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Year: 2012

Hindu Adoption Act

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Introduction

The Hindu Adoptions and
Maintenance Act, 1956 (‘the Act’) is not a commercial or corporate
legislation, but its importance in today’s business world is being felt
because of succession issues, family separations and family feuds
becoming the order of the day. With an increasing number of families
adopting children, the question often arises as to whether the adopted
child is entitled to succeed the father in the business, property, etc.
In several cases, questions, such as whether the adoption was valid,
what happens if the adopted father has subsequently a natural child,
etc., are raised. Hence, it becomes essential to examine this Act. This
is all the more true in a country such as India where a great number of
businesses are family owned or controlled.

 Although a great deal
of the Hindu Law is based on customs and usages, certain portions have
been codified. The Act is one such instance of codified law. It would
hence, overrule any text, custom, usage of Hindu Law.

Application

The Act applies to:

(i) Any person who is a Hindu, Jain, Sikh or Buddhist by religion.

(ii) Any person who is not a Muslim, Christian, Parsi or a Jew.

(iii) Any person who becomes a Hindu, Jain, Sikh or Buddhist by conversion or reconversion.

(iv)
A legitimate/Illegitimate child whose one or both parents is a Hindu,
Jain, Sikh or Buddhist by religion. However, in case only one parent is a
Hindu, Jain, Sikh or Buddhist by religion, then the child must be
brought up by such parent as a member of his community, family, etc.

(v)
Any child, legitimate or illegitimate, who has been abandoned both by
his father and mother or whose parentage is not known and who in either
case is brought up as Hindu, Buddhist, Jain or Sikh. This is a very
important clause which was added by the Amendment Act of 1945. The
reason for this Amendment was that only a Hindu can be adopted. As the
religion of an abandoned child or of a child whose parentage is not
known or cannot be ascertained, the explanation to section 2(1) of the
Act was amended to the effect that a child, legitimate or illegitimate
who has been abandoned by both of his parents or whose religion is not
known, but who in either case is brought up as a Hindu, will be a Hindu
by religion.

The Act does not apply to members of Scheduled
Tribes unless the Government so directs. Manner of making adoption Any
adoption by or to a Hindu must be made in accordance with the provisions
of the Act. It is interesting to note that in case the adoption is not
in accordance with the Act, then it shall be void. The consequences of a
void adoption are:

(a) it does not create any rights in the adoptive family in favour of the adopted child; and

(b) his rights in the family of his natural birth also subsist and continue.

Thus,
in a case of a void adoption, the adopted child would not be entitled
to any inheritance or succession benefits in his adopted family. The
pre-requisites of a valid adoption u/s.6 are as follows:

 (a) the adopter is capable of and has a right of adopting under the Act;

(b) the adoptee is capable of being taken in adoption under the Act;

(c) the person giving the adoptee is capable of doing so under the Act; and

 (d) all other conditions specified under the Act have been fulfilled.

Capacity of adopter

A male Hindu is capable of adopting a son or daughter:

(a) if he is of sound mind;

 (b) if he is a major, i.e., he is above 18 years of age;

(c)
if he has a wife, he shall not adopt except with the consent of his
wife, unless she has renounced the world or ceased to be a Hindu or has
been declared to be of unsound mind. If he has more than one wife, then
the consent of all wives is required.

The wife’s consent must be
obtained before the adoption and not after it. The proviso mandates the
consent as a condition precedent to adoption and hence subsequent
consent cannot validate the adoption.

In Kashibai W/O Lachiram
v. Parwatibai W/O Lachiram 1995 SCC (6) 213, has held that the wording
is mandatory and an adoption without wife’s consent would therefore be
void.

Now a Hindu can adopt a son or a daughter. Under the old
law, adoption of a daughter was invalid except where it was customarily
accepted among certain parts of India.

A female Hindu is capable of adopting a son or daughter:

 (a) if she is of sound mind;

(b) if she is a major, i.e., above 18 years of age;

 (c)
if she either is not married or her husband is dead or has been
declared of unsound mind or has renounced the world or has ceased to be a
Hindu or her marriage has been dissolved.

Thus, a Hindu married
woman whose husband does not suffer from any of the disabilities
specified above would not be able to adopt a child on her own even with
her husband’s consent. This is a unique position and a departure from
the earlier position under the uncodified Hindu Law. This principle has
also been laid down by the Bombay High Court in the case of Dasharath
Ramachandra Khairnar v Pandu Khairnar, (1977) 79 Bom LR 426. The Court
held that elaborate provisions are made in the Act setting out
circumstances under which a wife could have a capacity to adopt and the
consent of the husband to enable the wife to adopt is not one of the
enabling circumstances under the provisions.

Capacity of adoptee

A person may be adopted if:

(a) he is a Hindu;

(b) he has not been already adopted;

(c) he has not been already married, unless a custom or usage permits married people to be adopted; and

(d)
he must be below 15 years of age, unless a custom or usage permits
persons above 15 years to be adopted. The above conditions equally apply
to females. One of the most relevant conditions to be borne in mind is
that the adoptee must be below 15 years of age.

Capacity of person giving in adoption

The person giving the child in adoption can do so if he fulfils the following conditions:

(a) Only the natural father or mother or the guardian of a child can give him in adoption.

(b) The natural guardian can give consent for adoption to any person including himself, under the following situations:

(i) the natural father and mother are dead, have renounced the world, abandoned the child, been declared of unsound mind, etc.;

(ii) the City Civil Court has granted permission for the same

(iii) before granting permission the Court will have to be satisfied about the welfare of the child and other factors.

Conditions for a valid adoption

The additional conditions for a valid adoption are as follows:

(i)
If the adoption is of a son/daughter, the adoptive father or mother by
whom the adoption is made must not have a Hindu son/daughter,
grandson/granddaughter or great grandson/ granddaughter (whether by
legitimate blood relationship or by adoption) living at the time of
adoption; (where there is a child, adoption cannot be done even with the
consent of the child.)

(ii) If the adoption is by a male and
the person to be adopted is a female, the adoptive father is at least 21
years older than the person adopted;

(iii) If the adoption is
by a female and the person to be adopted is a male, the adoptive mother
is at least 21 years older than the person to be adopted;

(iv) The same child may not be adopted simultaneously by two or more persons;

(v)    The child to be adopted must be actually given and taken in adoption by the parents or guardians concerned or under their authority with intent to transfer the child from the family of its birth or in the case of an abandoned child or a child whose parentage is not known, from the place or family where it has been brought up, to the family of its adoption.

Effect of adoption

From the date of adoption the child will be considered to be the natural child of the adoptive family and all the ties with the original family are severed. The three exceptions to this Rule are:

(i)    The child cannot marry any person whom he could not have married had he continued in the original family of his birth;

(ii)    The adopted child is not deprived of the estate vested in him or her prior to his/her adoption when he/she lived in his/her natural family, subject to any obligations arising from such vesting of the estate; and

(iii)    The adopted child shall not divest any persons in the adoptive family of any estate vested in that person prior to the date of adoption. For instance, a Hindu widow absolutely inherits property on her husband’s death. Thereafter, she adopts a son. He cannot challenge the alienation made by the widow on the grounds that now he has an interest in such property since the property had already vested in the widow and the adoption does not relate back — Joti v. Mankubai, AIR 1988 Bom. 348/ Banabai v. Wasudeo, (1980) 82 Bom. LR 388.

(iv)    A valid adoption by a Hindu female operates as a valid adoption even by her husband. The principle has been laid down in Sawan Ram v Kala Wanti, 1967 AIR 1761 (SC). The Supreme Court held that “it is well-recognized that, after a female is married, she belongs to the family of her husband. The child adopted by her must also, therefore, belong to the same family. On adoption by a widow, therefore, the adopted son is to be deemed to be a member of the family of the deceased husband of the widow. ………… thus, itself makes it clear that, on adoption by a Hindu female who has ‘been married, the adopted son will, in effect, be the adopted son of her husband also.”

A valid adoption once made cannot be cancelled by the adoptive father or mother or any other person. Further, the adopted child also cannot renounce his adopted parents and return back to his natural family. If the adoption process has been properly followed, the consequences of the same cannot be undone and then the motive of the adoption has no relevance — Devgonda Patil v. Shamgonda Patil, AIR 1992 Bom. 189.

In the case of Chandan Bilasini v. Aftabuddin Khan, (1996) 7 SCC 13, the legal effects of an adoption have been well summarised:

“Section 12 of the Hindu Adoptions and Maintenance Act clearly provides that an adopted child shall be deemed to be the child of his adoptive father or mother for all purposes with effect from the date of the adoption and from such date all ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family. As a consequence, when a widow adopts a child, the child not merely acquires an adoptive mother but also acquires other relationships in the adoptive family, unless there is anything to the contrary in the Hindu Adoptions and Maintenance Act.

This position is reinforced by section 14(4) which sets out that where a widow or an unmarried woman adopts a child, any husband whom she marries subsequently shall be deemed to be the step-father of the adopted child. In other words, the family relationship gets crystalised as at the date of adoption. The child will be deemed to be the child of the parent who adopts the child and the existing or deceased spouse of that parent (as the case may be), if any, will be considered the child’s father or mother. A spouse subsequently acquired by the adoptive parent becomes the step-parent of the adopted child. The adopted child, however, cannot divest any person of any property already vested in that person [section 12(c)].”

The Supreme Court in Smt. Sitabai v. Ramchandra, AIR 1970 SC 343, referred to the scheme of the Hindu Adoptions and Maintenance Act and held:

“………. the child adopted is tied with the relationship of sonship with the deceased husband of the widow. The other collateral relations of the husband would be connected with the child through that deceased husband of the widow. For instance, the husband’s brother would necessarily be the uncle of the adopted child. The daughter of the adoptive mother (and father) would necessarily be the sister of the adopted son, and in this way, the adopted son would become a member of the widow’s family, with the ties of relationship with the deceased husband of the widow as his adoptive father.”

The Act also empowers the adoptive parents to dispose of their property either by way of sale, gift, exchange, etc., or by way of a will. Thus, merely because they have made an adoption that by itself is no bar on them from disposing of their properties in any manner as they deem fit.

Adoption and other Acts

Under the Income-tax Act, 1961, the definition of a child expressly includes an adopted child. Hence, clubbing provisions applicable to a minor child would also apply to an adopted child. An interesting issue would arise u/s.56(2)(vii), viz. would a gift of money/ property received by an adopted child from his or her parents be exempt? Would an adopted child be a lineal descendant of an adoptive parent? The Andhra Pradesh High Court had an occasion to consider a similar issue in the context of the Estate Duty Act, 1953, in the case of Estate of Nuli Lakshminarayana, 116 ITR 739 (AP). The Court held that the expression ‘lineal descendant’ takes in an ‘adopted son’. It is submitted that the ratio of this decision should be extended to section 56(2)(vii) also.

Section 6 and Schedule IA to the Companies Act, 1956 define the term relatives. The Schedule states that the term ‘son’ includes a step-son. However, it is silent as to whether an adopted son is included. The Department of Company Affairs in a clarification given at a meeting with Chamber of Commerce has stated that on adoption a person cannot be regarded as a relative of the persons who are relatives in his natural family. A corollary to this should mean that an adopted son is a son for Schedule IA.

The Bombay Stamp Act, 1958 provides a concessional rate of stamp duty @ 2% in case of a gift to any lineal ascendant/descendant of the donor. Again the term ‘lineal ascendant/descendant’ has not been defined. It is submitted that reliance may be placed on the decision of the Andhra Pradesh High Court explained above for concessional duty in case of a gift to/by an adopted child.

The definition of the term ‘immediate relative’ in the SEBI (Issue of Capital & Disclosure Requirement) Regulations and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 state that the term includes the child of a person. However, it does not expressly state whether an adopted child is included. It is submitted that in the light of the above discussion, an adopted child should also be treated as an immediate relative of a person.

How can a CA help?

Normally, an Auditor/CA is not directly involved with succession issues. Nevertheless, he can provide a lot of value -added services to his clients if he is aware of the law in this respect. Disputes on inheritance impact the operations of a corporation even in case of listed companies, especially, where an adopted child is to become the successor to the business/properties. A CA can be of great assistance to his clients in cases of such family feuds and on succession planning.

(A) ITAT: Jurisdiction: Power and scope: Decision on a matter not arising in appeal: AO not disputing genuineness of transaction: Not questioned genuineness before CIT(A) or Tribunal: Tribunal treating transaction sham is erroneous. (B) Non-competition fee received by assessee prior to 1-4-2003 is capital receipt and not taxable.

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The relevant assessment year is A.Y. 1997-98. The assessee was one of the promoters and a director of Gaghra Sugar Ltd. which had a factory for manufacture of sugar. The assessee was also the director of Ganges Sugar Mills (P) Ltd. which had applied for and received licence to set up new sugar factory in the same region. In such circumstances Gaghra Sugar Ltd. negotiated with the assessee and entered into an agreement with the assessee preventing the assessee from competing with the sugar business of the company directly or indirectly for a period of five years for a consideration or Rs.25 lakh. In the assessment proceedings the assessee claimed the said amount received for ‘non-competition’ as capital receipt not liable for tax. The Assessing Officer however taxed the said amount under the head ‘Other Sources’. The CIT(A) accepted the assesses contention and allowed the appeal. In the appeal filed by the Revenue, the Tribunal held that the claim of the assessee of ‘non-competition’ fee was not genuine and allowed the appeal of the Assessing Officer.

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

“(i) The Assessing Officer having assessed the noncompetition fee as revenue receipt without disputing the genuineness of the transaction and not questioned the genuineness even in the appeal either before the CIT(A) or before the Tribunal, order passed by the Tribunal treating the receipt of non-competition fees as a sham transaction is erroneous.

(ii) Non-competition fees received by the assessee prior to 1-4-2003 has to be treated as capital receipt and it is not taxable.”

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(2012) 25 STR 78 (Tri-Mum.) — Indoworth (India) Ltd. v. Commissioner of Central Excise, Nagpur.

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Appellant engaged in manufacture — Exported such goods to various countries — Filed refund under port services — Refund was rejected on ground that service provider registered under Business Auxiliary Services — Held, Once service tax is paid, the same cannot be disputed — Revenue cannot withdraw the refund — Refund allowed.

Facts:
The appellant engaged in manufacture of various types of textile worsted yarn and also exported the said products to various countries. By seeking benefit under Notification 41/2007-ST, the appellant claimed refund of the service tax paid by them on various specified services used in relation to export of goods. The refund claim so filed was rejected on the ground that when tax is collected considering the services as port service, refund cannot be granted considering it otherwise.

Held:
It was held that once the service tax paid on the eligible specified services and used the same for export, verification of registration certificate would not be required. Hence, the Revenue cannot withdraw the refund and appeal was allowed with consequential relief.

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(2011) 25 STR 68 (Tri.-Del.) — Em Pee Motors v. Commissioner of Central Excise, Chandigarh.

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Em Pee Motors provided BAS services — Promoted vehicle loans provided by ICICI — Commission received for the same — Out of commission received, appellant distributed incentives to customers opting for loan (subventions). Books of account reflected total of receipts against which payment is shown — This procedure followed due to inconvenience caused to banks as then they would have to issue TDS certificates to every customer — Credit of total amount claimed by appellant — However, service tax paid only on amount net of subventions — Held — Procedure followed to pay less tax — Service tax payable on gross amount.

Facts:
The appellant acted as an agent for ICICI bank and provided BAS services by promoting vehicle loan given by ICICI bank. Bank paid commission for the same. Out of the said commission, the appellant gave incentives to the customers for opting for the said loan scheme; this incentive is known as subvention. The appellant paid service tax on the amount net of subvention. The appellant argued that banks directly paid the incentive to the customers and the appellant never received the same. They contended that it was unjustified to pay service tax on the amount they never received. At the same time, banks did not issue TDS certificates to the customers opting for loans, rather issued it to the appellant. As a consequence of which the appellant could claim credit of the total amount from the Income-tax authority and paid service tax on the amount net of subvention.

Held:
Mere fact that the appellant chose to make payment out of the gross receipts cannot alter the gross amount received by them. It was held that service tax has to be paid on the gross amount received and reflected in the books. Hence, the order of the lower authorities was upheld.
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No. VAT 1512/C.R. 46/Taxation-1, dated 31-5-2012.

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This Notification rescinds with effect from the 1st April 2012, the earlier Notification, No. VAT 1507/CR- 44/Taxation-1, dated the 6th December 2007.

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(2012) 25 STR 46 (Tri.-Ahmd.) — Parekh Plast (India) Pvt. Ltd. v. Commissioner of Central Excise, Vapi.

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CENVAT credit of the service tax on invoices raised in the name of head office — Head office not registered as input service distributor — Defect in invoices — Procedural defect — Totally curable and condonable — Denial not justified — Also demand barred by limitation — Appellant cannot be impeached alleging misstatement or suppression of fact when no column for the fact to be disclosed in ER 1 itself.

Facts:
The assessee engaged in manufacture of excisable goods availed CENVAT credit of Rs.5,43,200. The Revenue contended that invoices issued by the service provider were in the name of head office. Such availment of credit was held unjustified as head office was not registered as input service distributor. The authority also alleged suppression for the fact that the information was not disclosed in ER 1 Form in order and justified invocation of longer period of limitation.

Held:
It was held that since the law itself does not require the assessees to disclose the above facts, failure to disclose the same cannot be equated with any suppression or misstatement. Invoices issued by the service provider in the name of head office are eligible documents for the purpose of claiming credit.

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Notifications w.r.t. Schedule D: No. VAT 1511/C.R. 142(1)/Taxation-1, dated 16-5-2012. No. VAT 1511/C.R. 142(2)/Taxation-1, dated 16-5-2012. No. VAT 1511/C.R. 142(3)/Taxation-1, dated 16-5-2012

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While by the first Notification changes are effected in entries in Schedule D effective from 1-6-2012, by the second Notification, areas and periods covered under Entry No. 5 of Schedule D and by the third Notification, areas and periods covered under Entry No. 10 of Schedule D are notified. All the notifications are effective from 1-6-2012.

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(2012) 25 STR 39 (Tri.-Del.) — Bhootpurva Sainik Society v. Commissioner of Central Excise, & Sales Tax, Allahabad.

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Appellant an association of ex-servicemen — Registered under Societies Registration Act, 1860 — Engaged in welfare of ex-servicemen — E.g., assisting them in finding employment, etc. — Entered into an agreement with Bharat Sanchar Nigam Ltd. — Whereby monthly amount was paid by them for services of security guards — Revenue demanded service tax on the security agency services provided by appellant prior to 18-4-2006 — Old definition in force with term ‘commercial concern’ — Reference of various judgments considered — Held, Appellant not a commercial concern — Service tax not payable.

Facts:
The appellants were registered under the Societies Registration Act, 1860 acting for the welfare of ex-servicemen who were members of the society. They were engaged in various causes like helping ex-servicemen to get a job, assist them and make efforts to help families of deceased ex-servicemen, etc. For the said purpose, the society entered into an agreement with Bharat Sanchar Nigam Ltd. for the services of security guards. The Revenue issued a show-cause notice on 21-9-2004 demanding service tax of Rs.26,494 for the period April, 1999 to December, 2003. The appellants pleaded that the old definition of security agency services was applicable to them and not being a commercial concern they were not covered. However, as the term ‘commercial concern’ was not defined in the Finance Act, 1994 the Revenue applied the popular meaning of commercial concern. Decisions in Sikar Ex-Servicemen Welfare Co-op. Ltd., (2006) 4 STR 303 (Tri.) and BCCI v. CST, Mumbai (2007) 7 STR 384 (Tri.) were relied upon by the appellants and hence, it was contended that they cannot be referred to as a commercial concern.

Held:
It was held that the appellant did not carry any of its activities with an intention of earning profits, nor were they considered as commercial concern and hence, were not liable to pay service tax.

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(2012) 25 STR 36 (Tri.-Del.) — Hind Tele Links v. Commissioner of Central Excise, Jalandhar.

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Appellant providing promotion and marketing services to M/s. Bharti Cellular Ltd. — Taxable as BAS — Failed to pay service tax — Did not contest the demand and paid it as soon as it was brought to notice — Penalties imposed u/s.76, u/s.77 and u/s.78 for the non-compliance — Prayed for reduction in penalties imposed under different sections for the same offence — The option to deposit 25% of penalty within a period of 30 days granted — Penalty u/s.76 set aside.

Facts:
he appellant provided services relating to marketing and promotion to M/s. Bharti Cellular Ltd. taxable under the category of business auxiliary services. It was noted that the appellant did not contest the amount of service tax confirmed by the authority. However, the appellant prayed for reduction in the penalties imposed u/s.76, u/s.77 and u/s.78. Appellant pleaded for the option of payment of 25% of penalty within 30 days, which was not made available to the them before.

Held:
It was observed that penalties under two different sections for the same offence were not justified and hence, penalty u/s.76 was set aside. Penalty imposed u/s.78 was upheld with modification that only 25% of the amount to be deposited only if paid within 30 days from the receipt of the order. Lastly, penalty for non-filing of the return etc. u/s.77 was not interfered with.

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(2012) 25 STR 30 (Tri.-Delhi) — Agrim Associates Pvt. Ltd. v. Commissioner of Sales Tax, Delhi.

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Appellant engaged in provision of service classifiable as ‘Commercial or industrial construction service’ from time to time and availed benefit under Notifications No. 15/2004-ST and 1/2006-ST and availed abatement of 67% — Revenue of the opinion that the value of Free of Cost (FOC) materials should be included in the gross value before availing such abatement — Held that only value of materials supplied should be included and value of FOC material not to be included in gross value on which abatement of 67% is granted — Stay of pre-deposit granted.

Facts:
The appellant provided ‘Construction service’/ ‘Commercial or industrial construction service’ and availed benefit under Notification No. 15/2004-ST and Notification No. 1/2006-ST for respective period of time. The Revenue contested that appellant provided completing and finishing services and hence abatement under Notification 1/2006-ST could not be availed. Also, it was argued that in order to avail such abatement, the gross value of revenue should include Free of Cost (FOC) materials before availing abatement of 67%.

Held:
It was held that the appellant was eligible to claim exemption under the said Notification and a complete waiver of the demand before the appeal was allowed and a stay order was sustained on collection of all demands arising out of the order during the pendency of the appeal.

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(2012) 25 STR 24 (Tri.-Del.) — Fiitjee v. Commissioner of Sales Tax, Delhi.

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Valuation of study material for commercial training or coaching services — Appellant denied exemption claimed under Notification No. 12/2003 — Held that study material issued forms integral part of the coaching services — Notification No. 12/2003 relates to works contract — Commercial coaching cannot be brought under definition of works contract — Appellants were directed to make a pre-deposit of 13 lakh — Partial stay granted.

Facts:
The appellant provided commercial training or coaching services. Along with such services, a consideration for the study material issued to the enrolled students was also collected and claiming exemption under Notification No. 12/2003, no service tax was paid thereon. According to the Revenue, the study material is integral part of the coaching which becomes meaningful and complete only with the aid of such study material. They also pointed out the decision in Cerebral Learning Solutions Pvt. Ltd. v. CCE, (2009) 15 STR 343 (Tri.) wherein pre-deposit was ordered.

Held:
It was held that the issue of study material and the coaching services are inseparable. Also, no evidence brought to the notice of the authority to suggest that the study material could be sold as text books to the book sellers. At the same time holding that the exemption Notification relied upon by the appellant related to works contract and commercial coaching could not be called as works contract, the appellant was directed to make a pre-deposit of Rs.13 lakh.

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(2012) 25 STR 122 (P&H) — Punjab Ex- Servicemen Corporation v. Union of India.

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Appellant is a security agency service provider — Refused to pay tax on the ground that profit is not the motive behind the business – respondent disagreed and contended that service tax would be payable — Absence of profit motive was not a valid reason for non-payment.

Facts:
The appellant a statutory corporation under the provisions of the Punjab Ex-Servicemen Act, 1978 is providing Security Agency Service. Accordingly, the appellant contended that it was not liable to pay service tax as there was no profit motive to carry on the business. Further, since the notice was not sent within 1 year, dispute was also raised on limitation ground. The Revenue contended that service tax was payable as absence of profit motive is not a determinant factor for imposition of liability.

Held:
U/s. 65(94) service provider should be engaged in the business rendering specified service. There is no warrant for reading therein requirement of profit motive. Applicability of limitation law — Statutes of limitation are retrospective in so far as they apply to all legal proceedings brought after their operation for enforcing causes of action accrued earlier — But they neither have the effect of reviving a right of action which is already barred on the date of their coming into operation nor do they have the effect of extinguishing a right of action subsisting on that date — Assessee’s appeal is dismissed.

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No. VAT 1512/CR-61/Taxation-1, dated 1-6-2012.

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Act No. VIII has been gazetted on 25th April, 2012 and changes have been made in the MVAT Act vide Notification No. VAT-1512/CR-61, the Taxation-1. Consequential amendments are made in the MVAT Rules, 2005 by this Notification.

