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Year: 2015

Toxic food – Regulation of pesticide use in farming is too lax

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India’s food chain continues to suffer from excessive toxicity, brought
on by the rampant and unrestrained use of pesticides. Official data were
released last week that showed nearly 18.7 per cent of samples tested –
samples of commonly consumed foods like vegetables, fruits, milk,
pulses, meat and spices – contained pesticide residues in varying
degrees. In over 2.6 per cent of the samples, the toxicity level was
higher than the permissible limits. The incidence of toxicity seems to
have nearly doubled when compared to similar studies in the past. Nor is
the problem confined to big cities, although Delhi and Mumbai are among
the worst hit: samples from small urban centres too have failed to pass
the safety test.

Earlier studies had shown that even drinking
water, beverages and soft drinks were not totally free of hazardous
chemicals. Worst of all, traces of banned or unapproved pesticides have
been found in commonly consumed foodstuffs. Clearly, regulation has
failed to check the circulation of prohibited chemicals and spurious
insecticides – substances which can be far more hazardous than the
permitted pesticides. Many of these harmful chemicals are feared to be
carcinogenic besides being injurious to the central nervous systems and
liver. A joint parliamentary committee(JPC) was set up in 2003 to go
into the safety standards for soft drinks, fruit juices and other
beverages. The Food Safety and Standards Authority of India (FSSAI) came
into being after the report of this JPC. However, many of the useful
recommendations of this panel, including one concerning formulation of
standards for individual food items – rather than for vegetables, fruits
and others collectively as a group – have yet to be fully implemented.

The
problem is not that India uses too much pesticide. In fact, India’s
per-hectare consumption of plant protection chemicals is just a fraction
of that in developed countries. Yet the problem of toxicity is far more
serious here than elsewhere. The real cause is the improper and
indiscriminate use of pesticides by farmers. Most pesticide
manufacturers stress the necessary precautions to be observed while
using these hazardous chemicals; these include allowing a prescribed
time to elapse between spraying pesticide and harvesting the crop. This
is necessary to let the pesticide molecules degenerate. But these
essential precautions are often ignored by farmers in India. Many of
them, especially vegetable growers, dip their produce in chemical
solutions just before going to the wholesale markets – which they
believe will improve their appearance and assure them better prices. The
use of chemicals like calcium carbide to artificially ripen fruits like
bananas, papayas and mangoes also contaminates them. This can be curbed
only by educating India’s farmers on the safe use of pesticides.
Pesticide marketing also needs to be better regulated. Only registered
dealers who have some knowledge of pesticides and their safe use should
be allowed to do business. This is important because farmers usually
rely on the advice of pesticide sellers when it comes to plant
protection issues. The pesticide industry must be pushed to contribute
to this effort.

(Source: Editorial in Business Standard dated 08-10- 2015)

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Fortify Aadhaar with Privacy Protection

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It is welcome that the Supreme Court has referred the Aadhaar dispute to a larger bench that will also examine whether it violates privacy. The government must legislate an explicit law to protect privacy, and penalize its violation.

The absence of a defined right to privacy now gives credence to concerns over how Aadhaar can be abused, for example, by using the Aadhaar tag to collate information on a person’s history of, say, medical, financial and government transactions.

A robust privacy law will offer a shield. Use of Aadhaarseeded bank accounts for transferring government benefits to citizens will eliminate duplication, fraud and waste. Such a system will allow the government to abandon product subsidy, with its inherent potential for diversion and other malpractice, and replace it with transfer of the subsidy amount directly to the end-beneficiary.

This will not just overhaul India’s subsidy administration but also get rid of the ills of product subsidy, such as subsidized kerosene being used to adulterate unsubsidised diesel. That the court has not gone back on its earlier order allowing the use of Aadhaar for food and cooking gas subsidy delivery is recognition of Aadhaar’s potential.

There remains the question about whether Aadhaar is mandatory. Aadhaar must be used wherever administration of subsidy is involved. This would be onerous only if Aadhaar enrolment were difficult. The onus is on the government to ensure that no eligible welfare beneficiary is denied the unique identity number. A beneficiary cannot be denied an entitlement if she cannot obtain Aadhaar. However, if Aadhaar is made available, and the beneficiary chooses not to enroll, she should forgo the benefit. You do not have to have a passport, but if you want to travel abroad, you need one.

(Source: Editorial in The Economic Times dated 09-10- 2015.)

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The 2G case – CBI deliberately withheld crucial files, concealed facts: Trial court

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Withholding of crucial documents, concealment of important facts and contradiction in statements of prosecution witnesses led to collapse of CBIs case in the 2002 additional spectrum allocation scam case. Special CBI Judge O. P. Saini, who discharged former Telecom Secretary Shyamal Ghosh and three telecom firms –Bharti Cellular Ltd., Hutchison Max Pvt. Ltd. and Sterling Cellular Ltd. in the case, said that CBI totally failed to prove its allegations. The court said that various documents, which were dubbed as unrelied upon by CBI, were “most important documents” and the agency had deliberately rendered it as inconsequential. It added that the agency wanted to give the impression that a grave crime had been committed when none had been done by “fabricating facts”.

It pointed out that TRAI reports and many other relevant documents were not filed in the court, adding that these facts “did not even find mention in the statements of witnesses.” CBI’s conduct in “relegating these (TRAI and other relevant) documents to a distant stage by not making them part of documents initially filed with the chargesheet and then dubbing them as unrelied upon and not placing on record certain other documents having important bearing on the case” went totally against the agency.

CBI’s allegation that Department of Telecommunications (DoT) had not obtained the required recommendation from TRAI prior to allocation of additional spectrum, fell flat. “I find myself in agreement with the defence counsel that TRAI recommendations were already there and DoT was not required to ask for fresh recommendations,” the judge said. The court noted that the previous TRAI recommendations of June 23, 2000 and October 24, 2000 had covered both inadequacy of the existing spectrum to the existing operators and also need for additional spectrum and also the rate at which spectrum was to be charged.

There were also contradiction in statements of prosecution witnesses which proved that CBI’s allegations were not true. The court pointed out several discrepancies in the statements of then Deputy Director General of DoT J. R. Gupta and then Wireless Advisor P. K. Gupta on whether then Member Finance was consulted before allocation of additional spectrum. CBI had alleged that former Telecom Minister Pramod Mahajan had taken this “hasty decision” on recommendation of Ghosh without consulting relevant bodies. The court, however, trashed CBI’s version and said the decision was “well debated and discussed.”

The court lambasted CBI for “deliberately” concealing and “changing its stand” over certain documents. The court added that it was because of this confusion that it summoned Bharti Cellular Ltd. CMD Sunil Bharti Mittal, Essar Group promoter Ravi Ruia and Asim Ghosh, then Managing Director of accused firm Hutchison Max Telecom Pvt. Ltd. as “additional accused” in the case. These three were not chargesheeted as accused in the case but were summoned by the court on March 19,2013 which relied on some documents placed by CBI. However, CBI later declared that it was not relying on these documents.

“The unrelied upon documents are by and large considered to be of no use to the prosecution. In the instant case, on January 14, 2013 and also in the application dated January 30, 2013, the prosecution referred to documents as unrelied upon, but in the course of submission changed its stand that these documents may also be taken as relied upon one. This change of stand distracted the attention of the court from these documents. In a sense, these documents lost credibility,” the court observed. On January 9 this year, Supreme Court had set aside the special court’s order summoning Mittal and Ruia, who was then a Director in Sterling Cellular Ltd., as accused in the case.

In 2012, CBI had filed a chargesheet in the case alleging a scam during the NDA regime in 2002. It had named Ghosh, Hutchison Max (P) Ltd., Sterling Cellular Ltd. and Bharti Cellular Ltd. as accused, claiming that on account of the conspiracy between these accused, Department of Telecommunications (DoT) allocated additional spectrum that had allegedly led to a loss of Rs 846.44 crore to the exchequer. The chargesheet also named former Telecom Minister Pramod Mahajan as an accused and alleged criminality on his part. However, since Mahajan had passed away, the proceedings against him were abated. (Remarks: The credibility & reliability of CBI is so low & yet the Establishment goes on entrusting more & more cases to CBI !!!)

(Source: The Times of India dated 16-10-2015.)

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Mr. M and Mrs. G

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The more one thinks about it, the more one is inclined to compare Narendra Modi with Indira Gandhi. The original Mrs. G was the last Indian prime minister to create an emotional bond with the public. The crowds at her memorial are far greater than at the Nehru Museum, situated at the other end of Teen Murti Marg. Irrespective of the long-term damage she did to the economy, and however much she fostered corruption, the poor thought she stood for and by them. Narendra Modi is the first prime minister after Mrs. G to have created a comparable bond. Whatever happens in the future, he will always remain the “hriday samraat” for a lot of Hindus who consider him the first Indian prime minister who is truly their own.

As with Mrs. G, the more his critics sound off about him, the stronger will be the bond between Mr. Modi and his public. It happened in Gujarat, and it may be happening now across much of the country north of the Vindhyas. For Mr. Modi stands tall in a way that no one has since Mrs. G. Like her, he can and does reach out directly to voters, without the need for party intermediaries. His party needs him more than he needs it — imagine the BJP’s Bihar campaign without Mr. Modi.

When Mrs. G came to power, she was broadly acceptable to most people. In about three years, though, she had alienated much of the English language press, and a good part of the chattering classes (as they later came to be called). Something not entirely dissimilar has now happened with Mr. Modi. Even those who were willing to give him the chance of a fresh start as prime minister have decided that Mr. Modi is in fact the same as of old. He mostly ignores them and what they say, just as Mrs. G did. Like her, if he responds at all, it is at mass rallies. Like her, he has no regard for the media.

But here’s the thing: the chattering classes play the role sometimes of the canary in the cage, down a mine shaft. When they turn against a political leader, it is a political warning shot. It happened with Rajiv Gandhi and with V. P. Singh: the alienation of the chattering classes marked the beginning of political decline. In Mrs. G’s case, her downfall did not come because of the chattering classes, but she would have avoided crucial mistakes if she had listened to them. She nationalised the wholesale trade in foodgrain in the middle of a drought! Soaring food prices provoked student protests that blossomed into a broader movement against corruption. Her brutal crackdown on the railwaymen’s strike of 1974 alienated yet more people.

The Emergency was the culmination of poor economics, the undermining of institutions and the centralisation of power, and it led to her ouster.

Mr. Modi is the first prime minister after Mrs. G with the power and possibly the intention to change the Indian system. Mrs. G’s bid to perpetuate power carried with it no great economic or social agenda, only a personal one. She overstepped several Laxman Rekhas, and paid the price. Mr. Modi has an agenda that goes beyond himself, and he has decided that he will not rein in those pushing social and intellectual illiberalism. Just as it wasn’t certain at the time whether Mrs. G would succeed in her gambit, we don’t know how far Mr. Modi will go or stop short. The tea leaves suggest that we will see more Dadris, or its equivalents. So Mr. Modi wouldn’t harm himself if he paid some attention to his critics — he won’t get their votes, but they might prevent him from making mistakes.

(Source: Weekend Ruminitions by Mr.T. N. Ninan in Business Standard dated 17-10-2015.)

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NJAC overturned in judicial overreach – Supreme Court’s decision to revive system of judges appointing judges pits judiciary against executive

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The collective order by a five-judge Constitution Bench of the Supreme Court to strike down as “unconstitutional and void” the 99th Constitutional Amendment Act and the National Judicial Appointments Commission (NJAC) Act 2014 legislated to replace the two-decade old collegium system of judges appointing judges, draws a line under arguably the biggest flashpoint between the judiciary and the executive over the past two decades. But given the widespread consensus that the collegium system has failed, this is unlikely to be the end of the matter.

Ordering the revival of the collegium system which allowed judges to appoint new judges since 1993, the Bench rejected the government’s plea to refer the case to a larger Bench.The apex court has simultaneously invited suggestions to improve the collegium system, fixing November 3 for its hearing on the matter. The broader judicial message is crystal clear. As senior lawyer Harish Salve put it, “SC is giving a message that the power is with them.”

This sets the stage for the most serious face off between judiciary and executive in a generation. While senior lawyer Ram Jethmalani hailed the verdict as a “historic day for democracy”, Attorney General Mukul Rohatgi scathingly called it “a flawed judgment ignoring the unanimous will of the Parliament, half the state legislatures and the will of the people for transparency in judicial appointments”. Union law minister Sadanand Gowda too says he was “surprised” because the NJAC “had 100% support of the people”.

NJAC was indeed enacted after a broad political consensus which evolved after several commissions and parliamentary committees found flaws in the collegium system over the years. It was ratified by Parliament as well as 20 state legislatures. This is why a senior advocate like K. T. S. Tulsi, while expressing disappointment over the judgment, quoted parliamentarians talking of the “tyranny of the unelected over the elected”.

This paper has argued in favour of NJAC because it promised to end opacity in judicial appointments. Judges don’t have unbridled power to appoint judges in most other liberal democracies. For example, US Supreme Court judges are appointed by the president and ratified by the Senate. For the UK’s apex court, an independent committee makes candidate recommendations to the prime minister who makes a final recommendation to the queen.

The Constitution envisages separation of powers between legislature, executive and legislature – which means each branch of government should stay within its own remit. Under NJAC the commission to select judges is composed equally of judges and non-judges, which should prevent power vesting exclusively with either judges or the political class.

With all due respect, rulings cannot be based on institutionalised distrust of the political executive or legislature. By calling for further discussion on the collegium system, the apex court itself has accepted that there were flaws in the system. It must now fix them. The judiciary remains a bulwark of Indian democracy and while preserving its independence is crucial, what’s equally incumbent on it is to look within and reform.

(Remarks : In India, the credibility & goodwill of the Politicians have reached such a low point and the Parliament has become so dysfunctional that citizens trust the higher Judiciary more than the Political Establishment.)

(Source: Editorial in The Times of India dated 17-10- 2015)

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By questioning expanding reservations, Bhagwat and Prasada draw fire but point out the obvious

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RSS chief Mohan Bhagwat’s call for a non-political committee to examine and determine which categories require reservation benefits and for how long has stirred a political hornets’ nest. Coming ahead of Bihar assembly elections BJP’s opponents – particularly RJD supremo Lalu Prasad – had a field day slamming Bhagwat. Given the atmosphere in poll-bound Bihar where every party is trying to get its caste calculations right, BJP quickly issued a clarification.

But political calculations aside, Bhagwat’s take on the reservations system isn’t without merit. Few can argue against his assertion that reservations have been politicised and aren’t being implemented in the spirit of their original intention. In fact, only last week Congress’s Jitin Prasada asked his own party to rethink the reservations policy and urged it to champion a new mechanism for social justice that focusses on the most backward castes and the poor among upper castes. This is an implicit admission that quotas have come to be cornered by a few powerful OBC castes that dominate the administrative machinery.

With parties across the political spectrum rushing to legitimise the reservation demands of different caste groups in the hope of cultivating vote banks, they have kicked off a race to the bottom. As a result, even influential communities are demanding a share of the reservations pie. This is precisely what the recent Hardik Patel-led Patidar agitation in Gujarat represents. Besides touching off caste conflicts, the fallout of this great reservations game has been the slow strangulation of meritocracy. This in turn has disastrous consequences for administration. The Yadavisation of the UP police force, wherein one particular OBC caste has come to dominate that state’s law and order machinery even as crime rates soar and communal riots break out, exemplifies this point.

The need of the hour is not just to reimagine the reservations policy but also create a new paradigm for social justice. One of the reasons for the reservations rush is the lack of adequate job opportunities elsewhere which makes government postings extremely lucrative and highly prized. This clearly isn’t sustainable. Boosting job creation in the formal sector, and not just economic growth, will enlarge the pie for all communities. Economic reforms along with sufficient investments in quality school education will create a level playing field and mitigate the need for quotas. It’s time to enact policies that lift all boats.

(Source: Editorial in The Times of India dated 23-09-2015.)

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2015 (39) STR 235 (Tri.-Mum.) CCE, Pune – III vs. Maharashtra State Bureau of Text Books Production & Curriculum Research

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Communication, determining the right of the party or likely to affect the rights, is appealable even though it may not be in the nature of an ‘order’.

Facts:
In view of centralised accounting system, the appellate authority allowed facility of centralised registration at the head office of the respondents, being the recipient of Goods Transport Agency services. Revenue argued that the rejection of centralised registration was through a letter, which cannot be appealed against and only service providers can be granted with centralised registration.

Held:
It is a well-settled law that a letter, conveying grounds of rejection and also the rejection, is an appealable order. The argument, that only service providers are eligible to obtain centralised registration, is meaningless and would defeat the objective of such registration. In Indirect tax laws, registration is linked with taxpayer, which is service recipient in the present case. Since respondents satisfied the conditions for centralised registration, centralised registration was rightly allowed.

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A. P. (DIR Series) Circular No. 5 dated 16th July, 2015

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Export factoring on non-recourse basis

This circular now permits banks to factor export receivables on a “non-recourse” basis (as against the present practice of factoring of export receivables on “with recourse” basis), subject to certain terms and conditions. The following is the gist of the terms and conditions: –

a) Banks must ensure that their client is not over financed and the invoices purchased must be genuine trade invoices.

b) Where export financing has not been done by the Export Factor, the Export Factor must pass on the net value to the financing bank/Institution after realising the export proceeds.

c) The bank that is the Export Factor, must have an arrangement with the Import Factor for credit evaluation & collection of payment.

d) Notation must be made on the invoice to the effect that the importer must make payment to the Import Factor.

e) After factoring, the Export Factor must close the export bills and report the same in the EDPMS to RBI.

f) When an Import Factor overseas is not involved, the Export Factor must obtain credit evaluation details from the correspondent bank abroad.

g) E xport Factor must conduct due diligence of the exporter.

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A. P. (DIR Series) Circular No. 4 dated 16th July, 2015

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Issue of shares under Employees Stock Options Scheme and/or sweat equity shares to persons resident outside India

Presently, an Indian Company can issue shares to its employees or employees of its joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, directly or through a Trust under Employees’ Stock Option (ESOP) Scheme, if: –

1. The scheme is drawn under the SEBI Act, 1992; and

2. The face value of the shares to be allotted under the scheme to non-resident employees did not exceed 5% of the paid up capital of the issuing company.

This circular now provides that an Indian company can issue “employees’ stock option” and/or “sweat equity shares” to its employees/directors or employees/directors of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, if: –

1. The scheme has been drawn either under: – (a) The Securities Exchange Board of India Act, 1992; or (b) The Companies (Share Capital and Debentures) Rules, 2014.

2. The “employee’s stock option”/“sweat equity shares” are in compliance with the sectoral cap applicable to the said company.

3. Issue of “employee’s stock option”/“sweat equity shares” in a company where foreign investment is under the approval route will require prior approval of FIPB.

4. Issue of “employee’s stock option”/“sweat equity shares” under the applicable rules/regulations to an employee/director who is a citizen of Bangladesh/ Pakistan will require prior approval of FIPB.

5. The issuing company must furnish a return as per the Form-ESOP (Annexed to this circular) to the concerned Regional Office of RBI within 30 days from the date of issue of employees’ stock option or sweat equity shares.

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A. P. (DIR Series) Circular No. 2 dated 3rd July, 2015

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Investment in companies engaged in tobacco related activities

This circular clarifies that prohibition with respect to Foreign Direct Investment (FDI) applies only in case of manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. In case of other activities viz. wholesale cash and carry, retail trading, etc., concerning cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes, FDI will be governed by the sectoral restrictions laid down in the FDI policy as amended from time to time.

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A. P. (DIR Series) Circular No. 1 dated 2nd July, 2015

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Re-export of unsold rough diamonds from Special Notified Zone of Customs without Export Declaration Form (EDF) formality

This circular clarifies that: –
a. Unsold rough diamonds which were imported on free of cost basis at SNZ, when re-exported from the SNZ (being an area within the Customs) without entering the Domestic Tariff Area (DTA ), do not require compliance with any EDF formality.

b. In case of lot/lots cleared at the Precious Cargo Customs Clearance Centre, Mumbai, Bill of Entry must be filed by the buyer and banks can permit import payments after being satisfied with the bona-fides of the transaction.

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Master Circulars dated 1st July, 2015

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RBI has issued 15 Master Circulars on 1st July, 2015. These Master circulars are a compilation of the regulatory framework and instructions issued by RBI and are for general guidance.

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A. P. (DIR Series) Circular No. 112 dated 25th June, 2015

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Overseas Foreign Currency Borrowings by Authorised Dealer Banks

This circular grants general permission banks to borrow from international/multilateral financial institutions (including International/Multilateral Financial Institutions of which Government of India is a shareholding member or which have been established by more than one government or have shareholding by more than one government and other international organisations) for general banking business. The borrowings are subject to applicable prudential conditions and cannot be used for capital augmentation purposes.

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SEBI’s jurisdiction over entities/transactions/GDRs outside India – Supreme court decides

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Background
Does SEBI have jurisdiction over (i) persons/advisors abroad? (ii) transactions under taken abroad? (iii) more specifically, over Global Depository Receipts (GDRs) issued abroad? If a non-resident person commits a securities related fraud abroad, can SEBI act against such persons? If yes, what are the conditions under which SEBI has jurisdiction? Some of these and certain related questions have been answered by the Supreme Court in the case of SEBI vs. Pan Asia Advisors Ltd. (Dated 6th July 2015, unreported).

Securities markets of India have significant connection with non-residents and foreign countries. Numerous nonresident investors invest in Indian securities. Indian companies regularly issue various forms of securities abroad. There are certain securities like GDRs that are issued, traded and redeemed/cancelled abroad. There are nonresident advisors who advise Indian companies. There are also non-residents who invest/trade in securities outside India or in India. Thus, there are numerous cases in which entities located out of India carry out transactions in India or in securities issued by Indian companies or advise Indian companies, etc. The question is does SEBI have jurisdiction over such foreign entities and/or foreign transactions in respect of such matters? And thus, can SEBI take action against such persons including lead managers even if they are not registered with SEBI? The Supreme Court has dealt with some of these issues.

The case is important for other reasons too. The matter related almost wholly to GDRs that are governed by the Reserve Bank of India through the Foreign Exchange (Management) Act, 2000 (FEMA) and Regulations issued thereunder. Thus, the submission made was that RBI should have sole jurisdiction over it. The decision of the Supreme Court in Vodafone International Holdings BV vs. Union of India and Another ((2012) 6 SCC 613) in respect of transactions abroad and their implications under tax was also discussed. Whether the principles laid down in that case would apply here was also considered.

Facts of the case
In the present case, the dispute before the Securities Appellate Tribunal (SAT ) as well as the Supreme Court was jurisdiction of SEBI. Though the minority dissenting decision of SAT had ruled also on the facts, the majority decision of SAT as also of the Supreme Court was purely on jurisdiction. Thus, neither had examined the findings of facts as also other allegations made by SEBI. However, it will still be necessary to understand what is SEBI’s contention in this regard.

SEBI alleged that a conspiracy was hatched to create a charade that GDRs were issued and duly subscribed by foreign institutional investors. Such a charade would eventually help the issuing company to raise funds and that too at a higher price. Investors in India would be impressed that foreign institutional investors had invested at a certain price in the GDRs issued by the company. Certain parties allegedly acting together took a loan from a bank for investment in the GDRs of the Indian company. The GDR proceeds were required by the loan agreement to be deposited with the same bank and were pledged for the purpose of the repayment of such loan. The company itself was alleged to be a party/signatory to such agreements. The GDRs were then converted into equity shares of the company by cancellation and such shares sold on stock exchanges in India to outside investors. This modus operandi was employed by the same persons in six companies. Such persons including the lead manager were located abroad. The net result was that investors in India were deceived by such conspiracy. SEBI thus took action under the SEBI Act as well as the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003 and debarred the lead manager and another person alleged to be primary persons behind the conspiracy from accessing the securities markets in India, rendering services in respect of securites in India, etc.

These parties appealed to SAT and raised the preliminary issue of jurisdiction of SEBI. The SAT by a majority decision held that SEBI had no jurisdiction in such a case. On appeal by SEBI, the Supreme Court reversed the order of SAT and restored the matter back to SAT holding that SEBI does have jurisdiction.

To arrive at its answer to this issue, the Supreme Court gave several reasons for its decision and interpretation of the law in this regard. These are discussed in the following paragraphs

Connection of GDRs with India
The submission made was that GDRs are created, traded and cancelled outside India – i.e., from “cradle-to-grave”, they are outside India. In that case, what is the connection with India which is required for an Indian regulator to exercise jurisdiction?

The Supreme Court identified the link as follows (emphasis supplied here and in later extracts):-

“Though it may appear that on the one hand underlying ordinary shares would be governed by the laws prevailing in India and the GDRs would be governed by the laws of the country in which such receipts are issued, the most relevant fact which is to be borne in mind is that the existence of GDRs is always dependent upon the extent of underlying ordinary shares lying with the Domestic Custodian Bank.”

GDRs could not be issued but for underlying shares in India. The issue of GDRs thus has close linkages with India and frauds, etc. in relation to GDRs and connected transactions in India would thus have concern with India.

Implications of a company being able to successfully issue GDRs
The Supreme Court highlighted the intangible aspect that investors associate with a company being able to issue GDRs. This of course goes to the core of the allegations. That the charade of issuing GDRs was made to give such recognition to the issuing company so that its shares will be bought and that too at higher prices. This aspect was recognized by the SAT as well in its minority decision.

GDRs are securities
For SEBI to have jurisdiction, an important issue is whether GDRs are “securities”. The other hurdle is that GDRs are issued abroad. The Supreme Court, considering the relevant definition of securities under the Securities Contracts (Regulation) Act, 1956 held that GDRs were securities. It observed that, “..even if GDR as such is not specifically referred to under the definition of `securities’ under Section 2(h) by virtue of sub-clause (iii) of the said section, any rights or interests in securities would also fall within the definition of securities.”.

Role of SEBI vis-à-vis protection of investors
GDRs have a base in and close connection with India. If there is a fraud, merely because the transactions were carried out outside India is not reason to disarm SEBI. In any event, the transactions that were entered into abroad were part of a total chain of transactions starting with issue of shares in India and culminating with transactions of securities in India. The Court observed:-

“Therefore, if there is going to be a false pretext or misleading information circulated with a view to lure both the foreign investors as well as Indian investors and in that process the very purpose of creation and trading in GDRs are found to be not true or bona fide, it cannot be said that simply because creation of such GDRs and its trading is in global market, SEBI should keep its mouth shut on the ground that it cannot extend its long statutory arm beyond Indian territory to control any such misdeeds deliberately committed with a view to defraud the Indian investors and thereby their interest in the investment of securities and its protection is at great stake.”

Applicability of FEMA does not prevent SEBI from exercising jurisdiction
A point strongly made was that GDRs are governed by the Foreign Exchange (Management) Act, 2000 and Regula-tions issued thereunder. It was even contended that this not only resulted in GDRs being solely governed by this law but it also gave the Reserve Bank of India exclusive jurisdiciton. Thus, SEBI has no jurisdiction, except purely in matters specifically stated in such law. The Supreme Court pointed out that these were two different issues. In particular, as far as frauds and the like were committed in respect of securities markets in India, SEBI did have juris-diction. The two regulators operate under different laws for different purposes and can thus act to further the objects of the respective laws they deal with.

Circumstances under which SEBI can exercise “extra-territorial” jurisdiction

It was claimed that SEBI was seeking to extend its powers beyond India. The transactions took place, and the parties were located, outside India. The question was whether action by SEBI in respect of such transactions/parties was extra-territorial and thus prohibited by law. Further, under what circumstances can SEBI exercise such powers.

Firstly, the decision in the case of GVK Industries Limited and another vs. Income Tax Officer and another – (2011) 4 SCC 36 was applied here. The following observations of the Supreme Court in that case were relied on:-

“…the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, – events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like — that occur, arise or exist or may be expected to do so, natu-rally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropri-ate cases, eliminate or engender such extraterritorial as-pects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well being of, or security of inhabitants of India, and Indians.”

The “effects doctrine” was also applied. In other words, applying this doctrine, even if the transactions took place abroad, if the effect was that certain things prohibited by Indian law took place in India, the Indian regulator could have jurisdiction.The following observations in the case of Haridas Exports vs. All India Float Glass Manufacturers’ Assn. and Others – (2002) 6 SCC 600 were relied on and applied (emphasis supplied):-

“46. It is possible that persons outside India indulge in such trade practices, not necessarily restricted to the effectuation of prices within India, which have the effect of preventing, distorting or restrict-ing competition in India or gives rise to a restrictive trade practice within India then in respect of that re-strictive trade practice, the MRTP Commission will have jurisdiction. The counsel for the respondents is right in submitting that if the effect of restrictive trade practices came to be felt in India because of a part of the trade practice being implemented here the MRTP Commission would have jurisdiction. This “effects doctrine” will clothe the MRTP Commission with jurisdiction to pass an appropriate or-der even though a transaction, for example, which results in exporting goods to India at predatory price, which was in effect a restrictive trade practice, had been carried out outside the territory of India if the effect of that had resulted in a restrictive trade practice in India. If power is not given to the MRTP Commission to have jurisdiction with regard to hat part of trade practice in India which is restrictive in nature then it will mean that persons outside India can continue to indulge in such practices whose adverse effect is felt in India with impunity. A competition law like the MRTP Act is a mechanism to counter cross border economic terrorism. Therefore, even though such an agreement may entered into outside the territorial jurisdiction of the Commission but if it results in a restrictive trade practice in India then the Commission will have jurisdiction under Section 37 to pass appropriate orders in re-spect of such restrictive trade practice.”

The decision of Vodafone was cited to support the argument that without specific powers in the law, transactions could not be “looked through” to determine the alleged underlying transactions. The Supreme Court rejected this argument stating that SEBI had specific and adequate powers in law to examine such transactions of alleged frauds.

Conclusion

The ruling of the Supreme Court will surely have larger ramifications. Transactions/persons abroad will not be beyond SEBI’s long hand solely on the ground that SEBI cannot have extra-territorial jurisdiction. This would have implications not just for GDRs, but also for almost any type of transaction/person connected with securities markets in India directly or indirectly. However, the limits are also ob-vious and clear as per the decision. There will have to be connection to and implications in India of such transac-tions. The decision also would have to viewed in light of the special fact in this case – that the GDRs could not have been issued without underlying shares in India. The issue cycle of GDRs – even if cradle-to-grave as argued

– did have direct implications to the underlying shares as well as other shares in India. The fact that shares arising out of cancelled GDRs were sold in India was also a relevant factor.

Wife’s Share in an HUF, Et tu, Gender Equality?

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Introduction
In recent times, there has been an effort at gender equality in India across various legislations, such as, amending the Hindu Succession Act to give rights to daughters and sisters in their father’s Hindu Undivided Family (HUF), women’s representation on the board of directors of listed and large public companies, etc. However, surprisingly one of the most basic rights of women – share of a wife in her husband’s HUF has yet not undergone a change. This position has remained constant right from the times of Manusmriti, the father of the Hindu Law. Let us examine the position in this respect.

Concept of an HUF
Just to set the background and to jog our memory, an HUF is a joint family belonging to a male ancestor, e.g., a grandfather, father, etc., and consists of male coparceners and other members. Thus, the sons and grandsons of the person who started the HUF would automatically become coparceners by virtue of being born in that family. The wife of a coparcener is a member of the HUF. A unique feature of an HUF is that the share of a member is fluctuating and ambulatory which increases on the death of a member and reduces on the birth of a member. The share can be crystallised only on the partition of an HUF. A partition refers to the breaking up of the joint family and giving separate identifiable shares to all or some of the coparcerners/members of the HUF. Thus, the HUF as an entity ceases to exist and its constituents become the owners of the property which was earlier owned by the HUF. The crux of the issue is which female member of an HUF has a right to demand a partition of an HUF?

Share of a Daughter
After the Amendment on 9th September 2005 to the Hindu Succession Act, 1956, even daughters would have an equal right as sons and hence, now, even they would become coparceners in their father’s HUF. The Bombay High Court has held daughters have a right to claim partition in their father’s HUF and this applies even to daughters born before 9th September 2005 – Babu Dagadau Awari vs. Baby AIR 2015 (NOC) 446 (Bom). Thus, this has been a major relaxation in women’s rights. Grand-daughters would also become coparceners in the respective HUFs of their paternal and maternal grandfathers.

Share of a Wife
However, when it comes to the share of a wife in her husband’s HUF, the position is the opposite. Under the Hindu law, a wife does not have a right to demand a partition of her husband’s HUF. She cannot demand a partition. Her only right is to get a share in her husband’s HUF equal to her son’s share in the event of a partition of such HUF. The decision of the Bombay High Court in Anand Krishna Tate vs. Draupadibai Krishna Tate, 2010(4) All MR 834 is on this point.

The Karnataka High Court in Thabagouda Satteppa Umarani by LRs vs. Satteppa 2015(1) KCRR 1022, held that it was to be noted that the term coparcener of an HUF referred to a male issue i.e., a father or a son. The wives of coparceners did not get any interest by virtue of their marriage. A wife had no share, right title or interest in the Hindu Undivided Family in which her husband was a coparcener with his brothers, father or sons and after the amendment of section 6 of the Hindu Succession Act,1956, with his sisters and daughters also. The wife, may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family she could not get any share, right, title or interest in the joint Hindu Family property which that family owned. A wife could not demand a partition unlike a daughter. She would get a share only if partition was demanded by her husband or sons and the property was actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he had as a coparcener in his HUF was wholly premature and completely misconceived. Thus, though the wife was entitled for an interest i.e., share, it was only along with her husband.

Share of a Widow
Is the position of a widow different from that of a wife whose husband is alive? Things start getting murkier now. Prior to the Hindu Succession Act, 1956, the position was different. Section 3 of the Hindu Women’s Right to Property Act, 1937 provided that when a Hindu male died intestate having behind his share in an HUF, then his widow had the same interest in the HUF as he himself had. Further, any such interest devolving on his Hindu widow was a limited interest known as a Hindu woman’s estate, and she had the same right of claiming partition as a male owner. Interestingly, this Act was repealed by the Hindu Succession Act, 1956. So an earlier law gave better protection to a widow as compared to the latter law! A Single Judge of the Bombay High Court in Anand Krishna Tate vs. Draupadibai Krishna Tate, 2010(4) All MR 834 has analysed the impact of this repeal and held that post-repeal, the 1937 Act affords no protection to widows. The Bombay High Court held that section 3, no doubt, gave a right to women to seek partition. However, this Act was repealed by Hindu Succession Act, 1956. Therefore, it was no longer possible to take advantage of section 3 of the Hindu Women’s Right to Property Act. If the provisions of Hindu Succession Act, 1956 are read, it would be clear that there is no provision similar to section 3 of the Hindu Women’s Right to Property Act. The legislature in its wisdom had not thought it fit to continue this right in a woman. However, another Single Judge of the Bombay High Court in the case of Smt. Kalawati Balasaheb Karne vs. Smt. Chandra Hanmant Karne, SA 405/2013, Order dated September 15, 2014, has considered this decision and held that in the wake of the revolution for emancipation of women and for recognising their rights as human beings equal to the males in respect of the properties in a Hindu family, depriving a widow simply because no other coparcerners demand partition would clearly be destructive of the movement. It must be noted that both the decisions are of Single Judges of the same High Court and hence, one cannot be said to have dominance over the other. However, both of these decisions have not considered a very old Full Bench judgment of the Bombay High Court in Sushilabai Ramchandra Kulkarni vs. Narayanrao Gopalrao Deshpande, AIR 1975 Bom 257 (FB). Although this decision dealt with the share which a widow would receive in a partition of her deceased husband’s HUF, it also held that a widow’s heir is entitled to have a partition of the HUF and separate possession thereof secured to her.

Several Courts have expressly held that a widow can claim a partition of her husband’s HUF. The Gujarat High Court in Vidyaben vs. JN Bhatt AIR 1974 Guj 23 states that she can claim a partition. It analysed section 6 of the Hindu Succession Act, 1956, which states that when a male Hindu dies leaving behind Class I female relatives (such as, wife, mother, daughter), then his interest in the HUF property shall devolve by testamentary (i.e., by Will) or intestate – succession (i.e., by law), as the case may be, under this Act and not by survivorship. It further provides that the interest of a Hindu male coparcener shall be deemed to be the share in the HUF property that would have been allotted to him if a partition of the property had taken place immediately before his death, irrespective of whether he was entitled to claim partition or not. The Court held that section 6 itself by implication gives a right to the female heir mentioned therein to claim partition of the joint family property and the moment the deceased coparcener left behind him his heirs who included a female relative specified in Class I of the Schedule the law governing coparcenary property with regard to devolution of interest would no longer be applicable and the testamentary or intestate succession as provided by this Act would govern the case. It held that the moment the interest of the deceased in the joint family, property is severed, the joint family status would come to an end and it would be open to the widow to claim partition therein. it observed that it was difficult    to    envisage    a    position    that    even    though    the    share of the deceased has to be ascertained on the footing that the wife would get the share if there was partition of the huf property just prior to the death of her husband, she would not get any share after his death and that her son would take the remaining property by survivorship. the gujarat high Court also cited with approval a very old decision of the Bombay high Court in Ranubai vs. Laxman Lalji Patil, AIR 1966 Bom 169 which was on somewhat similar lines. a similar view has been expressed by the gauhati high Court in CIT vs. Mulchand Sukmal Jain, 200 ITR 528 (Gau.) where it held that the rule of pristine Mitakshara law that when, in a family consisting of father, mother and son , partition takes place between the male members, the mother may be entitled to a share equal to that the son in lieu of her claim for maintenance, but she herself cannot demand partition, cannot apply to a state of affairs reached on the death of her husband. the widow as an heir of her husband would certainly be entitled to claim the share inherited by her and, for that purpose, compel a partition. even the Karnataka high Court in Thabagouda Satteppa Umarani by LRs vs. Satteppa 2015(1) KCRR 1022 has held that a widow can demand partition of the interest in an huf which her deceased husband would have been entitled to.

It is respectfully submitted that the decisions   upholding right of a widow to demand partition appear   more reasonable.

The supreme Court in Gurupad Khandappa Magdum Vs. Hirabai Khandappa Magdum, 129 ITR 440 (SC) dealt with what would be share of a widow in a partition of    her    deceased    husband’s    HUF?    The    Court    held     that    a widow would not only be entitled to share in the portion coming to her husband but she will also have to be allotted her own share in the coparcenary property along with son upon death of husband, i.e., she would get her own share equal to her son and also a part in her husband’s share.   

Position of Different Female Relatives

Based on the above discussion, it would be interesting to note that the law provides for a different treatment as to whether a female can ask for a partition in an huf depending upon her relationship. this is better explained by the following table:

So we have a situation where a married daughter can partition    her     father’s    HUF    even     if    she    got    married    years several moons ago but she cannot ask for partition of her    husband’s    HUF    with    whom    she     is     living?    Moreover,     she    can    demand    partition    after    her    husband’s    death    but not during his lifetime!  is this not a singularly unique   proposition?

Conclusion
One wonders in these times of talk about women empowerment and so many recently launched initiatives for the girl child, why has this legal right of a married lady has not been changed? is it not high time that the Legislature walks the talk and focuses on ironing out such creases from our archaic laws? the law relating to hufs especially is one which is fraught with confusion and complexity. Would it not be desirable to have one consolidated law relating to all aspects concerning an huf instead of having    some    portions    codified    and    some    uncodified?    Ease    of doing business should also be coupled with     the    ease    of    exercising    one’s    personal rights. only then can we say that India    is    a    fair    and    equal    rights’    democracy!

Attitude – Professional Skepticism

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Attitude – Professional Skepticism

Arjun (A) — He Bhagwan, in the last few meetings, you have been explaining to me our Institute’s disciplinary mechanism and its procedures.

Shrikrishna (S) —Yes, dear. It is governed by Chartered Accountants (Procedure of Investigations of Professional and other Misconduct and Conduct of Cases) Rules, 2007 published in the official Gazette of India dated February 28, 2007 (‘Enquiry Rules’).

A — Quite a longish name! Difficult to remember. We have discussed so many disciplinary cases so far. But frankly, I have lost track of what you had told me in the beginning – a couple of years ago.

S — H a! Ha! Ha! It does happen. Actually, the principles should be hammered every day.

A — I agree. We are so much engrossed with our dayto- day worries of the practice that we tend to forget the basic things. Please give me some tips that we should always keep in mind.

S — I was also thinking on the same lines. See I explained the Bhagwad Geeta to you thousands of years ago. Many people are still reading and trying to understand it. But very rarely any one practices it. Same is with your ethics.

A — That is precisely the trouble. In school also, we are taught so many good things. But when we grow old, we compromise on everything under the fond excuse of ‘practical approach’.

S — I don’t preach idealism. Even in the Mahabharata war, I had advised you a few loopholes in the rules of war. So one has to be practical. But one has to be careful in balancing the rules of ethics and practical life.

A — True. Thanks to your advice, I could get rid of Karna, Jayadratha and others. Otherwise, it would have been a tough time for all of us.

S — Anyway! There are a few guiding principles which you CAs should constantly keep in mind.

A — What are they?

S — First and foremost, you should never do anything in ‘good faith’. It is very dangerous. We are now in kaliyug. Total faith in anything and anyone is bound to invite trouble.

A — Yes, I remember the case where the CA wife filed a complaint against her CA husband when their relations got strained. And another incidence of a CA, who signed the balance sheet in good faith that the director would sign subsequently!

S — There are hundreds of such cases where there was a breach of trust. In difficult times, clients conveniently forget all the good things done by their CA for them. At times, he even risks his certificate of practice to accommodate them.

A — But you had told me a few High Court decisions – where it was held that for holding anyone guilty of gross negligence, there has to be some dishonesty or ill-motive on his part that is established. You said, even a blunder is not negligence and every negligence is not gross negligence.

S — Arjun, you are very smart ! You remember only what is convenient to you. Firstly, the law and court decisions are at their own place. Facts and circumstances are more important. And with due respect to the courts, you must note that now clause (7) of Part I of 2nd schedule is amended.

A — In what way?

S — Apart from ‘gross negligence’, even ‘lack of due diligence’ is added. This is a very wide expression.

A — Oh!

S — And moreover, if someone brings his financial statements, and you sign without much verification, can you say you are not negligent? You may not be dishonest or your motives may not be bad !

A — I see your point!

S — Again, you may not be dishonest to any person. But then, are you not dishonest to yourself? Are you not failing in your duty?

A — Yes; if we were just to sign in good faith, the audit profession has no meaning! It is abuse of our signature. It is not audit at all!

S — Moreover, if you simply endorse what client says – without verification, without asking any questions, then why is audit required at all? How can others trust the correctness of the balance-sheet?

A — But what about the principle of ‘watch-dog’ as opposed to ‘blood-hound’?

S — Now that principle is diluted. Remember, now the society and regulators expect you to be blood-hounds only. You cannot and should not accept anything at its face value. That is professional skepticism.

A — You mean, should we not trust anybody? Everything we should see with suspicion?

S — Not exactly that! But doing your duty truthfully and religiously does not mean distrust or suspicion. The question is your credibility. You are the financial police! Can you have police who do not suspect anybody? Or security personnel who does not check you. Does it mean, they suspect you? After all, the duty should be performed strictly – without fail.

A — I agree. But I would like to know more such principles when we meet next.

S — Om Shanti !

Note: This dialogue is based on the same simple but basic principles which we professionals should religiously follow.

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Limitation – Settlement of Accounts on dissolution of partnership firm – After 3 years right to sue would become time barred: Limitation Act Article 5:

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Smt. Shanti Bai Agrawal & Ors vs. Smt. Uma Bai Agarwal & Ors AIR 2015 Chhattisgarh 80

The undisputed facts were that a house was recorded in name of M/s. Gajadhar Prasad Kashi Prasad, a partnership firm. The firm had four partners including the plaintiff. The said property was in name of the firm M/s. Gajadhar Prasad Kashi Prasad and the plaintiff was residing in the said property from the year 1943. The partnership firm was dissolved on 02.11.1956. After dissolution of the firm, the plaintiff, who was a partner continued to reside in the house and was in possession thereof . The house also had also a shop in a portion thereof. It was case of the plaintiff that he was/in exclusive possession of the suit property for last 12 years after the dissolution, as the suit was filed in the month of September, 1994. The plaintiff/appellant pleaded that by ouster of the title of the defendants after dissolution, the plaintiff was in possession and therefore had acquired the right and title over the suit property by way of adverse possession. It was therefore for such reason, the title of the plaintiff was denied as the plaintiff had acquired the title over the suit land by way of adverse possession. Consequently, the suit for declaration and permanent injunction was filed.

The substantial question of law was thus framed as under: “Whether, the immovable property brought into partnership by partners, on dissolution, remained to continue to be immovable property in the hands of the partners ?”

The Hon’ble Court observed that on reading of section 46 it was clear that on dissolution of a firm, first the property of the firm was to be applied for payment of debts and liabilities of the firm and the surplus to be distributed among the partners according to their rights. Section 47 provides that the authority of the partners will continue only so far “as it may be necessary to wind up” the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution, “but not otherwise”.

The Supreme Court in (AIR 1996 1300) Addanki Narayanappa & Another vs. Bhaskara Krishnappa & Others, had an occasion to interpret the share of the partner and the nature thereof. It is stated that the share of a partner is nothing more than his proportion of the partnership assets after they have been turned into money and applied in liquidation of the partnership, whether its property consists of land or not. Further, on dissolution the debts and liabilities should first be met out of the firm property and thereafter assets should be applied in rateable payment to each partner of what is due to him firstly on account of advances as distinguished from capital and, secondly on amount of capital, the residue, if any, being divided rateably among all the partners. It is obvious that the Act contemplates complete liquidation of the assets of the partnership as a preliminary to the settlement of accounts between partners upon dissolution of the firm.

The Court further observed that it is well settled that the firm is not a legal entity, it has no legal existence, it is merely a compendious name and hence the partnership property would vest in all the partners of the firm. Accordingly, each and every partner of the firm would have an interest in the property or asset of the firm but during its subsistence no partner can deal with any portion of the property as belonging to him, nor can he assign his interest in any specific item thereof to anyone.

