BCAJ | Bombay Chartered Accountant Journal

Sale/Exchange/Works Contract

Introduction
Various types of
transactions take place in a commercial world. A peculiar issue, which
arises is about the status of a transaction where the dealer receives
goods for repair, replaces the same with his own goods and receives his
charges for repair. The old one received from the customer is retained
with him for further replacement after repair. The issue is whether, on
receipt of money from the customer towards the repair charges, the
dealer can be liable to tax under Sales Tax Laws or it can be considered
as transaction of exchange thereby, not liable to Sales Tax or whether
it falls in the category of Works Contract.

Judgment of Hon. M. S. T. Tribunal
The above issue was dealt with by M. S. T. Tribunal in case of Kirloskar Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011).

In
this case, the appellant M/s. Kirloskar Copeland Ltd. was the
manufacturer and seller of compressors used in air-conditioners. It
accepted defective compressors outside the warranty period with certain
fixed repair charges from the customer and replaced them at the option
of the customer with another repaired compressor off the shelf. The
defective compressor was then sent for repairs. The said repaired
compressor was then available for replacement in lieu of the defective
compressor of another customer. The cycle continues on. The repairs
charges received were mentioned in the books as ‘repair charges.’ This
was treated by the Assessing Officer as ‘sale’ of old repaired
compressors under the BST Act, 1959 and levied tax on the same.

The
Tribunal held that in a transaction of cross transfer of property in
the defective compressor received from customer and giving the repaired
compressor off the shelf, there is no consensual agreement of sale
supported by the price or money consideration. Holding this as not a
‘sale’ transaction, the Tribunal set aside tax. Thus, the situation
developed is that such receipt of money is not liable to tax under the
Sales Tax Laws.

The Madras High Court
The Madras High Court had an occasion to deal with a similar issue in Sriram Refrigeration Industries Ltd. vs. State of Tamil Nadu (53 VST 382)(Mad).

The
assessee received defective compressors in its Tamil Nadu office. The
assessee gave him another repaired compressor and also charged repair
charges. The defective compressor was then transferred to the Hydrabad
workshop to repair and keep it in its rolling stock.

The Tamil
Nadu Sales Tax Authorities levied Sales Tax on the same, considering the
transaction as Works Contract. The Tribunal was of the same view and
the Hon. Madras High Court confirmed the above view of the Tribunal.
Thus, confirmed the levy of tax on above transaction as “Works
Contract”.

Recent judgment of the Hon. Bombay High Court
Kirloskar
Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011) A Reference
application was filed before the Tribunal by the Department to refer the
question of law to the Hon. Bombay High Court. The Hon. Tribunal
rejected the said application on the ground that no question of law
arises as the issue is decided based on precedent. The Department
thereafter filed a Reference Application before the Hon. Bombay High
Court. The said application has now been decided. (Sales Tax application No. 10 of 2012 dated 8th May, 2014). The Hon. Bombay High Court has confirmed the view of the Tribunal that in the given circumstances there is no sale.

The
reasoning of the Hon. Bombay High court is as under: “11. In the
present case, we find that there is no sale at all. As stated earlier, a
defective compressor is brought by the customer of the Respondent to
its Sales and Service Office. Thereafter, the customer is informed about
the normal time of repairs which is approximately 60 days. At that
time, on payment of the repair charges, the customer is given an option
either to wait for 60 days or to take another repaired compressor off
the shelf of the Respondent. If the customer opts for the latter, then a
delivery note cum debit advice as well as a repaired compressor is
handed over to the customer. It is therefore evident that there is no
sale of the repaired compressor. All that is done is that on payment of
repair charges, the customer is given an option not to wait for 60 days
and instead take another second hand repaired compressor immediately in
lieu of the defective compressor.

12. The MSTT, after
considering all the evidence in this regard, came to the conclusion that
in the present case, there was a transaction of cross transfer of
property between the defective compressor and the repaired compressor
and therefore, there was no consensual agreement of sale supported by
price or other monetary consideration. We are in full agreement with the
findings of the MSTT on this aspect. What is paid is only the repair
charges and not the price for purchasing the repaired compressor. This
is clear from the fact that even if the customer opted not to take a
repaired compressor off the shelf of the Respondent, it would still have
to pay the same repair charges for repairing its own compressor and
wait for 60 days to receive the same from the Respondent, after repairs.
This puts it beyond the realm of doubt that what is charged to the
customer by the Respondent is only repair charges and not a price for
the sale of the repaired compressor.

13. Ms. Helekar, learned
counsel appearing on behalf of the applicant submitted that repair
charges are fixed and uniform all over India. According to her,
therefore, that was the price at which the repaired compressor was being
sold by the Respondent to the customer.

14. We do not agree. If
the repair charges were really the price of the sale of the repaired
compressor, there would be no question of the customer having to return
his defective compressor and thereafter take the repaired compressor off
the shelf of the Respondent. In the scenario suggested by Ms. Helekar,
all that the customer has to do is simply pay the repair charges and
take the repaired compressor off the shelf of the Respondent. That is
not the case. It is an admitted position that the defective compressor
is handed over to the Respondent along with the repair charges and in
lieu thereof the customer is handed over a repaired compressor. We
therefore find no merit in this contention.”

Thus, the situation
which arises now is that, though in Tamil Nadu, a similar transaction
may be Works Contract in Maharashtra. It will not be liable to tax.

Conclusion
In light of different judgments of two different high courts, the issue will remain debatable.

As
per the reasoning given by the Hon. Bombay High Court, the judgment of
the Tribunal cited above will be correct to the extent that it is not a
‘sale.’ However, the position still remains is that whether it may be
liable to tax as ‘Works Contract’ as per the Madras High Court judgment.
It may be noted that before the Hon. Bombay High Court, the above
Madras High Court judgment was not cited as well as this was not a point
of argument. Therefore, so far as the MVAT Act is concerned, the issue
will still remain open, as Works Contract sale is also covered in the
MVAT Act, 2002.

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Charitable purpose: S/s. 2(15), 11 and 12: Effect of first proviso to section 2(15) inserted w.e.f. 01-04/-2009: A. Y. 2009-10: Income incidental to charitable activity would not disentitle trust to exemption: Trust for breeding and improving quality of cattle: Object charitable: Finding that income was incidental: Trust entitled to exemption:

DIT(Exemption) vs. Sabarmati Ashram Gaushala Trust; 362 ITR 539 (Guj):

The assessee-trust was engaged in the activity of breeding milk cattle to improve the quality of cows and oxen and other related activities. For the A. Y. 2009- 10, the Assessing Officer found that the assessee had considerable income from the milk production and sale. He applied proviso to section 2(15) of the Income-tax Act, 1961 and held that the trust could not be considered as one created for charitable purposes. He therefore denied exemption u/s. 11 of the Act. The Tribunal noted that the objects were admittedly charitable in nature. The surplus generated was wholly secondary. Therefore, it held that the proviso to section 2(15) of the Act, would not apply and the assessee was entitled to the exemption.

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

i) M any activities of genuine charitable purposes which are not in the nature of trade, commerce or business may still generate marketable products, After settingoff of cost, for production of such marketable products from the sale consideration, the activity may leave a surplus. The law does not expect a trust to dispose of its produce at any consideration less than the market value. If there is any surplus generated at the end of the year, that by itself would not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating “surplus” is wholly incidental to the principle activities of the trust; which is otherwise for general public utility, and, therefore, of charitable nature.

ii) T he main objectives of the trust were to breed cattle and endeavour to improve the quality of cows and oxen in view of the need for good oxen as India is prominently an agricultural country. All these were objects of general public utility and would squarely fall u/s. 2(15) of the Act.

iii) Profit making was neither the aim nor object of the trust. It was not the principle activity. Merely because while carrying out the activities for the purpose of achieving the object of the trust, certain incidental surpluses were generated, that would not render the activity in the nature of trade, commerce or business. The assessee was entitled to exemption u/s. 11.”

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Judicial analysis: Taxability of Associations

Synopsis
The article analyses a recent judicial pronouncement and analyses in detail:-
• Whether trade associations are charitable in nature?
• Whether they are covered by the principle of mutuality?
• Whether services rendered by the association to a member or non-member is a taxable service?

In a recent decision FICCI vs. CST, Delhi-2014-TIOL- 701-CESTAT -DEL wherein two separate appeals were filed by Federation of Indian Chambers of Commerce and Industry (FICCI) and by Electronic and Computer Software export Promotion Council (ECSEPC), while considering on the applications for Stay, since substantial issues were heard in both the cases, the appeals were disposed off. In the said appeals the substantial common issues which fell for the Hon. Tribunal’s consideration were:

• Whether FICCI and ECSEPC are engaged in activities having objectives which would amount to public service and of a charitable nature and consequently fall outside the ambit of Club or Association.

• Whether their services to the respective members and the consideration received therefor was liable to tax, in view of the principle of mutuality declared in several judgments including in Ranchi Club Limited vs. Chief Commissioner of Central Excise & Service Tax 2012 (26) STR 401 (Jhar) and whether service tax was leviable under Club or Association-service, in the light of the judgment of the Gujarat High Court in Sports Club of Gujarat Ltd. vs. Union of India 2013-TIOL-528-HCAHM- ST.

• Whether services provided by FICCI and ECSEPC to non-members was liable to be classified as Club or Association-service and whether demand of service tax on FICCI for the period subsequent to 01-05-2011 was sustainable.

• Whether ECSEPC is a body constituted by or under any law and therefore falls outside the purview of the definition of Club or Association, in view of clause (i) of section 65(25a) of the Act; and

Thus, the important question that the Tribunal considered was whether both, FICCI and ECSEPC carried out activities having objectives amounting to public service and therefore would be falling in the excluded part of the definition of club or association service in section 65(25aa) of the Finance Act, 1994. Clause (iii) of the said definition excludes from its scope any person or body of persons engaged in activities having objective in the nature of public service and are of charitable, religious or political nature. Referring to Law Lexicon, Income Tax 1961, Charitable Endowment Act and Foreign Trade (Regulations) Rules, 1993, the Tribunal observed that the term “charitable purpose” would include a trust having an object and scope of public utility and advancement of any other object of general public utility and that public service would imply a service performed for the benefit of public and specially by a non-profit organisation. The Hon. Bench also observed that in order to hold an activity as charitable, the other objects of an institution or a body need not necessarily be charitable. If such objects are incidental or ancillary to the dominant purpose of charity, it would not take away the character of the activity being a valid charity as observed by the Supreme Court in CIT Madras vs. Andhra Chamber of Commerce (1965) 55 ITR 733 (SC) and that the said principle was reiterated in Surat Art Silk Cloth Manufactures Association, Surat AIR 1980 SC 387. FICCI itself was held as charitable by the Supreme Court in CIT, New Delhi vs. FICCI AIR 1981 SC 1408. In the Andhra Chamber of Commerce (supra), it was explained that promotion of trade, commerce or industry involves an object of general public utility and such activity may lead to economic benefit for the entire society although prosperity would be shared by those in trade, commerce or industry. On this count, it cannot be held otherwise. The Tribunal observed that contours of what attributes to charitable purpose or what object qualify as of general public utility and what constitutes public purpose are considered and explained in several decisions including those by the High Courts. The list, interalia, included South India Hire Purchase Association (1979) 116 ITR 793 (Mad) and Western India Chambers of Commerce and Industry Ltd. (1982) 136 ITR 67 (Bom). The Hon. Bench thus concluded that FICCI and ECSEPC are institutions having public service objectives and of a charitable nature. The Tribunal also noted that the authority holding the FICCI’s activities as covered within the ambit of club or association service omitted to provide reasons for distinguish Supreme Court’s judgment in FICCI’s own case wherein it was treated as a charitable organisation under the provisions of the Income Tax Act which are pari materia the exclusionary provision in section 65(25aa) whereas the authority relied on the Board’s circular dated 28-04-2008 instead. The adjudication order thus suffered from the vice of gross judicial indiscipline. For similar reasons, ECSEPC was also held as engaged in the activities which had objective in the nature of public service and of charitable nature.

Whether principle of mutuality applicable:
The next issue that the Tribunal dealt with was the issue as to whether the services provided by the appellant organisations to their respective members amounted to rendition of taxable service of a club or association in view of the principle of mutuality despite invalidation of the relevant provisions vide the judgments in Ranchi Club Ltd. 2012-TIOL-1031-HC-Jharkhand-ST and Sports’ Club of Gujarat 2013-119L-528-HC-AHM-ST. It was examined by the Hon. Tribunal that based on the Full Bench decision of the Patna High Court in CIT vs. Ranchi Club Ltd. 1992 (1) PLJR 252 (Pat), in Ranchi Club Ltd. (supra) it was ruled that while sale and service may be two different and distinct transactions, the basic feature common to both the transactions is that they require existence of two parties – for sale, a seller and a buyer and for a service, service provider and service recipient. Similarly, in Sports Club of Gujarat Ltd. (supra), the High Court declared the provision to the extent these purport to levy service tax in respect of services provided by a club to its members, as ultra vires. The Tribunal also noted that based on the said decision in Ranchi Club Ltd. (supra), the Tribunal granted full waiver of pre-deposit to appeal preferred by the Federation of Hotel & Restaurant Association of India in Appeal No.57179 of 2013 and in another preferred by Delhi Gymkhana Club Ltd. In Appeal No.55225 of 2013 wherein reference was also made to the decision of the Gujarat High Court in Sports Club of Gujarat Ltd. (supra). For the appellants, it was also pleaded that when the relevant provisions were declared ultra vires by the Gujarat High Court and in absence of any contrary decision by any other High Court, it would imply that there is no operative statutory provision in the law to justify levy of service tax on the service of club to its members. Citing interalia Full Bench’s decision in Madura Coats vs. CCE, Bangalore 1996 (82) ELT 512 (Tri.), the Tribunal observed that where adjudication of vires of a provision of a statute or a Notification is outside the province of the Tribunal, the decision of a particular High Court, in absence of a contrary decision by another High Court would have to be followed by the Tribunal as the Tribunal does not enjoy the liberty to disregard the view of the High Court.

Based on the above analysis and on following precedential guidance, the Bench held that on application of principle of mutuality, the services of FICCI/ESCEPC to their members do not qualify to be considered club or association service in absence of operative legislative provisions whereby the levy of service tax could be justified.

Services to non-members & levy after 1st May, 2011:

Primarily, it is to be noted here that the scope of Club or association service was expanded to cover facilities or advantages provided by a Club or association to persons other than its members also, provided such facilities or advantages are primarily intended for members. in the scenario, the tribunal observed that the Show Cause notices in both the appeals covered the period prior to the amendment vide the finance act, 2011. The notices for the period post amendment were issued as periodic notices reiterating allegation in the earlier notices. however, in both the cases since the Show Cause notices failed to indicate the effect of amendment, the tribunal held that services to non-members fell outside the ambit of Club or association service prior to 01-05-2011 and for the subsequent period, it will not attract service tax in absence of specific allegation that services to non-members fell within the expanded scope of the taxable service in terms of amended provisions.

ECSEPC: Whether a body constituted by or under any law:
The Tribunal noted that ECSEPC was constituted qua provisions of Export-Import Policy and its Articles of Association are subject to Foreign Trade Policy (FTP) and while examining this aspect in detail, the tribunal observed that Export Promotion Councils (EPCs) are non-profit organisations which are autonomous and competent to regulate their own affairs but subject to provisions of uniform byelaws to be framed by the Central Government periodically for constitution or business by EPCs and they are required to adopt byelaws that are approved by the Central Government and that ECSEPC is listed and recognised as an EPC in the Appendix to the FTP. To understand and analyse the scope of “body established or constituted by or under a law for the time being in force”, reliance was placed on the observations in the following judgments:

•   Dr. Indramani Pyarelal Gupta vs. W. R. NATHUY AND Ors. AIR 1963 SC 274….Para 22.
•   Finite Infratech Limited vs. IFCI and Ors. [2011] 161 Comp Case 257 (Delhi) … Para 22.
•   R. C. Mitter & Sons vs. CIT air 1959 SC 868 …
Para 22.
•   S. Azeez Basha vs. Union of India air 1968 SC 662 …
Para 22.
•   National Stock Exchange of India Limited vs. Central Information Commission (2010 100 SCl 464 (del) … Para 22.

After a detailed analysis, it was observed that ECSEPC though registered under Societies registration act, 1860 is notified to be an EPC and was chartered to function as EPC authorised to issue Registration cum Membership Certificate (RCMC) and it was concluded that ECSEPC was a body established or constituted under a law for the time being in force viz., foreign trade (development and Regulation) Act, 1992 read with FTP and as such is excluded from the scope of definition of Club or Association qua Clause (1) of section 65 (25a) of the act.

Conclusion:
thus, in conclusion, taxability of service tax on both the counts is decided in negative – the associations are held as charitable organisations and at the same time the concept of mutuality also is held applicable to them. this would apply to all cases for the period till 30-06-2012. Legal testing for the negative list based service tax law yet remains to be done. This decision pronounced by the Principal Bench of the CeStat, assumes particular importance for the fact that CeStat, mumbai in case of Vidarbha Cricket Association vs. CCE, Nagpur 2013-TIOL-1915-CESTAT- mum pronounced a majority decision (the matter was referred to a third member on account of difference in view, reported at 2013-TIOL-1404-CESTAT-MUM) holding that object of the association cannot be considered of charitable nature and that the activity of providing cricket cannot be considered an activity, charitable in nature. in this case, per majority it was also observed, contrary to the observation in fiCCi’s case (supra) above that the provisions of the income tax act, 1961 are not pari materia with Chapter V of the income tax act, 1994 or the said association is a charitable organisation because it is held to be a charitable organisation under the income tax, 1961. While the matter was referred to the third member, the plea was presented by the appellant’s counsel that the decision of Sports Club of Gujarat Ltd. vs. UOI (supra) had held the levy of service tax under Club and association service as ultra vires. however, the Bench held the view that the said issue was not raised before the referral Bench. (The decision was reported in July 2013 whereas the matter was heard by the division Bench on 14th June, 2013). The principle of mutuality however was not discussed in the said case of Vidarbha Cricket association (supra). having discussed this and considering that the decision in case of FICCI and ECSEPC above has been pronounced by the Principal Bench containing President CeStat, the pending litigation in similar matters achieves finality in the like manner.

[Note: Readers may note that the concept of mutuality and the decision of Jharkhand high Court ranchi Club (supra) were discussed at length earlier under this feature in July, 2012 and december, 2012 of BCaJ).

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Capital gain: Short-term or long-term: Exemption u/s. 54EC: A. Y. 2008-09: Assessee paid 96% of consideration by October 1999: Got possession of land on 12-12-2005: Sold the land on 09-01- 2008 and invested in section 54EC Bonds: Capital gain is long-term capital gain: Assessee is entitled to exemption u/s. 54EC:

CIT vs. K. Ramakrishnan; 363 ITR 59 (Del):

Under an agreement to purchase a land the assessee had paid 96% of the consideration by October 1999. The assessee got possession of the land on 12-12-2005. The assessee sold the land on 09-01-2008 and invested in section 54EC Bonds. The assessee claimed that the capital gain is a long term capital gain and is exempted u/s. 54EC of the Income-tax Act, 1961. The Assessing Officer held that the capital gain is a short-term capital gain and accordingly disallowed the exemption u/s. 54EC of the Act. The Tribunal allowed the assessee’s claim.

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

“i) The assessee acquired the possession of the plot on 12th December, 2005, and sold through a registered sale deed dated 9th January, 2008. This Court is of the opinion that having regard to the findings recorded by the Tribunal, the assessee had acquired the beneficial interest to the property at least 96% of the amount was paid by 3rd October, 1999.

ii) In view of the reasons the court is satisfied that the Tribunal’s impugned order does not disclose any error calling for interference. The appeal is accordingly dismissed.”

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Appeal before Tribunal: Stay: Power of Tribunal and High Court: Section 254(2A) of I. T. Act, 1961 and Article 226 of Constitution of India: A. Y. 2007-08: Power of Tribunal to grant stay limited to 365 days: In case of delay on part of Department Tribunal at liberty to conclude hearing and decide appeal: Department can make a statement that it would not take coercive steps and Tribunal can adjourn matter: Assessee can file writ petition for stay and High Court can grant stay.

CIT vs. Maruti Suzuki (India) Ltd.; 362 ITR 215 (Guj):

In an appeal by the assessee before the Tribunal for the A. Y. 2007-08, the Tribunal granted stay of recovery by an order dated 09-12-2011 which was extended by an order dated 15-06-2012. Thereafter, by an order dated 04-10- 2013, the Tribunal extended the stay by 180 days or till the disposal of the appeal whichever occurred first. The order recorded that after 15-06-2012, the case was listed thrice for hearing on 03-07-2012, 13-08-2012 and 08-09- 2012, but adjournments were taken by the Departmental representative. The Commissioner filed a writ petition and challenged the order of the Tribunal on the ground that the Tribunal did not have power to grant stay beyond the period of 365 days. The Delhi High Court held as under:

“i) I n view of the third proviso to section 254(2A) of the Income-tax Act, 1961, the Tribunal cannot extend stay of recovery of tax beyond the period of 365 days from the date of the first order of stay.

ii) T he provision will ensure that the Tribunal will try and dispose of appeals within 365 days of the grant of stay order. If the default and delay is due to lapse on the part of the Revenue, the Tribunal is at liberty to conclude the hearing and decide the appeal, if there is likelihood that the third proviso to section 254(2A) would come into operation. The third proviso to section 254(2A) does not prohibit the Revenue or Departmental Representative from making a statement that they would not take coercive steps to recover the demand. It would be appropriate and necessary for the Officers of the Revenue to examine and in appropriate cases make a statement before the Tribunal that no coercive steps would be taken to recover the demand as the delay was attributable to their fault and lapse. On such statement being made, it will be open to the Tribunal to adjourn the matter at the Request of the Revenue. Section 254(2A) does not prohibit the Revenue from not enforcing the demand, even when there is no stay of the challenged demand.

iii) T he provision does not prohibit an assessee from approaching the High Court by way of a writ petition for continuation, extention or grant of stay. The powers of the High Court under Articles 226 and 227 form part and parcel of the basic structure of the Constitution and cannot be nullified. An assessee can file a writ petition in the High Court asking for stay and the High Court has power and jurisdiction to grant stay and issue directions to the Tribunal as may be required. Section 254(2A) does not prohibit the High Court from issuing appropriate directions, including granting stay of recovery. Thus, the High Court in appropriate matters can grant or extend stay even when the Tribunal has not been able to dispose of an appeal within 365 days from the date of grant of the initial stay.

iv) If the appeal filed by the assessee has not been disposed of, it should be disposed of expeditiously and preferably within a period of two months. The demand shall remain stayed during the period in case the appeal has not yet been disposed off. However, in case the appeals were not disposed of within said period, it would be open to the assessee to file writ petition in the High Court for grant of stay of the demand. It will be also open to the Tribunal to proceed in accordance with law.”

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Capital gains vs. Business income: A. Y. 2006-07: Shares invested through Portfolio Management Scheme (PMS) resulted in capital gain and not business income:

Radials International vs. ACIT; (Del); ITA No. 485 of 2012 dated 250-04-2014: For the A. Y. 2006-07, the assessee had offered longterm and short-term capital gains on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The Assessing Officer held that as the transactions by the PMS manager were frequent and the holding period was short, the gains were assessable as business profits. The Tribunal upheld the view taken by the Assessing Officer.

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

“i) The PMS Agreement in this case was a mere agreement of agency and cannot be used to infer any intention to make profit;

ii) T he intention of an assessee must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing the money;

iii) A long with the intention of the assessee, other crucial factors like the substantial nature of the transactions, frequency, volume etc. must be taken into account to evaluate whether the transactions are adventure in the nature of trade.

iv) T he block of transactions entered into by the portfolio manager must be tested against the principles laid down, in order to evaluate whether they are investments or adventures in the nature of trade.

v) O n facts, the sources of funds of the assessee were its own surplus funds and not borrowed funds. About 71% of the total shares have been held for a period longer than six months, and have resulted in an accrual of about 81% of the total gains to the assessee. Only 18% of the total shares are held for a period less than 90 days, resulting in the accrual of only 4% of the total profits. This shows that a large volume of the shares purchased were, as reflected from the holding period, intended towards the end of investment.

vi) T he fact that an average of 4-5 transactions were made daily, and that only eight transactions resulted in a holding period longer than one year is not relevant because the number of transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of the transactions. Moreover, even if only a small number of transactions resulted in a holding for a period longer than a year, the number becomes irrelevant when it is clear that a significant volume of shares was sold/ purchased in those transactions.

vii) T his Court is thus of the opinion that the learned ITAT erred in holding the transactions to be income from business and profession. The order of the ITAT is consequently set aside and the appeal is answered in favour of the assessee.”

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Allowability of Corporate Social Responsibility (CSR) expenditure under the Income tax Act

Synopsis
The Companies Act 2013,
mandates incurring of Corporate Social Responsibility (CSR) expenditure,
by a certain class of companies. While the accounting and auditing,
issues are significant, the deductibility of the expenditure under the
Income Tax Act is a matter of concern. In this article the author
analyses these aspects in detail.

Introduction of CSR under THE Companies Act, 2013
CSR
is a concept that has been discussed substantially in business and
professional circles. There could be two views on whether an expenditure
of this nature should be voluntary or be mandated by legislation.
However, the discussion would now be academic as provisions in relation
to CSR are now incorporated under the Companies Act, 2013 (‘2013 Act’)
and Rules thereof. The Central Government through Ministry of Corporate
Affairs (‘MCA’) in order to achieve the aforesaid objective has issued
back to back notifications dated 27th February 2014 prescribing
applicability from 1st April 2014 of relevant provisions, schedules and
rules thereof under the 2013 Act concerning CSR.

Section 135,
Schedule VII to the 2013 Act and CSR policy Rules, 2014 (‘CSRP Rules’)
[hereinafter they are together referred to as ‘CSR provisions’] govern,
operate and determine the scope of CSR initiative for the companies.
Before discussing the topic of the article, namely the allowability/
deductibility of CSR expenditure under the Income Tax Act 1961, it would
be appropriate to deal with the guiding principles of CSR, its
applicability, features and scope thereof as enshrined under the 2013
Act and rules thereof.

Guiding Principles of CSR
The
MCA has listed the following guiding principles concerning CSR, which
helps one to understand the intention of the Legislature as regard to
CSR activity:

• CSR is the process by which an organisation
thinks about and evolves its relationships with stakeholders for the
common good, and demonstrates its commitment in this regard by adoption
of appropriate business processes and strategies;

• CSR is not charity or mere donation;

• CSR is way of conducting business, by which corporate entities visibly contribute to the social good;

• CSR should be used to integrate economic, environmental and social objectives with the company’s operations and growth; and

•
CSR projects/ programmes of a company may also focus on integrating
business models of a company with social and environmental priorities
and processes in order to create shared value

Features and Scope of CSR activities under 2013 Act and rules thereof

• CSR activities does not include the activities undertaken in pursuance of normal course of business of a company;

• CSR activities as undertaken within India by a Company will only qualify as CSR under the 2013 Act and rules thereof;

• CSR activities will have to be undertaken with preference to the local area and areas from where the Company operates;

•
Projects or programmes of CSR as undertaken by a Company should include
activities and/or subjects as mentioned in Schedule VII to the 2013
Act;

• Only activities which are not exclusively for the benefit
of employees of the Company or their family members shall be considered
as CSR activity;

• The CSR activities can be undertaken by the
company either through itself and/or through a registered trust or a
registered society or a company established under Section 8 of 2013 Act
by itself, its holding or subsidiary company, or otherwise subject to
compliance of conditions mentioned therein and a cap of maximum 5 % of
total CSR expenditure of the Company in one financial year;
• CSR activities can also be undertaken in collaboration with other companies with compliance of conditions mentioned therein;
•
Contribution of any amount directly or indirectly to any political
party u/s. 182 of the 2013 Act, shall not be considered as CSR activity;
and
• Any surplus arising out of the CSR activity will not be part of the business profits of the Company.

Applicability of CSR provisions under the 2013 Act and rules thereof

CSR
provisions are not applicable to all persons but are restricted to
companies. The provisions of Section 135 of the 2013 Act further
restrict the said applicability to only selected companies who fulfill
the following conditions:

• A Company having net worth of Rs. 500 crore or more during any financial year; or
• A Company having turnover of Rs. 1,000 crore or more during any financial year; or
• A company having net profit of Rs. 5 crore or more during any financial year;

The
CSRP Rules further provide that the CSR provisions are applicable to
all companies including a holding, subsidiary company and foreign
companies having project office or branch office in India, provided any
of the aforesaid conditions are fulfilled by the said companies. As
regard to applicability to foreign companies, the aforesaid conditions
viz, net worth, turnover and net profit will have to computed and
determined in light of the relevant provisions of 2013 Act.

So,
if a Company satisfies any of the aforesaid conditions in any of the
financial years, then the CSR provisions are applicable to the said
company and will have to be follow them year on year. However, the CSRP
rules relax the rigors of CSR provisions, if a company does not fulfill
any of the said conditions for a continuous period of 3 financial years.
The provisions will then apply once again in the year a company crosses
any one of the above thresholds.

Consequences upon applicability of the CSR provisions

•
The Board of Directors (‘Board’) of the concerned Company will have to
form from amongst themselves a Corporate Social Responsibility Committee
(‘CSRC’) containing at least 3 directors [including 1 independent
director];

This requirement is relaxed by the CSRP Rules, to
take care of specific situations, namely, non-requirement of independent
directors in regard to particular companies, applicability of
provisions to private company, foreign company, etc

• The CSRC
shall formulate a framework containing Corporate Social Responsibility
Policy (CSRP) of the Company, amount to be spent qua the CSR activities,
monitoring and transparency in implementation of the said activities,
etc; and give recommendations to the Board accordingly;

• The
Board is required to approve the CSRP of the Company alongwith ensuring
that the activities under the CSRP are undertaken accordingly;

•
In addition, the Board will be required to ensure that at least 2% of
average net profits of the concerned Company during the immediately 3
financial years shall be spent as per the CSRP approved by the Board of
the Company; and

• The Board’ Report should contain disclosure
of composition of the CSRC, details of CSRP [should also be published on
website of the company], alongwith reporting of other details in the
format as prescribed under the CSRP Rules including the amount of money
which was not spent as per the requirements of CSR provisions on CSRP
with reasons thereof.

Schedule VII to the 2013 Act duly amended
prescribes list of 10 specific subjects and/or projects of CSR,
recognised as CSR activities, which a Company needs to consider under
its CSRP. The said CSR activities are explained in detail in the ensuing
paragraphs during the course of discussion of allowability of CSR
expenditure under the Income-tax Act, 1961

Allowability of CSR expenditure under the Income-tax Act, 1961

With aforesaid background in place, it would be appropriate to discuss the allowability of CSr expenditure under the income-tax act, 1961.
The MCA mentions that tax treatment of CSR spends will be in accordance with the income-tax act, 1961 (‘the act’) as may be notified by the Central Board of Direct Taxes [‘CBDT’]. The CBDT till date of writing of this article has not notified any tax treatment as regard to allowability of CSr expenditure under the act. the newspaper articles and reports also are highlighting concerns for allowabil- ity of CSr expenditure under the income-tax act, on the ground that said expenditure may not be allowed to the Companies, since it is not wholly and exclusively for the purposes of the business of the assessee companies.

An issue which then requires to be analysed is, when the MCA requires for specific tax treatment on CSR spends, there seems to be an underlying assumption and/or un- derstanding that the present provisions of the act do not provide for allowability of said CSr expenditure under the act. however, on proper perusal of the provisions of the Act, one may find that CBDT may not be required to notify separate tax treatment for CSR spends, since the present provisions provide for allowability of said spending under various provisions of the act irrespective of whether the said expenditure is incurred wholly and exclusively for the purpose of business of assessee companies.

A chart explaining the specific CSR activities as prescribed under Schedule VII to the 2013 Act and simultaneous provisions of the income-tax act, 1961 which provide for allowability of expenditure qua the specific CSR activities are tabulated below:

Section 372A of the Companies Act, 1956 contained several exemptions which have been done away with by section 186 of the act. the differences in the exemptions are as follows:

Allowability of CSr Expenditure u/s. 35(2AA), 35AC, 35CCA and section 80G of the Act the provisions referred in above are not frequently dis- cussed or applied, while claiming deduction by assessee companies in computation of profits and gains from business or profession. the said provisions allow for deduction of expenditure in computation of profits and gains from business or profession irrespective of whether the expenditure incurred for the activities are related to business of the Company. however, the sine qua non for the purpose of claiming deduction u/s. 35AC is the Company should have income assessable under the head ‘Profit and gains from business or profession’, otherwise the Company shall have to claim deduction u/s. 80GGA of the act. further, there is also scope of claiming deduction u/s. 80G of the Act as regard to certain activities referred in above, however considering the direct coverage of the activities u/s. 35AC, the said provision of section 80G are not referred to. U/s. 35AC, the company can claim full deduction of the expenditure in computation of profit and gains from business of the Company.

With the onset of the CSR provisions under the 2013 Act, the aforesaid provision now will have greater applicability in computation of profits and gains from business of the assessee companies under the provisions of the act, unless otherwise prescribed by CBdt.

A brief overview of the aforesaid provisions of the act alongwith relevant rules under the 1962 rules are dis- cussed herein below:

Section 35AC of the Act provides for deduction of expenditure incurred by way of payment by an assessee of any sum to a public sector company or a local authority or to an association or institution approved by the national Committee for carrying out any eligible project or scheme. the said provision further provides that the assessee may either make payment aforesaid to the entities referred in above or either directly make payment of any sum to the eligible project or schemes. in other words, the provisions of section 35AC recognise the features of CSR provisions i.e., of allowing the Company to either make contribution to the eligible organisations/entities that undertake eligible projects or schemes and/or incur expenditure directly by itself on eligible projects or schemes. the eligible projects or schemes as referred in section 35AC are recommended under Rule 11K of the 1962 Rules. On perusal of Rule 11K, one may find that the significant guidelines of activities as recommended are in consonance to the subjects as prescribed under Schedule VII to the 2013 Act. the aforesaid chart tabulating the activities as prescribed under Schedule VII to the 2013 Act and the allowability of expenditure incurred on the said activities under the act confirms the said understanding.

The national Committee as referred in above is the nodal agency to provide approval to the organisation/entities who undertake eligible projects or schemes and/or to the eligible projects or schemes. the complete procedure as regard to composition of national Committee, its place of operation, functions of the said committee, guidelines for approval of organisation/entities and/or eligible project or schemes, application forms, audit reports for verification and procedure to be followed by the national Committee in granting approvals are documented in rule 11f to rule 11o of the 1962 rules and forms prescribed thereof. One may want to refer the said provisions and rules thereof for better understanding of the subject.

Similarly, the provisions of section 35(2AA), section 35CCA and section 80G alongwith relevant rules pre- scribed thereof may be looked into for further and better understanding of the subject.

In light of above, one may find that provisions of the Act have long recognised the CSR initiative and provided benefits accordingly by allowing expenditure in computa- tion of income from business of the assessees or deduction otherwise. however, considering the said initiative was not mandatory in nature until CSR provisions under the 2013 Act, therefore, one may not have had contribu- tions made by the corporate sector to the subject.

Allowability of CSr Expenditure u/s. 37(1) of the Act

A question which requires further consideration, is in case if the specific CSR activities as covered under Schedule VII to the 2013 Act are not allowable under the provisions of the act as referred in above, then can the said CSR expenditure could be allowed u/s. 37(1) of the Act.

On perusal of features of CSr provisions as reproduced in earlier paragraphs, one may find that the said provisions allow for activities to be undertaken which are in furtherance of business activities of the assessee company, however with limitations that said activity should neither be undertaken in normal course of business of the Company nor exclusively for employees of the Company and their family members. the said CSr provisions also mention that such expenditure should not be a charity and/or donation.

Recently, the Karnataka High Court in the case of CIT and Anr. vs. Infosys Technologies Ltd. (2014)(360 ITR 714), has opined that CSr expenditure which facilitates the business of the assessee is allowable u/s. 37(1) of the act. the relevant facts of the said decision are as under:

infosys technologies ltd (‘infosys’) has an establishment in Bannerghata Circle in Karnataka, where nearly 500 em- ployees are working. There was severe traffic congestion near the said establishment and therefore, the employees including the general public had to wait for a long time. the said congestion seriously affected the free movement of public including employees of infosys. infosys as a Corporate Social responsibility initiative installed traffic signal near the establishment which otherwise was responsibility of the State. a question arose as regard to allowability of said expenditure u/s. 37(1) of the Act. The high Court held that the said CSr expenditure incurred by infosys could be said to be laid out or expended wholly and exclusively for the business u/s. 37(1) of the Act and therefore, is allowable, for want of following reasons:

• The said expenditure facilitates the employees of Infosys for free movement and allows them to reach the office in time, which otherwise was affecting the business of Infosys on account of delay in reaching office and thereby resulting in delay in completing projects; and

• The Court further noted that just because the general public other than Infosys was also benefited by the said expenditure shall not come in way of deduction of said expenditure u/s. 37(1).

In view of the above decision, one may find that the if the CSr activity is undertaken in advancement of business of the assessee, then the said expenditure could be allowed u/s. 37(1) of the Act.

in addition to above, reliance could be placed on the fol- lowing decisions, wherein Courts have time and again held that contribution made by the assessee company in public welfare funds which are directly connected or related with the carrying on the business or which results in benefit to the business has to be regarded as allowable deduction u/s. 37(1) of the Act:

• Sri Venkata Satyanarayna Rice Mills Contractors Co. vs. CIT (223 ITR 101) (SC);

• Addl. CIT vs. Rajasthan Spinning and Weaving Ltd.
(274 ITR 463)(Raj);

• Mehsana District Co-operative Milk Producer’s Union Ltd. (203 ITR 601)(Guj);

• CIT vs. Kaira District Co-operative Milk Producers Union Ltd. (247 ITR 314)(Guj.);

• Krishna Sahakari Sakhar Karkhana Ltd vs. CIT (229 itr 577); and

• Surat Electricity Co. Ltd. vs. ACIT (125 itd 227)(ahd) in the same vein and for the sake of completeness, it would also be necessary to mention that in the following decisions, the Courts have either held against and/or remanded the matter on expenditure similar to CSR activity claimed for deduction u/s. 37(1) of the Act:

• CIT vs. Madras Refineries Ltd. (313 ITR 334)(SC) – The Supreme Court was hearing a plea for allowability of ex- penditure u/s. 37(1) of the Act on the CSR activity of providing drinking water and sanitation to residents in the vicinity of factory of the Company. the apex Court remanded the matter to the tribunal for denovo consideration as it was found that neither the madras high Court nor the Tribunal concerned had given specific finding to the effect that said CSr expenditure is allowable as business expenditure.

The madras high Court had earlier allowed for deduction of aforesaid CSr expenditure with the following relevant findings:

“The concept of business was not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located, in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measurewith the aid of such goodwill.”

• CIT and Anr. vs. Wipro Ltd. (360 ITR 658)(Kar) – Wipro ltd (‘Wipro’) had incurred expenditure on community development near its factory which was located in backward area and claimed as business expenditure. The Court specifically found that Wipro was not able to provide any supporting documents to substantiate its claim for community development which was claimed to be in the nature of religious funds, charitable institutions, social clubs or charity, etc. the Court held that for want of limitation of documents, the expenditure on community do not stand to test of commercial expedi- ency and therefore, said expenditure will not be allow- able u/s. 37(1) of the Act.

The relevance of documentation in allowability of expen- diture u/s. 37(1) of the Act was succinctly brought in the decision of apex Court in the case of CIT vs. Imperial Chemical Industries Ltd. (74 itr 17). the Supreme Court held that burden of proving that particular expenditure has been laid out or incurred wholly and exclusively for purpose of business is entirely on assessee.

Based on the above decisions, one may find that it is too early to carve out specific rules determining allowability of CSR expenditure u/s. 37(1) of the Act and the facts and circumstances of the respective cases shall determine the deductibility of said expenditure.

Lastly, it would also necessary to highlight that on perus- al of the CSR provisions of the 2013 Act, one also finds that during the course of implementation one may find that there are still some bottlenecks in its implementation with following questions remaining unanswered and/or no clarifications provided by the MCA on the said issues, which are as under:

• Whether, contribution of at least 2% of average net profit as prescribed under CSR provisions, is mandatory? the CSr provisions do not provide any advisory to that effect except for requiring a mere disclosure alongwith reasons thereof for non-spending of CSr expenditure in the Board’s report;

• Further, the definition of ‘average net profit’ is referred to in 2013 Act, whereas the CSRP Rules prescribes definition of ‘net profit’, which is not in consonance with the definition as referred in 2013 Act. One may recon- cile the said differences in definition with interpreting the ‘net profit’ definition only relevant to determine the applicability of CSr provisions, whereas ‘average net profit’ definition is relevant to determine the amount of CSR expenditure by a Company;

• In addition, the guiding principles to CSR provide for not considering the CSR expenditure as donation or charity, whereas Schedule VII to the 2013 Act itself provides for activities viz, contribution to PM National relief fund, contribution to technology incubators, etc, which supports the concept of donations given to said institutions; etc

It appears that it is possible to take view that the expenditure incurred on CSR activities as prescribed under the 2013 Act and Rules thereof may be allowed under the present provisions of the act and the CBDT may not be required to prescribe any separate tax treatment.

shailesh.kwebmaker

Interest – Refund of excess of payment of tax paid u/s. 195(2) to the depositor – the assessee/ depositor is entitled to interest from the date of payment of such tax.

Union of India vs. Tata Chemicals Ltd. [(Civil) Appeal vs. 6301 of 2011 dated 26-02-2014]

The respondent, a company, engaged in the manufacture of nitrogenous fertilizer had during the assessment year 1997-98, commissioned its naptha desulphurisation plant and to oversee the operation of the said plant it had sought the assistance of two technicians from M/s. Haldor Topsoe, Denmark. M/s. Haldor Topsoe had raised an invoice aggregating to $ 43,290/- as service charges for services of the technicians ($ 38,500/-) and reimbursements of expenses ($ 4,790/-).

The resident/deductor had approached the Incometax Officer u/s. 195 (2) of the Act, inter alia, requesting him determine as to what percentage of tax should be withheld from the amounts payable to the foreign company, namely, M/s. Haldor Topsoe, Denmark. The Assessing Officer/Income-tax Officer passed order u/s. 195 (2) of the Act directing the resident/deductor to deduct/withhold tax at the rate of 20% before remitting aforesaid amounts to M/s.Haldor Topsoe. Accordingly, the resident/deductor had deducted tax of Rs.1,98,878/- on the entire amount of $ 43,290/- and credited the same in favour of the Revenue.

After such deposit, the resident/deductor had preferred an appeal before the Commissioner of Income-tax (Appeals) against the aforesaid order passed by the Assessing Officer/Income-tax Officer u/s. 195 (2) of the Act. The appellate authority, while allowing the appeal so filed by the resident/deductor, had concluded that the reimbursement of expenses is not a part of the income for deduction of tax at source u/s. 195 of the Act and accordingly, directed the refund of the tax that was deducted and paid over to the revenue on the amount of $ 4,790/- representing reimbursement of expenses. After disposal of the appeal, the resident/deductor had claimed the refund of tax on $ 4,790/- (amounting to Rs. 22,005/-) with the interest thereon as provided u/s. 244A(1) of the Act.

The Assessing Officer/Income-tax Officer, while declining the claim made for interest, has observed that section 244A provides for interest only on refunds due to the assessee under the Act and not to the deductor and since the refund in the instant case is in view of the circulars viz. Circular No. 769 and 790 issued by the Central Board of Direct Taxes (for short, ‘the Board’) and not under the statutory provisions of the Act, no interest would accrue on the refunds u/s. 244A of the Act. Therefore, the Assessing Officer/Income-tax Officer while granting refund of the tax paid on the aforesaid amount refused to entertain the claim for interest on the amount so refunded.

Since the Assessing Officer/Income-tax Officer had declined to grant the interest on the amount so refunded, the resident/deductor had carried the matter by way of an appeal before the Commissioner of Income-tax (Appeals). The First Appellate Authority approved the orders passed by the Assessing Officer/Income-tax Officer and declined the claim of the deductor/resident on two counts: (a) that the refund in the instant case would fall under two circulars viz. Circular No. 769 and 790 issued by the Board which specifically provide that the benefit of interest u/s. 244A of the Act on such refunds would not be available to the deductor/resident and (b) that a conjoint reading of section 156 and the Explanation appended to section 244A (1)(b) of the Act would indicate that the amount refunded to the deductor/resident cannot be equated to the refund of the amount(s) envisaged u/s. 244A(1)(b) of the Act, wherein only the interest on refund of excess payment made u/s. 156 of the Act pursuant to a notice of demand issued on account of post assessment tax is contemplated and not the interest on refund of tax deposited under self-assessment as in the instant case.

The deductor/resident, aggrieved by the aforesaid order, had carried the matter before the Income-tax Appellate Tribunal (for short, ‘the Tribunal’). The Tribunal while reversing the judgment and order passed by the Commissioner of Income-tax (Appeals) has opined that the tax was paid by the deductor/resident pursuant to an order passed u/s. 195 (2) of the Act and the refund was ordered u/s. 240 of the Act. Therefore, the provisions of section 244A(1)(b) were clearly attracted and the revenue was accountable for payment of interest on the aforesaid refund amount. Accordingly, the Tribunal allowed the appeal of the deductor/resident and directed the Assessing Officer/Income-tax Officer to acknowledge the claim and allow the interest as provided u/s. 244A(1) (b) of the Act on the aforesaid amount of refund. The

Revenue being of the view that they were treated unfairly by the Tribunal had carried the matter by way of Income-tax Appeal before the High Court. The High Court refused to accept the appeal filed by the Revenue.

On further appeal by the Revenue, the Supreme Court held that the refund becomes due when tax deducted at source, advance tax paid, self-assessment tax paid and tax paid on regular assessment exceeds tax chargeable for the year as a result of an order passed in appeal or other proceedings under the Act. When refund is of any advance tax (including tax deducted/collected at source), interest is payable for the period starting from the first day of the assessment year to the date of grant of refund. No interest is, however, payable if the excess payment is less than 10% of tax determined u/s. 143(1) or on regular assessment. No interest is payable for the period for which the proceedings resulting in the refund are delayed for the reasons attributable to the assessee (wholly or partly). The rate of interest and entitlement to interest on excess tax are determined by the statutory provisions of the Act. Interest payment is a statutory obligation and non-discretionary in nature to the assessee. In tune with the aforesaid general principle, section 244A was drafted and enacted. The language employed in section 244A of the Act is clear and plain. It grants substantive right of interest and is not procedural. The principles for grant of interest are the same as under the provisions of section 244 applicable to assessments before 01-04-1989, albeit with clarity of application as contained in section 244A.