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(2012) 25 STR 16 (Kar.) — Essar Telecom Infrastructure Pvt. Ltd. v. Union of India.

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Appellant providing infrastructure services of erection and construction of towers to cellular telephone companies — Inclusive of operating and maintenance — Registered with service tax authority for the payment of service tax — Amounted to transfer of right to use the erected telecom network towers and other related equipments — VAT authority opined — The appellant liable to pay VAT as there is transfer of right to use the said goods — Mere fact that equipments are attached to earth in order to enable it to function does not detract the applicability of VAT — Treated as movable — Held appellant bona fide believed activity to be service — Paid service tax regularly — State directed to recover it through separate proceeding — VAT payable for subsequent period — No liability to pay penalty and interest.

Facts:
The petitioner was engaged in erecting and constructing tower sites and leased the same to various telecom operators such as BSNL, Airtel, and Vodafone, etc. According to the petitioner, the said structure was considered as immovable, as they are embedded in the earth and cannot be shifted without damage. Further, the act of dismantling the structure from the site would render them non-saleable. However, after the study of the agreement entered by them with various operators, the Revenue opined that there was a transfer of right to use the leased capacity and the consideration received by them was in the nature of monthly lease rentals.

Held:
It was held that the structure erected by the appellant was movable for the reason that on the expiry of the agreement or the termination of it, the same could be detached and fixed somewhere else. Having concluded that, it was held to attract VAT. However, the petitioner bona fide believed impugned activity to be service and paid service tax regularly on the same. In para 22 of the judgment, the Court held to the effect that upon the determination of VAT liability, the amount previously paid as service tax would be adjusted and it is for the State to seek recovery of the amount paid by the petitioner to the Central Government through a separate proceeding based on this judgment. However. No penalty or interest would be imposed.

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Notification w.r.t. Schedule A: No. VAT 1512/C.R. 62/Taxation-1, dated 30-5-2012.

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By this Notification changes are effected in Entry 59 in Schedule A: Raisins & Currants Nil Rates of tax : Period extended up to 31st May, 2013.

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(2012) 17 Taxmann.com 47 (Kar.) — CCE v. Tata Advanced Material Ltd.

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Assessee availed CENVAT credit of duty paid on capital goods on clearing goods — Capital goods destroyed in fire — Insurance company compensated assessee for the loss including duty — Revenue directed assessee to reverse the credit in respect of lost goods and confirmed demand — Issue, whether payment by insurance company renders regular credit as irregular — Held, No provision in Rules which empower reversal except in the cases when credit is taken irregularly.

Facts:
The assessee availed CENVAT credit of excise duty paid on capital goods bought and used in manufacturing excisable goods. About five years later, they were destroyed in a fire accident. Based on purchase invoice of new capital goods, a claim was put before the insurance company for reimbursement in terms of the policy taken. The reimbursed amount also included excise duty paid on the newly bought capital goods. The Department on getting such information directed the assessee to reverse the credit taken earlier on the lost goods. The assessee challenged it. The Tribunal held that the assessee had legally availed CENVAT credit. There is no legal provision which empowers the authorities to reverse CENVAT credit otherwise than in case of wrongful availment. The claim of the Department that assessee attained double benefit was also found without basis. The substantial question of law before the Court therefore was whether the impugned order amounted to encouraging unjust enrichment and whether or not credit can be claimed on goods lost in fire and for which they received compensation.

Held:
There is no provision in the Rules providing for reversal of credit except when it is irregularly taken and that was not the Revenue’s case. Merely because the assessee was compensated by the insurance company would not render legally taken credit irregular and it does not confer right on the authorities to demand reversal of credit. The assessee paid premium and covered the risk. It is not the case of double payment and the Department has no say in the matter.

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Compounding of Offences under the Service Tax — Notification No. 17/2012-ST.

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Service Tax (Compounding of Offences) Rules, 2012 have been introduced by which section 9A of the Central Excise Act, 1944 has been made applicable to Service Tax Law vide section 83 of the Finance Act, 1994.

Accordingly, an application for compounding of offences and getting immunity from prosecution may be made, either before or after the institution of prosecution. Rules also prescribe forms, procedure, authorities, fixation of amount and powers to grant and withdraw immunity granted from prosecution.

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Settlement of Cases under the Service Tax Law — Notification No. 16/2012-Service Tax.

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The Central Government has introduced Service Tax (Settlement of Cases) Rules, 2012 by which sections 31, 32 and 32A to P of the Central Excise Act, 1944 made applicable to Service Tax Law vide section 83 of the Finance Act, 1994 laying down the provisions of making application for the settlement of cases. The rules also prescribe form, manner of provisional attachment of property, etc.

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Rate of Tax – Entries in Schedule – Speakers for Car Stereos – Are Accessories of Car Stereos – Taxable as Electronic Goods and Not as Sound Transmitting Equipment – Entries 55 and 134 of Schedule I of the Kerala General Sales Tax Act, 1963.

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10. State of Kerala v. Sigma Inc, (2011) 42 VST 47 (ker)

Rate of Tax – Entries in Schedule – Speakers for Car Stereos – Are Accessories of Car Stereos – Taxable as Electronic Goods and Not as Sound Transmitting Equipment – Entries 55 and 134 of Schedule I of the Kerala General Sales Tax Act, 1963.


Facts

The dealer sold car stereos with or without speakers which was taxed @8% as electronic goods under Schedule Entry I 55 of the Act, whereas on sale of speakers without stereos, the tax was levied at 12% as sound transmitting equipment including loud speakers covered by the Entry 134 of Schedule I of the Act. The Tribunal allowed the appeal and held that speakers when sold without car stereos are also electronic goods taxable at 8% under Entry 55 of Schedule I. The Department filed revision petition before the Kerala High Court against the impugned order of the Tribunal.

Held

Under Entry 134 of Schedule I, ‘Sound Transmitting Equipment Including Loud Speakers are covered. The Department admitted that car stereos are not covered by Entry 134 and are covered by the general Entry 55 relating to electronic goods. The speakers suitable for attachment of car stereos will also be covered by Entry 55 of the Schedule I being accessories to electronic goods. The loud speakers which are not accessories to any electronic items like stereo, car stereos and radios are covered by Entry 55 and liable to tax @8%. The HC accordingly dismissed the revision petition filed by the Department.

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Rectification of Mistakes – Re-appreciation of Evidence on Records – Not Permissible – S. 37 of the Rajasthan Sales Tax Act, 1994.

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9. Assistant Commercial Taxes Officer v. Makkad Plastic, (2011) 42 VST 1 SC
    
Rectification of Mistakes – Re-appreciation of Evidence on Records – Not Permissible – S. 37 of the Rajasthan Sales Tax Act, 1994.

Facts

The Rajasthan Sales Tax Board, in an appeal filed by the Department, against the order in appeal passed, had allowed the appeal and upheld the assessment order passed by the assessing authority and confirmed the levy of tax at a higher rate as well as penalty. The Board, thereafter, upon application for rectification of mistake filed by the dealer, deleted the penalty, by passing order of rectification of mistake u/s. 37 of the Act. The Department filed revision petition, before the Rajasthan High Court against such order for rectification of mistake, which was dismissed by the High Court. The Department filed appeal before the SC against the judgment of the Rajasthan High Court.

Held

Under Section 37 of the Act, the Board has the power to rectify any mistake which is apparent on record, which is neither a power of review or nor is it akin to the power of revision. But it is only a power to rectify a mistake apparent on the face of the record for which a re-appreciation of the entire records is neither possible nor called for. While passing the subsequent rectification order, the Board had exceeded its jurisdiction by re-appreciating the evidence on record and held that there was no malafide intention on the part of the dealer for tax evasion. The SC set aside the orders passed by the Rajasthan High Court as well as the subsequent order for rectification of mistake passed by the Board and upheld the assessment order passed by the assessing authorities.

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Rent-a-cab service — Respondent having contract for making available various vehicles on request on hire to army — Held not liable for Service tax as the services similar to rent-a-cab scheme operator services, but not the same.

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44. (2012) 26 STR 219 (Tri.-Del.) CCE, Meerut-II v. Sapan Mehrotra.

Rent-a-cab service — Respondent having contract for making available various vehicles on request on hire to army — Held not liable for Service tax as the services similar to rent-a-cab scheme operator services, but not the same.


Facts:

The respondent had a contract with the Indian Army. The respondent was responsible for making available various means of transport such as buses, taxis, etc. on hire basis. The charges were defined in the contract. The Department levied Service tax considering the same as ‘rent-a-cab scheme operator service’ as the contract was for fairly long period. The CCE (appeals) held that the services of the respondent were not in the nature of rent-a-cab and therefore, set aside the demand of the Department. Against the Departmental appeal, the respondent argued that the vehicles were not given at disposal of the Indian Army and the services were similar to taxi services. The only difference was that the contract was for a longer period which is the prerequisite of rendering such services prescribed by the Indian Army. Moreover, the turnover in certain years was less than the basic threshold limit prescribed in Notification No. 6/2005, dated 1-3-2005.

Held:

The facts of the case were similar to that of taxi operator in the street. Such services were not liable to Service tax. Only the rates were for a fairly long duration, but the vehicles were not put at disposal of the army for a long duration. The appeal of the Department was dismissed.

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A.P. (DIR Series) Circular No. 66, dated 13-1- 2012 — (I) Scheme for Investment by Qualified Foreign Investors in equity shares — (II) Scheme for Investment by Qualified Foreign Investors in Rupee Denominated Units of Domestic Mutual Funds — Revision.

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(I) Scheme for Investment by Qualified Foreign Investors (QFI) in equity shares

This Circular permits QFI (non-resident investors, other than SEBI-registered FII and SEBI-registered FVCI, who meet the KYC requirements of SEBI), from jurisdictions which are FATF compliant and with which SEBI has signed MOUs under the IOSCO framework, to purchase on repatriation basis equity shares of Indian companies, subject the following terms and conditions. Some of the important terms and conditions are:

(i) QFI can invest through SEBI-registered Depository Participants (DP) only:

(a) In equity shares of listed Indian companies through recognised brokers on recognised stock exchanges in India

(b) In equity shares of Indian companies which are offered to public in India in terms of the relevant and applicable SEBI guidelines/regulations.

(ii) QFI can also acquire equity shares by way of rights shares, bonus shares or equity shares on account of stock split/consolidation or equity shares on account of amalgamation, demerger or such corporate actions.

(iii) QFI are allowed to sell the equity shares so acquired by way of sale:

(a) Through recognised brokers on recognised stock exchanges in India; or

(b) In an open offer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; or

(c) In an open offer in accordance with the SEBI (Delisting of Securities) Guidelines, 2009; or

(d) Through buyback of shares by a listed Indian company in accordance with the SEBI (Buyback) Regulations, 1998.

(iv) A separate single rupee pool bank account must be maintained by the DP with an AD Category-I bank in India for QFI investments under this scheme.

(v) The individual and aggregate investment limits for the QFI will be 5% and 10%, respectively of the paid-up capital of an Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the Portfolio Investment Scheme for foreign investment in India. However, wherever there are composite sectoral caps under the extant FDI policy, these limits for QFI investment in equity shares shall also be within such overall FDI sectoral caps.

(vi) QFI can remit foreign inward remittance through normal banking channel in any permitted currency (freely convertible) directly into single rupee pool bank account of the DP maintained with AD Category-I bank. Similarly, sale proceeds/dividends of equity shares will also be received in this single rupee pool bank account of the DP and must be repatriated to the designated overseas bank account of the QFI within five working days (including the date of credit of funds to the single rupee pool bank account by way of sale of equity shares) of having been received in the single rupee pool bank account of the DP, provided it is not reinvested within this period of five days.

(vii) Pricing of all eligible transactions and investment in all eligible instruments by QFI must be in accordance with the relevant and applicable SEBI guidelines only.

(II) Scheme for Investment by Qualified Foreign Investors in Rupee Denominated Units of Domestic Mutual Funds

This Circular has modified the Scheme for QFI investment in rupee denominated units of Domestic Mutual Funds under the Direct Route as follows:

1. The time period for which funds (by way of foreign inward remittance as well as by way of credit of redemption proceeds of the units of Domestic Mutual Funds) can be kept in the single rupee pool bank account of the DP under the scheme is five working days (including the day of credit of funds received).

2. Similarly, dividend received by QFI in the single rupee pool bank account must be remitted to the designated overseas bank accounts of the QFI within five working days (including the day of credit of such funds to the single rupee pool bank account). Dividend so received can be also utilised by the QFI, within these five working days, for fresh purchases of units of Domestic Mutual Funds under this scheme.

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(2012) 65 DTR (Mum.) (Trib.) 104 Ramesh R. Shah v. ACIT A.Y.: 2005-06. Dated: 29-07-2011

Revised return u/s.139(5) — When original return made u/s.139(1) declaring positive income, claim for carry forward of long-term capital loss made in revised return u/s.139(5) is allowable.

Facts:

The assessee had filed original return of income u/s.139(1) declaring total income of Rs.94.09 lakhs. Subsequently, the assessee filed a revised return claiming long-term capital loss of Rs.1.82 crore and the said loss was claimed to be carried forward u/s.74. The AO denied carry forward of such loss on the ground that as per section 80, loss not determined in return u/s.139(3) cannot be allowed to be carried forward and set off u/s.74. The learned CIT also confirmed the order of the AO observing that carry forward of loss returned for the first time in revised return of income is not eligible for carry forward to the next assessment year as per provisions of section 80.

Held:

In the present case, the assessee filed the original return u/s.139(1) in which the positive income is determined and subsequently even revised return filed declared positive income as the assessee could not set off the long-term capital loss on the sale of shares. He claimed the same to be carried forward.

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

A.P. (DIR Series) Circular No. 65, dated 12-1-2012 — Foreign Exchange Management Act, 1999 — Export of Goods and Services — Forwarders Cargo Receipt.

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Presently, banks are permitted to accept Forwarder’s Cargo Receipts (FCR) issued by IATA-approved agents, in lieu of bill of lading, for negotiation/collection of shipping documents, in respect of export transactions backed by letters of credit, only if:

1. the relative letter of credit specifically provides for negotiation of FCR in lieu of bill of lading and

2. the relative sale contract with the overseas buyer provides that FCR can be accepted in lieu of bill of lading as a shipping document.

This Circular has relaxed the above conditions, and provides that:

1. Banks can accept FCR issued by IATA-approved agents, in lieu of bill of lading, for negotiation/ collection of shipping documents, in respect of export transactions backed by letters of credit, if the relative letter of credit specifically provides for negotiation of this document in lieu of bill of lading even if the relative sale contract with the overseas buyer does not provide for acceptance of FCR as a shipping document, in lieu of bill of lading.

2. Banks can, at their discretion, also accept FCR issued by shipping companies of repute/IATAapproved agents (in lieu of bill of lading), for purchase/ discount/collection of shipping documents even in cases, where export transactions are not backed by letters of credit, provided the ‘relative sale contract’ with overseas buyer provides for acceptance of FCR as a shipping document in lieu of bill of lading.

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A.P. (DIR Series) Circular No. 64, dated 5-1-2012 — External Commercial Borrowings (ECB).

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Presently, ECB limit for eligible borrowers under the Automatic Route, for permissible end-uses, is US $ 750 million or its equivalent

This Circular makes the following changes in ECB guidelines:

1. The revised average maturity guidelines under the Automatic Route are as follows:

(a) ECB up to US $ 20 million or equivalent in a financial year with minimum average maturity of three years; and

(b) ECB above US $ 20 million and up to US $ 750 million or equivalent with minimum average maturity of five years.

2. Requirement of average maturity period, prepayment and call/put options for additional amount of ECB of US $ 250 million [i.e., US $ 750 million minus US $ 500 million (earlier limit)] has been dispensed with.

3. Eligible borrowers under the Automatic Route can raise Foreign Currency Convertible Bonds (FCCB) up to US $ 750 million or equivalent per financial year for permissible end-uses.

4. Corporates in specified service sectors, viz. hotel, hospital and software, can raise FCCB up to US $ 200 million or equivalent for permissible end-uses during a financial year subject to the condition that the proceeds of the ECB should not be used for acquisition of land.

5. As a result of enhancement in the ECB limits under the Automatic Route, from US $ 500 million to US $ 750 million, ECB/FCCB availed of for the purpose of refinancing the existing outstanding FCCB will be reckoned as part of the limit of USD 750 million available under the Automatic Route.

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A.P. (DIR Series) Circular No. 63, dated 29-12-2011 — External Commercial Borrowings (ECB) denominated in Indian Rupees (INR) — Hedging facilities for non-resident entities

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Presently, certain eligible borrowers are permitted to avail of ECB in Indian Rupees. This Circular permits non-resident lenders to hedge their currency risk in respect of ECB denominated in Indian Rupees. Hedge using any of the following products is permitted:

1. Forward foreign exchange contracts with Rupee as one of the currencies.

2. Foreign currency-INR options.

3. Foreign currency-INR swaps.

Detailed guidelines in this respect are annexed to this Circular.

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A.P. (DIR Series) Circular No. 60, dated 22-12- 2011 — Know Your Customer (KYC) norms/ Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT) Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 — Money changing activities.

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This Circular has amended instructions related to documents that can be considered as proof of identity and proof of address from foreign tourists.
Customer Identification Procedure

Features to be verified and documents that may be obtained from customers:

Extant
guidelines

 

 

Revised
guidelines

 

 

 

 

 

 

Features

Documents

Features

Documents

 

 

 

 

 

 

Transactions
with

 

 

Transactions
with

 

 

individuals

(i)

Passport

individuals

 

 

—  Legal 
name  and  any

— Legal name and any
other

(i)

Passport

other names used

(ii)

PAN card

names used

(ii)

PAN card

 

 

 

(iii)

Voter’s Identity Card

 

(iii)

Voter’s identity card

 

(iv)

Driving licence

 

(iv)

Driving licence

 

(v)

Identity card (subject

 

(v)

Identity card (sub-

 

 

to the AP’s satisfac-

 

 

ject to the AP’s

 

 

tion)

 

 

satisfaction)

 

(vi)

Letter from a recogn-

 

(vi)

Letter from a recog-

 

 

ised public authority
or

 

 

nised public author-

 

 

public servant
verifying

 

 

ity or public servant

 

 

the identity and resi-

 

 

verifying the
identity

 

 

dence of the customer

 

 

and residence of the

 

 

to the satisfaction
of

 

 

customer to the sat-

 

 

the AP.

 

 

isfaction of the AP.

— Correct permanent ad-

(i)

Telephone bill

— Correct permanent ad-

(i)

Telephone bill

dress

(ii)

Bank account state-

dress

(ii)

Bank account

 

 

 

 

ment

 

 

statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extant
guidelines

 

 

Revised
guidelines

 

 

 

 

 

 

 

 

 

Features

Documents

Features

Documents

 

 

 

 

 

 

 

(iii)

Letter from any rec-

 

(iii)

Letter from any rec-

 

 

ognised public
author-

 

 

ognised public
author-

 

 

ity

 

 

ity

 

 

 

(iv)

Electricity bill

 

(iv)

Electricity bill

 

 

 

(v)

Ration card

 

(v)

Ration card

 

 

 

(vi)

Letter from employer

 

 

 

 

 

(vi)

Letter from employer

 

 

(subject to satisfaction

 

 

(subject to satisfaction

 

 

of the AP). (Any one
of

 

 

 

 

the documents, which

 

 

of the AP). (Any one of

 

 

 

 

 

 

provides customer in-

 

 

the documents, which

 

 

formation to the
satis-

 

 

provides customer in-

 

 

faction of the AP
will

 

 

formation to the satis-

 

 

suffice).

 

 

 

 

 

 

 

 

 

 

faction of the AP will

 

Note: In case of foreign

 

 

suffice.)

 

 

 

 

tourists, copies of
passport

 

 

 

 

containing
identification par-

 

 

 

 

ticulars and address,
may be

 

 

 

 

accepted as
documentary

 

 

 

 

proof for both
identification

 

 

 

 

as well as address.
Further,

 

 

 

 

a copy of the visa of
non-

 

 

 

 

residents, duly
stamped by

 

 

 

 

Indian Immigration
authori-

 

 

 

 

ties may also be
obtained

 

 

 

 

and kept on record.

 

 

 

 

 

 

 

 

 

A.P. (DIR Series) Circular No. 59, dated 19-12-2011 — External Commercial Borrowings (ECB) for Micro Finance Institutions (MFIs) and Non-Government Organisations (NGOs) — Engaged in micro finance activities under Automatic Route.

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This Circular permits:

1. increased limit up to which Non-Government Organisations (NGO) can borrow funds from overseas lender by way of External Commercial Borrowings (ECB), under the Automatic Route, from US $ 5 million or its equivalent to US $ 10 million or equivalent during a financial year for permitted end-uses.

2. the following Micro Finance Institutions (MFI) to borrow funds from overseas lender by way of External Commercial Borrowings (ECB), under the Automatic Route, up to US $ 10 million or equivalent during a financial year for permitted end-uses from recognised lenders.

Eligible borrowers:

1. MFI registered under the Societies Registration Act, 1860.
2. MFI registered under Indian Trust Act, 1882.
3. MFI registered either under the conventional state-level cooperative acts, the national level multi-state cooperative legislation or under the new state-level mutually-aided cooperative acts (MACS Act) and not being a co-operative bank.
4. Non-Banking Financial Companies (NBFC) categorised as ‘Non-Banking Financial Company-Micro Finance Institutions’ (NBFC-MFI).
5. Companies registered u/s.25 of the Companies Act, 1956 and involved in micro finance activity.

Recognised lenders:
1. In case of NBFC-MFI — Multilateral institutions, such as IFC, ADB, etc./regional financial institutions/ international banks/foreign equity holders and overseas organisations.
2. In case of companies registered u/s.25 of the Companies Act, 1956 and involved in micro finance activity — International banks, multilateral financial institutions, export credit agencies, foreign equity holders, overseas organisations and individuals.
3. In case of other MFIs — International banks, multilateral financial institutions, export credit agencies, overseas organisations and individuals.

Permitted end-use — Lending to self-help groups or for micro-credit or for bona fide micro finance activity including capacity building.

credit agencies, overseas organisations and individuals. Permitted end-use — Lending to self-help groups or for micro-credit or for bona fide micro finance activity including capacity building.

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SEBI’S ACTIONS AGAINST PROFESSIONALS — AN UPDATE

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It is interesting to increasingly see several adverse actions being taken by SEBI, specifically against professionals such as Chartered Accountants and Company Secretaries. It is one thing where the adverse action is for violating the law by carrying out or conniving in certain practices such as insider trading, price manipulation, etc. where professionals are not dealt with specially and separately on account of their qualifications. But it becomes an area of interesting development in law when specific action is taken against professionals on account of the position they occupy in the company, say as CFOs, company secretary/compliance officers. Another category of such actions is in case of professionals who act as independent directors, particularly as member/chairman of audit committees. And, finally, it is even more so noteworthy when practising professionals are acted against when they are acting as such, as in the case of auditors.

While this is nothing new, recent times have seen increasing number of such cases. As will be discussed later, this aspect has been discussed in individual cases earlier here, but it was felt that it is worth having an update and review of the happenings thereafter.

However, let us first make a preliminary overview of the matter before going to specific cases.

Nature of violations and actions against professionals
Professionals like chartered accountants, company secretaries and even lawyers have a special relation and status with listed companies. The simplest case of violation/wrong-doing by such persons is where such professionals are found to have actively indulged in illegal practices such as insider trading, price manipulation, etc. Though their special position in the listed company may place them in a fiduciary position with access to such information or with special knowledge and skills to carry out such acts, such practices do not necessarily set professionals apart or treat them differently beyond a point. Such illegal acts can be committed by anyone and an analogy is of, say, a robbery. Hence, they have no cause for grievance if they are punished like anyone else. Indeed, such acts are rightly viewed relatively more seriously when committed by professionals than by others. After all, generally, such professionals not only have more information in a fiduciary capacity, but they ought to know the law and its consequences.

The other case is where a professional occupies a statutory or contractual position within a company — that is — where his rights and obligations are either statutorily recognised or contractual with the company and thus he is required to perform certain duties. And if he fails to do so, direct action against him could be taken. These are positions like that of the CFO or company secretary/compliance officer. Analogous to this is also the position of independent directors that many such professionals occupy, more so when they are part of the audit committee either as member or chairman.

Finally, there are external professionals such as auditors and action is often sought to be taken against them for certain acts or omissions while performing their duties.

This subject was broached upon at least twice earlier in this column. In the December 2010 issue, we considered the Bombay High Court decision in the Price Waterhouse/Satyam case, where the court considered whether auditors can be acted against directly by SEBI. In April 2011, we discussed a SEBI decision where independent directors/audit committee members were specifically acted against. Before taking a few recent examples, these earlier decisions are being briefly summarised here.