Therefore, according to section 47 of the Indian Partnership Act, 1932, after the dissolution of a firm, the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners continue notwithstanding the dissolution, “so far as may be necessary to wind up the affair of the firm” and further to complete transactions begun but unfinished at the time of the dissolution, “but not otherwise”. In this case the dissolution is not in dispute, therefore, the partners had only inter se right between them in terms of section 47 and 48(b)(iv) of the Indian Partnership Act to claim for the right as per the provisions of the said section.

Therefore, in view of the aforesaid discussion, it is held that after dissolution of the property, the immovable property i.e. the subject suit land which was of a partnership firm became “a movable assets” in the hand of the partners inter se of M/s. Gajadhar Prasad Kashi Prasad. The partners have their inter se right in terms of section 48 of the Indian Partnership Act which could have been enforced by filing a suit to claim a share of dissolved partnership firm. Further, as per Article 5 of the Indian Limitation Act, the suit could have been filed by either of the partners within three years of the dissolution.

Admittedly the dissolution happened on 02.11.1956, therefore, by application of (Article 106 of the Limitation Act, 1908) Article 5 of the Limitation Act, 1963, the defendants having not claimed any right for settlement of account and share in the partnership, it would be barred as the period of three years has lapsed. Taking into consideration the totality of the facts, the immovable property of firm M/s. Gajadhar Prasad Kashi Prasad, was a property of the firm and the firm having been dissolved on 02.11.1956 as per the Partnership Act, it fell into shares of the partners as a movable assets for which the partners could have sued for their part of share after the discharge of dues and other settlement within a period of three years from the date of dissolution. Having not done so, the right to sue for account and the share in the partnership property became barred by limitation

The Court dismissed the suit on ground that a suit is not maintainable on the basis of adverse possession, it can be used as a shield/defence.

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Coparcenary property -Right given to daughters to claim partition – Constitutionally valid-Hindu Succession Act 1956 section 6:

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Dr. G. Krishnamurthy vs. The UOI & Anr. AIR 2015 Madras 114

On 20th day of December, 2004, the Hindu Succession Amendment Bill 2004 was introduced, inter alia, seeking to amend the erstwhile section 6 and to omit sections 23 and 24 of the Hindu Succession Act, 1956. Ultimately, the Amendment Act, 2005 was passed as Act 39 of 2005 on 09.09.2005. This Act was introduced pursuant to the recommendation made by the Law Commission to alleviate the gender bias caused by the then existing Act.

By the Amendment Act, not only section 6 was amended apart from omission of sections 23 and 24, but consequent thereon, an insertion was made by way of Amendment to Schedule in Clause-I.

The petitioner submitted that by the amendment made to section 6, the entire concept governing the Hindu Law was sought to be overturned in one stroke. The principle governing “Sapinda” and ”coparcener” as existed in the Shastric and Customary Law has been obliterated . Upon deletion of section 23, it is likely that a Hindu woman after remarriage would continue in the dwelling house wholly occupied by the members of a family of a Hindu intestate. There is also a possibility of a non Hindu residing therein in view of the possible remarriage of the widow. The Petitioner filed a Petition seeking to declare the aforesaid Amendment Act, 2005 as Ultra Vires.

The Court observed that the enactment has been made on the recommendation made by the Law Commission to remove the discrimination meted out to women. Therefore, in order to uphold the protection given under Articles 14, 15 (2) and (3) and 16 of the Constitution of India, the amendment was brought forth. It is trite law that the provisions of the Act would prevail over the old Hindu Law. Though the conferment of the rights to a Hindu woman is belated, it is also gradual through different enactments.

By the Hindu Law of Inheritance Act 1929, inheritance right to three family heirs-son’s daughter, daughter’s daughter and sister was conferred on them

The next legislation “A Hindu Woman’s Right to Property Act , 1937” provided for the right of the Hindu widow to succeed along with the son of the deceased in equal share to the property of a deceased husband. Though the Hindu Succession Act, 1956, (hereinafter referred to as “the Act”) came into being, u/s. 6 the rights of women were restricted. Thus, the new amendment Act was introduced to bring forth an element of equality between a Hindu man and woman. The enactment has been made to implement the fundamental rights enshrined in the Constitution of India.

Coming to section 23 of the Act, it has been omitted to remove the disability to female heirs. The said decision was made keeping the larger public purpose in mind. By virtue of the amendment section 6, the difference between the son and daughter has been removed, and consequently section 23 of the Act has been rightly taken away from the statute book.

Section 24 of the Act also created a statutory discrimination against widows remarrying qua inheritance. This was rightly removed as a woman cannot be deprived of her right to get a property on her remarriage. In other words, by such a remarriage, the entitlement of the widow cannot be extinguished. Accordingly, section 24 was rightly removed from the text.

The petitioner had sought to challenge sections 23 and 24 of the Act on mere presumption and conjunctures. The petitioner had also submitted that a discrimination is sought to be made with respect to Class-II. He had also submitted that Class-I by the inclusion of certain categories of heirs has to be declared as unlawful. The court held that there was no merit in the said submission. In fact, the petitioner had admitted that the laudable object in treating a Hindu man and woman on par had to be appreciated. If that is so, there cannot be any challenge to Class-I of the schedule. Class-I of the Schedule is only consequent upon the amendment made to section 6. It only qualifies the heirs, who are entitled to a property as in Class-I in consonance with section 6. Class-I has never been amended and there is no challenge to it. Therefore, the challenge to the said inclusion made to Class-I of schedule is also rejected.

The Court further observed that a challenge to the constitutionality of an enactment is to be made on the touchstone of the Constitution. It cannot be done based upon mere presumptions. Equally, a mere hardship cannot be a ground to declare a valid legislation to be ultra vires. The court therefore declined to declare the Amendment of 2005 as unconstitutional.

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Consumer – Builder –Agreements are prepared in a one-sided-Delay in handing over of possession – Liable to pay interest and compensation: Consumer Protection Act, 1986.

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Shri Satish Kumar Pandy & Anr. vs. M/s. Unitech Ltd.; Consumer Case No. 427 of 2014 alongwith others (NCDRC, New Delhi) dated 8/6/2015

The complainants group of matters, booked apartments with the opposite party in a complex known as ‘vistas’ which was being developed in sector 70 of Gurgaon, and they entered into individual “Buyers Agreement” with the opposite party. The possession of the apartments was agreed to be delivered to them within 36 months from the date of their respective agreements. The grievance of the complainants was that neither the possession of the apartments has been given to them nor was the construction complete though the last date stipulated in the Buyer’s Agreement for delivery of the possession to them had already expired more than 2 years ago. The complainants therefore, approached the Commission seeking delivery of the possession of the flats agreed to be sold to them or in the alternative payment of current market value of such houses. They were also seeking payment of compensation on account of loss of rental income to them with effect from the stipulated date of possession and compound interest @18% p.a. with effect from the stipulated date of possession. The complainants were also seeking compensation on account of their mental torture, agony etc.

The Commission observed that the learned counsel for the complainants stated, on instructions, that the complainants were not interested in taking refund of the money paid by them to the opposite party and they wanted to have possession of their respective flats even if the said possession was to be delivered in terms of the revised date of possession indicated in the abovereferred letter of opposite party. Thus the only question which survived for consideration in these complaints was as to what interest/compensation was to be paid to the complainants by the opposite party, till the date the possession being delivered to them.

The Hon’ble Commission observed that for the exceptional circumstances mentioned in Clause 4 of the agreement the opposite party was required to hand over the possession of the apartment to the flat buyers within 36 months from the date of signing the agreement with them. The exceptional circumstances which could justify delay in hand over the possession of the apartments were:-

(a) Lock-out
(b) Strike
(c) Slow-down
(d) Civil Commotion
(e) War, enemy action, terrorist action, earthquake or act of God and
(f) any reason or circumstance beyond the control of the developer.

The delay in handing over the possession of the apartments would also be justified if there was to be a new legislation, regulation or order suspending, stopping or delaying the construction of the complex and the apartments.

The Commission observed that neither any new legislation was enacted nor an existing rule, regulation or order was amended stopping suspending or delaying the construction of the complex in which apartments were agreed to be sold to the complainants. There was no allegation of any lock-out or strike by the labour at the site of the project. There was no allegation of any slow-down having been resorted to by the labourers of the opposite party or the contractors engaged by it at the site of the project. There was no civil commotion, war, enemy action, terrorist action, earthquake or any act of God which could have delayed the completion of the project within the time stipulated in the Buyers Agreement.

The word ‘slow down’ having been used along with the words lock-out and strike, it has to be read ejusdem generis with the words lock-out and strike and therefore, can mean only a slow down if resorted by the labourers engaged in construction of the project.

Therefore, the plea of the opposite party that the completion of the project was delayed due to non-availability of water, sand and bricks in adequate quantity was rejected.

Since the delay in construction of the apartments could not be justified by the opposite party, it was required to pay compensation to the flat buyers. The contention of the learned counsel for the opposite party was that such compensation had to be calculated @ Rs. 5/- per sq. ft. of the super built area of the apartment for the period of delay in offering the possession beyond the period indicated in clause 4 of the Buyers Agreement, the complainants having agreed to the aforesaid term while agreeing to purchase the apartments. This was also the contention of the learned counsel for the opposite party that the terms of the contract are binding on the parties and cannot be altered by a consumer forum.

The Hon’ble Commission observed that a person who, for one reason or the other, either cannot or does not want to buy a plot and raise construction of his own, has to necessarily go in for purchase of the built up flat. It is only natural and logical for him to look for an apartment in a project being developed by a big builder such as the opposite party in these complaints. Since the contracts of all the big builders contain a term for payment of a specified sum as compensation in the event of default on the part of the builder in handing over possession of the flat to the buyer and the flat compensation offered by all big builders is almost a nominal compensation being less than 0.25% of the estimated cost of construction per month, the flat buyer is left with no option but to sign the Buyer’s Agreement in the format provided by the builder. No sensible person would volunteer to accept compensation constituting about 2-3% of his investment in case of delay on the part of the contractor, when he is made to pay 18% compound interest if there is delay on his part in making payment.

Thus the commission held that a term of this nature is wholly one sided, unfair and unreasonable. The builder charges compound interest @ 18% per annum in the event of the delay on the part of the buyer in making payment to him but seeks to pay less than 3% per annum of the capital investment, in case he does not honour his part of the contract by defaulting in giving timely possession of the flat to the buyer. Such a term in the Buyer’s Agreement also encourages the builder to divert the funds collected by him for one project, to another project being undertaken by him. He thus, is able to finance a new project at the cost of the buyers of the existing project and that too at a very low cost of finance.

The complainants have specifically alleged that some of the clauses in the Buyer’s Agreement were one sided and they were made to sign already prepared documents. It is also alleged that some of the clauses contained in the Buyer’s Agreement are totally unreasonable and in favour of the opposite party only. It is further alleged that the clause providing for compensation at the nominal rate at Rs.5/- per sq. ft. of the super built up area is unjust and exploits the complainants. It is also alleged that the opposite party has been utilising the money of the complainants for its own purposes. Therefore, the commission held that the opposite party should pay adequate compensation to the complainants which would not only take care of the additional financial burden on them on account of the delay in construction of the flat but would also give some compensation to them for the harassment and mental agony which they have suffered all along and were likely to suffer atleast for some more time on account of the opposite party having not delivered the possession of the flat to them by the date stipulated in the Buyer’s Agreement.

The cost of
the borrowing for individual home buyers was about 10% per annum though it had
gone upto 11.5% in last few years. Accordinfg to the commission, if the
opposite party, paid simple interest @ 12% per annum to the complainants, that
would not only take care of the additional financial burden on them but also
give some monetary compensation to them for their sufferings on account of the
delay in handing over possession of the flat purchased by them.

It transpired
during the course of arguments that the service tax has increased with effect
from 01.06.2015. Had the opposite party delivered possession in time, the
complainants would have paid service tax at the pre-revised rate. Therefore,
held that the increase in service tax with effect from 01.6.2015 should be
borne by the opposite party.

The
commission also directed a rate higher than 12% per annum should be paid by the
opposite party, if the revised date of delivery of possession is not honoured
by the opposite party.

CALCULATING TURNOVER – CHALLENGES & AMBIGUITIES

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Introduction
Accountants are often the most trusted advisers of businesses. It is therefore essential that accountants also understand when key disclosures need to be made to regulators. Among other things, the Competition Act, 2002 (‘the Competition Act’), regulates merger and acquisitions (combinations) of large enterprises. Combinations that satisfy the relevant asset/turnover thresholds prescribed in Section 5 of the Competition Act require mandatory prior notification to, and approval from, the Competition Commission of India (‘CCI’). While the Act provides a relatively detailed guidance on calculating the value of assets, the definition of ‘turnover’ is very wide. ‘Turnover’ is defined to include the value of sale of goods or services, excluding indirect taxes1. Beyond this skeletal definition, there is no other statutory guidance parties can rely on. To ensure compliance with the law, accountants should remain vigilant and work with lawyers to determine when notification to the CCI is required.

Importance of turnover
Turnover calculation is critical from a merger control perspective as the very requirement to notify a transaction often hinges on the turnover of the parties involved. Transactions where the parties fail to meet the asset and turnover thresholds under Section 5 of the Competition Act need not be notified. Further, to assess whether a transaction qualifies for the exemption under the Government of India notification S.O. 482(E) dated March 4, 2011 (‘Target Based Exemption’), parties need to assess if the target’s turnover in India is below INR 750 crores (or if target’s assets in India are below INR 250 crores). Computation of turnover by the parties will guide their decision on whether to notify transaction or not. Absent clarity on how to actually compute turnover for the purposes of the Act, businesses and their advisors face substantial uncertainty while deciding whether a transaction requires notifying to the CCI or not. Given the potentially substantial penalties that may be attracted for not notifying a transaction to the CCI, businesses and their advisors require clarity on how to calculate turnover so they can make the decision to notify or not notify with reasonable confidence.

The implications of getting it wrong are significant. A combination is void until it is cleared by the CCI as not being likely to cause an appreciable adverse effect on competition in India. In addition, substantial penalties of up to 1% of the turnover of the combination apply for failing to give the CCI notice of a notifiable combination.

Issues in turnover calculation

Here we examine 2 (two) questions which often surface in calculation of turnover while determining whether a transaction needs to be notified to CCI:

How to calculate turnover of enterprises which generate their revenue from commissions (i.e. enterprises which receive a gross amount which they subsequently transfer to another enterprise while retaining a percentage as their commission)? – It is possible that considering only the commissions earned while calculating turnover could lead to a decision not to notify a transaction to CCI whereas a turnover calculation based on gross receipts would require that a notification be made.

What constitutes turnover ‘in India’ for the purposes of the Competition Act? – Determining turnover ‘in India’ of an enterprise is crucial as both the turnover thresholds under Section 5 of the Competition Act as well as the de minimis thresholds under the Target Based Exemption have an India nexus requirement (i.e. a certain amount of turnover should be ‘in India’). Despite the critical importance of determining the residency of an enterprise’s turnover, when it comes to determining what constitutes turnover ‘in India’, there are no statutory guidelines at all.

Calculation of turnover for enterprises which generate their revenue from commissions
To determine the turnover of an enterprise, in practice, in most cases, the CCI looks at the audited books of accounts of an enterprise. However, in certain cases a simple reading of the books of accounts does not suffice and the CCI can and, in some cases, has gone beyond the books of accounts to determine the turnover.

In Fair Bridge/Thomas Cook2 , the CCI refused to consider the turnover figures for Thomas Cook (India) Limited (‘Thomas Cook’), as reflected in its books of accounts, as the ‘turnover’ for the purposes of the Competition Act. Considering the nature of Thomas Cook’s package tour operating business wherein Thomas Cook charges a consolidated amount for a packaged tour (which includes transportation, boarding, lodging, sightseeing and similar services). The CCI held that Thomas Cook’s turnover would include the gross amount charged to customers and not merely the commissions earned. In interpreting turnover to include gross receipts instead of commissions, the CCI relied on mainly two grounds – (i) Lack of a principal-agent relationship between Thomas Cook and the vendors who actually provided the lodging, boarding, sightseeing and similar services; and (ii) Provisions in Accounting Standards and Guidance Notes issued by the Institute of Chartered Accounts of India (‘ICAI’) as well as internationally accepted accounting practices followed by leading tour operators worldwide.

While Fairbridge/Thomas Cook decision does clarify the CCI’s stance on turnover calculation to a certain extent, the situation is still not completely clear. The CCI has considered commissions and not gross receipts to be the correct measurement of turnover of an enterprise acting as an agent for another entity, which is in line with the Indian Accounting Standards issued by the ICAI3. However, can this be interpreted to mean that in all situations where there is no principal-agent relationship, gross receipts are the correct measure of revenue? The answer is far from clear.

Thus, it appears that a mere lack of a principal-agent relationship need not necessarily imply taking the gross amounts which flow through an intermediary (such as an online retailer) as the turnover for the purposes of the Competition Act. However, absent any statutory clarification or definitive decisional observations by the CCI, calculation of turnover continues to remain an area of interpretive ambiguity.

We would suggest that accountants work closely with lawyers to determine whether the CCI is likely to treat commissions or gross receipts as the relevant turnover as the measure of revenue.

What constitutes turnover ‘in India’?
There are no statutory guidelines on determining what constitutes turnover ‘in India’. Calculating turnover ‘in India’ for an enterprise is crucial as: (i) parties involved in a transaction need to satisfy the asset/turnover thresholds u/s. 5 of the Competition Act to be considered ‘combinations’ and these thresholds have an India-nexus requirement, i.e. a certain amount of assets/turnover must be ‘in India’; and (ii) the applicability of the Target Based Exemption depends upon the target’s turnover ‘in India’.

Two issues which arise in determining an enterprise’s turnover ‘in India’ are: (i) whether the value of sales in the Indian market by a foreign company (i.e. a company not incorporated in India) cwonstitute turnover in India; and (ii) whether sales in non-Indian markets by Indian companies (i.e. companies incorporated in India) constitute turnover in India.

From the CCI’s decisional practice the following also constitute turnover in India:

  • revenue from sales in the Indian market by a foreign enterprise; and
  • revenue from export sales by an Indian enterprise.

Again, it is not always clear what the CCI would consider constitutes turnover ‘in India’.

Conclusion
While
the CCI is continually clarifying the rules, ambiguities in calculating the
turnover for certain enterprises which work on a commission based business
model remain. Further uncertainty also exists when it comes to determining what
constitutes turnover ‘in India’. Given these ambiguities, it is important that
accountants and lawyers use each others’ expertise to ensure that compliance
with the law is achieved.

IND AS – TOO MANY UNANSWERED QUESTIONS

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The first phase for Ind AS implementation will soon roll out with quarterly reporting from the first quarter of financial year 2016-17 along with comparative numbers for 2015-16. Despite being so close to the deadline, there are quite a few areas where there is lack of clarity or/and lack of legislation. This article discusses these issues at a very broad level.

Roadmap
One of the key issues with the roadmap is the alignment of implementation dates between NBFC companies and non-NBFC companies. This issue will apply to a consolidated group that has an NBFC company and a non-NBFC company. When a NBFC is below a non- NBFC company, there are several approaches on how the regulators may deal with the issue:

1. Allow the NBFC’s statutory accounts prepared under Indian GAAP to be consolidated without converting to Ind AS

2. The NBFC company prepares separate statutory financial statements under Indian GAAP, but will have to prepare Ind AS numbers for consolidation purposes

3. The NBFC is allowed early conversion to Ind AS, and hence for standalone statutory financial statements as well as consolidation purposes it applies Ind AS

4. The implementation dates for non-NBFC companies are postponed, to align them with the dates when NBFC have to apply Ind AS

When the NBFC is on the top of the structure, the problem is more serious. In this case, the non NBFC companies below the NBFC company may have prepared their financial statements as per Ind AS. For purposes of consolidation by the NBFC the non-NBFC companies beneath will have to continue preparing their accounts under Indian GAAP as well. This problem can be avoided if the NBFC company is exempted from preparing consolidated financial statements, till such time the NBFC is required to prepare Ind AS financial statements.

As can be seen each of the above approaches have their own merits/demerits. The regulators will have to take an appropriate decision after consultations with the affected groups.

The other major challenge with the roadmap is the mandatory application of Ind AS 115 Revenue from Contracts with Customers and Ind AS 109 Financial Instruments. Though the rest of the world will apply these standards much later, Indian companies will have to apply them immediately on Ind AS transition without any fall back to their predecessor standards.

A TRG (Transition Resource Group) has been set up by IASB and FASB to specifically deal with implementation and interpretation issues around IFRS 15 (Ind AS 115). Due to significant implementation issues, the IASB and FAS B are deferring the applicability of IFRS 15 by one year. India is probably the only country that applies Ind AS 115 mandatorily. It is unfortunate that India has to apply Ind AS 115 when the rest of world is still debating on several issues under Ind AS 115. In the authors opinion IAS 18 Revenue/IAS 11 Construction Contracts should apply with a choice to an early adoption Ind AS 115.

In a group that amongst other companies also has an NBFC and a foreign listing; the following situation may develop with respect to Ind AS 109:

1. The NBFC prepares its stand alone accounts under Indian GAAP

2. For India consolidation purposes the NBFC applies Ind AS 109

3. For its global listing purposes the NBFC does not use the option to early apply IFRS 9, but instead applies IAS 39.

NACAS and the ICAI will have to apply their minds on the subject and immediately come out with proper amendments after consulting the affected groups.

Minimum Alternate Tax
MAT is an unfinished legislation vis-a-vis Ind AS. Consider the following:

1. An infrastructure company has to recognise construction revenue upfront, as it is deemed to have exchanged its construction services for an intangible asset, viz., right to collect toll revenue from the public. This will result in recognition of margin and therefore will expose infrastructure companies to a potential MAT liability. This may further impair the ease of doing business in India for infrastructure companies.

2. There is no clarity on what line in the P&L, MAT will apply. This is important under Ind AS because the P&L comprises of two integral parts. The first part is the P&L before comprehensive income. The second part includes other comprehensive income, for example, gain on fair valuation of equity shares, when that option is used.

3. The first time adoption of Ind AS will result in a large number of adjustments which will be recognised in retained earnings. There is no clarity on whether and how MAT will apply to these items.

SEBI regulations
SEBI will have to provide appropriate format under clause 41 for reporting quarterly numbers under Ind AS. In the case of five year restatement for IPO purposes, it should be ideally reduced to three years and those numbers need not be restated to Ind AS, if the roadmap did not apply to the company for the earlier years.

Companies Act
Section 52 of the Companies Act prohibits a specified class of companies from using securities premium account for specified purposes, for example, applying the securities premium to adjust redemption premium on debentures or bonds. It was presumed that when Ind AS is rolled out, the specified class of companies will be notified to be companies that have applied Ind AS. There is no notification yet, from the Ministry of Corporate Affairs.

There is neither clarity nor a change in legislation with respect to distributable profits. Consider an Infrastructure company that recognises huge revenue and margins upfront, thought the cash is received in the form of toll revenue over the next several years. A prudent policy would be not to distribute the accounting profits that will realise over several future years. However, in the absence of legislation this may be difficult to enforce. It is not clear how the first time adoption changes and other comprehensive income (some of which are recycled and others are not recycled to the P&L), will impact distributable profits.

Conclusion
There is very little time, and the government and NACAS should act swiftly to provide the necessary clarifications and make appropriate changes to the legislations. This is imperative for the smooth implementation of Ind AS.

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[2015-TIOL-1592-HC-MAD-ST] Fifth Avenue Sourcing (P) Ltd vs. Commissioner of Service Tax.

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The amendment to section 35F of the Central Excise Act, 1944 with effect from 06/08/2014 regarding mandatory pre-deposit is prospective in nature and shall not apply to assessment proceedings initiated prior to the said date.

Facts:
The Petitioner was seeking permission to file an appeal without mandatory deposit as the dispute pertains to the period prior to amendment of section 35F.

Held:
The Hon’ble High Court relying on the decision of the Kerala High Court in the case of Muthoot Finance Limited [2015-TIOL-632-HC-KERALA-ST] (refer BCAJ-April’s issue) held that the amended provisions of section 35F of the Central Excise Act, 1944 are not given retrospective effect. Since the proceedings were initiated prior to 06/08/2014, the Appeal and stay application could be filed before the CESTAT without making a pre-deposit. The High Court also noted the decision in the case of Deputy Commercial Tax Officer, Tirupur vs. Cameo Exports and others [2006 (147) STC 218 (Mad)] rendered in the matter of Tamil Nadu General Sales Tax Act, 1959 wherein it has been held that the right of appeal is vested in the assessee the moment he files his return which commences the assessment proceedings. Therefore since the amendment is not retrospective, appeals deserved to be entertained without insisting on pre deposit.

Note: A contrary decision of the Mumbai CESTAT in the case of Maneesh Export(EOU), Satish J. Khalap, Vinay R. Sapte vs. Commissioner of Central Excise, Belapur[2015-TIOL-1093- CESTAT-MUM] reported in the BCAJ-July 2015 issue holding that the amendment to section 35F of the Central Excise Act, 1944 is retrospective in nature.

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[2015-TIOL-1596-HC-KAR-ST] Mrs. Prashanthi vs. The Union of India

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Notices of recovery initiated u/s. 87 of the Finance Act, 1994 before the show cause notices are adjudicated is illegal and are required to be squashed.

Facts:
A writ petition was filed against the action of recovery initiated by the department u/s. 87 of the Finance Act, 1994 even before the show cause notices were adjudicated.

Held:
The Hon’ble High Court held that the words “amount payable by a person” used in section 87 of the Finance Act, 1994 will have to be considered in the background of section 73 of the Finance Act, 1994 inasmuch as, show cause notice issued u/s. 73(1) of the Finance Act, 1994 is required to be adjudicated after considering representation of the person if filed and thereafter determine the amount payable. Any deviation in this regard would be in violation of principles of natural justice – doctrine of Audi Alteram Partem would be attracted. Until and unless there is determination and adjudication either u/s. 72 or u/s. 73 of the Finance Act. 1994, section 87 of the Finance Act, 1994 cannot be invoked. Thus, the notices are illegal and require to be squashed.

Note: Readers may also note a similar decision of the Bombay High Court in the case of ICICI Bank Ltd vs. Union of India [2015-TIOL-1164-HC-MUM-ST] holding that law enforcers cannot be permitted to do what is not permitted within the four corners of law. Without there being adjudication, coercive steps cannot be taken for recovery of service tax, penalty or interest.

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[2015-TIOL-1602-HC-KERALA-ST] M/s Geojit BNP Paribas Financial Services Ltd vs. Commissioner of Central Excise, Customs and Service Tax, Deputy Commissioner of Central Excise

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The provisions of section 11B of the Central Excise Act, 1944 are not applicable for refund of service tax paid erroneously

Facts
The Appellant wrongly paid service tax on services qualified as export of services and hence claimed a refund. The claim was rejected since it was filed beyond one year from the relevant date as provided u/s. 11B of the Central Excise Act. Hence, a writ petition was filed.

Held:
The Hon’ble High Court relying on the decision of the Karnataka High Court in the case of KVR Construction [2012 (26) STR 195(Kar)] noted that once there is no compulsion or duty cast to pay service tax, there was no authority for the department to retain such amount and the refund is not relatable to section 11B of the Central Excise Act, 1994. Further, the decision of the Apex Court in the case of Mafatlal Industries Ltd. [(1997) 5 SCC 536] holding that refund can only be processed in terms of section 11B was also distinguished by holding that the mistake in the present case is on account of fact and not on account of law. Section 11B is attracted only when the levy has a colour of validity when it was paid and only consequent upon interpretation of law or adjudication, the levy is liable to be ordered as refund. Thus, refund is granted and writ petition is allowed.

Note: Readers may also note a similar decision in the case of M/s. Vasudha Agencies vs. Commissioner of Service Tax- Mumbai-I [2015-TIOL-1470-CESTAT-MUM] and the digest of C.K.P. Mandal vs. Commissioner of Service Tax, Mumbai- II [2015 (38) STR 73 (Tri.-Mumbai) which was reported in the BCAJ-June 2015 issue and the decision of Commissioner of Central Excise and Service Tax, Bhavnagar vs. M/s. Madhvi Procon Pvt. Ltd. [2015-TIOL-87-CESTAT-AHM] also referred in the BCAJ-February 2015 issue.

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Rectification vis-à-vis Recall of the order

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Introduction
Under fiscal laws, assessment proceedings are final, subject to an appeal, revision or rectification. In other words, normally the fiscal enactments provide for rectification as one of the remedial measures, after the order is passed.

Under Bombay Sales Tax Act (BST Act) also, there was a provision for rectification by way of section 62 of the BST Act. As usual, the section provided for correction of mistakes which are apparent from record. In almost all fiscal enactments the provisions are similar, i.e. mistakes apparent from record are rectifiable.

Scope of Mistake apparent on record
The real controversy starts as to whether mistake can be said to be apparent from record. If the mistake is categorized as apparent on record, only then it will be rectifiable. There are number of judicial pronouncements under both, direct and indirect taxes, deliberating upon the scope of rectification.

Recent judgment of the Hon. Bombay High Court
Recently, the Hon. Bombay High Court had an occasion to decide such an issue. Reference is to the judgment in case of D. S. Solanki vs. The Maharashtra Sales Tax Tribunal & Ors. (W. P. No. 2779 of 2014 dt.28.4.2015). The facts in the above case, as noted by the Hon. Bombay High Court, are as under:

“3. In the present case, we are concerned with the assessment for the years 1993-94, 1994-95 and 1995-96. It is the contention of the petitioner that in the year 1999, the Revenue Authorities had initiated reassessment proceedings in respect of resale claim in respect of purchases from the vendors of the petitioner. Vide order dated 30.3.1999, re-sale claim allowed in respect of purchases from vendors was disallowed.

Similarly, vide orders dated 31.3.1999 and 29.11.1999, re-sale claim in respect of the assessment period 1994- 95 and 1995-96 was also disallowed.

Being aggrieved by the said orders, three appeals were preferred. Vide order dated 9.3.2001, the Appellate Authority dismissed the appeals and confirmed the orders passed by the first Appellate Authority. Being aggrieved thereby, three appeals were preferred before the learned Appellate Tribunal. The learned Tribunal vide order dated 29.1.2005, allowed the appeals and set aside the order passed by the Original Authority as well as the first Appellate Authority. The Revenue thereafter preferred the rectification applications, as aforesaid, which were allowed by the impugned order. Being aggrieved by the order, the present petition was filed”.

By allowing the rectification, the Tribunal recalled the original orders for fresh hearing.

Based on the zabove facts and the contentions of the parties, the Hon. Bombay High Court made observations about scope of rectification citing the judgment of the Hon. Supreme Court. The said observations are as under:

“6. Their Lordships of the Apex Court in the case of Deva Metal Powders Pvt. Ltd. (10 VST 751) (SC) (cited supra) had an occasion to consider a pari material provisions in U.P. Trade Tax Act. The Apex Court while considering the said provisions has observed thus :-

“This Court in M/s. Thungabhadra Industries Ltd. (in all the Appeals) vs. The Government of Andhra Pradesh represented by the Deputy Commissioner of Commercial Taxes, Anantapur, [AIR 1964 SC 1372] held as follows:

“There is a distinction which is real, though it might not always be capable of exposition, between a mere erroneous decision and a decision which could be characterized as vitiated by” error apparent”. A review is by no means an appeal in disguise whereby an erroneous decision is reheard and corrected, but lies only for patent error.

Where without any elaborate argument one could point to the error and say here is a substantial point of law which states one in the face and there could reasonably be no two opinions entertained about it, a clear case of error apparent on the face of the record would be made out.”

An error apparent on the face of the record for acquiring jurisdiction to effect rectification must be such an error which may strike one on a mere looking at the record and would not require any long drawn process of reasoning. The following observations in connection with an error apparent on the face of the record in the case of Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tiruymale [ AIR 1960 SC 137] need to be noted:

“An error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions can hardly be said to be an error apparent on the face of the record. Where an alleged error is far from self-evident and if it can be established, it has to be established, by lengthy and complicated arguments, such an error cannot be cured by a writ of certiorari according to the rule governing the powers of the superior Court to issue such a writ.”

“A bare look at Section 22 of the Act makes it clear that a mistake apparent from the record is rectifiable. In order to attract the application of Section 22, the mistake must exist and the same must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. “Mistake” means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception. “Apparent” means visible; capable of being seen, obvious; plain. It means “open to view, visible, evident, appears, appearing as real and true, conspicuous, manifest, obvious, seeming.” A mistake which can be rectified under Section 22 is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration. In our view rectification of an order does not mean obliteration of the order originally passed and its substitution by a new order.

What the Revenue intends to do in the present case is precisely the substitution of the order which according to us is not permissible under the provisions of Section 22 and, therefore, the High Court was not justified in holding that there was mistake apparent on the face of the record. In order to bring an application under Section 22, the mistake must be “apparent” from the record. Section 22 does not enable an order to be reversed by revision or by review, but permits only some error which is apparent on the face of the record to be corrected. Where an error is far from self-evident, it ceases to be an apparent error. It is, no doubt, true that a mistake capable of being rectified under Section 22 is not confined to clerical or arithmetical mistake. On the other hand, it does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. As observed by this Court in Master Construction Co. (P) Ltd. v. State of Orissa [1966] 17 STC 360, an error which is apparent from record should be one which is not an error which depends for its discovery on elaborate arguments on questions of fact or law.

“Mistake” is an ordinary word but in taxation laws, it has a special significance. It is not an arithmetical error which, after a judicious probe into the record from which it is supposed to emanate is discerned. The word “mistake” is inherently indefinite in scope, as to what may be a mistake for one may not be one for another. It is mostly subjective and the dividing line in border areas is thin and indiscernible. It is something which a duly and judiciously instructed mind can find out from the record. In order to attract the power to rectify under Section 22, it is not sufficient if there is merely a mistake in the order sought to be rectified. The mistake to be rectified must be one apparent from the record. A decision on a debatable point of law or a disputed question of fact is not a mistake apparent from the record. The plain meaning of the word “apparent” is that it must be something which appears to be so ex facie and it is incapable of argument or debate. It, therefore, follows that a decision on a debatable point of law or fact or failure to apply the law to a set of facts which remains to be investigated cannot be corrected by way of rectifications.”

“In the said case, initially, the assessee was assessed for the aluminum powder treating the same as a metal and as such holding him liable to pay tax at 2.2 %. In the rectification proceedings, it was held that the relevant entry would not include aluminum powder and as such the same was assessed treating the same to be an unclassified item. In this background, the aforesaid observation is made by the Apex Court. It has been held by the Hon’ble Apex Court that in order to attract the provisions of the Act, the mistake must exist and the same must be apparent from the record. It has been held that “Mistake” “means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception; to make an error in interpreting. It has been further held that a mistake which can be rectified u/s. 22 is one which is patent, obvious and whose discovery is not dependent on argument or elaboration. However, the Apex Court itself has held that the power u/s. 22 of the said Act is not confined to clerical or arithmetical mistake. It is further held that it does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. The Apex Court thus held that there cannot be hard and fast rule as to whether mistake is apparent or not and the same would be mostly subjective and the dividing line in border areas is thin and indiscernible. It has been further held that a decision on debatable point of law or fact or failure to apply the law to a set of facts which remain to be investigated, cannot be corrected by way of rectifications.”

After analysing the scope of rectification as above, the Hon. Bombay High Court in the case of the Petitioner observed as under :

“8. It would thus be seen that the learned Tribunal while deciding the Second Appeal proceeds on a footing that the assessment in question was made u/s. 33(3) of the said Act. However, the assessments were made in fact u/s. 33(2) of the said Act. It could further be seen that even the lawyer who was representing the petitioner before the learned Tribunal in the rectification application, himself admitted that the original assessments were made u/s. 33(2) and not u/s. 33(3) of the said Act. The learned counsel further admitted that the period for 1995-96 does not involve reassessment and the said matter had arisen from the assessment itself. The learned counsel fairly stated that the inaccuracies have crept in the order passed by the learned Tribunal, since the inaccuracies are in the first appeal itself. It could thus be seen that in the facts of the present case, though the assessments were made u/s. 33(2) and not u/s. 33(3), the Second Appeals were decided on an assumption that the assessments were done u/s. 33(3). It can thus be seen that the error which has been committed is on an erroneous assumption of fact. It is further to be noted that it is not even disputed by any of the parties that the error committed by the learned Tribunal is on an erroneous assumption of fact. These errors are such which can be seen with a naked eye. The errors are not of such a nature which would require detailed arguments to be advanced or a complicated process of investigation to be gone into, so as to unearth them. Any person with some understanding of law, can easily make out these errors. Not only that, but the learned counsel appearing on behalf of the assesesee in the rectification proceedings has also admitted that these errors have occurred in the order of which rectification is sought. In that view of the matter, we find that it cannot be said that the jurisdiction exercised by the learned Tribunal was exercised beyond the scope available to it u/s. 62.”

Thus, the Hon. High Court has confirmed that the mistakes which are of fact and the judgment is based on such mistaken facts then the judgment can be recalled for fresh decision.

Conclusion

There are a number of judgments about the above issue. Each case depends upon its own facts. However, the guidelines available are that if the issue is debatable, then rectification will not be permissible. If the mistake is clear as seen, then the rectification is possible and the effect can be either to modify the order or even recall the same.

CONTROVERSY : DIVISIBILITY OF WORKS CONTRACT

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Introduction
There has been long drawn controversy over the issue of taxability of works contract prior to the introduction of works contract service (WCS) in sub-clause (zzzza) in section 65(105) of the Finance Act, 1994 (the Act) with effect from 01/06/2007. The dispute dates back to the pronouncement of decision in Daelim Industrial Co. vs. CCE 2003 (155) ELT 457 (T). The controversy primarily relates to whether or not works contracts were taxable under the taxable services defined under the service tax law as commercial or industrial construction service (CICS)–with effect from 10/09/2004), construction of complex service (COCS) (w.e.f. 16/06/2005) or erection, commissioning or installation service (ECIS) (w.e.f. 01/07/2003). The decision in Daelim (supra) was doubted and referred to a Three Member Bench which was answered in CCE vs. BSBK Pvt. Ltd. 2010 (18) STR 555 (T) wherein it was ruled that turnkey contracts could be vivisected and service element therein could be subjected to service tax if the service was a taxable service under the Act. A contrary ruling by the Three Member Bench was however pronounced in Jyoti Ltd. vs. CCE 2008 (9) STR 373 and also in CCE vs. Indian Oil Tanking Ltd. 2010 (18) STR 577 (T). The Larger Bench in BSBK (supra) did not analyse or disagree with the operative ratio in the earlier decision of co-ordinate Benches. Therefore, BSBK (supra) could not have overruled or decided contrary to the decision by co-ordinate Benches. In this background, Larsen & Toubro while challenging an adjudication order confirming service tax demand somewhere in 2013 for execution of a turnkey contract prior to 01/06/2007, holding it as commercial or industrial service, also filed an application to refer the matter to Larger Bench in view of the above two conflicting decisions of Larger Benches. In the interim, Hon. Delhi High Court in G. D. Builders vs. Union of India 2013 (32) STR 673 (Del) ruled that after 46th Amendment to the Constitution, service portion of a composite contract could be vivisected for subjecting it to service tax by applying aspect doctrine for bifurcation of a composite contract. However, prior to this in CST vs. Turbotech Precision Engineering Pvt. Ltd. 2010 (18) STR 545 (Kar) and Strategic Engineering Pvt. Ltd. vs. CCE 2011 (24) STR 387 (Mad), it was decided that works contracts were not liable for service tax prior to 01/06/2007. Consequent upon CESTAT order referring the matter to Larger Bench, the revenue had appealed to Delhi High Court that since the issue stood resolved and decided in G. D. Builders & Others (supra) vide order dated 24/11/2013, for setting aside the order. The Delhi High Court disposed of the appeal in November, 2014 wherein consensus emerged that Five Member Bench can examine a preliminary issue whether the question raised was covered by the decision in G. D. Builders’ case (supra) and also that appropriate directions/orders could be passed after examining contrary view expressed by the Karnataka High Court and the Madras High Court in Turbotech Precision Engineering (supra) and Strategic Engineering (supra) respectively. Accordingly, the Larger Bench of five members headed by the Hon. President was constituted to look into the above limited angle. Although the reference was made for a limited purpose and applicability is confined to the period between 2004 and 2007, since the controversy over the issue is discussed at great length in approx. 220 pages interim order, the decision has assumed academic value. Various judicial precedents on the subject of works contract, taxability of sale of goods involved therein and adequacy of service tax provisions vis-à-vis works contracts vide a catena of judicial precedents have been analysed from various angles since the decision was reached in terms of majority. Discussed below are some of the key observations and views of both majority and minority members of the Hon. Larger Bench.

 Facts of The Case in Brief:
On behalf of  appellant Company, Larsen & toubro, it was pleaded that  g. d. Builders (supra) was per incuriam as it did not consider and explain several operative, relevant and binding precedents in the area and evolutionary history leading to enactment of distinct category of works contract from 01/06/2007 as several of its seminal reasons were passed sub silentio as the Appellants therein conceded that service component in a composite contract can be taxed but not as works contract per se and such other merits concerning taxability of works contract were not examined. Had the several facts of constitution limits and relevant legislative provisions, the enacting history of sub-clause (zzzza) and binding rationes been brought to the notice of the High Court, the conclusion drawn by the High Court could have been different and therefore G. D. Builders decision was based on concession by petitioners therein and did not have precedential vitality. Also, contrary decisions of Karnataka High Court in CIT vs. Turbotech Precision (supra) and Madras High Court in Strategic Engineering (supra) also need to be looked into. Revenue however contended that ruling in G. D. Builders is a binding precedent and not travelling beyond the scope of deliberations fixed by the Delhi High Court vide its order of 11th November, 2014 as contended by the Appellant. In view hereof, the facts and decision of G. D. Builders’ case (supra) as well as those of Turbotech Precision (supra) and Strategic Engineering (supra) were examined in addition to analysing the core issue of taxability of works contract prior to 01/06/2007 in terms of various judicial precedents and all the relevant provisions of service tax

Minority order: Brief Overview:
The minority order contains detailed analysis of scope of charging and valuation provision including the evolutionary history thereof and analysis and examination of a host of judicial precedents which interalia included Gannon Dunkerley & Co. and Others vs. State of Rajasthan & Others (1993) 88 STC 204 (the second Gannon Dunkerley), Larsen & Toubro vs. State of Orissa (2008) 12 VST 0031, Larsen & Toubro vs. State of Karnataka 2014 (34) STR 481 (SC) (a constitution Bench decision), K. Raheja Development Corporation vs. State of Karnataka 2006 (3) STR 337 (SC), Nagarjuna Construction P. Ltd. vs. UOI 2010 (19) STR 321 (AP). Mahim Patram (P) Ltd. vs. Union of India 2007 (7) STR 110 (SC), Bharat Sanchar Nigam Ltd. vs. UOI 2006 (2) STR 161 (SC), Kone Elevators India P. Ltd. 2014 (34) STR 641 (ST) etc. The glimpse of various inferences drawn is provided below:

In addition to examining the definitions CICS, COES and ECIS in section 65(105) and charging section 66, the scope of section 67 dealing with valuation of a service both prior to its amendment on 18/04/2006 and the amended provisions were examined and it was observed that section 67 read with the relevant clauses in section 65(105) and the charging provision leads to infer that “the gross amount charged by the service provider for providing CICS, COCS or ECIS shall be taxable value of such service.” Prior to the amendment of section 67, no exclusion was provided in section 67 on the lines of exclusion provided in Explanation 1 to section 67 that value of goods sold or deemed to have been sold in execution of works contract is excluded from the scope of taxable value referred to in section 67 as provided in clause (vii) to the said explanation for ECIS in respect of CICS or COCS.

  •    Exemption  Notifications  Nos.12/2003-ST,  15/2004-ST and 1/2006-ST attest to the fact that the Central Government was clearly of the view that value of goods sold by a service provider to the recipient thereof is included in the taxable value u/s. 67. It cannot be believed that pure sale transaction simplicitor were sought to be excluded as these were anyway beyond the scope of the Union’s residuary power. Further, these exemption notifications indicate no methodology for valuation of goods sold during execution of works contract. The 2nd Gannon Dunkerley (supra) categorically ordained to exclude value of goods at the time of incorporation, the profit margin on goods, the cost of storage, transportation etc. No Board circular also was issued hinting such exclusion. Actually, Rule 2A inserted in Valuation Rules when works contract service was brought from 01/06/2007 expressly stipulates the value of taxable service to be determined with reference to WCS provided in (zzzza) of section 65(105). Thus, on its terms, Rule 2A has no application to CICS, COCS or ECIS even after 01/06/2007 whereas after 01/06/2007, CICS, COCS and ECIS continue to be taxable services and there is neither repeal nor omission of these services.

  •     The definition of CICS, COCS and ECIS do not signal to cover works contract.

  •     The Hon. Finance Minister in the Budget 2007-08 speech categorically stated that new levy is proposed to impose service tax on works contract.
  •     Works contracts are distinct contractual arrangements and following a series of binding precedents and explicitly provided in Central and State legislations for bringing interalia works contracts within the scope of Union levy by expanding the scope of sale, defining works contracts in the Central Sales Tax Act and incorporating a specific power to make rules for computation/valuation of “deemed sale” in sales tax legislations and also introducing works contract category in the Finance Act, 1994 by expressly defining it together with complementary valuation Rules (Rule 2A) issued u/s. 94 of the Act to ensure proper valuation and confinement of levy strictly to service components also with effect from 01/06/2007. This integrated legislative and statutory landscape of the Act to the extent of works contract service in strict confirmation with constitutional limits on States and the Union taxation in this area as spelt out in second Gannon Dunkerley (supra) and all subsequent rulings including the latest Kone Elevator India Ltd. of 2014 (supra).

  •     In view of the exclusivity and insularity ordained in terms of legislative powers pertaining to taxation, both the federal partners (the Union or the States) are forbidden to trench upon the exclusive domain allocated to each by the constitution. Therefore a vague/overboard definition coupled with ambiguous charging and indeterminate valuation provision could not suffice in terms of First Builders Associations of India (S.C.1989), Second Gannon Dunkerley (supra) and L&T Ltd. (Orissa 2008) (supra). When the charging and/or valuation provisions on a true and fair classification fall short of this specific requirement, collection of sales tax on works contract would fall aside as per the above precedents among various others.

