BCAJ | Bombay Chartered Accountant Journal

Assessment pursuant to search in case of third party – Section 153C: A. Ys. 2006-07 to 2011- 12 – ‘Satisfaction’ that the documents found in search belong to third party is a precondition – ‘Satisfaction’ should be recorded and should be supported by material on recorded – Presumption that the document belongs to the searched person has to be rebutted:

Pepsi Food (P) Ltd. vs. ACIT; 270 CTR 459 (Del); CIT vs. Pepsi India Holdings (P) Ltd. vs. ACIT; 270 CTR 467 (Del):

In these cases, the petitioners filed writ petitions and challenged the validity of notices issued u/s. 153C of the Income-tax Act, 1961. The Delhi High Court allowed the writ petitions and held as under:

“i) Whenever a document is found from a person who is being searched, the normal presumption is that the said document belongs to that person. It is for the Assessing Officer to rebut that presumption and come to the conclusion or “satisfaction” that the document in fact belongs to somebody else.

ii) There must be some cogent material available with the Assessing Officer before he arrives at the satisfaction that the seized document does not belong to the searched person but to somebody else. Surmises and conjectures do not take the place of “satisfaction”. Mere use or mention of the word “satisfaction” or the words “I am satisfied” in the order or the note would not meet the requirement of the concept of satisfaction as used in section 153C.

iii) In order that the Assessing Officer of the searched person comes to the satisfaction that documents or material found during the search belong to a person other than the searched person, it is necessary that he arrives at the satisfaction that the said documents or materials do not belong to the searched persons. First of all, it is nobody’s case that the J Group had disclaimed the documents in question as belonging to them. Unless and until it is established that the documents do not belong to searched person, the provisions of section 153C do not get attracted.

iv) In the satisfaction note, there is nothing to indicate that the seized documents do not belong to the J Group where search took place. Secondly, the finding of photocopies in the possession of the searched person does not necessarily mean and imply that they ‘belong’ to the person who holds the originals. Further, the Assessing Officer should not confuse the expression ‘belongs to’ with the expression ‘relates to’ or ‘refers to’.

v) Going through the contents of the satisfaction note, one is unable to discern any “satisfaction” of the kind required u/s. 153C. Ingredients of section 153C have not been satisfied in this case. Consequently, the notices u/s. 153C are quashed.”

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Appeal before CIT(A) – A. Y. 2003-04 – Claim made for the first time before CIT(A) – CIT(A) can allow the claim on the basis of material on record:

CIT vs. Mitesh Impex; 367 ITR 85 (Guj): 270 CTR 66 (Guj):

In the return of income for the A. Y. 2003-04, the assessee had not made the claim for deduction u/s. 80HHC and 80- IB of the Income-tax Act, 1961 though the assessee was entitled to such deduction. For the first time the assessee made the claim for deduction before the CIT(A). CIT(A) allowed the claim on the basis of the material on record. The Tribunal upheld the order of the CIT(A).

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

“i) The Courts have recognised the jurisdiction of CIT(A) and Tribunal to entertain new ground or a legal contention. A ground would have a reference to an argument touching a question of fact or a question of law or mixed question of law and facts. A legal contention would ordinarily be a pure question of law without raising any dispute about the facts. Not only such additional ground or contention, the Courts have also recognised the powers of the CIT(A) and the Tribunal to entertain a new claim for the first time though not made before the Assessing Officer.

ii) This is primarily on the premise that if a claim though available in law is not made either inadvertently or on account of erroneous belief of complex legal position, such claim cannot be shut out for all times to come, merely because it is raised for the first time before the appellate authority without resorting to revising the return before the Assessing Officer.

iii) Therefore, any ground, legal contention or even a claim would be permissible to be raised for the first time before the appellate authority or the Tribunal when facts necessary to examine such ground, contention or claim are already on record. In such a case the situation would be akin to allowing a pure question of law to be raised at any stage of the proceedings.

iv) This is precisely what has happened in the present case. The CIT(A) and the Tribunal did not need to nor did they travel beyond the materials already on record, in order to examine the claims of the assessee for deduction u/ss. 80-IB and 80HHC of the Act. We answer the question against the revenue and in favour of the assessee.”

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Reassessment: Reopening at the instance of audit party – Sections 147 and 148 – A. Y. 2009- 10 – AO contested the audit objection but still reopened the assessment – Reopening is at the instance of the audit party – AO has not applied mind independently – Reopening is bad in law:

Raajratna Metal Industries Ltd. vs. ACIT (Guj); SCA No. 7140 of 2014 dated 30-07-2014:

For the A. Y. 2009-10, the assessment of the assessee petitioner was completed by an order u/s. 143(3) of the Income-tax Act, 1961 dated 24-12-2010. Subsequently, a notice u/s. 148 dated 11-03-2013 was issued for reopening the assessment. The assessee’s objections were rejected.

On a writ petition filed by the assessee challenging the notice u/s. 148, the Gujarat High Court found that the audit party had raised objections as regards the issue in question but the Assessing Officer had contested the audit objections and supported the assessment order. The High Court allowed the writ petition filed by the assessee and held as under:

“i)To satisfy ourselves, whether the reassessment proceedings have been initiated at the instance of the audit party and solely on the ground of audit objections, we called upon the Advocate for the Respondent to provide the original file from the Assessing Officer. On perusal of the files, the noting made therein and the relevant documents, it appears that the assessment is sought to be reopened at the instance of the audit party, solely on the ground of audit objections.

ii) It is also found that, as such, the Assessing Officer tried to sustain his original assessment order and submitted to the audit party to drop the audit objections.

iii) If the reassessment proceedings are initiated merely and solely at the instance of the audit party and when the Assessing Officer tried to justify the assessment order and requested the audit party to drop the objections and there was no independent application of mind by the Assessing Officer with respect to the subjective satisfaction for initiation of reassessment proceedings, the impugned reassessment proceedings cannot be sustained and the same deserve to be quashed and set aside.

iv) Present petition succeeds on the aforesaid ground alone, i.e., the assessment was reopened solely on the ground of audit objections raised by the audit party. Consequently, the impugned reassessment proceedings are hereby quashed and set aside.”

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Disallowance u/s. 14A – Expenditure relating to exempt income – Section 14A and Rule 8D of I. T. Rules – A. Ys. 2007-08 and 2008-09 – Disallowance cannot be made if there is no exempt income or if there is a possibility of the gains on transfer of the shares being taxable:

CIT vs. Holcim India P. Ltd. (Del): ITA Nos. 299 and 486 of 2014 dated 05-09-2014:

The Tribunal held in this case that disallowance u/s. 14A of the Income-tax Act, 1961 cannot be made if there is no exempt income or if there is a possibility of the gains on transfer of the shares being taxable. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) On the issue whether the assessee could have earned dividend income and even if no dividend income was earned, yet section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in CIT vs. M/s. Lakhani Marketing Inc. made reference to two earlier decisions of the same Court in CIT vs. Hero Cycles Limited, 323 ITR 518 and CIT vs. Winsome Textile Industries Ltd. 319 ITR 204 to hold that section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in CIT vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj). The third decision is of the Allahabad High Court in CIT vs. Shivam Motors (P) Ltd;

ii) Income exempt u/s. 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year.

iii) It is an undisputed position that assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc., cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax;

iv) What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).

v) In these circumstances, we do not find any merit in the present appeals. The same are dismissed.”

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Capital Gains – Status of Assessee – Compensation received on acquisition of inherited land by the Government is to be assessed in the hands of the sons in their status as “individual’s” and not jointly in the status of “Association of Persons.”

CIT vs. Govindbhai Manaiya [(2014) 367 ITR 498 (SC)]

Capital Gains – Interest on the enhanced compensation u/s. 28 of 1894 Act is to be taxed in the year in which it is received.

The respondents were three brothers. Their father died leaving the land admeasuring 17 acres and 11 gunthas to the three brothers and two other persons who relinquished their rights in favour of the brothers. A part of this, bequeathed land was acquired by the State Government and compensation was paid for it. On appeal, the compensation amount was enhanced and additional compensation along with interest was awarded. The respondents filed their return of income for each assessment years claiming the status of “individual.” Two questions arose for consideration before the Assessing Officer. One was as to whether these three brothers could file separate returns claiming the status of the “individual” or they were to be treated as an “association of persons” (AoP). The second question was regarding the taxability of the interest on the enhanced compensation and this interest which was received in a particular year was to be assessed in the year of receipt or it could be spread over the period of time.

The Assessing Officer passed an assessment order by treating their status as that of an AOP. The Assessing Officer also refused to spread the interest income over the years and treated it as taxable in the year of receipt.

The High Court held that these persons were to be given the status of “individual” and assessed accordingly and not as an AOP and that the interest income was to be spread over from the year of dispossession of land, that is the assessment year 1987-88 till the year of actual payment which was received in the assessment year 1999-2000 applying the principles of accrual of income.

The Revenue approached the Supreme Court challenging the decision of the High Court.

The Supreme Court observed that the admitted facts were that the property in question which was acquired by the Government, came to the respondents on inheritance from their father, i.e., by the operation of law. Furthermore, even the income which was earned in the form of interest was not because of any business venture of the three assesses but it was the result of the act of the Government in compulsorily acquiring the said land. In these circumstances, according to the Supreme Court, the case was squarely covered by the ratio of the judgment laid down in Meera and Co. [(1997) 224 ITR 635 (SC)] inasmuch as it was not a case where any “association of persons” was formed by volition of the parties for the purpose of generation of income. This basic test to determine the status of AOP was absent in the present case.

In so far as the second question was concerned, the Supreme Court held that it was also covered by its another judgment in CIT vs. Ghanshyam (HUF) reported in [(2009) 315 ITR 1 (SC)] albeit, in favour of the Revenue, in which it was held that whereas interest u/s. 34 was not treated as a part of income subject to tax, the interest earned u/s. 28, which was on the enhanced compensation, was treated as a accretion to the value and, therefore, part of the enhanced compensation or consideration making it exigible to tax. After holding that interest on the enhanced compensation u/s. 28 of the 1894 Act was taxable, the court dealt with the other aspect, namely, the year of tax and answered this question by holding that it had to be taxed on receipt basis, which meant that it would be taxed in the year in which it is received.

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Search And Seizure – Block Assessment – Surcharge – The charge in respect of surcharge, having been created for the first time by insertion of proviso to section 113 was substantive provision and hence was to be construed as prospective in operation and was effective from 1st June, 2002.

CIT vs. Vatika Township P. Ltd. [2014] 367 ITR 466 (SC)

There was a search and seizure operation u/s. 132 of the Act on the premises of the assessee on 10th February, 2001. Notice u/s. 158BC of the Act was issued to the assessee on 18th June, 2001, requiring him to file his return of income for the block period ending 10th February, 2000. In compliance, the assessee filed its return of income for the block period from 1st April, 1989 to 10th February, 2000. The block assessment in this case was completed u/s. 158BA on 28th February, 2002, at a total undisclosed income of Rs. 85,18,819. After sometime, the Assessing Office on verification of working of calculation of tax, observed that surcharge had not been levied on the tax imposed upon the assessee. This was treated as a mistake apparent on record by the Assessing Officer and, accordingly, a rectification order was passed u/s. 154 of the Act on 30th June, 2003. This order u/s. 154 of the Act, by which surcharge was levied by the Assessing Officer, was challenged in appeal by the assessee. The said order was cancelled by the Commissioner of Income Tax (Appeals)-I, New Delhi, vide order dated 10th December, 2003, on the ground that the levy of surcharge is a debatable issue and therefore, such an order could not be passed resorting to section 154 of the Act. The undisclosed income was revised u/s. 158BA/158BC by the Assessing Officer, vide his order dated 9th September, 2003, to Rs.10,90,000, to give effect to the above order of the Commissioner of Income Tax (Appeals), and thereby removing the component of the surcharge.

As the Department wanted the surcharge to be levied, the Commissioner of Income Tax (Central-I), New Delhi, issued a notice u/s. 263 of the Act to the assessee and sought to revise the order dated 9th September, 2003, passed by the Assessing Officer by which he had given effect to the order of the Commissioner of Income Tax (Appeals), and in the process did not charge any surcharge. In the opinion of the Commissioner of Income Tax, this led to income having escaped the assessment. According to the Commissioner of Income Tax, in view of the provisions of section 113 of the Act as inserted by the Finance Act, 1995, and clarified by the Board Circular No. 717, dated 14th August, 1995, surcharge was leviable on the income assessed. According to the Commissioner of Income Tax, the charging provision was section 4 of the Act which was to be read with section 113 of the Act that prescribes the rate and tax for search and seizure cases and rate of surcharge as specified in the Finance Act of the relevant year was to be applied. In this particular case, the search and seizure operation took place on 14th July, 1999, and treating this date as relevant, the Finance Act, 1999, was to be applied.

The Commissioner of Income Tax, accordingly, cancelled the order dated 9th September, 2003, not levying surcharge upon the assessee, as being erroneous and prejudicial to the interests of the Revenue. The Assessing Officer was directed by the Commissioner of Income Tax, to levy surcharge at 10 % on the amount of income-tax computed and issue revised notice of demand. The order covered the block period 1st April, 1989, to 10th February, 2000. This order of the Commissioner of Income Tax u/s. 263 of the Act was passed on 23rd March, 2004. The assessee filed the appeal before the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) against the said order of the Commissioner of Income Tax. The Tribunal, vide its order dated 23rd June, 2006, allowed the appeal of the assessee. The Tribunal held that the insertion of the proviso to section 113 of the Income-tax Act cannot be held to be declaratory or clarificatory in nature and was prospective in its operation. Against the order of the Tribunal dated 23rd June, 2006, the Revenue approached the High Court of Delhi by way of an appeal filed u/s. 260A of the Act for the block period 1st April, 1989 to 10th February, 2000. This appeal was been dismissed, vide order dated 17th April, 2007 by the High Court.

The High Court took the view that the proviso inserted in section 113 of the Act by the Finance Act, 2002, was prospective in nature and the surcharge as leviable under the aforesaid proviso could not be made applicable to the block assessment in question of an earlier period, i.e., the period from 1st April, 1989, to 10th February, 2000, in the instant case.

On further appeal, the Supreme Court noted that the issue about the said proviso to section 113, viz., whether it is clarificatory and curative in nature and, therefore could be applied retrospectively or it is to take effect from the date, i.e., 1st June, 2002, when it was inserted by the Finance Act, 2002, was considered by its Division Bench in the case of CIT vs. Suresh N. Gupta [(2008) 297 ITR 322 (SC)]. The Division Bench held that the said proviso was clarificatory in nature. However, when the instant appeal came up before another Division Bench on 6th January, 2009, for hearing, the said Division Bench expressed its doubts about the correctness of the view taken in Suresh N. Gupta and directed the Registry to place the matter before the Hon’ble the Chief Justice of India for constitution of a larger Bench.

A five judge Bench was constituted to hear the matter. The Supreme Court held that on examining the insertion of the proviso in section 113 of the Act, it was clear that the intention of the Legislature was to make it prospective in nature. This proviso could not be treated as declaratory/statutory or curative in nature. The Supreme Court observed that in Suresh N. Gupta itself, it was acknowledged and admitted that the position prior to amendment of section 113 of the Act whereby the proviso was added, whether surcharge was payable in respect of block assessment or not was totally ambiguous and unclear. The court pointed out that some Assessing Officers had taken the view that no surcharge was leviable. Others were at a loss to apply a particular rate of surcharge as they were not clear as to which Finance Act, prescribing such rates, was applicable. The surcharge varied from year to year. However, the Assessing Officers were not clear about the date with reference to which rates provided for in the Finance Act were to be made applicable. They had four dates before them, viz.:

(i) Whether surcharge was leviable with reference to the rates provided for in the Finance Act of the year in which the search was initiated;
(ii) The year in which the search was concluded; or
(iii) The year in which the block assessment proceedings u/s.158BC of the Act were initiated; or
(iv) The year in which block assessment order was passed.

In the absence of a specified date, it was not possible to levy surcharge and there could not have been an assessment without a particular rate of surcharge. The choice of a particular date would have material bearing on the payment of surcharge. Not only the surcharge was different for different years, it varied according to the category of assesses and for some years, there was no surcharge at all.

According to the Supreme Court, the rate at which the tax is to be imposed is an essential component of tax and where the rate is not stipulated or it cannot be applied with precision, it could be difficult to tax a person. In the absence of certainty about the rate because of uncertainty about the date with reference to which the rate is to be applied, it could not be said that surcharge as per the existing provision was leviable on block assessment qua undisclosed income. Therefore, it could not be said that the proviso added to section 113 defining the said date was only clarificatory in nature. The Supreme Court took note of the fact that the Chief Commissioners at their conference in 2001 accepted the position, that as per the language of section 113, as it existed, it was difficult to justify the levy of surcharge.

The Supreme Court held that the charge in respect of the surcharge, having been created for the first time by the insertion of the proviso to section 113, was clearly a substantive provision and, hence, has to be construed prospective in operation. The amendment was neither clarificatory nor was there any material to suggest that it was so intended by Parliament. Furthermore, an amendment made to a taxing statute could be said to be intended to remove “hardships” only of the assessee, not of the Department. On the contrary, imposing a retrospective levy on the assessee would have caused undue hardship and for that reason Parliament specifically chose to make the proviso effective from 1st June, 2002.

The Supreme Court overruled the Judgment of the Division Bench in Suresh N. Gupta treating the proviso as clarificatory and giving it retrospective effect.

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Taxability of Carbon Credits

Synopsis
Purchase and Sale of Carbon Credits is undertaken globally as a part of the Clean Development Mechanism (CDM), which is targeted towards reduction of Green Houses Gases in the atmosphere. Under this mechanism, Carbon Credits are purchased and sold for a consideration. The taxability of the gains arising from such sale have been a matter of litigation. The esteemed authors have analysed the conflicting decision and discussed the intricate points related to the taxability under the Income-tax Act, 1961 of the consideration received on the sales of these credits.

Issue
To limit concentration of Green House Gases (GHGs), in the atmosphere, for addressing the problem of global warming, the United Nations Framework Convention on Climate Change (UNFCCC) was adopted in 1992. Subsequently, to supplement the convention, the Kyoto Protocol came into force in February 2005, which sets limits on the maximum amount of emission of GHGs by countries. The Kyoto Protocol commits certain developed countries to reduce their GHG emissions. In order to enable the developed countries to meet their emission reduction targets, the Kyoto Protocol provides three market-based mechanisms, one of which is the Clean Development Mechanism (CDM).

Under the CDM, a developed country can take up a GHG reduction project activity in a developing/least developed country where the cost of GHG reduction is usually much lower, and in consideration for undertaking the activity the developed country would be given carbon credits for meeting its emission reduction targets. Alternatively, entities in developing/least developed countries can set up a GHG reduction project, in their respective countries, get it approved by UNFCCC and earn carbon credits. Such carbon credits generated, by the entities in the developing/least developed country, can be bought, for a consideration, by the entities of the developed countries responsible for emission reduction targets. Under the CDM, carbon credits are measured in terms of Certified Emission Reduction (CER) where one CER is equal to 1 metric tonne of carbon dioxide equivalent, and for which a certificate is issued, which certificate is saleable.

The question has arisen, under the Indian tax laws, as to whether the consideration received by an entity for sale of carbon credits generated by it is of a capital nature or a revenue nature, and whether such amount is taxable or not. Incidental questions are whether such income is eligible for deduction under chapter VIA and whether it is liable for MAT. While the Hyderabad, Jaipur and the Chennai benches of the tribunal have taken the view that sale proceeds of carbon credits are not taxable, being capital receipts arising out of environmental concerns and not out of the business, the Cochin bench of the tribunal has taken the view that the sale proceeds of such carbon credits are taxable as a benefit arising out of business.

My Home Power’s case
The issue first arose for consideration before the Hyderabad bench of the tribunal in the case of My Home Power Ltd vs. Dy. CIT 21 ITR (Trib) 186.

In this case, the company was engaged in the business of power generation through biomass power generation unit. During the relevant year, it received 1,74,037 Carbon Emission Reduction Certificates (CERs) or carbon credits for the project activity of switching off fossil fuel from naphtha and diesel to biomass. It sold 1,70,556 CERs to a foreign company and received Rs. 12.87 crore. It accounted this receipt as capital in nature and did not offer it for taxation.

The assessing officer treated the sale proceeds of the CERs to be a revenue receipt, since they were a tradable commodity, and even quoted on stock exchanges. He accordingly added a net receipt of Rs. 11.75 crore to the returned income. The Commissioner(Appeals) confirmed the order of the assessing officer and further held that it was not income from business and was therefore not entitled for deduction u/s. 80-IA.

Before the Tribunal, it was argued on behalf of the assessee that the main business activity of the assessee was generation of biomass-based power. The receipt had no relationship with the process of production, nor was it connected with the sale of power or with the raw material consumed. It was also not the sale proceeds of any by-product. It was further argued that CERs were issued to every industry, which saved emission of carbon, and was not limited to power projects. Further, the certificates were issued keeping in view the production relating to periods prior to the previous year. It was claimed that the amount was not compensation for loss suffered in the process of production or for expenditure incurred in acquisition of capital assets.

It was further argued that the certificates issued by the UNFCCC under the Kyoto protocol only recognised the achievement made by the assessee in emitting lesser quantity of gases than the assigned quantity, and had no relation to either revenue or capital expenditure incurred by the assessee. The certificate itself did not have any value unless there were other industries which were in need of such certificate, and was not dependent on production. In a hypothetical situation where all the industries in the world were able to limit emissions of gases to the assigned level, it was argued that there would be no value for such certificates issued by UNFCCC.

It was claimed that the process of business commenced from purchase of raw material and ended with the sale of finished products, and that the gain was not earned in any of the in-between processes, nor did it represent receipt to compensate the loss suffered in the process. Therefore, the amount did not represent any income in the process or during the course of business. It was also claimed that the amount did not represent subsidy for establishing the industry or for purchase of raw material or a capital asset. UNFCCC did not reimburse either revenue or capital expenditure, and in fact did not provide any funds, but merely certified that the industry emitted a particular quantity of gases as against the permissible quantity. It was therefore not a subsidy granted to reimburse losses. In fact, no payment was made by UNFCCC, but only a certificate was issued without any consideration of profit or loss or the cost of acquisition of capital assets.

It was also argued that the amount could not be considered to be a perquisite, as it was not received from any person having a business connection with the company, and was not received in the process of carrying on the business. It was claimed that unless there existed a business connection, no benefit or perquisite could be derived.

It was also claimed that the amount did not fall within the definition of income u/s. 2(24). It did not represent an incentive granted in the process of business activity, as the amount was not received under any scheme framed by the government or anybody to benefit the industry or to reimburse either the cost of the raw material or the cost of capital asset. The amount was not an award for the revenue loss suffered by the company, as it was granted without relevance to the financial gains or losses. The payment was made without any relevance to the financial transactions of the assessee and there was no consideration for paying this amount. The amount was paid in the interest of the international community and not in the interest of industry as such, or in the interest of the assessee as a compensation for the loss or expenditure during the course of business, and was therefore a sort of gift given by UNFCCC for the distinction achieved by the assessee in achieving emission of lesser amount of gases than the assigned amount. It was therefore not an income within the meaning of section 2(24) or section 28.

Reliance was placed on the decision of the Supreme Court in the case of CIT vs. Sterling Foods 237 ITR 579, for the proposition that just as certificates issued by the government for export of goods which were capable of sale, was held as not arising from the industrial undertaking, but from the export promotion scheme of the government, so also such CER certificates were attributable to the climatic protection scheme of the UNFCCC, which had no relevance to the business activities of the assessee.

It was further pointed out that under the draft Direct Taxes Code (DTC), such items were regarded as income, yet no amendment had been made to the Income-tax Act to bring such items to tax as income. Therefore, the intention of Parliament was not to tax such CERs till such time as DTC came into force.

It was pointed out that in the case of subsidies, subsidies received on revenue account alone would be taxed as income, while subsidies received on capital account were not to be taxed, but would be reduced from the cost of the capital asset for the purposes of claiming depreciation. Further, subsidy received for the public good was held as not taxable. In the case of the assessee, the amount did not represent composition for loss on revenue account, nor a gain during business activities, nor a reimbursement of any capital expenditure. It was claimed that the amount received was for public good and was therefore not taxable.

Besides claiming that it was a capital receipt, it was alternatively claimed that the income was not assessable for the relevant assessment year, since it related to reduction of carbon emissions during earlier years, that the amount was eligible for deduction u/s. 80-IA since the assessing officer was of the view that it was connected to the production of power and that, if it all it was to be taxed, the expenditure relatable to earning certificates had to be arrived at by taking into consideration the assets used and the materials consumed in the earlier years and such amount had to be reduced from the gross receipts to arrive at the taxable amount.

On behalf of the revenue, it was argued that the underlying intention behind the technological implementation by a company in the developing world is not only to reduce the pollution of atmosphere, but also to earn some profit from out of excess units that can be generated by implementation of the CDM project. It was claimed that the CER credits can be considered as goods, as they had all the attributes of goods, viz. utility, capability of being bought and sold, and capability of being transmitted, transferred, delivered, stored and possessed. According to the revenue, the purchase agreement between the assessee and the foreign company indicated that the sale transaction of CERs was nothing but a transaction in goods.

It was further argued on behalf of the revenue that by implementing the CDM project, the assessee got the benefit of efficiency in respect of reduction of pollution. Had there been no other benefits attached to it, under normal circumstances, the assessee would not have bothered to obtain CERs. It was because of the expenditure incurred for implementation of the project as a pollution reduction measure that the assessee got the benefit of the certificates. The expenditure incurred was claimed in its profit and loss account. Since it was known that the UNFCCC certificates had intrinsic value and had a ready market for redemption or trading, the assessee obviously pursued obtaining of these certificates. Further, these certificates were traded and were therefore akin to shares or stocks transacted in the stock exchange, and were therefore revenue receipts rightly brought to tax by the assessing officer.

The Tribunal observed that carbon credits were in the nature of an entitlement received to improve world atmosphere and environment, reducing carbon, heat and gas emissions. According to the Tribunal, the entitlement earned for carbon credits could at best be regarded as a capital receipt and could not be taxed as a revenue receipt. It was not generated or created due to carrying on of business, but it accrued due to world concern. Its availability and assumption of the character of transferable right or entitlement was only due to the world concern.Therefore, the source of carbon credits was world concern and environment, to which the assessee got a privilege in the nature of transfer of carbon credits. Therefore, the amount received for carbon credits had no element of profit or gain and could not be subject to tax in any manner under any head of income.

According to the Tribunal, carbon credits were made available to the assessee on account of saving of energy consumption and not because of its business. Transferable carbon credits was not a result or incidence of one’s business but was a credit for reduction of emissions. In its view, carbon credits could not be considered to be a by-product. It was a credit given to the assessee under the Kyoto Protocol and because of international understanding. According to the Tribunal, the amount received was not received for producing and selling any product, by-product or of rendering any service in the course of carrying on of the business, but was an entitlement or accretion of capital, and hence income earned on sale of these credits was a capital receipt.

The Tribunal relied on the decision of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. 57 ITR 36, where it was held that consideration for transfer of surplus loom hours by one mill to another mill under an agreement for control of production was a capital receipt and not an income. It was held that such sale proceeds was on account of exploitation of a capital asset, and it was a capital receipt and not an income. According to the Tribunal, the consideration received by the assessee for carbon credits was similar to the consideration received by transfer of loom hours.

Accordingly, the Tribunal held that carbon credits was not an offshoot of business, but an offshoot of environmental concerns, and that carbon credits did not increase profits in any manner and did not need any expenses. It was a nature of entitlement to reduce carbon emissions, with no cost of acquisition or cost of production to get such entitlement. Therefore, carbon credits was not in the nature of profit or in the nature of income, but a capital receipt.

The view taken by the Hyderabad bench of the Tribunal in this decision was followed by the Chennai bench of the tribunal in the cases of Ambika Cotton Mills Ltd vs. Dy CIT 27 ITR (Trib) 44 and Sri Velayudhaswamy Spinning Mills (P) Ltd vs. Dy CIT 27 ITR (Trib) 106 and recently, the Jaipur bench in the case of Shree Cements Ltd. vs. ACIT, 31 ITR(Trib) 513 has followed the decisions of the Chennai bench.

Apollo Tyres’ case

The issue again came up before the Cochin bench of the Tribunal in the case of Apollo Tyres Ltd. vs. ACIT 149 ITD 756, 31 ITR(Trib) 477.

In this case, the assessee received Rs. 3.12 crore from sale of CERs or carbon credits generated in the gas turbine unit. The assessee claimed that the income earned on sale of carbon credits was directly and inextricably linked to generation of power and that the assessee would therefore be entitled to deduction u/s. 80-IA. However, the assessing officer and the DRP held that the income was not derived from eligible business and was therefore not eligible for deduction u/s. 80-IA.

Before the Tribunal, the assessee raised an additional ground that the income received on sale of carbon credits was in the nature of capital receipt, and therefore not liable for taxation.

On behalf of the assessee, it was argued before the tribunal that the entitlement to carbon credits arose from the undertaking of the developed countries to reduce global warming and climate change mitigation across the world. It was claimed that carbon credits was an incentive provided to a project which employed a methodology to effect demonstrable and measurable reduction of emission of carbon dioxide in the atmosphere. The mechanism provided for trading CERs provided an opportunity to the holder of such certificate to dispose of the same to an actual user to acquire such credit to be counted toward fulfilment of its committed target reduction. Therefore, the mechanism provided by the United Nations provided an incentive for employment of new technology which helped in emission reduction, and therefore contributed to the desired object to protect the world environment. The purpose of Kyoto protocol was to protect the global environment and incorporate green initiative by adopting new technologies. The underlying object of CERs by the UNFCCC was focused on climate change mitigation by reducing the harmful effect of GHG emission and not to ensure that the recipient of such CER could run his business in a more profitable or cost effective manner.

It was argued on behalf of the assessee that all capital receipts were not income, but only capital gains chargeable u/s. 45 by virtue of the specific definition contained in section 2(24) (vi). Reliance was placed on the decision of the Hyderabad bench of the Tribunal in the case of My Home Power Ltd. (supra) for the proposition that the amount received on transfer of carbon credits was a capital receipt, and therefore not liable for taxation. It was alternatively argued that in case the tribunal found that the income on sale of carbon credits was a revenue receipt, then the assessee was entitled to deduction u/s. 80-IA, because it was inextricably linked to the business of the assessee.

On behalf of the revenue, it was argued that income or amount received by termination or sterilisation of a capital asset would fall in the capital field, but if the amount was received in the course of regular business activity due to sale of a product or entitlement incentive received due to a scheme of the government or the international community, then it would fall in the revenue field. According to the revenue, in the case before the tribunal, there was no sterilisation of any capital asset. The assessee generated power by using a gas turbine. What was given to the assessee was an incentive in the course of its regular business and therefore the amount received on sale of carbon credits had to be treated as a revenue receipt.

It was further submitted that the income on sale of carbon credits was not derived from the industrial undertaking. Though there might be a nexus between the business of the assessee and the receipt of income on sale of carbon credits, the income had to be necessarily derived from the industrial undertaking. In the case before the Tribunal, the income was derived on account of the scheme of the UNFCCC and not from the industrial undertaking. It was therefore argued that the assessee was not entitled to deduction u/s. 80-IA.

The Tribunal analysed the concept of carbon credits. According to it, carbon credits was nothing but an incentive given to an industrial undertaking for reduction of the emission of GHGs, including carbon dioxide. It noted that there were several ways for reduction of emission of GHGs, such as by switching over to wind and solar energy, forest regeneration, installation of energy-efficient machinery, landfill methane capture, etc. According to the Tribunal, it was obvious that carbon credits was nothing but a measurement given to the amount of GHG emission rates in the atmosphere in the process of industrialisation, manufacturing activity, etc. Therefore, carbon credits was a privilege/entitlement given to industries for reducing the emission of GHGs in the course of their industrial activity.

While considering whether the receipt was a capital receipt or a revenue receipt, the Tribunal analysed the decision of the Hyderabad bench of the tribunal in the case of My Home Power Ltd. (supra). It noted that the Tribunal in that case had placed reliance on the judgement of the Supreme Court in Maheshwari Devi Jute Mills Ltd. (supra), and that it had held that the amount received on sale of carbon credits was on sale of entitlement conferred on the assessee by UNFCCC under Kyoto Protocol. It also noted that sale of carbon credits did not result in sterilisation of any capital asset.

Analysing the decision of the Supreme Court in the case of Maheshwari Devi Jute Mills Ltd. (supra), the Cochin bench of the Tribunal noted that in the case before the Supreme Court, it was accepted by the revenue at the lower levels that the loom hours were assets belonging to each member and that it was only at the Supreme Court level, that the revenue contended that the loom hour was a privilege, and not an asset. The Supreme Court did not consider the aspect of whether the loom hours was a capital asset, since it had been accepted to be a capital asset, right up to the proceedings before the High Court, and a change in stand was not permitted by the Supreme Court. It was based on these facts that the Supreme Court held that the receipt on sale of loom hours must be regarded as capital receipt and not as income. The Tribunal according held that the said decision did not really help the case of the assesee as it was delivered on the facts of the case and therefore found that the Hyderabad bench was unduly influenced by the said decision of the Supreme Court in concluding that the carbon credits were capital assets.

The Cochin bench of the Tribunal noted that in the case before it, right from the assessment proceedings before the assessing officer till before the Tribunal, the assessee had not made any claim that the carbon credit was a capital asset as defined in section 2(14). Further, the assessee had claimed deduction u/s. 80-IA in respect of sale of carbon credits. Therefore, the assessee had effectively conceded that carbon credits were not capital assets. According to the Tribunal, had the assessee claimed that the carbon credits were capital assets, it would not have claimed deduction u/s. 80-IA on the income derived from sale of the carbon credits. The Tribunal observed that the assessee itself treated the carbon credits as an entitlement or privilege generated in the course of business activity.

The Tribunal noted that the assessee was engaged in the business of manufacture of tyres and for the purpose of captive consumption, the assessee generated electric power by using a gas turbine. In the process of power generation, the assessee reduced emission of carbon dioxide and therefore received carbon credits. According to the Tribunal, it was obvious that carbon credits were obtained by the assessee in the course of its business activity. The Tribunal was of the view that when the carbon credits was an entitlement or privilege accruing to the assessee in the course of carrying on of manufacturing activity, it could not be said that such carbon credits was an accretion of a capital asset. It noted that carbon credits was not a fixed asset or tool of the assessee to carry on its business. According to it, the sale of carbon credits was a trading or revenue receipt.

The Tribunal also considered the aspect of whether import entitlement was at par with carbon credits. It noted that both import entitlements and carbon credits came from a scheme, one of the government and one of the UNFCCC under the Kyoto protocol. It was therefore of the view that both were on par. Following the decision of the Kerala High Court in the case of OK Industries vs. CIT 42 CTR 82, which had held that import entitlement was generated in the course of business activity and could not be treated as an asset within the meaning of section 2(14), the Tribunal held that carbon credits also could not be treated as capital assets.

The Cochin bench of the Tribunal observed that the provisions of section 28(iv) read with section 2(24)(vd), which brought to tax the value of any benefit or privilege arising from business, were not brought to the notice of the Hyderabad bench of the Tribunal in the case of My Home Power Ltd. (supra), and that therefore that decision was not applicable to the case before it.

The Tribunal therefore held that the sale of carbon credits constituted revenue receipts and profits and gains of the business u/s. 28(iv) read with section 2(24)(vd).

Observations

Sale proceeds of carbon credits have not been specifically included in section 28, or in the definition of income u/s. 2(24). The legislature when desired, has amended the Income-tax Act to include certain specific receipts as income, even though the character of such receipts may not necessarily be in the nature of income. For instance, profits on sale of import entitlements and certain other specified receipts are specifically included as an income u/s. 28(iiia) to (iiie) read with section 2(24)(va) to (ve). Similarly, amounts received under an agreement for not carrying out any activity in relation to business is specifically taxable u/s. 28(va) read with section 2(24)(xii). The Cochin bench of the Tribunal does not seem to have considered this important fact of the omission, to expressly provide for the taxation of the carbon credits, which fact convey the intent of the legislature to not expose such receipts to taxation, which intent is further strengthened by clause(ii) to the proviso to section 28(va).

There is a specific exclusion, from taxation, under the clause(ii) to the proviso to section 28(va) for compensation received from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone Layer under the United Nations Environment Programme. Such compensation is similar in character to carbon credits, in the sense that both are received under a multilateral convention for protection of the environment for doing or not doing a particular activity, which results in environment improvement. The intention therefore appears to be not to tax such amounts, since these are rewards for benefiting the world and public in general.

The Cochin bench of the Tribunal seems to have been largely influenced by the fact that the assessee, in the initial stages before the tax authorities, had taken the stand that the amount was taxable and was relatable to its power generation business. It therefore proceeded on the footing that the assessee itself had considered the carbon credits as the receipts arising from its power generation business.

The fact that carbon credits are transferable or that they are traded on stock exchanges is irrelevant for deciding the fact as to whether they are capital receipts or revenue receipts. Similarly, it is not necessary that all benefits arising from business activity are of a revenue nature. For instance, by carrying on business, goodwill or a brand may be generated, which is of a capital nature. In fact the various receipts, now specifically made taxable under different clauses of section 28 aforesaid, are the cases of business receipts in the nature of capital, that are made taxable under specific legislation.

The real issue is whether the carbon credits, even where regarded as benefits or perquisites, arise from the business? The Hyderabad bench of the Tribunal, relied on the Supreme Court’s decision in the case of Sterling Foods (supra) to take a view that the export entitlements did not arise from the business of the industrial undertaking, but from the scheme of the Government. The view of the Cochin bench of the Tribunal, however meritorious, that the carbon credits arose on account of the manner in which the business was carried on, and was not totally divorced from the business activity, is at the most debatable. Considering the importance of the environment protection and the need to promote the measures to protect it, the Government should specifically amend the law if it believes that the carbon credits are taxable as income. In fact, the intention seems to have been to tax it once the DTC came into force, as the draft DTC had provisions for taxing such amount. If the intention is to tax it now, the Income-tax Act needs to be amended on the lines of Clauses (va) to (ve) of section 2(24) and Clauses (iiia) to (iiie) of section 28 for that purpose.

However, for the time being, the issue seems to have been concluded in favour of the assessee, by the Andhra Pradesh High Court, which approved the decision of the Hyderabad bench of the Tribunal in the case of CIT vs. My Home Power Ltd., 365 ITR 82. The Andhra Pradesh High Court agreed with the findings of the Tribunal that carbon credit is not an offshoot of business, but an offshoot of environmental concerns, and that no asset is generated in the course of business, but is generated due to environmental concerns. According to the High Court, the carbon credit was not even directly linked with power generation. The High Court held that the amount received on sale of excess carbon credits, was a capital receipt, and not a business receipt or income.

shailesh.kwebmaker

TRANSFER PRICING METHODOLO GY – RESALE PRICE METHOD AND COST PLUS METHOD

1 Introduction

The concept of
‘Transfer Pricing’ analysis refers to determination of ‘Arms Length
Price’ of transactions between related persons [also known as Associated
Enterprise (AE)]. The computation of Arm’s Length Price is required to
be based on a scientific approach and methodology, wherein the fair
value of transaction between two or more related persons is determined
as if the relationship would have not influenced the pricing of
transaction.

The various transfer pricing methods used in India are as follows:

Traditional Transaction Methods:
• Comparable Uncontrolled Price Method (CUP)
• Resale Price Method (RPM)
• Cost Plus Method (CPM)

Transaction Profit Methods:
• Profit Split Method (PSM)
• Transactional Net Margin Method (TNMM)

In
the October issue of BCAJ, an analysis of CUP method was discussed. In
this article, we will be analysing Resale Price Method (RPM) and Cost
Plus Method (CPM).

2. Resale Price Method – Meaning:

2.1 The Provision of Income Tax Act:

Under the Indian Income tax law, the statutory recognition of this method is provided in section 92C of Act read with Rule10B.

Rule
10B(1)(b) prescribes the manner by which arm’s length price can be
determined using RPM. The relevant extract is as follows:

“Determination of arm’s length price u/s. 92C

10B.
(1) For the purposes of s/s. (2) of section 92C, the arm’s length price
in relation to an international transaction or a specified domestic
transaction shall be determined by any of the following methods, being
the most appropriate method, in the following manner, namely :—

(a)…

(b) R esale price method, by which,-

(i)
the price at which property purchased or services obtained by the
enterprise from an associated enterprise is resold or are provided to an
unrelated enterprise, is identified;

(ii) such resale price is
reduced by the amount of a normal gross profit margin accruing to the
enterprise or to an unrelated enterprise from the purchase and resale of
the same or similar property or from obtaining and providing the same
or similar services, in a comparable uncontrolled transaction, or a
number of such transactions;

(iii) the price so arrived at is
further reduced by the expenses incurred by the enterprise in connection
with the purchase of property or obtaining of services;

(iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices,
if any, between [the international transaction or the specified
domestic transaction] and the comparable uncontrolled transactions, or
between the enterprises entering into such transactions, which could
materially effect the amount of gross profit margin in the open market;

(v) the adjusted price arrived at under sub-section;

(iv)
is taken to be an arm’s length price in respect of the purchase of the
property or obtaining of the services by the enterprise from the
associated enterprise.”

Based on the plain reading of the rule,
it can be observed that RPM is applicable in case the property is
purchased or service is obtained from an AE and resold to an unrelated
party. Accordingly, RPM would be suitable for distributors or resellers
and is less useful when goods are further processed or incorporated into
other products and where intangibles property is used.

However,
it is pertinent to examine whether RPM can be used in a reverse
situation i.e. when the property is purchased or service obtained by an
enterprise from an unrelated enterprise which is thereafter resold or
are provided to an AE.

In this respect, the Mumbai Tribunal in the case of Gharda Chemicals Limited vs. DCIT [2009-TIOL-790- ITAT-Mum]
had an occasion to consider this issue and rejected RPM on the ground
that RPM could be applied only in a case where Indian enterprise
purchases goods or obtain services from its AE and not in a reverse
case.

The resale price method focuses on the related sales
company which performs marketing and selling functions as the tested
party in the transfer pricing analysis. RPM is more appropriate in a
business model when the entity performs basic sales, marketing and
distribution functions and there is little or no value addition by the
reseller prior to resale of goods.

Further, if the sales company
acts as a sales agent that does not take title to the goods, it is
possible to use the commission earned by the sales agent represented as a
percentage of the uncontrolled sales price of the goods concerned as
the comparable gross profit margin. The resale price margin for a
reseller performing a general brokerage business should be established
considering whether it is acting as an agent or a principal.

Also,
if the property purchased in a controlled sale is resold to AE’s in a
series of controlled sales before being resold in an uncontrolled sale
to unrelated party, the applicable resale price is price at which
property is resold to uncontrolled party or the price at which
contemporaneous resale of the same property is made. In such a case, the
determination of appropriate gross profit will take into account the
functions of all the members of group participating in the series of
controlled sales and final uncontrolled sales as well as other relevant
factors

2.2 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators:

RPM
is also discussed in detail in the Transfer Pricing guidelines1
developed by OECD. It states that the method begins with a price at
which a product that has been purchased from an AE is resold to an
independent enterprise. This price (resale price) is then reduced by an
appropriate gross margin (i.e., “resale price margin”) representing the
amount out of which the seller would seek to cover its selling and
operating expenses and in the light of the functions performed make an
appropriate profit. Further, after making adjustment of other expenses
what is left can be considered as an Arm’s Length Price of the product
purchased from AE.

If there is material differences that affect
the gross margins earned in the controlled and the uncontrolled
transactions, adjustments should be made to account for such
differences. Adjustments should be performed on the gross profit margins
of the uncontrolled transactions.

The operating expenses in
connection with the functions performed and risks incurred should be
taken into account in this respect as differences in functions performed
are frequently conveyed in operating expenses.

The guidelines
also discuss the situation where such model should be used, practical
difficulties and application of the method in particular situations.

2.3 U N Practical Manual on Transfer Pricing for Developing Countries:

Similar
to OECD guidelines, UN guidelines also provide guidance for RPM. The UN
practical manual states that the starting point of the analysis for
using the method is the sales company. Under this method the transfer
price for the sale of products between the sales company and a related
company can be described in the following formula:

TP = RSP X (1-GPM)

Where,

• TP = the transfer price of a product sold between a sales company and a related company;

• RSP = the resale price at which a product is sold by a sales company to unrelated customers; and
GPM = the Gross Profit Margin that a specific sales company should earn, defined as the ratio of gross profit to net sales. Gross Profit is defined as Net sales minus cost of goods sold.

2.4 Most suitable situations for applicability of RPM:

The applicability of the method depends upon the facts of each case. However, various commentaries like OECD and UN has laid down situations where RPM would most likely be the suitable option in order to determine the arm’s length price. The same has been discussed in the ensuing paragraphs.

If comparable uncontrolled transactions can be identified, the CUP method may very well be the most direct and sound method to apply the Arm’s Length Principle. If the CUP method cannot be applied, however, other traditional transaction methods to consider are the Cost Plus Method and the Resale Price Method.

In a typical intercompany transaction involving a full-fledged manufacturer owning valuable patents or other intangible properties and affiliated sales companies which purchase and resell the products to unrelated customers, the resale price method is a method to use if the CUP method is not applicable and the sales companies do not own valuable intangible properties.

The situations where RPM could apply are discussed below:

The OECD guidelines states that RPM can be used where the reseller does not add substantial value to the products. Thus the reseller should add relatively little or no value to the goods. It may be difficult to apply RPM where goods are further processed and identity of goods purchased from AE is lost. For example, let say a reseller is doing limited enhancements such as packaging, repacking, labelling etc. In this case, this sort of activities does not add significant value to the goods and hence RPM could be used for determining ALP.

However, significant value addition through physical modification such as converting rough diamonds into cut and polished diamonds adds significant value to the goods and hence, RPM cannot be applied for such value added activity.

Another example could be, say, mineral water is imported from AE and sold in the local market by adding the brand name of Indian company, RPM cannot be applied since there is significant addition in value of goods due to the use of brand name of Indian company.

A Resale Price Margin is more accurate where there is shorter time gap between purchase and sale. The more time that elapses between the original purchase and resale the more likely it is that other factors like changes in the market, in rates of exchange, in costs, etc, would affect the price and hence would also be required to be considered for comparability analysis.

Further, in RPM the comparability is at the gross margin level and hence, RPM requires a high degree of functionality comparability rather than product comparability. Hence, a detailed analysis showing the close functional comparability and the risk profile of the tested party and comparables should be clearly brought out in the Transfer Pricing study report in order to justify comparability at gross profit level under RPM. Thus, RPM is useful when the companies are performing the similar functions.

However, a minor difference in products is acceptable if they are less likely to have an effect on the Gross Profit Margin. For example, Gross Profit Margin earned from trading of microwave ovens in controlled transaction can be compared with the Gross Profit Margin earned by unrelated parties from trading in toasters since both are consumer durables and fall within the same industry.

2.5 Steps in application of RPM:

Identify the transaction of purchase of property or services;

Identify the price at which such property or services are resold or provided to an unrelated party (resale price);

Identify the normal Gross Profit Margin in a comparable uncontrolled transaction;

Deduct the normal gross profit from the resale price;
Deduct expenses incurred in connection with the purchase of goods;

Adjust the resultant amount for the functional and other differences such as accounting practices etc that would materially affect the Gross Profit Margin in the open market;

The price arrived at is the Arm’s Length Price of the transaction.

The application of the resale price method can be understood with the following example:

The international transaction entered into by AE1 Ltd. with AE2 Ltd. which should be determined on the basis of Arm’s Length Price.

In another uncontrolled transaction, AE1 Ltd. had purchased from unrelated supplier (K Ltd.) and sold to unrelated customer (M Ltd.) and earned Gross Profit Margin of 15%.

The differences in sale to K Ltd. and A Ltd. are on account of the following:

Sale to A Ltd. was ex-shop and sale to M Ltd. was FOB basis. This accounted for additional 2% difference in Gross Profit Margin as sales price increased but corresponding expenses are not debited to trading but profit and loss account.

Quantity discount was provided to A ltd and not M Ltd. Impact is 1% on GP margin.

The differences in purchase from AE2 and K Ltd. are as follows:

Additional freight expenses incurred of Rs. 10 per unit and quantity discount received of Rs. 15 per unit on purchases from AE2 ltd and not on purchases from K Ltd. Further, Rs. 25/- towards custom duty is incurred on purchases in both the cases.

2.6 Advantages and Challenges of the RPM:

Advantages of RPM

The method is based on the resale price i.e., a market price and thus represent demand driven method

The method can be used without forcing distributors to in appropriately make profits. Hence, unlike other methods, distributor could incur losses on net basis due to huge selling expenses even if there is an Arm’s Length Gross Margin. Hence, this method could be used without distorting the figures.

Challenges of RPM

Non availability of gross margin data of comparable companies from public database is the biggest challenge in applying RPM since Companies Act, 1956 does not require Gross Profit Margin calculation to be reported and Tax Audit Reports which contain Gross

Profit Margin are not available in public database. Hence, difficulty would arise on account of external comparables.

Differential accounting policies followed across the globe makes application of RPM very difficult. Example:
Some companies include exchange loss/gain in purchase/sale whereas some companies show it as part of administrative and other expenses. Example

Some companies include excise duty on purchase in Purchase A/c whereas some companies show it as part of rent, rates and taxes.

RPM is unlikely to give accurate result if there is difference in level of market, function performed or product sold. Further, due to lack of availability of information on functions performed by the comparables, comparing the level of functions is difficult.

Another disadvantage is, for certain industries such as Pharmaceutical industry, wherein it is difficult to identify companies exclusively performing trading operations as most of the companies are into manufacturing and trading.

Further, usage of RPM in case of services could be a challenge considering the difference of surrounding situations in service transactions vs. product transactions as well as the financial disclosure norms applicable for service entities.

2.7 RPM – Comparability Parameters:

The following factors may be considered in determining whether an uncontrolled transaction is comparable to the controlled transaction for purposes of applying the resale price method as well as to determine whether suitable economic adjustments should be made to account for such differences:

Factors like business experiences (start-up phase or mature phase), management efficiency, cost structures etc that have less effect on price of products than on costs of performing functions should be considered. Such differences could affect Gross Margin even if they don’t affect Arm’s Length Prices of products.

A Resale Price Margin requires particular attention in case the reseller adds substantially to the value of the product (e.g., by assisting considerably in the creation or maintenance of intangible property related to the product (e.g., trademarks or trade names) and goods are further processed into a more complicated product by the reseller before resale).

Level of activities performed and risks borne by reseller. E.g., A buying and selling agent would obviously obtain higher compensation then a pure sales agent.

If the reseller performs a significant commercial activity besides the resale activity itself, or if it employs valuable and unique assets in its activities (e.g., valuable marketing intangibles of the reseller), it may earn a higher Gross Profit Margin.

