new unit in a backward area to generate employment. The High Court therefore held that the subsidy was clearly on capital account.

On an appeal by the Revenue, the Supreme Court held that the High Court ought not to have dismissed the appeal without inter alia considering the following question, which did arise for consideration:

“Whether on the facts and in the circumstances of the case and in law the Hon’ble Tribunal was right in holding that sales tax incentive is a capital receipt?”

The Supreme Court allowed the civil appeals and set aside the impugned order of the High Court and remitted the matter back to the High Court to decide the question, formulated above, in accordance with the law.

levitra

Set-off of Brought Forward Busines Losses against Capital Gains u/s.50

fiogf49gjkf0d
Issue for consideration

Under the provisions relating to set-off of brought forward business losses u/.s72, a brought forward business loss can be set off only against business profits of the current year, and not against income from any other source, including capital gains of the current year. Gains arising on sale of depreciable business assets forming part of a block of assets, though arising in the course of business, is taxable under the head ‘Capital Gains’ as a deemed shortterm capital gains on account of the specific provisions of section 50.

Section 50 reads as under:

“50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications:

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely:

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;

(ii) the written down value of the block of assets at the beginning of the previous year; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,

such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written-down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.”

The issue has arisen as to whether brought forward business losses can be set off against deemed shortterm capital gains, arising on transfer of depreciable assets, taxable u/s.50, since such gain is really a type of business income. While the Bangalore and Rajkot Benches of the Tribunal have held that unabsorbed business loss cannot be set off against the gains arising u/s.50, the Mumbai Bench of the Tribunal has held that the business loss brought forward from earlier years can be set off against such capital gains chargeable u/s.50.

Kampli Co-operative Sugar Factory’s case

The issue had come up before the Bangalore Bench of the Tribunal in the case of Kampli Co-operative Sugar Factory Ltd. v. Jt. CIT, 83 ITD 460. In this case relating to A.Y. 1997-98, the assessee sold the assets of its sugar factory, including the depreciable assets but excluding investments and deposits and the liabilities. The assessee claimed that the sale was a slump sale and the gains thereon was not taxable, since section 50B introduced with effect from A.Y. 2000-01 was not applicable to the year under consideration.

The Assessing Officer broke up the consideration into two parts — one for the land, which was held taxable as a long-term capital gains after deducting the indexed cost of the land, and the other for the depreciable assets, which was held taxable as deemed short-term capital gains after deducting the written-down value of the block of assets. He also did not set off the brought forward business losses against such capital gains.

The Commissioner (Appeals), upheld the order of the Assessing Officer and denied the set-off of the unabsorbed business losses against the capital gains.

The Tribunal confirmed that the sale was not a slump sale and bifurcation of the consideration was justified but proceeded to further examine the issue as to whether the unabsorbed business loss could be set off against the short-term capital gains arising u/s.50. The Tribunal held that the business assets were also capital assets as defined u/s.2(14), giving rise to capital gains on their sale chargeable u/s.45. The Tribunal observed that prior to 1st April, 1988, a component of capital gains arising from the sale of business assets was treated as a business profit by the legal fiction of the then prevailing section 41(2) while section 50 charged the whole amount under the head ‘capital gains’. The Tribunal further noted that the deeming capital gains u/s.50 of the Act is restricted to the capital gains being short-term capital gains and did not deem a business income to be the capital gains u/s.50 of the Act. The Tribunal therefore held that the unabsorbed business losses could not be set off against the capital gains.

A similar view was taken by the Rajkot Bench of the Tribunal in the case of Master Silk Mills (P.) Ltd. v. Dy. CIT, 77 ITD 530, where the Tribunal held that unabsorbed business losses could not be set off against sales proceeds of scrap of building that was taxable u/s.50 as a short-term capital gains. In that case the business had been closed and the income could not be said to have arisen in the course of business.

Digital Electronics’ case

The issue recently came up before the Mumbai Bench of the Tribunal in the case of Digital Electronics’ Ltd. v. Addl. CIT, 135 TTJ (Mum.) 419.

In this case, the assessee sold the factory building and plant and machinery, and claimed set-off of unabsorbed depreciation and brought forward business loss against such short-term capital gains taxable u/s.50. It was claimed that though the income was taxable as capital gains, its character remained that of business income inasmuch as the gains arose on transfer of a business asset on which depreciation was allowed. Reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of J. K. Chemicals Ltd. v. ACIT, 33 BCAJ (April 2001) page 36 [ITA No. 3206/Bom./89 dated 1st November 1993], where the Tribunal had held on similar facts [though in the context of section 41(2) and capital gains] that the character of such income that arose on transfer of depreciable assets remained that of business income, though it was taxed as capital gains under a deeming fiction.

The Assessing Officer however disallowed such setoff. The Commissioner (Appeals) upheld the stand of the Assessing Officer, taking the view that there was no ambiguity in section 72, and that reliance could not be placed on erstwhile provisions of section 41(2).

The Tribunal, analysing the provisions of section 72, observed that the said section 72 stated that the losses incurred under the head ‘Profits and Gains of Business or Profession’ which could not be set off against income from any other head of income, had to be carried forward to the following assessment year and was 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.” In other words, according to the Tribunal, there was no requirement of the gains being taxable under the head ‘Profits and gains of business or profession’ and thus, as long as gains were ‘of any business or profession carried on by the assessee and assessable to tax for that assessment year’, the same could be set off against loss under the head profits and gains of business or profession carried forward from earlier years. According to the Tribunal, the gains arising on sale of the business assets was in the nature of business income, though it was taxed under the head ‘Capital Gains’.

The Tribunal therefore held that the unabsorbed business losses could be set off against the capital gains charged to tax u/s.50.


Observations

The income from transfer of a depreciable asset, used for business, has its origin in business and is primarily characterised as a business income. This position in law was acknowledged specifically by old section 41(2) that is deleted w.e.f. 1-4-1988. Even the new section 41(2) provides for the similar treatment for taxing income on sale of depreciable assets used for generation and distribution of power under the head ‘profits and gains of business’.

The Income-tax Act contains provisions, for example, sections 8 and 22, which provide for an income to be taxed under a specific head of income though the same otherwise may have a different character. These provisions contain a deeming fiction and it is understood that they have a limited application.

The Supreme Court following its decisions in the cases of United Commercial Bank Ltd., 32 ITR 688 and Chhugandass & Co., 55 ITR 17, in the case of CIT v. Radhaswami Cocanada Bank Ltd., 57 ITR 306, had established this principle in the context of set-off of business losses against dividend income, which was then taxable under the head ‘Income from Other Sources’. It was noted by the Supreme Court that while one set of provisions, i.e., the nature of loss incurred by the assessee, classified the same on the basis of income being taxable under a particular head for the purpose of computation of the net income, the other set of provisions was concerned only with the nature of gains being from business and not with the head of tax. Their Lordships held that as long as the profits and gains were in the nature of business profits and gains, and even if these profits were liable to be taxed under a head other than income from business and profession, the loss carried forward could be set off against such profits of the assessee. The ratio of these decisions was again confirmed by the Supreme Court in the case of Western States Trading Co. Pvt. Ltd., 80 ITR 21.

Even in the context of section 50 gains, the Courts have consistently held that such gains, though taxed under a deeming fiction as short-term capital gains, are eligible for the benefit of exemption from taxation u/s.54E, 54EC, 54F, etc. on its reinvestment in the specified assets [see Assam Petroleum Industries Ltd., 262 ITR 587 (Gau.) Rajiv Shukla, 334 ITR 138 (Del.) and Ace Builders Pvt. Ltd., 281 ITR 210 (Bom.)]. The SLP against the last decision has been dismissed by the Supreme Court.

It is accordingly a fairly settled position in law that a benefit otherwise allowed in law under one provision shall not be denied by extending a fiction contained in any other provision of law unless specifically provided for. No such provision is found to be contained in the provisions of sections 70, 71 and 72 of the Act.

On a closer reading of section 72 one finds that it does not mandate that the income that is sought to be adjusted against the brought forward loss should be the one that is taxable under the head ‘profits and gains of business’. This precisely is brought out by the Mumbai Bench of the Tribunal by explaining that there is a distinct difference in the language employed in section 72 in the context of the loss that is to be carried forward, where the loss under the particular head of income is referred to, as against the context of the loss which it can be set off against, where the nature of income is referred to.

Looked at it from one more angle, the income that is sought to be taxed u/s.50 is to a large extent nothing but recoupment of depreciation that has been allowed as a deduction in computing the income under the head ‘profits and gains of business or profession’ and to the extent of the amount representing the recoupment should be considered as the business income.

The Mumbai Tribunal in the above-referred decision in J. K. Chemicals’ case was also impressed by the fact pointed out to the Tribunal that even the form of the Return of Income for the relevant year under consideration in that case provided for a set-off of brought forward business losses against the deemed short-term capital gains.

It is thus clear that in the case of capital assets of a business, the source of the income is really the business itself. It is by virtue of the fact that a business had been carried on that gains arises on sale of assets of that business. The character of the income is therefore that of business income, though there are specific provisions for taxing such gains as capital gains. Even a businessman would regard the character of such income as arising from his business.

Therefore, the view taken by the Mumbai Bench of the Tribunal in Digital Electronics case seems to be the better view of the matter.

The Year Gone By

fiogf49gjkf0d
Finally, the Lok Sabha has passed the Lokpal Bill, albeit with many deficiencies. This would not have been possible but for the continuous pressure exerted by Shri Anna Hazare and his team on the political class in general and the government in particular.

It is a general perception that the institution of the Lokpal under the Bill that has been passed by the Lok Sabha will not be sufficiently strong and independent. The appointment and the removal of the Lokpal are indirectly controlled by the Government. Doubts have been expressed about the constitutional validity of certain provisions. Apart from this, on the major objection to the Bill is that the government has retained control over the Central Bureau of Investigation (CBI). This is a legitimate objection. Every government has influenced the working of the CBI to suit its purposes. Without independence to investigate and prosecute, the CBI has lost its credibility as well as effectiveness. These views have been expressed by more than one retired Directors of CBI. They have, in no uncertain terms, stated that the CBI has to follow the orders of its political masters even in the matters of investigation, prosecution and filing appeals etc.

It is disappointing that the proposal of the government to give constitutional status to the Lokpal could not muster the requisite support.

In the Rajya Sabha where the government did not enjoy even simple majority the Bill could not be passed. The Government possibly deliberately avoided voting on the Bill. More than one MP stated that Parliamentarians were not ‘public servants’ and they should not be covered by Lokpal. Some of the MPs created ruckus, criticised Anna Hazare, tore the copy of the Bill and threw it on the floor of the House. Parliamentarians tell the citizens that the Parliament is supreme. But when MPs themselves create pandemonium and lower the prestige of the Parliament one is left wondering. We are back to square one without a Lokpal institution in place.

Disappointed Anna Hazare has ended his fast and also called off his proposed protest by masses courting arrest. Partly this retreat is on account of lack of expected crowd at the venue of the fast. This is not to say that there is no public support to the movement against corruption. However, it is difficult to sustain the kind of public participation that one saw in last April and in August. Also, there are many who feel that the approach of Team Anna in insisting that only the draft of the Bill prepared by them is acceptable is rather extreme and unacceptable.

There are lessons to be learnt by all from the events relating to the issue of Lokpal. Citizens have realised that if they strongly feel about something and voice that opinion through various forums the government cannot ignore it. The government and the ruling party should accept the fact that after all it is the citizens who are supreme and the Parliament is expected to reflect the opinion of the public. The educated urban middle class and youth are becoming aware and active; that constituency cannot be taken for granted. The opposition on the other hand should learn that they need to take a stand and make it public rather than sit on the fence and try to take advantage of the predicament of the government. The Civil Society should understand that in a functioning democracy one cannot expect or insist that only one view is right and that alone should be accepted. Let us hope that the movement against corruption continues and sooner than later we have a strong, independent and effective Lokpal.

The year 2011 is coming to a close. It is time to look back and ponder over the events of the year. The world saw change of guard in Egypt, the uprising in Syria. Dictator Gaddafi was killed in Libya with support from NATO, Kim Jong II another dictator died in North Korea while terrorist Osama bin Laden was killed in Pakistan by US forces. Economies of European countries as well as US are not in the best shape. Closer home, Indian economy has not been doing as well as one would like it to be. Interest rates have been consistently rising, the rupee has lost value in the recent months, and inflation has been only going up so also the trade deficit. The growth rate is lower than what was planned or expected at the beginning of the year. Industrialists attribute this lower growth in the Indian economy at least partially to ‘policy paralysis’, while the Prime Minister and Finance Minister blame the business heads for spreading the atmosphere of despondency. Huge scams rocked the nation and Tihar jail became a VIP hostel.

The year 2011 also saw audit reports of Comptroller and Auditor General making news. One must complement Mr Vinod Rai, the Comptroller and Auditor General for the excellent work done by him. He exposed major scams, inefficiencies, favouritism and faulty decision making. In spite of tremendous pressure and criticism, he went about doing his duty. He makes the profession of auditors proud. Recently, he has been appointed by the United Nations as the chairman of the panel of external auditors that audits and reports on the accounts and management operations of the United Nations and its agencies. The CAG has also shown how person occupying an office can make that office strong and effective. One experienced similar phenomena when T. N. Seshan became the Election Commissioner and Mr. N. Vittal became the Chief Vigilance Commissioner. Each of these individuals made an impact by their performance, courage and conviction while discharging their duties without getting perturbed by the limitations, criticism or pressure.

The year also saw the death of Pandit Bhimsen Joshi, Jagjit Singh and Bhupen Hazarika from the world of music, celebrated artist and painter M. F. Husain, Mario Miranda who brought smile to many faces with his cartoons, Dev Anand and Shammi Kapoor the two evergreen doyens of Bollywood, Satyadev Dubey from the field of theatre, Mansur Ali Khan Pataudi, the cricketer. Each of these individuals directly or indirectly touched the life of many Indians.

 In the ensuing leap year 2012 may India progress in leaps and bound.

Wishing you all a very Happy 2012.

Corruption is nature’s way of restoring our faith in democracy —Peter Ustinov

levitra

Deemed dividend: Section 2(22)(e): A.Y. 1999-00: Gratuitous loan deemed to be dividend: Shareholder permitting his immovable property to be mortgaged to bank enabling company to obtain loan: Loan by company to shareholder not deemed dividend.

fiogf49gjkf0d
The assessee holding substantial shareholding in a private company permitted his immovable property to be mortgaged to the bank for enabling the company to take the benefit of loan. In spite of request of the assessee, the company was unable to release the property from mortgage. Consequently, the board of directors of the company passed a resolution authoring the assessee to obtain from the company interest-free deposit up to Rs.50,00,000 as and when required. In the A.Y. 1999-00, the assessee obtained from the company a sum of Rs.20,75,000 by way of security deposit. A sum of Rs.20,00,000 was subsequently returned by the assessee to the company. For the A.Y. 1999-00, the Assessing Officer added the sum of Rs.20,75,000 as deemed dividend u/s.2(22)(e) of the Income-tax Act, 1961. The Tribunal upheld the addition.

On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:

“(i) The phrase ‘by way of advance or loan’ appearing in sub-clause (e) of section 2(22) of the Incometax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares . . . . . ; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act.

(ii) Thus gratuitous loans or advance given by a company to those class of shareholders would come within the purview of section 2(22), but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.

(iii) For retaining the benefit of loan availed from the bank if decision was taken to give advance to the assessee, such decision was not to give gratuitous advance to its shareholder, but to protect the business interest of the company. The sum of Rs.20,75,000 could not be treated as deemed dividend.”

levitra

Capital gain: Sections 10B and 50(2): A.Y. 1993- 94: Assessee eligible for exemption u/s.10B sold assets to sister concern after expiry of period of exemption. Purchase of assets of same rate of depreciation: Assessee entitled to benefit u/s.50(2).

fiogf49gjkf0d
The assessee had an export-oriented unit. After expiry of the term of benefit u/s.10B, in the A.Y. 1993-94, the assessee transferred the unit to a closely held company. There was a difference of Rs.71,42,904 between the value of the assets, as shown in the balance sheet as on date of transfer and the value of the assets adopted by the company. The Assessing Officer treated the difference as short term capital gains without allowing the benefit u/s.50(2). The Tribunal confirmed the order of the Assessing Officer.

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

“(i) The assessee carried on the same line of business, both as an export undertaking as well as in domestic trade. The assessee made an addition of 25% in the block of assets, viz., plant and machinery, during the previous year. Given the fact that the depreciation in respect of the assets transferred and purchased carried the same rate of depreciation and, hence, fell under ‘block of assets’, the assessee was justified in his claim on capital gains, that with the cost of the machinery added to the written down value of the machinery and the sale of the machinery during the relevant previous year, he was entitled to relief u/s.50(2).

(ii) Going by the provisions u/s.10B, the Revenue would not be justified in treating the assets of an export-oriented unit in isolation on the expiry of the tax holiday period, particularly when section 10B(4)(iv) recognises deemed grant of the depreciation allowance during the currency of the tax holiday, which means that at the expiry of the period of five years, the written down value of the plant and machinery continues to be available for the business of the assessee, which goes for normal assessment under various provisions of the Act.”

levitra

Business expenditure: Section 43B: In A.Y. 1996- 97 the assessee paid a sum of Rs.322.46 lakh on account of excise duty being the liability for the A.Y. 1997-98: Assessee is entitled to the deduction in the A.Y. 1996-97 in view of section 43B(a) r/w. Expl. 2.

fiogf49gjkf0d
During the previous year relevant to the A.Y. 1996-97, the assessee paid a sum of Rs.322.46 lakh on account of excise duty, the liability for payment of which was incurred in the previous year relevant to the A.Y. 1997-98. Relying on the provisions of section 43B of the Income-tax Act, 1961, the assessee claimed the deduction of the said amount in the A.Y. 1996-97. The Assessing Officer disallowed the claim. The Tribunal upheld the disallowance.

On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:

“The assessee cannot be deprived of the benefit of deduction of excise duty actually paid during the previous year, although in advance, according to the method of accounting followed by him. Section 43B(a) r/w. Expln. 2 allows deduction in such cases.”

levitra

Interest u/s.220(2): A.Y. 1994-95: Original assessment order set aside by Tribunal: Interest u/s.220(2) to commence after thirty days from the date of service of demand notice pursuant to fresh assessment order.

fiogf49gjkf0d
For the A.Y. 1994-95, the assessment was completed u/s.143(3) of the Income-tax Act, 1961 on 28-2-1997 determining the total income at Rs.2.05 crores. By a demand notice dated 28-2-1997 a demand of Rs.1.76 crore was raised. The assessment order was set aside by the Tribunal. Fresh assessment order was passed on 24-12-2006 computing the income at Rs.44.88 lakhs and raising a demand of Rs.22.02 lakhs. The Assessing Officer held that the assessee was liable to pay interest u/s.220(2) of the Act commencing from the day after thirty days from the date of service of the original demand notice dated 28-2-1997. The CIT(A) and the Tribunal accepted the claim of the assessee that the liability to pay interest u/s.220(2) commences from the day after thirty days from the date of service of the demand notice dated 24-12-2006 pursuant to the fresh assessment order.