The Supreme Court further held that a “tax refund” is a refund of taxes when the tax liability is less than the tax paid. As per the old section, an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the deductor/assessee had paid taxes pursuant to an order passed by the Assessing Officer/Income-tax Officer. In the appeal filed against the said order, the assessee had succeeded and a direction was issued by the Appellate Authority to refund the tax paid. The amount paid by the resident/deductor was retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount was refunded it should have carried interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and unauthorised retention of the money collected by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of section 244A, as that an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There was no reason to restrict the same to an assessee only without extending the similar benefit to a resident/deductor who had deducted tax at source and deposited the same before remitting the amount payable to a non-resident/foreign company.

According to the Supreme Court, providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing Statute. refund due and payable to the assessee is debtowed and payable by the revenue. The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. the State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex aequo et bono ought to be refunded, the right to interest follows, as a matter of course.

The Supreme Court held that in the present case, it was not in doubt that the payment of tax made by resident/ depositor was in excess and the department chose to refund the excess payment of tax to the depositor. The interest is required to be paid on such refunds. The catch however was from what date interest was payable, since the present case did not fall either under clause (a) or
(b) of section 244a of the act. the Supreme Court held that in the absence of an express provision as contained in Clause (a), it could not be said that the interest was payable from the 1st of april of the assessment year. Simultaneously, since the said payment was not made pursuant to a notice issued u/s. 156 of the Act, Explanation to Clause(b) had no application. In such cases, as the opening words of Clause(b) specifically referred to “as in any other case,” the interest was payable from the date of payment of tax. the sequel of the above discussion according to the Supreme Court was that the resident/ deductor is entitled not only the refund of tax deposited u/s. 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax.

Note: In the context of the liability of the revenue to pay interest u/s. 244A, reference may also be made to the judgment of the Apex Court (Larger Bench of 3 Judges) in the case of Gujarat Fluoro Chemicals [358 ITR 291] in which the Court has held that the assessee can claim only that interest which is provided under the act and no other interest can be claimed by the assessee on statutory interest for delay in payment thereof. We have analysed this judgment in our column ‘Closements’ in the november and december issues of this journal.

shailesh.kwebmaker

Corporate Social Responsibility – Companies Act, 2013:

A Paradigm Shift in Corporate Moral Responsibility (or Inner Transformation for Corporates)

Since the time provisions relating to Corporate Social Responsibility (CSR) have been announced, it is the most heated topics under discussion in the corporate world. It is, however not a totally new concept in India as the Securities and Exchange Board of India (SEBI) had ordered 100 largest companies listed on BSE and NSE to disclose their CSR activities and the amount spent on CSR. It is also to be noted that in parliament also, CSR was one of the most debated issues. The reasons for this may be political, but the fact that the issue caught the attention of our elected members indicates its significance.

Despite the problems that will be discussed in the following paragraphs the, initiative taken by the government is to be appreciated and we hope that the proper implementation of the same benefits the public at large. As the name suggests, CSR is a corporate’s responsibility and initiative towards upliftment of society and social welfare. In India, we look to the government and public authorities when it comes to spending towards social welfare. Internationally it is an accepted practice, but India is the first country to introduce statutory provisions with respect to CSR.

The Ministry of Corporate Affairs through the Companies Act 2013 (‘the Act’) has prescribed the provisions of CSR. Section 135 of the Act prescribes the basic provisions for the applicability and other requirements. CSR Rules 2014 contain the procedural part. Schedule VII to the Act prescribes list of activities on which amount can be spent to comply with the provisions of CSR. :

• Effective date

On 27th February 2014, the Ministry of Corporate Affairs (MCA) has notified section 135, Schedule VII of the Act and Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘Rules’). As per the notification, CSR provisions will be effective from 1st April 2014.

• Applicability

Every company including its holding or subsidiary, and a foreign company having branch/project office in India, which fulfills any of the following criteria in any of the financial years will have to comply with the provisions of CSR.

Further, every company which does not meet the criteria for three consecutive financial years is not required to (a) constitute a CSR Committee and (b) comply with the CSR provisions till such time it meets the below criteria. Criteria are as under:

1. Net worth of Rs. 500 crore or more, or
2. Turnover of Rs. 1,000 crore or more, or
3. Net profit of Rs. 5 crore or more

‘Net profit’ is defined in the CSR Rules as tabulated below

B – For a Foreign company

‘Net profit’ for a foreign company means the net profit as per profit and loss account prepared in terms of Clause (a) of s/s. (1) of section 381 read with section 198 of the Companies Act, 2013.

Issues which may have to be clarified by MCA

• For the purpose of deciding the applicability of CSR provision, the net profit after tax would be considered. Net profit as per financials would normally be understood as profit after tax.

• Since only profit of overseas branch is mentioned, in our view, loss of overseas branch will not be added for determining net profit criteria.

• According to Section 135, the criteria for applicability of CSR are to be applied to each company. However, as per CSR Rules, it could be interpreted that if CSR is applicable to parent company then it would automatically apply to its subsidiary or vice versa even though those entities do not meet the criteria.

• For reducing the dividend received from Indian companies from Net profit, practical difficulty will arise in determining whether such companies are complying with the provisions of section 135 or not.

• CSR Contribution

Company covered under the CSR provisions will have to spend, in every financial year, at least 2% of ‘average net profits’ of last 3 financial years on CSR activities. In the event such a company fails to spend such amounts in pursuance to its CSR Policy, the Board is required to provide reasons for not spending the specified amounts in the Board’s annual report. The ‘average net profit’ shall be calculated in accordance with section 198 [i.e., calculation of net profit prescribed for the purpose of determining the maximum managerial remuneration]

Issue which may have to be clarified by MCA

Since ‘average net profit’ is to be computed as per section 198, the definition of ‘net profit’ as given in the CSR rules will not apply i.e., profit of overseas branch and dividend from other companies in India complying with CSR provisions will not be reduced for calculation of ‘average net profit’.

• Schedule VII of the Companies Act, 2013

CSR policy relates to activities to be undertaken by the Company as specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of the Company. Following CSR activities are specified in Schedule VII.

1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;

2. Promotion of education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;

3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources & maintaining quality of soil, air & water;

5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

6. Measures for the benefit of armed forces veterans, war widows and their dependents;

7. Training to promote sports [rural, nationally recognised sports, Paralympic & Olympic sports];

8. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Schedule Castes, the Schedule Tribes, other backward classes, minorities and women;

9. Contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

10. Rural development projects.

• CSR Committee and the Board of Directors

1. The companies shall constitute a CSR Committee consisting of 3 or more directors including at least 1 independent director. However, unlisted public company or a private company or foreign company shall have its CSR Committee without independent director. A private company having only two directors on its Board shall constitute its CSR Committee with two such directors.

2. The key role of the CSR Committee is to formulate and recommend CSR policy to the Board of Directors, recommend the amount of expenditure to be incurred on the CSR and monitor the Corporate Social Responsibility Policy of the company.

3. The Board of Directors shall approve the CSR policy after considering recommendations from CSR Committee and disclose contents in Directors Report forming part of the annual report and also place it on the company’s website. Further, the Board shall ensure that the activities as are included in CSR Policy of the company are under- taken by the company.

4. The Company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR.

5. The format for the annual report on CSR activi- ties to be included in the Board’s report is also given. This has to be certified by the Director and Chairman of CSR Committee. In case of foreign company, the authorised representative resident in India shall also certify.

• Other key points as per the CSR Rules

1. CSR expenditure includes all expenditure including contribution to corpus, or on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity with Schedule VII of the Act.

2. A company may carry out CSR activities, through registered trust or society or a company estab- lished by the company or its holding or subsidiary or associate company. The following 2 CONditions are prescribed

a. If trust, society, or company is not established by the company, etc., it shall have an established track record of 3 years in undertaking CSR activities.

b. Company has specified the project or programmes to be undertaken through these entities, the mo- dalities of utilisation of funds on such projects and programmes and the monitoring and reporting mechanism.

3. A company may also collaborate with other companies for undertaking CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such activities.

4. The CSR expenditure has to be only on projects/ programmes undertaken in India only.

5. CSR projects or programmes that benefit only employees of the company or their families is not considered as CSR activities.

6. Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least 3 financial years but such expenditure shall not exceed five percent of total CSR expenditure of the company in one financial year.

7. Contribution to any political parties directly or indirectly is not considered as CSR activity.

8. The CSR policy of the company shall specify that the surplus arising out of the CSR activities shall not form part of the business profit of the com- pany.

• Substantial changes compared to draft rules:

Significant changes in final rules/schedule has been made as compared to the draft CSR rules and Schedule VII. Notably amongst them are as under:

(i) removal of 3 year block period concept,

(ii) hitherto programs integrating business models with social and environmental priorities and processes in order to create shared value was covered,

(iii) restricting expenses on personnel engaged in CSR to not more than 5% of CSR spend,

(iv) removing contribution to fund set up by State Government for socio economic development and relief and welfare of the SC/ST/BC, minorities and women,

(v) restricting the health care initiative to prevention

(vi) expanding the applicability of Section 135 to Foreign Companies having branch/project office in India (though section 135 only refers to Companies (which as per definition will include companies incorporated in India only),

(vii) removing the enabling clause in Schedule VII for notifying any other activities as part of CSR and substituting business social projects with rural social project.

• Conclusion

There is no clarity on tax treatment of amount spent on CSR. In the draft CSR rules it was specified that tax treatment will be in accordance with the Income Tax Act as may be notified by CBDT. However in the Rules notified, this para is removed. Clarity is also required in respect of accounting treatment for the unspent amount on CSR especially in view of expert advisory opinion issued by ICAI in June 2013 which opined that provision may not be required where there is no present obligation.

Key challenges for corporates would be where they are already spending money on the general welfare of the employees per se like housing, education, medical facilities etc. and now they will also have to spend on CSR as spending on employee welfare is not covered. So for such corporates this will be an additional financial outflow. To conclude, in India CSR would be successful only if it is implemented in its true spirit. It should be noted that there are no penal consequences for not spending on CSR in a particular year, however there is an indirect pressure on corporates to spend on CSR. We hope that CSR results in overall development of the society and general public at large and CSR becomes the game changer in terms of transforming India from a developing country to a developed nation.

shailesh.kwebmaker

ACCEPTANCE OF DEPOSITS BY COMPANIES

1. Companies Act, 2013

The Companies Act, 2013 (Act) has been in vogue since August, 2013. Out of 470 sections, 98 sections have been notified since 12th September, 2013. Recently, vide notification dated 26th March,2014, 183 sections have been notified and they are in force from April 01,2014. Thus in all today 281 sections are in operation. The Ministry of Corporate Affairs have notified the Rules in matters covered by the sections which are in force and these Rules have come into force on 01-04-2014. This Act and Rules replace the Companies Act, 1956 (old Act) and the Rules made there under.

2. Acceptance of Deposits:
Chapter V of the Act, deals with Acceptance of Deposits by companies. It contains four sections viz. sections 73 to 76. Of which, section 73, 74(1) and 76 are operative from1st April,2014. The Companies (Acceptance of Deposits) Rules, 2014 (Rules) have also been notified and they have come into force on 01-04-2014. These Rules are framed in consultation with RBI. It may be noted that these sections and the Rules apply to Public and Private Companies.

3. Deposit:
Section 2(31) of the Act, defines “deposit” which includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount received as provided in Rule 2(1)(c).

4. Exempted Deposits:
As per Rule 2(1)(c) the following amounts received by a company are not to be considered as Deposits under the above provisions.

(i) Receipt from the Central Government, or a State Government, (including from any other source whose repayment is guaranteed by the Central Government or a State Government), from a local authority , or from a statutory authority constituted under an Act of Parliament or a State Legislature;

(ii) Receipt from foreign Governments, foreign or international banks, multilateral financial institutions, foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of FEMA Act and rules and regulations made there under;

(iii) Any loan or facility from any banking company, from a banking institution notified by the Central Government u/s. 51 of the Banking Regulation Act, 1949, or a notified Co-operative Bank.

(iv) Any loan or financial assistance from any Public Financial Institutions notified by the Central Government;

(v) Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by RBI;

(vi) Intercorporate Deposits;

(vii) Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for. It is also provided that such allotment should be made within 60 days of receipt or refunded within 15 days on the expiry of 60 days. Adjustment for any other purpose shall not be considered as refund. It may be noted that there was no such time limit for allotment of securities under the old Companies Act or Rules. The above time limit will apply to amounts received before 01-04-2014 and outstanding as on that date;

(viii) Receipt from a person who, at the time of the receipt of the amount, was a director of the company. He should give a declaration that he has deposited the amount out of his own funds. It may be noted that under the Old Act in the case of Private Companies, exemption was given to relative of a Director and to a Member of the Company. This exemption is now withdrawn;

(ix) Any amount raised by issue of secured bonds or debentures or bonds or debentures compulsorily convertible into shares of the company within five years. It may be noted that under the Old Act there was no such time limit for conversion of debentures within 5 years;

(x) Any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposits. Under the Old Act there was no limit about the amount of Security Deposit;

(xi) Any non-interest bearing amount received or held in trust;

(xii) Any amount received in the course of, or for the purposes of, the business of the company,-

(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of 365 five days. There was no such limit of 365 days under the Old Act.

(b) as advance, against consideration for sale of any property;

(d) as advance received under long term projects for supply of capital goods.

(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to specified conditions.

5. Prohibition on Acceptance of Deposits from Public

(i) Section 73(1) provides that no company shall invite, accept or renew any deposit under this Act from the public except in the manner provided under this chapter.

(ii) Section 73(2) provides that a company may accept deposits from its members, subject to passing of a resolution in General Meeting, on such terms and conditions including the provision of security, if any, or the repayment of such deposits with interest as may be agreed upon between the company and its members on fulfillment of the following conditions:

(a) Issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in form DPT-1 pursuant to Rule 4.

(b) Filing a copy of the circular alongwith such statement with the ROC within 30 days before the date of issue of the circular.

(c) Depositing such sum which shall not be less than 15% of the amount of its deposits maturing during a financial year and the financial year next following and kept in a scheduled bank in a separate bank account to be called as “Deposit Repayment Reserve Account”. This reserve can be used for repayment of deposits only u/s. 73(5).

(d) providing such Deposit Insurance in such manner and to such extent as stated in Rule 5.

(e) Certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits ; and

(f) In the case of secured Deposits, the company should provide for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company. The manner in which the security is to be created is stated in Rule 6. In the case of secured deposits, the company will have to appoint Trustees for Depositors as provided in Rule 7.

If in any case a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as “unsecured deposits” and shall be so quoted in every circular, form, advertisement or in any document related in invitation or acceptance of deposits.

(iii) Section 73(3) provides that every deposit ac- cepted by a company shall be repaid with interest in accordance with the terms and conditions of the agreement with the depositors.

(iv) Section 73 (4) provides that if a company fails to repay the deposit or part thereof or any interest thereon, the depositor concerned may apply to the Tribunal as provided in that section.

6. Acceptance of Deposit from public by certain companies (eligible companies)

(i) Section 76(1) provides that, a public company, having networth of Rs. 100/- crore or more or turn over of Rs. 500/- crore or more may accept deposits from public on the condition that the prior consent of the company in general meeting by a special resolution has been obtained and the said resolution has been filed with the ROC before making any invitation to the public for acceptance of deposit. Such company is defined as an ‘eligible company’ as per Rule 2 (1)(e) of the Rules. The said rule provides that an ‘eligible company’ which is accepting deposits u/s. 180 (1)( (c ) may accept deposits by means of an ordinary resolution, if the amount to be borrowed together with amount already borrowed does not exceed aggregate of paid up capital plus free reserve.

(ii) Every such company accepting deposit shall be required to obtain rating (including its networth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency and the company should inform the public, the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits;

(iii) Further, in the case of a company accepting secured deposits from the public it shall, within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with the Rule 6 of the Rules.

(iv) Such eligible Company has also to comply with procedure listed in Para 5(II) above.

7. Repayment of deposits, accepted before com- mencement of 2013 Act

(i) Section 74(1) provides that in the case of any deposit accepted by a company before 01-04-2014, if the amount of such deposit or part thereof or any interest due thereon remains unpaid on the above date or becomes due at any time thereafter the company shall

(a) file, within a period of 3 months from 01- 04-2014 or from the date on which such pay- ments are due, with the ROC a statement of all the deposits accepted by the company and sums remaining unpaid on the above date with the interest payable thereon alongwith the arrangement made for such repayment in form DPT-4, pursuant to Rule 20 of the Rules.

(b) repay within 1 year i.e., by 31-03-2015 or from the date on which such repayments are due, whichever is earlier.

8. Manner and extent of deposit insurance:

As stated above, Rule 5(1) provides that every com- pany referred to in Para 5 and 6 above shall enter into a contract for providing deposit insurance at least thirty days before the issue of circular or advertisement or at least thirty days before the date of renewal, as the case may be. Further, it clarifies that amount as specified in the deposit insurance contract shall be deemed to be amount in respect of both principal amount and interest due thereon.

Rule 5(2) provides that the deposit insurance contract shall specifically provide that in case the company defaults in repayment of principal amount and interest thereon, the depositor shall be entitled to the repayment of principal amount of deposits and interest thereon by the insurer upto the aggregate monetary ceiling as specified in the contract. In case of any deposit and interest not exceeding Rs. 20,000, the deposit insurance contract shall provide for payment of the full amount of the deposit and in case of any deposit and interest thereon in excess of Rs. 20,000, the deposit insurance contract shall provide for payment of an amount not less than Rs. 20,000 for each depositor. Rule 5(3) provides that the insurance premium for such deposit insurance shall be paid by the company.

9. Limit & Terms and Conditions of acceptance of deposits by companies:

Rule 3 of the Rules provides for limits and other terms of deposits as under:

(i) No company referred to in section 73(2) and eligible company shall accept or renew any deposit, whether secured or unsecured, which is repayable on demand or upon receiving a notice within a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposit:

However, that company may, for the purpose of meeting any of its short term requirements of funds, accept or renew such deposits for repayment earlier than 6 months from the date of deposit or renewal subject to the conditions that-

(a) such deposit shall not exceed 10% of the aggregate of the paid up share capital and free reserves of the company, and

(b) such deposits are repayable not earlier than 3 months from the date of such deposits or renewal thereof.

(ii) No company referred to in section 73(2) shall accept or renew any deposit from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25% of the aggregate of the paid up share capital and free reserves of the company. For this purpose paid up share capital shall include preference share capital also.

(iii) No eligible company shall accept or renew-

(a) any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% of the aggregate of the paid-up share capital and free reserves of the company;

(b) In the case of deposits from others, if the amount of such deposit together with the amount of such other deposits, other than the deposit referred to Clause (a), outstanding on the date of acceptance or renewal exceed 25% of aggregate of the paid-up share capital and free reserves of the company.

(c) In other words, an eligible company can accept deposits upto 35% of paid up share capital (including preference share capital) and free reserves subject to the sub-limit of 10% from members.

(iv) No Government company eligible to accept deposit u/s. 76 shall accept or renew any deposit if the amount of such deposit together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds 35% of the aggregate of its paid-up share capital and free reserves of the company.

(v) No company referred to in section 73(2) or any eligible company shall invite or accept or renew any deposit in any form carrying a rate of interest or pay brokerage thereon at the rate exceeding the maximum rate of interest or brokerage as prescribed by RBI for acceptance of deposits by NBFC.

For this purpose, it is provided that the person who is authorised, in writing, by a company to solicit deposits on its behalf and through whom deposits are procured shall only be entitled to the brokerage and payment of brokerage to any other person for procuring deposits shall be deemed to be in violation of this rule. It may be noted that Para 4 (7) of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998, that no NBFC shall pay more than 12.5%P.A. interest on public deposits. Similarly, Para 4(8) provides that the rate of Brokerage/Commission to brokers shall not exceed 2% of the deposit collected. Brokers can be paid actual expenses incurred for this purpose but the same shall not exceed 0.5% of the deposit so collected.

(vi) The company shall not reserve to itself either directly or indirectly right to alter, to prejudice or disadvantage of the depositor any of the terms and conditions of the deposit, deposit trust deed and deposit insurance contract after circular or circular in the form of advertisement is issued and deposits are accepted.

(vii) Deposits may be accepted in joint names, not exceeding 3, with or without any of the Clauses viz.“jointly” “Either or Survivor” “Anyone or Survivor”.

10. Application mandatory

As per Rule 10 of the Rules , no company shall accept, or renew any deposit, whether secured or unsecured, unless an application, in such form as specified by the company, is submitted by the intending depositor for the acceptance of such deposit. The form of application referred to above shall contain a declaration by the intending de- positor to the effect that the deposit is not being made out of any money borrowed by him from any other person.

11. Furnishing of deposit receipts to depositors:

Rule 12 of the Rules mandate that every company shall, on the acceptance or renewal of a deposit, furnish to the depositor or his agent, a receipt for the amount received by the company, within a period of 21 days from the date of receipt of money or realisation of cheque or date of renewal.

The receipt referred to above shall be signed by an officer of the company duly authorised by the Board in this behalf and shall state the date of deposit, the name and address of the depositor, the amount received by the company as deposit, the rate of interest payable thereon and the date on which the deposit is repayable.

12. Maintenance of liquid assets and creation of deposit repayment reserve account:

As per Rule 13 of the Rules, every company referred to in section 73(2) and every eligible company shall, on or before 30th April of each year, deposit the sum not less than 15% as specified in Para 5 (ii) (c) above with any scheduled bank and the amount so deposited shall not be utilised for any purpose other than for the repayment of deposits:

Further, it also mandates that the amount remaining deposited shall not at any time fall below 15 % of the amount of deposits maturing, until the end of the current financial year and the next financial year.

13. Registers of deposits:

As per Rule 14 of the Rules, every company accepting deposits shall maintain at its registered office one or more separate registers for deposits accepted or renewed, in which there shall be entered separately in the case of each depositor the particulars as listed in Rule 14.

The entries specified in this Rule shall be made within 7 days from the date of issuance of the receipt duly authenticated by a director or secretary of the company or by any other officer authorised by the Board for this purpose. The register referred to above shall be preserved in good order for a period of not less than eight years from the financial year in which the latest entry is made in the register.

14. Premature repayment of deposits:

(i) Rule 15 of the Rules provides that, if a company makes a repayment of deposits, on the request of the depositor, after the expiry of a period of six months from the date of such deposit but before the expiry of the period for which such deposit was accepted, the rate of interest payable on such deposit shall be reduced by 1 % from the rate which the company would have paid had the deposit been accepted for the period for which such deposit had actually run and the company shall not pay interest at any rate higher than the rate so reduced:

(ii) However, nothing contained in this rule shall apply to the repayment of any deposit before the expiry of the period for which such deposit was accepted by the company, if such repayment is made solely for the purpose of (a) complying with the provisions of Rule 3; or (b) providing war risk or other related benefits to the personnel of the naval, military or air forces or to their families, on an application made by the associations or societies formed by such personnel, during the period of emergency declared under Article 352 of the Constitution:

(iii) If a company referred to in section 73(2) or any eligible company permits a depositor to renew his deposit, before the expiry of the period for which such deposit was accepted by the company, for availing of a higher rate of interest, the company shall pay interest to such depositor at the higher rate if such deposit is renewed in accordance with the other provisions of these rules and for a period longer than the unexpired period of the deposit.

(iv) Further, the Rule provides, where the period for which the deposit had run contains any part of a year then, if such part is less than 6 months, it shall be excluded and if such part is 6 months or more, it shall be reckoned as 1 year.

15. Return of deposits to be filed with the Registrar:

Rule 16 of the Rules requires that the company shall on or before 30th June, every year, file with the ROC a return in Form DPT-3 along with the prescribed fee and furnish the information contained therein as on 31st March, of that year duly audited by the auditor of the company.

16. Penal rate of interest:

Rule 17 of the Rules provides that every company shall pay a penal rate of interest of 18 % per annum for the overdue period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.

17. Penalty of Default

Sections 74(2), 74(3) and 75 of the Act, which have not yet been brought into force, provide as under.

(i) If the company fail to repay any existing deposit or interest due to depositors within the time allowed u/s. 74, the following penalties can be levied.

(a) The company shall be punishable with minimum fine of Rs. 1 crore which may be extend to Rs. 10 crore. This will be over and above the amount of Deposit and interest in respect which default is made for repayment.

(b) Every defaulting Officer shall be punishable with imprisonment which may extent to 7 years or with minimum fine of Rs. 25 lakh which may extend to Rs. 2 Crore or with both.

(ii) It may be noted that in both the above cases, the amount of minimum fine has no relationship with the amount in respect of which the default in repayment of deposit or interest is made. It may so happen that the default may be in respect of deposit of Rs. 25 lakh, against which minimum fine payable by the company is Rs. 1 crore. To this extent, the above provision is very harsh.

(iii) If it is found that there is default in repayment of outstanding Deposit or interest u/s. 74 and it is proved that such Deposit was accepted by the Company with intent to defraud the depositors or that the same was accepted for fraudulent purpose, every defaulting officer shall be personally responsible for any loss or damage that is incurred by the depositor. It may be noted that this penal action is without prejudice to the penalty leviable u/s. 74(3) as stated in (i) above. Further, the defaulting Officer will also be punishable u/s. 447 which provides for the following penalties.

(a) Imprisonment for minimum period of 6 months which may extend to 10 years.

(b) If the fraud involves Public interest, the mini- mum imprisonment can be for 3 years.

(iv) Rule 21 of the Rules provides that if any com- pany referred to in section 73(2) or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 25,000 and where the contravention is a continuing one, with a further fine which may extend to Rs. 500 for every day after the first day during which the contravention continues.

18. To Sum Up:

The above provisions for acceptance of deposits by Companies are very stringent as compared to the provisions under the Old Act. Considering these requirements, it will be difficult for some companies to comply with these provisions and will have to find alternate source of funds. In particular these provisions are very harsh for private companies as exemption for deposits or loans taken from members has now been withdrawn. The exemption is now given to deposits or loans from directors only. Under the Old Act exemption was given to deposits or loans from relatives of directors of private companies. This is not given under the New Act.

It is true that these provisions are made in the New Act in view of the fact that the Government has noticed in recent years that some Companies are defaulting in refunding the amount of deposits and interest on the due dates. Hence, such stringent provisions can be justified in the interest of persons who invest their hard earned monies in such public deposits. The provisions for Deposit Insurance, Credit Rating, Creation of Deposit Repayment Reserve Account, Creation of Security, appointment of Trustees for secured deposits etc. are provisions made to safeguard the interest of small depositors. However, it appears that there is no justification to rope in Private Companies which get deposit or loan from their members or their relatives.

Moreover, the penal provisions under which minimum fine can be levied for default in repayment of deposits or interest on due date are very harsh. The said fine can be levied on the Company and defaulting officer irrespective of the amount of the deposit and interest in respect of which default may occur.

shailesh.kwebmaker

Related Party Transactions – A Potential for Abuse?

While auditing related party transactions, an auditor is usually confronted with questions such as:

“Why should auditing related party transactions be any different from like transactions that are entered into with unrelated parties?”

“How does one ensure completeness of identification of all related party relationships and transactions with such parties?”

“How does an auditor deal with situations where the related party is the only source of supply of goods or services for an enterprise?

Related party transactions can be legitimate and value-enhancing for a corporation but they can also serve as a vehicle for illegitimate expropriation of corporate value by management or controlling shareholders. Related party transactions do not merely pose the potential harm of direct expropriation of value from minority investors, but they also reinforce negative perception of the country’s capital markets as a whole, and lead to a general discounting of equity markets.

Generally, related party transactions are not regarded as mechanisms for fraud, and their presence need not indicate fraudulent financial reporting. It is important for the auditor to understand the benign nature of most related party transactions, the differentiating features between benign and fraudulent transactions, and the importance of evaluating a company’s related party transactions in light of its broader corporate governance structure. However, at the same time, the auditor should not discount the fact that, related party relationships may present a greater opportunity for collusion, concealment or manipulation.

Enterprises establish a matrix of related party entities/ structures for tax efficiencies, compliance with regulatory requirements, ring fencing promoter interests, protecting intellectual property rights, providing common services etc. At times, related parties may be the only source of supply of goods and services. It is imperative that management designs, implements and maintains adequate controls over related party relationships and transactions so that these are identified and appropriately accounted for and disclosed in accordance with the reporting framework. In their oversight role, those charged with governance are required to monitor how management discharges its responsibility for such controls.

Standard on Auditing (SA) 550 Revised – Related Parties deals with the auditor’s responsibilities regarding related party relationships and transactions when performing an audit of financial statements.

As per the standard, the objectives of the auditor are:

a) Irrespective of whether the applicable financial reporting framework establishes related party requirements, to obtain an understanding of related party relationships and transactions sufficient to be able:

i. To recognise fraud risk factors, if any, arising from related party relationships and transactions that are relevant to the identification and assessment of the risks of material misstatement due to fraud; and

ii. To conclude whether the financial statements, insofar as they are affected by those relationships and transactions:

– Achieve a true and fair presentation (for fair presentation frameworks); or

– Are not misleading (for compliance frameworks); and

(b) In addition, where the applicable financial reporting framework establishes related party requirements, to obtain sufficient appropriate audit evidence about whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the financial statements in accordance with the framework.

Now, let us understand the application of SA 550 considering the following two case studies.

Case study I- Fraudulent financial reporting

ABC limited (‘ABC’) was engaged in the business of selling electronic items to retail, individual customers. The Company operates through retail outlets across the country and recognises revenue on sale to the retail customer on transfer of ownership of the goods. During the financial year ended 31st March 20X0, the Company entered into an arrangement with XYZ Limited (‘XYZ’) to sell goods and the Company recognised revenue on delivery of goods at the premises of XYZ. XYZ would in turn sell goods to retail customers. XYZ is an entity in which a whole time director of ABC owns 51% of the share capital. XYZ would fall within the definition of related party as per Accounting Standard 18-Related Parties (AS-18) as a key managerial personnel of ABC is able to exercise significant influence over XYZ. Sales made to XYZ constitute 15% of ABC’s total sales for the year. Initially, the auditor’s procedures were restricted to verification of documents such as delivery challans and sales invoices and ensuring that appropriate disclosures have been made as per the requirements of the AS- 18. Further, management asserted that related party transactions were conducted on terms equivalent to those prevailing in an arm’s length transaction.

The facts that were not discovered by the audit team were as follows:

• The risks of ownership were not transferred from ABC Limited to XYZ Limited on delivery of goods as XYZ was required to pay ABC only on further sale of goods and collection of money from XYZ’s end customers.

• Further, XYZ had an unlimited right to unilaterally return unsold goods back to ABC.

• The prices at which the goods were sold to XYZ were substantially higher prices than those charged to other customers.

• ABC limited also had a retail outlet in close proximity of XYZ Limited.

• The auditor should have obtained sufficient appropriate audit evidence supporting management’s representation that the transactions with XYZ were at arm’s length.

This above facts came to light when the internal auditors identified that XYZ had returned goods in the subsequent financial year and such returns constituted a significant value and volume of sales pertaining to earlier periods.

Analysis with respect to SA 550

Auditors’ Responsibilities

1 Identification and assessment of risk of material misstatement associated with related party transactions

Historically, the Company had not entered into any such transactions with any related/unrelated party as the Company’s ordinary business constituted selling of goods to individual end-customers. The Company already had an outlet in close proximity of XYZ. The sales were undertaken at prices higher than those with normal customers. Hence, this transaction should have been considered as a significant related party transaction giving rise to significant risk of fraud while performing risk assessment procedures.

2. Response to the risk of material misstatement

– The auditor should have then appropriately responded to the identified risk by performing the following procedures:

a. Inspecting the underlying contract with XYZ and evaluating –

i. The business rationale (or lack thereof) of the transaction which may suggest the same has been entered into to engage in fraudulent financial reporting.

ii. Consistency of the terms of transactions with management’s representation

b. Obtaining evidence that the transactions have been appropriately discussed and approved.

c. Where applicable, reading the financial statements of the related party or other relevant financial information, if available, for evidence of accounting of transactions in the accounting records of related party.

d. Confirming the purpose, specific terms or amounts of the transactions with the related parties. (This procedure will be less effective where the auditor judges that the Company is likely to influence the response of the related party)

3. Communication to those charged with governance:
The auditor in the above case would need to promptly communicate to those charged with governance to arrive at a common understanding of the issues involved and the expected resolution. The auditor would also need to communicate the impact on the financial statements and any resultant impact on the auditor’s report.

4. Independent Auditor’s report:
The auditor would need consider the requirement to appropriately modify the main report considering the materiality of amounts involved. Further, the auditor would also have to appropriately modify the reporting relating to paragraph 4(xxi) of the Companies (Auditor’s Report) Order, 2003 (‘CARO’) report.

We would now evaluate another case study which involves a complex structure of related party transactions.

Case Study 2
Mr. P and Mrs. P, well-known fashion designers, incorporated ABC Ltd. in April 20X0 as a 100% export oriented company to be engaged in the business of manufacturing and export of garments. The initial capital contribution was Rs. 5 crore. Given their expertise, the couple were able to attract investment from other individual shareholders of Rs. 45 crore. The shareholding pattern of ABC comprised of promoter shareholding of 51% held by Mr. P and Mrs. P whereas the balance 49% was held by other non-related shareholders. The shareholder agreement with individual shareholders mandated appointment of 3 independent directors. This appointment was made with the objective of protecting the interests of the minority shareholders.

During the year 20X1, ABC Ltd. incorporated XYZ Ltd (‘XYZ’), a subsidiary in the United States of America (US) with 60% shareholding by ABC and the balance 40% held by Mr. P and Mrs. P. ABC entered into an exclusive arrangement with XYZ by virtue of which the entire production of ABC was to be sold to XYZ. The agreement stipulated that given the commitment to buy-out the entire production, the sales consideration to be paid by XYZ to ABC for goods purchased should be just sufficient for ABC to earn a margin of 10% on cost of goods sold. This arrangement was approved by all the directors (including the 3 independent directors) in the board meeting held on 1st April 20X1. The arrangement was also approved in an extra ordinary general meeting held on 15th April
20X1 wherein only Mr. P and Mrs. P were present as shareholders.

XYZ in turn sold the goods purchased from ABC at a margin of 5% to M/s. PQR & Co., a partnership firm formed by Mr. P and Mrs. P in the US. M/s. PQR & Co. sold the goods in the retail market in the US at a margin of 40% of its cost. Against the aggregate purchases of Rs. 30 crore made by XYZ from ABC during the years 20X1-20X4, payments made by XYZ to ABC aggregated to only Rs. 10 crore. The balance payment of Rs. 20 crore could not be made by XYZ pending collection from PQR. The chief accountant at XYZ provided a confirmation to ABC for the year-end balance. PQR & Co. too provided a balance confirmation to XYZ for the amount due. The financial statements of ABC and XYZ have been audited by M/s. DEF & Associates (‘DEF’) since incorporation. Let us examine the factors which the auditors of ABC Ltd. would need to be cognizant of to comply with the requirements of SA 550

1. While assessing the risk of material misstatement, the auditors would need to assess the isk associated with related party transactions as significant risk given the existence of a related party with dominant influence–Mr. P and Mrs. P were significant shareholders in ABC and XYZ.

2. The auditors would need to understand the controls established by ABC and XYZ for identifying, accounting and disclosing related party relationships. DEF were the auditors for both ABC and XYZ. Assuming that Mr. P and Mrs. P would have disclosed their interest in the partnership firm, M/s. PQR & Co. in the notice of disclosure, DEF as auditors would need to ensure that the sales made by XYZ to PQR were disclosed as related party transactions in the financial statements of XYZ.

3. The terms of the contract between ABC and XYZ were authorised by the board as well as by the shareholders by an ordinary resolution. Authorisation and approval alone, however, may not be sufficient in concluding whether risks of material misstatement due to fraud are absent because authorisation and approval could have been ineffective, given that ABC was subject to the dominant influence of a related party.

4. Given that the related party transaction involved a clear conflict of interest, the auditors of ABC would need to consider whether the independent directors had appropriately challenged the business rationale of the contract, for e.g., by seeking advice from external professional advisors.

5. The contract was approved by way of an ordinary resolution passed by Mr. P and Mrs. P in their capacity as shareholders. DEF would need to consider whether the contract should have been approved by members (other than Mr.P and Mrs.P) who were not interested in the contract and whether all facts were made available to these members to enable decision -making.

6. DEF would need to evaluate the business rationale of the contract from the perspective of the related parties, XYZ and PQR to better understand the economic reality of the transaction. The subsidiary XYZ was used as a conduit to transfer goods to PQR at a price far lower than the market price so as to benefit the dominant shareholders. DEF would need to evaluate whether the transactions between the related parties were at arms’ length and complied with the benchmarking norms as per local transfer pricing regulations. Another important aspect was the disparity in the margins earned by PQR on the re-sale of goods to retail customers as against the margin earned by XYZ on
sale of goods to PQR. DEF in their capacity as auditors of PQR would need to be cognizant of this aspect in their risk assessment for related party transactions.

7. In view of the non-collection of the amounts due from PQR, the ability of XYZ to settle the receivable of Rs. 20 crore was significantly impacted. The mere fact that XYZ had provided a confirmation of the balance due to ABC would not be sufficient evidence in support of the recoverability of the amount due. The auditor would need to evaluate the realisability of receivables in the books of ABC.

Concluding remarks

Considering that a large number of frauds in the corporate world involve related parties, governments and standard setting bodies have adopted stronger and proactive standards and laws to provide for guidance and monitoring of companies and auditors for accounting, disclosures and validation requirements of related party transactions.The Companies Act, 2013 has widened the scope of coverage in terms of the definition of related party and the nature of transactions covered and at the same time mandated approval of such transactions by the audit committee/board of directors/shareholders as applicable. The tax laws have also been amended to cover transactions with specified domestic related parties in addition to cross border transactions with overseas affiliates and has made it obligatory on the tax payer to substantiate that such transactions are at arms’ length. With sweeping changes in legislation, the auditor would need to exercise heightened professional skepticism in identification of related party transactions, related risk of material misstatement (including fraud risk) and design adequate procedures to ensure compliance with the financial reporting and legal framework.

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GapS in gaap ? Consolidated Financial Statements

Section 129(3) of the 2013 Act requires that a company having one or more subsidiaries will, in addition to Separate Financial Statements (SFS), prepare Consolidated Financial Statements (CFS). Hence, the 2013 Act requires all companies, including non-listed and private companies, having subsidiaries to prepare CFS.

The 2013 Act also provides the following:

(a) CFS will be prepared in the same form and manner as SFS of the parent company.

(b) The Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.

(d) An explanation to the section dealing with the preparation of CFS states that “for the purposes of this sub-section, the word subsidiary includes associate company and joint venture.”

While there is no change in section 129(3), Rule 6 under the Companies (Accounts) Rules, 2014 deals with the “Manner of consolidation of accounts.” It states that the consolidation of the financial statements of a company will be done in accordance with the provisions of Schedule III to the 2013 Act and the applicable accounting standards. The proviso to this rule states as below:

“Provided that in case of a company covered under s/s. (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.”

Given below is an overview of key requirements under the Schedule III concerning CFS:

(a) Where a company is required to prepare CFS, it will, mutatis mutandis, follow the requirements of this Schedule as applicable to a company in the preparation of the balance sheet and statement of profit and loss.

(b) In CFS, the following will be disclosed by way of additional information:

(i) In respect of each subsidiary, associate and joint venture, % of net assets as % of consolidated net assets.

(ii) In respect of each subsidiary, associate and joint venture, % share in profit or loss as % of consolidated profit or loss. Disclosures at (i) and (ii) are further sub-categorised into Indian and foreign subsidiaries, associates and joint ventures.

(iii) For minority interest in all subsidiaries, % of net assets and % share as in profit or loss as % of consolidated net assets and consolidated profit or loss, separately.

(d) A company will disclose the list of subsidiaries, associates or joint ventures which have not been consolidated along with the reasons of nonconsolidation.

Practical issues and perspectives

AS 21 does not mandate a company to present CFS. Rather, it merely states that if a company presents CFS for complying with the requirements of any statute or otherwise, it should prepare and present CFS in accordance with AS 21. Keeping this in view and proviso to the Rule 6, can a company having subsidiary take a view that it need not prepare CFS?

This question is not relevant to listed companies, since the listing agreement requires listed companies with subsidiaries to prepare CFS. This question is therefore relevant from the perspective of a non-listed company.

Some argue that because neither AS 21 nor Schedule III mandates preparation of CFS, the rules have the effect of not requiring a CFS. Instead, a company should present a statement containing information, such as share in profit/ loss and net assets of each subsidiary, associate and joint ventures, as additional information in the Annual Report. In this view, the rules would override the 2013 Act. If it was indeed the intention not to require CFS, then it appears inconsistent with the requirement to present a statement containing information such as share in profit/loss and net assets of each of the component in the group.

Others argue that the requirement to prepare CFS is arising from the 2013 Act and the rules/ accounting standards cannot change that requirement. The proviso given in the rules is to deal with specific exemptions in AS 21 from consolidating certain subsidiaries which operate under severe long-term restrictions or are acquired and held exclusively with a view to its subsequent disposal in the near future. If this was indeed the intention, then the proviso appears to be poorly drafted, because the exemption should not have been for preparing CFS, but from excluding certain subsidiaries in the CFS.

In our view, this is an area where the MCA/ ICAI need to provide guidance/ clarification. Until such guidance/ clarifications are provided, the author’s preferred approach is to read the “proviso” mentioned above in a manner that rules do not override the 2013 Act. Hence, all companies having one or more subsidiary need to prepare CFS.

The subsequent issues are discussed on the assumption that the preferred view, i.e., all companies having one or more subsidiary need to prepare CFS, is finally accepted. If this is not the case, the views on subsequent issues may change.

IFRS exempts non-listed intermediate holding companies from preparing CFS if certain conditions are fulfilled. Is there any such exemption under the 2013 Act read with the rules?

Attention is invited to discussion on the previous issue regarding need to prepare CFS. As mentioned earlier, the preferred view is that all companies having one or more subsidiary need to prepare CFS. Under this view, there is no exemption for non-listed intermediate holding companies from preparing CFS. Hence, it requires all companies having one or more subsidiaries to prepare CFS.

Currently, the listing agreement permits companies to prepare and submit consolidated financial results/ financial statements in compliance with IFRS as issued by the IASB. For a company taking this option, there is no requirement to prepare CFS under Indian GAAP. Will this position continue under the 2013 Act?

Attention is invited to discussion on the earlier issue regarding the requirement to prepare CFS. As mentioned earlier, the preferred view is that CFS is required for all companies having one or more subsidiary. The rules are clear that consolidation of financial statements will be done in accordance with the provisions of Schedule III to the 2013 Act and the applicable accounting standards. Hence, the companies will have to mandatorily prepare Indian GAAP CFS, and may choose either to continue preparing IFRS CFS as additional information or discontinue preparing them.

An explanation to section 129(3) of the 2013 Act states that “for the purpose of this sub-section, the word subsidiary includes associate company and joint venture.” The meaning of this explanation is not clear. Does it mean that a company will need to prepare CFS even if it does not have any subsidiary but has an associate or joint venture?

The following two views seem possible on this matter:

(a) One view is that under the notified AS, the application of equity method/ proportionate consolidation to associate/joint ventures is required only when a company has subsidiaries and prepares CFS. Moreover, the rules clarify that CFS need to be prepared as per applicable accounting standards. Hence, the proponents of this view argue that that a company is not required to prepare CFS if it does not have a subsidiary but has an associate or joint venture.

b)The second view is that the above explanation requires associates/ joint ventures to be treated at par with subsidiary for deciding whether CFS needs to be prepared. Moreover, the 2013 Act decides the need to prepare CFS and the rules are relevant only for the manner of consolidating entities identified as subsidiaries, associates and joint ventures. Hence, CFS is prepared when the company has an associate or joint venture, even though it does not have any subsidiary. The associate and joint venture are accounted for using the equity/proportionate consolidation method in the CFS.

We understand that the MCA/ ICAI may provide an appropriate guidance on this issue in the due course. Until such guidance is provided from the author’s perspective, the second view appears to be more logical reading of the explanation. Hence, the preference is to apply the second view.

Section 129(4) read with Schedule III to the Act suggests that disclosure requirements of Schedule III, mutatis mutandis, apply in the preparation of CFS. In contrast, explanation to paragraph 6 of AS 21 exempts disclosure of statutory information in the CFS. Will this exemption continue under the 2013 Act?

A company will need to give all disclosures required by Schedule III to the 2013 Act, including statutory information, in the CFS. To support this view, it may be argued that AS 21 (explanation to paragraph 6) had given exemption from disclosure of statutory information because the 1956 Companies Act did not require CFS. With the enactment of the 2013 Act, this position is likely to change. Also, the exemption in AS 21 is optional and therefore this should not be seen as a conflict between AS 21 and Schedule III. In other words, the statutory information required by Schedule III for SFS will also apply to CFS.

The disclosures given in the CFS will include information for parent, all subsidiaries (including foreign subsidiaries) and proportionate share for joint ventures. For associates accounted using equity method, disclosures will not apply. This ensures consistency with the manner in which investments in subsidiaries, joint ventures and associates are treated in CFS.

There would be some practical issues in implementing the above requirement. For example,
(a) It is not clear as to how a company will give disclosures such as import, export, earnings and expenditure in foreign currency, for foreign subsidiaries and joint ventures. Let us assume that an Indian company has US subsidiary that buys and sells goods in USD. From CFS perspective, should the purchase/sale in US be treated as import/export of goods? Should such purchase/sale be presented as foreign currency earning/expenditure?

(b) How should a company deal with intra-group foreign currency denominated transactions which may get eliminated on consolidation? Let us assume that there are sale/purchase transactions between the Indian parent and its overseas subsidiaries, which get eliminated on consolidation. Will these transactions require disclosure as export/ import in the CFS?

The ICAI should provide appropriate guidance on these practical issues. Until such guidance is provided by the ICAI, differing views are possible on this this matter. To help resolving this issue, one may argue that the MCA has mandated these disclosures to be included in the financial statements to present information regarding imports/exports made and foreign currency earned/spent by Indian companies. In the absence of specific guidance, the preference is to use the said objective as a guiding principle to decide the disclosures required.
Assume that the 2013 Act requires even non-listed and private groups to prepare CFS. Under this assumption, the following two issues need to be considered:

(a) The date from which the requirement concerning preparation of CFS will apply. Particularly, is it mandatory for non-listed/ private groups to prepare CFS for the year-ended 31st March 2014?
(b) Whether the comparative numbers need to be given in the first set of CFS presented by an existing group?

(a) Based on the General Circular No. 8/2014 dated 4th April 2014, non-listed/private groups need to prepare CFS only for financial year beginning on or after 1st April 2014.
(b) Regarding the second issue, Schedule III states that except for the first financial statements prepared by a company after incorporation, presentation of comparative amounts is mandatory. In contrast, transitional provisions to AS 21 exempt presentation of comparative numbers in the first set of CFS prepared even by an existing group.

One may argue that there is no conflict between transitional provisions of AS and Schedule III. Rather, AS 21 gives an exemption which is not allowed under the Schedule III. Hence, presentation of comparative numbers will be mandatory in the first set of CFS prepared by an existing company.