Bombay High Court’s decision in Satyam auditors’ case
The Bombay High Court’s decision was a milestone in at least two aspects. Firstly, it held that auditors can be investigated by SEBI to decide if they have duly performed their duties as auditors of the listed company or not. It held this matter is not within the sole and exclusive province of the ICAI. Secondly, if it is found by SEBI that they have connived with the management in carrying out accounting/ auditing manipulations, then SEBI can act itself against the auditor without reference to ICAI. The point in law to be particularly noted is that the Court held that auditors were persons ‘associated with the capital markets’, a common term of securities law. The importance of this point lies in the fact that this gives SEBI direct jurisdiction over auditors since many provisions of securities laws use this term for various purposes and effects. Moreover, I would even venture to propose that once independent auditors are so held to be persons associated with the capital markets, professionals even more closely associated with or employed by the company are clearly covered. However, the Court has also observed:

“In a given case, if ultimately it is found that there was only some omission without any mens rea or connivance with anyone in any manner, naturally on the basis of such evidence the SEBI cannot give any further directions.”

A question arises is would mere knowledge of a wrong-doing make a person liable? While much would depend on facts on this untested issue, a professional knowing of a wrong-doing in his area of duties would obviously place a higher onus of obligation and liability.

SEBI decision against Independent Directors/Audit Committee members

SEBI’s decision discussed in the April 2011 issue (SEBI Order No. WTM/MSS/ID2/92/2011, dated March 11, 2011) also held that if independent directors/audit committee members participated in accounting manipulation or other illegal practices, they too can be acted against directly by SEBI.

Some recent developments
Now let us consider some recent cases to have an update.

In the Satyam alleged scam that readers are well aware of, there was a finding that a merger of a large sister company with Satyam was proposed. As per the Code of Conduct under the SEBI (Prohibition of Insider Trading) Regulations 1992, during such period while it is proposed (as determined in the prescribed manner), the trading window should be closed and this should be duly announced. This would prohibit specified officers, etc. from dealing in the shares of the company. This was not done and it appeared that many officers did sell the shares apparently on the basis of this pricesensitive information. Under the Code of Conduct, it is the compliance officer who is responsible for the implementation of the provisions of the Code under the supervision of the Board of Directors. When asked by a show-cause notice, the compliance officer inter alia replied that he was required by the chairman not to announce the closure of the trading window. Further, he said that he needed approval from the Board of Directors to go ahead with the announcement of the same. SEBI did not accept this reply and held the compliance officer liable for non-compliance of the Code. It observed:

“The Noticee has contended that since there was no direction from the Board of Directors of SCSL to close the trading window, the same was not closed by the Noticee. I observe that the Noticee is the compliance officer of SCSL responsible for closing the trading window whenever issues specified in clause 3.2-3 of Code and other similar issues are under consideration. Matters like consideration of accounts, declaration of dividend, bonus, acquisition of entities, etc. are put up as proposals before the Board. From the proposal stage itself, such information becomes price sensitive and remains so till decision thereon is disseminated to the public. As the proposal is not in public domain, it is imperative on the compliance officer to close the trading window so that insiders and connected persons do not take advantage of such information. In case any internal approvals are required, he may take them, but ensure that the trading window is closed on time. As compliance officer, he cannot raise the defence that internal approvals were not available. Such contention, if accepted, would render the concept of appointment of compliance officer meaningless and is therefore not acceptable.”

Accordingly, a penalty of Rs.5 lakh was levied on the compliance officer for the same.

Some observations can be made. This is a case where the compliance officer had a direct responsibility under law to carry out certain duties, albeit under the overall supervision of the Board. Several other persons are similarly given duties in one or the other manner under securities laws — for example — Independent directors and members of committees formed under Clause 49 of the Listing Agreement have certain obligations. The CFO is also required to also sign a statement regarding compliance of laws, absence of frauds, etc. under such Clause 49. In fact, it is likely that the duties of the CFO, compliance officer, independent directors, members of audit committee, auditors, etc. will increase by such provisions under securities laws as well as amendments/ re-enactment of the Companies Act. Thus, direct action by SEBI may be possible against them for failure in performing their duties.

The next recent example is decisions of SEBI in the last week of December 2011 where in the context of alleged manipulations in an IPO, interim orders were issued not only against the company but many other persons including independent directors, audit committee members, manager (finance), etc. The nature of directions varied, but it included directions prohibiting the persons from buying, selling or dealing in any securities. An example of this is the decision in the case of Bharatiya Global Infomedia Limited (dated 28th December 2011) where it was alleged that there were false and misleading disclosures in the red herring prospectus, misuse of issue proceeds, and other lapses in connection with the IPO. The company was debarred from raising further capital from the securities markets, till further directions and its directors including independent directors and members of the audit committee as also the manager (finance) were prohibited from buying, selling or dealing in securities markets in any manner, till further directions. Another example is the SEBI decision in Tijaria Polypipes Limited of 28th December 2011 where similar directions were given to the company, its directors including independent directors, its finance manager and company secretary and several other entities/ persons.

There are newspaper reports that Mahindra Satyam has initiated action against its erstwhile directors, auditors, etc. for damages. Though this seems to be a generic action, the outcome of this suit will be interesting.

Thus, it appears that over a period of time, there will be more instances of action taken against professionals, whether auditors, CFOs, company secretary/ compliance officers, independent directors, audit committee members, etc. A debate is required on this issue from various angles.

The issue is: Do the Indian circumstances demand a separate and special uniquely tailored set of legal provisions so as not only to ensure proper fixing of blame and responsibility, but also to provide for due powers? In India, almost as a rule, listed companies are promoter-dominated not only in terms of shareholding, but in terms of overall and day-to-day management control. The concepts of independent directors, audit committee, etc. are arguably western concepts where there exists a very diffused shareholding pattern and there is a need of placing an independent Board including its chief executive to ensure that matters such as remuneration, etc. are approved by such independent directors. There, the senior executives as CFOs also in contrast have independent powers. In In-dia, however, the domination of shareholding and management control of the promoters makes a significant difference. There is of course no excuse or defence for a person who actively connives in wrong-doings. However, as the case of Satyam’s company secretary shows, the reality is that it is an illusion that such professionals operate with the level of freedom that the law assumes they have. And apart from freedom, even the real scope of work, powers and information of such professionals may be limited and often it may be ad hoc. There is a case for holding a person from the promoter group primarily and specifically liable and responsible for compliances under law, though he may take external or internal professional advice on technical matters. In this case, in my view, the company secretary should have resigned if (as he states) he was not a party to non-compliance and, depending upon the stage at which the non-compliance had reached, should have reported the same too.

Another example of such mismatched powers and responsibilities is the widely-worded CEO/CFO certification under Clause 49 of the Listing Agreement. It is required that they certify, inter alia, that the financial statements do not contain any materially untrue statement, that there have not been any fraudulent or illegal transactions, etc. In
a typical promoter-dominated company, it is not only unrealistic, but even a mismatch of powers/ freedom and duties/liabilities to expect that such persons accept such wide responsibility.

In absence of clearer powers and obligations of professionals, uncertainty may continue to prevail. It is possible that many professionals may not be willing to come forward and help SEBI and the securities markets and take responsibilities that SEBI would like them to bear without such clarity in law.

It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy.

— George Horace Lorimer

Remedies for breach of contract — Damages — Measure/quantification of damages — Contract Act 1872, sections 73 and 74.

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[ MSK Projects India (JV) Ltd. v. State of Rajasthan & Ors., (2011) 10 SCC 573]

The Public Works Department of the State of Rajasthan (‘PWD’) decided in September 1997 to construct the Bharatpur bye-pass for the road from Bharatpur to Mathura, which passed through a busy market of the city of Bharatpur. After having pre-bid conference/meeting and completing the required formalities, it was agreed between the tenderers and PWD that compensation would be worked out on the basis of investment made by the concerned entrepreneur. Concession agreement dated 19-8-1998 was entered into between the parties authorising collection of toll fee by MSK-Appellant. According to this agreement, period of concession had been 111 months including the period of construction. The said period was to end on 6-4-2008. The State issued Notification preventing the entry of vehicles into Bharatpur city stipulating its operation with effect from 1-10-2000. MSK-Appellant invoked arbitration clause raising the dispute with respect to delay in issuance of notification.

The Arbitral Award was made in favour of MSKAppellant, according to which there had been delay on the part of the State of Rajasthan in issuing the Notification and the State failed to implement the same and the contractor was entitled to collect toll fee even from the vehicles using Bharatpur-Deeg part of the road. The State of Rajasthan was directed to pay a sum of Rs. 990.52 lac to appellant as loss due up to 31-12- 2003 with 18% interest from 31-12-2003 onwards.

The District Judge set aside the award and held that appellant MSK was not entitled to any monetary compensation. The appeal was allowed by the Rajasthan High Court. The issue arose for consideration before the Supreme Court as to measure/quantification of damages. Damages was claimed for loss of expected profit. The Court observed that in common parlance, ‘reimbursement’ means and implies restoration of an equivalent for something paid or expended. Similarly, ‘compensation’ means anything given to make the equivalent.

 The Court further observed that while interpreting the provisions of section 73 of the Indian Contract Act, 1872, the Courts have held that damages can be claimed by a contractor where the government is proved to have committed breach by improperly rescinding the contract and for estimating the amount of damages, the Court should make a broad evaluation instead of going into minute details. It was specifically held that where in the works contract, the party entrusting the work committed breach of contract, the contractor is entitled to claim the damages for loss of profit which he expected to earn by undertaking the works contract. Claim of expected profits is legally admissible on proof of the breach of contract by the erring party. But that there shall be a reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract. Section 74 emphasises that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation, whether or not actual loss is proved to have been caused by such breach.

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Partition — Right of pre-emption against stranger purchaser — Transfer of Property Act, Section 44.

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[ Bulu Sarkhel v. Kali Prasad Basu & Ors., AIR 2012 Calcutta 67 (High Court)]

One Shri Kali Prasad Basu and Shri Goutam Basu filed a title suit alleging that Manorama Bose, mother of present plaintiffs and defendants No. 1-4 was owner of a two-storeyed building and that on her death on 19th of October, 1974 the plaintiffs and defendant Nos. 1-4 inherited the said property each having 1/6th share in said undivided two-storeyed building having four flats, two in each row. It is stated that on 5th of September, 1976 the defendant No. 1 produced a typed paper for signature of other brothers and sisters for the proposal of construction of the said flat by the defendant No. 1 for accommodation of his family members. Other co-sharers signed in the said paper in good faith, but later on the defendant No. 1 illegally sold out the said flat to an outsider (defendant No. 5) though the said flat was an accretion to said joint property. The defendant No. 1 had no right to sell out a part of the joint dwelling house to a stranger (defendant No. 5) as there was oral agreement between the co-sharers that before selling to an outsider by a co-sharer, other cosharers should be approached first for purchase. Accordingly the plaintiffs filed suit for partition as well as for purchase of the flat sold to an outsider (defendant No. 5) by invoking section 4 of the Partition Act. The Trial Court decreed the suit and allowed the prayer of plaintiff and the defendant No. 2 for purchase of the property.

The Court observed that a mere assertion of a claim to a share without demanding separation and possession (by the outsider) is not enough to give other co-shares a right of pre-emption. In the case in hand admittedly the defendant No. 5 being stranger purchaser did not claim any partition. As such, section 4 of Partition Act had no application in the facts and circumstances of this case. It is true that the stranger purchaser (defendant No. 5) was put into possession of his vendor’s (defendant No. 1) flat since her purchase in 1990, and other co-sharers of the said dwelling house including the plaintiffs had a right to resist the said possession u/s.44 of the Transfer of Property Act, 1882. But that does not mean other co-sharers can exercise their right of pre-emption u/s.4 of the Property Act when the precondition of application of the said right as mentioned in the said Section was absent. The appeal filed by the defendant No. 5 (stranger purchaser) was allowed.

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Electricity dues of previous occupant — Demand from purchaser of premises — Electricity Act, 2003 section 43(1).

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[ Bhagya Nidhi Exports Ltd. Anr. v. Chhatisgarh State Power Distribution Co. Ltd., AIR 2012 Chhattisgarh 50 (High Court)]

The petitioner had challenged the correctness of two letters issued by Chhattisgarh State Power Distribution Co. Ltd. respondent No. 1, for depositing Rs.48,13,749, the amount of outstanding dues of electricity consumption by Kedia Distilleries, the earlier owner and occupier of the premises purchased by petitioner in auction-sale. The payment was called as a condition precedent for supplying new temporary connection to the premises now occupied by petitioner No. 1 as an auction-purchaser.

The petitioner contended that it had purchased the premises in auction-sale free from all encumbrances; therefore, imposing the condition of pre-deposit of the outstanding dues of Kedia Distilleries on the petitioner was not in accordance with law. The petitioner also contended that the dues of Kedia Distilleries were time-barred dues and they are not recoverable from the petitioner.

The Court observed that the Supreme Court in the case of Haryana SEB AIR 2010 SC 3835 concluded that the previous arrears do not constitute a charge over a property and in general law a transferee of the premises cannot be made liable for the dues of the previous owner/occupier, but if statutory rules or terms and conditions of supply, which are statutory in character, authorise the supplier of electricity to demand such dues from the purchaser claiming reconnection or fresh connection of electricity, the arrears due by the previous owner can be recovered from the purchaser. Therefore, so long as the provision is prevailing in the Supply Code, 2005, the demand made by the respondent No. 1 cannot be held to be illegal or arbitrary merely on account of challenge to the above provisions of the Supply Code.

The Court further observed that the rules of limitation are not meant to destroy the rights of the parties. Section 3 of the Limitation Act only bars the remedy, but does not destroy the right which the remedy relates to. Though the right to enforce the debt by judicial process is barred u/s.3 read with the relevant article in the Schedule, the right to debt remains. The time-barred debt does not cease to exist by reason of section 3. Only exception in which the remedy also becomes barred by limitation is that the right itself is destroyed. In Khadi Gram Udyog Trust v. Ram Chandraji Virajman Mandir, (1978) 1 SCC 44, it was observed that a debt may be time-barred, it would still be a debt due. Though the remedy may be barred, a debt is not extinguished. The petition was dismissed.

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Consumer Protection Act — Jurisdiction — Contract containing arbitration clause — Not prevented thereby from filing complaint to consumer forum — Consumer Protection Act, section 12.

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[ National Seeds Corporation Ltd. v. M. Madhu-sudhan Reddy & Anr., AIR 2012 SC 1160]

The appellant — M/s. National Seeds Corporation Ltd. (NSCL) is a Government of India company. Its main functions are to arrange for production of quality seeds of different varieties in the farms of registered growers and supply the same to the farmers. The respondents are engaged in agriculture/seed production. They filed complaints alleging that they had suffered loss due to failure of the crops/less yield because the seeds sold/ supplied by the appellant were defective. The District Consumer Disputes Redressal Forum allowed the complaints and awarded compensation to the respondents. The appellant contended that the District Forum did not have jurisdiction to entertain complaints as the growers of seeds had entered into a commercial agreement thus not covered by definition of consumer. The National Commission rejected the appellant’s plea that the only remedy available to the respondents was to file a complaint under the Seeds Act, which is a special legislation vis-à-vis the Consumer Act. The appellant challenged the order of the National Commission before the Supreme Court.

The Apex Court observed that though, the Seeds Act is a special legislation enacted for ensuring that there is no compromise with the quality of seeds sold to the farmers and provisions have been made for imposition of substantive punishment on a person found guilty of violating the provisions relating the quality of the seeds, the Legislature has not put in place any adjudicatory mechanism for compensating the farmers/growers of seeds and other similarly situated persons who may suffer loss of crop or who may get insufficient yield due to the use of defective seeds sold/ supplied by the appellant or any other authorised person. No one can dispute that the agriculturists and horticulturists are the largest consumers of seeds. They suffer loss of crop due to various reasons, one of which is the use of defective/ sub- standard seeds. The Seeds Act is totally silent on the issue of payment of compensation for the loss of crop on account of use of defective seeds supplied by the appellant and others ors. who may obtain certificate u/s.9 of the Seeds Act. A farmer who may suffer loss of crop due to defective seeds can approach the Seed Inspector and make a request for prosecution of the person from whom he purchased the seeds. If found guilty, such person can be imprisoned, but this cannot redeem the loss suffered by the farmer.

Section 3 of the Consumer Protection Act declares that the provisions the Consumer Act shall be in addition to and not in derogation of the provisions of any other law for the time being in force. Since the farmers/growers purchased seeds by paying a price to the appellant, they would certainly fall within the ambit of section 2(d)(i) of the Consumer Act and there is no reason to deny them the remedies which are available to other consumers of goods and services. The remedy of arbitration is not the only remedy available to a grower, rather, it is an optional remedy. He can either seek reference to an arbitrator or file a complaint under the Consumer Act. If the grower opts for the remedy of arbitration, then it may be possible to say that he cannot, subsequently, file complaint under the Consumer Act. However, if he chooses to file a complaint in the first instance before the competent Consumer Forum, then he cannot be denied relief by invoking section 8 of the Arbitration and Conciliation Act, 1996.

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Compensation for breach of contract — Liquidated damages — Contract Act 1872, section 74

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[M/s. Engineering Projects (India) Ltd. v. M/s. B. K. Construction (BKC), AIR 2012 Karnataka 35 (High Court)]

The Life Insurance Corpn. of India had entered into a contract with M/s. Engineering Projects (I) Ltd. (EPI) for construction of 144 houses in the housing colony. The respondent in turn, entrusted the said work to M/s. B. K. Constructions (BKC) as a sub-contractor. As the progress of work was not in accordance with the terms agreed upon, the contract came to be terminated. Clause 17 of the agreement, provided for resolution of dispute through arbitration. However BKC without availing the said opportunity filed a suit against EPI seeking an order of injunction restraining them from awarding contract to any other person. Stay was granted. Aggrieved by the said order, EPI approached the High Court.

The Court, by consent of the parties, appointed an Arbitrator u/s.21 of the Act. The Arbitrator issued notice to the parties and thereafter passed the impugned award, rejecting the claim of BKC and partially upholding the counterclaim preferred by EPI. Thereafter EPI had filed an application before the Court for making the award as rule of the Court, whereas BKC had filed application for setting aside the award.

The Court observed that the Arbitrator in answering the counterclaim of EPI under the head ‘liquidated damages’ had taken note of only a portion of clause 13 which reads as under:

 “If the work is not completed in time, liquidated damages shall be levied at 1% per fortnight subject to a maximum of 10% contract valued.”

Thus the clause 13 provided for a penalty. It applied to a case where the contractor performs the contract but not within the stipulated time. In other words, there is delay in performing the contract. In the instant case, admittedly, the contract is not completed. The reason for breach of the contract is because of the non-completion of the contract and not adhering to the time schedule in completing the contract. The condition precedent for application of clause 13 is that the contract should be completed, construction agreed to be put up was not to be in terms thereof and within the stipulated time. The compensation stipulated in the sub-clause is to compensate for the delay in completing the contract. However, clause 16 of the contract provides that “if the progress of the work is not commensurate with the programme, EPI will have a right to get the work executed through other agency ‘at the risk and cost of sub-contractor’ and will ‘terminate the work’. Therefore, the claim for damages by EPI against BKC is that the applicant did not perform the contract, i.e., has not completed the contract, in which event measure of damage would be the cost of contract awarded to BKC and after termination of the work, if it is completed by another contractor, it is the cost incurred by EPI and the difference in the said amount is the damages sustained by the respondent. There is no preestimation and there cannot be pre-estimation and therefore no stipulation is found in the contract.

Insofar as demand for liquidated damages was concerned, the Court observed that in case of termination of contract for not completing the construction, the learned Arbitrator committed error in relying clause 13 which has no application to the facts of this case. As was the instant case for breach of contract, i.e., for terminating the contract for not completing the construction, and no damage is stipulated. When no liquidated damages is stipulated in the contract, section 74 of the Contract Act is not attracted. Admittedly both the parties had not adduced any evidence in support of their respective claims. In the absence of any evidence to show what was the loss sustained by the respondent, the Arbitrator committed error in awarding compensation, which is not based on any evidence. The award was held to be contrary to law and was liable to be set aside.

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Governance

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I have often wondered as to what do we mean by ‘governance’. In my view, Governance is facing facts with an open and unbiased mind and taking swift and balanced decisions. In other words, face truth — nay — brutal truth and act. Governance is not limited to compliance with law — though this is essential — because governance is more than ‘boxticking’. It is all encompassing. It takes care of not only the shareholders but also of other stakeholders and the environment. Governance demands facing facts — truth and taking decisions before issues get out of hand.

  • There is a lot of controversy on ‘governance’ in public sector companies. The Children’s Investment Fund of the U.K. — TCI — is an investor in Coal India and has raised issues regarding the role of government and independent directors on the Board of Coal India. TCI has threatened legal action against independent directors and if I am not wrong has retained a leading legal firm of Delhi to question the decisions and directives of the Government of India and the decisions of the Board. The controversy is regarding pricing of coal and long-term supply agreements with power plants. The issue was resolved by the Government by issuing a ‘Presidential Directive’ to the Board of Coal India Limited to sign the supply agreements. However, since the controversy has arisen it appears from newspaper reports that the independent directors of Coal India have been active and have been adding safety clauses in the supply agreements. View defending the action of the Government is based on that: President holds the shares on behalf of the people of India.
  •  Government represents the people of India.
  • Presidential directive is in the interest of the people of India.
  • TCI was aware of the risk of government control on Coal India’s policy at the time of investing.

Hence, there exists no reason for TCI to object to the decisions and directions of the Government. This controversy raises three issues:

  • Firstly, can this concept be extended to the decisions of the majority shareholder in a non-public sector company? The answer is an emphatic: no. This is so because the promoters once having accepted outside shareholders are accountable to the minority shareholders. The whole concept of ‘independent directors’ is to protect the interest of minority shareholders. Even otherwise the promoters or majority shareholders and the Board are accountable to stakeholders other than shareholders. Further the argument of decision in the interest of ‘people of India’ does not apply.
  • Secondly, should there be different guidelines for governance of public sector units? The answer is: yes. This would avoid confusion and clearly define the role and responsibilities of the socalled independent directors who are in effect nominated directors.
  • Thirdly, should foreign institutions and individuals be barred from investing in public sector units and only Indian nationals, Indian institutions and persons of Indian origin should be allowed to invest in public sector units? The answer is again: yes. Because this would avoid all controversy as whether through the President of India or directly or indirectly it is ‘People of India’ who are shareholders. In conclusion I would repeat: Governance — nay — good governance is a difficult issue and it can and must be resolved. Besides the solutions suggested I am sure there would be other alternatives. These need to be explored — explained and implemented to bring in clarity both in the interest of governance and the investors.

The second limb of governance is being ‘fair’. This is based on the commandment ‘Do unto others as you wish them do unto you’. Let us test the retrospective amendment by the Finance Bill, 2012 of taxing gain arising on transfer of Indian assets held indirectly by a non-resident individual or a legal entity through a corporation in a tax haven. Newspapers report Vodafone has already sent a notice to the Government of India seeking a legal solution. The Finance Minister of the U.K., though not apparently, has met the Indian Prime Minister and the Finance Minister on this issue. The newspapers report that there exists an assurance of our Prime Minister that ‘law will prevail’. This retrospective amendment has also been criticised by many leading foreign investors.

The issues of ‘governance’ are: Is retrospective amendment fair? Does it represent ‘good governance’?

Let me at the outset mention that the Parliament is supreme and laws can be amended retrospectively. Retrospective amendments are welcome where they are made to clarify and/or implement ‘legislative intent’ — but retrospective amendment should not be used to fasten a liability which did not exist or the issue has been the subject-matter of public knowledge and debate and judicial interpretation. The use of ‘tax havens’ to legally avoid or reduce tax liability is public knowledge. The Government of India for the last many years has been unsuccessfully negotiating with the Government of Mauritius for amending the tax treaty for taxing capital gains without success. I repeat the issue is: To achieve the objective of taxing gain on transfer of Indian assets indirectly held through an legal entity in a tax haven — does retrospective amendment represent ‘good governance’ and is it fair? The answer is: No. Amend it but amend it prospectively. Those in-charge of governance have to realise the import of the age-old command of:

‘Yatha raja tatha praja’.

The tax gatherer has to realise that so far as business is concerned, ‘tax’ is a ‘cost’ and it is duty of every business man to reduce ‘cost’ and thereby increase profit. However, the reduction in cost has to be achieved within the framework of law. This right has been recognised by judicial pronouncements and is known as the ‘Westminster Principle’. As a matter of fact, many multinational and large corporations have a dedicated department — personnel — for seeking and devising means of legally reducing tax liability under national and international tax laws. Treaty shopping — a means of reducing tax liability in international operations has been practised for decades. Further, sometime back, business newspapers had reported that a public sector company — desiring to invest abroad or acquire assets abroad was exploring the possibility of making the investment through a subsidiary in a tax haven. This is certainly against the principle of fairness ‘Do unto others as you wish them do unto you’. It is judicially recognised that there is a difference between ‘tax evasion’ and ‘tax avoidance’. Tax evasion is a crime, whereas tax avoidance is a right and negating this right by a retrospective amendment is neither fair, nor does it represent ‘good governance’.