  •     In view thereof, Union’s intention to levy tax only on labour or service element must therefore be categorically expressed in charging provisions read with relevant taxable service and the valuation provisions. Such intention was explicated only by section 65(105)(zzzza) and not collectively through charging section, definition and valuation provisions so far as they related to CICS, COCS and ECIS.

  •     It is an established interpretation principle that where two constructions are fairly possible, the construction sustaining the legislation should be adopted instead of one which renders it invalid.

  •     In terms of revenue contentions, should it mean that insertion of WCS from 01/06/2007 and introduction of Rule 2A in the Valuation Rules were wholly unnecessary amendments in the existing legislative provisions?
  •     Neither the provision of the Act,any rule made there under or exemption notification issued under section 93 indicate how and at what point of time during execution of works contract, the value of goods and material used in execution thereof are to be valued for applying reductions. Although Notification No.12/2003-ST provides deduction towards value of goods sold on furnishing proof of such sales does not provide for computation of profits booked by builders on the goods incorporated in the contract.

  •    There  was  observation  in  Tamil  Nadu  Kalyana Mandapam Association’s case [2004 (167) ELT 3 (SC)] that it is well settled that the measure of taxation cannot affect the nature of taxation and therefore service tax levied as a percentage of the gross charge for catering cannot alter legislative competence of Parliament. This cannot be interpreted as propounding universal norm. This may be appropriate in the facts and circumstances of that case. The nexus and legislative competence tests are established by a long catena of binding authority including Constitution Benches including the second Gannon Dunkerley (supra) and K. Damodarasamy Naidu & Bros. AIR 1999 SC 3909, Tamil Nadu Kalyana Mandapam’s decision (supra) cannot be considered as having dissented or overruled entrenched principles consistently impounded and implicitly followed in a host of decisions including in to another legislation and tax such elements under the pretext of overreaching merely the measure of tax.

  •     Since binding expositions of relevant principles qua binding precedents were not brought to the notice of the Hon. High Court, G. D. Builders (supra) decision is incuriam and sub silentio.

  •     The analysis and the view concluded as: “28.  The decisions of the Karnataka and Madras High Courts, in Turbotech Precision Engineering Pvt. Ltd. and in Strategic Engineering Pvt. Ltd. have clearly concluded that a works contract is not leviable to Service Tax prior to 1-6-2007. Though, with respect there is not discernible a holistic analyses of the relevant statutory framework involved nor of the several precedents which support the conclusion recorded (in Turbotech and Strategic), as is found in the painstaking effort apparent in G.D. Builders, in our respectful view the conclusion that a works contract is defined, charged and is subject to the levy of Service Tax only w.e.f 1-6-2007 (on insertion of sub-clause (zzzza) in Section 65(105) of the Act), is consistent with the overwhelming catena of binding precedents considered and analyzed by us.”
  •    Consequently, the decision in BSBK Ltd. (supra) to the extent it rules that a works contract is a taxable service prior to 01/06/2007 was respectfully an error and stood overruled.
Majority view: Per Shri J. P. R. Chandrasekharan,

Member (T): Brief overview:

Not agreeing with the above, Hon. Member (Technical) proceeded with recording apprehension at the outset over the instant reference in view of the revenue’s pending appeals before the Supreme Court after admission in 2008 and 2010 respectively in Jyoti Ltd. (supra) and Indian Oil Tanking Ltd.’s case (supra) in the same matter. Further, the Delhi High Court having taken a view on this very issue in G. D. Builders’ case (supra) as well as in YFC Projects P. Ltd.’s case (2014) 44 GST 334/43 Taxman.com 219 (Delhi) that works contracts could be vivisected and discernible taxable services could be taxed prior to 01/06/2007 it was noted that the Tribunal being subordinate to High Court and Supreme Court would be bound by these decisions and the matter did not recur post 01/06/2007 as the dispute essentially related to the period 2004 to 2007. Besides this reservation, it was also noted that the ratio of G. D. Builders was consistently followed by the Tribunal in many cases including by Hon. President in CCE vs. Gopal Enterprises 2014 (36) STR 674, Kalpik Interiors vs. CST 2014 (36) STR 1283 and in Hindustan Aeronautics Ltd. vs. CST 2013 (32) STR783 (Tri.-LB).

    In the said case of G. D. Builders (supra), after examining at great length various decisions which among others included Gannon Dunkerley vs. State of Rajasthan [2002-TIOL-103-SC-CT], K. Raheja [2005-TIOL-77-SC-CT], Larsen & Toubro vs. State of Karnataka 2010 (34) STR 481 (SC)], Nagarjuna Construction Co. Ltd. vs. UOI 2012-TIOL-107-SC-ST, State of Kerala vs. Builders Association of India [2002-TIOL-602-SC-CT, Tamilnadu Kalyana Mandapan Association 2004 (167) ELT 3 (SC) etc. whereby the following issues in brief among others were examined:

a. Service tax is levied on taxable services as defined in section 65(105) read with definition clauses and applicable only on the service element as the Central Government does not have power to impose tax on entries under List-II of Seventh Schedule to the constitution. It cannot levy tax on goods and material used in works contract as central sales tax is levied on material used in “works contract” with effect from 11/05/2002 vide amendment of Central Sales Tax Act.

b. Composite or works contracts are not included in 65(105)(zzq) viz. CICS and (zzzh) viz. COCS as they apply to only service contracts. Therefore, the exemption of 67% under notification cannot be considered a part of main statutory provision as in terms of section 93 of the Finance Act, 1994, the exemption granted cannot relate to works contracts as they are not covered by clauses (zzq) and (zzzh) of section 65(105). Such tax is imposed only from 01/06/2007 under 65(105) (zzzza). There is conflict between these clauses and what is covered by (zzzza) cannot be covered by (zzq) and (zzzh) of section 65(105). The two cannot co-exist. Subsequent legislation shows that the earlier only did not cover composite or works contracts.

c.    Section 66 is charging section and section 67 relates to valuation. Tax can be levied on the value of service and not beyond. There is provision for notional value to substract the value of material or goods.

d.Vagueness or uncertainty makes levy invalid and illegal.

e.    Exemption Notification has to be read while keeping its objective and purpose in forefront. It may provide a convenient formula for computing the value of service in a composite contract. The Notification however is optional and an alternative. It meets the tests laid down u/s. 93 and 94 and it has not been shown that the value prescribed therein is absurd or irrational.

f.    On the strength of factual and legal analysis undertaken, conclusion summarised in para 36 in a nutshell that post 46th Amendment to the Constitution, composite contracts can be bifurcated to compute value of goods sold/ supplied in construction contracts with labour and material and the service portion of the composite contracts can be subjected to service tax by applying aspect doctrine for vivisection of the contract.

  The above decision on an identical issue was followed before another Bench of the Delhi High Court in YFC Projects P. Ltd. vs. UOI (supra). In view of the foregoing, the above decisions are binding on the Tribunal.

    In furtherance of the above and analyzing one of the main points of difference that conflicting decisions of
Karnataka and Madras High Courts as against the Delhi High Court’s decision in G. D. Builders (supra) on the same/similar issue are available, it was observed that facts of these decisions were completely different. In CST vs. Turbotech Precision (supra), the activity of development, design, installation and commissioning and technology transfer was sought to be taxed as consulting engineering service by the department.

Similarly, in Strategic Engineering’s case (supra), the contract involved erection of pipes and also connecting the laid pipes and subjecting them to carry fluids. This activity was sought to be taxed as erection commissioning and installation service wherein the Hon. High Court held that the services provided under works contract were not liable prior to 01/06/2007. However, the question whether works contract could be vivisected and subjected to service tax was not the issue for consideration before the Hon. High Court. Therefore, the said decision has no relevance to the issue considered in G. D. Builders’ case (supra). In support of this contention, the Hon. Member interalia relied upon Alnoori Tobacco Products (2004 170 ELT 135 (S.C.)]. The relevant extract read as follows:

“11. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid’s theorems nor as provisions of the statute and that too taken out of their context.”

  Accordingly, it was concluded that ratio of G. D. Builders stands uncontroverted and thus binding on all subordinate Courts including the Tribunal (irrespective of the strength of the Bench).

    Next examination pertained to the main issue of DIVISIBILITY of works contract prior to 01/06/2007 including analysing section 67 dealing with measure or valuation. The proposition of lack of adequate machinery provision was found without merits on the ground that four important elements of tax law viz. taxable event, the rate of tax, measure of tax and precision liable to tax were found existing in service tax law in section 65(105), sections 66, 67 and 68 of the Act and therefore the challenge was found not sustainable. As regards the primary issue relating to exclusion of value of goods, based on judicial pronouncements including in the case of K. P. Varghese vs. ITO 1981 AIR 1922 (SC), it was found that section 67 of the Act provided measure of the levy adequately and optional exemption notifications 12/2003-ST, 15/2004-

ST and 1/2006-ST as well as CENVAT Credit Rules, 2004 provided credit mechanism to capture value of services of goods. Therefore, at practical level of implementation, there is no difficulty to determine value of service rendered.

  At the end, the concept of works contracts was analysed in detail to distinguish it from the contracts for sale. It was observed that the Apex Court in Builders Association of India vs. UOI (supra) held that “by fiction, an indivisible contract has been made a divisible contract and the values of the goods involved in the execution of contract have been subjected to tax”. Further, it is restricted to the value of goods used and not the building as a whole. The law was further elaborated by the constitution Bench of Supreme Court in the second Gannon Dunkerley & Co. (supra). The Bench noted that contract of work is inherently a contract of service. The legal fiction created by Article 366(29A) of the Constitution to hold certain types of works contracts as deemed sale of goods in order that States could levy sales tax on the value of goods supplied as part of the works contract. Similarly, the 92nd amendment to the constitution provided for a specific entry for taxes on services in the Union list under entry 92C. Prior to this, entry 97 covered taxes on services. Thus, the power of Parliament to levy tax on services was never in dispute. Reliance was placed on Tamil Nadu Kalyana Mandap Association vs. UOI 2004 (167) ELT 73 (SC) which interalia held as follows:

“45. The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a Service Tax cannot be levied on the service aspect of catering….

46. It is well settled that the measure of taxation cannot affect the nature of taxation and, therefore, the fact that Service Tax is levied as a percentage of the gross charges for catering cannot alter or affect the legislative competence of Parliament in the matter…..

58. A tax on services rendered by mandap-keepers and outdoor caterers is in pith and substance, a tax on services and not a tax on sale of goods or on hire purchase activities.”

Similar reliance was placed on Association of Leasing and Financial Services Companies vs. UOI 2010 (20) STR 417 (SC) which interalia held:

“Merely because for valuation purposes inter alia “finance/interest charges” are taken into account and merely because Service Tax is imposed on financial services with reference to “hiring/interest” charges, the impugned tax does not cease to be Service Tax and nor does it become tax on hire-purchase/leasing transactions under Article 366(29A).”

Based on the above two decisions in respect of two transactions relating to catering services and hire purchase, it was found that since service tax could be levied on these services on the value attributable to the service component of composite transactions, the issue of divisibility of an indivisible contract for the levy of service tax was confirmed. It was observed that many services entail supply of goods and many examples were cited including those of photography services, cleaning services, banking services (entailing supply of cheque books, plastic cards for ATM transactions etc.) sound recording services (entailing supply of recording medium) etc. Further citing a recent decision of Apex Court in State of Karnataka vs. Pro Lab and Others 2015-TIOL-08-SC-LB which considered the issue of levy of sales tax on processing and supply of photographs, it was observed that if by virtue of clause 29A of Article 366 of the Constitution, the State legislature is empowered to segregate goods part of works contract to levy sales tax, the same logic would apply to the Central legislation for imposing service tax and Parliament is empowered to segregate service component of the works contract to levy service tax. Precisely, this was done by the Finance Act, 1994, when service tax was levied vide CICS, COCS and ECIS. It was further observed that statutory provision should be interpreted in the manner not to create discrimination among classes of service providers by taxing supplying services alone and another set providing both supply of goods and service not liable to tax. In effect, it was concluded with, “the issue referred to the Larger Bench is fully and squarely covered by the G. D. Builders case decided by the Hon. Delhi High Court”. Consequently, it has to be held that composite works contract can be vivisected and discernible service element could be subjected to service tax even prior to 01/06/2007.

Majority view: Per R. K. Singh, Member (T): Some key observations:

  •     Concurring with the order of per Hon. Shri P. R. Chandrasekharan, it was observed that the judgments of the Karnataka and Madras High Courts did not infringe upon the ratio of the Delhi High Court in G. D. Builders as regards the subject matter covered by the latter and that the subject matter referred to the Five Member Bench was squarely covered by the decision of the Delhi High Court in G. D. Builders’ case (supra).

  •     Section 67 adequately provided machinery provisions for measure of value of taxable service and which was not arbitrary by any standard whether post its amendment from 18/04/2006 or prior thereto. Since it refers to the value of service would imply that value of goods sold in a composite contract was not to be a part of the value for the purpose of this section.

  •     Notification No.12/2003 needs to be viewed as a measure of abundant caution and care on part of the Government.

Majority view: Per Rakesh Kumar, Member (T): Some key observations:

  •    “47.3 When indivisible works contracts are those contracts involving provision of service, in which there is transfer of property in goods from the service provider to the service receiver through accretion, and this transfer of property in goods is not sale, such contracts have to be treated as service contracts as in such contracts, there is absolutely no intention of transfer of property in and delivery of the possession of, a chattel as a chattel to the service receiver. A service contract will not cease to be a service contract just because the provision of service involves use of goods, the property in which gets transferred to the service recipient through accretion. Even the Law Commission’s Reports (Chapter IA para 7) refers to the works contract as “a contract for work (of service)”.

  •     It is a well settled law that legal fiction has to be given effect to only for a limited purpose for which it was created and therefore Article 366(29A) can be employed only to enable State Governments to levy sales tax on certain contracts including specified contracts. Since works contracts are service contracts, the same would attract service tax even during period prior to 01/06/2007.
  •    Just because State Governments have the power to levy sales tax on the transfer of property in goods involved in execution of works contract by invoking Article 366(29A), the power of Central Government to levy service tax on such works contract does not get restricted so as to confine the levy only to service portion of the works contract excluding the value of goods for providing the service. An inadmissible works contract is one single service contract whose value would include value of all goods and services which contribute to emergence of the service product.

  •   Exemption Notification issued under section 93 of the Act to provide abatement of the taxable value of specified services (including ECIS, COCS and CICS) are sufficient to avoid tax on goods subjected to tax by the State Government and no machinery provision is necessary.
  •     In commercial world, transactions of sale of goods and sale of services are intermixed and therefore some overlap is inevitable which has to be ignored in the interests of smooth functioning of laws governing the levy of tax on sale of goods and service tax.

  •    Separate and specific constitutional provision together with the machinery for determining the measure is required only when State Government wants to tax goods portion in a service transaction or the Central Government wants to tax service portion of a sale transaction. However, for levying service tax on a service transaction including works contract, no machinery for exclusion of value of goods is required and for the lack of the said machinery, the levy cannot be held invalid.

Conclusion:

Since the revenue is already before Supreme Court against the order of Turbotech Precision Engineering (supra) and Strategic Engineering (supra), whether the above intellectual exercise would impact any litigation process is a question which is posed by many. Nevertheless, a threadbare analysis of technical and judicial aspects on the subject of works contract would be a worth read for a large number of professionals and other stakeholders.

Welcome GST

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Introduction
After a long wait of more than 15 years, the time has now come to welcome the most awaited reform in the taxation history of India. The introduction of Goods & Services Tax (GST) is expected to become a reality just within a few months from now. The Government of India has conveyed from time to time its intention to introduce this much awaited reform in the system of indirect taxes at central as well as at State level. Readers may recall that a committee called “Empowered Committee of State Finance Ministers” was constituted on 17th July 2000, under the directions of the then Prime Minister of India, Shri Atal Bihari Vajpayee. It was given the task of replacing the existing system of sales tax prevailing in various states all over the country, designing the GST model and overseeing the IT back-end preparedness for its rollout. The committee, under the leadership of Dr. Asim Dasgupta, the then Finance Minister of West Bengal, who was the first chairman of this committee, did wonders in bringing together all the States and the Centre to discuss and resolve their issues and concerns. Many important decisions such as Introduction of VAT at state level, setting up Tax Information Exchange System (TINXSYS) and release of First Discussion Paper on GST (on 10th November 2009), etc., were taken on the basis of recommendations of this Committee and various groups and sub-groups working under its directions. After Dr. Gupta, the Committee was headed by Shri Sushil Modi, the then Finance Minister and Dy. Chief Minister of Bihar, thereafter Abdul Rahim Rather, the then Finance Minister of Jammu & Kashmir. And at present Shri K.M. Mani, the Finance Minister of Kerala is the chairman of Empowered Committee.

Successive Union Finance Ministers, starting from Shri Yaswant Sinha, Jaswant Singh, P. Chidambaram, Pranab Mukherjee and now Arun Jaitley have given their inputs from time to time. Dr. Manmohan Singh, as Finance Minister of India, has played an important role in the overall exercise of reforms.

Evolution of the concept of VA T and its journey to India
“Added Value Tax (AVT, in the American Tax nomenclature), tax on value added (TVA, as the French and German refer to it) and value added tax (VAT , the popular English usage) is a concept which originated during the first quarter of 20th century. Dr. Wilhelm Von Siemens, a German industrialist, propounded the concept in the year 1918 as a substitute to the then newly established German Turnover Tax. However, Maurice Lauré, Joint Director of the French Tax Authority, was the first to introduce VAT, in France, on April 10, 1954.

The VAT as a system of tax, conceptually, has been of great interest among the early writers on public finance. It became a topic of public debate after European Economic Community’s (EEC) acceptance of it as an instrument of tax harmonisation. In fact, the introduction of VAT in France largely paved the way for its being accepted as a common market tax. And it became the most popular system of indirect taxes after its adoption by England in the year 1971. The European and Australian countries have contributed a lot in its transformation, improvement and continuous development. At present, the system is prevalent in more than 140 countries all over the world. Malaysia is the latest addition where the system of VAT (GST) has been adopted with effect from 1st April 2015 in place of the earlier system of sales tax and services tax. The general rate of GST adopted in Malaysia is 6%.

The VAT , in common parlance, may be described as a tax levied on the value added to a product or service each time it changes hands. The growing popularity of VAT is due to its simple tax structure, transparency and neutrality. With the widening of tax base, the rate of taxes are lower. Whether it is sale/supply of goods or rending of services, most of the commodities as well as services are taxed at one single revenue neutral rate with exception only for a few commodities and services, which may be taxed at special rates. Tax exempt commodities are listed at minimum and zero rate of tax is provided on exports and inter-branch transfers. It enhances competitiveness and removes the cascading effect of taxes and levies by providing full setoff of taxes paid on inputs. As the levy covers each stage of value chain, the impact of tax is not concentrated on one level, which in turn reduces inducement for evasion considerably.

By virtue of method of computation, the incidence of tax, under VAT, can be seen readily from the tax paid on final point of sale. This is not possible when taxes are levied on inputs or intermediate stage of sale and purchase without any relief at subsequent stages. Because of transparency under VAT , it is possible to quantify, at any stage, precisely the tax borne at the earlier stages.

Neutrality is another attribute of VAT that is non-interference with the choices of decisions of economic agents and equal treatment of products, producers and consumers. In this system, other things remain the same, the tax liability does not vary as between different classes of dealers, or between integrated or specialised units. The allocation of resources is left to be decided by the free play of market forces and competition.

Main characteristics of VAT

  • A destination based multi-point system of taxation
  • Covers goods and services both
  • Collected at each stage of supply and distribution
  • Input Tax Credit
  • Ultimate burden passed on to the consumer

Looking into various advantages of the system of VAT , most of the countries all over the world have adopted the concept in their system of taxing goods and services. Thus it is being called as Goods & Services Tax (GST).

Although most of the developed and developing countries have adopted the system of VAT , the most notable exception is USA, where still the system of sales tax – General Sales Tax or Retail Sales Tax (RST) is prevailing. The manner of levying taxes in USA varies from State to State. In general, it may be described as a single point last stage taxation wbut there are exceptions depending upon the policy of a particular State.

As far as India is concerned, being a federal country, the taxation structure is governed by its Constitution. The Centre and the States levy tax on commodities at various stages of production and distribution, utilising their powers generated from the Constitution of India, which was prepared in the year 1949-50 for adoption by all the erstwhile provinces, which were merged, converted and united as States and a Government at Central level as to have one Independent India. The Constitution provides for separate independent powers as well as combined powers of the Centre and the States and also provides for collection, distribution and sharing of taxes.

In the present setup, Central Government levies taxes such as Custom Duty, Countervailing Duty, Excise Duty, Service Tax, etc. While the States have power to levy Sales Tax (State VAT ), Entertainment Tax, Entry Tax, Luxury Tax, State Excise, Profession Tax, etc. The Central Sales Tax, under an enactment of the Centre, is also being collected by the States.

A bare look at the history of indirect taxation in our country shows that many of the taxes which were levied before independence have continued either as it is or with minor modifications from time to time, and, a few more new taxes have been introduced in the free India. Although, abolition of some of the pre-independence taxes could have been considered by Governments at both the levels, but somehow it remained a major point of debate that whether the taxation structure should continue as it is or it needs a thorough overhaul? This fact is evident from the process of setting up of various committees, groups and task forces and their reports since 1969 till date.

Some of the committees which suggested, long ago, a major overhaul of the existing system of taxation include S. Bhootlingam Committee (1969), Indirect Taxation Enquiry Committee (1976) and Jha Committee on Indirect Taxes (1977). The Jha Committee, in the year 1978, strongly recommended adoption of the system of VAT. It said:”VAT in its comprehensive form extends from mining and manufacture stages to the retails stage. It can replace all other forms of internal indirect taxes such as excise, sales tax and octroi.”

Other notable committees, which gave important suggestions on redesigning of indirect taxation system include; “Tax Reforms Committee (1991-92)” chaired by Dr. Raja J. Chelliah, “Advisory Group on Tax Policy and Tax Administration (2001)”, chaired by Dr. Parthasarathi Shome and “Task Forces on Direct and Indirect Taxes (2002)”, chaired by Dr. Vijay Kelkar. Dr. Parthasarathi Shome also led the Tax Administration Reform Commission (TARC), which submitted its report to the present Finance Minister on 30th May 2014.

It may be worthwhile to note that adoption of a comprehensive system of value added tax is being consistently suggested by various committees constituted by the Government of India since 1977. The first positive step in this direction was taken in 1986 when modified value added tax (MODVAT) was introduced in Central Excise, which was later converted to CENVAT in the year 2000. However, real credit for a committed approach to reforms goes to Dr. Manmohan Singh, as Union Finance Minister (1991-96), who took up the challenge of reforms. In his Budget speech, in 1993, Dr. Manmohan Singh, indicated that high on his agenda of economic reforms was the replacement of historical sales tax systems by a Value Added Tax system. He entrusted this issue to the National Institute of Public Finance and Policy (NIPFP) for examination and recommendations. The NIPFP set up a high-level study team, under the leadership of Dr. Amaresh Bagchi, to go into the details of the issue. The report of the Committee, published in April 1994, is the pioneering work in this field and it has identified the basic themes for the subsequent discussions and action programs relating to reform of sales tax and other forms of indirect taxes. Its comments on the prevailing system of indirect taxes are also worth noting –

“The system (of domestic trade taxes) that is operating at present is archaic, irrational and complex. According to knowledgeable experts, the most complex in the world. It interferes with the free play of market forces and competition, causes economic distortions and entails high costs of compliance and administration.”

After the introduction of MODVAT, the next step towards comprehensive VAT was introduction of Service Tax in the year 1994. The concept, started with the coverage of just 3 services, now covers almost all services, except a privileged few. The Service Tax mechanism was modified from time to time with continuous expansion of its base and the facilities like input tax credit. The integration of Excise and Service Tax ITC was another step in the same direction.

Meanwhile, after a lot of discussion and persuasion, the States agreed to replace the age old sales tax with a transparent and vibrant system of value added tax. At present, all the States as well as Union Territories of India have adopted VAT in place of sales tax and trade tax, etc.

With these developments so far, we have reached a stage of fragmented VAT, which is working either independently or jointly with one or more taxes. Both the Centre and the States continue to levy tax at various stages of production and distribution utilising their powers generated from the Constitution of India (as described in the earlier paragraphs).

It is now time to consolidate all these indirect taxes into one, whether it is a tax on sale of goods, purchase of goods, on production, movement, entry or on consumption, rendering of services, receiving of services, entertainment or enjoying the luxuries, whatever needs to be taxed must be combined together into one tax. Thereafter, it does not make any difference whether it is called comprehensive VAT or Goods &    Services Tax (GST). The administration of such a tax, whether done by the Centre or the States, has to be in such a manner so as to avoid unnecessary hassles, unwanted complications and undue favours. The system must ensure that the Government gets what is due to it, neither more nor less. The consumer must know exactly the burden of tax on him. And the dealers (traders, manufacturers, service providers, etc.), who are responsible to collect tax from the ultimate consumer and deposit the same into the Government Treasury, must be ensured that there is no burden of tax on them while performing this pious duty.


 Indian Goods and Services Tax (GST)

Introduction of a Goods and Services Tax (GST) to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment. Increasingly, services are used or consumed in production and distribution of goods and vice versa. Separate taxation of goods and services often requires splitting of transaction value into value of goods and services for taxation, which leads to greater complexities, administration and compliances costs. Integration of various Central and State taxes into a GST system would make it possible to give full credit for input taxes collected. GST, being a destination-based consumption tax, based on VAT principle, would also greatly help in removing economic distortions caused by the present complex tax structure and will help in the development of a common national market.

All of us are well aware through various press reports and the budget speeches of respective finance ministers since 2004, that the Government of India is committed to introduce GST in place of existing indirect taxes which are being levied by Central and State Governments. Somehow, the process got delayed, first on account of the late introduction of state level VAT and thereafter, due to various other factors. The real work on designing a suitable GST model, for India, could start from May 2007, when the Empowered Committee of State Finance Ministers (EC) appointed a Joint Working Group (JWG) to give its recommendations regarding detailed framework to be adopted for GST. The working group studied various models and their suitability in Indian conditions. Based upon JWG Report, the EC announced in November 2007 that Indian GST shall be dual GST to be levied concurrently by both levels of Government,

The original target date for introduction of GST was set as 1st April 2010. P. Chidambram, the then Finance Minister in his budget speech 2007-08 stated “I wish to record my deep appreciation of the spirit of cooperative federalism displayed by State Governments and especially their Finance Ministers. At my request, the Empowered Committee of State Finance Ministers has agreed to work with the Central Government to prepare a roadmap for introducing a national level Goods and Services Tax (GST) with effect from 1st April, 2010.” Shri Pranab Mukherjee, as Finance Minister, in his budget speech 2009-10 stated, “I have been informed that the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise. I am glad to inform the House that, through their collaborative efforts, they have reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all stakeholders.”

While the Empowered Committee released its ‘First Discussion Paper on Goods and Services Tax’ on 10th November 2009, the Economic Division in the Department of Economic Affairs (Ministry of Finance, Government of India) initiated a working paper series with the objective of improving economic analysis and promoting evidence based policy formulation in its mandated areas of work. Several such well-researched Working Papers were released, which were written by well known economists such as Dr. M. Govinda Rao, Satya Poddar, Ehtisham Ahmad, R. Kavita Rao and others. Kavita Rao, in her paper released in November 2008, has raised certain issues with reference to dual GST, and, Satya Poddar & Ehtisham Ahmad, in their paper released in March 2009, have discussed in detail various aspects of GST model for India based upon their studies of implementation of VAT/GST in various other countries.

However, public debate on GST started only after release of ‘First Discussion Paper’ by the Empowered Committee. Considering various aspects of points covered by the said Discussion Paper, it was felt by almost all stake holders that it would need detailed discussion and the target date of 1st April 2010 cannot be met. Various institutions and associations of trade, industries and professionals, including ICAI, FICCI and others, submitted their views and queries. It may be worth noting that immediately after the release of the First Discussion Paper, the Task Force, appointed by the 13th Finance Commission headed by Dr. Vijay Kelkar, released its own Report on ‘Goods and Service Tax’ on 15th December, 2009. The recommendations of the Task Force are significant, and, the same are at variance with the recommendations of EC on certain key issues.

Apart from EC, and Task Force, etc, the Ministry of Finance (Government of India) also appointed a Joint Working Group of Central and State Government Officers, on 30th September 2009, for identifying issues concerning amendment to the Constitution and essential features of Central and State legislation for implementation of dual GST. It also constituted three sub working groups, on 1st June 2010, to work on specific issues, such as;

(1)    To work on and propose registration, returns, payments, refunds, audit and dispute resolution mechanism for GST regime.

(2)    To work on and draft legislation on Central GST and Model State GST
(3)    To work on and finalise basic design of IT system required for GST in general and IGST in particular.

Further, to have an appropriate IT infrastructure, an ‘Empowered Group on IT Infrastructure for GST’, was constituted, on 26th July 2010, under the chairmanship of Nandan Nilekani. On the basis of the recommendations of this committee, the EC set up a company known as Goods and Services Tax Network (GSTN), incorporated on 28th March 2013, u/s. 25 of the Companies Act, 1956.

Recently, two more committees have been formed for facilitating implementation of GST from 01/04/2016. While one committee called ‘Steering Committee’ will monitor the progress of IT preparedness of GSTN/CBEC/Tax Authorities, finalisation of reports of all the Sub-Committees constituted on different aspects relating to the mechanics of GST and drafting of CGST, IGST and SGST laws/rules. This Committee shall also monitor the progress on consultations with various stakeholders like trade and industry, and training of officers. The other committee has been assigned the job of recommendation possible tax rates under GST that would be consistent with the present level of revenue collection of Centre and States. While making its recommendations, this Committee will take into account expected levels of growth of economy, different levels of compliance and broadening of tax base under GST. The Committee would also analyse the Sector-wise impact of GST on the economy.

While all these committees, sub-committees, working groups, etc, are working on their respective assignments, the parliament is ready to pass the Constitution Amendment Bill, the States will follow soon, so as to empower the Centre and the States to levy tax on goods and services concurrently, the question which is of prime importance is, what would be the final design of Indian Goods and Services Tax?

Once the final design of Indian GST is known, then only it is possible to understand the real impact thereof. How it will affect the manner of tax collection and administration thereof? Whether the trade and industry will have relief from multi-tax authorities, and, whether the ultimate tax payer i.e. the consumer, will have any tangible benefit? Several advantages, which are being publicised, whether these are real or illusionary? Several such questions are coming to mind, some of them have been discussed at various seminars, workshops and study circles and some are yet to be discussed, and, the people are anxiously waiting for the answers.

Some basic questions, being asked by people in general, are noted here as follows:-

1.    Which commodities and services will remain out of the GST network? Although some indication has been given in the Constitution Amendment Bill, but one has to wait for the final outcome.

2.    Which taxes will be subsumed in GST? Various authorities from time to time have said that all indirect taxes levied by Central and State Governments will be subsumed in GST. But there are variances in various reports circulated so far. One important question is whether Octroi, LBT, Electricity Duty, etc. will form part of GST or will continue to be levied separately? Ideally, all such taxes which are being levied at present by all Government authorities (whether Central, State or local) on any kind of transaction related to goods and services should get covered by the GST. But, whether there is consensus on this issue?

3.    Which are the commodities and services to remain tax free (zero rated) within GST? At present there is a long list of exempt commodities under the Excise law. There are separate list of items exempt under VAT laws of each State. Whether it will be a common list of exempted (tax free) goods and services for CGST and SGST or it will differ from State to State? Further, can there be a situation where an item is exempt from SGST in a particular State but liable to tax for CGST or vice versa?

4.    What will be the rate of tax on sale/supply of taxable goods and/or services? Whether it will be one single rate of GST applicable to all such goods and services or there will be a Schedule specifying different rates of tax applicable to different types of taxable supplies?

5.    Further, how the proportion of CGST and SGST will be worked out? Whether it is rate of GST which will divided in two parts i.e. CGST and SGST, or the GST rate is sum total of CGST rate and SGST rate? Thus, whether effective rate of GST may be different State to State?

6.    Whether the rate of SGST on a particular kind of goods or services can be different from one State to another?

7.    What will be the threshold limit of turnover, below which GST is not applicable to a dealer/assessee? The First Discussion paper has indicated that there will be a common threshold of Rs. 10 lakh for SGST, and, there will be a higher threshold for CGST (Rs. 1.5 crore). It also suggested that there may be appropriate higher threshold for services. As thereafter there is no official communication, the issue needs to be clarified appropriately. How these separate thresholds will work? And, if a common figure of threshold is considered for CGST and SGST, then whether it is qua each State or combined figure of annual turnover in all the States together? At present, a small dealer having both the activities i.e. selling of goods as well as providing services is not liable to any tax (whether VAT or service tax) if his annual turnover of rendering services is below Rs. 10 lakh and further, if his annual turnover of sale of goods in each State is less than Rs. 10 lakh.

8.    A related question is that, at present small manufacturing units, cottage industries, village industries, etc., are not liable for Excise Duty, how they will get necessary exemption under the GST Law? Or all such units will be treated like other big industries, and therefore liable for the same treatment? There are a large number of dealers falling under this category all over the country.

9.    Regarding registration of dealers, the First Discussion Paper has indicated that each tax payer would be allotted a PAN-linked taxpayer identification number.Whether there will be two separate such numbers i.e. one for CGST and another for SGST? The question is pertinent with reference to multi-state operations.

10.    Answer to the above question would play an important role in deciding whether a dealer would be required to file one common return or two separate returns (may be in the same format). We understand that in case of dealers having multi-state activities, for each State, there may be a separate return for SGST qua each State but what about CGST returns in such cases.

11.    Similarly, for payment of taxes, whether it will be through one common challan or two separate payments i.e. one for CGST and another for SGST and may be third for IGST?

12.    As the credit for input SGST has to be used only against SGST payable on sales i.e. output SGST, how the CGST credit has to be utilised – whether qua each State or credit in one State can be utilised for payment of CGST in any other State. Most of the large scale service providers will have such a situation. How the mechanism will work if there is one common return and if there are separate returns?

13.    Regarding administration of GST, we have been given to understand that, the Centre as well as States will have concurrent jurisdiction. The Central Government authorities will assess the amount of CGST and the State Government authorities will assess the amount of SGST. Would that mean that the same dealer/assessee will be liable to be assessed by two different authorities in respect of the same transaction? Thus, the same invoices, same set of books of account and documents will have to be produced before two different authorities. And how the situation should be tackled if the Central authority takes a different view than that of the State authority, or vice versa, on any such point of assessment, whether it is value of transaction, classification, rate of tax or the amount of input tax credit, etc.?

14.    Whether a registered dealer under GST will be eligible for full input tax credit of respective components of GST for all purchases of goods and services (including capital goods) or there will be artificial restrictions and reductions?

15.    Whether the practice of disallowing input tax credit (as being prevalent in some of the States at present) will continue in GST regime, if a duly registered supplier has not paid due taxes to the Government or has delayed the payment of taxes?

16.    Will there be any kind of ‘composition schemes’ for dealers (whether supplying goods or services) having turnover below certain limit, say Rs. 1 crore? And those dealers who are in the business of retail trade like kirana merchants, who deal in various kinds of goods but not in a position to maintain commodity wise or tax rate wise accounts. Similarly, in case of hotels, restaurants and cooked food vendors.
17.    Whether the present definition of goods (as given under the local sales tax laws) will continue as it is or will be modified for the purposes of “GST”?

18.    What would be the definition of ‘services’ and how the place of supply in case of services will be determined?

19.    What about the taxation of transactions, which are falling at present in the deemed sale category? Whether such transactions of ‘works contract’, etc., will be categorised as ‘sale of goods’ or of rendering of services? The question is pertinent when there are different rates of taxes on various kinds of goods and services.

20.    How the process of transition will take place, particularly with reference to accumulated credits, etc., as on the date immediately prior to the date of implementing the new regime?

There are several such questions, which needs to be addressed, before taking a final decision, and their appropriate solutions need to be incorporated in the final draft of the new legislation.

Note from the indirect tax committee of BCAS: It is said by renowned tax experts that GST would free India from the shackles of archaic indirect tax laws and usher in a new era of growth and prosperity. GST may affect all industries, irrespective of the sector. It will impact the entire value chain of operations namely procurement, manufacturing, warehousing, distribution and sale. Some of the business models may need appropriate changes. The Indirect Taxes Committee of BCAS has taken an initiative to maintain a question bank on the proposed design of GST. We feel that the readers of BCAJ. They may have many questions to ask, particularly with reference to specific sector/s with which they are associated. And there may be general questions and suggestions which may be of immense importance. The BCAS is also preparing for providing a platform for dialogue amongst its readers on various issues of concern. All pertinent questions and suggestions are proposed to be submitted to the respective authorities who are responsible for drafting and finalising the Act and Rules concerning implementation of Goods and Services Tax. We would, therefore, like to invite all our readers to send their queries on GST, via e-mail to (to be informed), marking the subject as “GST Question Bank”. Our intention is to let our readers to take an active part in the framing of the law itself. We also propose to publish articles on best practices followed in some of the selected countries where GST has already been implemented successfully. Please look forward for the next issue of BCAJ.

Income Tax Officer vs. Late Som Nath Malhotra (through Raj Rani Malhotra) ITAT Bench ‘G’, New Delhi Before D. Manmohan, (V.P) and N. K. Saini, (A.M.) ITA No. 519/Del/2013 Assessment Year : 2003-04. Decided on 02.07.2015 Counsel for Revenue / Assessee: J. S. Minhas / Piyush Kaushik

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Section 148 & 292BB – Assessment made on the basis of notice issued in the name of the deceased is null and void despite the fact that the legal heir attended the proceeding.

Facts:
The AO on the basis of information received from DIT (Investigation), New Delhi that one Deepak Changia had given an accommodation entry of Rs. 2.01 lakh to the deceased assessee, issued notice dated 31.03.2010 u/s 148. In response to the said notice the legal heir, the wife of the deceased assessee, informed the AO that the assessee had expired on 06.12.2002 and she also furnished the death certificate and copy of Income Tax Return filed on 29.08.2003. The AO however framed the assessment in the name of the deceased assessee at an income of Rs. 23 lakh by making the addition of Rs. 19.94 lakh.

On appeal, the CIT(A) held that since the legal heir of the deceased assessee had informed the AO at the very beginning of assessment proceedings that the assessee had expired, the entire reassessment proceeding made in the name of the deceased was null and void. Against the order of the CIT(A), the revenue appealed before the Tribunal and contended that the CIT(A) erred in ignoring the provisions of section 292BB and holding the assessment not valid when the legal heir of the assessee had duly attended the proceedings and not objected to the same.

Held:
The Tribunal noted that in the present case the AO recorded the reasons for issuing the notice u/s. 148 of the Act in the name of the deceased assessee and got the approval of the Addl. CIT also in the same name. The AO issued notice dated 31.03.2010 u/s. 148 of the Act also in the name of the deceased assessee. In response when the legal heir informed him about the death of assessee, then also the AO did not issue any notice u/s. 148 of the Act or 143(2) of the Act in the name of the legal heir. Thus, according to the Tribunal, the entire assessment proceeding by the AO was on the basis of the notice which was invalid under the Act. Therefore, relying on the decision of the Allahabad High Court in the case of CIT vs. Suresh Chand Jaiswal (325 ITR 563), it was held that the assessment framed on the basis of the invalid notice was void ab initio.

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U.P. Electronics Corporation Ltd. vs. DCIT (TDS) ITAT Lucknow “A” Bench Before Sunil Kumar Yadav (J. M.) and A. K. Garodia (A. M.) ITA No.538/LKW/2012 Assessment Year:2009-10. Decided on 23.01.2015 Counsel for Assessee / Revenue: R. C. Jain / K. C. Meena

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Section 14A – Investments in wholly owned subsidiaries (WOS) – Before any disallowance can be made the AO must record objectively his satisfaction as regards the expenditure incurred by the assessee – With respect to investment in WOS no expenditure is generally incurred to earn dividend hence no disallowance u/s. 14A

Facts:
The assessee had made investment of Rs. 60.9 crore in the share capital of three wholly owned subsidiary companies. During the year under appeal, the assessee earned dividend income of Rs. 7.52 lakh. Applying the provisions of section 14A read with Rule 8D(2)(iii), the AO disallowed the sum of Rs. 40.31 lakh.

On appeal, the CIT(A) confirmed the order of the AO. Before the Tribunal, the assessee submitted that before applying the provisions of section 14A the Assessing Officer had failed to record objective satisfaction as regards the claims made by the assessee and secondly, the investment made is of long term and of strategic in nature, in the wholly owned subsidiaries. According to it, no decision is required in making the investment or disinvestment on regular basis and, therefore, there cannot be any direct or indirect expenditure.

Held:
The Tribunal agreed with the assessee that recording of objective satisfaction by the AO with regard to the correctness of the claim of the assessee is mandatorily required in terms of section 14A(2) of the Act. It also noted that in the instant case, the AO had simply recorded that the contention of the assessee is not acceptable. Further, it also noted that the entire investment by the assessee was made in the subsidiary companies, therefore, in those cases disallowance u/s. 14A(2) of the Act cannot be worked out unless and until it is established that certain expenditures are incurred by the assessee in these investments. Further, relying on the decisions of the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT (I.T.A. No. 1733/PN/2012), of the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT (328 ITR 81) and of the Mumbai Bench of the Tribunal in the case of M/s. JM Financial Limited vs. Addl. CIT, I.T.A. No. 4521/Mum/2012, the Tribunal accepted the submission of the assesse and allowed its appeal.

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[2015] 68 SOT 550(Mumbai) Archana Parasrampuria vs. ITO ITA No. 1196 (Mum) of 2009 Assessment Year: 2005-06. Date of Order: 26.11.2014

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Section 54F – Acquisition of “transferable tenancy rights” which constitute substantial rights over the property and were almost identical to ownership of property qualify for exemption u/s. 54F.

Facts:
The assessee earned long term capital gains on transfer of shares. She claimed the capital gain so arising to be exempt u/s. 54F on the ground that she had purchased a residential flat.

In the course of assessment proceedings, on examination of the transfer deed, the Assessing Officer (AO) noted that the assessee had acquired “transferable tenancy rights” and not “ownership” of the flat. He, disallowed the claim made by the assessee u/s. 54F of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.

Held: The Tribunal noted that the assessee had purchased rights in one of the flats from the developer, which under the agreement were allotted to him (developer) for selling to the intended purchasers. The assessee had paid a sum of Rs. 78,10,001 as consideration/premium to the developer for obtaining the tenancy rights in the flat in question. Though under the agreement in question, the assessee was liable to pay a monthly rent of Rs. 4,000 to the owner, the Tribunal was of the view that considering the overall facts and circumstances of the case and amount of rent being a meager amount when compared to the amount of rent otherwise payable on such a property in the area, it is apparent that the assessee is not the mere tenant in the house. The Tribunal concluded that she has purchased substantial rights in the flat in question. It observed that a perusal of clause 7 of the agreement reveals that the assessee is entitled to carry out repairs and renovation in the said flat except the changes which could be detrimental to the basic structure of the building. The owner was not entitled to terminate the tenancy of the assessee on any ground, whatsoever, except for nonpayment of rent. In the event of destruction of the said building or construction of a new building, the assessee/ tenant was entitled to obtain tenancy in respect to the new flat having the same carpet area on the same floor without any payment or consideration or premium to the owner under the agreement. The assessee had absolute rights to transfer or assign the tenancy rights in respect of the flat in favor of any person of her choice and to charge such consideration/premium for such transfer/assignment and the tenant/assessee would not be required to obtain any permission from the owner and will not be required to pay any premium for consideration to the owner for such transfer/assignment of tenancy rights. The tenant is also entitled to create mortgage in respect of the tenancy rights in the said flat and also bequeath the tenancy rights in respect of any person.

The Tribunal held that the rights of the assessee in the flat were not the mere tenancy rights but were substantial rights giving the asseseee dominion, possession and control over the property in question with transferable rights, which were almost identical to that of an owner of the property. There was no denial that the assessee has purchased the rights in the said flat for residential purposes.

The provisions of s. 54F having regard to its beneficial objects are required to be interpreted liberally. The coordinate Bench of the Tribunal, in somewhat similar circumstances, in the case of Smt. Meena S. Raheja vs. Dy. CIT (ITA No.3941(Mum) of 2009), dated 22.9.2010 in a case of 99 year leasehold rights has held that the assessee is entitled to the benefit of deduction u/s. 54F of the Act.

The Tribunal held that the assessee qualified for deduction u/s. 54F of the Act. The appeal filed by the assessee was allowed.

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[2015] 171 TTJ 145 (Asr) Sibia Healthcare (P) Ltd. vs. DCIT ITA No. 90/Asr/2015 Assessment Year: 2013-14. Date of Order: 9.6.2015

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Sections 200A, 234E – Prior to 1.6.2015 there was no enabling
provision for raising a demand in respect of levy of fees u/s. 234E.

Facts:
The
assessee company delayed the filing of TDS statements. In the course of
processing of TDS statements, the AO(TDS) raised a demand, by way of an
intimation dated 9th September, 2013 issued u/s. 200A of the Act, for
levy of fees u/s. 234E for delayed filing of the TDS statement.

Aggrieved
by the levy of fees in the intimation issued, the assessee preferred an
appeal to the CIT(A). The CIT(A) upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal noted the statutory provisions of section 234E as introduced
by the Finance Act, 2012 w.e.f. 1.7.2012 and also of section 200A as
inserted by the Finance Act, 2009 w.e.f. 1.4.2010. It also noted that
the provisions of section 200A were amended by Finance Act, 2015 w.e.f.
1.6.2015 to provide that in the course of processing of a TDS statement
and issuance of intimation u/s. 200A in respect thereof an adjustment
could also be made in respect of the “fee, if any, shall be computed in
accordance with the provisions of section 234E.”