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

“(i) The argument of the Revenue is that even though the original assessment order dated 28-2-1997 was set aside by the ITAT, once the fresh assessment order is passed, the demands arising therefrom would relate back to the date of service of the original demand notice dated 28-2-1997.

(ii) We see no merit in the above contention. U/s.156 of the Act, service of the demand notice is mandatory. Section 220(2) of the Act provides that if the amount specified in any notice of demand u/s.156 is not paid within the period prescribed u/ss.(1) of section 220, then, the assessee shall be liable to pay simple interest at the rate prescribed therein.

(iii) As per section 220(1) of the Act, the assessee was liable to pay the demand within thirty days from the service of the demand notice dated 24-12-2006. It is only if the assessee fails to pay the amount demanded, within thirty days of service of the demand notice dated 24-12-2006, the assessee was liable to pay interest u/s.220(2) of the Act. If the liability to pay interest u/s.220(2) arises after thirty days of service of the demand notice dated 24-12-2006, the question of demanding interest for the period prior to 24-12-2006 does not arise at all.

(iv) From the facts of the present case, the decision of the ITAT in holding that the assessee is liable to pay interest u/s.220(2) of the Act, from the end of thirty days after the service of notice of demand dated 24-12-2006 till the date on which the amount demanded was paid cannot be faulted.”

levitra

Capital gains: Exemption u/s.54F: Purchase of two adjacent flats, interconnected and used as one residential house: Assessee entitled to exemption u/s.54F

fiogf49gjkf0d
The assessee had purchased two adjacent flats which were interconnected and used as one residential house. On the assesee’s claim for exemption u/s.54F of the Income-tax Act, 1961 the Tribunal passed the order as under:

“It has been shown to us that investment was made by the assessee himself from his bank account in respect of both the flats i.e., flat Nos. 301 and 302 at Cozy Dwell Apartments at Bandra, Mumbai. However, this needs verification by the Assessing Officer. Further the fact whether these two apartments are being used as one residential house or not is also to be verified. Accordingly, the order of the CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to — (1) verify the fact whether investment in flat Nos. 301 and 302 was made by the assessee from his own funds, and (2) whether such flats are adjacent to each other having common passage and are being used as one residential house. After ascertaining these facts the Assessing Officer shall allow the exemption in respect of both the flats if it is found that both the flats are being used as one residential house and the investment was made by the assessee himself.”

The Bombay High Court upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue.

Note: The Supreme Court has dismissed the SLP No. 12607 of 2009 filed by the Revenue, by order dated 7-9-2009.

levitra

Capital gains: Exemption u/s.54F: Purchase of two adjacent flats, interconnected and used as one residential house: Assessee entitled to exemption u/s.54F.

fiogf49gjkf0d
The assessee had purchased two adjacent flats which were interconnected and used as one residential house. On the assesee’s claim for exemption u/s.54F of the Income-tax Act, 1961 the Tribunal passed the order as under: “It has been shown to us that investment was made by the assessee himself from his bank account in respect of both the flats i.e., flat Nos. 301 and 302 at Cozy Dwell Apartments at Bandra, Mumbai. However, this needs verification by the Assessing Officer. Further the fact whether these two apartments are being used as one residential house or not is also to be verified. Accordingly, the order of the CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to — (1) verify the fact whether investment in flat Nos. 301 and 302 was made by the assessee from his own funds, and (2) whether such flats are adjacent to each other having common passage and are being used as one residential house. After ascertaining these facts the Assessing Officer shall allow the exemption in respect of both the flats if it is found that both the flats are being used as one residential house and the investment was made by the assessee himself.” The Bombay High Court upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue. Note: The Supreme Court has dismissed the SLP No. 12607 of 2009 filed by the Revenue, by order dated 7-9-2009.

levitra

(2011) 39 VST 529 (AP) Asian Peroxide Limited and Another v. State of Andhra Pradesh

fiogf49gjkf0d
VAT — Constitutional validity — Power to prescribe rule not eligible for input tax credit — Valid — Retrospective effect — Invalid — Sections 2(19), 4(3) 13(4), and 78 of the Andhra Pradesh Value Added Tax Act, (5 of 2005) and Rule 20(2) (h) of the Andhra Pradesh Value Added Tax Rules, 2005.

Facts
The dealers filed writ petition before the AP High Court challenging constitutional validity of section 13(4) of the APVAT Act and Rule 20(2)(h) of the APVAT Rules. The effect of this rule is that all petitioners availing input tax credit in respect of coal, naphtha or natural gas u/s.13(1) of the APVAT Act is denied from retrospective effect.

Held
(1) The replacement of sales tax by VAT is mainly intended to improve revenue collections and to prevent cascading effect on sale price, besides plugging gaps in tax collection. It also becomes clear that though the Legislature permits the dealers to avail input tax credit (ITC) in respect of most items of common consumption, it was never intended that all taxable goods and business should invariables be allowed ITC.

(2) Under the Act, the tax payable by the VAT dealer shall be X-Y, where X is the total of VAT payable in respect all taxable sales made by a dealer and Y is the total ITC, which he is eligible to claim set-off. The ITC is allowed in respect of purchases of taxable goods except tax paid on purchase of goods specified in the sixth Schedule, subject to conditions that may be prescribed by the VAT Rules. S.s (4) of section 13 of the Act bars a VAT dealer claiming ITC in respect of the purchase of taxable goods as may be prescribed by the rule-making authority to that extent position is not denied. The petitioners urged that under the Act, ITC can be denied only in respect of those goods which are exempt from tax or attracts special rate of tax as provided in the sixth Schedule.

(3) The Government can prescribe any or all purchase of taxable goods in respect of which ITC should not be allowed, whether or not those taxable goods are included in the first or sixth Schedule. Section 13(4) r.w.s. 78(1) of the Act confers widest power on the State to prescribe the taxable goods in respect of which ITC cannot be allowed.

(4) The Legislature has retained prior legislative control on the rule-making authority. The VAT Rules, so laid before the legislative assembly for a period of 14 days can be modified or annulled and they shall be enforced only subject to such modification or annulment. Therefore section 13(4) of the VAT Act does not suffer from excessive delegation.

(5) The Rule 20(2)(h) which disqualifies natural gas, naphtha and coal from claiming ITC is valid and does not suffer from any defect of being ultra vires and is also not unreasonable. Since under Rule 20(2) when goods mentioned in negative list are sold subsequently without availing ITC, no tax shall be levied or recoverable from a dealer on sale of such goods. This brings out the rationale in classifying the traders and non-traders. Traders and non-traders do not stand on the same footing when it comes to use of such goods. The purpose or the use to which goods are put to use can be basis for a valid classification. The impugned rule is not discriminatory.

(6) In absence of any reasons, the retrospective effect given to rule is inequitable and arbitrary. Accordingly, it shall apply prospectively from notified date i.e., 31-12-2005.

levitra

(2011) 24 STR 422 (Tri.-Chennai ) — Agsar Paints Pvt. Ltd. v. Commissioner of Service Tax, Mumbai.

fiogf49gjkf0d
Cenvat — Input credit disallowed — Penalty of Rs.10,000 imposed under Rule 15 of CENVAT Credit Rules Act, 2004 — However, service tax paid on telephone service used for sale promotion is an eligible input service.

Facts
The Commissioner of Central Excise disallowed the total credit of Rs.21,360 of service tax paid on (i) telephone services (ii) vehicle maintenance (iii) fixed telephones, and (iv) courier agency and also upheld a penalty of Rs.10,000.

An appeal was filed only against the denial of credit of service tax paid on the telephone services as the same was eligible input service since used in connection with the activity of business of manufacture of final products.

Held
It was held that credit of service tax paid on the telephone services which is eligible input service since used in connection with the activity of business of manufacture of final products was admissible. The duty demand and the penalty to be requantified in light of the extended credit of service tax in respect of tax paid on telephone service.

levitra

Shareholder Agreements — Bombay High Court Decides

fiogf49gjkf0d
Shareholder groups of listed companies and even public companies often face a nagging problem. Many of them enter into agreements giving rights to each other of different kinds over the shares held by them. These may be in the form of restrictive or pre-emptive rights or rights to purchase the shares under certain terms and conditions. The concern that keeps bothering them is whether such rights and terms are valid under law or void or, even worse, whether these are illegal.

A recent decision of the Bombay High Court (MCX Stock Exchange Limited v. SEBI and Others, WP No. 213 of 2011, dated March 14, 2012) partially sets at rest — at least to the extent a High Court decision can — the concern whether an agreement giving certain options to purchase/sell shares is void and illegal being agreements for futures under the provisions of the Securities Contracts (Regulation) Act, 1956 (SCRA). This should help shareholders and investors of various hues who have entered into such contracts with other shareholders and faced the possibility that they may be held illegal/ void. As will be seen later though, a related issue has been kept open and so the question is not yet fully answered. Also, needless to emphasise, the decision is on facts of the case and one would have to see whether the agreements and surrounding circumstances in each case are such that the ratio of the decision may apply.

 To elaborate the issue further, before we go into the facts of the case, the SCRA, to simplify a little, was enacted mainly to regulate stock exchanges and trading on it. For this purpose, it was desired that trading in securities should take place only in regulated stock exchanges. Options, futures, etc. being securities were also required to be traded on stock exchanges. To ensure that parties do not carry out private transactions in such securities including by way of options and futures, such private transactions, subject to specified exceptions, were declared illegal and void. Stock exchanges provide a transparent mechanism for carrying out such transactions in securities also giving safety to counter parties and at the same time, other objectives such as control of undue speculation could be achieved. Hence, transactions through such exchanges were intended to be encouraged.

However, the manner in which the relevant provisions were worded resulted even in a very common set of private agreements being put to question. For example, major shareholders — particularly strategic investors — often enter into agreements whereby one or both are given an option to buy or sell the shares under certain circumstances. Such agreements are rarely assignable to third parties, are not standardised and have unique terms and conditions attached, are not generally severable into small units, etc. In other words, they do not resemble the typical options or futures that are traded on stock markets. However, the conservative view — and often endorsed by SEBI — was that such agreements amount to options/futures and hence may be held to be void and illegal.

The other provision that such private agreements fell foul of was the provisions relating to free transferability of shares. While the essence of private limited companies was restricted transferability of shares, public companies (including listed companies) required free transferability of shares. This, inter alia, enabled buyers of shares being freely able to buy shares — on and off the stock exchanges — without worrying about any restrictions the transferor may be facing. It also ensured that even the company was bound to register the transfer of the shares. Such private agreements providing for options, in a sense, created a restriction on the transfer of the shares. The question once again was whether such agreements fell foul of the law providing for free transferability of shares.

Arguably, the regulator and the law-makers had other reasons too to restrict agreements. These reasons went beyond the above purposes of ensuring trading in securities took place on stock exchanges only or to ensure that there is free transferability of shares for benefit of parties. Restrictions helped achieve other objectives such as limits on foreign holding, avoidance of benami holding of shares, etc. The problem was these provisions of SCRA which had other objectives to serve were also used and applied for such purposes. Thus, instead of making specific provisions to deal with specific concerns, they used the widely framed provisions of the SCRA. This thus resulted in bona fide and fairly common private agreements being subjected to the risk of being held illegal and void.

Coming to the Bombay High Court decision, a Company was formed by a Promoter Group for enabling trading in securities, etc. and thus required registration with the Securities and Exchange Board of India. Since a recognised stock exchange serves certain public purposes and it is not in the pubic interest that the ownership of such stock exchange is concentrated, the law provides that a group of persons acting in concert should not hold more than 5% of the share capital of such company. The relevant Regulations are in fair detail and various issues concerning it were the subject-matter of the Court decision. However, since the focus here is on the issue of validity of certain agreements relating to shares between shareholder groups, the other matters dealt with by the Court are not considered here.

 It appears that the Promoter Group originally held significantly more than 5% of the share capital of the Company. To ensure that it is in compliance with the law, a complex restructuring scheme was carried out. To simplify the matter to help focus on the issue of law, the restructuring can be explained as follows. The share capital of the Company was reduced under a court-approved scheme and further shares were issued to persons other than the Promoter Group. Further, certain shares held by the Promoter Group were transferred to other parties. The Promoter Group had entered into an agreement with certain parties holding shares in the Company whereby certain shareholders had an option to sell their shares to the Promoter Group under certain terms and conditions.

The issue was whether such an agreement amounted to options/futures and thus illegal and void. The Court analysed the nature and essence of the agreements and also the law on the subject matter. Firstly, it held that the agreements did not amount to contract of futures. Contract of futures necessarily involved agreements where the agreement to purchase/sale was concluded but only the payment and delivery was postponed. In the present case, since there was an option to sell, there was no current concluded transaction of purchase/sale. In fact, the transaction of purchase/ sale may not even arise in the future if the party did not exercise its option. Thus, the Court held there was no agreement of futures. The Court, however, did not deal with the issue whether the agreement amounted to an option, because this was not part of the allegations under the Notice issued to the aggrieved party. The Court asked SEBI, if it desired to raise that issue, to give an opportunity to the aggrieved party first.

Let us consider some extracts from the decision of the Court to consider the matter in context.

The Court described the nature of the agreements between FTIL (the Promoter) and PNB/ILFS (the counter parties) in the following words:

“The buy -back agreements furnish to PNB and IL&FS an option. The option constitutes a privilege, the exercise of which depends upon their unilateral volition. In the case of PNB, the buy-back agreements contemplated a buy-back by FTIL after the expiry of a stipulated period. But, in the event that PNB still asserted that it would continue to hold the shares, despite the buy-back offer, FTIL or its nominees would have no liability for buying back the shares in future. In the case of IL&FS, La -Fin assumed an obligation to offer to purchase either through itself or its nominee the shares which were sold to IL&FS after the expiry of a stipulated period. In both cases, the option to sell rested in the unilateral decision of PNB and IL&FS, as the case may be.”

Does the agreement amount to a contract of future so as to be violative of the law and hence illegal and void? The Court further analysed and observed as follows:

“In a buy-back agreement of the nature involved in the present case, the promisor who makes an offer to buy back shares cannot compel the exercise of the option by the promisee to sell the shares at a future point in time. If the promisee declines to exercise the option, the promissor cannot compel performance. A concluded contract for the sale and purchase of shares comes into existence only when the promisee upon whom an option is conferred, exercises the option to sell the shares. Hence, an option to purchase or repurchase is regarded as being in the nature of a privilege.
…

77.    The distinction between an option to purchase or (repurchase and an agreement for sale and purchase simpliciter lies in the fact that the former is by its nature dependent on the discretion of the person who is granted the option, whereas the latter is a reciprocal arrangement imposing obligations and benefits on the promisor and the promisee. The performance of an option cannot be compelled by the person who has granted the option. Contrariwise in the case of an agreement, performance can be elicited at the behest of either of the parties. In the case of an option, a concluded contract for purchase or repurchase arises only if the option is exercised and upon the exercise of the option. Under the notification that has been issued under the SCRA, a contract for the sale or purchase of securities has to be a spot delivery contract or a contract for cash or hand delivery or special delivery. In the present case, the contract for sale or purchase of the securities would fructify only upon the exercise of the option by PNB or, as the case may be, IL&FS in future. If the option were not to be exercised by them, no contract for sale or purchase of securities would come into existence. Moreover, if the option were to be exercised, there is nothing to indicate that the performance of the contract would be by anything other than by a spot delivery, cash or special delivery. Where securities are dealt with by a depository, the transfer of securities by a depository from the account of a beneficial owner to another beneficial owner is within the ambit of spot delivery.”

Finally, it concluded, with the following words, that the agreement was not in the nature of a futures contract:

“80. In the present case, there is no contract for the sale and purchase of shares. A contract for the purchase or sale of the shares would come into being only at a future point of time in the eventuality of the party which is granted an option exercising the option in future. Once such an option is exercised, the contract would be completed only by means of spot delivery or by a mode which is considered lawful. Hence, the basis and foundation of the order which is that there was a forward contract which is unlawful at its inception is lacking in substance.”

The next issue whether the agreements “would amount to an option in securities and, therefore, derivatives which were neither traded nor settled at any recognised stock exchange, nor with the permission of Securities and Exchange Board of India and therefore in violation of SCRA”. The Court noted that this allegation did not form part of the original notice and thus parties were not given an opportunity to reply to SEBI. Thus, SEBI was required to first give such an opportunity and then give its decision and then the question of appeal may arise.

The decision gives relief to parties who have entered into or propose to enter into such agreement at least from the concern that such agreement may amount to a futures agreement. Needless to emphasise, the decision was on facts. The other concern, though, remains open and that is whether such an agreement may amount to an option which is prohibited under law. It will have to be seen what course of action SEBI takes and whether the matter goes back to the Court.

However, it is time that the law-makers and even SEBI take the initiative and resolve the controversy. It does not seem that there can be any objection to such private agreements between two groups of shareholders where most of the elements of standardised over the counter futures/options contracts are absent. Such private agreements should be explicitly exempted and if desired, the specific areas where the law-makers have concern can be duly regulated.

(2011) 24 STR 410 (Tri.-Delhi) — Punjab Venture Capital Ltd. v. Commissioner of Central Excise, Chandigarh.

fiogf49gjkf0d
Consultancy of fund management including the identification of the projects not covered in Management Consultancy service — Primary objects were to find investment proposal and fund allocation — Confusion between Banking and Financial Services and Management Consultants — Sections 65(12) and 65(65) of Finance Act, 1994.

Facts
The issue arose as regards the interpretation of the term ‘Management Consultant’ with the term ‘Banking & Financial services’.

Held
The Tribunal observed that the excerpts of Fund Management agreement clearly show that the activity was to explore possibility of investment by various modalities. Also, it is clear that the appellants carried out the activity of providing service of consultancy of Fund Management including the identification of the projects. Allowing the appeal, the Tribunal held that the Department’s case was not coming out clearly as regards nature of services provided by the appellants. The Tribunal held that the appellants were providing the service of banking and financial services as their primary objective was to find investment proposal which involved fund allocation.

levitra

(2011) 24 STR 408 (Tri.-Delhi) — Rakesh Porwal & Associates v. Commissioner of Central Excise, Jaipur-II.

fiogf49gjkf0d
Whether verification of address of client for the bank by Chartered Accountant (CA) is covered under the Business Auxiliary Services (BAS) as u/s.65(19) of Finance Act, 1994.