The comparability analysis should take into account whether the reseller has the exclusive right to resell the goods, because exclusive rights may affect the Resale Price Margin.

The reliability of the analysis will be affected by differences in the value of the products distributed, for example, as a result of a valuable trademark.

In practice, significant difference in operating expenses is often an indication of differences in functions, assets or risks. This may be remedied if operating expense adjustments can be performed on the unadjusted gross profit margins of uncontrolled transactions to account for differences in functions performed and the level of activities performed between the related party distributor and the comparable distribution companies. Since these differences are often reflected in variation of the operating expenses, adjustments with respect to differences in the SG & A expenses to sales ratio as a result of differences in functions and level of activities performed may be required.

The differences in inventory levels and valuation method will also affect the Gross Profit Margin.

Further, adjustment on account of differences in working capital could also be considered (i.e., credit period for payables and receivables, the cycle of inventory, etc).

For RPM, product differences would be less relevant, since one would expect a similar level of compensation for performing similar functions across different activities for broadly similar products. Hence, typically RPM is more applied on the basis of functional comparability rather than product comparability. However, the distributors engaged in sale of markedly different products should not be compared.

Further, differences in accounting practices may be on account of:

Sales and purchases have been accounted inclusive or exclusive of taxes;
Methods of pricing of goods namely, FOB or CIF;

Fluctuations in foreign exchange, etc.

In actual practice, the resale may also be out of opening stock. Similarly, the goods purchased during the said year may remain in closing stock. The process of determination under RPM culminates in cost of sales rather than value of purchases. This cost of sales should be converted into cost of purchases. For this, closing stock of goods purchased from AE should be added and opening stock of purchases from AE should be deducted.

2.8 Judicial Precedents on RPM:

The applicability of the said method on a particular transaction is subject matter of litigation. Some of the decisions are discussed in brief hereunder.

DCIT vs. M/s Tupperware India Pvt. Ltd. [ITA No. 2140/Del/2011 & ITA No 1323/Del/2012]

The tax payer operates as a distributor of plastic food storage and serving containers. It has subcontracted the manufacturing activity to contract manufacturers.

The moulds required to manufacture the product are leased in by the tax payer from the AE’s and thereafter supplied to contract manufacturers. The moulds are owned and developed by the overseas group entities.

The tax payer contended that it did not add any value to the products and carries out the functions of a pure reseller. Further, the tax payer contended that it merely procures the moulds from the AE’s and supplies them to the contract manufacturers. Thereafter, it procures finished goods from contract manufacturers and sells them in Indian market without adding any value thereon. Further, there is strong correlation and interdependence between the purchase of mould and core activity of distributor. Accordingly, RPM is most appropriate method.

The Transfer Pricing Officer (TPO) rejected the same and computed the Arm’s Length Price by applying Transactional Net Margin Method (TNMM).

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the said addition and the Income Tax Appellate
Tribunal (ITAT) upheld the decision of CIT(A).

ITAT held as follows:

It is clear that there was hardly any value addition made by the tax payer relating to the transaction.

The function of the tax payer was that of the reseller and hence RPM is the most appropriate method in this case.

The TPO without any analysis concluded that

TNMM is the most appropriate method is not based on any facts relevant to the case.

Mattel Toys (I) Pvt Ltd vs. DCIT

The tax payer is a wholly owned subsidiary of Mattel Inc., USA. During the year under consideration, the tax payer imported finished goods and sold them in India as well as exported to AE’s. The tax payer also imported raw material from AE for manufacturing the toys in India.

The tax payer had benchmarked the said transaction using TNMM and in their study report had rejected
RPM method.

The TPO segregated the activities into 3 segments – (i) import of goods from AE and sale in domestic market; (ii) import of goods from AE and sold to AE; and (iii) import of goods from AE and export to third parties outside India.

The TPO worked out operating margin for all the three segments separately and proposed an adjustment. The assessee had contended before TPO for adoption of RPM as most appropriate method. However, TPO rejected the contention of the tax payer.

CIT(A) upheld the view of TPO and confirmed the addition.
The tax payer before ITAT contended that for determination of Arm’s Length Price for distribution activity, RPM is most appropriate. Further, the tax payer contended that its gross profit margin was higher than that of comparables.

ITAT held as follows:-

The nature of product was not much relevant but the functions performed of the comparability are to be seen. It observed, “the main reason is that the product differentiation does not materially effect the Gross Profit Margin as it represents gross compensation after the cost of sales for specific functions performed. The functional attribute is more important while undertaking the comparability analysis under this method. Thus, in our opinion, under the RPM, products similarity is not a vital aspect for carrying out comparability analysis but operational comparability is to be seen.”

It further held that gross profit margin earned by an independent enterprise was a guiding factor in
RPM.

Accordingly, RPM is the most appropriate method for determining Arm’s Length Price for distribution activity. Since the tax payer had adopted TNMM, the matter is remitted back to TPO for de novo adjudication. ITAT directed TPO to determine the Arm’s Length Price based on fresh comparables after considering RPM as the most appropriate method.

ITO vs. L’Oreal India Pvt. Ltd. [ITA No, 5423/ Mum/2009]

The tax payer, a wholly owned subsidiary of L’Oreal SA

France, is engaged in business of manufacturing and distribution of cosmetic and beauty products.

The tax payer operates in two business segments (i) manufacturing and (ii) distribution.

It had incurred huge losses on account of selling and distribution activities incurred as a part of marketing strategy.

In case of distribution segment, the tax payer adopted RPM as the most appropriate method. However, TPO rejected the taxpayer contention and concluded TNMM to be the most appropriate method.

CIT(A) deleted the entire addition on the income of the tax payer.

ITAT held as follows:-

OECD states that in case of distribution and marketing activities, where the tax payer purchases from AE and sales to unrelated parties without adding much value, RPM is the most appropriate method.

In the instant case there is no dispute that the tax payer buys the products from its AEs and sells to unrelated parties without any further processing.

RPM has been accepted in preceding as well as succeeding years in respect of distribution segment of the taxpayer.

Hence, RPM is appropriate method.

Panasonic Sales & Services (I) Company Limited vs. ACIT [ITA No 1957/Mds/2012]

The tax payer is a subsidiary of Panasonic Holdings

(Netherland BV) which is ultimately held by Matsushita

Electronic Co. Ltd., Japan.

The tax payer is engaged in the import of consumer electronic products from its AE for sale in domestic market and also provides market support services.

In case of purchase and resale activity, the tax payer adopted RPM method and for providing market support services, it adopted TNMM method. There was no issue in the value of international transaction and the method adopted by the tax payer to determine the arm’s length price. However, the dispute was as regards the determination of selling price and the calculation of gross profit margin.

The TPO reduced the cash discount offered by the taxpayer for early realisation of dues on account of sales while calculating the gross profit margin. Further, the TPO added the freight and storage charges treating them as direct expenses in relation to purchase of goods.

However, the tax payer contended that TPO erred in considering cash discount with trade discount. Further, the freight and storage expenses incurred are towards outward sales and not inward. The rules clearly states that only expenses incurred in connection with the purchases are required to be reduced from sales.

ITAT held as follows:-

Cash discounts offered to the customers are in nature of financial charges. Further, it is only an incentive
offered for early realisation. Thus held that TPO erred in equating cash discount with trade discount and that the cash discount in the present case was offered after completion of sales which is entirely different in nature from trade discounts.

Further, in case of freight and storage expenses incurred the same were incurred towards the cost of packing and transportation of goods from the warehouse to the customers and hence in the nature of selling and distribution expenses. Thus, it cannot be reduced from the selling price to determine the cost of goods sold.

Danisco (India) Pvt. Ltd. vs. ACIT

The tax payer is engaged in the business of manufacturing food flavours and trading of food additives/ingredients. For manufacturing, the tax payer purchases raw material from its AE. It also imports ingredients from its AE and resells them to its customers in India through distribution chain.

During the year under consideration, the tax payer selected TNMM as the appropriate method to benchmark its transaction. Further, it also carried out supplementary analysis in case of import of goods using RPM as the most appropriate method.

However, TPO rejected the 4 companies selected by the tax payer as comparables on the ground that these companies had negative net worth or persistent loses. Accordingly TPO made an adjustment.

On filing of objections, Dispute Resolution Panel (DRP) upheld the addition made by the TPO. The tax payer went into appal before ITAT.

The tax payer contended that TPO erred in making

the addition on the entire transaction and failed to appreciate the fact that the tax payer had also undertaken transactions with third party. Further, the companies only in manufacturing activity and not in trading activity cannot be considered as comparables. Lastly, TPO should have used segmental accounts furnished by the tax payer to examine the trading and manufacturing activity separately and should have used RPM for trading activity as it is widely used method.

Additionally, assessee relied on OECD guidelines and contended that it merely imported and resold goods without adding any value. Hence, RPM should be applied.

ITAT accepted the contention of the tax payer and restored the matter to the file of TPO for fresh adjudication. It gave the direction to TPO to apply RPM as a most appropriate method for trading transactions of imported goods.

2.9 Berry Ratio – An alternate method of benchmarking for distributor arrangements:

In relation to the distribution arrangements, in addition to the application of RPM as a benchmarking method, International transfer pricing principles have evolved over time. In 2010, OECD updated its transfer pricing guidelines and analysed use of Berry Ratio as a financial indicator for examining the Arm’s Length Price.

The Berry Ratio compares the ratio of gross profit to operating expenses of the tested party with the ratios of gross profit (less unrelated other income) to operating costs (excluding interest and depreciation) of third party comparable companies.

The underlying assumption of the Berry Ratio is that there is a positive relationship between the level of operating expenses and the gross profit. The more operating expenses that a distributor incurs, the higher the level of gross profit that should be derived.

Generally, Berry ratio should only be used to test the profits of limited risks distributors and service providers that do not own or use any intangible assets.

The challenges in using Berry Ratio could be identifying functionally similar comparable entities; comparables used should not own or use significant intangible assets, classification of costs by the comparable entities etc.

However, Berry Ratio could be extremely useful where operating margins are used as a measure of profitability in distribution business with exponential growth patterns.

Having discussed the RPM at length, we will elaborate CPM in the forthcoming paragraphs.

Cost Plus Method – Meaning:

3.1 The Provision of Income Tax Act:

Section 92C of the Act prescribes the method for computation of Arm’s Length Price, wherein Cost Plus Method (CPM) is enlisted as one of the methods. The same is not defined in the Act itself, but has been discussed at length in the Income Tax Rules.

Rule 10B prescribes the manner in which CPM can be applied. The text reads as follows:

“Determination of Arm’s Length Price u/s. 92C.

10B. (1) For the purposes of s/s. (2) of section 92C, the Arm’s Length Price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :—

…

cost plus method, by which,—

the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;

the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;

the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;

the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);
the sum so arrived at is taken to be an Arm’s Length Price in relation to the supply of the property or provision of services by the enterprise;”

3.2 OECD Transfer Pricing Guidelines for Multinational

Enterprises and Tax Administrators:

Cost Plus Method is discussed in the OECD Transfer Pricing guidelines2. It states that the CPM method begins with the costs incurred by the supplier of property/services in a controlled transaction for property transferred or services provided to an associated enterprise. An appropriate mark up is then added to the said cost, in view of the functions performed and the market conditions. Such price is known as the arm’s length price.

Thereafter, the guidelines go on to define the most appropriate situation where CPM may be used, i.e., if one of the following two conditions get satisfied:

none of the differences between the transactions being compared, or between the enterprises undertaking those transactions, materially affect the cost plus mark up in the open market; or

reasonably accurate adjustments can be made to eliminate the material effects of such differences.

The guidelines also stress that in principle, cost plus methodology should compare margins at gross profit level, however there may be practical difficulties in doing so. Thus, the computation of margins should be flexible to such extent.

The OECD guidelines discuss, at length, the applicability of CPM to various situations, determination of appropriate cost base and various adjustments and practical difficulties that may arise for the application of this method.

3.3 UN Practical Manual on Transfer Pricing for Developing Countries:

The UN Practical Manual also discusses Cost Plus Method as a traditional transaction method, and goes on to define the same as per the OECD guidelines.

It further defines the mechanism of CPM, by prescribing the following formula:

TP = COGS x (1 + cost plus mark-up)

Where,

   TP = the Transfer Price of a product sold between a manufacturing company and a related company;
   COGS = the Cost of Goods Sold to the manufacturing company; and
   Cost plus mark-up = gross profit mark-up defined as the ratio of gross profit to cost of goods sold. Gross profit is defined as sales minus cost of goods sold.

From the above, it can be seen that UN Manual also prescribes the practical application of Cost Plus Method, and breaks down the process in formulae and practical steps.

3.4 Most suitable situations for applicability of CPM:

The applicability of a method varies from one case to the other. However, there are certain standard cases where CPM would, most likely, be the most suitable option. The said cases are discussed hereunder:

Sale of semi-finished goods:

The application of CPM to the sale of semi-finished goods has been recommended by the OECD guidelines. However, in order to benchmark the transaction, a functional analysis of the same has to be conducted. Semi-finished goods are of various types, such as complete assembly of goods before sale, or a semi knocked down (SKD) condition. It has to be ascertained that how independent parties would arrive at a mark up, and determine their prices in such cases.

Hence, an appropriate cost base as well as mark up is essential to be derived at in order to benchmark the transactions, and arrive at the arm’s length price. The purpose of benchmarking is to ensure that prices set should give the same price to the associated enterprise as they would if the sales were made to independent parties. In such cases, internal comparable, i.e. sales made by the same manufacturer to associated enterprises as well as third parties, would be the ideal scenario.

However, if the manufacturer is not making similar sales to third parties, external comparables can also be used. For example, say, a manufacturer produces wheat products in a semi finished state, out of the raw material, and then sells the same to its AEs as well as non-AEs at a cost plus mark up of 15%. In this case, it is easy for the manufacturer to determine the cost of the raw materials and the mark up for the functions carried out. In this case, internal comparables are also available, and hence, the benchmarking process becomes considerably simpler.

Joint facility agreements, or Long-term buy & supply arrangements:

The OECD guidelines recommend Cost Plus Method for agreements or arrangements where the manufacturer acts as a contractual manufacturer. A contractual manufacturer is typically one who carries low risk and carries out low-level functions, whereas an entrepreneurial manufacturer is the one who carries majority of the risk and has entrepreneurial and more complex functions. In these cases, functional analysis of the entity is important to determine the category of manufacturer. Mere claim of the entity is not sufficient, and the agreements as well as functions of the entity have to be verified.

After it is determined whether an entity is a contractual or entrepreneurial entity, the comparables can be selected accordingly. This is due to the fact that a contractual manufacturer, bearing low risks, would likely have a less mark up than an entrepreneurial manufacturer, who essentially bears majority of the risks involved.

For example, say, A is a contractual manufacturer, which produces spare parts of computer hardware for its AE, as per the instructions and technical know-how of the AE. In this case, the functionality of ‘A’ is easy to determine, as it is a simpler entity, and thus the costs can be most appropriately determined. Due to less complexity of functions, the mark up to the cost can also be computed as per the agreements with the AE as well as the functions performed by ‘A’. In such a case, CPM is the most appropriate method.

Provision of services:

This is the third broad category which has been recommended by OECD guidelines for the use of CPM. In this category, CPM can be used wherein the services provided by the entity are low-end services. This is due to the fact that high end service providers do not charge fees on a cost plus basis. The true value in such cases is of the service provided, and not of the cost incurred for the provision of the same. For instance, a Chartered Accountant does not charge his fees based on the costs incurred for a study report, but for his expertise and service provided. In such cases, CPM is not the most appropriate method.

However, in low end services, such as in the case of job workers, the worth of the intangibles for value addition does not form a major part of the price, and hence, an appropriate mark up to cost can be easily determined. Hence, CPM is an appropriate method to derive the Arm’s Length Price.

In order to come to the decision whether CPM can be applied to a particular transaction/entity, the actual risk allocation has to be verified. The OECD guidelines3 provide an example, wherein the actual risk allocation is used to determine whether CPM can be used or not. The example reads as follows:

“Company A of an MNE group agrees with company B of the same MNE group to carry out contract research for company B. All risks of a failure of the research are born by company B. This company also owns all the intangibles developed through the research and therefore has also the profit chances resulting from the research. This is a typical setup for applying a cost plus method. All costs for the research, which the associated parties have agreed upon, have to be compensated. The additional cost plus may reflect how innovative and complex the research carried out is.”

Broadly, the CPM is most suitable to the aforesaid situations, but the applicability of the same varies on the facts of each case.

3.5 Situations wherein Cost Plus Method is NOT appropriate:

Furthermore, the UN Practical Manual4 has specified certain transactions wherein the application of CPM is not suitable. It states that where the transactions involve a full-fledged manufacturer which owns valuable product intangibles (i.e., an entrepreneurial manufacturer), independent comparables would be difficult to obtain. Hence, it will be difficult to establish a mark up that is required to remunerate the full-fledged manufacturer for owning the product intangibles. In such structures, typically the sales companies (i.e., commisionaries) will normally be the least complex entities involved in the controlled transactions and will therefore be the tested party in the analysis. The Resale Price Method is typically more easily applied in such cases.

3.6 Steps in application of CPM:

The steps for application of Cost Plus Method, as per

Rule 10B of the Indian Income Tax Act, are as follows:

Ascertain the direct and indirect cost of production.

Ascertain a normal gross profit mark-up to such costs.

Adjust the normal gross profit mark-up referred to in

(2) above to take in to account the functional and other differences.
The costs referred to in (1) above are increased by the adjusted gross profit mark-up referred to in (3) above.
The sum so arrived at is taken to be an arm’s length price.

The application of the aforesaid steps is being shown in the following example:

Production Costs of AE-India = 50

20% = Gross Profit Margin on production costs earned by 3P-India on sales made by other Indian comparable companies

3.7 Advantages and Challenges of CPM:

Advantages of CPM:

The applicability of CPM is based on internal costs, for which the information is readily available with the entity
Reliance is on functional similarities

Fewer adjustments are required on account of product differences than CUP
Less vitiated by indirect expenses which are not “controllable”

Challenges of CPM:

Practical difficulties in ascertaining cost base in controlled and uncontrolled transactions
Difficulties in determining the gross profit of the comparable companies on the same basis, because of, say, different accounting treatments for certain items

   Difficult to make adjustments for factors which affect the cost base of the entity/transaction
   No incentive for an entity to control costs since the method is based only on actual costs
   The level of costs might be disproportionately lower as compared to the market price, e.g., when lower costs of research leads to the production of a high value intangible in the market

3.8 Peculiar Issues in Application of CPM:

The OECD guidelines examine various practical difficulties in the application of CPM, which are being discussed in brief, hereunder:
Determination of costs and mark up:

While, an enterprise would mostly cover its costs over a period of time, it is plausible that those costs might not be determinant of the appropriate profit for a particular transaction of the specific year. For instance, some companies might need to reduce their prices due to competitive pricing, or there might be instances wherein the cost incurred on R&D is quite low in comparison to the market value of the product.

Further, it is important to apply an apt comparable mark up. For example, if the supplier has employed leased assets to carry out its business activities, its cost cannot be compared to the supplier using its own business assets. In such a case, an appropriate margin is required to be derived. For this purpose, the differences in the level and types of expenses, in light of the functions performed and risks assumed, must be compared. Such comparison may indicate the following:

Expenses may reflect a functional difference which has not been taken into account in applying the method, for which an adjustment to the cost plus mark-up may be required.

Expenses may reflect additional functions distinct from the activities tested by the method, for which separate compensation may need to be determined.

Sometimes, differences in expenses are merely due to efficiencies or inefficiencies of the enterprises, for which no adjustment may be appropriate.

Accounting consistency:

Where accounting practices are different in controlled and uncontrolled transactions, appropriate adjustments need to be made in order to ensure consistency in the use of same types of costs. Entities might also differ in the treatment of costs which affect the gross mark-up, which need to be accounted for.

3.9 Critical Points while Determining the Cost Base:

In CPM, it is most important to ensure that all the relevant costs have been included in the cost base in order to determine the Arm’s Length Price. The basic principle is to determine what price would have been charged, had the parties not been connected/associated. The OECD guidelines have discussed the same in depth.

An independent entity would ensure that all costs are covered and that a profit is earned on a transaction with a third party. The usual starting point in determining the cost base would be the accounting practices. The AE might consider a certain kind of expense as operating, while the third party may not do so. In such cases, appropriate adjustments need to be made so as to ensure accounting consistency.

Further, in principal, historical costs should be attributed to individual units of production. However, some costs, such as the cost of materials, would vary over a period of time, and it would be appropriate to average the costs over the period in question. Averaging might also be appropriate across product groups or over a particular line of production, and also for fixed costs where the different products are produced simultaneously and the volume of activity fluctuates.

Another difficulty arises on the allocation of costs between suppliers and purchasers. It may be so that the purchaser bears certain costs so as to diminish the supplier’s cost base, on which mark-up would be computed. In practical situations, this may be solved by not allocating costs which are being shifted to the purchaser in the above manner. For instance, say ‘S’ is the manufacturer of semi-finished goods, and supplies to its AE, viz. ‘P’. For this purpose, ‘S’ purchases raw material from a third party. Ideally, the cost of idle raw material should be borne by the supplier, i.e., ‘S’. However, there might be mutual agreements, wherein the purchaser, i.e., ‘P’, bears such cost of idle raw material, and hence, the cost burden of ‘S’ goes down. In such cases, while deriving at the cost base, appropriate adjustments should be made.

Thus, it is evident that no straight jacket formula can be derived for dealing with all cases. It has to be ensured that there is consistency in the determination of costs, between the controlled and uncontrolled transactions, so as to ensure that the appropriate Arm’s Length Price is obtained.

3.10 Cost Plus Model vs. Cost Plus Method:

Due to the ambiguity in the difference between Cost Plus Method and Cost Plus Model, the same is being discussed hereunder:

Cost Plus Model

It is a pricing model

Mark-up is added on operating costs/total cost
Method adopted in fact is TNMM

Comparison of Net Margins

Cost Plus Method

Method of determining arm’s length price

Mark-up is added on cost of goods sold

Comparison of Gross Margins

3.11 Judicial Precedents on CPM:

The applicability, benchmarking and cost base of CPM has been debated in the courts of law, both Indian and International, time and again. Some of the major judicial precedents are discussed in brief hereunder:

Wrigley India Private Limited vs. Addl. CIT [(2011) 142 TTJ (Del) 23]:

The taxpayer is a subsidiary of a US based company, engaged in the business of manufacture and sale of chewing gums.

The import of raw materials by the taxpayer from its AE constituted 14% of the total raw material consumed.
The taxpayer was selling products in domestic as well as international market.

In case of export to AEs, it benchmarked its transactions using TNMM.

The TPO applied CPM, and held that since the goods exported were same as the ones sold in domestic market to unrelated parties, the domestic transactions could be used as ‘comparable’ to the international transactions.

The ITAT upheld the additions made by using CPM, and observed that the goods sold to AE as well as non-AEs, were the same goods manufactured in the same factory using the same raw materials.

The use of internal comparables was also upheld, as the raw material purchased from the AE was only 14% of the total consumption, and hence, internal CPM could be used by taking GP/direct cost of production as PLI.

ITAT also held that though there was difference in domestic and export market, it should have had a positive impact on margins of the taxpayer as per capita income was higher in foreign countries than India and
the goods sold by the taxpayer were not ‘necessities of life’, but were consumed by middle and higher class people in the society.

Thus, internal CPM was considered to be the most appropriate method.

Diamond Dye Chem Ltd. vs. DCIT [2010-TII-20-ITAT-MUM-TP]:

The taxpayer is engaged in the business of manufacturing Optical Brightening Agents (OBAs), and exported its products both to AEs and non-AEs.

The sales made to AEs were more than 6 times of the sales made to non-AEs. The company adopted TNMM as the most appropriate method to benchmark the transaction.

TPO rejected the said method, and adopted CPM as the most appropriate method, and made an addition of Rs. 3,07,89,380/-.

The taxpayer preferred an appeal before the CIT(A) wherein it submitted that that there were a lot of functional differences between the sales made to AEs and those to unrelated parties, and hence, gross profit mark-up cannot be applied. Without prejudice to the same, the taxpayer also claimed that adjustments for differences on account of volume discounts, and staff & travelling cost of marketing and technical persons must be made while computing the Arm’s Length Price.

The CIT(A) did not accept the contention of the taxpayer for application of TNMM as the most appropriate method. The CIT(A) confirmed the application of CPM by the TPO, but allowed the adjustment on account of “staff and travelling cost of dedicated marketing personnel”. Thus, the CIT(A) arrived at an ALP of 55.27%, and after allowing the benefit of +/- 5% range, confirmed the addition to the extent of Rs. 38,67,421/-.

The ITAT upheld the use of CPM, and held that the taxpayer did not explain substantial differences in functional and risk profile to reject CPM. The ITAT held that the taxpayer could not satisfactorily explain as to what are the substantial differences in the functional and risk profiles of the activities undertaken by the taxpayer in respect of exports made to the AEs and non-AEs.

The ITAT further held that since the cost data for the manufacture of products are available as per cost audit report, the report thereof is assured, and hence, CPM is the most appropriate method.

However, it allowed discount adjustment on account of differences in volumes of sales since the sales made to AEs are almost 6 times to the sales made to non-AEs.

ACIT vs. L’Oreal India Pvt. Ltd. [ITA No. 6745/M/2008]:

The taxpayer is engaged in the business of manufacturing and distribution of cosmetic and beauty products, and is a 100% subsidiary of L’Oreal SA France.

During the AY 2002-03, the taxpayer had purchased raw materials from its associated enterprise and had used CPM to benchmark the same.

The Transfer Pricing Officer (TPO) rejected the same, and computed the Arm’s Length Price by applying Transactional Net Margin Method (TNMM).

The CIT(A) deleted the said addition, and the ITAT upheld the decision of the CIT(A).

ITAT held as follows:

CPM adopted by the taxpayer is based on the functions performed and not on the basis of types of product manufactured, as normally the pricing methods get precedence over profit methods.

Even according to the OECD guidelines, the preferred method is that which requires computation of ALP directly based on gross margin, over other methods which require computation of ALP in an indirect method, because comparing gross margins extinguishes the need for making adjustments in relation to differences in operating expenses, which could be different from enterprise to enterprise.

CPM had been accepted by the TPO in subsequent assessment years.

The Department went in appeal against the aforesaid order before the High Court, wherein the decision of the ITAT was upheld by the High Court.

ACIT vs. MSS India (P.) Ltd. [(2009) 32 SOT 132 (Pune)]:

The taxpayer is a 100% EOU, engaged in the business of manufacturing of strap connectors. It made sales to both its AEs and non-AEs.

83% of the total sales were made to the AEs.

It incurred a loss of 2.35% at the net level.

In order to justify arm’s length price, the taxpayer used CPM as well as TNMM. In TNMM, the taxpayer compared its net loss to the other companies which were incurring more losses. While, in using CPM, the taxpayer used internal comparables, i.e., it compared the margins from AEs and non-AEs.

TPO rejected the use of CPM on the basis that the division of cost was not verifiable. The comparables selected by the taxpayer were also rejected by the

TPO, and fresh comparables were selected.

TPO applied TNMM to benchmark the transactions and make adjustments to the value of sales to derive at an arm’s length price.

The CIT(A) and ITAT both upheld the use of CPM.

The ITAT held as follows:

The TPO rejected the use of CPM stating that “while distributing various costs, it is always difficult to exactly find out the correct ratio in which all these costs should be allocated and if the distribution of all these costs is not done correctly, it may give undesirable results”. The ITAT held that a method cannot be rejected merely because of its complexity.

The relevant considerations for selection of appropriate method ought to be the nature and class of international transaction, the class of AEs, FAR analysis and availability, coverage and reliability of data, the degree of comparability between related and unrelated transactions and ability to make reliable and accurate adjustment in case of differences.

It was not necessary that AEs should enter into international transaction in such a manner that a reasonable profit margin would be earned by the AE, but what was necessary that price charged for such transactions had to be at arm’s length.

ACIT vs. Tara Ultimo (P.) Ltd. [(2012) 143 TTJ (Mum) 91]:

The taxpayer, engaged in manufacture and trade of jewellery, sold finished goods to its AE and adopted CPM to compute ALP of the transaction, using Sales/ GP as the PLI.

TPO rejected the ALP computation made by the taxpayer, and made an adjustment to the taxpayer’s income, using TNMM.

On appeal, the CIT(A) deleted the addition made, and the Revenue went into appeal before the ITAT.

The ITAT made the following observations:

CIT(A) examined only one aspect of the matter i.e. sales of finished goods to the AEs, but failed to examine other aspects of import of diamonds from

AE and export of diamonds to AEs. Hence, the ITAT held that the CIT(A) had erred in rejecting TNMM.

The taxpayer had not placed on record any evidence to support ALP of diamonds imported and exported or to justify that the transactions were made at prevailing market price.

In the absence of documentation to support use of direct method such as CUP, CPM or Resale Price method, it was imperative to use indirect methods of determination of ALP i.e., TNMM or profit Split method.

The taxpayer had made comparison on ‘global level’ instead on ‘transaction level’. Further, one of the important input i.e., diamond had been imported from AEs where the arm’s length nature of the transaction was not established.

In view of the above, ITAT rejected the CPM method, and remanded the matter back to the CIT(A) for fresh determination.

Conclusion:
Various guidelines have been developed to assist the countries in proper tax administration, as well as MNEs to reasonably attribute the appropriate profit to each jurisdiction. In a global economy, where MNEs play a prominent role, transfer pricing is a major issue for tax administrations as well as taxpayers. In order to ensure that the respective governments receive the revenue that they are entitled to, and that the MNEs pay proper tax without suffering the consequence of double taxation, various methods and guidelines have been developed.

Resale Price Method and Cost Plus Method, have been discussed at length herein. However, it is pertinent to mention that the facts of each case may be unique, and need to be scrutinised independently before coming to a conclusion for the applicability of the most appropriate method. The purpose of the method is merely to arrive at the arm’s length price, for which several adjustments may need to be applied. It is important to use the above method with suitable flexibility for the same. It is advisable to reject the other methods before accepting most appropriate method for computation of arm’s length price. In conclusion, it is the intent and the essence of the provisions and the method to be kept in mind, and not merely the procedure.

Further, recently OECD has launched an Action Plan on Base Erosion and Profit Shifting (BEPS) identifying 15 specific actions needed in order to equip governments with the domestic and international instruments to address the challenge of MNEs adopting aggressive tax planning and profit shifting. The objective of this plan is to prevent double non-taxation and proper allocation of profits between various jurisdictions. The said objective can be achieved by appropriate FAR analysis and by selecting the most appropriate method for benchmarking the transaction between two associated enterprises.

shailesh.kwebmaker

Let us clean the nation

Prime Minister Modi, in his Independence Day speech sounded the bugle for “Swachh Bharat Abhiyan”. Like his other actions, this emphasis on cleanliness in an Independence Day speech was unconventional. He set an agenda which was not a party agenda but a national one. Though the opposition did make an attempt to cast some doubts saying that it was only showmanship, their comments did not cut much ice with the Indian public, a majority of whom are already enamoured with PM Modi. Pursuant to the appeal actions have been taken by corporates and citizens groups. With their cooperation the movement should succeed.

While cleanliness of roads, water, and sanitation are all welcome projects, what is far more important is cleaning the cobwebs in the mind. Mr. Modi craftily invited leaders from opposition parties to join the movement. This created a flutter particularly when Mr. Tharoor appreciated the proposal. In our country, political parties have constantly stuck to their stereotyped roles. Praising the laudable actions of somebody who is on the other side of the political divide is seen as committing a sin and more often than not political parties wash their hands of such comments by saying that it is the personal view of that leader. All this has to change. It is time that opposition parties realise that it is their duty to oppose the wrong actions of the Government, but if there is something that needs to be supported it should be done, though the credit for the same may well go to one’s political opponents.

To establish that he is serious in his endeavour, the Prime Minister and his party should set an example. Physical cleanliness can be achieved over a period of time. What is much more important is cleanliness in public life. Parties would do well to ensure that their leaders enjoy an impeccable reputation in public life. Those with established criminal backgrounds should not be offered party tickets. Cleaning the political system should be the top priority.

Along with this Swachh Bharat Abhiyan, the four pillars of democracy also are in dire need of a clean up drive. Apart from politicians to whom I made a reference, somebody needs to wield the broom to clean the bureaucracy. What is necessary is a real intent to put honest upright bureaucrats at proper places. In this case, one needs swift and firm action. As I write this editorial, there are disturbing reports that an engineer of a local body who is alleged to have amassed huge wealth and against whom action by the anti-corruption bureau is pending has been reinstated. It is astonishing to note that such a person, will be heading the “vigilance department.” This is a cruel joke on the public and this action needs immediate correction. The media which has often played a stellar role in exposing the wrong deeds of public officials also needs to do a fair amount of introspection. While it is true that in this era of competition, media houses are often caught in the race to be first off the blocks, to give breaking news, it would be worth their while if they pause for a moment and ascertain whether what came to the knowledge was a fact or fiction. A comment in the media can cause immense damage to reputations. A clean and responsible media strengthens democracy. Finally, the judiciary which is considered as the saviour is also not free from its share of black sheep. The controversies about appointments to the highest court of the land leave a bitter taste in the mouth. As far as the lower judiciary and quasi-judicial authorities are concerned, a massive clean-up drive is necessary. Inefficient and corrupt incumbents at this level affect the general public. This is because it is these forums that are accessible and affordable to the public in their quest for justice.

While the nation is watching this movement with a great degree of expectation, is there a role that our profession can play? Can we contribute our mite to keep public life clean? While rendering services to our clients, keeping abreast of the various developments in the profession and sharpening our skill sets are definitely a prerequisite, what cannot be lost sight of are the qualities of integrity and independence. We must realise that our profession has this unique position akin to that of a family doctor. We enjoy the confidence of our clients for long periods of time. If we give them proper advice and inculcate the habit of complying with the law and regulations rather than making an attempt to sidestep them, we would have done our nation a great service. We must express our opinions without fear and in an independent manner. While I agree that we cannot do any moral policing, or impose principles on our clients, we must follow professional ethics ourselves, and render correct advice so that we go to bed with a clear conscience, with the satisfaction that we have done the best that we could. If we perform our role diligently, we would have gone a long way in giving our country a cleaner business environment.

Finally, we have recently celebrated the Festival of Lights and embarked on a new Samvat 2071, which promises to be a prosperous one. Let us try and ensure that it is a clean one as well. If actions of others in the past have sullied our mind, let us wipe the blackboard clean, and begin life with a new slate. We will then have contributed to the Swachh Bharat movement in the true sense.

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On Crony Capitalism

In his 2012 book, Breakout Nations, Ruchir Sharma said that any country that produces too many billionaires, relative to its size, is in all likelihood off balance. “If the average billionaire of a country has amassed too much wealth, not just billions but tens of billions, the lack of balance can lead to stagnation,” said he. At that time, he had said that “many of India’s super rich still inspire national pride, not resentment, and they can travel the country with no fear for their safety”, but this “genial state of affairs could change quickly.”

That point may well have been reached. Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday came down heavily on crony capitalism – the nexus between “corrupt businessmen” and “venal” and “corrupt politicians” – which, he said, is “killing transparency and competition” and is “harmful to free enterprise, opportunity and economic growth.” The issue of cronyism had played out in full during the recent general elections. “If the debate during the elections is any pointer, this is a very real concern of the public in India today,” Mr Rajan added. Some argue that the charges of cronyism hurled at Narendra Modi during the election campaign, especially his closeness to Mukesh Ambani and Gautam Adani, did not stick; otherwise, how would his party, the Bharatiya Janata Party, have gained a majority in the Lok Sabha? In this narrative, the fear of cronyism is exaggerated.

One school of thought says that Japan and South Korea progressed rapidly because a handful of their companies were singled out for special treatment by the government, and they delivered the results. Most of them have become global conglomerates. That may be true but the Indian experience inspires no confidence. What did telecom companies do when the government gave them inexpensive spectrum? Some of them sold stakes to foreigners at a huge premium. It was only after the Comptroller and Auditor General quantified the loss – it could be up to Rs 1.76 lakh crore, it said – that the people got to know of the extent of the scam. Similarly, the special economic zones became an opportunity for land grabbing. And coal blocks were bagged to lay hands on an undervalued natural resource.
These instances shouldn’t surprise anybody because cronyism has been an integral part of Indian business. In the pre-liberalisation age, many business houses got industrial licences and just sat on them in order to create a scarcity that would keep prices high. Most worked behind the scenes to ensure that rivals were denied licences. “An important issue in the recent election was whether we had substituted crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for pay-offs to venal politicians,” RBI Governor Rajan said.

Cronyism acts as a significant entry barrier into regulated businesses. It is not easy to take on entrenched players who have decision makers in their pockets. If they can cause ministers to be shunted out, imagine the damage they can inflict on newcomers. That’s why most young entrepreneurs these days are happy to confine themselves to unregulated sectors such as information technology. One way to end cronyism in the allocation of natural resources is to move to transparent auctions, like it has happened in spectrum. So far, it seems to have worked well. There is no reason why it can’t be replicated in other sectors. The government needs to put in place safeguards that will ensure that there is no collusion between bidders.

So strong is popular resentment at cronyism and privatesector corruption that nobody has dared to name a businessman for the Bharat Ratna this year.

(Source: Extracts from an article by Mr. Bhupesh Bhandari in Business Standard dated 15-08-2014)

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NJAC: Govt. in a hurry has missed two important checks

The Constitution (121st Amendment) Bill, 2014, passed by the Parliament has proposed the establishment of a National Judicial Appointments Commission (NJAC). The NJAC will replace the collegium of judges, which is currently responsible for appointments to the Supreme Court of India and the High Courts.

The idea of such a constitutional commission is a sensible one, especially given the increasing dissatisfaction with the opaque functioning of the judicial collegium.

But the Parliament ought to have been careful not to throw the baby out with the bathwater. Despite its many faults, the collegium has been widely credited with protecting judicial independence, its raison d’etre and a fundamental prerequisite of the rule of law. In the two decades since, while other deficiencies have plagued the collegium, unbridled executive interference has not been one of them. In its collective anxiety to replace the collegium, the Parliament has failed to incorporate the collegium’s key safeguard against an erosion of judicial independence, i.e., a predominant voice for the judiciary in appointments. Experience demonstrates that a failure to give the judiciary preponderance in judicial appointments, especially in India’s constitutional democracy where the judiciary is the only real check on the legislature and executive, is prejudicial to judicial independence. As Nani Palkhivala powerfully described it, executive dominance immediately prior to and during the Emergency left our Constitution, specifically the judiciary, ‘defaced and defiled.’ For the nation to be once bitten and not twice shy is to take a blinkered view of this history.

However, in incorporating judicial preponderance, the cabal-like functioning that the collegium has often been accused of must not be replicated. Two checks are necessary: first, the NJAC must have a seventh member who is a retired Supreme Court judge for Supreme Court appointments and transfers between High Courts. For appointments to a high court, this seventh member should be a retired judge of the concerned high court. The former must be appointed by the Prime Minister, leader of the opposition in the Lok Sabha and the Chief Justice of India whereas the latter must analogously be appointed by the Chief Minister of the state, leader of the opposition in that state and the chief justice of the high court. This proposal will ensure that appointments to high courts are not entirely dictated by the Centre. It deserves the consideration of state governments to whom the constitutional amendment will now be sent for ratification. Secondly, a key modification is necessary to the appointment procedure. The exercise of a veto by any NJAC member must be accompanied by reasons, which must be publicly disclosed. Currently , this is not provided for. A failure to disclose reasons will allow pernicious prejudices that have often prevented fine judicial minds from being elevated to the Supreme Court to persist. Transparency, a key leitmotif of the reform of the appointments process, demands such disclosure. It is also imperative that the criteria for selecting judges, and other key regulations, are carefully formulated by the NJAC itself and not left to the executive.

Judges have been appointed to the Supreme Court who have not delivered any significant judgments during their high court tenures. This is not peculiar to collegium appointments but happened during the period of executive dominance too. For elevation of judges, the NJAC must ascertain the number of judgments delivered, undertake an assessment of their quality and the judges’ adherence to values of judicial life. For assessing lawyers and jurists, the extent and quality of their practice or academic work and probity of conduct must be gauged. The NJAC would do well to study the workings of Judicial Performance Evaluation programmes in several states in the US and establish well-defined criteria to assess potential adjudicative ability.

Without such criteria being incorporated and publicly known, the establishment of the NJAC is meaningless. Worse still, without judicial preponderance, its very existence has the ominous potential of setting the clock back on the nation’s long quest of rescuing the judiciary from the clutches of executive caprice. No matter how noble the professed intention of the government in proposing this amendment, and Parliament in passing it, the undue haste with which the bills were piloted through, the lack of meaning full public debate and the complete absence of genuine parliamentary scrutiny, suggest otherwise. They demonstrate a powerful government in an inexplicable hurry, and a lame-duck Parliament seemingly failing to grasp the magnitude of its actions, the effects of which will far outlive its members’ tenures. If the NJAC is to be a genuine third way for judicial appointments, let it be a way that is underpinned by respect for the judiciary, pervaded by transparency and alive to the lessons from India’s chequered history of judicial independence.

(Source: An article by Ms. Ruma Pal and Mr. Arghya Sengupta in Times of India dated 17-08-2014).

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A. P. (DIR Series) Circular No. 31 dated 17th September, 2014

External Commercial Borrowings (ECB) in Indian Rupees

Presently, an Indian company can, under the Automatic Route, issue shares/convertible debentures to a person resident outside India against lump-sum technical knowhow fee, royalty, External Commercial Borrowings (ECB) (other than import dues deemed as ECB or Trade Credit) and import payables of capital goods by units in Special Economic Zones subject to conditions like entry route, sectoral cap, pricing guidelines, etc. and compliance with applicable tax laws.

This circular permits an Indian company to issue equity shares against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or RBI under FEMA, 1999 or any rules/regulations framed or directions issued thereunder, if:

1. The equity shares are issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc.;

2. A pplicable taxes have been deducted on the funds payable and the conversion to equity is net of applicable taxes.

However, issue of shares/convertible debentures that require Government approval in terms of paragraph 3 of Schedule 1 of FEMA 20 or import dues deemed as ECB or trade credit or payable against import of second hand machinery will continue to be dealt in accordance with extant guidelines.

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Transfer Pricing – Issue of Shares at a Premium to Non-resident AEs – Whether alleged shortfall in Share premium can be taxed u/s. 92 of the Act

Synopsis
In the past, we have seen lots of twists & turns in Transfer Pricing litigation One such interesting issue has been whether any such alleged shortfall in share premium can be taxed u/s. 92 of the Act under the pretext that the assessee has forgone the so called notional income on the funds that it would have received. In the case of Vodafone a pro-assessee judgment was pronounced by the Honorable Mumbai High Court where it was held that the transaction did not give rise to any ‘income’ from International Transactions and therefore TP provisions are not applicable.

Tele-Services (India) Holdings Limited, wherein total TP adjustment of Rs. 1,397.26 crore was made for the Assessment Year [AY] 2009-10. The assessment order of the AO was challenged in a Writ Petition before the Bombay HC and the Court, after comprehensively dealing with various contentions, vide its order dated 10th October, 2014 decided the issue in favour of the petitioner.

Similarly, a writ petition in the case of Shell India relating to issue of shares by it to its non-resident AE Shell Gas BV, wherein a total TP adjustment of Rs. 15,220 crore has been made for the Assessment Year [AY ] 2009-10, is being heard by the Bombay High Court [HC].

There are about 24 other assessees facing tax demands on similar grounds.

In this Article, we discuss the salient features of the HC’s decision in the case of Vodafone.

Vodafone India Services Pvt. Ltd. vs. UOI (WP No. 871 of 2014, Bombay HC)

Brief Facts
1. The brief facts are as follows:

1. The Vodafone India Services Private Ltd. [Petitioner] issued certain equity shares to its holding company of face value of Rs. 10 each at a premium of Rs. 8,509 per share.

2. The petitioner contended that Fair Market Value [FMV] of the equity shares was Rs. 8,519 as determined in accordance with the prescribed methodology.

3. However, according to the AO and the TPO, the equity shares ought to be valued at NAV of Rs. 53,775 per share. Thus, the consequence of issue of shares by the Petitioner to its holding company at a lower premium resulted in the Petitioner subsidising the price payable by the holding company. This deficit was treated as a deemed loan extended by the petitioner to its holding company and periodical interest thereon is to be charged to tax as its interest income.

Issues involved

2. The main issues raised in the Writ Petition are as follows:

(a) Whether Chapter X of the Income-tax Act, 1961 [the Act] is a separate code by itself and the difference in valuation between ALP and the contract/ transaction price would give rise to income?

(b) Whether “Income” as defined in section 2(24) of the Act is an inclusive definition and it does not prohibit taxing capital receipts as income?

(c) Whether the forgoing of premium on the part of the Petitioner amounts to extinguishment/relinquishment of a right to receive fair market value and therefore, the issue of shares is a transfer within the meaning of section 2(47) of the Act?, and

(d) Whether the meaning of International Transaction as given in clauses (c) and (e) of the Explanation (i) to section 92B of the Act would include within its scope even a capital account transaction?

Petitioner’s Contentions
3. The petitioner contended that:
(a) Chapter X of the Act is a special provisions relating to avoidance of tax. Section 92 of the Act provides for computation of income arising from International Transaction, having regard to ALP. Section 92(1) of the Act which applies to the present facts, directs that any income arising from an International Transaction should be computed, having regard to the ALP. Thus, the sine-qua-non, for application of section 92(1) of the Act is that income should arise from an International Transaction. In this case, it is submitted that no income arises from issue of equity shares by the Petitioner to its holding company;
(b) T he impugned order dated 11th February, 2014 after correctly holding that the word ‘Income’ has not been separately defined for the purpose of Chapter X of the Act, yet proceeds to give its own meaning to the word ‘Income.’ This is clearly not permissible. The word ‘Income’ would have to be understood as defined by other provisions of the Act such as section 2(24) of the Act. A fiscal statute has to be strictly interpreted upon its own terms and the meaning of ordinary words cannot be expanded to give purposeful interpretation;
(c) Chapter X of the Act is not designed to bring to tax all sums involved in a transaction, which are otherwise not taxable. The purpose and objective is not to tax difference between the ALP and the contracted/book value of said transaction but to reach the fair price/consideration. Therefore, before any transaction could be brought to tax, a taxable income must arise. The interpretation in the impugned order to tax any amounts involved in International Transaction tantamount to imposing a penalty for entering into a transaction (no way giving rise to taxable income) at a value which the revenue determines on application of ALP;
(d) T he impugned order itself demonstrates the fact that the share premium on issue of shares is per se not taxable. This is so as the amounts received by the Petitioner on account of share premium has not been taxed and only the amount of share premium which is deemed not to have been received on application of ALP, alone has been brought to tax;
(e) I n case of issue of shares, it comes into existence for the first time only when shares are allotted. It is the creation of the property for first time. This is different from the transfer of an existing property. An issue of shares is a process of creation of shares and not a transfer of shares. Therefore, there is no transfer of shares so as to make Section 45 of the Act applicable. It was submitted that if the contention of the Revenue is correct, then every issue of shares by any Company would be subjected to tax;
(f) The issue of shares by the Petitioner to its holding company and receipt of consideration of the same is a capital receipt under the Act. Capital receipts cannot be brought to tax unless specifically/expressly brought to tax by the Act. It is well settled that capital receipts do not come within the ambit of the word ‘Income’ under the Act, save when so expressly provided as in the case of section 2(24) (vi) of the Act. This brings capital gains chargeable u/s. 45 of the Act, to tax within the meaning of the word ‘Income’;
(g) Attention was drawn to the definition of `Income’ in section 2(24) (xvi) of the Act which includes in its scope amounts received arising or accruing within the provisions of section 56(2)(viib) of the Act. However, it applies to issue of shares to a resident. Besides, it seeks to tax consideration received in excess of the fair market value of the shares and not the alleged short-fall in the issue price of equity shares. Thus, this also indicates absence of any intent to tax the issue of shares below the alleged fair market value as in this case;
(h) T he impugned order proceeds on an assumption, surmise or conjecture that in case the notional income, i.e., the amount of share premium forgone was received, the Petitioner would have invested the same, giving rise to income. It is submitted that no tax can be charged on guess work or assumption or conjecture in the absence of any such income arising; and
The impugned order itself demonstrates the fact that the share premium on issue of shares is per se not taxable. This is so as the amounts received by the Petitioner on account of share premium has not been taxed and only the amount of share premium which is deemed not to have been received on application of ALP, alone has been brought to tax;

In case of issue of shares, it comes into existence for the first time only when shares are allotted. It is the creation of the property for first time. This is dif-ferent from the transfer of an existing property. An issue of shares is a process of creation of shares and not a transfer of shares. Therefore, there is no transfer of shares so as to make Section 45 of the Act applicable. It was submitted that if the contention of the Revenue is correct, then every issue of shares by any Company would be subjected to tax;

The issue of shares by the Petitioner to its holding company and receipt of consideration of the same is a capital receipt under the Act. Capital receipts cannot be brought to tax unless specifically/expressly brought to tax by the Act. It is well settled that capital receipts do not come within the ambit of the word ‘Income’ under the Act, save when so expressly provided as in the case of section 2(24) (vi) of the Act. This brings capital gains chargeable u/s. 45 of the Act, to tax within the meaning of the word ‘Income’;

Attention was drawn to the definition of `Income’ in section 2(24) (xvi) of the Act which includes in its scope amounts received arising or accruing with-in the provisions of section 56(2)(viib) of the Act. However, it applies to issue of shares to a resident. Besides, it seeks to tax consideration received in excess of the fair market value of the shares and not the alleged short-fall in the issue price of equity shares. Thus, this also indicates absence of any intent to tax the issue of shares below the alleged fair market value as in this case;

The impugned order proceeds on an assumption, surmise or conjecture that in case the notional income, i.e., the amount of share premium forgone was received, the Petitioner would have invested the same, giving rise to income. It is submitted that no tax can be charged on guess work or assumption or conjecture in the absence of any such income arising; and

The impugned order places reliance upon the meaning of International Transaction as provided in subsection (c) and (e) of Explanation (i) to section 92B of the Act to conclude that the income arises. It is submitted that Explanation (i)(c) to section 92B of the Act only states that capital financing transaction such as borrowing money and/or lending money to AE would be an International Transaction. However, what is brought to tax is not the quantum of amount lent and/or borrowed but the impact on income due to such lending or borrowing. This impact is found in either under reporting/ over reporting the interest paid/interest received etc. Similarly, Explanation (i)(e) to section 92B of the Act, which covers business restructuring would only have application if said restructuring/reorganising impacts income. If there is any impact of income on account of business restructuring/reorganising, then such income would be subjected to tax as and when it arises whether in present or in future. In this case, such a contingency does not arise as there is no impact on income which would be chargeable to tax due to issue of shares.