The Tribunal
held that there was no enabling provision for raising a demand in
respect of levy of fees u/s. 234E. While examining the correctness of
intimation u/s. 200A, it had to be guided by the limited mandate of
section 200A, which, at the relevant point of time, permitted
computation of amount recoverable from or payable to, the tax deductor
after making adjustments specified therein which did not include fees
levied u/s. 234E.

The adjustment in respect of levy of fees u/s.
234E was beyond the scope of permissible adjustments contemplated u/s.
200A. This intimation is appealable order u/s. 246A(a), and, therefore,
the CIT(A) ought to have examined legality of the adjustment made under
this intimation in the light of the scope of section 200A. It also
observed that there is no other provision enabling a demand in respect
of this levy and in the absence of the enabling provisions u/s. 200A, no
such levy could be effected.

The appeal filed by the assessee was allowed.

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Settlement of cases – Interest – Section 245D(2C) – B. P. 01/04/1995 to 05/10/2001 – Assessee depositing tax on admitting additional income: Required amount deposited within time when application admitted – Further tax liability determined final order satisfied – Interest on further tax for the period during the pendency of application before Settlement Commission is unwarranted

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CIT vs. Vishandas and ors; 374 ITR 591 (Del):

The assessee and two others disclosed Rs. 10,00,000/- in the hands of each of the three assesses. The Settlement Commission directed to accept the offer of additional income of Rs. 1,48,16,160/- and rejected the waiver of interest. While computing the amount payable, the Assessing Officer made an addition of Rs. 13,03,211/- as interest recoverable for the period between 01/01/2004 and 26/03/2010 u/s. 245D(2C) of the Income-tax Act, 1961. The Commissioner (Appeals) held that section 245D(2C) could be invoked only if the assessee did not deposit the tax payable on income disclosed and admitted u/s. 245D(1). In the instant case, the assessee deposited Rs. 6,12,000/- within the time prescribed u/s. 245D(2C) on the income of Rs. 10,00,000/- in terms of order u/s. 245D(1) and deleted the addition. This was confirmed by the Tribunal.

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

“i) When the application was filed before the Settlement Commission, the assessee deposited the admitted tax liability. Soon, thereafter, when the application was admitted, the amount required was deposited within the time stipulated u/s. 245D(6A). The further tax liability determined was payable after the final decision. The records and the materials examined by the Commissioner (Appeals) and upheld by the Tribunal disclosed that even the tax liability finally determined was satisfied. In these circumstances, the addition of interest for the period during the pendency of the application before the Settlement was entirely unwarranted.

ii) We do not see any reason to disturb the concurrent findings of fact. The appeals do not raise any substantial question of law and are, consequently, dismissed.”

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ITAT: Power to grant stay beyond 365 days: Section 254(2A) – Section 254(2A) third proviso cannot be interpreted to mean that extension of stay of demand should be denied beyond 365 days even when the assesseee is not at fault. ITAT may extend stay of demand beyond 365 days if delay in disposing appeal is not attributable to assessee: ITAT should make efforts to decide stay granted appeals expeditiously

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DCIT vs. Vodafone Essar Gujarat Ltd. (Guj);SCA No. 5014 of 2015; dated 12/06/2015; www.itatonline.org: [2015] 58 taxmann.com 374 (Guj)

The Tribunal passed an order extending stay of recovery of demand beyond the period of 365 days. The department filed a Writ Petition to challenge the said order on the ground that in view of the third proviso to section 254(2A) of the Act, the Tribunal has no jurisdiction to extend the stay of demand beyond 365 days.

The Gujarat High Court dismissed the Petition and held as under:

“(i) It is true that as per third proviso to section 254(2A) of the Act, if such appeal is not so disposed of within the period allowed under the first proviso i.e. within 180 days from the date of the stay order or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee. Therefore, as such, legislative intent seems to be very clear. However, the purpose and object of providing such time limit is required to be considered. The purpose and object of providing time limit as provided in section 254(2A) of the Act seems to be that after obtaining stay order, the assessee may not indulge into delay tactics and may not proceed further with the hearing of the appeal and may not misuse the grant of stay of demand. At the same time, duty is also cast upon the learned Tribunal to decide and dispose of such appeals in which there is a stay of demand, as early as possible and within the period prescribed under first proviso and second proviso to section 254(2A) of the Act i.e. within maximum period of 365 days.

ii) However, one cannot lost sight of the fact that there may be number of reasons due to which the learned Tribunal is not in a position to decide and dispose of the appeals within the maximum period of 365 days despite their best efforts. There cannot be a legislative intent to punish a person/ assessee though there is no fault of the assessee and/or appellant. The purpose and object of section 254(2A) of the Act is stated herein above and more particularly with a view to see that in the cases where there is a stay of demand, appeals are heard at the earliest by the learned Tribunal and within stipulated time mentioned in section 254(2A) of the Act and the assessee in whose favour there is stay of demand may not take undue advantage of the same and may not adopt delay tactics and avoid hearing of the appeals. However, at the same time, all efforts shall be made by the learned Tribunal to see that in the cases where there is stay of demand, such appeals are heard, decided and disposed of at the earliest and periodically the position/ situation is monitored by the learned Tribunal and the stay is not extended mechanically.

(iii) By section 254(2A) of the Act, it cannot be inferred a legislative intent to curtail/withdraw powers of the Appellate Tribunal to extend stay of demand beyond the period of 365 days. However, the aforesaid extension of stay beyond the period of total 365 days from the date of grant of initial stay would always be subject to the subjective satisfaction by the Tribunal and on an application made by the assessee / appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay is not attributable to the appellant / assessee.

iv) As observed hereinabove, the Tribunal can extend the stay granted earlier beyond the period of 365 days from the date of grant of initial stay, however, on being subjectively satisfied by the Tribunal and on an application made by the assessee/appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay, is not attributable to the appellant / assessee and that the assessee is not at fault and therefore, while considering each application for extension of stay, the Tribunal is required to consider the facts of each case and arrive at subjective satisfaction in each case whether the delay in not disposing of the appeal within the period of 365 days from the date of initial grant of stay is attributable to the appellant – assessee or not and/or whether the assessee / appellant in whose favour stay has been granted, has cooperated in early disposal of the appeal or not and/or whether there is any delay tactics by such appellant / assessee in whose favour stay has been granted and/or whether such appellant is trying to get any undue advantage of stay in his favour or not. Therefore, while passing such order of extension of stay, Tribunal is required to pass a speaking order on each application and after giving an opportunity to the representative of the revenue – Department and record its satisfaction as stated hereinabove. Therefore, ultimately if the revenue – department is aggrieved by such extension in a particular case having of the view that in a particular case the assessee has not cooperated and/or has tried to take undue advantage of stay and despite the same the Tribunal has extended stay order, revenue can challenge the same before the higher forum/High Court. (Commissioner of Customs and Central Exercise, Ahmedabad vs. Kumar Cotton Mills Pvt. Ltd (2005) 180 ELT 434(SC) & Commissioner vs. Small Industries Development Bank of India in Tax Appeal No.341 of 2014 followed; Commissioner of Income Tax vs. Maruti Suzuki (India) Limited decided on 2.1.2014 in Writ Petition (Civil) No.5086 of 2013 not followed)”

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Capital gain – Agricultural land – Section 2(14)(iii) (b) – A. Y. 2009-10 – Land situated within prescribed distance from municipal limit – Measurement of distance – Amendment in 2014 providing that distance should be measured aerially is prospective and not to apply to earlier years

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CIT vs. Nitish Rameshchandra Chordia; 374 ITR 531 (Bom):

On 10/04/2007, the assessee purchased agricultural land and sold it on 15/04/2008. The assessee claimed the profit as exempt on the ground that the land sold was agricultural land and not a capital asset according to section 2(14) of the Income-tax Act, 1961, urging that the land was situated beyond 8 kms. of the municipal limits. The Assessing Officer rejected the claim holding that the distance must be measured by the shortest distance as the crow flies or the straight line method and not by the road distance. The Tribunal allowed the assesses claim.

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

“i) The amendment in the taxing statute, unless a different legislative intention is clearly expressed, shall operate prospectively. If the assessee has earned business income and not the agricultural income, section 11 of General Clauses Act, 1897, will prevail unless a different intention appears to the contrary. The relevant amendment prescribing that the distance to be counted must be aerial came into force w.e.f. 01/04/2014. The need for the amendment itself showed that in order to avoid any confusion, the exercise became necessary. This exercise to clear the confusion, therefore, showed that the benefit thereof must be given to the assessee.

ii) In such matters, when there is any doubt or confusion, the view in favour of the assessee needs to be adopted. Circular No. 3 of 2014, dated 24/01/2014, dealing with applicability expressly stipulates that it takes effect from 01/04/2014, and, therefore, prospectively applies in relation to the A. Y. 2014-15 and subsequent assessment years. Hence, the question whether prior to the A. Y. 2014-15 the authorities erred in computing the distance by road did not arise at all.”

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Business expenditure – Disallowance u/s. 40(a) (ia) -: Section 40(a)(ia) – Argument that the disallowance for want of TDS can be made only for amounts “payable” as of 31st March and not for those already “paid” is not correct. In Liminie dismissal of SLP in Vector Shipping does not mean Supreme Court has confirmed the view of the HC

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P. M. S. Diesel vs. CIT (P&H); ITA No. 716 of 2009 dated 29/04/2015:www.itatonline.org: 277 CTR 491(P&H):

Dealing with the scope of section 40(a)(ia) of the Income Tax Act, 1961, the Punjab and Haryana High Court held as under:

“(i) The introduction of Section 40(a)(ia) had achieved the objective of augmenting the TDS to a substantial extent. When the provisions and procedures relating to TDS are scrupulously applied, it also ensured the identification of the payees thereby confirming the network of assessees and that once the assessees are identified it would enable the tax collection machinery to bring within its fold all such persons who are liable to come within the network of tax payers. These objects also indicate the legislative intent that the requirement of deducting tax at source is mandatory.

(ii) The argument that section 40(a)(ia) relates only to assessees who follow the mercantile system and does not pertain to the assessees who follow the cash system is not acceptable. The purpose of the section is to ensure the recovery of tax. We see no indication in the section that this object was confined to the recovery of tax from a particular type of assessee following a particular accounting practice.

(iii) The argument that section 40(a)(ia) applies only to amounts which are “payable” and not to amounts that are already “paid” is also not acceptable (Commissioner of Income Tax vs. Crescent Export Syndicate (2013) 216 Taxman 258 (Cal) and Commissioner of Income Tax vs. Sikandar Khan N. Tunwar (2013) 357 ITR 312 (Guj) followed)

(iv) Though in Commissioner of Income Tax vs. M/s Vector Shipping Services (P) Ltd (2013)262 CTR (All) 545, 357 ITR 642, it was held that no disallowance could be made u/s 40(a)(ia) as no amount remained payable at the year end and the Special Bench decision of the Tribunal in Merilyn Shipping & Transports, 136 ITD 23 (SB) (Vishakhapatnam) was noted, this cannot be agreed with as there is no reasoning for the finding. The dismissal of the department’s petition for special leave to appeal (SLP) was in limine. The dismissal of the SLP, therefore, does not confirm the view of the Allahabad High Court.”

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Business expenditure – Disallowance of payment to directors – Section 40(c) – A. Y. 1981-82 – Film production – Amounts paid as professional charges to directors for directing and producing film – Amounts not paid in their capacity as members of Board of Directors – No disallowance can be made u/s. 40(c)

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CIT vs. Rupam Pictures Pvt. Ltd.; 374 ITR 450 (Bom)

The assessee was in the business of production of films. In the A. Y. 1981-82, two directors of the assessee company were paid Rs. 3 lakh and Rs. 1.5 lakh, respectively for directing and producing a film. The Assessing Officer applied section 40(c) of the Income-tax Act, 1961 and disallowed the payment in excess of Rs. 72,000/- in respect of each of them. The Tribunal deleted the addition.

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

“i) The disallowance made by the Income-tax Officer u/s. 40(c) was not justified. The amounts paid to the two individuals were not paid in their capacity as members of the Board of Directors but as professional charges for directing and producing a film.

ii) The Revenue was, therefore, not justified in disallowing the claim, the character of remuneration mode being different.”

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Hindu Succession – Hindu female dying intestate – Her step son falls in category of heirs of husband – Hindu Succession Act 1956. Section 15(10)(b).

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S. A. Ramalingam vs. Elumalai AIR 2015 Madras 235

The suit was filed by the respondent/plaintiff for declaration of his right, title and interest in respect of and recovery of the suit items, which admittedly belonged to one Sampoornammal, who was none other than the stepmother of the plaintiff.

The facts that Sampoornammal, who was the senior wife of Ramasamy Padaiyachi, was the original owner of the property and during the subsistence of the first marriage, Ramasamy Padaiyachi married one Rajammal as his second wife. Rajammal gave birth to the plaintiff through Ramasamy Padaiyachi. Shri Ramasamy Padaiyachi predeceased the senior and junior wives and the senior and junior wives also died thereafter and after their death, the defendant (son of one of the paternal uncles of Sampoornammal – senior wife) has been in possession and enjoyment of the suit properties.

The dispute in respect of the suit items arose between the plaintiff/step-son of  Sampoornammal and the defendant,.

The Hon’ble Court observed that the relationship between the parties was not disputed. The plaintiff being the step son of the owner falls in the category of the heir of the husband as referred to in clause (b) of section 15(1) and will come as legal heir of female dying intestate.

The Hon’ble Apex Court in the decision reported in (1987) 2 SCC 547 (Lachman Singh vs. Kirpa Singh and others) has categorically laid down that the in the case of a female Hindu dying intestate, a step son, that is, the son of her husband by his another wife falls in the category of the heirs of the husband referred to in clause (b) of section 15(1) and will come in as her heir. That being the legal position, both the courts below by relying on the law so laid down by the Apex court, rightly held that the plaintiff being step son of Sampoornammal, under clause 15(1) (b) of the Hindu Succession Act, was entitled to succeed to her property, in the absence of other legal heirs and the denial of his right, title and interest by the defendant insofar as the suit items are concerned, is hence legally not sustainable. When the plaintiff is held to be entitled to the suit items, the possession of the suit items by the defendant without any right would amount to trespass and encroachment. Though the defendant sought to set up title on the strength of release deed executed by the plaintiff’s mother for her herself and on behalf of the plaintiff, who was the erstwhile minor son, the same for want of any right to do so by Rajammal and for want of registration was held to be not valid a document. When release deed is held to be invalid, the question of taking steps to set aside the same for the purpose of establishing the right of the plaintiff did not at all arise.

Part C | Information On & Around

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Att ack on RTI activist in Latur:

The entire episode of this attack was recorded on cell and
the video was circulated widely. When on my cell, I went
through it for nearly 40 minutes. Tears flowed from my
eyes. What inhuman activities by Shiv-Sena workers. (If
any one desires to view the video, call me on 9821096052,
I shall forward it).

A Right to Information (RTI ) activist from Latur, Mallikarjun Bhaikkatti, was brutally beaten and his face blackened allegedly by Shiv Sena activists on the premises of a college in the district in front of over 2,000 students, teachers, staff and onlookers. The activist had sought information through RTI queries, about unauthorised construction activity.

Sena youth wing president Aditya Thackeray said that those responsible for thrashing Bhaikkatti had been dismissed by the party. “Heard of the unfortunate incident in Latur. The party strongly condemns the disgraceful act. Those involved have been moved from the party,” he tweeted.

Senior member of the institution which runs the college, Shivaji Bhosle, has been arrested and the police have launched a manhunt for around 25 Sena activists.

Bhaikkatti told TOI , “A group of people with saffron scarves waiting in an SUV with a Shiv Sena emblem assaulted me. They dragged me into their car where they beat me, snatched my phone, and brought me to Shahu junior college campus. They kicked and showered blows on me while some assaulted me with belts and iron rods. They poured wangan lubricant on me.”

District Police Chief Dnyaneshwar Chavan told TOI that they have photos of the incident and are trying to zero in on the culprits based on the pictures.

RTI activist receives 32kg of ‘replies’:

An RTI activist, who was denied information by panchayat officials for his queries under the Right to Information Act, finally received 32 kilos of papers as replies after waiting for eight months.

Daniel Jesudas had requested information on the expenditure and details of work sanctioned by the executive officer of Vellalore town panchayat for a period of six months from August 2014 to February 2015.

He finally received the reply, costing the government more than Rs.11,000. As per the courier slip, courier charges alone were Rs.1,130 and the weight of the bundle was 32 kilos. “The panchayat officials told me they spent over Rs.9,000 just on photo copies,” he said.

3 RTI Activists sad story:

Three RTI activists were arrested in the last week of September on the charge of running an extortion racket targeting builders. The Mulund police said that Laxminarayan Shetty, Pankaj Chandanshive and Anil Mhaske had demanded Rs.2 lakh from a developer for not filing complaints with various government departments.
The developer, Sanjay Gharat, had planned to refurbish an old house with the help of his relative. In January, Shetty allegedly met him and sought Rs.1 lakh for not blocking the repairs by filing a complaint with the local BMC ward office.

According to the First information report (FIR), Gharat paid Rs.50,000. But a few months later, Chandanshive again approached Gharat and demanded Rs.1 lakh. The developer paid Rs.10,000.

Earlier this month, Mhaske allegedly tried to extract more money by saying that Shetty and Chandanshive were part of this group.

This time, Gharat alerted the Mulund police, who arrested the three men. Cops sought their remand for seven days, saying they wanted to find out if the trio was part of a bigger extortion ring that targeted builders. The court granted the request.

Shetty and Chandanshive have two previous criminal cases pending against them.

Part B | RTI Act, 2005

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Maharashtra Chief Information Commissioner Mr. Ratnakar Gaikwad has said:

Ten years after the Act was enacted, Gaikwad said the public authorities still do not think it necessary to put out all information, though section 4 of the RTI Act requires it. On the performance of information commissioners in Maharashtra, Gaikwad said there were two aspects:

Quantitative and qualitative. “In the last decade, around 44 lakh RTI queries were received across the state and 99% disposed of. Of the 1.54 lakh queries that have gone into appeal, 1.2 lakh have been disposed of. As on September 30, around 30,000 are pending,” he said.

The state information commissioner also wants a provision to be introduced in the Act to punish those who use it for blackmail. “Such persons must be blacklisted,” he said, adding that there must be a limit on the number of RTIs a person can file before the same PIO in a month.

Part A | Decision of CIC

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Whether PIO can file a Writ against order of the appellate authority – CIC:

The petitioner is the Public Information Officer, Syndicate Bank Regional Office at Mugulrajapuram, Vijayawada, under the Right to Information Act, 2005 (for short ‘the Act’).

The AP High Court held:
This court is of the opinion that the Writ Petition, filed by the Public Information Officer, is not maintainable because even though he is an employee, he is designated as Public Information Officer, who is charged with the duty of dealing with the requests of persons seeking information and render reasonable assistance to such persons. U/s. 7 of the Act, the Public Information Officer shall dispose of the requests received by him either by providing information on payment of the prescribed fee or by rejecting the request for any of the reasons specified in sections 8 and 9 of the Act. A person, who does not receive a decision within the time specified under sub-section 1 of section 7 of the Act or is aggrieved by the decision of the Central Public Information Officer or the State Public Information Officer, is entitled to file an appeal to such Officer, who is senior in rank of the Central Public Information Officer or the State Public Information Officer. A second appeal against such decision shall lie to the Central Information Commission or the State Information Commission as the case may be.

The scheme of the Act, discussed above would reveal that every Public Information Officer nominated as such under the Act has a dual role to play viz. as an officer of the Public Authority and also the Public Information Officer. While such Officer is loyal to his employer while acting in his role as the Officer, he acts as a quasijudicial authority while disposing of the request made for furnishing information. His orders are subject to further appeals. Therefore, in the opinion of this Court, the Public Information Officer cannot don the role of the Officer of the Public Authority in relation to the orders passed by the appellate authorities against the orders passed by him. If his order is reversed by the appellate authority, he cannot be treated as aggrieved party giving rise to a cause of action for him to question such Orders. It is only either the public authority, against whom the directions are given, or any other party, who feels aggrieved by such directions, that can question the orders passed by the appellate authorities. As such, the Public Information Officer, who filed this Writ Petition, is wholly incompetent to question the order of the appellate authority and the Writ Petition filed by him is not maintainable.

Even on merits, this Court has no hesitation to hold that the information sought for by respondent No. 2 does not fall within the exempted category u/s. 8 (1) (h) of the Act because that information, which respondent No. 2 has sought, relates to pending proceedings before the Debt Recovery Tribunal. However, what is exempted u/s. 8 (1) (h) is information, which would impede the process of investigation or apprehension or prosecution of respondent of offenders. It is not the pleaded case of the Bank that any investigation or apprehension or prosecution of respondent No. 2 will be impeded by furnishing information sought for by him. Even if the information relates to a pending dispute before a Court or Tribunal, that would not fall u/s. 8 (1) (h) of the Act.

For the above-mentioned reasons, the Writ Petition is dismissed.

[PIO, Syndicate Bank, Regional Office, Mugulrajapuram, Vijaywada vs. Central Information Commission: Writ Petition No. 28785 of 2011 before the Hon’ble Sri Justice C V. Nagarjuna Reddy]

States abusing law – Time to reform colonial-era sedition law to prevent misuse

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The Tamil Nadu police arrested the folk singer S. Kovan on charges of sedition. The 52-year old Mr. Kovan had recorded hard-hitting songs pointing a finger at the chief minister of Tamil Nadu, J. Jayalalithaa – and her government, of the all India Anna Dravida Munnetra Kazagham or AIADMK – of profiting from the sale of liquor in the state’s chain of alcohol shops under the Tamil Nadu State Marketing Corporation, or TASMAC. There are about 6,800 state-run alcohol shops in Tamil Nadu, and TASMAC earned just under Rs. 24,000 crore a year in 2013-14. Mr. Kovan, an outspoken Dalit rights activist, has sympathised with other hot-button issues before the prohibition movement, but his songs on alcohol attacking Ms. Jayalalithaa have touched a particular nerve, with his supporters saying they have been seen over 400,000 times on You Tube. it is, however, entirely questionable as to whether they constitute sedition.

Proviso to section 3 and section 37(1) – Business is set-up on recruitment of employees and all expenditure incurred thereafter are allowable as business expenditure.

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5. Reliance Gems & Jewels Ltd. vs. DCIT
ITAT “D” Bench, Mumbai
Before N.K. Billaiya (A M) and Amarjit Singh (J. M.)
I.T.A. No.3855/Mum/2013
A. Y. : 2008-09. Date of Order: 28.10.2015
Counsel for Assessee / Revenue: F.V. Irani / Vivek Anand Ojha

Proviso to section 3 and section 37(1) – Business is set-up on recruitment of employees and all expenditure incurred thereafter are allowable as business expenditure.

FACTS

The assessee is in the business of trading and merchandising of diamonds and gold jewelleries. Return for the year was filed disclosing loss of Rs. 87.26 lakh. On perusal of the annual account, the Assessing Officer found that the assessee had not started its business therefore the entire expenditures were disallowed. The assessee carried the matter before the CIT(A) who upheld the order of the AO. Before the Tribunal, the assessee placed before it the details of employee-wise salaries alongwith job description and details of tax deducted at source as well as the details regarding other expenses. The assessee further submitted that the setting up of business is different from commencement of business and the expenditures are allowable on setting up of business. It also relied on the decision of the Delhi High Court in the case of Omniglobe Information Tech India Pvt. Ltd. vs. CIT (Income Tax appeal No. 257 of 2012). The Revenue strongly relied on the orders of the lower authorities and contended that the decision relied upon by the assessee relates to service industries and therefore same cannot be applied on the facts of the assessee’s case.

HELD

The Tribunal noted that the assessee had recruited the employees for the purpose of its business. According to the Tribunal, the type of business the assessee was engaged in, require persons who have expertise in understanding the jewellery, and without such recruitment, it would not be possible to commence the business. It also referred to the proviso to section 3 of the Act, which defines the term “previous year” in relation to a newly setup business (and not with reference to the commencement of business), thus as contended by the assessee, the setting up of business was more relevant than the date of commencement of business.

Therefore, relying on the decision of the Delhi High Court in the case of Omniglobe Information Tech India Pvt. Ltd., the Tribunal held that the recruitment of employees was indicative that business was set up by the assessee. Accordingly, the appeal filed by the assessee was allowed.

Section 10A – Unless the initial years claim is withdrawn, subsequent years claim cannot be denied.

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4. ACIT vs. Sitara Diamond Pvt. Ltd.
ITAT Mumbai `E’ Bench
Before N. K. Billaiya (AM) and Ram Lal Negi (JM)
ITA Nos. 4422/Mum/2012 and 6727/Mum/2011
A. Y.s: 2006-07 and 2007-08.  
Date of Order: 2.09. 2015.
Counsel for revenue / assessee: S. K. Mahapatra / Nitesh Joshi

Section 10A – Unless the initial years claim is withdrawn, subsequent years claim cannot be denied.

FACTS

Deduction u/s. 10A was first made by the assessee in assessment year 2005-06, which was allowed by the order dated 10.12.2008 passed u/s. 143(3) of the Act. For the assessment years 2006-07 and 2007-08, the Assessing Officer (AO) denied claim for deduction u/s. 10A. Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the claim of the assessee on merits. Aggrieved, the revenue preferred an appeal to the Tribunal where on behalf of the assessee it was argued that while the CIT(A) has allowed the appeal on merits, the Revenue could not withdraw the claim of deduction since unless the initial years claim is withdrawn, subsequent years claim cannot be denied.

HELD

The Hon’ble High Court of Bombay has considered such issue in the case of CIT vs. Paul Brothers 216 ITR 548 wherein the Hon’ble High Court has held that “unless deductions allowed for the assessment year 1980-81 on the same grounds were withdrawn, they could not be denied for the subsequent years”. This decision of the Hon’ble High Court of Bombay was followed by the Hon’ble high Court in the case of CIT vs. Western Outdoor Interactive Pvt. Ltd. 349 ITR 309 wherein the Hon’ble High Court has held that “where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income-tax Act, 1961, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Incometax Officer cannot withdraw the relief for subsequent years. More particularly so, when the Revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years.”

Following the ratio laid down by the High Court, the Tribunal declined to interfere with the order of CIT(A). The appeals filed by the Revenue were dismissed.

Section 88E – STT paid on speculation loss has to be considered if after setting off the speculation loss against speculation gain there is positive income which has been included in the computation of total income.

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3. Sanjay Mohanlal Mota (HUF) vs. ITO
ITAT Mumbai `E’ Bench
Before N. K. Billaiya (AM) and Ram Lal Negi (JM)
ITA No. 2988/Mum/2013
A. Y. : 2007-08.                                    
Date of Order: 3. 09. 2015.
Counsel for assessee / revenue : Jitendra Singh / S. K. Mahapatra

Section 88E – STT paid on speculation loss has to be considered if after setting off the speculation loss against speculation gain there is positive income which has been included in the computation of total income.

FACTS

The assessee was trading in shares and stocks and
also derived dividend income, interest income and rent which were
assessed under the head Income from Other Sources. While assessing the
total income, the Assessing Officer (AO) noticed that the loss in
respect of speculative transaction, though assessed, was carried forward
and did not form part of total income. He asked the assessee to show
cause why proportionate STT of Rs.1,79,722 should not be treated as STT
relating to speculative transactions and therefore, why this amount
should not be reduced from the total STT paid. The assessee filed a
detailed reply where it contended that when speculation income is taxed
there is no reason its claim should not be allowed when there is a
speculation loss. It was also contended that there is no provision for
bifurcating STT paid on each type of transaction. The AO rejected the
contentions of the assessee and disallowed the proportionate claim of
STT of Rs.1,79,722. Aggrieved, the assessee preferred an appeal to the
CIT(A) who confirmed the action of the AO. Aggrieved, by the order
passed by CIT(A), the assessee preferred an appeal to the Tribunal.

Held

A
perusal of the section 88E shows that the total income of the assessee
should include income chargeable under the head `profits and gains of
business or profession’ which arises from taxable securities
transactions. If this condition is fulfilled, then the assessee is
entitled to a deduction from the amount of income-tax on such income of
an amount equal to STT paid by him. Since the speculation loss is set
off against the speculation gain and thereafter if any positive income
remains that positive income is taken in the computation of total
income. Even the STT paid on speculation loss has to be considered while
giving effect to it. The Tribunal restored the issue to the file of the
AO with a direction to examine whether there is any positive income
remaining after giving set off to the speculation loss. The AO was
directed to allow the claim if positive income is found under this head
after giving reasonable and sufficient opportunity of being heard to the
assessee. The appeal filed by the assessee was allowed for statistical
purposes.

Sections 22, 56 – Rent received for renting of terrace for installation of mobile antennas is chargeable to tax under the head `Income from House Property’. It is wholly irrelevant as to whether the antenna is part of the building or land appurtenant thereto. As long as the space which has been rented out is part of the building the rent is required to be treated as `income from house property’.

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11. [2015] 168 TTJ (Trib) 502 (Del)
Manpreet Singh vs. ITO
ITA No. 3976/Del/2013
Assessment Year: 2009-10.                   
Date of Order: 6.01.2015

Sections 22, 56 – Rent received for renting of terrace for installation of mobile antennas is chargeable to tax under the head `Income from House Property’. It is wholly irrelevant as to whether the antenna is part of the building or land appurtenant thereto. As long as the space which has been rented out is part of the building the rent is required to be treated as `income from house property’.

FACTS

In the return of income filed by the assessee, an individual, amounts aggregating to Rs.2,91,723 received from Bharati Airtel and Idea Cellular Limited towards renting out its terrace for use by these companies for installing mobile antennas were offered for taxation under the head `Income from House Property’. The assessee had claimed deduction @ 30% u/s. 24(a) of the Act. In the course of assessment proceedings, the Assessing Officer (AO) considered this sum of Rs.2,91,723 to be chargeable to tax under the head `Income from Other Sources’. He denied deduction of Rs.87,516 claimed u/s. 24(a) and added back this sum to the total income. Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO by relying on the decision of Calcutta High Court in the case of Mukherjee Estate (P.) Ltd. vs. CIT 161 CTR 470 (Cal). Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that under the terms of the leave and license agreement entered into by the assessee rent was for use of “roof and terrace” area (not more than 900 sq. ft. in case of Bharti Airtel and not more than 800 sq. ft. in case of Idea Cellular Ltd.). The installations mentioned in the leave and license agreement, which were permitted, were to be done by the companies. The obligation of the assessee did not exceed beyond permitting use of space for such installations. There was no dispute on the fact that the assessee was the owner of the property. The CIT(A) upheld the taxability under the head `income from other sources’ and thus rejected the claim of deduction u/s. 24(a) on the basis of his understanding of the law laid down by the Calcutta High Court. The Tribunal held that the reliance of CIT(A) on the decision of the Calcutta High Court in the case of Mukerjee Estates (P) Ltd. was misplaced since in that case the Tribunal had given a categorical finding that the assessee had let out the hoardings and the assessee had failed to substantiate whether the roof was let out or the hoarding was let out. Undisputedly, the assessee was the owner of the property. Rent was for space to host the antennas and not for the antennas. The Tribunal held that since rent is for the space, terrace and roof space in this case, and which space is certainly a part of the building, the rent can only be taxed as `income from house property’. The appeal filed by the assessee was allowed.

Section 271E – Order passed u/s. 271E levying penalty for violation of provisions of section 269T was required to be passed within six months from the end of the month in which penalty proceedings were initiated.

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15. [2015] 43 ITR (Trib) 683 (Del)
ITO vs. JKD Capital and Finlease Ltd.
ITA No. 5443/Del/2013
A. Y. : 2005-06.                       
Date of Order: 27.03.2015

Section 271E – Order passed u/s. 271E levying penalty for violation of provisions of section 269T was required to be passed within six months from the end of the month in which penalty proceedings were initiated.

FACTS

The assessment of total income was completed vide order dated 28th December, 2007 passed u/s. 143(3) of the Act. In the assessment order, the Assessing Officer (AO) initiated penalty proceedings u/s. 271E of the Act. The assessee preferred an appeal against the order dated 28th December, 2007. Upon dismissal of the appeal by CIT(A), the AO referred the matter regarding penalty under section 271E to the Additional Commissioner of Income-tax who issued a show cause notice on 12th March, 2012.

Order levying penalty u/s. 271E was passed on 20th March, 2012. Aggrieved by the order levying penalty, the assessee preferred an appeal to the CIT(A) who allowed the appeal on the ground that the penalty order was time barred. Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the stand taken by the CIT(A) in holding that the impugned penalty order is time barred on the ground that section 275(1)(c) of the Act will apply in the cases of penalty for violation of section 269SS, has been approved by the Delhi High Court in the case of CIT vs. Worldwide Township Projects Ltd. [2014] 367 ITR 433 (Del). The Tribunal noted that the Delhi High Court had made a mention of the decision of the Rajasthan High Court in the case of CIT vs. Hissaria bros. [2007] 291 ITR 244 (Raj.) expressing a similar view. It noted the following observations of the Delhi High Court:

“We are, therefore, of the opinion that since penalty proceedings for default in not having transactions through the bank as required under sections 269SS and 269T are not related to the assessment proceeding but are independent of it, therefore, the completion of appellate proceedings arising out of the assessment proceedings or other proceedings during which the penalty proceedings under sections 271D and 271E may have been initiated has no relevance for sustaining or not sustaining the penalty proceedings and, therefore, clause (a) of sub-section (1) of section 275 cannot be attracted to such proceedings. If that were not so clause (c) of section 275(1) would be redundant because otherwise as a matter of fact every penalty proceeding is usually initiated when during some proceedings such default is noticed, though the final fact finding in this proceeding may not have any bearing on the issues relating to establishing default, e.g. penalty for not deducting tax at source while making payment to employees, or contractor, or for that matter not making payment through cheque or demand draft where it is so required to be made. Either of the contingencies does not affect the computation of taxable income and levy of correct tax on chargeable income; if clause (a) was to be invoked, no necessity of clause (c) would arise.”

The Tribunal, following the ratio of the decision of the jurisdictional High Court, held that the penalty order was barred by limitation as the penalty order was passed beyond six months from the end of the month in which penalty proceedings were initiated in the month of December 2007 and the penalty order was thus required to be passed before 30th June, 2008, the penalty order was in fact passed on 20th March, 2012. The date on which the CIT(A) has passed order in the quantum proceedings had no relevance as it did not have any bearing on the issue of penalty.

The appeal filed by the revenue was dismissed.

Depreciation – Carrying on of business – Set-off of unabsorbed depreciation of previous years – Section 32(2) and 41(2) – A. Y. 2002-03 – Where once amount realised by assessee by sale of building, plant and machinery was treated as income arising out of profits and gains from business by virtue of section 41(2) notwithstanding fact that assessee was not carrying on any business during relevant assessment year, provision contained in section 32(2) would become applicable and, consequently, set-

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Karnataka Trade Corporation Ltd. vs. ACIT; [2015] 62 taxmann.com 239 (Karn)

The appellant is a Public Limited Company manufacturing cement in a factory situated at Mathodu village, Hosadurga Taluk. In the relevant year, i.e. A. Y. 2002- 03, the assessee had not carried on any business. In the relevant year the assessee had received amounts on sale of building, plant and machinery and as a result an amount of Rs. 34,01,644/- was treated as income from business u/s. 41(2). However, the assessee’s claim for set off of the brought forward unabsorbed depreciation was rejected. This was upheld by the Tribunal.

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

“In computing the income from business, the provisions of Section 32 as well as Section 41 of the Act would be applicable. Therefore, once the amount realized by the assessee by sale of building, plant and machinery is treated as income arising out of the profits and gains from the business by virtue of Section 41(2) of the Act, notwithstanding the fact that the assessee was not carrying on any business during the relevant assessment year, the provision contained in Section 32(2) become applicable and consequently, the setoff has to be given for unabsorbed depreciation allowances of previous year brought forward in terms of that provision.”

Loss – Carry forward and set off – Section 79 – A. Y. 2002-03 – During the relevant assessment year holding company of assessee reduced its shareholding from the 51% to 6% by transferring its 45% shares to another 100% subsidiary company – 51% of voting rights remained with the holding company – The revenue not justified in refusing to allow carry forward and set-off of business losses

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CIT vs. AMCO Power Systems Ltd.; [2015] 62 taxmann. com 350 (Karn)

In the A. Y. 2002-03, 51% of the shares of the assessee were held by the holding company. In the relevant year the holding company transferred 45% shares to another 100% subsidiary company. In the relevant year, the Assessing Officer disallowed the assessee’s claim for set off of the carried forward loss relying on section 79, on the ground that the voting power of the holding company is reduced from 51% to 6%. The Tribunal held that the voting power of the holding company has remained at 51% and allowed the assessee’s claim.

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

“The expression ”not less than 51% of voting power…”used in Section 79 indicates that only voting power is relevant and not the shareholding pattern. Despite transfer of shares, the holding-company still holds effective control over the assessee-company. The objective of Section 79 is to prevent misuse of losses carry forward by the new owner. Therefore, losses could be carry forward and setoff even if there is change in shareholding since effective control over the assessee company is unchanged.”

Revision – Section 263 – A. Y. 2007-08 – Assessee consistently following project completion method – Revision on the ground that other method is preferable – Revision not valid

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CIT vs. Aditya Builders.; 378 ITR 75 (Bom):

The Assessee was engaged in construction of commercial and residential premises. For the A. Y. 2007- 08, the Assessing Officer accepted the project completion method followed by the assessee and completed the assessment u/s. 143(3). Exercising the powers u/s. 263 of the Act, the Commissioner set aside the assessment and directed to recomputed the income of the asessee applying the percentage completion method. The Tribunal held that the assessee had been consistently following project completion method over the years. Moreover, the issue relating to the appropriate method of accounting is a debatable issue and, thus, the Commissioner would have no jurisdiction u/s. 263 to direct application of one particular method of accounting in preference to another. The Tribunal set aside the order of the Commissioner.

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

“The assessee had chosen the project completion method of accounting and had been consistently following it over the years. The Revenue could not reject the method because, according to the Commissioner, another method was preferable. Thus, no fault could be found with the order of the Tribunal.”

Charitable trust – Exemption u/s. 11(2) – A. Y. 2005-06 – Accumulation of income – Three purposes given covered by fourteen objects of trust – More than one purpose specified in Form 10 and details about plan of such expenditure not given – Not sufficient to deny exemption

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DIT(E) vs. Envisions; 278 ITR 483 (Karn):

The assessee, a registered charitable trust, collected donations of Rs.32,47,909/- and incurred incidental expenses of Rs.7,527/-. For the A. Y. 2005-06, it claimed the remaining amount as accumulation u/s. 11(2). In Form 10, 3 purposes were given out of the 14 objects of the Trust. The Assessing Officer disallowed the accumulation holding that the purpose stated was vague and thus the benefit of section 11(2) was denied. The Commissioner (Appeals) and the Tribunal allowed the assesee’s claim.

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

“i) T he objects of the trust, as given in the trust deed, were 14 in number. The three purposes for which accumulation was prayed for and mentioned in Form 10 by the assessee were undisputedly covered by the objects of the trust. As such, it could not be disputed that the purpose mentioned by the assessee while claiming the benefit, was for achieving the objects of the trust.

ii) M erely because more than one purpose had been specified and details about the plan of such expenditure had not been given would not be sufficient to deny the benefit u/s. 11(2) to the assessee. As long as the objects of the trust are charitable in character and as long as the purpose or purposes mentioned in Form 10 are for achieving the objects of the trust, merely because of nonfurnishing of the details, as to how the amount was proposed to be spent in future, the assessee could not be denied the exemption as was admissible u/s. 11(2) of the Act.”

2015 (38) STR 143 (Tri.-Bang.) Commr. of C.Ex. & ST., Tirupati. vs. Gimpex Ltd

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The date of filing refund claim even though filed before wrong authority would be taken as date of filing for determining period of limitation.

Facts:
The Assessee filed refund claim of input service before the Assistant Commissioner of Service Tax, Chennai. The claim however was returned stating that the application was to be filed with the jurisdictional Assistant Commissioner of service tax. Consequently, the Assessee filed the claim accordingly. Thereafter, the claim was rejected on ground of time-bar. The first appellate authority granted relief by holding that the refund claim cannot be rejected on the ground of limitation when the claim was originally filed in time but before wrong authority, relying on the Tribunal’s decision in case of Gujarat Tea Processors and Packers Ltd [2010 (17) STR 489 (Tri-Ahmd)]. Hence, the revenue filed the appeal.

Held:
The Tribunal held that the decision of the first appellate authority was appropriate and took the view that the date of filing of refund claim before the wrong authority to be taken as the date of filing for determining limitation and rejected the department’s appeal.

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[2015] 59 taxmann.com 402 (Madras) V.N.K. Menon & Co vs. CEST

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There cannot be said to be any suppression after the activity comes to the knowledge of the department. Hence, demand of service tax under extended period of limitation is held invalid to the extent it related to the period after statements of appellant company’s officials were recorded.

Facts:
The assessee was manufacturing on job-work basis for his principal and also collected a fixed amount as service charges towards certain services provided to the principal. The department was of the view that these expenses incurred for providing the services were in the nature of overheads essential for manufacturing activity and therefore were required to be reckoned while the assessable value of the finished goods was calculated for payment of duty. In August 1996, the department recorded statement from the officials of the assessee-company. A show cause notice was issued in October 1998 for the period 1995-96 to November 1997. The Tribunal upheld the intention of evasion for the receipt of service charges from their principal as the activities of the assessee came to light subsequent to an investigation by the department. However, it also held that, as the department was aware of the activities of the assessee after recording the statement, demand under extended period is valid only to the extent it pertains to the period prior to August 1996. Before the High Court, assessee contended that if there is no suppression post August, 1996, no extended period could be invoked post August, 1996 and, therefore, the same analogy will have to be applied for the period prior to August, 1996 as well.

Held:
The High Court affirmed the order of the Tribunal on the ground that, findings recorded by the Tribunal in so far as the period prior to August, 1996 and post August, 1996 stems from strong judicial reasoning and there is no error on record warranting interference with the well considered finding of the Tribunal.

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[2015] 59 taxmann.com 252 (Andhra Pradesh) K.V. Narayana Reddy vs. Addl. Commissioner.

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Where appeals filed against the order-inoriginal are rejected by lower appellate authorities as barred by limitation, the said order cannot be entertained by the Court under writ jurisdiction.

Facts:
The assessee filed writ petition before the High Court as both the lower appellate authorities did not entertain the appeals filed by the petitioner on the ground that it was time barred and beyond permissible period for condonation. The contention of the petitioner was that attempt to prefer appeal unsuccessfully before the appellate authority does not preclude him from maintaining the writ as at present he is remediless.

Held:
Relying upon decision of the Court in the case of Resolute Electronics (P.) Ltd. vs. Union of India [WP No.1409 of 2015] and quoting judgment of Supreme Court in the case of Singh Enterprises vs. CCE [2008] 12 STT 21 (SC), the Court held that it is not legally permissible to accept the challenge to the order in writ jurisdiction when Appellant has unsuccessfully pursued other remedies for if it is done, the writ Court will unsettle a legally settled position. Thus, where appellate authority has already decided the matter against the petitioner, the writ Court is debarred from doing so as the same binds the writ Court applying the principle of res judicata, particularly, when the appellate authority’s orders are not challenged in the writ jurisdiction. Accordingly, the writ petition was dismissed as not maintainable.

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[2015] 59 taxmann.com 195 (Madras) – CCE vs. Integral Coach Factory

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Even if assessee pays duty on clearance of final products which are exempted under Exemption Notification, goods continue to remain “exempted goods” and do not become “other than exempted goods” for the purpose of Notification No.89/95-CE dated 18/05/1995.

Facts:
The assessee manufactures excisable goods falling under Chapter 86. During the disputed period, though it was entitled for exemption under Notification No.62/95- CE dated 16/03/1995, it cleared the exempted goods on payment of duty. It however did not pay duty on ferrous and non-ferrous scrap since as per Notification No.89/95- CE dated 18/05/1995, waste parings and scrap arising in the course of manufacture of exempted goods and falling within the schedule to the Central Excise Tariff Act, 1985, were exempted from the whole of excise duty. Department issued show cause notice demanding duty on the ground that as per the proviso to the said notification, such exemption would not be applicable if waste parings and scrap cleared from a factory in which any other excisable goods other than exempted goods are also manufactured. The case of the department was that since assessee cleared the goods after payment of duty and did not avail benefit of exemption notification No.62/95- CE, the goods cleared from factory cease to be exempted goods and hence benefit of notification No.89/95-CE is also not allowed to assessee. The Tribunal decided in favour of assessee

Held:
The High Court observed that erroneous payment of duty caused the department to hold that the goods are other than exempted goods and therefore demand was made. Affirming the Tribunal’s order it was held that proviso to this Notification would not apply to the facts of the case and the erroneous payment of duty would not render the goods other than exempted goods. Hence, so long as the goods manufactured are exempted goods, waste parings, scrap arising in the course of the manufacture of exempted goods would be entitled for the exemption.

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[2015] 59 taxmann.com 196 (Karnataka) – CCE vs. Federal Mogul TPR India Ltd.

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Notification No.8/2005-ST dated 01/03/2005 is not an absolute exemption notification. Further, unlike section 5A of Central Excise Act, 1944 exemption notifications u/s. 93 of the Act are optional.

Facts:
The assessee manufacturer sent goods to their sister concern for Chrome Plating on job work basis. After completion of the process of chrome plating, the sister concern returned the said goods to the assessee under cover of an invoice on payment of service tax on the value of job work charges and subsequently on receipt of such job worked goods, the assessee availed CENVAT credit of service tax so passed on by its sister concern. The job worked goods thereafter passed through various manufacturing processes at the assessee’s factory and then were cleared on payment of duty. As per department’s contention, the process of chrome plating does not amount to manufacture in terms of section 2(f) of the Central Excise Act, 1944 but is a “business auxiliary service” liable for payment of service tax. However an exemption is granted under Notification No. 8/2005- ST dated 01/03/2005 to taxable service of production of goods on behalf of the client on which appropriate duty is paid by the principal manufacturer. According to the department the said exemption notification is an unconditional notification and section 5A(1A) of the Central Excise Act, 1944 which mandates the assessee to avail the exemption notification is applicable to the facts of the case. Therefore, service tax has been charged wrongly in order to pass on service tax credit to assessee. The Tribunal decided in favour of assessee and the revenue is in appeal.