Facts
The appellant was a CA and was paying service tax on the fees received by him as Chartered Accountant. The dispute arose as regards the services rendered by the CA to M/s. HDFC for contact-point verification of residence and offices of the clients of the banks.

The Revenue held that the aforementioned services were covered under the Business Auxiliary service and accordingly confirmed the service tax demand of Rs.1,78,479 along with interest and penalty. The appellant referred to the agreement entered into by the appellant with M/s. HDFC for providing services of contact-point verification of residence and offices and any other services as per the set guidelines and formats set by the bank from time to time. The appellant also drew attention to the definition of BAS u/s.65(19) of the Finance Act which relates to the services in relation to promotion of marketing of services provided by the client.

Held
The Tribunal observed that the verification of the addresses given by the client cannot be considered to be a service similar to promoting or marketing the services of the bank or evaluating their prospective customers. Accordingly, it was held that the services provided by the appellant were not considered Business Auxiliary Service.

levitra

(2011) 24 STR 310 (Tri.-Del.) — Batra Sons v. Commissioner of Central Excise, Jalandhar.

fiogf49gjkf0d
Penalty — Non-registration — Section 75A of the Finance Act, 1994 (the Act) — Section 75A no more in statutory book from 10-9-2005, but at relevant time, such mandatory requirement of registration could not be dispensed with — Penalty imposable.

Penalty — Non-payment of tax — Penalty u/s.76 and u/s.78 of the Act — Revisionary authority imposing penalty in revision — No element indicating deliberate attempt to escape liability — Penalties cannot be imposed mechanically — Section 80 of the Act.

Penalty — Failure to file returns — Tax paid and revised returns filed after getting revised figures- Mala fide not imputed — Penalty u/s.77 of the Act set aside.

Facts
The appellants appealed against a revisional order passed u/s.84 of the Act levying penalty u/s.75A, 76, 77 and 78 of the Act and contended that the revisional order intended to impose penalty without justifiable reason and that all cases required consideration u/s.80 of the Act. The Revenue on the other hand submitted that there was no need to intervene with the orders passed as in the absence of imposition by the adjudication order, revisionary power was bound to be exercised.

Held
The Tribunal observed that while imposing the penalty, the authority failed to apply the law properly. As regards penalties levied under various sections, it was held that:

Revisionary authority in respect of penalty levied to the extent u/s.75A was justified even though the provision was no longer in force, but at the relevant point of time when the law was in force to regulate taxable activities, such a mandatory requirement could not be dispensed with. In the absence of any reason to establish mala fide intention on part of the assessee, the penalty imposed u/s.76 and u/s.78 of the Act was unwarranted and the same invited consideration u/s.80 of the Act which provides for non-imposition of penalty in case of reasonable cause on part of the assessee. As far as penalty u/s.77 was concerned, there was a failure in filing the return. However, the assessee paid the taxes and revised returns were filed. Also, the authority did not cite any reasonable ground for levying penalty under this section and thus penalty u/s.77 of the Act is set aside.

levitra

(2011) 24 STR 307 (Tri.-Del.) — Power Grid Corporation of India Ltd. v. Commissioner of Sales Tax, New Delhi.

fiogf49gjkf0d
Leasing telecommunication network to another telegraph authority — Not a taxable service — Since telegraph authority not a subscriber — The definition of leased circuit — As per interpretation of statutes — Includes part — Should satisfy the conditions/requirements of means port — Hence the plea of Revenue rejected.

Facts
The appellant, a holder of infrastructure provider category II licence under first proviso to section 4 of the Indian Telegraph Act, 1885 it also provides its services to M/s. Bharti Infotech Ltd. and M/s. Data Access India Ltd., who are also registered under the said provisions. The Revenue contended that the service of leasing of telecommunication network provided by the appellant was taxable in terms of clause (zd) of s.s 105 of section 65 of the Finance Act, 1994 which defined the taxable service as: “service provided to a subscriber by telegraph authority in relation to leased circuit”.

According to the appellant, M/s. Bharti Infotech Ltd. and M/s. Data Access India Ltd., (registered under the above provisions) could not be considered as subscriber as they were telegraph author- ity. Since the service was not provided to the subscriber, the appellant was not liable to pay the service tax. The appellant relied on the decision in the case of Fascel Ltd v. Commissioner, (2007) 7 STR 595 (Tribunal). Also, a Circular issued by the CBEC 91/2/2001-ST, dated 12-3-2007 was cited. The appellant further submitted that the facility of telecommunication network provided by them to different users on a band-width-sharing basis did not come within the meaning of ‘leased circuit’.

Held
Relying on the decision in the case of Reliance Telecom Ltd. v. CST, Ahmedabad (2007) TIOL 414- CESTAT AHM, the Tribunal held that telegraph authority receiving interconnecting service cannot be considered as a ‘subscriber’. As such, the demand failed except for about Rs.7 lakh in respect of service provided to M/s. Converges and M/s. Dakshe Services, as the same were not registered as telegraph authority.

levitra

(2011) 24 STR 290 (Tri.-LB) — Sri Bhagavathy Traders v. Commissioner of Central Excise, Cochin.

fiogf49gjkf0d
Valuation — Whether amount incurred as reimbursements to be included in the assessable value — Conflicting views of the Tribunal — C.B.E.C & C. Circular cannot be relied upon to support the claim of splitting part of amount as reimbursable expenses and rest as service charges — Costs for input services and inputs used in rendering services cannot be treated as reimbursable costs — Section 67 of the Finance Act, 1994 (the Act).

Facts
The appellant provided C&F agency services to several persons including M/s. Indian Oil Corporation Ltd. (hereinafter referred to as ‘IOCL’). A show-cause notice (SCN) was issued against the appellant, a registered assessee, for short payment of service tax of Rs.53,90,080 from April 2003 to March 2006 along with interest and penalty. The Tribunal (Referral Bench) while hearing the appeal noted the decision in the case of Sangamitra Services Agency v. CCE, Chennai (2007) TIOL 1335- CESTAT and a plethora of cases wherein it was held that “reimbursement charges should not form part of the gross value for the discharge of service liability”. The Tribunal (Referral Bench) also noted a contrary decision in the case of M/s. Naresh Kumar & Co. Pvt. Ltd. v. CST, Kolkata (2008) 11 STR 578 (Tribunal) wherein it was held that “the cost incurred on reimbursement of expenses if any, needs to be included in the gross value of the taxable services rendered.” In view of contrary decisions on the issue, the matter was referred to the Larger Bench. The appellants referring to the agreement with IOCL submitted that they were required to submit bills separately for both fixed operating expenses and service charges as a C & F agent. Also, according to the agreement, expenses incurred towards electricity and water charges, communication expenses, etc. were reimbursed on actual basis. Similar agreements were entered into with other parties. The appellant referred to the definition of value of taxable service which is defined as ‘gross amount charged for the services rendered’. In this behalf, the appellant submitted that expenses incurred on activities on behalf of the principal and recovered as reimbursements cannot be treated as part of value of C & F services. Referring to the various circulars, the appellant submitted that various services like Custom House Agent service and Steamer Agent service did not include several expenses incurred on account of exporter/importer. Also the value of Consulting Engineering service and manpower recruiting service did not include amount incurred on behalf of the clients which are reimbursed on actual basis.

The provisions of section 67 of the Act underwent changes w.e.f. 19-4-2006 only and the concept of consideration was introduced which included reimbursement also. The Revenue on the other hand submitted that during the relevant period the gross amount paid by the service recipient on which the service tax was charged included all the expenses incurred towards provision of service as service tax was a destination-based consumption tax. Also, during the relevant period Rule 6(8) of the Service Tax Rules, 1994 provided that “the value of taxable service in relation to services provided by a C&F agent to clients for rendering services of C&F operations in any manner shall be deemed to be gross amount of remuneration or commission (by whatever name called) paid to such agent by the client engaging such agent” and relied on the decisions of Nilesh Kumar & Co. Pvt. Ltd. [(2008) 11 STR 578 (Tri.)] and Harveen & Co. [(2011) TIOL 848 CESTAT-Del.]

Held
The Tribunal (Larger Bench) observed that on basis of various cases relied by the assessee and the Department, it was important to consider the scope of the term ‘reimbursements’. In case of service provider and service recipient, the question of reimbursements shall arise when the service recipient was legally bound to pay certain amount to any third party and the amount is paid by the service provider on behalf of the service recipient. The various circulars of the Board relied upon by the appellant clearly referred to amounts payable on behalf of the service recipient. However, the same could not be held to be in support of the claim of the assessee that the amount can be split as reimbursable expenses and the rest as towards service charges. The costs for input services and inputs used in rendering services cannot be treated as reimbursable expenses. No decision of the Division Bench of the Tribunal was shown by the assessee in their favour. Accordingly, it was held that the there was no conflict in the decisions rendered by the Co-ordinate Benches and the matter was returned to the Referral Bench for decision on merits.

levitra

(2011) 24 STR 387 (Mad.) — Strategic Engineering P. Ltd. v. Additional Commissioner, Central Excise, Madurai.

fiogf49gjkf0d
Writ jurisdiction — Writ petition not to be rejected for existence of alternative statutory remedy — After the admission of writ petition, the Court should normally hear the case on merits — Article 226 of the Constitution of India.

Whether erection and laying of pipes is liable to service tax under erection, commissioning and installation services or scientific or technical consultancy services.

Facts
The company, a manufacturer of FRP pipes, falling under Chapter No. 7014.00 of the Central Excise Tariff was also in the business of laying GRP pipes for its customers for consideration of labour charges. Order confirming the demand of service tax for the show-cause notice demanding service tax was served on the petitioner under the category of ‘Erection, Commissioning and Installation’ and ‘Scientific or Technical Consultancy services’ for services rendered by the petitioner to its non-resident clients. The writ was admitted without notice to the respondent. However, the Court directed the Revenue to file a counter on merits claimed by the petitioner. The respondent challenged maintainability on the ground of availability of alternate remedy. However, the Court found that subsequent to admission of the writ and filing of counter by the respondent, it was not appropriate to relegate the petitioner to alternate remedy. Further, the question involved in the writ was found purely legal and the Court decided to hear the merits of the case.

Held
The question pertained to whether or not commissioning and installation of pipes was covered by the service tax provisions of section 65(28) of the Finance Act, 1994 at relevant time. It was found that the service of commissioning and installation was redefined by substituting section 65(28) by section 65(39a) with effect from 10-9-2004 and wherein drain laying or other installation for transportation of fluid, etc. were inserted only with effect from 16-6-2005. It was further found that the respondent demanded service tax treating the business as execution of works contract. Since this service came into effect only from 1-6-2007, the demand raised for the period in question was found unsustainable and allowing the petition, the SCN and order were held to be the outcome of misreading of legal provision.

levitra

(2011) 24 STR 272 (Kar.) — Commissionerr of Central Excise and Service Tax, LTU, Bangalore v. Micro Labs Ltd.

fiogf49gjkf0d
Premium paid for employees’ health/medical insurance — CENVAT credit of service tax allowed — Input service should be utilised directly or indirectly in relation to the final product — Irrespective of the fact whether mentioned or not in the definition of input service in Rule 3 of the CENVAT Credit Rules, 2003 it amounted to input service.

Facts
The employer paid health insurance premium of the employees and claimed credit for the same. The adjudicating authority denied the credit. It was confirmed by the first Appellate Authority, however allowed by the Tribunal. The question for consideration was eligibility of the assessee to avail CENVAT credit towards payment of service tax on the Group Insurance Health Policy. The decision in the case of Commissioner v. Stanzen Toyotetsu India (P) Ltd., (2011) 23 STR 444 (Kar.) was referred to in which it was inter alia held that “the Group Insurance Health Policy taken by the assessee is a service which would constitute an activity relating to business which is specifically included in the input service definition”.

Held
It was held that services such as transport facility provided to the employees and vehicle insurance pertaining to the same, workmen’s compensation and expenses relating to the same, even though not expressly mentioned in the definition of input service tantamount to input services and the Tribunal’s decision was held legal and valid.

levitra

(2011) 24 STR 283 (Ker.) — Precot Mills Ltd. v. Union of India.

fiogf49gjkf0d
Demand — Transport service recipient — Retrospective amendment of statute — Demand in terms of amended statute sustainable only if matter was kept alive at time when original provision was in force — Otherwise demand unsustainable.

Facts
The petitioner, a manufacturer of cotton yarn engaged the services of transporter to transport the manufactured cotton yarn. With the introduction of levy of service tax on services rendered by goods transport operators, a question arose as to liability of the customers engaging the services of transporters to pay service tax.

The Supreme Court in the case of Laghu Udyog Bharati v. UOI, 1999 (33) RLT 911 held that “the person who is availing the services of a transporter could not be made liable for filing returns and paying service tax and that service tax being on the value of services, is payable only by the person who provides the services who only can be regarded as an assessee for the purpose of service tax”.

In the aftermath of the judgment, the Parliament enacted Chapter V and sections 116 and 117 of the Finance Act, 2000 whereby the persons engaging the services of the goods services operators were made liable to pay service tax during the period of 16-7-1997 and 15-10-1998.

The petitioner vide their original petition challenged the constitutional validity of sections 116 and 117. The petitioner also contended that even if sections 116 and 117 were considered to be valid, only in respect of demand notices issued while the provisions struck down by the Supreme Court were in force and the matter was alive can be continued by virtue of new sections.

Held
The High Court observed that the Supreme Court in J. K. Cotton Spinning and Weaving Mills Ltd. and Another v. Union of India and Others, (1987) 32 ELT 234 held that “even if a provision is amended with retrospective effect, the Department can proceed with the demand only if the matter was kept alive at the time when the original provision was in force.” Accordingly, allowing the original petition, the High Court held that the petitioner was not liable to pay service tax as demanded.

levitra

Software Development Charges — whether liable to VAT or Service Tax?

fiogf49gjkf0d
Introduction
When there are two different authorities to levy tax of a similar nature, there is bound to be a controversy. And one such controversy going around is whether development charges for software are liable to VAT or service tax? The issue is debatable as both the authorities consider the same under their jurisdiction.

There are certain judgments, mainly about aspect theory, under which the respective authorities under VAT and service tax consider some aspect of the transaction as liable to tax under their respective law and try to levy tax. This results in overlapping and also leads to double taxation of the same transaction. However, without making any attempt to analyse the theory of double taxation, etc., let’s try to understand the correct position of taxation of software development charges.

Software, whether goods?
The first issue in relation to taxation of software is whether softwares are goods. This issue has already been settled by the Supreme Court. Reference can be made to the judgment of the Supreme Court in the case of Tata Consultancy Service v. State of Andhra Pradesh, (137 STC 620) (SC).

In para 17 the Supreme Court has observed as under:

“17. Thus this Court has held that the term ‘goods’, for the purposes of sales tax, cannot be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc. are ‘goods’ for the purposes of sales tax. The submission of Mr. Sorabjee that this authority is not of any assistance as ‘software’ is different from electricity and that software is intellectual incorporeal property, whereas electricity is not, cannot be accepted. In India the test, to determine whether a property is ‘goods’, for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible.”

Thus, in relation to ready software whether canned or uncanned, the Supreme Court has observed that they are goods and hence can be subjected to sales tax including VAT, as presently levied.

However, the issue still remains whether all uncanned softwares are liable to VAT. There may be two situations under the above category of uncanned software:

One is that uncanned software may be developed for a particular customer as per his specifications. The software developer reserves all IPR including copyright in the said software unto himself. He will transfer the same to the customer after the software is ready against consideration. The transaction satisfies the test laid by the Supreme Court.

The other situation is that the customer while putting the order for development of software may reserve his copyright and IPR in the said software to be developed unto himself right from original stage of development of the software. Under the above circumstances it can be said the developer is not developing any software as his property which he can transfer to the customer. In this case the software coming into existence belongs to the customer as copyright lies with him as and when the software is being developed. Therefore the software developer can be said to be rendering services for development and not selling any software. In such a case there is no justification for levy of VAT. If at all, applicable service tax may be leviable, but not VAT.

This issue has been decided now by the Karnataka High Court in the case of Sasken Communication Technologies Ltd. v. The Deputy Commissioner of Sales Tax, DVO-5 (W.A. Nos. 90-101/2011 dated 15-4- 2011). In this case also similar issue was involved. The dealer M/s. Sasken Communication Technologies Ltd. developed software for its customers. However, as per agreement the copyrights and IPR in the said software belonged to the customer right from original stage of development. The Karnataka High Court held that since the copyright belonged to the customer right from the beginning, the software coming into existence after development belonged to the said customer and therefore there is nothing in the hands of the developer to transfer the same to the customer. In other words there was no sale of goods against consideration so as to attract VAT. This was nothing but rendering of development services for software.

The High Court has observed as under about the nature of transaction:

“39. From the aforesaid Clauses it is abundantly clear that the parties have entered into an agreement whereby the assessee renders service to the client for development of software, i.e., for software development and other services. Pursuant to the agreement and the work orders, the service shall be performed by the assessee. Services must be requested by issue of a valid work order together with a statement of work. As compensation for the service rendered to the customer, the fees specified in the relevant work order or in the statement of work is payable and billing is done on a time and material basis or on a fixed price or on a monthly basis. Pricing for time and material projects shall be fixed at a rate set forth in Annexure-A to the agreement.

40. The assessee agrees that all patentable and unpatentable, inventions, discoveries and ideas which are made or conceived as a direct or indirect result of the programming or other services performed under the agreement shall be considered as works made for hire and shall remain exclusive property of the client and the assessee shall have no ownership interest therein. Promptly, upon conception of such an invention, discovery, or idea, the assessee agrees to disclose the same to the client and the client shall have full power and authority to file and prosecute patent applications thereon and maintain patents thereon. At the request of the client the assessee agrees to execute the documents including but not limited to copyright assignment documents, take all rightful oaths and to perform such acts as may be deemed necessary or advisable to confirm on the client all right, title and interest in and to such inventions, discoveries or ideas, and all patent applications, patents, and copyrights thereon. Both the source code of developed software and hardware projects of worldwide intellectual property in and each shall be owned by the client. The assessee acknowledges that all deliverables shall be considered as works made for hire and the client will have all right, title including worldwide ownership of intellectual property rights in and each deliverable and all copies made from it. If acceptable to the client, the client may reuse all or any of the components developed by the assessee outside the scope of those contracts for the execution of the projects under this agreement.