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TS-76-ITAT-2014(Del) Bharti Airtel vs. ACIT A.Y: 2008-2009, Dated: 11-03-2014

10. TS-76-ITAT-2014(Del) Bharti Airtel vs. ACIT A.Y: 2008-2009, Dated: 11-03-2014

Section 92 – Notwithstanding the amendment to the ITA, issuance of corporate guarantee that does not have a bearing on the profits or losses or assets of enterprise does not amount to “international transaction” for transfer pricing provisions.

Facts:
The Taxpayer is an Indian company engaged in the provision of telecommunication services. The Taxpayer had during the financial year issued a corporate guarantee on behalf of its associated enterprise (AE) and also contributed to the share capital in its foreign subsidiaries.

With respect to the corporate guarantee issued by the Taxpayer on behalf of its AE guaranteeing the repayment of a working capital facility advanced by a bank, the Taxpayer contended that it had not incurred any costs or expenses on account of issue of such guarantee and the guarantee was issued as a part of the shareholder activity. Accordingly, there was no requirement to charge a guarantee fee under the TP provisions.

The Taxpayer, however, in its TP documentation study determined an arm’s length (AL) guarantee fee and offered this income to tax.

During the Transfer Pricing Audit, the Tax Authority observed that by issuing the corporate guarantee, the AE’s credit rating benefited from association to the Taxpayer and the Taxpayer, was therefore, required to receive AL consideration and accordingly estimated the AL fee and a TP adjustment was made with respect to the differential guarantee fee.

For the contribution to the share capital of its foreign subsidiaries, the Taxpayer did not benchmark the said transaction as the payments were in the nature of capital contributions. However, during the course of the audit proceedings, the Tax Authority noted there was a significant delay in the allotment of shares to the Taxpayer and treated the contributions as interest free loans for the period between the date of payment and the date on which shares were actually allotted and imputed an AL interest on the amounts deemed as an interest free loan.

The issue before the Tribunal was whether a corporate guarantee issued without a charge is to be considered as “international transaction” and whether transfer pricing provisions apply to such transaction. Further the Tribunal was required to decide on whether the share application money can be treated as interest free loan to AE’s

Held:
On issue of corporate guarantee to its AE

Reviewing the definition of the term “international transaction”, the Tribunal held that in order for the transaction to be an “international transaction” subject to TP, the transaction should be such as to have a bearing on profits, income, losses or assets of such enterprise.

Accordingly, the Tribunal held that a corporate guarantee issued without a charge is outside the ambit of ‘international transaction’ and transfer pricing provisions do not apply to such arrangements, even after the amendment introduced by the Finance Act, 2012.

On Capital contribution to AEs

The Tribunal held that the characterisation of the payment made by the Taxpayer to its AEs as capital contribution was not in dispute and were in the nature of payments for share application money.

The Tribunal noted there was no provision enabling deeming fiction under the Indian transfer pricing regulations to regard share application money as interest free loan.

Further, the Tribunal observed there is no finding about what is the reasonable and permissible time period for allotment of shares. Even if one was to assume there was an unreasonable delay in the allotment of shares, the capital contribution could have, at best, been treated as an interest free loan only for such period of “inordinate delay” and not the entire period from the date of making the payment to date of allotment of shares.

This aspect of the matter is determined by the relevant statute, which is different than that of an interest free loan on a commercial basis between the share applicant and the company to which the capital contribution is being made.

Since the Tax Authority did not bring any evidence on the payment of interest to an unrelated share applicant for the period between making the share application payment and allotment of shares, the Tribunal held it was unreasonable and inappropriate to treat the transaction as partly in the nature of an interest free loan to the AE.

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S-179-ITAT-2014(Mum) Huawei Technologies Co. Ltd. vs. ADIT A.Ys: 2005-2009, Dated: 21-03-2014

9. S-179-ITAT-2014(Mum) Huawei Technologies Co. Ltd. vs. ADIT A.Ys: 2005-2009, Dated: 21-03-2014

Premises of Indian subsidiary used by parent company to perform core sales activities constitutes fixed place PE for the parent company in India.

The employees of Indian subsidiary securing orders on behalf of the parent company constitutes dependent agent PE for the parent company.

Facts 1:
The Taxpayer, a company incorporated in China, was engaged in supplying telecommunications network equipment. The Taxpayer had not filed any return of income in India.

Taxpayer had a wholly owned subsidiary in India (ICo). A survey was undertaken by the Tax Authorities at the ICo’s premises. On the basis of the documents found at the time of survey, the Tax Authority concluded that the Taxpayer has a PE in India and the income that has accrued from the supply of telecommunications network equipment during the previous year is taxable in India.

Held 1:
The Tribunal observed that the business of the Taxpayer was carried on India through the active involvement of the employees of the ICo. The employees of the ICo and the Taxpayer had jointly prepared bidding contracts, as well as negotiated and concluded the contract on behalf of the Taxpayer with its Indian customers from ICo’s premises.

Since the premises of the ICo was used to carry out core selling activities of the Taxpayer, the Taxpayer had a fixed place PE in India in the form of office premises of the ICo.

The employees of the ICo were part of the sales team of the Taxpayer, who habitually secured orders in India wholly or almost wholly for the Taxpayer in India. Further, the ICo was economically and financially dependent on the Taxpayer. Thus the ICo also created a Dependent Agency PE as per the India- China DTAA as well as a business connection as per the ITA for the Taxpayer in India

Software embedded in equipment necessary for the operation and control of the equipment does not constitute Royalty

Facts 2:
The Taxpayer was engaged in the supply of telecommunications network equipment. The Tax Authority artificially allocated the revenue from such supply between the Hardware and Software, although there was one consolidated price for the supply.

In respect of the Hardware portion, the Tax Authority computed the operating profits and allocated a part of it to the PE in India. In respect of the Software portion, the Tax Authority contended that it amounted to Royalty as per the India-China DTAA.

The Taxpayer contended that there was no separate supply of software and the software was embedded with the hardware/equipment. Thus, the entire receipt must be taxed as Business Income. Reference in this regard was made to the Delhi High court decision in the case of Ericsson A.B. (2012)(204 Taxman 192) and Nokia Networks OY (2013)(212 Taxman 68).

Held 2:
From the agreement with the Indian customers it is clear that the Software is a set of programmes embedded in the equipment and is necessary for control, operation and performance of the equipment.

The buyers were granted non-exclusive, nontransferable and non-sub-licensable licence to use the software. No ownership rights or interests are transferred to the buyer.

Hence following the decision in the case of Ericsson A.B (supra) it was held that the entire income is to be taxed as business income in India.

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TS-179-ITAT-2014(Mum) Viacom 18 Media Pvt. Ltd vs. ADIT A.Y: 2009-2012, Dated: 28-03-2014

8. TS-179-ITAT-2014(Mum) Viacom 18 Media Pvt. Ltd vs. ADIT A.Y: 2009-2012, Dated: 28-03-2014

Section 9(1)(vi): As the term “process” is not defined under the DTAA, in terms of Article 3(2) of DTAA, it will have the same meaning as provided under the ITA; payments made for the transponder service amounts to “royalty” as per the India-USA DTAA.

Facts:
The Taxpayer, an Indian Company, was engaged in broadcasting television channels from India, marketing of advertising airtime on these channels, distribution of the channels, marketing and distribution of films through its film division ‘Studio 18’ and production of program content/television software.

The Taxpayer had entered into an agreement with an US Company (US Co) for availing 24 hour satellite signal reception and retransmission service (‘transponder service’). In consideration of the transponder service, the Taxpayer was required to pay transponder service fee (‘fee’)

Relying on the Delhi High court’s decision in the case of Asia Satellite communications Co. Ltd. (332 ITR 340), the Taxpayer contended that the payments made to US Co. were not taxable under the ITA. Further reference was made to the decision in the case of WNS North America (152 TTJ 145) and Siemens Aktiengesellschaft (310 ITR 320) to contend that the retrospective amendment in the ITA will not affect the benefit available under the DTAA and since the payments are not in the nature of Royalty and fee for included service (FIS) under the India-USA DTAA they are not taxable in India in the absence of a permanent establishment (PE), accordingly approached the Tax Authority requesting Nil withholding order for such payments.

The Tax Authority contended that the payments are taxable as royalty in light of amended provisions of 9(1)(vi) of the ITA and also under Article 12 of the India-USA DTAA and consequently subject to tax withholding.

On Appeal, the First Appellate Authority upheld the Tax Authority’s contention. Aggrieved, the taxpayer appealed to the Tribunal.

Held:
It is well settled that the Taxpayer will be governed either by the provisions of DTAA or the ITA, whichever is more beneficial.

The term “Royalty” is defined in the DTAA, therefore, any amendment in the definition of “Royalty” adversely affecting a Taxpayer covered by the DTAA would be inconsequential due to the protection of the DTAA.

Article 3(2) of the India-US DTAA provides that a term not defined in the DTAA, shall, unless the context requires otherwise, have the meaning which it has under the laws of the contracting state. The term “process” is not defined in the DTAA. Therefore, the meaning of such term under the ITA has to be applied.

However, Explanation 6 was inserted to clarify the meaning of the term “process” in the context of transmission by satellite and it does not in any way modify the definition of the term “royalty”. Thus this amendment cannot be considered as overriding the DTAA.

The use of transponder by the Taxpayer for telecasting/broadcasting the programme involves the transmission by the satellite (including uplinking, amplification, conversion for downlinking of signals) and hence falls within the definition of the term “Process” as per Explanation 6 of section 9(1)(vi). This meaning will also be applicable for interpreting the term “process” existing in the DTAA in terms of Article 3(2). Hence, the payments made for use/ right to use of process would fall in the ambit of the expression “royalty” as per the DTAA as well as the provisions of the ITA.

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TS-161-ITAT-2014(Del) JC Bamford Excavators Limited. vs. DDIT A.Y: 2006-2007, Dated: 14-03-2014

7. TS-161-ITAT-2014(Del) JC Bamford Excavators Limited. vs. DDIT A.Y: 2006-2007, Dated: 14-03-2014

Consideration for the use of IPRs includes occasional onsite support. Such visitors perform stewardship activities and do not give rise to service PE.

Employees of parent company visiting the premises of an Indian Company for quality inspection to ensure that the licensed products meet the global quality standards perform stewardship activities and do not trigger service PE. Performance of technical services by employees on behalf of the Taxpayer results in a Service PE for the Taxpayer as per India-UK DTAA.

Effective connection is to be seen between the PE and the “contract, right or property” from which royalty or FTS arise.

Facts:
The Taxpayer, a UK company, was engaged in the business of manufacture, assembly, research, design and sale of material-handling equipment. The Taxpayer entered into a Technology Transfer Agreement (TTA) with its wholly-owned Indian subsidiary (ICo).

As per the terms of the TTA, the Taxpayer was required to perform the following activities for a consideration:

• Grant license to manufacture, permit the ICo to use know-how, trademark, inventions and any confidential information (IPRs) belonging to the Taxpayer.

• Provide technical assistance to the ICo’s personnel through its technical consultants to enable the licensed products to be manufactured as per the quality standards.

• Conduct random testing and inspection of licensed products manufactured by the ICo to ascertain if they meet the quality standards. For this purpose, employees of the Taxpayer occasionally visited the premises of the ICo.

For the technical assistance as stated under the TTA, the Taxpayer deputed eight employees to work with the ICo. The cost of such employees was recovered from the ICo. Such personnel occupied key managerial positions and were engaged in managing overall operations of the ICo.

The Tax Authority contended that the employees deputed for more than 90 days constituted a Service PE and the payments from the ICO being effectively connected to the PE need to be considered as business profits under the DTAA.

However, the Taxpayer contended that it did not have a PE in India as:

• Occasional visits of the Taxpayer’s employees for inspection and quality check were an integral part of royalty. Hence, the entire consideration for IPR under the TTA (embedded with the cost of occasional visit of employees) was taxable as royalty/fees for technical services (FTS) under Article 13 of the DTAA, as well as ITA.

• Personnel deputed under the IPAA ceased to be employees of the Taxpayer and they became the employees of the ICo. Accordingly, the presence of such personnel did not constitute a PE of the Taxpayer in India and reimbursement of salary of such employees under the IPAA was not taxable in India.

On appeal, the CIT(A) upheld the position adopted by the Taxpayer. Aggrieved, the Tax Authority filed an appeal with the Tribunal.

Held:
On constitution of Service PE

Based on the facts, the following factors supported the view that the assignees continued to be the employees of the Taxpayer:

• Assignment of employees to the ICo was pursuant to the license of IPRs to the ICo, for which, the Taxpayer committed to provide technical assistance to the ICo from time to time at the ICo’s request and subject to the availability of specialists or engineers.

• No employment contract between the ICo and the Assignees/appointment letter/terms and conditions of deputation were placed on record before the Tribunal.

• Assignees retained lien on their employment with the Taxpayer such that, after completion of assignment, the Assignees would resume employment with the Taxpayer at a level no less favourable than that which they left prior to the deputation.

• Agreements clearly mentioned that the Assignees would be subject to the rules and regulations of the ICo but would not be considered as employees of the ICo.

• The Taxpayer had full responsibility to remunerate the Assignees. Recovery of cost from the ICo is nothing but consideration for supply of the Assignees.

• The Assignees have no legal recourse to the ICo for any grievances or disciplinary actions.

It is quite natural that persons deputed with the ICo for a consideration will work under the direction of the ICo and could not have worked for the benefit of the Taxpayer. Since all the conditions of Service PE were satisfied, it was held that Taxpayer constituted a Service PE on account of assignees.

On account of service integral to a royalty arrangement under the TTA, the Tribunal held that occasional visitors undertook activities in India in terms of the obligation integral to the TTA i.e., testing and inspections, which were carried out to ensure that the licensed products adhered to the global standards of quality. Such activities were required by and in the interest of the Taxpayer and it amounted to stewardship activities which cannot be considered for constituting a PE in India. Reliance in this regard was placed on the SC decision in the case of Morgan Stanley (supra).

On Taxability under Article 7 on business profits visà- vis Article 13 on royalty and FTS

Consideration for granting the IPRs in relation to the technical know-how, patent rights and confidential information for the manufacture and sale of licensed products falls within the scope of royalty as defined under the DTAA, as well as the ITA.

Consideration received for the provision of services of personnel was for the application/enjoyment of IPRs and it qualified as FTS under the DTAA, as well as the ITA.

Effectively connected with PE

In terms of the DTAA, where a right or property or contract for which the royalty or FTS is paid is effectively connected with a PE through which the beneficial owner of the income carries on business in the source state, (i.e., India in the present case), then such royalty/FTS would be taxed as “business profits” under Article 7 and Article 13 on royalty and FTS would cease to apply.

For applicability of Article 7, effective connection should exist between the PE on the one hand and right, property or contract on the other, and not royalties or FTS flowing from such right, property or contract.

The words “effectively connected” are akin to “really connected”. In the context of royalties, it is in the nature of something more than the mere possession of the property or right by the PE but equal to or a little less than the legal ownership of such property or right. But, in no case, remote connection between the PE and property or right can be categorised as effectively connected.

It is of significance to note that an effective connection is required to be seen between the PE and the “contract” from which such fees resulted and not such FTS per se. The mere fact that such fee is effectively connected with the PE is not sufficient to bring the amount within the purview of business profits.

Taxation of various streams

For the different set of considerations, it was concluded:

• For royalty income from IPRs embedded with the salary of Occasional Visitors:

Royalty income cannot be said to be effectively connected with Service PE and the same would be taxable as Royalty on gross basis under the DTAA, as well as the ITA..

• For Service PE:

Service PE is represented by the Assignees deputed to the ICo. Thus, the contract, by virtue of which the Assignees were sent to India, is effectively connected with the Service PE and FTS arising out of such contract would be taxable as business profits under Article 7 of the DTAA.

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TS-150-ITAT-2014(Mum) Antwerp Diamond Bank NV vs ADIT A.Y: 2004-2005, Dated: 14.03.2014

6. TS-150-ITAT-2014(Mum) Antwerp Diamond Bank NV vs ADIT A.Y: 2004-2005, Dated: 14.03.2014

On facts, payments made by Indian Branch office
for accessing the software installed in the server belonging to the head
office is in the nature of reimbursement of expenses and not royalty
under the India-Belgium Double Taxation avoidance agreement (DTAA).
Definition of Royalty as widened in Income-tax Act (ITA) is not relevant
for the purpose of DTAA.

Facts:
The Taxpayer, a tax resident of Belgium, was operating in India through a Branch office (BO).

The
Taxpayer (HO) acquired a banking application software named as
“Flexcube” (Software) from an Indian software company. The software was
installed in the server at Belgium and was apparently used for banking
purposes by the HO all over the world. The said software license was
also amended to allow the Indian BO to use it by making it accessible
through a server located in Belgium.

The cost to get data processed was reimbursed by the BO, on a pro-rata basis to the HO.

The
Tax Authority disallowed the above payment on the basis that the
payment constituted ‘royalty’ on which no taxes were withheld at source.

The Taxpayer submitted that:

• The payment was in the nature of reimbursement;
•
Also, it did not satisfy the requirement of payment made for ‘use of’
or ‘right to use’ any copyright for it to be treated as ‘royalty’ under
the India – Belgium DTAA.

On appeal, the CIT(A) agreed with the
Taxpayer and held that the data processing cost paid by the Indian BO
does not amount to ‘royalty’.

Aggrieved, the Tax Authority appealed before the Tribunal.

Held:
The
BO sends data to the HO for getting it processed as per the requirement
of banking operations. As per the terms of the agreement between the HO
and the third party, the HO has non-transferable rights to use software
and the HO cannot assign, sub-license or otherwise transfer the
software. The HO allocates expenditure of the I.T. resources on a
pro-rata basis.

Insofar as the BO is concerned, it is only
reimbursing the cost of processing of its business data to the HO, which
has been allocated to it on a pro-rata basis. Such reimbursement does
not fall within the ambit of the definition of “royalty” under the DTAA.

In
the present case, the payment made by the BO is not for ‘use of’ or
‘right to use’ software. The BO does not have any independent right to
use or control over the main frame of the computer software installed in
Belgium. To qualify as ‘royalty’ under the DTAA, the payment should be
qua the use or the right to use the software exclusively by the BO. The
BO should have exclusive and independent use or right to use the
software and for such usage, payment should be made.

It is also
not the case of the Tax Authority that the HO has provided any copyright
of the software or copyrighted article developed by the HO for the
exclusive use of the BO for which the BO is making royalty payment along
with a mark-up exclusively for royalty.

The definition of
‘royalty’ under the DTAA is exhaustive and not inclusive. Therefore, it
has to be given the meaning as contained in the DTAA itself and the
widened definition of royalty after its retroactive amendment by the
Finance Act 2012 should not be looked into.

Reimbursement of
data processing cost to the HO does not fall within the ambit of
definition of ‘royalty’ under the DTAA and accordingly, there is no tax
withholding obligation for the BO.

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Transfer Pricing Regulations for Financial Transactions

Cross Border Financial Transactions such as intercompany loans and guarantees between Associated Enterprises have received prominent attention worldwide due to implications under the Transfer Pricing Regulations. Several issues arise in respect of benchmarking and documentation of such transactions. Divergent rulings by Tribunals on these issues have caused further complications. This article attempts to throw light on Indian Regulations, Judicial Rulings and some of the international practices in this arena. This Article is written in Questions and Answers format for elucidating relevant provisions/law more succinctly.

Q.1 Which types of financial transactions are covered by the Transfer Pricing Regulations?

A.1 Most common Financial Transactions (FTs) undertaken between Associated Enterprises (AEs) are in the nature of loans and guarantees, as such the scope of discussion in this Article is restricted to Transfer Pricing Regulations (TPRs) pertaining to such transactions. Other types of FTs such as “Cash Pooling” and “Factoring Arrangements” etc. are not discussed in this Article.

Transfer Pricing Regulations world over primarily seek to cover inter-company loans and/or guarantees. Focus on other types of FTs under TPRs is limited.

Q.2 What are OECD’s views on loans to AEs?

A.2 There is no specific guidance in OECD’s Transfer Pricing Guidelines regarding FTs. However, OECD implicitly guides to apply the relevant method in determining the “arm’s length rate of interest” on inter-company loans. Therefore, one needs to look at the jurisdictional transfer pricing rules, if any, in determining the arm’s length rate of interest on intercompany loans between AEs.

Q.3 What are the provisions under the UN Transfer Pricing Guidelines?

A.3 The Department of Economic & Social Affairs of the United Nations has published a “Practical Manual on Transfer Pricing for Developing Nations” (Manual) in 2013. The object of this Manual is to provide clearer guidance on the policy and administrative aspects of transfer pricing analysis by developing countries. The Manual is addressed at countries seeking to apply “arm’s length standard” to transfer pricing issues. Since India has adopted the “arm’s length” principle in its Transfer Pricing regime, the Manual would provide a useful guide.

While the Manual provides a practical guidance on issues faced by developing countries, it has its inherent limitations, in that it represents views of the authors and members of the Sub-committee entrusted with the task of preparing it. Chapter 10 of the Manual represents an outline of particular country’s administrative practices as described in detail by representatives from those countries. Commenting on the practices followed by Indian Transfer Pricing Administration (ITPA), the Manual states (Paragraph 10.4.10 on page 405) that the following practices are followed by the ITPA in determination of the arm’s length pricing of inter-company loans:

Examination of the loan agreement;
Comparison of terms and conditions of loan agreement;
Determination of credit rating of lender and borrower;
dentification of comparable third party loan agreement;
Suitable adjustments to enhance comparability

The ITPA prefers to apply the Prime Lending Rate (PLR) of Indian banks for outbound loans (i.e., loans advanced by an Indian Company to its overseas AEs), on the premise that loans are advanced from India in Indian currency which are subsequently converted into foreign currency. This stand is formally accepted and incorporated into the Safe Harbour Rule which provides for acceptable interest rates based on Prime Lending Rates of Indian Banks.

However, the above stand of the Tax Department has been challenged by tax payer and the Tribunal has ruled in favour of the tax payers. (Refer answer to question no. 6 infra).

Q.4 What are the provisions under the Income-tax Act, 1961?

A.4 Explanation to section 92B has been retrospectively amended vide Finance Act 2012 to bring FTs under TPRs in India. Accordingly, the following Clause has been added to the definition of the term “International Transaction”:

“Explanation—For the removal of doubts, it is hereby clarified that—

(i) the expression “international transaction” shall include—

(c) Capital financing, including any type of longterm or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;

From the above explanation, it is clear that loans and guarantees between AEs are covered under the TPRs of India retrospectively w.e.f. 1st April 2002.

Safe Harbor Provisions as applicable to loan transactions [Notified on 18th Sept. 2013 applicable for Five Assessment Years beginning from AY 2013-14]

Q.5 Under what circumstances interest free loan can be justified?

A.5 Interest free loans prima facie are not at arm’s length as normally a lender would not give any interest free loans to a stranger. However, the lender may justify such loan to its AE on considerations other than interest. For example, if the interest free loan is in the nature of quasi capital, then it can be justified.

In April 2002, the Central Government constituted an Expert Group to recommend transfer pricing guidelines for companies for pricing their products in connection with the transactions with related parties and transactions between different segments of the same company. The Group submitted its Report in August 2002. It generally recommended arm’s length principle except in following cases:

“Exceptions to arm’s length transfer price

In exceptional cases, the company may decide to use a non-arm’s length transfer price provided:

• the Board of Directors as well as the audit committee of the Board are satisfied for reasons to be recorded in writing that it is in the interest of the company to do so, and
• the use of a non-arm’s length transfer price, the reasons therefore, and the profit impact thereof are disclosed in the annual report

Remarks: Examples of such exceptional cases could be a company giving an interest free loan to a loss making subsidiary or a company accepting the offer of a controlling shareholder to work as the CEO on a nominal salary.”

However, the same Report identifies “Borrowing or lending on an interest-free basis or at a rate of interest significantly above or below market rates prevailing at the time of the transaction” as one of the undesirable corporate practices related to transfer pricing.

In nutshell, interest free loans may be justified in following circumstances:

• When loan has more of an equity substance than loan i.e. it is in the nature of Quasi Capital.

The Australian Taxation Office in its Discussion Paper on “Intra-group Finance Guarantees & Loans Application of Australia’s Transfer Pricing and Thin Capitalization Rules –June 2008” (paragraph 58 on page 15 of the Paper) has opined that to the extent that the debt funding performs the role of an equity contribution it would seem appropriate that portion of the debt funding be regarded as quasi equity and that it be costed on an interestfree basis, consistent with its purpose and effect. This is in line with the OECD view that the cost of funding a company’s participation is a ‘shareholder activity’ and that it would not justify a charge to the borrowing company.

On the peculiar facts of the case, (where loan was converted into equity upon receipt of RBI approval) the Tribunal, in case of Micro Inks Ltd. vs. ACIT [2013] 36 taxmann.com 50, held that the loan provided was in the nature of quasi capital. One of the interesting observations made by the Tribunal was regarding consideration of the com- mercial business consideration between AEs. The Tribunal held that sustainability of business of the step down subsidiary in USA was crucial to the Indian company (who advanced loan to it) in view of the fact that the Indian company has substan- tial business transactions with it and therefore it would not be appropriate to equate the relations between AEs to that of a lender and a borrower.

The above observations are significant as in ear- lier in case of VVF Ltd. [2010] TII 4 ITAT, the Mumbai Tribunal held that commercial expediency to be irrelevant as the impact of any such inter- relationship should be neutralised by arm’s length treatment. Further, in the case of Perot Systems TSI India Ltd. [2010] 130 TTJ 685, the Delhi Tribunal had refused to accept the contention of the as- sessee that the outbound loan was quasi capital in nature on the grounds that no lender would lend money to new company or the intention of the lender company was to earn dividends and not interest.

Loan is in the nature of a Hybrid Instrument.

The loan may be structured in the form of con- vertible debentures or bonds where there may not be any interest or very low interest for the initial period and may be converted into equity at a later date. This may be resorted by a parent company to give sufficient time to its subsidiary to make profit without much financial burden.

Every case of thin capitalisation may not be to avoid tax. Sometimes, host countries regulations justify low equity and high debt especially when companies do not want to compromise on liquid- ity. Moreover, loans require less documentation, highly flexible in their repayment and lending in- stitutions also take them at par with equity when they are from AEs.

Q.6If interest has to be charged on inter-company loans, how does one bench mark it? Who shall be the tested party – the borrower or the lender?

Also elucidate on Separate/Standalone Entity Approach vs. Group Entity/On-lending Approach

A.6 Indian Transfer Pricing Regulations do not have special rules (except in case of Safe Harbor Rules) or guidance on benchmarking loan transactions between AEs. However, one needs to apply general provisions of transfer pricing regulations while determining arm’s length interest rate on loans between AEs.

Consider a case where an Indian Company “A” has advanced loan to its wholly owned subsidiary “B” in UAE. While undertaking the benchmarking analysis to determine arm’s length rate of interest, often a dilemma arises as to whether one should look at the rate at which “B” would have been able to borrow in UAE market or the rate at which ‘A” would have earned interest, had it advanced loan to a non-related party. Normally, Indian Entity is used as a tested party and also it being the assessee under the Indian Transfer Pricing Regulations, benchmarking of in- terest charged is done from Indian Entity’s point of view. In the given example, what company “A” would have earned had it given a loan to non AE would be relevant. For determining income of “A” in an arm’s length scenario, sources of funds of “A” i.e., cost of funds (i.e. whether it is back to back loan or out of internal accruals), foreign ex- change risks, risk of default, availability of internal or external CUP etc. would be relevant.

As stated earlier, in such a scenario, Indian Transfer Pricing Administration would prefer to apply Prime Lending Rate of the Company A’s bank in India as an external CUP as loan would be advanced from India in Indian currency rather than LIBOR or EURIBOR. The idea seems to arrive at opportunity cost of earning, i.e., if Company “A” would have advanced similar loan to Company “B” in India, what would have been the rate of interest?

On similar facts, in case of Bharti Airtel Ltd. vs. ACIT [2014] 43 taxmann.com 150 (Del. Trib.), the assessee contended that the loans were given in foreign currencies and in the international market where the bank lending rates are based on LIBOR rates. Hence, the LIBOR rate should be considered for determining the arm’s length interest rate. The Tribunal upheld the contentions of the assessee.

In case of M/s. Siva Industries & Holdings Ltd. vs. ACIT [(I.T.A. No. 2148/Mds/2010) paragraph 11], the Chennai Tribunal held that “Once the transaction between the assessee and the Associated Enter- prise is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm’s length interest rate in respect of the transaction between the assessee and the Associated Enterprises”.

Thus, one has to benchmark the Indian entity and find out what interest it would have earned, had it advanced loan to an independent entity operating in same circumstances, located in the same market and on similar terms and conditions. In the process one also needs to benchmark the borrower based on the separate entity approach taking into account the circumstances in which it operates.

General Rules of Transfer Pricing Analysis suggest that one needs to arrive at arm’s length inter- est rate as if Company “B” is an independent/ standalone entity. Here one needs to examine various factors such as terms and tenor of loan, guarantee offered, nature of interest rate such as fixed vs. floating, the overall financial market in UAE, credit rating of “B”, nature of loan instru- ment i.e., whether pure loan or hybrid instrument with conversion option etc. Thus if “A” were to lend to any other independent entity operating in UAE with similar terms and conditions, then what it would have earned or if there is any other comparable data already available in public domain then that may be used.

In real life situations company “B” would be able to borrow at LIBOR linked rate. Therefore, the starting point of benchmarking analysis would be LIBOR which may further be fine tuned consider- ing various factors other discussed above.

Thus, one may conclude that while arriving at the arm’s length interest rate especially in case of outbound loans from India, one may take LIBOR/ EURIBOR, as the case may be, as base rate and make adjustments to arrive at arm’s length interest rate taking into account facts and circumstances in the country in which the borrower AE operates.

It may however be noted that the Safe Harbor Rules in India does not support above view and it requires Indian entity to apply the interest rate based on the Base Rate of State Bank of India . (Refer answer to Q.4 supra). It may also be noted that Safe Harbor Rules prescribes “acceptable price/ range of margins and/or rate of interest” without determining arm’s length price, margin or interest. More often than not, unilateral Safe Harbor Rule results in litigation in the opposite country as the acceptable range in one country would lead to loss of revenue in the other country.

Group Entity or On-lending Approach
Another approach which is followed is known as Group Entity or On-lending Approach. In this case, the taxpayer has a central treasury which raises loan at the group level and then allocates funds to various subsidiaries. In this case, there will not be a separate evaluation of subsidiary’s borrowing capacity or credit rating as the loan is advanced at the group level and therefore implic- itly subsidiary assumes the same credit rating as its parent. This approach makes sense in real life commercial/financial world.

However, the standalone entity approach is widely practiced as it supports arm’s length standard. Even OECD prefers this approach.

Australian Transfer Pricing Rules
The Australian Transfer Pricing Rules have been comprehensively amended for the first time in past 30 years vide Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013.

The new rules are applicable for income year on or after 1st July 2013. The new rules provide for independent/standalone party approach. Australia also has Thin Capitalisation Rules in place. The new rules provide that in order to determine the arm’s length conditions between two AEs on the same footing as they may exist between two indepen- dent enterprises, one may need to consider issues such as whether independent entities operating in comparable circumstances would have advanced loans with the same or similar characteristics, provided various forms of credit support, sought to refinance at a different market interest rate, issued shares or paid dividends.

In short, the taxpayers need to:

• Assess if the quantum of debt meets arm’s length conditions.

• Consider if the capital structure (debt/equity mix) is arm’s length.

• Re-consider the interest rate with regard to fac- tors such as the impact of the rate on profits of the company, and whether or not the rate is adjusted as the parent company’s cost of funds changes.

Q.7 Are there any judicial precedents in India on the above issue?

A.7So far decisions on the issue of inter-company loans have come from Tribunals only. Ratios laid down by various decisions are as follows:

Other Relevant Decisions:

•    Tata Autocomp Systems Ltd. vs. ACIT [2012] 21 taxmann.com 6 (Mum.)
•    Aurinpro Solutions Ltd. vs. ADCIT [2013] 33 taxa- mann.com 187 (Mum.)
•    Mascon Global Ltd. vs. DCIT ITA No. 2205/
MDS/2010
•    Four Soft Limited vs. DCIT – TS-518-ITAT-201 (Hyd)
•    DCIT vs. Tech Mahindra Ltd. [2011] 12 taxmann. com 132(MUM.)
•    Aithent Technologies (P.) Ltd. vs. ITO [2012] 17 taxmann.com 59 (Del)
•    Mahindra & Mahindra vs. DCIT – TS-408-ITAT- MUM-2012
•    Cotton Naturals (I) (P.) Ltd. vs. DCIT [2013] 32 taxmann.com 219 (Del-Trib)
•    Hinduja Global Solutions Ltd. vs. ADCIT – TS-147- ITAT-MUM-2013
•    ITO vs. Maharishi Solar Technology Pvt. Ltd. TS- 306-ITAT-2012-DEL

for outbound loans. At times benchmarking of inbound transactions is more crucial than outbound as it results in base erosion, interest being deductible expense.

Though India does not have Thin Capitalisation Regulations in place, it has robust Foreign Ex- change Laws which regulates borrowing from overseas. Borrowing from overseas shareholder requires minimum 25 % of shareholding. There are several restrictions for use of borrowed money as well as the sectors which can borrow. For example only real sector (i.e. industrial sector), infrastructure sector and certain service sectors such as software, hospital and hotel are allowed to borrow from overseas. Borrowing for general corporate purpose or for working capital require- ment is practically banned.

The biggest benchmarking or safe harbor limit (so to say) is contained in “all-in-cost borrowing limit” prescribed under the Foreign Exchange Manage- ment Act, 1999 (FEMA). Since RBI does not allow payment of interest beyond this limit, generally payment of interest at the rate prescribed by RBI should be considered as arm’s length. One may draw support for this contention from the fact that the Indian Safe Harbor Rules prescribes the acceptable limit of minimum interest to be charged for loans advanced by Indian entity (i.e. for outbound loans) but does not prescribe limit

From the above case laws, it is apparent that different tribunals have taken divergent views. Transfer pricing cases being more facts based, it is difficult to arrive at standard conclusion and perhaps that is why transfer pricing analysis is regarded as an “art” and not a “science”.

However, Tribunals have upheld application of LIBOR rate for determination of arm’s length inter- est rate in contradiction of Indian Transfer Pricing Administration’s stand of applying PLR of Indian Banks. It would be interesting to see how this jurisprudence develops further at higher forums.

Inbound Loans

Q.8 What are the provisions applicable to inbound loans?

A.8 The same transfer pricing rules and regula- tions apply to inbound loans as are applicable or maximum interest that may be allowed as deduction on inbound loans.

Present limits of all-in-cost borrowing under External Commercial Borrowing (ECB) route are as follows:

Average Maturity Period

All-in-cost
over 6 month LIBOR*

Three years and up to five years

350 bps

More than five years

500 bps

* for the respective currency of borrowing or applicable
benchmark

All-in-cost limit includes rate of interest, other fees and expenses in foreign currency except commit- ment fee, pre-payment fee, and fees payable in Indian Rupees.

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Maharashtra Ordinance No. VII OF 2014 dated 03-03-2014

The Government of Maharashtra has promulgated this Ordinance whereby in case of builders and developers the limitation for making an order of assessment for any of the periods which expires on 31-03-2014 has been extended up to 30-09-2015.

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Supreme Court Judgment in the case of Bansal Wire Industries

Trade Circular 11T of 2014 dated 04-04-2014

As per the Supreme Court judgment ‘Stainless Steel Wire’ is not declared goods taxable @5%, but it is taxable as the residual entry.

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Extension of date for filing Audit Report in Form 704 for 2012-13 by developers

Trade Circular 9T of 2014 dated 29-03-2014 In case of developers (other than those opting for composition scheme), if Mvat audit report for the period 2012-13 is filed by 10th May, 2014, it is decided administratively not to levy penalty u/s. 61(2) of the MVAT Act.

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Submission of Annexures with/as part of returns for the periods starting from 1st April 2014

Trade Circular 9T of 2014 dated 25-03-2014

From 01-04-2014 onwards with every MVAT return, whether monthly, quarterly or half yearly, Annexure J1 & J2, that is buyer-wise sales and supplier-wise purchase will have to be filed.

For a composition dealer required to file Annexure J2 –supplier wise purchase, this requirement is over and above annual Annexure J1 & J2 and Form 704

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State of Tamil Nadu vs. M/S. Mahaveer Chemical Industries, [2012] 49 VST 200 (Mad)

Central Sales Tax – Subsequent Sale By Transfer of Document of Title To Goods – Transporters Giving Delivery of Goods To Buyers As Per Instruction of Dealer – Not a Continuation of Inter-State Sale–S/s. 3(b) and 6(2) Of The Central Sales Tax Act, 1956.

FACTS
The assessee, a dealer in chemicals having office at Coimbatore, Tamil Nadu, had purchased liquid/gaseous chemicals from M/s. Cochin Refineries Limited Ernakulum, Kerala. The said goods were further sold to the dealers either in Coimbatore or to the dealers out side the state of Tamil Nadu and claimed exemption from payment of tax u/s. 6(2) of the CST Act, 1956 by producing the required E-1 and Form C. The assessing authority rejected the claim after noticing the fact that after taking delivery from the transporters, the assessee had issued from XX delivery notes to transport chemicals in same tankers to the end users within and outside the state of Tamil Nadu. The Tribunal allowed the claim and the department filed revision petition before the Madras High Court.

HELD
As per section 3(b) of the CST Act, 1956 all subsequent inter-State sales effeted by transfer of document of title to the goods also qualified to be inter-state sales. However, when there is a break in the movement and it comes to an end, the exemption u/s. 6(2) of the Act is no longer available to claim benefit of second inter-state sale. Such subsequent inter-state sale could be made between two dealers residing in the same street provided that there is a sale by transfer of document of title to the goods while they are in transit from one state to another. The burden of proof is on the assessee. The Court further held that in the present case, the journey of goods started from Cochin to Coimbatore and there was no obligation on the part of carrier to transport the goods further to any place beyond Coimbatore. Thus, the subsequent arrangement that the assessee had with the transporter to carry the goods to another place for a different person however did not make the movement a continuation of the original inter-state sale. Once the movement of goods terminated at Coimbatore, on the doctrine of constructive delivery, the authorities rightly rejected the assessee’s claim of exemption u/s. 6(2) of the CST Act. Accordingly, the High Court allowed revision petition filed by the department and set aside the judgment of the Tribunal.

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M/S.Shree Shyam Enterprises vs. Joint Commissioner, Sales Tax, Bally Circle And Others, [2012] 49 VST 177 (WBTT)

Value Added Tax – Input Tax Credit – Tax Invoice Purchase of Goods Under Auction – Sale Release Order Issued By Vendor Containing Prescribed Particulars – Disallowance of Claim For Want of Tax Invoice – Not Correct, Section 21 of The West Bengal Value Added Tax Act, 2003 and R. 91 (7) Of The West Bengal Value Added Tax Rules, 2005

FACTS
The assessee dealer purchased goods from M/s. South Eastern Railway on auction after paying due tax to it. The vendor issued sale release order containing particulars, i.e., date of sale, sale order number and date, name and address of selling dealer, full description of goods sold, quantity or number of goods sold, value of the goods sold, rate and amount of tax charged. The dealer claimed input tax credit in returns. The department rejected the claim for want of proper tax invoice and did not consider the sale release order as tax invoice. The dealer filed application u/s. 8 of The West Bengal Taxation Tribunal Act, 1987 against the rejection of claim of input tax credit.

HELD
The vendor issued sale release order containing all the particulars required under sub-Rule (7) of Rule 91. The documents having contained all the particulars, as required in sub-rule (7) of rule 91 of the VAT Rules, 2005, the Sale Release Order ought to have been equated with and treated at par with the Tax Invoice. The appeal was allowed and assessing authority was directed to allow the claim on verification of documents, treating the sale release order as tax invoice.

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M/S. IFB Industries Ltd. vs. State of Kerala, [2012] 49 VST SC 1.

Sales Tax – Turnover of Sales – Trade Discount – Given Subsequently – By Credit Notes – Deductible, Section 2 (xxvii) of The Kerala General Sales Tax Act, 1963 and R 9(a) of The Kerala General Sales Tax Rules, 1963.

FACTS
The appellant Company is a manufacturer of home appliances. The company as a part of Sales Promotion Scheme allowed discount to its dealers on achieving pre-set sale targets subsequent to issue of sales invoices by way of credit notes. The Company claimed deduction of such trade discount from turnover of sales. The assessing authority principally accepted the claim but there was a dispute in the computation thereof. The matter was disputed up to the High Court. The Kerala High Court held that discount in question was not a trade discount at all and it was not eligible for deduction in terms of Rule 9(a) of the Rules. The appellant company filed appeal before the SC.

HELD
The definition of the term “turnover” contained in section 2(xxvii) read with Explanation (2)(ii) to it recognises discounts other than cash discounts and provides that those other discounts like the cash discount shall not be included in the turnover. Further, Rule 9(a) stipulates that the accounts should show that the purchaser has paid only the sum originally charged less discount. There is nothing in Rule 9(a) to read it in a restrictive manner to mean that a discount in order to qualify for exemption under its provisions must be shown in the invoice itself. Accordingly, the SC allowed the appeal and remanded the matter back to the assessing authority to pass fresh orders in light of the judgment of the SC.

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[2014] 43 taxmann.com 172 (Mumbai – CESTAT) – Hiranandani Constructions (P.) Ltd vs. CCE

Stay – Whether charges collected by the Promoter developer from flat buyers in terms of provisions of Section 5 of the Maharashtra Ownership of Flats (Regulation) Act, 1963 are liable to service tax under ‘Management, maintenance and repair services’ – Held, prima facie – No.

The appellant was engaged in the construction of residential complex and collected certain amounts as the development and maintenance fees from the flat buyers before handing over to them possession of the flats. Such sum was collected by it as a promoter to discharge payments towards outgoing expenses including any municipal local taxes, property tax, water charges, electric charges, revenue assessment or interest or any mandatory charges under the provisions of section 5 of the Maharashtra Ownership of Flats (Regulation) Act, 1963. The Appellant was under obligation to return the balance amount, if any, after debiting the expenses, while handing over the possession. The department considered the a ctivity as taxable under the category of “management, maintenance and repair services”. The Tribunal after perusing the provisions of section 5 of the Maharashtra Ownership of Flats (Regulation) Act, 1963, held that the Appellant has made out a strong case in their favour and accordingly unconditional waiver and stay for recovery was granted.

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[2014] 43 taxmann.com 41 (Mumbai – CESTAT) – Maharashtra State Co-op. Bank Ltd vs. CCE

Pre-deposit waiver – Whether lease rental received from letting of property acquired from defaulting borrower under the provisions of SARFAESI Act is liable to service tax as renting of immovable property service or is regarded as recovery of outstanding loan? Held, since the appellent is the lessor, it is liable to Service Tax.

Facts:
The appellant is a co-operative bank rendering banking and financial services. It took possession of the Borrower’s factories’ plant and machinery in terms of section 13(4)(a) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, for the default in repayment of loan. Thereafter, the bank leased out the factory and received lease rent from lessee which it adjusted against the loan amount. As per the terms of the lease agreement, the lessee was required to maintain the plant and machinery in good condition at the lessee’s own cost and accordingly the lessee incurred certain expenditure. The department was of the view that the Appellant-bank is liable to discharge service tax liability not only on the amounts received towards rent for the lease of the factories but also on the expenditure incurred by the lessees towards maintenance and repair on the grounds that such activities are undertaken by the lessees on behalf and on account of the appellant.

The appellant contended that the action of letting of the factories cannot be construed as renting of immovable property per se but should be considered as recovery of outstanding loans. As regards, maintenance expenses incurred by the lessee, it submitted that, this cost has been incurred by the lessees and the service provider is the person who actually undertook the maintenance and repair services and not the bank, therefore the appellant is not rendering any service towards management, maintenance or repair.

Held:
The Tribunal observed that, in the lease rental agreements, the appellant is treated as a lessor and therefore, lease rentals received by bank are prima facie liable to service tax. As regards the maintenance and repair costs incurred by the lessee, the Tribunal expressed a prima facie view that the Appellant is not the service provider and there is no liability on the appellant in respect of those transactions. Considering the fact that, the appellant had already discharged entire liability of rental income under protest, the waiver from pre-deposit of balance taxes was granted by the Tribunal.

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[2014] 43 taxmann.com 259 (Ahmedabad – CESTAT) – SOS Enterprise vs. CCE&ST

Whether, a service provider can be directed to pay differential service tax if the recipient of his service is found to have claimed credit in excess of that paid by the service provider? Held, no.

Facts:
The Appellant provided services as direct selling agent to its principal and raised invoices on the principal for such services. In a proceeding against the principal, on verification of records, it was found that, the principal has taken the CENVAT Credit more than service tax actually paid by the Appellant. On this ground demand was confirmed against the Appellant to the extent of excess CENVAT Credit and penalties were imposed. The Appellant explained that the differences arise because the Appellant paid the service tax on “receipt basis”, whereas the Principal may have taken the CENVAT Credit on the basis of invoice.

Held:
The Tribunal held that, if the department has to make out an offence case against the appellant, it is the responsibility of the department to show that the appellant had received the amount but did not pay the service tax. In the absence of any evidence to show that the Appellant has not paid the tax on the amount received and in the absence of specific allegation in the show cause notice or in the findings of the lower authorities, requirement of pre-deposit of taxes was waived.

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[2014] 43 taxmann.com 42 (New Delhi – CESTAT) Balaji Tirupati Enterprises vs. CCE

Whether a contract of maintenance can be held as divisible if material portion and service portion is separately mentioned in the Contract between the parties? Held, yes.

Facts:
In this case, the issue before the Tribunal was that in terms of works contract of repair of transformers, whether the goods deemed to be sold in the execution of works contract were liable for Service Tax.

Held:
The Tribunal on the perusal of the Works Order executed by the Appellant with the power supply authorities categorically observed that, both parties to the contract were conscious of the terms which involved both sales and service. The composition of the goods used for repair contract of transformer is patently clear. Tribunal relied upon the decision in the case of CCE vs. Kailash Transformers [Final Order No. ST/A/402/12-Cus, dated 23-05-2012] in which the Tribunal assigned weightage to the manner how the parties operated with the understanding of sale of goods as well as service provided to effectuate the contract. Accordingly it was held that the Finance Act, 1994 is not a Commodity Taxation Law. As a result of which the goods which were deemed to be sold in the execution of works contract shall not enter into the purview of the levy of the Service Tax.

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Treatment of expenditure incurred for development of roads/highways in BOT agreements – Circular No. 9 dated 23rd April, 2014

CBDT has clarified that the cost of construction on development of infrastructure facility of roads/highways under BOT projects be amortised and claimed as allowable business expenditure under the Act. The amortisation is computed at the rate which ensures that the whole of the cost incurred in creation of infrastructural facility of road/highway is amortised evenly over the period of concessionaire agreement after excluding the time taken for the creation of such facility.