Held:
The High Court observed that, the said Exemption Notification applies only in cases where such goods are produced using raw materials or semi-finished goods supplied by the client i.e. the principal manufacturer and goods so produced are returned to the said client for use in or in relation to the manufacture of the goods on which appropriate duty of excise is paid.

Therefore the High Court held that the conditions stipulated in the notification establish that it is a conditional notification. As regards applicability of section 5A of the Central Excise Act, 1944 it was held that the mandatory requirement on the manufacturer of such excisable goods of not to pay the duty of excise on such goods in respect of which an exemption u/s 5A(1A) has been granted absolutely is not found in section 93 of the Finance Act, 1994. Further, absence of section 5A of Central Excise Act, in section 83 of the Finance Act, 1994, which provides for application of certain provisions of the Central Excise Act,1944 in relation to service tax, indicates that the provisions of section 5A of Central Excise Act, are not applicable to the Finance Act, 1994. Accordingly, the Tribunal order was upheld and CENVAT credit of the service tax paid by the job worker was allowed to the assessee.

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2015 (39) STR 24 (Mad.) V. Sathyamoorthy & Co. vs. CESTAT Chennai.

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A Tribunal can grant three adjournments in an appeal and if Tribunal decides the stay application ex-parte before granting three adjournments on the ground that Appellants have adopted dilatory tactics by not appearing and thereby abusing the law, the action of the Tribunal would be too harsh.

Facts:
The department during the adjudication passed an ex-parte order confirming the demand on Appellants. Appellants filed appeal and stay petition before Tribunal. Before the date of hearing on stay application, Appellants sought adjournment by filing request letter. Tribunal granted an adjournment without even taking into account the said request letter on record. Before the next date, Advocate of Appellant requested an adjournment vide a request letter. Tribunal on that occasion overlooked the letter and passed an ex-parte stay order stating that since no plea of financial hardship was taken, Appellant was directed to pre-deposit Rs.4 crore and also recorded that the Appellants had not cooperated during the adjudication process and also in the present appeal proceedings which amounted to abuse of the process of law.

Held:
Appellants challenged the said ex-parte order before the High Court stating that the Tribunal is entitled to grant three adjournments to a particular party as per proviso to section 35C of the Central Excise Act. The High Court observed that the Tribunal’s action of deciding the stay petition ex-parte on second adjournment and that too ignoring the Appellants request for an adjournment terming non-appearance as abuse to process of law is too harsh. Accordingly, the case was remanded to Tribunal for reconsideration and directed Appellants not to seek adjournment on the next date.

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2015 (39) STR 22 (Kar.) Atharva Associates vs. Union of India

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If the appeal has been filed along with stay application and neither stay application nor appeal has been disposed of, then recovery cannot be initiated.

Facts:
An Order was passed confirming demand proposed in the Show Cause Notice. Appellants preferred an appeal before first appellate authority along with stay application which was not disposed of. Meantime, the department initiated recovery proceedings by issuing notice for recovery. Appellants filed writ petition challenging the said recovery notice.

Held:
The High Court held that since the right of appeal has been exercised by the Appellants as per applicable provisions and since first appellate authority has yet to decide the stay application, the recovery notices though executable, could not be enforced or else the appeal will be infructuous or lead to multiplicity of proceedings. Enforcement of recovery was thus stayed till disposal of the stay petition by the first appellate authority.

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Free supply vis-a-vis Sale and Sale Price

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Under the Sales Tax Law, transaction of sale can be taxed as per sale price of that transaction.

A ‘sale’ can take place if the transaction fulfills certain criteria. The term ‘sale’ is defined in Sales Tax Laws and it has also been defined in (MVAT Act,2002). The said definition is given in section 2(24) of MVAT Act,2002 and it is reproduced below for ready reference.

“(24) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration hut does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;…”

The transaction, to be ‘sale’, should be for consideration.

The above term ‘sale’ has also been subject matter of interpretation by various courts. A reference can be made to the landmark judgment in case of Gannon Dunkerly and Co.(9 STC 353)(SC). In this judgment about ‘sale’, it is observed as under:

“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”

From the above passage, it is clear that to be a ‘sale’ following criteria should be fulfilled.

(i) There should be two parties to contract i.e. seller/ purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e. transfer of ownership from seller to purchaser.

Thus, to consider the transaction as ‘sale’, consideration in money terms is necessary. Without consideration, no sale can take place.

In number of cases, the customer i.e. buyer may supply certain goods to its vendor which are to be incorporated in the finished goods to be supplied by vendor to the said buyer. Similarly there may be cases, where contractee may be supplying some goods to be used in contract to be executed for it by contractor appointed by it. Both above issues are common and the tax position of same can be analysed as under:

The supply of such goods by buyer to the vendor will be free supply, as it is to be incorporated in goods to be supplied to it. It is also possible that for the purpose of Excise etc. the vendor may be required to include value of such goods in its sale price and after calculating Excise on such total value, the value of free supply by buyer will be deducted again and in fact the net amount is only charged to the buyer.

The issue arises whether such value of free supply is part of sale price of vendor for which it will be required to discharge sales tax on the same.

There is a be possibility of considering above value as sale price, if, first there is sale by buyer of said goods to the vendor and thereafter vendor again selling the said goods along with its finished goods to the buyer. Therefore, it will be required to be seen whether there is sale by buyer of the free supply made by it to the vendor.

There are instances where supply made by customer to supplier has been considered as sale and accordingly liable to tax in the hands of customer as well as supplier. Reference can be made to the judgment of Supreme Court in case of M/s. N. M. Goel (72 STC 368)(SC). In this case, the facts were that the contractee has given certain materials to contractor for use in the contract executed for the said contractee. As per terms in contract the goods to be supplied were to be valued as per the prices mentioned in the contract. It is under the above circumstances, the Supreme Court held that the transaction of supply of goods by contractee fulfills the requirements of a transaction being ‘sale’. There are two parties i.e. contractee and contractor, supply of moveable goods and consideration. The Supreme Court also held that when the possession of the goods is given to the contractor there is transfer of property and hence, the sale transaction from contractee to contractor gets complete. The Supreme Court further held that when contractor uses these goods in the contract for contractee, there is again fresh transfer of property from contractor to contractee and hence one more sale transaction from contractor to contractee. In fact, the Supreme Court has noted facts of case as under.

“The appellant, a dealer registered under the Madhya Pradesh General Sales Tax Act, 1958, made an item rate tender to the PWD for construction of food grain godowns and ancillary buildings. In that tender, prices of the materials used for the construction including cost of iron, steel and cement were included. The PWD had, however, agreed to supply from its stores the iron, steel and cement and to deduct the prices of the materials so supplied and consumed in the construction, from the final bill of the appellant. Clause (10) of the contract provided: “. . . . . if it is required that the contractor shall use certain stores to be provided by the Engineer-in-Charge as shown in the Schedule of materials hereto annexed, the contractor shall be bound to procure and shall be supplied such material and stores as are from time to time required to be used by him for the purposes of the contract only, and the value of the full quantity of materials and stores supplied at the rates specified in the said Schedule of materials may be set-off or deducted from any sums then due or thereafter to become due to the contractor under the contract or otherwise, or against or from the security deposit, or the proceeds or sale thereof if the same is held in Government securities, the same or a sufficient portion thereof being in this case sold for the purpose. All the materials so supplied to the contractor shall remain the absolute property of the Government and shall not be removed on any account from the site of the work, and shall be at all times open to inspection by the Engineer-in- Charge.” For the construction, the appellant was supplied iron, steel and cement by the PWD and the appellant purchased other materials from the market. The prices of iron, steel and cement supplied to the appellant for the work were deducted from its final bill. The Sales Tax Officer assessed the appellant to entry tax for iron, steel and cement u/s. 6(c) of the Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976, on the ground that their entry had been effected by the PWD, which was not a registered dealer, at the instance of the appellant, because the appellant had ultimately used the materials for the construction work; and the Deputy Commissioner affirmed the assessments on revision. A writ petition filed by the appellant challenging the assessments to entry tax was dismissed by the High Court. On appeal to the Supreme Court:

Based on the above, the Supreme Court has held as under:

“On these set of facts, while dismissing the appeal, (i) that since the PWD was not a registered dealer the presumption u/s. 6(c) applied, that the entry of the goods had been effected by the appellant into the local area before they were purchased by the appellant; that in order to attract entry tax not only the property in the goods had to pass from the PWD to the appellant but there had to be an independent contract-separate and distinct-apart from the mere passing of the property: mere passing of property from the PWD to the appellant would not suffice; that, in this case, for the performance of the contract, the appellant was bound to procure the materials; but in order to ensure that quality materials were procured, the PWD undertook to supply such materials and stores as from time to time were required by the appellant to be used for the purpose of performing the contract only. The value of such quantity of materials and stores so supplied was specified at a rate and got set-off or deducted from any sum due or to become due thereafter to the appellant. Clause (10) of the contract read in proper light indicated that a sale inhered from the transaction. By the use or consumption of materials in the work of construction, there was passing of the property in the goods to the appellant from the PWD. By appropriation and by the agreement, there was a sale from the PWD to the appellant as envisaged in terms of clause (10); and that, therefore, the appellant was liable to pay entry tax on the materials supplied by the PWD.”

Based on above judgment of Supreme Court there are number of other judgments where the supply of goods by contractee to contractor has been held as ‘sale’, if such supply is against pre agreed price. In such cases, normally the contractor bills for gross value and gives deduction for the material value as arrived at as per the prices agreed and claims net amount from the contractee. Thus, if such is the mode of billing by the contractor it gives sufficient indication that the supply by the contractee is as per agreed price and hence will be considered to be ‘sale’. In such cases, even if, the supply is referred to as free supply, it will be a misnomer and in reality it will be a ‘sale’ from contractee to contractor and again from contractor to contractee.

However, if there is no such situation i.e. no prices are given for the materials supplied by contractee/buyer as well as no deduction for any value for same is made in the bills of contractor, then there is no sale/purchase of such materials. This position is also clear from judgment of the Hon. Tribunal in case of CIDCO Ltd. (M.A. No.122 of 2005 in S.A. no. 1707 of 1999 DT.6.10.2007).

In this case, the appellant has purchased cement from other state and given free to contractor. In assessment, tax was levied but in first appeal the same was deleted. When the appellant was in second appeal, the Department filed Misc. Application for levy of the tax on cement. The Hon. Tribunal held that when the supply is free of cost there is no question of levy and the Misc. Appl. was rejected. This covers up the legal position. The net result is that if in the contract there are no terms giving price to the goods to be supplied to contractor, and accordingly the same is also not considered in the bills prepared by the contractor, there is no question of any sale transaction involved in such supply. In other words, there is no question of attraction of any tax under Sales Tax Laws on such free supply on either side.

The other situation is consideration of value of such supply for Excise purpose.

For purpose of paying Excise duty the vendor may consider the value of goods supplied by buyer and may be mentioned on the invoice also.

However mentioning the value of goods for payment of Excise duty cannot amount to sale/purchase and cannot bring it in fold of sale price/purchase price.

This position is clear from judgment of the Hon. Tribunal in case of Ghadge Patil Ind. Ltd. & others (S. A. 320 to 327 of 2002 dt.30.3.2007). The short gist of judgment is as under:

The facts of the case relating to year 1994-95 and others are that appellant received an order for supply of certain manufactured parts. The buyer gave certain parts as free issue to be incorporated in the manufactured goods. In purchase order there was no term about creditor particular price to be considered for the said free issues. In its sale bill appellant added the cost of such free issues in his price to calculate excise duty. The cost so added was then given deduction. On above facts lower authorities considered the cost of such supplies as part of sale price and levied tax on the same. Before the Tribunal, appellant explained the facts. The Tribunal observed that in this case the supplies are not made with any particular consideration. There was no intention on part of buyer or seller to sale/ purchase above goods nor agreed for any consideration. Therefore, there cannot be sale from appellant to buyer. The addition in price was with sole purpose of calculating duty, as it was attracted even on free supply cost, as per Excise laws. The Tribunal distinguished the judgment in case of N. M. Goyal (72 STC 368) on above facts. The Tribunal made reference to judgment in case of Gannon Dunkerley & Co. (9 STC 353), Indian Coffee & Tea Distributors Co. (6 STC 47), Indian Alluminium Cables (115 STC 161), Hindustan Aeronautical Ltd. (55 STC 314) and Auto Comp Corpn. (S.A.1083 of 99 dt.26.9.2003). The Tribunal directed to delete the addition.

Thus, it is held that for considering the free supply value as sale/purchase there should be conscious decision on the same which can be ascertained from the fact of giving prices for such supply and billing mode by supplier. Simply mentioning value for Excise duty calculation cannot make it sale/purchase, and cannot be part of price of transaction, nor can it be included in sale price.

Conclusion

Whether free supply by buyer/contractee to the vendor/ contractor will amount to sale/purchase depends upon intention of the parties coupled with underlying documents. To make the intention clear, in documents it should be specifically mentioned that the supply is free to the vendor but the value may be considered for excise payment. If the documents are not clear, then the dispute may arise and the sales tax department will certainly try to claim tax on the same.

RECENT AMENDMENTS: INTEREST ON CENVA T CREDIT WRONGLY TAKEN

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Preliminary
The issue whether interest is leviable at the point of time when CENVAT credit is wrongly taken or at the point of utilization has been a matter of extensive judicial examination. An important amendment was made in Rule 14 of CENVAT Rules through Notification dated 17/03/2012 and further a significant amendment has been made vide Notification dated. 01/3/2015. Hence, the implication of the latest amendment in the backdrop of the earlier judicial controversies, are discussed hereafter.

Background
Relevant Statutory Provisions – [Rule 14 of CENVAT Credit Rules, 2004 (“CCR”)]

“Where CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with the interest shall be recovered from the manufacturer or provider of the output service and the provisions of the sections 11A and 11AB of the Excise Act, or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”

[Note – The words “taken or utilized wrongly” have been substituted by the words “taken and utilized wrongly” vide Notification No. 18/2012 – CE(NT) dated 17/03/2012].

Supreme Court Ruling overruling High Court Ruling

Attention is particularly drawn to the ruling of the Punjab & Haryana High Court in the case of Ind – Swift Laboratories Ltd. vs. UOI (2009) 240 ELT 328 (P & H) (which was subsequently set aside by the Supreme Court), relevant extracts from which, are reproduced hereafter for reference :

Para 9

“The Scheme of the Act and the CENVAT credit Rules framed thereunder permit a manufacturer or producer of final products or a provider of taxable service to take CENVAT credit in respect of duty of excise and such other duties as specified. The conditions for allowing CENVAT credit are contained in Rule 4 of the Credit Rules contemplating that CENVAT credit can be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service. Such CENVAT credit can be utilized in terms of Rule 3(4) of Credit Rules for payment of any duty of excise on any final product and as contemplated in the aforesaid sub-rule. It, thus, transpires that CENVAT credit is the benefit of duties leviable or paid as specified in Rule 3(1) used in the manufacture of intermediate products etc. In other words, it is a credit of the duties already leviable or paid. Such credit in respect of duties already paid can be adjusted for payment of duties payable under the Act and the Rules framed thereunder. Under section 11AB of the Act, liability to pay interest arises in respect of any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded from the first day of the month in which the duty ought to have been paid. Interest is leviable if duty of excise has not been levied or paid. Interest can be claimed or levied for the reason that there is delay in the payment of duties. The interest is compensatory in nature as the penalty is chargeable separately.”

Para 10

“In Pratibha Processors vs. Union of India, 1996 (88) ELT 12 (SC) = (1996) 11 SCC 101, it was held that interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. Similarly, in Commissioner of Customs vs. Jayathi Krishna & Co. – 2000 (119) ELT 4(SC) (2000) 9 SCC 402, it was held that interest on warehoused goods is merely an accessory to the principal and if principal is not payable, so is it for interest on it. In view of the aforesaid principle, we are of the opinion that no liability of payment of any excise duty arises when the petitioner availed CENVAT credit. The liability to pay duty arises only at the time of utilization. Even if CENVAT credit has been wrongly taken, that does not lead to levy of interest as liability of payment of excise duty does not arise with such availment of CENVAT credit by an assessee. Therefore, interest is not payable on the amount of CENVAT credit availed of and not utilized.”

Para 11

“Reliance of respondents on Rule 14 of the Credit Rules that interest under section 11AB of the Act is payable even if CENVAT credit has been taken. In our view, said clause has to be read down to mean that where CENVAT credit taken and utilized wrongly, interest cannot be claimed simply for the reason that the CENVAT credit has been wrongly taken as such availment by itself does not create any liability of payment of excise duty. On a conjoint reading of section 11AB of the Act and that of Rules 3 and 4 of the Credit Rules, we hold that interest cannot be claimed from the date of wrong availment of CENVAT credit. The interest shall be payable from the date CENVAT credit is wrongly utilized.”

In an important ruling the Supreme Court, in the case of Ind-Swift Laboratories Ltd. (2011) 265 ELT 3 (S.C.)], set aside the order passed by the Punjab & Haryana High Court (2009) 240 ELT 328 (P & H)] on the question of charging interest on CENVAT credit wrongly taken but not utilised. By interpreting the expressions and words used in the provisions of Rule 14 of CCR, the Supreme Court concluded that interest is payable on CENVAT credit wrongly taken even if such credit has not been utilised.

The issue for consideration was whether an assessee can be made liable to pay interest for taking wrong credit if such credit has not been utilised in as much as he has not derived any benefit out of his wrong action.

The more important observations of the Supreme Court are reproduced hereafter for ready reference:

Para 17

“…………….. In our considered opinion, the High Court misread and misinterprets the aforesaid Rule 14 and wrongly read it down without properly appreciating the scope and limitation thereof. A statutory provision is generally read down in order to save the said provision from being declared unconstitutional or illegal. Rule 14 specifically provides that where CENVAT credit has been taken or utilized would be recovered from the manufacturer or the provider of the output service. The issue is as to whether the aforesaid word “OR” appearing in Rule 14, twice, could be read as “AND” by way of reading it down as has been done by the High Court. If the aforesaid provision is read as a whole we find no reason to read the word ‘OR’ in between the expression ‘taken’ or “utilized wrongly” or has been erroneously refunded’ as the word ‘AND’. On the happening of any of the three aforesaid circumstances such credit becomes recoverable along with interest.”

Para 18

“We do not feel that any other harmonious construction is required to be given to the aforesaid expression / provision which is clear and unambiguous as it exists all by itself. So far as section 11AB is concerned, the same becomes relevant and applicable for the purpose of making recovery of the amount due and payable. Therefore, the High Court erroneously held that interest cannot be claimed from the date of wrong availment of CENVAT credit and that it should only be payable from the date when CENVAT credit is wrongly utilized. Besides, the rule of reading down is in itself a rule of harmonious construction in a different name. It is generally utilized to straighten the crudities or ironing out the creases to make a statue workable. This Court has repeatedly laid down that in the garb of reading down a provision it is not open to read words and expressions not found in the provision statute and thus venture into a kind of judicial legislation. It is also held by this Court that the Rule of reading down is to be used for the limited purpose of making a particular provision workable and to bring it in harmony with other provisions of the statute.”

The interpretation made by the Honorable Supreme Court considering the specific circumstances of a case involving evasion of duty, has been a matter of extensive deliberation by experts and rightly so in as much as if the same is applied generally, it would mean unsettling the settled law.

Important Ruling of Karnataka High Court in CCE & ST vs. Bill Forge Pvt. Ltd. (2012) 26 STR 204 (KAR) [Bill Forge Case]

    The observations of the Karnataka High Court in the Bill Forge case are very important, in as much as not only has it distinguished facts of the case of UOI vs. Ind-Swift Laboratories Ltd. (2011) 265 ELT 3 (SC) but it has made fine distinction between making an entry in the register and credit being ‘taken’ to drive home the point that interest is payable only from the date when duty is legally payable to the Government and the Government would sustain loss to that extent.

“It is also to be noticed that in the aforesaid Rule, the word ‘avail’ is not used. The words used are ‘taken’ or “utilized wrongly”. Further the said provision makes it clear that the interest shall be recovered in terms of sections 11A and 11B of the Act………”

Para 20

“From the aforesaid discussion what emerges is that the credit of excise duty in the register maintained for the said purpose is only a book entry. It might be utilized later for payment of excise duty on the excisable product………Before utilization of such credit, the entry has been reversed, it amounts to not taking credit.”

Para 22

“Therefore interest is payable from that date though in fact by such entry the Revenue is not put to any loss at all. When once the wrong entry was pointed out, being convinced, the assessee has promptly reversed the entry. In other words, he did not take the advantage of wrong entry. He did not take the CENVAT credit or utilized the CENVAT credit. It is in those circumstances the Tribunal was justified in holding that when the assessee has not taken the benefit of the CENVAT credit, there is no liability to pay interest. Before it can be taken, it had been reversed. In other words, once the entry was reversed, it is as if that the CENVAT credit was not available. Therefore, the said judgment of the Apex Court has no application to the facts of this case. It is only when the assessee had taken the credit, in other words, by taking such credit, if he had not paid the duty which is legally due to the Government, the Government would have sustained loss to that extent. Then the liability to pay interest from the date the amount became due arises under section 11AB, in order to compensate the Government which was deprived of the duty on the date it became due.”

  •     The ruling in Bill Forge case has been followed in a large number of subsequently decided cases. For example:

    CCE vs. Pearl Insulation Ltd. (2012) 27 STR 337 (KAR)

    CCE vs. Gokuldas Images (P) Ltd (2012) 28 STR 214 (KAR)

    CCE vs. Strategic Engineering (P) Ltd (2014) 45 GST 662 (MAD)

    Sharvathy Conductors Pvt. Ltd. vs. CCE (2013) 31 STR 47 (Tri – Bang)

    CCE vs. Sharda Energy & Minerals Ltd. (2013) 291 ELT 404 (Tri – Del)

    Gary Pharmaceuticals (P) Ltd vs. CCE (2013) 297 ELT 391 (Tri – Del)

    CCE vs. Balrampur Chinni Mills Ltd (2014) 300 ELT 449 (Tri – Del)

    Gurmehar Construction vs. CCE (2014) 36 STR 545 (Tri – Del)

  •     However, in many cases, Bill Forge case has not been followed and instead the position held by the Supreme Court in the Ind Swift case has been followed. For example:

    Dr Reddy Laboratories Ltd vs. CCE (2013) 293 ELT 89 (Tri)

    Bharat Heavy Electricals Ltd vs. CC & CCE (2014) 303 ELT 139 (Tri – Bang)

    CCE vs. Sundaram Fasteners Limited (2014) 304 ELT 7 (MAD)

    Balmer Lawrie & Co. Ltd vs. CCE (2014) 301 ELT 573 (Tri – Mumbai)

Important amendment in Rule 14 of CCR

In a very significant amendment in Rule 14 of CCR, with effect from 17/03/2012, the words CENVAT credit has been “taken or utilized wrongly” have been substituted by the words “taken and utilized wrongly”.

This amendment strongly reinforces the interpretation placed by the Punjab & Haryana High Court in Maruti Udyog Ind Swift Laboratories and Karnataka High Court in Bill Forge case to the effect that, no interest can be recovered in cases where CENVAT credit has been wrongly taken but not utilized by an assessee.

    Recent Amendment: Analysis

In the recent Budget, Rule 14 of CCR has been amended vide Notification No. 6/2015-Central Excise (NT) dated 01/03/2015. The amended Rule 14 reads as under:

“14. Recovery of CENVAT credit wrongly taken or erroneously refunded. –

“(1) (i) Where the CENVAT credit has been taken wrongly but not utilized, the same shall be recovered from the manufacturer or the provider of output service, as the case may be and the provisions of section 11A of the Excise Act or section 73 of the Finance Act, 1994 (32 of 1994), as the case may be, shall apply mutatis mutandis for effecting such recoveries;

(ii) Where the CENVAT credit has been taken and utilized wrongly or has been erroneously refunded, the same shall be recovered along with interest from the manufacturer or the provider of output service, as the case may be and the provisions of sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, 1994, as the case may be, shall apply mutatis mutandis for effecting such recoveries.

    For the purposes of sub-rule (1), all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilization thereof shall be deemed to have occurred in the following manner, namely: –

    i)the opening balance of the month has been utilized first;
    ii)credit admissible in terms of these rules taken during the month has been utilized next;
    iii)credit inadmissible in terms of these rules taken during the month has been utilized thereafter.”
The amended Rule 14(1) of CCR deals with two distinct situations viz.

  •     one where credit has been wrongly taken but not utilised and
  •     the other where credit has been wrongly taken and also utilised.

Further, to deal with a scenario, where credit has been utilised, a deeming provision has been brought in through new sub-rule 14(2), to lay down the manner in which the utilisation shall be deemed to have occurred.

  •     Prior to the introduction of this sub-rule, the assessee used to avail CENVAT credit even where the eligibility of CENVAT credit was in dispute. As long as the balance of CENVAT credit in the books of the assessee was more than the amount of the disputed CENVAT credit, it was construed that the disputed amount of CENVAT credit availed by the assessee had not been utilised and consequently, the proceedings under Rule 14 of CCR for recovery of credit and interest thereon could not be initiated against it.

However, after the above amendment, the manner prescribed therein will have to be applied to determine the utilisation of ineligible credit or otherwise.

  •     The larger view of trade & industry and tax payers generally is that the amended Rule 14 of CCR continues to be in line with Government’s consistent view to the effect that:

  •     recovery of interest along with CENVAT credit would be applicable only in those situations where the assessee takes credit and also utilises the same; and

  •     in those cases, where the assessee takes CENVAT credit but does not utilise such credit for specified reasons, recovery would be only of credit wrongly taken and the question of any recovery towards interest does not arise at all.

  •     A better view which may be adopted while interpreting Rule 14(2) of CCR is that the opening balance of CENVAT credit should only include the admissible amount of CENVAT credit and the inadmissible amount of CENVAT credit should be recorded separately. In such a case, while computing the amount of CENVAT credit utilized in a particular month, the total admissible amount of CENVAT credit available with the assessee will have to be taken into account first and the inadmissible amount of CENVAT credit will be said to be utilised only after the admissible CENVAT credit is exhausted. In such a case, an assessee will become liable to pay interest only in those cases where the balance of inadmissible CENVAT credit available with it is less than the credit utilised in a month.

This view can be supported by the following reasons :

  •     the earlier rule was silent regarding manner of utilisation, the amendment in the said rule has been made as a matter of trade facilitation exercise.
  •     it is consistent with the leniency shown in the past when the provision of Rule 14 was amended to overcome the adverse impact of Supreme Court decision in case of Ind-Swift.

It is a need of every business and tax payer to keep some amount of CENVAT credit on hold without utilizing the same for excise duty payment or payment of service tax.

Eligibility to CENVAT credit is prone to extensive litigations. Hence, in many cases where credit eligibility is of a doubtful and disputable nature and could often involve substantially high amount, tax payers often opt to avail credits to protect their rights but choose not to utilize the credits pending clarity & judicial evolvement, so as to avoid any interest liability in case the matter is decided adversely.

However, in the amended Rule 14 (2) of CCR, due to employment of the words “For the purposes of sub-rule
(1)”, there is an apprehension that the field formations may erroneously interpret that the deeming provisions laid down in Rule 14(2) would also apply to the cases covered under Rule 14 (1) (i).

Further, to arrive at the due date for interest payable the Rule 14(2) is creating a deeming fiction that all the credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely:-

    the opening balance of the month has been utilised first;
    ………………..

    ………………..
It is apprehended by trade and industry that credits kept on hold during any month form part of the opening balance of the next month, the field formations may interpret the same to be deemed utilised and thus liable for interest. This could result in unnecessary litigations and hardships to trade and industry and tax payers generally.

Conclusion:

The amendment in Rule 14 of CCR vide Notification dated 01/03/2015 needs to be understood, in the backdrop of introduction of time limits for availment of credit under CCR, for the first time with effect from 01/09/2014. In cases where availment of CENVAT credits was of a doubtful nature/under litigations, substantial amounts of credits were availed by tax payers prior to 01/09/2014 (but kept unutilised) in order to protect their interest in a scenario where matter gets decided in their favour at a future point of time and at the same time, avoiding any interest liability in case the matter is decided against them.

Further, in the absence of specific provisions under CCR or clarification by CBEC, in practice, no systematic records are maintained by assessees with regard to CENVAT credits utilised but not availed. This would create practical difficulties for the audit team/field formations to ascertain correctness of credit utilisation and interest liability on wrong utilisation. It appears that though legislative intent behind the amendment is laudable, there is a clear disconnect in the fine print that has emerged. This leaves room for doubts and possible hardships to trade and industry and tax payers from the field formations.

Suggestions:

Appropriate amendment should be made in Rule 14(2) of CCR to avoid unnecessary litigations.

Alternatively, CBEC should issue suitable clarifications / instructions to the effect that :

the deeming provisions in Rule 14(2) would apply only in those cases where inadmissible credit has been taken and also utilised; and

On lines with Instructions under erstwhile MODVAT Rules, [Ref – Circular No. 4/91 – Cx 8 dated 14/02/91 (File No. 263/5/91-CX – 8)] lay down detailed procedure to be followed by assessees who desire not to utilise the credit taken by them in order to ensure that they are covered under Rule 14(1)(i) of CCR.

Rollatainers Ltd. vs. ACIT ITAT Delhi `F’ Bench Before R. S. Syal (AM) and C. M. Garg (JM) ITA No. 3134 /Del/2010 Assessment Year: 2003-04. Decided on: 6th August, 2015. Counsel for assessee / revenue : Gaurav Jain / Vikram Sahay

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Section 147 – Internal audit cannot perform functions of judicial supervision. Initiation of re-assessment on the basis of an interpretation of the provisions of law by the audit party is forbidden, the communication of law or the factual inconsistencies by the internal audit party, do not operate as a hindrance in the initiation of re-assessment proceedings.

Facts:
The assessee filed its return of income declaring a loss of Rs.12,48,92,067. The Assessing Officer (AO) completed the assessment u/s. 143(3) of the Act determining the loss at Rs.11,32,76,728. While assessing the total income the AO allowed deduction of Rs.3,61,75,597 out of unpaid interest of earlier year amounting to Rs.5,01,38,035 u/s. 43B on the basis of the claim of the assessee that it was discharged / paid.

The audit scrutiny of the assessment records revealed that out of the amount of Rs.3,61,75,597 which was allowed by the AO as a deduction, a sum of Rs.2,45,01,117 was transferred to a wholly owned subsidiary company. The audit party pointed out to the AO that this sum of Rs. 2,45,01,117 was not actually paid but only transferred to subsidiary company and consequently it ought to have been disallowed.

The AO, after recording reasons, issued notice u/s. 148 of the Act. In the order passed u/s. 143(3) r.ws. 147 of the Act, the AO disallowed the claim of Rs.2,45,01,117.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO in reopening the assessment and also on merits.

Aggrieved, the assessee preferred an appeal to the Tribunal where interalia, it challenged the re-opening on the ground that in view of the ratio of the decision of the Apex Court in the case of Indian and Eastern Newspaper Society vs. CIT 119 ITR 996 (SC) initiation of reassessment on the basis of internal audit report was not sustainable.

Held:
The Tribunal noted that it had to examine whether the assessee’s case fell within the ratio laid down in the case of CIT vs. PVS Beedis Pvt. Ltd. 237 ITR 13 (SC) in which the initiation of reassessment proceedings on the basis of audit objection has been held to be valid or in Indian and Eastern Newspaper Society (supra) and further CIT vs. Lucas T.V.S. Ltd. 249 ITR 306 (SC).

The logic in not sustaining the initiation of reassessment on the basis of interpretation of law by the audit party is that the internal auditor cannot be allowed to perform the functions of judicial supervision over the Income-tax authorities by suggesting to the AO about how a provision should be interpreted and whether the interpretation so given by the AO to a particular provision of the Act is right or wrong. An interpretation to a provision given by the audit party cannot be construed as a declaration of law binding on the AO.When an internal audit party objects to the interpretation given by the AO to a provision and proposes substitution of such interpretation with the one it feels right, it crosses its jurisdiction and enters into the realm of judicial supervision, which it is not authorised to do. In such circumstances, the initiation of reassessment, based on the substituted interpretation of a provision by the internal audit party, cannot be sustained.

The Tribunal noted that the Madras High Court has in the case of CIT vs. First Leasing Co. of India Ltd. 241 ITR 248 (Mad) aptly explained the position that although, the audit party is not entitled to judicially interpret a provision, but at the same time, it can communicate the law to the AO, which he omitted to consider. It also noted that the Madras High Court has observed that the Supreme Court has made a distinction between the communication of law and interpretation of law.

Where the audit party interprets the provision of law in a manner contrary to what the AO had done, it does not lay down a valid foundation for the initiation of reassessment proceedings. If however, the audit party does not offer its own interpretation to the provisions and simply communicates the existence of law to the AO or any other factual inaccuracy, then the initiation of reassessment proceedings on such basis cannot be faulted with.

In a nutshell, whereas the initiation of reassessment proceedings on the basis of an interpretation to the provisions of law by the audit party is forbidden, the communication of law or the factual inconsistencies by the internal audit party, do not operate as a hindrance in the initiation of reassessment proceedings.

The Tribunal noted the audit objection, in this case, divulged that the audit party simply suggested that the interest of Rs.2.45 crore was not actually paid, but, only transferred to a subsidiary company and the same should have been disallowed and this omission on the part of the AO resulted in over assessment of loss of Rs.2.45 crore. This, according to the Tribunal, showed that the AO was simply informed of the fact which had escaped his attention during the course of assessment proceedings to the effect that the sum of Rs.2.45 crore was not allowable u/s. 43B of the Act which is nothing, but a communication of law to the AO. The Tribunal observed that it was not confronted with a situation in which the AO, after due consideration of the matter in the original assessment proceedings interpreted 43B as allowing deduction for a sum of Rs.2.45 crore in respect of interest not paid to financial institutions, but, transferred to assessee’s wholly owned subsidiary company, but, the audit party interpreted this provision in a different manner from the way in which it was interpreted by the AO and then suggested that the amount ought to have been charged to tax. According to the Tribunal, the instant case is fully covered by the decision in the case of PVS Beedis Pvt. Ltd. (supra) and consequently the audit objection in the instant case constituted an `information’ about the escapement of income to the AO, thereby justifying the initiation of reassessment.

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Malineni Babulu (HUF) vs. Income Tax Officer ITAT “A” Bench, Hyderabad P. Madhavi Devi (J.M.) and Inturi Rama Rao (A. M.) I.T.A. No.: 1326/HYD/2014 Assessment Year: 2009-10. Decided on 07-08-2015 Counsel for Assessee / Revenue: S. Rama Rao/ D. Srinivas

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Section 40(a)(ia) – Non deduction of tax at source on interest paid as payees furnished Form 15H – Mere non-filing of Form 15H would not entail disallowance of interest paid.

Facts:
One of the issues before the Tribunal was regarding addition of Rs.0.98 lakh made under the provisions of Section 40(a)(ia). During the year, the appellant had made interest payment of Rs.0.98 lakh to the coparceners of the appellant. It was claimed that the taxable income of the payees was below the taxable limit hence Form 15H were obtained from them and it was claimed to have been submitted to the CIT, Guntur by post, but no proof in support of the dispatch by post was furnished before the CIT. However, copies of Form 15H were filed before the AO. The CIT acting u/s. 263 directed the AO to disallow the same for failure to adduce evidence in support of dispatch of Form 15H by post.

Held:
According to the Tribunal, mere non-filing of Form 15H with the CIT does not entail disallowance of expenditure. It is only a technical breach of law and the Act provides for separate penal provisions for such default. Thus, according to the Tribunal, where the taxable income of the payees is below the taxable limit and Form 15H is obtained from them no disallowance under the provisions of section 40(a)(ia) can be made. Further, relying on the decision of the Delhi Bench of the Tribunal in the case of Vijaya Bank vs. ITO [2014] [49 Taxmann.com 533, the tribunal allowed the appeal filed by the assessee.

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Smt. Rekha Rani vs. DCIT ITAT Delhi `F’ Bench Before G. C. Gupta (VP) and Inturi Rama Rao (AM) ITA No. 6131 /Del/2013 Assessment Year: 2009-10. Decided on: 6th May, 2015. Counsel for assessee / revenue : None / Vikram Sahay

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Section 271(1)(b) – The provision of section 271(1)(b) is of
deterrent nature and not for earning revenue. Penalty u/s. 271(1)(b)
could not be imposed for each and every notice issued u/s. 143(2) of the
Act, which remains not complied with on the part of the assessee.

Facts:
The
Assessing Officer (AO) issued notice u/s. 143(2) of the Act on five
different dates and the assessee failed to comply with the same. The AO
invoked the provisions of section 271(1)(b) of the Act and imposed
penalty of Rs. 10,000 for each default on the ground that the assessee
had no reasonable cause for not appearing on the date fixed for hearing.
Thus, he levied a total penalty of Rs.50,000. Aggrieved, the assessee
preferred an appeal before CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal observed that there was no reasonable cause on the part of the
assessee for not appearing on the different dates of hearing before the
AO in response to the notices issued u/s. 143(2) of the Act. The
Tribunal found that the default was the same in all the five cases and
therefore, it held, that penalty of Rs.10,000 could be imposed for the
first default made by the assessee in this regard. It held that the
penalty u/s. 271(1)(b) could not be imposed for each and every notice
issued under section 143(2), which remained not complied with on the
part of the assessee. It observed that the provision of section 271(1)
(b) is of deterrent nature and not for earning revenue. It held that any
other view taken shall lead to imposition of penalty for any number of
times (without limits) for the same default of not appearing in response
to the notice u/s.143(2) of the Act. This, according to the Tribunal,
does not seem to be the intention of the legislature in enacting the
provisions of section 271(1)(b) of the Act. It observed that in case of
failure on the part of the assessee to comply with the notice u/s.143(2)
of the Act, the remedy with the AO lies in framing “best judgement
assessment” under the provisions of section 144 of the Act and not to
impose penalty u/s. 271(1)(b) of the Act again and again.

The
Tribunal restricted the penalty levied u/s. 271(1)(b) of the Act to the
first default of the assessee in not complying with the notice issued
u/s. 143(2) of the Act.

The appeal filed by assessee was partly allowed.

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Hindu Law – Suit for partition – Concept of dual ownership – Land and building or structure standing thereon

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Dattaram Waman Kambli vs. Shantaram Bapu Kambli & Ors.; AIR 2015 (NOC) 474 Bom.

The plaintiff and his two brothers namely, the defendant nos. 1 and 2 had equal share in the land. The dispute was about the entitlement of the plaintiff to any share in the house, which was constructed on the land in question. The plaintiff did not dispute that he had not contributed anything towards the construction of the house and the defendant nos. 1 and 2 were permitted to construct the house with their own funds. The house was constructed in the year 1977 in which the defendant nos. 1 and 2 were residing.

The learned counsel for the appellants submitted that the concept of dual ownership is recognised in India and it has been accepted by the Courts in India despite a contrary concept prevailing under the British law.

It was submitted that though, the share of the plaintiff in the land is not disputed, in view of the aforesaid position of law accepted by the Courts in India, the plaintiff is not entitled to get any share in the structure of the house constructed thereon. As against this, the learned counsel appearing for the respondent (Original Plaintiff) submits that the Hindu law does not recognise such a concept of dual ownership.

The Hon’ble Court observed that in Ramkrishna Girishchandra Dode & Others vs. Anand Govind Kelkar & Others delivered by this Court reported in (1999) 1 Bombay Case Reporter 63, it has been held as under:

“The concept of dual ownership one of the land and the other of the structure on the land has been recognised by several decisions of this Court. The consistent view taken by this Court is that where the landlord get a decree for eviction of a plot of land against a tenant the licensee or a sub-tenant inducted by the tenant on the structure put by him has no right against the landlord. If therefore the landlord is entitled to get vacant possession of the land, he is entitled to evict the occupant in the said structure erected by the tenant, in as much as the occupant of the structure has no legal right against the landlord in so far as the land is concerned. The land must be put in possession of the landlord, free from any encumbrance whatsoever.”

In view of the aforesaid position of law, it was apparent that the concept of the dual ownership, one of the land and the other in the building or structure standing thereon had been recognised and accepted by the Courts in India. The applicability of the principle would not be different even if it is a case between the real brothers and the law as has been laid down by the Courts in India would apply to the dispute between the real brothers also. Merely because, the plaintiff had share in the land beneath the building, it does not automatically follow that he would have share in the building constructed also. The plaintiff did not dispute that he has not contributed anything for construction of the house on the land in which he has a share. It is also not in dispute that he had permitted his brothers to construct building/house with their own funds. No objection was raised for such construction. Therefore, it had to be held that though the plaintiff has share in the land, he did not have any share in the structure or building erected thereon.

The plaintiff is not entitled to a partition and possession of the suit house.

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GUIDANCE NOTE ON ACCOUNTING FOR DERIVATIVE CONTRACTS

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The recently issued ‘Guidance Note on Accounting for Derivative Contracts’ (GN) under Indian GAAP amongst other things will apply to forward contracts or derivatives that hedge a highly probable forecasted transaction or firm commitment. It will also apply to derivatives entered into for hedging both foreign currency and interest rate risk such as a cross currency interest rate swap which are outside the scope of AS-11.

The GN however does not cover items that are within the scope of other standards, for example, investments which are in the scope of AS-13 and forward exchange contracts to hedge existing items in the balance sheet which are in the scope of AS-11.

The GN is not meant to be exhaustive, for example, it does not cover accounting of embedded derivatives.

The GN contains the following broad requirements:

i. All derivative contracts should be recognised on the balance sheet and measured at fair value.

ii. If any entity decides not to use hedge accounting as described in this GN, it should account for its derivatives at fair value with changes in fair value being recognised in the statement of profit and loss.

iii. If an entity decides to apply hedge accounting as described in this GN, it should be able to clearly identify its risk management objective, the risk that it is hedging, how it will measure the derivative instrument if its risk management objective is being met and document this adequately at the inception of the hedge relationship and on an ongoing basis.

iv. An entity may decide to use hedge accounting for certain derivative contracts and for derivatives not included as part of Hedge Accounting, it will apply the principles at (i) and (ii) above.

v. Adequate disclosures of accounting policies, risk management objectives and hedging activities should be made in its financial statements.

In case a derivative contract is not classified as a hedging instrument because it does not meet the required criteria or an entity decides against such designation, it will be measured at fair value and changes in fair value will be recognised immediately in the statement of profit and loss.

Transitional provisions in the GN
The transitional provisions in the GN requires any cumulative impact (net of taxes) to be recognised in reserves as a transition adjustment and disclosed separately. The GN becomes applicable for accounting periods beginning on or after 1st April, 2016; its earlier application is encouraged.

Query
In March 2008, the ICAI issued an announcement that in case of derivatives, if an entity does not follow AS 30, keeping in view the principle of prudence as enunciated in Accounting Standard (AS) 1, Disclosure of Accounting Policies, the entity is required to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market.

Accordingly, Company Aggrieved Ltd. (CAL), accounting policy is to recognise mark to market losses on derivative, and ignore mark to market gains. As per its accounting policy this exercise is carried out on an itemised basis (and not on a portfolio basis).

Assume CAL is a private company with a low net worth and therefore is not covered under Ind AS, nor does it want to apply it voluntarily. On 1st April, 2016, CAL expects a huge unrecognised mark to market gain, which under the GN it is required to be recognised in reserves. CAL falls in the normal income tax bracket, and is not covered under MAT. For certain reasons, CAL wants to recognise the unrecognised mark to market profits at 31st March, 2016 in the P&L. It feels aggrieved that it is not allowed to do so under the GN.

Can CAL recognise in the year ended 31st March 2016 P&L, the unrecognised mark to market gains?

Author’s Response
Yes. The transitional provisions in the GN are conflicting with the requirement of notified accounting standard AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. As per AS 5, any changes in accounting policies, other than those that are caused on account of a new accounting standard is recognised in the P&L. The changes in accounting policies caused as a result of a new accounting standard are recognised as per the requirement contained in that new accounting standard. The new accounting standard may require the change in accounting policy to be recognised in the reserves.

In the instant case, the change in accounting policy is not caused as a result of a new accounting standard but due to a new Guidance Note. The changes in accounting policy due to the GN should therefore be necessarily recognised in the P&L. This will be the technically right thing to do. However, given that the GN has been issued under the authority of the ICAI, it appears that entities will have an option of either following the principle of AS 5 or to follow the requirements of the GN. In other words, the unrecognised mark to market gains can either be recognised in the 31st March 2016 P&L or alternatively is adjusted in the reserve at 1st April 2016.

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[ITA No 7646 to 7653, 7654 to 7669/ Mum/ 2012] (Unreported) Mckinsey & Co. Inc vs. ADIT A.Y: 2009-10, Dated: 17.04.2015

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If the facts are similar, settlement reached under Mutual agreement procedure (MAP) for one assessment year also applies to other assessment years .

Facts:
The Taxpayer, a US company, was engaged in the business of providing strategic consultancy services. I Co was part of Taxpayer’s group and was set up to provide similar services to customers in India.

For rendering services in India, I Co availed following assistance from the Taxpayer.

• Advice on matters such as prevailing practices in various geographical areas, industries, etc. as may be relevant to the specific client assignment;
• Provision of information/data as may be specifically requested by I Co in areas such as population, GDP, inflation, production capacities, regulations, policy framework, etc., and
• Other advisory support as may be required by I Co for the purposes of executing the client assignments.

On similar facts, but for a different assessment year, Government of India and Government of USA had agreed under a Mutual Agreement procedure (MAP) that the services rendered by the Taxpayer would not fall in the category of fee for included services (FIS), and hence such fees will not be taxable in India.

For the year under reference, The Tax Authority held that services were chargeable in India as FIS and the MAP proceeding relating to a different assessment year is not applicable for the relevant assessment year.