Revenue’s Contentions

Revenue contended that:

Section 92(1) of the Act is to be read with section 92(2) of the Act. It is stated that a conjoint reading of two provisions would indicate that what is being brought to tax under Chapter X of the Act is not share premium but is the cost incurred by the Petitioner in passing on a benefit to its holding company by issue of shares at a premium less than ALP. This benefit is the difference between the ALP and the premium at which the shares were issued. Issue of shares by the Petitioner to its holding company, resulted in the following benefits to its holding company:

Cost incurred by the Indian Co. for a correspond-ing benefit given to the Holding Co. After all, the Holding Co. has actually got shares worth Rs. 53,775/- each at a price of Rs. 8,159/- each.

Benefit also accrues to the valuation of Holding Co. in the international market by taking undervalued shares of the subsidiary Co., by increasing the real net worth of the Holding Co.

Besides the above, at the hearing, following further sub-missions in support of the conclusion arrived by the impugned order were also advanced:

The Petitioner does not challenge the constitutional validity of Chapter X of the Act or any of the Sec-tions therein. The Petitioner raises only an issue of interpretation. Moreover, the fact that the Petitioner-Company and its holding company are AEs within the meaning of Chapter X of the Act is also not disputed. Therefore, the provisions of Chapter X of the Act are fully satisfied and applicable to the facts of the present case;

The Petitioner itself had submitted to the jurisdiction of Chapter X of the Act by filing/sub-mitting Form 3-CEB, declaring the ALP. Thus, the respondent-revenue were under an obligation to scrutinise the same and when found that the ALP determined by the Petitioner-Company is not cor-rect, the AO and the TPO were mandated to apply Chapter X of the Act and compute the correct ALP. Therefore, the Petitioner should be relegated to the alternate remedy of approaching the Authorities under the Act;

The issue of Chapter X of the Act being applicable is no longer res integra as identical provision as found in Section 92 of the Act was available in sec-tion 42(2) of the Income-tax Act, 1922 (1922 Act). The SC in Mazagon Dock Ltd. vs. CIT [1958] 34 ITR 368 – upheld the action of revenue in seeking to tax a resident in respect of profit which he would have normally made but did not make because of his close association with a non-resident. Further, the Court observed that it is open to tax notional prof-its and also impose a charge on the resident. The aforesaid provision of section 42(2) of the 1922 Act were incorporated in its new avtar as section 92 of the said Act. It was thus emphasised that the legis-lative history supports the stand of the respondent-revenue that even in the absence of actual income, a notional income can be brought to tax;

Section 92(1) of the Act uses the word ‘Any in-come arising from an International Transaction’. This indicates that the income of either party to the transaction could be subject matter of tax and not the income of resident only. Further, it is submitted that for the purpose of Chapter X of the Act, real income concept has no application, otherwise the words would have been ‘actual income’. Therefore, the difference between ALP and the contracted price would be added to the total Income;

It was further submitted that under the Act what is taxable is income when it accrues or arises or when it is deemed to accrue or arise and not only when it is received. Therefore, even if an amount is not actually received, yet, in case income has aris-en or deemed to arise, then the same is charge-able to tax. Thus, the difference between ALP and contract price is an income which has arisen but not received. Thus, income forgone is also subject to tax; Chapter X of the Act is a complete code by itself and not merely a machinery provision to compute the ALP. Chapter X of the Act applies wherever the ALP is to be determined by the A.O. It is the hidden benefit in the transaction which is being charged to tax. Therefore, the charging section is inherent in Chapter X of the Act; Even if there is no separate head of income u/s.

14 of the Act in respect of International Transaction, such passing on of benefit by the Petitioner to its holding company would fall under the head ‘Income’ from other sources u/s. 56(1) of the Act; and Section 4 of the Act is the charging section which provides that the charge will be in respect of the total income for the Assessment Year. The scope of total income is defined in section 5 of the Act to include all income from whatever source which is received or accrues or arises or deemed to be received, accrued or arisen would be a part of the total income. Therefore, the word ‘Income’ for purposes of Chapter X of the Act is to be given widest meaning to be deemed to be income aris-ing, for the purposes of total income in section 5 of the Act.

In view of the above, it was submitted that the Petition should not be entertained.

Findings/Decision of the HC

Wider meaning of ‘Income’ is not permissible in absence of specific provision in the Statute

On the contention of the revenue that the definition of In-ternational Transaction in the sub-Clause (c) and (e) of Explanation (i) to section 92B of the Act should be given a broader meaning to include notional income, the HC held as under:

While interpreting a fiscal/taxing statute, the intent or purpose is irrelevant and the words of the taxing statute have to be interpreted strictly;

In case of taxing statutes, in the absence of the provision by itself being susceptible to two or more meanings, it is not permissible to forgo the strict rules of interpretation while construing it;

The SC in Mathuram Agarwal vs. State of M.P. [1999] 8 SCC 667 had laid down the following test for interpreting a taxing statue as under:

“The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particu-larly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute.

Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter.”

In view of the above, it was clear that it was not open to DRP to seek aid of the supposed intent of the Legislature to give a wider meaning to the word ‘Income’.

Whether the definition of ‘Income’ u/s. 2(24) includes ‘Capital Receipt’

Following decision of the Bombay HC in the case of Cadell Weaving Mill Company Private Limited vs. CIT [2001] 249 ITR 265 (Bombay) upheld by the Apex Court in CIT vs. D. P. Sandu Brothers Chembur Private Limited. [2005] 273 ITR 1 (SC), it could not be disputed that income would not in its normal meaning under the Act include capital receipts unless specified.

Section 56(2)(viib) of the Act seeks to tax a Com-pany in which public are not substantially interest-ed, in respect of the consideration received from a resident on sale of shares, which is in excess of the fair market value of the shares, as Income from Other Sources. The amount received on issue of shares was admittedly a capital account transac-tion not separately brought within the definition of income, except in cases covered u/s. 56(2)(viib) of the Act. Therefore, in absence of express legisla-tion, no amount received, accrued, or arising on capital account transaction could be subjected to tax as income. Parliament had consciously not brought to tax amounts received from a non-resident for issue of shares, as it would discourage capital inflow from abroad.

Neither the capital receipts received by the tax payer on issue of equity shares to its AE, a non-resident entity, nor the alleged shortfall between the so called fair market price of its equity shares and the issue price of the equity shares, could be considered as ‘Income’ within the meaning of the expression as defined under the Act.

A transaction on capital account or on account of restructuring would become taxable to the extent it impacts income, i.e., under-reporting of interest received or over-reporting of interest paid or claim of depreciation, etc. It was only that income which had to be adjusted to the ALP. The issue of shares at a premium was a capital account transaction and not income.

In tax jurisprudence, it is well settled that the fol-lowing four factors are essential ingredients to a taxing statute:

subject of tax;

person liable to pay the tax;

rate at which tax is to be paid, and

measure or value on which the rate is to be applied.

There is difference between a charge to tax and the measure of tax (i) & (iv) above. This distinction is brought out by the SC in Bombay Tyres India Ltd. vs. Union of India reported in 1984 (1) SCC 467 wherein it was held that the charge of excise duty is on manufacture while the measure of the tax is the selling price of the manufactured goods.

In this case also the charge is on income as under-stood in the Act, and where income arises from an International Transaction, than the measure is to be found on application of ALP so far Chapter X of the Act is concerned.

The arriving at the transactional value/ consideration on the basis of ALP does not convert non-income into income. The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of ALP to transactional value/consideration itself does not arise.

The ingredient (g)(i) mentioned above, relating to subject of tax is income which is chargeable to tax, is not satisfied. The issue of shares at a premium is a capital account transaction and not income.

TP Provisions – Scope and Objective

Section 92(1) of the Act has clearly brought out that ‘Income’ arising from an International Transaction is a condition precedent for application of

Chapter X of the Act. Transfer Pricing provisions in Chapter X of the Act are to ensure that in case of International Transaction between AEs, neither the profits are understated, nor losses overstated.

They do not replace the concept of income or expenditure as normally understood in the Act, for the purposes of Chapter X of the Act.

Section 92(2) of the Act dealt with a situation where two or more AEs entered into an arrangement whereby, if they were to receive any benefit, ser-vice or facility, then the allocation, apportionment or contribution towards the cost or expenditure had to be determined in respect of each AE having regard to the ALP. It would have no application in Petitioner’s case where there was no occasion to allocate, apportion or contribute any cost and/ or expenses between the tax payer and the AE.

The objective of Chapter X of the Act is not to punish Multinational Enterprises and/ or AEs for doing business inter se. Arm’s Length Price (ALP) is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when income arose in case of an International transac-tion between AEs. It does not warrant re-computation of a consideration received/given on capital account.

Real income versus Notional income

Reliance by the Revenue upon the definition of Interna-tional Transaction in sub-Clauses (c) and (e) of Explanation (i) to section 92B of the Act to conclude that income had to be given a broader meaning to include notional income, as otherwise Chapter X of the Act would be ren-dered otiose/ meaningless, was held to be far-fetched.

It was contended by the Revenue that in view of Chapter X of the Act, the notional income is to be brought to tax and real income will have no place. The entire exercise of determining the ALP is only to arrive at the real income earned, i.e., the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and call-ing the measure a notional income. The HC found that there is absence of any charge in the Act to subject issue of shares at a premium to tax.

Charging or Machinery Provisions

Chapter X of the Act is a machinery (computation-al) provision to arrive at the ALP of a transaction between AEs. The substantive charging provisions are in sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and gains of business), 45 (Capital gain) and 56 (Income from other Sources). Even income arising from International Transactions between AEs had to satisfy the test of ‘Income’ under the Act and had to find its home in one of the above heads, i.e., charging provisions. Following the five member bench of the apex court in CIT vs. Vatika Township Private Limited [2014]

49 taxmann.com 249 (SC), in absence of a charg-ing section in Chapter X of the Act, it was not possible to read a charging provision into Chapter X of the Act.

It was submitted that the machinery section of the Act cannot be read de-hors charging section. The Act has to be read as an integrated whole. The HC held that on the aforesaid submission also, there can be no dispute. However, as observed by the SC in CIT vs. B. C. Srinivasa Shetty 128 ITR 294, “there is a qualitative difference between the charging provisions and computation provisions and ordinarily the operation of the charging pro-visions cannot be affected by the construction of computation provisions.” In the present case, there is no charging provision to tax capital account transaction in respect of issue of shares at a pre-mium. Computation provisions cannot replace/ substitute the charging provisions. In fact, in B. C. Srinivasa Shetty (supra), there was charging provision but the computation provision failed and in such a case the Court held that the transaction cannot be brought to tax. The present facts are on a higher pedestal as there is no charging provision to tax issue of shares at premium to a non-resident, then the occasion to invoke the computation provisions does not arise. The HC therefore, found no substance in the aforesaid submission made on behalf of the Revenue.

It was also contended that Chapter X of the Act is a complete code by itself and not merely a machinery provision to compute the ALP. It is a hidden benefit of the transaction which is being charged to tax and the charging section is inherent in Chapter

X of the Act. It is well settled position in law that a charge to tax must be found specifically mentioned in the Act. In the absence of there being a charging Section in Chapter X of the Act, it is not pos-sible to read a charging provision into Chapter X of the Act. There is no charge express or implied, in letter or in spirit to tax issue of shares at a premium as income. In the present case, there is no charging provision to tax capital account transaction in respect of issue of shares at a premium. Computation provisions cannot replace/substitute the charging provisions.

The HC held that the issue of shares at a premium by the Petitioner to its nonresident holding company does not give rise to any income from an admitted International Transaction. Thus, no occa-sion to apply Chapter X of the Act can arise in such a case.

Whether the Share premium is chargeable to tax as ‘Income from other sources’

Share premium have been made taxable by a legal fiction u/s. 56(2)(viib) and the same is enumerated as ‘Income’ in section 2(24)(xvi) of the Act. How-ever, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares.

Whereas in this case, what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, in absence of express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as income.

Thus, neither the capital receipts received by the Petitioner on issue of equity shares to its holding company, a non-resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act. Although section 56(1) of the Act would permit in-cluding within its head all income not otherwise excluded, it did not provide for taxing a capital account transaction of issue of shares as was specifically provided for in section 45 or section 56(2) (viib) of the Act and included within the definition of income in section 2(24) of the Act.

Concluding Remarks

Thus, the HC held that the issue of shares at a premium by Petitioner to its AE did not give rise to any ‘Income’ from an International Transaction and therefore, there was no need to invoke TP provisions. The ruling surely comes as a morale booster for investors’ confidence and will also help improving the overall image of the Indian tax system. It goes without saying that the said principles should squarely apply to similar matters pending before the Bombay HC, namely Shell, Essar, etc., provided the basic facts are the same as those of Petitioner.

It seems that the tax department may take the matter to the SC and pass on the responsibility for taking a decision in this regard to the SC, instead of dropping the issue at this stage, as otherwise the dispute should not have actually traversed beyond the level of the DRP.

One can only hope that wiser counsel will prevail and the department as also the Government will accept the decision, issue a circular clarifying that except for specific charging provisions, capital receipts are not taxable and generally, use this opportunity to win/regain the faith of taxpayers and investors especially foreign investors.

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Amendments to Maharashtra Value Added Tax Rules, 2005 Trade Circular 18T of 2014 dated 26.9.2014

In this Trade Circular, various amendments carried out in Maharashtra Value Added Tax Rules, 2005 have been explained.

Now a composition & deemed dealer is required to file Annexure J1 & J2 along with half yearly return and details in Annexure C & D for entire year along with Second & last Half yearly return on or before 30th June of the succeeding year.

All dealers are also required to file Annexure J1 & J2 along with monthly, quarterly or half yearly return.

Dealers not liable for MVAT audit are required to file annual details in annexure C, D, G, H & I on or before 30th June of succeeding year.

Now a dealer who is unable to make quarterly application for declaration forms due to half yearly periodicity of return can apply for change in periodicity of returns to quarterly by email to peridiocity@mahavat.gov.in on or before 15th May of that financial year. Such change shall be final unless changed to monthly. Effective from F.Y. 2015-16.

Now, an option has been given in Registration Form 101 for a proprietor or partner to mention Adhar Card Number (UID).

Dealer having turnover between Rs. 60 lakh and Rs. 1 crore in F.Y. 2013-14 is required to file Annexures J1, J2,C,D,G,H & I for F.Y. 2013-14 along with return for the period ending on 30.9.2014. New Forms 604A & 605 have been prescribed.

SERVICE TAX UPDATE

Chargeability on transaction between joint venture and its members

Circular No. 179/05/2014 – ST dated 24th September, 2014

Vide this circular clarification has been provided with respect to chargeability of service tax on transaction between a joint venture and its members and vice versa post negative list regime of Service Tax with effect from 1st July, 2012 whereby all services are taxable subject to the definition of the service available in section 65B(44) of the Finance Act, 1994 other than the services specified in the Negative List and Mega Exemption notification.

The circular focuses on the issues of service tax implication on transactions in the nature of :

(a) cash calls or capital contributions made by the member to JV and
(b) Administrative services provided by member to JV.

The TRU has clarified that, according to Explanation 3 (a) under the definition of service, an unincorporated association or body of persons and its members are treated as distinct persons and hence taxable services provided by one to the other (i.e,. JV to member or vice versa) would be liable to service tax.

The circular specifically deals with the issue of cash calls / capital contribution made by members to the JV.

The circular clarifies that if cash calls are merely ‘transactions in money’ – they are excluded from the definition of service as per section 65B (44) of the Finance Act, 1994. Whether cash calls are in the nature of consideration for taxable service and not ‘transaction in money’ – would depend on the terms of the JV agreement in each case.

It is also clarified that JV may provide some taxable service in the form of agreeing to do something for direct benefit of the member or for the benefit of the third party on behalf of the member such as granting rights, reserving production capacity or providing an option on future supplies, for which the JV might have received cash calls in the nature of advance payments. Where member of the JV is providing services to the JV in his individual capacity, such as management of cash calls, administrative services, management of project office, etc. and the JV pays such member in cash (through pooled cash calls or otherwise) or in kind (i.e., goods, rights etc.), such services by member to the JV would be liable to service tax.

The TRU has specifically advised its field formations to carefully examine the applicability of service tax with reference to the specific terms / clauses of each JV agreement.

Services in relation to inward remittances from abroad Circular No. 180/06/2014 – ST dated 14th October, 2014

Vide this circular, Circular No.163/14/2012-ST dated 10.7.2012 is superseded clarifying the following issues in levy of service tax on the activities involved in the inward remittances :

(1) No service tax is payable on foreign currency remitted to India from overseas;

(2) Services provided by agent or the representation service provided by an Indian entity/bank to a foreign money transfer service operator (MTSO) in relation to money transfer falls in the category of intermediary service, therefore the same shall be subject to service tax;

(3) Service tax would apply on the services provided by way of currency conversion by a bank/entity located in India in the taxable territory to the recipient of remittance in India;

(4) Service tax is payable on commission received by sub-agents from Indian bank/entity;

(5) Service tax is payable on the amount charged separately, if any, by the Indian bank/entity/agent/sub-agent from the person who receives remittance in the taxable territory, for the service provided by such Indian bank/entity/ agent/sub-agent.

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Hindustan Zinc Limited vs. State of Andhra Pradesh And Others, [2012] 47 VST 1 (CSTAA)

Inter-State Sale/Stock Transfer-Dispatch of Goods by Factory to its branch Out Side the State–To Meet Monthly Requirements Of Goods as per Order Placed To Branch By Customer- Transaction Of Inter-State Sale- Taxable In the State from Which Goods Dispatched By the Factory-Sections 3, 6 and 22(1B) of the Central Sales Tax Act, 1956.

Facts
The appellant, a public sector Company, having stock point and Kolkata and factory in the State of Andhra Pradesh received orders from two customers of west Bengal for supply of Zinc and lead for supply of goods of specified quantity at specified rate as per schedule of delivery. One of the conditions of the order was that in case of breach of any condition of the contract, the sum of Rs. 50,000/- paid by the customer at the time of placing order, could be forfeited by the appellant company. The factory of the appellant company situated in Andhra Pradesh dispatched the goods to its Kolkata and Jharkhand branch showing the appellant company as consignor and consignee in all documents of transport of goods including excise gate pass. The Kolkata and Jharkhand branch of the company supplied goods to the customer and paid tax at applicable rate under the local sales tax law. The Company in the State of Andhra Pradesh showed the movement of goods to its Kolkata and Jharkhand branch as inter-State stock transfer. The sales tax authorities in AP assessed the above transaction by treating it as inter-State sale of goods taking place from the State of AP, which was confirmed by the State Appellate Tribunal. The Company filed appeal against the said judgment of Tribunal before the Central State Appellate Authority (CSTAA) u/s. 20 of The Central Sales Tax Act, 1956.

Held
The scope of an appeal filed u/s. 20 of The CST Act is wide inasmuch as an appeal lies against an order determining issues relating to stock transfers of goods in so far as they involve a dispute of inter-state nature. The authority has the right not only to consider any question of law that may arise, but also to reassess the facts and consider the correctness of the inference drawn by the lower authorities including the Tribunal.

The authority further held that specific orders were made by the branch office of the appellant company to the customers for sale of their products on the conditions mentioned therein. The customers placed orders for supply of specified quantity of goods in specified monthly quantities. It is true that even though the orders placed by the customers indicated the specified quantities to be supplied every month and the supplies did not always confirm to it, that by itself may not tilt the scale in favour of the appellant. Similarly, the fact that in some months, more quantities were supplied to the customers or that the goods sent from the factory to the branch were not earmarked may not also change the position. It is not for the Tribunal to consider each element individually and appreciate its impact on the transaction. On the other hand, it would be the proper thing to take note of all the circumstances, in the light of the facts available and come to a conclusion whether the movement of goods was triggered by the orders of purchase placed on the branch office.

The authority on an appreciation of all facts and circumstances confirmed the decision of the State Tribunal treating the transaction as inter-state sale taxable in the State of AP under The CST Act. It also directed the State of West Bengal and Jharkhand, to transfer the refundable amount of tax based on its order to the State of AP to which tax was due on the disputed transactions.

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[2014] 49 taxmann.com 561 (Mumbai – CESTAT) MSC Agency (India) (P.) Ltd. vs. Commissioner of Central Excise, Thane-II

Various charges collected by Steamer Agent from the importers/exporters of goods under different names are liable to service tax under Business Auxiliary Services with effect from 10-09-2014.

Facts:
Appellant registered under “steamer agency” also collected service charges from importers and exporters for various other services rendered in respect of the import/export cargo handled by appellant. Such services included; bill of lading fees; LCL consolidation charges; amendment charges for amendments in the bill of lading; facilitation/processing charges; administration charges for stamp duty; delivery order fees for taking delivery of cargo; documentation fees for export to USA; hazardous documentation charges for taking special care of hazardous cargo; bill of lading surrender charges; manifest correction charges; and detention waiver/refund processing charges. Appellant did not charge service tax on such service charges. According to department, these services merit classification under “Business Auxiliary Service” (‘BAS’). The Appellant contended that such other services cannot be taxed under BAS, since BAS encompasses services only when the same is rendered on behalf of another person, and services in the present case are not rendered on behalf of shipping lines.

Held:
The Hon’ble Tribunal analysed the scope of BAS u/s. 65(19) and held that the activities undertaken by the appellant for which service charges are collected are in respect of cargo imported or exported by their customers. Thus, these services were in relation to “procurement of goods or services, which are inputs for the client” and such services clearly fall under sub-Clause (iv) of section 65 (19) as it stood with effect from 10-09-2004. Even if it is held that these activities did not fall under sub-Clause (iv), they would certainly fall under sub-Clause (vii) namely “any service incidental or auxiliary to any activity specified in sub-Clauses (i) to (vi).” Even if the appellant had acted as a commission agent as claimed by them, they would fall under sub-Clause (vii) of Clause (19) of section 65 as the entry covered the services rendered as a commission agent.

The Tribunal further held that the contention of the appellant that to attract BAS, there should be 3 parties and the service should have been rendered “on behalf of the client”, is an incorrect argument. Rendering of service on behalf of the client applies only to sub-Clauses (iii), (v) and (vi) which relate to customer care management, production of goods and provision of services. The said condition does not apply to other sub-Clauses, including sub-Clause (iv) which is applicable in the present case. While upholding the invocation of extended period, Tribunal considered the fact that the appellant is service tax assessee since 1997 onwards and when the scope of BAS was expanded in the Budget 2004 and explained in the Circular, the appellant chose to ignore this circular, not taking reasonable precautions. Penalties u/s. 76, 77 and 78 were also upheld. However, for the period 10-05-2008 onward, only penalty u/s. 78 was held leviable in view of the amendment made in the said section vide Finance Act, 2008.

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2014 (35) STR 953 (Tri-Chennai) Arkay Glenrock (P) Ltd., Unit-II vs. CCE, Madurai

Re-agitation before same authority after finalisation without filing an appeal before higher authority not possible. Refund of CENVAT is eligible for EOU clearing goods to another EOU.

Facts:
Appellant, an EOU engaged in the manufacturing of granite slabs exported goods and also clearing it to other EOU. On account of accumulation of CENVAT Credit, Appellant applied for a refund. The claim was allowed partially disallowing to the extent of clearance to another EOU. The first appellate authority allowed the entire claim considering supplies made to other EOU as export and sent the matter to adjudicating authority for sanctioning the balance refund. Adjudicating authority allowed entire refund claim and sanctioned the balance refund claim. Against this order, the department filed this appeal. The first appellate authority allowed department’s appeal in the second round and against which the Appellant preferred this appeal.

Held:
The Tribunal held that appeal filed by the department before the first appellate authority in second round was not maintainable as matter attended finality in the first round and since department did not prefer an appeal at first round, the issue could not be re-agitated again before the same authority.

On merits, the Tribunal held that since export benefits are granted when goods are sold to SEZ, on same principal benefits should also be granted for goods sold to EOU and following the Gujarat High Court’s decision in Essar Steel Ltd. vs. UOI 2010 (249) ELT 3 (Guj) allowed the appeal.

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2014 (35) STR 945 L & T Sargent & Lundy Ltd. vs. CCEx, Vadodara

Export of service not to be regarded as exempt service for proportionate reversal of CENVAT Credit-Beneficial circular applicable retrospectively, while circular which creates liability or change has prospective effect.

Facts:
Appellant provided services locally as well as exported out of India. Service tax was charged on services provided in the country and services were exported without payment of service tax. The department was of the view that the CENVAT Credit utilisation has to be restricted to 20% on account of provision of exempted service namely export. The dispute pertained to the year 2007. Appellant argued that in the year 2008, CBEC had issued circular clarifying export of services would not be regarded as exempt services. However, department denied the benefit of circular stating the non-applicability for the period under dispute.

Held:
Tribunal held that Supreme Court has in Suchitra Components vs. CCE,, Guntur 2008 (11) STR 430 held that, a beneficial circular has to be applied retrospectively while an oppressive circular has to be applied prospectively and therefore allowed the claim of the Appellant.

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2014 (35) STR 946 (Tri-Delhi) Sarda Energy & Minerals Ltd. vs. CCE, Raipur-I

Assessee is entitled to take credit of service tax paid on GTA service under reverse charge before its taxable date.

Facts: Appellant deposited service tax as a receiver of GTA service in December 2004. The liability to pay service tax as a receiver of service arose from January, 2005 onwards. Appellant after payment of service tax took CENVAT Credit. The Department denied the credit on the ground that the service was not taxable in the month of December, 2004.

Held: The Tribunal observed that credit is available on the basis of payment of service tax and not on the basis of whether or not service tax is payable. Though Appellant was not liable yet paid service tax, was entitled to take credit of the same as per the CENVAT Credit Rules.

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Payment of VAT on material portion exempt under Notification No.12/2003 – ST dated 20-06- 2013 in contract involving material and labour.

(A) [2014] 49 taxmann.com 379 (Allahabad) – Mahendra Engineering Ltd.
The question of law before the High Court was whether abatement of cost of material replaced for repair of transformer as stipulated under Notification No. 12/2003. S.T. dated 20-06-2013 is admissible to the respondent or service tax is liable on gross value of bill charges from customers as laid down u/s. 67 of the Finance Act, 1994. The High Court noted that Tribunal has made observations that in the invoices issued by the assessee, the value of goods used, such as transformer oil and service charges are shown separately and in respect of the supply of consumables used in providing the service of repair, sales tax or, as the case may be, VAT is paid. The Tribunal, in this factual situation, observed that when the value of goods used was shown separately in the invoices on which sales tax or VAT has been paid, the service tax would be chargeable only on the service/labour component and the value of goods used for repair would not be includible in the assessable value of service.

Since this factual position was not disputed, the High Court dismissed the appeal having regard to the earlier judgment of the Division Bench in Balaji Tirupati Enterprises [2014] 43 taxmann.com 39 (All) on the ground that no substantial question of law was involved.

(B) [2014] 49 taxmann.com 421 (Allahabad) – S.K. Engineering Works vs. CCE&ST.

On examination of the records, the High Court allowed the writ and remanded the matter to assessing authority on the ground that the work contract of petitioner included service as well as supply of material the Notification dated 20-06- 2003 must be given effect to.

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[2014] 49 taxmann.com 345 (Madras) CCE vs. Sri Ranga Balaji Cotton Mills

When it is proven that the respondents clandestinely cleared excisable goods, the assessee cannot escape penalty u/s. 11AC by paying the duty along with interest prior to the issuance of show cause notice.

Facts:
The question of law before the High Court was whether the Tribunal was right in setting aside the mandatory equal amount of penalty imposed by the lower appellate forum u/s. 11AC on a proven ground that the respondents had clandestinely cleared excisable goods. The Tribunal disposed of the appeal filed by the assessee at the admission stage itself on the ground that the duty was paid by the assessee prior to the issuance of show cause notice. Aggrieved by the said order of the Tribunal, the Revenue filed appeal.

Held:
The High Court referred to the decision of Apex Court in the case of Union of India vs. Rajasthan Spg. and Wvg. Mills 2009 (238) E.L.T. 3, in which it was stated that, mere payment of differential duty whether before or after the show cause notice would not alter the situation and there would be liability towards penalty in case the conditions for imposing such penalty spelt out in section 11 AC of the Act are attracted. Relying upon the same, the High Court held that, the question of exonerating the assessee from payment of penalty does not arise and answered the question of law in favour of revenue.

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[2014] 49 taxmann.com 560 (Bombay) – Commissioner of Central Excise vs. Jyoti Structure Ltd.

Even if extended period invoked u/s. 11A(4), for imposition of penalty u/s. 11AC, proof to satisfy ingredients of fraud, collusion or any willful conduct etc., necessary.

Facts:
The assessee was engaged in manufacture of Galvanized Transmission Towers and parts thereof. The department observed that the assessee cleared these goods and parts thereof with remarks on the invoices that they were exempted from payment of excise duty. Commissioner (Appeals) after referring to Notification in this regard and after analysing the entire material on record concluded that the assessee acted bonafide on the advice/purchase order of the customer and availed the exemption. When it was pointed out later on that the condition No. 64 of the Notification is not fulfilled and the exemption is not available to the assessee, the assessee paid the amount of duty leviable together with interest thereon. Since there was nothing on record as to existence of fraud, collusion, any willful misstatement or suppression of facts, etc., so as to enable the Revenue to impose the penalty, the Commissioner (Appeals) set aside the penalty. Tribunal upheld the order of Commissioner. The case of the department was that when the Revenue invoked the extended period within the meaning of s/s. (4) of section 11A of the Central Excise Act, 1944 for the purpose of payment of duty, then, a separate proof for satisfying the ingredients thereof is not necessary for imposition of penalty.

Held:
The High Court held that if the material produced is not pointing towards any fraud or collusion or any willful misstatement or suppression of facts or contravention of the provisions of the Act or Rules with an intent to evade payment of duty, then, imposition of penalty is not called for.

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[2014] 49 taxmann.com 417 (Allahabad) H.M. Singh & Co. vs. Commissioner of Central Excise, Customs & Service Tax.

Penalty set aside-mass ignorance amongst service providers to include the valuebonafide conduct of the assessee.

Facts:
The assessee was engaged in providing taxable service of manpower recruitment and supply agency service. The assessee did not include provident fund payments received from service receiver in relation to manpower supplied to it, in the taxable value of services. The Department issued notice of demand levying penalty u/s. 77 and 78. The Assessee contended that he paid service tax including interest even before issue of adjudication order and the said amount was not included in the value of taxable service under bonafide belief that service tax was not applicable on it. The attention of the Court was also drawn to the fact that on the common issue 200 notices were sent by the revenue thus evidencing mass unawareness among the service providers regarding the issue.

Held:
The Hon’ble High Court noted that at the material time, the department also observed that there appeared a general ignorance among the service providers as to whether the service tax was attracted on the component of provident fund received from the recipient of the service to whom the manpower services were provided. The High Court also observed that, appellant did not retain any of the amounts out of employer’s contribution to provident fund payments received from the service receiver towards the deputed employees, but deposited it in the account of the concerned employees maintained with the Provident Fund Commissioner. The High Court held that the conduct of the appellant in paying the entire amount of service tax dues together with interest even before the order of adjudication was passed is a factor which must weigh in the balance and hence there was no fraud, collusion, willful misstatement or suppression of facts or contravention with intent to evade the payment of tax in this case. Accordingly, the penalty was set aside.

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2014 (35) STR 865 (Bom) Bharti Airtel Ltd. vs. CCEx, Pune-III

Transmission tower, its parts and prefabricated building on which telecommunication equipments are erected are neither capital goods nor inputs for a telecom service provider.

Facts:
The Appellant engaged in providing cellular telecommunication service availed CENVAT Credit of excise duty paid on tower parts, shelters/prefabricated buildings (PFB) purchased by them and treated them as capital goods from October, 2004 onwards till March, 2008. This was objected to by the department.

Before first appellate authority, Appellant contended that tower and parts of tower were the part of “Base Trans-receiver Station” (BTS) which comprises of BTS transmitter, transformers, batteries, stabilisers, antenna, tower etc., which was a integrated system falling under Chapter heading 85.25 of the Central Excise Act and hence was capital goods eligible for credit. The BTS was used for providing the telecommunication service and hence credit availment was correct. It was also contended that tower and its parts were accessories of antenna. An independent argument about the coverage of these items as ‘inputs’ if they ought to be held as not capital goods was also advanced.

First appellate authority upheld the reversal of credit on all items except on BTS transmitter and antenna holding that each of these goods had independent functions hence cannot be treated as integrated system and held that even in SKD/CKD condition, these would be classifiable under 7308 heading and the said heading was not classifiable under capital goods definition. On the argument of inputs, first appellate authority held that since these items became an immovable property and hence could not be regarded as ‘inputs’ and confirmed the reversal along with interest and penalty.

Tribunal rejected appellant’s contention on the reasons advanced by the first appellate authority and confirmed the reversal of credit. On the issue of imposition of penalty and limitation, the Tribunal remanded the case to the first appellate authority.

Appellant challenged the reversal of credit before the High Court.

Held:
The High Court, after observing that tower and its part, PFB were fixed to the earth and after its erection they became an immovable property and therefore, held that these items could not be regarded as goods and hence argument about the coverage as inputs was held to be without force. Further, the High Court observed that in CKD/SKD condition the tower and its part was covered under chapter 7308 and hence the same were also not falling in the definition of capital goods. Further it was held that, an antenna could function without its erection (the tower and its part) and hence the argument that tower is the accessory of antenna was rejected and thus the appeal itself was rejected.

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Export order prior to “Sale” for section 5(3) of CST Act,1956

Introduction
As per the provisions of Constitution, no tax can be levied on the transaction of sale in course of export. The term “sale in course of export” is defined in section 5 of the CST Act,1956. Section 5(1) defines direct export. There is also category of deemed export by way of section 5(3) of the CST Act,1956. The said section provides exemption to one sale taking place prior to actual export sale. The section is reproduced below for ready reference.

“S.5. When is a sale or purchase of goods said to take place in the course of import or export. –

(3) Notwithstanding anything contained in s/s. (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export..”

Conditions required to be fulfilled
There are number of points of dispute in relation to interpretation of above section. As per the overall interpretation, following conditions are required to be fulfilled for earning exemption under this section.

1. There should be pre existing export order from the foreign buyer with Indian seller (Indian exporter).
2. The Indian exporter should purchase goods from another Indian vendor for compliance of above export order.
3. There should be actual export by the Indian Exporter.

Controversy
Number of controversies arise on account of interpretation of above conditions. The basic controversy sometime relates to date of sale by local vendor to exporter and the date of receipt of Indian export order by the exporter. The sales tax authorities interpret that the exporter should place order on the local vendor only after receipt of export order from the foreign buyer. The further argument of the dealer can be that the exporter can receive proposal for export or may initially receive export order verbally (and then confirmed subsequently in writing). The argument will be that even if the order is placed on receipt of verbal order or based on proposal it should be valid subject to the condition that before actual sale by the local vendor to Indian exporter there is a confirmed export order from the foreign buyer. Accordingly dealers argue that their sale to Indian exporter should be covered by section 5(3) and exempt. However, the litigation arises due to such difference in interpretation.

Recent Judgment
Hon. Bombay High Court has recently an occasion to deal with such a controversy. The reference is to judgment of Hon. High Court in case of Exide Industries Ltd. vs. The State of Maharashtra (W.P. No.12025 of 1012 dt. 4.8.2014)(Bom).

The short facts as narrated in the judgment are reproduced below.

“3. The short but very interesting question that has arisen for consideration before us is the interpretation of section 5 of the Central Sales Tax Act, 1956 (CST Act) and in particular s/s. 3 thereof.

Section 5(3) inter alia provides that notwithstanding anything contained in s/s. (1), the last sale or purchase of any goods, preceding the sale or purchase occasioning the export of those goods out of the territory of India, shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order in relation to such export. In the facts of the present case under a purchase order/agreement dated 5th March, 2004 M/s. Crown Corporation Pvt Ltd (hereinafter referred to as “M/s. Crown”) required the Petitioner to supply Submarine Navy Batteries of the type and specifications more particularly set out therein. On 25th May, 2004 the Algerian Navy placed a purchase order on M/s. Crown, for the supply of Submarine Navy Batteries. On 14th September, 2004, the Petitioner sold and supplied Submarine Navy Batteries to M/s. Crown, who in turn exported the same to the Algerian Navy. The ARE -1 was prepared by the Petitioner on 14th September, 2004 showing the Petitioner as the seller, M/s. Crown as the purchaser, and the Algerian Navy as the consignee. In these circumstances, the Petitioner contends that the sale effected by them of Submarine Navy Batteries to M/s. Crown, is exempt from the levy of sales tax under the BST Act by virtue of the provisions of section 5(3) of the CST Act. On the other hand, the Respondents contend that since the purchase order placed by M/s. Crown on the Petitioner on 5th March, 2004 was before the date when the Algerian Navy placed the purchase order on M/s. Crown (i.e., on 22nd May, 2004), the sale by the Petitioners to M/s. Crown did not take place after, and for the purpose of complying with, the agreement or order of the Algerian Navy (i.e., on 22nd May, 2004). It was therefore not “for or in relation to such export” as contemplated under the provisions of section 5(3) of the CST Act. It is in this light that we are called upon to decide the interpretation of the said provision. After adverting to the facts, we will analyse the provisions of the CST Act in some depth, later in this judgment.”

After referring to the facts in detail, the Hon. High Court on merits of the case observed as under:

“26. Section 5(1) of the CST Act stipulates that a sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India, only if the sale or purchase either occasions such export, or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India. As, the section originally stood prior to its amendment in 1976 and thereafter in 2005, the sale by an Indian exporter from India to the foreign importer, alone qualified as the sale which had occasioned the export of the goods. According to the Export Control Order, exports of certain goods could be made only by specified agencies such as State Trading Corporations. In other cases also, manufacturers of goods, particularly the small and medium scale, had to depend upon some export houses for exporting their goods because special expertise was needed for carrying on the export trade. A sale of goods made to an export canalising agency such as State Trading Corporations or to an export house, in compliance with an existing contract or order, was inextricably connected with export of the goods. At the same time, since such a sale did not qualify as sales in the course of export, they were liable to State Sales Tax which corresponded in the increase in the price of the goods and made exports out of India uncompetitive in the fiercely competitive international markets. To tackle this problem, section 5 was amended by the Central Sales Tax (Amendment Bill, 1976) by inserting s/s. (3) therein to provide that the last sale or purchase of any goods preceding the sale or purchase occasioning export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for, or in relation to, such export. This is the legislative intent in inserting s/s. 3 to section 5 of the CST Act.

The word “sale” also has been defined in the Central Sales Tax Act u/s. 2(g) which reads as under :-

2(g) ‘sale’ with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and includes –

a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

a delivery of goods on hire-purchase or any system of payment of instalments;

a transfer of the right to use any goods for any purpose

(whether or not for a specified period) for cash, deferred payment or other valuable consideration;

a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods.

As defined u/s. 2(g), a sale means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and also includes transfers as set out in clauses (i) to (vi) of section 2(g). In view thereof, the words “last sale” appearing in section 5(3) of the CST Act will have to be construed keeping in mind the definition of the word “sale” in section 2(g).

Keeping in mind the provisions of section 5(3) and section 2(g), we have to decide whether the purchase order/agreement dated 5th March, 2004 placed by M/s. Crown on the Petitioner would be a “sale” as contemplated u/s. 5(3) r/w section 2(g) as contended by the Revenue, or whether selling and supplying the Submarine Navy Batteries to M/s. Crown on 14th September, 2004 would fall within the word “sale” as contemplated under the said provisions. To our mind, it is clear that the purchase order/ agreement dated 5th March 2004 between the Petitioner and M/s Crown can never be construed as a “sale” as contemplated under the provisions of section 5(3) of the CST Act. As set out earlier, section 2(g) defines the word “sale” to mean any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and includes transfers as more particularly set out in clauses (i) to (vi) of the said section. We do not find that the purchase order/ agreement dated 5th March, 2004 can by any stretch of the imagination fall within the definition of the word “sale” in section 2(g). This is for the simple reason that the word “sale” contemplates inter alia transfer of the goods or a transfer of the right to use any goods for any purpose or delivery or supply of goods [See. Section 2(g), Clauses (i), (iii), (iv), (v), (vi)] by one person to another. In the peculiar facts of this case and after carefully perusing the purchase order/agreement dated 5th March, 2004 between the Petitioner and M/s. Crown, we are of the view that there was no “sale” of the Submarine Navy Batteries by virtue of the said purchase order/agreement.

In the facts of the present case, there was no transfer of goods as contemplated u/s. 2(g) of the CST Act. On a perusal of the said agreement and its various clauses, at the highest, it can be said that the same amounts to an “agreement to sell”, that maybe performed at a future date by the Petitioner. It is this performance that translates into a “sale” of the Submarine Navy Batteries.

In the facts of the present case, we find that in performance of the purchase order/agreement dated 5th March, 2004, the Petitioner sold and supplied the Submarine Navy Batteries to M/s. Crown on 14th September, 2004. This sale was after the date when the Algerian Navy placed its purchase order on M/s. Crown. The purchase order placed by the Algerian Navy on M/s. Crown was dated 22nd May, 2004. In this view of the matter, we find that the sale of the Submarine Navy Batteries by the Petitioner to M/s. Crown was the “last sale preceding the sale occasioning the export” as contemplated u/s.

5(3) and the same took place after, and for the purpose of complying with the purchase order dated 25th May, 2004, placed by the Algerian Navy on M/s. Crown. In view thereof, the sale of Submarine Navy Batteries by the Petitioner to M/s. Crown on 14th September, 2004 were deemed to be in the course of export as contemplated u/s. 5(3) of the CST Act and therefore, could not be taxed as a local sale under the provisions of the BST Act.”

Conclusion

Thus the controversy is now resolved. The requirement is that there should be an export order prior to sale to Indian Exporter. Therefore, even if the local vendor supplies to the Indian exporter based on export proposal with the Indian exporter, but confirmed export order is received by the Indian exporter before actual sale by the local vendor to Indian exporter, still there will not be any difficulty in application of section 5(3) and exemption will be available.

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Supply & Installation of lifts – Sale or Works Contract?

Introduction
Several controversies have revolved around the issue as to whether a transaction amounts to ‘sale’ or “works contract”. In several judgments, the issue has been dealt with different perspectives. In a very well-known decision in the case of State of Andhra Pradesh vs. Kone Elevators – [2005-(181)-ELT-156-(SC)], a Three Judges Bench of the Supreme Court held that a contract of supply and installation of lift was one for sale and not a works contract as (a) the obligation of civil construction and preparatory work is that of purchaser of the lift and not of supplier and therefore (b) skill and labour employed for converting main components into end product was only incidental to components in the contract for sale. Consequent to the said judgment, several show cause notices were issued to the appellant proposing re-opening of assessment, as in a large number of cases in various States, the assessments were done considering the contracts as works contracts. In the State of Maharashtra, prior to the above decision in Kone Elevators’ case, the State treated contracts for sale and installation of lifts as works contracts as per the High Court’s decision in Otis Elevator Company (India) Ltd. vs. State of Maharashtra – (1969)-24-STC-525- (Bom). However, following the decision of the Supreme Court in Kone Elevators (Supra) from 01-04-2006, the position was adjusted to the law laid down by the Three Judge Bench of Supreme Court.

In this background, M/s. Kone Elevators India engaged in the manufacture, supply and installation of lifts as well as civil constructions, while undergoing assessment for 1995-1996 in the State of Tamil Nadu, the Sales Tax Tribunal and later the High Court, held that activity of erection and commissioning of lift was works contract and not sale. As against this, in some other States, the assessments closed based on treating the transaction as ‘sale’ were proposed to be re-opened. Driven by the paradox, Kone Elevators India Private Limited filed a writ petition, wherein along with other special leave petitions, it was noted by the Three – Judge Bench that the question raised for consideration is whether the manufacture, supply and installation of lifts is ‘sale’ or “works contract” and that in 2005-(181)-ELT-156-(SC) (supra), the Bench had not noticed the decisions of Supreme Court rendered in State of Rajasthan vs. Man Industrial Corporation Limited – (1969-1-SCC-567, State of Rajasthan & others vs. Nenu Rani – (1970)-26-STC-268-(SC) and Vanguard Rolling Shutters & Steel Works vs. Commissioner of Sales Tax – (1977)-2-SCC-250 and therefore, found it appropriate to refer the controversy to the Larger Bench to resolve the discord and to decide whether contract for manufacture, supply and installation of lifts in a building is a contract for sale of goods, liable for sales tax/VAT under the State legislation or a works contract wherein labour and service components would be excluded from total consideration. Consequently, the Five Judge Bench of the Hon. Supreme Court by majority in Kone Elevator India Pvt. Ltd. vs. State of Tamilnadu 2014 (34) STR 641 (SC) overruled the Three Judge Bench decision of 2005 considering it incorrect and held that individually manufactured goods such as lift, car, motors, ropes, rails etc., are components of lift and they are assembled and installed with skill and labour at site to become permanent fixture of building thus satisfying the fundamental characteristics of works contract. The judgment by the majority as well as the contrary view are briefly summarised below:

Some important decisions relied upon in Kone Elevators vs. State of Tamil Nadu 2014 (34) STR 641 (SC).

Before proceeding with the outline of the judgment, a few of the important decisions relied upon by the Larger Bench are briefly described below:

In Patnaik & Co. vs. State of Orissa 1965 (2) SCR 782 the issue involved related to construction of bodies on the chassis supplied to the contractor as bailee. It was held that such a contract being one for work and not a contract for sale, as the parties under the contract did not sell the bus bodies. The Bombay High Court in Otis Elevator Company (India) Ltd. vs. State of Maharashtra 1969 (24) STC 525 (Bom) held that manufacture, supply and installation of lifts is works contract as per the Bombay Lifts Act, 1939 read with Rules thereunder.

As against the above, in Union of India vs. Central India Machinery Manufacturing Co. Ltd. (1977) 2 SCC 847, the Apex Court held that the contract of manufacture and supply of wagon was nothing but a ‘sale’ and not works contract. However, post 46th Constitutional Amendment and insertion of a sub-Article 29A in Article 366 of the Constitution, in Builders’ Association of India and others vs. UOI & others (1989) 2 SCC 645 it was held that the works contract which was an indivisible one is by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour and services and the property transfers when the goods are supplied in the works and goods involved in the execution of works contract. Therefore, composite contracts for supply and installation, construction of lift or flat are classified as “works contract”.

In case of Hindustan Shipyard Ltd. vs. State of A.P. (2000) 6 SCC 579 (relied on in the case of Kone Elevators 3 Bench Judgment – supra also), the Court held that if the thing to be delivered has individual existence before delivery as the sole property of the party delivering it, then it is a sale. If the bulk of the material used in construction belongs to the manufacturer selling the end product for a price, then it is a stronger pointer that contract in substance is of sale of goods and not one for labour. However, the test is not decisive. The Court finally ruled observed that it is not bulk of the material alone but the relative importance of material qua the work, skill and labour of the payee is also to be seen. If the major component of the end product is material consumed in producing the chattel to be delivered and skill & labour is incidentally used, the end product delivered by the seller to the buyer would constitute sale whereas if the main object of the contract is to avail skill and labour of the seller though same material may be used incidentally by investing skill and labour of the supplier, the transaction would be a contract of work and labour.

In Vanguard Rolling Shutter’s case (1977) 2 SCC 250, the Supreme Court while reversing the decision of the High Court had observed that material as supplied was not supplied by the owner so far as to pass as chattel simplicitor but affixing to one immovable property and after which it became permanent fixture and accretion to the immovable property. Further, the operation to be done at site was not incidental but a fundamental part of the contract and therefore it was a works contract. Similarly, in Man Industrial Corporation Ltd. (supra) also, the Court treated the contract for providing and fixing different windows of certain sizes as per specification, design, drawings etc., as contract for work and labour and a contract for sale for fixing the windows to the building was not incidental/subsidiary to the sale but was essential term of the contract.

In addition to the above, interalia the decisions such as State of Madras vs. Gannon Dunkerley & Co. AIR 1958 SC 560, Associated Hotel’s case (1972) 1 SCC 472, State of Gujarat vs. M/s. Variety Body Builders (1996) 3 SCC 500 etc. were discussed to appreciate the controversy and genesis of law in respect of works contract before dwelling upon the principles in relation to works contract to apply to manufacture, supply and installation of lifts. Nevertheless, it was also observed and noted that there is no standard formula by which a contract of sale could be distinguished from a contract of work as it depended on facts and circumstances of each case. Further, citing landmark judgment of Bharat Sanchar Nigam Ltd. vs. UOI

Others 2006 (2) STR 111 (SC), which dealt with the issue of whether mobile phone connection was a transaction of sale or service or both, the Court observed that after 46th Amendment, the sale elements when covered under Article 366 (29A), the “dominant nature test” was not applicable and this was also reiterated in recent decision of the Apex Court in Larsen & Toubro Ltd.’s case 2014 (34) STR 481 (SC) relied upon heavily while deciding the instant case of Kone Elevators.

Core issue in brief:

The petitioners contended that supply and installation of lift cannot be treated as contract of sale. Each major component of crane has its own identity prior to installation and they are assembled/installed at site to bring ‘lift’ into existence and installation requires great skill and expertise and without installation, adjustment, testing etc. no lift could become operational in a building. Besides discussing various rulings on the subject matter, the petitioner’s counsel referred to Bombay Lifts Act, 1939 and Rules made thereunder to drive home the point that manufacture, supply and installation were controlled by statutory provisions under an enactment of the legislature which reflected that immense skill is required for such installation, as a result of which only lift becomes operational and lift is not sold like goods.

Various States like Maharashtra, Gujarat, Karnataka, Orissa, Tamilnadu and Andhra Pradesh, Rajasthan, Haryana etc., have put forward their submissions. Those of which argued against the transaction being treated as a works contract, in substance, contended that even if a high degree of skill went into the installation was an inseggregable facet of the manufacturing process and would not be more than an article for sale on the basis of a special order and erection meant only a functional part of the system to bring the goods to use and hence it was the culmination of the fact of sale. The contract involved goods in any form intended for transfer but the completion of transfer involved certain activities, under any name but the term “deliverable state” as provided in section 21 of the Sale of Goods Act, 1930 was attracted and therefore the contract was purely of sale of goods. As against this, the States contending the contract as one of works contract, backed the theory that considering multifarious activities involved in the installation, it should be construed as works contract.

Majority view:

Thoroughly considering Article 366(29A), the Larger Bench interalia importantly referred to three categories of contracts as explained in Hindustan Shipyard (supra) as follows:

“(i) the contract may be for work to be done for remunera-tion and for supply of materials used in the execution of the work for a price;

it may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; and

it may be a contract for supply of goods where some work is required to be done as incidental to the sale.”

Thereafter, it opined that the first contract is a composite contract consisting of two contracts, one of which is for the sale of goods and the other is for work and labour; the second is clearly a contract for work and labour not involving sale of goods; and the third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale.”