The second issue under ‘fairness’ which is disturbing is cancellation of telecom licences because of corruption. Cancellation is justified where both the giver and taker are involved in the act. Even where the investor is indirectly involved in corruption, cancellation is justified.

The issue is: Is it fair to cancel the licence where an investor has acquired interest in the licence holder after he had obtained the licence and was not involved in the act of bribing. The author is of the view that under such circumstances the licence holder should be punished — the gain the licence holder made be confiscated and the government should acquire the licence holder’s interest in the joint venture without any compensation. An investor who was not involved in corruption should not be penalised. The principle should be and is: ‘Penalise the guilty’.

Above all there is no logic in penalising an investor who is not part of the management group. Let the Government nationalise the corporation without compensation to the promoter, but not penalise you and me who are just investors.

The third limb of governance is ‘transparency’. The issue I would like to discuss is: Life Insurance Corporation acquiring 84% of shares of ONGC offered by the Government in auction. The issue failed as investors perceived that the share of ONGC was probably over -priced. The Government directed LIC to acquire the shares. It is reported that the investment by LIC in ONGC probably exceeded the limit prescribed by the Regulator. I am aware that LIC carries a ‘sovereign guarantee’. Did the Government at the time of announcing the auction declare that if the auction failed or the issue is not fully subscribed, LIC would acquire the unsubscribed shares? The issues are: can — should the ‘sovereign guarantor’ dictate investment policy of LIC and does LIC’s action or gov-ernments’ directive meet the test of transparency.

Let us not forget the old instance of LIC investing in Mundra companies. Chagla Committee was appointed to investigate the investment. The fall out of the findings of the committee was that both the Finance Minister and the Finance Secretary resigned.

The difference between two instances is that in Mundra’s case a private sector entity was involved and in ONGC’s case a public sector entity is involved. It can be argued that in both LIC and ONGC the people of India are involved. The argument in the author’s opinion is fallacious. In case of LIC — it is only the policy-holders who are involved and invest-ments have to be — no must be in the interest of the policy-holders, a class distinct from the rest of people of India. Related issue is: Is this investment in line with the mission statement of LIC which reads as under:

‘Enhancing the quality of life of people through financial security by providing products and services of aspired attributes with competitive returns and by rendering resources for economic development’.

‘Swami Saran Sharma in Outlook Money of 2 May 2012 commented: ‘LIC’s investment in several PSUs is like deliberately chasing bad money.’

The Times of India of 15 May 2012 reports that Mody’s have downgraded LIC. The comment reads as under:

‘LIC’s downgrade comes in the wake of the government dipping into LIC’s resources to recapitalise banks and to bail out the government in its divestment programme.’

The standing Committee on Finance has questioned the Government — regarding LIC’s acquisition of ONGC shares and asked the Insurance Regulatory and Development Authority (IRDA) to inquire if the company had breached investment norms while buying the shares during the Government stake auction. It is reported in Business Standard dated 25-4-2012:

“The committee cannot but conclude that the objec-tive of disinvestments has been reduced to merely deficit-bridging,” goes its rap on one state-run firm’s equity being bought by the other. The report says it regrets the government using central public sector enterprises (CPSEs) as a ‘milching cow’.”

The directive of the Government, on the touchstone of ‘governance’, is not a transparent act. It does not meet both the criterion of ‘fairness’ and ‘transparency’.

High-Frequency Trading

High-Frequency Trading (‘HFT’) has been around for many years now. In spite of this, very little is known about HFT. Ever since the beginning, people in general have either sung praises or spoken of the dark side of HFT. The purpose of this article, however, is not to dwell on the merits or demerits of HFT. Instead, this article is to depict how technology is used in this trade and the basic mechanics of HFT. The technical content has been kept at a bare minimum and logical/practical aspects have highlighted wherever possible.

Background

Once upon a time trading in stocks, securities, commodities, etc. was done on the ‘exchange floor’. Back then, ‘trading’ was a fairly straight-forward affair. Buyers and sellers gathered on exchange floors and heckled with each other until they struck a deal. Those were the heady days of power, pressure and sentiments. However, trading on the exchange floor had its own limitations and the trading practices were plagued with malpractice.

In case you have never had the chance to see how trading took place in the olden days or experience it, check these movies — English movies — Trading Places, Wall Street, Hindi movie — Guru.

By mid-nineties, computers and technology started gaining prominence. The ability of a computerised system, to flawlessly execute transactions, match buy and sell orders, etc., was growing exponentially. Then, in 1998, the Securities and Exchange Commission authorised electronic exchanges to compete with marketplaces like the New York Stock Exchange. The basic intent was to open markets to anyone with a desktop computer and a fresh idea. This objective was achieved largely.

Apparently, (as per data published by NYSE and other public sources) between 2005 and 2009 the trading volume (on the NYSE) grew about 164%. News reports have credited HFT for a large part of this meteoric rise. As a matter of fact, there are some who say that in the United States (US), while high-frequency trading firms represent 2% of the approximately 20,000 firms operating, they account for 73% of all equity orders volume. Currently, it is estimated that HFT trades account for 56% of all equity order volumes in the US, 38% of trades in Europe and 5-10% of trades executed in Asia.

Making money out of thin air

HFT became most popular when exchanges began to offer incentives for companies to add liquidity to the market. For instance, some exchanges have a group of liquidity providers called supplemental liquidly providers (SLPs), which attempt to add competition and liquidity for existing quotes on the exchange. As an incentive to the firm, the exchange pays a fee1 or rebate for providing the said liquidity. Rumour has it that the SLP was introduced following the collapse of Lehman Brothers in 2008, when liquidity was a major concern for investors.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

HFT made simple

HFT is a program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. HFT uses complex algorithms2 to analyse multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds.

Powerful algorithms — ‘algos,’ in industry parlance — execute millions of orders a second and scan dozens of public and private market-places simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

Basic mechanics

The mechanics of such systems coupled with complex algorithms are not standardised. Conceptually, the design may be broken down as follows:

  •     The data stream unit i.e., the part of the systems that receives data e.g., quotes, news, etc., from external sources.

  •     The decision or strategy unit

  •     The execution unit.

These systems are very intelligent and make use of social networks, scanning or screening technologies to read posts of users and extract human sentiment which may influence the trading strategies.

Characteristics of a HFT system

HFT can be characterised as under:

  •     It uses computerised algorithms to analyse incoming market data and implement trading strategies;

  •     HFT trading strategies are for investment horizons of less than one day. The primary game plan is to unwind all positions before the end of each trading day. An investment position is held only for very brief periods of time i.e., from seconds to hours. The system rapidly trades into and out of those positions, sometimes thousands or tens of thousands of times a day;

  •     At the end of a trading day there is no net investment position. Since they must finish the day flat, HFTs exhibit balanced bi-directional (i.e., ‘two-way’) flow. It is argued that due to this feature HFTs can’t accumulate large positions.

  •     HFTs can’t deploy large amounts of capital, infact, HFTs have little need for outside capital or leverage, and tend to be proprietary traders. In theory, HFTs can’t ‘blow up’ (they don’t use much leverage, and don’t have much capital, so they can’t lose much capital!);

  •     Generally employed by proprietary firms or on proprietary trading desks in larger, diversified firms;

  •     It is very sensitive to the processing speed of markets and of the traders own access to the market;

  •     Positions are taken in equities, options, futures, ETFs, currencies, and other financial instruments that can be traded electronically;

  •     High-frequency traders compete on a basis of speed with other high-frequency traders, not (supposedly) the long-term investors (who typically look for opportunities over a period of weeks, months, or years), and compete for very small, consistent profits;

  •     HFT is a very low-margin (low-risk, low-reward) activity;

  •     Theoretically speaking, HFTs follow a Gaussian (Normal) distribution. Their logic is simple i.e., large expected returns are rare and tiny expected returns are abundant;

  •     For the HFTs, opportunities are short-lived because they are very small and they are heavily competed for;

  •     Economics of HFT requires identification of large quantities of trading signals, which is highly technology-intensive. Success or failure in this case is determined by the HFTs speed i.e., speed in capturing opportunities before they are accessed by competitors.

Standard HFT strategies

Most high-frequency trading strategies fall within one of the following trading strategies:

  •     Market making: involves placing a limit order to sell (or offer) or a buy limit order (or bid) in order to earn the bid-ask spread. By doing so, market makers provide counterpart to incoming market orders;

  •     Ticker tape trading: much information happens to be unwittingly embedded in market data, such as quotes and volumes. By observing a flow of quotes, high-frequency trading machines are capable of extracting information that has not yet crossed the news screens;

  •     Event arbitrage: certain recurring events generate predictable short-term response in a selected set of securities, HFTs take advantage of such predictability to generate short-term profits;

  •     High-frequency statistical arbitrage: this strategy requires the HFT to exploit predictable temporary deviations from stable statistical relationships among securities.

HFT the dark side

High-frequency traders often confound other investors by issuing and then cancelling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

HFT came into spotlight about two years ago when a very large Wall Street firm sued one of their former employees for stealing code that was used in one of their programs used to execute this type of trade. When the former employee (programmer) was accused of stealing secret computer codes/software — that a Government prosecutors said could ‘manipulate markets in unfair ways’ — it only added to the mystery be-cause the Wall Street firm acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

It is rumored that in May 2010 — a flash crash took place in the Dow in which several companies and blue chips lost a lot of their value in a matter of minutes, and the New York Times reported that shares of big companies like P&G and Accenture saw ridiculous prices like a penny or a $100,000. The prices were later restored to more usual levels.

Even in India — BSE cancelled all the futures traded on in one of the trading last year, and at least an initial report blamed an algo trader from Delhi for causing havoc because of their trades.

In spite of the fact that HFT has been around for more than a decade, even today, very little is known about HFT and Algorithmic trading. Only recently regulators like the SEC and SEBI has started asking some questions. In fact, if the readers are interested they may look up the recent guidelines issued by SEBI on this issue. SEBI’s endeavour is to contain possibilities of systematic risk caused by the use of sophisticated automated software by brokers.

There are several questions like how do these programs work, what are the triggers, is there a risk and do these programs provide an undue/ unfair advantage to the user. Only time will tell.

Disclaimer:

This article is only intended to create awareness about HFT. The contents of this article are based on various stories, articles, research papers, etc. currently available in the public domain. The purpose of this article is neither to promote, nor malign any person or a company mentioned in the article.

Deferre d taxes an d effec tive tax ra te reconcilia tion — Approach under Ind AS

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In this article, we will aim to understand the Ind AS approach towards computing deferred taxes using a simple case study and extending it to understand the effective tax rate reconciliation, one of the important disclosures for taxes under Ind AS 12.

Computation of deferred taxes using the balance-sheet approach

Deferred taxes under Ind AS are computed using the balance-sheet approach. While in principle, the concept of deferred tax is similar to Indian GAAP, the approach adopted for computation is different. This approach is based on the principle that each asset and liability has a value for tax purposes, considered the tax base. Differences between the carrying amount of an asset/liability and its tax base are temporary differences. Deferred tax assets/liabilities are computed using the substantially enacted tax rate on such temporary differences which are either taxable or deductible in the future periods, subject to specific exemptions under Ind AS 12.

Temporary differences are either taxable temporary differences or deductible temporary differences. A taxable temporary difference results in the payment of tax when the carrying amount of an asset or liability is settled. This means that a deferred tax liability will arise when the carrying value of an asset is greater than its tax base, or the carrying value of a liability is less than its tax base. Deductible temporary differences are differences that result in amounts being deductible in determining taxable profit or loss in future periods when the carrying value of an asset or liability is recovered or settled. When the carrying value of a liability is greater than its tax base or the carrying value of an asset is less than its tax base, a deferred tax asset may arise.

Summary of accounting for deferred tax

In summary, the approach for computing deferred tax under Ind AS is as follows:

  •  Determine the tax base of the assets and liabilities
  • Compare the carrying amounts in the balance sheet with the tax base, and identify all taxable/ deductible temporary differences apart from the specific exceptions under Ind AS
  • Apply the tax rate to the temporary differences to determine the value of deferred tax assets/ liabilities to be recorded. 

Case study

Given below is the balance sheet of an entity as at 31 December 20X2

The first step is to determine the tax base of the above assets and liabilities

Note 1: Land

Consider that under the entity’s tax jurisdiction the indexed cost of land is considered as the cost of land while calculating the profit on sale of such land. Hence the indexed cost of land (tax base) will exceed the book value of land by the indexation benefit provided each year resulting in a deductible temporary difference.

Note 2: Plant and equipment

The original cost of plant and equipment is assumed to be INR 20mn purchased on 1 January 20X2 having an estimated useful life of four years. Depreciation in the books is provided on a straight-line basis. The depreciation rate for tax purposes is 50% and is calculated on a written-down value method. Accordingly, at the end of year 1, the accounting base of Property, Plant and Equipment is INR 15mn and the tax base is INR 10mn resulting in a taxable temporary difference of INR 5mn.

Note 3: Dividend receivable

One of the entity investees has declared a dividend of INR 10mn and the entity has recognised a receivable in its financial statements. In the jurisdiction of the entity, dividends are tax-exempt. In this case, no deferred tax liability is recognised, following either of these analyses:

  • The tax base of the receivable is zero and therefore there is a temporary difference of INR 10mn; however, the tax rate that will apply is zero when the cash is received. Therefore, no deferred tax liability is recognised.
  • The tax base of the receivable is INR 10mn since, in substance; the full amount will be tax deductible (i.e., the economic benefits are not taxable). Therefore, no deferred tax liability is recognised as the tax base is equal to the carrying amount of the asset.

Note 4: Trade receivables

The entity has net debtors of INR 6mn after recognising a bad debt provision of INR 2mn in the books. In the jurisdiction of the entity, tax does not allow a deduction for provision of bad debts and allows a deduction only in the year the company records a bad debt write-off. Hence, the tax base for trade receivables is INR 8mn. This results in a deductible temporary difference which will reverse when the debtor is actually written off in the books and tax allows a deduction.

Note 5: Interest receivable

The entity has accrued interest receivable of INR 5 mn, which will be considered as income for tax purposes only when it receives it in cash. Hence the tax base of the receivable equals zero. This difference results in a taxable temporary difference because the amount will be taxed in a future period i.e., when the cash is received.

Note 6: Loan

The entity has taken a loan of INR 12 mn on 31 December 20X2 and has incurred an upfront loan processing fee (transaction cost) of INR 1 mn. As per Ind AS 39, the entity records the loan value, net of the processing fee as INR 11mn. Consider that under the entity’s tax jurisdiction, such costs are allowed as a deduction in the year when they are incurred. Hence the tax base of the loan is INR 12 mn leading to a taxable temporary difference of INR 1 mn. In the future years, there will be a reversal of this difference as and when the transactions costs are charged to the income statement as per the effective interest rate method under Ind AS 39.

Note 7: Business loss

Consider that the entity has incurred book losses during the current period of INR 4 mn. The tax loss of the current year amounts to INR 21.3 mn. These losses can be carried forward for a period of eight years and claimed as a set-off against tax profits earned in the future. The loss during the current year is on account of an identifiable cause that is unlikely to occur in the future periods. The entity determines that it is probable that future tax profits will be available to recover the deferred tax asset recognised on these losses. In this case, there is an asset tax base of INR 21.3 mn while the accounting base is nil leading to a deductible temporary difference.

Thus the deferred tax computation under the balance sheet approach is as shown in table on previous page:

Effective tax rate reconciliation

One of the mandatory disclosures required by Ind AS 12 is the disclosure of the effective tax rate reconciliation. Effective tax rate reconciliation is explained under Ind AS 12 as a numeric reconciliation between the actual tax expense/income i.e., sum of the current and deferred tax; and the expected tax expense/income i.e., product of accounting profit multiplied by the applicable tax rate. There are two approaches to disclose this reconciliation — reconcile the effective tax rate percentage to the actual tax rate percentage or reconcile the absolute actual income tax expense to the expected tax expense. We have adopted the second approach in the illustration below. Continuing the case study above, consider that the computation of taxable income/loss for the entity is as under:

All temporary differences not considered as part of the deferred tax computations since they are neither deductible, nor taxable in future periods (for example, donations and penalties or dividends) or considered additionally under the deferred tax computations, but will impact taxable income in future periods (for example, land indexation) will form part of the effective tax rate reconciliation.


Note that in case the business losses did not meet the deferred tax asset recognition criteria, then this component (non-recognition of deferred tax asset on business losses due to uncertainty) would also have formed part of the effective tax reconciliation.

The approach under Ind AS 12 for computing deferred taxes and related effective tax rate disclosure ensures that all possible tax impacts to be recorded in the financial statements have been determined. It also helps the reader of the financial statements correlate the tax and account-ing position of the company leading to better understanding of the financial statements.

TDS: Payment to sub-contractors: Section 194C: Union of truck operators procuring contracts for its members: No sub-contracts: Tax not deductible at source.

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[CIT v. Truck Operators Union, 339 ITR 532 (P&H)]
The assessee was a truck operators’ union. It procured contracts for its members. The Assessing Officer made an addition of Rs.6,30,32,453 by way of disallowance u/s.40(a)(ia) holding that such payment to the members required deduction of tax u/s.194C of the Act which was not done. The Tribunal deleted the addition and held as under:

“The assessee-union had been formed by truck operators in order to obtain bigger contracts through it. It was of course entitled to booking charges received, which constituted its main income and the main function of the assessee was to arrange contracts from different agencies for its member operators which were factually and collectively formed by such members. The freight received from the parties concerned belonged to the member truck operators by whose trucks the contracts were performed and as such, the same was disbursed to none else but them. The assessee-union did not give any sub-contract to its members as alleged by the Assessing Officer.”

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

“When the union was acting only in the representative capacity and there was no separate contract between the union and its members for performance of the work as required for applicability of section 194C(2) of the Act, section 40(a)(ia) of the Act was not applicable.”

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TDS: Sections 194C and 194I of Income-tax Act, 1961: A.Y. 2007-08: Assessee engaged in transportation of building materials: Payment to contractors for hiring dumpers: Not rent for machinery or equipment but payment for works contract: Section 194C applicable and not Section 194I.

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[CIT v. Shree Mahalaxmi Transport Co., 339 ITR 484 (Guj.)]

The assessee was engaged in the transportation of building materials, etc. In the A.Y. 2007-08, the assessee paid Rs.1,18,29,647 as rent for hiring dumpers and deducted tax at source at the rate of 1.12%. as applicable u/s.194C of the Income-tax Act, 1961. The Assessing Officer held that the payment was governed by section 194-I and accordingly passed order u/s.201(1) holding the assessee to be in default and levied interest u/s.201(1A) of the Act. The Commissioner (Appeals) and the Tribunal held that the assessee was not in default and that the levy of interest was not justified.

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

“(i) The assessee had given contracts to the parties for the transportation of goods and had not taken machinery and equipment on rent. The Commissioner (Appeal) was justified in holding that the transactions being in the nature of contracts for shifting of goods from one place to another wood be covered as works contracts, thereby attracting the provisions of section 194C of the Act. Since the assessee had given sub-contracts for transportation of goods and not for the renting out of machinery or equipment, such payments could not be termed as rent paid for the use of machinery and the provisions of section 194-I of the Act would not be applicable.

(ii) The Tribunal was, therefore, justified in upholding the order passed by the Commissioner (Appeals).”

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Allowance of input tax credit — Stand of the Department and related procedural aspects — Trade Circular No. 8T of 2012, dated 21-6-2012.

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This is a clarificatory Circular in nature in view of the Bombay High Court decision in case of M/s. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur in writ petition No. 33/2012. This Circular states in detail the stand of the Department regarding allowing/disallowing of Input Tax credit and related procedural aspects.

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Professional tax payment electronically — PFT.1012/C.R.29/Taxation 3, dated 14-6-2012.

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By this Notification every PTRC holder has to make payment electronically of tax, interest, penalty or any amount under the law with effect from 1-7-2012.

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Chanchal Kumar Sircar v. ITO ITAT ‘A’ Bench, Kolkata Before Mahavir Singh (JM) and C. D. Rao (AM) ITA No. 1147/Kol./2011 A.Y.: 2005-06. Decided on: 21-2-2012 Counsel for assessee/revenue : S. Bandyopadhyay/S. K. Roy

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Section 54EC — Exemption from capital gains tax —
Whether assessee entitled to claim exemption under the provision when
the investment in the eligible bonds is made within six months of the
date of receipt of consideration as against the prescribed condition of
the date of transfer — Held, Yes.

Facts:
During the year under appeal
the assessee sold three flats and the entire floor of a building
constructed by him by sales agreements dated 2-7-2004 and 1-7-2004,
respectively. The entire consideration aggregating to Rs.131.77 lacs was
received in instalments between 1-7-2004 and 27-6-2005. Each of the
instalment received by the assessee was deposited by him in full with
NABARD almost immediately and in any case within six months’ period from
the dates of the respective receipts. The assessee claimed exemption
u/s.54EC of the Act on Capital Gains. The AO completed the assessment
u/s.143(3) of the Act accepting the returned income. The CIT, in
exercise of his powers u/s.263 of the Act, held that the investments of
sale consideration amounts should be within six months’ from the date of
the sale and not from the date of receipt of consideration as claimed
by the assessee. In that view, he not only set aside the assessment, but
also gave directions for not considering the deposits made beyond the
period of six months from 2-7-2004 for the purpose of section 54EC.

In
consequence to revision order passed u/s.263 of the Act by the CIT,
assessment was framed u/s. 254/263/143(3) of the Act by the AO on
24-12-2010, and disallowed exemption u/s.54EC of the Act. Aggrieved, the
assessee preferred appeal before the CIT(A) and the CIT(A) also
confirmed the action of the AO.

Held:
According to the Tribunal, if the
period is reckoned from the date of agreement and receipt of part
payment at the first instance, then it would lead to an impossible
situation by asking the assessee to invest money in specified asset
before actual receipt of the same. In taking this view the Tribunal was
supported by the decision of the Andhra Pradesh High Court in the case
of S. Gopal Reddy v. CIT, (181 ITR 378), where in a similar situation of
delayed receipt of compensation amount on acquisition of property, the
Court observed that if the investment in specified asset was made within
a period of six months from the date of receipt of compensation, as
against the date of acquisition of the property denoting transfer
thereof, the same should be considered to be sufficient compliance for
the purpose of claiming exemption u/s.54E of the Act. The Tribunal noted
that similar view was also taken by the Allahabad High Court in the
case of CIT v. Janardhan Dass, (late through legal heir Shyam Sunder)
(299 ITR 210) and by the Andhra Pradesh High Court in the case of
Darapaneni Chenna Krishnayya (HUF) v. CIT, (291 ITR 98). In view of the
above consistent principle adopted by the High Courts in respect to
interpretation of a beneficial provision and the fact that the assessee
invested in specified bonds i.e., NABARD bonds, within one month of the
receipt of sale consideration, the Tribunal held that the assessee is
eligible for exemption u/s.54EC of the Act.

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Clarification on service tax on remittance from abroad to India — Circular No. 163/14/2012-ST, dated 10-7-2012.

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This Circular has clarified that no service tax will be leviable on the amount of foreign currency remitted to India from abroad as the service has been defined u/s.65B(44) and the definition specifically excludes a transaction in money or actionable claim.

As the remittance of foreign currency from abroad is a transaction in money, therefore, it will fall outside the ambit of service. It is further clarified that even the Indian counterpart bank or financial institution who charges the foreign bank or any other entity for the services provided at the receiving end, is not liable to service tax as the place of provision of such service shall be the location of the recipient of the service, i.e., outside India, in terms of Rule 3 of the Place of Provision of Services Rules, 2012.

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India’s DTAAs – Recent Developments

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In the last two years, India has signed DTAAs with
several developing countries and revised DTAAs with several advanced
countries either by signing a Protocol amending the existing DTAA or by
signing a revised DTAA. In this Article, our intention is to highlight
the salient features of some such DTAAs or Protocols amending the DTAAs.
The purpose is not to deal with such DTAAs or Protocols extensively or
exhaustively. It will be seen that the recent treaties with developing
countries follow more or less a similar pattern. Further, the DTAAs with
Developed Countries are being modified to exclude the concept of “Make
Available”, include ‘Limitations of Benefits (LOB) Clause’ and other
Anti- Abuse Provisions. Further, Articles on ‘Exchange of Information’
and ‘Assistance in Collection of Taxes’ are being included or the scope
of such existing Articles is being extended.

The reader is advised to refer the text of the relevant DTAA or the Protocol while dealing with facts of a particular case.