Held:
India –USA DTAA provides the Taxpayers to approach the competent authorities of its resident State, where an action of the other State results in taxation not in accordance with the DTAA. The competent authorities are required to endeavour to resolve the issue through mutual agreement procedure. Any such agreement reached is implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States. Accordingly, even the Tribunal was bound by the settlement arrived under MAP proceedings. Hence services rendered by the Taxpayer are not taxable in India.

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TS-325-ITAT-2015 (Mum) Idea Cellular Limited vs. ADIT A.Ys: 2010-11, Dated: 10.06.2015

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Section 9(1)(v), 9(1)(vii) – “Arranger Fee” paid to foreign bank to facilitate loan from, and negotiating terms and conditions with, NR lender, is not in the nature of interest or fees for technical services (FTS).

Facts:
Taxpayer, an Indian Company (I Co), entered into term loan agreement with an a non-resident (“NR”) lender. This term loan was arranged by a foreign bank (F Co) as an arranger. As per the arranger agreement, F Co was required to act as an intermediary between I Co and the lender, liaise with the NR lender and negotiate the terms and conditions of the facility with the lender on behalf of I Co. For such services, I Co paid “arranger fee” to F Co. I Co contended that the payment made to F Co was not in the nature of interest under the Act and hence, taxes were not required to be withheld on “arranger fee”. However, the Tax Authority contended that the “arranger fee” was in the nature of interest or alternatively qualified as FTS and hence liable to tax u/s.9(1)(v)/(vii) of the Act.

Held:
The issues in appeal were decided as under:

Whether arranger fee can be regarded as interest

FCo, as an arranger, facilitated the credit facility between the lender and I Co on terms which were agreeable to both the parties. Thus, F Co had acted as a sort of broker or middleman for arranging the loan for I Co.

Interest is defined under the Act and the definition has two limbs. The main limb of the definition clearly provides that interest should be in respect of the money borrowed or debt incurred. F Co was not the lender because no debt was incurred by I Co in favour of F Co vis-a-vis the money borrowed. FCo was merely a facilitator who brought parties together for facilitating the loan/credit facility.

The second limb of the definition of interest is an inclusive limb and includes service fee or other charge. However, such fee or charge should also be in respect of money borrowed i.e. given by the lender to the borrower. The service fee or other charge does not bring within its ambit any third party or intermediary who has not given any money.

The fundamental proposition permeating between various kinds of payments covered by “interest” under the Act is that, those payments are paid or payable to the lender either for giving loan or for giving the credit facility. Nowhere the definition suggests that interest includes fees paid to a third party who did not give any loan or extend any credit facility.

The element of borrower-lender relationship is a key factor to bring the payment within the ambit of definition of interest under the Act. The Arranger fee may be inextricably linked with the loan or utilisation or loan facility but it is not a part of interest payable in respect of money borrowed or debt incurred.

Whether arranger fee can be regarded as FTS

“Arranger fee” is also not in the nature of ‘consultancy services’ as F Co did not provide any advisory or counselling services. The payment is also not for managerial services.

The term ‘managerial’ essentially implies control, administration and guidance for business and day-to-day functioning. It includes the act of managing by direction or regulation or superintendence. F Co was not involved in: providing control, guidance or administration of credit facility; or in day-to-day functioning of I Co; or in overseeing the utilisation or administration of the credit facility. Thus, on facts, F Co cannot be said to have rendered managerial services. Consequently, “arranger fee” cannot be termed as FTS within the meaning of section 9(1)(vii) of the Act. The Tribunal also relied on decisions in Credit Lyonnais ([2013] 35 taxmann.com 583) and Abu Dhabi Commercial Bank Ltd ([2013] 37 taxmann.com 15)..

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[ITA No.5406/DEL/2012] (Unreported) Pride Offshore International LLC (Presently known as Ensco Offshore International Taxation) vs. ADIT A.Y: 2008-09, Dated: 22.05.2015

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Section 44BB – Income from providing drilling rig on hire to a person who is engaged in drilling activities in India for ONGC is eligible for the benefit of presumptive taxation u/s. 44BB of the Act.

Facts:
Taxpayer, a Company incorporated in USA (USCo), was a non-resident (“NR”) engaged in the business of providing drilling rig, and rendering services and facilities in connection with prospecting, production and extraction of mineral oil. USCo provided an offshore drilling rig on hire to one of its group entity- also a NR (Group Co) which the Group Co used for drilling activity in India carried out on behalf of oil producing Indian company (I Co). USCo had a PE in India. The income from the contract entered into by USCo in India was effectively connected with that PE in India.USCo filed its return of income by declaring income from provision of drilling rig on presumptive basis u/s 44BB of the Act. However, the Tax Authority argued that the rig was not provided by USCo pursuant to a direct contract with I Co but was provided to a sub-contractor. Accordingly, the Taxpayer was not entitled to avail benefit of taxability u/s. 44BB of the Act.

Held:
The benefit of presumptive taxation u/s 44BB requires that the Taxpayer should be a NR and it should be

• engaged in the business of providing services or facilities in connection with the prospecting, production and extraction of mineral oil (first limb)or
• engaged in the business of supplying ‘plant and Machinery’ on hire used or to be used in the prospecting, or extraction of mineral oils (second limb)

The second limb requires that the NR Taxpayer must supply plant and machinery and such plant and machinery should be used for prospecting for extraction or production of mineral oils. The emphasis is on “use for” and not “use by”.

Whether the rig is deployed in the prospecting activities pursuant to a direct contract with I Co or pursuant to a contract with sub-contractor is nowhere the condition or any mandatory provision of section 44BB. The only essence is that equipment is used in the prospecting for or extraction of mineral oils.

Where the provision does not create any discrimination between the person who actually does the activity of prospecting for or extraction or production, and the person who supplies the plant and machinery, the narrow interpretation of the provisions is not permitted.

Further in the case of PGS Geophysical (269 CTR 433), Delhi HC laid down two conditions for the applicability of section 44BB as follows:
• Taxpayer should have a (Permanent Establishment) PE in India during the relevant period and
• The contract entered into by the Taxpayer in India should be effectively connected with that PE in India.

As both these conditions were fulfilled, benefit of section 44BB was available to USCo.

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MORALITY OF A LAWYER’S ETHICS

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Morals are an emotive concept. Everyone has a view on what exactly it means and how exactly to live a morally right life. Like the story of the blind men and the elephant, it means different things to different people. This is even more pronounced when it comes to the practice of law. Every situation requires a judgement- what is the right thing to do and what would be wrong – “legally right” and “legally wrong”, one must hasten to add. That professional judgement is invariably also judged from the moral standpoint. That is when all hell can break loose.

Morals, Ethics and Law
Each of morals, ethics and laws, are about assessment of the right and the wrong. An individual’s own principles of right and wrong, constitutes his morals. Every human being has an innate sense of what is right and wrong to his mind – this dictates his “morals”. Ethics is about the rules of conduct that a community of individuals, formed on the basis of activity or even culture, writes for itself. Ethics have a clear link to character (“ethos”) of the section of society that follows it.

Law, binds an entire society, and evolves from the influence of morals and ethics. It is essentially a product of averaging the forces of morals and ethics and developing an acceptable minimum standard of conduct across society. All averages leave constituents unhappy – those above and below the average can always feel shortchanged. Therefore, despite doing the legally right thing, one can be perceived as morally wrong, and doing the something legally wrong too can get lauded as ethically sound.

Decline of morality: really?
First, let’s deal with the issue of morality. The refrain that “moral values are on the decline” is as old as the hills. It is something that could have been said in almost every phase of human history. It is quite like that oft-stated phrase: “we live in interesting times.” You can say it in every single conceivable situation. Examples abound of how societies would have said morals are on the decline. A society’s sense of morals can change with time. Jesus Christ devoted his short life to preaching his sense of morality. The society in which he preached believed that Christ was an assault on their moral values – in today’s moral compass, unthinkable. References to Shylock in The Merchant of Venice allude to how immoral the moneylender was in asserting his legal right to a pound of flesh. If that play were to be written today, Shakespeare would have been castigated for holding anti-semitic prejudices by referring to Shylock’s membership to the Jewish community.

Take the worst that man can do to man: slavery. When slave labour was being questioned by citizens in the northern parts of the United States, slave owners in the south argued that moral values were on the decline. They asserted how it was morally wrong to attack their legal right to own property that they had legally paid for. Indeed, slave owners would quote the Bible to convince their slaves that a life committed to slavery was Godendorsed. Today, it is revulsive to even think about it. Yet, those who indulge in slave labour today (yes, it is alive and kicking – and yes, it can even take the form of the domestic help in Mumbai households without any of the rights their employers would take for granted from their employers) surely convince themselves about the morality of their actions so that they get sleep at night.

One man’s soul-filling morality can be another man’s toxic poison. When the Indian Supreme Court refused to strike down law criminalizing homosexuality, a section of society argued that the court’s refusal to intervene is evidence that moral values were on the decline. The sections that went to the Supreme Court had argued that the Delhi High Court striking down that law was evidence that morality was on the decline. They wanted the Supreme Court to correct that. This moral bunch had representation from the ayatollahs of every faith that lives in India and whose fatwas, large sections of our society are accustomed to follow.

Even individuals who have given a lifetime of commitment to universal brotherhood and doggedly adhering to their sense of morality are not immune from attack of those who don’t accept that moral compass. Mahatma Gandhi was even killed. His killers would have developed a strong moral argument in their own minds to convince themselves that taking his life was the “right” thing to do. The Dalai Lama, a living idealist who uses scientific methods in his bid to emphasize that it is not extraordinary to be compassionate even with those who may inspire hate, is accused by some young-and-violent Tibetans of neglecting their interests with his peace-based approach to the universe. Some of them immolate themselves in protests – indicating that at least in their minds, they have the fullest moral conviction that their approach is right and the Dalai Lama’s practice is wrong.

Evolution of Law
Therefore, what is morally right and wrong is incapable of being tied down to the satisfaction of all. It can vary depending on the individual considering the question. For the same individual, it can vary with the time in which she considers the question. It could even vary if the context in which she considers the question varies, even if at the same time. When every individual in a society has a strong view on the right and the wrong, consensus is impossible. It is to grapple with this dilemma that societies need “law” – a minimum set of rules that everyone needs to conform to, across sections of society. It is enforced by the coercive power of the “State”.

What then should be the moral and ethical compass for a practitioner of law? By nature, human society is judgmental. One of my favourite questions in talks that I give on the rule of law is: “How many in this room believe Ajmal Kasab should have a trial?” I have not come across a single instance of a huge majority response that he indeed needs trial. The nature of audience has ranged from chartered accountants, businessmen, consultants, bureaucrats, and sadly, even lawyers.

It is this apathy that would come to bite when a chartered accountant, businessman, consultant, bureaucrat or lawyer stands accused and the popular voice of society is that she does not need a trial. Business and crime are being considered synonymous in the rising din of society and the same treatment that the educated professional class wants to mete out to Kasab is the treatment that the rest of society wants to mete out to this class.

The need for a trial to assess what actually happened in the eyes of law is a critical component of the rule of law. Our constitution guarantees protection to members of our society against incriminating themselves for a very sound reason. If there were no such protection, all it would need to “solve crime” would be to physically beat false confessions out of people. Therefore, even where someone confesses to a crime, the justice system is required to go into whether the confession is truthful and to see that justice is indeed done. How else does one prevent drivers owning up banging up cars they never drove, or for that matter, weak youngsters in a professional firm from being forced to confess to wrongs they never committed just to protect the erring partner in a professional negligence claim? What really transpired can only be found out by trial.

One is seeing increasing instances of assaults on lawyers agreeing to represent those accused of crimes that anger society. It can take varying forms. Physical assaults on potential lawyers for Kasab, tongue-lashing of Salman Khan’s lawyer, reputational  assault  on  amicus  curiae (a “friend of the court” appointed by the court to render assistance) in the Supreme Court appeal of Kasab’s sentence when he was reported to have said that the trial had not been fair. It is in this milieu that developing  a strong sense of adherence to a personal moral and ethical standard is critical to save society from the rule of the mob. What is that standard?

The  lawyer’s  Ethical  Standard a lawyer is required to dispassionately present facts and law to the judge, who required to dispassionately rule on matters before her without fear or favour and uncaring for consequences outside the realm of law and justice. Every lawyer is duty-bound to accept any brief at a fee consistent with his standing. That is the real ethic of a lawyer. That a brief can turn politically controversial or socially unpopular is not a ground for refusing a brief. A lawyer is obliged to use all fair, legitimate and honourable means to uphold his client’s interests regardless of his personal opinion as to the guilt. His loyalty is to the law.

Judging his client’s guilt is the court’s role. The lawyer is but one of the officers of that court.

Not too long ago, Kerala Congressmen were upset that party spokesman Abhishek Manu Singhvi represented a local lottery distributor. The Bharatiya Janata Party had once expelled Ram Jethmalani for representing convicts in the Indira Gandhi assassination case. Eventually, one of the accused was actually absolved in appeal. Both these politician-lawyers had  stood  their  ground.  But not all do so. They fall into the unethical trap of finding reasons to return briefs, or worse, even going on national television to argue how an accused like Kasab should never get trial. Such attitudes erode the objectivity and fearlessness critical for an effective run of the rule of law.

For a real professional, the foundational rule is not to judge. More importantly, not to be influenced by others’ judgements, in distraction from the facts and merits of the situation. It is the role of the judge to render judgement and not that of the professional. A lawyer refusing to take up representation despite having time on hand is identical to a doctor refusing to treat a patient because of his own moral judgments – say the dying patient is gay and the doctor is a homophobe.

Worse is taking up representation and deliberately jeopardizing the case. Sadly these are the kinds of suggestions one hears of in a charged up society. It is another matter that such suggestions would have been heard all through human history. It is akin to doctors injecting poison into Kasab in revenge  instead  of  saving his life. That would have been an insult to the efforts of those who gave up their lives in the process of apprehending Kasab.

The worst of all is to intimidate and attack those who do their job in conformity with their ethical standard. There can be nothing more immoral than questioning the morality of those who serve the cause of dispensation of justice on the ground that they are serving clients accused of crime.

Hindu Law – Partition – Doctrine of throwing Property in common hotchpot – Assessment under the Wealth tax Act would be evidence : Hindu Succession Act section 23

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Vineeta Sharma vs. Rakesh Sharma & Ors. AIR 2015 (NOC) 895 (Del)

The
plaintiff had filed a suit for partition against her brothers and
mother in respect of constructed premises. The undisputed facts were
that the suit premises were purchased and constructed by the plaintiff’s
father, wherein he along with his family stayed for some time and also
let out a portion thereof to the tenants. The plaintiff’s case was that
since her father and brother died intestate, she was entitled to
one-fourth share in the suit premises. She stated that whenever she
visited her paternal home, she stayed in the suit premises. The
plaintiff averred that the suit premises were never treated as HUF
property and no Will was ever executed by their father.

The
defendants No. 1 and 2 (sons) contested the suit. Their case was that
the plaintiff being the married daughter, had only restricted rights in
the suit premises and could not seek its partition. They averred that
the plaintiff was also not entitled to any share, as the suit premises
was a HUF property, and was so assessed by the Income Tax Department as
also the Wealth Tax Authorities.

The plaintiff deposed that her
father acquired the suit premises from his own earnings, savings and
loans and had constructed the same in March, 1966, when all the
defendants were studying and they could not have contributed to the
construction expenses.

On the other hand, the defendants stated
that their father had abandoned his individual rights in the suit
premises by making a declaration on affidavit dated 23.05.1966,
submitted by him with the Income Tax Department, and which was accepted
as HUF property vide Assessment Order dated 31.03.1976 for the
Assessment Year 1972- 73. They stated that from the Assessment Year
1972-73 to 1988-90 and until the demise of their father, the premises
had been assessed to Income-tax as well as Wealth-tax, as HUF under the
provisions of Income-tax Act as well as Wealth-tax Act.

The
Hon’ble Court observed that as per the plaintiff, the suit premises was
self-acquired property of their father, whereas as per defendants No. 1
and 2, though, it was the self-acquired property of their father, he had
thrown it in the hotchpot of HUF.

The law relating to blending
of separate property with joint family property is well settled.
Property, separate or self-acquired of a member of a joint Hindu family
may be impressed with the character of joint family property, if it was
voluntarily thrown by the owner into the common stock with the intention
of abandoning his separate claim therein, but to establish such
abandonment a clear intention to waive separate rights must be
established.

The separate property of a Hindu ceases to be
separate property and acquires the characteristics of a joint family or
ancestral property not by any physical mixing with his joint family or
his ancestral property but by his own volition and intention, by his
waiving and surrendering his separate rights in it as a separate
property. The act by which the coparcener throws his separate property
in the common stock is a unilateral act. There is no question of either
the family rejecting or accepting it. By his individual volition, he
renounces his individual right in that property and treats it as a
property of the family. No sooner than he declares his intention to
treat his self-acquired property as that of the joint family property,
the property assumes the character of joint family property. The
doctrine of throwing into the common stock is a doctrine peculiar to the
Mitakshara school of Hindu law.

The Hon’ble Court observed that
from the Assessment Order dated 31.03.1972 of the Assessment Year 1972-
73, it is seen that the plaintiff’s father had declared some income
from the suit premises in the status of HUF. It is also seen therefrom
that the HUF came into existence under the assessee’s declaration made
on 23.05.1966 on an affidavit. The Income Tax record of the subsequent
year upto the Assessment Year 1999-2000 would evidence that the
plaintiff’s father had been filing Income Tax Returns and been assessed
to Income Tax as Karta of HUF. The incomes received from the suit
premises was being declared by the plaintiff’s father as of HUF and was
assessed as such during all these years. The Assessment Order under the
Wealth Tax Act of the years 1977-78 onward would also evidence the suit
premises having been assessed as HUF for the purpose of Wealth Tax. From
all this record, it was concluded that the plaintiff’s father, for all
purposes, had consciously abandoned his individual rights in the suit
premises to HUF with effect from 23.05.1966. The affidavit filed by the
plaintiff’s father with Income Tax Department declaring the suit
premises as HUF on 23.05.1966 was not the solitary step taken by him,
but, he continued to maintain the HUF status of the suit premises till
he died. In view of all this, even the payment of property tax by the
plaintiff’s father in his name and not that of HUF or even for that
matter, filing of eviction case against the tenant Bank of Baroda in his
own name than that of HUF would not make any difference. There is no
dispute that the suit premises was initially acquired by the plaintiff’s
father in his own name and it was in those circumstances that the suit
premises continued to be assessed to property tax in his individual name
rather than that of HUF. The payment of property tax by any means does
not create any right or title in the name of the assessee. Filing an
eviction case by the plaintiff’s father in his own name instead of the
HUF, can also be said to be only for the convenience. In any case, the
partition could only be filed by him in his name, being the Karta of
HUF. Thus it was held that the suit premises was of the HUF property of
the plaintiff’s father, with he being the Karta thereof till his death.

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Foreign Judgement – Enforceable before Court in India – Civil Procedure Code, section 13(b)

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Masterbaker Marketing Ltd vs. Noshir Moshin Chinwalla, AIR 2015 (NOC) 771 (Bom.)

A foreign Court which has jurisdiction over the subject matter and passes a decree, the same is conclusive u/s. 13 of the CPC. The plea of the defendant that judgement was obtained by playing fraud hence could not be conclusive could not be considered as it had not submitted to the jurisdiction of the competent Court in a foreign country. The defendant would not be allowed to raise up his hands after the plaintiff has gone through the process of trial and undertaken the execution by applying to the executing Court to retry the issue.

The plaintiff had filed his plaint. The defendant was given notice of the action. He was served a summon. He was called upon to answer the plaintiff’s claim. The trial Court was bound to hear the defendant and to dismiss the plaintiffs claim if it was fraudulent or perjurial. It was, therefore, not only the defendant’s right to get the action of the plaintiff dismissed if it was perjurial or fraudulent, but also its duty to bring perjurial act constituting fraud to the notice of the Court if it was known to the defendant at the time of the trial. If that was not done at the time of trial then and was sought to be done later after the judgment was passed, it would constitute a retrial issue. That retrial is forbidden by the salutary principle of resjudicata. If permitted, it would allow all defendants not to defend the claim and allow any decree to be passed which would then be challenged whilst being executed. That would be an abuse of the Court process.

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Territorial Jurisdiction – Infringement of Copyright and/or Trademark

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Introduction
A question that arises in almost every matter
pertaining to violation of intellectual property rights is – Which Court
would have the necessary territorial jurisdiction to try, entertain and
dispose of the present proceedings? By this article, an endeavour shall
be made to explain which Court/Courts would have territorial
jurisdiction in respect of matters of infringement of copyright and/or
trademark.

The determination of territorial jurisdiction of a
civil court is governed by the Code of Civil Procedure,1908(“CPC”)1
Section 20 of the CPC which would be the relevant Section with respect
to cases of infringement of copyright and/or trademark provides that a
Suit may be filed, inter alia, either where the Defendant actually and
voluntarily resides or carries on business or works for gain or where
the cause of action arises wholly or in part. An explanation appended to
the said Section provides that a Corporation is deemed to carry on
business at its sole or principal office in India or at a place, where
in respect of any cause of action arising at such place it has a
subordinate office.

Hence, under these provisions, a Plaintiff
would be obliged to travel to where the Defendant actually and
voluntarily resides or carries on business or works for gain or where
the cause of action has arisen, wholly or in part. To illustrate this
point, consider a a case where an owner of copyright in a musical work
resides in Delhi, however, his musical work is being infringed by a
Defendant in Chennai by causing unauthorised communication thereof in a
bar in Chennai itself and nowhere else. In such a case, the Plaintiff
copyright owner would be constrained to travel to Chennai to file a
proceeding to restrain the acts of infringement of copyright since both
the Defendant is residing in Chennai as also the cause of action has
arisen in Chennai. Such acts of infringement often take place in remoter
parts of the country, making it even more cumbersome for a Plaintiff to
travel to every nook and corner of the country to protect his
intellectual property rights.

These difficulties were noted by
the Joint Committee that was constituted prior to the passing of the
Copyright Act, 1957 (“CA”) in as much as it was observed that many
authors are deterred from instituting infringement proceedings because
the court in which the proceedings are to be instituted are at a
considerable distance from the place of their ordinary residence. The
Joint Committee recommended that such impediments should be removed and
the proceedings should be allowed to be instituted in the local court
where the person instituting the proceedings ordinarily resides, carries
on business etc2.

Hence, it was in this background that an
additional forum was provided for by Legislature in section 62 of the CA
to enable authors to file a suit for infringement of copyright where
they reside or they carry on business or work for gain3. Subsequently,
section 134 was also brought into effect in the Trade Marks Act, 1999
(“TMA”) to provide an additional forum even in case of infringement of
trademark at a place where the Plaintiff resides or carries on business
or works for gain.

It is the scope and purview of both these
provisions that is sought to be explained and commented upon in this
Article. In fact, the Supreme Court has in a recent judgment dated 1st
July, 2015 in the case of IPRS vs. Sanjay Dalia4 dealt extensively with
the ambit and scope of the said provisions. My effort shall be to
explain the ratio decidendi of the Apex Court and thereafter highlight
certain issues which may still need to answered by the Hon’ble Courts to
afford complete clarity on these provisions.

STATUTORY PROVISIONS
Before
adverting to the aforesaid decision of the Apex Court in the case of
IPRS vs. Sanjay Dalia5, it would be helpful to consider the actual text
of the relevant provisions which provide, inter alia, as under :-

CA
“Section
62. Jurisdiction of court over matters arising under this Chapter. —
(1) Every suit or other civil proceeding arising under this Chapter in
respect of the infringement of copyright in any work or the infringement
of any other right conferred by this Act shall be instituted in the
district court having jurisdiction.

(2) For the purpose of sub-section (1), a “district court having jurisdiction” shall,
notwithstanding anything contained in the Code of Civil Procedure, 1908
(5 of 1908), or any other law for the time being in force, include a
district court within the local limits of whose jurisdiction, at the
time of the institution of the suit or other proceeding, the person
instituting the suit or other proceeding or, where there are more than
one such persons, any of them actually and voluntarily resides or
carries on business or personally works for gain.”

TMA
“134. Suit for infringement, etc., to be instituted before District Court. —
(1) No suit– (a) for the infringement of a registered trade mark; or
(b) relating to any right in a registered trade mark; or (c) for passing
off arising out of the use by the defendant of any trade mark which is
identical with or deceptively similar to the plaintiff’s trade mark,
whether registered or unregistered, shall be instituted in any court
inferior to a District Court having jurisdiction to try the suit.

(2) For the purpose of cls. (a) and (b) of sub-section (1), a “District Court having jurisdiction” shall,
notwithstanding anything contained in the Code of Civil Procedure, 1908
(5 of 1908) or any other law for the time being in force, include a
District Court within the local limits of whose jurisdiction, at the
time of the institution of the suit or other proceeding, the person
instituting the suit or proceeding, or, where there are more than one
such persons any of them, actually and voluntarily resides or carries on
business or personally works for gain…”

It may be noted
that though the current TMA contains Section 134 which provides an
additional forum to a Plaintiff, the earlier Trade and Merchandise Marks
Act, 1958 contained no such provision. Under the Trade and Merchandise
Marks Act, 1958, a Plaintiff was constrained to follow the Defendant
and/or the cause of action for vindication of his rights as u/s. 20 of
the CPC. This position has, however, now changed u/s. 134 of the TMA. A
bare perusal of both section 62(2) of the CA and section 134(2) of the
TMA which are pari materia6 in nature would show that they make a
significant departure from the provisions of the CPC and provide for the
existence of an additional forum in a Suit relating to infringement of
copyright and/or trademark, before a Court, where the Plaintiff actually
and voluntarily resides or carries on business or works for gain.

Both section 62(2) of the CA and section 134(2) of the TMA are additional forums and do not take away or abridge the right of a Plaintiff, if he so chooses to follow the Defendant and/or the cause of action u/s. 20 of the CPC. Hence, a Plaintiff in a suit for infringement of copyright and/or trademark would be entitled to approach the appropriate Court either u/s. 20 of the CPC or u/s. 62(2) of the CA or u/s. 134(2) of the TMA, as the case may be. It is possible, in a given case, that the appropriate Court could be the same Court whether section 20 of CPC is applied or the provisions of the CA or TMA are applied. An illustration would be that, take a case where an owner of copyright in a musical work resides in Delhi. The Defendant is also residing in Delhi and is infringing the musical work by causing unauthorised communication thereof in a bar in Delhi itself and nowhere else. In such a case, the Courts at Delhi would have the necessary territorial jurisdiction to entertain such a Suit for infringement of copyright since firstly, as u/s. 62 of CA, the Plaintiff resides in Delhi. Secondly, u/s. 20 of CPC, the Defendant also resides in Delhi and thirdly, even the cause of action is arising in Delhi. Hence, in such a case, it would only be the Courts at Delhi which would have the necessary territorial jurisdiction.

The question however, is of cases where only section 62 of the CA and/or section 134 of the TMA are invoked as conferring territorial jurisdiction on the Court.

    IPRS VS. SANJAY DALIA7

The Apex Court was dealing with two appeals from the Delhi High Court in this case. In the first Appeal, the facts were that the the Plaintiff was carrying on business through a Branch Office situate at Delhi and it was on this basis that the territorial jurisdiction of the Delhi High Court had been invoked. In the second Appeal, also the territorial jurisdiction of the Delhi High Court was invoked on the basis that the Plaintiff had a branch office at Delhi. In both these matters, the admitted position was that the registered office of the Plaintiffs was not in Delhi nor had any cause of action arisen in Delhi at the time of filing the suits but only the Branch Offices were in Delhi. Proceedings had been filed on the basis, as a suit could be filed wherever the Plaintiff was carrying on business and since these Plaintiffs had a branch office in Delhi, they must be deemed to carry on business in Delhi thereby, rendering the Delhi High Court as the Court having the necessary territorial jurisdiction. Objections were however, raised by the Defendants to the territorial jurisdiction of the Delhi High Court, on the basis that in both these matters the Plaintiff had a registered office in Bombay where the cause of action had also arisen and hence, it should be the Courts at Bombay which would have the necessary territorial jurisdiction. A Division Bench of the Delhi High Court upheld the objection of the Defendant in the first matter whilst in the second matter, the Division Bench of the Delhi High Court, allowed an amendment to be made to the Plaint to add averments to the effect that the infringing magazines were being circulated in Delhi as well thereby showing that cause of action had arisen in Delhi, and on this basis rejected the plea of the Defendant of lack of territorial jurisdiction. It was against these two Orders of the Delhi High Court, that appeals were preferred before the Apex Court.

The Supreme Court was thus called upon to answer whether in light of section 62 of CA and section 134 of TMA could a Plaintiff Corporation file a Suit anywhere it chose to, based on the existence of a branch office or must the Plaintiff Corporation be constrained to file proceedings at a place where either its registered office is situated or at a place where it has a branch office and where the cause of action has also arisen akin to the Explanation to section 20 of the CPC. The Explanation to section 20 of the CPC as mentioned earlier provides that a Corporation is deemed to carry on business at its sole or principal office in India or at a place, where in respect of any cause of action arising at such place it has a subordinate office.

The Supreme Court after considering the legislative history and the purpose for which the provisions had been brought onto the statute book observed that if the provisions are not interpreted purposively, as is being suggested by the Supreme Court, it could lead to abuse of the provisions, in as much as the Plaintiff will institute a suit in a wholly unconnected jurisdiction based solely on the existence of a branch office. The Supreme Court illustrated the possible abuse and observed, inter alia, that “There may be a case where plaintiff is carrying on the business at Mumbai and cause of action has

arisen in Mumbai. Plaintiff is having branch offices at Kanyakumari and also at Port Blair, if interpretation suggested by appellants is acceptable, mischief may be caused by such plaintiff to drag a defendant to Port Blair or Kanyakumari. The provisions cannot be interpreted in the said manner devoid of the object of the Act.” It has also been observed that such a counter mischief to the defendant was unforeseen by Parliament and it is the court’s duty to mitigate the counter mischief.

Hence, the Supreme Court has held that the additional right to institute a suit at a place where the Plaintiff resides or carries on business has to be read subject to certain restrictions, such as in case plaintiff is residing or carrying on business at a particular place/having its head office and at such place cause of action has also arisen wholly or in part, plaintiff cannot ignore such a place under the guise that he is carrying on business at other far flung places also. The very intendment of the insertion of provisions in the CA and TMA is the convenience of the plaintiff. The interpretation of provisions has to be such which prevents the mischief of causing inconvenience to parties. The Supreme Court whilst interpreting these provisions was also of the view that the issue raised before it had not been raised in any of the earlier cases cited before it

It was in light of these findings that the Supreme Court was pleased to dismiss both the appeals by holding that the provisions of section 62 of the CA and section 134 of the TMA have to be interpreted in the purposive manner. There is no doubt about it that a suit can be filed by the plaintiff at a place where he is residing or carrying on business or personally works for gain. He need not travel to file a suit to a place where defendant is residing or cause of action wholly or in part arises. However, if the plaintiff is residing or carrying on business etc. at a place where cause of action, wholly or in part, has also arisen, he has to file a suit at that place.

Whilst this judgment, brings much required clarity to the issue as to the interpretation of these provisions of the CA and TMA, in my opinion, these findings of the Supreme Court amount to introducing an Explanation or a Sub-section (3) to both section 62 of the CA and section 134 of the TMA, which explanation or sub-section had not been provided even by the Legislature whilst passing the said statutes.

The effect of this judgment would be to limit the scope and effect of these provisions. Plaintiffs would now be obliged to file proceedings in accordance with these principles laid down by the Apex Court. The effect of this judgment will, in fact, be felt in several pending proceedings, which proceedings may have been initiated prior to this judgment at a place where the Plaintiff had only a branch office but no cause of action, based on the bare language of these provisions. Already in several proceedings in different High Courts, to my knowledge, applications have been moved for rejection/return of plaint on account of lack of territorial jurisdiction of that Court based on this judgment.

    CONCLUSION

Even though this judgment does bring forth a fair amount of clarity on the issue of territorial jurisdiction in cases of infringement of copyright and/or trademark, in my opinion, certain important issues still remain to be answered in connection with the interpretation of these provisions.

To illustrate an issue which still needs to be addressed and has not been conclusively determined by the Supreme Court, consider a situation, where the Plaintiff is having a branch office in Delhi and the cause of action has also arisen there whilst its registered office is at Bombay. In such a case, can it be said that the Plaintiff is precluded from approaching the Courts at Bombay and must only file his case in the Courts at Delhi or is it still his option to choose the forum of his convenience between these two forums.

It may be noted that the Supreme Court in the IPRS judgment, was dealing with two cases where factually this position did not arise and in both cases, jurisdiction had been invoked only on the existence of a branch office and not on the basis of a combination of branch office plus cause of action. It is trite law that a decision is an authority for what it actually decides8 and hence, considering the nature of the facts involved, it would be difficult to assert that this issue has been conclusively adjudicated upon.

In my opinion, however, in the IPRS case itself, the Supreme Court had referred to its earlier judgment in Patel Roadways vs. Prasad Trading Co.9 wherein the Court whilst explaining the provisions of Section 20 of the CPC had observed, inter alia, that “The clear intendment of the Explanation, however, is that, where the corporation has a subordinate office in the place where the cause of action arises, it cannot be heard to say that it cannot be sued there because it does not carry on business at that place.”

Thus, from the perspective of the convenience of the Defendant and not the Plaintiff, the Supreme Court has already opined that it is the location of the subordinate office, within the local limits of which a cause of action arises, which is to be the relevant place for the filing of a suit and not the principal place of business.

On an analogy of this principle of convenience of parties as explained by the Supreme Court, in my opinion, it could be urged that a Plaintiff corporation which has a subordinate office in the place where the cause of action arises, ought not to be heard to say that it will not sue there since it would like to sue at a place where it has its registered office. The obvious convenience involved of both parties would have to be considered as has been explained by the Supreme Court. Considering that the Plaintiff has a branch office at that place he can hardly be heard to complain that the place is not convenient and also from the perspective of the Defendant, considering cause of action is arising at that place, it would mean that the Defendant and/or its products and/or services are to be found at that place thereby indicating that such a place would be convenient to the Defendant also. Hence, on the basis of convenience of both parties, it ought to be held that it is only the Court where the cause of action has arisen and where the Plaintiff also has a branch office which is the Court having the necessary territorial jurisdiction.

Another issue which has remained unanswered is the effect of this judgment on the Chartered High Courts i.e. the High Courts of Bombay, Calcutta and Chennai. As explained herein above, the Supreme Court has in a sense incorporated the Explanation to section 20 of CPC into the provisions of the CA and the TMA, however, by virtue of section 120 of CPC, section 20 of CPC itself does not apply to the Chartered High Courts. The territorial jurisdiction of the Chartered High Courts is governed by their respective Letters Patent and not by section 20 of CPC10. Hence, in such a situation can it be said that this interpretation would apply to these Chartered High Courts or would these Courts be able to exercise a more unrestricted jurisdiction than the other High Courts.

Whilst in my opinion, the judgment in IPRS does leave door ajar for several new issues to be resolved upon to bring forth complete clarity on the subject, the judgment is an important step forward towards interpreting and laying down the contours of the territorial jurisdiction of a Court in respect of proceedings initiated u/s. 62 of the CA or section 134 of the TMA.

SA 250: Consideration of Laws and Regulations in an Audit of Financial Statements

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Laws and regulations form the substratum of any economy to ensure the
forbearance of any acts, deeds or inaction by the regulated which may be
detrimental to the interest of the economy or part thereof. Compliance
with laws and regulations by corporates is imperative, both on the
frontiers of survival and continuance. In present times, given the
multifold increase in the complexity of applicable laws and regulations,
enterprises are finding it extremely difficult to keep pace with the
plethora of changes in regulatory landscape and effective implementation
and compliance.

SA 250 Consideration of Laws and Regulations in
an Audit of Financial Statements requires auditors to ensure compliance
with the applicable framework of laws and regulations by the audited.
However, as is time and again proclaimed, auditors are watchdogs and not
bloodhounds. The responsibilities advocated by this Standard are a
direct function of ‘ifs and buts’. The auditor is not responsible for
preventing non-compliance and cannot be expected to deter non-compliance
with all laws and regulations that apply to an enterprise.

Specific
attention must be paid to the fact that compliance or non-compliance
with all laws and regulations applicable to an enterprise does not find
an immediate reflection in the financial statements. For example, while
the contribution made by an employer to Employees’ Provident Fund is
reflected in the financial statements, but say for instance,
non-compliance with the requirements of filing of returns for effluent
disposal with the Pollution Control board by a chemical manufacturing
company need not necessarily find a mention in the financial statements.

SA 250 draws a thin line between those laws and regulations
which have and which do not have a direct effect on the determination of
material amounts and disclosures in the financial statements.
Accordingly, depending on which category these laws fall under, the
auditor’s responsibilities stand differentiated. For the former, the
auditor’s responsibility is to obtain sufficient appropriate evidence
about compliance with the provisions of those laws and regulations. For
the latter category, the auditor’s responsibility is limited to
undertaking specified audit procedures to help identify non-compliance
with those laws and regulations that have a material effect on the
financial statements. However, when the line between the black and white
is grey, the auditor is supposed to exercise his professional judgment
while determining the umbrella the law falls under.

Just like
every other SA, SA 250 cannot be applied in complete isolation. As
required by SA 200, professional skepticism needs to be maintained in
the backdrop of applicable laws and regulations applicable on the
entity. While adhering to SA 250, the auditor has to also bear in mind
SA 315, which requires the auditor to obtain a general understanding of
legal and regulatory framework applicable to the industry where the
entity operates. At times, when the outcome of non-compliance is severe,
questions get raised on the validity of the growing concern assumption,
in which case, the auditor would need to consider the requirements of
SA 570. The auditor can seek written representations from the management
in terms of SA 580 about management’s knowledge of identified or
suspected non-compliance with applicable laws. However, receipt of
written representations must not affect the nature and extent of other
evidence to be obtained by the auditor in this regard.

Further,
audit procedures applied to form an opinion on the financial statements
may bring instances of noncompliance or suspected non-compliance with
laws and regulations to the auditor’s attention. Such audit procedures
may include reading of minutes, inquiring of the entity’s management and
in-house legal counsel or external legal counsel concerning litigation,
claims and assessments; and performing substantive tests of details of
classes of transactions, account balances or disclosures – for e.g.,
scrutiny of payments made to government authorities towards
fines/penalties, scrutiny of legal and professional expenses to
understand whether unusual payments have been made for
legal/retainership fees as also to seek evidence of legal cases pending
against the company etc.

The next obvious question which arises
is – What is the auditor supposed to do in case of identified or
suspected non-compliance? Firstly, the auditor must have a discussion
with the management or where appropriate, with those charged with
governance, and if sufficient information is not obtained, the auditor
may evaluate the need of obtaining legal advice. If satisfactory
information is still not obtained, the auditor shall consider its effect
on the audit opinion.

A non-compliance with applicable law or
regulation does not merely impact the financial statements.
Noncompliance can also impact the level of reliance that the auditor
places on the integrity of the management or employees. It can also
cause the auditor to reassess the possibility of material misstatements
in other areas, as also the faith the auditor places in the management’s
Written Representations.

However, if the auditor suspects that
the management is involved in non-compliance, the auditor can escalate
the issue to those charged with governance and also consider the impact
of such non-compliance on the audit opinion. If the auditor concludes
that the non-compliance has a material effect on the financial
statements, and has not been adequately reflected in the financial
statements, the auditor may express a qualified or adverse opinion on
the financial statements. This standard also provides for the scenario
that if the auditor has identified or suspects noncompliance with laws
and regulations, the auditor shall determine whether he has a
responsibility to report the same to parties outside the entity, for
instance – regulatory and enforcement authorities.

Let us now examine certain case studies.

Case Study I
ABC
Limited (‘ABC’) is engaged in the manufacturing of pharmaceutical
products, having operations in many countries across the globe. During
the year, a manufacturing unit of ABC, which accounted for over 60% of
the company’s production, received notices from the Food and Drug
Administration Authority of the United States of America and regulators
in other countries, stating that pursuant to the inspection of the
manufacturing processes at the said unit, violations of Good Medical
Practices (GMP) were observed. Several prohibitions were imposed on the
functioning of the said unit, including a prohibition to sell the
products manufactured by the unit to US regulated markets. ABC decided
to voluntarily shut down its operations in this unit on a temporary
basis to examine ‘what went wrong’. ABC however is in dialogue with
regulatory authorities to assuage the restrictions. What would be the
auditor’s responsibility in such a scenario?

Analysis

The auditor must discuss with the management the severity of the case, and the company’s current standing in this regard. The auditor has also to bear in mind that the plant accounted for over 60% of the company’s production and also the fact that other markets may also raise questions on the acceptability of products manufactured in this plant. The auditor would also need to consider whether there is a need for reduction in the carrying value of inventories, whether any provisions are required for fines/penalties, accounting for possible sales returns and if such provisions are required to be made, then the basis used by the management for arriving at such estimates. Further, in such cases, there are inherent uncertainties regarding the future actions of the regulators, the impact of which may not be ascertainable and therefore, the actual amounts incurred may eventually differ from the estimates made. If the auditor concludes that this is a significant matter, he should also consider highlighting the same as a Matter of Emphasis (MOE) in the audit report.

    Case Study II

PQR Limited (‘PQR’) is a company engaged in production of steel. During the year, the company and some of its competitors received notices from Competition Commission of India (CCI) for alleged cartelization by certain steel manufacturing companies. CCI imposed a penalty of Rs. 100 Crores on PQR against which PQR has filed an appeal before Competition Appellate Tribunal. The Company has not made any provision in this regard. What would be the auditor’s responsibility in this case?

    Analysis

The auditor must assess the facts and circumstances, and must have a detailed discussion with the management on the Company’s standing in the case. The auditor, if he deems necessary, must also take an independent legal opinion to deduce whether the company has a fit case or whether there is a need for making provision on a best estimate basis of the likely penalty that may be levied. The auditor should also have a joint discussion with the company’s legal counsel in this regard. Depending on the significance of the matter, the auditors may consider including a ‘Matter of Emphasis’ in the audit opinion.

    Case Study III

LMN Limited is a public listed company engaged in the manufacture of automobiles. During the year ended 31 March 20X0, LMN has incurred loss of Rs.120 crore. LMN has paid to its Managing director Mr.DEF (‘DEF’) (who is also the promoter shareholder holding 51% of the paid up capital of LMN) managerial remuneration exceeding the limits set out by the Companies Act, 2013.

As LMN has incurred losses for the year, LMN was required to obtain approval from the shareholders as well as the Central Government for payment of remuneration to DEF as the same exceeded the limits set out in the Companies Act, 2013. LMN management contends that seeking approval of the shareholders was only a compliance formality as the Managing Director himself holds more than 51% of the paid up capital of LMN. What are the duties of the auditor in this regard?

    Analysis

Since LMN Limited had no profits for the year, it was required to comply with the requirements of Schedule V to the Companies Act, 2013 which sets out the limits for maximum managerial remuneration payable to managerial personnel for public listed entities in the event of a loss or inadequate profits. The auditor would need to explain the management the legal position and advise the client to seek approvals of the shareholders and the Central Government or alternatively recover the remuneration paid in excess of the prescribed limits from DEF. In the event DEF chooses not to return the excess payment, the auditor would need to qualify the audit opinion for non-compliance with the requirements of the Companies Act, 2013.

    Case Study IV

STU Limited (‘STU’) is engaged in the business of providing mobile telecommunication services. As per TRAI (Telecom Regulatory Authority of India) regulations, a prescribed percentage of Adjusted Gross Revenue (AGR) earned by a telecom operator is payable to the department of telecommunications as license fees. STU has been paying license fees on revenue earned from providing telecom services to its customers. According to TRAI, license fees are also payable on non-telecom revenues like profit on sale of fixed assets, rent, dividend and treasury income. TRAI has accordingly raised a demand of Rs.500 crore as license fees payable on non-telecom revenue earned by STU from inception till date. The definition of AGR is currently being challenged by all telecom operators including STU. The telecom operators have contested this interpretation of TRAI and have filed a petition before the appellate tribunal seeking injunction against TRAI demands. What would be the auditor’s responsibilities in such a case?

    Analysis

The issue of payment of license fees on non-telecom revenue seems to be a pan-industry issue as against being specific to STU. The company has contested the demand raised by TRAI. However, the auditor would need to discuss with the Company’s legal counsel the basis of demands raised by TRAI and their tenability. The auditor may consider requesting STU to obtain a formal legal opinion in this regard. It would also help if the auditor were to understand as how this issue has been dealt with by STU’s competitors. Based on this evaluation, the auditor would need to assess whether a provision is warranted or a disclosure as contingent liability would be sufficient compliance.

    Case Study V

HIJ Pharma Limited (HIJ) is a pharmaceutical company engaged in the manufacture of life saving drugs. HIJ is required to adhere to pricing norms as prescribed under Drug Price Control Order (DPCO). During the year ended 31 March 20X1, it was observed that some of the drugs were sold at prices much higher than those prescribed under the DPCO. Under DPCO, companies are liable to deposit the overcharged amount to the Credit of Drug Prices Equalization Account, which was not actioned by HIJ. HIJ received demand for payment of Rs.400 crores to the credit of the Drug Prices Equalisation Account under Drugs (Price Control) Order for few of its products, which was contested by HIJ. Based on its best estimate, HIJ made a provision of Rs.100 crore in its books of accounts towards the potential liability related to principal and interest amount demanded under the aforesaid order and believed that the possibility of any liability that may arise on account of penalty on this demand is remote. What are the Auditor’s duties in this regard?

    Analysis

The management believes that the company would not be liable for any penalties. The auditor must ensure that adequate provisions are made in books to the extent of overcharged amount and interest thereon. Considering the provisions of AS 29 – Provisions, Contingent Liabilities and Contingent Assets – the auditor must also evaluate whether any need arises for disclosure as Contingent Liability of the amount of penalties leviable by DPCO.