In the case where an assessee has claimed any deduction out of the initial cost of the development of infrastructure facility of roads/highways under BOT projects in the earlier year, the total deduction so claimed for the Assessment Years prior to the Assessment Year under consideration be deducted from the initial cost of infrastructure facility of roads/highways and the cost ‘so reduced’ be amortised equally over the remaining period of toll concessionaire agreement.Trade Circular VAT liability of developers – computation – Trade Circular 12T of 2014 dated 17-04-2014.

This Circular is applicable only to those infrastructure projects for development of road/highways on BOT basis where ownership is not vested with the assessee under the concessionaire agreement.

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Is It Fair To Ignore Prior Agreement For section 50C of Income-tax Act, 1961? [vis-a-vis section 43CA and section 56(2)(vii)(b)]

Synopsis:

Section 43CA and Section 56 bring to tax incaome based on the concept of stamp duty value of the property transferred. The provisions contemplate the valuation as on the date of an agreement if the same is anterior to registration. There is no such saving in Section 50C, making it unfair.

This article attempts to examine whether amendments brought by Finance Act, 2013 has created anomaly, rendering section 50C of Income-tax Act, 1961 (“Act”) unfair or causing inequity.

Vide the Finance Act 2013, a new section viz. 43CA has been introduced in the Actto come into effect from 1st April, 2014. Section 43CA is similar to section 50C of the Act, (which came into effect from 1st April 2003). Section 50C provides for capital gains tax on deemed consideration as per the stamp duty valuation of capital asset at the time of its transfer. The newly introduced section 43CA creates a legal fiction, that in case of transfer of land and building by assessee, who held such asset not as a capital asset but as stock in trade. (eg. a builder), the market value decided by the Stamp authority shall be the deemed consideration received by the Transferor and income tax shall be charged on such deemed consideration notwithstanding the lesser consideration written in the deed of transfer. However, section 43CA carves out an exception to this legal fiction, where the consideration has been already fixed under an earlier Agreement for sale and when sale is completed subsequently in pursuance of such earlier Agreement for sale, the stamp duty value on the date ofprior Agreement for sale shall be taken into account and the legal fiction would operate with reference to such prior date of agreement for calculating the income tax liability under the head “profits and gains of business/profession”.

By the Finance Act 2013, section 56 of the Act is also amended, which amendment is to come into effect from 1st April, 2014. Prior to the amendment section 56 provides that, in case of purchase of an immovable property, if consideration stated in the agreement, is less than the stamp duty value of the property, the differential amount, shall be deemed to be an income of the Purchaser, under the head “Income from other source” and accordingly, the purchaser shall be required to pay the income tax on such differential amount under the head “income from other source”. The amendment to section 56, however, provides for similar exception to the legal fiction by laying down that in cases in which the sale is completed subsequently in pursuance of an earlier agreement, the stamp duty value on the date of the earlier Agreement for sale shall be taken into consideration for income tax purpose and not the stamp duty value of property on the date of completion of transfer. In other words, the escalated market value of the property on the date of completion of transfer will not bring any additional tax liability for the purchaser.

The exceptions as aforesaid, introduced by Finance Act, 2013, to the deeming provisions are do not find a place in section 50C of Income Tax Act. The insertion of section 43CA and amendment to section 56 of the Act seem to have been brought in to provide for a remedy in several genuine situations, where under an earlier Agreement for sale the consideration is fixed and the completion of transfer is required to be postponed on account of transfer being conditional upon various statutory permissions and sanctions etc. and merely because in the meantime, the property prices have shot up, the assessee would not be required to pay additional taxes due to deeming provisions, although in fact the parties are bound by the consideration fixed under the earlier agreement and the boom in real estate market is of no help to seller for claiming higher consideration.

There seems to be no reason for not providing the similar exception in section 50C. The status of seller who is taxed u/s. 50C of the Act and the one u/s. 43CA of the Act is the same in almost all respect except that in the first case there is a transfer of capital asset and in the latter case, there is a transfer of immoveable property held as stock in trade. For the differential treatment to be valid, there has to be an intelligible differentia and reasonable nexus connected to the object of statute, which does not seem to be present in this case.

Section 50C and section 56 of Act seek to tax two sides of one transaction. The former seeks to tax the seller on a deemed to have incremental consideration on sale of capital asset and the latter seeks to tax the benefit that the purchaser is deemed to have received by paying consideration lesser than the stamp duty value. Amending only section 56 leads to an incongruous situation. The purchaser alone can rely on earlier Agreement for sale and successfully establish that the stamp duty valuation on the date of agreement is to be considered for testing the deeming fiction, however the seller in the same transaction cannot raise this contention. Further, having accepted in the assessment of purchaser a particular stamp duty valuation, it will be absurd for the department to contend in assessment of seller that a different stamp duty valuation is to be adopted.

Therefore, section 50C in its existing form is unfair and needs to be amended or read down by judicial forums.

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New SEBI Corporate Governance Requirements – vis-à-vis New Companies Act – Overlap and Contradictions

Synopsis
Recently, after the Companies Act, 2013 came into force, the SEBI has substantially revised its existing requirements for corporate governance of the listed companies by replacing the earlier Clause 49 of the Listing Agreement with a new one and also by inserting a new Clause 35B.

Against this backdrop of the Companies Act, 2013 and the new SEBI provisions – the overlapping and at times contradictory new requirements, the hurdles of complying with them, the problem of separate penal provisions in the cases of non-compliance of the said two directives calls for a detailed discussion. The Author analyses in depth the new requirements…

SEBI’s new requirements from 1st October, 2014
SEBI has brought into effect the comprehensively revised requirements for corporate governance for listed companies. The earlier Clause 49 of the Listing Agreement is now replaced with the new one. Further, a fresh new Clause 35B has also been put into effect that requires companies to provide e-voting for all shareholders.

To give a brief background recently, several provisions of the Companies Act, 2013, (‘the 2013 Act’) relating to corporate governance were notified to come into effect from 1st April, 2014. At the time when the Bill was close to being passed, SEBI had issued a Concept Paper proposing revised corporate governance requirements based on this Bill. The objective was to comprehensively revise its existing requirements taking into account provisions in the Bill and to initiate debate on the proposed requirements. Thereafter, recently, shortly after the provisions of the 2013 Act were notified, SEBI too brought into effect the new Clauses 49/35B. However, unlike the provisions in the 2013 Act, the SEBI requirements will come into force from 1st October, 2014.

Importance/implications of the new requirements
The new requirements of the two provisions need discussion for several reasons. Firstly, the changes made are substantial. Secondly, for reasons best known to legislators, two sets of overlapping and at times contradictory requirements have been brought into force. Thirdly, the consequences of non-compliance of these two norms will be dealt with in different ways. The penal and other consequences of violations under the 2013 Act are different from those under the Listing Agreement.

The penal consequences under the 2013 Act vs. the Listing Agreement
The consequences of violating the Listing Agreement are generally stated, in the form of a penalty upto Rs. 25 crore. (Note: As I write this article, SEBI has circulated draft provisions that could provide stricter punishments for violations, if brought into effect). This would be levied on the Company. However, SEBI often takes a fairly strong action against other persons like Independent Directors, Audit Committee members, etc. who fail in their duties by debarring them or, as a recent case showed, requiring them to compensate the company for huge losses allegedly caused by their acts/omissions. Even otherwise, SEBI has exercised its powers over the Board, directors, officers and even the Auditors and Courts have upheld these powers in several cases. The action taken may be in a variety of ways including debarment, requirement to compensate, etc.

In comparison, the consequences of violating the provisions of the 2013 Act are usually a fine on the Company and a fine or imprisonment for the officers in default. In some cases, it is possible that there may be class actions too, which can result in compensation to those who suffered loss. Another important difference is that considering that the requirements are contained in different provisions and there are generally different types of penal consequences provided, violation of different provisions of the 2013 Act can have different consequences.

Overlapping provisions
As will be seen later on, there is overlapping and an element of duplication. However, the provisions are often different too. In such a case, the logical recourse for a company seeking scrupulous compliance would be to, where possible and to the extent possible, comply with the stricter or narrower of the two provisions. For example, the 2013 Act provides for a lower number of independent directors while SEBI provides a higher number for certain companies. Thus, those companies would have to comply with the SEBI requirements which would automatically ensure that the provisions of the 2013 Act are also complied with.

Let us now consider a few important requirements.

Applicability
The SEBI requirements apply to all listed companies and certain other specified entities. The requirements under the 2013 Act apply in a varied manner. Generally, they apply to all listed companies. In addition, they apply to certain other companies too. For example, the requirement to have one woman director applies to public companies having a paid up share capital of Rs. 100 crore or more or having a turnover of Rs. 300 crore or more. The requirement relating to Independent Directors applies to public companies having (i) paid up share capital of Rs. 10 crore or more (ii) turnover of Rs. 100 crore or more (iii) having total outstanding loans/debentures/deposits exceeding Rs. 50 crore. And so on.

Woman/Independent directors
SEBI companies require to have at least one woman director. It does not matter whether such director is part of the Promoter Group, an Independent Director, an executive or a non-executive director. The 2013 Act also has similar provisions.

SEBI requires at least one-third of the total number of directors to be Independent Directors. If the Chairman is an Executive Director or is a Promoter or related to the Promoter Group, then the Company 50% of the Board should constitute of Independent Directors. The 2013 Act requires companies to have at least one-third of the total number of directors to be Independent Directors. Any fraction would be rounded off to one. For specified nonlisted companies, there should be minimum two independent directors, irrespective of the size of the Board.

The definition of Independent Director under the two sets of provisions are substantially similar.

Tenure of Independent Director
This is one of the several contradictions between the requirements of SEBI Clause/the 2013 Act. The 2013 Act states that an Independent Director shall hold office for term of five consecutive years at a time and this term can be renewed, by a special resolution, for another period of five years. The SEBI Clause has substantially similar requirements.

The 2013 Act says that the tenure held as on 1st April, 2014 would not be counted. SEBI Clause, however, states that if an Independent Director has held tenure of five years or more as on 1st October, 2014, he shall be eligible for another tenure of five years only.

Audit Committee
The requirements under the 2013 Act and SEBI Clause are broadly similar. However, there are a few differences.

The 2013 Act requires that a majority of the Audit Committee should consist of Independent Directors, while SEBI has a higher requirement of two-thirds. SEBI, in addition, also requires that the Chairman of the Audit Committee should be an Independent Director.

The requirement under the 2013 Act is that a majority of the members of the Audit Committee should be “financially literate,” as defined. SEBI has extended this requirement to all the members. Thus, to ensure due compliance, the stricter requirement in such a case would apply and all the members of the Audit Committee of a listed company should be financially literate.

The role and functions of the audit Committee as prescribed by SEBI are far more elaborate and detailed. Considering the nature of the obligations, though, a listed company will have to ensure due compliance of both the sets of provisions.

Material subsidiary companies SEBI Clause has certain requirements relating to material, non-listed indian subsidiary companies and other subsidiaries. material subsidiaries are those subsidiaries incorporated in india,that are unlistedand whose income or net worth is more than 20% of the consolidated income or consolidated net worth respectively of the listed parent company. for such companies, there are certain at least one independent director of the parent company shall be a director of such subsidiary.

A statement of significant transactions and arrangements by an unlisted subsidiary shall be periodically brought to the attention of the Board of directors of the parent. “Significant,” in this context, means a transaction or arrangement that exceeds, or is likely to exceed 10% of total revenues/expenses/assets/liabilities of such subsidiary.

Selling, disposal or leasing of more than 20% of the assets of a material subsidiary shall require the approval of the shareholders by way of a special resolution. it is not clear whether such requirement would be attracted if such sale, disposal or lease, is in one transaction or in one financial year or cumulative.

further, to reduce the holding or control of the parent to less than 50% in a material subsidiary, the approval of the shareholders by way of a special resolution would be required.

The 2013 Act contains no corresponding requirements.

Related party transactions
SEBI Clause and the 2013 Act both have fairly detailed requirements relating to related party transactions. analy- sis of this topic even for one of the two sets would require a separate article by itself. however, there are some important features of difference between the two.

What constitutes a related party is defined in different manner under the two provisions. While the 2013 Act seeks to be specific and provides a defined set of relationship that would make a party a related party, the SEBI definition is qualitative. It includes all parties treated as related party under the 2013 Act and adds more.

As regards approval, the 2013 Act requires that the Board shall approve the specified related party transactions. Companies having paid up capital of at least rs. 10 crore, shall obtain the prior approval of the shareholders by way of a special resolution. further, transactions beyond the specified amount as per specified formula would also be covered. at such meeting, members who are related parties cannot vote. the provisions do not apply to trans- actions in the ordinary course of business and at arm’s length, as defined.

SEBI however requires that the audit Committee should approve all related party transactions. however, in case of “material” related party transactions, special resolution shall be passed to take approval where the related parties should not vote. a transaction with a related party would be treated as “material” if such transaction individually or taken together with previous transactions during the financial year exceed 5% of the annual turnover or 20% of the net worth, whichever is higher, of the company.

Further, though SEBI Clause will come into force generally from 1st october, 2014, all those material related party transactions that are likely to extend beyond 31st march, 2015 are required to be placed for approval of the shareholders at the first meeting of shareholders after 1st october, 2014. a Company may even get such approval at a meeting prior to 1st october, 2014.

E-Voting
SEBI has introduced a new Clause 35B to make e-voting mandatory by listed companies for shareholder resolutions. all shareholder resolutions including resolutions to be passed by postal ballot should be capable of being voted through e-voting. The e-voting would be through an agency that provides such platform and complies with conditions as prescribed by the ministry of Corporate affairs.

The 2013 Act/Rules framed thereunder require all listed companies and companies having at least one thousand shareholders to provide facility of e-voting.

Conclusion
these are just some of the new requirements relating to corporate governance in the 2013 Act/SEBI Clauses. While the 2013 Act does not give much of a transition period, SEBI has given some time to implement. however, considering the overlapping requirements, significant provisions have become applicable. Considering the punitive and other consequences of non-compliance, the first full year of 2014-15 will require serious efforts to be compliant. at the same time, considering the manner in which they are introduced, there are likely to be several unintended violations. this will only get worse considering poor/loose drafting particularly in the 2013 Act. The fact that the requirements create substantial new requirements and even hurdles, make it even more difficult. One hopes that SEBI and the MCA takes a liberal approach during the year, gives relaxations where possible and takes a lenient view of unintended violations during the first full year of applicability.

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Amendment in Mega Exemption Notification- Sponsorship of sports events Notification No. 1/2014-ST dated. 10th January, 2014

Vide this Notification, the scope of Mega Exemption Notification No. 25/2012 dated June 20, 2012 has been widened by inserting the words “or country” in the opening paragraph, in entry 11, in item (a) of the said Notification. With such insertion, the exemption scope of sponsorship of sporting events organied by a national sports federation has been widened by covering teams or individuals representing any Country instead of representing only district, state or zone.

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2014 (34) STR 225 (Tri.-Del.) Neelav Jaiswal & Brothers vs. CCEx.,Allahabad.

Valuation: Whether the remittance of contribution towards Provident Fund should be included in gross amount charged for supply of manpower services? Held yes.

Facts:
The Appellants engaged in providing manpower supply agency services received provident fund contribution with respect to personnel deployed by the Appellants with M/s. Hindalco Industries Ltd. The Appellants contested that since provident fund contribution was separately paid and the same did not form part of consideration for providing taxable services, the amounts would not be leviable to service tax. Relying on the decision delivered by the Delhi High Court in case of Intercontinental Consultants & Technocrats Pvt. Ltd. vs. UOI 2013 (29) STR 9 (Del.), the Appellants argued that value of taxable services shall only be gross value received for providing taxable services and nothing more.

Held:
Though the Appellants had statutory obligation to contribute towards provident fund, M/s. Hindalco Industries Ltd. not only remitted the remuneration of the personnel but also remitted the contribution to provident fund. Therefore, both these amounts constituted gross amount charged for providing taxable services.

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2014 (34) STR 205 (Tri-Chennai) Faizan Shoes Pvt. Ltd. vs. Comm. Of ST, Chennai.

In case of amendment in refund notification, whether provisions existing on the date of export of goods should be considered or provisions existing on the date of filing refund claim should be considered?Held provisions on date of claim should be considered.

Facts:
The Appellants exported goods and claimed refund of service tax paid vide Notification No. 41/2007-ST dated 06-10-2007. The department rejected refund claim on the ground that the exporter did not satisfy the following conditions of the said Notification, existing at the time of export which were modified at the time of filing refund claim:

• The exporter should not have availed drawback of service tax
• The refund claim should have been filed within 6 months and

Further, the amount of commission should have been declared on shipping bill.

The Appellants relied on the decision of Mumbai Tribunal in case of WNS Global Service Pvt. Ltd. vs. CCE, Mumbai 2008 (10) STR 273 (Tri.-Mum.) and contested that in case the refund claim is filed post the amendments of the notification and if the amended requirements are satisfied, refund claim cannot be rejected. Since the conditions were modified and there was no condition for non-availment of drawback and time limit was extended to 1 year at the time of filing refund claim, the Appellants were required to fulfil the amended conditions. Further, since SCN was silent with respect to non-declaration of commission amount on shipping bill, the order travelled beyond SCN and in any case, the same was a procedural lapse.

The revenue relied on the decision of Chennai Tribunal in case of CCE, Madurai vs. Shiva Tex Yarn & Others 2012 (25) STR 56 (Tri.-Chennai) wherein it was held that the amendments to notification has prospective effect only.

Held:
Decision cited by revenue is a Single Member Bench decision whereas decision cited by the Appellants is a Division Bench decision including the Single Member who had rendered the decision. Having regard to the objective of duty and tax free exports and Circular dated 12-03- 2009 clarifying that pending claims to be dealt with by applying amended provisions, it was held that the provisions as applicable on the date of filing refund claim needs to be followed. Non-mention of commission amount in shipping bill was a mere procedural lapse. Accordingly, if documentary evidence is available with respect to payment of service tax on commission, refund claim is to be granted.

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Reassessment: S/s. 147 and 148: A. Y. 1999-00: Note forming part of return mentioning and describing the nature of receipt under a noncompete agreement: Return accepted u/s. 143(1): Notice u/s. 148 on the basis of same material and nothing more: Not valid:

CIT vs. Atul Kumar Swami; 362 ITR 693 (Del):

For the A. Y. 1999-00, in the note filed together with the accounts and the returns disclosed that he received a sum of Rs. 88 lakh as a one-time, non-compete fee. He concededly paid advance tax of Rs. 27,60,600/- on the same. He claimed that this is a one-time capital receipt. The return was processed u/s. 143(1) of the Income-tax Act, 1961. Subsequently, the Assessing Officer reopened the assessment by issuing notice u/s. 148 dated 09-01- 2002 and brought the said amount of Rs. 88 lakh to tax as business income. The Tribunal held that there was no tangible material and that it was under mere circumstance that the advance tax to the tune of Rs. 27.6 lakh was paid did not amount to admission by the assessee. The Tribunal allowed the assessee’s appeal and held that the reopening was not valid.

In appeal, the Revenue contended that having regard to Explanation 1 to section 147 read with section 143(1), the reopening in this case was justified. The Revenue also argued that the agreement entered into by the assessee under which the amount was paid had not been filed during the assessment stage. And this justified the reassessment proceedings.

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

i) A valid reopening of assessment has to be based only on tangible material to justify the conclusion that there is escapement of income.

ii) The note forming part of the return filed for the A. Y. 1999-00 clearly mentioned and described the nature of the receipt under the non-compete agreement. The reasons for Notice u/s. 147 nowhere mentioned that the Revenue came up with any other fresh material warranting reopening of assessment. Therefore, mere conclusion of the proceedings u/s. 143(1) ipso facto did not permit invocation of powers for reopening the assessment.

iii) We are satisfied that the Tribunal’s reasons are justified and do not call for any interference.”

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[2014] 44 taxmann.com 149 (Bombay) – Saswad Mali Sugar Factory Ltd. vs. CCE.

Whether invocation of extended period and imposition of penalty u/s. 78 go hand-in-hand? Held yes.

Facts:
The Appellant is receiver of Goods Transport Agency (GTA ) service during April 2005, to October 2006. Adjudicating authority confirmed the demand and penalty. Commissioner (Appeals) upheld the service tax liability on the ground that there was suppression of facts but deleted the penalty u/s. 78 on the ground that the Appellant proved a reasonable cause for the failure. Thus the case is squarely covered by section 80 of the Act. Revenue did not contest deletion of penalty. Assessee’s appeal before Tribunal was dismissed for non-deposit of service tax.

Held
Hon’ble High Court held that the condition for invocation of extended period of limitation as provided in section 73 and the condition precedent to imposing penalty u/s. 78 are identical viz. there should be fraud, collusion or wilful misstatement or suppression of facts or contravention with intent to evade payment of service tax. Once the Commissioner (Appeals) has come to a finding that there was genuine cause for non-imposition of penalty then the same cause is also to be factored to conclude that extended period of limitation cannot be invoked. This finding will also apply to determine whether there was any intent to evade payment of service tax. High Court also observed that, revenue has not preferred appeal against deletion of penalty. High Court set aside the order of Tribunal and directed it to take up the matter on merits without requiring any pre-deposit.

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Interpretation – Three months – Does not mean 90 days – Bar of Limitation – Application filed on next day after limitation period due to holiday on the said date – Not barred by limitation.

Subodh Chandra Dash vs. M/s. B. Engineers & Builders Ltd., Bhubaneswar AIR 2014 Orissa 50

An agreement was executed between the parties. The bills were submitted by the petitioner, but they were not settled. The Arbitrator was appointed and the award was passed by the Arbitrator in favour of the petitioner. On 28- 01-2008, the opposite party obtained copy of the award. On 29-04-2008, Arbitration Petition was filed by the opposite party before the learned District Judge, Bhubaneswar u/s. 34 of the Arbitration and Conciliation Act, 1996. The opposite party filed objection to the said petition. The impugned order was passed on 18-08-2011 holding that the application filed u/s. 34 of the Act is within time.

The sole question that arose for consideration in the application is, whether the limitation of three months as provided in section 34 proviso to s/s. (3) of the Act should be calculated as ninety days.

The Court observed that in the case of State of H.P. and another vs. Himachal Techno Engineers and another,: 2010 SAR (Civil) 711, wherein the Supreme Court held that to equate 90 days to the expression of “three months” mentioned in section 34(3)of the Act is erroneous. The Supreme Court further held that a ‘month’ does not refer to a period of 30 days, but refers to the actual period of a calendar month. If the month is April, June, September or November, the period of the month will be thirty days. If the month is January, March, May, July, August, October or December, the period of the month will be thirty-one days. The Supreme Court further held that if the month is February, the period will be twenty-nine days or twentyeight days depending upon whether it is a leap year or not. In the aforesaid case, the Supreme Court further held that section 12 of the Limitation Act, 1963 provides for exclusion of time in legal proceedings.

The Court further held that section 9 of General Clauses Act, 1897 provides that in any Central Act, when the word ‘from’ is used to refer to commencement of time, the first of the days in the period of time shall be excluded. Therefore, to apply the said principle to the present case, while calculating the date of limitation, the date on which the copy of the award has been received by the opposite party i.e., on 28-01-2008 shall be excluded from computation of the limitation.

Therefore, computing the period of limitation from 29-01-2008, 3 days of January, 29 days of February (as 2008 was a leap year), 31 days of March and 28 days of April shall be included in the limitation. Thus, a total period of 91 days is the period of limitation for the present opposite party to prefer an application u/s. 34 of the Act. However, it was not disputed that the period of limitation ended on 28-04-2008. However, the application was filed on 29-08-2008. Therefore, it is seen that there is delay of one day in preferring the application u/s. 34 of the Act. However, it is not disputed that 28-01-2008 was a holiday, because the same was Lawyer’s Day, it is a holiday observed in the State of Odisha. Therefore, the application was filed on 29-01-2008 and is not barred by limitation.

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Hindu Succession-Co-parcenary property – Rights of daughter – Section 6, Hindu Succession Act 1956

Pratibha Rani Tripathy and Anr vs. Binod Bihari Tripathy & Ors. AIR 2014 Orissa 74

The Appellants had filed an appeal for partition of the immovable & movable properties as described in Schedules-‘ A’ & ‘B’ of the plaint and for recovery of possession of the Schedule-‘C’ properties.

The late Shri Durga Charan Tripathy was the son of the Defendants 1 & 2. He was married to Plaintiff No. 1 as per the Hindu rites and customs and the Plaintiff No. 2 was born out of their wedlock on 16-12-2000. Durga Charan Tripathy expired on 29-06-2002. The suit land, which was the ancestral property of the Defendant No. 1 & his deceased son, was never partitioned between them at any point of time. After the death of Durga Charan Tripathy, the Plaintiffs & Defendant No. 2 succeeded to the interest of Durga Charan Tripathy over the Schedule ‘A’ property i.e., the land.

During the course of the hearing of the appeal, the Defendant Nos. 5 & 6, who are daughters of Defendant Nos. 1 & 2 & sisters of late Durga Charan Tripathy, have filed a cross objection, inter alia, claiming that they have equal share in Schedule ‘A’ property with their late brother Durga Charan Tripathy to which they are entitled to in view of the amendment of the Hindu Succession Act, 1956 by the Hindu Succession (Amendment) Act 2005. Admittedly, the said amendment came into force with effect from 09- 09-2005 i.e., during pendency of the suit.

The moot question, therefore, arose as to whether after amendment of the Hindu Succession Act in the year 2005, the Court below should have held that the Defendant Nos. 5 & 6 (daughters) have equal share with their brother late Durga Charan Tripathy in the property along with their mother Defendant No. 2.

The Hon’ble Court observed that, by the date the suit was disposed of i.e., in the year 2007, the amendment had come into force. Hence, the amended provisions of section 6 of the Hindu Succession Act with regard to right of the daughter will operate in the instant case as there has been no partition effected prior to 20-12-2004 as per s/s. (5) of the said section. Thus, the Trial Court, while determining the share of the parties over the joint family property described in Scheduled ‘A’, should have considered the amendment brought into the Hindu Succession Act by the commencement of the Hindu Succession (Amendment) Act 2005. Applying the aforesaid provision of section 6 as well as the amendment to section 23 of the Act, it would be seen that late Durga Charan Tripathy along with Defendant Nos. 1 & 2 & Defendant Nos. 5 & 6 would have been entitled to equal share in Schedule ‘A’ property & therefore, each of them would have got 1/5th share. 1/5th Share of late Durga Charan Tripathy is succeeded by the Plaintiffs as well as Defendant No. 2.

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Evidence – Printout generated from computer seized not admissible for non fulfillment of statutory conditions: Section 138C customs Act:

Agarvanshi Aluminium Ltd vs. Commr. Of Cus. (I) NHAVA Sheva; 2014 (299) ELT 83 (Tri. Mum)

The brief facts of the case are that the importer imported aluminium scrap during the period July, 2004 to June, 2006 through various ports. The total quantity of aluminium scrap imported was 3889.998 MTs and the value declared was Rs. 23,84,81,992/-. The DRI, which investigated the imports, came to the conclusion that the appellant had misdeclared the value of imports and the actual value of imports amounted to Rs. 28,40,85,648/- and accordingly issued a show cause notice dated 31-12-2007 demanding differential duty of Rs.1,40,76,571/-.

This demand of duty was based on the evidence unearthed from the indenting agents premises involving differential duty of Rs. 48,80,774/- contemporaneous value of imports involving duty of Rs. 42,06,213/- and on the basis of LME prices minus permissible discount involving a duty of Rs. 49,89,584/-.

The appellant submitted that the demands towards differential duty is based on computer printouts recovered from the premises of the indenting agent (Shri Purshottam Parolia) cannot be relied upon as per section 138C of the Customs Act, 1962. As per the said provisions, the computer printouts can be taken as evidence only subject to fulfilling the terms and condition specified in the section and same have not been complied with in the instant case. The Hon’ble Tribunal observed that in this case, demands have been confirmed against the importer on three counts:

(a) On the basis of computer printout and statement of the indenter and the partner of the importer.
(b) On the basis of contemporaneous imports and
(c) On the basis of LME price,

As per the panchnama, in the list of the documents seized, initially the list of document typed was till Sr. No. 99, thereafter five items were added in handwritten form and Sr. No. 103, it is mentioned that four computer units without any mouse, keyboard, monitor and other accessories i.e., peripherals is mentioned. In the panchanama, the description of the item i.e., make, model, serial no. of the CPU were not mentioned. Moreover, they are handwritten and other 99 items are typed. Further, it was found that as per the panchanama, 4 CPU were seized, but as per the report of Directorate of Forensic Science, computers are found to be five in number and printouts are taken from these five CPUs which has been relied on in the impugned order. Therefore, the veracity of the panchanama is doubtful.

From the above provisions, it was clear that for admissibility of computer printout there are certain conditions which have been imposed in section 138C. Admittedly, the condition of the said section has not been complied with.

The Tribunal relied on the decision in case of Premier Instruments & Control Ltd. (2005) 183 ELT 65 (Trib.) wherein it was held that “computer printout were relied on by the adjudicating authority for recording a finding of clandestine manufacture and clearance of excisable goods. It was found by the Tribunal that printouts were neither authenticated nor recovered under Mahazar. It was also found that the assessee in that case had disowned the printout and he was not even confronted. The Tribunal rejected the printouts and the revenues finding of clandestine manufacture and clearance. Thereafter, it was found that there is a strong parallel between the instant case and the case cited. Nothing contained in the printout generated by the PC can be admitted as evidence for non- fulfillment of the statutory condition”.

Therefore, the printout generated from the PC seized cannot be admitted into evidence for non-fulfillment of statutory condition of section 138C of the Customs Act, 1962.

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Development Agreement – Conditional sale – Suit by developer for specific performance – maintainable: Contract Act section 202 and 204, Transfer of property Act 1882, section 54

Ashok Kumar Jaiswal vs. Ashim Kumar Kar AIR 2014 Calcutta 92 (FB)

A development agreement is in the nature of an agreement for sale subject to certain conditions. It is an agreement for a conditional sale. A suit at the instance of a developer (where the developer is the non-owner party to a development agreement) is not prohibited by section 14(3) (c) of the Specific Relief Act, 1963.

A contract between a developer and an owner would also consist of reciprocal rights and obligations. It would be preposterous to say that only the owner can maintain a suit against the developer for enforcing his rights and not vice versa. If the developer has a right under the contract, he must have a remedy in the form of approaching a forum for grievance redressal. This is not to say that the developer will necessarily succeed in such a legal action. A question of maintainability of a suit is completely different from the question of whether the suit will succeed or not on the facts of the case and in the light of the applicable law. Section 14(3)(c) of the Specific Relief Act can in no manner be interpreted as debarring a developer from approaching the legal forum for redressal of his grievance. To that extent, a suit at the instance of a developer is maintainable and not barred by section 14(3) (c) of the Specific Relief Act.

Ordinarily, a Power of Attorney executed by an owner in favour of the developer for effectuating the terms and conditions of the development agreement does not give a bare agency to the developer but it gives the developer an interest in the property which forms the subject-matter of the agency. However, merely because such a power of attorney gives the developer such an interest, it cannot be said that the agency cannot be revoked or terminated. Further, merely because such a power of attorney may be revoked, it would not imply that the development agreement can otherwise not be specifically enforced if the facts in a particular case so warrant

Section 53A of the Transfer of Property Act would suggest, if a proposed transferee of an immovable property under an agreement for sale is put in possession and continues in possession in part performance of the contract and does some act in furtherance of the contract and is willing to perform the balance part, his possession would be protected and the transferor would be debarred from dispossessing him other than under a right expressly provided by the terms of the contract. If a developer files a suit for specific performance of a contract and the owner files a suit for recovery of possession, one may have to dismiss both on different logic. A court of law is duty-bound to resolve the controversy that is brought before it, as far as practicable. The Court of law is not entitled to complicate the issue by making the controversy more complicated.

Section 202 of the Indian Contract Act 1872, provides that when the agent had interest in the property under the agency agreement in the absence of an express provision, the contract could not be terminated to the prejudice of such interest. Section 203 permits the principal to revoke the authority of his agent. However, when the agent partly exercised his authority, such revocation would not be permissible u/s. 204. If one reads these three provisions together, one would find that the Power of Attorney so revoked by the owner should not be looked at in an isolated manner. The Power of Attorney generally issued to the developer, is in continuation of the original agreement for development of the property, meaning thereby, that the developer who was entrusted to develop the property would be given authority to further act, as per the contract, including dealing with the property to the extent permissible under the contract. Hence, the Power of Attorney was nothing but an agency agreement executed in furtherance of the original contract.

If the original contract creates an interest in favour of the developer even if the Power of Attorney is revoked such interest would not evaporate.

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Intercorporate Investments: Changes Galore

Synopsis
The 2nd phase of the provisions of the Companies Act, 2013 has been made operative w.e.f. 1st April, 2014. This includes provisions dealing with intercorporate investments. Substantial changes have been made in the law in this respect. It is time for Corporate India to unlearn and relearn all they know in this respect. This article examines the salient features of the new provisions on intercorporate investments.

Introduction
Part-II of the Companies Act, 2013 (“the Act”) has made about 183 further sections (after the initial 98) effective from 1st April, 2014 and a Part-III is pending. The Rules in respect of Part-II sections have also been notified. One of the sections notified in Part-II is section 186 which deals with “Loans and investments by a company”. Section 186 coupled with section 185 has caused maximum heartburn amongst corporate India. This section 186 is a modern day avatar of section 372A of the Companies Act, 1956 (which in itself was a modern day avatar of the erstwhile section 372 of the same Act), but it has undergone a transmutation as compared to the original section. As the heading of the section suggests, it deals with two legs ~ loans by a company and investments by a company. In addition, there are certain other sections of the Companies Act, 2013 which deal with intercorporate investments. Through this article, let us examine the provisions relating to investments by a company in another body corporate, i.e., intercorporate investments.

Applicability
One of the most distressing features of section 186 is that it even applies to private limited companies which are not subsidiaries of public limited companies. Section 372/372A had a blanket exemption for private limited companies. A similar exemption is not found u/s. 186. Thus, all private companies would now have to comply with the provisions of this section.

Limit on Investments
The overall limit for a company to invest in the securities of another body corporate u/s. 186(2) is the higher of the following two limits:
(a) 60% of paid-up share capital + free reserves + securities premium; or
(b) 100% of free reserves + securities premium

This limit applies to investment by way of fresh acquisition or purchase or otherwise of securities of another body corporate.

The term ‘Securities’ has been defined u/s. 2(81) of the Act to mean securities as defined u/s. 2(h) of the Securities Contract (Regulation) Act, 1956. Thus, they would include shares (equity, preference, convertible preference, non-voting rights shares), debentures, bonds, derivatives in securities, warrants, other marketable securities of a body corporate. The limit would apply to investment by a company in the securities of both listed as well as unlisted companies.

Next let us examine the definition of the term ‘body corporate’. Section 2(11) of the Act defines it as including a company incorporated outside India. However, it does not include a corporate sole, a co-operative society and any other body corporate so notified by the Government. The most important aspect of a body corporate is that it is an independent legal entity with a distinct identity which is separate from its partners/shareholders/members and has a perpetual succession. It can own property on its own accord and in its own name. Hence, investing in the securities of a foreign subsidiary/joint venture would also fall within the purview of these limits. However, a mutual fund structured as a trust is not a body corporate and hence, investment in the units issued by a mutual fund (structured as a trust) would not be within the purview of section 186.

Let us next look at the composition of the limits for considering the 100% or 60%:

(a) Section 2(64) of the Act defines the phrase ‘paid-up share capital’ to mean such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paidup in respect of shares of the company but does not include any other amount received in respect of such shares, by whatever name called.

(b) The phrase ‘free reserves’ is defined by section 2(43) to mean such reserves which are available for distribution as dividend. These reserves are to be reckoned as per the last audited balance sheet of a company. The following are however, not treated as free reserves:

(i) any amount representing unrealised gains, notional gains or revaluation reserve, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value.

(c) T he last component of the limits is ‘securities premium’ which is governed by section 52 of the Act and it states that where shares are issued at a premium, the amount of the premium received on those shares shall be transferred to a “securities premium account”.

What if Limits are to be exceeded?

In case the investment in another body corporate is to be in excess of the limits specified above, then the investor company must obtain a prior special resolution of its shareholders passed at a general meeting. The Rules notified u/s. 186 provide that this would not be required where a holding company proposes to invest (by way of subscription or acquisition) in shares of its wholly owned subsidiary. However, the resolution would be required if the subsidiary is not a 100% subsidiary. Thus, if any, only if, the entire share capital is held by the investor and/or its nominees, would a special resolution not be required. The resolution must specify the total amount up to which the Board is authorised to make such acquisition. Section 110(1) of the Act and the Rules notified therein specify the items which must be transacted through postal ballot. While giving of loans/guarantees/security in excess of limits u/s. 186 have been specified, investment in excess of the limits u/s. 186 has not been specified. Hence, such a resolution is not mandatorily to be passed via a postal ballot.

In addition, the requirements of the Companies (Management and Administration) Rules, 2014 as well as the revised Clause 35B of the Listing Agreement should be complied with by all listed companies. This requires that for all resolutions to be passed at General Meetings, evoting facility must be provided by the listed company.

Layers of Investment Companies

S/s. (1) of section 186 introduces a novel concept, i.e., any company can make an investment through not more than two layers of investment companies. Companies in India are accustomed to having a web of investment companies. This has often been criticised on the grounds that it gives rise to opacity and proves difficult for regulators to ascertain the ultimate owner of an investee company. Thus, any company desiring to make an investment, after the coming into force of section 186, can do so either directly or through an investment company or through one investment company followed by a 2nd layer of investment company. However, it cannot have a 3rd layer of investment company under the 2nd layer of investment company. This s/s. prohibits making any investment, unlike the limits u/s. 186(2)(c) (which apply only for investment in a body corporate) and this does not restrict the scope to investment in a body corporate. Hence, any investment by a company through more than 2 layers of investment companies is not allowed. Thus, investment in a company, LLP, body corporate, partnership firm, etc., would all be covered. Considering the way the s/s. is worded, one wonders whether this prohibition would also apply to investment by a company in other asset classes, such as, land. However, a harmonious reading with the other sub-sections does not seem to indicate so.

The restriction is on routing any investment through more than 2 vertical layers of investment companies as illustrated by the following diagram (illustration-1) which violates section 186:

Thus, since aBC has routed its investment in XYZ via 3 layers of investment companies, the prohibition u/s.
186(1) would apply.

It may be noted that the prohibition is on having more than 2 layers of investment companies and hence, we need to ascertain what constitutes an investment company? the section defines an ‘investment company’ to mean a com- pany whose principal business is acquisition of shares, debentures or securities. at the outset, it is very clear that the definition only applies to a company and not to any other body corporate or entity. A company is defined to mean a company incorporated under the act or under any previous company law. Hence, if an LLP is used as an investment vehicle then this prohibition u/s. 186 would not apply. Whether you can incorporate an investment LLP is another story altogether.

Secondly, it must be a company whose principal business is acquisition of securities. What is principal business has not been defined. In this context, the principal business tests laid down by the reserve Bank of india to determine what constitutes an nBfC (non-banking financial Company) may be helpful. according to these tests, a company will be treated as an NBFC if it satisfies both the following conditions as per its audited accounts:

(i) Its financial assets as per the last audited Balance Sheet should be more than 50% of its total assets (netted off by intangible assets) and

(ii) Its income from financial assets as per the last audited Profit & Loss Account should be more than 50% of its gross income.

It should be noted that both these tests should be sat- isfied in order to treat a company as an NBFC. A company whose principal business is acquisition of securities may generally also qualify as an NBFC unless it can be treated as a Core investment Company or a CiC or if it is a company exempted from nBfC provisions, e.g., stock brokers. in this respect, the decision of the madras high Court u/s. 372 of the Companies Act,1956 in HC Kothari, 75 Comp. Cases 688 (mad) may be referred to. this decision held that it is clear that the income derived from the business is not the criteria. the test would rather be, as to what is the principal business of the company? a balance- sheet should show as to what is the principal business of the company.

The department of Company affairs’ views (dated 1st July, 1963) under the erstwhile section 372 may also be considered:

“In the Department’s opinion whether a company is or is not an investment company and the business which it should or should not transact to fall within the provision of the definition of an “Investment company” within the meaning of section 372(10) is actually a question of fact. The words used in the section are “whose principal business is the acquisition of shares. ” These words imply that the company concerned is expected to hold the shares, etc., acquired by it for a reasonable time.”

The Department’s views (dated 23rd February, 1961 and 4th October, 1961) under the erstwhile section 372, in relation to a share trading company, were as follows:

“The question as to whether a particular share trading company which deploys its funds for short-term transaction in buying and selling shares is an investment company or not, is one of fact which has to be determined in relation to the actual business transacted by it. The Department is inclined to the opinion that a company should be treated as an investment company if the whole or substantially the whole of its business relates to shares, securities, stock and debentures, etc. A share trading company may take advantage of these provisions of section 372 if it can be classed as an investment company.”

The act expressly provides that the restriction on two layers of investment companies even applies to an NBFC whose principal business is acquisition of securities. CiCs are a class of NBFCs which invest 90% of their net assets in group companies’ securities and at least 60% of 90% of their net assets in group companies’ equity shares. thus, even NBFCs and CiCs are restricted from having only two layers of investment companies.

The investor company could be an investment or an operating company but it cannot route its investment via more than 2 layers of investment companies. if the investment is routed through an operating company or one whose principal business is not acquisition of securities, then the restriction u/s. 186 on 2 layers would not apply. The following diagram (illustration-2) would amplify this statement:

Thus, since PQR has routed its investment in XYZ via a mix of 2 layers of operating companies and 2 layers of investment companies, the prohibition u/s. 186(1) does not apply. as explained the prohibition is only on more than 2 layers of ‘investment’ companies. one additional factor to be borne in mind in structuring an investment through an investment company is the NBFC directions. it is quite possible that the investment company, i.e., one whose principal business is acquisition of securities may constitute either an NBFC or a CIC. if it is an NBFC-ND-SI/Systemically Important Non-deposit taking NBFC, i.e., one which has total assets of rs. 100 cr. and above, then the NBFC directions impose a restriction that it cannot lend and invest more than 40% of its owned funds to a single group of parties and more than 25% of its owned funds to a single party. thus, in such a case, the twin restrictions of the act as well as of the directions would have to be borne in mind.

Exemption:
The prohibition on making investments only through   a maximum of two layers of investment companies will not affect the following two cases:
(i)   a company from acquiring any other company incorporated in a country outside india if such other company has investment subsidiaries beyond two layers as per the laws of such country; or
(ii)   a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

Further, section 186(1) gives power to the Government to prescribe such companies which can invest via more than 2 layers of investment companies.

Thus, exceptions presently available are if the indian in- vestor company has acquired a foreign company which, in turn, has more than two layers as per the laws of its country or if the subsidiary of an investor company, in turn, has any investment subsidiary for meeting the requirements of any law.

When indian companies make overseas investments, several times they consider routing such overseas investments through an intermediate holding Company (IHC), regional holding Company (RHC), etc. it is a moot point whether the prohibition u/s. 186 can apply to an investment made in a foreign company via more than 2 layers of IHCs/RHCs? This is because a company is defined under the act to mean a company incorporated under the act or under any previous company law and an ihC or a RHC incorporated abroad is a body corporate but not a company within the meaning of the act. interestingly, under the fema regulations, the RBI is also known to frown upon the use of multi-layered SPVs for making an overseas direct investment.

Other compliances
in addition to the above substantive provisions, section 186 also lays down several compliances for the investor company, such as, holding investments in its own name, board resolution to be passed by unanimous consent of all directors present at the meeting, maintaining a register of investments, obtaining prior approval of financial institutions in certain cases, etc.

except the provisions relating to two layers of investment companies, none of the other provisions of section 186 are applicable to the following cases of investments:

(a)   to any acquisition made by a registered NBFC whose principal business is acquisition of securities in respect of its investment activities. it may be noted that the exemption is only available to an nBfC which is registered with the rBi. under the CIC directions, a CiC is also a class of nBfCs. hence, this exemption should be available even to registered CICs. however, only CIC-nd-Si, i.e., those which have an aggregate asset size in excess of rs.100 crore need to be registered with the rBi. other CiCs are exempted from registration both as a CiC and as an nBfC. hence, will such exempted CiCs be eligible for the exemption u/s. 186 is a moot point?
(b)   to any acquisition made by a company whose principal business is the acquisition of securities. Such companies could be NBFCs, CICs, stock/subbroking companies, Venture Capital Companies, alternative investment funds structured as companies, etc.
(c)   to any acquisition of shares allotted in pursuance of clause (a) of s/s. (1) of section 62, i.e., allotment under a rights issue.

A related compliance is laid down u/s. 187 of the Act which requires all investments made or held by a company to be held in its own name. however, it may hold shares in its subsidiary company in the name of its nominees if it’s required to ensure minimum number of members. unlike the earlier section 49 of the 1956 act, section 187 even applies to a company whose principal business consists of buying and selling of securities.

An additional compliance is incorporated in the report of the Board of directors. it requires to give particulars of investments u/s. 186. Further, the Audit Committee’s terms of reference includes scrutiny of intercorporate investments.

Further, section 179(3) states that the power to invest the funds of the company can be exercised by the Board of directors only at a meeting of the Board. hence, a Circu- lar resolution is not possible.

Exemptions u/s. 372a Dropped

Section 372A of the Companies Act, 1956 contained several exemptions which have been done away with by section 186 of the act. the differences in the exemptions are as follows:

details

Section 372a of the 1956 act

Section 186 of the 2013 act

Applicability
to Private Companies

Entire
Section did not apply to Private Limited Companies

Entire
Section applies to Private Limited Companies. This is a major change

Companies
whose

Entire
Section did not

Restriction
on invest-

principal business

apply to a company

ment through 2 layers

is acquiring securi-

whose principal busi-

of investment com-

ties

ness was acquisition

panies even applies

of securities

to a company whose

principal business is

acquisition of securi-

ties. The remaining

s/s.s of section 186

do not apply to such a

company.

NBFCs

No
exemptions for

Restriction
on invest-

NBFCs

ment through 2 layers

of investment com-

panies even applies

to an NBFC but the

remaining sub-sections

of section 186 do not

apply to an NBFC.

Acquisition
by

Entire
Section did

Now the
exemption is

Holding Company

not apply to subscrip-

only available qua the

tion or purchase of

passing of a special

securities by a Holding

resolution by the Hold-

Company in its wholly

ing Company if the

owned subsidiary

limits u/s. 186 would

be exceeded by virtue

of such acquisition.

However, the other

s/s.s of section 186

continue to apply.