A) DTAAs/Protocols Signed and Notified

1. Finland

A revised DTAA and Protocol has been signed on 15-01-2010 between India and Finland, effective from 1st April, 2011.

As
per the revised Agreement, withholding tax rates have been reduced on
dividends from 15 % to 10 % and on royalties and fees for technical
services from 15 % or 10 % to a uniform rate of 10 %.

The
revised DTAA excludes the concept of “Make Available” from Article 12
(FTS). The revised Agreement also expands the ambit of the Article
concerning Exchange of Information to provide effective exchange of
information.

The Article, inter-alia, provides that a
Contracting State shall not deny furnishing of the requested information
solely on the ground that it does not have any domestic interest in
that information or such information is held by a bank etc. An Article
for Limitation of Benefits to the residents of the contracting countries
has also been included to prevent misuse of the DTAA.

Other features of the revised Agreement are:-

a) Provisions regarding Service PE has been included in the Article concerning PE.

b)
Paragraph 2 to Article 9 has been included to increase the scope for
relieving double taxation through recourse to Mutual Agreement Procedure
(MAP).

c) A new Article on assistance in collection of taxes
has been added, to ensure assistance in collection of taxes when such
taxes are due under the domestic laws and regulations.

d) The
time test for Independent Personal Service has been extended from 90
days or more in the relevant fiscal year to 183 days or more in any
period of 12 months commencing or ending in the fiscal year concerned.

2. Switzerland

India
has signed a Protocol amending the DTAA with Switzerland, notified on
27-12-2011, effective from 01-04-2012 (and, in respect of Exchange of
Information Article 26, effective from 01-04-2011).

The 14 Articles of the Protocol deal with various matters. Some of the noteworthy changes are as follows:

i) International Traffic to include transport via ship also:

The
earlier definition under the Article 3 (i) of the DTAA referred to
means of transport as ‘aircraft’ alone. Now the ambit has been increased
and the word ‘ship’ has also been added. The business profits will not
exclude the profits from the operation of ships; the change in
definition is evident due to the change in the ambit of international
traffic, which now includes ‘ship’ also as one of the means of
transport. Further changes under Article 8 in addition to air transport
also include shipping, which is consequential. Similar changes are
incorporated under Article 11 & 13.

ii) Non-discrimination clause:

Article
24 of the India-Swiss Protocol has incorporated the changes on the
basis of agreement which is line with the USA. Therefore, the taxation
of a permanent establishment which an enterprise of a Contracting State
has in the other Contracting State, shall not be less favorably levied
in that other State than the taxation levied on enterprises of that
other State carrying on the same activities. This provision shall not be
construed as obliging a Contracting State to grant to residents of the
other Contracting State any personal allowances, reliefs and reductions
for taxation purposes on account of civil status or family
responsibilities, which it grants to its own residents.

Further,
it is clarified that the non-discrimination provision shall not be
construed as preventing a Contracting State from charging the profits of
a permanent establishment which a company of the other Contracting
State has in the first mentioned State, at a rate of tax which is higher
than that imposed on the profits of a similar company of the first
mentioned Contracting State, nor as being in conflict with the
provisions of business profits. However, the difference in tax rate will
not exceed 10 % points in any case.

iii) Exchange of Information:

The
competent authorities of the States will exchange information for the
purposes of carrying out provisions of the DTAA between India and Swiss
and the domestic laws and compliances concerning the taxation. Further,
the exchange of information is not restricted to apply only to the
residents of the Contracting State alone. Proper disclosure methods have
also been provided. On a request for information from India,
Switzerland will need to use its administration to obtain that
information regardless of whether it requires this information under its
own tax laws, as long as it does not violate its legal process. The
information may be held by a bank, financial institution, nominee or
person acting in an agency or a fiduciary capacity. But for the same,
India has to first exhaust its own laws to obtain the information. A
host of procedures are provided in the protocol which are mandatory.

The
amendment clarifies that exchange of information which is foreseeable
and relevant, the procedure has to be set out in order to safeguard the
genuine issues.

iv) Definition of the term “Resident of a Contracting State” in Article 4 (1) expanded:

A
new paragraph is added to the Protocol, which expands the scope of the
term “Resident of a Contracting State”, and includes a recognised
pension fund or pension scheme in that Contracting State. These pension
funds or pension schemes will be recognised and controlled according to
the statutory provisions of that State, which is generally exempt from
income tax in that state and which is operated principally to administer
or provide pension or retirement benefits.

v) Conduit Arrangement:

This
provision is a anti-abuse provision. It states that benefits under
Articles 10 (Dividends), Article 11 (interest), Article 12 (Royalty) and
Article 22 (Other Income) would not be available, where such sums are
received under a “conduit arrangement”.

The term “Conduit Arrangement” means a transaction or series of transactions which is structured in such a way that a resident of a Contracting State entitled to the benefits of the Agreement, receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either Contracting State and who, if it received the item of income directly from the other Contracting State in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favourable than those available under this agreement to a resident of a Contracting State and the main purpose of such structuring is obtaining benefits under this Agreement.

3.    Lithuania

India signed a DTAA with Lithuania on 26-07-2011 and notified on 26 -07-2012, effective from 01 -04-2013. Lithuania is the first Baltic country with which a DTAA has been signed by India.

The Agreement provides for fixed place PE, building site, construction & installation PE, service PE, Off-shore exploration/exploitation PE and agency PE.

Dividends, interest and royalties & fees for technical services income, will be taxed both in the country of residence and in the country of source. The low level of withholding rates of taxation for dividend (5% & 15%), interest (10%) and royalties & fees for technical services (10%) will promote greater investments, flow of technology and technical services between the two countries.

The Agreement further incorporates provisions for effective exchange of information including exchange of banking information and supplying of information without recourse to domestic interest. Further, the Agreement provides for sharing of information to other agencies with the consent of supplying state. The Agreement also has an article on assistance in collection of taxes. This article also includes provision for taking measures of conservancy. The Agreement incorporates anti-abuse (limitation of benefits) provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

4.    Mozambique

India has notified the DTAA with Mozambique on 31st May, 2011, effective from 1st April, 2012.

The DTAA provides that profits of a construction, assembly or installation project will be taxed in the state of source, if the project continues in that state for more than 12 months.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic, shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 7.5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

5.    Tanzania – Revised DTAA

India has signed a revised DTAA with Tanzania on 27th May, 2011, effective from 1st April, 2012.

The DTAA provides that business profits will be taxable in the source state, if the activities of an enterprise constitute a permanent establishment in the source state. Profits of a construction, assembly or installation project will be taxed in the state of source, if the project continues in that state for more than 270 days.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed a two-tier 5% or 10% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions, to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

6.    Georgia

India has signed a DTAA with Georgia on 24-08-2011, effective from 1st April, 2012.

The Agreement provides for fixed place PE, Building Site, Construction & Installation PE, Service PE, Insurance PE and Agency PE. The Agreement incorporates para 2 in Article concerning Associated Enterprises. This would enhance recourse to Mutual Agreement Procedure, to relieve double taxation in cases involving transfer pricing adjustments.

Dividends, interest and royalties & fees for technical services income will be taxed both in the country of residence and in the country of source. The low level of withholding rates of taxation for dividend (10%), interest (10%) and royalties & fees for technical services (10%) will promote greater investments, flow of technology and technical services between the two countries.

The Agreement incorporates provisions for effective exchange of information, including exchange of banking information and supplying of information without recourse to domestic interest. The Agreement also provides for sharing of information to other agencies with the consent of supplying state.

The Agreement has an article on assistance in collection of taxes, including provision for taking measures of conservancy. The Agreement incorporates anti-abuse (limitation of benefits) provisions to ensure that the ben-efits of the Agreement are availed of by the genuine residents of the two countries.

7.    Singapore

India has signed a Second Protocol amending DTAA with Singapore on 24th June, 2011, entered into force from 1st September, 2011, but shall be given effect to for taxable periods falling after 01-01-2008, i.e. Financial Year 2008-09 & subsequent financial years. Both India and Singapore have adopted internationally agreed standard for exchange of information in tax matters. This standard includes the principles incorporated in the new paragraphs 4 and 5 of OECD Model Article on ‘Exchange of Information’ and requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.

8.    Norway

India signs revised DTAA with Norway on 2nd February, 2011, effective from 1st April, 2012.

The revised tax treaty provides for exchange of information between the two nations including banking data. It also provides that each state would be required to collect and provide the information, even though such information is not needed by that state.

It also provides for the Limitation of Benefit (LOB) clause, whereby the treaty benefit would be denied, if the main purpose of the transaction or creation or existence of residence is to avail the treaty benefit.

9.    Japan

India has notified on 24-05-2012, amendments to Article 11 of the India-Japan DTAA, but effective from 1st April, 2012.

As per Article 11(3), interest arising in India and derived by Central Bank or any financial institution wholly owned by Government of Japan, is not taxable in India. Earlier, Inter-national business unit of Japan Finance Corporation was one of the entities entitled to the benefit under Article 11(3). According to the amendment, Japan Bank for International Cooperation would be entitled to the benefit now, instead of the International business unit of Japan Finance Corporation.

10.    Taipei (Taiwan)

The Taipei Economic and Cultural Center in New Delhi has signed a DTAA with the India – Taipei Association in Taipei. Taiwan’s Ministry of Finance (MOF) on August 17, 2012 announced that Taiwan’s income tax agreement and protocol with India entered into force on August 12, 2012 and will apply to income derived from Taiwan on or after January 1, 2012, and to income derived from India on or after April 1, 2012. The agreement has been entered u/s. 90A of the Income-tax Act, 1961 wherein any “specified association” in India may enter into a DTAA with any “specified association” in a “specified territory” outside India. The Taipei Economic and Cultural Center in New Delhi and India – Taipei Association in Taipei have been notified as “specified associations” and “the territory in which the taxation law administered by the Ministry of Finance in Taipei is applied”, has been notified as the “specified territory” for the purpose of Section 90A.

Salient Features of the DTAA

Persons Covered – The DTAA applies to persons who are residents of India, Taipei or both.

Taxes Covered
•    In case of India, the DTAA will cover income tax (including any surcharge thereon).
•    In the case of Taipei, it would cover the following (including the supplements levied thereon):

–  the profit seeking enterprise income tax;

–  the Individual consolidated income-tax; and

–  the income basic tax.

Definition of Person

•    The term “person” to include an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws of the respective territories.

Resident

•    In order to qualify as a “resident of a territory” under the DTAA, person has to be “liable to tax” therein by reason of his domicile, residence, place of incorporation, place of management or any other criterion of a similar nature, and also includes that territory and any sub-division or local authority thereof.

•    Further, the term ‘resident’ does not include any person who is liable to tax in that territory only in respect of income from sources in that territory.

•    In case of dual residency, necessary tie breaker rules have been prescribed to determine tax residency. For individuals, the DTAA provides for criteria such as permanent home, centre of vital interests, habitual abode, etc. For persons other than individuals, the tie breaker provides for place of effective management criteria.

Permanent Establishment (‘PE’) – The DTAA contains clauses for constitution of a fixed place PE and inclusions thereon. For construction/supervisory PE, the activities at a building site, or construction, installation, or assembly project or supervisory activities should last for more than 270 days. In respect of constituting a PE by way of furnishing of services, including consultancy services, the services should be rendered for a period or periods aggregating to more than 182 days within any 12 month period for the same or connected project.

Shipping and air transport – Profits from operation of ships or aircraft in international traffic shall be taxable only in the territory of residence.

Dividends, Interest, Royalties and Fees for Technical services (‘FTS’)

•    Dividends, Interest, Royalties and FTS may be taxed in the territory of residence as well as in the source territory.

•    The rate of tax in the source territory shall not exceed the following rates (on a gross basis) in case the beneficial owner of the Dividend, Interest, Royalties and FTS is a resident of the other territory:

– Dividends: 12.5%
– Interest: 10%
– Royalties and FTS: 10%

•    FTS has been defined to mean payments of any kind, including the provision of services of technical or other personnel.

Capital gains

•    Income by way of Capital gains shall be taxed as follows:

– From alienation of Immovable property: In the territory in which the immovable property is situated.

– From alienation of ships or aircraft operated in international traffic: The territory in which the alienator is a resident.

– From alienation of shares deriving more than 50% value from immovable property: In the territory in which such immovable property is situated.

– From alienation of any other shares: The territory in which the company whose shares are alienated, is a resident.

– From alienation of any other property: The territory in which the alienator is a resident.

Methods of Elimination of Double Taxation (Tax Credit)

•    The DTAA allows for the “credit method” to eliminate taxation of income by both India and Taipei. The tax credit for taxes paid on such income in the other territory is available as a credit to a taxpayer in his territory of residence. However, the above tax credit should not exceed the tax on the doubly taxed income in the territory of his residence.

•    It has also been provided that, where any income received in accordance with the provisions of the DTAA by the resident of the other country is exempt from tax in the country of residence, then in calculating the tax on the remaining income of such resident, the resident country may nevertheless take into the exempted income.

•    Further, India would not grant credit to its residents on the Land Value Increment Tax imposed under the Land Tax Act, in Taiwan.

Limitation of Benefits (LOB)

•    This Article restricts the benefits under the DTAA if the primary purpose or one of the primary purposes was to obtain the benefits of the DTAA. Legal entities not having bonafide business activities are also covered by the LOB clause.
(Source: Taiwan’s Ministry of Finance)

11.    Nepal

India signed a revised DTAA with Nepal on 27-11-2011 and notified on 12-06-2012, effective from fiscal year beginning on or after the 1st day of April, 2013.

B)    DTAAs signed but not notified

12.    Australia – Protocol amending the DTAA

The protocol was finalised in February, 2011. The protocol amending the DTAA was signed on 16th December, 2011. However, the same is not yet notified.

In the Protocol, the threshold limit to avail the exemption for service, exploration and equipment permanent establishments and taxation thereof have been enhanced/rationalised to encourage cross border movement of capital and services between the two countries. It also removes the “Force of Attraction Rule” in Article 7.

The Exchange of Information Article is updated to internationally accepted standards for effective exchange of information on tax matters, including bank information, and also for exchange of information without domestic tax interest. It also provides that the information received from Australia in respect of a resident of India can be shared with other law enforcement agencies with authorisation of the competent authority of Australia and vice-versa. This will facilitate higher degree of mutual cooperation between the two countries.

The protocol provides that India and Australia shall lend assistance to each other in the collection of revenue claims.

According to it, the assets or money kept in one country can be recovered by the other country for the purposes of recovery of taxes by following certain conditions and procedure.

In the existing treaty, the concept of non-discrimination was not present. As per the protocol signed, nationals of one country shall not be discriminated against the nationals of the other country in the same circumstances in line with international practices.

13.    UK – Protocol to the DTAA

India has signed a protocol dated 30th October, 2012 with UK and Northern Ireland amending the DTAA. This Protocol amends the DTAA which was signed on 25th January, 1993. However, the same is not yet notified.

The Protocol streamlines the provisions relating to partnership and taxation of dividends in both the countries. Now, the benefits of the DTAA would also be available to partners of the UK partnerships to the extent income of UK partnership are taxed in their hands. Further, the withholding taxes on the dividends would be 10% or 15% and would be equally applicable in UK and in India.

The Protocol also incorporates into the DTAA anti-abuse (limitation of benefits) provisions to ensure that the benefits of the DTAA are not misused.

The Protocol incorporates in the DTAA provisions for effective exchange of information, including exchange of banking information and supplying of information irrespective of domestic interest. It now also provides for sharing of information to other agencies with the consent of the supplying state.

There would now be a new article in the DTAA on assistance in collection of taxes. This article also includes provision for taking measures of conservancy.

14.    Indonesia – Revised DTAA

India has signed a revised DTAA with Indonesia on 27th July, 2012. However, the same is not yet notified.

The revised DTAA gives taxation rights in respect of capital gains on alienation of shares of a company to the source State. The Agreement further provides for rationalisation of the tax rates on dividend income, royalties and Fees for Technical Services in the source State @ 10%.

The revised DTAA further incorporates provisions for effective exchange of information including banking information and sharing of information without domestic tax interest. The revised DTAA also provides for assistance in collection of taxes and incorporates Limitation of Benefits and anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents.

15.    Uruguay

India has signed a DTAA with Uruguay on 8th September, 2011. However, the same is not yet notified.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalty income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source and tax credit will be given in the country of residence.

The Agreement also incorporates provisions for effective exchange of information including banking information and assistance in collection of taxes including anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

16.    Ethiopia

India has signed a DTAA with Ethiopia on 25th May, 2011. However, the same is not yet notified.

The DTAA provides that profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 183 days.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest, royalties and fees for technical services income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 7.5% in the case of dividends and 10% in the case of interest, royalties and fees for technical services. Capital gains from the sale of shares will be taxable in the country of source.

The Agreement incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

17.    Colombia

India has signed a DTAA with Colombia on 13-05-2011. However, the same is not yet notified.

The DTAA provides that profits of a construction, assembly or installation projects will be taxed in the State of source if the project continues in that State for more than six months.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalty income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

18.    Netherlands

India and Netherlands have concluded a Protocol on 10th May, 2012 to amend the Article 26 of the DTAA concerning Exchange of Information. However, the same is not yet notified.

The Protocol will replace the Article concerning Exchange of Information in the existing DTAC between India and Netherlands and will allow exchange of banking information as well as information without domestic interest. It will now allow use of information for non-tax purpose if allowed under the domestic laws of both the countries, after the approval of the supplying state.

Clarification on point of taxation rules — Circular No. 162/13/2012-ST, dated 6-7-2012.

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This Circular has been issued to clarify issues relating to point of taxation in (i) continuous supply of service — dealing with the transition by way of changes in the Rules w.e.f. 1st April 2012; (ii) works contracts — the transition by way of changes in tax treatment w.e.f. 1st July 2012; and (iii) introduction of partial reverse charge in certain services w.e.f. 1st July 2012. Accordingly,

(i) In the case of continuous supply, where the invoice had been issued or payment received before or on 31st March 2012, the point of taxation is governed by Rule 6 of the Point of Taxation Rules, 2011 as it stood at that point of time.

(ii) In the case of works contracts, which have been subjected to certain changes in service tax treatment effective from 1st July, if there has been a change in the effective rate of tax, the point of taxation will be determined under Rule 4, and if not, it will be determined under Rule 3. Introduction of service tax for a service that was not exempted by Notification, but was outside the scope of taxable service, does not constitute a change in the effective rate of taxation, and will be dealt with under Rule 3. (iii) For services where partial reverse charge has been introduced from 1st July, it will apply only when the point of taxation is on or after 1st July.

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Clarification regarding cess — Circular No. 161/12/2012-ST, dated 6-7-2012.

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The CBEC has circulated the new single accounting code for all taxable services, which is 00441089 for service tax, 00441090 for other receipts, and 00441093 for penalties. The code for ‘deduct refunds’ is 00441094. These codes are effective from 1st July 2012. The old codes will continue to be operative for payment pertaining to the period prior to 1st July 2012.

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Clarification regarding cess — Circular No. 160/11/2012-ST, dated 29-6-2012 and Order N0. 2/2012, dated 29-6-2012.

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There has been some doubt regarding the applicability of provisions of the Finance Act, 2004 relating to education cess and the Finance Act, 2007 relating to secondary and higher education cess as the concerned Acts make reference to section 66 of the Finance Act, 1994, which shall cease to have effect from 1st July, 2012. In this connection, reference to the s.s (1) of section 8 of the General Clauses Act, 1897 is made for interpretation of statutes and thus any reference to section 66 of the Finance Act, 1994 shall be construed as reference to the newly re-enacted provision i.e., section 66B of the same Act. Despite the stated position of law, the matter has been settled by the issue of Removal of Difficulties Order No. 2/2012, dated 29-6-2012.

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Transport of passengers and goods by rail exempted from service tax — Notification No. 43/2012-ST, dated 2-7-2012.

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Vide this Notification, exemption has been granted from whole of service tax leviable on two kinds of services provided by Indian Railways, namely,

(a) Service of transportation of passengers (with or without accompanied belongings) in 1st class or in air-conditioned coach and

(b) Services by way of transportation of goods. The exemption would be effective up to 30th September 2012.

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Service of foreign commission agent utilised for export of goods exempted — Notification No. 42/2012-ST, dated 29-6-2012.

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By this Notification, the service of a commission agent located outside India and used for the export of goods is exempted from service tax up to a value of 10% of the FOB value of the goods exported. However, the exemption is not available for the export of canalised item, project export, export financed under lines of credit extended by the Government of India or by EXIM Bank.

It is also not available for export by the Indian partner with equity participation in an overseas joint venture or wholly-owned subsidiary. The said Notification also contains the procedure in detail and the forms in which the exporter is required to inform Dy. Commissioner/ Assistant Commissioner of Central Excise regarding before claiming exemption.

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Shri 1008 Parshwanath Digamber Jain Mandir Trust v. DIT ITAT ‘I’ Bench, Mumbai Before P. M. Jagtap (AM) and N. V. Vasudevan (JM) ITA No. 5544/M/2009 Decided on: 8-2-2012 Counsel for assessee/revenue: Ajay Ghosalia/ Sanjiv Dutt

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Section 12AA — Registration of charitable trust — Trust constituted with the object clause consisting of charitable as well as religious — Whether entitled for registration — Held, Yes.

Facts:
The assessee trust had applied for registration u/s.12AA of the Act. Its objects, as per its trust deed, were charitable as well as religious. According to the DIT, since the objects were admixture of religious as well as non-religious, relying on the decision of the Jammu & Kashmir High Court in the case of Ghulam Mohidin Trust v. CIT, (248 ITR 587) and the decision of the Supreme Court in the case of State of Kerala v. M. P. Shanti Verma Jain, (231 ITR 787), the registration u/s.12AA was denied. Before the Tribunal, the Revenue justified the order of the DIT on the ground that at the time of grant of registration u/s.12AA, it was necessary that he was satisfied that the objects are charitable and as per section 2(15), which defines the term ‘charitable purpose’, religious purpose is not part of charitable purpose.

Held:
According to the Tribunal, the trust, whose objects are religious as well as charitable, would be entitled for grant of registration and also to claim exemption u/s.11. For the purpose, reliance was placed on the decision of the Gujarat High Court in the case of ACIT v. Bibijiwala, (AA) Trust (100 ITR 516). It further observed that when the assessee seek exemption u/s.11, the same would be allowed subject to provision of section 13(1)(a) and (b) of the Act. According to it, the decisions relied on by the Revenue were on different facts, hence, not applicable to the case of the assessee.

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Exemption of service provided to SEZ, etc. — Notification No. 40/2012-ST, dated 20-6-2012.

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Vide this Notification, exemption granted to services provided to an unit located in a Special Economic Zone or Developer of SEZ and used for the authorised operations, from the whole of the service tax, education cess and secondary and higher education cess leviable thereon, subject to complying with conditions and procedures.

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Rebate of service tax to exporter — Notification No. 41/2012-ST, dated 29-6-2012.

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This Notification deals with provision and procedure for rebate given in the form of refund of service tax paid on services utilised for goods exported. The rebate is available for export of both excisable and non-excisable goods.

For excisable goods, it applies to services used beyond the place of removal, for export of the goods. For non-excisable goods, it applies to services used for the export of the goods. Rebate is given as per the schedule of rates in the Notification; however if actuals are over twenty per cent more than the notified rate, the rebate can be claimed on the actuals as supported by documents.

The exclusions under definition of ‘input services’ in the Cenvat Credit Rules, as contained in clauses A, B, BA and C of Rule 2(l) apply to rebate also. Rebate is not available if Cenvat credit of service tax paid on specified service used for export of goods has been taken.

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(2011) 40 VST 141 (MP) Fairdeal Corporation v. Commissioner of Commercial Tax, Madhya Pradesh and Others

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Sales Tax — Rate of tax — Entries in Schedule — ‘Fan covers’ and ‘Terminal Boxes’ — Used for manufacture of monoblock pump sets — Accessories of pump sets — Not an accessories to electric motors — Sch. I — Entry 89, Sch. II, — Part IV — Entry 7 of Madhya Pradesh Vanijya Kar Adhiniyam, 1994 (5 of 1995).

Facts:
The dealer manufactured and supplied fan covers and terminal boxes according to specification for use as accessories in monoblock pumps. The question before the High Court was whether the fan covers and terminal boxes, manufactured and supplied by the dealer, to be used for manufacture of monoblock pump sets used for irrigation purposes, were covered by Entry 7 of Part IV of Schedule II to the Madhya Pradesh Vanijya Kar Adhiniyam, 1994 as parts and accessories of the electric motor, or under Entry 89 of Schedule I to the Act as accessories of pumping sets.

Held:
The electric motors on which these two items were fixed are an integral part of the monoblock pump and not separable from the pump. The items in question could be used as accessories to the electric motor, but when the electric motor itself was an integral part and inseparable from the monoblock pump, the items in question would not be accessories of the electric motor but accessories of the monoblock pump.