    Concluding remarks

The auditor’s responsibilities for reporting compliance with applicable laws and regulations have increased manifold with the increasingly changing regulatory landscape in India. Though the auditor’s professional duty to maintain confidentiality of client information precludes reporting of an identified or suspected non-compliance with laws and regulations to any third party, given the legal framework in India, the confidentiality consideration is overridden by statute, the law or courts of law. For instance, under the present legal and regulatory framework for financial institutions in India, the auditor has a statutory duty to report the occurrence, or suspected occurrence of non-compliance with laws and regulations to the supervisory authorities. The auditor therefore needs to perform his duty with due care and exercise adequate professional skepticism while providing assurance on compliance with applicable laws and regulations.

Income Computation and Disclos URE Standards (ICDS) – No Tax Neutrality

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Background
The Indian Accounting Standards (Ind AS), the
Indian version of International Financial Reporting Standards, will have
significant impact on financial statements for many entities. Ind AS’s
are meant to primarily serve the needs of investors and hence are not
suitable for the purposes of tax computation. A clear need was felt for
tax accounting standards that would guide the computation of taxable
income.

The Central Government (CG) constituted a Committee in
December 2010, to draft Income Computation and Disclosure Standards
(ICDS). Section 145 of the Indian Income tax Act bestows the power to
the CG to notify ICDS to be followed by specified class of taxpayers or
in respect of specified class of income.

In August 2012, the
Committee provided drafts of 14 standards which were released for public
comments by the CG. After revisions, the CG has notified 10 ICDS
effective from the current tax year itself (viz. tax year 2015- 16) for
compliance by all taxpayers following mercantile system of accounting
for the purposes of computation of income chargeable to income tax under
the head “Profits and gains of business or profession” or “Income from
other sources”.

Earlier, the CG had notified two standards in
1996 viz., (a.) Accounting Standard I, relating to disclosure of
accounting policies. (b.) Accounting Standard II, relating to disclosure
of prior period and extraordinary items and changes in accounting
policies. They now stand superseded. These standards were largely
comparable to the current AS corresponding to AS 1 & AS 5.

ICDS
are meant for the normal tax computation. Thus, as things stand now,
ICDS has no impact on minimum alternate tax (MAT ) for corporate
taxpayers which will continue to be based on “book profit” determined
under current AS or Ind AS, as the case may be.

ICDS shall apply
to all taxpayers, whether corporate or otherwise. Further, there is no
income or turnover criterion for applicability of ICDS. An entity need
not maintain books of accounts to compute income under ICDS. However, if
the differences between ICDS and Ind AS/current AS as the case may be,
are several, an entity may need to evolve a more sophisticated system of
tracking them as against doing it manually on an excel spreadsheet. It
is possible that the current tax audit requirements will be enhanced to
require auditors to report on the correctness of tax computation under
ICDS. Non-compliance of ICDS gives power to the Tax Authority to assess
income on “best judgement” basis and also levy penalty on additions to
returned income.

List of ICDS
Following is the list of 10 ICDS notified w.e.f. April 1,2015:
1. ICDS I relating to accounting policies
2. ICDS II relating to valuation of inventories
3. ICDS III relating to construction contracts
4. ICDS IV relating to revenue recognition
5. ICDS V relating to tangible fixed assets
6. ICDS VI relating to the effects of changes in foreign exchange rates
7. ICDS VII relating to government grants
8. ICDS VIII relating to securities
9. ICDS IX relating to borrowing costs
10. ICDS X relating to provisions, contingent liabilities and contingent assets

KEY differences between icds and current as A few key differences between ICDS and current AS are given below:

ICDS I prohibits recognition of expected losses or markto- market losses unless permitted by any other ICDS.

During
the early stages of a contract, where the outcome of the construction
contract cannot be estimated reliably, contract revenue is recognised
only to the extent of costs incurred. This requirement is contained both
in AS 7 and ICDS III. However, unlike AS 7, ICDS III states that the
early stage of a contract shall not extend beyond 25 % of the stage of
completion.

AS 7 requires a provision to be made for the
expected losses on onerous construction contract immediately on signing
the contract. Under ICDS III, losses incurred on a contract shall be
allowed only in proportion to the stage of completion. Future or
anticipated losses shall not be allowed, unless such losses are actually
incurred.

Under AS 9, revenue from service transactions is
recognised by following “percentage completion method” or “completed
contract method”. Under ICDS IV, only percentage of completion method is
permitted.

Under AS 11, all mark-to-market gains or losses on
forward exchange or similar contracts entered into for trading or
speculation contracts shall be recognised in P&L. In contrast, ICDS
VI requires gains or losses to be recognised in income computation only
on settlement.

Under AS 11, exchange differences on a
non-integral foreign operation are not recognised in the P&L, but
accumulated in a foreign currency translation reserve. Such a foreign
currency translation reserve is recycled to the P&L when the
non-integral operation is disposed. Under ICDS VI, exchange differences
on non-integral foreign operations shall also be included in the
computation of income.

Under AS 12, government grants in the
nature of promoter’s contribution are equated to capital and hence are
included in capital reserves in the balance sheet. Under ICDS VII,
government grants should either be treated as revenue receipt or should
be reduced from the cost of fixed assets based on the purpose for which
such grant or subsidy is given.

Under AS 12, recognition of
government grants shall be postponed even beyond the actual date of
receipt when it is probable that conditions attached to the grant may
not be fulfilled and the grant may have to be refunded to the
government. Under ICDS VII, recognition of Government grants shall not
be postponed beyond the date of actual receipt.

Under AS 16, in
the case of borrowings in foreign currency, borrowing costs include
exchange differences to the extent they are treated as an adjustment to
the interest cost. Under ICDS IX, borrowing cost will not include
exchange differences arising from foreign currency borrowings.

AS
16 requires the fulfilment of the criterion “substantial period of
time” for treating an asset as qualifying asset for the purposes of
capitalisation of borrowing costs. ICDS IX retains substantial period
condition (i.e. 12 months) only for qualifying assets in the nature of
inventory but not for fixed assets and intangible assets. Therefore,
ICDS requires capitalisation of borrowing costs for tangible and
intangible assets even when they are completed in a short period.

Under
ICDS IX, capitalisation of specific borrowing cost shall commence from
the date of borrowing. Under AS 16, borrowing cost is capitalised from
the date of borrowing provided the construction of the asset has
started.

Unlike AS 16, income on temporary investments of
borrowed funds cannot be reduced from borrowing costs eligible for
capitalisation in ICDS IX.

Unlike AS 16, requirement to suspend
capitalisation of borrowing costs during interruption of active
construction of asset is removed in ICDS IX.

Under ICDS X, a
contingent asset is recognized when the realisation of related income is
“reasonably certain”. Under AS 29, the criterion is “virtual
certainty”.

Impact of ICDS
The notification of ICDS was imperative to ensure smooth implementation
of Ind AS, and therefore should have maintained a tax neutral position.
Unfortunately, ICDS are not tax neutral vis-à-vis the current Indian
GAAP and tax practices currently followed and may give rise to
litigation. For example, based on AS 7 Construction Contracts, the
current practice is to recognise any expected loss on a construction
contract as expense immediately. In contrast, ICDS will require expected
losses to be provided for using the percentage of completion method.

ICDS
I lays out the “accrual concept” as a fundamental accounting
assumption. The prohibition on recognising expected or mark-to-market
losses appears to be inconsistent with the accrual concept. Though
mark-tomarket losses are not allowed to be recognised, there is no
express prohibition on recognising mark-to-market gains. The ICDS
therefore appears to be one-sided, determined to maximie tax collection,
rather than routed in sound accounting principles. Matters such as
these are likely to create litigious situations despite the Supreme
Court decision in the Woodword Governor case where the status of ICDS is
upheld.

The preamble of the ICDS states that where there is
conflict between the provisions of the Income-tax Act, 1961 and ICDS,
the provisions of the Act shall prevail to that extent. Consider that a
company has claimed markto- market losses on derivatives as deductible
expenditure u/s. 37(1) of the Income-tax Act. Can the company argue that
this is a deductible expenditure under the Incometax Act (though the
matter may be sub judice) and hence should prevail over ICDS, which
prohibits mark-to-market losses to be considered as deductible
expenditure?

Under ICDS, exchange differences arising on the
settlement or on conversion of monetary items shall be recognised as
income or as expense. Consider that a company uses foreign currency loan
for procuring fixed asset locally. Now under ICDS, the exchange
difference on the foreign currency loan will be recognised in the
P&L A/c. Now consider the following decision in Sutlej Cotton Mills
Ltd. vs. CIT (116 ITR 1) (SC) “The Law may, therefore, now be taken to
be well settled that where profit or loss arises to an assessee on
account of appreciation or depreciation in the value of foreign currency
held by it, on conversion into another currency, such profit or loss
would ordinarily be trading profit or loss if the foreign currency is
held by the assessee on revenue account or as a trading asset or as part
of circulating capital embarked in the business. But, if on the other
hand, the foreign currency is held as a capital asset or as fixed
capital, such profit or loss would be of capital nature”. As per this
decision the exchange difference in our fact pattern will be
capitalised. However, under ICDS it will be recognised in the P&L
A/c. It is not absolutely clear whether the court decision or ICDS will
prevail in the given instance.

All ICDS (except ICDS VIII
relating to Securities) contain transitional provisions. These
transitional provisions are designed to avoid double jeopardy. For
example, if foreseeable loss on a contract is already recognised on a
contract at 31st March 2015, those losses will not be allowed as a
deduction again on a go forward basis using the percentage of completion
method. On the other hand, if only a portion of the loss was
recognised, the remaining foreseeable loss can be recognised using the
percentage of completion method. The detailed mechanism of how this will
work is not clear from the ICDS.

The transitional provisions
are not always absolutely clear. In the case of non-integral foreign
operations, e.g. non-integral foreign branches, ICDS requires
recognition of gains and losses in the P&L (tax computation), rather
than accumulating them in a foreign currency translation reserve. It is
not absolutely clear from the transitional provision whether the
opening accumulated foreign currency translation reserve, which could be
a gain or loss, will be ignored or recognised in the first transition
year 2015-16. Since the amounts involved will be huge, particularly for
many banks, the interpretation of this transitional provision will have a
huge impact for those who have not already considered the same in their
tax computation in the past years.

Some of the transitional
provisions are also expected to have a material unanticipated effect.
For example, the ICDS requires contingent assets to be recognised based
on reasonable certainty as compared to the existing norm of virtual
certainty. Consider a company has filed several claims, where there is
reasonable certainty that it would be awarded compensation. However, it
has never recognised such claims as income, since it did not meet the
virtual certainty test under AS 29. Under the transitional provision, it
will recognise all such claims in the first transition year 2015-16. If
the amounts involved are material, the tax outflow will be material in
the year 2015- 16. This could negatively impact companies that have
these claims. The interpretation of “reasonable certainty” and “virtual
certainty” would also come under huge stress and debate. This may well
be another potential area of uncertainty and litigation.

Overall,
the CG through CBDT will have to play a highly pro-active role to
provide clarity and minimise the potential areas of litigation. An
amendment of the Incometax Act would have been more appropriate rather
than a notification of the ICDS because the impact is expected to be
very high and all pervasive.

IT A No. 599/LKW/2012 (Unreported) IT O vs. Shri Sharad Mishra A.Y. 2009-10 Order dated: 12-06-2015

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Presence in India for less than three hours on the day of arrival cannot be considered as one complete day in order to compute number of days of stay in India for determining residential status.

Facts:
Taxpayer arrived in India on 25.10.2008 from Hong-Kong by a flight at 9.10 P.M. Relying on Walkie vs. IRC [1952] 1 AER 92, Taxpayer contended that as his presence in India on the day of arrival to India was less than 3 hours, it should not be included in calculating the number of days of stay in India and since his total stay in India is 181 days in the relevant financial year, he qualifies as a nonresident for the relevant financial year. However, the Tax Authority contended that the day of arrival of the Taxpayer in India should be included for calculating the number of days of stay in India. Thus, the Taxpayer would qualify as a resident of India.

Held:
Arrival of the Taxpayer in India at 9.10 P.M and consequent presence in India for less than three hours cannot be treated as his stay for one complete day and should be excluded while computing the number of days of his stay in India.

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TS-336-ITAT-2015(Mum) Flag Telecom Group Limited v DDIT A.Ys: 2001-09 Order dated: 15-06-2015

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Sections 9(1)(i) and 9(1)(vii) – Standby maintenance charges does not amount to Fee for technical services (FTS) under the Act. Restoration services for restoring the telecommunication traffic is in the nature of business income and income would be attributable to the extent of length of cable situated in territorial waters of India.

Facts 1
The Taxpayer, a company incorporated in Bermuda, was engaged in the business of building high capacity submarine fiber optic telecommunication link cable system. The Taxpayer had built under-sea cable to link between United Kingdom and Japan for providing telecommunication link to various countries. The Taxpayer entered into a Capacity Sales Agreement (CSA) with an Indian Company (I Co). As per CSA, the Taxpayer was required to provide standby maintenance services to I CO.

The Tax Authority contended that the payment for standby maintenance is for rendering technical services and hence it is in the nature of Fee for technical services (FTS) under the Act.

Held 1:
U/s. 9(1)(vii) of the Act, FTS is defined to mean any payment in consideration of managerial, technical, or consultancy services.

Payment made for standby maintenance is a fixed annual charge payable for arranging standby maintenance arrangement which is required in a situation when undersea cable is being repaired. It is for keeping facility or infrastructure ready for rendering repair services, when required. Such charges are not for rendering of any services. Thus, receipt on account of standby maintenance charges is not FTS under the Act.

Facts 2:
The Taxpayer had sold certain cable capacity to various parties including I Co. The balance capacity remained with the taxpayer as its stock. The Taxpayer also entered into another agreement with certain telecom cable operators who carried telecommunication traffic for I CO. As per this agreement, the taxpayer was required to restore traffic to telecom cable operators’ customer (I Co) in the event of disruption in the traffic on their cable system by providing an alternative telecommunication link route through its own spare capacity in the cable. For these services, I Co directly made payments to the Taxpayer.

The Tax Authority contended that payment made by ICo to the Taxpayer for restoration services was in the nature of FTS under the Act. On appeal, First Appellate Authority held that income was not in the nature of FTS but it was in the nature of business income and treated 10% of the global receipts of the Taxpayer as income taxable in India. The Taxpayer contended that restoration services were not in the nature of managerial or consultancy services. They merely involved provision of standard facility of carrying telecommunication traffic and accordingly income from such services was in the nature of business income. Further, as no operations were carried on in India except for the fact that small part of the entire cable system, about 12 nautical miles from the shore, was laid down by the Taxpayer in territorial waters of India, the amount of income attributable only to such portion should be taxed in India.

Held 2:
Restoration services does not fall within the ambit of ‘managerial’ or ‘consultancy services’, in the absence of direction, regulation, administration or supervisory or advisory activities by the Taxpayer.

The Taxpayer has a cable system network in which it has spare capacity, which is being provided to I Co on behalf of telecom cable operators in case of disruption in their cable network. This amounts to provision of a standard facility for carrying telecommunication traffic to other telecom service providers. It does not involve transfer of technology or rendering of technical services.

Simple use of sophisticated technical equipment for providing the capacity in the cable to I CO ipso facto does not lead to any inference that any technical service is being provided by the Taxpayer to I Co. The Taxpayer earned business income.

Since part operations are carried on in India, only that income which is reasonably attributable to the proportion of the length of the cable in the territorial waters in India to the segments on which restoration have been provided should be taxed in India.

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TS-430-AAR-2015 Measurement Technology Limited Order dated: 29-06-2015

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Article 13 of India-UK DT AA – Amount received for rendering ‘managerial services’ and ‘procurement service’ not FTS – Routine managerial services cannot be classified as royalty if no intellectual property is created – Service PE not established as period of stay does not exceed the threshold

Facts:
Taxpayer, a company incorporated in the United Kingdom (UK), was engaged in the business of development and supply of intrinsic safety explosion protection devices, field bus and Industrial networks, lightning and surge protection and gas analysis equipment. Taxpayer had a subsidiary in India (I Co) which was engaged in the business of manufacturing industrial control equipment used for process control in hazardous environments.

Taxpayer entered into two service agreements with ICo. Under Agreement 1, Taxpayer was required to provide following services to I Co

  • Strategy and direction of business development of ICo;
  • Attendance in person or by phone at regular operational meetings to discuss progress of activities, both financial and operational;
  • Management of personnel including conducting staff interviews, setting individual targets and carrying out performance appraisals; and
  • Any other services related to the above.

The services under Agreement 1 were to be provided through one of the employees of Taxpayer who was designated as Group Operational Director (GD). GD provided services through telephone calls, e-mails and occasional visits to India. It was not disputed that the total presence of GD in India was less than 30 days. As part of its services GD also monitored financial and operational progress of I Co along with overseeing human resource matters of I Co and also undertook quality and design reviews for I Co.

Under the Agreement 2, the Taxpayer provided procurement services to I Co. The Taxpayer constituted a procurement team in UK to look into the global sourcing requirement of raw materials for all its group entities including I Co to consolidate the group’s purchase requirements resulting in cost savings for the group.

The Taxpayer contended that the services provided did not satisfy the make available condition and hence they did not constitute FTS under India-UK DTAA .

The Tax Authority contended that services rendered by the Taxpayer were in the nature of technical and consultancy services. Further, as the Taxpayer was required to provide report containing the technical details and plans to I Co, it would satisfy the make available condition. Additionally, services of the Taxpayer also partake the character of royalties for the use of plan, or for information concerning industrial, commercial or scientific experience under India-UK DTAA .

Held:
India-UK DTAA was amended to exclude “managerial services” from the definition of FTS and to include the make available condition in the DTAA for taxation of FTS. Thus post-amendment, managerial services are not covered in the definition of FTS and even the technical or consultancy services cannot be treated as FTS if they do not meet the criteria of ‘make available’.

Services provided under both the agreements are managerial in nature. The activities are routine managerial and procurement activities and cannot be classified as technical or consultancy services. Moreover, by providing such services, taxpayer was not making available any technical knowledge of enduring benefit in nature which would enable employees of ICO to apply them on their own in future.

Further, services provided under both the agreements were general and routine in nature and did not create any intellectual property. Thus payments made to the Taxpayer did not qualify as ‘royalty’ under the India- UK DTAA .

Since visits to India were not for more than 30 days in a year, ‘Service PE’ would not be constituted in India.

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TS-386-ITAT-2015 ABB Inc vs. DDIT(IT) A.Y: 2009-10 Order dated: 30-06-2015

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Article 12 of India-US DT AA – Business development, market services and other support service do not satisfy make available condition and hence, no Fees for Included Services (FIS) under the DT AA. Where a Permanent Establishment (PE) is created in respect of trading transactions only, income from rendition of services cannot be attributed to the PE

Facts
The Taxpayer, a US Company, was engaged in providing business development, marketing services and other support services to its Indian associated enterprise (AE). The Indian AE was also involved in purchase and sale of Taxpayers’ products in India.

Taxpayer claimed that services rendered to its AE do not satisfy “make available” condition and hence it could not be characterised as FIS under the India-USA DTAA . However, Tax Authority contended that technical services rendered by the Taxpayer to its AE satisfy “make available” condition and thus they are taxable in India.

On further appeal before the Dispute Resolution Panel (DRP), it was held that services constituted FIS under India-USA DTAA . Additionally, without prejudice to FIS taxation, DRP held that since the Indian AE to whom services were rendered was also involved in the purchase and sale of Taxpayer’s products in India, such AE’s would constitute a dependent agent Permanent establishment (DAPE) of the Taxpayer in India and the amounts received for services rendered to the AE (which constituted DAPE for the Taxpayer) would be attributable to the DAPE and is to be treated as profits and gains from business.

Held
Relying on the decision of Karnataka HC in the case of De Beers India (P) Ltd. (2012) 346 ITR 467 (Kar), it was held that consideration for services cannot be brought to tax under the India US DTAA as these services do not enable the recipient of the services to utilise the knowledge or know-how on his own in future without the aid of the service provider. Further the services do not involve transfer of technology. Thus the payment received by the Taxpayer from its AE does not constitute FIS under India-USA DTAA .

Under India-USA DTAA business profits are taxable in Source State but only so much of them as are attributable to (a) that PE (b) sales in the Source State of goods or merchandise of the same or similar kind as those sold through that PE or (c) other business activities carried on in the Source State of the same or similar kind as those effected through that PE. Thus, where a PE is constituted in respect of the trading transactions only, no part of the income earned from rendering of services by the Taxpayer can be attributed to the PE.

Further in the absence of any finding that the Indian AE was paid remuneration less than arm’s length, nothing can be attributed to DAPE of the Taxpayer in India.

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Koyo Tech Electro (P) Ltd, [2013] 60 VST 235 (WBTT)

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Cancellation VAT- Registration of Dealer – Rented Place of Business – Whether Landlord Holds legal Ownership of Building Complete or Incomplete- Not For Department to Consider – Carrying on Business and Filing of Returns and Paying of Tax – Sufficient Enough For Grant of Registration, section 29 of The West Bengal Value Added Tax Act, 2003.

FACTS
The dealer company had rented the office premises on monthly rent and had obtained registration certificate under The West Bengal VAT Act, and, filed periodical returns and paid taxes. Subsequently the company received order from VAT department cancelling registration certificate. The company applied to the Joint Commissioner, for restoration of registration which was rejected after taking report from the lower authority who cancelled the registration certificate on the ground of incomplete construction of building, non- confirmation of ownership of the owner, etc. The company filed an application before The West Bengal Taxation Tribunal against the aforesaid cancellation of registration certificate as well as the confirmation thereof by the Joint Commissioner.

HELD
The fact that building in which office of the dealer was situated was in an incomplete stage could not be considered in framing opinion that business could not be carried out from such premises. Business can be carried on from makeshift room. Such office-cum-godown does not require to be housed in a well furnished room. Further, in rejecting the prayer for restoration of certificate of registration, the Joint Commissioner had viewed that the landlord from whom the dealer had claimed tenancy, failed to establish her ownership of the building. In making such observation, the concerned authority sought to assume the role of a civil court. This is totally unwarranted. The landlady in question was not under any obligation to prove her legal ownership in respect of the building at the time of inspection conducted by the respondents. The Tribunal after considering fact of carrying on business, filing of return and payment of tax by the dealer, allowed the application and restored the registration certificate granted to the dealer.

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State of Karnataka vs. Vasavamba Stores, [2013] 60 VST 19 (Karn).

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VAT – Rate of Tax – ‘Fryums’ are “Pappad”- Exempt From Payment of Tax, section 4(1)(b) and Entry 40 of Schedule 1 of The Karnataka Value Added Tax Act, 2004.

FACTS
The respondent Company, the manufacturer, sold ‘Fryums’ and claimed exemption from payment of tax under Entry 40 of Schedule 1 of The KVAT Act being covered by the term ‘Pappad’. The respondent company was reassessed and the authority levied tax under residuary entry by treating ‘Fryums’ as Sandige. The VAT Tribunal allowed appeal. VAT department filed revision petition before The Karnataka High Court against the order of the Tribunal. The High Court held in favour of the respondent company.

HELD
The High Court, following judgement of SC in case of Shiv Shakti Gold Finger [1996] 9 SCC544, held that the shape of the “Pappad” is not a relevant consideration when the ingredients are the same. Accordingly, the High Court dismissed the revision Petition filed by the State Government and confirmed the order of Tribunal holding ‘Fryums’ are “Pappad” hence exempt from payment of tax under the KVAT Act.

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[2015] 59 taxmann.com 128 (New Delhi – CESTAT) Uniworth Ltd vs. CCEST

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100% EOU are entitled to avail and utilise the CENVAT credit in respect of duty paid on inputs, even if other inputs are procured duty free under CT-3 procedure. The assessee can exercise both the options simultaneously.

Facts:
The Appellant is a 100% EOU and procured goods duty free. They also procured furnace oil on payment of duty and took CENVAT credit thereof. The adjudicating authority was of the view that the Appellant is allowed only one of the two options i.e. either to procure goods duty free or to pay duty and avail CENVAT credit. Therefore CENVAT credit taken of duty paid on furnace oil was disallowed.

Held:
The Tribunal observed that as per Rule 3 of the CENVAT Credit Rules,2004, 100% EOUs are fully eligible to take CENVAT credit of duty paid on inputs used in or in relation to the manufacture of final products because this rule does not make any exception as regards 100% EOUs. It held that Notification No. 18/2004-C.E. (N.T.) dated 06/09/2004 did not in any way affect the eligibility of the EOU from taking CENVAT credit; it only allowed them the facility to pay duty either by debit to the PLA or by debit to the CENVAT credit account. Reproducing Para 4 of Circular No. 54/2004-Cus., dated 13/10/2004 and decision In the case of Tata Tea Ltd. vs. CCE 2006 taxmann.com 1952 (Bang. – CESTAT), the Tribunal further held that the legal position is clear that the 100% EOUs are eligible to take CENVAT credit of duty paid on the raw material procured by them for use in or in relation to the manufacture of their final product. Accordingly the appeal was allowed.

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[2015] 59 taxmann.com 321 (Mumbai – CESTAT) CESTAT, MUMBAI BENCH-Inox Air Products Ltd. vs. Commissioner of Central Excise, Raigad

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CENVAT credit cannot be denied just because invoices are in the name
of Head Office/ another unit not registered as Input Service Distributor
(ISD).

Facts:
The assessee was engaged in the
manufacture of natural gases having units at various places. Assessee’s
one unit took credit of Customs House Agent (CHA) services where invoice
was in the name of Head Office; and also of machine repair services
where invoice was in name of another Unit. The demand of duty was raised
because the invoices under which the credit was availed were in name of
Head Office/other units and assessee was not registered as Input
Service Distributor.

Held:
Tribunal held that since
assessee had nine units manufacturing the same product, the doubt of
nexus of input and output products would never arise. It is quite
natural that the service provided by a CHA would be in the name of the
Head Office as the clearance of goods through customs is centralized.
The only basis for denying credit has been that invoices are either in
the name of another unit of the appellant or in the name of their Head
Office. Since doubt has never been raised regarding actual receipt of
services, credit cannot be denied.

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[2015 (39) STR 210 (Tri.-Mumbai) Commissioner of Service Tax, Mumbai-I vs. N.V. Advisory Pvt. Ltd

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Recipient of Services located outside India – Money received in convertible foreign exchange – fact that advice resulted in investment in India not relevant.

Facts:
The Respondent is providing services in the nature of advice on investment opportunities and is also providing back office operation support to the firms situated outside India. The payments are received in convertible foreign exchange. A refund claim was filed in respect of service tax paid on the input services used and consumed by them in the course of providing output services which were exported. The Adjudicating Authority rejected the claim. The Commissioner (Appeals) allowed the refund claim citing the CBEC Circular No. 111/5/2009-ST dated 24/02/2009 clarifying the term “used outside India” to mean that the benefit of the service accrues outside India. Therefore, revenue has preferred the present Appeal.

Held:
The Tribunal held that Rule 3(i)(iii) and Rule 3(2) of the Export of Services Rules, 2005 is satisfied as the recipient is located outside India and the payment is received in convertible foreign exchange. Relying on the Larger Bench decision of Paul Merchants Ltd vs. Commissioner of Central Excise, Chandigarh [2013(29) STR 257 (Tri. Del) the Tribunal allowed the refund claim. Accordingly, the plea of the revenue that the services were used for making investment in India and therefore cannot be treated as export, was dismissed. Further in the matter of back office support operations, relying upon the decision of Commissioner of Central Excise, Hyderabad vs. Deloitte Tax Services India Pvt. Ltd [2008 (11) STR 266 (Tri.-Bang)] the Tribunal held that since the client was situated outside India, it is an export of service.

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[2015-TIOL-1719-CESTAT-DEL] Commissioner of Service Tax-Delhi vs. Ishida India Pvt. Ltd.

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Effective use and enjoyment of service of procuring purchase orders is abroad and therefore the services are exported.

Facts:
The Respondent, a wholly owned subsidiary of a foreign company is engaged in procuring purchase orders from Indian customers on behalf of the foreign company. Goods are supplied in India and they receive “indent commission” in convertible foreign exchange at a predetermined percentage. A refund claim was filed for the service tax wrongly paid by them on the export of services. Adjudicating authority rejected the claim stating that the condition of export of services was not satisfied. Commissioner (Appeals) allowed the refund, therefore revenue is in Appeal.

Held:
The Tribunal noted that if the respondents did not canvass the purchase orders and sent it to the foreign company, there would be no supply of goods or use of goods in India at all. Therefore the service is definitely utilized/benefited by the foreign company. Merely because the goods supplied were ultimately used in India, cannot be a reason to hold that there was no export of the output service. Accordingly, it was held that the effective use and enjoyment of the service is by the foreign company and therefore refund is allowable as the services were exported.

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[2015-TIOL-1602-CESTAT-MUM] Commissioner of Central Excise, Nagpur vs. M/s Shri K. M. Sharma

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Charges levied on the basis of activities and material involved and not on the basis of number/nature or scope of manpower cannot fall under the category of “Manpower Supply and Recruitment Services”.

Facts:
Respondents undertook work as incidental to fabrication of Iron Steel Products supplied by the manufacturer. Department alleged that they provided services of Supply of Manpower. It was argued that the consideration is received and charged on per metric ton of output and is done on a job basis which was supported by the invoices. The First Appellate authority cancelled the demand, against which revenue is in appeal.

Held:
The Tribunal concurred with the views of the first appellate authority who noted that the charges do not have any nexus with the number/nature/scope of manpower supply and charges pertained to various types of activities and quantity of material involved. Further, the activity was with respect to goods which were still on the production line of the manufacturer, therefore the respondents were entitled to the benefit of exemption notification no. 8/2005-ST which exempts the taxable service of production of goods on behalf of the client. Relying on the decision of M/s. Ritish Enterprises vs. CCE, Bangalore [2010 (18) STR 17 (Tri.-Bang) the order of the first appellate authority was confirmed. A similar decision was also rendered in the case of Commissioner of Central Excise, Nagpur vs. Shri GM Mate, Shri Babulal Ladse [2015-TIOL-1663- CESTAT-MUM].

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[2015-TIOL-1593-CESTAT-DEL] M/s. Ambedkar Institute of Hotel Management vs. Commissioner of Central Excise and Service Tax, Chandigarh.

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Meals prepared at one’s own premises and simply supplied at pre-determined rates without getting involved in serving of meals in any manner would not be covered by the definition of outdoor caterer.

Facts:
Appellant is an institute providing mid-day meal to the schools under the Government Scheme. The institute prepares food as per the fixed menu and supplies to the schools and is neither supplying any crockery etc. nor is involved in serving the meal at the school. The department sought to levy service tax under outdoor catering service. Besides, the space in the institute was also made available to various persons for their functions. The Commissioner confirmed both the demands under outdoor catering and mandap keeper services respectively. Aggrieved by the same, the present appeal is filed.

Held:
The Tribunal noted that the Appellant was neither preparing the meals at the school nor serving them and the meals were only supplied at pre-determined rates. Accordingly, it was held that the activity was not a taxable service of outdoor catering. Though the Appellant was a ‘caterer’ within the meaning of section 65(24) of the Finance Act, 1994, the Tribunal stated that the service covered u/s 65(105)(zzt) of the Finance Act, 1994 was that of an “outdoor caterer” and not by a ‘caterer’. Further in respect of the second matter, it was confirmed that mandap keeper service was provided by them, however since the turnover was below the threshold limit, they were exempted from the service tax.

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[2015-TIOL-1453-CESTAT-MUM] Larsen and Toubro Ltd vs. Commissioner of Service Tax, Mumbai.

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A works contract can be vivisected prior to 01/06/2007 and be subjected to levy of service tax under “erection, installation and commissioning service”. Also, longer period of limitation invokable.

Facts
The Appellant had entered into six lumpsum turnkey contracts prior to 01/06/2007 each having three parts and a consideration for each of the parts viz. designing, procurement of various capital goods and thereafter installation of such goods was ascertainable. They were discharging service tax in respect of designing under “consulting engineer service”. No service tax was discharged in respect of the third part considering it to be an indivisible works contract comprising of both goods and services on the basis of the decision of the Tribunal in the case of Daelim Industrial Co. Ltd vs. CCE, Vadodara [2006(3) STR 124(T)]. Member (Judicial) and member (technical) had divergent views both in respect of taxability as well as invocation of extended period and therefore the matter was placed before the third member.

Held:
The third member distinguished the decision in the case of Daelim Industrial Co. Ltd (supra) by stating that the said decision has not taken into account the 46th constitutional amendment which inserted clause (29A) in Article 366 of the constitution mandating that the indivisible contracts could be split up and a part of it could be subject to tax. The member relying on the decision of the five member Bench reported in 2015-TIOL-527-CESTAT-DEL-LB held that works contract can be vivisected prior to 01/06/2007 and the service portion can be subjected to levy of service tax. In respect of extended period, the member noted that the same is a question of facts and law and stated that if the Appellant had a bonafide belief, they would have reflected the transaction as an exempted service in the service tax return and by not doing so, they had suppressed the material fact from the department. Further, it was also stated that though there are divergent views of various forums, a large number of them are based on Daelim Industrial Co. Ltd. (supra) which is irrelevant to the issue and the remaining are expressed after 2007. Thus, when tax was rightfully discharged in respect of designing activities it ought to have been discharged on the installation activity being the dominant service in these contracts and accordingly extended period invokable.

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Charitable trust – Exemption u/s. 11 – A. Y. 2008- 09 – Hospital – Application of income to objects and for purposes of trust – Charity Commissioner giving directions from time to time – Amounts charged or surcharges levied on bills given to indore patients – To be treated as income from activities of trust – Entitled to exemption u/s. 11

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DIT(Exemp) vs. Jaslok Hospital and Research Centre; 378 ITR 230 (Bom):

The assessee is a charitable trust running a hospital. For the A. Y. 2008-09, the assessee declared total income at Nil claiming exemption u/s. 11. The Assessing Officer found that the assessee levied surcharge of 20% on the bills given to the patients and recovered 25% of the fees paid to honrary doctors. The Assessing Officer treated these amounts as corpus donations and denied exemption u/s. 11. The Tribunal allowed the assessee’s claim and deleted the addition.

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

“i) T he Tribunal concurred with its earlier order in relation to exemption. Despite the directions of the Charity Commissioner, the Revenue could not insist that the amount charged or surcharges levied should not be treated as income from the activities of the trust. The authorities under the Income-tax Act are supposed to scrutinize the papers and related documents of the trust or the assessee so as to bring the income to tax and in accordance with the Income-tax Act.

ii) In such circumstances, the concurrent finding did not in any manner indicate that the directions issued by the Charity Commissioner are incapable of being complied with or liable to be ignored. The directions issued did not change the character of the receipts. The appeal does not raise any substantial question of law.”

TS-429-AAR-2015 SkillSoft Ireland Limited Order dated: 20.07.2015

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Article 12 of India-Ireland Double Taxation Avoidance Agreement (DT AA) –Payment for E-learning products providing access to E-learning platform and the educational content embedded in the form of computer software is royalty under India-Ireland DT AA

Facts
Taxpayer, a Company resident of Ireland, was engaged in providing on-demand e-learning content, online information resources, online courses, flexible learning technologies and performance support solutions (E-Learning products).

The Taxpayer had entered into a reseller agreement with an Indian Company (I Co) for the sale of E-learning products in India. I Co purchased E-learning products on principal-to-principal basis and sold the product to end users/customers in India in its own name. It also entered into license agreement with end users.

As per the license agreement, end-users were granted non-exclusive, non-transferable license to access E-learning products which enabled the users to access the E-learning platform and the educational content embedded therein.

Taxpayer contended that the payment received by it from ICo was for a copyrighted article and not for the copyright and therefore, it was not royalty under the DTAA . Tax Authority contended that consideration for license to use confidential information embedded in licensed software amounts to royalty under India-Ireland DTAA .

Held
E-learning products of Taxpayer consists of two components. First is the course content and second is the software through which course content is delivered to end-customer who gains access to specially designed software for understanding the content. Such especially designed software was not available in public domain but was licensed to I Co who in turn sub-licensed to endcustomers. Merely because the license had been granted on non-transferable and non-exclusive basis, it did not take away the software out of the definition of copyright. Further, the present case was not similar to an e-library or on-line banking facility provided by a bank.

To constitute ‘royalty’ under DTAA , it is not necessary to transfer any exclusive right. What is necessary is that the consideration should be for the use of or right to use any copyright. Reliance in this regard was placed on Karnataka High Court (HC) decision in the case of Synopsis International Old Ltd (212 Taxman 454).

Reliance was placed on AAR decision in the case of Citrix Systems Asia Pacific (343 ITR 1) to conclude that distinction between copyright vs. copyrighted article is illusory as copyrighted article is nothing but an article which incorporates the copyright of the owner/licensee and the permission for using such an article is also for the copyright embedded therein. Software and computer databases would qualify as “literary work” under the definition of royalty provided under the DTAA.

Thus the right to use confidential information embedded in the form of computer software programme would constitute royalty under the DTAA .

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TS-327-ITAT-2015 (Hyd) Locuz Enterprise Solutions vs. DIT A.Ys: 2008-09 and 2009-10 Dated: 03.06.2015

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Section 9(1)(vi), 195 – Payment for purchase of computer software for reselling to ultimate users, does not amount to royalty under the Act.

Facts:
Taxpayer, an Indian Co, was engaged in the business of trading of software. Taxpayer made certain payments to a non-resident (“NR”) for the purchase of computer software without withholding taxes on such payments u/s. 195 of the Act. Tax Authority contended that the payments were towards obtaining user license in the computer software and hence they represented use of copyright and accordingly being in the nature of royalty, were chargeable to tax in India.

The Taxpayer contended that it is a distributor of NR’s software products and the payments were made merely for the purchase of software for distributing them to the ultimate customers (i.e., the actual users of the software) in the prescribed territory. Accordingly, payments did not represent payment for use the software nor for acquiring license for use of the software and hence, were not royalty.

Held:
Taxpayer is purely a trader in software and not the user of the software. NR has appointed Taxpayer as nonexclusive distributor/re-seller of the software products of the for the territory.

The end user of the software products is not the Taxpayer but the customers in India, to whom the Taxpayer has sold the products.

Based on the agreement between the Taxpayer and NR, it is evident that the Taxpayer is a registered reseller, who books orders with NR on behalf of customers, collects payments and delivers software to the end users or customers. Further most of the time, the delivery is actually made via e-mail or via internet download. Since no ownership rights in the patents, copyrights relating to the software have been transferred by the NR to the Taxpayer, payment does not amount to royalty under the Act and hence taxes are not required to be withheld.

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[2015-TIOL-2225-HC-MAN-ST] Suprasesh General Insurance Services & Brokers Pvt. Ltd. vs. The Commissioner of Service Tax & CESTAT, Chennai

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Services of a re-insurance broker involves more than mere receiving and transmitting the premium to the re-insurer.

Facts:
The Appellant, an Insurance broker as well as a reinsurance broker paid service tax under “Insurance Auxiliary service” in respect of broking activity. However no service tax was paid for brokerage retained from the net premium remitted to the overseas re-insurer on evidencing it as export of service. The revenue demanded service tax on the said brokerage retained. The demand was confirmed holding that the services were rendered to the Indian insurance company by way of identifying re-insurer rendering consultancy and risk management services for re-insurance negotiation on behalf of the insurance company. The only service rendered to the overseas reinsurer is remittance of premia for reinsurance for which the commission is retained. So the service is rendered and consumed in India and not exported. It was further held that retention of brokerage cannot be termed as payment received in convertible foreign exchange. The Tribunal restricting the demand to the normal period of limitation confirmed the demand. Accordingly, the present appeal is filed.

Held:
The High Court relying on the decision of JB Boda and Co. Pvt. Ltd. vs. Central Board of Direct Taxes [1997- 223-ITR-271 (SC)] held that the Appellant is not merely receiving and transmitting the amounts to the overseas insurer but much more is done by the Insurance broker even as per the IRDA (Insurance Brokers) Regulations. He is required to furnish all the details about the risk involved, the premium payable, the period of coverage and the portion of the risk which is sought to be reinsured and thus serves the overseas insurer in the course of business. Accordingly it was held that the services are exported. Further, the Court noted the CBEC circular No. 56/5/2003 dated 25/04/2003 which clarified that service tax is a destination based consumption tax and is not applicable to export of service. Further, even under the Export of Service Rules, 2005, the proviso of receipt in foreign exchange applies only in respect of a recipient having a commercial or a business establishment in India and thus does not apply to the present case. Accordingly, it was held that the question of receiving the payment in convertible foreign exchange does not arise and thus the appeal is allowed.

[Note: Readers may note that sub-rule 3(2) of the Export of Service Rules, 2005 inserted with effect from 19/04/2006 provides that any service will be treated as export only if the amount is received in convertible foreign exchange. Further with effect from 01/07/2012, Rule 6A of the Service Tax Rules mandates receipt in foreign exchange to qualify as an export of service. However, the Apex Court in the case of JB Boda (supra) has held that retention of the amount would qualify as a receipt in foreign exchange to avoid the unnecessary two-way traffic which is an empty formality and a meaningless ritual. Accordingly post the amendment in the Rules, the retention of amounts from the payments to be remitted in foreign currency should qualify as a receipt in foreign exchange.]

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Software – sale vis-a-vis service

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Introduction
The menace of double taxation (i.e. VAT and Service Tax both on the same transaction) is increasing day by day. Both the authorities are trying to extract maximum out of the confused and unsettled legal position about attraction of VAT and Service Tax on certain type of transactions.

In relation to software, we come across sale/purchase transactions wherein both Service Tax and VAT are being levied. This is on account of uncertainty of legal position. There are different judgments from various Tribunals and High Courts.

Copyright in software
In relation to software, the sale/purchase transactions can take place on the premises that there is sale/purchase of copyright in the concerned software. However, whether there is sale/purchase of copyright either outright or by way of transfer of right to use goods is to be decided on the facts of each case. There can be certain guidelines based on decided cases.

Reference can be made to the judgment of the Hon’ble Karnataka High Court in the case of Sasken Communication Technologies Ltd. (55 VST 89) Karnataka.

In this judgment, it was observed that if the copyright is in regard to software developed for customer, firstly it belongs to the developer and thereafter if transferred to the customer for a consideration then it will be sale of software. There can be another situation, where the software is developed, wherein copyright from the inception belongs to the customer. In such circumstances, the software so developed belongs to customer only. The developer in such a case is rendering services. In such a situation, VAT is not applicable. Relevant observations of the High Court can be noted as under;

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

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

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

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

Uncertainty prevails
In spite of the above judgments, the disputes are still arising about attraction of both the taxes. Recently, there was a controversy before the Hon’ble Karnataka High Court, where three separate transactions about software were involved. The reference is to the latest judgment of the Hon’ble Karnataka High Court in case of Infosys Ltd. (Writ Petition no. 57023-57070/2013 dated 9.2.2015.

The facts in this case are that the appellant M/s Infosys was having 3 separate transactions. One for sale of ready software like “Finacle”, another transaction was that it could be customised as per requirement of the customer. Both these transactions were considered as sale and VAT on the same was charged.

The third transaction was about implementation of the software supplied to the customer. Appellant was contending that this is a separate transaction for only rendering services and cannot be made liable to VAT . However, the sales tax authorities considered such implementation part also as part of the total transaction of supply and customisation. So, VAT was levied on the full implementation charges also.

High Court’s observations
So far as implementation part is concerned, the Hon’ble High Court did not agree with the understanding of the authorities. The relevant observations of the Hon’ble High Court are as under;
“52. The understanding of the authorities is that the assessee has developed a software viz., ‘Finacle software’ which is a basic software relating to banking activities and is the copyright holder for the same. Whenever customer namely a bank approaches the assessee to develop software for their business activities, the assessee will take steps to develop the said software as per the requirement of the customers. In this activity, the assessee will make changes to the Finacle software held by it by customising the same to the requirement of the customers and will deliver the improved/modified version of the Finacle software to them. Here, what is transferred is the software with all modifications as per the request and the proposal made by the customers. This implementation process is nothing but value addition to the Finacle software, but the dealer while declaring the turnover, splits the said transaction into two parts namely, sale part and service part. This act of the dealer in splitting the contract as one for sale and the other for implementation of finacle software, thereby claiming exemption on the latter part is not correct because in almost all the instances, what is supplied by the assessee to the customers is the software as per the requirements and the amount received towards the whole process of customisation has to be considered as the amount received for the supply of customised Finacle software.

53.    From the aforesaid findings, it is clear that the Assessing Authority is of the view that the customisation is equivalent to implementation. During customisation when scripting or code writing is done in order to make the standard or package software useful to the client, the consideration paid for customisation constitutes the consideration for transfer of goods. The said aspect is not disputed by the assessee.

54.    What the assessee contends is that the assessee has the packaged software ‘Finacle’ a banking solution. If the said software cannot be used as such by the banks, then they make known their requirements to be incorporated in the said packaged software either by way of modifications, additions and so as to make it customer specific, which is called as customisation. What is sold by the assessee to the bank is the customised software and not the packaged software. It is clear from the invoice that for the consideration received for this customised software, the assessee has paid VAT because the assessee has copyright not only in the packaged software but also in the customised software and what is transferred to the bank is only the right to use the said software which is a deemed sale. After this customised software is installed in the premises of the bank, before bank starts using it, the process of integration with other systems has to be carried out. It is for that purpose a separate contract called service contract is entered into. The terms of the said contract as set out above involves only rendering service and rendering training to the employees of the bank, so that the installed software starts functioning. The terms of the agreement makes it clear that it is not obligatory for the bank/customer to have the services rendered only by the assessee as a part of contract of sale or a condition of sale. It is open to the customers to have the services rendered by any other competent agency. Therefore, the Assessing Authority has misconstrued this implementation to that of customisation of the software and erred in holding that the customisation involves transfer of goods and the assessee cannot avoid payment of VAT by describing the same as implementation.”

Thus, the Hon’ble High Court has appreciated that the transactions were independent. Further, where there is no transfer of copy right and only services are involved, no VAT can be levied.

Conclusion

The issue about dual taxation of VAT and Service Tax is a burning issue. The customers are suffering due to double levy by the vendors. The clarity of law is therefore very much required. We hope that with the help of above judgments both the concepts i.e. about independent nature of transactions and nature of transactions involving sale/purchase of software will become clear. Therefore, there will be some certainty and correct tax will be levied. We hope that authorities from both the departments will follow the judgment in the spirit of Law so as to overcome the problem of double taxation.