Penalty
Section 186 imposes a heavy penalty for the violation of the provisions of this section. if a company contravenes the provisions of this section, the company shall be pun- ishable with fine which ranging from Rs. 25,000 to Rs. 5 lakh. Every officer who is in default shall be punishable with a term which may extend to 2 years and with fine ranging from rs. 25,000 to rs. 1 lakh.

Layers of Subsidiaries
in addition to the restriction on layers of investment companies u/s. 186, there is also a restriction u/s. 2(87) of the act on the number of layers of subsidiaries which certain prescribed class of holding companies can have. a subsidiary includes a company as well as a body corporate, such as an LLP. Thus, in respect of prescribed holding companies they cannot have more than certain number of layers of subsidiaries. it may be noted that unlike the restriction on layers of investment companies, this restriction applies both to operating as well as investment subsidiaries and to subsidiaries which are companies or body corporates. Currently, no class of holding companies or number of layers have been prescribed.

one may compare the restrictions contained in section 186 vs. section 2(87) as follows:

Compilance for The Investee company
The investee company needs to pay special attention as to whether the issue of fresh securities to the investor company would constitute a private placement u/s. 42 read with the Rules notified thereunder and/or a preferential issue u/s. 62(1)(c) read with the Rules notified thereunder? Several substantive and procedural conditions have been laid down in this respect for the investee company.

Conclusion
The law relating to intercorporate investments is one area which has witnessed a sea change under the Companies Act, 2013 as compared to the Companies Act, 1956! Corporate india is going to have to grapple with several intended and unintended consequences of these new provisions but then, who said law and logic go together?

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Gaps in GAAP

Depreciation
Synopsis
In this article, the author has dismissed inconsistencies in the depreciation policy prevailing AS-6 on Depreciation Accounting and as per the Schedule II of the new Companies Act, 2013 with regard to the concepts of “Useful Life” and “Residual Value”. The author has addressed issues like Revenue-based amortisation, component accounting, revaluation of fixed assets, etc. along with the applicability of transitional provisions in different situations.

Background In the 1956 Act, Schedule XIV prescribed depreciation rates for various assets, both under the SLM method and WDV method. The purpose of prescribing minimum rates was to ensure that dividends are declared out of profits determined after providing for minimum depreciation. AS-6 on Depreciation Accounting laid out principles for depreciation for the purposes of financial statements. Under this standard, depreciation under Schedule XIV is counted as minimum. Higher depreciation was required to be provided for, if based on management’s assessment, the useful life of asset was lower than that laid out in Schedule XIV.

Initially, Schedule II of the 2013 Act laid out useful lives for assets, which were to be compulsorily used as minimum rates except by Ind-AS companies. Pursuant to an amendment to Schedule II this requirement was removed. Rather, the provision now reads as under:

“(i) The useful life of an asset shall not be longer than the useful life specified in Part ‘C’ and the residual value of an asset shall not be more than five per cent of the original cost of the asset:

Provided that where a company uses a useful life or residual value of the asset which is different from the above limits, justification for the difference shall be disclosed in its financial statement.”

From the use of word “different”, it seems clear that both higher and lower useful life and residual value are allowed. However, a company needs to disclose in the financial statements justification for using higher/lower life and/ or residual value.

Transitional provisions
With regard to the adjustment of impact arising on the first-time application, the transitional provisions to Schedule II state as below:

“From the date Schedule II comes into effect, the carrying amount of the asset as on that date:
(a) Will be depreciated over the remaining useful life of the asset as per this Schedule,
(b) A fter retaining the residual value, will be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.”

Proviso to Schedule II states that if a company uses a useful life or residual value of the asset which is different from limit given in the Schedule II, justification for the difference is disclosed in its financial statements. How is this proviso applied if notified accounting standards, particularly, AS 6 is also to be complied with?

AS 6 states that depreciation rates prescribed under the statute are minimum. If management’s estimate of the useful life of an asset is shorter than that envisaged under the statute, depreciation is computed by applying the higher rate. The interaction of the above proviso and AS 6 is explained with simple examples:

(i) T he management has estimated the useful life of an asset to be 10 years. The life envisaged under the Schedule II is 12 years. In this case, AS 6 requires the company to depreciate the asset using 10 year life only. In addition, Schedule II requires disclosure of justification for using the lower life. The company cannot use 12 year life for depreciation.

(ii) T he management has estimated the useful life of an asset to be 12 years. The life envisaged under the Schedule II is 10 years. In this case, the company has an option to depreciate the asset using either 10 year life prescribed in the Schedule II or the estimated useful life, i.e., 12 years. If the company depreciates the asset over the 12 years, it needs to disclose the justification for using the higher life. The company should apply the option selected consistently.

Similar logic will apply for the residual value.

Whether revenue based amortisation under Schedule II can be applied to intangible assets other than toll roads?

Amended Schedule II reads as follows “For intangible assets, the provisions of the accounting standards applicable for the time being in force shall apply except in case of intangible assets (Toll roads) created under BOT, BOOT or any other form of public private partnership route in case of road projects.” The amendment clearly suggests that revenue-based amortisation applies to toll roads. The same method cannot be used for other intangible assets even if they are created under PPP schemes, such as airport infrastructure.

Is component accounting under Schedule II mandatory? Is it applied retrospectively or prospectively? How are transitional provisions applied in the case of component accounting?

Component accounting requires a company to identify and depreciate significant components with different useful lives separately. For example, in the case of a building, the base structure or elevators or chiller plant may be identified as separate components. The application of component accounting is likely to cause significant change in the measurement of depreciation and accounting for replacement costs. Currently, companies need to expense replacement costs in the year of incurrence. This was causing a volatility. Under component accounting, companies will capitalise these costs as a separate component of the asset, with consequent expensing of net carrying value of the replaced part. Component accounting would comparatively result in a more stable P&L account.

Schedule II clarifies that the useful life is given for whole of the asset. If the cost of a part of the asset is significant to the total cost of the asset and the useful life of that part is different from the useful life of the remaining asset, the useful life of that significant part will be determined separately. This implies that component accounting is mandatory under Schedule II. In contrast, AS 10 gives companies an option to follow the component accounting; it does not mandate the same.

Materiality in the context of component accounting is decided on an asset by asset basis, and how significant the cost of component is, compared to cost of the total asset. This will call for judgement to be exercised. Component accounting is required to be done for the entire block of assets as at 1st April, 2014. It cannot be restricted to only new assets acquired after 1st April 2014.

If a component has zero remaining useful life on the date of Schedule II becoming effective, i.e., 1st April 2014, its carrying amount, after retaining any residual value, will be charged to the opening balance of retained earnings. The carrying amount of other components, i.e., components whose remaining useful life is not nil on 1st April 2014, is depreciated over their remaining useful life.

In case of revaluation of fixed assets, companies are currently allowed to transfer an amount equivalent to the additional depreciation on account of the upward revaluation of fixed assets from the revaluation reserve to P&L. What is the position under Schedule II?

Under Schedule XIV, depreciation was to be provided on the original cost of an asset. Considering this, the ICAI Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets allowed an amount equivalent to the additional depreciation on account of the upward revaluation of fixed assets to be transferred from the revaluation reserve to the P&L.

In contrast, schedule II to the 2013 Act requires depreciation to be provided on historical cost or the amount substituted for the historical cost. therefore, in case of revaluation, a company needs to charge depreciation based on the revalued amount. Consequently, the ICAI Guidance note, which allows an amount equivalent to the additional depreciation on account of upward revaluation to be recouped from the revaluation reserve, will not apply.

Schedule II to the 2013 Act is applicable from 1 April 2014. Section 123, which is effective from 1 April 2014, among other matters, states that a company cannot declare dividend for any financial year except out of (i) profit for the year arrived at after providing for depreciation in accordance with Schedule II, or
(ii) … Given this background, is the applicability of Schedule II preponed to financial statements for even earlier periods if they are authorised for issuance post 1st April 2014?

As per MCA announcement, Schedule II is applicable from 1st april 2014.

Schedule II contains depreciation rates in the context of Section 123 dealing with “Declaration and payment of dividend” and companies use the same rate for the preparation of financial statements as well. Additional depreciation may be provided, based on assessment of useful life as per AS 6.

One view is that for declaring any dividend after 1st April 2014, a company needs to determine profit in accordance with Section 123. this is irrespective of the financial year-end of a company. Hence, a company uses Schedule ii principles and rates for charging depreciation in all financial statements finalised on or after 1st April 2014, even if these financial statements relate to earlier periods.

The second view is that based on the General Circular 8/2014, depreciation rates and principles prescribed in Schedule II are relevant only for the financial years commencing on or after 1st april 2014. the language used in the General Circular 8/2014, including reference to depreciation rates in its first paragraph, seems to suggest that second view should be applied. For financial years beginning prior to 1st april 2014, depreciation rates prescribed under the Schedule XiV to the 1956 act will continue to be used.

In the author’s view, based on the clear intent of the regulator, second view is the preferred approach for charging depreciation in the financial statements.

How do the transitional provisions apply in different situations? In situation 1, earlier Schedule XIV and now Schedule II provide a useful life, which is much higher than AS 6 useful life. In situation 2, earlier Schedule XIV and now Schedule II provide a useful life, which is much shorter than AS 6 useful life.

In situation 1, the company follows aS 6 useful life under the 1956 as well as the 2013 Act. In other words, a status quo is maintained and there is no change in depreciation. hence, the transitional provisions become irrelevant. in situation 2, when the company changes from Schedule XiV to Schedule ii useful life, the transitional provisions would apply. for example, let’s assume the useful life of an asset under Schedule XiV, Schedule ii and as 6 is 12, 8 and 16 years respectively. the company changes the useful life from 12 to 8 years and the asset has already completed 8 years of useful life, i.e., its remaining useful life on the transition date is nil. in this case, the transitional provisions would apply and the company will adjust the carrying amount of the asset as on that date, after retaining residual value, in the opening balance of retained earnings. if, on the other hand, the company changes the useful life from 12 years to 16 years, the company will depreciate the carrying amount of the asset as on 1st April 2014 prospectively over the remaining useful life of the asset. this treatment is required both under the transitional provisions to Schedule ii and AS 6.

How are tax effects accounted for adjustments made to retained earnings required by transitional provisions?

Attention is invited to the ICAI announcement titled, “Tax effect of expenses/income adjusted directly against the reserves and/or Securities Premium Account.” the announcement, among other matters, states as below:

“… Any expense charged directly to reserves and/or Securities Premium Account should be net of tax benefits expected to arise from the admissibility of such expenses for tax purposes. Similarly, any income credited directly to a reserve account or a similar account should be net of its tax effect.”

Considering the above, it seems clear that the amount adjusted to reserves should be the net of tax benefit, if any.

shailesh.kwebmaker

[2014] 45 taxmann.com 282 (AAR – New Delhi) Oxford University Press., In re Dated: 30-04-14

Article 14, India-Sri Lanka DTAA; section 9(1) (vii) the Act – payments for sales promotion services rendered by a Sri Lanka resident were not FTS under the Act and were also not taxable in terms of Article 14.

Facts:
The Applicant was the Indian branch of Oxford University press, which is a department of Oxford University, UK. The Applicant was engaged in publishing, printing and reprinting of educational books. The Applicant appointed an individual resident of Sri Lanka as Resident Executive for promotion of sale in Sri Lanka of books published by the Applicant. The Applicant paid certain remuneration to the Resident Executive by remitting it to her bank account in Sri Lanka. The Applicant approached AAR for its ruling on the taxability of such remuneration.

Ruling:

• On examining the scope of duties and responsibilities of Resident Executive, the services rendered by Resident Executives were promotion of brand name and sale of publications of the Applicant. The job description indicates that recipient is more a marketing executive.

• India-Sri Lanka DTAA does not define technical services and hence, definition thereof under the Act should be referred. The services rendered by Resident Executive were not covered within ‘managerial, technical or consultancy services’ mentioned in Explanation (2) to section 9(1)(vii) of the Act. Hence, the payment was not FTS, either under the Act or under India-Sri Lanka DTAA .

• The payment will be covered under Article 14 of India- Sri Lanka DTAA but is not taxable even under that provision.

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shailesh.kwebmaker

[2014] 44 taxmann.com 1 (Mumbai – Trib.) Viacom 18 Media (P) Ltd vs. ADIT A.Y: 2009-10 to 2011-12, Dated: 28-03-14

Article 12, India-USA DTAA; section 9(1)(vi),
the Act – transponder service will be ‘process’ under Article 12 and
hence payment therefor will be ‘royalty’ under India-USA DTAA as well as
the Act.

Facts:
The taxpayer was engaged in
broadcasting of television channels from India and marketing advertising
airtime on these channels. The taxpayer had obtained round-theclock
satellite signal reception and retransmission service (‘transponder
service’) from an American company (“USCo”). USCo was a tax resident of
USA in terms of Article 4 of India-USA DTAA . The taxpayer had paid
transponder service fee to USCo during the relevant assessment years.

The
taxpayer approached the AO u/s. 195(2) for nil withholding tax
certificate in respect of transponder service fee. The AO did not issue
the certificate since, in his view, the payment was ‘royalty’ in terms
of Article 12 of India-USA DTAA , read with amended provisions of
section 9(1)(vi)

Held:
• The definition of “royalties”
in Article 12(3)(a) includes payments for “process”. The term “process”
is not defined in India-USA DTAA. Hence, its definition in explanation 6
to section 9(1)(vi) of the Act will apply. The use of transponder by
the taxpayer for telecasting/ broadcasting the programs involves
transmission by satellite, including uplinking, amplification,
conversion by downlinking of signals and is covered within the
definition of “process”.

• Hence, payments made for use/right to use of “process” is “royalty” in terms of India-USA DTAA as well as the Act.

•
The decision of Delhi High Court in Asia Satellite Telecommunications
Co. Ltd. vs. DIT [2011] 332 ITR 340 (Delhi) is not applicable since it
was rendered prior to the insertion of the explanation 6 to section
9(1)(vi) and explanation below section 9(2).

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shailesh.kwebmaker

ITA.No.276 /Hyd/2010 and ITA.No. 277/ Hyd/2010 DDIT vs. DQ Entertainment (International) P. Ltd (Unreported) A.Y: 2005-06 to 2007-08, Dated: 28-03-2014

Section 9, 195 of the Act – on facts, as the source of income was outside India, exception carved in section 9(1)(vii)(b) of the Act applied and the payments made for services was not chargeable.

Facts:
The taxpayer was engaged in the production of 2D and 3D animation films for various clients. During the relevant years, the taxpayer entered into ‘Outsourcing Facilities Agreement’ for outsourcing some episodes or part of episodes to two sub-contractors – a Hong Kong entity and a Chinese entity. Under the agreement, both the entities were to provide production work/Production material to taxpayer by availing the necessary production premises, facilities, personnel, materials, services and expertise.

According to the taxpayer: the payment was made to the sub-contractors in the course of business; the subcontractors did not have any ‘business connection’ or PE in India; the income did not arise under the deeming provision of section 9(1)(vii) of the Act; and hence the payments were not taxable in India.

According to the AO since the production material was specifically created by sub-contractors for the taxpayer, the substance of contract was not supply of goods but was provisioning of services. Hence, the payments were FTS u/s. 9(1)(vii) of the Act and therefore, the taxpayer should have withheld the tax.

Held:
The production of animation films or part of certain episodes did not have any element of technical services. Delhi Tribunal3 as also Delhi HC4 held that utilisation of knowledge, information and expertise of party undertaking a job of another party is no reason to treat the services rendered as technical or consultancy services

• Section 9(1)(vii)(b) of the Act carves out an exception in case of resident utilising services in business carried on outside India or earning income from a source outside India. As per decision of Supreme Court5, contract is to be considered the source of income and since, as per the contract with the overseas clients, the jurisdiction was of the courts/arbitration at the place where overseas client was located (subjecting the taxpayer to foreign laws), ‘source of income’ was outside India. The viewership of the animation films was also located outside India.

• Thus, there was a direct nexus between the payments and earning of income from source outside India. Therefore, exception in section 9(1)(vii)(b) will be applicable and there was no liability to withhold tax u/s. 195.

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shailesh.kwebmaker

[2014] 43 taxmann.com 425 (Chennai – Trib.) DCIT vs. Velti India (P.) Ltd A.Y: 2009-10, Dated: 27-02-2014

Article 12, India-South Africa DTAA; section 9, 40(a)(i), the Act – payments made to nonresident for transmission of bulk SMS were not FTS and hence withholding tax obligation did not arise.

Facts:
The taxpayer was an Indian company. The taxpayer availed services of a telecom carrier in South Africa (“SACo”) to transmit bulk SMS. For this service, the taxpayer made certain payments to SACo. The taxpayer did not withhold tax from such payments.

In the course of assessment of income, the AO concluded that the payments made by the taxpayer to SACo were FTS and accordingly, the taxpayer should have withheld tax from the said payments. Since the taxpayer had not withheld tax from the said payments, invoking provisions of section 40(a)(i) of the Act, the AO disallowed the payments.

Held:
• As per Article 12 of India-South Africa DTAA, FTS “means payments of any kind received as a consideration for services of a managerial, technical or consultancy nature”.

• The service provided by SACo was only transmission of bulk SMS, which was mere transmission of data and did not require any technical knowledge or skill. Delhi High Court has held1 that such services do not involve human intervention and therefore the payments cannot be regarded as FTS. Also, Madras High Court has held2 that collection of fees for usage of standard facility does not result in payment for providing technical services.

• The services were rendered outside India.

• Section 195 should be read along with sections 4, 5 and 9 as well as the tax treaties and unless the income is chargeable to tax in India, withholding tax obligation does not arise.

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shailesh.kwebmaker

Transfer Pricing – Inter – corporate Financial Guarantees

In our previous Article, we studied transfer pricing implications of cross border inter-corporate loans. In this article, we shall look at transfer pricing implications of cross border corporate guarantees between two Associated Enterprises. Guarantees may be for loan, performance of contract or delivery of products etc. However, we shall restrict our discussion, primarily to loan guarantees though principles discussed herein below would be equally applicable to other types of guarantees. We have maintained the Questions and Answers format for elucidating relevant provisions/law more clearly.

Q What are the different types of Guarantees?
A Meaning of the word Guarantee as per the Oxford Dictionary is:

“An undertaking to answer for the payment or performance of another person’s debt or obligation in the event of a default by the person primarily responsible for it.”

OECD’s Statistical Glossary defines Loan Guarantee as: “A legally binding agreement under which the guarantor agrees to pay any or all of the amount due on a loan instrument in the event of non payment by the borrower.”

Wikipedia defines Loan Guarantee as: “A loan guarantee, in finance, is a promise by one party (the guarantor) to assume the debt obligation of a borrower if that borrower defaults. A guarantee can be limited or unlimited, making the guarantor liable for only a portion or all of the debt.” A Guarantee may be implicit or explicit.

Implicit Guarantee
Implicit guarantee is one when the lender assumes that the borrower being part of a well known group or with financial backing of its parent company, its dues/debts are secured. In case of any unforeseen circumstances, the borrower will be rescued/bailed out by its parent or other group companies.

Implicit guarantees are informal and hence not enforceable in law. Implicit guarantees are not recognised by many countries and normally do not enter the transfer pricing arena.

Explicit Guarantee
Explicit guarantee is one where a formal guarantee agreement is executed whereby the guarantor undertakes to make good loss to the lender in case of default by the borrower. Guarantee commission on explicit guarantees between Associated Enterprises (AEs) needs to be benchmarked on an arm’s length basis applying provisions of the transfer pricing regulations.

Other types of guarantees are letter of comfort/letter of intent whereby the parent company assures the lender that it will safeguard the interest of its subsidiary. This type of guarantee may not have a legally binding force. At times, the parent may undertake to replenish capital in the event of continuing losses which may erode subsidiary’s net worth. Safe Harbour Rules in the Indian Transfer Pricing Regulations clearly define what types of guarantee is covered. The definition of the Corporate Guarantee as per said Rules is as follows:

“Corporate guarantee” means explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short-term or long term borrowing. (Emphasis supplied)

Explanation:– For the purposes of this clause, explicit corporate guarantee does not include letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of a similar nature.

Provisions of the Safe Harbour Rules (SHRs) throw light on the following issues:

• SHRs are applicable for explicit corporate guarantees (Implicit Guarantees and other forms of guarantees are not covered);
• SHRs cover guarantees given by an Indian Company (i.e., only the outbound scenario);
• SHRs are applicable only when a guarantee is given to the Wholly Owned Subsidiary (WOS) and not otherwise;

Q. What are the regulations under FEMA for obtaining and issuing Guarantees by an Indian entity?
A. FEMA Regulations for issuing guarantees:
(Master Circular on Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) Abroad Para B.1)

Indian entities can offer any form of guarantee – corporate or personal (including personal guarantee by indirect resident individual promoters of the Indian Party)/primary or collateral/guarantee by the promoter company/guarantee by group company, sister concern or associate company in India provided that:

i) All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e., currently within 100% of the net worth as on the date of the last audited balance sheet of the Indian party.
ii) No guarantee should be ‘open ended’ i.e., the amount and period of the guarantee should be specified upfront. In the case of performance guarantee, time specified for the completion of the contract shall be the validity period of the related performance guarantee.
iii) I n cases where invocation of performance guarantees breach the ceiling for the financial exposure of 100% of the net worth of the Indian Party, the Indian Party shall seek prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.

[Note: In case of invocation of a performance guarantee, which had been issued before 14th August, 2013, the limit of 400% shall be applicable and remittance on account of such invocation over and above 400% of the net worth of the Indian party shall require prior approval of the Reserve Bank.]

iv) A s in the case of corporate guarantees, all guarantees (including performance guarantees and Bank Guarantees/SBLC) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOS/JV outside India, and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

Note: Specific approval of the Reserve Bank will be required for creating a charge on immovable/moveable property and other financial assets (except pledge of shares of overseas JV/WOS) of the Indian party/group companies in favour of a non-resident entity within the overall limit fixed (presently 100%) for the financial commitment subject to submission of a ‘No Objection’ by the Indian party and its group companies from its Indian lenders.

FEMA Regulations for obtaining overseas guarantees: (Foreign Exchange Management (Guarantees) Regulations, 2000, Para 3A)

With prior approval of RBI:
A Corporate registered under the Companies Act, 1956 can avail of domestic rupee denominated structured obligations by obtaining credit enhancements in the form of guarantee by international banks, international financial institutions or joint venture partners.

Without prior approval of RBI:
A person resident in India may obtain without the prior approval of the Reserve Bank, credit enhancement in the form of guarantee from a person resident outside for the domestic debts raised by such companies through issue of capital market instrument like bonds and debentures subject to the following conditions:

• Eligibility:
– A person resident in India
– Other than branch or office in India owned or controlled by a person resident outside India
– I n accordance with the provisions of the

Automatic Route Scheme specified in schedule Automatic route scheme: (Foreign Exchange Management

(Borrowing or Lending in Foreign Exchange) Regulations, 2000, Schedule I, Regulation 6(1)] Borrowing (Guarantee) in Foreign Exchange up to $ 500 million or its equivalent:

Eligibility:
• Any company registered under the Companies Act, 1956, other than a financial intermediary (such as bank, financial institution, housing finance company and a nonbanking finance company)

• The borrowing should not exceed in tranches or otherwise $ 500 million or equivalent in any one financial year (April – March)

End use purpose:
• For investment in real sector – industrial sector including Small and medium enterprises (Sme) and infrastructure sector in india.

• For first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Governments’ disinvestment programme of PSU shares.

• For direct investment in overseas Joint Ventures(JV)/ Wholly owned Subsidiaries (WoS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

Q. Whether Guarantee is an “international transaction” under the Indian Transfer Pricing regulations?

A. In one of the earlier rulings on the subject of guarantee, delivered on 9th September, 2011, the hyderabad Tribunal in case of Four Soft limited [(hyd. ITAT) – 62 DTr 308] ruled that:

“The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution. In view of this matter, we hold that no TP adjustment is required in respect of corporate guarantee transaction done by the assessee company.”

However, thereafter the Income tax Act, 1961 (“Act”) was amended vide Finance Act 2012 to bring guarantees and other financial transactions within the ambit of the Transfer Pricing regulations (TPrs). Explanation to section 92B was added to the definition of the term “International Transaction”, which reads as follows (only the relevant extract is reproduced):

“Explanation—For the removal of doubts, it is hereby clarified that—

(i) the expression “international transaction” shall include—

(c) Capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;”

from the above, it is clear that loans and guarantees between AEs are covered under the TPRs of India retrospectively
w.e.f. 1st april 2002.

Post the above amendment, divergent rulings of the tribunals have come which are enumerated hereunder:

i) Bharati Airtel Ltd. vs. ACIT [2014] 43 Taxmann.com 150 (delhi – trib.)

In this case, the tribunal held that “even after the amendment to Section 92 B, by amending explanation to section 92 B, a corporate guarantee issued for the benefit of the aes, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and or therefore, it is outside the ambit of ‘international transaction’ to which ALP adjustment can be made.”

ii) The mumbai tribunal, in cases of (a) Everest Kanto Cylinder Ltd. vs DCIT (ITA No. 542/Mum/2012) and (b) Technocraft Industries (India) Ltd. vs. ACIT (ITA No.7519/ Mum/2011), Mumbai (January 2014) held that post amendment of section 92B guarantee transactions are covered by the Transfer Pricing Regulations.

Safe harbor Provisions as applicable to Guarantee transactions [Notified on 18th September 2013 applicable for Five Assessment years beginning from Ay 2013-14]

Sr.

No.

Eligible
Interna- tional Transactions

Acceptable
Circumstances

Remarks

Providing
corpo- rate guarantee where the amount guaranteed does not exceed Rs.100
crore.

Guarantee
com- mission or the fee charged
should be minimum

2% per annum of the amount guaranteed.

Corporate
Guar- antee is defined to mean explicit corporate guaran- tee extended by a

company to
its WOS being a non-resident in respect of any short-term or long term
borrowing.

The Australian Taxation Office in its Discussion Paper on “Intra-group Finance Guarantees & Loans Application of Australia’s Transfer Pricing and Thin Capitalization Rules

Between AES be given without charging any commission?

A. Post amendment of section 92B of the Act, transactions of cross border Guarantees between two aes are covered under the transfer pricing regulations. however, we have divergent decisions from tribunals on this point. (Refer Ans. 3 supra)

OECD Guidelines on Transfer Pricing (Para 7.13) provide intra-group services are said to be rendered when an AE derives benefits from an active association in the form of explicit guarantee from a group member and/or global marketing and promotion of the group whereas no services are said to be rendered where there is incidental benefits due to passive association of the ae with its group members. in the former case, issuance of guarantee would demand charging whereas, in the later case there is no need of any charge as no services are said to be rendered.

Australian Discussion Paper (2008) (paragraph 31) on “intra-group finance Guarantees and loans” states that “incidental benefits from association with a larger group where the market accords those benefits without an associated company actually providing an economic service that confers a benefit on the recipient would not usually be a basis for imposing a charge.”

From the above discussion, one may conclude that in the following circumstances, intra-group guarantees may not carry any charge or commission and therefore, are out of ambit of the transfer pricing regulations:

i) When the benefit obtained by an AE is on account of a passive association (something akin to implicit guarantee);

ii) When the corporate guarantee is issued for the benefit of the ae, which does not involve any costs to the assessee and therefore does not have any bearing June 2008” (paragraph 181 on page 42 of the Paper) has opined that where the provision of a guarantee relates exclusively to the establishment or maintenance of a parent company’s participation as an investor, the costs of such participation should not be allocated to the subsidiary and should not affect the allocation of profit between the parent and subsidiary. in such a circumstance it could be fair and reasonable to determine that the arm’s length consideration for the provision of the guarantee is nil. On profits, income, losses or assets of the Guarantor (Based on the
decision of the delhi tribunal in case of Bharati Airtel (I.T.A. No.
5816/Del/2012));

iii) Where the guarantee is provided for the debt which is in lieu of equity or which is in the nature of equity.

At Paragraph 105 of the Paper it is reported that: “The pricing of a guarantee is calculated as a percentage or spread on the amount of the debt being guaranteed. no chargeable percentage or spread arises on any portion of the debt that serves the purposes of equity.”

Q. What are the provisions under the OECD Transfer Pricing Guidelines regarding cross border guarantees?

A. Paragraph 7.13 of the (Chapter VII- Intra-Group Services) OECD Guidelines on Transfer Pricing (July 2010) makes a distinction between an “active association” and a “passive association” between aes. according to the Guidelines, in case of a passive association, an AE would receive incidental benefits just because it is part of the multinational enterprise Group. in such a scenario, no services are said to be rendered even though it receives higher credit rating being affiliated to a larger group. however, in case of an active association, services are said to be rendered when the ae receives higher credit rating because of guarantee offered by another group member or benefit obtained from the group’s reputation deriving from global marketing and public relation campaigns.

Benefit on account of “passive association” is akin to “implicit guarantee” whereas, benefit on account of “active association” is akin to “explicit guarantee”. therefore, even oeCd supports the view that there is no need of any charge in the case of implicit guarantee whereas explicit guarantee needs to be charged and benchmarked under transfer pricing regulations.

Q. how does one benchmark guarantee fee?
a. Benchmarking of guarantee fee is a complex issue in view of unavailability of comparable data and unique nature of the transaction.

Various methods or approaches can be used to benchmark a guarantee fee depending upon the facts of the case and availability of the comparable data. Various situations and appropriate methods/approaches are discussed in the Australian Discussion Paper (2008) (paragraphs 128 to 171) on “intra-group finance Guarantees and loans” as well as arising from different case laws, as follows:

i) CUP Method
CUP Method is the most appropriate method where sufficient data for comparison are available.

Under this method, the guarantee fee is determined by comparing the arm’s length guarantee fee charged by an independent party for providing similar guarantee on similar terms and conditions. in this approach, quantum of risk, type of guarantee, period of guarantee, borrower’s standalone credibility etc. are considered for arriving at arm’s length guarantee fee.

There may be Internal CUP or External CUP. In the case of the former, the spread between guaranteed and non-guaranteed third party loans are compared and the guarantee fee charged is equivalent or more due to difference in interest rates between these two types of loans.

In case of External CUP the fees applicable to Letter of Credit or Collateral debt Securities data are used.

The CUP method would be ideal in cases where a creditworthy subsidiary that is able to raise the debt funding it needs on a stand-alone basis obtains better terms with the benefit of a parent guarantee.

ii) Benefit/yield Approach
This approach is also known as “interest Saving approach”. in this method, arm’s length guarantee fee is determined through the interest rate saving which the subsidiary earns due to explicit guarantee by its parent. Thus, this method/approach seeks to benchmark the guarantee fee from the perspective of the borrower.

Under this approach, uncontrolled interest rates, risk assessments and market indicators are used as indirect benchmarks for arriving at the arm’s length fee, rather than using uncontrolled guarantee fee as a benchmark.

In other words, an arm’s length fee is estimated as the spread between the interest rate the borrower would have paid without the guarantee and the rate it pays with the guarantee, less the arm’s length discount. the remaining spread, net of the discount, would have to be sufficient to make the deal attractive to an independent guarantor for the additional risk it would assume, if it provided the guarantee. if there is no additional risk, then consideration has to be given to the economic substance of the arrangement between the parties.

In the case of General electric Capital Canada inc.’s in december 2009 (Ge Capital), the tax Court of Canada (TCC) (2009 TCC 563 Date: 20091204)
Upheld the yield approach for determination of arm’s length fee for the explicit guarantee provided to the Canadian subsidiary (GE Canada) by the US Parent Co. (Ge uSa).

In the case of Four Soft Ltd. vs. DCIT [(Hyd. ITAT)
– 62 DTR 308], the Tribunal, while upholding non charging of guarantee fees by the indian Company in respect of overseas aes observed that “the subsidiary company has not received any benefit in the form of lower interest rate by virtue of the corporate guarantee given by the assessee company and at the same time, the assessee company significantly benefited from such transaction”. Thus the Tribunal did look at the “benefit approach” in benchmarking guarantee fees.

iii) Profit Split Method
this method is useful where there are series of transactions owing to special relationship between the parent company and its subsidiary.

For example, the parent may supply trading stock to a subsidiary, purchase outputs from the subsidiary and also provide debt funding and a guarantee. There may be benefits flowing from the parent to the subsidiary as well as from the subsidiary to the parent. Such cases require a careful analysis of benefit flows and their impacts on the respective parties in order to appropriately determine the share of profit each party should receive for its contribution to the profit channel.

iv) Risk/Reward Based Approach or Cost Based approach

This approach takes into account the risk the parent would take in extending guarantee to its subsidiary/ ae in the event of default and reward it in terms of increased profitability and sustainability or viability of subsidiary’s business. the reward could also be based on the quantified risk and perceptions of the probability that the risk will not materialise compared to the probability that it will materialise.

This approach seeks to value the guarantee fee from the perspective of the guarantor by focussing on the actual and potential financial and other impacts of providing guarantee. The benchmarking is done as if such guarantee transaction is entered into by two independent parties taking into account the circumstances of the borrower. The borrower’s creditworthiness [to be determined based on arm’s length, i.e., as if it is an independent enterprise] is of utmost importance as it has a direct bearing on its financial strength and the default risk.

v) The other two approaches are, namely: (i) option Pricing Model Approach [Using financial model for valuing options where the guarantee fee is ascertained as equivalent to a premium chargeable for insuring the underlying loan asset] or (ii) Credit Default Swaps [which is akin to a financial guarantee where a parent would make a periodic fixed payment to a third party should the subsidiary default on its obligation].

Both the above approaches are not much in vogue and hence not discussed at length.

In actual practice, especially in complex cases a combination of various approaches may be used.

Q. What are the Judicial Precedents for benchmarking of cross border guarantees?

A. Indian experience and judicial precedents (in addition to cases discussed hereinabove) on charging of guarantee fees are summarised as follows:

Indian Experience
Indian Transfer Pricing Administration prefers CUP method for benchmarking guarantee commission in cases of outbound guarantees (i.e., where indian company has given guarantee to its overseas ae). in most cases, interest rate quotes and guarantee rate quotes available from banking companies are taken as the benchmark rate to arrive at the ALP. The Indian tax administration also uses the interest rate prevalent in the rupee bond markets in india for bonds of different credit ratings. the difference in the credit ratings between the parent in india and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of indian bonds is also considered for determination of the arm’s length price of such guarantees.

In the above context, it is interesting to note the observations of the hyderabad tribunal in case of four Soft limited (supra) wherein the tribunal observed that “in our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution.”

In case of M/s. Asian Paints Ltd. vs. ACIT (ITA No. 408/ Mum/2010), the Mumbai Tribunal upheld following observations of the Cit (a) which are worth noting:

“The TPO has collected data from the Website of Allahabad Bank, hSBC Bank and robo india finance and applied the flat rate of 3%. That is to say the TPO has adopted a ‘naked quote’ without factoring in the qualitative factors which determine the fees. a quotation given by a third party e.g. a Banker does not constitute a CUP since it is quotation and not an actual uncontrolled “transaction”. the TPO has adopted a 3% rate or guarantee fees when the Citi Bank Singapore (the bank providing the loan amount) itself has charged interest at the rate of 1.625% only on the loan granted to its ae at Singapore. this makes the stand of the TPO unsustainable as guarantee fees can in no circumstances exceed the rate at which interest is charged on loan.”

From the above, two principles emerge which are as follows:

(i) Banks’ quotes of “Guarantee Commission” cannot be applied blindly (naked quote) without factoring into qualitative factors thereunto
(ii) Under no circumstances, guarantee fees can exceed the rate of interest charged on the underlying loan for which guarantee is given.

In the case of Reliance Industries Ltd. [I.T.A. No.4475/ Mum/2007], the Mumbai Tribunal held as follows:

(i) Guarantee transactions do fall within the definition of the “International Transaction” under the Transfer Pricing regulations post retrospective amendment of section 92B of the act vide the finance act 2012;

(ii) For benchmarking of guarantee fees, one cannot apply any naked bank rate, as guarantee fee largely depends upon the terms and conditions on which loan has been given, risk undertaken, relationship between bank and the client, economic and business interest etc.

In the case of Glenmark Pharmaceuticals Limited vs. ACIT [TS-329-ITAT-2013(Mum)-TP], the Mumbai Tribunal also held as follows:

(i) CUP is the most appropriate method for benchmarking Guarantee transactions.

(ii) There is a conceptual difference between Bank Guarantee and Corporate Guarantee. Bank Guarantee is a foolproof instrument of security for the customer and failure to honour the guarantee is treated as deficiency of services of the Bank under the Banking laws. on the other hand, the CG – Corporate Guarantee is provided by the Company either to the Customer or to the Bank for giving loans to the sister concerns/AEs of the said company; but it is not foolproof. failure to honour the guarantee may attract contract laws and it is however a legally valid document and the Customer/Bank can sue the company in Court if it does not pay up.

(iii) Unless the ‘naked quotes’ of the bank guarantee rates as given in the websites for public, are adjusted to various controlling factors, these rates are no good CUP.

(iv) Conclusion:

From the above discussion, it can be concluded that guarantee given by an Indian Parent to its overseas subsidiary needs to be benchmarked as per transfer pricing regulations in India. The CUP method is ideal subject to availability of comparable data. in complex cases one or more methods/approaches can be used. Indian Safe harbour provisions provide considerably higher rate of guarantee commission/fees and therefore, less likely
to be opted by assesses in india.

Benchmarking of guarantee is never an easy task in view of commercial exigencies and other factors involved. The Indian Transfer Pricing Administration (ITPA) should therefore adopt a comprehensive approach in arriving at arm’s length fees rather than adopting naked rates/fees as are quoted on the website of the Banks/Financial Institutions. It would be interesting to see whether the ITPA would be willing to allow as deduction guarantee commission/fee charged by the foreign parent to its indian subsidiary based on the bank rate.

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A. P. (DIR Series) Circular No. 107 dated 20th February, 2014

Notification No. FEMA. 230/2012-RB dated 29th May, 2012, notified vide G.S.R. No. 797(E) dated 30th October, 2012 read with Corrigendum dated 10th September, 2013 notified vide G.S.R. No. 624(E) dated 12th September, 2013

Foreign Direct Investment (FDI) into a Small Scale Industrial Undertakings (SSI)/Micro & Small Enterprises (MSE) and in Industrial Undertaking manufacturing items reserved for SSI/MSE

Presently, an India Company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annex A, can issue shares or convertible debentures to a person resident outside India, to the extent of 24% of its paid-up capital. The said Company can issue shares in excess of 24% of its capital if:

(a) It has given up its small scale status.

(b) It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector.

This circular has aligned the policy on FDI with respect to investment in Small Scale Industrial unit and in a company which has de-registered its small scale industry status and is not engaged or does not propose to engage in manufacture of items reserved for small scale sector in lines with provisions of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. As a result:

(i) A company which is reckoned as Micro and Small Enterprises (MSE) (earlier Small Scale Industries) in terms of MSMED Act, 2006 and not engaged in any activity/sector mentioned in Annex A to schedule 1 can issue shares or convertible debentures to a person resident outside India, subject to the limits prescribed in Annex B to schedule 1, in accordance with the entry routes specified therein and the provision of FDI Policy, as notified from time to time.

(ii) Any Industrial undertaking, with or without FDI, which is not an MSE, having an Industrial License under the provisions of the Industries (Development & Regulation) Act, 1951 for manufacturing items reserved for manufacture in the MSE sector can issue shares in excess of 24% of its paid up capital with prior approval from FIPB.

In terms of the provisions of MSMED Act: –

(i) In the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951: –

(a) A micro enterprise means where the investment in plant and machinery does not exceed Rs. 25 lakh.

(b) A small enterprise means where the invest ment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore.

(ii) In the case of the enterprises engaged in providing or rendering services: –

(a) A micro enterprise means where the investment in equipment does not exceed Rs. 10 lakh.

(b) A small enterprise means where the investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.

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Settlement Deed – Cancellation – Registered Settlement deed cannot be cancelled by executing cancellation deed: Transfer of Property Act, 1882, section 9:

V. Ethiraj vs. S. Sridevi & Ors.; AIR 2014 Karnataka 58

Once, the settlement deed was executed by mother in favour of her daughter, mother lost her right, title and interest in the schedule property. Subsequently, on the day mother executed cancellation deed, she had no right in the property. The registered settlement deed cannot be cancelled by executing a cancellation deed. If at all the said document is to be canceled, it had to be done under the provisions of Specific Relief Act, by approaching a competent civil Court for cancellation of such document. If the fact of fraud, undue influence, mistake or any other ground which is alleged for cancellation of the said documents is proved, the Court may order for cancellation. That is the only mode known to law to cancel the registered settlement deed. Otherwise, the parties by consent have to annul the settlement by executing the document of reconveyance. Therefore, by execution of the cancellation deed, the registered settlement deed did not stand cancelled. Unilaterally, the settler cannot execute a cancellation deed of settlement.

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Eligibility of deduction u/s. 801A for the unexpired period – Circular No. 10 dated 6th May, 2014 [F. No. 178/84/2012/ITA.I]

When an enterprise or undertaking develops an infrastructure facility, industrial park or Special Economic Zone, as the also may be, and transfers it to another enterprise or undertaking for operation and maintenance in accordance with the proviso to Clause (i) or Clause (iii) of s/s. (4) of section 80-1A of the Act and if this transfer is not by way of amalgamation or demerger, the transferee shall be eligible for the deduction for the unexpired period.

Amended Form 49A and 49AA notified – Notification No. 26 dated 16th May, 2014 [S.O.2045(E)] – Income-tax (5th Amendment) Rules, 2014 – The amended form gives an option to the applicant to get his mother’s name printed on the PAN card.

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VAT liability of developers – computation – Trade Circular 12T of 2014 dated 17-04-2014.

48. MVAT Trade Circular

VAT liability of developers – computation – Trade Circular 12T of 2014 dated 17-04-2014.

By this trade circular, the Commissioner has clarified certain queries raised by the trade and associations in respect of computation of tax liability of developers.

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Addl. CIT vs. Vinay Vasudeo Kulkarni Income-tax Appellate Tribunal Pune Bench “A”, Pune Before Shailendra Kumar Yadav (J.M.) and R. K. Panda (A. M.) ITA No. 2363 / PN / 2012 Asst. Year 2009-10 Decided on 29-04-2014 Counsel for Revenue/Assessee: P. L. Pathade/ Kishore Phadke

Section 145 – Income is taxable in the year when right to receive accrues.

Facts:

The assessee, an individual, was in business. His main business was that of commission agent /dealer for Daikin Air-conditioning India Pvt. Ltd. As per the practice followed – on receipt of the order for air-conditioner placed by the assessee, Daikin used to credit the commission to the account of assessee irrespective of the supply of goods and deduct tax at source. The assessee had shown such commission as “Contingent Income” under the group “Current Liabilities” in the Balance Sheet. The balance in the said account on 31-03-2009 was Rs. 32,72,500. However, the assessee was advised by Daikin to raise invoice for commission only after the installation of the air-conditioner and collection of money from the air-conditioner sold. The assessee received the payment only thereafter. The assessee, who was following the mercantile method of accounting, recognised the income in the year when invoice was raised. The AO treated the sum of Rs. 32.72 lakh as the income of the current year. On appeal, the CIT(A) allowed the appeal filed by the assessee.

Held:

The Tribunal observed that income accrues only when there is right to receive such income. It further observed that though the Schedule VI requires income accrued but not due as part of profit, for income tax purpose ‘income accrued but not due’ is a contradiction in terms, since what was not due could not have accrued. What is not due cannot be subjected to legal action to enforce recovery and hence, income in legal sense could not be treated as accrued, so as to require its inclusion in taxable income. The Tribunal relied on the decision of the Pune Tribunal in the case of Dana India Pvt. Ltd. (ITA No. 375 / PN / 09 dt. 09.02.2011). In the case of the assessee, the Tribunal noted that the work relating to erection and installation was completed in the subsequent years. Therefore, the income also accrued in the subsequent years. Relying on the decision of the Madras high court in the case of CIT vs. Lucas Indian Services Ltd. (315 ITR 273), the Tribunal dismissed the appeal of the revenue.

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T. Subramanian vs. Deputy Commercial Tax Officer, Ettayapuram, [2012] 50 VST 410 (Mad)

Sales Tax – Interest-Tax Paid As per Order Of High Court- In a Writ Petition Filed- Against Recovery Proceedings- Demand For Interest – Not Permissible, section 24(3) of The Tamil Nadu Sales Tax Act, 1959.

Facts
The father of the petitioner had filed writ petition before the Madras High Court against the recovery action taken by the Department for recovery of assessed dues. The High Court directed him to pay the dues in six equal installments, which he paid without any default. Thereafter, the Department issued demand notice claiming interest as per section 24(3) of the act for the belated payment of due amount. The petitioner filed writ petition before the Madras High Court against such demand notice for payment of interest.

Held
Indeed, ordinarily, there is no discretion vested with the authority under the act to desist from levying interest or reducing the same. Also, no notice or providing reasonable opportunity to the assessee is no essential. In law, there is no estoppel against a statute. But in the present case, the High Court in the earlier writ had permitted the petitioner to pay due amount in installments. At that time, on both sides, no plea was raised for payment of interest for the delayed payment by the assessee and admittedly no writ appeal is filed against the said order of High Court. Hence, the order of High Court became final and binding between the parties. When the High Court had permitted to pay due amount by way of installments by exercising its judicial discretion, then the invocation of section 24(3) of the Act for payment of interest, for payment made as per order of the High Court, is neither justifiable, nor valid and not prudent one. The High Court accordingly allowed the writ petition and set aside the demand raised by the department for payment of interest to promote the substantial cause of justice.

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161 TTJ 283 (Del) Bharati Airtel Ltd. vs. Addl CIT ITA No. 5636/Del/2011 Assessment Years: 2007-08. Date of Order: 11.03.2014

Section 5 – Non-refundable security deposits received by the assessee from landline subscribers and also activation fees received from them are in respect of services rendered by the assessee over the period in which the connection is in use and therefore are taxable over estimated customer churn period and not in the year of receipt.

Facts:

In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee has received Rs. 3,46,00,000 as non-refundable security deposits from land line customers. He noticed that the assessee has not regarded this amount as a revenue receipt but has amortised the same over estimated period of customer’s relationship, as derived from estimated customer churn period, in accordance with Generally Accepted Accounting Policies. For this treatment, the assessee had relied upon the exposure draft of technical guide on revenue recognition for telecommunication operators, as issued by ICAI. He also noted that the activation fees were also accounted on similar basis and direct activation cost was also deferred and amortised over the same period as activation revenue.

The AO was of the view that there is no specific recommendation in the said exposure draft with regard to non-refundable security deposit and that the activation fees cannot be treated as in parity with non-refundable security deposit since activation fees, according to him, were in the nature of joining fees for being eligible to use the services. He, charged to tax the entire amount of nonrefundable security deposits received by the assessee during the previous year. Aggrieved the assessee raised an objection before the DRP but without any success.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

Non-refundable security deposit received from landline subscribers was in respect of services rendered by the assessee over the period in which the connection would be in use, and, therefore, its being amortized over the estimated customer churn period is in accordance with generally accepted accounting principles in as much as it would indeed present a distorted picture of financial affairs when entire amount of non-refundable security deposit is treated as income relatable to the year in which it is received.