41. Therefore, even before rendering service, the assessee has given up his rights to the software to be developed by the assessee. The considerations under the agreement is not for the cost of the project, the consideration is for the service rendered, based on time or man-hours. Once the project is developed, all rights in respect of the said project including the intellectual property rights vest with the customer and he is at liberty to deal with it in any manner he likes. The assessee has agreed to execute all such documents which are required for the exercise of such absolute rights over the software developed by the assessee.

 42.   The ‘deliverables’ has been defined under the agreement to mean all materials in whatever form generated, treated or resulting from the development, including but not related to the software modules or any part thereof, the source code and or object code, enhancement applications as well as any other materials media and documentation which shall be prepared, written and or developed by the developer for the client under this agreement and/or project order. If the customer agrees to provide any hardware, software and other deliverables that may be required to carry out the development and provide the deliverables he may do so. Otherwise the assessee has to make or provide all those hardware and software to develop the deliverable and the final product. No doubt at the end of the day, this software which is developed is embedded on the material object and only then the customer can make use of the same. The software so developed even before it is embedded on the material object or after it is embedded on a material object exclusively belongs to the customer. In the entire contract there is nothing to indicate that the assessee after developing the software has to embed the same on a material object and then deliver the same to the customer so as to have title to the project which is developed. The title to the project/software to be developed lies with the customer even before the assessee starts rendering service.”

The above observations of the High Court entirely cover the debatable issue. The parties can now very well decide whether the transaction of development of software will be covered by VAT or service tax based on ownership in the copyright and IPR. We hope that the controversy will rest here and the future transactions will be free from any dispute.

A market is never saturated with a good product, but it is very quickly saturated with a bad one.
— Henry Ford

REFUND OF CENVAT CREDIT: OTHER THAN ON EXPORTS

fiogf49gjkf0d
Statutory provisions [Rule 5 of CENVAT Credit Rules, 2004 (‘CCR’)]

“Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilised by the manufacturer or provider of output service towards payment of,

  • duty of excise on any final product cleared for home consumption or for export on payment of duty; or
  • service tax on output service,

and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by Notification.

Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in respect of such duty; or claims rebate of service tax under the Export of Services Rules, 2005 in respect of such tax:

Provided further that no credit of the additional duty leviable u/ss.(5) of section 3 of the Customs Tariff Act shall be utilised for payment of service tax on any output service.

 Explanation — For the purposes of this rule, the words ‘output service which is exported, means the output service exported in accordance with the Export of Services Rules, 2005.”

Refunds in situations other than export — A contentious issue

Rule 5 under CCR is the only provision which permits refund of CENVAT credit, essentially in case of exports. Refunds of unutilised CENVAT credit are often claimed in situations, other than export. For example, discontinuance of business, payments in case of disputes made in cash due to insistence by the Department instead of debit to CENVAT credit, Pre Deposits pending appeal made in cash instead of debit to CENVAT credit, etc.

Interpretation of the words ‘where for any reason such adjustment is not possible . . . .’ in Rule 5 has resulted in extensive litigations between the tax Department and the taxpayers.

Entitlement to refund in situations other than exports has been a very contentious issue and divergent judicial views have been expressed. There are very limited cases directly relating to service tax. However, there are extensive judicial precedents under Central Excise, principles in regard to which are relevant for service tax and which serve as a useful guide while dealing with issues of refunds relating to service providers.

The same are analysed hereafter along with the latest Larger Bench Ruling.

Mumbai Tribunal ruling holding that refund is inadmissible in situations other than exports

In the case of National Leather Cloth Mfg. Co. v. CCE, (2006) 198 ELT 400 (Tri-Mumbai) followed the ratio of the judgment in case of CCE, v. Rajashree Cements, (2001) 132 ELT 724 (Tri-Chennai) and denied the refund of MODVAT credit observing as under:

“The decision in the cases of Bombay Burmah, Arcoy Industries and Omkar Textile have been rendered contrary to the earlier decision of the Tribunal in the case of Rajashree Cements, which was delivered at an earlier point of time on 9-9- 2001. Moreover, Rajashree Cements also correctly notices the provisions of law which allow cash refund only in the case of unutilised credit in respect of export of final products. Hence, the decision in the said case is binding and the same requires to be followed until reversed by either Larger Bench or by any superior court”.

In the case of Rajashree Cements referred above, the Tribunal had held as under:

Para 5

“Accordingly, we hold that payment of duty through RG23A Part II account is a payment of duty and the refund of the same has to be given, if otherwise admissible and principle of unjust enrichment does not apply. However, the refund amount is to be given in RG23A Part II accounts if the same is in operation.”

In the case of National Leather, though it was an admitted fact that the appellants were not in a position to utilise the credit as they have closed down, legitimate refund was denied.

The three decisions of the Tribunal cited by the appellants and not followed in the above case of National Leather (supra) as the same were considered contrary to the decision in the case of Rajashree Cements are given below.

  • Assessee’s factory closing before allowance of Modvat credit by the Tribunal and utilisation of credit was prevented due to initiation of proceedings by the Department. It was held that the assessee was entitled to cash refund. [CCE v. Omkar Textile, (2002) 148 ELT 461 (Tri-Mum.)]
  • Amount originally paid by the assessee by debiting RG23A. Part II. The assessee moved out of Modvat credit scheme when dispute finally settled — It was held that the assessee is not able to utilise credit, the very basis of refund is defeated, in which case amount is to be given in cash. [CCE v. Arcoy Industries, (2004) 170 ELT 507 (Tri-Mum.)]
  • Section 11B contains no bar against payment of refund by cheque/cash in cases where original payment of duty was from Modvat/Cenvat account. Moreover, the assessee ceased to exist as a manufacturing unit and has no Cenvat account into which refund can be credited. [CCE v. Bombay Burmah Trading Corpn., (2005) 190 ELT 40 (Tri-Del.)]

Larger Bench Ruling in Gauri Plasticulture (P) Ltd. v. CCE, (2006) 202 ELT 199 (Tri-Mumbai) (LB)

In this case duty debit was made in CENVAT (MODVAT) account. However, the appellants could not utilise the credit due to departmental objections and insistence of payment from PLA Account. Thereafter the appellants surrendered their licence due to discontinuance on business and applied for refund of unutilised CENVAT credit.

The Larger Bench, under the peculiar facts of the case held that credit can be given in MODVAT Account, but if an assessee is not able to utilise, cash refund can be granted. The important observations made by the Larger Bench are as under:

Para 8

“Detailed reading of the above judgments, leads into the fact that wherever the assessee was unable to utilise the credit on account of objection raised by the Department or actions taken by them by way of initiation of proceedings or paid duty out of Modvat account at the Department’s insistence, and for that reason, he had to pay duty in cash or out of the PLA, they would be entitled to refund of that credit in cash, on the dispute being ultimately settled in their favour. In the decisions holding that such refund in cash is not possible, it has been observed that there is no provision allowing refund of such credit in cash. However, we are not in agreement with the above proposition for the simple reason that there is also express no bar in the Modvat Rules to that extent. We have to keep in mind that it is not the refund of unutilised credit, but the credit which has been used for payment of duty at the insistence of the Revenue or has been reversed because the Department was of the view that the same is not available for utilisation. This is a simple and basic principle of equity, justice and goods conscience. Had the Department not prevented the assessee from utilising the credit otherwise available to him, they would have been in a position to use the same towards payment of duty on their final product, which obligation they had to discharge from their PLA account. As such, on the success of their claim subsequently, if the assessee is maintaining Modvat credit and is in a position to use the same for future clearances, it should normally be credited back in the same account from where it was debited i.e., RG23A Part account. However, if an assessee is not able to use the credit on account of any reasons, whatsoever (which may be closure of his factory or final products being exempted, etc.) the refund becomes admissible in cash or by way of credit entry in PLA to the extent duty paid in cash or out of PLA during the relevant period.

Para 9

On the same basic principles of equity, justice and good conscience, if such refund in cash makes the assessee enrich because during the period when the dispute was pending, they had not paid any duty in cash and as such, the debit entry in Mod-vat account would have made no difference, as the credit would have been lying unutilised only in the account, such credit, cannot be refunded in cash.”

Karnataka High Court ruling in UOI v. Slovak India Trading Co. Pvt. Ltd., (2006) 201 ELT 559 (Kar.) [Confirmed by the Supreme Court (2008) 223 ELT A 170

In this case, the assessee was engaged in manufacture of shoes for M/s. Bata India Ltd. and was registered under the Central Excise. They surrendered their registration and a refund application was made on 14-5-2003 claiming a refund of Rs.4,15,057. During the Internal Audit, it was noticed that the assessee had availed CENVAT credit of the materials received by them during the past and had availed the credit to the tune of Rs.3,09,390. On scrutiny, it was noticed that there was neither production, nor clearance of finished goods. CENVAT credit availed by the assessee was irregular. A show-cause notice was issued in the matter with regard to irregular availment and also with regard to rejection of refund claim. Thereafter, an order was passed ordering allowance of CENVAT credit of Rs.3,72,405 availed. Refund claim was rejected in terms of section 11B of the Act. It was stated that there is no provision in Rule 5 of the CENVAT Credit Rules, 2002 with regard to refund. An unsuccessful appeal was filed by the assessee. Thereafter, the Tribunal was moved and the Tribunal allowed the appeal in terms of the impugned order.

The High Court held that Rule 5 of the CENVAT Credit Rules, 2002 does not expressly prohibit refund of unutilised credit where there was no manufacture in light of the closure of factory. Further, since the assessee has come out of the MODVAT Scheme, refund of unutilised credit has to be granted.

The Department’s appeal against the afore-said Court ruling was rejected by the Supreme Court.

Recent Larger Bench Ruling in the case of Steel Strips v. CCE, (2011) 269 ELT 257 (Tri.-LB)

The following question was referred to the Larger Bench regarding refund of unutilised amount of MODVAT credit in cash for the period from December, 1997 to September, 1999:

“Whether in cases where either on account of coercion by the Department or otherwise, the assessee pays the duty through PLA account, in spite of having sufficient balance in the MODVAT/CENVAT credit, on the factory or unit becoming inoperative and there being no likelihood of restarting the production, can such assessee be entitled for refund of the credit amount under the provisions of law in force?

Though, the Larger Bench ruling is with reference to section 11B of Central Excise Act, 1944, the observations are very relevant in the context of Rule 5 of CCR.

The Larger Bench distinguished the rulings of Larger Bench in Gauri Plasticulture (P) Ltd., Karnataka High Court in Slovak India as well as other rulings and held that refund of unutilised credit is only permissible in case of exports and for no other reason whatsoever that may be.

The Larger Bench made the following important observations while passing the order:

Para 5.7

“A distinction between provisions of the statute which are of substantive character and are built in with certain specific objectives of policy on the one hand, and those which are merely procedural and technical in their nature on the other hand, must be kept clearly distinguished. An eligibility criteria to get refund calls for a strict construction, although construction of a condition thereof may be given a liberal meaning if the same is directory in nature. The doctrine of substantial compliance is a judicial invention, equitable in nature, designed to avoid hardship in cases where a party does all that can be reasonably expected of it, but fails in or faults in some minor or inconsequent aspects which cannot be described as the ‘essence’ or the ‘substance’ of the requirement. Like the concept of ‘reasonableness’, the acceptance or otherwise of a plea of ‘substantial compliance’ depends upon the facts and circumstances of each case and the purpose and object to be achieved and the context of the prerequisites which are essential to achieve the object and purpose of the rule or the regulation. Such a defence cannot be pleaded if a clear statutory prerequisite which effectuates the object and the purpose of the statute has not been met. Certainly, it means that the Court should determine whether the statute has been followed sufficiently, so as to carry out the intent for which the statute was enacted and not a mirror image type of strict compliance. Substantial compliance means ‘actual compliance in respect to the substance essential to every reasonable objective of the statute’ and the Court should determine whether the statute has been followed sufficiently so as to carry out the intent of the statute and to accomplish the reasonable objectives for which it was passed.

Para 5.8

Fiscal statute generally seeks to preserve the need to comply strictly with regulatory requirements that are important, especially when a party seeks the benefits of an exemption clause, substantial compliance of an enactment is insisted upon, where mandatory and directory requirements are lumped together, for in such a case if mandatory requirements are complied with, it will be proper to say that the enactment has been substantially complied with notwithstanding the non-compliance of directory requirements. In cases where substantial compliance has been found, there has been actual compliance with the statute, albeit procedurally faulty. The doctrine of substantial compliance seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke a tax or duty exemption and to forgive non-compliance for either unimportant and tangential requirements or requirements that are so confusingly or incorrectly written that an earnest effort at compliance should be accepted.

Para 5.9

The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad of cases. Quite often, the critical question to be examined is whether the requirements relate to the ‘substance’ or ‘essence’ of the statute; if so, strict adherence to those requirements is a precondition to give effect to that doctrine. On the other hand, if the requirements are procedural or directory, in that they are not of the essence of the thing to be done, but are given with a view for the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance. In other words, a mere attempt at compliance may not be sufficient, but actual compliance of those factors which are considered as essential. In the cases of refund substantial compliance with the law granting refund is sine qua non.

Para 5.11

No person has a vested right in any course of procedure. He has only the right of prosecution or defence in the manner laid down by law. He has no right other than to proceed according to the mandate of the statute governing the subject. Claim of refund is not a matter of right unless vested by law. That would depend upon the object of the statute and eligibility. The purpose for which law has been made and its nature, the intention of the Legislature in making the provision, the relation of the particular provision to other provisions dealing with the subject including the language of the provision are considerable factors in arriving at the conclusion whether a particular claim is in accordance with law. No injustice or hardship plea can be raised to claim refund in the absence of statutory mandate in that behalf and no equity or good conscience can influence fiscal courts without the same being embedded in the statutory provisions.

Para 5.13

It is well-settled principles of law that what cannot be done directly should not be allowed to be done indirectly. On surrendering of their licence, the appellants were not allowed to claim the refund of the unutilised credit in the Modvat account, and the same would have lapsed. As such, utilisation of the same towards payment of disputed demand of duty, after surrendering of their registration, had not led to a situation where the assessee was compelled not to use the

credit for regular clearances and had to make payment through PLA accounts. As such, in the instant refund in cash was not to be allowed.

Para 5.16

Modvat law has codified the procedure for adjustment of the duty liability against the Modvat account. That is required to be carried out in accordance with law and unadjusted amount is not expressly permitted to be refunded. In the absence of express provision to grant refund, that is difficult to entertain except in the case of export. There cannot be presumption that in the absence of debarment to make refund in other cases that is permissible. Refund results in outflow from treasury, which needs sanction of law and an order of refund for such purpose is sine qua non. Law has only recognised the event of export of goods for refund of the Modvat credit as has been rightly pleaded by the Revenue and instant reference was neither the case of ‘otherwise due’ of the refund, nor the case of exported goods. Similarly, absence of express grant in statute does not imply ipso facto entitlement to refund. So also absence of express grant is an implied bar for refund. When right to refund does not accrue under law, claim thereof is inconceivable. Refund of unutilised credit is only permissible in case of export of goods and for no other reason, whatsoever that may be. Thus, where the assessee pays duty through the PLA account, in spite of having sufficient balance in the Modvat/Cenvat credit account on the factory or unit becoming inoperative and there being no likelihood of re-starting the production, such an assessee cannot be entitled to refund of the credit amount under the provisions of law in force.”

Conclusion

The Department authorities are following the aforesaid Larger Bench ruling and denying refunds, though in many cases, the reasons could be genuine.

With due respects to the Larger Bench, it would appear that refund provisions being in the nature of beneficial provisions ought to be construed liberally rather than strictly in accordance with the settled principles laid down by the Supreme Court from time to time.

It is suggested that appropriate amendment need to be made in Rule 5 of CCR, whereby powers may be granted to CBEC to prescribe circumstances under which refunds may be permitted subject to appropriate revenue safeguards.

Insertion of Rule 40BA and Form No. 29C — Notification No. 60/2011 [F. No. 133/70/2011- SO(TPL), dated 1-12-2011.

fiogf49gjkf0d
CBDT has made following amendments vide Incometax (Ninth Amendment)

Rules, 2011 with effect from 1st December, 2011 Rule 40BA inserted to provide for special provisions for payment of tax by Limited Liability Partnership (LLP)

LLP shall furnish the report of an accountant as required by section 115JC for the purpose of computation of adjusted total income and minimum alternate tax in Form No. 29C.

levitra

Narad Investments & Trading Pvt. Ltd. v. Dy. CIT ITAT ‘H’ Bench, Mumbai Before B. R. Mittal (JM) and Rajendra Singh (AM) ITA Nos. 3360/Mum./2010 A.Y.: 1996-97. Decided on: 19-10-2011 Counsel for assessee/revenue: Jayesh Dadia/ V. V. Shastri

fiogf49gjkf0d
Section 220(2) — Interest payable by assessee — Manner of computing default period — Original assessment set aside and fresh assessment made by the AO — Whether period of levy of interest is to be reckoned from the date of default as per the original assessment order or as per the fresh assessment order — Held that interest payable is to be computed from the date of fresh assessment order.

Issue: When original assessment has been set aside by the Tribunal and fresh assessment has been made by the AO, the period of levy of interest u/s.220(2) should be reckoned from the date of default as per the original assessment order or as per the fresh assessment order.

In the case of the assessee the original assessment was confirmed by the CIT(A) but on further appeal, the Tribunal set aside the order of the CIT(A) and the issue was restored back to the AO. In the fresh assessment, the AO repeated the addition raising the same demand but interest u/s.220(2) was levied from the date of demand notice issued as per the original assessment order. The assessee disputed the AO’s action relying on the Board Circular No. 334, dated 3-4-1982, and contended that as the original assessment had been set aside by the Tribunal, the interest u/s.220(2) could be charged only from the date when the demand become due as per the fresh assessment order and not from the date of original assessment order.

Held:
In terms of the Board Circular (supra), in case the assessment is set aside by the CIT(A) and setting aside become final, interest u/s.220(2) has to be charged only after expiry of 35 days from the date of service of demand notice pursuant to the fresh assessment order. In the case of the assessee, since the original order of assessment was confirmed by the CIT(A) but on further appeal, the Tribunal set aside the order of the CIT(A) and the issue restored to the AO, it was held that in terms of the Circular, the interest u/s.220(2) had to be charged only from the date of the fresh assessment order.

levitra

Haware Constructions Pvt. Ltd. v. ITO ITAT ‘H’ Bench, Mumbai Before N. V. Vasudevan (JM) and R. K. Panda (AM) ITA Nos. 5601/Mum./2009, 6861/Mum./2010 & 1547/Mum./2011 A.Ys.: 2005-06, 2006-07 & 2007-08 Decided on: 5-8-2011 Counsel for assessee/revenue: J. P. Bairagra/ Goli Sriniwas Rao

fiogf49gjkf0d
Section 80IB(10) — Deduction in case of housing project — (1) Whether an assessee builder can follow project completion method of accounting — Held, Yes; (2) Whether the AO justified in refusing to grant deduction on the ground that the commercial area exceeded the permissible limit and/or the area of the flat exceeded the permissible limit after considering balcony and terrace — Held that the limit as applicable as on the date when the project was approved should be applied and not as on the date of completion of the project and based thereon, the assessee had not exceeded the permissible limit as laid down in the Act;

Section 2(22)(e) — Deemed dividend — Loans and advances to related concern — Held that taxable in the hands of the shareholder and not in the hands of the assessee borrower.