Also in detail was considered Larsen and Toubro (su-pra) wherein it was found to have been elucidated that after 46th Amendment, transfer of property in goods whether as goods or in some other form would include goods ceased to be chattels or movables or mer-chandise and become attached or embedded to earth. Thus goods which are incorporated into immovable property are deemed as good/s and therefore the narrow meaning given to the term “works contract” in Gannon Dunkerley-I (supra) no longer survives. Once the characteristics of works contract are satisfied in a contract, irrespective of existence of additional obligation, the contract does not cease to be a works contract because nothing in Article 366(29A)(b) limits the term “works contract”. In view thereof, the Larger Bench among other things reiterated what was stated in Larsen and Toubro (supra) “even if dominant intention of the contract is not to transfer the property in goods and rather it is the rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if it otherwise has elements of works contract”. The Bench noted that from their detailed analysis, the following 4 concepts emerge:

“(i) the works contract is an indivisible contract but, by le-gal fiction, is divided into two parts, one for sale of goods and the other for supply of labour and services;

The concept of “dominant nature test” or, for that matter, the “degree of intention test” or “overwhelming component test” for treating a contract as works con-tract is not applicable;

The term “works contract” as used in clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and once the characteristics of works contract are met within a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract.”

The Court went through the terms of the agreement in detail and referring to Richardson & Crudass Ltd. (1968) 21 STC 245 (SC), noted that they were also indicative of the fact that the whole contractual obligation was not divisible in parts and was intimately connected with labour and services undertaken by the applicants in erecting and installing the apparatus. Further, for functioning of lift in a huge building to carry persons to several floors calls for considerable technical skill, expertise, experience and precision in execution of work and therefore found it difficult to sever the agreement in two parts, one for sale of goods and another for services as the two are intimately connected. Severance is not possible and in fact it was an indivisible contract. For installation of the elevator, regard must be had to its technical facet, safety devise and actual operation and apart from it, it is an important fact that upon installation, it becomes a permanent fixture in the premises. Therefore, installation of a lift in a building cannot be regarded as transfer of a chattel as goods but a composite contract.

The Bench per majority view thus held that:

The dominant nature test or overwhelming component fees is not applicable.

A composite contract is works contract in terms of Article 366(29A)(B) of the Constitution, the incidental part of labour and services pales into total insignificance for determination of nature of contract.

The conclusions reached in Kone Elevator (supra) were based on bedrock of incidental service for de-livery since the contract itself speaks about obligation to supply lift as well as its installation which conveys performance of labour and service. Hence fundamental characteristic of works contract are satisfied. The decision rendered in Kone Elevators (supra) does not lay down the law correctly and it is accordingly overruled.

Contrary view:

According to the view expressed at great length by the Hon. Justice F. M. Ibrahim Kalifulla, by calling an activity as “works contract” by itself will not make the activity a works contract unless as explained in the document confirms to that effect. The contract according to the Bench, related only to supply a branded lift in the premises of the purchaser. Major part of the work is carried out by the purchaser in order to enable the petitioner to erect its elevator in the premises. In view of the nature of the prod-uct supplied, it has to necessarily assemble different parts in purchaser’s premises and thereby fulfill the contract of supply of lift in a working condition.

It was also noted emphatically that reference made by petitioner’s counsel to Bombay Lifts Act,1639 did not provide any scope to reach the conclusion that a contract between petitioner and the purchaser was one of works contact and therefore the submissions made in such re-gard were not acceptable. Next aspect dealt with this in contrary view is elaborate analysis of terms and condi-tions of the specimen contract of the petitioner with purchaser of the elevator. The first part of the contract related to preparatory work for the erection of the lift, the whole of which was observed to have been done by the purchaser whereas provision of ladder in the pit or steel fascia at every sill level were found to be only material and part of the lift and hence did not involve any work therein according to the Bench.

Another set of conditions related to prize variation clause captioned as “works contract.” The Bench making a threadbare analysis of conditions laid therein observed that the caption had nothing to do with the contents there-in. Under this very head, it was stipulated by way of pay-ments that claim for manufactured material had to be paid with material invoice and claim for installation relating to labour costs was required to be paid along with their final invoice. This was found to be indicative of contract be-ing divisible in nature and calling it an indivisible one is contrary to its own terms. The most glaring condition that 90% was payable on signing of the contract and 10% on commissioning of lift or in case of delay beyond control of appellant, then within 90 days of the material getting ready for dispatch itself was suggestive of the fact that the contract was separable, one for supply of material and minuscule portion for work involved. It was further found that receiving 90% upfront without having obligation to fulfill or suffer damages read along with other stipulations disclose that it was attributable towards manufacturing cost whereas the balance towards installation service. Therefore, it would have to be the contract of manufac-ture, supply and installation would be one of ‘sale’ alone and therefore could not be called works contract. Once conclusion reached accordingly, then application of Ar-ticle 366(29A)(b) could not be made.

The next in line, was the observation that as a general proposition, it is not appropriate to hold that whenever any element of works is involved, irrespective of its magnitude, all contracts should be held to be works contracts, though the contract may be for supply of goods. Such sweeping interpretations is inappropriate; what is omitted to be considered is whether in the first instance, by the essential ingredients of the contract, the essential ingredi-ents of ‘sale’ as defined in the Sale of Goods Act are present or absent for the purpose of levy of sales tax. If they are present, then going by the ratio of Bharat Sanchar Nigam’s case (supra), application of Article 366(29A) is not available. In the instant case, the essential ingredient of the contract was for sale of the lift and for this purpose, the petitioner also agreed to carry out installation. In Larsen & Toubro’s case (supra), the contract related to development of property which did not pertain to labour and services alone but also to bring into existence some element of works. Such a ratio considering the nature of contract dealt with could not have universal application to every contract. In the case on hand, when the contract itself was for supply of lift, simply because some work element was involved for installation of the lift, it cannot be held that the whole contract is a works contrathe Larsen

Toubro (supra) at para 76 would apply in the peculiar facts of that case relating to the construction of building between developer and owner on one side and purchaser on the other.

In the instant case, since sale as defined under the Sale of Goods Act occurred when a lift was supplied and there-fore the question of deemed ‘sale’ did not arise. Also going by the dictum in Patnaik and Company (supra), the contract as a whole has to be examined to understand the real intention of the parties. Applying the said principle to the instant contract to ascertain a contract of ‘sale’ and “works contract”, it can be held that what was transferred by petitioner to the purchaser after its installation was lift as a chattel and this contract is nothing but a sale. To conclude, simply because some element of works is involved in a contract, the whole contract would not be-come works contract. Even after the 46th Amendment, if Article 366(29A)(6) is to be invoked, as a necessary con-comitant, it must be shown that terms of contract lead to conclusion that it is works contract. Unless a contract is proved to be a works contract, Article 36B(29A)(b) is not invokable. Alternatively, if the terms of contract lead to a conclusion of sale, it will attract the provisions of relevant sale tax contract. The Bench thus concluded that the instant case was sale of lift and therefore the decision in Kone Elev.ators (India) Pvt. Ltd. (supra) was correct.

Conclusion:

Considering that each of the views above, whether majority or otherwise has its own merits and due consideration of facts involved in the issue, it is hard to infer that sanity is necessarily statistical. Nevertheless, the majority view of the Apex Court is respected as law and a binding precent for all. Yet, it is difficult to conclude that controversy surrounding various composite contracts involving sale and works or services of different proportions would cease to exist, considering the fact that each transaction is unique on its own facts and each emerging issue may be different from the available precedents on the larger issue. However, on having a closer look, it is not an up-hill task to deduce that the chief cause of controversy is nothing but absence of a common legislation to tax sale and service. Non-taxability of one component or difference in rate of taxation under separate legislations and Centr-State tug of war are the main contributories to the litigation relating to composite contracts involving sale and works. When a common tax tool is available to tax both goods and services, irrespective of their proportion in a composite contract, the courts will not be required to hair-split and make microscopic observations to analyses their divisibility or otherwise or the elements of sale or service or interpret whether intangible element is goods or service. Every tax compliant corporate citizen is awaiting a day when one complies with the law under a legislation, the hanging sword of wrath under the other legislation no longer exists.

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ParmanandTiwari vs. Income-tax Officer “SMC(B)” ITAT bench: Kolkata Before Mahavir Singh, JM I.T.A No.2417/Kol/2013 Assessment Year: 2008-09. Decided on 02.09.2014 Counsel for Assessee / Revenue: None / David Z. Chawngthu

Section 199 and Rule 37BA – Credit for TDS granted even though the certificates issued were not in the name of the assessee.

Facts:
The assessee is an individual and a professional Chartered Accountant. Earlier, the assessee was a partner in the firm M/s. Tiwari & Co.The said firm was dissolved w.e.f. 30.12.2006 and the assessee became proprietor of this firm fromthe said date. During the course of assessment proceedings the AO found that all the TDS certificates were issued in the name of M/s.Tiwari & Co. with PAN which belonged to the erstwhile partnership firm.The assessee contended before the AO that he has included the underlying income in the TDS certificates in his return of income and accordingly, the credit for TDS should also be allowed to him in accordance with Rule 37BA of the Rules.The AO disallowed the claim of the assessee by observing that Rule 37BA of the Rules was inserted w.e.f. 01.04.2009 only and hence, the credit in the hand of the assessee cannot be allowed.

On appeal the CIT(A) upheld the order of the AO stating that the credit of TDS cannot be given to the assessee as the deductee (in this case M/s. Tiwari & Co., partnership firm), had failed to file a declaration with the deductor as required under Rule 37BA.

Held:
The Tribunal noted that the total income of the assessee included income qua the TDS certificates which were issued in the name of M/s. Tiwari & Co., the erstwhile partnership firm. It also noted that these receipts were earned by M/s. Tiwari & Co., as proprietary concern of the assessee. Further, the AO had also completed the assessment including therein the said income. However, the AO did not allow the credit for TDS on the ground that the TDS certificate is not in the PAN of Parmanand Tiwari, in his individual capacity. According to the tribunal the TDS certificates not being in the name of the assessee was only a technical breach. According to it, wrong submission of PAN by deductor does not debar the assessee from claiming credit of TDS deducted particularly when the income is assessed in the hands of the assessee. Further, according to the Tribunal, the insertion of the proviso to sub-Rule (2) of Rule 37BA was to mitigate the hardship faced by assessee for claiming credit of TDS. As regards whether the amended Rule is a beneficial provision and in turn could be declared as retrospective and applicable to all pending matters, the Tribunal referred to the decision of the Supreme Court in the case of Allied Motors Pvt.Ltd. vs. CIT (1997) 224 ITR 677 and held that the said amended Rule was retrospective in nature and would apply to all pending matter. The Tribunal allowed the appeal filed by the assessee.

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DCIT vs. UAE Exchange & Financial Services Ltd. ITAT Bangalore `C’ Bench Before P. Madhavi Devi (JM) and Abraham P. George (AM) ITA No. 91/Bang/2014 Assessment Year: 2009-10. Decided on: 10th October, 2014. Counsel for revenue/assessee: Dr. K. Shankar Prasad/Cherian K. Baby

Section 32 – Printers, scanners, port switches and projectors qualify for depreciation @ 60% being the rate applicable to computers.

Facts:
The assessee company was carrying on business of money transfer, money changing, travel and ticketing, insurance support services and gold loan. In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had claimed depreciation @ 60% on printers, scanners, Port switches, projectors, etc. He was of the view that these items qualify for depreciation @ 15% since these do not suffer same rate of obsolescence as computers and they cannot be classified as computers. He rejected the argument of the assessee that these are parts of PCs and cannot independently work in isolation. He, accordingly, allowed depreciation on these @ 15%.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the CIT(A) has followed the decision of the Special Bench of the Tribunal in the case of DCIT vs. Datacraft India Ltd. (40 SOT 295)(Mum)(SB) wherein it is held that routers and switches are to be classified as computer peripherals and depreciation at the rate of 60% be allowed. The CIT(A) had also considered the decision of the Delhi High Court in the case of CIT vs. M/s. Bonanza wherein it is held that depreciation @ 60% is allowable on computer peripherals.

The Tribunal held that the printers, scanners, projectors as well as port-switches are all functionally dependent on computers and therefore, the order of CIT(A) is in consonance with the precedents on the issue. It observed that the DR was not able to place any other contrary decision before it. The Tribunal confirmed the order of the CIT(A).

The appeal filed by the revenue was dismissed.

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A. P. (DIR Series) Circular No. 15 dated 28th July, 2014

Compilation of R-return: Reporting under FETERS – Discontinuation of ENC and Sch 3 to 6 file

This circular states that with effect from the first fortnight of September, 2014 banks are not required to submit ENC and Sch. 3 to 6 file under FETERS. Banks have to submit only BOP6 file and QE file under FETERS.

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A. P. (DIR Series) Circular No. 30 dated 15th September, 2014

Data on Import of Gold Statement – Submission under XBRL

This
circular states that statement on import of Gold, both monthly and
half-yearly, now have to be filed in XBRL format from September, 2014.
However, the monthly and half-yearly statement for September has to be
filed both manually (format annexed to this circular) as well as in the
XBRL format. From October, 2014 only the XBRL statement needs to be
filed.

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A. P. (DIR Series) Circular No. 28 dated 8th September, 2014

Risk Management and Inter Bank Dealings: Hedging Facilities for Foreign Portfolio Investors (FPIs)

Presently, FPI are permitted to hedge their currency risk on the market value of entire investment in equity and/or debt in India as on a particular date.

This circular permits FPI, holding securities under the Portfolio Investment Scheme (PIS) in terms of schedules 2, 2A, 5, and 8 of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (Notification No. FEMA 20 /2000-RB dated 3rd May 2000), to now hedge the coupon receipts arising out of their investments in debt securities in India falling due during the next 12 months. The hedge contracts cannot be rebooked on cancellation, but they can be rolled over on maturity if the relative coupon amount is still to be received.

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Press Note No. 8 (2014 Series) issued by DIPP dated 27th August, 2014

Policy for Private Investment in Rail Infrastructure Sector through Domestic and Foreign Direct Investment

This Press Note, with immediate effect, permits FDI in the following sectors of the Railway Transport Sector: –

Construction, operation and maintenance of the following.

(i)Suburban corridor projects through PPP, (ii) Highspeed train projects, (iii) Dedicated freight lines, (iv) Rolling stock including train sets, and locomotives/ coaches manufacturing and maintenance facilities, (v) Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) Mass Rapid Transport Systems.

FDI beyond 49% of the equity of the investee company in sensitive areas from security point of view, will be brought before the Cabinet Committee on Security (CCS) for consideration on a case to case basis. Paragraph 6.1 has been amended as under: – 6.1 Prohibited Sectors: FDI is prohibited in:

(a) Lottery Business, including Government/private
lottery, online lotteries etc.
(b) Gambling and Betting, including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) M anufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
(h) A ctivities/sectors not open to private sector investment: e.g: (l) Atomic energy and (ll) Railway operations ( other than permitted activities mentioned in para 6.2)

Foreign technology collaboration in any form, including licensing of franchise, trademark, brand name, management contract, is also prohibited for Lottery Business and Gambling and Betting activities.

Paragraph 6.1.12.1(ii) & 6.1.12.1(iii) are amended as under: –

(ii) “Infrastructure” refers to facilitiesrequired for functioning of units located in the Industrial Park and includes roads ( including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.

(iii) “Common Facilities” refer to the facilities available for all units loicated in the industrial park, and include facilities of power, roads (including approach roads), railway line/sidings including electrifies railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility building, industrial canteens, convention/conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.

A new Paragraph 6.2.16, as under, has been added: –

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Press Note No. 7 (2014 Series) issued by DIPP dated 26th August, 2014

Review of the policy on Foreign Direct Investment (FDI) in Defence sector – amendment to ‘Consolidated FDI Policy Circular 2014

This Press Note has modified Paragraphs 4.1.3(v)(d) and 6.2.6 of ‘Consolidated FDI Policy Circular 2014’ relating to Defence Sector, with immediate effect.

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A. P. (DIR Series) Circular No. 14 dated 25th July, 2014

Issue of Prepaid Forex Cards – Due Diligence and Adherence to KYC norms

This circular states that banks/FFMC selling pre-paid foreign currency cards for travel purposes are required to follow the same rigorous standards of due diligence and KYC that they follow while selling foreign currency notes / travellers cheques to their customers.

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A. P. (DIR Series) Circular No. 11 dated July 22, 2014

Notification No. FEMA 310/2014-RB dated 12th June, 2014

Export of Goods and Services – Project Exports

This circular has: –

1. Done away with the requirement of obtaining approval of the Working Group in case of project exports and deferred service exports proposals for contracts exceeding US $ 100 Million. Henceforth, banks/Exim Bank will consider awarding post-award approvals without any monetary limit and permit subsequent changes in the terms of post award approval within the relevant FEMA guidelines/regulations.

2. R emoved the time limit of 30 days for submission of form DPX1/PEX-1/TCS-1 to the Approving Authority (AA) by the exporters. Exporters now have to submit the appropriate form to their banks for approval.

The revised Memorandum of Instructions on Project and Service Exports (PEM) is annexed to this circular.

A. P. (DIR Series) Circular No. 13 dated 23rd July, 2014 Foreign investment in India by SEBI registered long-term investors in Government dated Securities

Presently, FII, QFI and long term investors can invest up to US $ 30 billion in Government securities. Out of the above limit, a sub-limit of US $ 10 billion is available for investment by long term investors in Government dated securities.

This circular has, while maintaining the overall limit at US $ 30 billion, made the following changes: –

1. T he limit for investment by FII/QFI/FPI in Government dated securities has been increased by US $ 5 billion to US $ 25 billion.

2. T he limit for investment by long term investors in Government dated securities has been reduced from US $ 10 billion to US $ 5 billion.

FII/QFI/FPI will have to invest the said additional sum of US $ 5 billion in government bonds with a minimum residual maturity of three years. Also, all future investments against the limit vacated when the current investment by an FII/QFI/FPI runs off either through sale or redemption will have to be made in government bonds with a minimum residual maturity of three years. However, there will be no lock-in period and FII/QFI/FPI can freely sell the securities (including that are presently held with less than three years of residual maturity) to the domestic investors.

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A. P. (DIR Series) Circular No. 10 dated 21st July, 2014

Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 – Money Transfer Service Scheme – Recognising E-Aadhaar as an ‘Officially Valid Document’ under PML Rules

This circular states that Indian Agents under MTSS can treat physical Aadhaar card/letter or Aadhaar letter download from the UIDAI under the e-KYC process as ‘Officially Valid Document’ under PML Rules. Further, if the address provided by the customer is same as that on the Aadhaar letter, Aadhaar letter may be accepted as a proof of identity as well as proof of address.

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A. P. (DIR Series) Circular No. 9 dated 21st July, 2014

Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 – Money Changing Activities – Recognising E-Aadhaar as an ‘Officially Valid Document’ under PML Rules

This circular states that Authorised Persons can treat either physical Aadhaar card/letter or Aadhaar letter download from the UIDAI under the e-KYC process as ‘Officially Valid Document’ under PML Rules. Further, if the address provided by the customer is same as that on the Aadhaar letter, Aadhaar letter may be accepted as a proof of identity as well as proof of address.

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The tightening noose around insider trading – net gets wider, more legal fictions applied to catch offenders

Synopsis
In this article, the learned author stresses on Insider Trading as a growing phenomenon globally, especially in India and the efforts taken by SEBI to safeguard the investors. The author brings to our attention a new concept ‘Temporary Professional Relationship’ and its coverage with regards to Insider Trading. Importance is also given to various important nuances of Insider Trading and several types of persons who could be termed as ‘Insiders’ with their knowledge of price sensitive information.

INTRODUCTION
The law to define and catch insider trading on unpublished price sensitive information is quite widely worded. Moreover, several terms contain legal fictions/deeming provisions. Appellate authorities too have adopted further legal fictions or rebuttable presumptions. The noose of the law has got one notch tighter with a recent decision (in the matter of KLG Capital Services Limited, order of SEBI dated 24th July, 2014). In this decision, SEBI, perhaps for the first time, applied the concept of “temporary professional relationship” of a person with a company that would make him an insider, and thus, held that his trades with unpublished price sensitive information (UPSI), is insider trading. Whether such trades were with such UPSI was also determined by applying deeming provisions. Moreover, two other deeming principles established by earlier cases have also been applied here. Finally, the case is especially noteworthy for the systematic manner in which information is collected, the relationships determined and the sequence of transactions analysed.

Background of law relating to insider trading
The law relating to insider trading is principally contained in detailed Regulations – the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“the Regulations”). The punishable act of insider trading is determined in a fairly complex manner wherein several legal fictions/deeming provisions are applied. Importantly, not all of deeming provisions are rebuttable presumptions, and hence they are presumed to be true with no choice to prove otherwise. Certain persons are deemed to be insiders if have certain specified types of close relationships with the Company. However, several categories of persons are deemed to be connected with the Company and hence insiders.

Insider trading takes place if such insiders trade while in possession of UPSI or if they share such UPSI. However, several types of information are deemed to be UPSI. Then, certain trades by insiders are also deemed to be insider trades in the sense that such trades are simply prohibited. And so on. However, it is ironical that even with such a widely framed law, the cases caught and punished are relatively very few. And even in cases detected and punished, a very detailed investigation is required to establish the violation.

Facts in the present case
In the present case, it was found that a certain company (“Acquirer”) acquired shares of a listed company (“the Company”) that resulted in the Acquirer being required to make an open offer. Certain persons (“the Traders”) were alleged to have acquired shares of the Company while in possession of the UPSI that such open offer would be made. The shares were thereafter sold at a substantially higher price, resulting in a large sum of gains to the Traders.

SEBI alleged that this was in violation of the insider trading Regulations. Let us see how SEBI went about establishing the necessary ingredients of insider trading in the facts of that case using several legal fictions.

Having information of open offer whether UPSI?
Does having information of an impending open offer by itself a UPSI? The answer is yes, though it appears that this was not disputed in this case. Hence, this was not required to be established in detail. A takeover is deemed to be UPSI as per the definition of that term.

Whether the traders in the present case were “insiders”?
The crucial question was whether the Traders were insiders. There were two aspects to this. One was that the fact that the Traders were not connected with the Company but they were connected with the Acquirer. Secondly, even with regard to their connection with the Acquirer, the Traders were not connected in any of the forms specified in the Regulations. The question was whether they could still be deemed to be connected with the Acquirer.

For the first aspect, the issue was whether the Traders need to be connected with the Company whose shares were dealt in, or whether they can be connected to any company. The common understanding is that the inside information usually emanates from the Company whose shares are traded in. A person is closely connected with such company as officer, consultant, director, etc. and becomes aware by virtue of such connection about UPSI. He then trades, based on such UPSI. Thus, a connection with any other company ought not meet the requirement. However, SEBI relied on an earlier decision of the Securities Appellate Tribunal (“SAT ”) which had held that the connection may be with any company. Since the Traders were shown, as is seen later, connected with the Acquirer company, it was held that this was sufficient.

The following words of the SAT in V.K. Kaul vs. Securities and Exchange Board of India (Appeal No. 55 of 2012) were relied on:-

“Regulation 2(e) defines ‘insider’ to mean any person who, (i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company or; (ii) has received or has had access to such unpublished price sensitive information. It needs to be appreciated that the clause makes a distinction between ‘the company’ and ‘a company’. When it refers to ‘the company, the references is to the company whose Board of Directors is taking a decision and when it refers to ‘a company’, the reference is to a company to which the decision pertains. This has been explained even by the adjudicating officer by way of an illustration in para 30 of his order dated January 4, 2012, in the case of Mr. V. K. Kaul as under:-

“30. To illustrate, if noticee’s submission is accepted then a situation will arise wherein a Director of the company X cannot be held guilty of insider trading if he trades in the scrip of company Y based on the UPSI, that company X is going to make a strategic investment / placing a huge purchase order for plant and machineries in company Y. Such a scenario will defeat the purpose of PIT Regulations.”

We are, therefore, of the view that the term price sensitive information used in regulation 2(HA) is wide enough to include information relating directly or indirectly to ‘a company.’ The solrex had decided to purchase shares of the target company. Here, solrex is ‘the company’ and target company is ‘a company.’ The decision of solrex to purchase shares of the target company is likely to materially affect the price of securities of the target company. Only the insiders of solrex are aware about this decision of the company. If the insiders of solrex are allowed to trade in the shares of the target company ahead of purchase of shares by solrex, surely the trading will be on the basis of insider information. the decision of solrex to purchase shares of the target company is, therefore, UPSI for the insiders of solrex and they are prohibited from dealing in the shares of the target company till such information becomes public. It is not obligatory under the regulations that the upsi must be in the possession or knowledge of ‘a company’ in whose securities an insider of ‘the company’ deals. As long as, an insider of ‘the company’ deals in the securities of ‘a company’ listed on any stock exchange while in possession of UPSI relating to that company, the provisions of regulation 3(i) of the regulations will get attracted.”

The next aspect was whether the traders were connected with the acquirer. the traders were not directors, advisors, etc. of the acquirer. however, the records showed that they had some connection with either the acquirer or companies connected with it. they were involved directly or indirectly with the acquirer in terms of carrying out of certain acts relating to the takeover or otherwise having other connections. the persons who actually traded in the shares were also shown connected and the flow of the UPSI to them was also shown. Based on such findings, SEBI held that the traders had a “temporary professional connection” with the acquirer and hence, were deemed to be connected.

This is relevant for any person connected with a Company, particularly professionals like Chartered accountants. even if they are not statutory auditors and have a one- time connection of any sort, they could be held to have a “temporary professional connection”, and thus deemed to be insiders.

Reliance on Phone/sms records it is interesting to note, how the records of phone/sms between the traders during the critical time when the transactions were carried out were obtained and placed on record. This helped support the case of SEBI.

How to Establish that Insiders Traded while in Possession of UPSI
A regular problem faced in cases of insider trading is how to establish that dealings by insiders were so, while being in possession of UPSI. Not all trades of insiders are automatically insider trading. An additional condition required to be proved is that they were, while in actual possession of inside information. An earlier decision of the sat helped introduce yet another fiction. At that time, the law was worded more strictly and it was required to be proved that the person dealt on the basis of UPSI. However, sat held that once an insider deals in securities, it will be presumed that he has done so on the basis of inside information. SEBI relied on the observation of hon’ble sat in the matter of Rajiv B. Gandhi and Others vs. SEBI (appeal no. 50 of 2007) that:

“We are of the considered opinion that if an insider trades or deals in securities of a listed company, it would be presumed that he traded on the basis of the unpublished price sensitive information in his possession unless he establishes to the contrary. Facts necessary to establish the contrary being especially within the knowledge of the insider, the burden of proving those facts is upon him. The presumption that arises is rebuttable and the onus would be on the insider to show that he did not trade on the basis of the unpublished price sensitive information and that he traded on some other basis. He shall have to furnish some reasonable or plausible explanation of the basis on which he traded. If he can do that, the onus shall stand discharged or else the charge shall stand established.”

Relying on this decision, SEBI held that the insider who trades would be presumed to have traded while in possession of UPSI.

This principle is also important for persons close to the Company which would include Chartered accountants acting as auditors, internal auditors, advisors, independent directors, etc. if they deal in the shares of such a Company, it is possible that they would be presumed to have done so while in possession of UPSI. And then it would be upto them to show how they did not. Thus, such persons may consider adopting a policy to never deal in the shares of a Company in which they are regularly or even temporarily connected.

Whether a Person merely Possessing is UPSI Deemed To be an Insider?
The decision of the sat in Dr. Anjali Beke’s case (Dr. An- jali Beke vs. SEBI (appeal no. 148 of 2005)) was relied on to support the argument that even a non-insider who receives UPSI would be deemed to be an insider person who could violate the regulations if he deals, etc. in the securities. Reliance on this decision explicitly was perhaps necessary since at the time of the alleged acts of insider trading, the law was ambiguous. It was only a few months later that the regulations were amended explicitly and clearly state that a person who merely receives UPSI is an insider.

Reliance on Circumstantial Evidence for Establishing offence of Insider Trading
The next concern arises out of the peculiar nature of insider trading. Many of the ingredients required to prove insider trading are difficult to establish directly. The US Court in rajratnam’s case had held that circumstantial evidence can be relied on in insider trading cases. This decision was applied on by the sat in V. K. Kaul’s case. SAT had observed:-

“…The adjudicating officer has rightly relied on the observations of u. s. Court in rajaratnam case (supra) on the relevance of circumstantial evidence in para 38 of the impugned order which reads as under :-

38. Regarding the issue of relevance of circumstan- tial evidence, the hon’ble district Court southern district of new york in the matter of united states of america V raj rajaratnam 09 Cr. 1184 (rjh) decided on 11.08.2011 has observed as follows: “…moreover, several other Courts of appeals have sustained insider trading convictions based on circumstantial evidence in considering such factors as “(1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the trades or the relationship between the tipper and the tippee.” United States vs. Larrabee, 240 f.3d 18, 21-22 (1st Cir. 2001)…”

The above principles are not in conflict with the regulatory framework prescribed by the Board and can be looked into while deciding case of insider trading under the indian regulatory framework.”

SEBI relied on this decision to rely on various circumstantial evidence in the present case.

Disgorgement of Gains with Interest the gains made by the traders were thus worked out. to that, simple interest @ 12% was added for six years. the traders were also debarred from dealing in the securities markets for specified period of time.

Conclusion
This decision reiterates and emphasises several aspects that need consideration by professionals and executives having any connection to the company. The wide definitions and numerous deeming provisions may result in their own trades, or of persons related/connected to them, being held to be insider trading. Apart from suffering disgorgement of the gains with interest, the person may also suffer penalties, prosecution, debarment and of course, loss of reputation.

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Precedent – Judicial discipline – Third Member is bound to consider judgement of Division bench – CESTAT order was unsustainable for non consideration of law in favour of assessee:

Larsen and Toubro Ltd vs. Commissioner of Central Excise; 2014 (306) ELT 27 (Bom.)(HC)

There was a difference of opinion between the Judicial member and the Technical Member. The appeal before the Tribunal was therefore referred to a Third Member. The Third Member held against the appellant/assessee. Prior to the decision of the Third Member, there was a decision of the Tribunal which supported the appellant’s contention before the Tribunal. That decision was brought to the notice of the learned Third Member before passing the order. The Third Member was bound to consider the judgment of the Tribunal. He, however, did not do so.

Prima facie, at least, even before the Tribunal the position for law appears to be in favour of the appellant. Unfortunately, the third member did not consider the judgment of the Tribunal.

The court also observed that the order of Tribunal was referred not because it has any precedent value in this court but is a indication of what the impugned order of the third member may well have been, had the judgement been considered by the learned third member.

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Precedent – Law declared by Supreme Court – Binding on all High Courts – High Court Judge sitting singly bound by Supreme Court decision rather than Division Bench Judgement which is contrary to Supreme Court. (Constitution of India, Article 141)

Sidramappa and others vs. State of Karnataka and Others; AIR 2014 Karnataka 100 (Karn.)(HC) (FB)

The learned single Judge of Karnataka High Court in a Writ Petition passed an order stating that earlier judgement of a Division Bench of the High Court requires reconsideration and in the absence of any statutory provision empowering him to refer the same to the larger Bench the relevant papers be placed before Chief Justice to examine the question and constitute a larger Bench.

The Hon’ble Court observed that according to Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all Courts within the territory of India. The expression “all courts” means Courts other than the Supreme Court. The decision of the Supreme Court is binding on all the High Courts. In other words, the High Court’s cannot hold the law laid down by the Apex Court is not binding on the ground that relevant provisions were not brought to the notice of the Supreme Court, or the Supreme Court laid down the legal position without considering all the points. The decision of the Apex Court binds as much the pending cases as the future ones. Even the directions issued by the Apex Court in a decision constitute binding law under Article 141. It is pertinent to state that the Supreme Court is not bound by its own decisions and may overrule its previous decisions. It is also pertinent to state that the Apex Court may overrule the previous decisions either by expressly saying so or impliedly by not following them in a subsequent case. Thus, in view of Article 141 of Constitution of India, when there is a decision of the Apex Court directly applicable on all fours to the case on hand, the Learned Single Judge could have decided the Writ Petitions following the decision of the Apex Court, holding that the decision of the Division Bench is contrary to the law laid down under Article 141 of the Constitution of India. Therefore the learned single Judge could decide the petitions in accordance with the law laid down by the Apex Court.

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Guarantor – Mortgage by deposit of title deeds – Liability of Guarantor – Loan taken from bank – Deposit of title deeds with Bank. Section 128-Contract Act, Transfer of property section 58(f).

Allahabad Bank vs. M/s. Shivganga Tube Well and Others; AIR 2014 Bombay 100 (Bom.)(HC)

The original defendant No. 1 had availed a loan of Rs. 10 lakh on for the purposes of purchase of a truck with Bore-Well Rig, Machine, Screw Compressor, Drilling Rig, etc. The original defendant No.1 – the borrower hypothecated the said machinery and its accessories with the plaintiff Bank. At the same time, the defendants No. 2 to 6 i.e., present respondents No. 2 to 6 agreed to stand as continuing guarantors for the original defendant No. 1 in repayment of the loan amount as agreed between the appellant Bank and the defendant No. 1. They agreed to mortgage their respective immovable property. They accordingly delivered their title-deeds. Thus, equitable mortgage by depositing the title-deed was created by these respondents.

All the defendants attended the Himayatnagar branch of appellant Bank and deposited the title-deeds of their respective immovable properties, as detailed in the plaint. They had agreed by executing affidavits regarding the confirmation of the mortgage by deposit of title-deeds and had further agreed that the revival of the loan, if any by the borrower i.e. defendant No. 1 shall bind the mortgagor.

The Appellant Bank filed a suit for recovery of an amount of Rs. 27,76,137/- and for preliminary decree for sale of the mortgaged property for recovery of the said amount was decreed against the borrower-original defendant No. 1, but was dismissed against the guarantors i.e., defendants No. 2 to 6. Hence, the appeal was filed against the guarantors.

The Hon’ble Court noted the difference between “the agreement to mortgage” and “mortgage by deposit of title-deeds”. The mortgage by deposit of title-deeds is defined by section 58(f) of the Transfer of Property Act, 1882.

It is undisputed that the city of Hyderabad is a notified city where the delivery of the title-deeds of immovable property can be made with the intention to create a security thereon.

It is a settled position of law that the mortgage by deposit of title deeds requires no registration. However, if any document is executed, which would show that the mortgagee has, under the said document, mortgaged the property by deposit of title-deeds, then only the registration of the said document is required. However, the contemporaneous document fortifying the “intention to create the security” is neither an agreement to mortgage or a mortgage. The deposit of title-deeds itself with intention in the mind of the person that the said title-deeds are being deposited with intention to create a security thereon, is sufficient to culminate the transaction into a mortgage by deposit of title-deeds. This mortgage by deposit of title-deeds is sometimes called as equitable mortgage, as was prevalent in England. However, the ingredients of the equitable mortgage and the mortgage as defined u/s. 58(f) of the Transfer of Property Act are not identical.

The documents on record, coupled with the affidavits as admitted by the defendant and positively proved by the relevant witness of the plaintiff would show that the title-deeds were deposited with the plaintiff Bank, with an intention to create the security thereon.

The title-deeds of the respective respondents were admittedly put in the custody of the appellant Bank at that time. None of the relevant respondents at any time asked for return of those title-deeds, nor complained of keeping the same in the custody of the Bank.

The documents on record would show that the respondents No. 2 to 6 had intention to create the security for the repayment of the loan availed by the principal borrower. Therefore, they showed their readiness to deposit the title-deeds by various agreements and affidavits and also by placing all the title verification certificate by the Advocates, etc. and ultimately, they deposited the titledeeds with the appellant Bank at Hyderabad branch.

The above facts is sufficient to hold that the respondents No. 2 to 6 stood as guarantors and created mortgage of their property for repayment of the loan advanced to the principal borrower by depositing their title-deeds.

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Frivolous Litigation – State as a Litigant/party – Expenses to be paid personally by officials concerned.

Haryana Dairy Development Co-op Federation Ltd. vs. Jagdish Lal; (2014) 3 SCC 156 (SC)

In the instant case, an amount of Rs. 8,724/- was to be paid to the Respondent employee as reimbursement of his medical claim. The Petitioner Haryana Dairy Development Cooperative Federation Limited filed SLP before Supreme Court. The Court frwoned upon such practice of the petitioner corporation as the corporation must have spent the amount already by filing this petition more than the total amount involved herein.

The Law Commission of India in its 155th report has observed that what is distressing is that the number of pending litigations relate to trivial matters or petty claims, some of which have been hanging for more than fifteen years. It hardly needs mention that in many such cases money spent on litigation is far in excess of the stakes involved, besides wasting valuable time and energy of the concerned parties as well as the Court.

The court directed that the expenses of the litigation shall be incurred by the Managing Director personally who has signed affidavit in support of the petition and it shall not be taken from the Federation.

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Deficiency in service – Mental Agony & harassment – Cost of Litigation-Builder. (Consumer Protection Act section 17).

Col. Sukhawant Singh Saini (Retd.) vs. GBM Builders and Developers P. Ltd.; (State Consumer Disputes Redressal Commission, UT Chandigarh).

The facts, in brief, are that the complainant booked a 2 BHK flat , the price whereof was Rs. 22,50,000/-. He paid a sum of Rs.1.00 lakh, as booking amount, to the builder. The allotment letter, dated 13-10-2011, was issued in favour of the complainant, in respect of the aforesaid flat. Totally, the complainant paid a sum of Rs. 21,50,000 towards the price of the flat, in question. The remaining amount of Rs.1.00 lakh was to be paid by the complainant, at the time of handing over possession of the flat, by the builder (Opposite Party). The Opposite Party, failed to deliver the possession in time. The complainant wrote a number of letters requesting the Opposite Party, to hand over physical possession of the flat. The opposite Party vide letter dated 06-12-2012 intimated the complainant that possession of the flat shall be delivered on or before 15-01-2013. Even on that date, the possession of the flat was not delivered. It was intended that the complainant suffered a lot of mental agony and physical harassment, on account of non-delivery of possession of the flat, in question, by the stipulated date, or non-refund of the amount deposited by him. It was further stated that the aforesaid acts of the Opposite Party, amounted to deficiency, in rendering service, as also indulgence into unfair trade practice. When the grievance of the complainant was not redressed, left with no alternative, a complaint u/s. 17 of the Consumer Protection Act, 1986 was filed claiming from the Opposite Party compensation for mental agony and physical harassment; refund of Rs. 21.50 with interest @18% p.a. from the date of deposit of the said amount; pay interest @10.75% p.a., which was being paid by him (complainant) to the Bank of India, for the loan facility, availed of by him to purchase the flat, in question; etc.

The state commission observed that as per the evidence produced, on record, it is evident that the complainant only booked one flat, bearing No. 498, in the project of the Opposite Party, for a sale consideration of Rs. 22.50 lakh. There is nothing, on record, that the complainant purchased this flat, for commercial purpose with the intention to resell the same as and when there was escalation in prices. Thus the complainant falls within the definition of a consumer, as defined by section 2(1)(d)(ii) of the Act.

The next question, that falls for consideration, is, as to within which period the possession of the flat was to be delivered. It is evident from this document, that the Opposite Party stated therein, that it would try to give possession of the flat by 15-01-2013. It means that possession of the flat was to be delivered, on or before this date. However, there is no document, on record, to prove that either on 15-01-2013 or immediately thereafter offer of possession of the flat, in question was made to the complainant, but he refused to accept the same. Had the construction of the flat, in question, been complete, in all respects, then certainly the Opposite Party would have sent offer of possession of the flat, after 15-01- 2013, to the complainant. Non-sending of such a letter, in itself, indicates that construction of the flat, in question, was not complete, and as such, the question of offer of possession thereof on or after 15-01-2013 did not at all arise. By making a false promise, that the possession shall be offered by 15-01-2013, and failure to abide by the commitment, the Opposite Party was not only deficient in rendering service but also indulged into unfair trade practice.

Even by the time the complaint was filed, the possession of the flat was not offered to the complainant. The Opposite Party utilised the amount, deposited by the complainant, for a sufficient long period. Neither the possession was offered to the complainant, nor refund of the amount, was made to him. Since the Opposite Party failed to deliver possession of the flat by the stipulated date or even by the time the complaint was filed, it was its bounden duty to refund Rs. 21.50 and Rs. 37,028/- (paid as service tax) to the complainant but it failed to do so. It was, therefore, held that the complainant was entitled to the refund of Rs. 21,50,000/- deposited by him towards the price of the flat and Rs. 37,028/- paid by him, towards service tax to the Opposite Party. By not refunding the amount aforesaid, the Opposite Party was deficient, in rendering service.

For the financial loss caused to the complainant on account of non-refund of the amount, deposited by him immediately after the expiry of the stipulated date for delivery of possession of the flat, the complainant was entitled to refund of the aforesaid amounts, with interest @12% interest p.a. from the respective dates of deposits.

As stated above, neither possession of the flat by the stipulated date, was given to the complainant, nor refund of the amounts paid by him, was made. One can really imagine the mental condition of a person, who deposited 95% of the price of the flat, but was neither delivered the possession thereof nor refund of the amounts deposited by him was made. The complainant, thus, suffered a lot of mental agony and physical harassment, on account of the acts of omission and commission of the Opposite Party. Not only this, the complainant shall also not be able to purchase a flat, at the same rate, on account of escalation in prices. Compensation for mental agony and physical harassment and on account of escalation, in prices to the tune of Rs. 1,50,000/- was granted Litigation cost of Rs.15,000/- also granted. (Dated 02-07-2014 complaint Case No. 41 of 2014).

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Accounting for cost of test runs

BACKGROUND
The accounting for cost of test runs raises some very interesting questions both under Indian GAAP and IFRS. Paragraph 16 of IAS 16 states that the cost of an item of plant and equipment includes any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Paragraph 17 enumerates examples of directly attributable cost and includes cost of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition; such as samples produced when testing equipment. However, it does not clearly state what the treatment should be when the net proceeds are greater than the cost of testing. Now consider the following two scenarios.

Scenario 1
The cost of test run is Rs. 100. The samples produced are sold at Rs. 80. Theoretically, two answers are possible. The first answer is to capitalise Rs. 100 and consider Rs. 80 as revenue (P&L). The second answer is to capitalise net, i.e., Rs 20. Nothing is taken to P&L.

Scenario 2
The cost of test run is Rs 100. The samples produced are sold at Rs. 130. Theoretically, the following three possibilities exist.

1. Capitalise Rs.100. Take Rs. 130 to revenue (P&L)
2. Capitalise a negative amount of Rs. 30. Nothing is taken to P&L.
3. Capitalise zero amount. Take Rs. 30 to revenue (P&L).

Interpretation under IFRS
This matter was discussed in the IFRS Interpretation committee. They felt that the way paragraph 17 is written, it is only the costs of testing that are permitted to be included in the cost of the plant and equipment. These costs are reduced by the net proceeds from selling items produced during testing. It is self-evident that if the net proceeds exceed the cost of testing, then those excess net proceeds cannot be included in the cost of the asset. Those excess net proceeds must therefore be included in the P&L.

IFRS Interpretation Committee also relied upon paragraph 21 of IAS 16, which indicates that proceeds and related costs arising from an operation, which is not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management, should be recognised in P&L and cannot be capitalised. Paragraph 21 is reproduced below.

“Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management. These incidental operations may occur before or during the construction or development activities. For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense.”

Based on the above discussion, in Scenario 1, a net amount of Rs. 20 is capitalised. In Scenario 2, zero amount is capitalised, and Rs. 30 is taken to revenue (P&L).

Interpretation under Indian GAAP
The following guidance is available in Indian GAAP. It may be noted that the below mentioned Guidance Note on Treatment of Expenditure During Construction Period is withdrawn, but nonetheless relevant for our assessment, since it does not conflict with any accounting standard with respect to the principle that is being debated.

Paragraph 9.1 of AS 10 Accounting for Fixed Assets

The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price.

Paragraph 9.3 of AS 10 Accounting for Fixed Assets

The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalised as an indirect element of the construction cost.

Paragraph 8.1 of Guidance Note on Treatment of Expenditure During Construction Period

It is possible that a new project may earn some income from miscellaneous sources during its construction or preproduction period. Such income may be earned by way of interest from the temporary investment of surplus funds prior to their utilisation for capital or other expenditure or from sale of products manufactured during the period of test runs and experimental production. Such items of income should be disclosed separately either in the profit and loss account, where this account is prepared during construction period, or in the account/statement prepared in lieu of the profit and loss account, i.e., Development Account/Incidental Expenditure During Construction Period Account/Statement on Incidental Expenditure During Construction. The treatment of such incomes for arriving at the amount of expenditure to be capitalised/deferred, has been dealt with in para 15.2.

Paragraph 11.4 of Guidance Note on Treatment of Expenditure During Construction Period

During the period of test runs and experimental production it is quite possible that some income will be earned through the sale of the merchandise produced or manufactured during this period. The sale revenue should be set off against the indirect expenditure incurred during the period of test runs as suggested in para 15.2.

Paragraph 15.2 of Guidance Note on Treatment of Expenditure During Construction Period

From the total of the aforesaid items of indirect expenditure (one of the aforesaid items included expenditure relating to expenditure on test runs) would be deducted the income, if any, earned during the period of construction, provided it can be identified with the project.

Paragraph 14.5 of Guidance Note on Treatment of Expenditure During Construction Period

Income during the construction or pre-production period should be shown separately in the financial statements (see paragraph 8.1 of this Note).

Conclusion
Based upon the above guidance, it is clear in Scenario 1, that a net amount of Rs. 20 is capitalised and nothing is taken to the P&L. However, in the case of Scenario 2, when the corresponding income is greater than the cost of trial run, neither the guidance note nor the standard are absolutely clear on what should be done. However, the author believes that based on similar arguments produced above in the context of IFRS interpretation, a net amount of zero is capitalised and Rs. 30 is taken to revenue (P&L).

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TS-435-ITAT-2014(Mum) Reuters Transaction Services Ltd vs. DDIT A.Ys: 2008-10, Dated: 18.07.2014

Electronic deal matching services provided through equipment installed at customers’ location would constitute royalty under India-UK DTAA .

Facts:
The Taxpayer, a company incorporated in England and a Tax Resident of UK, is engaged in the business of providing an electronic deal matching systems services which enables authorised dealers in foreign exchange in India (customers), such as banks etc. to effect deals in spot foreign exchange with other foreign exchange dealers. The services are provided against certain monthly charges. Further, the server through which such services are provided is located outside India.

The electronic deal matching system services facilitates the customers to deal in the foreign exchange with the other counterparts who are ready for the transaction of purchase and sale of foreign currency.

In order to avail the above services, the customers entered into two contracts:

• Agreement to provide matching services with the Taxpayer
• Access agreement with an Indian company (I Co), a subsidiary of the Taxpayer, for obtaining equipment in order to avail the above matching services. The customers could avail the services of the Taxpayer only through the equipment and connectivity provided by the Taxpayer through I Co.

Separately, Taxpayer had entered into a marketing agreement with I Co.

The fee for providing the above services would be charged by the Taxpayer from the Indian subscribers and the Taxpayer in turn would remunerate I Co for the marketing and installation services provided by I Co to the customers.

Taxpayer contended that the fee received from its customers in India is in the nature of business profit which is not taxable in India in the absence of a PE as per Article 7 of the India-UK DTAA . Further, such fees did not constitute Royalty or FTS under the India-UK DTAA .

The Tax Authority contended that such fee was Royalty as well as FTS both under the Act as well as the DTAA . Alternatively, I Co constituted an Agency PE for the Taxpayer in India, and the equipment installed by I Co would also constitute a fixed place PE for the taxpayer in India and hence taxable as business profits.

Held:
The nature of service rendered by the Taxpayer includes the information concerning commercial use by the customer. The entire system along with the matching system and connectivity involves processing of customer’s business queries and orders and finding out the matching reply in the shape of counterpart demand or supply for execution of the transaction of purchase and sale of foreign exchange. This system of the Taxpayer is available only to the customers who have been given the access to the information concerning commercial as well as processing the orders placed by the customers.

As per the terms and conditions stipulated in the agreement the Indian customers accept the individual non-transferable and non-exclusive license to use the licensed software programme for the purpose of carrying out the purchase and sale of foreign exchange. The facts on hand is not a case of Payment for access to the portal by use of normal computer and internet facility but the access is given only by use of computer system and software system provided by the Taxpayer under license.

Customers make use of the copyright software along with computer system to have access to the requisite information and data available on the server of the Taxpayer.

Accordingly, by allowing the use of software and computer system to have access to the portal of the Taxpayer for finding relevant information and matching their request for purchase and sale of foreign exchange amount to imparting of information concerning technical, industrial, commercial or scientific equipment work and hence the payment made in this respect would constitute royalty.

Delhi HC decision in the case of Asia Satellite Telecommunications Co. Ltd (332 ITR 340) is distinguishable in the facts of this case. The Asia Sat’s case was based on the finding that the transponder capacity has only a media for uplinking and downlinking of signals of the broadcaster and TV operators to be transmitted to their customers without any manipulation for improvement, whereas in the case on hand, the Taxpayer is providing not only media but also allowed to use the information, store the information on server and even to manipulate and drive the data to anyone for their commercial purpose.

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TS-481-ITAT-2014(Mum) Cosmic Global Ltd vs. ACIT A.Y: 2009-2010, Dated: 30.07.2014

Section 9(1)(vii) – Translation of a text from one language to another is not “technical” in nature, does not fall within the definition of FTS under the Act.

Facts:
The Taxpayer is an India company engaged in the business of providing translation services through the web. For this purpose the Taxpayer availed translation services from translators residing in India as well as outside India.

In respect of fee paid to translators in India, the Taxpayer withheld necessary taxes. However on fee paid to the nonresident (NR) translators the Taxpayer did not withhold tax at source.

The Tax Authority held that the fees paid to the NR translators are technical in nature as per section 9(1)(vii) of the Act and hence was liable to withholding of taxes. Thus the Tax Authority disallowed the payments made to NR translators in computing the business income of the Taxpayer, for failure to withhold the tax at source.

The order of the Tax Authority was upheld by the First appellate Authority. Aggrieved, the Taxpayer appealed before the Tribunal.

Held:
Fee for technical services under the Act is defined to mean any consideration for the rendering of any managerial, consultancy or technical services. The term “technical” is defined by dictionary to mean a service relating to a particular subject, art, craft, or its technique requiring special knowledge to be understood or services involving or concerned with applied and industrial sciences.

In the present case, the Taxpayer is getting the translation of the text from one language to another. The only requirement for translation from one language to the other is the proficiency of the translators in both the language.
Apart from the knowledge of the language, the translator is not expected to have the knowledge of applied sciences or the craft or techniques in respect of the text to be translated. The Translator is not required to contribute anything more to the text that is to be translated nor is he required to elaborate the meaning of the text.