It noted that this practice has consistently been followed by the assessee and Revenue had accepted the same in other years. The Tribunal noted that the Supreme Court has in the case of CIT vs. Excel Industries Ltd. (358 ITR 295)(SC) reiterated that it would be inappropriate to allow reconsideration of an issue for a subsequent year when the same fundamental aspect permeates in the different assessment years.

The Tribunal deleted the addition made by the AO. This ground of appeal filed by the assessee was allowed.

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M/S. Frostees Exports (India) Pvt. Ltd. vs. DCCT, Corporate Division, Kolkata and Others, [2012] 50 VST 392

Sale of Motor Vehicles- Recovery Of Road Tax,
Insurance Charges And Registration Cost- Post Sale- Not Forming Part of
Sale Price, section 2(30) and (31) of The West Bengal Sales Tax Act,
1994

Facts
The petitioner a private limited company
engaged in the business of selling motor vehicles sold motor vehicles
and collected, over and above price of motor vehicles, cost of
registration, insurance premium and road tax payable by the buyer under
the Motor Vehicles Act, 1989. The Company claimed collection of such sum
as not forming part of sale price being post sale services, whereas the
department treated it as forming part of sale price and levied tax
thereon. The Company filed appeal before the West Bengal Taxation
Tribunal against the order of appeal confirming the levy of tax by the
assessing authority on such sum.

Held
Under the Motor
Vehicles Act, delivery to the owner is a pre-condition of a sale and
sale was complete with the issue of sale certificate. Under the Act, it
is the liability of the owner to get it insured before registration.
Therefore, the registration of the motor vehicle is a post-delivery
event. The insurance premium is payable by the owner before
registration. Likewise, the owner of motor vehicles has to pay road tax.
So therefore, there is no scope for debate that the payment of road tax
is a post delivery event and hence it should not form part of sale
price.

Neither of the sides asserted whether after the sale the
physical possession of the goods was retained by the selling dealer.
Even if retained, it was retained by him as bailee for the purpose of
service of registration, insurance and payment of road tax. This
possession is a possession on behalf of the person to whom the goods
were sold. Any amount spent in respect of those retained goods during
such possession was spent on behalf of the buyer and as such it would
not form part of sale price as defined in section 2(31) of the Act.

The
Tribunal further held that it is settled law that, in the composite
transactions also, the value of service cannot be included in the sale
and taxing the service rendered by the Dealer after sale of the goods is
beyond the scope of Entry 54 of List II, Schedule VII read with Article
366(29A) of the Constitution of India. The Tribunal allowed the appeal
and held that the collection of sum by way of road tax, insurance
premium and registration cost not to be included in sale price of the
goods sold and not liable for tax.

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161 TTJ 742 (Mum) Jamsetji Tata Trust vs. JDIT(Exemption) ITA No. 7006/Mum/2013 Assessment Years: 2010-11. Date of Order: 26- 03-2014

S/s. 10, 11 to 13 – Benefit of section 10 cannot be denied by invoking the provisions of s/s. 11 to 13. Therefore, dividend income on shares and mutual funds and long term capital gains on sale of shares which are exempt u/s. 10(34), 10(35) and 10(38), respectively cannot be brought to tax by applying s/s. 11 to 13.

When short term capital gain arising from sale of shares subjected to STT is chargeable to tax at 15% then the maximum marginal rate on such income cannot exceed the maximum rate of tax provided under the Act.

Facts I :

The assessee, a charitable trust, claimed dividend income on shares and units as well as long term capital gain on sale of shares to be exempt u/s. 10(34), 10(35) and 10(38) of the Act. The Assessing Officer (AO) denied the exemption on the ground that the income was derived from property held by the trust and not by any other person. According to him, section 11 exclusively deals with the income from property held under trust and not section 10(34), 10(35) and 10(38). He held that there is a violation under s. 13 and as a result he denied the exemption u/s. 11. He denied the alternative claim that the said income is exempt u/s. 10(34), 10(35) and 10(38) on the ground that these sections do not deal with property held under trust. He observed that if the income of the trust which is not held exempt under s/s. 11, 12 and 13 is allowed to be exempt under other s/s.of section 10, it will lead to open ground for trust to exercise (sic-earn) long term securities income and dividend income and claim exemption of the same under other s/s.s of section 10 of the Act.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held I:

The exemption u/s.10 is income specific irrespective of the status/class of person whereas the exemption u/s. 11 is person specific though on the income derived from the property held under the trust. Further, the exemption u/s. 11 is subject to the application of income and modes or form of deposit and investment.

The Tribunal noted that the Delhi High Court in the case of CIT vs. Divine Light Mission (278 ITR 659) (Del) was dealing with a question whether agricultural income from property held under the trust can be denied exemption u/s.11 of the Act. The Court in that case held that the agricultural income shall not be included in the computation of total income of the previous year in view of section 10(1) of the Act. Therefore, this income was held not required to be considered for the purpose of section 11 of the Act. The Court noted that the Madras High Court in the case of His Holiness Silasri Kasivasi Muthukumara Swami Thambiran & Ors vs. Agrl. ITO & Ors. (113 ITR 889)(Mad) has held that agricultural income derived by charitable or religious trust is exempt u/s. 10 could not be said to be brought to tax under sections 11 to 13. It observed that a similar view has been taken in series of decisions where the question involved was allowability of exemption u/s/s. 10(22), 10(23) vs. sections 11 and 13.

The Tribunal held that exemption u/s.11 is available on the income of the public charitable/religious trust or institution which is otherwise taxable in the hands of other persons. Thus the income which is exempt u/s. 10 cannot be brought to tax by virtue of section 11 and 13 of the Act because no such pre-condition is provided either under sections 10 or 11 to 13 of the Act. Therefore, sections 11 to 13 would not operate as overriding effect to section 10 of the Act. The language of these provisions does not suggest that either section 10 is subject to the provisions of sections 11 to 13 or sections 11 to 13 has any overriding effect over section 10. Therefore, the benefit of section 10 cannot be denied by invoking the provisions of sections 11 to 13 of the Act. Once the conditions of section 10 are satisfied then no other condition can be fastened for denying the claim u/s. 10 of the Act.

The Tribunal held that dividend income on shares and mutual funds and long term capital gain on sale of shares are exempt u/s. 10(34), 10(35) and 10(38) respectively and cannot be brought to tax by applying sections11 and 13 of the Act. This ground of appeal filed by assessee was allowed.

Facts II:

The Assessing Officer (AO) while assessing the total income of the assessee, a charitable trust, denied exemption u/s. 11 of the Act and applied maximum marginal rate of tax to the entire income which included short term capital gains arising from sale of equity shares for which section 111A prescribes the rate to be 15 %. Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that the rate of tax on short term capital gain arising from sale of shares shall be the rate prescribed under the Act u/s.111A and not the maximum marginal rate.

Held :

The Tribunal noted that the rate of tax on short term capital gain arising from sale of equity shares is provided u/s. 111A as 15 %. However, relevant income which is derived from the property held under trust wholly for charitable or religious purpose is charged to tax as per provisions of section 164(2) which does not prescribe the rate of tax but mandates the maximum marginal rate as prescribed under the provisions of the Act. It observed that section 111A is a special provision for rate of tax chargeable on short term capital gain arising from sale of equity shares.

The Tribunal held that when the short-term capital gain arising from the sale of shares subjected to STT is chargeable to tax at 15 % then the maximum marginal rate on such income cannot exceed the maximum rate of tax provided under the Act. It held that the short term capital gain on sale of shares already subjected to STT, is chargeable to tax at maximum marginal rate which cannot exceed the rate provided u/s. 111A of the Act.

This ground of appeal was decided in favor of the assessee.

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State of Tamil Nadu vs. Karnataka Bank Ltd., [2012] 50 VST 93 (Mad)

Sales Tax – Import of Goods by Bank – Under the Master Lease Agreement – Followed by Supplementary Lease Agreement-On Facts – Sale in The Course of Import – Not Taxable, section 5(2) of The Central Sales Tax Act, 1956 and section 3A(2)(a) of The Tamil Nadu General Sales Tax Act,1959

Facts
The assessee, a Bank entered into Master Lease Agreement with Hindustan Power Ltd., for importing and leasing of machinery on rental basis. The Bank accordingly ordered machinery as per the specification of the Company from the foreign manufacturers. While the goods were in transit, the Bank and the Company entered in to a Supplementary Lease Agreement which was stated to be a part of the Master Lease Agreement. Since, the Master Lease Agreement made no reference as to the purchase order placed with the foreign manufacturer, the revenue took the stand that the Supplementary Lease Agreement is un-connected with the Master Lease Agreement and rejected the claim of the assessee for exemption from payment of tax as sale in the course of import u/s. 5(2) of the CST Act, 1956. The first appellate authority as well as Tribunal allowed the claim and revenue filed revision petition before the Madras High Court.

Held
The bank had placed a purchase order on the manufacturer at the request of the lessee Company towards purchase of the specified equipment and in the event the lessee was unable to firm up with the manufacturer for the equipment to be leased within the stipulated time, it was open for the lessor bank to withhold for payment and canceled the same. Once the arrangement between the assessee and the lessee, as regards lease agreement, got finalised for the purpose of import of machinery, the subsequent documentation was merely a follow-up action and it is difficult to read each one of the documentation in isolation. When the first of the documents viz., the Master Lease Agreement got dovetailed into purchase order placed by the assessee with the foreign manufacturer, the subsequent documentation completes the balance of the transaction the assessee bank had with the lessee. On facts of the case, the High Court held that there was an inextricable link between the Master Lease Agreement and the Supplementary Lease Agreement on the one hand and the import of specific goods based on the purchase order on the other. Accordingly, the High Court rejected the revision petition filed by the revenue and allowed the claim of the assessee bank for exemption from payment of tax on the lease of the imported machinery to the Lessee company being sale in the course of import.

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2014] 44 taxmann.com 113 (Delhi) CST Delhi vs. Ashu Exports (P) Ltd

Whether vocational education courses not recognised by Statute or Authority like AICTE etc. were liable to service tax prior to 27-02- 2010? Held, No.

Facts:
The Respondent – ran courses to impart procedural and practical skill based training in areas such as export import management, retail management and merchandising and claimed exemption vide Notification No.9/2003 as well as 24/2004 dated 10-09-2004 under “Commercial or Coaching Services” provided by vocational/recreational training institute. The courses provided by the assesse were not accredited or certified by any Central or State Government or statutory authority such as AICTE

The revenue alleged that, the exemption Notification applied in terms only to vocational training imparted by Institutes such as ITI and State sponsored or recognised educational training institute generally imparting technical and vocational skills immediately after the 10+2 grade and not to Assessee’s institution which imparts managerial and management skills akin to MBA.

Held:
Tribunal decided in favour of the assesse. On appeal by the Department, the Hon’ble High Court affirming the decision of the Tribunal held that, the term “vocational training institute” included the commercial training or coaching centres providing vocational coaching or training meant to “impart skills to enable the trainees to seek employment or to have self-employment directly after such training or coaching”. The notion of such training institute having been recognised or accredited to nowhere emerges from such a broad definition. Further, Notification 3/2010- ST dated 27-02-2010 substitutes the existing explanation to the term “vocational training institute” and narrowing it to those institutes affiliated to National Council for Vocational Training offering courses in designated trade in fact supports the assessee. Had the intention been to exempt only such class or category of institutions, the appropriate authority would have designed such a condition in the original Notification of 2003 and Notification No.10 of 2004 which had been relied upon in this case.

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[2014] 44 taxmann.com 287 (New Delhi – CESTAT)- New Okhla Industrial Development Authority vs. CCE&ST.

Whether long-term lease of immovable property (99-years) is outside the purview of the definition of renting service in section 65(105) (zzzz)? Held, No.

Facts:
The Appellant, a statutory Development Authority, created by the provisions of the U.P. Industrial Area Development Act, 1976 had entered into long-term leases with third parties whereunder vacant lands were leased to such third parties, inter alia, for business or commercial purposes on long-term leases (of 99 years duration). The Appellant’s contention was that a long-term lease would not amount to renting of immovable property as such leases are substantially in the nature of transfer of ownership and consideration received on such transfers would not amount to consideration received for providing the taxable service enumerated in section 65(105)(zzzz).

Held:
Tribunal disagreeing with the argument of the Appellant held that, provision of section 65(105)(zzzz) neither marks nor accommodates any distinction between long-term and short-term leases. On a true and fair construction of this provision, it is clear that a service provided in relation to renting of immovable property for use in the course of or in furtherance of business or commerce is the taxable service. The provision does not restrict the ambit of the taxable service to only short-term leases nor identifies or classifies leases in terms of the duration. Tribunal further held that, in the absence of any restrictive signification in section 65(105)(zzzz), of a legislative intent to exclude long-term leases of immovable property from the purview of the taxable service defined and enumerated in the said provision, there is no authority to hold that long-term leases (so-called) are outside the purview of the taxable service-“renting of immovable property”. While coming to this conclusion, Tribunal also observed that what is a long-term and what is a short-term lease cannot be an open-ended, ambiguous and inchoate concept and that no authority, statutory or otherwise brought to the attention of the Tribunal which would provide a guidance to classify leases into long-term and short-term so far as section 65(105)(zzzz) is concerned.

b) Whether introduction of clause (v) in Explanation 1 to section 65(105)(zzzz) w.e.f. 01-07-2010 is prospective in nature? Held, Yes.

Held:
Tribunal held that, normally an inclusionary clause does not limit the plenitude of an enacting provision couched in broad terms. Thus the illustrations of what are “immovable property”, set out in the inclusionary clause in Explanation 1 would not derogate from “vacant land” being comprehended within the expression “renting of immovable property”. However, clause (zzzz) has an exclusionary clause as well, enumerating the subjects excluded from the ambit of “immovable property”. On a true and fair construction of the exclusionary clause, the legislative intent is compelling that vacant land whether having facilities clearly incidental to its use as such or otherwise does not constitute immovable property. As a consequence of the interplay between the enumeration of renting of immovable property as the taxable event read with the inclusionary and exclusionary clauses (in particular subclause (b) of the exclusionary clause) in section 65(105) (zzzz), renting of vacant land was clearly outside the purview of the taxable service, prior to 01-07-2010.
Tribunal also relied upon Clause 75 of the Finance Bill 2010. The Board Circular No. No.334/20I0-TRU, dated 26/02/2010 (in paragraph 3) and statement of objects and reasons accompanying the Finance Bill, 2010 to hold that, transactions covered by this sub-clause (v) of the Explanation have only the prospective operation.

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[2013] 147 ITD 41 (Jaipur – Trib.) (TM) Escorts Heart Institute & Research Centre Ltd. vs. DCIT(TDS), Jaipur A.Y. 2008-09 & A.Y. 2009-10 Order dated-3th November 2013

I. When payment is made directly by the assessee’s clients to the third party and assessee merely deducted the said amount, paid by the client, from fees charged by it to its client and the assessee did not make any payment to the third party, the question of affixing the liability u/s. 194J upon the assessee does not arise.

Facts I:

The assessee company was running a multi-specialty hospital. At the relevant time, the assessee did not have a blood bank and, therefore, patients were required to arrange blood from outside.

For various operations, the assessee company charged a package fee to the patients. Since the facility of the blood bank was not available, the patients were required to procure blood from outside and whatever expenses the patients were required to incur at blood banks, the credit for the same was given to the patients from their package fee.

If the assessee charged a sum of Rs. 1,00,000/- as a package fee for performing one operation upon a patient, say ‘A’, and ‘A’ was required to take certain services of Rs. 1,000/- from the outside blood bank, then ‘A’ would directly make the payment of Rs. 1,000/- to the blood blank and assessee would later refund the same to ‘A’. In substance, the fee received by the hospital was only Rs. 99,000/- from the patient ‘A’ and Rs. 1,000/- was debited as blood processing charges by the assessee in its books of accounts.

Revenue held that the assessee had disclosed the payment made to the blood bank in its books of account and, therefore, the only inference that can be drawn is that the patients made the payment to the blood bank on behalf of the assessee and therefore assessee was required to deduct TDS u/s. 194J for the payments made to blood bank.

Aggrieved, the assessee filed appeal before Tribunal.

It is to be noted, that it was not disputed, that all the charges received by the blood banks and were against the processing of the blood and/or conducting various tests on the blood and the blood banks were not charging anything against the cost of blood.

Held I:

It was held, that it is settled law, that the entries in the books of account are not decisive. It is the substance of the transactions which is to be seen. In substance, it clearly emerged that the assessee had not made any payment to the blood banks and payments were made directly by the patients to blood banks, and hence the question of affixing the liability u/s. 194J upon the assessee does not arise.

II. When amount payable by assessee to retainer doctor was fixed, the retainer doctor was not allowed to take any similar assignment in any company engaged in similar business and the retainer doctor was also required to abide by general rules and regulations of the company, then it was held that there existed employer – employee relationship between assessee and the retainer doctor and the assessee was required to deduct tax u/s. 192.

Facts II:

The assessee had deducted tax from the payment made to retainer doctors u/s. 194J, treating the payment made to the doctors as professional charges. While, as per revenue, the payment made to the doctors should have been treated as salary and, accordingly, tax should have been deducted at source u/s. 192. Aggrieved, the assessee filed appeal before Tribunal.

As per retainership agreement, the following things were evident-

• The agreement initially was for fixed period and thereafter renewable, on mutually agreeable terms.

• The retainer doctor had to report to the Head of the Department.

• The retainer doctor was not allowed to act in a similar, or any capacity, for any other company engaged in a business similar to that of the company.

• Though a consolidated retainership fee of fixed amount was paid to retainer doctor, but he was required to raise a monthly bill for processing of his professional fees.

• This agreement could be terminated ‘by either party’ upon three months’ prior notice or payment of three months’ retainer fee in lieu to the other party.

• The retainer doctor must commit to work in the interests of the company and in accordance with its values and philosophy, abiding by the rules, regulations and policies, as applicable. The retainer doctor must also follow the work processes, technical standards, protocols and general instructions issued thereof, of the company, as are in force, or amended from time to time.

Held II:

On facts, it was held that the fixed monthly remuneration payable to retainer doctors is in the nature of salary liable for deduction of tax u/s. 192. It was also held that merely because a retainer doctor is required to raise a monthly bill, it cannot be accepted that he is an independent professional and the employer – employee relationship does not exist. While holding that there existed employer employee relationship between assessee and retainer doctor, the following distinctions were pointed out between facts of assessee’s case and some other cases wherein it was held that no employer-employee relation existed-

• In the case of CIT vs. Coastal Power Co. [2008] 296 ITR 433 (Delhi), consultant had agreed to indemnify the company against liabilities which it may suffer/ incur, arising out of or in connection with agreement with the consultant of the performance of services thereunder. Thus, an indemnity clause was the basis on which it was held that no employer-employee relation existed, because it is unlikely that any employee would indemnify his employer and other employees against all liabilities.

• In the case of Dr. Shanti Sarup Jain vs. First ITO [1987] 21 ITD 494 (Mum.), the doctor was not only in receipt of fixed salary of Rs. 1,000/- per month but was also entitled to 50% income from indoor patients and on visits. The doctor had also employed his own staff in his consulting room. Hence, it was held that the income received by Dr. Shanti Sarup Jain was income from profession.

• In the case of Dy. CIT vs. Ivy Health Life Sciences (P.) Ltd. [2012] 20 ITR (T) 179, the remuneration payable to the doctor was not a fixed amount but there was a fee sharing arrangement between the doctor and the hospital.

• In the case of ITO vs. Apollo Hospitals International Ltd. ITA NO. 3363/AHD/2008, it was pointed out that in the case of employee doctor, general service rules and regulations were made applicable but not in the case of consultant doctors. Judicial Member had upon certain findings concluded that there is no employer-employee relationship between assessee and retainer doctor. However the Third Member, while arriving at the conclusion that there exists employer-employee relationship, did not comment upon the following findings of the Judicial Member –

• An employee doctor is paid performance-linked bonus whereas a consultant doctor is not paid any such bonus.

• There is no retirement age for consultant retainers, whereas the same is defined for an employee as 58 years.

• The retainer doctor is required to report to the directors/ HOD of the appellant hospital. The retainer doctor is also bound by the general instructions/regulations of the company and also with the secrecy clause etc. However, these sorts of conditions would be always there in all types of employment arrangements, be it a regular, temporary or of consultancy in nature so as to ensure discipline and proper coordination in running an origination and this condition does not imply that there exists employer employee relationship.

• The condition of the MOU with the retainer doctors, which restrict them not to work, for other hospitals, is a quite natural condition and would be there in such arrangement, especially in view of the nature of the service/expertise involved in the medical profession and this condition does not imply that there exists employer employee relationship.

• The retainer doctors are engaged for the fixed period on temporary basis which may or may not be renewed as such. Similarly they are also not entitled for other benefits like PF contribution, retirement benefits, live benefits, HRA, LTA, terminal compensation etc., which are otherwise available to all the regular employee of the assessee.

III. merely because the sale price is fixed as per the agreement between the parties, it cannot be said that the difference between the purchase cost and the sale price, i.e., the markup, is the commission for sale of medicines and consequently no tax is deductible u/s. 194h on the markup.

Facts iii:
The assessee had an agreement with FHWL.

the agreement had two aspects-
1. With regard to sale of the medicines by FHWL to the assessee.
as per the agreement, FHWL had to sell the medicines at cost plus certain markup which had been fixed on the basis of turnover as under.
for turnover upto rs. 12 crore, 2% markup.
for turnover in excess of 12 crore, 1.5% markup. for turnover in excess of 15 crore, 1.25% markup.

2. With regard to providing of the manpower by FHWL to the assessee
as per agreement fhWl would provide manpower to the assessee for smooth running of their pharmacy. however, as per the agreement, all expenses incurred by FHWL on the employees and the smooth running of pharmacy were to be reimbursed by the assessee to FHWL on monthly basis. thus, FHWL was not charging anything over its actual labour cost on which the tax at source was being deducted by the assessee u/s. 194C.

Revenue was of the opinion that the mark up paid by the assessee to FHWL on medicines sold by FHWL to assessee was commission chargeable to tax u/s. 194H.

Learned accountant member observed that FHWL was not charging anything over its actual labour cost to the assessee-company on which tax at source was being deducted u/s. 194C. The Learned Accountant Member was thus of the opinion that the mark-up on the turnover, under the given facts and circumstances, thus, represented neither business profit of FHWL nor commission allowed to it by the assessee, but a consideration toward the manpower services contracted to the assessee-company, exigible to TDS u/s. 194C.

Learned Judicial member however posed a question before third member that whether in the facts and circumstances of the case, the provisions of section 194C on the mark up/profits, be invoked by the Tribunal where neither this is a case of department nor of the assessee.

Held iii:
Merely because the sale price is fixed as per the agreement between the parties, it cannot be said that the difference between the purchase cost and the sale price, i.e., the markup, is the commission for sale of medicines. the sale price charged by FHWL i.e., cost plus markup is the price of the medicines sold by FHWL to the assessee and there was no element of principal and agent relationship, as assumed by the ao. Therefore, the stand of the revenue that the markup is the commission cannot be accepted and consequently no tax was deductible u/s. 194h on the markup.

Similarly, the view of the learned accountant member that the markup is a consideration for providing the manpower is also based upon the presumption and contrary to the express provisions of the agreement and hence provisions of section 194C is not applicable on mark ups/ profits.

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[2014] 44 taxmann.com 18 (Ahmedabad – CESTAT)- Quintiles Technologies (India) (P.) Ltd vs. CST

Whether, refund of CENVAT credit under Rule 5 of CCR is admissible even if some of the services exported are otherwise exempted from service tax by exemption notification? Held, Yes.

Facts:
Appellant engaged in providing I.T. enabled services included taxable as well as exempt services. All its services were exported and no service was provided in the DTA . While calculating refund of CENVAT as per formula mentioned in Rule 5(1) of CENVAT credit rules, 2004, the Appellant added all services exported, whether dutiable or exempted to both “Export Turnover” and “Total Turnover” as specified in Clause 5 of Notification No. 5/2006- CE (NT) dated 14-03-2006. The contention of the revenue was that, while calculating refund, although services exempted by exemption notification were to be included in “Total Turnover”, it should be deducted from “Export Turnover” on the ground that, no service tax credit is admissible against exempt services.

Held:
Tribunal held that as per Clause (D) of Rule 5(1) of CENVAT Credit Rules, 2004, in the definition of ”Export turnover of Services”, there is no distinction with respect to payments received from export of services. Further, there is no evidence on record that Appellant has taken any input service tax with respect to exempted services exported out of India. The logic of giving cash refund of taxes used, in relation to export of goods/services under Rule 5 of CENVAT Credit Rules, 2004, is to have ‘Zero rated’ exports and in case of the appellant, no exempted service is provided in the domestic tariff area.

Therefore it was held that even exempted services will be added to the “export turnover of services” and all the unutilized service tax credit pertaining to exported service (including otherwise exempt service) will be admissible as refund under Rule 5 of the CENVAT Credit Rules, 2004.

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2014 (34) STR 236 ( Tri-Del.) Commr. Of C.Ex., Allahabad vs. Shiv Engineering & Ors.

Whether activity of repair/testing of transformers and replacement of coil, transformer oil and supply of other items could get benefit of Notification No.12/2003 prescribing deduction of value of material in valuation of service tax liability under Management, Maintenance or Repair service? Held yes.

Facts:
Respondent provided service of repair of old and damaged transformers under composite agreement with the customers and discharged service tax liability on the labour component under Management, Maintenance or Repair service and not on the value of various items replaced but the department challenged the orders contesting that the Respondent provided service of repair or maintenance of transformers under composite contract and was obliged to replace certain parts which were used/ consumed during the repair and that process of replacement was only ancillary to main work of repairs. Moreover, exemption claimed as per Notification 12/2003 was not applicable as replaced parts were not sold by them.

Held:
The Tribunal held that, the total repair cost constitutes cost of labour charges and cost of goods LV leg coil, transformer coil and other supply items. Value for parts were shown separately in the contract and thereby condition of documentary evidence indicating value of goods/ material as per the Notification No.12/2003 was fulfilled. VAT was paid on goods/materials value. Therefore, Revenue’s contention was rejected.

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2014 (33) STR 238 ( Tri-Del.) Commr. Of C.Ex., Ludhiana vs. Forgings & Chemicals Industries

Whether commission paid to overseas agent for procuring orders from overseas is input service eligible for CENVAT credit? Held yes.

Facts:
The respondent had overseas agents for procuring export orders and claimed CENVAT credit of service tax paid on commission paid to them. The department has denied CENVAT credit. The First Appellate Authority held that the Business Auxiliary service of procuring export orders received from overseas agent has to be treated as an input service, as the definition of “input service” is to be interpreted in the light of requirement of business and it cannot be read restrictively so as to confine only upto factory or upto the depot of the manufacture and setaside the order. An appeal was filed by Revenue against that order.

Held:-
Rejecting revenue’s contention, the Hon’ble Tribunal held that the definition of ‘input service’ covered the activities of advertisement or sales promotion and also the activities related to business. The service of procuring export order is clearly covered in marketing and sales promotion services and it is also an activity related to manufacturing business of the applicant. Thus, it is input service eligible for CENVAT credit.

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2014 (34) STR 90 (Tri.-Mumbai) CCE, Goa vs. Asia Pacific Hotels Ltd.

Whether CENVAT credit allowable signifies its availability or its utilisability?

Facts:
Respondent was engaged in the hotel business and provided services such as beauty parlour, health club & fitness centre, dry cleaning, internet cafe, mandap keeper services etc. Respondent also provided non-taxable services such as hotel accommodation, restaurant & bar services. Respondent availed CENVAT credit of service tax paid on certain services which were utilised for taxable and non-taxable services as per provisions of Rule 6(5) of CCR. Revenue contended that the said Rule permitted taking of the credit and not permitted its utilisation and accordingly the demand was raised to the extent of credit was utilised by the Respondent. In the appeal proceedings, Revenue had a single ground that Rule 6(5) of CCR allows assessee to take the credit and therefore ‘taking’ of credit is distinct from ‘utilisation’.

Held:
Tribunal held that the purpose and objective of CCR is to allow a manufacturer/service provider not only to take credit but also to utilise the same. Therefore, if Respondent is allowed only to ‘take’ the credit without allowing it to ‘use’, the basic objective of CCR would be defeated. The Revenue’s appeal was rejected.

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2014 (34) STR 58 (Tri.-Del.) DSCL Sugar vs. CCEx., Lucknow

Whether a place where goods are stored after
clearance from the factory on the payment of duty can be considered as
“place of removal” for the purpose of “input service” definition and
therefore whether CENVAT credit is allowed in respect of services
consumed at such place of removal? Held yes.

Facts:
Appellant
manufacturing sugar paid excise duty at the specific rate as per
section 4A of Central Excise Act, 1944 (CEA). Appellant cleared sugar
from the factory and stored the same at its place of storage at Agra and
Farukhabad. Appellant availed CENVAT credit of service tax paid in
respect of godown rent of Agra and Farukhabad, sugar handling charges
and security charges at these godowns, for insurance of sugar and cash,
vehicle hire charges, vehicle insurance etc. Respondent was of view that
since the services availed were after clearance of goods from the
factory, these cannot be qualified to be “input services” within the
meaning specified in Rule 2(l) of the CENVAT Credit Rules 2004 (CCR

Held:
Tribunal after referring to the definition of “input service” under the
said Rule 2(l) and after referring to the definition of “place of
removal” as defined under CEA held as under:

CCR does not define
the expression “place of removal”. However as per Rule 2(p) of the said
Rule, the terms defined in the CEA or Finance Act 1994 will apply for
the purpose of the said Rules.

Section 4(c) of CEA defines the
“Place of removal” to include a depot, premises of consignment agent or
any other place, or premises from where the excisable goods are to be
sold after their clearance from the factory. Therefore the said premises
are to be considered as “place of removal” as also affirmed by the
Tribunal in case of L.G. Electronics (India) Pvt. Ltd. vs. CCE 2010 (19)
STR 340 and by Punjab & Haryana High Court in case of Ambuja
Cements vs. UOI 2009 (14) STR 3 (P&H). The credit was thus allowed
for godown rent of Agra and Farukhabad. Credit in respect of other
expenses were allowed considering them relating to manufacturing
activity and supported by a number of High Court decisions.

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TDS: Rent: Section 194-I: Petitioner was owner of network of telecom towers: Provides passive use to telecom service providers: The amounts received by petitioner is ‘rent for use of machinery, plant or equipment’: Tax is deductible u/s. 194-I(a):

Indus Towers Ltd. vs. CIT; [2014] 44 taxmann.com 3 (Delhi):

The petitioner provided passive infrastructure services to its customers, i.e., major telecom service providers in the country which, inter alia included, tower, shelter, diesel generator sets, batteries, air conditioners, etc. Till 2012, it sought for issue of a lower tax deduction certificate, u/s. 194-I of the Income-tax Act, 1961, on its projected receipts and such lower deduction certificates were issued treating those receipts as rent. Subsequently, the petitioner applied for issue of a lower deduction certificate on its projected receipts u/s. 194C. The Assessing Officer however issued lower deduction certificate treating receipts u/s. 194-I.

Aggrieved by that certificate, petitioner filed a writ petition before Delhi High Court, which by its order directed the petitioner to prefer a revision petition before the Commissioner who was to dispose it of expeditiously. The Commissioner by its impugned order u/s. 197 declined its request for determination of lower rate of Tax Deduction at Source (TDS).

Being aggrieved, the petitioner filed another writ petition before the Delhi High Court. The petitioner urged that there was no intention to rent or lease the premises or facilities or equipment and what was contemplated by the parties was a service.

On the other hand the revenue contended that the use of the premises, and the right to access it, amounted to renting the premises. The High Court held as under:

“i) The crucial question to be decided in instant case was whether the activity, i.e., provision of passive infrastructure by the petitioner to the mobile operator constituted renting within the extended definition under Explanation to section 194-I or whether the activity was service, pure and simple without any element of hiring or letting out of premises.

ii) The dominant intention in these transactions between the petitioner and its customers is the use of the equipment or plant or machinery. The ‘operative intention’ here, was the use of the equipment. The use of the premises was incidental; in that sense there is inseparability to the transaction. Therefore, the submission of the petitioner, that the transaction is not ‘renting’ at all, is incorrect; equally, the revenue’s contention that the transaction is one where the parties intended the renting of land (because of the right to access being given to the mobile operators) is also incorrect. The underlying object of the arrangement or agreement (in the MSA) was the use of the machinery, plant or equipment, i.e., the passive infrastructure. That it is necessary to house these equipment in some premises is entirely incidental.

iii) In view of the above conclusions, it is held that the writ petition is entitled to succeed to the extent that the tax deductions to be made by the petitioner are to be at the rate directed in section 194-I (a) for the use of any machinery or plant or equipment at the rate indicated for that provision, i.e., 2%. The revenue’s contentions to the contrary are rejected. The writ petition is allowed.”

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2014 (34) STR 47 (Tri-Del.) CCE, Bhopal vs. Sonali India

Whether free material supplied by service receiver needs to be included in the value of taxable services provided by the service provider? Held no.

Facts:
Respondent entered into contract with IOCL for erection of tanks and pumps. The tanks and pumps were supplied by IOCL. Respondent supplied other materials and rendered erection service. Respondent discharged service tax liability after claiming the abatement of 67% on the gross amount charged under Notification No. 1/2006 dated: 01-03-2006. The dispute was while allowing the abatement of 67% whether the value of tanks and pumps were to be included in the taxable value.

Held:
Rejecting Revenue’s appeal held that, the gross amount charged by the service provider need to include the value of plant, machinery, equipment, parts etc., only when the same were sold by the service provider in the course of providing the service. Since nowhere it was alleged that the tanks and pumps were sold by the Respondent. In the course of rendering the service appeals filed by the Appellant (revenue) was dismissed.

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2014 (34) STR 235 (Tri.-Bang.) Esskay Shipping (P) Ltd. vs. CCE, Visakhapatnam

Whether penalty is leviable u/s. 76 of the Finance Act, 1994 when service tax with interest is paid before issuance of SCN and the same is intimated to Central Excise officer? Held no.

Facts:
The Appellants paid service tax with interest for the period from October, 2010 to March, 2011 before issuance of SCN. Penalty u/s. 76 of the Finance Act, 1994 was imposed under SCN.

Held:
As per section 73(3) of the Finance Act, 1994, if the assessee has paid service tax and intimated to the Central Excise officer, Central Excise officer cannot issue SCN u/s. 73 (1) of the Act. Further, Explanation 2 to the said section provides that in a case of payment of service tax and intimation to Central Excise officer, no penalty is imposable. Therefore, the order was set aside.

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Controversy: cenvat: Commission Paid to Agents Abroad

Introduction:
In a landmark decision of Coca Cola India Pvt. Ltd. vs. CCE, Pune-III 2009 (242) ELT 168 (Bom), the Honourable Bombay High Court categorically held that credit was admissible of service tax paid by the concentrate manufacturer on advertising service used for marketing of soft drinks removed by the bottling company. Any activity relating to business could be covered under the definition of input service as per Rule 2(1) of the CENVAT Credit Rules, 2004 (CCR) provided there is a relation between the manufacturer of concentrate and such activity. Service tax paid on advertisements, sales promotion and market research is admissible as credit for payment of excise duty on concentrate especially when such expense forms part of a price of a final product which suffers excise duty. Within a short time frame of this decision, yet in another landmark case viz. CCE, Nagpur vs. Ultratech Cement Ltd. 2010 (20) STR 577 (Bom), the Court held that the scope of the definition of input service is very wide and it covers not only the services used directly or indirectly in or in relation to manufacture of final products, but also various services used in relation to the business of manufacturer whether prior to manufacture or post manufacturing activity, whether having a direct nexus or integrally connected with the business of manufacturing the final product. All services in relation to business of manufacture of the final product are covered. When these two well reasoned decisions were pronounced in quick succession, it largely appeared that many disputes relating to the CENVAT credit of service tax paid on various services used for business purposes would be settled based on the observations in the above cases. In many decisions as a matter of fact, the Tribunals have relied upon or followed the above decisions. Nevertheless, litigation for the CENVAT has been continuing for services such as transportation for employees, mobile phones, group insurance health policies, outward freight, outdoor caterer’s services, travel agent’s services etc., used by a manufacturer since these services and many others are not used directly in relation to the activity of manufacture. The nexus theory is often interpreted very narrowly by the revenue authorities both vis-à-vis manufacturers and service providers.

Nevertheless, the activity directly related to sale of a manufactured final product liable for excise duty or in the course of exports appeared less questionable for admissibility of credit particularly considering the definition of input service provided in CCR at least prior to the amendment made with effect from 01-04-2011 read as follows:

“(l) “input service” means any service, –

(i) used by a provider of taxable service for pro viding an output service; or

(ii) used by the manufacturer, whether directly or indirectly in or in relation to the manufacture of final products and clearance of final products, upto the place of removal, and includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.”

[emphasis supplied].

Controversy:
It can be seen that the above definition specifically includes the expression “sales promotion” in addition to advertisement and market research. Prima facie it hardly appears controversial that when a manufacturer of an excisable product pays commission to agents domestically or abroad, whether it has any nexus with the sale of such products as the services of agents are directly used for effecting or augmenting sale. The service of the commission agents is exigible to service tax as business auxiliary service considering it a service in relation to sale or promotion of client’s goods under the erstwhile section 65(19)(i) of the Finance Act, 1994 (the Act) since 09-07-2004. When a manufacturer pays commission to an overseas agent for executing sales abroad, the manufacturer is liable to pay service tax on such commission under reverse charge mechanism applicable u/s. 66A of the Act since 18-04-2006. Since the commission paid directly is related to the sale of the final product, the CENVAT credit of service tax so paid under reverse charge has been available to such exporter-manufacturer.

When the Commissioner of Central Excise, Ludhiana filed an appeal [reported in CCE, Ludhiana vs. Ambika Overseas 2012 (25) STR 348( P&H)] against ruling of the Tribunal that the assessee was entitled to avail credit of service tax paid to the foreign commission agents for services of procuring orders as these services were input services, the Punjab & Haryana High Court found no reason to interfere with the decision of the Tribunal as revenue failed to establish illegality or perversity in the order of the Tribunal. As against this decision, in a detailed order passed in the case of Commissioner of C. Ex. Ahmedabad vs. Cadilla Healthcare Ltd. 2013 (30) STR 3 (Guj), the question that was raised before the Court for consideration that whether the service of a commission agent for promotion of sale of final products of the assessee which is categorised as business auxiliary service (u/s. 65(19)(i) of the Act) would fall within the purview of “input service”. According to the assessee, the commission agents find buyers for the assessee’s goods and thereby they promote sales of the assessee’s goods. The definition of input service specifically includes services in relation to sales promotion whereas according to the revenue, the commission agent is a person directly concerned with the sale and purchase of goods and is not connected with sales promotion. In view hereof, the meaning of the expression “sales promotion” was examined by the Court in detail and at the end of which, a fine distinction was made between services in relation to ‘sales’ and “sales promotion” to hold that the service of commission agent was observed as one in relation with ‘sale’ and therefore not falling within the purview of the main or the inclusive part of the definition of input service in terms of Rule 2(l) of CCR. Arriving at the above conclusion, reliance was placed on the decision in Commissioner of Income Tax vs. Mohd. Ishaque Gulam 232 ITR 869 wherein the Madhya Pradesh High Court distinguished expenditure made on the sale promotion and commission paid to the agents and held that commission paid to the agents cannot be termed as expenditure on sales promotion. Further, for the contention that in any case, the service provided by the commission agent was in relation to business activity of the assessee and the list of activities in the inclusive part of the definition of input service was illustrative as the words “such as” preceded the said list of services, it was observed that unless the activity was analogous to the business activity, it could not be considered input service. Since the service of the commission agents was found not analogous with accounting, auditing, recruitment, coaching and training, credit rating, quality control, share registry, security services etc., it was held that it did not qualify to be “input service.”

The logical questions to every person studying legal provisions arise are:

• Whether the activity in relation to ‘sale’ is less
akin to being an “input service” in relation to
manufacture than the services of share registry,
security services, credit rating etc.? Is it simply
because such services find specific place in the
definition?

• In the context of definition of input service
whether there exists a material difference between
sales promotion and sale in relation to
manufactured goods? Is sale promotion not
carried out to achieve sale?

• Is the commission agent not helping to execute
sale after identifying the buyers?

• Does the cost of final product sold and subjected
to excise duty not include the cost towards
commission payment and therefore is it not a
cost incurred before the goods are removed
from the place of removal?

Despite knowing the replies to all the above questions,
the decision of the Honourable Gujarat High Court is a reality. However, very importantly, it is
required to note here that the following relevant
facts were not placed before the Honourable Gujarat
High Court in the said case of Cadilla (supra)
while the service of commission agents was not
interpreted as input service.

(a) After the amendment of the definition of “input
service” with effect from 01-04-2011, in response to
some prevailing doubts in the trade, as to availability
of credit in respect of certain items, CBEC
issued Circular No. 943/04/2011 dated 29th April,
2011. In reply to a question that whether the credit
on account of sales commission be disallowed after
the deletion of expression “activities relating to
business”, a clarification was issued at para 5 as,
“the definition of input service allows all credit on
services used for clearance of final products upto
the place of removal. Moreover, activity of sales
promotion is specifically allowed and on many occasions,
the remuneration for the same is linked to
actual sale. Reading the provisions harmoniously it
is clarified that credit is admissible on the services
of sale of dutiable goods on commission basis”.
Thus, it is clear that the credit is available even
in the post-amendment period.

(b) Secondly, in order to provide benefit to exporters
of various goods, the services provided
by commission agents located outside India for
causing sale of goods exported by Indian exporters
are exempted vide Notification No. 42/2012-ST
dated 29-06-2012, of course, subject to fulfillment
of certain conditions laid thereunder. (The said
exemption existed earlier under Notification No.
18/2009-ST dated 07-07-2009. Prior to bringing this
Notification also, vide Notification No. 41/2007-Service
Tax, exemption by way of refund was available
to exporters in respect of this service with
effect from 01-04-2008). Since the commission paid
abroad directly relates to sale of exported goods,
instead of asking assessees to pay service tax and
then allowing the claim of refund, the exemption
is allowed on fulfillment of conditions and following
prescribed procedure. This is clearly indicative of
the fact that the service provided relates to goods
sold in the course of exports and the services are
input services for the said sales.

(c) Thirdly the two benchmark decisions referred
above viz. Coca Cola Pvt. Ltd. (supra) and Ultratech
Cement Ltd. (supra) which broadly laid principles
interpreting the scope of input service were not
considered. The instant decision of the Gujarat
High Court now poses a question mark on these
two widely followed decisions of the Honourable
Bombay High Court.

Conclusion:

Consequent upon the above decision of the
Gujarat High Court in case of Cadilla Healthcare
Ltd. (supra), the authorities at various levels of
litigation in the State of Gujarat would be required
to follow the decision in respect of dispute relating
to the CENVAT credit of service tax paid on commission
to agents. However, the credit as per the
Circular No.943 remains available. The benefit of
Notification No. 42/2012-ST also continues in case
of commission paid in respect of export sales. In
the States of Punjab & Haryana, certainly Ambika
Overseas (supra) would be followed and elsewhere
in the country, the authorities follow either of the
two decisions found convenient. The fact however
remains that the service provided by an agent of
procuring sales order was used before executing
the order by the manufacturer and therefore the
cost of which is already factored into the cost
of the final product on which the excise duty is
levied. Hence, the service should qualify to be
an input service and the CENVAT credit therefore
should be available. However, to put an end to
the controversy and frivolous litigation, if the
CBEC considers issuing a further clarification in the
matter, it would mean a proactive step in larger
interests of law-compliant assessees.

shailesh.kwebmaker

SERVICE TAX IMPLICATIONS OF REDEVELOPMENT OF CO-OPERATIVE SOCIETY ON OR AFTER 01-07-2012

Synopsis

In this article the author analyses the relevant definitions and typical terms and concepts used in documentation of redevelopment of housing and commercial societies.

He explains the Service Tax implications on existing Society/members and on Developers on construction of Rehab flats/units and also analyses the valuation of rehab construction services and valuation of development rights in light of Circular issued by the Service Tax authorities.

He also dissects the provisions of point of time rules applicable and CENVAT eligibility in respect of input services and capital goods used in redevelopment projects.

1. Preamble:

1.1. Acute shortage of land, rising population, ever increasing demand for housing and its sky rocketing prices has brought about an innovative concept of redevelopment of old properties in Mumbai. Re-development is a unique feature typical to the real estate sector in Mumbai. One rarely finds redevelopment projects in other cities due to availability of ample land and possibility of expansion of city in all directions.

Re-development has become a necessity in Mumbai, as countless buildings have outlived their estimated useful life and such buildings are beyond repair. Most property owners or societies are financially incapable of undertaking extensive repair or restoration. In a redevelopment project, the developer exploits the development potential and existing members get reconstructed flats/units with modern amenities, additional area, corpus and other allowances. Redevelopment is, therefore, a win-win solution for society, members and the developer.

1.2. Redevelopment is a complex economic transaction having far reaching implications under the Income-tax, VAT, Stamp duty, Service tax and other such laws. This article covers only the Service tax implications for the society, its members and the developer in respect of redevelopment of society property on or after 1st July 2012.

1.3. The reference to the following phrases/abbreviations in the article would mean:

• The Act – The Finance Act, 1994
• Valuation Rules – Service tax (Determination
of value ) Rules,2006
• POTR – Point of Taxation Rules, 2011
• CCR – CENVAT Credit Rules, 2004

2. Typical documentation and terms of redevelopment of housing and commercial societies:

2.1. A Developer normally executes following agreements:

• “Development Agreement” with the society.
• “Permanent Alternative Accommodation Agreement” with existing members for allotting flats/units in redeveloped building (“Rehab flats/units”).
• “Agreement to sale” with purchasers of new flats (“Saleable flats”).

2.2. The society appoints a developer for reconstruction of specified area for its members. In consideration, the society transfers the balance development potential (FSI and rights to load TDR) to the developer for constructing saleable flats/units.

2.3. The usual terms of a redevelopment project are as under:

• Developer pays cash consideration for development potential (popularly known as FSI) to society.

• Developer allots flats/units in a redeveloped building to members.

• Developer may allot flat/unit to some members in his other project.

• Developer may purchase flats from existing members for consideration.

• Developer pays the following to the members

Lump-sum consideration to compensate consequential increase in maintenance and property tax on redeveloped building (popularly known as “Corpus allowance”)

Rent allowance to cover rent for temporary accommodation.

Shifting allowance to cover shifting cost such as transportation etc.

Reimbursement of brokerage for temporary accommodation.

Hardship allowance

• Developer may provide temporary alternative accommodation to members:

In his other project; or
In flats/units taken by him on rent.