Facts:
(1) A.Y. 2005-06:

The assessee was engaged in the business of construction and builder. On account of revision in AS-9, it changed its method of accounting in respect of projects which commenced after 1st April, 2003 from percentage completion method and started recognising revenue from the projects on completion of the projects, when the risk of ownership was transferred to the customer. However, the AO termed the change to project completion method as invalid. On appeal, the CIT(A) agreed with the AO and rejected the project completion method of accounting applied by the assessee to the new projects.

(2) A.Y. 2006-07:

The assessee was denied the benefit of deduction u/s.80IB(10) for the following reasons:

(a) The commercial area in the housing project exceeded 5% of the total project area;

(b) Some of the purchasers of flats had also purchased adjacent flats, the sum total of these two flats exceeded 1000 sq.ft.;

(c) Majority of the flats sold exceeded the area of 1000 sq.ft. after including balcony and terrace.

(3) A.Y. 2007-08:

The assessee had taken unsecured loan of Rs.8.02 crore during the year from HEB Pvt. Ltd., which had got free reserves of Rs.50.96 crore. According to the AO the provisions of section 2(22)(e) were attracted since one of the shareholders of the assesseecompany was holding more than 20% equity capital in HEB Pvt. Ltd. and the assessee-company.

Held:
(1) A.Y. 2005-06:
Relying on the various decisions (listed below), the Tribunal held that the project completion method was an accepted and recognised method of accounting. It also noted that the same was also accepted by the AO in the preceding as well as in the subsequent assessment year. According to it, an assessee can follow any recognised method of accounting and the condition was that the same method should be followed consistently. Since the assessee in the instant case was regularly following the project completion method and has offered the income in the year of completion of project, the Tribunal did not find any reason to reject the same. Accordingly, the assessee’s appeal was allowed.

(2) A.Y. 2006-07:

(a) Relying on the decision of the Special Bench of the Tribunal in the case of Brahma Associates reported in 122 TTJ 443 and the Co-ordinate Bench of the Tribunal in the case of Shri Girdharilal K. Lulla vide ITA No. 4207/Mum./2009 order dated 30-5-2011, the Tribunal found merit in the submissions of the assessee that when the approval was obtained prior to 31-3-2005, the condition of shopping area not exceeding 5% of built-up area or 2000 sq.ft. whichever is less, as introduced by the subsequent amendment are not applicable in respect of projects approved and commenced before 1-4-2005. Accordingly, the appeal filed by the assessee was allowed on this ground.

(b) As regards the second objection of the revenue that the assessee had sold two or more than two flats to one party, the combined area of which was more than 1000 sq.ft., the Tribunal accepted the submission of the assessee that the area of two flats should not be combined even though the two flats were sold to one person because:

  • the built-up area of each flat as approved by CIDCO was less than 1000 sq.ft.;
  • the assessee has sold each flat under separate agreement;
  • the assessee has not sold two flats by combining them together as one flat to one party;
  • there is no evidence with the Department that the assessee had sold the flat after combining the two flats together;
  • It is also not the case of the Revenue that each flat in the housing project undertaken by the assessee could not have been used as an independent or as a self-contained residential unit not exceeding 1000 sq.ft. of built-up area and that there would be a complete habitable residential unit only if two or more flats were joined with each other which would ultimately exceed 1,000 sq.ft. of built up area;
  • the condition that not more than one residential unit in the housing project was allotted to any person not being an individual, has been inserted by the Finance (No. 2) Act, 2009 w.e.f. 1-4-2010.

(c) The Tribunal agreed with the assessee that the definition of ‘built-up area’ as given in s.s 14(a) of section 80IB, whereby the balcony/terrace area was also considered as part of built-up area, was inserted by the Finance Act, 2004 w.e.f. 1-4-2005 and, therefore, the same was applicable only in respect of the projects approved after 1-4-2005. In the given case of the assessee, as the project was approved prior to 1-4-2005, the appeal filed by the assessee was allowed on this ground.

(3) A.Y. 2007-08:

The Tribunal noted that the assessee was not a registered shareholder in HEB Pvt. Ltd. Therefore, relying on the decision of the Special Bench of the Tribunal in the case of ACIT v. Bhaumik Colour P. Ltd., [313 ITR (AT) 146] where it was held that deemed dividend can be assessed only in the hands of the person who is a shareholder of the lender company and not in the hands of a person other than a shareholder and not in the hands of the borrowing concern in which such shareholder is member or partner having substantial interest, the appeal filed by the assessee was allowed and directed the AO to delet the addition.

Cases relied on (A.Y. 2005-06):
1. Awadesh Builders v. ITO, 37 SOT 122 (Mumbai);
2. Prestige Estate Projects (P) Ltd. v. DCIT, 129 TTJ (Bang) 680;
3. CIT v. Bilahari Investment (P) Ltd., 299 ITR 1 (SC);
4. H. M. Constructions v. CIT, 90 TTJ (Bang.) 510.

levitra

ITO v. Damodar Bhuvan CHS Ltd. ITAT ‘D’ Bench, Mumbai Before N. V. Vasudevan (JM) and T. R. Sood (AM) ITA No. 1610/Mum./2010 A.Y.: 2005-06. Decided on: 16-9-2011 Counsel for revenue/assessee : M. R. Kubal/ B. V. Jhaveri

fiogf49gjkf0d
Section 2(24) — Income — Taxability of receipt of transfer fees and non-occupancy charges from its members by the housing society — Amount received in excess of the limits prescribed under the law — Held that the sum received is exempt from tax on the principle of mutuality.

Facts:
The assessee was a co-operative housing society. During the year under appeal, its claim to treat the receipt of the sum of Rs.15 lac towards transfer charges (described as contribution to heavy repair fund) and Rs.1.31 lac towards non-occupancy charges as exempt was negatived by the AO. On appeal, the CIT(A) held that these receipts are exempt under the principle of mutuality.

Held:
As regards the receipt of Rs.15 lacs towards transfer charges, relying on the Bombay High Court decision in the case of the Sind Co-operative Housing Society v. Income-tax Officer, (317 ITR 47), which was also followed in the cases of Suprabhat Co-operative Housing Society Ltd. v. ITO, (ITA No. 1972 of 2009 dated 1-10-2009) as well as Shyam Co-operative Housing Society Ltd. v. CIT, (ITA Nos. 92, 93 and 206 of 2008, dated 17-7-2009), the Tribunal held that the principle of mutuality applies to the receipt of transfer fees. Similarly, in respect of the receipt of Rs.1.31 lac towards non-occupancy charges, the Tribunal relied on the decision of the Bombay High Court in the case of Mittal Court Premises Co-op Society v. ITO, (320 ITR 414) and held that the principle of mutuality equally applies to such receipt. It further held that the restriction on the quantum of receipt by an association from its members prescribed by any other law regulating the relationship between members and its association will not be relevant while taxing the receipts under the Act. Thus, according to it, the principle of mutuality will not cease to exist in respect of receipts from members by an association beyond the quantum restricted by any law regulating the relationship between members and its association.

levitra

Yahya E. Dhariwala v. DCIT ITAT ‘G’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and V. Durga Rao (JM) ITA No. 5501/Mum./2009 A.Y.: 2005-06. Decided on: 25-11-2011 Counsel for assessee/revenue: K. Gopal/ A. K. Nayak

fiogf49gjkf0d
Section 54EC — Six months period, referred to in section 54EC, should be reckoned from the end of the month in which the transfer takes place.

Facts:
During the previous year relevant to the assessment year under consideration the assessee sold shares of two private limited companies. The assessee chose to invest the entire sale consideration in the bonds specified u/s.54EC of the Act. Of Rs.1,97,50,000 invested by the assessee in REC bonds, a sum of Rs.45,00,000 was invested on 30th August, 2005. The AO in an order passed u/s.147 r.w.s. 143(3) of the Act denied the claim for deduction of Rs.45,00,000 on the ground that the shares have been transferred on 24th February, 2005, whereas the investment was made on 30th August, 2005 which is beyond the period of six months from the date of sale. The assessee submitted that the sale of shares took place on 28th February, 2005, based on documents filed with the Registrar of Companies.

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

Aggrieved, the assessee preferred an appeal to ITAT.

Held:
The Tribunal noted that the subject-matter of transfer is shares of a private limited company. In case of shares of private limited company, the process of transfer of shares can be said to be completed only when the board of directors approves the transfer. The Annual Return filed before the ROC disclosed that the date of registration of transfer was 28th February, 2005. Board resolution approving the transfer of shares was passed on 25th February, 2005. Just because the stamping was done on 24th February, 2005 of blank forms, it cannot be concluded that there is transfer on 24th February, 2005. The Tribunal concluded that the date of transfer is 28th February, 2005. Hence, the investment made on 30th August, 2005 was within a period of six months as contemplated under the Act.

The Tribunal then held that even if the date of transfer is to be taken as 24th February, 2005, the wording used in the section is ‘at any time within a period of six months after the date of such transfer’. The Tribunal noted that the Madras High Court in the case of Kadri Mills Ltd. and the Calcutta High Court in the case of Brijlal Lohia and Mahabir Prasad Khema have held that since the term ‘month’ is not defined in the Income-tax Act, 1961, the expression used under the General Clauses Act, 1897 should be applied. Having noted the definition of the term ‘month’ as defined under The General Clauses Act, 1897 and also that the Act in certain sections has stated the period in number of days the Tribunal held that from the language in section 54EC the period of six months should be reckoned from the end of the month in which the transfer takes place. As the investment was made on 30th August, 2005, the Tribunal held that the assessee has invested a part of the capital gain within a period of six months after the date of transfer of the long-term capital asset in question in specified assets.

The Tribunal allowed the appeal filed by the assessee.

levitra

A.P. (DIR Series) Circular No. 97, dated 28-3- 2012 — Overseas Investments by Resident Individuals — Liberalisation/Rationalisation.

fiogf49gjkf0d
This Circular has proposed the following three changes:

(1) Acquiring qualification shares of an overseas company for holding the post of a Director A resident individual can now remit funds, within the overall ceiling prescribed from time to time under the Liberalised Remittance Scheme, for acquiring qualification shares for holding the post of a Director in the overseas company up to the extent required by the laws of the host country where the company is located.

(2) Acquiring shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration General permission is granted to resident individuals to acquire shares of a foreign entity in part/ full consideration of professional services rendered to the foreign company or in lieu of Director’s remuneration. However, the value of such shares must be within the overall ceiling prescribed from time to time under the Liberalised Remittance Scheme.

(3) Acquiring shares in a foreign company through ESOP Scheme Permission has been granted to resident employees or Directors of an Indian company to accept shares offered under an ESOP Scheme in a foreign company, irrespective of the percentage of the direct or indirect equity stake of the foreign company in the Indian company, provided:

(i) The shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis,

(ii) Annual Return is submitted by the Indian company to the Reserve Bank through the AD Category-I bank giving details of remittances/ beneficiaries, etc.

levitra

A.P. (DIR Series) Circular No. 96, dated 28- 3-2012 — Overseas Direct Investments by Indian Party — Rationalisation.

fiogf49gjkf0d
This Circular has proposed the following six changes:

1. Creation of charge on immovable/movable property and other financial assets

A charge can be created, under the Approval Route within the overall limit fixed (presently 400%) for financial commitment, on the immovable/movable property and other financial assets of the Indian Party and their group companies by way of pledge/ mortgage/hypothecation. However, a ‘No objection’ letter needs to be obtained from lenders to the entities on whose assets the charge is being created.

2. Reckoning bank guarantee issued on behalf of JV/WOS for computation of financial commitment

For calculating the financial commitment of the Indian Party to its overseas JV/WOS, henceforth, bank guarantee issued by a resident bank on behalf of the overseas JV/WOS of the Indian party will also be considered if the same is backed by a counter guarantee/collateral from the Indian Party.

3. Issuance of personal guarantee by the direct/ indirect individual promoters of the Indian

Party General permission is now granted to indirect resident individual promoters of the Indian Party to also give a Personal Guarantee on behalf of the overseas JV/WOS of the Indian Party.

4. Financial commitment without equity contribution to JV/WOS

An Indian Party can undertake, under the Approval Route, financial commitment by way of guarantee/ loan, without equity contribution, in the overseas JV/WOS if the laws of the host country permit incorporation of a company without equity participation by the Indian Party.

5. Submission of Annual Performance Report
In cases where laws of the host country do not prescribe mandatory audit of the books of account of the overseas JV/WOS, the Indian Party can submit the Annual Performance Report on the basis of unaudited annual accounts of the overseas JV/ WOS, if:

(a) The Statutory Auditors of the Indian Party certify that the unaudited annual accounts of the JV/WOS reflect the true and fair picture of the affairs of the overseas JV/WOS.

 (b) The un-audited annual accounts of the overseas JV/WOS have been adopted and ratified by the Board of the Indian Party.

6. Compulsorily Convertible Preference Shares (CCPS)

Henceforth, Compulsorily Convertible Preference Shares (CCPS) will be treated on par with equity shares (and not as loans) and the Indian Party will be allowed to undertake financial commitment based on the exposure to overseas JV/WOS by way of CCPS.

levitra

Sales Tax — PSI units established under 1988 Scheme — Retrospective amendment to Rule — Providing calculation of CQB — Bad in law to that extent they are inconsistent with para 2.11 of 1988 GR — Rule 31AA of the Bombay Sales Tax Rules, 1959.

fiogf49gjkf0d
(2011) 41 VST 436 (Bom.)
Prasad Power Control Pvt. Ltd. and Another v. Commissioner of Sales Tax, Mumbai and Others.

Sales Tax — PSI units established under 1988 Scheme — Retrospective amendment to Rule — Providing calculation of CQB — Bad in law to that extent they are inconsistent with para 2.11 of 1988 GR — Rule 31AA of the Bombay Sales Tax Rules, 1959.


Facts:

The dealer company, entitled to sales tax exemption under the Package Scheme of Incentives (PSI), 1988 under the Bombay Sales Tax Act, 1959 as per terms and conditions of Government Resolution, dated September 30, 1988 subject to maximum specified limit of notional sales tax liability to be calculated as per Para 2.11 of the said GR. Section 41B of the Act, inserted from May 1, 1994, empowers the Commissioner of sales tax to determine the cumulative quantum of benefits (CQB) received by any dealer to whom any certificate of entitlement is granted under various specified PSI at any time from January 1, 1980, in the manner prescribed by the Rules. Rule 31AA was inserted in the Bombay Sales Tax Rules, 1959 from March 24, 1995 providing for calculation of CQB for any period starting from January 1, 1980. The assessment of the dealer was completed for the periods 1994-95 to 1996-97 and the assessing authority calculated CQB as per Rule 31AA against which dealer filed appeals before the Appellate Authority as well as filed writ petition before the Bombay High Court challenging the constitutional validity of Rule 31AA providing for calculation of CQB to that extent they are inconsistent with Para 2.11 of GR dated September 30, 1988.

Held:

 (i) There can be no dispute that the State Legislature has power to make laws with retrospective effect, but if that law arbitrarily impairs or seeks to take away the rights vested in the citizens, then such law must be held to be bad in law to the extent it is made retrospectively.

(ii) In the present case, the petitioners had a vested right in computing CQB as per Para 2.11 of the 1988 GR and since that vested right is sought to be divested by introducing Rule 31AA retrospectively, it must be held that Rule 31AA to the extent it seeks to apply to the units established under the 1988 scheme prior to the insertion of said rule is bad in law.

(iii) When the PSI itself was to operate based on the exemption granted under the sales tax law, it is difficult to envisage that in calculating the CQB, the Scheme intended to ignore the exemptions available under the sales tax law. In any event, the language used in Para 2.11 of the 1988 GR does not directly or indirectly indicate that in calculating CQB the exemptions provisions contained under the sales tax law have to be ignored.

(iv) The calculation of CQB under PSI 1988, as per Para 2.11 of 1988 GR, has to be made with reference to tax payable, by a unit not covered under PSI 1988, at maximum rate of tax payable under the Act or rules including exemptions or concessions available under any other provisions of the Act, rules or notifications. Accordingly, the High Court allowed the writ petition filed by the company.

levitra

Sales tax — TDS on works contract — At flat rate — On total contract value — Without any mechanism to determine taxable turnover, etc. — Constitutional validity — Invalid — Section 3AA of the Tripura Sales Tax Act, 1976.

fiogf49gjkf0d
(2011) 41 VST 386 (Gauhati) Sri Pradip Paul v. State of Tripura

Sales tax — TDS on works contract — At flat rate — On total contract value — Without any mechanism to determine taxable turnover, etc. — Constitutional validity — Invalid — Section 3AA of the Tripura Sales Tax Act, 1976.


Facts:

The dealer entered into works contract for digging and development of tube-well for State PWD of the Tripura Government. Under the contract, pipes were supplied free of cost by the Department and some little materials were supplied by the dealer. The State PWD deducted sales tax from payment of bills to the dealer/contractor at flat rate as provided in section 3A of the Tripura Sales Tax Act, 1976. The dealer filed writ petition before the Gauhati High Court challenging constitutional validity of provisions of section 3A of the Tripura Sales Tax Act, 1976 providing for levy of sales tax as well as provisions of TDS at flat rate u/s.3AA of the act. The High Court following various decisions of SC and other High Courts upheld constitutional validity of section 3A of the act providing levy of tax at different rate of tax on sale of goods involved in execution of works contract but TDS provisions were held as invalid.

Held:

 (i) Under the contract, the dealer was to supply necessary fittings and some other material however little they may be, the contract is not a service contract, but works contract involving sale of those goods and liable for sales tax on corresponding turnover of sales.

(ii) No tax can be imposed and recovered in respect of sale arising out of works contract as per section 3A inasmuch as tax is leviable on turnover of sales, but the manner of computation of turnover has not been provided in respect of works contract in the Act making thereby assessment and computation of tax inapplicable in respect of works contract.