A bare perusal of the definition of FTS under the Act and the dictionary meaning of the word “technical” makes it unambiguously clear that the translation services are not technical in nature. Thus fee paid to NR translators is not FTS u/s. 9(1)(vii) of the Act.

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Lodha Builders Pvt Ltd. & five other group companies vs. ACIT ITAT“E” Bench, Mumbai Before D. Karunakara Rao, (A. M.) and VivekVarma, (J. M.) I.T.A. No.475 to 481/M/2014 A.Y. 2009-10. Decided on: 27-06-2014 Counsel for Assessee/Revenue: P.J. Pardiwala, Sunil MotiLala, Paras S. Savla and Gautam Thacker/Girija Dayal

Section 269SS/269T and section 271D/E – Transactions involving the receipts and payments of loans and advances among the group settled by way of “journal entries” – Penalty imposed deleted on the ground of “reasonable cause.”

Facts:
The assessees and five other appellants belong to the Lodha group which is engaged in the business of land development and construction of real estate properties. There were large number of transactions aggregating to Rs. 495.23 crore involving the receipts and payments of loans and advances among the group settled by way of “journal entries”. During the assessment proceedings, the AO asked the assessee to show cause as to why loans were accepted/repaid otherwise than by the account payee cheque/draft.

In this regard, assessee informed that the said loans/advances were transacted with the sister concerns only by way of “journal entries” and there were no cash transactions involved. The core transactions were undertaken by way of cheques only. It was further explained that the assessees resorted to the journal entries for transfer/assignment of loan among the group companies for business consideration. Journal entries were passed to transfer/ assign liabilities or to take effect of actionable claims/ payments received by group companies on behalf of the assessee. It was contended by the assessee that the said transactions with the sister concerns were for commercial expediencies which should be kept outside the scope of the provisions of sections 269SS/269T of the Act. The journal entries were also passed in thebooks of accounts for reimbursement of expenses and for sharing of the expenses within the group to which the provisions of section 269SS of the Act have no application and for this, the assesses relied on the judgment of the Madras High Court in the case of CIT vs. Idhayam Publications Ltd. [2007] 163 Taxman 265. It also relied on the CBDT Circular No.387, dated 6th July, 1984 and contended that the purpose of introducing section 269SS of the Act was to curb cash transactions only and the same was not aimed at transfer of money by transfer/assignment of loans of other group companies.

The Addl. CIT relied on the decision of the Bombay High Court in the case of Triumph International (I) Ltd., dated 12-06-2012 reported in 22 taxmann.com 138/345 ITR 370 where it was held that where the loan/deposit were repaid by debiting the amount through journal entries, it must be held that the assessee has contravened the relevant provisions. According to him even bona fide and genuine transactions, if carried out in violation of provisions of section 269SS of the Act would attract the provisions of section 271D of the Act. Accordingly, he levied a penalty of Rs. 495.24 crore u/s. 271D.

On appeal, the CIT(A) relied on the judgment of the Bombay High Court in the case of Triumph International (I) Ltd. dated 17-08-2012, for the proposition that receiving loans and repayments through “journal entries” constitutes “violation” within the meaning of provisions of section 269SS and 269T of the Act.

Held:
According to the Tribunal, the CIT(A) ignored the finding of the Bombay High Court in the case of Triumph International (I) Ltd. which judgment was relied on by him viz., that “the transactions in question were undertaken not with a view to receive loans/deposits in contravention of section 269SS but with a view to extinguish the mutual liability of paying/receiving the amounts by the assessee and its sister concern to the customers. In the absence of any material on record to suggest that the transactions in question were not reasonable or bona fide and in view of section 273B of the Act, we see no reason to interfere with the order of the Tribunal in deleting the penalty..”. Further, referring to the judgment of the Bombay High Court in the case of Triumph International (I) Ltd. dated 12-06-2012, the Tribunal agreed with the revenue that the journal entries are hit by the relevant provisions of section 269SS of the Act. However, it added that as per the said judgment completing the “empty formalities” of payments and repayments by issuing/receiving cheque to swap/square up the transactions, was not the intention of the provisions of section 269SS of the Act, when the transactions were otherwise bona fide or genuine. Such reasons of the assessee constitute “reasonable cause within the meaning of section 273B of the Act. The Tribunal further noted that there is no finding of AO that the impugned transactions constituted unaccounted money and are not bona fide or not genuine. In the language of the Bombay High court, “neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment”.

According to the Tribunal, admittedly, the transactions by way of journal entries were aimed at the extinguishment of the mutual liabilities between the assessees and the sister concerns of the group and such reasons constitute a reasonable cause. The Tribunal further noted that the causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by accountpayee cheque/bank draft, was on account of the following, namely: alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/ MIS purpose; consolidation of family member debts; and correction of errors. According to it, all these reasons were, prima facie, commercial in nature and they cannot be described as non-business by any means. The tribunal agreed with the assessee as to why should the assessee under consideration take up issuing number of account payee cheques/bank drafts which can be accounted by the journal entries. What is the point inissuing hundreds of account payee cheques/account payee bank drafts betweenthe sister concerns of the group, when transactions can be accounted in books using journal entries, which is also an accepted mode of accounting? In its opinion, on the factual matrix of these cases under consideration, journal entries should enjoy equal immunity on par with account payee cheques or bank drafts. Therefore, the tribunal held that though the assessee had violated the provisions of section 269SS/269T of the Act in respect of journal entries, the assessee had shown reasonable cause and, therefore, the penalty imposed u/s. 271D/E of the Act were not sustainable.

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TS-418-ITAT-2014(Mum) MISC Berhad vs. ADIT A.Ys: 2004-08 and 2009-2010, Dated: 16.07.2014

Charter arrangement includes slot charter arrangement and covered within the ambit of Article 8, shipping income, of India-Malaysia DTAA ?Facts: Taxpayer, a tax resident of Malaysia, is engaged in the business of shipping in international traffic. The Taxpayer operates ships that are either owned by it or taken on lease. Insofar as the shipping business from India is concerned, the Taxpayer books cargo from shippers/customers in India up to the final destination port, with all risks and responsibility. The bill of lading is issued for the entire voyage.

The Taxpayer, under a slot charter arrangement, arranges for transport of cargo from the Indian port to the hub port, using the service of feeder vessels which are owned by a third party.

From the hub port, the Taxpayer’s containers are transhipped on the mother vessel, which are owned/ leased by the Taxpayer, and from the hub port it is carried to the final destination port.

The Taxpayer had claimed the benefit of Article 8 of the India-Malaysia DTAA on the entire freight income which comprised two components: (i) Transportation of cargo in international traffic by operating ships owned or pooled by the Taxpayer. (ii) Carriage of goods by feeder vessels belonging to another shipping line wherein the Taxpayer did not have any pool arrangements.

However, the Tax Authority allowed the benefit of Article 8 on the first component and denied the benefit of Article 8 on freight income on the second component. The Tax Authority contended that Article 8 of India-Malaysia DTAA applies only when the taxpayer is the owner, lessee or charterer of a ship.

Held:
Article 8(1) of the India – Malaysia DTAA provides that profits derived by an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in the State in which the ships are operated. The activity of “operation of ships” carried on by a person cannot be understood merely as a person who operates the ships. It has to be understood in the broader sense of carrying out shipping activity. Carrying out of shipping activity could be as an owner or as a lessee or as a charterer of a ship. Where the word “owner” has to be inferred as a person who owns a ship and the word “lessee” as one who owns a ship for a given lease period, the word ”charterer” has to be understood as a person who charters/hires a ship for a voyage.

Reliance was placed by the Tribunal on several definitions and Bombay HC decision in the case of Balaji Shipping UK Ltd. [253 CTR 460] to support the following:

• Operation of a ship can be done as a charterer who does not mean to own or control the ship, either as an owner or as a lessee.
• Charterer is a hirer of a ship under an agreement to acquire a right to use a vessel for transportation of goods on a determined voyage, either the whole/part of the ship in a charter party agreement.
• The word “charterer” includes a voyage charter of part of a ship/slot, since it is an arrangement to hire space in a ship owned and leased by other persons.

The concept “charterer of ships” under the Act includes slot charter arrangement. The facility of slot hire arrangement is not merely an auxiliary or incidental activity to the operation of ships, but is inextricably linked to such activity.

The risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting cargo of a person who has hired the ship. The risk of the Taxpayer is towards its customers with whom it has agreed to transport the cargo.

Transportation of cargo in the container belonging to the Taxpayer from the Indian port i.e., the port of booking to the hub port through feeder vessel by way of space charter/ slot charter arrangement falls within the ambit of the word “charterer”. This component cannot be segregated from the scope of “operation of ships” as defined in Article 8 of India- Malaysia DTAA .

The voyage between the Indian port to the hub port through feeder vessel and from the hub port to the final destination port through mother vessel owned/leased by the Taxpayer are inextricably linked and there is complete linkage of the voyage. Therefore, the entire profits derived from the transportation of goods carried on by the Taxpayer is to be treated as profits from operation of ships and, therefore, the benefit of Article 8 cannot be denied to the Taxpayer on the part of the freight from voyage by the feeder vessels.

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Document Gift or relinquishment deed-Determination- Stamp Act, 1899, Article 55

Srichand Badlani vs. Govt. of N.C.T. of Delhi & Ors. AIR 2014 (NOC) 539 Del.

One of the co-owners can relinquish his share in a co-owned property in favour of one or more of the coowners. The document executed by him in this regard would continue to be a relinquishment deed irrespective of whether the relinquishment is in favour of one or all the remaining co-owners of the property. There is no basis in law for the proposition that if the relinquishment deed is executed in favour of one of the co-owners, it would be treated as a Gift deed. The law of stamp duty (as applicable in Delhi) treats relinquishment deed and gift deed as separate documents, chargeable with different stamp duties. It is not necessary that in order to qualify as a relinquishment deed, the document must purport to relinquish the share of the relinquisher in favour of all the remaining co-owners of the property. Even if the relinquishment is in favour of one of the co-owners, it would qualify as a relinquishment deed.

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Consent Decree – Appeal not maintainable – Party to approach the court which had recorded compromise and passed decree and establish that there was no compromise. [CPC O. 23 R.3]

Smt. Lajja Devi vs. Khushi Ram Prajapat, AIR 2014 (NOC) 510 (Raj.)(HC.)

The Civil Misc. Appeal had been filed against the judgement and decree dated 05-11-2011, passed by the District Judge, Alwar whereby a consent decree u/s.13B of the Act of 2005 had been passed dissolving the marriage between the appellant–wife and the respondent-husband.

It was contended that the appellant is an absolutely illiterate lady and was married to the respondent on 31- 01-2009. It is submitted that the judgment and decree dated 05-11-2011 purportedly by consent for dissolution of marriage has been obtained fraudulently and the appellant at no point of time signed an application u/s. 13B of the Act of 2005, nor even entered the witness box before the District Judge, Alwar nor make any statement as attributed to her before the learned trial court. It is submitted that the judgment and decree for dissolution of marriage on 05-11-2011 is absolutely fraudulent and in fact an outcome of criminal enterprise.

The Court observed that section 96(3) CPC categorically states that no appeal shall lie from a decree passed by the court with the consent of the parties. There is thus a clear statutory prohibition against filing of an appeal against a consent decree. Thus, the court held that u/s. 96(3) CPC, an appeal against a consent decree is not maintainable.

The Hon’ble Supreme Court in the case of Pushpa Devi Bhagar (D) by LR vs. Rajinder Singh & Ors. [AIR 2006 SC 2628 (1)] had the occasion to deal with a situation where a consent decree was sought to be impugned in appeal.

The Hon’ble Court observed that the position that emerges from the amended provisions of Order 23, can be summed up thus :

(i) No appeal is maintainable against a consent decree having regard to the specific bar contained in section 96(3) CPC.

(ii) No appeal is maintainable against the order of the court recording the compromise (or refusing to record a compromise) in view of the deletion of clause (m) Rule 1, Order 43.

iii) No independent suit can be filed for setting aside a compromise decree on the ground that the compromise was not lawful in view of the bar contained in Rule 3A.

(iv) A consent operates as an estoppel and is valid and binding unless it is set aside by the court which passed the consent decree, by an order on an application under the proviso to Rule 3 of Order 23.

Therefore, the only remedy available to a party to a consent decree to avoid such consent decree, is to approach the court which recorded the compromise and made a decree in terms of it, and establish that there was no compromise. In that event, the court which recorded the compromise will itself consider and decide the question as to whether there was a valid compromise or not. This is so because a consent decree, is nothing but contract between parties superimposed with the seal of approval of the court. The validity of a consent decree depends wholly on the validity of the agreement or compromise on which it is made.

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When Professionals have to run their firms…….

Professionals are a unique blend of people who not only have to produce (i.e., service and manage clients), but also have to manage their flock (i.e., their people). When these professionals start assimilating management knowhow, they start shaping their firm’s destiny. Management knowhow usually comes very late in the day to most professionals and often from one’s own experiences and pitfalls; which means that the firm may have suffered multiple consequences till then. These could be in terms of stagnant growth, losing talented professionals, making do with mediocrity, or becoming a second rated firm for their “target” client segment.

Some of the questions that need to be soul searched are:

1. What is it that makes “running a firm” so difficult?
2. Why do we often hear that he is great tax professional, but a lousy leader of people?
3. Why do we often hear that he is a good people person, but lacks the technical skills to become a partner?
4. Why do talented professionals leave good firms?

Similarly, there are questions that abound within professionals that merit serious consideration.

The one word that seeks to address all of the above is “Leadership”.

When professionals have to run their firms…… how can you empower professionals to run their firms? Are they born with such talent? Can these abilities be imparted? Do these abilities need to be upgraded every few years? The answer is a resounding YES.

Almost everyone can be trained to be a good manager. And each good manager can develop himself to become a great leader.

A true professional will primarily concern himself with knowledge acquisition and upgradation, synthesis of facts and solution formulation for clients, and set a precedent for others to be inspired from and emulate. Additionally, he will be looking at market forces – competitors, new players, regulators, associates and other stakeholders, and constantly evaluate and reposition his firm’s strategy. He will be constantly mentoring his team and providing them valuable feedback on how they should be motivated to embrace the challenges of the profession. Professionals who excel at all of these are running their firms successfully.

In pursuit of the above goal of running a firm successfully, there are challenges galore:

? Analysis and interpretation of professional standards, law and regulations
? Human resources management
? Client servicing and delivery
? Risk Management and accountability
? Ethics and values
? Professional upgradation – Life Long Learning

ATTRIBUTES
One can look at the following attributes for a professional who is trying to lead his professional service firm (“PSF”) and the way to think about implementing and executing:

Focus:
Often when professionals are asked “what is the vision of your firm” and someone says to be the market leader or to be the best or to excel in so and so, it is often an empty rhetoric. There is no vision statement written nor do the other partners and/or the managers or even the associates are completely clueless on the founder/ partner’s vision for the firm. It is of paramount importance that there is laser focus (relentless) on the goals of the firm. The firm leadership in an inclusive manner defines the goals. It is the collective responsibility of each member of the firm to ensure that the goals are met. When there is an intent backed with adequate time and resources and coupled with “tone at the top”, goals will get executed. The quality of the execution is purely a derivative of passion and relentless focus.

Planning:
Planning comes naturally to professional service firms who manage projects, e.g., an audit firm is used to planning an audit engagement where there is deployment of resources (team members) and there is a time bound expectations of the final audit report. A well planned engagement is more likely than not going to result into a successful engagement. Conversely, professionals, especially sole practitioners and smaller firms who do not plan adequately often run into cost over runs due to delayed and inefficient completion of engagements. Project management principles always suggest efficient planning as the corner stone of any project.

Execution:
This brings us to execution. No professional service firm can grow or even sustain itself without quality execution and the resultant client satisfaction. Again, one has to remember the mathematical model of clients pay for lack of knowledge or ability. Execution drives the fair market value in the equation. At the end of the day what every client wants from a professional is a solution to their problem. Execution directly impacts the professionals’ perception in the eyes of the client. Professionals who deliver solutions to complex problems are considered premium professionals i.e., the high end intellectual class of professionals. Those who provide expertise and experience are the second category who command a relative premium over the general practitioner. This category primarily comprises of professionals with grey hair i.e. professionals with solid experience and a fair degree of expertise. The rhetoric is “trust us: we have been through this before”. The final category is out friendly neighborhood, general practitioner. He is the go to guy for all first level problems and for the bread and butter solutions.

Now, execution is laser focused in the first category of the premium expert as it is time which is very scarce and therefore commanding a very high premium for these professionals. Their processes are geared up to provide high quality focused execution. No wonder they are at the top of their game.

In the second category, execution is clinical and professional.

In the third category of the general practitioner, execution standards greatly differ from one professional service firm to another. Those firms that practice a high degree or high quality of execution focus will outshine the rest.

Solution:
Professional service firms have to learn to be solutions focused and not be perceived as problem creators or query raisers. Each business has its own dynamic of the professional problems and challenges. A professional service firm that believes in problem solving and thinking about solutions for its clients is a hands down winner. It is this solution centricity that brings us closer to client centricity: one of the key attributes of successful professional service firms. The culture of the firm has to encourage individuals into constantly thinking about client solutions. This again ties in to our model of clients pay for value.

Professionals get paid for the value they deliver. This is not just a clichéd statement. In the ever-growing complex environment, the larger organisations have in-house teams for all vital functions.

Example: It is not uncommon to have a separate M&A team that focuses on new acquisitions/inorganic growth opportunities. If insourcing is a given, why should a client pay to a consultant or a professional advisor? In a real world situation clients pay because either they do not know the solution or they do not know enough about the subject or even if they know, they may not have the ability to be sure about a final opinion – which is demanded by regulations or otherwise. Thus, when clients pay for value, what they are essentially doing is paying for the lack of knowledge and/or ability and/or time. Simply put,

Clients pay for value = Fair market value of lack of knowledge or ability or time

Value is what is perceived and what is delivered. A solution to a complex problem is value delivered, so also is out of the box thinking or innovative application of a tax position or a tax rule, such that it reiterates a client position or saves taxes for a client.

Often, clients are habituated to pay for what is not within their realms of expertise or functional subject matter area. Sometimes it is also to cover oneself from a potential risk of an adverse outcome.

Thus, when a professional demonstrates knowledge and ability to execute, if he delivers significant value, he can often command a premium on his normal charge out rates.

Dynamic Forces in Market Place:

Each country is constantly revisiting the relevance of accounting, tax and business rules and constantly looking at ways to keep them updated. Business transactions evolve constantly and the level of complexity keeps on growing. Demand and supply forces generate lot of incongruity between what is and what ought to be. In such a situation, the dynamic forces in the market place takeover and dictate how a particular profession will grow and respond to these forces. Businesses often reach out to the professional firms in terms of being the harbinger for change. It is upto the professional service firms to create systems that allow rapid response to these dynamic forces. A professional service firm has to be in alignment with the 7-S’ framework1 so as to seize the incongruency and the resultant opportunities that are thrown up.

Clients tend to expect real time responses to questions and day to day challenges. PSFs have to be organised and geared up to provide rapid responses to meet the client need and to answer “what is value to the client?”

III. Counseling vs. Advocacy

Advocacy by definition is all about articulating one’s professional ideals and channelizing the technical knowledge to a given client challenge and finally tying all of these together, to communicate the professional’s intent. It is of deep importance that a PSF leader wears a hat of an advisor when it comes to dealing with a client. It is often found that a deep dividing line can be created between completing a job versus providing professional advice/counseling. To meet this gap, if a professional wears the hat of an Advisor, it is far more permeable to further a client’s interest.

Counseling is all about conveying a point of view to a client. Thereafter, providing alternative scenarios of possible outcomes and associated results.

In contrast, advocacy is sheer representation of a client’s position before a target interest group (“TIG”). This TIG could be a regulatory authority, a court of law, an arbitration panel, a policy maker or even a client interest group. It is clear that when a client’s position is to be conveyed across this broad spectrum, it is the art of advocacy that helps remove all communication barriers and synthesises a technical argument in a manner that the TIG can see the underlying merit and accept the arguments.

Example: The eminent jurist, late Shri Nani Palkhivala, in the case of Kesavananda Bharati vs. the State of Kerala, articulated the matter before the Supreme Court and outlined the Basic Structure doctrine of the Constitution. The Basic Structure doctrine forms the basis of a limited power of the Indian judiciary to review, and strike down, amendments to the Constitution of India enacted by the Indian parliament which conflict with or seek to alter this basic structure of Constitution. Such was the power of his advocacy, that recalling Mr. Palkhivala’s performance during the hearing of the review petition, Justice Khanna remarked, “It was not Nani who spoke. It was divinity speaking through him.” Justice Khanna was speaking for an astounded and grateful nation.

It is therefore important for professionals to learn the art of advocacy as that will put them in good stead when providing representation and litigation advisory services to their clients.

Values, integrity, ethics

A professional is normally called upon for implementing any new policy or regulation. The members of the public trust a professional and inbuilt in that trust is integrity, values and ethics.

Integrity is a personal virtue, an uncompromising and predictably consistent commitment to honour moral, ethical, spiritual and artistic values and principles.

In ethics, integrity is regarded by many as honesty and truthfulness or accuracy of one’s actions.

Values can be defined as broad preference concerning appropriate courses of actions or outcomes. Values reflect a person’s sense of right and wrong or what “ought” to be. Types of values include ethical/moral values, ideological (religious, political) values, social values and aesthetic values. Values have been studied in various disciplines such as anthropology, behavioral economics, business ethics, corporate governance, political sciences, moral philosophy, social psychology, sociology and theology.

Nothing summarises this better than the phrase, “Doing the right things”..

Leadership is all about doing the right things….

management is doing things right, said Peter F. Drucker.

It is so important for the leader in a PSF to set the tone about doing the right things. This, by implication, clearly means that always a leader has to focus on the right path. This is often tough and full of obstacles. Pursuing the right path is never easy and is like traversing a road full of twists and turns. One can never know what to expect at the next juncture. One can expect several resistances on the way including from one’s own fraternity in the firm. It is during this gruesome journey when the mantle of leadership is tested to its core. At that point, a leader of the PSF should consider the right path.

It is normally easy to take a convenient way out, which is full of short cuts and is devoid of any long term substance or depth. To add to this, the temptation of short term positive results create an indiscretion in one’s mind and a leader is often tempted to follow this wrong path in pursuit of short term gains. It is here that a true leader amplifies the spirit of leadership by pursuing the right path and embodying the universally acclaimed principle of doing the right things. The result is often long lasting and sustained and helps creating a firm that lasts and endures generations.

Zero tolerance:

It is important for a PSF to set a culture of zero tolerance for inappropriate conduct, accepting delivery that is less than optimal and enduring professionals who show scant respect for the basic tenets of professional ethics. The survival of individuals within a PSF environment that is cultured with zero tolerance goes a long way in establishing the righteousness and forbearance of morality, ethics and values, integrated with the basic social fibre and the deep rooted belief in doing the right things for the PSF. Zero tolerance also sets a clear roadmap for growth and sustenance of a PSF. All the firms that have grown and sustained over decades have shown tremendous affinity to the concept of zero tolerance.

Fearless approach:

Absolute clarity in one’s technical abilities leads to conduct which is fearless. It is often said that when there is nothing to lose, there is nothing to fear. Once a professional accepts that the final results are not in one’s hands, and therefore one should not endlessly worry about the outcome of a particular matter. What is more relevant and important is that the professional has given his or her best to a particular client situation and there is no technical deficiency in the final product. Thereafter, if a different view is taken by a competent authority, it is not really a reflection of the professional’s quality of delivery. Thus, there cannot be a question of aspersing any doubt on the technical ability of the professional. At that stage, the professional can truly find a sense of equilibrium in his professional practice. His “Dharma” is to conduct himself fearlessly and the resultant outcome will always be optimum.

Client centricity:

Quality work is not equivalent to quality service. If a professional in a PSF can ensure that client service is accorded paramount importance alongside the quality of the client delivery, what he would have created is a culture of “Client centricity” in the firm. All teams of various practice areas would keep the client at the centre whilst rendering their professional services. The client should feel that his or her needs and sensitivities are being addressed contemporaneously by the client service team. Client centricity also deals with ensuring that we do a better job than our competitors at listening to our clients and working out at finding out what they like and don’t like about dealing with us. We also have thoughtful, well executed plans to invest our time and resources in growing relationships with key clients, thereby earning and deserving their trust and future business. Finally, it deals with laying a greater emphasis in the firm’s measurement and reward systems on growing existing client relationships, rather than just pursuing new accounts and “rain-making”.

In conclusion

When professionals have to lead and run their firms, a lot of the above needs to be implemented so as to sustain the firm. And to grow the firm, the leadership of the PSF has to connect the firm to the future and connect the professionals to the firm. Leaders will be expected to set direction, ensure execution, secure commitment and lead by example.

shailesh.kwebmaker

An auditor’s expert – a mere specialist or a Man Friday?

Where an enterprise involves an expert to provide information necessary for the preparation of the financial statements, the auditor would need to decide whether he has the requisite knowledge and experience to evaluate on his own, the work performed by the expert or whether he needs to engage an ‘auditor’s expert’ so as to decrease the risk that material misstatement will not be detected.

In the previous article, we explained aspects that an auditor would need to consider where he himself chooses to evaluate the work of the expert rather than employing an ‘auditor’s expert’. We will now focus on audit considerations where an auditor elects to engage his own expert. SA 620 provides the requisite guidance in this regard.

An auditor’s expert refers to a person or organisation possessing expertise in a field other than accounting or auditing, employed or engaged by the auditor to assist him to obtain sufficient appropriate audit evidence for the purpose of the audit. SA 620 accentuates the need for the auditor to evaluate the expert’s objectivity and to establish a proper understanding with the expert of the expert’s responsibilities for the purposes of the audit.

An auditor’s expert could be an internal expert or an external expert. An auditor’s internal expert may be a partner or staff of the auditor’s firm or of a network firm. The internal expert could therefore be subject to quality control policies and procedures of the auditor’s firm. The auditor would be in a better position to exercise oversight over the functioning of the expert where he engages an internal expert.

Whereas an auditor’s external expert is not a member of the engagement team and may not be subject to quality control policies and procedures instituted by the audit firm. Where the auditor engages an external expert, he would need to exercise greater diligence in evaluating the objectivity of the external expert. Some of the factors that the auditor should be cognisant of while engaging an external expert are:

i. Enquire from the client of any interest or relationship that the client has with the auditor’s external expert that may affect the expert’s objectivity.

ii. Discuss with the expert whether he has any other interest in the client other than the present engagement for which he is being engaged by the auditor. Interests and relationships that may be relevant to discuss with the auditor’s expert include financial interests, business and personal relationships and provision of other services.

iii. Discuss whether there are any safeguards to prevent his objectivity from being impaired. Such safeguards could be in terms of code of conduct/independence requirements as prescribed by the professional body of which the expert is a member.

iv. The auditor should consider obtaining a written representation from the auditor’s external expert about any interests or relationships with the entity of which that expert is aware.

Other aspects that the auditor needs to consider while engaging internal or external experts are:

i. Whether the work of the auditor’s expert relates to a significant matter that involves subjective and complex judgments.
ii. Whether the auditor’s expert is performing procedures that are integral to the audit, rather than being consulted to provide advice on an individual matter.
iii. The competence, capabilities and objectivity of the auditor’s expert.
iv. Obtaining an understanding of the auditor’s expert’s field of expertise.
v. The nature, scope and objectives of the auditor’s expert’s work are agreed between the auditor and the auditor’s expert, regardless of whether the expert is an auditor’s external expert or an auditor’s internal expert.
vi. Whether the auditor’s expert will have access to sensitive or confidential entity information.

Application of SA 620 in practice
• Engagement of auditor’s internal expert
Due to complexities involved in various matters, which in turn leads to specialisation, many firms have separate departments which offer direct tax, indirect tax, transfer pricing and other advisory services. These departments employ professionals other than qualified accountants as well like lawyers, engineers, management graduates, corporate finance professionals etc., for rendering tax and advisory services.

It is a usual practice for auditors to refer client’s matters involving direct and indirect taxes having implications on financial reporting to tax specialists within their firm. These specialists need not necessarily be qualified accountants (could be tax lawyers). An illustrative list of factors that need to be borne in mind are:

a) Such specialists would be subject to relevant ethical requirements including those pertaining to independence.

b) Where an auditor engages such internal experts, it is important that such experts understand the interrelationship of their expertise with the audit process.

c) The fact that the auditor would be involving an internal expert from a different service line should be clearly articulated and agreed to in the terms of engagement agreed with the client.

d) T here should be a clear agreement between the auditor and the internal expert covering aspects such as, who would test the source data, consent of the expert to discuss his findings or conclusions with the client, whether the auditor would get access to and could retain the work papers of the expert and the manner and form of the report/findings that would be communicated by the expert.

For example, the auditor may seek assistance from an internal tax expert to evaluate the likelihood of pending cases involving tax demands raised by tax authorities being decided against the client. In such cases, there needs to be a clear agreement as to whether the internal expert would evaluate only the likelihood of the demands fructifying in favour or against the client or would the tax expert also comment on the adequacy of the tax provisions carried in the books. Likewise, in order to obtain comfort on the adequacy of tax expense/provision, the auditor may seek clearance from his internal tax expert on whether the transactions with related parties are at the arms’ from a transfer pricing perspective.

Similarly, the auditor may seek clearance from indirect tax experts on disputed indirect tax cases involving service tax, customs duty, excise etc. from the perspective of recording a provision or disclosure as contingent liability or otherwise.

A vital factor that the auditor should be cognisant of is whether the tax specialist (auditor’s internal expert) is rendering tax advisory services to the client. In such cases, the auditor needs to assure himself that the position advocated by the tax specialist in respect of tax matters that the audit team has requested for evaluation is not in any manner influenced by the existing relationship that the tax specialist has with the client. The auditor should be mindful of whether the quantum of fees billed by the tax specialist would in any manner impair the objectivity of the tax specialist in providing his clearance.

Another area where an auditor may seek assistance from an internal expert is testing of automated IT controls surrounding an accounting system to the extent that such controls have a bearing on financial reporting. Where clients deploy sophisticated IT systems to process large amounts of data for financial reporting, it may not be possible for the auditor to perform substantive testing manually. Take for instance, testing of revenue for a telecom client involving millions of subscribers or testing of interest on deposits accepted by bank having thousands of deposit accounts. In such cases, the Company would need to deploy high end ERP systems to initiate, record, process and report transactions. Given the IT environment in these enterprises, one would need to engage IT experts to test the general IT controls and application controls. The auditor may engage his internal expert having expertise in information technology to assist him in testing the controls. This would entail sharing of sensitive client data with the internal expert. Here again, the auditor would need to ensure that adequate safeguards are in place to maintain confidentiality of client information that is shared with the IT expert. Further, the auditor would need to verify the origin of the data, obtain an understanding of the internal controls over the data and review the data for completeness and internal consistency.

Another practical example of involvement of auditor’s internal expert relates to the involvement of specialists in corporate finance/financial risk management for testing the valuation of complex derivatives, business purchase, brand valuation etc. In these cases, management would have obtained the valuation of the derivatives/business purchase from a management expert and the auditors would need to obtain assurance that the valuation is appropriate. Given the highly technical nature of the valuation, an auditor may engage an internal expert to evaluate the underlying assumptions and methods for arriving at the valuation.

Engagement of auditor’s external expert

Typically, general insurers need to make an estimate on the ultimate cost of claims to know the full cost of paying claims in order to set future premium rates. Further, they also need to set up reserves in their accounts to ensure that they have sufficient assets to cover their liabilities. Such reserves are in the form of Incurred But Not Reported (IBNR) and Incurred But Not Enough Reported (IBNER).

Assuming a year end of 31st March, IBNR claim reserve is required in respect of claims that have occurred before 31st March, but the claim has not yet been reported to the insurer whereas IBNER is required in respect of claims that have been reported, but not yet closed.

In other words, IBNR is the liability for future payments on losses which have already occurred but have not yet been reported in the insurer’s records whereas IBNER refers to expected future development on claims already reported (i.e., claims which have not yet been recorded in full to its ultimate loss value).

Reserve for IBNR/IBNER is recorded by management based on actuarial valuation carried out by a management appointed actuary. In such determination, the appointed actuary follows the guidance issued by the professional body governing the actuarial profession in concurrence with the directions issued in this regard by the statutory authority regulating insurance business. The quantum of such reserves would be material to the financial statements of the insurance company.

In India, auditors usually include in their report a comment to the effect that they have placed reliance on the management appointed actuary for valuation of liabilities for IBNR and IBNER claims.

Auditors in certain jurisdictions overseas may appoint their own actuary(external expert)to assess the appropriateness of management’s judgments and assumptions used in the calculation of the reserves for reported claims. The actuary would review the methodology and assumptions used for calculating the reserve and comment whether they are in line with the related regulations and also comment on the reasonableness.

The auditors would nevertheless need to have discussions with the client and the actuaries and would need to perform the following with the assistance of its own expert:

Determine the client’s overall methodology for generating the reserves for reported claims including changes compared to the previous period.

Assess whether the auditor appointed actuary has adequately reviewed the appropriateness of managements judgments and assumptions used in the calculation of the reserves.

Assess whether the overall reasonableness of the reserves for reported claims is appropriate given the consideration of historical evidence of the reasonableness of the previous periods level of the reserves for reported claims.

Perform reconciliation of net earned premium, net claims paid together with net claims outstanding as appearing in the financial statements and the actuarial data inputs used by the actuary for the IBNR/IBNER computation.

Closing remarks

The decision of auditors of whether to employ their own experts or otherwise, should be taken only after very careful consideration of the risk of material misstatement in the relevant area of the financial statements and scrutiny of the status and the work of the management’s expert. Any decision in this regard should be influenced by the knowledge that, ultimately, the audit opinion is the sole responsibility of the auditor, and that this responsibility is not reduced by reliance on the work of a management’s expert or an auditor’s expert.

In terms of requirements of Indian GAAS, the auditor is not permitted to refer to the work of the auditor’s expert in the audit report containing an unmodified opinion, unless required by law or regulation. Further, even if any local law were to permit inclusion of such reference in the audit report, SA 620 mandates the auditor to state that such reference does not in any manner reduce his responsibility for the opinion issued.

shailesh.kwebmaker

Ind-AS Carve Outs

Synopsis
You may be aware that adoption of the converged Indian Accounting Standards (Ind-AS) has been prescribed under the Union Budget 2014-2015, voluntarily from the fiscal year 2015-16 and mandatorily from the year 2016-17. The Ind-AS are formed in alignment with the principles of IFRS as issued by the International Accounting Standards Board (IASB). In this article, the learned author points out an illustration of the Ind-AS 40 ‘Investment Property’, wherein some differences between Ind-AS and IFRS have been noted. The author explains therein, the necessity to keep the carve-outs to the bare minimum while finalising the Ind-AS, to ensure that there is global acceptability for financial statements that are prepared using these standards once thay are issued.

The Honourable Finance Minister during the Union Budget 2014-15 announced that Ind-AS would be applicable voluntarily from the year 2015-16 and mandatorily from the year 2016-17. To meet the roadmap, swift measures need to be taken. One key step is the notification of the final Ind-AS on a priority basis. This will help companies in timely preparation for Ind-AS adoption. The author is confident that the ASB and the ICAI will meet our expectations and ensure that the final Ind-AS are notified promptly.

A major part of the world is now reporting under the IFRS as issued by the International Accounting Standards Board (IASB). The last of the developed countries to adopt the IFRS was Japan. Earlier, China too has adopted the IFRS, but retained only one difference between Chinese GAAP and the IFRS. As of now, there are only two significant countries that do not use the IFRS. One is the USA. However, the USA allows the IFRS for foreign private filers. It is also being hoped that the US may ultimately allow US companies to voluntarily adopt the IFRS in future. Besides, for a long time, the US and the IASB have been working together on numerous standards, which has resulted in the US slowly inching towards the US GAAP that is closer to the IFRS. The other significant exception to the IFRS adoption is India.

The IASB is an independent standard setting body comprising of 14 full-time members from different parts of the world. The IASB is also responsible for approving interpretations of IFRS. IFRS’s are developed through an international consultation process, the “due process,” which involves interested individuals and organisations from around the world. The development of an the IFRS is carried out during the IASB meetings, when the IASB considers the comments received on the Exposure Draft. Finally, after the due process is completed, all outstanding issues are resolved, and the IASB members have balloted in favour of publication, the IFRS is issued. This is a very time consuming process, but results in technically solid IFRS’s being issued. It takes into consideration the needs and realities of different countries, and tries to balance them. At times, some of these needs and realities could be conflicting, and it would be impossible to keep all countries happy all the time. Nonetheless, the bottom line remains that the standards should be technically robust, one that would reflect the substance of the underlying business and transactions in a fair and transparent manner.

Most countries that have adopted the IFRS, have adopted them as they are, i.e., without indigenising them to their local GAAP. There were many reasons for taking this approach. Foremost, their local GAAP was developed to meet some regulatory and other objectives such as taxes or capital adequacy or protecting creditors. They did not often reflect the true and fair picture and hence were not typically driven towards meeting the needs of the investors. This had to change and investor needed to be given precedence if capital formation and growth objectives were important for that country.

Most countries that did adopt the IFRS as it is, did so because it enhanced the credibility of the financial statements which resulted in low cost of capital. As major groups have companies all over the world, using one accounting language helped them in preparing consolidated financial statements seamlessly. Using one accounting language across their different companies in the world also meant that their management information systems and IT was consistent across the globe. This made their lives much more predictable, consistent and easier. Today most stock exchanges in the developed world either

require or allow the IFRS. Also, investors around the globe understand the IFRS and are very comfortable with it. Any country that departs from the IFRS will not receive any of the above benefits. For example, in countries such as Singapore and Hong Kong, local standards are largely aligned to IFRS, but there are very few differences. This does not allow Singapore/Hong Kong entities to demonstrate compliance with IASB IFRS.

The Credit Lyonnais Securities Asia (CLSA) and the Asian Corporate Governance Association (AGCA) recently released their seventh joint report on corporate governance in Asia. Among other matters, the report ranks 11 Asian markets on macro Corporate Governance (CG) quality. A perusal of the report extracts indicate that amongst the 11 Asian countries, India has got the lowest rating on accounting and auditing matters as it has not implemented IFRS. Due to the same reason, India’s rating has also declined vis-à-vis previous periods. The chart given above depicts this.

The adoption of Ind-AS will resolve these issues and bring India at par with the world at large that has adopted IFRS. To achieve full benefit, it is imperative that Ind- AS’s are notified without any major difference from IASB IFRS. If India were to implement the IFRS with too many differences, it would be akin to moving from one Indian GAAP to another Indian GAAP. It would not be possible for Indian companies to state that they are compliant with the IFRS, and hence, those financial statements will be treated as local GAAP financial statements. More importantly if an Indian company wants to prepare IASB IFRS financial statements in the future, it will have to convert again from Ind-AS to IASB IFRS.

At the same time, it is appreciated that accounting is an art, and not a precise science. Primarily, financial statements should reflect and capture the underlying substance of transactions. The accounting standards are drafted to ensure that underlying transactions are properly accounted for and also aggregated and reflected transparently in the financial statements. But as already pointed out, this is not a precise science, and people may have different views on how to achieve this objective. Also at times, countries depart from the basic objective of true and fair display, to help companies in difficulty and pursue other unrelated objectives. Hence, a country may desire to have a few carve-outs in exceptional circumstances from IASB IFRS. To illustrate, it is believed that in the Indian scenario, classification of loan liability as current merely based on breach of minor debt covenant, say, few days delay in submission of monthly stock statement to bank, does not reflect the expected behaviour of the lender (who may ultimately condone the violation) and may create undue hardship for Indian corporates.

On the other hand, the proposed removal of the fair valuation option under Ind-AS 40 with respect to investment property, does not appear to be reasonable as can be seen from the arguments in the table below. This is not typically a carve-out, but certainly removes one option provided in the IFRS.

Ind-AS 40 Investment Property

Background

IAS 40 allows entities an option to apply either the cost model or the fair value model for subsequent measurement of its investment property. If the fair value model is used, all investment properties, including investment properties under construction, are measured at fair value and changes in the fair value are recognised in the profit or loss for the period in which it arises. Under the fair value model, the carrying amount is not required to be depreciated.

Ind-AS 40 hosted on the MCA website does not permit the use of fair value model for subsequent measurement of investment property. It however requires the fair value of the investment property to be disclosed in the notes to financial statements. It is understood that the ICAI may now be proposing to retain fair valuation model for subsequent measurement of investment property. However, all changes in the fair value will be recognised in the OCI, instead of profit or loss. It is expected that the proposed fair valuation model may be similar to revaluation model under Ind-AS 16 Property, Plant and Equipment.

Technical perspective

Before issuing the IAS 40, the IASB had specifically considered whether there was a need for issuing separate IFRS for investment property accounting or should it be covered under the IAS 16 Property, Plant and Equipment. After detailed evaluation and consultation with stakeholders, the IASB decided that characteristics of investment property differ sufficiently from those of the owner-occupied property. Hence, there is a need for a separate IFRS. In particular, the IASB was of the view that information about fair value of investment property, and about changes in its fair value, is highly relevant to the users of financial statements.

An investment property generates cash flows largely in-dependently of other assets held by an entity. The generation of independent cash flows through rental or capi-tal appreciation distinguishes investment property from owner-occupied property. This distinction makes a fair value model (as against revaluation model) more appropriate for investment property.

The ICAI proposal for allowing fair valuation for investment property is unclear. Particularly, it is unclear whether a company will need to depreciate investment property. Since a company is not recognising fair value gain/ loss in P&L and on the lines of revaluation model in Ind-AS 16, it appears that companies may need to charge depreciation on investment property in profit or loss for the period. This means that while a company will charge depreciation on investment property to profit or loss; it will recognise fair value change directly in OCI. This may give highly distorted results.

In case of investment property companies, investors and other stakeholders measure performance based on rental income plus changes in the fair value. Under the ICAI proposal, no single statement will reflect such performance of an investment property company. A major global accounting firm had conducted a survey in India “IFRS convergence: an investor’s perspective.” Among the survey participants, 67% were in favour of allowing fair value model for investment property as an option to the cost model.

The author would therefore strongly support retaining the fair valuation option under IAS 40. India is at the threshold of introducing new structures such as REIT to provide a boost to the infrastructure and real estate sector. Fair valuation would be the most appropriate basis for investors to enter or exit out of these funds. Hence, retaining the fair valuation model under IAS 40 is imperative.

IASB IFRS may not necessarily provide the best answers in all cases, and there may be a few instances where the standards could have been much better. Nonetheless, the author believes that the standard setters and regulators will have to consider the benefit of these carve outs with the benefits lost as a result of departing from IASB IFRS. Ultimately, it is not about one-upmanship but aligning with the world. In my view, full adoption of IASB IFRS is a goal worth pursuing. At the same time the standards setters and regulators should engage with the IASB in resolving the Indian specific pain points amicably. As an alternative approach, the author suggests that companies should be allowed an option to adopt IASB IFRS, instead of Ind-AS, if they wish to.

In the long-run, the standard setters and regulators should work closely with the IASB so that any differences that arise are resolved more promptly. A mutually respectable relationship can be built with the IASB, where the IASB and the world can gain from India’s participation in the standard setting process and simultaneously India can also benefit from the process in improving its financial reporting framework.

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TS-309-ITAT-2014(Mum) Everest Kanto Cylinder Ltd vs.ADIT A.Y: 2008-09, Dated: 25.09.2014

Payment of guarantee commission and recovery of the same from subsidiary is an international transaction; Bharti Airtel decision distinguished.

Facts:
The Taxpayer, an Indian company, set up subsidiary in Dubai (F Co) for expanding its business in Dubai region. F Co obtained term loan for its working capital requirements and for capital expenditure from the foreign branch of an Indian bank.

Taxpayer provided corporate guarantee to the bank in India in respect of such loans by way of deed of guarantee. In return 0.5% guarantee commission was charged by the Taxpayer from its F Co. Guarantee commission collected from F Co was held to be at arm’s length by the Tribunal in the Taxpayer’s own case for the immediately preceding year.

The Taxpayer had an independent sanction “letter of Credit arrangement” between the bank in India in respect of Inland and foreign letter of credit, where 0.6% guarantee commission was to be paid by the Taxpayer to the bank in India for the bank guarantee provided. The schematic presentation of the facts is as below.

The Tax Authority computed the arm’s length price of corporate guarantee @3% (as against 0.5% made by the Taxpayer) and made certain additions in this regard. Such addition was also affirmed by the dispute resolution panel (DRP).

Taxpayer alternatively contended that the transaction of giving corporate guarantee to bank on behalf of F Co, is not an international transaction, and even if it is regarded as an international transaction, since the Taxpayer has recovered from F Co the comparable cost of guarantee commission charged, the transaction is at arm’s length.

Held:
The decision of Delhi Tribunal in case of Bharti Airtel Ltd (ITA No.5816/DeI/2012) is distinguishable on facts as no guarantee commission was charged in that case. The Delhi Tribunal excluded the transaction of giving corporate guarantee from the purview of international transaction on the plea that transaction of such a nature was not having any bearing on the profits, income or loss or assets of the enterprise.

However, in the present case Taxpayer has incurred cost for providing bank guarantee and has also recovered guarantee commission from its subsidiary. Both these transactions, have impact on the income as well as expenditure of the Taxpayer. Thus the transaction of corporate guarantee is an international transaction subject to TP provisions.

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Wealth Tax – Valuation of asset – If in the opinion of the Assessing Officer, if the value determined by the taxpayer on the basis of rules 3 to 7 is absurd or has no correlation to the fair market value or otherwise not practicable, in such a case, it is open to the Assessing Officer to invoke rule 8 of Schedule III and determine the value of the asset either under rule 20 or refer u/s. 16A, for determination of the valuation of the asset

Amrit Banaspati Co. Ltd. vs. CIT [2014] 365 ITR 515 (SC)

The dispute before the Supreme Court related to wealthtax return of the appellant-assessee for the assessment year 1993-94. The assessee filed its return of taxable wealth at Rs.1,31,76,000 against which the assessment was completed at net wealth of Rs. 3,90,93,800. The dispute was about the valuation of the property in question being a residential flat situated in Worli, Bombay, which was owned by the assessee and used as a guest house. The immovable property was acquired by the assessee before 1st April, 1974, and the assessee filed return on self-assessment as per rules 3 to 7 of Schedule III to the Wealth-tax Act, 1957 (hereinafter referred to as the “Act”). In the course of assessment proceedings, the Assessing Officer (for short, “AO” ) was of the opinion that the value of the said flat as disclosed in the return (as Rs.1,55,139) did not appear to be in consonance with the market value for a similar size flat in Mumbai and referred the matter to the Departmental Valuation Officer under Rule 20 of Schedule III who valued the flat at Rs. 2,60,73,000. The Assessing Officer also relied upon the agreement to sell of the said flat dated 15th September, 1995, entered by the assessee with its vendor. In the said agreement, the price of the flat was shown at Rs.10,26,000. The Assessing Officer was of the opinion that due to wide variation between the alleged market value as determined by the Departmental Valuation Officer and the value as disclosed by the assessee, it was not practicable to value the property as per rules 3 to7 hence, rule 8(a) was attached.

The Assessing Office further observed that as the assessee had taken plea that it was paying rent at Rs. 500 per month prior to the purchase of the flat and incurred expenditure on the improvement of the said flat, it was difficult for the Assessing Officer to ascertain the price and, therefore, it would be impracticable to apply rule 3.

On appeal, preferred by the assessee, the Commissioner of Wealth-tax (Appeals) dismissed the appeal. The appellate order was confirmed by the Income-tax Appellate Tribunal. Thereafter, the assessee preferred a miscellaneous application u/s. 35 of the Act seeking rectification of mistakes of fact and law apparent from the Tribunal’s order. It was rejected by the Income-tax Appellate Tribunal. Finally, the High Court also affirmed the view taken by the Revenue.

Further on appeal, the Supreme Court, after referring to various provisions held that a conjoint reading of the various provisions makes it clear that the Legislature has not laid down a rigid directive on the Assessing Officer that the valuation of an asset is mandatorily required to be made by applying rule 3; the Assessing Officer has the discretionary power to determine whether rule 3 or rule 8 is applicable in a particular case. If the Assessing Officer is of the opinion that it is not practicable to apply rule 3, the Assessing Officer can apply rule 8 and value of the asset can be determined in the manner laid down in rule 20 or section 16A.

The word ‘practicable’ is to be construed widely. In the present context if in the opinion of the Assessing Officer, if the value determined by the taxpayer on the basis of rules 3 to 7 is absurd or has no correlation to the fair market value or otherwise not practicable, in such a case, it is open to the Assessing Officer to invoke rule 8 of Schedule III and determine the value of the asset either under rule 20 or refer u/s. 16A, for determination of the valuation of the asset.

The Supreme Court held that the invocation of rule 8(a) cannot be based on ipse dixit of the Assessing Officer. The discretion vested in the Assessing Officer to discard the value determined as per rule 3 has to be judicially exercised. It must be reasonable, based on subjective satisfaction; the power must be shown to be objectively exercised and is open to judicial scrutiny.

The Supreme Court observed that in the present case, the Assessing Officer refused to accept self-assessment for the following reasons:

(i) T here was a wide variation between the market value and the valuation done by the assessee as per the municipal taxes.

(ii) T he property was used as a guest house.

(iii) T he value for levy of municipal tax was very low, as the total rateable value of the assessee was done by the municipal authorities at Rs.6,573 per annum.

(iv) T he assessee was a tenant of the property at Rs.500 per month. After purchase of the property a lot of expenditure was incurred from time to time on improvement of the property which was very difficult to ascertain.

(v) T he value of the building was grossly understated as the assessee himself entered into an agreement to sell the same in the year 1995 for a sum of Rs.10,26,000.

Considering the above factors, the Assessing Officer assessed the value of the property at Rs. 2,60,73,000 as valued by the Department Valuation Officer.

The Commissioner of Wealth-tax held that the reference made by the Assessing Officer to the Department Valuation Officer was justified. The Income-tax Appellate Tribunal also justified the action of the Assessing Officer and on appeal, the same was affirmed by the High Court, vide the impugned judgment.

The Supreme Court after careful consideration of the facts and circumstances of the case and the submission made by the learned counsel for the parties, was of the opinion that the Assessing Officer was justified in holding that it was not practicable to apply rule 3 in the instant case and rightly referred the matter to the Valuation Officer u/s. 16A for determination of the value of the asset. The Assessing Officer, thereafter, has rightly assessed the wealth-tax on the basis of such value determined by the Valuation Officer. The Supreme Court did not find any merit in this appeal and the same was accordingly, dismissed.

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Capital gains –Exemption – In peculiar facts of the case, namely that the sale deed could not be executed in pursuance of agreement to sell for the reason that the assessee had been prevented from dealing with the residential house by an order of a competent court, which could not have been violated, the relief u/s. 54 should not be denied.