In the monoblock pump the electric motor has no separate existence as independent item, therefore, the items in question could not be said to be an accessories to electric motor when used in monoblock pump.

When these items are used as accessories to the monoblock pump sets of less than 10 horse-power capacity they are covered by Entry 89 of Schedule I and not by Entry 7 of Part IV of Schedule II which is a general entry in respect of electric machine, its part and accessories. However, if the same items were sold by the petitioner for use as accessories or otherwise to some other main item, then they would be taxed according to the relevant entry covering such items and accessories.

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(2011) 16 Taxmann.com 209 (Chennai-CESTAT) — Safety Retreading Co. P. Ltd. v. Commissioner of Central Excise, Salem.

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Appellant retreaders of tyres — Paying service tax under maintenance and repair services on labour charges — Material cost benefit under Notification No. 12/2003-ST, dated 20-8-2003 claimed — As per Revenue, under the notification benefit available for actual sale of material and not raw material consumed during course of provision of service available — Held, There is no evidence of sale of material in rendering maintenance and repair service — ‘Deemed sale’ relevant only in case of services under works contract and not in respect of maintenance and repair service — Satisfaction of conditions under Notification 12/2003-ST not proven — Hence benefit denied.

Facts:
The appellant is engaged in retreading of used tyres and thus providing repairs and maintenance service and paying service tax on the component labour charges involved. The tread rubber patches, bonding gum, etc. are purchased and used for redoing treading on them. The invoices for this job are prepared by indicating separately the actual cost of material used. Due VAT as per the Tamil Nadu VAT Act, 2006 is paid on this. Also filed returns with sales tax authorities which are duly assessed. The Revenue held that only in the case of actual sale of material, benefit of Notification 12/2003 is available and not in case of consumption of raw material during the course of providing service.

The Bench referred to many relevant decisions on the subject matter which inter alia included Bharat Sanchar Nigam Ltd. v. UOI, (2008) 200 STR 161 (SC), Rainbow Colour Lab. v. State of MP, (2000) 2 SCC 385, Shilpa Colour Lab, (2007) 5 STR 423 (Tri.-Bang.), Speedway Tyre Service v. CCE, (2009) 18 STT 293 (Delhi), PLA Tyre Works v. CCE, (2009) 19 STT 362 (Chennai), Idea Mobile Communication Ltd., (2011) 23 STR 433 (SC) and Aggarwal Colour Advance Photo System (2011) 23 STR 608 (Tri.-LLB), etc.

The two Members of the Bench differed in their views. The points of difference placed before the Third Member.

The Third Member recognised that the issue related to interpretation of Notification 12/2003-ST as well as benefit of deduction of cost of raw materials available considering the tread rubber patches and bonding gum used as ‘deemed sale’ on which VAT is paid.

Held:
There is no evidence of sale of material in rendering service of maintenance and repair.

The concept of ‘deemed sale’ relevant only in respect of services under the category of ‘works contract’ for service tax purpose.

‘Maintenance and repairs’ being a specific service cannot be treated as service under ‘works contract’ for service tax purpose.

The assessee did not prove that conditions under Notification 12/2003-ST were satisfied and therefore they are not entitled to the benefit under the said Notification.

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(2012) 25 STR 206 (Tri-Bang.) — Lanco Industries Ltd. v. Commissioner of Central Excise, Tirupathi.

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CENVAT credit availed and utilised on irregular basis — Such credit reversed before issuance of show-cause notice — Interest charged from the date of availment up to the date of reversal — Argued that interest if at all leviable — Should be from date of utilisation — Penalty — Imposed for suppression of facts in order to avail inadmissible credit — Penalty for irregular availment of inadmissible credit — Held, Appellant liable to pay interest on CENVAT credit irregularly availed — Penalty for suppression of facts set aside — Penalty for availment of inadmissible credit upheld.

Facts:
The appellant made wrongful/irregular availment and utilisation of CENVAT credit and voluntarily reversed the same. However, they were directed to pay interest under Rule 12/14 of the CENVAT Credit Rules, 2002/2004 for the period till the date of reversal. The appellant pleaded that the major part of the credit was not utilised. According to the appellant, interest was not payable for the fact that they had already reversed the credit before the issuance of the show-cause notice and against the allegation of suppression, the appellants argued that they had already disclosed all the material facts to Department through ER-1.

Held:
With regards to the interest payable on the wrong availment of credit it was held that reversal of credit before issuance of show-cause notice cannot take away the liability. Hence, appellant was held liable to pay the interest. However, it was concluded that there was no suppression of facts by the appellant and penalty on this count was withdrawn thus retaining penalty for wrong availment of credit.

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(2012) 25 STR 196 (Tri-Del.) — Praveen Jain & Co. Pvt Ltd. v. Commissioner of Service Tax, Delhi.

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Appellant availed CENVAT credit prior to making payment to service provider — Order confirming demand of duty by denying CENVAT credit of Rs.25,51,699 and imposition of penalty of Rs.10,000 — Appellant contended that it was mistake that happened and payment subsequently made to service providers — Denial of credit and demand of duty not justified — Claimed that it was clear violation of the CENVAT Credit Rules, 2004 — However taking into account subsequent payment, denial of the credit was set aside — However, interest was held payable for the period of wrong availment along with penalty of Rs.10,000.

Facts:
The appellant availed credit on input services prior to making payments to the service provider. However, it made payments before the issuance of the show-cause notice. The appellants argued that it was a mistake from their end and subsequent regularisation of the deficiency of the documents can be condoned. As per the Revenue, the payment of price and duty to the supplier of inputs and input services is different. Making the payment to the supplier of inputs was not a pre-condition for availing the credit. However, credit of the input services cannot be availed unless and until payment has been made to the service provider.

Held:
Held that the appellant had enjoyed monetary benefit and hence, was liable for the payment of interest and penalty. On the other hand, taking into account the subsequent payment made to the service provider denial of the credit was set aside.

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(2012) 25 STR 178 (Tri-Ahmd.) — Rahul Trade Links v. Commissioner of Central Excise, Rajkot.

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Penalty — Non-payment of service tax — Separate penalties imposed u/s.76 and u/s.78 — Finding that assessee not having requisite mens rea — Tax paid with interest and penalty — Commissioner rightfully reduced penalty — No infirmity in the impugned order.

Facts:
The appellant was inter alia engaged in distribution for Tata Teleservices Ltd. on a commission basis. The assessee failed to pay service tax for the services rendered. The adjudicating authority confirmed the penalty and interest u/s.76 and u/s.78, but reduced the penalty. The appellant challenged the order and vehemently argued that equivalent penalty u/s.78 is not attracted.

Held:
The Tribunal observed that the penalties imposed under the abovementioned sections are clearly distinct even if the offences are carried out in the same transaction. The Tribunal dismissing the appeal held that the finding of the adjudicating authority was not shown to be perverse in any manner.

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(2012) 25 STR 167 (Tri-Mum.) — Maharashtra Seamless Ltd. v. Commissioner of Central Excise, Raigad.

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Appellants manufacturing unit located in Raigad District — Input services for the maintenance of windmill located in Satara District — Electricity so generated was consumed for the manufacture of the final product — Such credit rendered ineligible — Proceedings initiated against appellant —As per appellant, there was no mandate in definition of input service that services be used in manufacturing factory alone — Maintenance of windmills — Eligible input credit — Appeal allowed.

Facts:
The appellant was a manufacturing unit engaged in manufacture of excisable good situated at Raigad. They took credit on maintenance services received for their windmill situated in Satara District and consumed electricity generated out of it for the production of final product. The credit taken for above-mentioned input service was disallowed. According to the revenue there was no nexus between the said input services and the final product manufactured by them and they placed reliance on the Tribunal’s decisions in the case of Rajhans Metals Pvt. Ltd. v. CCE, Rajkot, (2007) 8 STR 498 (Tri.-Ahd) and Indian Rayon Industries Ltd., (2006) 4 STR 79 (Tri.) wherein it was held that services used at the site of windmills cannot be considered as input services by unit situated at some other place.

Held:
Held that the input services were rendered for the maintenance of windmills for generation of electricity cannot be brought into dispute. Further, after the study of the input service definition, it was concluded that the said service falls under the definition of input service. As regards input service used at different place was concerned, it was pertinent that there was no mandate in law that it should be used in the factory. The cited decisions were distinguished stating that the decision in the case of CCE, Nagpur v. Ultratech Cement Ltd., (2010) 20 STR 577 (Bom.) was not available before the Tribunal including in the case of Rajhans (supra). Hence, appeals allowed.

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(2012) 25 STR 136 (Tri-Bang.) — Sobha Developers Ltd. v. Commissioner of Central Excise, Bangalore.

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CENVAT credit — Appellant service provider to SEZ units/developer — Issue — Appellant of the opinion that provision of service to SEZ units is export of service and cannot be considered as exempted service — Demand raised on ground that service provided was exempted service and the availment of CENVAT credit of input service credit would fall under restriction/ demand under Rule 6 of CENVAT Credit Rules, 2004 — Noted that supplies to SEZ were free of all the taxes considering them at par with exports — Appeal allowed with consequential relief.

Facts:
The appellant provided services to SEZ units/ developers and contended that services provided should be considered as export of service and the demand raised through impugned orders should be set aside. Whereas, according to the Revenue the two basic conditions to hold a service as exports are that service should be provided outside India and payment for such services be received in convertible foreign exchange are not fulfilled. The appellant relied upon the decision in the case of Shyamraju & Co (I) Pvt. Ltd. V. UOI, 2010 (256) ELT 193 (Kar) wherein it was clearly noted that provision of services to SEZs are free of all taxes and this could be done by treating them at par with exports. In this case the issue does not, relate to whether the tax is to be levied or not but to decide whether the appellant is eligible to utilise CENVAT credit and whether they are eligible to pay an amount equal to 8% for the period prior to 1-4-2008.

Held:
By applying ratio of the decisions laid down in the various cases cited which inter alia included Bajaj Tempo Ltd. v. Collector, (1994) 69 ELT 122 and Steelite Industries Ltd., (2009) 244 ELT A89 (Bom.), it was held that the provisions of service to SEZ units were to be made applicable either on payment of tax or without tax and which cannot be equated with exempted services. Also, that services provided to SEZ units were covered by Rule 6 of the CENVAT Credit Rules, 2004, and hence, there stood no inconsistency between the Special Economic Zones Act, 2005 and the Finance Act, 1994. Therefore, considering all the arguments it was held that the restriction under the CENVAT Credit Rules, 2004, would not apply and services would be considered at par with exports and all the appeals were allowed.

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GAPs in GAAP — Accounting for Rate Regulated Activities

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Many governments establish regulatory mechanisms to govern pricing of essential services such as electricity, water, transportation, etc. Such mechanisms endeavour to maintain a balance between protecting the consumers from unreasonable prices and allowing the providers of the services to earn a fair return. These rate-regulation mechanisms result in significant accounting issues for service providers.

Company X, the owner of electricity transmission infrastructure and related assets, has been licensed for twenty years to operate a transmission system in a particular jurisdiction. Only one operator is authorised to manage and operate the transmission system. Company X charges its customers for access to the network at prices that must be approved by the regulator. Pricing structures are defined in the law and related guidelines, and are determined on a ‘cost plus’ basis that is based on budget estimates. Once approved, prices are published and apply to all customers. Prices are not negotiable with individual customers. Prices are set to allow Company X to achieve a fair return on its invested capital and to recover all reasonable costs incurred. At the end of each year, Company X reports to the regulator deviations between the actual and budgeted results. If the regulator approves the differences as ‘reasonable costs’, they are included in the determination of rates for future periods. The key question is that, can an entity recognise this difference which it would attempt to recover through rates for future periods as assets and liabilities?

To deal with this issue, the International Accounting Standards Board (IASB) was working on the proposed IFRS for Rate Regulated Activities. Though the IASB paused its project, the ICAI recently issued the Guidance Note on Accounting for Rate Regulated Activities (GN). It is stated that the GN will apply both under the Indian GAAP and IFRS-converged standards (Ind-AS). Since the GN is still to be cleared by the National Advisory Committee on Accounting Standards (NACAS), the ICAI has not announced its applicability date. The GN applies to those activities of an entity which meet both of the following criteria:

(i) The regulator establishes the price the entity must charge its customers for the goods or services the entity provides, and that price binds the customers.

(ii) The price established by regulation (the rate) is designed to recover the specific costs the entity incurs in providing the regulated goods or services and to earn a specified return (costof- service regulation). The specified return could be a minimum or range and need not be a fixed or guaranteed return. The GN defines the ‘costof- service’ regulation as ‘a form of regulation for setting up an entity’s prices (rates) in which there is a cause-and-effect relationship between the entity’s specific costs and its revenues.’ However, the GN does not deal with regulatory mechanisms which prescribe rates based on targeted or assumed costs, such as industry averages, rather than the entity’s specific costs.

GN acknowledges that the rate regulation of an entity’s business activities creates operational and accounting situations which would not have arisen in the absence of such regulation. With cost-ofservice regulation, there is a direct linkage between the costs that an entity is expected to incur and its expected revenue as the rates are set to allow the entity to recover its expected costs. However, there can be a significant time lag between incurrence of costs by the entity and their recovery through tariffs. Recovery of certain costs may be provided for by regulation either before or after the costs are incurred. Rate regulations are enforceable and, therefore, may create legal rights and obligations for the entity.

The GN requires an entity to recognise regulatory assets and regulatory liabilities. Regulatory assets represent an entity’s right to recover specific previously incurred costs and to earn a specified return, from an aggregate customer base. Regulatory liabilities represent an entity’s obligation to refund previously collected amount and to pay a specified return. The following paragraphs explain the reasons provided in the GN for recognition of rate regulated assets and liabilities.

 (1) The Framework, defines an ‘asset’ as follows: “An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.” In a cost-of-service regulation, the resource is the right conferred by the regulator whereby the costs incurred by the entity result in future cash flows. In such cases, incurrence of costs creates an enforceable right to set rates at a level that permits the entity to recover those costs, plus a specified return, from an aggregate customer base. For example, if the regulator has approved certain additions to be made by the entity in its assets base during the tariff period, which would be added to the asset base for tariff setting, the entity upon making such additions obtains the right to recover the costs and return as provided in the regulatory framework though the actual recovery through rates may take place in the future. While adjustment of future rates is the mechanism the regulator uses to implement its regulation, the right in itself is a resource arising as a result of past events and from which future cash inflows are expected.

(2) The cause-and-effect relationship between an entity’s costs and its rate-based revenue demonstrates that an asset exists. In this case, the entity’s right that arises as a result of regulation relates to identifiable future cash flows linked to costs it previously incurred, rather than a general expectation of future cash flows based on the existence of predictable demand. The binding regulations/orders of the regulator for recovery of incurred costs together with the actual incurrence of costs by the entity would satisfy the definition of asset as per the Framework since the entity’s right (to recover amounts through future rate adjustments) constitutes a resource arising as a result of past events (incurrence of costs permitted by the regulator for recovery from customers) from which future economic benefits are expected to flow (increased cash flows through rate adjustments).

(3) As regards the ‘control’ criterion in the definition of an asset as per the Framework, it may be argued that though the entity has a right to recover the costs incurred, it does not control the same since it cannot force individual customers to purchase goods or services in future. In this regard, it may be mentioned that the rate regulation governs the entity’s relationship with its customer base as a whole and therefore creates a present right to recover the costs incurred from an aggregate customer base. Although the individual members of that group may change over time, the relationship the regulator oversees is between the entity and the group. The regulator has the authority to permit the entity to set rates at a level that will ensure that the entity receives the expected cash flows from the customers’ base as a whole. Further, the Framework states that control over the future economic benefits is sufficient for an asset to exist, even in the absence of legal rights. The key notion is that the entity has access to a resource and can limit others’ access to that resource which is satisfied in case of the right provided by the regulator to recover incurred costs through future rate adjustments. Any issues regarding recoverability of the amounts should not affect the recognition of the right in the financial statements though they certainly merit consideration in its measurement.

    4. The Framework defines a liability as ‘a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.’ In cost-of-service regulation, an obligation arises because of a requirement to refund to customers excess amounts collected in previous periods. In such cases, collecting amounts in excess of costs and the allowed return creates an obligation to return the excess collection to the aggregate customer base. For example, if the tariffs initially set assume a certain level of costs towards energy purchased but the actual costs incurred by the entity are less than such assumed levels, the entity would be obliged to make a refund following the ‘truing up’ exercise by the regulator. Such obligation is a present obligation relating to amounts the entity has already collected from customers owed to the entity’s customer base as a whole, not to individual customers. It is not a possible future obligation because the regulator has the authority to ensure that future cash flows from the customer base as a whole would be reduced to refund amounts previously collected. The obligation exists even though its amount may be uncertain. An economic obligation is something that results in reduced cash inflows, directly or indirectly, as well as something that results in increased cash outflows. Obligations link the entity with what it has to do because obligations are enforceable against the entity by legal or equivalent means.

Potential inconsistency with Framework

The IASB has been working on proposed IFRS for Rate Regulated Activities, since 2008. It issued an exposure draft of proposed IFRS in July 2009; however, it has not been finalised till date and the project has been paused. One key reason for the delay arises from strong view that regulatory assets and regulatory liabilities do not meet the definition of an asset and liability under the IASB Framework for Preparation and Presentation of Financial Statements. The proponents of this view make the following arguments:

    1) One of the essential characteristics of a regulatory regime is that entities entering it get access to a large customer base in a market that requires a significant investment in infrastructure (i.e., natural ‘barriers to access’). In return, the entity agrees to accept the ‘economic burden’ of having to comply with operating conditions, one of which is the requirement to have the prices of the goods or services it delivers approved by the regulator. This ‘economic burden’ does not lead to a recognisable liability on day one, but may require the recognition of a liability if it leads to contracts becoming onerous as defined by AS-29 Provisions, Contingent Liabilities and Contingent Assets. Under Indian GAAP, any price paid to receive the right to operate in this regulated market will meet the definition of an intangible asset. However, if the regulator allows an entity to increase its future prices, this is not creating a separate asset, but granting the entity relief from the ‘economic burden’ of its operating conditions to put them partly in the same position as an entity in an unregulated market and allowing them to generate a normal return.

    2) A cause-and-effect relationship between a cost incurred and future rate increases may not be sufficient enough to justify the recognition of an asset, as this would apply to every entity reconsidering price setting for future periods based upon current year’s performance. For example, Widget Limited (the company) is
‘widget maker.’ It is not involved in rate regulated activity and does not have one-to-one contract with customers. The company is a dominant market participant having some monopolistic features. The company believes that it has incurred too many raw material costs in the current period. The company may make business decision to increase the price for transactions beginning the next year. The question is whether it is appropriate to recognise the incremental increase in sales price multiplied by the expected volume of sales for next year given that the link/reason the dominant market participant increased its price was because this year’s costs were too high (and therefore this year’s ‘reasonable profit’ expected by equity holders was not achieved).

    3) To support recognition of regulatory assets/ liabilities, the GN argues that the regulator negotiates rates on behalf of the whole customer base and a regulated entity therefore is comparable to an entity negotiating future prices with a specific customer, thereby binding both the entity and the customer. However, the contrary view is that rate regulation is a condition of the entity’s entry into the regulated market (i.e., a condition of the operating license) and does not create a separate asset. The entity has control over the right to operate in the regulated market, not over the future behaviour of its customers. Since the regulator did not guarantee the future recovery of any costs incurred, an asset controlled by the entity is not being created.

The Framework for Preparation and Presentation of Financial Statements under Indian GAAP is similar to that under IFRS. Therefore, one may argue that the GN is not in accordance with the Indian Framework, which is the base document and serves as a guiding principle in drafting of standards.

Conclusion

Whilst the author does not believe that the existing asset and liability definitions are met, one can understand why the standard-setter considered the recognition of regulatory assets and regulatory liabilities for entities that meet certain conditions, to provide decision-useful information. The author believes that the only way this can be done under the existing Framework is to state that the proposals in the GN are a departure from the Framework, and to provide clear guidance on the scope of the standard and to prohibit analogising. While all entities have the right to increase or decrease future prices, regulated entities have the following characteristics to justify a departure from the Framework: (a) Their prices and operational decisions are restricted and governed by the law and require regulatory approval.

    The economic impact of the regulation is to ensure that the regulated entity earns a specified return. (c) As noted in the GN, the regulator does act on behalf of the aggregate customer base with respect to price. Most importantly, the author believes a departure from the Framework is justified because the requirements would result in financial information that presents the economic effects of the regulation — that the entity will achieve a specified return.

A perusal of publicly available Indian GAAP financial statements of few companies engaged in power distribution indicates that they have recognised regulatory assets/ regulatory liabilities. From an Indian GAAP perspective, the Guidance Note is not expected to have any significant impact on these companies and would not change anything (other than legitimising current accounting practice). Therefore the author believes that the standard-setters should not have issued the Guidance Note in the first place and should actively participate in the ongoing effort of the IASB in developing a global standard for rate regulation.   

CENVAT credit — The respondents availed credit on the basis of xerox copy of the bill of entry — The original copy of the same was not available with them and hence they also lodged a police complaint — They also made efforts to obtain a certified copy of the same from the Commissioner who refused to do the same — Held, CENVAT credit was allowed because credit could not be disallowed on the ground of mere technical violence.

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(2012) 26 STR 187 (Tri.–Mumbai) — Commissioner of Central Excise, Kolhapur v. Shah Precicast P. Ltd.

CENVAT credit — The respondents avai led credit on the basis of xerox copy of the bill of entry — The original copy of the same was not available with them and hence they also lodged a police complaint — They also made efforts to obtain a certified copy of the same from the Commissioner who refused to do the same — Held, CENVAT credit was allowed because credit could not be disallowed on the ground of mere technical violence.


Facts:

The respondents availed CENVAT credit on the basis of the xerox copy of the bill of entry. A show-cause notice was issued for wrong availment of credit on the basis of xerox copy of the bill of entry. Penalty also was imposed. The appellant contended that the original copy of the bill of entry was not available with them and they had lodged a police complaint. Further they put in efforts to obtain a certified copy of the bill of entry from the Commissioner who denied their request.

Held:

It was held that the respondents were entitled for CENVAT credit availed by them on the strength of xerox copy, because they had made efforts to obtain a certified copy of the bill of entry which was denied to them. Also it was not disputed that the goods had suffered duty and they had been used in the manufacture of final product. The credit could not be denied on the basis of mere technical violence.

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CENVAT credit — The appellant reversed credit on obsolete inputs — Penalty u/s.11AC was imposed on the ground that they reversed it only when pointed out and hence their intention was to evade duty — Held, for imposing penalty under this section there should be fraud, suppression or willful omission, etc. and for imposing such a penalty mens rea has to be proved — Also a short delay in reversal does not prove that their intention was to evade duty.

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(2012) 26 STR 184 (Tri.–Del.) — Ranbaxy Laboratories Ltd. v. Commissioner of Central Excise, Chandigarh.

CENVAT credit — The appellant reversed credit on obsolete inputs — Penalty u/s.11AC was imposed on the ground that they reversed it only when pointed out and hence their intention was to evade duty — Held, for imposing penalty under this section there should be fraud, suppression or willful omission, etc. and for imposing such a penalty  mens rea has to be proved — Also a short delay in reversal does not prove that their intention was to evade duty.


Facts:

The appellants were manufacturers of bulk drugs and they availed CENVAT credit on inputs used in the manufacture of their final products. The quality control store department rejected some inputs and with reference to a report titled ‘Status of Obsolete, slow-moving, non-moving materials’ the officers directed that the CENVAT credit availed on such inputs should be reversed immediately and the appellant reversed the same. Later the Department issued a showcause notice imposing penalty u/s.11AC on the ground that the appellant had intention not to reverse the credit and they reversed the credit only because the report regarding unusable inputs was detected by the officers of the Department. The appellant contended that the due date for reversal of duty was 20-12-2002 and they reversed the same on 4-12-2002 and the Department contended that they reversed the credit only when the appellant was caught on the wrong foot.

Held:

For imposing penalty u/s.11AC short levy of duty should have arisen by reason of fraud, collusion or any willful misstatement or suppression of facts and to impose penalty such contravention should be made with an intention to evade payment of duty. Hence to impose penalty under this section mens rea (i.e., guilty mind) has to be proved. In this case the company was in the process of writing off such inputs in their stores and there was nothing to suggest that they would not have reversed the credit at the time of writing off the inputs in their stock. A short delay in reversal did not prove that they had intention to evade duty.

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The appellant manufactured stranded wire in their factories and received permission from M.P. State Electricity Board to generate electricity from windmills — Availed services of erection, installation and commissioning, repair, maintenance, insurance and took CENVAT credit — Department denied CENVAT credit as windmills were located far away from the factory and the power generated by the windmills was not directly received in the factory of the appellant — Held, appellant was eligible to CENVA<

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(2012) 26 STR. 117 (Tri.-Del.) — Rajratan Global Wires Ltd. v. Commissioner of Central Excise, Indore.