(iii) Section 3AA of the act and Rule 3A(1) of the rules are bad in law inasmuch as it permits deduction of tax at flat rate.

levitra

Service tax demanded on construction of apartments for a client who in turn allotted it to its employees for residence — The issue highly debatable, however Board’s Circular No. 332/16/2010, dated 24-5-2010 in favour of appellant — Held: Activity covered by exclusion clause of the definition of ‘residential complex’ as per section 65(105) (zzzh) — Stay and waiver granted.

fiogf49gjkf0d
(2012) TIOL 283 CESTAT-Bang. — Nitesh Estates Ltd. v. CCE, Bangalore.

Service tax demanded on construction of apartments for a client who in turn allotted it to its employees for residence — The issue highly debatable, however Board’s Circular No. 332/16/2010, dated 24-5-2010 in favour of appellant — Held: Activity covered by exclusion clause of the definition of ‘residential complex’ as per section 65(105) (zzzh) — Stay and waiver granted.


Facts:

The appellant constructed residential complexes during March, 2007-March, 2008 for ITC Ltd. who provided the apartments for residence of its employees. Invoking extended period in July, 2009, service tax was demanded and penalty was levied. The appellant contended that residential construction was done for personal use of ITC Ltd. and hence was covered by exclusion clause u/s.65(91a) of the Act and relied on Board’s Circular 332/16/2010, dated 24-5-2010, wherein it was clarified that residential complex constructed by National Building Construction Corporation Ltd. (NBCC) for officers of the Central Government was not taxable. Support was also placed on Khurana Engineering Ltd. v. CCE, (2011) 21 STR 115 (Tri.-Ahmd.) wherein residential complexes constructed by the assessee for PWD/Government of India for residential use of the Central Government employees were held to be covered by the exclusion clause. The Revenue, on the other hand distinguished the situation wherein a person building on one’s own and not through a contractor, only would fall within the ambit of exclusion clause.

Held:

The issue is highly debatable, however the Board’s Circular and Tribunal’s decision (supra) could be taken support of. Further, considering that the appellant also had good case on limitation, recovery of dues was stayed, but the case was posted for early hearing.

levitra

Services of mining, loading, transportation and unloading — Whether cargo handling service or goods transportation service — Since tax paid as receiver of GTA service — Contract indicated small component of loading and unloading — Handling or transportation within factory or mining area does not amount to ‘cargo’ is well settled — In the contracts of appellants handling is incidental to transportation — Held revenue’s attempt to convert this to cargo handling appears far-fetched — Demand set as<

fiogf49gjkf0d
(2012)   TIOL   290   CESTAT-Del.   — R. K. Transport Company v. CCE, Raipur.
    

Services of mining, loading, transportation and unloading — Whether cargo handling service or goods transportation service — Since tax paid as receiver of GTA service — Contract indicated small component of loading and unloading — Handling or transportation within factory or mining area does not amount to ‘cargo’ is well settled — In the contracts of appellants handling is incidental to transportation — Held revenue’s attempt to convert this to cargo handling appears far-fetched — Demand set aside.


Facts:

The appellant provided integrated services of mining for excavation of bauxite ore, loading it into trucks at stock yards and transportation of the same by road and unloading the same at a specified area for two aluminium companies during August, 2002- March, 2006. Revenue proceeded the case considering this as cargo handling service. From 1-1-2005, the appellant discharged service tax as recipient of GTA service on consideration received for transportation of goods. For services other than transportation. The appellant paid service tax from 16-6-2005 under Business Auxiliary Service as services in relation to production were covered under Business Auxiliary Service. According to the appellant, services covered under mining service were not liable prior to 1-6- 2007. Relying on several decisions including Sainik Mining & Allied Services (2008) 9 STR 531 (Tri.) and Modi Construction (2008) 12 STR 34 (Tri.), the appellant contended that handling of goods within factory or mines could not be considered handling of cargo. The Revenue contended that argument of the assessee that mining was a dominant activity was incorrect and relied in support on Gajanand Agarwal v. CCE, (2009) 13 STR 138.

Held:

The contracts indicated insignificant component of cargo handling service and main activities were mining and transportation. No separate rates were available for loading and unloading as available in the case of Gajanand Agarwal (supra). The Revenue’s attempt to convert such activity from transportation and deny abatement claimed appeared farfetched to find legal support. Loading and unloading combined with transportation service rendered in respect of transportation would not become cargo handling service. The appeal was accordingly allowed.

levitra

Penalty — Education cess is for welfare of the state and appellant not entitled to credit of the same, hence no penalty leviable u/s.76 of Finance Act, 1994 (penalty for failure to pay service tax).

fiogf49gjkf0d
(2012) 25 STR 594 (Tri.-Del.) — Pahwa International Pvt. Ltd. v. Commissioner of Service Tax, Delhi.

Penalty — Education cess is for welfare of the state and appellant not entitled to credit of the same, hence no penalty leviable u/s.76 of Finance Act, 1994 (penalty for failure to pay service tax).


Facts:
The appellant wrongly utilised credit for education cess against service tax. Education cess was meant for specific purpose i.e., welfare of the state.

Held:

The appellant was not entitled to avail credit of education cess against credit for service tax. The penalty u/s.76 of the Finance Act, 1994, upon the appellant was waived.

levitra

Appellant, a labour contractor — Conversion process of tin plate to containers in the premises of M/s. NKPL — Tax levied on the appellant — The appellant was providing manpower recruitment or supply agency services — On the basis of facts it was held that there was no service tax liability.

fiogf49gjkf0d
(2012) 25 STR 471 (Tri-Ahmd.) — Rameshchandra C. Patel v. Commissioner of Service Tax, Ahmedabad.

Appellant, a labour contractor — Conversion pro-cess of tin plate to containers in the premises of M/s. NKPL — Tax levied on the appellant — The appellant was providing manpower recruitment or supply agency services — On the basis of facts it was held that there was no service tax liability.


Facts:

The appellant was a labour contractor and was doing conversion of tin plate to containers to pet jars in the factory premises of M/s. NK Proteins Ltd. (NKPL). The machinery, space and all other facilities were provided by NKPL. The appellant was required to take the required labour to the factory of NKPL to undertake the conversion depending upon the requirement of NKPL. According to the agreement, the appellant was to pay specific amount determined on the basis of number of containers produced by the appellant. Proceedings were initiated against the appellant on the ground that the activity undertaken amounted to providing manpower recruitment or supply agency.

Held:

To determine whether the service is taxable under manpower recruitment or supply agency, first of all it should be provided by manpower recruitment or supply agency and secondly it should be in relation to manpower supply or recruitment. The appellant was doing only contract manufacturing work and there was no question of any labour supply or manpower supply or manpower recruitment agency. Nowhere in the agreement there was any mention with regards to manpower supply or recruitment and the agreement specifically talks about the products to be manufactured and payments to be made. The appellant was also registered with the labour department as a contract manufacturer and not as a labour supply or manpower supply or manpower recruitment agency. The Department totally failed to show in which manner the service provided by the appellant could be categorised under manpower supply or recruitment. Hence it was held that the appellant was not liable to service tax.

levitra

Mutual fund distribution — Liability to pay service tax on commission — As per Service Tax Rules, 1994 such liability was on recipient of services i.e., mutual fund company — If they did not pay it, liability was not transferred to mutual fund distributor.

fiogf49gjkf0d
(2012) 25 STR 481 (Tri-Del.) — Raj Ratan Castings Pvt. Ltd v. Commissioner of Customs & Central Excise, Kanpur.

Mutual fund distribution — Liability to pay service tax on commission — As per Service Tax Rules, 1994 such liability was on recipient of services i.e., mutual fund company — If they did not pay it, liability was not transferred to mutual fund distributor.


Facts:

The appellant was a distributor of mutual fund units who received commission from mutual fund companies or asset management companies. The commission received by the appellant from the said companies, was taxed by the authorities on the ground that it provided Business Auxiliary Services to the mutual fund company.

Held:

It was held that the liability to pay tax is of the service recipient i.e., the mutual fund company. If it was not paid by the company, proceedings have to be started against the company and the liability will not transfer to the mutual fund distributor.

levitra

Tax liability — Relevant date — Rate of tax — Advance payment — Demand for differential tax due to subsequent change of rate of tax — Rate of service tax increased from 8 to 10.2% w.e.f. 10-9-2004 — Appellant received advance payment before 10-9-2004 — Appellant paid tax on full value received — Department did not take any objection to such payment in advance — Held, rate that was applicable at the time of receipt of value of service will apply in a case where the appellant chose to pay tax on

(2012) 25 STR 459 (Tri.-Del.) — Vigyan Gurukul v. Commissioner of Central Excise, Jaipur-I.

Tax liability — Relevant date — Rate of tax — Advance payment — Demand for differential tax due to subsequent change of rate of tax — Rate of service tax increased from 8 to 10.2% w.e.f. 10-9-2004 — Appellant received advance payment before 10-9-2004 — Appellant paid tax on full value received — Department did not take any objection to such payment in advance — Held, rate that was applicable at the time of receipt of value of service will apply in a case where the appellant chose to pay tax on advance amount received.


Facts:

The appellant was providing commercial coaching services during the year 2004. The rate of service tax increased from 8 to 10.2% w.e.f. 10-9-2004. The appellant received advance payment before 10-9- 2004 for providing services part of which were provided after 10-9-2004. They paid tax @8%, the rate prevalent at the time of paying service tax on the amounts received by them. The Department did not take any objection to such payment in advance. At a later date, the Department request ed the appellant to deposit the differential service tax on that part of the advance fee collected by them during the period 1-9-2004 to 9-9-2004 against which services were rendered during the period from 10-9-2004 to 31-3-2005. The appellant deposited the differential amount of service tax. The appellant later felt that they need not have paid tax at the higher rate as advised by the Department and they filed a refund claim for the same. The Department rejected the claim.

Held:

It was held that the appellants cannot recover the additional tax amount from their students in view of the fact that the contracts with students were concluded. The appellant paid tax on full value received. The Department did not take any objection to such payment in advance. So at the later date when the rate of service tax increased, there was no reason for the Department to claim that the appellant should not have paid tax in advance. The rate that was at the time of receipt of value of service will apply in case where the appellant chose to pay tax on advance amount received. Comments: The current provisions of Point of Taxation Rules are also in line with the above judgment. Where bill has been raised and payment is also received before change in the rate, the old rate will apply.

Section 66A — Import of services — Constitutional validity upheld — Charge of service tax created on services provided from outside India by a person having a business establishment/fixed establishment from which the services are provided and received in India by a person who has a place of business, fixed establishment, permanent address or usual place of residence in India and the Rules in respect thereof made under powers conferred by sections 93 and 44 r.w.s. 66A of the Finance Act, 1994 ar<

fiogf49gjkf0d
(2012) TIOL 122 HC-ALL-ST — GLYPH International Ltd. v. Union of India & Others.

Section 66A — Import of services — Constitutional validity upheld — Charge of service tax created on services provided from outside India by a person having a business establishment/fixed establishment from which the services are provided and received in India by a person who has a place of business, fixed establishment, permanent address or usual place of residence in India and the Rules in respect thereof made under powers conferred by sections 93 and 44 r.w.s. 66A of the Finance Act, 1994 are not unconstitutional on both grounds; legislative competence and/or extra-territorial operation of laws.


Facts:

The petitioner, a software manufacturer and 100% exporter had an agreement with a US company whereby the US company would promote petitioner’s business activity in US. Service tax was demanded on the amount paid to the US company for the period 2008-09. The petitioner challenged the levy on the said US company’s services viz. AMC charges for upgradation of software and online support services. The grounds of the challenge were (a) constitutional validity of section 66A and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (Import Rules) (b) extra-territorial jurisdiction of the levy based on the scope of section 64 of the Act which provides that the Act will extend to whole of India except State of Jammu & Kashmir. The petitioner contended that section 66A and the Import Rules create another taxable event/ incidence of tax from services provided to services received in India and which was against the legislative scheme. While challenging constitutional validity the petitioner in the context of Entry 92C of the Union list contended that services rendered in India which would form part of GDP were sought to be taxed as they significantly contributed to GDP. However, levying service tax on services rendered outside India being not part of GDP would be unconstitutional. The petitioner also contended that unlike the Income-tax Act, there did not exist double taxation treaty in service tax and therefore hardship in the form of multiple taxation on the same activity would be caused. They placed reliance upon All India Federation of Tax Practitioners v. Union of India, (2007) 7 STR 625 (SC). Discussing various parts of the said decision, it was contended that service tax is a VAT which in turn is both a general tax and destination-based consumption tax leviable on services provided within the country. Further reliance was placed on various decisions, including on Ishikawajma Harima Heavy Industries (2007) 3 SCC 481. The Revenue, on the other hand, contended that 66A was a valid provision and did not suffer from the vice of unconstitutionality and inter alia relied on Tamil Nadu Kalyan Mandapam Association v. UOI, (2004) TIOL 36 SC-ST (wherein constitutional validity of section defining Mandap Keeper’s service was upheld) and All India Federation of Tax Practitioners (supra) (wherein legislative competence of Parliament to levy service tax on chartered accountants, cost accountants and architects was upheld). Among other decisions, Indian National Shipowners Association v. UOI, (2009) 13 STR 235 (Bom.) was also referred to and noted.

Held:

Constitutional validity of the competence of Parliament to levy service tax has been upheld by the Supreme Court in Tamil Nadu Kalyan Mandapam Association (supra), All India Federation of Tax Practitioners (supra) and Association of Leasing and Financial Service Companies (2016) TIOL 87 SC-ST-LB. In the case under examination, the concern was for objection to the legislative powers of the Parliament on its extra-territorial operations, namely, the charge in respect of taxable events/ incidence of service tax on services provided outside India. Citing excerpts from the decisions such as Shrikant Bhalchandra Karulkar v. State of Gujarat, (1994) 5 SCC 459, State of Bihar & Ors. v. Shankar Wire Products Industries & Ors., (1995) Supp. 4 SCC 646 and GVK Industries Ltd. v. Income-tax Officer & Anr., (2011) 4 SCC 36, the High Court held:

As held in GVK Industries Ltd.’s case, Parliament does not have power to legislate for any territory other than territory of India or part of it and such laws would be ultra vires. It follows therefore that Parliament is empowered to make laws with respect to aspects or cause that occur, arise or exist or may be expected to do so within the territory of India and with respect to extra-territorial aspects or cause that have an impact on or nexus with India. Citing various terms in the agreement of the petitioner with the US company, it was concluded, “we find that taxable services provided from outside India are received and can be taxed in India u/s.66A(1)(b) of the Act.” Further that Import Rules made in exercise of powers conferred by sections 93 and 94 r.w.s. 66A of the Finance Act, 1994 do not suffer from the vice of constitutionality either on the ground of lack of legislative competence or on the ground of extra-territorial operation of laws.

levitra

(2011) 24 STR 411 (Tri.-Chennai) — Commissioner of Central Excise (ST), Pondicherry v. Fairline Worldwide Express.

fiogf49gjkf0d
Rectification of mistake by Tribunal in service tax appeal — Section 74 of the Finance Act, 1994 providing a period of two years for rectification of mistake by any Central Excise Officer not applicable to appeals to Tribunal.

Facts
The application for rectification arose out of Tribunals final order No. 213/2010, dated 19-12-2010.

The Revenue contended that as section 74 of the Finance Act, 1994 provided for a two-year period of limitation for rectification of error by a Central Excise Officer, the same period of limitation should be applied in the case of orders passed by the Tribunal also.

Held
The Tribunal noted that there was no statutory provision for filing application for rectification in case of service tax appeals before the Tribunal. In the absence of an express provision for filing application for rectification in orders in service tax appeals disposed of by the Tribunal, the application was held one without merits.

levitra

Appellant claimed CENVAT credit — Based on delivery notes — Revenue’s contention — Delivery notes cannot be considered as valid documents for availment — Held, credit cannot be denied — Delivery notes valid for availment of credit.

fiogf49gjkf0d
(2012) 25 STR 428 (Kar.) — CCE, Bangalore v. Saturn Industries.

Appellant claimed CENVAT credit — Based on de-livery notes — Revenue’s contention — Delivery notes cannot be considered as valid documents for availment — Held, credit cannot be denied — Delivery notes valid for availment of credit.


Facts:

The appellant claimed CENVAT/Modvat of the duty paid on the basis of the delivery notes. The Revenue in its appeal against the Tribunal’s order, contended that delivery notes cannot be considered as valid legal document for availment of the credit.

Held:

It was held that the benefit cannot be denied on the grounds of non-compliance with procedures when sufficient evidence about the duty payment on inputs was available on records.

levitra

Branch Transfer of Parts, Components vis-à-vis Inter-State Sale

fiogf49gjkf0d
The issue whether transfer of goods from head office to a branch office is a branch transfer or inter- State sale is always highly debatable. As per section 6A(1) of the CST Act, 1956, when the transfer is not pursuant to a pre-existing contract of sale, it will amount to a branch transfer. However, whether the movement from head office to a branch or from one branch to another branch in another State is due to the pre-existing sale contract or not is a contentious issue and has to be decided on facts of the case. There are number of judgments, which throw light on the above subject.

Branch transfer of goods can be of two types, (a) finished goods and (b) intermediatory goods. In case of finished goods, there can be factual position that the goods have been moved because of a pre-existing sale order and hence it may amount to inter-State sale. However, in respect of intermediatory goods like parts and components, the situation may be different. Some aspects about transfer of components and parts can be examined as under:

Reference can be made to judgment of the Andhra Pradesh High Court in the case of Bharat Electronics Ltd. v. Deputy Commissioner (CT), No. II Division, Vijayawada & Another, (46 VST 179) (AP). The facts in this case are that the unit of the above appellant dealer at Machilipatnam in Andhra Pradesh dispatched certain materials to its branch in another State. The goods dispatched were manufactured goods at Machilipatnam, like night-vision devices, etc. The said goods were to be incorporated in the equipment manufactured at the branch in another State (where the goods were dispatched) and the finished goods were supplied by that branch to the customer. On the sale of finished goods, tax was discharged in the said State of sale. However, the Andhra Pradesh authorities disallowed branch transfer claim on the ground that such transfer was connected with pre-existing sale order and hence it G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT was inter-State sale. The issue was contested before the Andhra Pradesh High Court.