Sanjeev Lal & Anr. vs. CIT & Anr. [2014] 365 ITR 389 (SC)

A residential house, being house No.267 situated in Sector 9-C, Chandigarh, was a self acquired property of Shri Amrit Lal, who had executed a Will whereby life interest in the aforesaid house had been given to his wife and upon death of his wife, the house was to be given in favour of two sons of his pre-deceased son – Late Shri Moti Lal and his widow. Upon the death of Shri Amrit Lal, possession of house was given to his widow. His widow, Smt. Shakuntala Devi expired on 29th August, 1993. Upon the death of Smt. Shakuntala Devi, as per the Will, the ownership in respect of the house in question came to be vested in the assessee and another grandchild of the late Shri Amrit Lal.

The assessee had decided to sell the house and with that intention they had entered into an agreement to sell the house with Shri Sandeep Talwar on 27th December, 2002, for a consideration of Rs.1.32 crore. Out of the said amount, a sum of Rs.15 lakh had been received by way of earnest money. As the assessee had decided to sell the house in question, he had also decided to purchase another residential house bearing house No.528 in Sector 8, Chandigarh, so that the sale proceeds, including capital gain, can be used for purchase of the aforesaid house No.528. The said house was purchased on 30th April, 2003, i.e., well within one year from the date on which the agreement to sell had been entered into by the assessee.

The validity of the Will had been questioned by Shri Ranjeet Lal, who was another son of the deceased testator, Shri Amrit Lal, by filing a civil suit, wherein the trial court, by an interim order had restrained the appellants from dealing with the house property. During the pendency of the suit, Shri Ranjeet Lal expired on 2nd December, 2000, leaving behind him no legal heirs. The suit filed by him had been dismissed in May, 2004, as there was no representative on his behalf in the suit.

Due to the interim relief granted in the above stated suit, the assessee could not execute the sale deed till the suit came to be dismissed and the validity of the Will was upheld. Thus, the assessee executed the sale deed in 2004 and the same was registered on 24th September, 2004.

Upon transfer of the house property, long-term capital gain had arisen, but as the assessee had purchase a new residential house and the amount of the capital gain had been used for purchase of the said new asset. Believing that the long-term capital gain was not chargeable to income-tax as per the provisions of section 54 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the assessee did not disclose the said long-term capital gain in his return of income filed for the assessment year 2005-06.

In the assessment proceedings for the assessment year 2005-06 under the Act, the Assessing Officer was of the view that the assessee was not entitled to any benefit u/s. 54 of the Act for the reason that the transfer of the original asset, i.e., the residential house, had been effected on 24th September, 2004, whereas the assessee had purchased another residential house on 30th April, 2003, i.e., more than one year prior to the purchase of the new asset and, therefore, the assessee was made liable to pay income-tax on the capital gain u/s. 45 of the Act.

The appeal, as far as it pertained to the benefit u/s. 54 of the Act was concerned, had been dismissed by the Commissioner of Income-tax (Appeals) and, therefore, the appellants had approached the Income-tax Appellate Tribunal. The Tribunal also upheld the orders passed by the Commissioner of Income-tax (Appeals) and, therefore, the appellants had approached the High Court by filing appeals u/s. 260A of the Act, which were dismissed. Thus, the assessee approached the Supreme Court.

The Supreme Court observed that upon plain reading of section 54 of the Act, it is very clear that so as to avail of the benefit u/s. 54 of the Act, one must purchase a residential house/new asset within one year prior or two years after the date on which transfer of the residential house in respect of which the long-term capital gain had arisen has taken place.

The Supreme Court noted that in the instant case, the following three dates were not in dispute. The residential house was transferred by the appellants and the sale deed had been registered on 24th September, 2004. The sale deed had been executed in pursuance of an agreement to sell which had been executed on 27th December, 2002, and out of the total consideration of Rs.1.32 crore, Rs.15 lakh had been received by the appellants by way of earnest money when the agreement to sell had been executed and a new residential house/new asset had been purchased by the appellants on 30th April, 2003. It was also not in dispute that there was litigation wherein the will of the late Shri Amrit Lal had been challenged by his son and the assessee had been restrained from dealing with the house in question by a judicial order and the said judicial order had been vacated only in the month of May, 2004, and, therefore, the sale deed could not be executed before the said order was vacated though the agreement to sell had been executed on 27th December, 2002.

The Supreme Court remarked that if one considers the date on which it was decided to sell the property, i.e., 27th December, 2002, as the date of transfer or sale, it cannot be disputed that the assessee would be entitled to the benefit under the provisions of section 54 of the Act, because longterm capital gain earned by the appellants had been used for purchase of a new asset/residential house on 30th April, 2003, i.e., well within one year from the date of transfer of the house which resulted into long-term capital gain.

According to the Supreme Court, the question therefore to be considered was whether the agreement to sell which had been executed on 27th December, 2002, can be considered as a date on which the property, i.e., the residential house had been transferred.

The Supreme Court held that in normal circumstances by executing an agreement to sell in respect of an immoveable property, a right in person is created in favour of the transferee/vendee. When such a right is created in favour of the vendee, the vendor is restrained from selling the said property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Thus, by virtue of the question is whether the entire property can be said to have been sold at the time when an agreement to sell is entered into. In normal circumstances, the aforestated question has to be answered in the negative. However, looking at the provisions of section 2(47) of the Act, which defines the word “transfer” in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred.

Consequences of execution of the agreement to sell are also very clear and they are to the effect that the appellants could not have sold the property to someone else. in practical life, there are events when a person, even after executing an agreement to sell an immovable property in favour of one person, tries to sell the property to another. In our opinion, Such an act would not be in accordance with law because once an agreement to sell is executed in favour of one person, the said person gets a right to get the property transferred in his favour by filing a suit for specific performance and, therefore, without hesitation it could be said that some right, in respect of the said property, belonging to the assessee had been extinguished and some right had been created in favour of the vendee/ transferee, when the agreement to sell had been executed.

Thus, a right in respect of the capital asset, viz., the property in question had been transferred by the assessee in favour of the vendee/transferee on 27th december, 2002. The sale deed could not be executed for the reason that the assessee had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated.

In view of the aforesaid peculiar facts of the case and looking at the definition of the term “transfer” as defined u/s. 2(47) of the Act, the Supreme Court was of the view that the assessee was entitled to relief u/s. 54 of the act in respect of the long-term capital gain, which he had earned in pursuance of transfer of his residential property being house No. 267, Sector-9-C, situated in Chandigarh and used for purchase of a new asset/residential house.

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Acceptance and Repayment of Loans & Deposits – Applicability Journal Entries

Issue For Consideration

Section
269SS of the Income-tax Act provides that no person shall take or accept
any loan or deposit otherwise than by an account payee cheque or bank
draft or by use of ECS through a bank account if the amount or the
aggregate of amounts of loan or deposit is twenty thousand rupees or
more. Likewise, section 269T provides that any loan or deposit shall be
repaid by an account payee cheque or bank draft drawn in the name of the
person who has made the loan or deposit or by use of ECS through a bank
account, if the amount of loan or deposit together with interest is Rs.
20,000 or more.

A violation of the provisions of section 269SS
attracts the penalty u/s. 271D and of section 269T attracts the penalty
u/s. 271E of an amount that is equivalent to the amount of loan or
deposit taken or repaid. No penalty however, is leviable where the
person is found to be prevented by a reasonable cause for the failure to
comply with the provisions of section 269Ss or section 269T in terms of
section 273B of the Act.

These sections list certain exceptions
wherein the specified transactions shall not be regarded as in
violation of the provisions. None of the exceptions specifically exclude
the transactions that are settled by an accounting entry or adjustment
of accounts. This has led to a controversy in a case where a transaction
of a loan or a deposit is executed or settled by a journal entry not
involving any movement of cash or funds. The Bombay High Court has held
that repayment of a loan by settlement of account through a journal
entry violated the provisions of section 269T while the Delhi High Court
has held otherwise.

Triumph International Finance(I) Ltd .’s case
In
CIT vs. Triumph International Finance (I) Limited, 345 ITR 270(Bom),
the High Court was asked by the Revenue to consider the following
question;

“Whether, on the facts and in the circumstances of the
case, the Tribunal was justified in law in holding that transactions
effected through journal entries in the books of the assessee would not
amount to repayment of any loan or deposit otherwise than by account
payee cheque or account payee bank draft within the meaning of section
269T to attract levy of penalty u/s. 271E of the Income-tax Act, 1961?”

The
assessee, a Public Limited Company, a member of the NSE and a Category I
Merchant Banker, registered with SEBI, which was engaged in the
business of shares, stock broking, investment and trading in shares and
securities had accepted a sum of Rs. 4,29,04,722/- as and by way of
loan/inter-corporate deposit from the Investment Trust of India before
1st April, 2002, which was repayable during the assessment year
2003-2004. On 3rd October, 2002, it had transferred 1,99,300 shares of
Rashal Agrotech Limited, held by it, to the Investment Trust of India
for an aggregate consideration of Rs.4,28,99,325/-. As a result, the
assessee, on one hand, was liable to repay the loan/ inter-corporate
deposit amounting to Rs. 4,29,04,722/- to the Investment Trust of India
and on the other hand, to receive Rs. 4,28,99,325/- from the Investment
Trust of India towards sale price of the shares of Rashal Agrotech
Limited sold to the Investment Trust of India.

Instead of
repaying the loan/inter-corporate deposit to the Investment Trust of
India and separately receiving the sale price of the shares from the
Investment Trust of India, both the parties agreed that the amounts
payable/ receivable be set-off in the respective books of account by
making journal entries and the balance be paid by account payee cheque.
Accordingly, after setting off of the mutual claims through journal
entries, the balance amount of Rs. 5,397/- due and payable by the
assessee to the Investment Trust of India was paid by a crossed cheque
dated 19th February, 2003 drawn on Citibank.

It had filed its
return of income declaring loss of Rs. 17,27,21,815/- for the assessment
year 2003-2004. The assessment was completed u/s. 143(3) determining
the loss at Rs. 9,84,92,500/-.

Relying on the comments in the Tax
Audit Report regarding repayment of loan/inter-corporate deposit,
otherwise than by an account payee cheque or draft, the AO issued a
show-cause notice u/s. 271E, calling upon the assessee to show cause as
to why action should not be taken against the assessee for violating the
provisions of section 269T of the Act.

The detailed reply
however, was ignored by the AO who by an order dated 21st March, 2006
passed under section 271E of the Act, on the basis of the report of the
Joint Parliamentary Committee of Lok Sabha and Rajya Sabha on the Stock
Market Scam, imposed penalty amounting to Rs. 4,28,99,325/- on the
ground that the assessee had repaid the loan/inter-corporate deposit to
the extent of Rs. 4,28,99,325/- in contravention of the provisions of
section 269T of the Act.

On appeal filed by the assessee, the
Commissioner (Appeals) confirmed the penalty levied by the AO. On
further appeal filed by the assessee, the Tribunal allowed the appeal by
following its decisions in some of the group cases, and held that the
payment through journal entries did not fall within the ambit of section
269SS or 269T of the Act and consequently no penalty could be levied
either u/s. 271D or 271E of the Act.

The Revenue, in its appeal
to the High Court, submitted that the assessee belonged to the Ketan
Parekh Group, which was involved in the securities scam. It submitted
that the Ketan Parekh Group was found to be indulging in large scale
manipulation of prices of select scrips through fraudulent use of bank
and other public funds and had flouted all the norms of risk management
by making transactions through a large number of entities so as to hide
the nexus between the sources of funds and their ultimate use with the
sole motive of evading tax. It was further submitted that since the
language of section 269T of the Act was clear and unambiguous, the
tribunal ought to have held that repayment of the loan/inter-corporate
deposit otherwise than by account payee cheque or demand draft was in
violation of the provisions of section 269T of the Act and, hence, the
penalty imposed u/s. 271E of the Act was justified.

The
assessee, on the other hand, submitted that section 269T of the Act was
enacted to curb the menace of giving false explanation of the
unaccounted money found during the course of search and seizure; that
the bonafide transaction of repayment of loan or deposit by way of
adjustment through book entries carried out in the ordinary course of
business would not come within the mischief of the provisions of section
269T of the Act; the legislative history as also the circulars issued
by the CBDT confirmed that the provisions were not meant to hit genuine
transactions and the legislative intent was to mitigate any unintended
hardships caused by the provisions to genuine transactions; that in the
present case, genuineness of the transactions entered into by the
assessee with the Investment Trust of India was not in doubt; that no
additions on account of the transactions had been made in the regular
assessment; section 269T postulated that if a loan or deposit was repaid
by an outflow of funds, the same had to be by an account payee cheque
or demand draft and that discharge of the debt in the nature of loan or
deposit in a manner otherwise than by an outflow of funds would not be
hit by the provisions of section 269T.

The assessee further submitted that instead of repaying the amount by account payee cheque/demand draft and receiving back the amount by way of demand draft/cheque, the parties, as and by way of commercial prudence, had settled the account by netting off the accounts and paid the balance by account payee cheque. relying on a decision of the apex Court in the case of J.

B. Boda and Company P. Limited, 223 ITR 271(SC), it was submitted that the two-way traffic of forwarding bank draft and receiving back more or less same amount by way of bank draft was unnecessary and, therefore, in the facts of the present case, no fault could be found with the repayment of loan through journal entries. it was also submitted that the plain reading of section 269t, that each and every loan or deposit had to be repaid only by an account payee cheque or draft if accepted, would lead to absurdity because, by such interpretation not only mala fide transactions, but even genuine transactions would be affected.

Relying on the judgments of the apex Court in the cases of Kum. A. B. Shanti, 255 ITR 258 (SC) and J. H. Gotla, 156 ITR 323, the assessee submitted that if a strict and literal construction of a statute led to an absurd result, a result not intended to be subserved by the object of the legislation as ascertained from the scheme of the legislation and, if
another construction was possible apart from the strict and literal construction, then, that construction should be preferred to strict literal construction.

Inviting the attention of the court to the provisions of the Code of Civil Procedure and the books on accountancy, the assessee submitted that set-off of the claim/counter- claim otherwise than by account-payee cheque or bank draft was legally permissible in commercial transactions as also in the accounting practice. therefore, it must be held that genuine transactions like the transaction in the present case involving repayment of loan through journal entries did not violate section 269t of the act.

In any event, it was contended that having regard to the commercial dealings between the parties it must be held that there was reasonable cause for repaying the loan through journal entries. in view of section 273B of the act, penalty was not imposable u/s. 271 e of the act. In support of the above contention, reliance was placed on the decisions of the high Courts in the cases of Noida Toll Bridge Company Limited, 262 ITR 260 (Del.), Shree Ambica Flour Mills Corporation) 6 DTR 169 (Guj.) and Motta Constructions P. Limited, 338 ITR 66 (Bom.).

On careful consideration of the rival submissions, the court observed that the basic question to be considered in the appeal was whether repayment of loan of Rs. 4,28,99,325/- by making journal entries in the books of account maintained by the assessee was in contravention of section 269t of the act, and, if so, for failure to comply with the provisions of Section 269T, the assessee was liable for penalty u/s. 271e of the act.

The court observed that the argument advanced by the counsel for the assessee that the bonafide transaction of repayment of loan/deposit by way of adjustment through book entries carried out in the ordinary course of business would not come within the mischief of section 269t could not be accepted, because, the section did not make any distinction between the bonafide and non-bonafide transactions and required the entities specified therein not to make repayment of any loan/deposit together with the interest, if any otherwise than by an account payee cheque/bank draft if the amount of loan/deposit, with interest if any, exceeded the limits prescribed therein. Similarly, the argument that only in cases where any loan or deposit was repaid by an outflow of funds, section 269t provided for repayment by an account payee cheque/draft, could not be accepted because section 269t neither referred to the repayment of loan/deposit by outflow of funds nor referred to any of other permissible modes of repayment of loan/deposit, but merely provided for an embargo on repayment of loan/deposit except by the modes specified therein. Therefore, in the case before it, where loan/deposit had been repaid by debiting the account through journal entries, it must be held that the assessee had contravened the provisions of section 269t of the act.

The court found that the reliance on the decision of the apex court in the case of J. B. Boda & Company P. Limited (supra) was misplaced as the aforesaid decision had no relevance to the facts of the present case, because, section 80-o and section 269t operated in completely different fields. The object of section 80-O was to encourage Indian Companies to develop technical knowhow and make it available to foreign companies and foreign enterprises so as to augment the foreign exchange earnings, whereas, the object of section 269t was to counteract evasion of tax. for section 80-o, receiving income in convertible foreign exchange is the basic requirement, where as, for section 269t, compliance of the conditions set out therein is the basic requirement. Section 80-O does not prescribe any particular mode for receiving the convertible foreign exchange, whereas, section 269t bars repayment of loan or deposit by any mode other than the mode stipulated under that section and for contravention of section 269t penalty is imposable u/s. 271e of the act. In these circumstances, the decision of the apex Court rendered in the context of section 80-o cannot be applied while interpreting the provisions of section 269t of the act.

The high Court further noted that on reading section 269t, 271e and 273B together, it became clear that u/s. 269T it was mandatory for the persons specified therein to repay loan/deposit only by account payee cheque/draft if the amount of loan/deposit together with interest, if any, exceeded the limits prescribed therein; non-compliance of the provisions of section 269t rendered the person liable for penalty u/s. 271e in the absence of the reasonable cause for failure to comply with the provisions of section 269t of the act.

The court refused to accept the argument advanced on behalf of the assessee that if section 269t was construed literally, it would lead to absurdity, because, repayment of loan/deposit by account payee cheque/bank draft was the most common mode of repaying the loan/deposit and making such common method as mandatory did not lead to any absurdity. Having held so, the court however observed that, in some cases, genuine business constraints necessitated repayment of loan/deposit by a mode other than the mode prescribed u/s. 269t and to cater to the needs of such exigencies, the legislature had enacted section 273B which provided that no penalty u/s. 271e should be imposed for contravention of section 269t if reasonable cause for such contravention was shown. the court noted that in the present case, the cause shown by the assessee for repayment of the loan/deposit otherwise than by account-payee cheque/bank draft was reasonable, as it was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom loan/deposit was received by the assessee, in as much as it would have been an empty formality to repay the loan/deposit amount by account-payee cheque/draft and receive back almost the same amount towards the sale price of the shares.

Neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business had been doubted in the regular assessment and there was nothing on record to suggest that the amounts advanced by investment trust of india to the assessee represented the unaccounted money of the investment trust of india or the assessee. The fact that the assessee company belonged to the Ketan Parekh Group which was involved in the securities scam could not be a ground for sustaining penalty and it was not in dispute that settling the claims by making journal entries in the respective books was also one of the recognised modes of repaying loan/deposit.

In the result, the court held that the tribunal was not justified in holding that repayment of loan/deposit through journal entries did not violate the provisions of section 269T of the Act. However, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan/deposit was not a bonafide transaction and was made with a view to evade tax, it was held that the cause shown by the assessee was a reasonable cause and, therefore, in view of section 273B of the act, no penalty u/s. 271e could be imposed for contravening the provisions of section 269t of the act.

Worldwide Township projects lTD.’s case
The issue inter alia recently arose for consideration of the delhi high Court in the case of CIT vs. Worldwide Townships Projects Ltd., 269 CTR 444, wherein the revenue challenged the order of the tribunal holding that the penalty order passed by the ao u/s. 271d of the act was unsustainable in law.

In this case, the assessee filed its return of income for the assessment year 2007-08 on 30-10-2007, which return was taken up for scrutiny. the ao found that during the year in question, the assessee had shown purchases of land worth rs. 14.22 crore, which had remained to be paid at the end of the year. This was accordingly reflected as Sundry Creditors in the name of one PACL India Ltd., which had purchased lands on behalf of the assessee from several land owners on payments made by it through demand drafts to various land owners on behalf of the assessee.

The AO held that the transactions amounted to extending of a loan to the assessee by PACL India Ltd and that the said transaction fell foul of the provisions of sections 269SS and 269T of the Act, since no funds had passed through the bank accounts of the assessee for acquisition of the lands. The ao levied a penalty u/s. 271d holding the assesssee responsible for violation of the provisions of section 269SS for sums aggregating Rs.14,25,74,302/- that, in his view, were transferred to the loan account in the form of book entries, otherwise than through an account payee cheque or a account payee draft.

In the appeal by the assessee, the Cit (appeals), relying on the decision of the delhi high Court in the case of Noida Toll Bridge Co. Ltd,: 262 itr 260, disagreed with the findings of the AO and deleted the penalty in the given circumstances of the case. The tribunal held that the order passed by the ao was beyond the time permissible u/s. 275(1)(a) and was not tenable in law.

On a further appeal to the high Court by the revenue, the delhi high Court was unable to appreciate as to how, in the given circumstances of the case, there was an offence u/s. 269SS of the Act. The High Court observed that a plain reading of the provision indicated that the import of the above provision was limited and it applied only to a transaction where a deposit or a loan was accepted by an assessee, otherwise than by an account payee cheque or an account payee draft. the ambit of the section was clearly restricted to transactions involving acceptance of money and was not intended to affect cases where a debt or a liability arose on account of book entries. the object of the section was to prevent transactions in currency, which fact was also clearly explicit from Clause (iii) of the explanation to section 269SS of the Act, which defined a loan or deposit to mean “loan or deposit of money.” The liability recorded in the books of account by way of journal entries, i.e., crediting the account of a party to whom monies were payable or debiting the account of a party from whom monies were receivable in the books of account, was clearly outside the ambit of the provision of section 269SS of the Act, because passing such entries did not involve acceptance of any loan or deposit of money. in the present case, admittedly no money was transacted other than through banking channels in as much as PACL India Ltd. made certain payments through banking channels to land owners on behalf of the assessee, which were recorded by the assessee in its books by crediting the account of PACL India Ltd, and in view of that admitted position, no infringement of section 269SS of the Act was made out.

The delhi high Court noted that the court, in the case of Noida Toll Bridge Co. Ltd. (supra), had considered a similar case where a company had paid money to the Government of Delhi for acquisition of a land on behalf of the assessee therein. It noted that, in the said case, the ao had levied a penalty for alleged violation of the provisions of section 269SS, which was confirmed by the Commissioner(appeals), but was deleted by the tribunal. In an appeal by the Revenue, the High Court held as under:-

“While holding that the provisions of section 269SS of the Act were not attracted, the Tribunal has noticed that: (i) in the instant case, the transaction was by an account payee cheque, (ii) no payment on account was made in cash either by the assessee or on its behalf, (iii) no loan was accepted by the assessee in cash, and (iv) the payment of Rs. 4.85 crore made by the assessee through IL & FS, which holds more than 30% of the paid-up capital of the assessee, by journal entry in the books of account of the assessee by crediting the account of IL & FS. Having regard to the aforenoted findings, which are essentially findings of fact, we are in complete agreement with the Tribunal that the provisions of section 269SS were not attracted on the facts of the case. Admittedly, neither the assessee nor IL & FS had made any payment in cash. The order of the Tribunal does not give rise to any question of law, much less a substantial question of law.”

The high Court accordingly held that there was no violation of the provisions of section 269SS on passing of the journal entries for accepting a liability that arose on account of the payment made by a person on behalf of the assessee.

Observations.
Chapter XXB containing sections 269SS to section 269TT were introduced by the Income-tax (Second Amendment) act, 1981 with effect from 11th july, 1981 with a view to counter the evasion of tax. the object of the provisions are explained by the CBDT in its Circular no. 345 dated 28-06-1982 stating that the proliferation of black money posed a serious threat to the national economy and to counter that major economic evil, Chapter XXB was introduced.

It is apparent that the provisions were introduced to control the transactions in cash and where found to be without reasonable cause, to punish the persons executing such transactions. any interpretation placed on these provisions shall have to factor in the objective behind the insertion of these provisions, a fact which has been the guiding factor for the judiciary, in case after case, while deciding the issues that routinely arise in applying the provisions. this aspect has been appreciated by the Bombay high Court when it stated that settling the claims by making journal entries in the respective books was also one of the recognised modes of repaying loan/ deposit and once such settlement is found to be genuine, the question of levy of penalty does not arise. With this finding, in our opinion, the court accepted the principle that the non cash transactions were outside the scope of the set of the provisions, collectively read.

A literal interpretation of these provisions, also, in our respectful opinion, does not lead to bringing an accounting entry within the ambit of these provisions. a loan or deposit has to be ‘taken’ or ‘accepted’ or ‘repaid’ for attracting the provisions. there has to a receipt or a payment; has to be received or paid. taking, accepting or repaying is a sine qua non of these provisions, failing which the provisions shall not apply. It is essential that this fact is established by the revenue before applying these provisions. these terms, when understood in common parlance, cannot by any stretch of imagination include the act of passing an accounting entry. In ordinary course, one does not take a loan by passing an accounting entry and so it is, in the case of a repayment. An accounting entry can pave a way for settlement or settling a transaction and may consequently result in creation of a debt or extinguishing a debt but cannot be construed as an acceptance or repayment which, in the ordinary meaning of the terms, are acts that require transfer of funds, which, in the case under consideration, is cash. In the absence of any movement of cash, the provisions have no role to play. Any other interpretation would rope in all those transactions wherein a debt is converted into a loan or a deposit.

Any doubt remaining in the matter of interpretation of these provisions is further dispelled by Clause (iii) of the Explanation to both the provisions, section 269 SS and 269T which defines a ‘loan or deposit’ to mean loan or deposit of money. unless a transaction involves money changing hands, the provisions have no role to play. We respectfully submit that it is this aspect of the provisions that the court failed to appreciate; may be due to the fact, recorded in the order, that the assessee admitted that the provisions of s.269t were applicable to its case.

The attention of the Bombay high Court was drawn by the assessee, not with success, to impress that the provisions were not applicable to the cases involving accounting entries, by relying on the decisions in the cases of noida Toll Bridge Company Limited, 262 ITR 260 (Del), Shree Ambica Flour Mills Corporation, 6 DTR 169 (Guj) and Motta Constructions P. Limited, 338 ITR 66 (Bom).

In Motta Constructions P. Limited, 338 ITR 66 (Bom), the same high Court was asked to examine the applicability of section 269 SS to the case of the journal entry passed by the company for acknowledging the debt in favour of a director, who had incurred some expenditure on behalf of the company. the court, in the circumstances, held that the said provisions had no application to the case where a debt was created by a journal entry, in as much as no loan or deposit could be said to have been received by the assessee company.

In Noida Toll Bridge Company Limited, 262 itr 260 (Del.), the High Court held that the provisions of s. 269SS were not applicable to a case of the company crediting the account of one IL & FS on payments made by IL & FS on behalf of the company, where none of the parties had made payment in cash. in Shree Ambica Flour Mills Corporation(2008, ) 6 DTR 169 (Guj) it was held that the payments made by sister concerns for each other were not in violation of section 269SS or section 269T of the Act.

The allahabad high Court also, in the case of CIT vs. Saurabh Enterprises 269 CTR 451, has taken a view that where no cash was involved, but merely adjusting book entries, there was no violation of sections 269SS or 269T. the income-tax appellate tribunal has, through its various decisions, taken a consistent stand that the provisions of section 269SS and section 269T do not apply to the case of a debt created or extinguished by accounting entries. Please see, Bombay Conductors & Electrical Ltd. 56 TTJ (Ahd) 580, Muthoot M. George, 47 TTJ (Coch) 434, Sunflower Builders (P.) Ltd. 61 ITD 227 (Pune). the decision of the ahmedabad tribunal was later on confirmed by the Gujarat High Court reported in 301 itr 328.

Significantly, it is required to be appreciated that even otherwise, an accounting entry may not be and cannot be said to have the effect of resulting in a loan or a deposit. The Supreme Court, in the case of Bombay Steam Navigation Co., 56 ITR 52, observed as under; “An agreement to pay the balance of consideration, due by the purchaser, does not in truth give rise to a loan. A loan of money results in a debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources . Every creditor who is entitled to receive a debt cannot be a lender.”

While it is true that the provisions do not expressly exclude journal entries from the application of section 269SS and section 269T, it is also true that the entries, by themselves, cannot be said to have resulted in receiving a loan or repaying a loan, and without doubt, not in money. the decision of the Bombay high Court, on this limited aspect, needs to be reviewed.

shailesh.kwebmaker

Comparable Uncontrolled Price (‘CUP’) Method – Introduction and Analysis

1 Background

Transfer pricing
provisions in section 92 of the Income-tax Act, 1961 (‘the Act’)
prescribe that the arm’s length price (‘ALP’) of international/specified
domestic transactions between associated enterprises (‘AEs’) needs to
be determined with regard to the ALP, by applying any of the following
methods:

– Price-based methods: CUP Method
– Profit-based
methods: Resale Price Method (‘RPM’), Cost Plus Method (‘CPM’), Profit
Split Method (‘PSM’) and Transactional Net Margin Method (‘TNMM’)
– Prescribed methods: Other Method

The
provisions of the Act prescribe the choice of the Most Appropriate
Method having regard to the nature of the transaction, availability of
relevant information, possibility of making reliable adjustments, etc,
and do not prescribe an hierarchy or preference for any method1.

In
this article, the authors have sought to explain the conceptual
framework of the CUP Method, considerations for its applicability and
practical issues concerning industry-wise application of the CUP Method.
Judicial precedents have been referenced as appropriate, for further
reading.

2. Conceptual framework
The CUP Method has
been defined in Rule 10B(1)(a) of the Income-tax Rules, 1962. The
various nuances surrounding the application of CUP Method ( on the basis
of the sub clauses in the rule ) have been analysed below:

(i)“The
price charged or paid for property transferred or services provided in a
comparable uncontrolled transaction, or a number of such transactions,
is identified;”

Analysis
The CUP Method compares the
price in a controlled transaction to the price in an uncontrolled
transaction in comparable circumstances. If there is any difference in
the two prices, underlying factors remaining constant, it may suggest
that the conduct of the related parties to the transaction is not at
arm’s length, i.e. the controlled price ought to be substituted by the
uncontrolled price.

The CUP can be Internal or External. An
internal CUP is the price that the assessee has charged/paid in a
comparable uncontrolled transaction with a third party. An external CUP
is the price of a comparable uncontrolled transaction between third
parties (i.e. no involvement of the assessee). Refer to section 4 for
discussion of the issue governing selection of Internal CUPs and
External CUPs.

A potential issue could arise as regards whether
the provisions prescribe the use of a comparable ‘hypothetical
transaction’, i.e. transaction for which a price/consideration ‘is to be
paid’ or ‘would have been paid’.

Please refer to sections 5 and 6 for detailed discussions.

“(ii)
such price is adjusted to account for differences, if any, between the
international/ specified domestic transaction and the comparable
uncontrolled transactions or between the enterprises entering into such
transactions, which could materially affect the price in the open
market”

Analysis
In an ideal scenario, none of the
differences between the transactions being compared or between the
enterprises undertaking these transactions should materially affect the
price in the open market. One needs to assess whether reasonably
accurate adjustments can be made to eliminate the material effects of
such differences.

Accordingly, the application of the CUP Method
prescribes stringent comparability considerations which need to be
addressed before the determination of ALP, which makes the application
of the CUP Method extremely difficult.

Currently, there is no
prescribed guidance on the manner of computing adjustments. Accordingly,
one can take guidance from the Organisation for Economic Cooperation
and Development (‘OECD’) Guidelines which specify different types of
comparability adjustments.

The characteristics of the
goods/services/property/ intangibles under consideration, including
their end use, have a bearing on the comparability under the CUP Method
and require suitable adjustment. To illustrate, the prices of imported
unprocessed food products would not be the same as imported processed
food products.

Differences in contractual terms, i.e. credit
terms, transport terms, sales or purchase volumes, warranties,
discounts, etc., also play an important role whilst undertaking
comparability adjustments under the CUP Method and adjustments can
typically be made for these quantitative differences. Further, the
comparable uncontrolled transactions should ideally pertain to the
same/closest date, time, volume, etc., as that of the controlled
transaction.

The prices of various products may also differ due
to the differences in the geographic markets, owing to the demand and
supply conditions, income levels and consumer preferences,
transportation costs, regulatory and tax aspects, etc. Indian judicial
precedents have recognised these differences.

A potential issue
may arise in cases where it is not possible to quantify the exact
adjustment to be made to the uncontrolled transaction where the
differences are on account of qualitative attributes, say, for example,
adjustment for difference in quality of Indian products visà- vis
Chinese products.

Further, there may arise differences in the
intensity of functions performed and risks assumed by the assessee,
vis-à-vis a comparable uncontrolled transaction, where it may not be
possible to effect/adjust such differences. In such cases, it is
advisable to maintain robust transfer pricing documentation to identify
and address such material differences and reject the CUP method. To
illustrate, the ownership of intangibles such as trademarks/brands,
etc., could impair the application of the CUP Method.

“(iii) the
adjusted price arrived at under sub-clause (ii) is taken to be an arm’s
length price in respect of the property transferred or services
provided in the international/ specified domestic transaction.”

Analysis
The
results derived from an appropriate application of the CUP Method
generally ought to be the most direct and reliable measure of an ALP for
the controlled transaction. The reliability of the results derived from
the CUP Method is affected by the completeness and accuracy of the data
used and the reliability of assumptions made to apply the method.

3. Application & pertinent issues
The
Indian transfer pricing authorities have indicated a strong preference
for applying the CUP Method given that CUP directly focuses on the
international transaction under review. Even though the degree of
comparability required for application of the CUP Method is high,
unadjusted or inexact CUPs have been routinely applied by the
authorities.

Appellate Tribunals have dealt with the issue of
the application of CUP Method in several transactions pertaining to
various industry sectors and have thrown some light on the guidelines
and reasonable steps that need to be undertaken to make appropriate and
reasonable adjustments to the CUPs in order to arrive at the ALP.
Further, the Tribunals have also adjudicated on the preference of
selection of Internal CUPs over External CUPs. These industry-wide
transactions and the issues concerning application of CUP method in
regard to various categories of payments have been elucidated below:

(i) Payment/Receipt of brokerage:

Under
the internal CUP approach, the brokerage charged by the assessee
(broker) to its AEs could be compared to the brokerage charged by the
assessee to a third party. However, it would be important to consider
the following factors since they have a direct bearing on the pricing of
the respective transactions:

a.    the contractual terms and conditions, i.e. underlying functions and control exercised by each transacting party (e.g. settlement terms, margin money stipulations etc.)
b.    Volume of transactions and resultant discounts, if any
c.    functions performed by the assessee in earning the brokerage from the related party as well as unrelated party.

The Mumbai Tribunal in the case of RBS Equities has upheld the use of the CUP method for brokerage transactions after providing for an adjustment for differences in marketing function, research functions and differences in volumes.

(ii) Payment/receipt of guarantee fees:

Placing reliance on international guidance and several judicial precedents2 , arm’s length guarantee fees are a factor of the following:

a.    nature – whether the guarantee under consideration is a quasi-equity guarantee.
b.    Whether the benefit derived by the recipient is implicit/ explicit in nature
c.    Purpose of guarantee – A financial or unsecured guarantee would warrant a higher compensation as opposed to a performance or secured guarantee
d.    the value of assets at risk/anticipated loss given default of the borrower and anticipated probability of default of the borrower
e.    the rate at which guarantees are extended by banks in the country of the lender/borrower
f.    Credit rating of the borrower

In view of the above, it could also be argued that guarantee rates obtained from independent bank websites are generic in nature and not specific to any particular transaction that has been carried out. thus, not only are they negotiable, they also vary depending on the terms and conditions of the transactions, and the relationship between the banks and the customer. hence, they cannot be used directly to represent the guarantee fee charged on a particular tested transaction. this principle is supported by indian judicial precedents as well.

(iii) Financial services – Intercompany loans/ deposits:

Placing reliance on several judicial precedents3, it could be argued that in a case where foreign currency loans/ deposits are advanced by an indian assessee to its overseas subsidiary (say in the USA), the rate of interest on the intercompany loan could be determined with reference to CUPs, i.e. the london interbank offered Rate plus basis points, appreciating that arm’s length interest rates are a factor of the following:

a.    the value of the assets at risk, or the anticipated loss given the default of the borrower;
b.    anticipated probability of default of the borrower;
c.    the level of interest rates, in terms of risk-free rates for given tenor and currency;
d.    the market price of risk, or credit spreads; and
e.    taxes;
f.    Whether the loan/deposits are quasi-equity in nature (i.e. convertible to equity upon maturity);
g.    Purpose of the loan – i.e. whether the loans were extended for further investment purposes.

(iv) Pharmaceuticals, chemicals – Import of raw materials/Active Pharmaceutical Ingredients (‘APIs’):

The mumbai Bench of the indian tax tribunal, in the cases of Serdia4 Pharmaceuticals and Fulford India5, have provided useful insights on transfer pricing issues related to the pharmaceutical industry.

In the case of Serdia, the prices of off-patented APIs imported by the taxpayer from foreign aes were compared by the Revenue authorities with the prices of generic APIs purchased by competitors from third party suppliers, by using the CUP Method.

Before decoding the Serdia verdict, it would be essential to delve into the decision of the Canadian federal Court of Appeal (‘FCA’) rendered in the case of GlaxoSmithKline Inc (‘GSK’)6 , as it has been quoted and relied upon by the Tribunal in the case of Serdia.

GSK imported APIs from its AE for secondary manufacture and distribution of the drug named “Zantac”. GSK also had a license agreement with its AE, which provided GSK with the right to use the “Zantac” trademark. applying the CUP Method, the Revenue compared GSK’s import prices of APIs from AEs with the prices of generic APIs purchased by competitors from third party suppliers, and an adjustment was proposed for the difference in prices. Eventually, the FCA ruled that GSK’s license agreement with its ae must be considered as a circumstance relevant to the determination of the ALP of the APIs imported by GSK from its AE, and thereafter restored the matter back to the lower authorities for fresh adjudication.

What logically follows from the conclusion is that the price of a generic product cannot simply be a CUP for another product, which is accompanied with a license or right to use intellectual property (‘IP’), which in the aforesaid case was a valuable trademark. holding this to be the pivotal principle, let us revert to the Serdia ruling, where there was no evidence furnished by the taxpayer relating to the licensing of any accompanying intangible based on which a higher price to AEs could be justified. Further, the Tribunal clearly distinguished the facts of Serdia’s case from those in the case of uCB india7 and stated that the CUP Method cannot blindly be rejected without giving due consideration to the facts of each and every case.

Fulford, however, put forth an argument before the Mumbai Tribunal against the use of the CUP Method applied by the revenue, to benchmark the prices of import of off-patented APIs from AEs with prices of generic APIs. Fulford’s primary contention was that the said comparison was flawed, as it had been undertaken in complete disregard of the functions, assets, and risks (‘FAR’) profile or characterisation of the parties to the transaction and Fulford’s FAR was of routine distributor entitled to profits commensurate to its distribution function. Fulford argued that application of the CUP Method in such cases might result in the indian distributor earning exorbitant margins or profits, a significant portion of which it might not deserve, being related to the intangibles owned and the various risks, including product liability risks borne by the foreign principal. Another issue faced by taxpayers has been the application of the CUP Method using secret comparables. Section 133(6) of the Act empowers the Indian Revenue authorities to call for information from various public sources in order to determine the ALP of the transaction, i.e. comparing the import prices of APIs imported by the pharmaceutical companies with the prices of APIs available from such sources. In this regard, it is pertinent to note that without furnishing requisite details such as the quantum of transactions, quality of the API purchased, shelf life of the products, it is extremely difficult to make reliable adjustments as contemplated under the CUP method. A number of pharmaceutical companies face the double-edged sword where reduced import prices (owing to transfer pricing disallowances) are generally not considered by the Customs authorities for the purposes of customs duty assessment.

(v) Information technology and Software – Payment of service fee:

The charge-out rates in the case of some it companies are determined having regard to the qualification/designation of the employees, i.e. per month/per man hour rates. In this regard, some judicial precedents8 issued by the Indian Tribunals favour the application of the CUP Method as opposed to the tnmm method, since the rates are not determined on the basis of software developed or volume of work. In the case of Velankani Software, the Tribunal upheld the use of the internal CUP Method where the technology, asset and marketing support was provided by the ae in the controlled transaction as opposed to the uncontrolled transaction, where the assessee used its own technology, assets and marketing infrastructure, since the assessee operated on a billing ‘on time and material’ basis, i.e. rates based on man months at different prices for different skill sets of employees for aes as well as non aes, subject to the detailed documentation furnished by the taxpayer.

(vi) Purchase and sale of power:

It is a known fact that a number of taxpayers set up captive power production units in order to source power at economical rates and achieve synergies and long term economies of scale. for the purposes of determining the appropriate quantum of deduction under the provisions of Chapter Vi-a of the act read with section 92Ba of the act, it is essential that the transfer of power by such captive units to the operating manufacturing plants is undertaken at fair market value/ALP. In this regard, guidance is provided by recent judicial precedents9 of the tribunals, wherein it is prescribed that any of the following values could be used as a CUP to determine the FMV of the controlled transaction

a.    Price at which excess power, if any, is sold by the captive power unit to the State Electricity Board
b.    Price at which power is purchased by the operating companies from the State Electricity Board
c.    Grid rates according to the Tariff card of the State electricity Board

(vii) Purchase and sale of diamonds:
In the diamond industry, there is a huge dissimilarity and variation of features which leads to differences in prices. the pricing of the diamonds depends upon various parameters/factors like size of the diamond, carat weight, various types of shape, colour, clarity, grade, etc., which leads to differential pricing of the diamonds. Thus, in such a condition, it becomes very difficult to apply the CUP method in benchmarking the pricing of diamonds.

4. Internal vs. External CUPs

The indian revenue authorities tend to accept the use of Internal CUPs as well as External CUPs to determine the ALP of the controlled transactions. However, the oeCd Guidelines as well as several judicial precedents10 promote the preference of the internal methods over the external methods since the assessee itself is the party to the controlled as well as the uncontrolled transaction and the quality of such data is more reliable, accurate and complete as against external comparables, which is the most important consideration in determining the possible application of the CUP Method. In case of external CUP, data may be derived from public exchanges or publicly quoted data. The external CUP data could be considered reliable if it meets the following tests:

a. the data is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled sales

b. the data derived from external sources is used to set prices in the controlled transaction in the same way it is used by uncontrolled assessees in the industry

c. the amount charged in the controlled transaction is adjusted to reflect the differences in product quality and quantity, contractual terms, market conditions, transportation costs, risks borne and other factors that affect the price that would be agreed to by uncontrolled assessees

5. Can quotations be used as CUPS?

Given the above absence of realistic internal/external CUP data for benchmarking the controlled transaction, can it be said that quotations obtained from third parties could constitute valid CUPs?

In the case of KTC Ferro Alloys Pvt. Ltd. (TS 20 ITAT 2014 (Viz) TP), Adani Wilmar Ltd. (TS 171 ITAT 2013 (Ahd) TP), Reliance Industries Ltd. (TS 368 ITAT 2012 (Mum)), Ballast Nedam Dredging (TS 25 ITAT 2013 (Mum) TP) and
A. M. Todd Co. India P. Ltd. (TS 117 ITAT 2009 (Mum)), various benches of the Tribunals had accepted quotations and rates published in magazines and newspapers as CUPs, subject to necessary adjustments.

However, in the case of Redington India Ltd. (TS 123 ITAT 2013 (CHNY) – TP), the Chennai ITAT rejected the ‘list price’ published on the manufacturer’s website as a CUP, observing that it is only an indicative price and the CUP can only be based on actual sales. Further, in Sinosteel India Pvt. Ltd. (TS 341 ITAT 2013 (DEL) TP), the Delhi ITAT held that ALP under the CUP Method is to be determined based on ‘the price charged or paid’ in a comparable uncontrolled ‘transaction’ and hence, a quotation which has not fructified into a transaction could not be accepted as a CUP.

6. Introduction of the sixth method – Other Method

The Central Board of direct taxes has inserted a new rule 10AB by notifying the “other method” apart from the five methods already prescribed:

“For the purposes of clause (f) of sub-section (1) of section 92C, the Other Method for determination of the arms’ length price in relation to an international transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with Methods of Computation of Arm’s Length Price or between non- associated enterprises, under similar circumstances, considering all the relevant facts.”

The Guidance Note on Transfer Pricing issued by the institute of Chartered accountants of india (august 2013 – revised) explains that the introduction of the other method as the sixth method allows the use of ‘any method’ which takes into account (i) the price which has been charged or paid or (ii) would have been charged or paid for the same or similar uncontrolled transactions, with or between non-AES, under similar circumstances, considering all the relevant facts.

The various data which may possibly be used for comparability purposes under the ‘Other Method’ could be:

(a) Third party quotations; (b) Valuation reports; (c) tender/Bid documents; (d) documents relating to the negotiations; (e) Standard rate cards; (f) Commercial & economic business models; etc.

It is relevant to note that the text of rule 10aB does not describe any methodology but only provides an enabling provision to use any method that has been used or may be used to arrive at the price of a transaction undertaken between non-AEs. Hence, it provides flexibility to determine the price in complex transactions where third party comparable prices or transactions may not exist, i.e. a more lenient version of the CUP Method. The wide coverage of the other method would provide flexibility in establishing ALPs, particularly in cases where the application of the five specific methods is not possible due to reasons such as difficulties in obtaining comparable data due to uniqueness of transactions such as intangibles or business transfers, transfer of unlisted shares, sale of fixed assets, revenue allocation/splitting, guarantees provided and received, etc. however, it would be necessary to justify and document reasons for rejection of all other five methods while selecting the ‘Other Method’ as the most appropriate method. the OECD Guidelines also permit the use of any other method and state that the taxpayer retains the freedom to apply methods not described in the OECD Guidelines to establish prices, provided those prices satisfy the ALP.

The general underlying principle is that as long as the quotation can be substantiated by an actual uncontrolled transaction to be considered as a price being representative of the prevailing market price, it can be considered as a comparable under the CUP Method. For all other purposes, the quotation would be considered as a comparable under the other method.

7. Conclusion

The CUP Method is the most direct and reliable measure of an ALP for the controlled transaction, using a comparable uncontrolled transaction, subject to an adjustment for differences, if any. the reliability of the results derived from the CUP Method is affected by the completeness and accuracy of the data used and the reliability of assumptions made to apply the method.

Application of the CUP Method entails, among others, a close similarity of the following comparability parameters like quality of the product, nature of services, contractual terms and conditions, level of the market, geographic market in which the transaction takes place, date of the transaction, foreign currency risks and intangible property ownership which could materially affect the price charged in an uncontrolled transaction.

Generally, internal CUPs are preferred over external CUPs in view of availability of reliable and accurate comparable data. A quotation could be considered as a CUP, so long as it is substantiated by an actual transaction and is a clear reflection of the prevailing market price.

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Time to introspect

Decisions of various judicial forums are always discussed and debated. Many decisions, particularly those of the High Court and the Apex Court have far-reaching impact on the business, industry, the profession and the public in general. Judgements of the Tribunals also attract attention, but to a lesser degree, as they are fact-based and do not finally decide the issue. However, recently, a decision of the Mumbai Bench of the Income Tax Appellate Tribunal was widely publicised in the media, and was the topic of discussion among our colleagues, for it contained rather critical observations about the profession. There were responses to what appeared in the media by some leaders of our profession.

On reading of the decision, I felt that while the comments may not have been necessary to decide the appeal, they were not entirely unwarranted. While it is true that in regard to some of the observations contained in the said decision that there could be two views, their tone reflected concern and anguish rather than only criticism. It must also be appreciated that the order was authored by a member of our profession.

The appeal before the Tribunal was filed beyond the prescribed period by 2,984 days. The delay was on account of erroneous advice given by a Chartered Accountant, which was admitted by him on the affidavit. The Tribunal which expressed admiration for core expertise and knowledge of Chartered Accountants, felt that the commission of such an error by a Chartered Accountant was unlikely. It felt that the affidavit had been issued to accommodate the client. It therefore rejected the affidavit. However, as the Tribunal has stated that if the Chartered Accountant had actually tendered such grossly erroneous advice or the Chartered Accountant “accommodated” the assessee in both events there was cause for worry. I would share that concern.

Even more disturbing was the fact that the reporting in the media gave an impression that the Tribunal had virtually castigated the entire profession, while the contents of the order were significantly different. What was distressing was the perception in the public mind that the profession deserved the brickbats it purportedly received.

Rather than take up an aggressive or defensive posture, the profession should take a note of this decision and seriously introspect. In an earlier editorial, I had mentioned that as professionals we need to understand our role and the parameters within which we carry out our professional duties. Given the nature of our profession a close association with the client is inevitable. However, that relationship or association should not result in our shying away from our duties and responsibilities. As much as we may have sympathy for the travails that a businessman has to suffer on account of unjust laws, complicated regulations etc., we cannot let that colour the opinion that we have to express as auditors and the advice that we have to give as tax consultants.

Apart from the expertise and technical prowess for which the public relies on our profession, what distinguishes us, or at least what ought to, from others is the ethical standards which we are expected to follow. It is in this area that we have seen consistent deterioration over the last couple of decades. We see among professionals, a desire for quick success, quick money and for that purpose the willingness to make the necessary compromises. While this is the attitude of some in the profession, the businessman also wants to hoodwink the law and achieve his objective wherever he can. This results in the “accommodation” to which the Tribunal has made a reference. Whenever this aspect is raised in discussions, the refrain of many of my friends is that the deterioration in the the profession is a “reflection of deteriorating ethical and moral standards in society.” While this is true, it cannot be a defence for falling standards of conduct. If, as a profession, we wish to claim some different and distinct status, we cannot say that because society tolerated unethical conduct by others, such conduct by a Chartered Accountant is pardonable. It is because of our professional skills and standing that the society expects something different from us. If we are to retain the rapidly diminishing respect for our profession in the society, we must discharge our onerous obligation. The Tribunal in another paragraph points out that if the member had indeed committed such a gross error, the efficacy of the Continuing Professional Education programs (CPE) which are held by the ICAI, may have reduced. Attendance of these programmes is mandatory, for practising professionals. While a general statement about the falling standards of these programmes is certainly not appropriate, their content, the manner in which they are conducted, is certainly worth a revisit. With continuous development of laws, rules and regulations and changes in the business environment, updation is required in a vast number of areas. The primary role of the ICAI is that of a regulator of the profession, and the setter of accounting and auditing standards. The responsibility of ensuring the updation of knowledge of a large number of members in numerous areas, while maintaining a high standard of quality is an onerous responsibility. For the benefit of the profession at large, it can share this responsibility with other professional bodies.

As far as individual professionals are concerned, one has in the recent past experienced an attitude of seeking exemption from the mandatory attendance of CPE programmes or make an attempt only to comply with the regulations in letter and not in spirit. This is inexcusable. If we claim to be an elite profession then we must accept the principle that our knowledge and professional skills have to remain updated and our skills have to be honed to perfection.

Finally, it is true that the conduct of the Chartered Accountant which led to the observations by the honourable Tribunal may not be representative of the profession in general, it is certainly not a solitary instance. Let us take this opportunity to introspect. I only hope that this will not be like an introspection by any political party after a debacle, but one which will result in some positive action.