2.4. Developer may sell additional area to existing members at concessional or market rate.

2.5. Developer sells saleable flats/units to Purchasers who will be admitted as members by society at later date.

3. Crux of redevelopment transaction:

Redevelopment transaction is a barter trans action between society/members and developer, the particulars whereof are tabulated below:

Question arises whether above-referred transactions are liable to service tax? If yes, when are such transactions taxable and what is the value of such services?

4. Relevant definitions, terms and concepts:

4.1. The relevant extract of definition of “Service” u/s. 65B(44) of the Act:

“‘Service’ means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include

(a) An activity which constitutes merely,-

(i) a transfer to title in goods or immovable property, by way of sale , gift or in any manner; or

(ii) ………
……”

4.2. The relevant extract of section 66E of the Act:

Following shall constitute declared services, namely:-

(a) ……..
(b) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuances of completion certificate by the competent authority
(c) ……
(d) ……
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act
(f) …….
(g) …….
(h) service portion in the execution of a works contract

4.3. “Works contract” is as defined u/s. 65B(54) to mean a contract wherein:

• transfer of property is in goods involved in the execution of such contract; and
• such contract is leviable to tax as sale of goods; and
• such contract is for the purpose of carrying out construction of any movable or immovable property.

4.4. The service tax implications for builder, developer, labour contractor and works contractor differ from each other. It is essential to understand these terms and the meaning of the word “immovable property”. The service tax legislation does not define these terms. One may have to go by the definitions in the General Clauses Act or common parlance meaning of such terms.

4.5. The term “Immovable Property” as defined under Clause (26) of General Clauses Act, 1897 includes land, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth.

4.6. “Builder” should mean a person constructing the building on land owned by him with intention to sell the flats/units.

4.7. “Developer” should mean a person who acquires development rights in the land and constructs the building thereon for sale.

4.8. Contractor constructs building on the land owned by another person. The contractor can further be classified as “labour contractor” or “works contractor”. The labour contractor undertakes a pure “service” contract and uses material provided by the principal. The “works contractor” undertakes composite contract and uses his own material in execution of the contract.

4.9. The issue is whether the developer is a “builder” or a “works contractor” vis-à-vis construction of rehab flats/units for a society and its members. The effective tax rate, date of service tax applicability, valuation and relevant Rules and notifications etc., are different for builders/ developers and for works contractors. In a society redevelopment project, the developer usually does not get title to or rights in land pertaining to rehab portion. The developer gets the development rights or right to construct saleable portion on society’s land.

The contractor or works contractor constructs
the building on the land belonging to its principal.
The construction material (belonging
to and used by the contractor) passes from
contractor to the client by the principle of accretion.
As far as construction for rehab flats/
units in redevelopment project is concerned,
the developer does not have the rights in the
land. He constructs on the land belonging to
the society. One can, therefore, safely conclude
that the developer is a “works contractor” for
construction of rehab flats/units in a redevelopment
project.

The society grants development rights (balance
after utilisation for rehab construction) to the
developer for constructing saleable portion. The
developer gets valuable rights in land pertaining
to saleable portion. The developer acts as a
“builder” selling the flats/units to the purchasers
along with underlying rights in the land.

In most of the redevelopment projects, the
developer acts in a dual capacity i.e., “Works
contractor” for rehab portion and “builder”
for saleable portion. However, it will be advisable
to examine the redevelopment agreement
minutely, to determine the exact scope and
role of the developer for assessing Service tax
implications.

5. Service tax implications for Society and members:

5.1. A Society/members transfer development rights
to developer for reconstructed flats/units and
other consideration in cash.

In the absence of a definition of the term
“Immovable property” in the Service tax legislation,
one may adopt the definition of “Immovable
property” given under Clause 26 of
General Clauses Act, 1897. Development rights
are squarely covered under the above referred definition of immovable property. Transfer of
such immovable property is outside the ambit
of Service tax.

5.2. Members usually get Corpus allowance, rent allowance,
shifting allowance, hardship allowance
etc. Two possible views as to the taxability of
such allowances are as under:

• All the above referred allowances are
consideration for a single deliverable i.e.,
transfer/relinquishment of rights in the
property by the members to the developer.
It is a transaction of immovable property
not liable to Service tax.

• Such allowances are a consideration for
different deliverables by the members. It
is not a consideration for transfer or relinquishment
of members’ rights in immovable
property. Such allowances are received by
the members for having agreed to vacate,
shift and tolerate the hardship associated
with shifting during the reconstruction
of the society’s building. Even lump-sum
compensations received by members (for
compensating them for consequential increase
in maintenance and property tax on
redeveloped buildings-popularly known as
“Corpus allowance”) may be regarded as
consideration for agreeing to tolerate the
financial burden in the future. There are all
chances of the Service tax authority treating
these to be declared service u/s. 66E(e) of
the Act. In such a case, members receiving
such allowances would be liable to Service
tax, if the total value of all services (including
these allowances) provided by them is
above one time threshold exemption limit
of Rs. 10 lakh.

5.3. Sometimes, the developer may provide temporary
alternative accommodation to members in
his other project or in flats/units taken by him
on rent. As the transaction between developer
and members is not in cash, the issue would
arise as to the taxability of these transactions in
the hands of members. It is a barter transaction
and consideration received in kind is liable to
Service tax, if the transaction is that of service is
taxable. The taxability of such service is already
discussed in the preceding paragraph.

6. Service tax implications for developer on construction
of residential flats allotted to existing
members in redevelopment project on or
before 30-06-2012:

Prior to 1st July, 2012, the construction of a
residential complex was taxable either under
“Construction of complex” category u/s. 65 (105)
(zzzh) or under “works contract service” u/s.
65(105)(zzzza) of the Act. The term “Residential
Complex” was defined u/s. 65(91a) of the Act.
The construction of a complex for personal use
was specifically excluded from the definition of
“Residential Complex”. Hence, any construction
of a Residential complex for personal use was
not taxable under any of the above referred
categories.

The Central Board of Excise and Customs (CBEC),
vide their circular 151/2/2012- ST dated 10th February,
2012, clarified that re-construction undertaken
by a building society by directly engaging
a builder/developer will not be chargeable to
Service tax as it is meant for the personal use
of the society/its members. The relevant extract
of the aforesaid circular is reproduced for ready
reference.

“Re – construction undertaken by a building society
by directly engaging a builder/developer will
not be chargeable to service tax as it is meant
for the personal use of the society/its members.”

The developers, therefore, were not liable to
Service tax till 30-06-2012 in respect of residential
flats allotted to existing members of the society
in redevelopment project.

7. Service tax implications on construction of
Rehab flats/units allotted to existing members
of the society in redevelopment project on or
after 01-07-2012:

7.1. The service tax legislation has been revamped
w.e.f 01-07-2012. Section 65 (105) listing out
taxable services and section 65(91a) defining
residential complex is no longer on statue book.
Circular no. 151/2/2012-ST dated 10th February,
2012, being inconsistent with the new Service
tax legislation, is no longer valid and subsisting
after introduction of negative list based levy.
In view of a substantial change in the law, it is necessary to revisit the issue whether developers
are liable to Service tax in respect of rehab
flats/units allotted to members of the society.

7.2. India has adopted the ‘Negative List based
service taxation’ w.e.f. 01-07-2012 wherein any
activity is liable to service tax, if such activity
is:

• Covered under definition of “Service” as
defined u/s. 65B(44) of the Act; and

• Not falling in “Negative List of Services” as
listed u/s. 66D of the Act; and

• Provided within the taxable territory; and

• Not covered under Notification no. 25/2012
dated 20-06-2012 or any other exemption
notification.

7.3. As discussed in para 4.9, the developer is a
“works contractor” for construction of rehab
flats/units in redevelopment project. The service
portion in a works contract is a declared service
u/s. 66E(h) of the Act and is a “service” as
defined u/s. 65B(44) of the Act. Such service is
neither in the negative list of services (as listed
in section 66D of the Act) nor is it exempt under
any of the exemption notification. In view of
this, any such service provided within taxable
territory (whole of India except Jammu and
Kashmir) is liable to Service tax w.e.f. 01-07-2012.

The Maharashtra Chamber of Housing Industry
(MCHI) has sought clarification from the Service
Tax Commissioner, Mumbai-I on the issue whether
Builders/Developers are liable to Service tax in
respect of rehab flats/units allotted to society
members in redevelopment project. The Commissioner,
vide his letter F.No.V/ST-I/Tech-II/463/11
dated 31-08-2012, clarified that Service tax is leviable
on construction of such rehab flats/units.
8.

Valuation of rehab construction service :

8.1. In a redevelopment project, the developer receives
consideration in the form of development
rights for constructing Rehab flats/units. Any
activity carried out by one person for another
person for consideration (whether in cash or in
kind) is a service. Section 67 of the Act requires
a service provider to include the monetary value
of consideration in kind in the value of taxable
services provided by him.

8.2. Section 67 of the Act deals with determination
of value of taxable services:

8.3. Developer receives consideration in the form
of development rights for constructing rehab
flats/units in a redevelopment project.

Section 67(1)(ii) is applicable when value of
consideration received in kind is ascertainable.
Section 67(1)(iii) applies when the value of
consideration is not ascertainable in ordinary
course.

An erroneous notion which prevails is that the
value of development rights is not ascertainable
and hence, the construction service in respect
of Rehab flats/units are to be valued u/s. 67(1)
(iii) read with Rule 3 of Valuation Rules. The Service tax authorities, relying on Circular
No.151/2/2012-ST dated 10-02-2012, value the rehab
flats/units at the rates at which similar flats are
sold by the developer. This is not a correct proposition,
as the Service tax is leviable on the value
of consideration (i.e. development right) received
by the developer and not on the value of flats
which is a consideration received by members/
society for granting development rights to the
developer. The construction of the rehab portion by the developer is a “Works Contract” service.
Such service cannot be valued at the market
value of rehab flat/units arrived at, by applying
the rate of saleable flats as sale rate of saleable
flats includes the land value. In a Redevelopment
Project, the land attributable to rehab flats/units
belongs to the society/members and it is never
transferred by the developer to the members or
the society. Hence, the land value should not
be included while ascertaining the value of the
construction service for rehab flats.

Development rights are liable to stamp duty and
market value of such rights (for the purpose
of stamp duty) is prescribed in the Government
reckoner of majority of the States. The value of
consideration (i.e Development Rights) is, therefore,
ascertainable and hence valuation is to be
done u/s. 67(1)(ii) of the Act. A very strong view
is prevalent that the value of development rights
(consideration received in kind by builder for
construction of rehab flats/units to members)
should be taken at stamp duty valuation.

8.4. The monetary value of development rights is
gross consideration for works contract executed
by the developer for the society. It is a gross
consideration for works contract which comprises
of material and service value. One has
to segregate the service portion from the total
value of the works contract. Section 67(1) of
the Act read with Rule 2A of Valuation Rules
prescribes following two valuation methods for
valuing the service component in the works
contract:

• Specific Valuation Method [Rule 2A (i) of
Valuation Rules]

• Presumptive Valuation Method [Rule 2A (ii)
of Valuation Rules]

Under the Specific Valuation Method, the value
of service portion is worked out by reducing
value of goods (material) used from gross
contract value excluding VAT. The service value
should not be less than specified overheads
relating to the project.

It is practically impossible
to work out the value of service portion
under this method for redevelopment project.
Under Presumptive Valuation Method, the value
of service portion in the works contract for
new construction (original works) is deemed
to be 40% of gross consideration/contract value
excluding VAT. Thus in the redevelopment
project, the effective service tax rate under
presumptive method would be 4.944% of the
value of development rights.

The developer is eligible for Cenvat Credit of
input services and capital goods irrespective
of the valuation method followed by him.

9. Point of Taxation for construction of rehab
portion:

9.1. The question arises when Service tax on rehab
portion is payable by the developer? Point of
Taxation Rules, 2011 determines the point of
taxation (‘POT’) i.e., the point of time when
service shall be deemed to have been provided.

The provisions, rules, notifications and circulars
subsisting on POT should be applied for determining:

• Taxability of transaction

• Applicable tax rate

• Valuation

• Cenvat eligibility

• Due date for tax payment

9.2. Works contract service is a continuous supply of
service. In case of continuous supply of service
where the provision of the whole or part of
the service is determined periodically on the
completion of an event in terms of a contract,
which requires the receiver of service to make
any payment to the service provider, the date
of completion of each such event as specified
in the contract shall be deemed to be the date
of completion of provision of service;

Explanation to Rule 3 of POTR provides that
whenever any advance is received by the service
provider towards the provision of taxable
service, the POT shall be the date of receipt of
such advance.

9.3. The point of taxation arises when service provider
is legally entitled to receive consideration
(development right in land) from service recipient
(society). The point of time when developer
receives irrevocable rights in the land is a point of taxation for rehab construction. The taxable
event occurs at such point and service tax liability
triggers on such date for developer.

One has to examine the development agreement
carefully to determine the point of taxation
and it could be any of the following probable
dates:

• Date of execution of development agreement.

• Date of developer getting vacant possession
free from all encumbrances.

• Date on which developer gets necessary
permissions (IOD, Commencement Certificate
etc) from local authority or government
to commence the construction.

• Date on which developer completes the
construction of area earmarked for original
occupants/members.

• Date on which full consideration for land
rights is paid to the society.

• Any other relevant date, specified in development
agreement, on which the substantial
rights in land are unconditionally and
irrecoverably bestowed on the developer.

The POT is a date on which developer have
received Sale Consideration (in form of development
rights) in advance for flat to be allotted to
the society/members. The liability to discharge
Service Tax arises on such date even if construction
is not started on such date.
The Redevelopment project for residential
complex in respect of which POT has already
arisen before 30-06-2012 is not liable to service
tax even if:

• Construction is started on or after 01-07-
2012.

• Construction is started before 30-06-2012
but completed on or after 01-07-2012.

• Possession of Rehab units given on or after
01-07-2012.

10. Sale of additional area to members and sale of
saleable flats/units:

The developer acts as a builder in respect of
saleable portion of project. Sale of under construction
flats/units are liable to service tax @
3.09% or 3.708%.

11. Cenvat eligibility on or after 01-07-2012:

The developer is liable to Service tax on rehab
and saleable portion. Both are taxable activities
and hence, the developer is entitled to claim
Cenvat in respect of input services and capital
goods used in redevelopment projects subject
to provision of Cenvat Credit Rules, 2004.

12. Conclusion:

It is the duty of the Government to provide
affordable shelter to citizens. Instead of encouraging
redevelopment activities through tax
concessions, Government levies service tax on
redevelopment projects. The levy is harsh and
unjust but it is often said that tax and equity are
strangers. Developers will have to factor tax
incidence in their project cost. In order to avoid
future dispute or litigation, it will be advisable
to incorporate a clear clause in agreement as
to who will bear the service tax incidence on
rehab flats/units.

shailesh.kwebmaker

ITO vs. Yash Developers ITAT Mumbai `G’ Bench Before B. R. Mittal (JM) and N. K. Billaya (AM) ITA No. 809/Mum/2011 and 3644/Mum/2012 A.Y.: 2007-08 and 2008-09. Decided on: 31st January, 2014. Counsel for revenue/assessee: B. P. K. Panda /S. C. Tiwari and Ms. Natasha Mangat.

S/s. 80AC, 80IB(10), 139 – Amendment made to section 80IB(10) w.e.f. 01-04-2005 whereby as per Clause (d), limit has been imposed on the extent of commercial area which a project can contain, does not apply to projects approved before that date. Claim for deduction made in a return of income filed u/s. 139(4) will be decided on merits even though return of income is not filed within the time prescribed as per section 139(1) of the Act.

Facts:
The assessee, a partnership firm, engaged in the business of developing and construction filed its return of income for assessment year 2007-08 declaring total income of Rs. Nil after claiming deduction u/s. 80IB(10) of Rs. 74,684. For the assessment year 2008-09, the assessee filed return of income on 30-09-2009 by declaring total income at Rs. Nil after claiming deduction of Rs. 24,85,233 u/s. 80IB(10) of the Act.

The Assessing Officer (AO) denied deduction u/s. 80IB(10) of the Act for assessment year 2007-08 on the ground that the assessee had constructed shops with the aggregate built up area of 3,382 sq. ft which constituted commercial area of 6.12% of the total built up area which was in excess of the limit prescribed by Clause (d) of section 80IB(10) as amended by the Finance (No. 2) Act, 2004 w.e.f. 01-04-2005. Since the assessee had not fulfilled one of the conditions, the AO denied deduction u/s. 80IB(10). For assessment year 2008-09, the AO also stated that the assessee did not file the return of income within the stipulated time prescribed u/s. 139(1) of the Act. In view of the provisions of section 80AC of the Act, the AO denied the claim of Rs. 24,85,233 made u/s. 80IB(10) of the Act.

Aggrieved, the assessee filed an appeal to CIT(A) who allowed the appeal filed by the assessee for both the years.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal observed that on similar facts in the assessee’s own case for the same project, the Tribunal by its order dated 29-07-2011 relating to assessment years 2005-06 and 2006-07, the assessment years which also fall after the amendment made by insertion of Clause (d) to section 80IB(10) of the Act, applicable from 1.4.2005 has held that the assessee is eligible to claim deduction u/s. 80IB(10) of the Act in respect of the housing project. As there was no change in the facts and circumstances in the assessment years under consideration, the Tribunal applied the said decision of ITAT to these years as well. It also observed that the similar issue had also come before the Hon’ble Gujarat High Court in the case of Manan Corporation vs. ACIT (214 Taxman 373 (Guj), while considering the appeal for assessment year 2006-07 wherein it was held by their Lordship that the condition of limiting commercial establishment/ shops to 2,000 sq. feet which has come into force w.e.f. 01-04-2005 would be applicable for the project approved on or after 01-04-2005 would be applicable for the project approved on or after 01-04-2005 and where the approval of the project was prior to 31-03-2005, the amended provision would have no application for those projects. The Tribunal observed that the Gujarat High Court placed heavy reliance on the decision of the Bombay High Court in the case of Brahma Associates (333 ITR 289)(Bom). The Tribunal held that the issue is covered not only in the assessee’s own case for assessment years 2005-06 and 2006-07 but also by the decision of the Gujarat High Court in the case of Manan Corporation (supra). The Tribunal rejected the appeal filed by the revenue.

In respect of the return being filed beyond due date prescribed u/s. 139(1) of the Act, the Tribunal observed that the issue is covered in favor of the assessee by the decision of the Bombay High Court in the case of Trustees of Tulsidas Gopalji Charitable & Chaleshwar Temple Trust (207 ITR 368)(Bom) which has been considered by the CIT(A) while deciding the same in favour of the assessee. Following the said decision, the Tribunal held that there is no reason to interfere with the order of the CIT(A). This ground of appeal taken by the department for assessment year 2008- 09 was also rejected.

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shailesh.kwebmaker

DCIT vs. Chetan M. Kakaria ITAT Mumbai `C’ Bench Before N. K. Saini (AM) and Sanjay Garg (JM) ITA No. 4961/Mum/2011 A.Y.: 2006-07. Decided on: 3rd February, 2014. Counsel for revenue/assessee: Ravi Prakash/ Firoz Andhyarujina

S/s. 269T, 271E – Amount given or taken from the firm by the partners cannot be treated as giving or taken of loan. Therefore, penalty u/s. 271E cannot be levied even if such amounts are given or taken in cash.

Facts:
In the course of assessment proceedings the Assessing Officer noticed that the assessee had repaid loans, aggregating to Rs. 33,26,960 (Rs. 2,00,000 + 31,26,960), in cash, to the two firms where he was a partner. Such repayment of loan in cash was also reflected in the tax audit report. The amounts borrowed from the firm were reflected in the balance sheet as unsecured loans. The AO considered these payments to be in violation of section 269T of the Act and proceedings for levy of penalty u/s. 271E of the Act. He levied penalty of Rs. 33,26,960 u/s. 71E of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the penalty levied by the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The transactions between the firm and the assessee were treated by the AO as repayment of loan in cash. It held that there is no independent legal entity opf the firm apart from the rights and liability of the partners constituting it and if any amount is given or taken from the firm by the partners that cannot be treated as giving or taking of the loan. In the instant case, the assessee being a partner gave the money to the partnership firm when it was in need of business exigencies, later on the amount was received back. If the said amount had been routed through the capital account, there could have been no disallowance by the department because a partner can deposit cash in his capital account and he also has a right to receive it in cash. The Tribunal held that the AO was not justified in levying the penalty and CIT(A) has rightly deleted it.

It noted that on a similar issue, the Madras High Court has in the case of CIT vs. V. Sivakumar (354 ITR 9) (Mad) held as under:

“that there was no separate identity for the firm and the partner is entitled to use the funds of the firm. The assessee acted bona fide and there was a reasonable cause within the meaning of section 273B. Penalty could not be imposed.

It also noted that the Rajasthan High Court has in the case of CIT vs. Lokhpat Film Exchange (Cinema) (304 ITR 172)(Raj) held as under:

“the assessee had acted bona fide and its plea that inter se transactions between the partners and the firm were not governed by the provisions of sections 269SS and 269T was a reasonable explanation. Penalty could not be imposed.”

Considering the facts of the case and also the ratio of the above stated decisions the Tribunal held that the CIT(A) was justified in deleting the penalty levied by the AO u/s. 271E of the Act.

The appeal filed by the revenue was dismissed.

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shailesh.kwebmaker

(2014) 99 DTR 162 (Agra) DCIT vs. Gupta Overseas A.Y.: 2008-09 Dated: 04-02-2014

Rule 27 of ITAT Rules, 1963: Any ground raised by the assessee if decided against him by the CIT(A) can be pursued by the assessee in his capacity as respondent before the Tribunal even if the CIT(A) has ultimately decided the issue in favour of the assessee.

Facts:
The payments of Rs. 1,05,27,465/- under the head ‘Design and development expenses’ were disallowed by the Assessing Officer by invoking the provisions of section 40(a)(i) by taking a view that they were in the nature of fees for technical services u/s. 9(1)(vii).

Aggrieved, assessee carried the matter in appeal before the learned CIT(A). Before the CIT (A), apart from disputing the disallowance on merits, the assessee also disputed the impugned disallowance on the ground that the provisions of section 40(a) (i) can be invoked only to disallow the expenditure of the nature referred therein which is shown as ‘payable’ as on the date of Balance Sheet and is to be read pari-pasu with section 40(a)(ia). The assessee relied upon the decision of Hon’ble ITAT Special Bench, Vishakapatnam in case of Merilyn Shipping & Transport vs. ACIT [2012] 136 ITD 23. Though this decision was in the context of section 40(a)(ia), the assessee argued that the same principle should even apply in the context of section 40(a)(i) as per the non-discrimination Clause in the Double Taxation Avoidance Agreement (DTAA) between Indian and foreign countries in consideration.

The CIT (A) deleted the impugned disallowance by holding on merits that none of the amounts so paid by the assessee was actually taxable in India. However, the CIT (A) rejected the above alternative plea raised by the assessee on the ground that decision of the Hon’ble ITAT Special Bench, Vishakhapatnam, has been suspended as an interim measure by the Hon’ble Andhra Pradesh High court till final decision and therefore, the CIT (A) did not follow that decision.

The Revenue challenged the correctness of the CIT (A)’s order by filing an appeal. In the course of this appeal, the assessee- respondent raised the same issue by invoking Rule 27 of the Appellate Tribunal Rules, 1963.

Held:
Rule 27 of the Appellate Tribunal Rules, 1963, provides that, “the respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him”. This provision is independent of, and quite distinct from, the statutory right to file cross objection u/s. 253(4) of the Income Tax Act, 1961, which allows the respondent, on being put to notice about the fact of an appeal having been filed against an order, to raise his grievances against the said order by filing the cross objections within stipulated time.

The important distinction between the scope of a cross objection u/s. 253(4) and an objection under Rule 27 is that while former calls into question correctness of a part of the operative order, the latter merely challenges a part of the reasoning adopted in the process of arriving at operating order, i.e. conclusion, even as it does not challenge the conclusion itself. U/s. 253(4), one can challenge the conclusions. Under Rule 27, one cannot challenge the conclusions, even though it can challenge the reasons for arriving at those conclusions, to the limited extent of the pleas which have been decided against the respondent, as it provides that the respondent “may support the order on any of the grounds decided against him”. In effect thus, under Rule 27, those grounds which have been decided against the respondent, even when the assessee does not challenge the same, can be agitated again, and to that extent, reasoning of even a favourable order can be called into question. However, cross objection u/s. 253(4) can call into question the conclusions arrived at in the impugned order, and, therefore, cross objections constitute a remedy against unfavourable portion of the order. It is thus clear that the scope and purpose of cross objections are distinct and mutually exclusive. No doubt that it is a common practice that the cross objections are routinely filed to support the orders appealed against by the other party, but a wrong practice, no matter how prevalent, can affect the correct legal position.

Therefore, while the respondent may indeed raise any of the issues, with regard to the grounds decided against the assessee even though the assessee may not be in appeal or cross objection, the respondent can do so only by way of a written intimation to that effect duly served on the other party reasonable in advance.

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2013-TIOL-119-ITAT-DEL ACIT vs. Lakhani India Ltd. ITA No. 2657/Del/2011 Assessment Year: 2006-07. Date of Order: 31- 12-2013

Section 36(1)(iii) – In a case where assessee has substantial profits which are deposited in cash credit account and the debit balance in cash credit account is not on account of purchase of assets, interest on funds utilised from such cash credit account for acquiring capital assets cannot be disallowed under proviso to section 36(1)(iii).

Facts :
The assessee made a payment of Rs. 98.98 lakh to SIDCUL from an overdraft account. There was a debit balance in the said account on the date of making the payment. The assessee thereby incurred interest liability. The industrial plot which was allotted to the assessee was not put to use for business purposes by the assessee during the previous year relevant to the assessment year under consideration.

The Assessing Officer (AO) disallowed a sum of Rs. 10,52,537 on account of interest liability by invoking the proviso to section 36(1)(iii).

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the appeal by observing that the profit generated during the year and recoveries from the debtors, etc. are more than the investment so made in the assets.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held :
The Tribunal noted that a similar addition made by the AO in the assessee’s own case was deleted by CIT(A) for assessment year 2005-06, whose order, has been upheld by ITAT. It noted the conclusion recorded by the ITAT in the said order which was as under – “17. With the assistance of the learned representative, we have gone through the record carefully. The assessee has placed on record copy of CC account and demonstrated that the debit balance was not on account of purchase of assets. It has deposited a sum of Rs. 113.98 lakh in this account before making payment of Rs. 56 lakh. The assessee has a substantial profit which was deposited in this very account. Thus, it has substantial surplus fund which can enable it to acquire the capital assets. Learned CIT(A) has observed that the assessee has declared an income of Rs. 3.55 crore which suggest that it has excess interest free funds, than the investment made in the acquisition of the assets. Considering these aspects, we are of the view that proviso to section 36(1)(iii) is not applicable on the facts of the present case. Hence, this ground of appeal is rejected.”

Following the above mentioned order, the Tribunal dismissed this ground of appeal filed by the Revenue.

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2014-TIOL-110-ITAT-MUM Jagannath K. Bibikar vs. ITO ITA No. 2735/Mum/2012 Assessment Years: 2005-06. Date of Order: 11-12-2013

S/s. 2(42A), 49(1) – Payment made towards
relocation of hutment dwellers is for the purpose of removing
encumbrances in title of the owners and constitutes expenditure incurred
in connection with transfer and is allowable as deduction even though
there is no specific mention about it in the development agreement.

Facts:
The
assessee was a co-owner of the land. The leasehold rights in respect of
the plot were sold to M/s. Havana Hotels Resorts Pvt. Ltd. and M/s.
Samyam Erectors Pvt. Ltd. The capital gains arising on this transaction
were offered to tax by the assessee in two years i.e., 2005-06 and
2006-07.

While computing capital gains, the assessee claimed
deduction of Rs. 5,00,000 paid towards relocation expenses. This sum of
Rs. 5,00,000 represented the assessee’s 50% share of Rs. 10,00,000. The
assessee claimed that this payment was in terms of Clause 10 of the
development agreement under which it was an obligation of the assessee
to bear any charges or encumbrances in respect of plot of land
transferred to the developer and in case any charge or encumbrance is
found the owner is liable to ward off the same. The payment was for
removal of settled hutments and therefore the assessee to discharge its
liability to remove encumbrances had incurred this expenditure. It was
also contended that the payment was made to consenting party since it
was in occupation of part of the property in question and therefore the
payment was made in connection with transfer of asset in question.

The
Assessing Officer disallowed this sum of Rs. 5,00,000 while passing an
order pursuant to direction of CIT u/s. 263 of the Act.

Aggrieved, the assessee preferred an appeal to Commissioner of Income-tax (Appeals) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the genuineness of the payment was not disputed by
the authorities below and even the purpose of the payment was not
questioned by the AO as well as CIT(A). The disallowance was made only
on the ground that the transfer/development agreement does not speak
about such payment. It noted that as per clause 10 of the development
agreement dated 10-09-2004 it was obligatory on the part of the
owners/transferors of the land to ward off any charges and encumbrances
arising in the property.

The Tribunal did not find any merit in
the argument of the revenue that in the absence of any specific mention
in the agreement such payment is not allowable as deduction. The
Tribunal held that when the payment is undisputedly made towards
relocation of the hutment dwellers then it is certainly for the purpose
of removing the encumbrances in the title of the owners in respect of
land in question. Since the payment was made for removal of encumbrances
in respect of the property in question being relocation of the hutment
dwellers therefore, it was held to fall in the category of expenditure
incurred in connection with the transfer of property.
This ground of appeal filed by the assessee was allowed.

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Section 194H – Provisions of section 194H apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account.

5. DCIT vs. Telco Construction Equipment Co. Ltd.
ITAT Bangalore `C’ Bench
Before P. Madhavi Devi (JM) and Jason P. Boaz (AM)
ITA No. 478/Bang/2012
Assessment Year : 2007-08.
Decided on: 7th March, 2014.
Counsel for revenue/assessee: Priscilla Singsit/S. Anantha.

Section 194H – Provisions of section 194H apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account.

Facts:

The assessee-company was carrying on the business of manufacturing, purchase and sale of excavators, loaders, cranes, dumpers and spare parts etc. For the relevant assessment year, the assessee filed its return of income declaring income of Rs. 282,44,84,066/-. In the course of the assessment proceedings, the Assessing Officer (AO) observed that the assessee has debited a sum of Rs. 14,84,26,424 as sales commission, out of which a sum of Rs. 6,46,11,000/- relates to the provision made towards commission. The assessee was asked to explain as to how the provision has been made and on what basis it is worked out and as to why no TDS was made from this amount. The assessee explained that the provision was made on the basis of sales made during the year from different sales offices of the company and on the basis of communication received from these offices regarding commission payable on such sales. As to why no TDS was made from this amount, it was clarified that no TDS was made from the provision but as and when the commission payments were made in the subsequent year, TDS was made and remitted to the Government account.

The AO disallowed a sum of Rs. 6,46,11,000 u/s. 40(a) (ia) since according to him the provisions of section 194H were applicable and the assessee failed to comply with the same. Aggrieved, the assessee filed an appeal to CIT(A) who relying on the decision of the jurisdictional High Court in the case of ACIT vs. Motor Industries Co. (249 ITR 141) held that the amount credited by the assessee is only a provision and not actual payment of commission to the party and till the amounts are credited to the respective party’s account, it cannot be said that the same have become finally quantified and hence, the provisions of section 194H are not attracted. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The amount credited by the assessee is to the provision account and not to the respective agent’s accounts. Therefore, it is clear that the assessee has not made any payment to the agents. The provisions of section 194H would apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account. As rightly pointed out by the learned counsel for assessee, the agents would get vested right to receive the commission only when they fulfill the obligations under the agreement for commission. We find that the CIT(A) has properly appreciated the issue before deleting the addition made by the AO. In view of the same, we do not see any reason to interfere with the finding of the CIT(A) on this issue. This ground of appeal of the revenue was dismissed.

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S/s. 143(2), 292B, 292BB – Where a revised return filed is treated as non-est since the original return was not filed within due date mentioned in section 139(1), the period of issue of notice u/s. 143(2) needs to be computed with reference to date of filing original return of income. Notice issued u/s. 143(2) beyond the period stated in the proviso to section 143(2)(ii) does not fall within the term `any mistake, defect or omission’ stated in section 292B. The provisions of section 292BB canno<

4. Amiti Software vs. ITO
ITAT Bangalore `A’ Bench
Before N. V. Vasudevan (JM) and Jason P. Boaz (AM)
ITA No. 540/Bang/2012
A.Y.: 2008-09. Decided on: 7th February, 2014.
Counsel for assessee / revenue: H. N. Khincha / Bijoy Kumar Panda

S/s. 143(2), 292B, 292BB – Where a revised return filed is treated as non-est since the original return was not filed within due date mentioned in section 139(1), the period of issue of notice u/s. 143(2) needs to be computed with reference to date of filing original return of income. Notice issued u/s. 143(2) beyond the period stated in the proviso to section 143(2)(ii) does not fall within the term `any mistake, defect or omission’ stated in section 292B. The provisions of section 292BB cannot extend to a case where the question of limitation is raised on admitted factual position in a given case.

Facts:

For the assessment year 2008-09, the assessee filed the original return of income on 01- 10-2008 declaring a total loss of Rs. 16,15,127 and also claiming deduction u/s. 10A amounting to Rs. 1,54,83,511. The assessee computed tax payable under MAT u/s. 115JB. The return of income was processed on 27.8.2009 and it resulted in a demand of Rs. 2,05,710. The return filed was beyond the due date prescribed u/s. 139(1).

The assessee filed a revised return on 30.9.2009 in which business income was stated to be Rs. Nil after claiming exemption of Rs. 1,53,83,511 u/s. 10B. Since the original return was filed beyond the due date, the AO treated the revised return to be non-est. A notice dated 19-08-2010 was issued by the AO and served on the assessee. There was no dispute that this was the only notice issued and served and the assessee did not dispute having received this notice.

Since the original return was filed beyond due date mentioned in section 139(1), the AO in view of the provisions of proviso to section 10A(1A) of the Act, denied the deduction claimed u/s. 10A of the Act. He completed the assessment assessing the total income under the normal provisions of the Act and not u/s. 115JB. Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that the assessment be annulled since the notice u/s. 143(2) was issued beyond the time limit mentioned in proviso to 143(2) (ii). The CIT(A) did not agree, since the assessee had attended the hearings and participated in the assessment proceedings. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The admitted factual position is that the notice u/s. 143(2) of the Act dated 09-08-2010 was admittedly beyond the period of six months from the end of the financial year in which the return of income was filed by the assessee, as laid down in proviso to section 143(2)(ii) of the Act. It is also not in dispute that this is the only 143(2) notice issued by the AO. The order of assessment is very clear on this aspect. The law is by now well settled that issuance of a notice u/s. 143(2) of the Act within the statutory time limit is mandatory and it is not a procedural requirement which is inconsequential. Reference may be made to the decision of the Hon’ble Delhi High Court in the case of Alpine Electronics Asia Pvt. Ltd. vs. DGIT, 341 ITR 247 (Del), CIT vs. Vardhana Estates Pvt. Ltd., 287 ITR 368 and ACIT vs. Hotel Blumoon, 321 ITR 362 (SC). The contrary view expressed by the Hon’ble Madras High Court, in our view, cannot be followed as the decisions relied on by the ld. counsel for the assessee of the Hon’ble Punjab & Haryana High Court and Allahabad High Court also took the view that non issuance of notice u/s. 143(2) of the Act renders assessment order invalid. Admittedly, notice u/s. 143(2) of the Act not having been served on the assessee within the period contemplated under law, the order of assessment has to be held to be invalid and annulled.

As far as section 292B is concerned, we do not think that the notice issued by the AO u/s. 143(2) of the Act in the present case will fall within any mistake, defect or omission which is in substance and effect in conformity with or according to the intent and purpose of this Act. The requirement of giving of the notice cannot be dispensed with by taking recourse to the provisions of section 292B of the Act. As far as provisions of section 292BB is concerned, as laid down in the decisions of the Allahabad High Court in the case of Manish Prakash Gupta (supra) & Parikalpana Estate Development (P) Ltd. (supra) and Hon’ble Punjab & Haryana High Court in the case of Cebong India Ltd. (supra), the provisions of section 292BB cannot be applied in a case where admittedly no notice u/s. 143(2) had been issued within the time limit prescribed in law.

We may also clarify that the dispute in the present case is not with regard to issue and service of notice u/s. 143(2) of the Act, as admittedly there was only one notice u/s. 143(2) dated 19-08-2010 issued and served on the assessee before completion of the assessment proceedings.The question is as to, whether the said notice was issued and served within the time contemplated u/s. 143(2) of the Act. The provisions of section 292BB lay down the presumption in a given case. It cannot be equated to a conclusive proof. The presumption is rebuttable. The provisions of section 292BB cannot extend to a case where the question of limitation is raised on admitted factual position in a given case. We therefore hold that the provisions of section 292BB of the Act will not be applicable to the present case.

The appeal filed by the revenue was dismissed.

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Section 54EC –Term ‘month’ used in the provisions does not mean 30 days but it means ‘calendar month’ therefore investments made before the end of the calendar months eligible for deduction.

3. Alkaben B. Patel vs. Income Tax Officer
In the Income Tax Appellate Tribunal Special
Bench, Ahmedabad
Before G.C. Gupta V. P.), Mukul Kr. Shrawat
(J. M.) and N.S. Saini (A. M.)
ITA No.1973/Ahd/2012
Asst. Year 2009-10. Decided on 25/03/2014
Counsel for Assessee / Revenue: U.S. Bhati / P.L. Kureel and O.P. Vaishnav

Section 54EC –Term ‘month’ used in the provisions does not mean 30 days but it means ‘calendar month’ therefore investments made before the end of the calendar months eligible for deduction.

Issue:

The issue before the Tribunal was – whether for the purpose of section 54EC the period of investment of six months should be reckoned after the date of transfer or from the end of the month in which transfer of capital asset took place? The assessee had earned Long Term Capital Gain on sale of a flat. She invested the gain earned in purchase of NHAI bonds and claimed deduction u/s. 54 EC. The sale of flat took place on 10th of June, 2008 and the bonds were purchased on 17th of December, 2008.According to the AO, the assessee was required to invest the capital gain in the specified asset within a period of six months from the date of thetransfer i.e. 10th of December 2008, and that requirement was not complied with by the assessee; hence, not eligible for the deduction u/s. 54EC of IT Act. The contention of the assessee was that since the application for the purchase ofthose bonds was tendered in the bank on 8th December, 2008,which was within the period of six months from the date of the transfer of the Long Term Capital Asset, the assesseewas eligible for the deduction u/s. 54EC.

Alternatively, the assessee’s contention was that up to the endof the month of December 2008, the said investment waseligible for the deduction. According to the AO as well as the CIT(A), the assessee was unable to establish that the impugned application for investment in NHAI bond was actually tendered on 8th of December, 2008. They were also not convinced with the alternate contention of the assessee.

Before the Tribunal, the revenue justified the orders of the lower authorities and contended that the Income-tax Act and the Income-tax Rules have used two types of phraseology in respect of the computation of period for the purpose of prescribing a limitation. The first type of wordings used is “not exceeding 6 months from the date on which application is made” or “anytime within a period of 6 months after the date of suchtransfer”. These words are used in section 54EC and section 281 B as well as in Rule 10K(2) and Rule 11AA(6). The second type of wordings used are “6 months/4months/1 month from the end of the month” in which a particular order is made/received/application is received. This wording is found in section 275 and section 154(8) aswell as in Rule 6DDA(5). It was emphasised that the wordings are unambiguous and the intention of the legislation is apparent that wherever the end of the month is to be calculated then the intention is made clear in the statute itself. Otherwise as per the language, a particular date is to be taken into account for the purpose of calculation of days/ months. It was therefore pleaded that in a situation when the intention of the legislation is clear, then there is no necessity to take the help of “General Clauses Act,1897” as suggested by the assessee. Further, it was pleaded that in section 54EC, the limitation of period for an investment has beenprescribed as “at any time within a period of 6 months from thedate of such transfer”. In ordinary sense, a ‘month’ is a period from a specified date in a month to the date numerically corresponding to the date in the following months, less one. For example, if a particular date is 10th June, 2008, one month shall be up to 9th July, 2008. Therefore, the term”month” has been used in section 54EC in an ordinary sense and the same should not exceed more than 30 days.The wordings of the section should not be replaced by any other wordings. Therefore, in the said example, one month cannot be extended up to 31st July, 2008. If that would have been the intention of the legislation, then certainly these words ought to have been prescribed in the provisions of section 54EC of the Act.

The revenue also relied on the following decisions:
• Dhanraj Singh Choudhary vs. Nathulal Vishwakarma 16 taxmann.com249 (SC);
• Chironjilal Sharma HUF vs. UOI,(unreported decision of the Supreme Court);
• Jethmal Faujimal Soni vs. ITAT231 CTR332(Bom.);
• Kumarpal Amrutlal Doshi vs. DCIT (Appeal) (ITA No, 1523Mum/2010, order dated 09.02.2011);
• Shree Ram Engg. & Mfg Industries vs. ACIT (ITANo. 3226& 3227/Ahd/2011);
• Hindustan Unilever Ltd. vs. Deputy Commissioner of Income-tax [191 Taxman 119 (Bom.)];
• S. Lakha Singh Bahra Charitable Trust [15Taxmann. com 97(Asr)].

Held:

The Tribunal noted the argument of the revenue thatsince the statute has prescribed the limitation of six months, the words viz.,“at any time within a period of six months” must not be replaced by the words “at any time within a period of end of six months”. However, according to the tribunal, the incentive provision is to be examined by “purposive construction of statute” or “constructive interpretation of statute” which is neither “liberal interpretation of statute” nor a ‘literal interpretation of statute’. It further added that, it is the true intention of the enactment, which is required to be considered by a court of law.

To resolve the controversy i.e., whether the intention of the legislator was to compute six calendar months or to compute 180 days,the tribunal relied on a decision of the Allahabad High Court in the case of Munnalal Shri Kishan Mainpuri, 167 ITR 415 where the Court while answering the dispute in respect of law of limitation held that, there is nothing in the context of section 256(2) to warrant the conclusion that the word ‘month’ in it refers to a period of 30 days. Therefore, it was held by the Apex court that reference to six months in section 256(2) is to six calendar months and not 180 days. Similarly, it was noted that in the case of Tamal Lahiri vs. Kumar P. N. Tagore, 1978 AIR 1811/1979 SCC (1) 75, the Apex court opined while interpreting section 533 of Bangalore Municipal Act, 1932 the expression six months in the said section means sixcalendar months and not 180 days.

The Tribunal also noted that in a few more sections of the Income-tax Act, the legislature had not used the terms “Month” but has used the number of days to prescribe a specific period e.g. first proviso to section 254(2A) where it is provided that the Tribunal may pass an order granting stay but for a period not exceeding 180 days.This according to the Tribunal was an important distinction made in the statute while prescribing the limitation period. Therefore, the tribunal concluded that in the absence of any definition of the word ‘month’ in the Act, the definition of General Clauses Act 1897 shall be applicable. Accordingly, the tribunal held that the investment in question qualifies for the deduction u/s. 54EC.

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Section 80-IB – Assessee engaged in development of Geographical Information System software, claimed deduction u/s. 80IB –AO and CIT(A) denied deduction u/s. 80IB holding that the assessee was not engaged in the manufacture or production of any article– Tribunal held that the software came into existence after carrying on several processes and was transferred only on completion of the said processes. When transfer of property is an ongoing process at each stage of work, then it will amount to p<

9. [2013] 146 ITD 641 (Ahmedabad – Trib.)
Bhavin Arun Shah. v. ITO
A.Y. 2003-04
Order dated- 28th June 2013

Section 80-IB – Assessee engaged in development of Geographical Information System software, claimed deduction u/s. 80IB –AO and CIT(A) denied deduction u/s. 80IB holding that the assessee was not engaged in the manufacture or production of any article– Tribunal held that the software came into existence after carrying on several processes and was transferred only on completion of the said processes. When transfer of property is an ongoing process at each stage of work, then it will amount to provision for services. The fact that software is produced on a platform not owned by the assessee is irrelevant, when what is being transferred by the assessee is not the platform but the end product and hence assessee was held eligible for deduction u/s. 80-IB.

Facts:

The assessee was engaged in the business of development of Geographical Information System (GIS) software for municipality. And it was undisputed fact that the assessee was engaged in the business of development of customised software on job work basis. The process of development of GIS software involved collection of maps in paper form from municipality. The maps were then digitised by the assessee and also demographic features, geographical features and other infrastructure available in particular areas were incorporated. The maps so prepared were then integrated into software solution to attach further attribute, information and to provide reports and analytical options to the municipalities. The assessee had claimed deduction u/s 80-IB in respect of his business income.

The Assessing Officer had disallowed claim of deduction u/s. 80-IB on the ground that the customised software developed by the assessee was not manufacture of articles or things. The CIT (A) had upheld the order of the Assessing Officer. The Tribunal, relying on decision of Supreme Court in case of CIT vs. Oracle Software India Ltd., (2010) 320 ITR 546, had held that if a process renders a software usable for which it is otherwise not fit then the said process can be termed as manufacture. However, Tribunal was also of the opinion that if one party engages another party to create an item of property that the first party will own from the moment of its creation, then no property will have been acquired by the first party from the other and the transaction should be characterised as the provision of services. However, in case of customised software when the originally developed software is owned by the developer and not by the receiver of such software prior to its transmission then the consideration paid by the receiver is towards the software and not towards the intellectual skills employed by the software developer and in such cases the developer can be held as engaged in manufacture of a customised software and thereby be entitled to deduction u/s. 80IB. Hence Tribunal remitted the matter to the Assessing Officer to show the point of time at which the client of the assessee acquired property in the software, developed by the assessee.

The Assessing Officer, in remand proceedings, expressed the view that since basic area maps were the material on the basis of which the software was developed, and since basic area maps always belonged to the client, it was a case of provision of services. The Commissioner (Appeals) also confirmed the view of the Assessing Officer. Aggrieved, the assessee filed appeal before Tribunal again.

Held:

On demonstration of this software in court, it was noticed that what was produced by the assessee was not a mere compilation of map simplictitor but a much value added product that produced a variety of information which was big help in efficient administration of the municipal work.

The software, came into existence after carrying on several processes, and it was only on completion of these processes, the property in the product could be transferred to the client and the mere fact that one of the inputs was owned by the client itself, did not mean that the property in the product never belonged to the assessee. The transfer of property was therefore not an ongoing process at each stage of work as it is in the case of a provision of services and therefore assessee was held eligible for deduction u/s. 80-IB.

The Tribunal also held that, though the basic inputs (area maps) were given by the client, i.e. the municipality itself, but the product was much more than the compilation of the input and the fact that was being produced, was on a platform (basic inputs) not owned by the assessee, was irrelevant, inasmuch as what was being transferred by the assessee was not the platform but the end product.