The High Court examined the nature of inter-State sale and its requirements. The High Court referred to observations in the case of K.C.P. Ltd. (Ramakrishna Cements) 1993 (88 STC 374) (AP) and reproduced following portion:

“that the company may have several units or divisions located at different places engaged either in the same line of manufacture or trading or in different manufacturing or trading activities. Normally, the units or divisions will have no separate identity of their own, much less a distinct legal entity. There may be separate establishments, separate planning and separate management, but these aspects by themselves do not detract from the basic characteristic of communion with the corporate body that had created these units or divisions. They can claim no independent existence apart from the company itself. The property of these units or divisions is legally held by the company. The profits generated by the units formed part of the company’s income and would go to the benefit of the general body of shareholders of the company. So also, the liabilities or losses incurred by the individual units, in the ultimate analysis, would have to be borne by the company. It was the company that could sue for the recovery of property or dues or be used for the outstandings due on account of dealing of the units. A single balance sheet was prepared by the company in respect of all the units and divisions owned and controlled by the company . . . .”

The Andhra Pradesh High Court also referred to law laid down by the Supreme Court in the case of Bharat Heavy Electricals Ltd. (102 STC 345) (SC) and reproduced the following observations:

“The Tribunal missed to note that the plant and equipment which is the subject-matter of contract such as boiler package or turbo-generator package is incapable of being manufactured and despatched as a finished unit. Necessarily, the equipment/components or assembled units have to be despatched to the customer’s site and installed there. The contract does not contemplate the dispatch of a readymade finished product to the customer’s place for instantaneous use in the power-plants, etc. On the other hand, it is clear from the terms of the contract, especially the price payment clause, that the components and parts forming part of the larger package should be supplied from time to time by BHEL. It is not at all possible to transfer the finished product such as ‘boiler package’ at a time. It may be noticed that the Tribunal itself has given a different reasoning for excluding the inter-unit transfers from the taxable net at paragraph 29, sub para 3. The Tribunal rightly puts it on the ground that the article transferred from the petitioner unit to the executing unit (Trichy, etc.) loses its identity as it is incorporated into a larger component or equipment. There is yet another closely allied reasoning to say that the goods sent to Trichy or other executing unit does not stand on the same footing as those sent direct to the customer’s site. In the case of the former, there is interruption of movement and the snapping of inextricable bond that should exist between the inter-State movement and the contract of sale. In regard to the goods sent to Trichy unit (or other executing units), the dispatch therefrom to inter-State customer takes place after assembling or processing and it is the sole concern of that unit. Trichy unit can even retain the goods for itself and divert them for any other use. There is nothing to indicate that the goods sent by Hyderabad unit to Trichy or other units are earmarked for any particular contract. The Hyderabad unit had no inkling of their ultimate utilisation and whether, how and when the goods will be moved to the customer’s place by Trichy unit. As far as Hyderabad unit is concerned, it is a case of pure and simple stock transfer to another unit under ‘F’ forms. At best, the inter-State movement, or to put it in other words, the inter-unit movement to Trichy can only be said to be for the purpose of fulfilling the contract, but not in the course of fulfilment of the contract of sale, a distinction recognised in the Tata Engineering & Locomotive Co.’s case (1971) 27 STC 127 (SC); AIR 1971 SC 477; (1971) 2 SCR 849. The movement to Trichy in our opinion is not a necessary consequence of the contract, nor is it incidental to the contract that goods of this nature should first be moved to Trichy. As already observed, there is no inextricable and uninterrupted bond between the contract and the movement of goods to Trichy or other sister units of the petitioner.”

After noting the above legal position, the High Court observed as under about the facts of the particular case before it:

“It is only if the goods, which move from one State to another, are sold as they are and are not incorporated in, or do not form part of, other goods would the question of such transfer of goods attracting levy of tax under the CST Act, as an inter-State sale, arise. It is not in dispute that the goods supplied by the Machilipatnam unit, to other units of BEL located outside the State, are merely components of, and are incorporated in, the goods manufactured by other units of the petitioner company locate outside the State of A.P., and the goods transferred by the Machilipatnam unit are not sold to the Armed Forces as they are. The transfer of goods by the Machilipatnam unit, to other units of the petitioner-company located outside the State, fall within the ambit of section 6A(1) of the CST Act, and are not inter-State sales exigible to tax u/s.6 of the Act. The order of the first respondent, holding that the transfer of such components by the Machilipatnam unit to other units of the petitioner-company situated outside the State constitutes inter-State sales under the CST Act, must therefore be quashed.”

Thus, the legal position emerges is that if the goods transferred are supplied as it is to the customer and link between transfer and such sale is established, then it may amount to inter -State sale from the moving State. However, if the transfer is of components and parts, then even if they are in relation to pre-existing order of finished goods in which such parts and components are to be incorporated, there is no possibility of inter-State sale of such parts and components from the moving State. This also clarifies the position that the movement should be linked with the ultimate goods to be supplied to the customer and not with the intermediatory goods which may be incorporated in the ultimate goods to be supplied. This judgment will certainly be a guiding judgment on the above-referred issue.

Circular on issuance of TDS Certificates in Form No. 16A downloaded from TIN Website.

fiogf49gjkf0d

Circular No. 1 of 2012 [F.No. 276/34/2011-IT(B)], dated 9th April, 2012 — Copy available for download on www.bcasonline.org

levitra

Notification No. 14/2012 (F.No. 142/31/2011- TPL)/S.O. 626 (E), dated March 28, 2012 — Income-tax (third amendment) Rules, 2012 — Amendment in Rule 12 and substitution of Forms ITR 1, ITR 2, ITR 3 ITR 4S, ITR 4 and ITR V.

fiogf49gjkf0d
The gist of the amendment is as under:

(1) An individual or HUF must file the return of income electronically for the A.Y. 2012-13 and in subsequent years if his/its total income exceeds Rs.10 lakh.

(2) A resident individual or a resident HUF must file the return of income electronically for the A.Y. 2012-13 and subsequent years, if he/it has: (a) assets (including financial interest in any entity) located outside India; or (b) signing authority in any account located outside India.

(3) The prescribed ITR Form SAHAJ — ITR 1 and SUGAM — ITR 4S cannot be used by a resident

levitra

Section 40(a)(ia) — Disallowance of expenditure for failure to pay TDS within the time stipulated u/s.200(1) — Payment/expenditure was incurred throughout the year — Whether payment of TDS made after the end of the accounting year but before the due date for filing of return was allowable as deduction — Held, Yes.

fiogf49gjkf0d
Piyush C. Mehta v. ACIT
ITAT ‘C’ Bench, Mumbai Before N. V. Vasudevan (JM) &
N. K. Billaiya (AM)
ITA No. 1321/Mum./2009
A.Y.: 2005-06. Decided on: 11-4-2012
Counsel for assessee/revenue:
Prakash K. Jotwani/Pitambar Das

Section 40(a)(ia) — Disallowance of expenditure for failure to pay TDS within the time stipulated u/s.200(1)

— Payment/expenditure was incurred throughout the year — Whether payment of TDS made after the end of the accounting year but before the due date for filing of return was allowable as deduction — Held, Yes.


Facts:

The assessee is an individual engaged in the business of building repairs, and construction works contracts. In the course of assessment proceedings the AO noticed that the assessee had not paid the TDS deducted on the labour charges/ advances paid to various contractors within the time stipulated u/s.200(1). The assesses had made payments/advances to the contractors throughout the year, but had deposited the TDS only on 31-5-2005. According to the AO, the assessee was required to deduct TDS on the dates the payments were made. Since that was not done, he held that in terms of provisions of section 40(a)(ia) the payments of Rs.1.41 crore were not allowable. On appeal, the CIT(A) confirmed the order of the AO.

Held:

According to the Tribunal, the amendment to section 40(a)(ia) by the Finance Act, 2008 made two categories of defaults, causing disallowance on the basis of the period of the previous year in which tax was deductible. The first category of disallowances included the cases in which tax was deductible and was so deducted during the last month of the previous year, but there was failure to pay such tax on or before the due date specified in section 139(1). The second category included those cases where tax was deductible and was deducted during the first eleven months of the previous year, i.e., till February, 2005 in the case of the assessee. In such case, the disallowance was to be made if the assessee failed to pay it before 31st March, 2005.

Then came the amendment by the Finance Act, 2010. The said amendment dispensed with the earlier two categories of defaults brought about by the Finance Act, 2008. It has not made any change qua the first category described above. With reference to the second category, the Tribunal noted that the hitherto requirement of paying it before the close of the previous year has been eased to extend such time for payment of tax up to the due date u/s.139(1) of the Act. The effect of this amendment is that, now the assessee, deducting tax either in the last month of the previous year or first eleven months of the previous year, shall be entitled to deduction of the expenditure in the year of incurring it, if the tax so deducted at source, is paid on or before the due date u/s.139(1). As regards the applicability of the amendment by the Finance Act, 2010 to the case of the assessee, the Tribunal relied on the decision of the Calcutta High Court in the case of Virgin Corporation (ITA No. 302 of 2011 GA 3200/2011 decided on 23-11-2011), where it was held that the said amendment was retrospective from 1-4-2005 and accordingly, allowed the appeal of the assessee.

As regards the applicability of the decision of the Mumbai Special Bench in the case of Bharati Shipyard Ltd. v. DCIT, where it was held that the amendment by the Finance Act, 2010 was prospective and not retrospective from 1-4-2005, the Tribunal relying on the Delhi Tribunal decision in the case of Tej International (P) Ltd. v. Dy. CIT, (2000) 69 TTJ (Del) 650 read with the Bombay High Court decision in the case of CIT v. Godavaridevi Saraf, 113 ITR 589 (Bom.), held that as per the hierarchical judicial system in India, the wisdom of the Court below has to yield to the wisdom of the higher Court. The fact that the judgment of the higher judicial forum is from a non-jurisdictional High Court does not alter the position. Accordingly, the decision of the Calcutta High Court prevailed over the decision of the Mumbai Special Bench.

In view of the above, the Tribunal held that the Amendment to the provisions of section 40(a)(ia) of the Act, by the Finance Act, 2010 was retrospective from 1-4-2005. Consequently, any payment of tax deducted at source during the previous years relevant to and from A.Y. 2005-06 can be made to the Government on or before the due date for filing return of income u/s.139(1) of the Act.

levitra

Section 54EC — The limit of Rs.50 lakh referred to in the proviso to section 54EC is with reference to a financial year — If subscription for eligible investment was not available to the assessee during the period of six months, then investment made beyond a period of six months qualifies for deduction u/s.54EC.

fiogf49gjkf0d
Aspi Ginwala v. ACIT
ITAT ‘C’ Bench, Ahmedabad
Before D. K. Tyagi (JM) and
A. Mohan Alankamony (AM)
ITA No. 3226/Ahd./2011
A.Y.: 2008-09. Decided on: 30-3-2012
Counsel for assessee/revenue:
S. N. Soparkar/S. P. Talati

Section 54EC — The limit of Rs.50 lakh referred to in the proviso to section 54EC is with reference to a financial year — If subscription for eligible investment was not available to the assessee during the period of six months, then investment made beyond a period of six months qualifies for deduction u/s.54EC.


Facts:

The assessee sold a house property on 22-10-2007. The long-term capital gain arising on such sale was computed and returned at Rs.1,30,32,450 after claiming exemption of Rs.100 lakh u/s.54EC, on account of investment of Rs.50 lakh each made in REC bonds (invested on 31-12-2007) and bonds of NHAI (invested on 26-5-2008). During the period from 1-4-2008 to 26- 5-2008 no subscription for eligible investment was available to the assessee. The Assessing Officer (AO) held that the assessee is entitled to exemption of up to Rs.50 lakh u/s. 54EC of the Act. He, accordingly, allowed exemption in respect of amount invested in bonds of REC and did not allow exemption in respect of amount invested in bonds of NHAI. Aggrieved the assessee preferred an appeal to the CIT(A) who upheld the action of the AO. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that there is no dispute about the fact that the assessee could have invested the amounts in eligible investment within six months of the date of transfer i.e., on or before 21-4-2008 to avail of exemption u/s.54EC of the Act. Also, there is no dispute that during the period from 1-4-2008 to 26-5-2008 subscription to eligible investment was not available to the assessee and the assessee had subscribed on the 1st day of reopening of subscription. It also noted that the dispute which remained to be decided was whether as per the provisions of section 54EC, the assessee is entitled for exemption of Rs.1 crore as six months period for investment in eligible investment involves two financial years. If the answer to this question is yes, whether investment made by the assessee on 26-5-2008 beyond six months period is eligible for exemption in view of the fact that no subscription for eligible investment was available to the assessee from 1-4-2008 to 26-5-2008. It is clear from the proviso to section 54EC that where the assessee transfers his capital asset after 30th September of the financial year, he gets an opportunity to make an investment of Rs.50 lakh each in two different financial years and is able to claim exemption up to Rs.1 crore u/s.54EC of the Act. The language of the proviso being clear and unambiguous, the benefit available to the assessee cannot be denied, the assessee is entitled to get exemption up to Rs.1 crore in this case. Various judicial authorities have taken a view that delay in making an investment due to non-availability of bonds is a reasonable cause and exemption should be granted in such cases. Relying on the observations of the Mumbai Bench of the ITAT in the case of Ram Agarwal v. JCIT, (81 ITD 163) (Mum.) the Tribunal held that the investment s made by the assessee on 26-5- 2008 beyond six months is eligible for exemption in view of the fact that no investment was available from 1-4-2008 to 26-5-2008. The Tribunal allowed the appeal filed by the assessee.

levitra

Section 40(a)(ia) — Per majority — Section 40(a)(ia) can apply only to expenditure which is outstanding as on 31st March and does not apply to expenditure which is paid during the previous year.

fiogf49gjkf0d
Merilyn Shipping & Transports v. ACIT ITAT Special Bench, Visakhapatnam
Before D. Manmohan (VP),
S. V. Mehrotra (AM) and Mahvir Singh (JM) ITA No. 477/Viz./2008

A.Y.: 2005-06. Decided on: 29-3-2012 Counsel for assessee/revenue: Subramanyam/T. L. Peter and D. Komali

Section 40(a)(ia) — Per majority — Section 40(a)(ia) can apply only to expenditure which is outstanding as on 31st March and does not apply to expenditure which is paid during the previous year.


Facts:

The assessee-firm incurred brokerage expenses of Rs.38,75,000 and commission of Rs.2,43,253without deducting TDS. Of the aggregate amount of Rs.41,18,253 incurred during the previous year, the amounts outstanding as on 31st March were Rs.1,78,025. In the course of assessment proceedings the assessee’s representative agreed for disallowance. The AO disallowed Rs.41,18,253 u/s.40(a)(ia).

Aggrieved, the assessee preferred an appeal before the CIT(A) and contended that on a careful reading of the provisions of section 40(a)(ia) and also on going through the expert opinion, the disallowance u/s.40(a)(ia) should be Rs.1,78,025, being the amount of brokerage and commission outstanding as on 31st March on which tax was not deducted at source, and not the entire sum of Rs.41,18,253. The CIT(A) rejected the contention made on behalf of the assessee and upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal. Since the Division Bench did not agree with the decision rendered by the Hyderabad Bench of the ITAT in the case of Teja Constructions, (ITA No. 308/Hyd./2009 relating to A.Y. 2005-06, order dated 23-10-2009), on which reliance was placed by the counsel of the assessee, it referred the matter to the President to constitute a Special Bench (SB). The President constituted the SB to decide the following question:

“Whether section 40(a)(ia) of the Income-tax Act can be invoked only to disallow expenditure of the nature referred to therein, which is shown as ‘payable’ as on the date of the balance sheet or it can be invoked also to disallow such expenditure which became payable at any-time during the relevant previous year and was actually paid within the previous year?”

Held:

The majority view (VP and JM) of the SB was as under:

By replacing the words ‘amounts credited or paid’, as proposed by the Finance Bill, 2004 with the ‘payable’, at the time of enactment (by the Finance Act, 2004), the Legislature has clarified its intent that only outstanding amounts or the provisions for expenses liable for TDS under Chapter XVII-B of the Act is sought to be disallowed in the event there is a default in following the obligations casted upon the assessee under Chapter XVII-B. Section 40(a)(ia) creates a legal fiction by virtue of which even genuine and admissible expenditure can be disallowed due to non-deduction of tax at source. A legal fiction has to be limited to the area for which it is created. The word ‘payable’ must be understood in its natural, ordinary or popular sense and construed according to its grammatical meaning. Such a construction would not lead to absurdity because there is nothing in this context or in the object of the statute to suggest to the contrary. The word ‘payable’ is to be assigned strict interpretation, in view of the object of the legislation which is intended from the replacement of the words in the proposed and enacted provision.

The majority view of the SB was that section 40(a) (ia) is applicable only to the amounts of expenditure which are payable as on 31st March of every year and it cannot be invoked to disallow the amounts which have been actually paid during the previous year, without deduction of tax at source.

The AM held that the object of section 40(a)(ia) is to ensure that the TDS provisions are scrupulously implemented without any default. The term ‘payable’ cannot be assigned a narrow interpretation. Section 40(ia) is to be interpreted harmoniously with the TDS provisions. Accordingly, section 40(a)(ia) applies to all expenditure which is actually paid and also which is payable as at the end of the year.

The SB, by a majority view, decided the question referred to it in favour of the assessee.

levitra

Carry forward and set-off in case of Nil Return v. Reassessment at Loss — Unabsorbed depreciation entitled to be carried forward and set off even if return showing nil income was filed — Also, loss determined in Appellate proceedings and not claimed by assessee eligible to be carried forward.

fiogf49gjkf0d
(2012) 67 DTr (Ahd.) (Trib.) 470
ACIT v. Mehsana District Co-operative Milk
Producers Union Ltd.
A.Y.: 1999-2000. Dated: 30-6-2011

Carry forward and set-off in case of Nil Return v. Reassessment at Loss — Unabsorbed depreciation entitled to be carried forward and set off even if return showing nil income was filed — Also, loss determined in Appellate proceedings and not claimed by assessee eligible to be carried forward.

Facts:

The assessee, a co-operative society had filed nil return of income u/s.139(1). The assessment was completed u/s.143(3) r.w.s. 147 at total income of Rs.48.19 crore. The assessee went into appeal and after Appellate proceedings, the income of the assessee was determined at loss of Rs.5.41 crore. The assessee vide application u/s.154 requested the AO to permit carry forward of such loss to subsequent year. The AO vide his order u/s.154 held that loss can be carry forward only if the same is determined in pursuance to return filed u/s.139(3). In this case as per return of income, the income declared was nil and the loss was determined only on giving appeal effect which was could not be carry forward as per the AO.

On further appeal, the CIT(A) upheld the stand of the AO. He further stated that in this case, the assessment was reopened by issue of notice u/s.148. Placing reliance on the decision of the Apex Court in the case of CIT v. Sun Engineering Works (P) Ltd., (198 ITR 297), the CIT(A) held that section 147 was for the benefit of the Revenue and the assessee cannot be allowed relief not claimed by him in the original assessment. However, out of the total loss of Rs.5.41 crore, sum of Rs.5.10 crore pertained to unabsorbed depreciation. The CIT(A) permitted carry forward of such unabsorbed depreciation referring to Explanation 5 to section 32 wherein benefit is allowed even if deduction not claimed by the assessee. Both the Revenue as well as the assessee went into appeal.