The appellant manufactured stranded wire in their factories and received permission from M.P. State Electricity Board to generate electricity from windmills — Availed services of erection, installation and commissioning, repair, maintenance, insurance and took CENVAT credit — Department denied CENVAT credit as windmills were located far away from the factory and the power generated by the windmills was not directly received in the factory of the appellant — Held, appellant was eligible to CENvAT credit in respect of abovementioned services — it may not be always possible to locate windmills in the vicinity of factory.


Facts:

The appellant manufactured stranded wire in their factory and received electricity from their wind-mills at Dewas through wheeling arrangement in terms of their agreement with the M.P. State Electricity Board. The appellant availed the services of erection, installation and commissioning, repair, maintenance and also insurance and took CENVAT credit of service tax paid on these services. The Department was of the view that since windmills were located far away from the factory and the power generated by the windmills was not directly received in the factory, the appellant was not eligible to CENVAT credit.

Held:

In case of wind-power generator, it may not be possible to locate it in the vicinity of factory as wind-power generators have to be located at places where wind with sufficient speed is available throughout the year. The appellant’s factories were situated far away from the windmills and they had obtained permission from M.P. State Electricity Board and in the permission, wind mills were mentioned as for captive use by the appellant. Therefore it was held that windmills were to be treated as captive plant and the service of erection, installation and commissioning, repair and maintenance and also insurance used in respect of the same are eligible for CENVAT credit. Services received had clear nexus with the business of manufacture since electricity generated by the windmills was used for running appellant’s factories.

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Respondent providing service of Pandal or Shamiana — On investigation it was found that respondent was providing the customers premises for organising marriage functions — They also provided furniture, fixtures, etc. for the same — Respondent of the view that during the time of dispute the marriage function was not treated as social function — Held, respondent’s activity of providing such facilities was treated as temporary occupation of Mandap and that marriage was still a social function duri<

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(2012) 26 STR 36 (Tri.-Del.) — Commissioner of Central Excise, Kanpur v. Heera Panna Guest House.

Respondent providing service of Pandal or Shamiana — On investigation it was found that respondent was providing the customers premises for organising marriage functions — They also provided furniture, fixtures, etc. for the same — Respondent of the view that during the time of dispute the marriage function was not treated as social function — Held, respondent’s activity of providing such facilities was treated as temporary occupation of Mandap and that marriage was still a social function during the period of dispute.


Facts:

 The respondent was registered for providing taxable service of Pandal or Shamiana. On investigation it was found that the respondent was allowing temporary occupation to the customers for organising marriage functions and for this purpose, besides permitting temporary occupations of the premises, the respondent was also providing furniture, fixtures, lighting, catering, etc. A specific provision w.e.f. 1-6- 2007 was made that social function included marriage and hence, respondent contended that for the period prior to 1-6-2007, marriages were not social functions. The respondent was of the view that giving their premises to their clients mainly for marriage functions would not be considered social functions prior to 1-6-2007 i.e., during the period of dispute and providing the service in relation to use of Mandap or providing Pandal or Shamiana service for marriage function was not taxable.

Held:

The activity of the respondent was treated as allowing temporary occupation of Mandap for some consideration and was treated as service in relation to use of Mandap which was taxable during the period of dispute. It was held that even though the period of dispute was prior to 1-6-2007, it could not be construed that marriage was not a social function prior to 1-6-2007.

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Appellant, a service provider under advertising Agency Service — Department of the view that the appellant did not discharge service tax liability and also had wrongly availed CENVAT credit — Terms of agreement stated that the appellant was entitled to 10% commission on gross amount spent which included print advertisement and also other expenses incurred — Held, all such expenditure or cost shall be treated as consideration for the taxable service provided and shall be included in the value fo<

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(2012) 26 STR 33 (Tri.-Mumbai) — Quadrant Communications Ltd. v. Commissioner of Central Excise, Pune-III.

Appellant, a service provider under advertising Agency Service — Department of the view that the appellant did not discharge service tax liability and also had wrongly availed CENVAT credit — Terms of agreement stated that the appellant was entitled to 10% commission on gross amount spent which included print advertisement and also other expenses incurred — Held, all such expenditure or cost shall be treated as consideration for the taxable service provided and shall be included in the value for the purpose of charging service tax on the said service — CENvAT credit allowed for the same — Penalty waived.


Facts:

The appellant was a service provider falling under the category of ‘Advertising Agency Service’. On scrutiny of records, it was found that the appellant had not discharged the service tax liability on the gross amount received by them in respect of services rendered and further they wrongly availed CENVAT credit on vehicle maintenance/insurance. Accordingly, service tax was demanded disallowing the credit and also demanded interest and penalty. The client had appointed the appellant to act as an advertising agent/consultant on the terms set out in the agreement and the agreement stated that the appellant will act as an exclusive creative agency of the clients for certain brands specified in the agreement. The terms of agreement also indicated that the appellant was entitled for an agency commission of 10% on gross media spent which included print advertisement, outdoor hoardings and all other expenses incurred on behalf of the client, third party, etc. The appellant got only the agreed commission from the customers and they had discharged service tax on the said commission income and also the appellant did not avail any service tax credit on the service tax paid by the advertisers.

Held:

It was held that if any expenditure or costs are incurred by the appellant i.e., the service provider in the course of providing taxable service, all such expenditure or cost shall be treated as consideration for the taxable service provided and shall be included in the value for the purpose of charging service tax on the said service. However, the appellant was held eligible to take credit of the excise duty/ service tax on input/input services used in or in relation to the provision of output service subject to providing necessary documents in respect of such credit and the penalty also was waived.

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Valuation — Reimbursement of expenses — Whether includible in taxable value — Held, yes, if the same were required to be spent in order to provide taxable service.

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(2012) 26 STR 14 (Tri.–Del.) — Harveen & Co. v. Commissioner of Central Excise, Chandigarh.

valuation — Reimbursement of expenses — Whether includible in taxable value — Held, yes, if the same were required to be spent in order to provide taxable service.


Facts:

The appellant was providing clearing and forwarding services to M/s. Whirlpool India Private Limited during the period April 2001 to September 2005 and was receiving payment as commission/service charges. Apart from this, the appellant was also receiving amounts for service charges for employment, freight for distribution/transportation of goods, loading/unloading of goods, phone expenses, etc.

The appellant was required to arrange transportation of goods for which the appellant was paid fixed remuneration. Although as per the agreement, this charge was called ‘freight charges’, the same was not on actual basis. The Department was of the view that the remuneration received as freight charges was also remuneration for clearing and forwarding services and they further stated that various expenses reimbursed to the appellant were nothing but consideration for providing clearing and forwarding services. The Department further was of the view that these amounts should be added to the value of commission received by the appellant and service tax should be paid on such gross receipts and demand for service tax was made by the Department along with interest and penalty.

Held:

 It was held that without engaging clerks and utilising telephones and having godowns for storing the goods and without paying the loading and unloading charges, the appellant could not have rendered the clearing and forwarding services and even if these expenses were separately billed to the client, the expenses will form a part of value of taxable services. In case of transportation services, they were provided by the person operating the vehicles and there was no proof of the fact that the appellant had the responsibility to deliver the goods at the door-steps of the client. For freight revenue, it was conceded that it could be considered as reimbursable expense so long as the actual freight amounts were claimed. For expenses of pre-dispatch inspection, octroi and detention charges, it was held that these expenses were not towards any activity that would constitute service rendered by the appellant and therefore, excludible. Abatement from gross receipts received could be allowed for the expenses subject to production of vouchers for such expenses.

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Appellant engaged in providing service of booking of air tickets, arrangement for food, local travel, etc. at places outside India — Appellant paid service tax under the category of ‘Air Travel Services’ but Department demanded tax for providing ‘Tour Operator Service’ — Held, out-bound tours outside the purview of service tax — Predeposits of the dues were waived.

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(2012) 26 STR 12 (Tri.-Bang.) — Thomas Cook (India) Ltd. v. Commissioner of Central Excise, Hyderabad.

Appellant engaged in providing service of booking of air tickets, arrangement for food, local travel, etc. at places outside India — Appellant paid service tax under the category of ‘Air Travel Services’ but Department demanded tax for providing ‘Tour Operator Service’ — Held, out-bound tours outside the purview of service tax — Pre-deposits of the dues were waived.


Facts:

The appellant was engaged in arranging tours/ tour packages within India and out of India. The appellant undertook activities like booking of air tickets, arrangements for hotel stay at places outside India, food, local travel at places outside India, etc. and they also undertook work related to Visa formalities. The appellant paid service tax under the category ‘Air Travel Services’ in respect of tickets booked from a place in India to the first place outside India and air travel from last destination in foreign country to the first destination in India. The Department was of the view that the amount collected from tourists like air fare and expenses for other arrangements was to be included under the category of ‘Tour Operator Service’ for which the Department raised service tax demand along with interest and penalty.

Held:

The planning and arrangements undertaken are primarily relating to out-bound tours and the same involve coordination with agencies outside India. According to the Board’s Circular F. No. B. 43/10/97- TRU, activities of out-bound tours are outside the purview of service tax. Hence the pre-deposits of the dues were waived.

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Transplantation of human organs — Donor and recipient near relatives, hence approval of authorisation committee is not necessary.

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[Sonia Ajit Vayklip (Miss.) & Anr v. Hospital Committee, Lilavati Hospital & Research Centre & Ors., AIR 2012 Bombay 93.]

A tribal lady from Chhattisgarh, had challenged the decision of the respondents herein refusing to grant approval for transplantation of her kidney to the body of her younger brother Deepak Ajeet Vayklip. By their report dated 4th January 2012, the Authorisation Committee and the Chairman of the Authorisation Committee and Director of Medical Education and Research, Mumbai have not granted permission to the petitioner No. 1 for donating her kidney to her brother Deepak Ajeet on the ground of mental status of the petitioner No. 1 and also on the ground that the petitioner donor is suffering from right kidney stones and ureteric stones.

The Court observed that as the preamble indicates, the Transplantation of Human Organs and Tissues Act, 1994 is enacted to provide for regulation of removal, storage and transplantation of human organs and tissues for therapeutic purposes and for prevention of commercial dealings in human organs and matters connected or incidental thereto. Section 3 of the Act provides that any donor may, in such manner and subject to such conditions as may be prescribed, authorise the removal, before his death, of any human organ or tissue or both of his body for therapeutic purposes in such a manner and subject to such conditions as may be prescribed.

The legislative scheme therefore, is that two types of cases are contemplated:

(i) donor to stranger

(ii) from donor to near relative

No such approval is required from the Authorisation Committee for donation of a human organ or tissue to a near relative, because there would be no commercial element for such donations. Even in the donation to a near relative, there are three restrictions:

(A) where either the donor or the recipient is a foreign national, prior approval of the Authorisation Committee is required.

(B) in case of a minor, no organ or tissue can be removed from the body of the minor before his death for the purpose of transplantation except in the manner as prescribed;

(C) in case of mentally challenged person, no organ or tissue can be removed from the body of the mentally challenged person before his death for the purpose of transplantation. Mentally challenged person is defined as having mental illness or mental retardation.

The Court observed that in cases where donor and recipient are near relatives as defined by the Act, there need be no enquiry by Authorisation Committee to ascertain whether there is any commercial element. Such enquiry is therefore, not at all required to be held in the case of near relatives. Approval of Authorisation Committee would not be necessary in such cases. Having regard to the facts and circumstances of the case and the urgency involved and also having regard to the fact that the State of Chhattisgarh has also released a grant of Rs.2 lac in favour of the proposed kidney transplantation of the petitioner No. 2, the Court allowed the petition.

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Pre-deposit by way of debiting CENVAT Account allowed.

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(2012) 26 STR 354 (Tri.-Kolkata) — Nicco Corporation Ltd. v. CCEC&S.

Pre-deposit by way of debiting CENVAT Account allowed.


Facts:

The appellant was directed to make pre-deposit of an amount as a condition of hearing appeal before the Commissioner (Appeals). The appellant debited the amount in CENVAT credit account. The Commissioner (Appeals) took a view that this did not amount to pre-deposit and rejected the appeal.

Held:

The Tribunal disposed of the stay petition holding that pre-deposit made by debiting CENVAT account was sufficient compliance and directed the Commissioner (Appeals) to hear the matter and decide the issue on merits after giving reasonable opportunity of hearing without further pre-deposit since the matter was not decided on merits.

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CENVAT credit — Respondents purchased an induction furnace and took CENVAT credit for the same after nine years — They sold the machine and paid duty on transaction value — Department was of the view that the duty was payable of the amount equal to the CENVAT credit availed at the time of purchase — Held, respondents had paid the correct amount of duty — Machine cannot be treated as cleared as such when it was sold after putting into use for nine years.

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(2012) 26 STR 87 (P & H) — Commissioner of Central Excise, Chandigarh v. Raghav Alloys Ltd.

CENvAT credit — Respondents purchased an induction furnace and took CENvAT credit for the same after nine years — They sold the machine and paid duty on transaction value — Department was of the view that the duty was payable of the amount equal to the CENvAT credit availed at the time of purchase — Held, respondents had paid the correct amount of duty — Machine cannot be treated as cleared as such when it was sold after putting into use for nine years.


Facts:

The respondent was engaged in the manufacture of non-alloy steel ingots who purchased an induction furnace in the year 1994 and took credit CENVAT for the same. It used the said machinery till 2003 and then sold it after payment of duty which was equal to 16% on the sale price. The respondent paid duty on the transaction value but the Revenue was of the view that respondent should have paid duty equal to CENVAT credit availed at the time of purchase of the machinery and also imposed penalty on them.

Held:

It was held that the respondent had paid the correct amount of duty because capital goods are used over a period of time and that they lose their identity as capital goods only after use over a period of time. The same became inserviceable and fit to be scrapped. The object of CENVAT credit on capital goods is to avoid the cascading effect of duty. For this, it is provided that if the machines were cleared ‘as such’ the assessee shall be liable to pay duty equal to the amount of CENVAT credit availed. The machine cleared after putting into use for nine years cannot be treated as cleared ‘as such’.

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A show-cause notice was issued imposing penalty on the respondents for late payment of service tax in spite of the fact that the respondents had already paid service tax along with interest — Held, no such notice was required to be issued.

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(2012) 26 STR 3 (Kar.) — CCE & ST, LTU, Bangalore v. Adecco Flexione Workforce Solutions Ltd. and (2012) 26 STR 4 (Kar.) — Commissioner of Service Tax, Bangalore v. Prasad Bidappa.

A show-cause notice was issued imposing penalty on the respondents for late payment of service tax in spite of the fact that the respondents had already paid service tax along with interest — Held, no such notice was required to be issued.


Facts:

In both the cases, show-cause notices were issued imposing penalty for delayed payment of service tax in spite of the respondents paying the service tax along with interest before issuance of SCN.

Held:

It was held that no notice shall be served on the persons who have paid service tax along with interest. If notices are issued, the person to be punished is the person issuing such a notice and not the person to whom the notice was issued.

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Service of order — Whether sending of order by speed-post complies with the provision of section 37C(1)(a) of the Central Excise Act — Held: Order is to be served on the assessee or his agent by Registered Post A.D. or any other mode specified in section 37C ibid.

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(2012) 26 STR 299 (Bom.) — Amidev Agro Care Pvt. Ltd. v. UOI.

Service of order — Whether sending of order by speed-post complies with the provision of section 37C(1)(a) of the Central Excise Act — Held: Order is to be served on the assessee or his agent by Registered Post A.D. or any other mode specified in section 37C  ibid.


Facts:

The High Court admitted the appeal on substantial question of law as to whether CESTAT was justified in holding that the pre-conditions of section 37C of the Central Excise Act, 1944 were complied with and therefore the appeal filed by the appellant was barred by limitation. The case of the assessee was that the copy of the order passed by the Commissioner (Appeals) on 31st March, 2008 was not served upon them and only when the recovery proceedings were initiated, they obtained the copy of the order dated 31-3-2008 on 20-2- 2010 and thereupon filed an appeal before CESTAT within three months. Thus, it was contended that it was filed in time. CESTAT dismissed the appeal holding it to be time-barred on the ground that the copy of the order was dispatched on 1st April by speed-post and therefore it must have been received by the assessee in 2008. This complied with the requirement of section 37. Held: As per section 37C(1)(a) it was mandatory for the Revenue to serve a copy of the order by registered post with acknowledgement due to the assessee. Since in this case, the order was not sent by registered post but by speed-post, there was no evidence of tendering decision to the assessee. In the circumstances, the requirements of section 37C were not complied with. Further reliance by CESTAT on the decision of P&H High Court in Mohan Bottling Co. (P) Ltd. (2010) 255 ELT 321 was held incorrect as in that case, the order was sent by registered post. As such, the claim of the assessee that copy of the order was received for the first time on 26-2-2010 would have to be accepted.

Facts:

In both the cases, show-cause notices were issued imposing penalty for delayed payment of service tax in spite of the respondents paying the service tax along with interest before issuance of SCN. Held: It was held that no notice shall be served on the persons who have paid service tax along with interest. If notices are issued, the person to be punished is the person issuing such a notice and not the person to whom the notice was issued.

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Contract of clearing and forwarding agent’s services entered into in 1998 providing that liability to pay service tax vested in service provider. Law amended retrospectively in 2000 to come into effect from 16-7-1997 to shift the liability to service recipient. The issue whether the change in legal provisions alter the legal rights or obligation arising out of contractual terms and whether or not the principal could deduct service tax from the bills of contractor — Held, nothing in law prevents<

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(2012) 26 STR 284 (SC) — Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ramsaran

Contract of clearing and forwarding agent’s services entered into in 1998 providing that liability to pay service tax vested in service provider. Law amended retrospectively in 2000 to come into effect from 16-7-1997 to shift the liability to service recipient. The issue whether the change in legal provisions alter the legal rights or obligation arising out of contractual terms and whether or not the principal could deduct service tax from the bills of contractor — Held, nothing in law prevents the parties from agreeing that burden of tax would be borne by the service provider — Hence, arbitrator took possible view of the relevant clause in the contract which could not be interfered by the High Court.


Facts:

The appellant, a Government undertaking manufactures steel products and the respondent firm provided transportation service under a contract for handling goods from the stockyard of the appellant. The terms of contract provided that the contractor would have to bear all duties and taxes. However, the appellant was held ‘assessee’ under the law as the service tax law was retrospectively amended in the year 2000, whereby the recipient of ‘clearing and forwarding service’ was required to pay service tax to the Government as ‘assessee’. The appellant deducted such service tax paid by it to the Government from payments made to the respondent-contractor. According to the respondent, since the appellant was the ‘assessee’ under the law in terms of retrospective amendment made in the service tax law, the tax payment was the responsibility of the contractee-appellant and the terms in the agreement of the respondent’s responsibility of payment of tax was only in accordance with the provisions of law prevailing at the time of entering into agreement. (At the time of entering into agreement, the service provider had to discharge the obligation of service tax.) Arbitration award given in favour of the appellant was earlier set aside by the High Court with the observation that the purpose of the relevant clause in the agreement was not to shift the burden of taxes from the assessee who is liable under the law to pay taxes to a person who is not liable to pay taxes under the law. The petition against the said decision of the High Court (given by the Single Member Bench) was dismissed by the Division Bench of the Bombay High Court and this was challenged in the Supreme Court.

Held:

The Finance Act, 1994 provisions determine the liability of the assessee towards tax authorities and it is irrelevant to determine rights and liabilities under the contract. Nothing in law prevents them from entering into contract regarding burden of tax arising under the contract between the parties. The Supreme Court after considering the submissions from both the sides also observed that assuming that the relevant clause in the agreement was capable of two interpretations, the view taken by the arbitrator was clearly a possible view if not plausible one. It cannot be said that the arbitrator travelled outside his jurisdiction or the view taken was against the contract. The High Court therefore had no reason to interfere with the award. Thus allowing the appeal, it was held that the appellant could not be faulted for deducting service tax.

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The Ministry of Corporate Affairs has vide General Circular No. 10, dated 21st May 2012 issued Guidelines for declaring a financial institution as a Public Financial Institution.

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Full version of the Circular can be accessed at MCA website

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Ministry issues general clarification on Cost Accounting and Cost Audit Order.

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By General Circular No. 12/2012, dated 4th June 2012 the Ministry has issued general clarifications on Cost Accounting Records and Cost Audit Order No. 52/26/CAB-2010, dated 2nd May, 2011. It shall be applicable as under:

(a) For all companies wherein their products/activities are already covered under any of the erstwhile industry-specific Cost Accounting Records Rules and meeting with the threshold limits mentioned in the said Cost Audit Orders — in respect of each financial year commencing on or after the 1st day of April, 2011 i.e., from the financial year 2011-12 onwards.

(b) For all companies wherein their products/activities are for the first time covered under any of the revised industry-specific Cost Accounting Records Rules, and meeting with the threshold limits mentioned in the said Cost Audit Orders — in respect of each financial year commencing on or after the 7th December, 2011 i.e., from the financial year 2012-13 (including calendar year 2012) onwards.

In case of companies engaged in production, processing, manufacturing or mining of multiple products/activities, if any of their products/activities are not covered under the industry-specific Cost Accounting Records Rules, but are covered under the Companies (Cost Accounting Records) Rules, 2011 notified vide GSR 429(E), dated June 3, 2011 and wherein such products/activities are not covered under cost audit vide cost audit orders dated June 30, 2011 and January 24, 2012; such companies shall be required to file compliance report with the Central Government in accordance with the clarifications given vide para

 (a) of the MCA’s General Circular No. 68/2011, dated 30-11-2011.

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Ministry grants exemption from Mandatory Cost Audit to all units located in specified zones.

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Vide General Circular No. 11/2012, dated 25th May 2012, the Ministry of Corporate Affairs has issued clarification regarding the coverage of the Cost Accounting Records and Cost Audit by granting exemption from Mandatory Cost Audit to units located in the specified zones.

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Ministry extends time limit for filing Form 11 for F.Y. 2011-12.

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Vide Circular dated 6th June 2012 the Ministry has extended the time limit for filing the mandatory Form 11(LLP) from 60 days to 90 days for the financial year ending 31-3-2012 effective 31st May 2012.

Full version of the Circular can be accessed on http://www.mca.gov.in/Ministry/pdf/General_Circular_ No_13_2012.pdf

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Non-availability of information from foreign branches

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Punj Lloyd Ltd. (31-3-2012)

From Notes to Accounts The company’s branch at Libya has fixed assets (net) and current assets aggregating to Rs. 9,909,622 thousand as at March 31, 2011 in relation to certain projects being executed in that country. Due to civil and political disturbances and unrest in Libya, the work on all the projects has stopped, the resources have been demobilised and necessary intimation has been given to the customers. The company has also filed the details of the outstanding assets with the Ministry of External Affairs, Government of India. Pending the outcome of the uncertainty, the aforesaid amounts are being carried forward as realisable.

From Auditors’ Report 6. As stated in Note 19 of schedule ‘M’ to the financial statements, due to civil and political disturbances and unrest in Libya, the work on all the projects in Libya has stopped. There are aggregate assets of Rs.9,909,622 thousand, aggregate revenues of Rs.1,954,565 thousand, profits before tax of Rs.96,816 thousand and cash flows of Rs.1,803,620 thousand for the year then ended in Libya Branch, which have been audited by another auditor in Libya. However, we were unable to perform certain procedures that we considered necessary under the requirements of Statement on Auditing SA600 (Using the work of another auditor) issued by the Institute of Chartered Accountants of India, including obtaining corroborative information and/or audit evidence, in relation to certain components of financial statements of Libya Branch. The ultimate outcome of the above matters cannot presently be ascertained in view of the uncertainty as stated above. Accordingly, we are unable to comment on the consequential effects of the foregoing on the financial statements.

In our opinion, proper books of account as required by law have been kept by the company so far as appears from our examination of those books and proper returns adequate for the purposes of our audit have been received from branches and unincorporated joint ventures not visited by us except to the extent stated in paragraph 6 above. The branches and unincorporated joint ventures auditors’ reports have been forwarded to us and have been appropriately dealt with;

Without considering our observations in paragraph 6 above, the impact whereof on the Company’s profits is not presently ascertainable, in our opinion and on consideration of reports of other auditors on separate financial statements and on the other financial information and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India . . . .

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Limited Liability Partnerships integrated on MCA21.

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The Ministry of Corporate Affairs, has integrated the Limited Liability Partnership (LLP) under the platform of MCA21. As a result all state of the art services like credit card payment, online banking from six banks, payment through NEFT from any bank and host of other services will now be available for them.