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OUR DREAMS ARE WITHIN OUR REACH

When we look back at our lives, we find that so many of our wonderful dreams have remained dreams only. We have not been able to realise our dreams. In many cases we have not even tried to achieve them.

If God gives us a chance to live our lives again, what would our life be like? Would it be better than our first innings? Would we achieve more? Would we become better human beings? Most of us would agree that if we are given another chance, our second innings would be better than this one. We would be better human beings, achieve many more goals, and reach far greater heights. We would be able to fulfil many of our unfulfilled dreams. A question arises as to why is it so? Why is it that we failed to achieve our goals? Why is it that we even failed to try? This is because we fail to do many things out of fear of failure and fear of ridicule. We are just too scared to step out of our comfort zone. It is said that even eagles need a push. The baby eagle who is ready to fly, but afraid of it, is literally pushed out of its comfort zone of the nest by the mother. It is only when it is pushed out, the baby eagle realises the power of its own wings and soars to great heights in the wide open sky. We must also learn to step out from our comfort zone. It is only then we will realise these dreams. I love this quote by R.L. Stevenson, which is my favourite.

“Twenty year from now you will be more disappointed by the things you did not do than by the ones you did do. So,throw off the bowlines, sail away from the safe harbor. Catch the trade winds in your sail. Explore, Dream, Discover.”

How true are these words! One cannot succeed without trying. We may lose. But it is “better to have loved and lost” than to have never loved at all. As it is aptly said, “A ship is safe in the harbour but that is not what it is meant for!” Friends, we have to dream, lift our anchors, and sail the high seas ( nay, rough seas) to achieve our dreams. We may have to face gales and storms, high winds, and rains. There is no option but to sail and overcome all these to achieve our dreams.

There are some interesting things about sailing. I did not know until I tried my hands at sailing, that a good sailor can sail in any direction, no matter from where the wind is blowing. Even when he wants to go in a direction directly from where the wind is blowing, he can always zigzag his way to the desired destination! In the words of Edward Gibbon, “the winds and waves are always on the side of the ablest navigator.” We have to be ablest navigators in this sea of life and reach our destination, realise our dreams. We should firmly believe that “It is not over until win!”

And have we not watched with baited breath the yachts racing, tilted at an impossible angle. My God! It is so scary to be in that yacht at that time. But, here too, experienced sailors tell us that if you feel too scared, just let go off the ropes! The yacht will at once come to a balanced even keel and you will be safe. So it is with life. If we are too scared we have just to let go off everything and trust in God. He will take care of us. He will see that our ship does not tilt over and we are not dumped into the sea. God is always there to look after us!

We have to be adventurous, learn to take risks, and chances. After all, if nothing is ventured, nothing will be gained. As Andre Gide puts it, “Man cannot discover new oceans unless he has the courage to lose sight of the shore. We just cannot sit on the shore of a river, afraid to step into the waters, and expect to cross the river.”

So friends, we shall dream, dream of reaching great heights. We shall never be afraid of failure and we shall put in our best. It is only if we try our best, put our best foot forward that we will be able to achieve our goals, and fulfil our dreams. It is our duty to be what we are capable of being. The greatest waste in the world is the difference between what we are and what we become, and what we are really capable of becoming.

“It is not enough to have lived. Be determined to live for something”.

– William Arthur Ward

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Representation seeking deferment of new Tax Audit Report or extension of time for filing the Return of Income for Assessment Year 2014-15 to 30th November 2014

25th August 2014

The Chairman
Central Board of Excise & Customs
Government of India,
North Block, Vijay Chowk,
New Delhi 110 001.

Hon’ble Sir,

Re: Representation seeking deferment of new Tax Audit Report or extension of time
for filing the Return of Income for Assessment Year 2014-15 to 30th November 2014

The Central Board of Direct Taxes (“CBDT”) vide Order dated 20th August under section 119 of the Act, has extended the due date for obtaining and furnishing of the report of audit under section 44AB of the Act for Assessment Year 2014-15 in case of assessees who are not required to furnish report under section 92E of the Act from 30th September, 2014 to 30th November, 2014. However the Order is silent on the extension of due date for filing the Return of Income.

The CBDT vide Notification No.33 dated July 25, 2014 has notified new Form No. 3CA, Form No. 3CB and Form No. 3CD for furnishing Audit Report u/s 44AB of the Income Tax Act, 1961 [Tax Audit Report]. Various new clauses have been added while many others have been amended. The new clauses and the amended clauses require auditor to certify the correctness of figures having a direct impact on the total income of the assesse.

The Tax Audit report is the basis of computation of income. Various deductions and disallowances are quantified in the Tax Audit Report to be included in the return of income.

It is respectfully submitted that the relief sought to be provided by the CBDT by granting extension of time for filing the Tax Audit Report without a corresponding extension of due date for filing the Return of Income would not serve the desired purpose. It will actually necessitate filing of the Return of Income without audited figures in respect of various deductions and disallowances being available.

Considering the substantial changes made in the new Form 3CD, in principle and to be fair and just, the new requirement should not have been made retrospectively applicable to the Financial Year 2013-2014 [Asst. Year 2014-2015] as that causes severe hardship to the assessees as well as the auditors. Instead of deferring this to Financial Year 2014-2015 [Asst.Year 2015-2016], only the date of obtaining and furnishing Tax Audit Report has been extended and that too, without making consequential extension in the due date of furnishing the Return of Income for the Asst.Year 2014-2015 [Financial Year 2013-2014] and hence, this extension is effectively meaningless.

As such, the extension granted for obtaining and furnishing of the report of audit under section 44AB would not provide relief to the assessees and the hardships faced would continue. In fact, many returns may not have correct figures and the return of income filed without audited figures being available may need to be revised after obtaining the Tax Audit Report, particularly in case of non-corporate assessees. This would lead to avoidable duplication of work as well as additional time and costs to be incurred by assesses as well as the Department (having to process a large number of revised returns).

Hence to provide the desired relief to assessees, it is earnestly requested that either the applicability of new form of Tax Audit Report should be deferred to the next year [Financial Year 2014-2015] to avoid it’s retrospective applicability [which is the just and fair thing to do] or atleast, the due date for filing the return of income for the Assessment Year 2014-15 for all assessees (other than assessees who are required to furnish report under section 92E of the Act) liable to Tax Audit should be extended to 30th November 2014 i.e. the date upto which extension has been granted to obtain and furnish the Tax Audit Report.

We trust you would find merit in our above genuine request and accede to the same.Your early action in the matter will be highly appreciated.

Thanking you.

Yours Sincerely

Bombay Chartered Accountant Society

Nitin Shingala President,

Kishor B. Karia Chairman Taxation Committee

Sanjeev R. Pandit Co-Chairman

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Extension of due date of deposit of Service Tax and TDS in October 2014 due to Public Holidays

6th August 2014

The Chairman
Central Board of Excise & Customs
North Block,
Rashtrapati Bhavan,
Defence Headquarters.
New Delhi 110 001

The Chairman
Central Board of Direct Taxes
Government of India
North Block
Parliamentary Street
New Delhi 110 001

Respected Sirs,

Sub: Extension of due date of deposit of Service Tax and TDS in October 2014
due to Public Holidays

This is to bring to your notice that there will be a series of public holidays in the first week of October 2014 as mentioned below:

In view thereof, it will be very difficult for the taxpayers to make payment of Service Tax/Excise Duty and TDS by their due dates being the 6th and the 7th of the month respectively. You are therefore requested to consider extension of the due dates for payments of Service Tax/Excise Duty and the TDS from 6th October 2014 and 7th October 2014 respectively to 10th October 2014.

Your early action in this regard will help in easing undue hardships to the taxpayers and will be highly appreciated.

Thanking you.

Yours faithfully

Bombay Chartered Accountant Society

Nitin Shingala President,

Kishor B. Karia Chairman Taxation Committee

Sanjeev R. Pandit Co-Chairman

Govind G. Goyal Chairman Indirect Taxes & Allied Laws Committee

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India’s antiquated law on contempt of court restricts personal liberty and must be overhauled

After having raised the issue of whether the clubby and secretive collegium system actually preserves the independence of the judiciary former Supreme Court judge, Justice Markandey Katju, has now trained his guns on India’s antiquated contempt of court law. He has made the valid point, that judicial supremacy cannot be based on the law of kings in a democracy. Is interference or disruption of the due course of judicial proceedings or the administration of justice contempt of court? Or, does criticism of a judgment or a judge constitute sufficient ground for invocation of the dreaded law? While it ought to be the former in India it’s often understood as the latter, as the contempt law has been employed when judges were made targets of personal attacks or to silence criticism of judgments. But criticising a judge or a judgment perceived to be flawed cannot be seen to be an illegitimate act that scandalises the court or seriously undermines public confidence in the administration of justice. In the UK and US, where both civil and criminal contempt laws are in operation, substantial amendments have constrained the powers of judges who might otherwise have acted to vindicate their authority, pomp and majesty which are anathema to a democratic institution.

The Indian contempt Act of 1971 has evolved over time to incorporate amendments that delineated what does not constitute contempt and framed rules to regulate contempt proceedings, yet inconsistencies remain. In 2006, an important amendment to the 1971 Act provided for truth as a valid defence in contempt proceedings, especially because the law was considered a threat to the fundamental rights to personal liberty and freedom of expression. Not just the doctrine of truth but public interest must be the cornerstones on which the law must be based. The judiciary, executive and legislature must ensure there are enough safeguards against arbitrary exercise of the power for contempt of court

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Labour law overhaul must happen at the centre

Reform of India’s archaic and restrictive labour laws are central to any reform programme. This is a wellunderstood fact now; that the unfortunate stunting of India’s manufacturing sector, particularly in labourintensive industries, can largely be laid at the feet of these statist laws is undeniable. Not only do they provide bureaucrats with a reason to harass entrepreneurs, and place an excessive and unfair burden on small and medium enterprises, but they have signally failed to protect India’s workers. The fact that every employer wishes to avoid the incidence of these laws has led to widespread casualisation of the workforce. As a consequence, over 90 per cent of Indians work in the unorganised sector. Any comprehensive approach to restarting the economy from the new government will need to include a complete overhaul of labour law.

It is unfortunate, therefore, that the new government has shown little interest in pushing the envelope as far as this essential reform is concerned. Instead, the Bharatiya Janata Party (BJP), which leads the National Democratic Alliance government, has stressed that the Rajasthan government – which it also runs – is conducting labour law reform. The Rajasthan government will alter the application of related central laws: for example, raising the threshold of the number of employees who can be laid off without government permission from 100 to 300, and applying the Contract Labour (Regulation and Abolition) Act only to companies with more than 50 workers, compared with 20 now. Similar labour law changes are being contemplated in Madhya Pradesh, also ruled by the BJP, and even Haryana, which is ruled by the Congress. These are certainly welcome developments, indicating that labour law changes as necessary reforms to revive the manufacturing sector have begun to gain wider acceptance in many states.

(Source: Business Standard, dated 23-07-2014)

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Supreme Court feels slighted snaps at Centre on National tax tribunal

The Supreme Court reacted sharply to the Centre’s stand that the purpose behind creation of National Tax Tribunal (NTT) was to associate domain experts in deciding taxation disputes as it was often felt that judges lacked expertise in specialized fields.

A five-judge constitution bench comprising Chief Justice R M Lodha and Justices J S Khehar, J Chelameswar, A K Sikri and R F Nariman wondered why the government rushed to the judges whenever they faced a problem.

“Judges may not be experts. But whenever there is a problem, they come to the judges by way of courts or commissions,” the bench said before reserving its order on a petition filed by Madras Bar Association challenging the National Tax Tribunal Act.

The petitioner had alleged that these tribunals could not have been empowered to decide questions of law, which exclusively fell within the courts’ domain. It said the government, by constituting NTTs and providing appeal against their orders directly to the Supreme Court, had denuded the jurisdiction of high courts.

The inclusion of chartered accountants and company secretaries on NTTs and allowing them to decide questions of law did not go down well with the apex court. “How can a CA or CS help determine the question of law involved in a taxation dispute,” the bench asked.

Appearing for an association of chartered accountants and company secretaries, senior advocate K V Vishwanathan said the CA and CS courses involved study of taxation laws.

The bench said, “These days, Class VIII and IX students also study about Constitution. That does not mean they have knowledge of law. The taxation experts may be able to help a judicial member understand the complexities involved in a dispute but how will they determine a question of law?”

In a lighter vein it said, “Many clerks and stenographers after long association with lawyers know the provisions of law quite well. Can they be said to have knowledge enough to decide questions of law. A CA or a CS would be studying taxation law from the angle of tax purposes only and not for understanding the questions of law that would arise in a dispute.”

Appearing for the petitioner, senior advocate Arvind Datar said NTT experimentation was dangerous for the judiciary as slowly, the government would take away expert subjects – disputes relating to company law, trademark and intellectual property – from the high court’s jurisdiction by creating separate tribunals in the name of infusing experts into the dispute redressal mechanism.

NTT, instead of supplementing the judiciary, was supplanting the court’s jurisdiction, Datar said.

The bench asked solicitor general Ranjit Kumar whether NTTs enjoyed any autonomy at all. “The NTT chairman does not even have power to set up benches. This power is vested with the central government. What is the autonomy we are talking about,” it asked.

(Source: Times of India, dated 24-07-2014)

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Judicial appointments need transparency

Amid growing concerns about political pressure on the appointment or extension of judges, the government has indicated that it intends to move quicker on creating a judicial appointments commission. This immediately follows the revelation of a series of events from 2005 which, although the facts continue to be disputed, nevertheless raise serious concerns. Former Supreme Court judge, and current chairman of the Press Council of India, Markandey Katju recently said that a judge of the Madras High Court was granted an extension although a report by the Intelligence Bureau had said that he was corrupt. Mr. Katju said that the collegium that appoints judges, then headed by the erstwhile chief justice of India, R C Lahoti, had given in to pressure from the government. Mr. Katju said that the ex-prime minister, Manmohan Singh, was put under pressure from a coalition partner – who could only be the Dravida Munnetra Kazagham(DMK) from Tamil Nadu – to protect the judge, and a senior minister pressured the collegium on behalf of the government. Then law minister, H R Bhardwaj, subsequently claimed that extensions to the judge were solely the collegium’s decision. It has now emerged, in a report by The Times of India, that the Prime Minister’s Office had, in fact, lobbied in favour of making the judge in question a permanent member of the Madras High Court bench.

On one level, this is a reminder of the bad old days of coalition politics under the United Progressive Alliance (UPA). The DMK proved itself to be a difficult and bullying ally, and often used its pivotal numbers in the parliamentary coalition to dubious ends. Whether it is in the reported arm-twisting of Ratan Tata by the telecom ministry it controlled; or its insistence that A Raja be retained as a minister in 2009; or in the doubtful Maxis- Aircel deal, the DMK bears a great deal of responsibility for the downfall of the UPA . If these latest allegations are true, however, then it becomes clear that Dr Singh himself had no intention, right from the start, of standing up to this ally. It is no surprise, then, that the UPA failed to manage its coalition.

However, the larger point that must be made is on the nature of judges’ appointments. The incumbent government has already been accused of intervening unduly in judicial appointments, by refraining from returning the nomination of eminent lawyer Gopal Subramanium to the collegium. With each such report, there are more holes in the existing justification for the collegium, that it is immune to political pressure. However, the answer is not to simply replace it with another opaque system. The appointment of judges must be made in the open, and transparently. The executive must be given a greater, but circumscribed, say in the choice of judges, certainly. However, if accusations of corruption or bias are going to be thrown around in this manner, then it is clear that the process requires clarity and light in order to preserve the aura of the judicial system. The proposed judicial appointments commission should, thus, not be a closed and opaque body.

(Source: Business Standard, dated 24-07-2014)

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Another market crash in the offing?

Reserve Bank of India governor Raghuram Rajan has added his voice to a steadily rising chorus warning of the heightened risks of a global market crash. Specifically, he says there’s a disconnect between the state of the economy and asset prices; that excessively accommodative monetary policy in the developed economies has led to asset bubbles; that competitive monetary easing is leading to beggar-thy-neighbour policies reminiscent of the Great Depression in the 1930s; that the recent low volatility masks many of the risks; and that not enough is being done in terms of improved regulation.

Rajan should know. He was one of those who predicted the financial crisis. At that time, he had said that among the reasons for the crisis were the skewed incentives for fund managers that led to excessive risk-taking. That hasn’t changed. Nor has the pervasive inequality in the US. Several economists have argued that the lack of growth in real wages was the underlying reason for the explosion of private sector debt that led to the financial crisis, as debt was substituted for income. The International Monetary Fund has warned that housing markets are once again getting overheated in several countries.

There have been half-hearted attempts at regulation, but it’s far from enough. The attempt has been to get back to business as usual, by papering over the cracks with money. As the Bank for International Settlements pointed out in its annual report last year, the role of accommodative monetary policy was to buy time to put reforms in place. Instead, it warned, “The time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.”

The worry is the bubbles seem to be getting larger and larger and we are still to recover from the bursting of the last one. And after using up all available ammunition on tackling the current crisis, how will the world deal with another bust?

Will the central banks be able to engineer a soft landing? The history of serial booms and busts casts serious doubts about that. Indeed, if history is any guide, the Chinese Communist Party’s record of steering its economy to a soft landing is much better than that of Western governments and central banks, although whether they will be able to handle their current crisis remains to be seen. The silver lining, if one may call it that, is that there is often a gap between the first warnings and the final bursting of a bubble. For instance, some had cautioned as early as 2004 that a bubble was in the making. And Raghuram Rajan’s famous warning at Jackson Hole was made in August 2005, two years before the crisis hit.

(Source: Extracts from an Article by Mr. Manas Chakravarty in the Mint Newspaper dated 11-08-2014)

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BUSINESS CASE FOR ANTICORRUPTION

Efforts on anti-corruption has taken a front seat
for the past couple of years. The beginning of 1990s saw several
international organisations introducing anti-corruption instruments to
make the functioning of businesses clean. With globalisation and
business opportunities spread across the globe, companies have to follow
the norms of several countries. Strong anti-corruption rules of USA and
Britain has led many companies to introduce anti-graft initiatives in
their working. However, India still lags behind.

In the recently
published Ease for Business Index (2014) constituted by the World Bank,
India ranked 134 amongst 189 nations in the world (the lower bottom),
indicating that India is an investment / business averse country. Ease
for Business Index takes into account, procedures of obtaining licenses,
permits, tax regulations and infrastructure facilities. Lack of
transparency and accountability shrouds all the above procedures.

Though
India is trying to address the issue of corruption by making
legislative changes, ratifying international conventions and adopting
technology in its administrative functioning, merely rules and
regulations will not address the issue. It is important that the
business stakeholders are committed and come together to participate in
the fight against corruption.

Business Case for Anti-corruption
A
recent report of Price Waterhouse Coopers (PWC), a leading consultancy
firm, mentions that increasingly companies have recognised “corruption”
as a major threat to their business.

• 63% of the companies indicate that they have experienced corruption.

• 39% of the businesses have lost important bids due to corrupt officers.

•
Corruption leads to the damage of the brand name. Correspondingly,
companies have reported that having an anti-graft programme has a great
chance of enhancing the brand name.

• The report goes as far as
mentioning that the total money that a company spends on legal,
financial and regulatory suits due to corruption is much less compared
to the reputational damage (brand) which is done to the organisation.

• 43% of the companies do not enter a particular market which is highly vulnerable to corruption.

Risks of not engaging in the anti-corruption initiatives
• Criminal prosecution (heavy cost to the company)
• Exclusion from bidding processes
• No legal remedies in case the company increases the
cost of the materials
• Damage to reputation, brand and share price
• Regulatory censure
• Cost of corrective action
• Demotivated employees
• Uneven market, loss of business opportunities
• Policy-makers responding by adopting tougher and more rigid laws and regulations (domestic, national and international)

Benefits of introducing anti-corruption initiatives in the companies:

•
With strong anti-corruption mechanism in a company, the organisation
saves on legal suits. Further, it also attracts new companies through
rigorous business integrity policies.
• Business attracts investments from ethically oriented investors.
• Employee retention and morale of the employee increases as hard work will be the key criteria for progress of the employees.
• Increase productivity by means of a motivated workforce.
• Business can obtain a competitive advantage of becoming a preferred choice of customers, through positive branding.
• Together, businesses can create a level playing field.
• Business collaboration on anti-corruption initiatives influences positive rules and regulations.

Global
Compact Network India, is one of the local networks of UN Global
Compact; a strategic policy initiative for businesses that are committed
to aligning their operations and strategies with ten universally
accepted principles in the area of Human Rights, Labour, Environment and
Anti-Corruption. The 10th principle of UNGC is holistically dedicated
to fight against Anti-corruption in all its form. Furthering the 10th
principle Collective Action Project India provided a platform for
anti-corruption dialogue between private and public sector and
incentivise ethical behavior of businesses. The project in a phased out
manner has taken up pressing corruption issues in the Indian context, in
the spheres of public procurement, bribery and fraud, and supply chain
transparency and sustainability in India.

In the past three
years, since Collective Action was launched in India in 2011, one of the
significant achievements of GCNI has been creation of a platform for
dialogue and deliberation; with an equal number of participants from
public sector, private sector, business associations and SMEs. GCNI has
also been successful in making the businesses take notice about the
merits of adoption of international instruments, one of them being
Integrity Pact (to achieve transparency in procurement). From a time
when discussing corruption was a taboo to a time when talking and
tackling corruption is seen as a sign of sustainable business, GCNI, in a
short duration, has achieved much more than its anticipated goal of
creating awareness about graft.

In its first series of pan-India
consultation conducted during 2010-2011 titled Ethical Business for
profitability, GCNI partnered with academicians, civil society, chambers
of commerce, international business councils to share their best
practices which are being followed in various sectors. Mr. J. F. Ribeiro,
former Supercop, speaking at the Seminar in Mumbai pointed out the
importance of the topic and highlighted the need to understand and
analyse the different ethical dilemmas that companies face today,
especially with relation to corruption. Mr. N. Vittal, Former
Central Vigilance Commissioner delivering the keynote address in Chennai
emphasised that policies based on ethics, of any business, would mean
that they are legal, fair and open to public scrutiny. Any company which
does not practice such a policy is most likely to face contempt and
ridicule at some point or the other. Seminar participants in all four
cities (Mumbai, Chennai, Delhi, Kolkatta) unanimously confirmed that
business can attract and retain talent if they are branded as an ethical
business today.

In the second series of pan-India consultation
conducted between 2011-2012 titled Turning Down the Demand and Cutting
off the Supply saw increased participation from private sector and small
and medium sector enterprises (SMEs). The main aim of second series of
consultations was to know about innovated ways in which corruption could
be tackled and some of the ground realities which are not factored in
while constructing Anti-Corruption policies. Corporate Fraud triangle
was explored so that efforts could be made at all levels through
Collective Action.

In
conclusion, ‘Collective Action’ is a collaborative and sustained
process of cooperation among stakeholders. It increases the impact and
credibility of individual action, brings vulnerable individual players
into an alliance of likeminded organisations and levels the playing
field between competitors. Collective action besides representing big
private and public sector organisations also leverage equal
representation to the Medium/Small scale enterprises who despite being
major contributor to the Nation’s income fail to convey the issues and
challenges faced by them and thus become more prone to corrupt
practices.

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A. P. (DIR Series) Circular No. 19 dated 11th August, 2014

Liberalised Remittance Scheme for resident individuals-clarification

This circular states that banks are no longer required to report remittances under the Liberalised Remittance Scheme (LRS) for acquisition of immovable property outside India because as per A.P. (DIR Series) Circular No. 5 dated 17th July, 2014 facility under LRS can be used for acquisition of immovable property outside India.

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A. P. (DIR Series) Circular No. 18 dated 30th July, 2014

Constitution of Special Investigating Team – sharing of information

This circular advices Authorised Persons to ensure that all information/documents as and when required by the Special Investigation Team (SIT) are made available to them.

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A. P. (DIR Series) Circular No. 17 dated 28th July, 2014

External Commercial Borrowings (ECB) Policy — Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till 31st December, 2014: –

The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.

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A. P. (DIR Series) Circular No. 16 dated 28th July, 2014

Trade Credits for Imports into India – Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till 31st December, 2014: –

The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.

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[2014] 46 taxmann.com 217 (New Delhi – CESTAT) Delhi Transport Corporation vs. CST, New Delhi

Whether provision in the agreement to bear service tax liability by service receiver would absolve the service provider from his statutory liability to pay the same to Government? Held, No.

Facts:
Appellant provided taxable service of “sale of space or time for advertisement” to various advertising agencies. The agreements entered into with these service receivers contained a clause that the liability to tax including service tax would be borne by the recipient of the service. Appellant therefore claimed that it neither obtained registration nor collected and paid service tax from service receivers under the bonafide belief that by virtue of the agreement, liability to remit service tax stood transferred to the recipient. The assessee also pointed out that, in terms of specific clause in the agreement, disputes arose between Appellant and service receivers some of which are subject matter of arbitration proceedings and that, advertisers had not reimbursed the Appellant for the service tax component. It was also submitted that, in one of such proceedings, the High Court has given a direction, that in the event service tax liability is imposed, such liability shall be on the service receiver in terms of the agreement. Accordingly reliance was placed on the Apex Court judgment in the case of Rashtriya Ispat Nigam Ltd. vs. Dewan Chand Ram Saran [2012] 21 taxmann.com 20.

Revenue rejecting the contention of the assessee invoked extended period of limitation which is assailed by the assessee on the ground of bonafide belief.

Held:
The Tribunal rejecting the claim of bonafide belief held that, nothing is alleged, asserted nor established that there is any ambiguity in the provisions of the Act, which might justify a belief that the Appellant/service provider was not liable to service tax. It further held that it is axiomatic that no person can harbour a “bonafide belief” that a legislated liability could be excluded or transferred by a contract. It is a well settled position that legislation is not rejected or amended by private agreement.

Decision of the Apex Court relied by the assessee was distinguished on the ground that, in that case Court only observed that, transferring of the burden of liability to tax to a contractor was not prohibited and qua the terms of the agreement between the parties, the contractor was liable to bear the burden. However, it is not an authority for the proposition that if the Appellant’s tax burden is shifted to the advertisers under the private agreement, the Appellant is immune to tax so far as revenue authorities are concerned. Appeal was accordingly dismissed.

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2014(34) STR 890 (Tri-Mum.) Vodafone Cellular Ltd. vs. CCE, Pune-III

Whether the time limit of one year as provided u/s.
11B of the Central Excise act, 1944 is applicable to service tax rebate
cases specifically when the Notification does not provide any time
limit for filing such rebate claim?

Facts:
Rebate claim
filed by the appellants vide Notification No. 11/2005 was rejected on
ground that services provided in India to international inbound roamers
registered with Foreign Telecom Network operator but located in India at
the time of provision of service, was not export of services vide
Export of Service Rules, 2005 and that the refund claim was not filed
within one year and therefore, the claim was time barred. Further,
doctrine of unjust enrichment was also not fulfilled.

The
appellant contended that the Tribunal in its own case, relying on Paul
Merchants Ltd. vs. CCE 2013 (29) STR 257 (Tri.), had delivered a
favourable decision and had held that that the services provided by
appellant were “export of services” since the services were rendered to
foreign telephone service providers, who were located outside India and
the principle of unjust enrichment is not applicable for export
transactions vide section 11B (2) (a) of the Central Excise Act, 1944.
Also, there was no time limit to file rebate claim under Notification
No. 11/2005. Relying on the various High Court decisions, the appellants
advanced the argument that the ratio of Central Excise decisions will
not be applicable to service tax export matters and therefore, the time
limit prescribed in section 11B of the Central Excise Act for filing of
refund claim does not apply to service tax rebate claim filed under
Notification No. 11/2005.

The respondents claimed that the
decision of Paul Merchants Ltd. (supra) was challenged before High Court
and the case was admitted. Further, the decision delivered in
appellant’s own case was also challenged before the High Court and
therefore, the decisions given were in jeopardy. Since section 11B is
made applicable to service tax vide section 83 of the Finance Act, 1994,
time limit of one year is applicable even to the rebate claims filed
under Notification No. 11/2005. Even if it was assumed that there was no
time limit prescribed, the authority should exercise their powers
within reasonable period, i.e., one year.

Held:
The
decisions delivered in case of Paul Merchants Ltd. (supra) and in
appellant’s own case were not granted any stay. Therefore, on merits,
the appellants were eligible for rebate claim. Since the transaction was
one of export, the principle of unjust enrichment was not applicable in
view of specific provisions u/s. 11B. Time limit of one year was
applicable even to rebate claims vide section 11B of the Central Excise
Act, 1944 read with section 83 of the Finance Act, 1994. Even if it was
assumed that there was no time limit, it is a settled law that though
the law is silent, a reasonable time limit should be read into the Law.

Relying
on decisions of GOI vs. Citadel Fine Pharmaceuticals 1989 (42) ELT 515
(SC) and Everest Flavours Ltd. 2012 (282) ELT 481 (Bom.), 7 rebate
claims were remanded back for the limited purpose of verification as to
whether the claims were time barred or not in view of decision delivered
therein and two rebate claims were allowed.

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2014 (34) S.T.R. 758 (Tri.-Ahmd.) M/s. Demosha Chemicals Pvt. Ltd. vs. Commissioner of C. Ex. & St. Daman

If invoices are in the name of head office, whether CENVAT Credit can be distributed to only 1 of its units prior to 1st April, 2012? Held, Yes.

Facts:
During the period from September, 2006 to July, 2011, the appellants availed CENVAT Credit of input services, invoices of which were raised at the registered/head office. The head office, not being registered as Input Service Distributor, did not raise any invoice on the appellants to distribute CENVAT Credit. Accordingly, CENVAT Credit availed by the appellants was disallowed in absence of valid document for availment of CENVAT credit vide Rule 9(1) of the CENVAT Credit Rules, 2004. The department contended that in absence of registration as Input Service Distributor, the appellants were not allowed to distribute CENVAT Credit only to one unit.

Held:
It was not disputed that the appellants had more than one unit, the invoices received by head office related to actual provision of services and that the appellants had availed more than eligible CENVAT Credit of service tax paid. In a similar case of Doshion Limited vs. Commissioner of Central Excise, Ahmedabad 2013 (288) ELT 291 (Tri- Ahmd.), it was held that there was no requirement for proportionate distribution of CENVAT Credit. Further, there was no loss to Revenue. Also, in absence of any legal requirement, the procedural irregularity had to be ignored. Further in case of Modern Petrofils vs. Commissioner of Central Excise 2010 (20) STR 627 (Tri. Ahmd.), the invoices were raised in the name of head office as against factory and the appellants were not registered as Input Service Distributor. The Tribunal held that since admissibility of input services was not disputed, the omissions were curable defects and CENVAT Credit was allowed. Since there were no provisions for distribution of proportionate CENVAT Credit as Input Service Distributor to various units before 1st April, 2012 and in view of ratio of decisions cited above, the appeal was allowed.

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2014 (34) STR 796 (Tri. – Ahmd) Jayesh Silk Mills vs. Commissioner of Central Excise, Surat

In absence of any prescribed time limit, whether application for restoration of appeal can be filed anytime? Held, No.

Facts:
The Tribunal directed the appellants to deposit entire amount of duty demanded as pre-deposit vide Order dated 5th July, 2005. However, due to non-compliance with the said requirement, the appeal was dismissed vide Order dated 5th October, 2005. Subsequently, the appellants deposited 50% duty on 30th December, 2005 and 20th February, 2006 and requested the Tribunal to restore the Appeal. The Tribunal extended the time limit for predeposit till 30th November, 2006. Further, the payment made was supposed to be reported on 1st December, 2006. Since, the amount was not deposited within even such extended time limit, the Appeal was dismissed vide Order dated 13th December, 2006.

The appellants filed an application for restoration of appeal after four years with the reasoning of financial difficulty and closure of business, they could not deposit balance amount. Further, since there were various decisions in favour of the appellants, the appellants requested to restore the Appeal without insisting on deposit of balance dues.

Held:
The Tribunal observed that the Mumbai Tribunal in case of Kiritkumar J. Shah vs. C.C.E, Nagpur 2011 (22) STR 246 (Tri.-Mum.), had held that three months, being the maximum time allowed for filing appeal, should be considered to be time limit even for filing application for restoration of appeal and that there cannot be any justification to file application at the sweet will of the assessee. Relying on the Mumbai Tribunal’s decision and having regard to inordinate delay in filling such application, the application for restoration was not considered and no merits of the case were not decided.

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2014 (34) STR 789 (Tri. – Bang.) Patel Engineering Works vs. C.C., C.E., & S.T., Visakhapatnam- I

Whether value of goods supplied while providing services would be included in valuation under service tax? Held, No.

Facts:
The
appellants undertook maintenance and repairs of ships. They discharged
service tax on the value of services provided. However, the adjudicating
authority confirmed service tax demand on value of goods supplied while
undertaking maintenance, management or repair service. Further, service
tax on GTA services availed was not paid by the appellants. The
appellants stated that Notification Nos. 12/2003 and 1/2006 specifically
excluded value of goods sold and they discharged service tax on correct
amount with respect to GTA services.

Held:
The
Tribunal observed that the Hon’ble Delhi High Court in case of G. D.
Builders & Others vs. UOI 2013 (32) STR 673 (Del) held that Section
67 of the Finance Act, 1994 enables the Government to levy service tax
only on the consideration received for rendering taxable service and it
prohibits inclusion of value of goods supplied while rendering services.
Following the Hon’ble Delhi High Court’s decision, the Tribunal
remanded back the matter with the order to quantify and exclude the
value of goods supplied/sold along with provision of services from
service tax levy.

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2014 (34) STR 778 (Tri. – Ahmd.) JCT Electronics Ltd. vs. Commr. Of Ex. & S.T., Vododara

Whether adjustment of excess service tax paid can be done in any of the next months/ quarters? Held, No.

Facts:
The appellants paid excess service tax which was adjusted suo motu by them after a long lapse of period. The appellants contested that such service tax adjustment was appropriate vide Rule 6(4A) and 6(4B) of the Service Tax Rules, 1994 since the amount involved was less than Rs. 1 lakh. According to Service Tax Department, such adjustment could be made in the next month or next quarter provided intimation was filed to the department within 15 days of such adjustment. The case of the department was that since the appellant did not follow the procedure prescribed, their adjustment was not acceptable. The first Appellate authority confirmed the demand along with interest and also imposed penalties u/s. 76 and 77 of the Finance Act, 1994. The appellants argued that they have adjusted their own money and hence, penalty was unwarranted in the present case.

Held:
The Tribunal observed that the phrase used under Rule 6(4A) was “subsequent month or quarter” and not “subsequent months and quarters.” Further, the appellants had not fulfilled all conditions as required under the said Rules. Distinguishing the case of Siemens Limited vs. CCE, Pondicherry 2013 (29) STR 168 (Tri.), it was held that since, in the present case, there was no reasonable explanation provided by the appellant, the first Appellate authority was correct in demanding service tax along with interest. However, since the appellants had a bonafide belief with respect to adjustment of excess service tax paid, the penalties were set aside.

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2014 (34) STR 753 (Tri. – Ahmd.) Quintiles Technologies (India) Pvt. Ltd. vs. Commr. of S.T., Ahmd.

Whether refund of CENVAT Credit is available with respect to export of exempted services? Held, Yes.

Facts:
The appellant was engaged in exporting taxable as well as exempt business auxiliary services. The appellants had, therefore, filed refund claims for unutilised CENVAT credit under Rule 5 of the CENVAT Credit Rules, 2004 read with Notification No. 5/2006-CE (NT) dated 14th March, 2006. The appellants argued that exempted services shall form part of export turnover as well as total turnover and therefore, they were eligible for 100% CENVAT Credit. However, the department was of the view that while calculating refund claim, exempted services exported shall not be considered as “Export Turnover” though the same is includible in the total turnover and accordingly, CENVAT Credit proportionate to exempted services exported shall not be admissible.

Held:
The Tribunal observed that the definition of “Export turnover of services” under Clause D of Rule 5(1) of the CENVAT Credit Rules, 2004, does not make any distinction with respect to payments received from export services. The logic of giving cash refund of taxes used in relation to export of goods/services is to have “Zero Rated exports.” Therefore, following the decision delivered in case of Zenta Pvt Ltd. 2012 (27) STR 519 (Tri.), it was held that even exempted export services should be added to export turnover of services and the appellants were allowed refund of total unutilised CENVAT Credit.

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2014 (34) STR 583 (Tri-Chennai) Sundaram Brake Lininigs vs. CCE, Chennai-II

Whether accidental and medical insurance obtained
by the Manufacturer for employees and their family members are eligible
input services for claiming CENVAT Credit?

Facts:
The
appellants, being manufacturer of excisable goods, availed CENVAT Credit
on accidental and medical insurance premium paid for the employees and
their family members. The appellants relied on the decisions of the
Karnataka High Court in case of CCE vs. Micro labs Ltd.- 2012 (26) STR
383 (Kar.) and CCE vs. Stanzen Toyotetsu India (P) Ltd.-2011 (23) STR 44
(Kar.) wherein group insurance and health insurance policy of employees
was held to be qualified “input service.”

Revenue relied on the
decision of the Gujarat High Court in case of CCE vs. Cadila healthcare
Ltd. – 2013 (30) STR 3 (Guj) wherein it was concluded that all services,
the cost of which became part of the cost of the business, cannot be,
prima facie considered as an input service.

Held:
The
Tribunal observed that the employer took accidental insurance policy for
the workers of the company to cover its business risk and similarly,
health insurance for providing proper treatment to the employees falling
sick. Insurance bring employees back to work without loss of man-hours
and disruption of manufacturing lines of the company. Thus, such
insurance cannot be considered as having no relation with the
manufacturing activity. However, insurance premium attributable to the
families of employees had no direct nexus with the manufacturing
activity and will not be qualified as input service. Following the
decision of the Karnataka High Court in Micro labs Ltd. (supra), the
order was set aside and matter was remanded back to the adjudicating
authority to quantify the insurance premium attributable to family
members which was held ineligible as CENVAT credit.

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2014 (34) STR 586 (Tri-Del.) Radico Khaitan Ltd. vs. CCE., Delhi

Whether service tax refund claim can be rejected on the sole technical ground that refund claim was not shown as ‘receivable’ in the Balance Sheet? Held, No.

Facts:
After paying service tax on advances received, the agreement for provision of services was terminated and consequently, no services were provided by the appellants. The appellants filed refund claim which was rejected by the Revenue.

The appellants contested that they had refunded the value of taxable service along with service tax to the customer and sufficient documents were already shown for the amounts received and refunded back to the customer. Furthermore, chartered accountant’s certificate was provided for refund of service tax amount to the customer. Further legality of claim has substantiated through guidance note, circular and judicial pronouncements and since the amount was already refunded to customer, there was no question of unjust enrichment.

Held:
The Tribunal observed that there was no dispute regarding eligibility of refund claim but, prima facie the claim was rejected since the amounts were not shown in the Balance Sheet as ‘receivable’. The rejection made on such a short ground cannot be held to be just and fair. Therefore, the Tribunal held that irrespective of the non-reflection of refund amount in the Balance Sheet, the same needs to be refunded inasmuch as the same was not required to be paid by the assesse.

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2014 (34) STR 596 (Tri-Del.) Jenson & Nicholson (India) Ltd. vs. CCE., Noida

Whether financial services of techno-economic feasibility of rehabilitation and modalities of finance, are eligible input service? Held, Yes.

Facts:
The appellants manufacturers of paints and varnishes had various factories. The appellants, being a sick company applied to BIFR for finalising rehabilitation package and in the process availed services of techno feasibility study of rehabilitation and obtained report on further fund raising. The appellants took CENVAT Credit on such services which was denied by revenue authorities.

The appellants contested that the services were obtained in view of order of BIFR and the same were financial services covered very well within the definition of input services. In any case, these services were “activities relating to business” specifically covered under the definition of input services.

Held:
In terms of BIFR’s orders, the appellants availed such services with respect to techno-economic feasibility of rehabilitation and modalities of finance. Without such feasibility report, it was not possible for BIFR to finalise the rehabilitation package for the appellants. Therefore, such services had nexus with its manufacturing activity and are covered within the term “activities relating to business” and therefore, CENVAT Credit was allowed to the appellants.

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2014 (34) STR 610 (Tri-Ahmd.) Arvind Mills Ltd. vs. Comm. Of ST, Ahmedabad

Whether activity, of supplying qualified/skilled employees to subsidiary/group companies, is taxable under “manpower recruitment and supply agency service”? Held, No.

Facts:
The appellants manufacturers of fabrics and readymade garments supplied qualified/skilled employees to its subsidiary/group companies. Department alleged that the transaction was covered under manpower recruitment and supply agency services. Relying on the Divisional Bench decision in case of M/s. Paramount Communication Ltd. vs. CCE, Jaipur 2013-TIOL-37-CESTAT -DEL, the appellants contested that the services were not in the nature of manpower recruitment and supply agency services.

Held:
The appellants had deputed its employees to subsidiary/ group companies engaged in similar line of business. There was no allegation or findings about deputation of employees to any concern other than its own subsidiary/group companies. The employees did not work under the direction/ supervision and control of subsidiary/group companies but completed the work as directed by the appellants.

Manpower recruitment or supply agency phrase under service tax laws, stipulated “any commercial concern” within its purview and the appellants were merely a composite textile mill and not a commercial concern engaged primarily in recruitment or supply of manpower. The Hon’ble Tribunal relied on the decision in the case of Paramount Communication Ltd. (supra) wherein it was observed that in case the personnel works for two sister concerns, the rendition of services was by the personnel to both the companies and it was not a case of one company providing services to another. Accordingly, the appeal was allowed.

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[2014] 46 taxmann.com 22 (Karnataka) – CST vs. Peoples Choice

Whether the proceedings initiated by an order dated after the amendment, in respect to the period prior to the amendment by invoking the provision before amendment is vitiated after the amendment? Held, Yes.

Facts:
Department issued show cause notice as on 06-10-2004 calling upon the respondent to show cause as to why the service tax for security services rendered for the period from 16th October, 1998 to 31st March, 2004 should not be demanded under the provisions of section 73(1)(a) of the Act, invoking the extended period of limitation, and why it should not be recovered u/s. 73(2)(a) of the Act. The provisions contained in section 73(1)(a) of the Act were substituted vide Finance Act, 2004 with effect from 10-09-2004. The provision prevailing prior to 10-09-2004 was providing for value of taxable services escaping assessment, while after its substitution vide Finance Act, 2004, it provided for recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded.

Held
The High Court held that admittedly, on the date of show cause notice, i.e., 06-10-2004, the provisions contained in section 73(1)(a) of the said Act, prevailing prior to 10-09- 2004, were not in existence. In other words, the statutory provision under which the show cause notice issued was not in existence as on that date, and therefore as rightly held by the Tribunal SCN is not valid.

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2014 (34) STR 814 (Guj.) Astik Dyestuff Pvt. Ltd. vs. CCE & Customs, Gujarat

Whether Sales commission is eligible input service for availment of CENVAT Credit? Held, No. In case of contradictory decisions of the two High Courts, whether it is mandatory to refer the matter to Larger Bench? Held, No.

Facts:
The appellant availed of CENVAT Credit on commission services procured during the period July, 2008 to April, 2009. The Adjudicating Authority and Tribunal relying on the decision of the jurisdictional High Court in the case of CCE, Ahmedabad-II vs. Cadila Healthcare Limited 2013(4) STR 3 (Guj.) and disallowed CENVAT Credit on sales commission. Being aggrieved, the appellants filed appeal before the Hon’ble High Court with following substantial questions of law:

• Whether the Tribunal was justified in passing the order without considering contrary decisions of the Punjab & Haryana High Court and the Gujarat High Court on the same subject and also that the department had not filed appeal against the Punjab & Haryana High Court’s decision?

• Whether the Tribunal was justified in relying only on the Gujarat High Court’s decision since service tax is a central levy and such discrimination would violate Article 14 and 19(1)(g) of the Constitution of India?

• Whether there was injustice on the part of the Tribunal and the order was illegal and absurd?

• Whether sales commission was not in the nature of sales promotion, an activity specifically covered in inclusive part of definition of input services for availment of CENVAT Credit?

The appellants contended that they were entitled to CENVAT Credit on sales commission in view of CBEC Circular dated 29th April, 2011 which is binding on the department. The appellants relied on various decisions in support of their contention. The appellants argued that in view of the favourable decision of the Punjab & Haryana High Court in the case of Ambika Overseas 2012 (25) STR 348 (P & H), the appellants was entitled to CENVAT Credit and since there were contrary decisions of the two High Courts, the appellants requested to refer the matter to the Larger Bench.

Held:
If there is conflict between the jurisdictional High Court’s decision and CBEC Circular, decision of the jurisdictional High Court is binding on the department.

Decision of the jurisdictional High Court in case of Cadila Healthcare Limited (supra) has been challenged before the Hon’ble Supreme Court and the said order is not stayed by the Hon’ble Supreme Court.

Decision of the jurisdictional High Court is binding on the department rather than decision of the other Courts even in case there are contradictory decisions prevailing on the subject matter.

Since decision of Cadila Healthcare Limited (supra) is pending before the Hon’ble Supreme Court, the matter cannot be referred to the Larger Bench. Even otherwise, the High Court did not see any reason to take a contrary view than as given in Cadila Healthcare Limited (supra).

Just because there were contrary decisions, matter cannot be referred to the Larger Bench when the High Court was in agreement with the view taken by the jurisdictional High Court.

Accordingly, the Hon’ble High Court held that the Tribunal was right in relying on the decision of Cadila Healthcare Limited (supra) CENVAT Credit of sales commission services.

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2014 (34) S.T.R. 809 (A.P.) Commr. of Cus. & C. Ex. Hyderabad-III vs. Grey Gold Cements Ltd.

Whether CENVAT Credit of service tax paid on outward transportation of final goods from place of removal is allowed? Held, Yes.

Facts:
Respondent availed CENVAT Credit on input services of transportation of goods from place of removal. The adjudicating authority disallowed such CENVAT Credit, however the first Appellate authority relying on CBEC Circular F. No. 137/3/2006-CX.4, dated 02-02-2006 decided the case in favour of the respondent. Department appealed against the order and the matter was referred to the Larger Bench. The Larger Bench relying on the judgement of the Punjab & Haryana High Court in the case of Gujarat Ambuja Cement Ltd. vs. Commissioner of Central Excise, Ludhiana 2009 (14) S.T.R. 3 (P & H), CBEC Circular and the Hon’ble Supreme Court’s decision in the case of All India Federation of Tax Practitioners vs. UOI 2007 (7) STR 625 (SC), held that service tax is a destination based consumption tax to be borne by customers. The Larger Bench also held that if CENVAT Credit is denied on transportation services, it would be a tax on business rather than being a consumption tax. The argument advanced by the department that CENVAT Credit cannot be allowed for services the value of which do not form part of value under Excise Law was not accepted by the Larger Bench.

Held:
The Hon’ble High Court agreed with the analysis of the Larger Bench of Tribunal and dismissed the appeal by the department.

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[2014] 46 taxmann.com 45 (SC) Union of India vs. Hindustan Zinc Ltd.

Whether, as per Rule 57CC of the Central Excise Rules, 1944 (Rule 6 of the CENVAT Credit Rules, 2004), CENVAT Credit on inputs is required to be reversed/paid if by-products arising in the manufacturing process is cleared at nil rate of duty? Held, No.

Facts:
The assessee obtained zinc ore concentrate from the mines on payment of excise duty which is used as an input for the production of zinc. In the process of manufacturing, sulphuric acid was produced as a by-product which is also a dutiable product. However, clearance of sulphuric acid as a by-product to fertiliser plants was chargeable at nil rate of duty in terms of Notification No. 6/2002-CE. Revenue contended that as per Rule 57CC of the Central Excise Rules, 1944 (Rule 6 of the CENVAT Credit Rules, 2004), the assessee was obliged to maintain separate accounts and records for the inputs used in the production of zinc and sulphuric acid and in the absence of the same the assessee was obliged to pay 8% as an amount on the sale price of exempt sulphuric acid.

The assessee filed writ petitions under Article 226 before the High Court challenging the vires of Rule 57CC and constitutional validity of Rule 6 of the CCR, 2004 on the ground that the Central Government by subordinate legislation cannot fix rates of duties which is the prerogative of the Parliament u/s. 3 of the Central Excise Act, 1944 read with Central Excise Tariff Act, 1975. The High Court decided the petition in favour of the respondents on the interpretation of Rule 57CC and Rule 57D itself, without going into the question relating to the vires. On appeal by the department, the Apex Court decided the matter on merits and held as under:

Held:
The Apex Court observed that emergence of sulphur dioxide in the calcination process of concentrated ore is a technological necessity and then conversion of the same into sulphuric acid as a non-polluting measure cannot elevate the sulphuric acid to the status of final product. Technologically, commercially and in common parlance, sulphuric acid is treated as a by-product in extraction of non-ferrous metals by companies not only in India but all over the world.

It was further observed that the given quantity of zinc concentrate will result in emergence of zinc sulphide and sulphur dioxide according to the chemical formula on which respondents have no control. The ore concentrates (zinc or copper) are completely utilised for the production of zinc and copper and no part can be traced in the sulphuric acid which is cleared out. The Court held that, when in the case of the respondents, no quantity of zinc ore concentrate has gone into the production of sulphuric acid, and that entire quantity of zinc concentrate is used for the production of zinc, applicability of Rule 57CC cannot be attracted. Accordingly, the Hon’ble Court affirmed the decision of the High Court holding that the mischief of recovery of 8% under Rule 57CC on exempted sulphuric acid is not attracted.

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2014(34) STR 906 (SC) Ghanshyam Dass Gupta vs. Makhan Lal

Whether the High Court can decide the appeal ex parte on merits in case of non-appearance on behalf of appellant in view of Explanation to Order 41 Rule 17 (1) of the Code of Civil Procedure? Held, No.

Facts:
The appellant engaged a lawyer for conducting his appeal before the High Court. Later on, the lawyer was elevated as judge of the High Court and consequently, he returned the brief. Though the appellant engaged another lawyer, due to oversight of the clerk, Vakalatnama of the new advocate was not placed on record and therefore the new lawyer was not intimated of the final hearing. On the day of final hearing, the old lawyer informed that he had been returned the brief and therefore there was no effective appearance made on behalf of the appellant. Even the respondent was absent. The learned judge however, decided the appeal on merits by a detailed judgment.

The appellant contended that the High Court was not justified in deciding the appeal on merits since there was no representation on behalf of the appellant. The appellant alleged that the only course open to the High Court was either to dismiss the appeal on default or adjourn the same, in view of Explanation to Order 41 Rule 17(1) of the Code of Civil Procedure (CPC).

The respondent’s counsel contested that since the appeal was of the year 2003 which came up for the final hearing after nine years, the High Court can decide the matter on merits even in the absence of the appellant.