Held:

As per section 32(2), for carry forward of unabsorbed depreciation, the only condition is that full effect cannot be given to depreciation allowable u/s.32(1) on account of there being insufficient profit. Carry forward of unabsorbed depreciation as per section 32(2) is automatic. No other condition is required to be fulfilled by the assessee for carry forward of unabsorbed depreciation. Hence, assessee is eligible to carry forward unabsorbed depreciation even if not claimed in return of income. Regarding balance business loss, as per section 72, the assessee is not required to fulfil any conditions so as to be eligible for carry forward of loss. The only requirement is that the result of computation under the head ‘Income from Business or Profession’ should be loss. However, for denying the benefit of carry forward of loss, the Revenue has relied upon section 139(3). The Tribunal held that section 139(3) would have application only where the assessee files the return disclosing the loss. If the assessee files the return disclosing the loss, then he is required to file return as per section 139(1). In the given case, firstly, the assessee has not disclosed any loss in the return of income, so 139(3) should not be applicable. Even if applied, only condition u/s.139(3) is for filing return before due date as stated u/s.139(1) which has been filed by the assessee. So, benefit of carry forward of loss is to be allowed.

The judgment of the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd., (supra) was distinguished since that case could have relevance during the assessment/Appellate proceedings. In the given case the assessment as well as Appellate proceedings are already completed. The AO has himself given effect to Appellate orders and determined the loss. Hence, once the orders of Appellate authorities have become final and the effect has been given and loss is determined thereby, the same has to be carried forward as per provisions of the Income-tax Act.

Hence, even though nil return of income was filed by the assessee u/s.139(1), he is entitled to carry forward entire loss as determined under Appellate proceedings.

levitra

Section 80G — Approval for the purpose of section 80G cannot be denied simply because the trust is not registered as charitable trust.

fiogf49gjkf0d
(2011) 131 ITD 117 (Hyd.)
Kamalakar Memorial Trust v. DIT (Exemptions)
Dated: 5-3-2010

Section 80G — Approval for the purpose of section 80G cannot be denied simply because the trust is not registered as charitable trust.


Facts:

The assessee was engaged in running of old-age home as a charitable trust and was claiming a deduction u/s.80G. On filing of application for renewal of exemption certificate, the Director of Income-tax (DIT) rejected the application stating that running an old-age home constitutes as business activity. Further the DIT observed that the assessee is not registered as a charitable trust under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowment Act, 1987. He thus held that the trust is not eligible for renewal of exemption certificate.

Held:

Running an organisation purely with the intentions of no profit cannot be termed as trade activity. The nature of activity depends not only on the economies of scale of organisation but also on the motives of organisation. In the given case, the assessee had applied for renewal of exemption certificate required for the purposes of section 80G which as per the Director of Income-tax is against the laws. The assessee contended that the fees charged by them for inmates are nominal fees for the services rendered for the inmates and further stated that these fees only fulfilled a partial amount of expenses which the organisation actually incurred for the inmates. Five members out of seventeen were admitted for free. Thus, there is no profit motive of the assessee, as there was no benefit from the fees charged from the inmates. Also it mentioned that for the year ended 31-3-2007 there was excess of expenditure over income of Rs.60,923 which shows that there is no intention of making profits. The assessee further relied on the decision given by the Nagpur Bench, in the case of Agricultural Produce & Market Committee v. CIT, (2006) 100 ITD 1.

Thus, in the light of the justifications presented by the assessee, it is clear that though it is not registered as a charitable trust, one cannot ignore its intentions and objectives of the organisation. Thus the DIT was directed to accept the application for renewal of approval u/s.80G within three months from the date of receipt of this order.

levitra

Section 153A read with section 143 — Non-service of notice u/s.143(2) when a return is filed u/s.153(A), AO cannot make addition and is bound to accept income returned.

fiogf49gjkf0d
(2011) 130 ITD 509 (Agra) Narendra Singh v. ITO-2(3), Gwalior A.Y.: 2001-02. Dated: 30-11-2010

Section 153A read with section 143 — Non-service of notice u/s.143(2) when a return is filed u/s.153(A), AO cannot make addition and is bound to accept income returned.


Facts:

The assessee filed return of income u/s.153A. The Assessing Officer completed the assessment wherein he made certain addition to the assessee’s income. On appeal, the assessee raised an objection that the assessment framed without issuing notice u/s.143(2) was void ab initio. The CIT(A) rejected the assessee’s objection. Aggrieved the assessee made an appeal to the ITAT.

Held:

Section 153(A) states that all other provisions of the act shall apply to the return filed in response to notice issued under this section as if such return is a return required to be furnished u/s.139. It does not provide for any methodology for making assessment. It only states that the AO shall assess or reassess the total income in respect of each assessment year falling within such six assessments. The section creates a legal fiction that all the provisions of the Act so far as they are applicable to return filed u/s.139 shall apply to the return filed u/s.153A. The provisions of both the sections 139 and 153A are under Chapter XIV. The word ‘shall’ makes it mandatory that all the provisions of this Act as are applicable to section 139 will apply to the return filed in response to notice issued u/s.153A.

According to section 143, the AO is permitted to process the return based on the return filed by the assessee. AO shall have no power to make an assessment unless he has issued the notice within the prescribed time.

Thus it was held that in the absence of service of such notice the AO cannot make addition in the income of the assessee and AO is bound to accept the income as returned by the assessee.

levitra

Section 271(1)(c), read with section 10(13A) of the Income-tax Act, 1961 — Mere making of a claim, which is not mala fide but which is not sustainable in law by itself does not amount to furnishing of inaccurate particulars regarding income of assessee so as to attract levy of penalty u/s. 271(1)(c).

fiogf49gjkf0d
(2011) 130 ITD 378/9 taxmann.com (Delhi) N. G. Roa v. Dy. CIT, Circle 47(1), New Delhi A.Y.: 2004-05. Dated: 7-4-2010

Section 271(1)(c), read with section 10(13A) of the Income-tax Act, 1961 — Mere making of a claim, which is not mala fide but which is not sustainable in law by itself does not amount to furnishing of inaccurate particulars regarding income of assessee so as to attract levy of penalty u/s. 271(1)(c).


Facts:

The assessee had claimed exemption u/s.10(13A) for two residential accommodations taken on rent. The assessee, in view of CIT v. Justice S. C. Mittal T.C. 32R 593 (Punj. & Har.), was under a belief that he was entitled to exemption with regard to both the residential accommodations held by him. Whereas, the Assessing Officer disallowed the exemption claimed with respect to one property, holding that exemption u/s.10(13A) could be allowed only qua one residential accommodation. Further, the Assessing Officer levied penalty u/s.271(1)(c). On appeal, the Commissioner (Appeals) also confirmed the levy of penalty. Aggrieved, the assessee went for second appeal.

Held:

(1) The factum of the assessee taking two residential accommodations on rent was not disputed. The only issue was whether by claiming exemption with regard thereto, the assessee had rendered himself liable to levy of penalty for furnishing inaccurate particulars of income.

(2) The meaning of word ‘particulars of income’ has been clearly laid down by the Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. As held in this case, there has to be a concealment of the particulars of the income of the assessee; the assessee must have furnished inaccurate particulars of his income; the meaning of the word ‘particulars’ used in the section would embrace the details of the claim made and to attract penalty, the details supplied by the assessee should in his return must not be accurate, not exact or correct, not according to the truth or erroneous. Also it was held that mere making of a claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars regarding the income of the assessee and there is no question of inviting penalty u/s.271(1)(c) for the same.

(3) The instant case of the assessee is squarely covered under the above decision. In the instant case, the assessee had accurately and truthfully disclosed all particulars of the residential accommodations rented and payments made. It was only, as such, a case of difference of opinion where the claim made by the assessee [exemption u/s.10(13A)] relying on earlier relevant decision was viewed differently by the Department. Thus, no concealment penalty was, in such situation, attracted. Thus the appeal of the assessee was to be allowed and penalty levied was to be cancelled.

levitra

Section 140A r.w.s. 244A — Whether an assessee is entitled to interest on excess payment of selfassessment tax from date of payment upto the date the refund is actually granted — Held, Yes.

fiogf49gjkf0d
2011) 130 ITD 305
11 ADIT v. Royal Bank of Scotland N.V.
A.Y.: 2007-08. Dated: 3-11-2010

Section 140A r.w.s. 244A — Whether an assessee is entitled to interest on excess payment of self-assessment tax from date of payment upto the date the refund is actually granted — Held, Yes.


Facts:

The assessee was into the business of banking. The return of income filed by the assessee, in the relevant assessment year was processed u/s.143(1) to determine the final income tax liability of Rs.272.93 crore. Against this, the credit of Rs.346.36 crore was allowed which was aggregate of T.D.S, advance tax and self-assessment tax. Accordingly the refund was issued, but as it didn’t include any interest element u/s.140A, the assessee filed an application u/s.154. On appeal the CIT(A) allowed the assessee’s claim.

Held:

The CIT(A) relying on the decision of the Madras High Court in the case of Ashok Leyland Ltd. (2002) (254 ITR 641/125) and Cholamandalam Investment & Finance Co. Ltd. (2008) 166 Taxmann 132, held that computation of interest on excess payment of selfassessment tax has to be paid in terms of section 244A(1)(b) i.e., from the date of payment of such amount up to the date on which refund is actually granted.

levitra

Section 40(a)(ia) of the Income-tax Act, 1961 — Provisions of section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax at source.

fiogf49gjkf0d
(2012) 49 SOT 448 (Mumbai)
Dy. CIT v. Chandabhoy & Jassobhoy
A.Y.: 2006-07. Dated: 8-7-2011

Section 40(a)(ia) of the Income-tax Act, 1961 — Provisions of section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax at source.

Accountants, had employed 18 consultants with whom it entered into agreements for a period of two years renewable further at the option of either parties. These consultants were prohibited from taking any private assignments and worked full time with the assessee. During the year, the assessee had paid an amount of Rs.26.75 lac to the said consultants by way of salary after deduction of tax at source u/s.192 and claimed deduction of the same. The Assessing Officer after analysing the agreements entered by the assessee-firm with the said consultants came to a conclusion that there was no employer-employee relationship and that the payment made to the consultants was in the nature of fees for professional services. He, therefore, held that the assessee should have deducted tax at source u/s.194J and, invoking the provisions of section 40(a)(ia), he disallowed the entire payment made to the consultants. The CIT(A) deleted the disallowance made by the Assessing Officer.

The Tribunal confirmed the CIT(A)’s order. The Tribunal noted as under:

(1) There is no dispute with reference to the deduction of tax u/s.192 and also the fact that in the individual assessments of the consultants these payments were accepted as salary payments.

(2) It is also not the case that the assessee has not deducted any tax.

(3) The assessee had indeed deducted tax u/s.192 and so the provisions of section 40(a)(ia) also do not apply since the said provisions can be invoked only in the event of non-deduction of tax at source, but not for lesser deduction of tax.

levitra

Section 12AA of the Income-tax Act, 1961 — When assessee had not carried out any activity other than running school or hostel and all properties owned by it were held in trust for purpose of carrying on charitable activities, there was nothing unlawful in assessee acquiring assets and buildings and registration u/s.12AA could not be denied to it.

fiogf49gjkf0d
(2012) 49 SOT 242 (Chennai)
Anjuman-e-Khyrkhah-e-Aam v. DIT (e)
Dated: 18-7-2011
The assessee-trust was running a school with hostel facilities. Its application for grant of registration u/s.12AA was rejected on the ground that the activities carried on by it were not charitable in nature. The Tribunal allowed the appeal of the assessee and directed the authority to grant registration u/s.12AA. This order was challenged before the High Court which remitted the matter back to the DIT(E) for fresh disposal. The DIT(E) considered the issue again and finally reached at a conclusion that the assessee was not eligible for getting registration u/s.12AA on the ground that the main activity of the assessee was to accumulate huge investments in purchase of assets and earn rental income from those assets without engaging itself in any charitable activities.

The Tribunal held in favour of the assessee. The Tribunal noted as under:

(1) It was true that the assessee-trust had been established since more than 100 years and it was running the school with hostel facilities attached to it.

(2) Amounts collected by the assessee-trust had been used for the purpose of running the school and hostel and also in constructing buildings. A major portion of the outgoings of the assessee-trust had been towards construction of buildings.

(3) If the object of the assessee-trust was to run educational institution and the assessee had been carrying on that activity alone, the construction of buildings and purchase of property could not be treated as a point against the assessee. The assessee might be purchasing properties and constructing buildings for the purpose of letting out to earn income necessary for carrying on the charitable activity in the nature of running the school and hostel.

(4) All the properties owned by the assessee-trust were held in trust for the purpose of carrying on charitable activities. There was nothing unlawful in the assessee acquiring assets and buildings.

(5) If the entire activities carried on by the assessee were charitable in nature, the expenses incurred for construction of buildings and purchase of assets also qualified to be considered as application of funds for charitable purposes.

levitra

filing appeal by Revenue: Instruction No. 3 of 2011, dated 9-2-2011 is retrospective: Department must show ‘cascading effect’.

fiogf49gjkf0d
[CIT v. Varsha Dilip Kohle (Bom.) (Aurangabad Bench); ITA No. 7 of 2010 dated 5-3-2012]

In this appeal filed by the Revenue in the year 2010 the tax amount in dispute was Rs.6,69,770. CBDT Instruction No. 3 of 2011, dated 9-2-2011 prescribed the limit of Rs.10,00,000 for filing an appeal before the High Court u/s.260A of the Income-tax Act, 1961. The High Court observed that since the tax effect does not exceed Rs.10 lakh, the appeal is required to be dismissed in view of the CBDT Instruction No. 3 of 2011, dated 9-2-2011.

The Department contended that (i) as the appeal has been filed prior to the issuance of the Circular, the Circular did not apply; and (ii) as the appeal had a ‘cascading effect’ involved a ‘common principle’, the appeal could not be dismissed in view of the Supreme Court’s verdict in Surya Herbals.

The Bombay High Court dismissed the appeal and held as under: “

(i) In CIT v. Smt. Vijaya V. Kavekar, (Tax Appeal No. 78 of 2007 with Tax Appeal No. 76 of 2007) decided on 29-7-2011, a Division Bench of this Court, while interpreting the very Circular No. 3 of 2011, has held that the Circular has a retrospective operation and instructions contained in the Circular would apply even to the pending cases.

(ii) As regards Surya Herbals case, the appeal does not involve any ‘cascading effect’ as the Department has not shown whether there are other appeals which raise the same point.”

levitra

CENVAT credit of the service tax paid — Input services such as rent-a-cab service, outdoor catering services provided by the manufacturer to its employees working in the factory — held that such services are in relation to manufacture of final product — Hence, eligible input service.

fiogf49gjkf0d
(2012) 25 STR 428 (Kar.) — CCE, Bangalore v. Bell Ceramics Ltd.

CENVAT credit of the service tax paid — Input services such as rent-a-cab service, outdoor catering services provided by the manufacturer to its employees working in the factory — held that such services are in relation to manufacture of final product — Hence, eligible input service.


Facts:

The appellant claimed Cenvat credit of service tax paid by the appellant under rent-a-cab service and outdoor catering service to transport its employees to the factory and back and to provide food for them. The appellant was of the view that these services fall under input services which were entitled to credit.

Held:

Any service used by the manufacturer whether directly or indirectly in relation to the manufacture of the final product shall be considered to be eligible input service. Hence, CENVAT credit of the same can be availed.

levitra

Nirupama K. Shah v. ITO ITAT ‘B’ Bench, Mumbai Before D. Manmohan (VP) and Rajendra Singh (AM) ITA No. 348/Mum./2010 A.Y.: 2006-07. Decided on: 18-11-2011 Counsel for assessee/revenue: Dr. K. Shivaram/O. A. Mao

fiogf49gjkf0d
Section 54F — Amounts paid for completion of flat purchased in semi-finished condition, pursuant to a tripartite agreement entered into by the assessee with the contractors and the builder form part of cost of new house even though such agreement was entered prior to agreement for purchase of house.

Facts:
The assessee who was 50% co-owner of a flat at Walkeshwar sold the same for a sum of Rs.2.30 crores as per transfer deed dated 15-1-2006. The assessee invested sale proceeds in purchase of a house property vide agreement dated 26-5-2006 for Rs.45.60 lacs. The assessee had before completion of the building incurred expenditure of Rs.43 lakhs as per three supplementary agreements dated 22-4-2006. The assessee, therefore, treated the cost of the new house at Rs.88.60 lakhs for the purpose of claiming deduction u/s.54F.

The assessee explained to the AO that the flat purchased was in a semi-finished condition without flooring, plumbing, wiring, etc. Therefore, for providing internal basic amenities as mentioned in the main agreement, the assessee entered into a supplementary agreements which were also signed by the builder. The AO observed that the supplementary agreements were entered prior to the main agreement. The main agreement did not have reference of the supplementary agreements. The main agreement clearly provided that the builder was providing the flat with all basic amenities required for making the premises habitable. He did not allow the exemption with reference to this sum of Rs.43 lakhs and held the expenditure of Rs.43 lakhs incurred by the assessee to be cost of improvement of the flat, which could not be considered for deduction u/s.54F.

Aggrieved the assessee preferred an appeal to the CIT(A) where he submitted that since the assessee was in urgent need of the flat and the flat being purchased was in skeletal condition, the seller suggested that the assessee engage other contractors for finishing the work. It was because of this reason that the supplementary agreement was entered into before the main agreement. The assessee substantiated his contentions by referring to letter dated 29-3-2006 written by the builder. The CIT(A) confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the assessee took possession of the flat on 15-5-2006 and thereafter the registered deed was executed on 26-5-2006. The Tribunal held that the claim of the assessee cannot be rejected only on the ground that the agreement had been entered into prior to taking over possession of the flat. The claim of the assessee to engage other contractors to expedite work as suggested by the builder cannot be held unjustified on the facts of the case. It held that all expenditure incurred for acquisition of the new flat prior to taking over possession has to be considered as part of the cost. However, in order to verify that the assessee has not claimed any bogus expenditure to inflate the cost so as to claim higher deduction or show double expenditure in respect of the same type of work, the Tribunal set aside the order passed by the CIT(A) and restored the matter to the file of the AO for passing a fresh order after necessary examination.

The Tribunal allowed the appeal filed by the assessee.

Note: It appears that the reference to section 54F should be a reference to section 54, since the assessee had sold a residential house.

levitra