Accordingly, all LLP forms except forms to be filed by Foreign LLP shall be processed and approved by respective Registrar of Companies (ROCs) of concerned state. The forms to be filed by foreign LLPs shall be processed and approved by the ROC, Delhi & Haryana.

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Issues arising on migration to an ERP software.

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Shipping Corporation of India Ltd. (31-3-2011)

From Notes to Accounts
The Company being a shipping company, its activities are based both in shore and in floating ships. The Company has implemented three different ERP packages to take care of both shore and the ship-related transactions and they have gone live from 28-2-2011. The accounts for the period 1-4-2010 to 31-1-2011 (i.e., for ten months) are prepared in the legacy system and for the period 1-2-2011 to 31-3-2011 (i.e., for two months) are prepared in the new system. With all efforts, the system has been implemented and the accounts for the 4th quarter and year ending 31-3-2011 are for the first time prepared under the new system.

In addition to the above, supporting documents for income and expenses are not received by the Company from the agents and transactions have been recorded based on the amount of the advance released/data received from the agents for the month of March 2011.

Necessary accounting effects to rectify the migration errors have been carried out by the management wherever the instances have been observed and the exercise is continuing and the necessary rectification will be made appropriately.

Further to the above, the company is unable to make certain adjustment in respect of the following due to issues arising on migration and uploading of data in the new system:

(i) Translation of certain balances as per policy No. 8(c), wherever rectification entries have been passed post revaluation of the balances of the assets and liabilities,

(ii) The segmental results disclosed segment report may consist certain inter-segment compensating issues,

(iii) In some of the assets, depreciation is accounted where instances of classification in inter-assets class is noticed and date of capitalisation is taken based on best available information,

(iv) Certain transactions relating to payments, etc. reflected in the bank reconciliation statements could not be incorporated,

(v) During the current year aggregate Net Credit balance of Rs.25375.49 lakhs in vendor and accounts payable are shown as Sundry creditors and other liabilities, which up to previous year were disclosed vendor-wise debit and credit separately,

(vi) The foreign currency revaluation effects of various assets and liabilities are included in the debtors, instead of grouping the same with the respective assets and liabilities,

(vii) The second phase of audit by the Comptroller & Auditor General of India, has not been completed due to limitation of time.

The impact of items stated in para (i) to (iv) is not material on the result of the Company. Further the matters stated in para (iv) to (vi) relates to assets and liabilities and grouping thereof under the various heads of the Balance sheet.

From Auditors’ Report

(f) Attention is invited on:

Note. No. 1, Schedule-25 Notes on Accounts, regarding various errors and omissions have been made by the Company during the process of migration/uploading of data post migration in the new accounting software ERP-SAP, in respect of accounting of the income and expenses, assets and liabilities for which necessary rectification has been carried out by the Company.

Further there remain certain items where the company is unable to make appropriate adjustments and the effects of errors and adjustments, if any, as might have been determined to be necessary in the data migrated/uploaded in the accounting software post migration.

It has been further noticed that the Company has:

(i) Not accounted the income and expenditure in respect of unfinished voyages as per accounting policy No. 2(c), having no impact on the profit for the year.

(ii) Non-accounting of foreign currency transactions at the rates as stipulated in accounting policy No. 8(a) for the months of January 2011 and February 2011, instead the same have been accounted at the exchange rates applicable for the month of March 2011.71

(g) Note No. 17 of Schedule-25 ‘Notes to the Accounts’ in respect of balances of Sundry Creditors, Debtors, Loans & Advances and Deposit which are subject to confirmation.

In our opinion and to the best of our information and according to the explanations given to us, subject to our comments in para 4(f) above, the said accounts.

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Cost Audit Reports and Compliance Reports to be filed after 30th June 2012 in new XBRL formats.

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Ministry of Corporate Affairs has mandated the cost auditors and the companies to file Cost Audit Reports (Form-I) and Compliance Reports (Form-A) for the year 2011-12 onwards (including the overdue reports relating to any previous year) in XBRL mode.

Therefore, filing of existing Form I – Cost Audit Report and Form A – Compliance Report shall not be allowed till 30-6-2012 by which time the new XBRL mode of filing will be ready and enabled.

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Company Law Forms changing where new Schedule VI is applicable.

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Currently Form 23AC, Form 23ACA, Form 23AC-XBRL and Form 23ACA-XBRL cannot be filed by those companies whose financial year is starting on or after 1-4-2011 as Revised Schedule VI is applicable for such period.

 New e-forms are undergoing revision to align with the Revised Schedule VI and new forms would be updated shortly.

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Disclosure regarding support/comfort letters given for subsidiaries.

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Tata Communications Ltd. (31-3-2011)

From Notes to Accounts

Note 4: As on 31 March 2011, the Comfort for the credit facility agreement in respect of various subsidiaries:

The Company has undertaken to the lenders of TCTSL and TCIPL that it shall retain full management control so long as amounts are due to the lenders.

Note 5: The Company has issued a support letter to Tata Communications International Pte. Limited (TCIPL), regarding providing financial support enabling, in turn, TCIPL to issue such support letter to certain subsidiaries having negative net worth as at 31 March 2011 aggregating Rs.1,245.71 crore (2010: Rs.1,508.41 crores) in various geographies in order that they may continue to be accounted for as going concern.

The letters of comfort/support mentioned in 4 and 5 above have been provided in the ordinary course of business and no liability on the Company is expected to materialise in these respect.

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A.P. (DIR Series) Circular No. 132, dated 8-6-2012 — Money Transfer Service Scheme.

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Presently, a single individual beneficiary can receive for personal e up to 12 remittances not exceeding INR156,614 each in a calendar year. This Circular has increased the number of remittances that an individual can receive from 12 to 30.

Thus, an individual can now receive for personal use up to 30 remittances each, not exceeding US INR156,614 in a calendar year.

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Interest on refund: Section 244A of Incometax Act, 1961: A.Y. 1998-99: Period for interest: Period of delay caused by assessee: Assessee’s belated claim for deduction allowed by CIT(A): No delay caused by assessee: Interest payable from beginning of relevant A.Y.

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[CIT v. South Indian Bank Ltd., 340 ITR 574 (Ker.)]

For the A.Y. 1998-99, the assessee’s belated claim for bad debts was rejected by the Assessing Officer for failure to establish the claim. The claim was allowed by the CIT(A). The Assessing Officer denied interest on refund u/s.244A of the Income-tax Act, 1961 on the ground that the delay was attributable to an additional claim of deduction which was allowed by the CIT(A). The Tribunal held that the assessee was entitled to interest from 1-4-1999.

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

“The Assessing Officer had not established that the assessee had caused any delay in issuing the refund order. There was no decision by the Commissioner or Chief Commissioner on this issue. The assessee was eligible to get interest from 1-4-1999, till the date of refund.”

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A.P. (DIR Series) Circular No. 131, dated 31-5-2012 — Overseas Direct Investments by Indian Party — Online Reporting of Overseas Direct Investment in Form ODI.

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Presently, although banks can generate the UIN online for overseas investments under the Automatic Route, reporting of subsequent remittances for overseas investments under the Automatic Route as well as the Approval Route could be done online in Part II of Form ODI only after receipt of the letter from RBI confirming the UIN.

This Circular states that, in the case of overseas investments under the Automatic Route, UIN will be communicated through an auto-generated e-mail sent to the email-id made available by the Authorised Dealer/Indian Party. This auto-generated e-mail giving the details of UIN allotted to the JV/WOS will be treated as confirmation of allotment of UIN, and no separate letter will be issued with effect from June 1, 2012 by RBI, either to the Indian Party or to the Authorised Dealer. Subsequent remittances are to be reported online in Part II of form ODI, only after receipt of the e-mail communication/ confirmation conveying the UIN.

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A.P. (DIR Series) Circular No. 117, dated 7-5- 2012 — Transfer of Funds from Non- Resident Ordinary (NRO) Account to Non- Resident External (NRE) Account.

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Presently, transfer of funds from NRO to NRE account is not permitted. This Circular permits transfer funds from NRO account to NRE account within the overall ceiling of INR61,456,745 per financial year, subject to payment of appropriate tax as if funds were remitted abroad.

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Falling BRIC — India’s macro numbers are harming its global image.

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It has been more than ten years since the term ‘Bric’ was coined. The Bric nations — Brazil, Russia, India and China — were supposed to be the engines of global growth, the new poles of the world economy as Europe and North America slipped slowly into twilight. Yet Jim O’Neill of Goldman Sachs, the man leading the team that coined the phrase in 2001, has been quoted as saying that “there are important structural issues about all four, and as we go into the 10-year anniversary, in some ways India is the most disappointing”.

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Penalty – Concealment of Income – There is no time limit prescribed for payment of tax with interest for the grant of immunity under clause (2) of Explanation 5 to section 271(1)(c).

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[Asst. CIT v. Gebilal Kanhaialal HUF (2012) 348 ITR 561 (SC)]

Search and seizure operation were carried out during the period 29-7-1987 to 1-8-1987 at the residential/business premises of the assessee HUF, represented by the Karta, Shri Kalyanmal Karva. Assets worth Rs.48,32,000 besides incriminating documents were seized. On 1-8-1987, the Karta while surrendering the amount made a statement u/s. 132(4). The return of income for the assessment year 1987-88 which was required to be filed u/s.139(1) on or before 31-7-1987 was not filed. Pursuant to notices issued u/s.142(1)(ii) in December 1988, the assessee on 16-2-1990 furnished required information including statement of all assets and liabilities whether included in the accounts or not. In the said statement, the said Karta reiterated his earlier statement of concealment. The Department denied the immunity under clause (2) of Explanation 5 to section 271(1) (c) mainly for the reason that the assessee had failed to file his return of income on or before 31-7-1987 and had failed to pay the tax thereon.

The Supreme Court observed that Explanation 5 is a deeming provision. It provides that where, in the course of search u/s. 132, that assessee is found to be the owner of unaccounted assets and the assessee claims that such assets have been acquired by him by utilising, wholly or partly, his income for any previous year which has ended before the date of search or which is to end on or after the date of search, then, in such a situation, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall be deemed to have concealed the particulars of his income for the purposes of imposition of penalty u/s. 271(1)(c). The only exception to such a deeming provision or to such a presumption of concealment is given in sub-clause (1) and (2) of Explanation 5. Three conditions have got to be satisfied by the assessee for claiming immunity from payment of penalty under clause (2) of Explanation 5 of section 271(1)(c). The first condition was that the assessee must make a statement u/s. 132(4) in the course of search, stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in section 139(1). Such statement was made by the karta during the search which concluded on 1st August, 1987. It was not in dispute that condition No.1 was fulfilled. The second conditions for availing of the immunity from penalty u/s. 271(1)(c) was that the assessee should specify, in his statement u/s. 132(4), the manner in which such income stood derived. Admittedly, the second condition, in the present case also stood satisfied. According to the Department, the assessee was not entitled to immunity under clause (2) as he did not satisfy the third condition for availing of the benefit of waiver of penalty u/s. 271(1)(c) as the assessee failed to file his return of income on 31st July, 1987, and pay tax thereon particularly when the assessee conceded on 1st August, 1987 that there was concealment of income.

The Supreme Court held that the third condition under clause (2) was that the assessee had to pay the tax together with interest, if any, in respect of such undisclosed income. However, no time limit for payment of such tax stood prescribed under clause (2). The only requirement stipulated in the third condition was for the assessee to “pay tax together with interest”. In the present case, according to the Supreme Court, the third condition also stood fulfilled. The assessee had paid tax with interest up to the date of payment.

The Supreme Court held that the assessee was entitled to immunity under clause (2) of Explanation 5 to section 271(1)(c).

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(2011) 40 VST 81 (AP) Tirupati Chemicals v. Dy. Commercial Tax Officer and Others, and ABC Constructions v. Commercial Tax Officer, Vijay Wada

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Advance Ruling — Binding on applicant as well as on others — Provisions not arbitrary — Not unconstitutional — Sections 32(2), 33(1)(c), 47(d) and 67(4) of Andhra Pradesh Value Added Tax Act, 2005 and rr. 17(4) and 66 of Andhra Pradesh Value Added Tax Rules, 2005.

Facts:
The petitioners filed two separate writ petitions before the AP High Court challenging the constitutional validity of section 67(4) of the Andhra Pradesh Value Added Tax Act, 2005 providing for binding effect of order passed by the Advance Ruling Authority (ARA), on the applicant, in respect of goods and/or transactions for which the clarification is sought and also binding on to all the officers other than the Commissioner.

According to petitioners the order of ARA was not binding on other dealers.

Held:
(1) U/s.67(4), the order of the ARA is binding on the applicant who sought clarification, in respect of the goods and transactions in relation to which it was sought and it is binding on all the officers other than the Commissioner. If the order of the ARA is to bind only the applicant and not to other dealers, in respect of goods or transactions in relation to which clarification was sought, then clauses (i) and (ii) of the said sub-sections would overlap , thereby rendering either clause (i) or (ii) inapposite surplusage.

(2) It is true that such ruling would bind other dealers who had not sought a clarification, without their being heard by ARA. That, by itself, would not necessitate the Court reading words ‘the applicant’ in to clause (ii) of section 67(4). It is no doubt harsh that the ruling of the ARA would bind other dealers. This however is matter essentially for the Legislature.

(3) Section 67(4)(iii) makes it clear that the order of the ARA would not bind the STAT, or Court in the exercise of its jurisdiction u/s.34 of the Act.

(4) The remedy of an appeal is provided under the Act u/s.33(1)(c) of the Act to other dealers in whose case the orders are passed following the order of the ARA.

Accordingly, the High Court dismissed the writ and upheld the constitutional validity of provisions of section 67(4) of the Act.

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(2012) 25 STR 245 (Tri. Del.) — Indian Institute of Forest Management v. Commissioner of Central Excise, Bhopal.

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Management consultant — Organising short-term courses for officers on topics related to Forestry Management, Environment Management System, Social Forestry, Water Resources Management, etc. — Held, it merely improved skills and knowledge level of officers attending courses — It could not be called rendering advice, directly or indirectly, in connection with management — In that view, it could not be made liable to service tax as Management Consultancy Service.

Facts:
The appellant an Institute under the Ministry of Environment and Forest, Government of India is a premier institute for education research, training and consultancy in the area of Forest Management. The appellant also conducted classes for various degree and diploma courses and organised short-term courses in various subjects relating to Forest Management, Social Forestry, Water Shed Management, Environment Management System, etc. for which no degree or diploma was given. The Department was of the view that this activity is covered under ‘Management Consultancy Service’ and the same would attract service tax. According to the Department, during the period from 1999-02 to 2002-04, the appellant provided services of management consultancy for various organisations for which service tax was not paid. Service tax was demanded and penalty was imposed. The show-cause notice was adjudicated. The order reviewed by the Commissioner confirmed the demand of some amount as additional service tax liability along with interest and penalty.

Held:
It was held that the activity of organising the short-term courses is not covered by the definition of ‘Management Consultancy Service’ as the appellant does not conceptualise, device, develop, modify, rectify or upgrade any working system of any organisation and that the shortterm courses organised meant for senior officers of Indian Forest Service, National Afforestation and Ecodevelopment Board, Department of Science and Technology, etc. are not rendering any consultancy, advice or technical assistance to any organisation in connection with management of that organisation and hence the orders upholding the service tax demand and penalty was held not sustainable.

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BMC elections — Dance of democracy

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1. I am very disappointed that the voter turnout in the city is so low. We have no right to call ourselves educated and enlightened if we don’t come out to vote. We cannot expect things to change then. Voting is not just a fundamental right, it is our duty. If we fail to vote, we have no right to make comments about the state of affairs in the city. The quality of life is deteriorating and desperate measures are needed. Mumbai is the most important city in the country and generates a huge amount of revenue. It also has the largest number of urban problems. We want the elected leaders to fight for the city and get funds.

— Deepak Parekh, HDFC Chairman

2. The BMC is one of the richest corporations in the country. Despite this, the condition of Mumbai is pitiable. People should not consider voting day as a holiday, but as a day to do their duty. We can talk about responsibility only when we talk about duty. People should cast their vote. Not casting your vote is a crime.
— Anupam Kher, Actor 3.

It is very sad that a lot of people have not come out to vote. If you don’t vote, you have no right to complain. They are not contributing to the society. You are getting what you deserve . . . you are harming society and the country.

— Priya Dutt, Congress MP,

Mumbai North-Central 4. Times View — Another election, another low turnout in Mumbai. Is it apathy, or cynicism? Do we not care? Or do we believe that both sides are equally unworthy of our vote, that there’s nothing to choose from? Either which way, it doesn’t bode well for the city. The more affluent, it would appear, have mentally seceded from the city.

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FDI — The cost of caprice

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Serious economies cannot behave irresponsibly. That is the lesson to be drawn from the international fallout of our domestic telecom scandal. Within a week of the Supreme Court cancelling 122 telecom licences because of how they were issued, Bahrain Telecommunications Company has pulled out its investment in S Tel, and Etisalat of the UAE has written off investment of $ 827 million in Etisalat DB, in which it holds a 45% stake. A Norwegian Minister has come calling, to protect the interests of Telenor (which is majority-owned by the Norwegian Government), and you can rest assured that the Russians are not going to meekly accept the loss of Sistema’s majority stake in Sistema Shyam TeleServices, especially when Sistema owner Vladimir Yevtushenkov is closely linked to Prime Minister Vladimir Putin. So how much damage has been done internationally to the country’s standing and goodwill, because Mr. Raja was allowed to get away with his antics while the Prime Minister and Finance Minister fiddled?

Our capricious politicians are only dimly aware of the international fallout of their domestic dance. All too often, the operating assumption within the country is that the Government can do pretty much what it wants since most serious businessmen don’t want to be in court against it. That is not how it works around the world. So Devas has dragged Antrix to arbitration in Paris, after the government woke up one day and cancelled their contract. Cairn has accepted the Government’s unilateral rewriting of its contract with the Oil and Natural Gas Corporation, but only because it needed the Government’s approval for a change in shareholding control, and you can be sure that others in the energy space have been watching. Indeed, who is to tell how much damage was caused by the Enron-Dabhol fiasco in the 1990s, in terms of lost investment? While the collapse of Enron saved India some blushes, subsequent overseas investment in Indian power generation has been barely $ 5 billion (about the cost of one ultra-mega power project).

As it is, the country makes life hard for businesses, or it would not figure embarrassingly low in the World Bank’s list of countries ranked on the ease of doing business (132nd in a list of 183 countries; six years ago it was 116th out of 155 countries). Why add to the headaches with poor contractnegotiation, then second thoughts and unilateral action? This is not to argue that the country should not get out of bad deals; rather, the issue is of avoiding capricious conduct in an economy that hopes to be the fourth largest in the world by the end of the decade. If you want to get there, you have to start behaving like a serious economy, not invite comparisons with banana republics.

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Clarifications on filing of conflicting returns by contesting parties.

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The Ministry of Corporate Affairs has vide General Circular No. 1/2012, dated 10th February 2012 issued clarification to Circulars No. 19 and 20 issued on 2-5-2011 regarding the filing of conflicting returns pertaining to the change of directors or their appointment.

In order to avoid such eventualities wherever there is a management dispute, the company is now required to mandatorily file the attachment relating to the cause of cessation along with Form 32 with the ROC concerned irrespective of the ground of cessation viz.

(a) Retirement
(b) Disqualification
(c) Death
(d) Resignation
(e) Vacation of office u/s.283 or 313 or 260
(f) Removal u/s.284 or withdrawal of nomination by appointment authority
(g) Absence of reappointment

Aggrieved director can file complain in ‘Investor Compliant Form’ and ROC will take efforts to settle the same amicably. Till such dispute is settled, the documents filed by the company and by the contesting groups of directors will not be approved/ registered/recorded and will thus not be available in the registry for public viewing. Full Circular can be viewed on http://www.mca.gov.in/Ministry/pdf/ General_Circular_No_01_2012.pdf

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A.P. (DIR Series) Circular No. 80, dated 15-2-2012 — Export of goods and services — Simplification and revision of Softex procedure.

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This Circular has revised the procedure for submission of SOFTEX Forms for software exporters having annual turnover of Rs.1,000 crore or who file at least 600 SOFTEX forms annually. The new form and revised procedure for submitting the same are annexed to this Circular.

As per the revised procedure, the eligible software exporter has to

(1) File a statement in Excel format giving all particulars along with quadruplicate set of SOFTEX form to the nearest STPI.

(2) STPI will then verify the details and decide on a percentage sample check of the documents in details.

(3) Software companies will have to submit all the documents on demand to STPI within 30 days of their advice or any reasonable/ extended time.

(4) STPI will certify the statement and SOFTEX forms in bulk on the ‘Top Sheet’ regarding the values, etc.

(5) STPI will forward the first copy of the revised SOFTEX format to the concerned Regional Office of RBI, the “duplicate copy along with bulk statement in Excel format to Authorised Dealers for negotiation/collection/settlement. The third copy to the exporter and the last copy will be retained by STPI for its own record”.

(6) Exporters, using the revised procedure, will have to provide information about all the invoices including the ones lesser than US $ 25,000, in the bulk statement in Excel format.

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A.P. (DIR Series) Circular No. 79, dated 15-2- 2012 — Clarification — Purchase of immovable property in India — Reporting requirement

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A non-resident who has set up a branch, office or other place of business In India (other than a liaison office), and who has acquired any immovable property in India has to file a declaration in form IPI with RBI within 90 days from the date of such acquisition. However, no such declaration has to be filed by an NRI or PIO when he acquires any immovable property in India.

Form IPI has been modified to reflect this position and the amended Form IPI is annexed to this Circular.

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A.P. (DIR Series) Circular No. 76, dated 9-2-2012 — Clarification — Establishment of project offices in India by foreign entities — General permission.

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Presently, general permission has been granted to a foreign entity for setting up a Project office in India, subject to certain conditions.

This Circular clarifies that despite the general permission, citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, cannot establish in India, a branch office or a liaison office or a project office or any other place of business by whatever name called, without the prior permission of RBI.

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A.P. (DIR Series) Circular No. 75, dated 7-2- 2012 — External Commercial Borrowings — Simplification of procedure.

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Presently, approval of RBI is required for:

(a) Reduction in amount of ECB.
(b) Changes in the drawdown schedule where the original average maturity period is not maintained.
(c) Reduction in the all-in-cost of the ECB after obtaining LRN. This Circular has granted powers to banks to approve changes in respect of the above i.e., reduction in all-in-cost, subject to certain conditions and changes in the drawdown schedule when original maturity period is not maintained.

(a) Reduction in amount of ECB

Banks can approve reduction in loan amount in respect of ECB availed under the Automatic Route, provided

(i) Consent of the lender for reduction in loan amount has been obtained;

(ii) Average maturity period of the ECB is maintained;

(iii) Monthly ECB-2 returns in respect of the LRN have been submitted to the Department of Statistics and Information Management (DSIM); and

(iv) There is no change in the other terms and conditions of the ECB.

(b) Changes/modifications in the drawdown schedule when original average maturity period is not maintained

Banks can approve requests for changes/modifications in the drawdown schedule resulting in the original average maturity period undergoing change in respect of ECB availed both under the Automatic and Approval Routes. However, any elongation/ rollover in the repayment, on expiry of the original maturity of the ECB, will continue to require the prior approval of RBI.

The approval can be granted provided:

(i) There are no changes/modifications in the repayment schedule of the ECB;
(ii) Average maturity period of the ECB is reduced as against the original average maturity period stated in the Form 83 at the time of obtaining the LRN;
(iii) Reduced average maturity period complies with the stipulated minimum average maturity period as per the extant ECB guidelines;
(iv) Change in all-in-cost is only due to the change in the average maturity period and the ECB complies with the extant guidelines; and
(v) Monthly ECB-2 returns in respect of the LRN have been submitted to DSIM.

(c) Reduction in the all-in-cost of ECB Banks can approve requests for reduction in allin- cost, in respect of ECB availed both under the Automatic and Approval Routes, provided

(i) Consent of the lender has been obtained and there are no other changes in the terms and conditions of the ECB; and

(ii) Monthly ECB-2 returns in respect of the LRN have been submitted to DSIM.

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A.P. (DIR Series) Circular No. 74, dated 1-2-2012 — Deferred Payment Protocols dated April 30, 1981 and December 23, 1985 between Government of India and erstwhile USSR.

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With effect from January 20, 2012 the Rupee value of the Special Currency Basket has been fixed at Rs.71.456679 as against the earlier value of Rs. 73.923372

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A.P. (DIR Series) Circular No. 73, dated 21-1- 2012 — Opening of Diamond Dollar Accounts (DDAs)

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Presently, banks are permitted to open and maintain Diamond Dollar Accounts (DDA) of eligible firms and companies, subject to certain terms and conditions.

This Circular requires banks to submit a statement giving the data on the DDA balances maintained by them on a fortnightly basis within 7 days of close of the fortnight to which it relates, to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Trade Division, 5th Floor, Amar Building, Mumbai-400001.

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