Held:
After discussing the Explanation to Order 41 Rule 17 (1) of CPC in detail, the Hon’ble Supreme Court observed that the explanation was introduced to give an opportunity to the appellant to convince the Appellate Court that there was a sufficient cause for non-appearance. Such an opportunity would be lost, if the Court decides the appeal on merits. Following the decision in case of Abdul Rahman and Others vs. Athifa Begum and Others (1996) 6 SCC 62, the Hon’ble Supreme Court allowed the appeal, restored the appeal and directed the High Court to dispose off the appeal in accordance with Law.

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Belated refund applications and refund under MVA T Act, 2002

Introduction
Under the Maharashtra Value Added Tax Act, 2002 (MVAT Act), there are a number of new procedures as compared to the earlier regime of the BST Act. The major departure is in regard to getting refund as per the records of the dealer.

Earlier, there used to be speaking assessments orders in all cases. Therefore, irrespective of the data in the return in the course of assessments, dealers were able to put before the assessing authority the correct position, as per record and also used to get refunds as per the said records. Thus, even if refund was not claimed in the return, the dealer could, in the course of assessment, put forth his claim.

Refund as per returns under MVA T Act, 2002
Under the MVAT Act, there is a prescribed procedure for getting refunds as per returns. The procedure for granting refunds is given in section 51 of the MVAT Act, 2002. If a dealer is entitled to a refund, as per returns filed by him, then he can file an application u/s. 51 (form 501) for claiming the said refund. The department can process the application and if satisfied, refund will be granted.

However, there is time limit for filing such an application for refund. Upto 2008-09, the said time limit was three years. On 01-05-2011 section 51(7) was amended, so as to curtail the time limit from three years to 18 months. As per the interpretation of the Department, the said curtailed period was to apply from the year 2009-10. However, the matter was contested before the Hon’ble Bombay High Court and in case of Vaibhav Steel Corporation (69 VST 460), it was held that refund being a substantive right, the amendment should apply prospectively and can not apply to prior periods. Accordingly, in the above case, though application for the year 2009-10 was filed after 18 months but as it was within 36 months, the Hon’ble High Court directed the authorities to process the application.

Refund application for 2010-11
In the case of Vaibhav Steel Corporation, the issue was about 2009-10. Therefore, there was uncertainty about application of the said ruling to the period 2010-11. It was contended by the department that the said ruling will not apply to the period 2010-11.

Recent judgment in case of Sagar Enterprises
Recently, the Hon’ble Bombay High Court had one more occasion to deal with the above controversy. In the judgment in the case of Sagar Enterprises (WP No. 12191 of 2013, dated 15-07-2014), in addition to the period 2009-10, year 2010-11 was also involved, the Hon’ble High Court has observed as under;

“2. The claim of the Petitioner is for refund. That arises in the backdrop of the returns for the Financial Years 2009- 2010 and 2010-2011 under the Maharashtra Value Added Tax Act, 2 002. The Petitioner claims that as per section 61 of the Maharashtra Value Added Tax Act, 2002 the Audit Report was filed before the due date prescribed. The Audit Report for the aforesaid period resulted in refund to the tune of Rs.17,51,801/- and Rs. 7,24,218/- respectively.

3. The Petitioner claims that he approached the Authorities for refund being a dealer covered by the Act, but what has been brought to his notice is the circular under which the Commissioner notified that all such applications and to seek refund ought to be within the period prescribed by s/s. (7) of section 51 of the Act. It is urged that the circular insists that the Maharashtra Act No. XV/2011 by which section 16(4) was inserted w.e.f. 01-05-2011 would govern the claim. Meaning thereby, that an application for refund cannot be entertained unless it is made within 18 months from the end of the year containing the period to which the return relates.

4. The learned counsel appearing for the Petitioner states that the words “18 months” were substituted for the original words “three years” by the Maharashtra Act No. XV/2011 w.e.f. 01-05-2011. This cannot govern the claim for refund for the prior period. In fact the Assessment Orders passed by the Deputy Commissioner of Sales Tax, Business Audit Branch, Mumbai and the Assistant Commissioner of Sales Tax, Refund Audit Branch are referred to in the petition. Thus, it is submitted that so long as the claim of the Petitioner pertains to the Accounting Years 2009- 2010 and 2010-2011 the applications for refund could have been filed within a period of three years and not the curtailed period. The circular, therefore, travels much beyond the legal provision and in any event the circular cannot govern and control interpretation of the subject legal provision, is the submission of the Petitioner’s Advocate.

5. Mr. Vagyani, learned Government Pleader appearing on behalf of the Respondents, on instructions, states that though such stand has been taken and reiterated in the affidavit filed by the Joint Commissioner (Respondent No. 3) in reply to this Writ Petition, now he has received instructions to state before this Court that the Petitioner’s refund applications shall be processed after they being treated as filed under the unamended provision. The refund applications shall be processed and an order will be passed thereon as expeditiously as possible and before 31st August, 2014.

6. We accept these statements made by Mr.Vagyani on instructions, as undertakings given to this Court. We direct that the refund applications of the Petitioner be processed and disposed of accordingly. No further extension will be granted under any circumstances.”

In light of above, it appears that for 2010-11 also the time limit to submit refund applications was three years. Therefore, the dealers, who have not uploaded applications within 18 months but have submitted it within 18 months thereafter with covering letters etc., will be eligible to take benefit of above judgment.

However, the issue still remains where the applications have not been filed within 36 months. The issue also remains for the other years where there has been a delay in submitting refund applications.

In the above writ petition, the learned advocate for the petitioner brought to the notice of the Hon’ble High Court 252 other cases for which there is delay and hence, the refunds have remained pending. The Hon’ble High Court has called for details and thereafter further action will be taken.

From the above legal position, it appears that the claims of refunds should be considered by Department in substance without rejecting them on technicalities. The dealers can expect relief in regard to refunds irrespective of filing of belated application etc.

Set off vis-à-vis details from vendors
At present under the MVAT Act, set-off is allowed/ disallowed based on cross checking of J1 & J2 annexures given with VAT Audit report in Form 704.

In case of mismatch, set-off is disallowed. In assessment/ appeals department directs furnishing of revised J1/J2 to allow set-off or the copy of Form 704 of vendor etc. On non-production of above, set-off is disallowed.

Before the Tribunal, in the case of Modern Steel (VAT App. No. 47 & 48 of 2014 dt.13-06-2014 readwith Corrigendum dt. 09-0702014). Similar facts arose.

The facts and direction of the Hon. M.S.T. Tribunal are as follows:-

“4. In the Second Appeal, Shri C. B. Thakar, the learned Advocate submitted that the set-off cannot be disallowed on the ground that the purchase are not disclosed by the vendor in the audit report in Form 704 or even has not filed the audit report. He, therefore, submitted that the appeal be remanded for verification of the purchases and enquiry concerning the transactions of M/s. Munirs Dismantling Company/Corporation.

6. On perusal of the appeal order and assessment order concerning the disallowing of set-off of m/s. munirs Dismantling Company/Corporation, we find that both the authorities have not enquired into as to whether the reports are filed and tax is paid on the said transactions also. We do not find that both the authorities have verified the purchases of m/s. munirs dismantling Company/ Corporation. the enquiry conducted by both the authorities is incomplete and require further inquiry and verification. In this view, the order passed by the appellate authority is not sustainable disallowing set-off of rs.1,99,500/- and is liable to be set aside and matter needs to be remanded to the appellate authority for verification and further inquiry.

7. If set-off is allowed, the same would be available for adjustment of CST dues and there would be no demand in CST appeal. For the reason, it is necessary to set aside the order in CST appeal also. for the forgoing reasons, we pass the following order:

VAT Second Appeals Nos. 47 & 48 of 2013 are allowed. The disallowing of set off on purchase transactions of m/s. munirs dismantling Company/Corporation is set aside. The appellate authority is directed to verify the transactions of m/s. munirs dismantling Company/Corporation and find whether the tax is paid into Government Treasury and decide the claim of set-off in accordance with law and on assessment of the set-off, the refund if found due may be adjusted as per the provisions of law against CST demand and shall recompute the sales tax liability.

Accordingly, appeals are disposed off. Proceedings are closed.” the hon. tribunal has clearly ruled that simply on basis of non disclosure by vendor or non production of copy of form 704 of vendor, set-off cannot be disallowed. The verification of payment of tax by vendor is required to be brought on record.

This judgment gives useful guidance in the matter of verification of set off claim by the Department.

Matching on electronic system may be a good tool in hands of department to initiate further inquiry. however, it cannot be the basis for disallowing set off. Accordingly verification of payment by due legal procedure is necessary on part of department.

It is expected that department will follow the direction of the tribunal in pith and substance and not subject the buyers to unwarranted and unjustified set-off disallowance and levy of interest and penalty.

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ACIT vs. Gopalan Enterprises. ITAT Bangalore ‘B’ Bench Before N. V. Vasudevan (JM) and Jason P. Boaz (AM) ITA No. 241/Bang/2013 A.Y.: 2004-05. Decided on: 13-06-2014. Counsel for revenue/assessee: L. V. Bhaskar Reddy/B. K. Manjunath.

S/s. 28, 37, 80IB (10) – Even in an assessment u/s 143(3) r.w.s. 147 addition to income on account of bogus purchases will qualify for deduction u/s. 80IB (10).

Facts:
The assessment of total income of the assessee, a partnership firm, engaged in the business of property development was completed vide order dated 26-12-2006 passed u/s. 143(3) of the Act.

The Assessing Officer based on information received from AO of a sister concern of the assessee reopened the assessment u/s. 147 of the Act.

The assessee raised objections regarding validity of the service of notice u/s. 148 of the Act and non-furnishing of reasons recorded. The assessee was furnished with the reasons recorded by the AO on 24-12-2010.

The assessee did not participate in the proceedings for assessment and the assessment was completed u/s. 144 of the Act. In the assessment order, the AO having discussed about fictitious purchases found in the case of assessee’s sister concern concluded that an addition of Rs. 1,66,41,525 was required to be made on account of fictitious purchases. He also stated that since there was no reply from the assessee, the fictitious purchases are treated as debited to revenue/income for which section 80IB is not applicable. He, accordingly, added Rs. 1,66,41,525 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A) where without prejudice to its contention that the expenditure is incurred for the purpose of business and therefore is allowable prayed that in view of the decision of Tribunal in the case of S. B. Builders & Developers vs. ITO (45 SOT 335)(Mum) the deduction u/s. 80IB(10) be allowed on enhanced profits. The CIT(A) upheld the addition but allowed the alternative claim of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The AO came to the conclusion that the fictitious claim of purchases to the extent of Rs. 1,61,41,525 was considered as not relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act because the assessee did not give any reply or participate in the assessment proceedings. In our view, such conclusion by the AO was without any basis. The AO ought to have identified it with reference to the evidence available on record as to whether fictitious purchases are relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act.

Be that as it may, in the proceedings before the CIT(A), the assessee has categorically made a claim that the fictitious expenses are relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act. The CIT(A), in our view, has only directed to verify the claim of the assessee and if it is found correct to allow deduction u/s. 80IB(10) of the Act in respect of enhanced income. In our view, the claim made by the assessee was that the expenses disallowed were inextricably linked with the profits on which the claim for deduction u/s. 80IB(10) was made. As rightly pointed out by the ld. Counsel for the assessee, the Hon’ble Supreme Court in its decision in the case of CIT vs. Sun Engineering Works Pvt. Ltd. (198 ITR 297) (SC) has visualised a situation where the assessee cannot be permitted to challenge reassessment proceedings at an appellate or revisional proceeding and seek relief in respect of items earlier rejected or claimed relief in respect of items not claimed in the original assessment proceedings. The Hon’ble Court has, however, given a rider that if such claims are relatable to escaped income, the same can be agitated. In our view, the claim for fictitious purchases if it is relatable to profits/receipts which are eligible for deduction u/s. 80IB(10) of the Act, the disallowance of such expenses will go to enhance the income/ profits eligible for deduction u/s. 80IB(10) of the Act on which the assessee will be entitled to claim deduction u/s. 80IB(10) of the Act. It cannot be said that the disallowed expenditure cannot be considered as profits derived from the housing project or as operational profit.

The Tribunal confirmed the directions given by CIT(A).

The appeal filed by the revenue was dismissed.

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K. Prakash Shetty vs. ACIT ITAT Bangalore ‘B’ Bench Before N. V. Vasudevan (JM) and Jason P. Boaz (AM) ITA No. 265 to 267/Bang/2014 A.Y.: 2006-07, 2008-09 and 2009-10. Decided on: 05-06-2014. Counsel for assessee/revenue: H. N. Khincha/ Farahat H. Qureshi

S/s. 271(1)(c), 271AAA, 292BB – Show cause notice issued u/s. 274 of the Act not spelling out the grounds on which penalty is sought to be imposed is defective. Consequently, an order imposing penalty is invalid.

Facts:
The assessee was an individual who belonged to M/s. Gold Finch Hotel Group. There was a search u/s. 132 of the Act on 20-11-2009 in the case of the assessee. On 30-12-2011, assessment orders were passed u/s. 143(3) r.w.s. 153A for AY 2006-07, 2008-09 and 2009-10. In each of these years, the income returned in response to notice issued u/s. 153A exceeded the returned income declared in return of income filed u/s. 139. The difference between the income returned u/s. 139 and income returned u/s. 153A of the Act was due to disclosure made by the assessee consequent to search u/s. 132 of the Act.

For AY 2006-07, the Assessing Officer (AO) initiated penalty proceedings u/s. 271(1)(c) of the Act and for AY 2008-09, he initiated penalty proceedings u/s. 271(1) (c)/271AAA of the Act and for AY 2009-10, he initiated penalty proceedings u/s 271AAA of the Act. In respect of all the three years, the AO imposed penalty u/s. 271(1) (c) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal, where it challenged the validity of orders imposing penalty on the ground that the show cause notice issued u/s. 274 of the Act was defective for AY 2006-07 and that for AY s 2008-09 and 2009-10 notice u/s. 274 of the Act had been issued for imposing penalty u/s. 271AAA of the Act, but the order imposing penalty was passed u/s. 271(1)(c) of the Act.

Held:
The show cause notice issued u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. The show cause notice is also bad for the reason that in A.Y.s 2008-09 and 2009-10 the show cause notice refers to imposition of penalty u/s. 271AAA whereas the order imposing penalty has been passed u/s. 271(1)(c) of the Act. It held that the aforesaid defect cannot be said to be curable u/s. 292BB of the Act, as the defect cannot be said to be a notice which is in substance and effect in conformity with or according to the intent and purpose of the Act. Following the decision of the Karnataka High Court in the case of CIT & Anr vs. Manjunatha Cotton and Ginning Factory (359 ITR 565) (Kar), the Tribunal held that the orders imposing penalty in all assessment years to be invalid and consequently it cancelled the penalty imposed.

The appeal filed by the assessee was allowed.

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Capital gain: Exemption u/s. 54: A. Y. 2007- 08: Sale of bungalow jointly owned with wife: Purchase of adjacent flats one in the name of assessee and other jointly with wife and used as single residential house: Assessee entitled to exemption u/s. 54 in respect of investment in both houses:

CIT vs. Devdas Naik (Bom): ITA No. 2483 of 2011 dated 10/06/2014: In the A. Y. 2007-08, the assessee sold a bungalow jointly owned with wife for a consideration of Rs. 3 crore. With this sum they bought three flats, one in the assessee’s name, another in the name of assessee and his wife and third in the name of the wife. The assessee claimed exemption u/s. 54 of the Income-tax Act, 1961 in respect of his investment by him in two flats. The two flats were adjacent, converted into single residential house with one common kitchen, though purchased from two different sellers under two distinct agreements. The Assessing Officer held that the assessee was entitled to exemption u/s. 54 in respect of only one flat and disallowed the claim in respect of the second flat. The Tribunal relied on the decision of the Special Bench in ITO vs. Ms. Sushila M. Jhaveri;107 ITD 327 (Mum)(SB) and allowed the assesee’s claim.

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

“i) Admitted fact is that the flats were converted into one unit and for the purpose of the residence of the assessee. It is in these circumstances the Commissioner held that the acquisition of the flats may have been done independently but eventually they are a single unit and house for the purpose of residence. This factual finding could have been made the basis for recording a conclusion in favour of the assessee. We do not find that such a conclusion can be termed as perverse.

ii) R eliance placed by the Tribunal on the order passed by it in the case of Ms. Sushila M. Jhaveri and which reasoning found favour with this Court is not erroneous or misplaced. The language of the section has been noted in both the decisions and it has been held that so long as there is a residential unit or house, then the benefit or deduction cannot be denied.

iii) I n the present case, the unit was a single one. The flats were constructed in such a way that they could be combined into one unit. Once there is a single kitchen, then, the plans can be relied upon.

iv) We do not think that the conclusion is in any way impossible or improbable so as to entertain this appeal. In this peculiar factual backdrop, this appeal does not raise any substantial question of law. The appeal is devoid of any merits and is dismissed.”

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Business expenditure: Disallowance u/s. 43B r.w.s. 36(1)(va): A. Y. 2006-07: Employees’ contribution to PF: Paid by the employer-assessee to the Fund before the due date for filing of return of income for the relevant year: Allowable as deduction in the relevant year u/s. 43B r.w.s. 36(1)(va):

CIT vs. M/s. Hindustan Organic Chemicals Ltd. (Bom); ITA No. 399 of 2012 dated 11-07-2014:

For
the A. Y. 2006-07, the Assessing Officer disallowed the claim for
deduction of the employees’ contribution to the Provident Fund on the
ground that the same was paid by the employer after the due date under
the Provident Fund Scheme. The CIT(A) allowed the deduction to the
extent of the payment made during the grace period and disallowed the
balance claim of Rs. 1,82,77,138/- paid by the assesee beyond the grace
period but before the due date for filing the return of income under the
Income-tax Act, 1961. Considering the amendment of section 43B by the
Finance Act, 2003 w.e.f. 01-04-2004 and the Judgment of the Supreme
Court in the case of CIT vs. Alom Extrusion Ltd.; 319 ITR 306 (SC), the
Tribunal allowed the assess’s claim for deduction of the said amount.

In
appeal, the Revenue contended that admittedly there was a delay in
payment of the employees’ contribution to PF amounting to Rs.
1,82,77,138/- and therefore, as per the provisions of section 43B
r..w.s. 36(1)(va) of the Act, deduction on account of the said
contribution towards PF was not allowable if the payments were made
after the due dates specified in the relevant Act.

The Bombay High Court rejected the contention of the Revenue, upheld the decision of the Tribunal and held as under:

“i)
We find that the ITAT was fully justified in deleting the addition of
Rs. 1,82,77,138/- on account of delayed payment of Provident Fund of
employees’ contribution.

ii) We therefore find that no
substantial question of law arises as sought to be contended by Mr.
Malhotra on behalf of the Revenue.”

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Export – Deduction u/s. 80HHC – Turnover to include sale of goods dealt in and sale of scrap is not includible

Commnr. of Income Tax-VII, New Delhi vs. Punjab Stainless Steel Industries (Civil Appeal No.5592 of 2008 dated 5th May, 2014)

The assessee was a manufacturer and exporter of stainless steel utensils. In the process of manufacturing stainless steel utensils, some portion of the steel, which could not be used or reused for manufacturing utensils, remained unused, which was treated as scrap and the respondent-assessee disposed of the said scrap in the local market and the income arising from the said sale was also reflected in the profit and loss account. The respondent-assessee not only sold utensils in the local market but also exported the utensils.

For the purpose of availing deduction u/s. 80HHC of the Act for the relevant Assessment Year, the assessee was not including the sale proceeds of scrap in the total turnover but was showing the same separately in the Profit and Loss Account.

For the purpose of calculating the deduction, according to the provisions of section 80HHC of the Act, one has to take into account the profits from the business of the assessee, export turnover and total turnover. The deduction, subject to several other conditions, incorporated in the section, is determined as under:

P_r_o_fi_ts_ _o_f _th_e_ _B_u_s_in_e_s_s_ X__ E_x_p_o_r_t _T_u_rn_o_v_e_r

Total Turnover

According to the Revenue, the sale proceeds from the scrap should have been included in the ‘total turnover’ as the respondent-assessee was also selling scrap and that was also part of the sale proceeds.

The assessee had objected to the aforestated suggestion of the Revenue because inclusion of the sale proceeds of scrap into the total turnover would reduce the amount deductible under the provisions of section 80HHC of the Act.

By virtue of the judgment delivered by the High Court, the accounting method followed by the respondent assessee had been approved and therefore, Revenue filed an appeal before the Supreme Court.

The Supreme Court observed that to ascertain whether the turnover would also include sale proceeds from scrap, one has to know the meaning of the term ‘turnover’. The term ‘turnover’ has neither been defined in the Act nor has been explained by any of the CBDT circulars.

The Supreme Court held that in the aforestated circumstances, one has to look at the meaning of the term ‘turnover’ in ordinary accounting or commercial parlance.

Normally, the term ‘turnover’ would show the sale effected by a business unit. It may happen that in the course of the business, in addition to the normal sales, the business unit may also sell some other things. For example, an assessee who is manufacturing and selling stainless steel utensils, in addition to steel utensils, the assessee might also sell some other things like an old air conditioner or old furniture or something which has outlived its utility. When such things are disposed of, the question would be whether the sale proceeds of such things would be included in the ‘turnover.’ Similarly, in the process of manufacturing utensils, there would be some scrap of stainless steel material, which cannot be used for manufacturing utensils. Such small pieces of stainless steel would be sold as scrap. Here also, the question is whether sale proceeds of such scrap can be included in the term ‘sales’ when it is to be reflected in the Profit and Loss Account.

In ordinary accounting parlance, as approved by all accountants and auditors, the term ‘sales,’ when reflected in the Profit and Loss Account, would indicate sale proceeds from sale of the articles or things in which the business unit is dealing. When some other things like old furniture or a capital asset, in which the business unit is not dealing are sold, the sale proceeds therefrom would not be included in ‘sales’ but it would be shown separately.

In simple words, the word “turnover” would mean only the amount of sale proceeds received in respect of the goods in which an assessee is dealing in. For example, if a manufacturer and seller of air-conditioners is asked to declare his ‘turnover,’ the answer given by him would show the sale proceeds of air-conditioners during a particular accounting year. He would not include the amount received, if any, from the sale of scrap of metal pieces or sale proceeds of old or useless things sold during that accounting year. This clearly denotes that ordinarily a businessman by word “turnover” would mean the sale proceeds of the goods (the things in which he is dealing) sold by him.

So far as the scrap is concerned, the sale proceeds from the scrap may either be shown separately in the Profit and Loss Account or may be deducted from the amount spent by the manufacturing unit on the raw material, which is steel in the case of the respondent assessee, as he is using stainless steel as raw material, from which utensils are manufactured. The raw material, which is not capable of being used for manufacturing utensils will have to be either sold as scrap or might have to be re-cycled in the form of sheets of stainless steel, if the manufacturing unit is also having its re-rolling plant. If it is not having such a plant, the manufacturer would dispose of the scrap of steel to someone who would re-cycle the said scrap into steel so that the said steel can be re-used.
When such scrap is sold, in according to the Supreme Court, the sale proceeds of the scrap could not be included in the term ‘turnover’ for the reason that the respondentunit is engaged primarily in the manufacturing and selling of steel utensils and not scrap of steel. Therefore, the proceeds of such scrap would not be included in ‘sales’ in the Profit and Loss Account of the respondent-assessee.

The situation would be different in the case of the buyer, who purchases scrap from the respondent-assessee and sells it to someone else. The sale proceeds for such a buyer would be treated as “turnover” for a simple reason that the buyer of the scrap is a person who is primarily dealing in scrap. In the case on hand, as the respondent-assessee was not primarily dealing in scrap but is a manufacturer of stainless steel utensils, only sale proceeds from sale of utensils would be treated as his “turnover.”

The Supreme Court referred to the “Guidance Note on Tax Audit U/s. 44AB of the Income Tax Act” published by The Institute of Chartered Accountants of India and observed that the meaning given by the ICAI clearly denotes that in normal accounting parlance the word “turnover” would mean “total sales.” The said sales would definitely not include the scrap material which is either to be deducted from the cost of raw material or is to be shown separately under a different head. The Supreme Court did not find any reason for not accepting the meaning of the term “turnover” given by a body of Accountants, which is having a statutory recognition.

For the aforesaid reasons, the Supreme Court dismissed the appeal.

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Fresh Claim outside Return of Income or in Appeal

Synopsis
Admissibility of a claim (which is not made by filing of revised return) before assessing officer/appellate authority, have always been a vexed issue. There are various judicial pronouncements that support the contention that an additional claim can be raised before the appellate authorities, even if it has not been raised before the Assessing Officer nor claimed in the return of income. However, recently the Chennai Tribunal in the case of Chiranjeevi Wind Energy, has held that such claim cannot be entertained.

In this Article, the learned Authors have done a detailed analysis of this decision in view of various judicial pronouncements.

An assessee is required to file his return of income, u/s. 139(1), before the due date specified in Explanation 2 to that section. In case he discovers any omission or any wrong statement in such return of income, he can file a revised return before the expiry of one year from the end of the relevant assessment year, or before the completion of assessment, whichever is earlier, in accordance with the provisions of section 139(5).

Very often, the assessee discovers a mistake or omission in the return of income after the expiry of the time prescribed for revision of his return of income u/s. 139(5). This generally happens during the course of assessment proceedings u/s. 143(2), which normally take place only towards the end of the time limit for completion of assessment, which is two years from the end of the relevant assessment year. The issue arises whether in such cases the assessee can make a claim for a deduction, before the assessing officer or before the appellate authorities, which has not been claimed in the return of income, when he is not in a position to revise his return of income. The Income-tax Department is of the view that such a claim can be made only through a revised return of income filed in time. Relying on the decision of the Supreme Court in the case of Goetze (India) Ltd vs. CIT 284 ITR 323, the department contends that no such claim can be made outside the revised return of income. The case of the assessees has been that any rightful claim whenever made, should be allowed, if not by the assessing officer, at least by the Commissioner(Appeals) or the Income Tax Appellate Tribunal, a stand that is objected to by the Income-tax department on the ground that any claim not considered by the assessing officer cannot be considered by the Commissioner (Appeals) or the Income Tax Appellate Tribunal.

While the Mumbai bench and other benches of the tribunal has taken the view that the decision of the Supreme Court in Goetze India’s case does not apply to the claim made before the appellate authorities, who can consider any additional claim at their discretion, the Chennai bench of the tribunal has recently taken a contrary view holding that a claim not made before the assessing officer could not be considered by the Commissioner (Appeals).

Mahindra & Mahindra’s case
The issue came up before the Mumbai bench of the Income Tax Appellate Tribunal in the case of Mahindra & Mahindra Ltd vs. Addl. CIT 29 ITR (Trib) 95.

In this case, during the course of the assessment proceedings, the assessee filed a letter with the assessing officer pointing out that the sale proceeds of R & D assets had been added to taxable income u/s. 41(1) in the computation of income, but the sale proceeds had already been reduced from R & D expenses claimed for the year u/s. 35(2AB). Effectively, the same income had been offered to tax twice through oversight. It was therefore claimed by the assessee, during the course of the assessment proceedings, that the addition made to the taxable income u/s. 41(1), in computing the total income, be ignored.

The assessing officer rejected the assessee’s claim on the ground that such a claim was not arising out of the return of income and that such a claim could only be made by filing a revised return of income, in view of the decision of the Supreme Court in Goetze India’s case(supra). The action of the assessing officer was confirmed by the Commissioner (Appeals).

On appeal by the assessee, the Tribunal noted that the Bombay High Court, in the case of Pruthvi Brokers & Shareholders Pvt. Ltd. 349 ITR 336, had held that even if a claim was not made before the assessing officer, it could be made before the appellate authorities. The tribunal therefore held that an assessee was entitled to raise not merely additional legal submissions before the appellate authorities, but was also entitled to raise additional claims before them. According to the Tribunal, the appellate authorities had the discretion whether or not to permit such additional claims to be raised, but it could not be said that they had no jurisdiction to consider the same. They therefore had the jurisdiction to entertain a new claim, but that they may choose not to exercise their jurisdiction in a given case was another matter.

The Tribunal therefore held that the claim of the assessee, made before the assessing officer and also made before the appellate authorities, was to be allowed, subject to verification of the evidence filed by the assessee before the assessing officer.

Chiranjeevi Wind Energy’s case
The issue again came up before the Chennai bench of the Tribunal in the case of Chiranjeevi Wind Energy Ltd. vs. ACIT 29 ITR (Trib) 534.

In this case, the assessee had claimed deduction of Rs. 10,78,976 u/s. 80-IB before the assessing officer which deduction was allowed by the assessing officer. The assessee however raised an issue of additional/ higher deduction of Rs. 50,61,142 u/s. 80-IB before the Commissioner(Appeals), on the ground that the action by the assessing officer, in disallowing certain other claims, has resulted in assessment of the total income at a higher figure and as a consequence thereof the assessee was qualified to claim a higher deduction u/s. 80IB. The Commissioner(Appeals) did not entertain such a claim presumably, on the ground that such a claim was permissible only by filing a revised return of income by relying on the decision of the Supreme court in the Goetze (India)’s case (supra).

On further appeal by the assessee, it was contended by the assessee that it was entitled to a higher deduction on account of the additions to the qualifying income returned by it. The Tribunal noted that the claim made by the assessee of Rs. 10,78,976, was allowed by the assessing officer. Higher deduction claim was never made before the assessing officer and was made before the Commissioner(Appeals) for the first time. It therefore rejected the assessee’s claim for allowance of higher deduction u/s. 80-IB.

Observations
It is a matter of serious concern that the Chennai bench of the Tribunal, in a somewhat brief decision, brushed off the claim of the assessee without considering the developed case law on the subject, in favour of the entertainment of the claim. No specific reason has been given by the tribunal but for stating that the claim was not made before the assessing officer, not realising that the need for the claim arose for the first time on account of the higher assessment by the assessing officer. It was the ground that became available to the assessee on account of the change in circumstances and the same did not exist at the time of filing the return of income.

The Bombay High Court, in the case of Pruthvi Brokers & Shareholders (supra) has discussed the issue in great detail. It observed as under:

“A long line of authorities establish clearly that an assessee is entitled to raise additional grounds not merely in terms of legal submissions, but also additional claims not made in the return filed by it.

From a consideration of decision of the Supreme Court in the case of Jute Corpn. of India Ltd. vs. CIT 187 ITR 688, it is clear that an assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. It cannot however be said that they have no jurisdiction to consider the same. They have the jurisdiction to entertain the new claim. That they may choose not to exercise their jurisdiction in a given case is another matter.”

The high court in that case further held that the decision in the Jute Corporation’s case (supra) did not curtail the ambit of the jurisdiction of the appellate authorities stipulated earlier. it did not restrict the new/additional grounds that might be taken by the assessee before the appellate authority only to those that were not available when the return was filed or even when the assessment order was made. The appellate authorities therefore have jurisdiction to deal not merely with additional grounds which became available on account of change of circumstances or law, but with additional grounds which were available even when the return was filed. Similarly, in National Thermal Power Corpn. Ltd. vs. CIT 229 ITR 383, the supreme Court held that the power of the tribunal is expressed in the widest possible terms. It noted that the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. As observed by the supreme Court, if, for example, as a result of a judicial decision given while the appeal is pending before the tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, the assessee is not prevented from raising that question before the tribunal for the first time, so long as the relevant facts are on record in respect of that item. It therefore held that the tribunal is not prevented from considering questions of law arising in assessment proceedings although not raised earlier.

The Bombay high Court, in another judgment in the case of Balmukund Acharya vs. Dy CIT ITA No.217 of 2001 dated 19-12-2008 (reported on www.itatonline.org), has taken the view that even in the case of an intimation u/s.143(1), where the assessee had erroneously offered certain capital gains to tax in the return of income and the returned income was accepted, in appeal, the assessee was entitled to claim that the income which was wrongly offered to tax cannot be taxed.

Importantly, the Supreme Court, in Goetze India’s case (supra), has made it clear that the issue in that case was limited to the power of the assessing authority, and did not impinge on the power of the income tax appellate tribunal u/s. 254.

Therefore, given the wide powers of the appellate authorities, an additional claim can be raised before the appellate authorities, even if it has not been raised before the assessing officer nor claimed in the return of income.

It is interesting to note that the CBdt, as far back as in 1955, vide its Circular no. 14-XL(35) dated 11-04-1955, have stated that:

“Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on whom it is imposed by law, officers should —

(a) Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;
(b) Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”

The law developed, post Goetze (india)’s case, has made it abundantly clear that:

a) an assessee is entitled to make a fresh claim for deduction or relief before the appellate authorities, during the course of the appellate proceedings, irrespective of the claim not being made by revising the return of income or before the assessing officer during the course of the assessment proceedings. The decision in Goetze (India)’s case has not prohibited such a claim before the appellate authorities.
b) an assessing officer when confronted with the valid claim, though not made in the return of income or the revised return of income, is required to consider the same on merits and not reject simply on the ground that the claim was made outside the return of income.

In CIT vs. Jai Parabolic Springs Ltd. 306 ITR 42 (Del), the delhi high Court held that the tribunal had power to allow deduction for expenditure to assessee to which it was otherwise entitled to even though no claim was made by the assessee in the return of income. in this case, the decision of Supreme Court in Goetze (India) Ltd. was considered. Again, the Cochin tribunal in the case of Thomas Kurian 303 ITR (AT) 110 (Coch), held that the Cit(a) had the power to entertain a claim not made in the return of income. In Lupin Agrochemicals Ltd. ITA No. 3178 (Mum), the case of Goetze (I) Ltd. was considered and it was held that said decision did not prevent an assessee to make legal claim in assessment proceedings and that such claim could be made even in appellant proceedings. In Abbey Chemicals 94 TTJ (Ahd) 275, it was held that the Cit(a) having allowed assessee’s claim for exemption u/s. 10B after considering the facts of the case as well as the case law, could not recall his order by taking recourse to section 154, as the error of judgement, if any, committed by the CIT (A), tcould not be qualified as a “mistake” within the meaning of section 154.

The position in respect of the eligibility of the assessee to place a fresh claim, before the assessing officer, is equally good. in Chicago Pneumatic Ind. Ltd. 15 SOT 252 (Mum), the mumbai tribunal held that the a.o. was obliged to give relief to the assessee even where the same was not claimed by the assessee by way of a revised return. In the above case, it was observed that the government was entitled to collect only the tax legitimately due to it and therefore one had to look into the duties of the a.o. rather than his powers to avoid undue hardship to the assessees. the hon. Tribunal also referred to the CBDT Circular No. 14 (XL-35) dt. 11.04.1955, which directed the officers as back in 1955 to draw attention of the assessees to refunds and reliefs to which they were entitled but had failed to claim for some reason or the other. The case also referred to another Circular No. F-81/27/65-IT (B) dt. 18.05.1965 and stated that the above circulars were binding on the departmental authorities. the above decision was considered and followed by the hon. mumbai tribunal in the case of Emerson Network Power Ind. 27 SOT 593 (Mum) wherein the Mumbai tribunal held that the assessing officer was obliged to consider the legitimate claim of the assessee made before him but not made in the return of income or by a revised return. In Rajasthan Commercial House v/s. DCIT, 26 SOT 51 (Uro) (Jodh), the jodhpur tribunal held that relief claimed by the assessee could be allowed by the a.o. when such claim was made by the assessee vide a rectification application u/s. 154. Also see Dodsal Pvt. Ltd. ITA No. 680/M/04 (Mum). Lastly, the Bombay high court in the case of Balmukund Acharya ITA No. 217 of 2001 (Bom) dated 19-12-2008 again confirmed the power and the duty of the assessing officer when it inter alia held that the authorities under the act were under an obligation to act in accordance with law and that tax could be collected only as provided under the act and that if any assessee, under a mistake, misconception or on not being properly instructed was over assessed, the authorities under the act were required to assist him and ensure that only legitimate taxes due were collected.

Today, the state of affairs are such that, leave aside the tax payers being advised of reliefs due to them, any claim for such relief by them is denied by Assessing Officers, and when entertained by the appellate authorities, is strongly resisted in appeal, sometimes even by taking the matter to the high Court or supreme Court. What is perhaps required is a change in approach of the income- tax department, where only fair share of taxes is collected, and not maximum tax by any means. This would perhaps require not just changes to law, but change in attitude of the tax authorities. No government should be happy by short changing its citizens and surely not when they are ignorant of their rights and reliefs.

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Century Metal Recycling Pvt. Ltd. vs. DCIT ITAT Delhi `B’ Bench Before H. S. Sidhu (AM) and H. S. Sidhu (JM) ITA No. 3212/Del/2014 A.Y.: 2007-08. Decided on: 5th September, 2014. Counsel for revenue/assessee: Satpal Singh/ Sanjeev Kapoor

Sections. 79, 271(1)(c) – Penalty u/s. 271(1)(c) is not leviable in a case where claim to carry forward capital loss was denied due to change in majority shareholding.

Facts:
For assessment year 2007-08 the Assessing Officer (AO) in an order passed u/s.143(3) of the Act assessed the returned income to be the total income. However, the claim of carry forward of loss of Rs. 23,09,722 was denied on the ground that there was a change in majority shareholding of the assessee and therefore by virtue of section 79 the said loss cannot be carried forward.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO. The assessee after receiving the order of CIT(A) did not carry forward the capital loss of Rs. 23,90,722 in its return of income for AY 2012-13. The AO levied a penalty of Rs. 8,05,000 u/s. 271(1)(c) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the carry forward of long term capital loss of AY 2005-06 and 2006-07 had been duly accepted as correct as per returns filed and assessment orders passed by the AO in the relevant years. In the AY 2006-07 the AO specifically mentioned that carry forward of long term capital loss is allowed.

The Tribunal also noted that in the assessment order of AY 2007-08 there was no mention that the assessee had furnished any inaccurate particulars of income or had made any wrong claim of carry forward of long term capital loss. The disallowance of carry forward of long term capital loss was on technical ground and not on account of any concealment of any particulars of income. The Tribunal noted that section 271(1)(c) postulates imposition of penalty for furnishing of inaccurate particulars and concealment of income. It observed that the conduct of the assessee cannot be said to be contumacious so as to warrant levy of penalty. The Tribunal held that the levy of penalty was not justified. It set aside the orders of the authorities below and deleted the levy of penalty.

The appeal filed by the assessee was allowed.

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Shri G. N. Mohan Raju vs. ITO ITAT Bangalore `C’ Bench Before P. Madhavi Devi (JM) and Abraham P. George (AM) ITA No. 242 & 243/Bang/2013 Assessment Years: 2006-07 and 2007-08. Decided on: 10th October, 2014. Counsel for assessee/revenue: Padamchand Khincha/ Dr. Shankar Prasad

Sections. 143(2), 147 – AO cannot suo moto treat the return of income filed before issue of notice u/s. 148 to be a return filed in response to the said notice. Notice u/s. 143(2) issued before the assessee has filed a return in response to notice u/s. 148 cannot be treated as a valid notice.

Facts:
For the assessment year 2006-07 the assessee filed his return of income u/s 139 on 10.7.2007. In the computation filed along with the said return the assessee stated that it has received Rs. 97,80,000 which has been treated as capital receipt. The said return of income was processed u/s. 143(1) of the Act.

On 24.12.2009, a notice u/s. 148 of the Act was issued for reopening the assessment. In response to the said notice the assessee did not file any return of income. On 23.9.2010, a notice u/s. 143(2) dated 17.9.2010 was dispatched by registered post. On 5.10.2010, an authorised representative of the assessee appeared before the AO and stated that the return of income originally filed could be treated as return filed pursuant to the notice u/s. 148 of the Act. On 5.10.2010, the AO issued a notice u/s. 142(1) of the Act but there was no notice u/s 143(2) of the Act.

The AO completed the assessment u/s 143(3) r.w.s. 147 of the Act.

Aggrieved by the action of the AO in framing an assessment u/s. 143(3) r.w.s. 147 without issue of a notice u/s. 143(2) of the Act, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to Tribunal.

Held:
The Tribunal noted that in the case before it a notice u/s. 143(2) of the Act had been issued to the assessee, but on the date when such notice was issued viz. 23.9.2010, assessee had not filed any return pursuant to the reopening notice u/s. 148 of the Act. It, further, noted that the first instance when the assessee requested the AO to treat the returns originally filed by it as returns filed pursuant to the notices u/s. 148 of the Act, was on 5.10.2010 which was clear from the narration in the order sheet. It observed that the crux of the issue is whether notices u/s.143(2) is mandatory in a reopened procedure and whether notices issued prior to the reopening would satisfy the requirement specified u/s. 143(2) of the Act.

The Tribunal noted that in the case of M/s. Amit Software Technologies Pvt. Ltd. (ITA No. 540(B)/2012 dated 7.2.2014), the co-ordinate Bench has after considering the decision of the Madras High Court in the case of Areva T and D India Ltd. and also the decision of the Delhi High Court in the case of M/s. Alpine Electronics Asia PTE Ltd. (341 ITR 247)(Del), held that section 143(2) of the Act was a mandatory requirement and not a procedural one.

If the income has been understated or the income has escaped assessment, an AO is having the power to issue notice u/s. 148 of the Act. Notice u/s. 148 of the Act issued to the assessee required it to file a return within 30 days from the date of service of such notice. There is no provision in the Act, which would allow an AO to treat the return which was already subject to a processing u/s. 143(1) of the Act, as a return filed pursuant to a notice subsequently issued u/s. 148 of the Act. However, once an assessee itself declares before the AO that the earlier return could be treated as filed pursuant to a notice u/s. 148 of the Act, three results can follow. AO can either say no, this will not be accepted, you have to file a fresh return or he can say that 30 days time period being over I will not take cognisance of your request or he has to accept the request of the assessee and treat the earlier returns as one filed pursuant to the notice u/s. 148 of the Act. In the former two scenarios, AO has to follow the procedure set out for a best judgment assessment and cannot make an assessment u/s. 143(3). On the other hand, if the AO chose to accept assessee’s request, he can indeed make an assessment u/s. 143(3). In the case before us, assessments were completed u/s 143(3) r.w.s. 147. Or in other words AO accepted the request of the assessee. This in turn makes it obligatory to issue notice u/s. 143(2) after the request by the assessee to treat his earlier return as filed in pursuance to notices u/s. 148 of the Act was received. This request, in the given case, has been made only on 5.10.2010. Any issue of notice prior to that date cannot be treated as a notice on a return filed by the assessee pursuant to a notice u/s. 148 of the Act. In other words, there was no valid issue of notice u/s. 143(2) of the Act, and the assessments were done without following the mandatory requirement u/s. 143(2) of the Act. This, it held, renders the subsequent proceedings invalid. The Tribunal, quashed the assessment done for the impugned years.

The appeals filed by the assessee were allowed.

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2014-TIOL-723-ITAT-DEL Rajasthan Petro Synthetics Ltd. vs. ACIT ITA No. 1397 /Del/2013 Assessment Year: 2008-09. Date of Order: 22.8.2014

Sections 2(47), 45, 50 – Taking over of the possession of the capital asset by the secured lendor does not amount to transfer of asset and short term capital gain on such transfer cannot be charged. A restraint on dealing with the assets in any manner resulting in from issuance of notice for recovery is merely a prohibition against private alienation and does not pass any title to the authority which held a lien or charge on the aforesaid class of assets.

Facts:
The assessee company was engaged in the business of manufacture and trade of synthetic yarn and freight forwarding. The assessee filed its return of income declaring a Nil income. The assessee submitted that it had borrowed loans from various financial institutions to purchase capital assets prior to 1999. When it ran into losses and upon its net worth being fully eroded, it became sick as per provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). In the meanwhile, the assessee was served a notice u/s. 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) from Stressed Assets Stabilization Fund (SASF) (a financial institution which had taken over the loans advanced by IDBI Bank Ltd) who was authorised to act on behalf of self and all the secured lenders of the assessee. The SASF took over physical possession of the secured movable and immovable assets of the assessee u/s. 13(4) of SARFAESI on 28.9.2007.

The assets of the assessee were sold by SASF sometime in March, 2008 for a sale price of Rs. 10 crore. The principal amount of loans outstanding to the secured lenders amounted to Rs. 97.42 crore, of which Rs. 24.46 crore was due on account of unpaid principal amount of borrowings utilised for working capital. It was stand of the assessee that the amount of Rs. 24.46 crore being the unpaid amount of working capital borrowings can form part of its taxable income and Rs. 72.96 crore (Rs 97.42 crore minus Rs. 24.46 crore) on account of unpaid principal amount of borrowings utilised for creation of depreciable fixed assets cannot form part of taxable income.

The Assessing Officer (AO) added a sum of Rs. 61,73,27,400 to the total income of the assessee as short term capital gain on the ground that the assets of the assessee have been sold for a certain consideration and in return the assessee has received as benefit waiver of entire loan of Rs. 97.42 crore outstanding in its books. Since the WDV of the assets as per books was Rs 11.23 crore the AO charged Rs 61.73 crore as short term capital gains.

Aggrieved the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The AO erred in applying the provisions of section 2(47) of the Act in considering that the secured lendor acquires title to the secured assets of the assessee company on taking over of possession of assets of the assessee by overlooking the fact that what the secured lenders acquired on taking over of the possession of the secured assets were merely a special right to execute or implement the recovery of its dues from dealing with those assets of the assessee company. Had the assessee company tendered the amounts payable to the secured lenders before the date of sale of such assets without any further act, deed or thing being required to be carried out or completed towards title of the assets, the assessee company could have regained or taken possession of the secured assets from the secured lenders.

The ownership rights in the assets did not at any stage stand transferred to the secured lenders by taking over the possession of the secured assets. Thus, the sale consideration received by the secured lender actually belonged to the borrower which by operation of law remained retained by the secured lenders to recover their costs, dues, etc. Further, if the consideration to the assessee is to be considered as the sale amount received by the lending banks, then, the loans waived by such banks (availed by the assessee for the purchase of capital assets such as land, building, plant and machinery, etc) was nothing but a capital receipt not liable for tax since neither the provisions of section 28(iv) nor section 41(1) of the Act are attracted.

This ground of appeal of the assessee was allowed.

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2014-TIOL-757-ITAT-MUM ITO vs. Dr. Jaideep Kumar Sharma ITA No. 3892/Del/2010 and 5784/Mum/2011 Assessment Years: 2007-08 and 2008-09. Dateof Order: 25.7.2014

Section 40(a)(ia) – Second proviso to section 40(a)(ia), inserted w.e.f. 1.4.2013, is curative in nature and hence has retrospective effect.

Facts:
In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee was getting professional and technical services from SRL Ranbaxy and had paid Rs. 64,55,563 for the same. He held that tax on this sum was deductible u/s.194J of the Act. He also noticed that a sum of Rs. 88,689 was paid by the assessee for getting MRI envelopes, visiting cards, forms, etc printed for exclusive use of the assessee. This amount, according to the AO, was liable for deduction of tax at source u/s 194C of the Act. Since the assessee had not deducted tax at source on these amounts, he disallowed both these amounts u/s. 40(a)(ia).

Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the addition of Rs. 64,55,563 by holding that assessee was an agent of M/s. SRL Ranbaxy Ltd. and hence was not liable for deduction u/s. 194J. He also deleted the addition of Rs. 88,689 by considering the said transaction to be purchase of goods and not a case of job work liable for TDS u/s. 194C.

Aggrieved, the revenue preferred an appeal to the Tribunal. Before the Tribunal, the assessee filed necessary confirmation from the payee that they have paid the taxes on the amounts received from the assessee and contended that the second proviso to section 40(a)(ia) is clarificatory and therefore operates retrospectively.

Held:
The Tribunal noted the second proviso, inserted by Finance Act, 2012 w.e.f. 1.4.2013, and held that even though the said proviso has been inserted w.e.f. 1.4.2013, the Agra Bench of the Tribunal has in the case of Rajiv Kumar Aggarwal (ITA No. 337/Agra/2013 order dated 29.5.2013) following the jurisdictional High Court in the case of CITR vs. Rajinder Kumar (362 ITR 241)(Del) held that the second proviso is declaratory and curative in nature and has retrospective effect from 1.4.2005.

Following the above mentioned decision of the Agra Bench, the Tribunal directed the AO to verify whether the payee has filed his return of income and paid taxes within the stipulated time. If it has done so, no disallowance u/s. .40(a)(ia) in respect of the above payments be made.

The Tribunal set aside the two cases to the file of the AO for the limited purpose of examination whether the payee has filed its return of income and paid taxes on the same within the stipulated time.

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2014] 150 ITD 34 (Mumbai) Agrani Telecom Ltd. vs. Asst. CIT A.Y. 2006-07 Order dated – 13th Sept 2013

Section 37(1): If there is continuity of business with common management and fund, then even if the assessee starts a new line of business in a particular year, the payment made for carrying out running of such new business, is a business expenditure which has to be allowed in the year in which it has been incurred.

If the expenditure incurred by the assessee, to do business for earning some profit, does not impact its fixed capital, then such expenditure has to be reckoned on revenue account, even though the advantage from the expenditure so incurred, may endure in future.

Facts:
The assessee company was mainly engaged in the business of trading in telecom and security equipment and providing transportation service.

During the year under consideration, it had entered into the business of Fleet Management services and providing security products and networking solutions.

The assessee had paid consultancy charges to a consultant, who had provided various kinds of advisory services and had also contributed in identifying prospective customers, for rendering of the aforesaid services.

The Assessing Officer disallowed consultancy charges by treating the same as capital expenditure

On appeal before CIT(A), the assessee contended that the Assessing Officer had completely misunderstood the facts and that it had incurred the said consultancy charges only after setting up of the new business and for developing the existing new business, which was in the service industry.

On scrutinising the books of accounts of the assessee, CIT(A) noted that the income offered from new business services were meagre as compared to the income offered from existing business of trading and transportation service. He thus held that such consulting charges can neither be capitalised nor allowed as revenue expenditure. It was clear cut case of capital expenditure not allowable u/s. 37(1).
On appeal before the Tribunal.

Held:
For deciding the issue whether the expenditure is capital or revenue in nature, the concept of enduring benefit is quite a paramount factor but such test of enduring benefit cannot be held to be conclusive. There may be a case where expenditures have been incurred for obtaining advantage of enduring benefit but nonetheless they may be on revenue account. What has to be seen is the nature of advantage in a commercial sense, that is, whether it is in the capital field or for the running of the business. If the advantage is necessitating the business operations for enabling the assessee to do business for earning some profit without having impact on fixed capital, then such expenditure has to be reckoned on revenue account, even though the advantage may endure in future.

In the present case, there is no augmentation of asset to the assessee but the expenditure has helped the assessee to develop a proper guidance for running the new line of service industries. Thus, in our opinion, the payment for consultancy charges is on account of revenue field only and has to be allowed as revenue expenditure u/s. 37(1) as it is wholly and exclusively for the purpose of business.

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