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Section 5(2): Salary received by a non-resident from a foreign employer for rendering services outside India, is not taxable in India merely because said salary was credited to NRE bank account of the assessee in India.

8. (2014) 101 DTR 79 (Agra)
Arvind Singh Chauhan vs. ITO
A.Ys.: 2008-09 & 2009-10 Dated: 14-02-2014

Section 5(2): Salary received by a non-resident from a foreign employer for rendering services outside India, is not taxable in India merely because said salary was credited to NRE bank account of the assessee in India.

Facts:

The assessee, an individual, was in employment of a Singapore Company (ESM-S) and worked on merchant vessels and tankers plying on international routes. The assessee’s stay in India in the relevant previous year, was less than 182 days, and so the residential status of the assessee is ‘non-resident’. In the income tax return filed by the assessee, the salary received from ESM-S was not offered to tax on the grounds that his salary income was accruing and arising outside India. As for the salary income being credited to the bank account in India, the assessee’s contention was that the salary income deposited in the bank account in India, directly from the bank account of the company outside India. Thus, it was outside the ambit of section 5(2). However, the Assessing Officer was of the view that the assessee’s explanation could not be accepted for several reasons. One of the reasons is that since the appointment letter was issued by a foreign employer’s agent in India, it is to be deemed that the salary income accrued in India. The Assessing Officer further took note of the fact that the salary cheques were credited to the assessee’s account with HSBC Bank in Mumbai. Hence, the salary of Rs. 13,34,884 received from ESM-S was brought to tax in the hands of the assessee.

Held:

The above issue is analysed in two parts as follows:

1. Whether issuance of an appointment letter gives the assessee the right to receive salary?

Once it is not in dispute that the assessee qualifies to be treated as a ‘non-resident’ u/s. 6, as is the undisputed position in this case, the scope of taxable income in the hands of the assessee is restricted to section 5(2), Therefore, it is only when at least one of the two conditions u/s. 5(2) is fulfilled that the income of a non-resident can be brought to tax in India. In the present case, the services are rendered outside India as crew on merchant vessels and tankers plying on international routes. A salary is compensation for the services rendered by an employee and, therefore, situs of its accrual is the situs of services, for which salary paid, being rendered. It is wholly incorrect to assume that an employee gets the right to receive the salary just by getting the appointment letter. An employee has to render the services to get a right to receive the salary and unless these services are rendered, no such right accrues to the employee. Undoubtedly, if an assessee acquires a right to receive an income, the income is said to have accrued to him even though it may be received later on, it’s being ascertained, but this proposition will be relevant only when the assessee gets a right to receive the income, and, in the present case, the assessee gets his right to receive salary income when he renders the services and not when he simply receives the appointment letter. Thus, the receipt of an appointment letter cannot be the sole basis for deciding situs of accrual of salary.

2. Whether salary amount remitted to bank account in India attracts taxability u/s 5(2)(a)?

The law is trite that the ‘receipt’ of income, for this purpose, refers to the first occasion when the assessee gets the money in his own control – real or constructive. What is material is the receipt of income in its character as income, and not what happens subsequently once the income, in its character as such is received by the assessee or his agent; an income cannot be received twice or on multiple occasions. As the bank statement of the assessee clearly reveals these are US dollar denominated receipts from the foreign employer and credited to non-resident external account maintained by the assessee with HSBC, Mumbai. The assessee was in lawful right to receive these monies, as an employee, at the place of employment, i.e. at the location of its foreign employer, and it is a matter of convenience that the monies were thereafter transferred in India. The connotation of an income having been received and an amount having being received are qualitatively different. The salary amount is received in India in this case but the salary income is received outside India. Thus, when the salary has accrued outside India, and thereafter, by an arrangement, the salary is remitted to India and made available to the employee, it will not constitute as receipt of salary in India by the assessee so as to trigger taxability u/s. 5(2)(a).

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Section 40A(3) – In a case where liability for an expense is incurred in one year and the payment thereof is made in a subsequent year, the law applicable in the year in which the liability was incurred would be applicable and not the law applicable in the year in which the payment is made.

7. 149 TTJ 205 (Ahm)
Tushar A. Sanghvi (HUF) vs. ITO
ITA No. 1901/Ahd/2011
Assessment Years: 2008-09.
Date of Order: 09-02-2012

Section 40A(3) – In a case where liability for an expense is incurred in one year and the payment thereof is made in a subsequent year, the law applicable in the year in which the liability was incurred would be applicable and not the law applicable in the year in which the payment is made.

Facts :

In the course of the assessment proceedings for the assessment year 2007-08, the Assessing Officer noticed that the assessee had shown creditors’ outstanding at Rs. 1,95,17,664 as on 31-03-2007. He asked the assessee to give details of payments made to the said outstanding creditors in the subsequent years. Upon receiving the details from the assessee, the AO made enquiries with the concerned banks where the cheques issued by the assessee were presented for clearance. From the replies furnished by the bank, the AO noticed that the cheques issued in the name of the creditors M/s. Bhavi Enterprises, M/s. Patel Traders and M/s. Jayraj Traders were deposited in some other persons accounts. Cheques of amounts aggregating to Rs. 62,10,000 issued in favour of M/s. Bhavi Enterprises were deposited in accounts of another person. Cheques of amounts aggregating to Rs. 12,10,000 issued in favour of Patel Traders were deposited in accounts of other persons. The AO called upon the assessee to give details as to in which assessment year expenses have been claimed on account of the above creditors. The assessee expressed inability to furnish the reply. The AO concluded that the payments were made otherwise than by account payee cheques and accordingly Rs. 62,10,000 is required to be treated as income in the assessment year 2008-09 and Rs. 12,10,000 is required to be treated as income in the assessment year 2010-11. He reopened the assessment for the assessment year 2008-09 u/s. 147 of the Act. The assessee vide its reply informed the AO that the above mentioned parties were mediators who were entitled only to commission which is evident from the sample copy of the bill. Without prejudice, it was submitted that the purchases were made in the year 2004 and as the transactions related to the said year only 20% of the disallowance should be made of the amounts paid otherwise, than by account payee cheques or drafts as per provisions applicable in that assessment year. The AO added Rs. 62,10,000 to the total income of the assessee for assessment year 2008-09. Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal found that there is no dispute about the facts. It noted that the expenses were incurred in the assessment year 2004-05 and the payment was made in the assessment year 2008- 09 by crossed cheques. It then noted the provisions of section 40A(3) as applicable in assessment year 2004-05 and also as applicable in assessment year 2008-09. It held as under: When we go through the provisions applicable in assessment year 2004-05 and assessment year 2008-09, we find that there are three major differences;

(i) The first difference is that, as per the provisions of the assessment year 2004-05, the assessee is required to make payment by way of crossed cheque/crossed bank draft whereas as per the provisions of assessment year 2008-09, the assessee is required to make payment by way of a/c. payee cheque/a/c payee bank draft;

(ii) The second difference is this, that as per the provisions applicable in assessment year 2004-05, the disallowance was to be made to the extent of 20% of payments made in contravention to the prescribed mode whereas, as per the provisions applicable in the assessment year 2008-09, such disallowance is to the extent of 100% of such payment in contravention to the prescribed mode;

(iii) The third difference is with regard to payment in a subsequent year in contravention to the prescribed mode. As per the provisions applicable in the assessment year 2004- 05, the disallowance was to be made in the relevant year in which the expenditure was incurred whereas as per the provisions of assessment year 2008-09, addition is to be made in the year in which payment in contravention to the prescribed mode was made by the assessee irrespective of the fact as to whether the expenditure was incurred in an earlier year. Now, the question to be decided by us, is as to whether if an expenditure incurred in the assessment year 2004-05 for which payment is made in the assessment year 2008-09, provision of section 40A(3) applicable in assessment year 2004-05 is required to be applied or the provisions in assessment year 2008-09 being the year of payment, are to be applied. The A O has applied the provisions of section 40A(3) as amended w.e.f. 01-04-2008, because the payments were made by the assessee in the assessment year 2008-09 and the claim of the assessee before us is this, that since the expenses were incurred in the assessment year 2004-05, such expenses are to be subjected to the provisions applicable in assessment year 2004-05.

The Tribunal noted that the decision of the Tribunal in the case of Anand Kumar Rawatram Joshi (supra) is under similar facts with small difference that in that case, the expenses were incurred in assessment year 2007-08 and the payments were made in assessment year 2008-09. It noted that in the said case the Tribunal has in para 8 held that if the liability is incurred up to 2007-08 but the payment made is in a subsequent year i.e., in the assessment year 2008-09 or any subsequent year, the provisions of section 40A(3) as applicable in that year in which the liability was incurred should be applied, as per which, if the assessee does not make payment for such a liability in a sum exceeding Rs. 20,000/- by an a/c payee cheque drawn on a bank or by an a/c payee bank draft, the allowances originally made shall be deemed having wrongly been made and the assessment order of that year in which liability was incurred should be rectified as per the provisions of section 154 and for the purpose of reckoning the limitation period of four years, it shall be reckoned from the end of the assessment year following the previous year in which the payment was so made.

The Tribunal held that the present issue is squarely covered in favour of the assessee by this Tribunal decision rendered in the case of Anand Kumar Rawatram Joshi (supra). Applying the ratio of the said decision, if the provisions of section 40A(3) as applicable in the assessment year 2004-05 are applied, no addition in the present year is justified and no disallowance can be made in the assessment year 2004-05 also because as per the provision of section 40A(3) as applicable in the assessment year 2004-05, the payments are required to be made by a crossed cheque/crossed bank draft and the assessee has made the payment by way of crossed cheque and, therefore, no disallowance is called for in the present case as per the provisions of section 40A(3) applicable for the assessment year 2004-05. The Tribunal allowed the appeal filed by the assessee.

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Section 54F – Since assessee had entered into a registered agreement within time period prescribed u/s. 54F, he was entitled to claim exemption even in respect of amounts paid at the time of booking which was more than one year prior to the date of transfer. New house vests in the assessee by registered deed and not by availing of housing loan or payment of booking amount.

6. 62 SOT 59 (Bang)
Gopilal Laddha vs. ACIT
ITA No. 1356/Bang/2012
Assessment Years: 2009-10.
Date of Order: 31-10-2013

Section 54F – Since assessee had entered into a registered agreement within time period prescribed u/s. 54F, he was entitled to claim exemption even in respect of amounts paid at the time of booking which was more than one year prior to the date of transfer. New house vests in the assessee by registered deed and not by availing of housing loan or payment of booking amount.

Facts:

During the previous year relevant to assessment year 2009-10, land belonging to the assessee was acquired by the Karnataka Industrial Development Board for Bangalore Metro Rail Corporation and the assessee received compensation of Rs. 84,61,701 on 21-07-2008. The assessee acquired a residential flat at Bangalore for Rs. 50,98,720 by registered sale deed dated 11-09-2008. He, accordingly, claimed exemption of Rs. 46,11,166 u/s. 54F of the Act.

In the course of assessment proceedings the Assessing Officer (AO) noticed that the said flat whose cost was considered for claiming exemption u/s. 54F of the Act was booked on 19-01-2006 and the assessee had taken a loan of Rs. 40 lakh from Syndicate Bank which was sanctioned on 24-05-2006 for investment in purchase of the said flat. Thus, the AO noticed that the amount of Rs. 44,70,852 was paid by 31-03-2007 i.e., more than one year prior to acquisition of the new asset. The AO was also of the view that since the assessee invested Rs. 40 lakh out of the Housing Loan from Syndicate Bank in the purchase of the new asset and therefore only Rs. 6,23,433 qualified for exemption. He accordingly, worked out the exemption u/s. 54F at Rs. 6,23,433 and allowed Rs. 6,23,433 instead of Rs. 46,11,166 as claimed.

Aggrieved, the assessee preferred an appeal to Commissioner of Income-tax (Appeals), who dismissed the appeal by holding that the assessee is not eligible for exemption u/s. 54F as claimed.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the AO had restricted the claim for exemption for the reason that though the flat was purchased by registered deed dated 11-09-2008, the booking was made on 09-01-2006 and a housing loan of Rs. 40 lakh was taken from Syndicate Bank on 24-05-2006 which was invested in the said property before 31-03-2007.

The Tribunal did not agree with the view of the authorities below that both these investments amounting to Rs. 44,70,852 being made more than one year prior to the date of receipt of compensation of Rs. 84,61,701 for asset, on 21-07-2008, the assessee would not be eligible for exemption u/s. 54F of the Act. The Tribunal was of the view that the amounts paid by the assessee on booking of the asset on 09- 01-2006 and the housing loan of Rs. 40 lakh availed from Syndicate Bank for investment in the purchase thereof have not vested the assessee with the ownership of the new asset. The assessee has been vested with the ownership of the new asset only by virtue of the Registered Sale Deed dated 11-09- 2008. It held that the authorities below have erred in restricting the exemption u/s. 54F of the Act to Rs. 6,23,433. It held that the assessee is entitled to exemption of Rs 46,11,166 as claimed by it.

This ground of appeal filed by the assessee was allowed.

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[2014] 41 taxmann.com 259 (Ahmedabad – CESTAT) Indofil Chemicals Co vs. CCE.

Refund claim by SEZ Unit – What constitutes sufficient evidence for establishing services received and consumed in SEZ?

Facts:
The Appellant in SEZ received GTA services during the period April to September, 2009 and filed a refund claim. The adjudicating authority as well as the first appellate authority rejected the refund claim only on the ground that the Appellant did not produce documentary evidences in respect of taxable services provided to SEZ and consumed partially or wholly outside the SEZ.

Held:
Tribunal observed that the refund application is supported with the bills of transport companies, which indicate the consignors or beneficiary of the services as the Appellant in a particular Clause which is in SEZ. From the records, the Tribunal also observed that the said transport company is for transportation of the goods into the SEZ unit and also taking up the goods from the SEZ unit. These documents were held as sufficient evidence before the lower authorities to justify his refund claim and accordingly the claim was allowed.

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[2014] 41 taxmann.com 318 (Gujarat) CCE vs. Neel Pigments (P.) Ltd

The claim of rebate be allowed even if duty-paid goods are not exported ‘directly’ from the factory/ warehouse, provided documentary evidence establishing direct co-relation between duty-paid goods manufactured/cleared by assessee and those exported by assessee is placed on record.

Facts:
The Assessee – a manufacturer from Gujarat, filed different rebate claims in terms of Rule 18 of the Central Excise Rules, 2002 and Notification No.19/2004 dated 06-09-2004. Rebate claims were granted as such claims were found allowable. The department filed appeal before the Appellate Commissioner, which was rejected. Aggrieved by the order, the department preferred writ before the High Court.

The primary objection of the department for not allowing claim was that, manufacturer had breached condition 2(a) of the Notification dated 06-09-2004, by not directly exporting the goods from factory or warehouse at Gujarat, but first by supplying the same to a trader exporter and thereafter, exporting from Maharashtra.

Held:
The High Court observed that the revenue authorities as well as the revisional authority have concurrently come to the conclusion that there was a direct corelation between goods manufactured in the factory with the goods exported and when such fact was established through reliable, undisputed and contemporaneous documentary evidence, there was no infirmity in granting refund.

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[2014] 41 taxmann.com 377 (New Delhi – CESTAT) Delhi Public School Society vs. CST, New Delhi.

Merely calling an agreement as “Joint Venture Agreement” would not make the parties joint ventures or partners unless there is sharing, both in profit and losses and a community of interest among the parties.

Facts:
The assessee entered into agreements with distinct entities which intended to establish schools in different areas (within India and overseas as well) in collaboration with the assessee. The assessee was experienced in establishing and managing schools that provided quality education and had a brand image in the area. The agreements were named as “Education Joint Venture”. As per the agreement, the schools were to be established, run and managed by Board of Management comprising of nominees of assessee and the other entity in each case. The Assessee provided academic, operational and managerial expertise for establishing and running the school and allowing the use of the name DPS, its motto/ logo, subject to assessee retaining right, interest and title therein and other reasonable restrictions. The obligation of the other party was to provide land, buildings and all infrastructural amenities like furniture, laboratory, library and sports materials etc. for the school including residential accommodation for the principal, teachers and staff including meeting the revenue deficit, budgeted expenditure, to raise loans for all running expenditure and to meet the consequent financial liability. The assessee was specifically indemnified from any claims in this regard. The assessee, under the terms of the agreements was to receive an annual fee from the other entity.

The department contended that, the services provided by the assessee to the other party constitute a franchisee service. The assessee contended that, since the agreements between the assessee and the other parties are “education joint ventures”, the services provided by the assessee thereunder would not constitute taxable services.

Held
The Tribunal held that, on a true and fair analysis of the agreements between the parties, it is clear that the assessee is wholly immune from any losses arising out of the enterprise i.e., the educational institution to be established pursuant to the agreement and also no entitlement to any share in the profits arising therefrom, hence the normative ingredients of a partnership or a joint venture are absent. Hence, in the totality of circumstances neither the indicia of a partnership or a joint venture is discernable from the terms and conditions of the agreements between the parties. The participation of the assessee in the management of the schools is calibrated only for effectuation of the assessees perceived expertise and experience, in establishing and running quality English Medium Schools and is in furtherance of effective execution of the franchise service provided by it for which the assessee receives remuneration as clearly indicated in Clause 3 of the agreement and therefore, would not tantamount to the assessee being a joint venturer. The Tribunal therefore held that, since all the ingredients of ‘franchisee services’ are fulfilled, the service is taxable under the category of franchisee service.

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[2014] 41 taxmann.com 260 (Bangalore – CESTAT) Inox Air Products Ltd. vs. CCE, Hyderabad

In absence of specific allegation in the SCN for levy of penalty for a specific purpose, no penalty can be levied.

Facts:
The
appellant had one manufacturing unit (Unit-I) and one service providing
unit (Unit-II). During the period from April 2007 to April 2008, Unit-I
took the CENVAT credit on certain input services though it was not
eligible to do so. This credit was, in fact, meant for Unit-II. The
irregular availment of CENVAT credit by Unit-I was noticed by the
department in October 2008, whereupon the credit was reversed forthwith
on 16-10-2008. For this, a Show Cause Notice was issued in April 2009.
The Appellant paid interest in February 2010. In the Show Cause Notice, a
penalty of Rs. 2,000/- was imposed under Rule 15(3) of the CCR, which
was also paid by the Appellant.

Subsequently, order was reviewed
by the department for non-imposition of penalty under sub-rule (4) of
Rule 15 of the CCR, 2004 read with section 78 of the Finance Act, 1994
and accordingly an appeal was filed with the Commissioner (Appeals) who
allowed the same and imposed penalty under 15(4) of CCR.

This
higher penalty was challenged by the Appellant contending that, no
ground for imposing penalty under Rule 15(4) was alleged in the Show
Cause Notice.

The department contended that, such penalty could
not be resisted by the appellant by mere reason of non-mentioning of
sub-rule (4) of Rule 15 or of section 78 of the Finance Act, 1994 in the
Show Cause Notice. Further, the wrong mentioning of section 11AC of the
Central Excise Act is also not fatal to the Revenue. It was further
contended that the demand confirmed against the appellant by the
original authority by invoking the extended period of limitation was not
challenged by it, it was precluded from resisting penalty under Rule
15(4) read with section 78.

Held:
It was held that
Para 5 of the Show Cause Notice contained an allegation to the effect
that the appellant contravened certain rules with intention to evade
payment of duty, but such allegation was made for the specific purpose
of invoking the extended period and not for imposing a penalty under
Rule 15(4). It further observed that irregular availment of the CENVAT
credit as alleged for invoking Rule 15(3) and not for invoking Rule
15(4) and that though the Show Cause Notices invoked Rule 15 of the
CENVAT Credit Rules, 2004, any sub-rule was not specified therein. The
Tribunal held that, since the different sub-rules of Rule 15 covered
different factual situations and, it was incumbent on the department to
specify the particular sub-rule which they wanted to invoke in a
particular Show Cause Notice. Relying upon Amrit Foods vs. CCE 2005
(190) ELT 433 (SC), the penalty under Rule 15(4) was set aside.

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[2014] 41 taxmann.com 254 (Mumbai – CESTAT) Jaika Motors Ltd. vs. CCEST, Nagpur

Valuation –Cost of spare parts sold by an Authorised Service Station, whether as sale simplicitor or under the composite contract, is not to be included in taxable value, if sale price of sales tax/Vat is separately shown.

Facts:
The Appellant, an authorised service agent for Hyundai Motor cars undertook maintenance/service of motor cars. It also supplied spare parts of these vehicles. During the course of scrutiny of the records, it was noticed that the Appellant was selling spare parts for motor vehicles during the course of providing repair services on which it was paying VAT. However, the value of these spare parts was not included in the consideration received for repair services and Service tax liability was not discharged on the value of such spare parts.

The department demanded Service tax on sales portion on the grounds that, any goods used in the course of providing service has to be treated as inputs used for providing the service and accordingly, the cost of such inputs formed integral part of the value of taxable service. The Appellant contended that the sale figure in the balance sheet included sale of spare parts simplicitor as well as sale of spare parts that may occur in the course of repair of motor vehicles. It also relied upon Circular No. B. 11/1/2001-TRU, dated 09-07-2001, wherein it was clarified that the cost of parts and accessories supplied during the course of repair and servicing of vehicles would not be includable in the taxable value if such cost was shown separately in the bills/ invoices. Further, they discharged Sales tax/VAT liability on the sale of spare parts.

Held:
The Tribunal referring to above circular held that, if a transaction involves only sale of spare parts, the question of levying Service tax would not arise at all. It further held that, even in a case of composite transaction involving sale of goods and rendering of service, if the bill/invoice issued clearly shows payment of Sales tax/VAT on the spare parts, then the value of such spare parts would not be included in the gross consideration for the service.

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2014 (33) STR 372 (Bom) Space Age Associates vs. UOI

Whether in order to claim deduction for sale/supply of goods under Notification No. 12/2003 –ST dated 20-06-2003, only sale invoices are to be considered? Matter remanded.

Facts:
The Appellant provided services of erection, commissioning and installation of power stations to various electricity boards. The contract entered with customers were composite contracts where supply of goods and services were involved. The Appellant was registered with the Service tax department and discharged Service tax liability. The revenue confirmed the demand on account of mismatch between the figures reflected in the ST-3 Returns and those in the P & L A/c. also invoking longer period of limitation. The plea that supply of goods was part of sale figure was not taken cognizance of.

In the Appeal before the Tribunal, the Tribunal dropped demand beyond the period of limitation but upheld the demand for normal period on account of non-availability of deduction under Notification No. 12/2003 –ST on account of the Appellant’s failure to produce sale invoices and directed to pre-deposit Rs. 1 crore. The Appellant contended that it had already produced sample copies of running bills, its sales tax returns etc. which were sufficient for claiming deduction under the said Notification.

Held:
Notification No. 12/2003 is a conditional notification which extends the benefit only upon the Appellant producing the documentary proof, indicating the value of goods supplied while rendering the service. The above condition does not mean that the goods have to be necessarily shown separately under the invoices. If the Appellant is able to show from the documents such as running bills, contract copies, returns filed with Sales tax authorities, it would be held that it is complying with the conditions. The Tribunal committed a fundamental error in insisting only upon the production of invoices as evidence of goods sold and ignoring the running bills, sales tax returns, contract terms etc. to arrive at value of goods. The High Court, accordingly, set aside the Order and remanded the matter to consider the petition afresh and pass the appropriate order on merits.

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2014 (33) STR 357 (Kar) United Telecom Limited vs. CCEx, Bangalore –I

Whether the share broker’s service used by a manufacturer of telecom equipments for sale of its investment in shares of another company is an input service?

Facts:
The Appellant was engaged in the manufacture and sale of telecom equipments and was paying excise duty on the same. In the month of November 2008, the Appellant had availed the services of a Stock Broker for selling its investment in the other company’s shares. The Appellant availed Service tax paid on said stock broker’s service treating the same as input service. The Revenue authorities and Tribunal disallowed the claim of the Appellant by contending that the same was not integrally connected to the business of the Appellant.

Before the High Court, the Appellant contended that the stock broker’s service was used for the purpose covered by the inclusive part of the definition of “input service”.

Held:
The High Court observed that, though the Appellant’s activity of investing in the shares was one of the incidental objects as per its Memorandum of Association, the claim for CENVAT Credit of Service tax paid on stock broker’s service was not against any liability arising out of the business activity of the Appellant and not relatable to the business activity and hence the High Court found no scope for making any interference with the Tribunal’s Order and as such, the appeal was dismissed.

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2014 (33) STR 153 (Guj) Commissioner of Central Excise & Customs vs. Ashish Anand & Co.

No powers to reduce penalty below minimum prescribed limit by invoking section 80 of the Finance Act, 1994.

Facts:
The short question under consideration was whether penalty u/s. 76 of the Finance Act, 1994 (the Act) be reduced below the minimum limit prescribed by invoking section 80 of the Act. The department argued that the Commissioner (Appeals) and CESTAT had no authority to reduce the penalty as provided in the law.

Held:
Applying the decision of the Gujarat High Court in Port Officer 2010 (19) STR 641 (Guj), it was observed that section 80 of the Finance Act, 1994 had an overriding effect over sections 76, 77, 78 and 79 of the Act (the Act) and no penalty was imposable in case of reasonable cause for failure to comply with laws as provided in respective sections. The authorities, Commissioner (Appeals) and CESTAT however, do not have powers to levy penalty below minimum prescribed limit and therefore, it was held that penalty u/s. 76 could not be reduced below the minimum prescribed limit by invoking section 80 of the Act.

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2014 (33) STR 142 (All) K. Amand Caterers vs. Union of India

If the assessee was eligible for VCES and had taken benefit of VCES, recovery proceedings cannot be initiated until application under VCES is decided.

Facts:
On 31st May, 2013, a search was conducted wherein it was detected that the petitioners were liable to pay service tax. Consequently, an order was passed on 7th June, 2013 u/s. 87 of the Finance Act, 1994 which was challenged on the ground that they had filed declaration of such tax dues under Service Tax Voluntary Compliance Encouragement Scheme, 2013 (VCES) on 20th June, 2013. Having regard to section 106 of the Finance Act, 1994, it was pleaded that they were eligible for VCES since the date of notice or order of determination was not prior to 1st March, 2013 and therefore, the order was illegal and arbitrary without deciding the application. The department claimed their right to initiate recovery proceedings and argued that unless the application under VCES was found valid and in time, the petitioners were not entitled to any relief in the writ petition.

Held:
The petitioners had prima facie demonstrated that they were eligible to take benefit of VCES u/s. 106 and 107 of the Finance Act, 1994 and unless application under VCES was decided, proceeding u/s. 87 shall not be continued. The object of VCES would be defeated if the recovery was allowed to proceed. An interim order was passed directing Competent Authority to decide the application under VCES within 60 days of passing the Order.

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2014 (33) STR 137 (Mad) Commissioner of S. T., Chennai vs. Sangamitra Services Agency.

Reimbursable expenses not in the nature of remuneration/ commission cannot form part of gross amount for clearing and forwarding agent’s services.

Facts:
The substantial question put forth before the High Court was whether reimbursable expenses such as freight, labour, electricity, telephone etc. received by the assessee at actuals should not be added to the taxable value related to clearing and forwarding agent’s services in view of Rule 6 (8) of the Service Tax Rules, 1994, providing for service tax levy on gross amount of remuneration.

Held:
In the absence of any material to show the understanding between the principal and the client that the commission was all inclusive, it was difficult to hold that the gross amount/commission would include expenses for providing services and all incidental charges for running of business. Receipts in the nature of reimbursements would not take colour of remuneration or commission. Rule 6(8) of the Service Tax Rules, 1994 referred to gross amount i.e. receipts in nature of remuneration or commission.

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2014 (33) STR 124 (Guj) Commissioner of C. Ex. & Customs vs. Stovec Industries Ltd.

The Department has to follow prescribed monetary limits for filing appeal in various Courts having regard to the Circulars in place which are binding on the department.

Facts:
The respondents were engaged in the manufacture and export of Rotary Screen Printing Machines and parts thereof. Aggrieved by the order of the CESTAT with respect to rejection of CENVAT Credit of around Rs. 2,02,472/-, the department was in appeal. The appeal was filed on 5th August, 2011. The respondents contested that vide Circular dated 20th October, 2010, the Central Excise department was not allowed to file an appeal if the duty involved was less than or equal to Rs. 2 lakh with equal mandatory penalty and any other penalty. The limit of Rs. 2 lakh was increased to Rs. 10 lakh vide Circular dated 17th August, 2011.

Held:
In view of Circular dated 17th August, 2011 taking effect from 1st September, 2011, the appeal could not be preferred by department in the High Court. The appeal, therefore, was dismissed without going into the substantial question of law since the department was bound by its own Circulars.

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Liability of Builders and Developers vis-à-vis New Rules

Introduction
Whether builders are liable to tax under MVAT Act, 2002 has been a burning issue since 20th June, 2006. The matter has been ultimately decided by the Hon’ble Supreme Court by way of judgment in case of Larsen & Toubro & others (65 VST 1). In the said judgment, the Hon’ble Supreme Court observed that the tax can be levied from the stage of agreement and thereafter. The Hon’ble Supreme Court also observed that the tax can be levied on the value of the goods only and no tax can be levied on the value of immovable property. So far as Maharashtra is concerned Hon’ble Supreme Court has directed to align the provisions in tune with above observations.

Amendment to MVAT Rules, 2005
As a follow-up to the above Supreme Court judgment, the Government of Maharashtra issued notification dated 29-01-2014 by which certain rules are amended. The short gist of amended rules is as under:

i) In Rule 58(1) an amendment is made so as to provide that the deduction as per the table will be available after the reduction of land value from the contract price.

ii) Rule 58(1A), which is related to the calculation of land value, is amended and a proviso is added. It has now been provided that if a higher value is proved before the Department of Town Planning and Valuation then the dealer can take that higher value instead of ready reckoner value.

iii) Rule 58(1B) is inserted to provide that if the agreement is entered into where some work is already done, then the value of the goods, after taking deduction for labour and land, will be as per the following calculation:

(b) For determining the value of goods as per the above Table, it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying, the date of completion of the stage referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant.

(1C) If the dealer fails to establish the stage during which the agreement with the purchaser is entered into then the entire value of goods as determined after deductions under sub-Rules (1) and (1A) from the value of the entire contract, shall be taxable.

Certain issues

In light of the above new rules and the Supreme Court judgment, various issues arise. Some of them are discussed below:

In the above judgment, the Hon’ble Supreme Court held that the Constitution of amendment bringing works contract in the sales tax net did not prohibit that if in addition to labour and material, if a third element like land is involved, there cannot be a taxable works contract. In other words, the Supreme Court has decided that even if in a contract, a third element like immovable property is involved, it can still be a taxable works contract under Sales Tax Laws. Accordingly, liability in case of builders can be attracted from the date of amendment in constitution, i.e., 1983, though in Maharashtra it will be enforced from 20th June, 2006.

The other fall out is that the contract with the builder is also to be treated as a normal contract. A normal contract can take place even by a mutual understanding and without a written document. Similarly, in the case of builders, a contract may arise by any action for the effecting transaction, though the actual agreement for sale may be registered subsequently. For example, the builder may issue an allotment letter, though agreement may be registered subsequently. In light of the interpretation made by the Hon’ble Supreme Court, the works contract will take place from the date of allotment letter itself.

An issue may also arise about the deduction for cost of land. In addition to the purchase cost, there are other expenditures like registration fees, TDR purchase cost etc. The issue will be whether, in addition to working as per Rule 58 (1A), such additional expenses will also be allowable. It is to be noted that Rule 58(1A) provides for deduction for probable sale value of the land involved in the contract. The value is to be worked out as per the ready reckoner rate.

Therefore, there cannot be further deductions on account of TDR etc. If at all, because of TDR etc., land value is increasing, the builder will be required to get a certificate from the Department of Town Planning and Valuation. Without such certificate, it will be difficult to get the extra deduction.

An issue may also arise for set-off. Although, tax is payable as per slabs given in Rule 58(1B), i.e., as per the completion stage, there is no provision requiring reduction of set-off in any given proportion. Therefore, as per the Rules that are in force today, the set off will be allowable fully, though tax may be payable on given percentage. To avoid litigation it is better that the department clarifies the above issue at the earliest.

It is also be noted that the builder now becomes a normal dealer. Therefore, he can claim set-off as any normal dealer. As per the normal provisions, set-off is allowable on effecting purchase and entering it in the books. The restrictions and negative list will be operative as applicable to a normal dealer. If Rule 53(6) is not applicable to the builder, he can claim set-off on all purchases. If at all ultimately, part of the premises are sold as immovable property, i.e., after completion of the building/unit in the building, there will still not be any adverse effect on the set off already taken.

As per Rule 58(1B), tax is payable according to the completion stage. One of the issues will be that even if the cost of work completed prior to agreement is higher, the tax will still be payable as per the given percentage. In other words, tax will get paid even on the completed portion.

In case of K. Raheja Development Corporation vs. State of Karnataka (141 STC 168)(SC), the Hon. Supreme Court has observed that if the sale agreement is after completion of the premises, then Sales Tax cannot apply. From the new Rule 58(1B) it appears that even if the building is fully complete, but occupation certificate is not received, the builder will be liable to pay tax on 55% value of the goods. This is contrary to the above judgment delivered by the Supreme Court. Thus, there will be a situation where tax will get attracted on sale of immovable property portion also, because of above mentioned Rule.

This will be unconstitutional. It is expected that an alternative scheme to grant higher deduction, as per completion stage, should be framed based on the records of the builder. Further the taxation after completion of building, but before getting occupation certificate, should be revisited by the Government.

Conclusion
There may be many further issues in respect of the taxation of builders. As per the ordinance dated 03-03-2014, the time limit for assessment for the year 2006-07 for the builders is extended to September, 2015. We hope that before such completion date, the above referred issues will be clarified by the department.

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S/s. 54B, 54F – Assessee is not entitled to claim exemption under s/s. 54B/54F in respect of investments made in the name of major married daughters. The term `assessee’ used in section 54B/54F cannot be extended to mean the major married daughters.

5. 160 TTJ 236 (Vishaka)
Ganta Vijaya Lakshmi vs. ITO
ITA No. 253/Viz/2012
Assessment Years: 2008-09.
Date of Order: 22-07-2013

S/s. 54B, 54F – Assessee is not entitled to claim exemption under s/s. 54B/54F in respect of investments made in the name of major married daughters. The term `assessee’ used in section 54B/54F cannot be extended to mean the major married daughters.

Facts:

During the previous year relevant to the assessment year 2008-09, the assessee transferred wet agricultural land for a consideration of Rs. 1,41,12,000. The assessee purchased an agricultural land, for a consideration of Rs. 52 lakh, in the name of her younger daughter and a residential house in the name of her eldest daughter for a consideration of Rs. 58 lakh. The long term capital gain arising on such transfer was claimed to be exempt under s/s. 54B/54F on the grounds that the investment made in the names of two daughters qualifies for exemption under s/s. 54B/54F. The assessee claimed that she has entered into “Possession purchase agreements” with her two daughters to comply with the provisions of s/s. 54B/54F. It was also contended that the daughters should be considered as her benamidars.

The Assessing Officer (AO) denied the exemption claimed by the assessee on the ground that the properties purchased were not registered in the name of the assessee. The claim of “benami” was rejected by the AO on the grounds that the Benami Transactions (Prohibition) Act provides exemption to the property purchased in the name of unmarried daughters only. He also refused to recognise both the “possession purchase agreements” as they were unregistered documents and did not transfer the properties. Tribunal news Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The decision of the jurisdictional High Court in the case of Late Mir Gulam Ali Khan vs. CIT 56 CTR 144 (AP) was rendered on typical facts of the case before the Court viz. that the assessee in that case entered into an agreement for purchasing a residential property and had also paid earnest money in furtherance of the same. Unfortunately, he passed away before the completion of the purchase transaction. Hence, the legal representative of the assessee completed the purchase of property. Thus, in effect, the new house property was not purchased in the name of the assessee, who sold the old property. Since the said legal representative of the assessee is liable to be assessed in respect of the capital gain on the property sold by his father, he claimed the cost of new property as deduction u/s. 54 of the Act. Thus, the facts prevailing in the case of Late Mir Gulam Ali Khan are peculiar and further, u/s. 159 of the Act, the legal representative is treated as assessee in respect of liability of the deceased person. The liberal view taken by the High Court in that case cannot be stretched in each and every case, where the property was not purchased in the name of the assessee who sold the property. It held that the assessee in the present case cannot derive support from this decision.

In respect of the other decisions relied upon, on behalf of the assessee, the Tribunal noted that in all those cases, the new property was either purchased in joint names i.e., in the names of the assessee and others, or it was purchased in the names of spouse or minor daughter. The Tribunal held that in its view the Courts have considered the investments made in the name of wife or minor daughter as an investment made by the assessee himself for the reason that there was no real intention to provide consideration for the benefit of wife/minor daughter alone.

In the instant case, undisputedly, the investments have been made in the names of the married daughters and apparently both of them are also majors. Thus, it is not a case of joint ownership along with the assessee. Both the daughters of the assessee shall have every right over the property purchased in their respective names. Thus, it cannot be said that the intention of purchasing the properties was not to give benefit to them. The assessee claims that she has entered into purchase possession agreement with her two daughters. However, we tend to agree with the view of the learned CIT(A) that the said agreement does not actually effect transfer of assets to the name of the assessee. Further, as pointed out by the AO, the said agreements have been entered only to show some compliance with the provisions of section 54B/54F of the Act.

The appeal filed by assessee was dismissed.

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Valuation of closing stock: Section 145: A. Y. 2006-07: Land purchased by assessee in dispute before civil court: Adverse impact on market value of land: Assessee reduced value of closing stock and adopted the same in the subsequent years accepted by Revenue. Addition on account of under valuation of closing stock not proper: CIT vs. Satish Estate P. Ltd; 361 ITR 451 (P&H):

The assessee had purchased a land in respect of which one A had filed a suit against the assessee on 11-03-2006. This dispute had an adverse impact on the market value of the land. The assessee valued the land at Rs. 75 lakh below the cost price and accordingly reduced the value of the closing stock as on 31-03-2006. The Assessing Officer made an addition of Rs. 75 lakh on the ground of undervaluation of closing stock. Commissioner (Appeals) deleted the addition holding that the assessee had not changed the method of valuing the closing stock. The Tribunal found that the Revenue did not challenge the value of the opening stock of the land in the subsequent assessment year while passing the assessment order u/s. 143(3) and accepted the valuation. The Tribunal dismissed the appeal filed by the Revenue. On appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal and held as under:

“i) A civil suit was filed by A in which the assessee was impleaded as a party. There was an interim order passed by the trial court which was affirmed by the Court as well. Thus, the assessee was justified in reducing the valuation of the closing stock.

ii) The assessee had reduced the closing stock and the same was taken as opening stock in A. Y. 2007-08 which was accepted by the Assessing Officer while framing the assessment u/s. 143(3). Thus no loss to Revenue had been caused.

iii) In view of the above, no substantial question of law arises. Consequently the appeal stands dismissed.”

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Recovery of tax: Power of TRO u/s. 281: Petitioner had purchased a property from one ‘M’ on 17-05-1995: TRO having found that ‘M’ inspite of several demand notices issued during years 1989 to 1994 had not paid income tax dues passed an order u/s. 281 declaring above sale transaction as void: TRO had no power u/s. 281 to declare sale transaction as void:

Karsanbhai Gandabhai Patel vs. TRO; [2014] 43 taxmann. com 415 (Guj):

The petitioner purchased a property from one ‘M’ on 17-05-1995. ‘M’ had defaulted in making payment of income tax dues for various assessment years. The Assessing Officer issued several demand notices on ‘M’ during the years 1989 to 1994 for recovery of the unpaid taxes. However, ‘M’ had not paid such taxes. Thereupon the Tax Recovery Officer (TRO) attached the above property by issuing an order dated 22-05-1995. Thereafter, he passed an order dated 08- 11-1995 u/s. 281 declaring the above sale transaction as void. He passed the order without any notice to the petitioner. Later on 03-02-2004, he wrote to ‘M’ indicating that the department would proceed with the auction sale of the property under attachment to recover the dues of ‘M’. The Gujarat High Court allowed the writ petition filed by the petitioner and held as under:

“i) Section 281 provides certain transfers to be void. S/s. (1) thereof provides that where, during the pendency of any proceedings under the Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of the said proceedings or otherwise. Proviso to s/s. (1), however, provides that such charge or transfer shall not be void if made for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee or with the permission of the Assessing Officer.

ii) It can thus be seen that, even if the transaction creating a charge or parting of possession has been entered into by the assessee during the pendency of any proceedings under the Act or after completion thereof, the eventuality of such charge or transfer being declared void can be avoided provided one of the two conditions contained in the proviso is satisfied. Under such circumstances, the transferee can demonstrate that the transaction had taken place with the previous permission of the Assessing Officer or that the same was entered into for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee.

iii) This element of the transaction being with adequate consideration and without notice would equally apply to the assessee as well as the transferee. In a given case, it may even be open for the assessee to establish that the transaction was for adequate consideration without notice. In a given case, even if the assessee had notice of the pendency or the outstanding tax or sum payable, the transferee can still take shelter of the transactions having been entered into by him for adequate consideration and without notice.

iv) It is, therefore, that the Courts have read into this provision the requirement of hearing the transferee also. Quite apart from this, Courts have taken a view that s/s. (1) of section 281 only provides for the eventuality of the transaction hit by the said provision as being void. It does not create any machinery for the revenue authorities to entertain dispute and declare the transaction to be void for which purpose, only a civil suit would lie.

v) The Bombay High Court in the case of Gangadhar Vishwanath Ranade (No. 2) vs. T.R.O. [1989] 177 ITR 176 held that u/s. 281, the TRO has no power to declare a transfer as void. This decision of the Bombay High Court was carried in appeal before the Supreme Court. The Apex Court in TRO vs. Gangadhar Vishwanath Ranade [1998] 234 ITR 188/100 Taxman 236 confirmed the view of the Bombay High Court.

vi) The issue involved in the instant case is squarely covered by the decision of the Supreme Court in the case of Gangadhar Vishwanath Ranade (supra). Therefore, the order passed by the Tax Recovery Officer u/s. 281 was liable to be set aside.”

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Recovery of tax: Liability of directors: Section 179: A. Y. 1998-99: Debts Recovery Tribunal directing recovery of bank’s dues by sale of properties of company: Balance due to bank supplied by directors from their personal resources: Directors agreeing to forgo their loans to company in order to have its name struck of register of companies: Facts establishing that non-recovery of tax due from company not attributable to gross neglect, misfeasance or breach of duty on part of directors: Recover<

(2014) 43 taxmann.com 288 (Guj):

The petitioners were directors of a private company. On 24-06-2002, the Assessing Officer issued notices to the directors u/s. 179(1) of the Income-tax Act, 1961, for recovery of the tax dues of the company of Rs. 7,53,649/- in respect of the A. Y. 1998-99. Being not satisfied by the reply given by the directors, the Assessing Officer passed order u/s. 179 for recovery of the tax dues from the directors. The Commissioner dismissed the revision petition made u/s. 264 of the Act.

The Gujarat High Court allowed the writ petition filed by the directors and held as under:

“i) The company had run into losses. The company had substantial dues towards the bank from which it had taken loan. Certain properties were also mortgaged to the bank. To realise its dues, the bank filed a petition before the Debt Recovery Tribunal where the parties agreed to settle the total dues for Rs. 25 lakh. The properties of the company were valued at Rs. 18 lakh. The balances was supplied by the directors from their personal resources. Additionally, in order to strike the name of the company off the register of companies, the directors agreed to forgo their loans to the company which were in excess of Rs. 16 lakh.

ii) When such facts were established, the Assessing Officer ought to have held that the petitioners had succeeded in establishing that non-recovery of the tax dues of the company could not be attributed to gross neglect, misfeasance or breach of duty on the part of the directors in relation to the affairs of the company.

iii) The assets of the company may not have been mortgaged to the bank. Nevertheless, the Debts Recovery Tribunal held the bank entitled to recover the suit dues by sale of hypothecated machinery and movables and by sale of immovable property. This would not bring the action of the petitioners within the expression of gross neglect, misfeasance or breach of duty on their part.

iv) The contention of the counsel of the Revenue that the petitioners should have offered the properties for recovery of the Department was not tenable. The orders passed by the Income Tax Officer and the Commissioner were to be quashed.”

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Reassessment: Change of opinion: S/s. 147 and 148: A. Y. 2005-06: AO completed original assessment u/s. 143(3) on 24-12-2007: Subsequently issued notice u/s. 148 on basis of investigation report dated 13-03-2006 received from investigation wing: Reasons to believe did not state that investigation report was not with Assessing Officer when he completed original assessment: Attempt to reopen assessment was result of a change of opinion: Reopening not valid

Rasalika Trading & Investment Co. (P.) Ltd. vs. Dy. CIT; [2014] 43 taxmann.com 371 (Delhi):

The assessee, an investment and security business company, had raised additional capital and offered shares at a premium of Rs. 90 per share during the previous year relevant to the A. Y. 2005-06. The Assessing Officer completed the assessment of the assessee for the A. Y. 2005-06 u/s. 143(3) on 24-12-2007. Subsequently the Assessing Officer issued notice u/s. 148 on the basis of the investigation report dated 13- 03-2006 received from the DIT (Investigation), New Delhi. The said report indicated that the assessee was amongst the beneficiaries of bogus accommodation entries. The Delhi High Court allowed the writ petition filed by the assessee and held as under:

“i) It is evident from the aforesaid that the reassessment proceedings were initiated by the impugned notice which expressly and plainly states that ‘reasons to believe’ are based upon the materials contained in the investigation report of 13-03-2006. The notice itself does not spell out that the report was not on the record when the original assessment was completed on 24-12-2007, nor did the revenue even suggest so in the counter affidavit filed in the proceedings. It is only in a subsequently filed additional affidavit that the position is sought to be clarified. Clearly, the High Court refrains from making such an enquiry at a time when the Assessing Officer has, in the first instance, failed to spell out clearly in section 148 notice itself that such report was not on record. In other words ‘the reasons to believe’ do not state even in one sentence that the investigation report was not with the Assessing Officer when he completed the assessment.

ii) The material on record in fact suggests otherwise. The nature of the queries put to assessee and the replies and confirmation furnished to the Assessing Officer in the course of the regular assessment clarify that what excited the suspicion was indeed gone into by the Assessing Officer himself while framing the assessment u/s. 143(3).

iii) Such being the case the Court has no doubt that the impugned notice, in the circumstances of the case, is based upon stale information which was available at the time of the original assessment and in fact appears to have been used by the Assessing Officer at the relevant time, i.e., during the completion of proceedings u/s. 143(3).

iv) Therefore, the attempt to reopen the proceedings u/ss 147 and 148 is really the result of a change of opinion. Consequently, the impugned notice and all proceedings further thereto are beyond the authority of law and were liable to be quashed.”

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