SOME BURNING ISSUES

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I Utilisation of education cess & secondary higher education cess for payment of excise duty & service tax.

Background
Education Cess (EC) was first introduced through the Finance Bill in 2004 as a surcharge with a purpose to fund basic education. Similarly, Secondary Higher Education Cess (SHEC) was introduced through the Finance Bill, 2007 as a surcharge with a purpose to fund secondary and higher education. In terms of sub-clauses (vi) (via) & (x) & (xa) of Rule 3(1) of the CENVAT Credit Rules, 2004 (CCR 04) a manufacturer of final products (MFP) or provider of output service (OSP) is allowed to avail CENVAT Credit on EC and SHEC. Further Rule 3(7) of CCR 04 provides that EC/SHEC on excisable goods and services can be utilised either towards payment of EC/SHEC on excisable goods or for payment of EC/ SHEC on taxable services. However, in view of specific restrictions provided under CCR 04, EC and SHEC on goods and services cannot be utilised towards payment of basic excise duty (CENVAT ) or service tax

Exemption from EC & SHEC
In a significant move, the EC levied u/s. 91 read with section 93 of the Finance Act, 2004 on excise duty is fully exempted vide Notification No. 14/2015-CE dated 1st March, 2015. Similarly, SHEC leviable u/s. 136 read with section 138 of the Finance Act, 2007 on excise duty is also fully exempted vide Notification no. 15/2015-CE dated 1st March, 2015.

Consequently, section 91 read with section 95 of the Finance (No.2) Act, 2004 and section 136 read with section 140 of the Finance Act, 2007 levying EC and SHEC respectively on taxable services have ceased to have effect from June 01, 2015 in terms of the said Notification No.14/2015- Service tax, dated 19th May, 2015.

Notification allowing utilisation of CENVAT credit on EC and SHEC towards payment of basic excise duty

Consequent upon exemption of EC and SHEC on excise duty, the government issued Notification No. 12/2015 – CE (NT) dated 4th April, 2015 allowing utilisation of CENVAT credit on EC / SHEC towards payment of basic excise duty. The Notification is reproduced below for ready reference:

“2. In the CENVAT Credit Rules, 2004 (hereinafter referred to as the said rules), in rule 3, in sub-rule (7), in clause (b), after the second proviso, the following shall be substituted, namely:- “Provided also that the credit of EC and SHEC paid on inputs or capital goods received in the factory of manufacture of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise leviable under the First Schedule to the Excise Tariff Act:

Provided also that the credit of balance fifty per cent EC and SHEC paid on capital goods received in the factory of manufacture of final product in the financial year 2014-15 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act:

Provided also that the credit of EC and SHEC paid on input services received by the manufacturer of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act.” [emphasis supplied]

Issues not addressed in the Notification
Although the above Notification has addressed some issues of the trade & industry, their primary concern remains unaddressed. Even after the amendment of Rule 3(7)(b) of CCR 04 utilisation of EC & SHEC towards payment of basic excise duty is not possible under various scenarios described below:

Unutilized balance of EC & SHEC of inputs, capital goods and input services as on 28th February, 2015.

EC & SHEC paid on inputs & input services received prior to 1st March, 2015 and CENVAT credit availed after 1st March, 2015.

Availment of first 50% credit of EC & SHEC paid on capital goods received prior to 1st March, 2015 and CENVAT credit availed after this date.

EC & SHEC credit availed on inputs and capital goods reversed prior to 1st March, 2015 in terms of Rule 4(5)(a) of CCR 04 and re-credits taken on or after this date.

EC & SHEC credit on input services reversed prior to March 01, 2015 and re-credit taken in terms of Rule 4(7) of CCR 04 on and after 1st March, 2015.

Re-credit taken of EC & SHEC on or after 1st March, 2015 in pursuance of any order of adjudicating authorities.

No Notification issued so far to allow utilisation of CENVAT credit on EC & SHEC for payment of service tax.

a) Effective 1st June 2015, the levy of EC & SHEC on services has been done away with. Although CBEC has issued Notification providing mechanism for utilisation of EC and SHEC for payment of excise duty on clearance of final products, corresponding provision for service tax on taxable output services is not provided for. Thus, differential treatment is provided to OSP compared to MFP, without any sound reasoning.

b) For the service providers, there could be a scenario wherein a service provider has availed credit on EC & SHEC on goods and services but not started providing any output services before 1st June 2015. Under such circumstances, there will be huge unutilised credit balance of EC & SHEC in the CENVAT credit account which cannot be utilised by such service provider unless the government allows such unutilised credit by issuing necessary clarification/amendment in CCR 04.

c) Since CCR 04 treats MFP & OSP at par for the purpose of utilisation of CENVAT credit, differential treatment will defeat the legislative intent of the government, to provide CENVAT credit benefit to the assessees across goods and services. Hence, an equal benefit needs to be extended also to service providers.

Suggestion
The Union Budget for 2015-16 has focused at making India an easier place to do business and has unveiled a number of facilitation measures to advance the said cause. In line with the said vision, the government should come out with an amendment in CCR 04 to mitigate the hardships faced by the trade & industry, so as to address primary concerns of the MFP & OSP. It is suggested that:

The government should amend sub Rule 7 of Rule 3 of CCR 04, by deleting the restriction imposed with reference to utilisation of CENVAT credit on EC & SHEC.

Further, the proviso recently incorporated under Rule 3(7) of CCR 04 vide Notification No. 12/2015 – CE (NT) dated 30th April, 2015 also requires to be deleted being restrictive in nature for the reasons explained above as it is creating hardship to industry due to large amount of CENVAT credit relating to EC & SHEC remaining unutilised.

II Services provided by agents/distributors of mutual fund or asset management companies.

Background
Prior to 1st April 2015, the following services were exempted from service tax under Mega Exemption Notification No. 25/2012 – ST dated 20th June, 2013 (as amended) :

Entry No. 29 – Services in relation to Mutual Fund or Asset Management Company by

i) Mutual Fund agent to a Mutual Fund or Assets Management Company

ii) Distributor to a Mutual Fund or Asset Management Company. With effect from 1st April, 2015, these exemptions have been withdrawn and consequent thereto an amendment is made vide Notification No. 7/2015 dated 1st March, 2015 in Reverse Charge Mechanism (RCM) contained in Notification No. 30/2012 – ST dated 20th June, 2012 (as amended), whereby 100% service tax on services provided by a MF Agent / Distributor to a MF/AMC is required to be paid by the recipient of service (viz. MF / AMC) as it used to be under the law prevailing till 30th June, 2012 in case of services of mutual fund agents or distributors.

Issue:

  •     Post 1st April, 2015, it is understood that MF/AMC discharge their service tax obligations and make payment of commission to agents or distributors of MF/ AMC after deducting the service tax paid by them under RCM. However, it is a well-known fact that the chain of MF/AMC intermediaries is not limited to merely agents or distributors but often goes up to three to four layers of sub–agents or sub–distributors.

In the scenario, relevant provision of Rule 2(p) of CCR 04 defining “output service” is examined below :

“Output service” means any service provided by a provider of service located in the taxable territory but shall not include a service –

………..

1    ……..

2    Where the whole of service tax is liable to be paid by the recipient of service”.

  •     Due to the above specific provision, agents and distributors of MF or AMC cannot avail CENVAT credit of service tax that may be paid by sub-agents /distributors in the chain and hence are unable to reimburse service tax to them inasmuch as they have already suffered tax through reduced commission (net of service tax) paid to them by Mutual Funds and/or AMCs.

This is resulting in a severe burden on the large section of MF and AMC intermediaries whereby there is a service tax incidence of 14% at every stage in the chain rendering the business model almost unviable The given scenario also is against the principle of value addition. This needs to be urgently addressed inasmuch as it could result in large number of MF/AMC intermediaries going out of business.

Suggestion

Rule 2(p) of CCR 04 defining output service needs to be amended whereby sub-clause (2) reproduced above is deleted. Alternatively, RCM provisions made applicable to services provided by agents/distributors of MF/AMC be done away with and instead service providers should be made liable to discharge service tax obligations so as to ensure that CENVAT chain is not broken. Another alternative is to provide exemption to sub-distributors/sub-agents under entry 29(a) of Mega Notification No. 25/2012-ST along with the exemption provided to sub-brokers of stockbrokers as sub-brokers of stock brokers and those of mutual funds are at par on this issue.

III    Commission received from overseas principals in convertible foreign exchange by business intermediaries in India

Background

  •     Business establishments in the country includes business intermediaries/agents who act as essential support link to the smooth running of small and medium businesses by ensuring stable supplies and in particular keeping overseas suppliers’ unbroken engagement in Indian markets at reasonable prices through regular marketing and other support services.In addition to providing employment in a sizeable measure, the said business intermediaries earn valuable foreign exchange for the country.

  •     Some recent amendment in service tax law has adversely impacted stated business intermediaries receiving commission from overseas principals in convertible foreign exchange. For the period prior to 1st July, 2012, commission received in convertible foreign exchange for services provided from India by intermediaries/agents (for goods and services) to overseas principals was considered as “exported services” Hence, the said commission was exempted from payment of service tax. However, post 1st July, 2012 a new concept of ‘Intermediaries’ is introduced in Place of Provision of Services Rules, 2012 (POP Rules), whereby intermediaries (for services) providing services from India to overseas principals were made liable to pay service tax despite the fact that commission is received by the said intermediaries in convertible foreign exchange in India.

  •     Further, vide Notification No.14/2014 dated 11th July, 2014 an amendment was made in Rule 9 of POP Rules whereby, even intermediaries/agents for goods have been made liable for service tax with effect from 1st October, 2014, despite the fact that they receive commission from overseas principals in convertible foreign exchange in India.

Issue:

  •     The principal concern of trade & industry is that the stated policy of the government is, “we need to export our goods & services and not our taxes”. Hence, levying service tax on commission received by intermediaries in convertible foreign exchange in India from overseas principals is contrary to this policy and also contrary to taxation practice prevalent in VAT/ GST systems worldwide.

  •     The service tax amendments made with effect from 1st July, 2012 and 1st October, 2014 has resulted in an unprecedented scenario, whereby an intermediary receiving commission in convertible foreign exchange in India is taxed whereas an intermediary based outside India to whom commission is paid from India (other than for exports) in convertible foreign exchange would not be liable for service tax under reverse charge mechanism.

  •    It is impossible for the business intermediaries to pass on service tax of 14% to the overseas suppliers, unlike other service providers. Hence, this has resulted in a huge cost burden for the business intermediaries in India. It is apprehended by the trade & industry that the total tax incidence (Central & States) under GST regime could be as high as 27% based on report presented by a Sub-Committee to the Empowered Committee of State Finance Ministers. This would be in addition to the peak income tax of 33%(+). The same would have a cumulative impact of rendering the business of intermediaries in India commercially unviable. There is an imminent prospect of thousands of small & medium sized intermediaries existing across the country going out of business resulting in loss of livelihood and creating unemployment as well.

Suggestion

In order to ensure that there is consistency vis-a-vis stated policy of the government for the exports and also adherence to taxation practices followed worldwide with an objective of keeping costs of exports minimal to achieve global competitiveness, due encouragement is required to be provided to businesses carried out by thousands of self-employed individuals or small and medium enterprises and earning foreign exchange. In order that their businesses are not rendered unviable, the following is suggested:

Appropriate amendment be carried out in Rule 9 of POP Rules, whereby concept of ‘Intermediary’ is done away with, in cases where recipient of service is located outside India and commission is received in convertible foreign exchange by Intermediaries (for goods & services) in India. Alternatively, Rule 9 of POP Rules be amended with immediate effect, to restore exemption hitherto available to commission received by intermediaries for goods in India from overseas principals in convertible foreign exchange. If the objective of the government was to provide relief to exporters of goods paying commission to overseas intermediaries, the same can be extended by granting exemption in the same manner as provided prior to 01/07/2012.

Welcome GST – Part II VA T (GST) in Australia & New Zealand

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Preface
In continuation of our discussion on evolution of VAT and its journey to India, while Indian GST is still to be legislated, let’s try to understand in brief the practices being followed in some of the leading countries the world over.

VAT (GST) in Australia

Introduction
The Federal Government of Australia introduced the system of Goods and Services Tax (GST), throughout the country, with effect from 1st July 2000. GST has replaced the age old system of Wholesale Sales Tax, (which was prevalent in Australia) and many other taxes, duties and levies such as banking taxes, stamp duties etc., (which were being levied by various States and Territorial Governments).

Threshold
Business Enterprises : T urnover of GST supplies Australian Dollar (A$) 75,000 Non-profit
Non-profit Organisations : Turnover of GST supplies Australian Dollar (A$)1,50,000
Provider of Taxi Travel : Nil

Business Enterprises/charitable organisation having annual turnover below the threshold may opt for voluntary registration.

Business Enterprises are defined as follows:
An enterprise includes a business. It also includes other commercial activities but does not include:

• Private recreational pursuits and hobbies,
• Activities carried on as an employee, labour-hire worker, director or office holder,
• Activities carried on by individuals (other than trustees of charitable funds) or partnerships (in which all or most of the partners are individuals) without a reasonable expectation of profit. It however includes the activities of entities such as charities, deductible gift recipients, religious and government organisations, and certain non-profit organisations.

The term ‘sales’ (supplies) includes: Sale of goods or services, leasing of premises, hiring of equipments, providing advice, exporting goods, etc. However, a sale (supply) will fall in one of these three categories:

1. Taxable Sale
2. Input Taxed Sale
3. GST Free Sale

Registration:
There is very simple procedure for registration. Once a business enterprise or an organisation is liable to register on the basis of crossing the threshold, it needs to apply for registration [to obtain Australian Business Number (ABN)], within 21 days, to the Australian Tax Office (ATO) either online via the Business Portal External Link, or by phone (by calling on a given number) or through a registered tax agent or BAS agent. On satisfactory submission of necessary details, the registering authority will notify the ABN to the applicant.

Similarly, a business enterprise or an organisation may apply for voluntary registration any time as it may desire.

Coverage
GST is levied on all taxable sale/supply of goods, properties and services. It is to be paid by a taxable person, who sells/supplies such goods, properties and/or services for a consideration.

The consideration may be monetary or otherwise. The non-monetary considerations may be such as barter transactions or payment in the form of refraining from doing something, etc.

Certain kind of transactions in land and buildings are covered under taxable sale/services. The term ‘property’ includes; an interest or right over land, a personal right to call for or be granted any interest in or right over land, and a licence to occupy land or any other contractual right exercisable over or in relation to land. Sale of newly constructed premises (whether commercial or residential) are included in the category of ‘taxable sales’.

Exemptions (Tax free sales)
1. Exports
2. GST free products and services
3. Sale of a business as a going concern

Exports:
Export of goods and services from Australia to any foreign destination are generally tax free (zero rated). Thus, no tax is levied on exports but full input tax credit is available to the exporters.

It may be noted that exported goods are generally tax free (zero rated) if they are exported from Australia within 60 days from one of the following, whichever occurs earlier:

(1) The supplier receives any payment for the goods,
(2)  The supplier issues an invoice for the goods so exported

And in case of services – broadly the supply of service/s are GST free (zero rated) if the recipient of service is outside Australia.

There is also a Tourist Refund Scheme whereby a receipt for goods with a combined total over A$ 300 is eligible for a refund of any GST paid upon exiting the country with refunds claimed at a TRS (Tourist Refund Scheme) counter at the airport. The advantage of this arrangement is that goods purchased 60 days prior to departure may be freely used within Australia prior to departure as long as they are carried in hand luggage and presented when making a refund claim, or shown to customs officials before being checked in as baggage.

GST free products and services
Certain goods and services are tax free (zero rated). The sale/supply of such goods and services are not liable for GST but full input tax credit is available to the seller/supplier. The list of GST free products and services includes:

Most of the items of food and beverages, some medical and health care services, specified medicines, medical aids & equipments, educational courses, course material, child care services, religious services, some of the charitable activities, supply of accommodation and meals to residents of retirement villages, cars for disabled people, water sewerage & drainage services, precious metals (such as Gold, Silver, etc.), sale of goods through duty free shops, farm land, grant of land by Government, international mail, specified tele-communication services, etc.

Sale of a business as a going concern
The Sale of a business as a going concern is GST free (zero rated) if all of the following conditions are satisfied:

(1) Everything necessary for the business’s continued operation is supplied to the buyer,
(2) The seller carries on the business until the day it is sold, that is, until settlement,
(3) The buyer is registered or required to be registered for GST, and
(4) Before the sale, the buyer and seller agree in writing that the sale is as a ‘going concern’.

Input Taxed Sales
Certain types of transactions of sale/supply of goods and/ or services are categorised as Input Taxed Sale. No tax (GST) is levied on the sale/supply of such goods and/or services as the case may be, but such transactions are not eligible for input tax credit, These include; banking and financial services, and supply of residential premises by way of rent or sale.

Financial sales (supplies) are defined under the GST Regulation. Examples include: Lending or borrowing money, buying or selling shares or other securities, creating, transferring, assigning or receiving an interest in, or a right under a super fund.

Charitable institutions (non-profit organisations) are permitted to have input taxed sales of food by school tuck shops and canteens, etc.

Taxable Sale
Sale of goods and services, that must have GST included in their price, are referred to as ‘taxable sales’. The term ‘taxable sale’ does not include sale/supplies which are described as (1) GST Free Sales and (2) Input Taxed Sales. Thus sale/supply of all goods and services (other than GST Free and Input Taxed Sale) are taxable sale, if such sale/supplies are made by a taxable person (i.e. a business enterprise or an organisation registered or liable for registration), and such sales/supplies are made;
1. for a consideration,
2. in the course of furtherance of business (enterprise), and
3. the sale is connected with Australia

It may be noted that:

1.    Consideration may be monetary or non-monetary such as barter or refraining from doing something.
2.    Only those goods and services are considered as taxable sales which are sold/supplied as part of conducting business. It will also include sale of business assets such as machinery, equipments, vehicles, etc. And it also includes things done during the course of setting up or winding down the business.

3.    A sale of goods is connected with Australia if the goods are any of followings:-
(i)    Delivered or made available to the purchaser in Australia
(ii)    Removed from Australia (however exports of goods and services, as described above, are generally tax free)

(iii)    Brought to Australia – provided the seller either imports the goods or installs or assembles the goods in Australia.

4.    A sale of property is connected with Australia if the property is situated in Australia.
5.    A sale/supply of something other than goods and property is connected with Australia if any of the following applies:

(i)    The thing is done in Australia

(ii)    The seller makes the sale/supply of thing through a business which is carried on in Australia
(iii)    The sale/supply is a right or option to purchase something that would be connected with Australia.

Rate of  Tax

Australia has adopted the single rate of GST @ 10% on sale/supply of all taxable goods, properties and services.

Input Tax Credit (ITC)

A registered tax payer as well as a required to register tax payer is entitled to claim input tax credit of GST paid on goods and services acquired for the purposes of its business (except in case of input taxed sales).

There are provisions to work out input tax credit in case of mixed sale such as ‘taxable sale’ and ‘input taxed sale’, and, in case of mixed purchases (acquisitions) i.e. purchases for the purposes of business and for personal use.

The only document required, for the purposes of claiming Input Tax Credit, is the possession of ‘Tax Invoice’ issued by the supplier. Input tax credit in respect of any purchases (acquisitions) of the value exceeding A$ 82.50 can be claimed only on the basis of ‘tax invoice’ issued by the seller/supplier. However, ITC on small purchases having value up to A$ 82.50 can be claimed even without a ‘tax invoice’ (i.e. on the basis of records maintained by the purchaser).

There is a four years time limit to claim input tax credit.

Tax Invoice

It is necessary for a ‘tax payer’ (seller/suppler of taxable goods/services) to issue ‘tax invoice’ to its customer for sales/supplies exceeding A$ 82.5 (including GST). The time limit for issuing tax invoice is 28 days from the date of supply. A purchaser can claim input tax credit only after receiving ‘tax invoice’ from its supplier. If the supplier fails to issue a tax invoice within the prescribed period of 28 days, the purchaser can seek permission from the concerned GST authorities for claiming input tax credit on such purchases (acquisitions).

For sales/supplies of up to A$ 82.50, the supplier can either issue a ‘tax invoice’ or ‘invoice’ or ‘cash docket’ or a ‘receipt’. The purchaser can claim input tax credit on the basis of such ‘invoice’ or ‘cash docket’ or a ‘receipt’, etc., as the case may be.

In absence of any such document (from the supplier), the purchaser still can claim input tax credit of such small purchases on the basis of his own books/diary having full particulars of such purchases such as description of purchases, quantity, date, price paid and the ABN of the supplier. There is also a provision for Recipient Created Tax Invoice.

Essential Ingredients of a Tax Invoice

Tax invoices for taxable sales of less than A$1,000 must include enough information to clearly determine the following seven details:

1.    that the document is intended to be a tax invoice

2.    the seller’s identity

3.    the seller’s Australian business number (ABN)

4.    the date of issuing tax invoice

5.    a brief description of the items sold, including the quantity (if applicable) and the price
6.    the GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, as a statement such as ‘Total price includes GST’

7.    the extent to which each sale on the invoice is a taxable sale (that is, the extent to which each sale includes GST).
In addition to above, a ‘tax invoice’ of A$ 1000 and above must contain ABN of the purchaser, Interstate sales/ supplies

All taxable sales/supplies within Australia are liable to single rate GST (whether sold within a particular state or inter-state).

It may be noted that Australia is having federal structure. There is a Central Parliament called ‘common wealth parliament’, six states and two major territories, each having a separate parliament. The states are sovereign entities, subject to certain powers of the Commonwealth as defined by the Constitution. Australian Constitution governs the rights of Federal Legislative Powers and States Legislative Powers.

As far as GST is concerned, it is collected and administered by the Federal Parliament and the revenue is distributed to the States under a set system.

Sales/supplies within the Group Enterprises There are provisions whereby related entities may form a single group for GST purposes.

An entity may separately register a branch for GST purposes if this suits its management and accounting structure. Two or more related entities may form a GST group if they satisfy certain membership requirements.

GST groups are treated as a single entity. Generally, transactions between group members are ignored for GST purposes. So, there is no tax on inter-group supplies and so no input tax credit to the receiver.

One entity, known as the representative member, manages the group’s GST affairs. The representative member is responsible for the GST payable and can claim the GST credits on transactions undertaken by group members (except transactions between group members).

The representative member is the only group member who must complete the GST component of an activity statement. In doing this, the representative member will effectively be accounting for the group’s total GST liability. However, if an entity opts to register separately a branch for GST purposes, the branch operates as a distinct entity for reporting purposes, accounting for GST separately from its parent entity. Thus, unlike GST groups, transactions between the branch and the parent entity will be taxable and GST credits can be claimed accordingly.

Filing of Returns & Payment of Taxes

A ‘Taxable Person’ is required to submit Business Activity Statement (BAS) generally quarterly and the taxes are required to be paid accordingly within 28 days from the end of reporting period. But, certain dealers (tax payers) have to submit their statement on monthly basis, within 21 day from the end of month, such as those dealers whose annual GST turnover is A$ 20 million or more. Small dealers are permitted to submit BAS annually.

There are also provisions whereby a dealer (having annual turnover of less than A$ 20 million) can be permitted to make payment of GST quarterly and the BAS is submitted annually. There is also an easy installment payment scheme for small dealers having turnover up to A$ 2 million. The Financial Year in Australia is from 1st July to 30th June.

For payment of taxes, there are various options such as internet banking, credit/debit card, direct transfers, through cheque/money orders, and, also through cash payment at post offices (up to A$ 3,000). The monthly/quarterly or annual BAS to be submitted mainly electronically either through ATO’s business portal or directly from business software enabled for Standard Business Reporting (SBR) or through myGov account linked to Australian Tax Office (ATO). However, there is also a facility to submit paper return by post (in specific circumstances). And, if there is no activity to report during the period i.e. if it is a ‘NIL turnover return’, it can be just reported on phone to the ATO.

There are prescribed provisions regarding accounting for GST purposes for different classes of tax payer such as accounting on cash basis, normal mercantile basis and there are also separate provisions regarding sale of goods made under ‘lay by sale agreement’ (i.e. goods identified by the purchaser, initial payment made, the balance payable in installments and the delivery of goods on receipt of final payment).

There are also provisions for simplified accounting methods to make calculating GST easier for the retailers such as bakeries, milk bars, convenience stores, etc.

Assessment

Australia has adopted Self Assessment System since 1st July 2012. The periodic Activity Statement submitted by the tax payer is treated as notice (order) of assessment.

Refunds

Refunds, if any, due to the tax payer as per periodic Business Activity Statement submitted by the tax payer, are granted within prescribed time limit of 14 days from the date of submitting return, and, the same is directly sent to the nominated bank account of the tax payer (unless withheld for any further enquiry or investigation or for adjusting against earlier dues). No separate application is required for claiming refund.

VAT (GST) in New Zealand

GST in New Zealand was introduced much earlier i.e. with effect from 1st October 1986. Its introduction represented a major change in New Zealand’s taxation policy as until this point almost all revenue had been raised via direct taxes. It is administered by the Inland Revenue Department of Government of New Zealand.

Most of the provisions under New Zealand GST Law are similar to those as discussed in Australian GST, with a few exceptions. One major notable difference is the rate of GST. It was 10% at the time of introduction in the year 1986. But, since then it has undergone two changes; first in the year 1989, it was raised to 12.5% (on 1st July 1989) and thereafter in 2010 it was raised to 15%. At present, it is 15%, effective from 1st October 2010.

However, there is no departure from the concept of single rate GST. It is the same rate applicable to all taxable goods and services. Overall, the broad scheme of taxation is the same in Australia and New Zealand.

Some minor differences in procedures may be such as the registration threshold is 60,000 New Zealand Dollars. Application for registration is to be made within 21 days from the date of liability, etc.

A registered tax payer is liable to pay GST (under the same value added tax system i.e. Output Tax – Input tax credit), either on monthly, two monthly or six monthly basis, within 28 days from the end of reporting period. Periodic returns can be filed either online or in paper form Taxes to be paid generally online but cheque payment facility is available to small tax payers. The refunds are granted within 15 working days from the date of submission of periodic return in which refund is claimed by the tax payer.

(To be continued – GST in Singapore, Malaysia, EU countries.)

National Agricultural Co-operative Marketing Federation of India Ltd. vs. JCIT ITAT Delhi Special Bench `F’ Bench Before Justice (Retd.) Dev Darshan Sud (President), G. C. Gupta (VP) and R. S. Syal (AM) ITA Nos. 1999 & 2000/Del/2008 Assessment Years: 2001-02 & 2002-03. Date of Order: 16th October, 2015. Counsel for assessee / revenue : Hiren Mehta & Sanjeev Kwatra / Sulekha Verma

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Section 37(1) – If a claim of damages and interest thereon is
disputed by the assessee in the court of law, deduction cannot be
allowed for the interest claimed on such damages. Deduction can be
allowed only when an enforceable liability to pay the same arises
irrespective of the fact that it relates to earlier years.

Facts
For
assessment year 2001-02, the assessee filed its return of income and
the assessment was completed on 27.2.2004 u/s. 143(3) of the Act. During
the course of assessment proceedings for AY 2003-04, a special audit
u/s. 142(2A) was carried out which divulged interalia that the assessee
had claimed deduction for interest payable to M/s Alimenta SA
Switzerland (`Alimenta’) on account of arbitration award, which was
disputed by the assessee. The Assessing Officer (AO) observed that the
assessee claimed deduction of interest amounting to Rs. 7.92 crore
payable to Alimenta for AY 2001-02. Such interest was not debited to P
& L Account, but was directly reduced in the computation of total
income. He also observed that since tax was not deducted at source,
amount was not allowable u/s. 40(a)(i) as well. Notice u/s. 148 was
issued and duly served on the assessee.

In the course of
assessment proceedings, the AO noticed that the claim for deduction was
not backed by any corresponding liability to pay; the liability claimed
by the assessee as deduction was not acknowledged due to ongoing
litigation and proceedings for compromise. He also noticed that the
assessee had not deducted tax and therefore in view of provisions of
section 40(a)(i), as well, the amount was not allowable. He rejected the
assessee’s contention that there was a breach of contract on its part
for which the Delhi High Court held it liable for loss incurred by
Alimenta and also interest @ 18% per annum from the date of award till
the date of realisation; the judgment delivered by Delhi High Court was
binding, the liability was determined and ascertained because of the
decree of the Delhi High Court notwithstanding the assessee filing an
appeal against it.

The AO disallowed the assessee’s claim.
Aggrieved, by the additions made, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved,
by the order passed by CIT(A), the assessee preferred an appeal to the
Tribunal. Similar issue was decided in favor of the assessee, by the
Tribunal, for assessment years 2003-04 and 2004-05. The Division Bench
was not convinced with the reasoning given by the Tribunal in its order
for AY s 2003-004 and 2004- 05 in deleting the disallowance of interest
and made a reference for constitution of a Special Bench.

The President posted the following question for consideration of the Special Bench-

“Whether
on the facts and circumstances of the case, where claim of damages and
interest thereon is disputed by the assessee in the court of law,
deduction can be allowed for the interest claimed on such damages while
computing business income?”

Held
(i) Under the
mercantile system of accounting, an assessee gets deduction when
liability to pay an expense arises, notwithstanding its actual
quantification and discharge taking place subsequently. The relevant
criteria for the grant of a deduction is that the incurring of liability
must be certain. If the liability itself is uncertain, it assumes the
character of a contingent liability and ceases to be deductible. Thus, a
deduction can be allowed only when an assessee incurs liability to pay
an amount in the nature of an expense. The aspect of incurring a
liability needs to be understood in a correct perspective. It is here
that a distinction between a contractual and a statutory liability
assumes significance. A statutory liability is incurred on a mere
issuance of a demand notice against the assessee and becomes deductible
at that point of time. The factum of the assessee raising a dispute
against such a demand does not ruin the incurring of liability. On the
contrary, a contractual liability is not incurred on a mere raising of
demand by a claimant. It arises only when such a claim is either
acknowledged or in a case of non-acceptance, when a final obligation to
pay is fastened coupled with the claimant acquiring a legal right to
receive such an amount. Unless the claimant acquires an enforceable
right to receive, it cannot be said that the first person has incurred a
liability to pay such an amount. To put it simply, in the case of a
contractual dispute between the parties, liability of the assessee to
pay arises only when the claimant against the assessee acquires some
legal right to receive the amount. In the absence of the vesting of any
such right in the claimant, neither he earns any income nor the assessee
incurs a corresponding liability to pay, entitling him to claim
deduction for the same. The crux of the matter is that, except for the
assessee accepting a contractual claim, his liability to pay does not
arise until some legal obligation to pay is fixed on him. A legal
obligation to pay is attached on an assessee when a competent court
passes order and a suit is decreed against him and not during the
pendency of litigation. This difference between a contractual and a
statutory liability has been recognised by the Hon’ble Delhi High Court
in assessee’s own case since reported as National Agricultural
Co-operative Marketing Federation of India Ltd. vs. CIT (2011) 338 ITR
36 (Del).

(ii) On facts, the legally enforceable liability
against the assessee to pay interest at the rate of 18% to Alimenta,
which was created by the decree of the ld. Single Judge dated 28.1.2000,
remained suspended from the date of stay granted by the Division bench
of the Hon’ble High Court on 28.2.2001. It is only on the passing of the
consequential judgment and decree by the Hon’ble Delhi High Court in
September, 2010, subject to certain stays etc. granted against the
operation of this judgment, that the assessee incurred a legally
enforceable liability to pay such interest to Alimenta.

(iii)
Now the moot question is, whether the assessee is entitled to deduction
for interest at the rate of 18% decreed by the ld. Single Judge of the
Delhi High Court in the computation of income for the years under
consideration. The answer will be in affirmative if the assessee had any
legal obligation to pay such interest during the years in question and
vice versa. We can do this by ascertaining if any legally enforceable
liability existed against the assessee to pay interest in the years
under consideration. Per contra, was Alimenta legally entitled to
receive such interest income during the years in question? It is
pertinent that the stay order against the judgment and decree of the ld.
Single Judge was passed by the Division Bench on 28.2.2001, which is
well within the financial year relevant to the assessment year 2001-02
under consideration and remained operative in subsequent years including
the immediately succeeding year in appeal. This shows that the assessee
did not have any legal obligation to pay interest during these two
years. The hitherto obligation which was created by the judgment of the
ld. Single judge against the assessee was eclipsed and frustrated by the
later judgment of the Division bench and such obligation ceased to
exist for the time being.
iv)     Unless     there     is     a     specific     contrary     provision, deduction for an expense can be allowed in the year in which     liability     to     pay     finally     arises.    Once     a     person     has    not voluntarily accepted a contractual obligation and further there subsists no legal obligation to pay qua such contractual claim at a particular time, it cannot be said that the person incurred any liability to pay at that point of time so as to make him eligible for deduction on that count. Not withstanding the fact that obligation relates to an earlier year, the liability to pay arises only in the later  year,    when    a    final    enforceable    obligation    to    pay    is    settled    against that person. In our considered opinion, there is  no qualitative difference between the two situations, viz.,  first,     in    which     no     enforceable     liability     to     pay     is     created    in     the     first     instance,     and     second,     in     which     though     the enforceable liability was initially created but the same stands wiped out by the stay on the operation of such enforceable liability. In both the situations, claimant remains without any legal right to recover the amount and equally the opposite party without any legal obligation to pay the same. neither any income accrues to the claimant, nor any deduction is earned by the opposite party. We are instantly confronted with the second type of situation in which the obligation created against the assessee by the judgment of the ld. Single judge on 28.1.2000 was stayed by the judgment of the  division Bench on 28.2.2001, which position continued till the decree on the judgment dt. 6.9.2010 reviving the judgment of the ld. Single judge, became enforceable. even though the crystallization of liability of the assessee to pay interest pursuant to the developments after 6.9.2010 also covers earlier years including the years under consideration, but such liability of the assessee became due only on the acquisition of right by alimenta to enforce the decree issued on the advent of the judgment dated 6.9.2010. Consequently, the assessee can claim deduction for such interest only at such a later stage and not during the years under consideration.

(v)  The Special Bench answered the question posted before it in negative by holding that in the facts and circumstances of the case, where claim of damages and interest thereon is disputed by the assessee in the court of law, deduction can’t be allowed for the interest claimed on such damages in the computation of business income.

[2015] 173 TTJ (Pune)(UO) 17 Bhavarlal Hiralal Jain & Others vs. DCIT ITA No. 735 to 738 & 778 to 780/Pn/2013 Assessment Year: 2009-10. Date of Order: 28th November, 2014

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Section 2(24)(iv) – In the absence of any material on record to show that the company has paid any amount to its consultant specifically for services rendered by him to the assessee in connection with the individual tax matters of the assessee, no part of the remuneration paid by the company is assessable as a perquisite in his hands.

Facts
The Assessing Officer noticed that a company Jain Irrigation Systems Ltd. (JISL) had paid a sum of Rs. 2,79,000 as consultancy fees to Mr. Wohra, a Chartered Accountant. The said Chartered Accountant had also attended various matters of the assessee and his family members. He had filed returns of 5 gentlemen and 4 lady members of the family of the assessee but had not charged any amount for services rendered to the assessee and his family members. Since the assessee was a director of the company JISL, the Assessing Officer regarded a sum of Rs. 10,000 as a perquisite taxable u/s. 2(24)(iv) of the Act and included it in the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
It is not mandatory or compulsory for any professional to charge for professional services rendered to any director or relative of a director or close family members of directors when he is getting fees for rendering services to a company. He may do it voluntarily and free of cost as well. The Tribunal observed that there is no material on record to show that the company has paid any amount to the consultant on behalf of the assessee.

In the absence of any material on record to show that the company has paid any amount to its consultant specifically for the services rendered by him in connection with the individual tax matters of the assessee and other family members of the assessee, no part of the remuneration paid by the company was held to be assessable as perquisite in the hands of the assessee.

This ground of appeal of the assessee was allowed.

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[2015] 70 SOT 92 (Mum) Shivalik Venture (P.) Ltd. vs. DCIT ITA No. 2008(Mum) of 2012 Assessment Year: 2009-10. Date of Order: 19th August, 2015

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Section 115JB – An item of receipt which does not fall under the definition of “income” at all and hence falls outside the purview of the computation provisions of Income-tax Act cannot also be included in “book profit” u/s. 115JB of the Act.

Facts
The assessee company, engaged in the business of development and leasing of commercial complexes and rehabilitation of buildings under Slum Rehabilitation Scheme held a parcel of land as its capital asset and the said land was attached with development rights/FSI. The development rights/FSI attached to a portion of the said land were transferred by the assessee to its subsidiary company. In view of the provisions of section 47(iv) being applicable, to the assessee company, the capital gains arising on the said transfer to its subsidiary company were not included in the total income of the assessee company.

While computing the `book profit’ u/s. 115JB also, the assessee company did not offer the said amount on the ground that since the said amount was not income it did not come within the purview of section 115JB. The assessee had attached a note in the Notes forming part of accounts explaining therein that the profits arising on transfer of capital asset to its subsidiary company is, in its opinion, not coming within the purview of section115JB.

The Assessing Officer (AO) did not agree with the contentions of the assessee and he included the amount of profit on transfer of development rights in the `net profit’ for the purpose of computing `book profit’ u/s. 115JB of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A). The CIT(A) upheld the order of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that the profit and loss account should be read along with the Notes forming part of accounts and the net profit should be understood as the net profit show in the profit and loss account as adjusted by the Notes given in the notes to accounts. It was also contended that since the profit arising on transfer of a capital asset by a company to its wholly owned subsidiary company is not treated as income u/s. 2(24) and since it does not enter into computation provision at all under the normal provision of the Act, the same should not be considered for the purpose of computing book profit u/s. 115JB.

Held
The Tribunal observed that in the instant case the assessee has disclosed an item of income in the profit and loss account, but claimed that the same should be excluded by referring to the Notes to accounts. However, the principle, that the profit and loss account should be read along with Notes to accounts should be applied uniformly in all kind of situations and, hence, due adjustment needs to be done for the effect of items disclosed in the Notes to accounts. The Tribunal held that there is merit in the contention of the assessee that the notes given to Notes to accounts should be read along with the profit and loss account. Hence, the net profit shown in the profit and loss account should be adjusted with the items given in Notes to accounts, meaning thereby, the profits arising on sale of capital asset to its wholly owned subsidiary company should be excluded from the net profit and the net profit so arrived at should be considered as `net profit as shown in the profit and loss account’ used in Explanation I to section 115JB. Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10(other than the provisions contained in clause (38) thereof) is to be reduced from net profit, if they are credited to the profit and loss account. The logic of these provisions, is that an item of receipt which falls under the definition of `income’ is excluded for the purpose of computing `book profit’, since the said receipts are exempted under section 10 while computing total income. Thus, it is seen that the Legislature seeks to maintain parity between the computation of `total income’ and `book profit’, in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of `income’ at all and, hence, falls outside the purview of the computation provisions of the Income tax Act, cannot also be included in `book profit’ u/s. 115JB.

This ground of appeal filed by the assessee was allowed.

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[2015] 154 ITD 299 (Guwahati) Assistant CIT vs. Murlidhar Gattani A.Y. 2007-08 Date of Order: 22nd January, 2015

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Section 80-IC of the Income-tax Act, 1961 – ‘Milk’ is an article or thing mentioned in Part-A of Fourteenth Schedule of the Act and profit derived from production of milk is eligible for deduction u/s. 80-IC of the Act.

FACTS
The assessee, a proprietorship concern, was carrying on business of production of milk and milk based products, and had claimed deduction u/s. 80-IC in respect of profit & gains derived from the said business.

The Assessing Officer disallowed assessee’s claim holding that the article or thing, viz., milk, mawa, cream against which the assessee had sought deduction u/s. 80-IC were not specified in the Fourteenth Schedule referred to in section 80-IC(2)(b).

On appeal, the Commissioner (Appeals) held that ‘Milk’ was an article mentioned in Fourteenth Schedule of the Act, and that profit derived from milk was eligible for deduction u/s. 80-IC subject to other conditions laid down in section 80 IC of the Act.

On revenue’s appeal:

HELD

CIT-(A) had held that that Milk is an article mentioned in Fourteen Schedule of the Income-tax Act, 1961 and that profit derived from Milk is eligible for deduction u/s. 80IC of the Act by making following observation-

Sl. No.5 of Schedule 14 in respect of North Eastern States reads as under: Milk and milk based product industries manufacturing or producingi.

i. Milk Powder;
ii. Cheese;
iii. Butterghee;
iv. Infant food;
v. Weaning food;
vi. Malted milk food

The point is whether the first word (milk) in the items read independently or in conjunction with the word “based industries”. In order to find the answer, it may be useful to look at some of the other items in Schedule 14. Item 4 is Food & Beverages Industries. This may read as Food Industries and Beverages Industries. Similarly, meat and poultry Product Industries may be read as Meat Product Industries & Poultry Product industries.

The milk and milk based industries were definitely not used in a similar way because had it been so, one of the words “Milk” appearing therein would become superfluous. Therefore, the first “Milk” appearing in item No. 5 must be read separately. Therefore, the milk is an article or thing mentioned in Part A of Schedule XIV.

Also in the case of CIT vs. Tara Agencies [2007] 292 ITR 444, the Honorable Apex Court while explaining the meaning of the word “production” has observed as under:

‘The expression “produced” was given a wider meaning than the word “manufacture” pointing out that the word “produced” will include an activity of manufacturing the materials by applying human endeavour on some existing raw material, but the word ‘produce’ may include securing certain produce from natural elements, for example, by milching the cow the milkman, produce milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk’

‘The word “production” or “produce” when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.’

In view of the above decision of the Honorable Apex Court, it is held that “Milk” is an article or thing which can be produced by the assessee and the view taken by the CIT- (A) that “Milk” is an article or thing mentioned in Part-A of Fourteenth Schedule of the Act, and that the profit derived from production of milk is eligible for deduction u/s. 80IC of the Act is upheld.

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[2015] 154 ITD 161 (Mumbai – Trib.) Assistant CIT vs.Yusuf K. Hamied A.Y. 2009-10 Date of Order: 21st January, 2015

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Section 17 of the Income-tax Act, 1961 – Where assessee occupies accommodation that belongs to employer as per independent rent agreement by paying standard rent and also receives HRA from his employer for not getting accommodation then no perquisite addition can be made u/s. 17(2)(ii).

FACTS
The assessee was having tenancy agreement with his landlord, M/s CIPLA, who was also employer of assessee.

The assessee was occupying the house in the capacity of a tenant by paying standard rent.

The AO held that the assessee had derived the perquisite benefit u/s. 17(2)(ii), since the property could have fetched the rent much higher than the rent paid by the assessee. Accordingly, he made the addition

On appeal, the CIT-(A) deleted the addition holding that the assessee did not derive any benefit in his capacity of employee.

On appeal by the revenue.

HELD
The findings recorded by the ld. CIT(A) for deleting the addition made were as follows –

There is no legal authority or principle to deny coexistence of employer-employee relationship and landlord-tenant relationship. Separate contractual relationships can co-exist with independent terms. No law or principle can come in the way of distinct and independent contractual relationships between the very same parties.

Also the assesse is paying standard rent and standard rent cannot be called as nominal rent. In fact, it is a fair rent which is also the measure for calculating income from house property.

The assessee has occupied the accommodation as a tenant of CIPLA, being the landlord of the premises. CIPLA has not recovered any rent from the appellant pursuant to employer-employee relationship; rather CIPLA has received rent from the assessee in terms of contract of tenancy independent of the contract of employment.

Therefore, CIT(A) was of the considered view that the deemed mechanism of computation of value of perquisite u/s. 17(2)(ii) cannot be applied to the facts of this.

The aforesaid findings of CIT-(A) has not been controverted by the Department.

Hence, since the assessee has occupied accommodation that belongs to employer as per independent rent agreement by paying standard rent and has also received HRA from his employer for not getting accommodation no perquisite addition can be made u/s. 17(2)(ii).

In the result, appeal of the Revenue is dismissed.

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Income or capital – A. Y. 2008-09 – Fund allotted to Government Company for a scheme – Specific direction that the interest on the amount should be utilised for the scheme – Interest is not assessable as income

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CIT vs. Karnataka State Agricultural Produce Processing and export Corporation Ltd.; 277 ITR 496 (Karn):

The assessee is a company fully owned by the Government of Karnataka engaged in trading in agricultural produce. The Government of Karnataka sanctioned Rs. 10 crore for improvement of infrastructure in order to encourage the farmers for development of horticulture sector and to promote exports. The grant of Rs. 10 crore was kept in fixed deposits by the assessee till utilisation for the desired projects. The Government of Karnataka had specifically directed that the interest earned on fixed deposits should be treated as additional grant of the scheme and not to be treated as “income of the assessee”. The Assessing Officer assessed the interest as income from other sources. The Tribunal deleted the addition.

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

“There was no profit motive as the entire fund entrusted and the interest accrued therefrom from deposits had to be utilized only for the purpose of the scheme originally granted. The whole of the fund belonged to the State exchequer and the assessee had to channelise them to achieve the objects of centrally sponsored scheme of infrastructural development as specified in the Government order. Hence, interest on all these fixed deposits had to be considered as capitalised and not revenue receipts to be treated as income.”

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Income – Mutuality – A. Y. 1986-87 – Co-operative society allotting plots in land to members at premium – Ownership of land remaining with society – Premium to be utilised for development of common facilities and amenities – Co-operative society a mutual concern – Premium received for transfer of plots exempt from tax

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CIT vs. Prabhukunja Co-operative Housing Society Ltd.; 377 ITR 13 (Guj)(FB): 279 CTR 466 (GUJ)(FB):

The
assessee is a co-operative housing society. It owned lands for
residential use. Such lands were developed by the society for providing
common amenities such as internal roads, drainage, street lights if need
be, common plot and club house. Individual plots were allotted to
members who enjoy occupational rights but ownership of the land always
remained with the society. On the plot of land so allotted, the member
would be allowed to construct his residential unit. Upon transfer of the
plot by a member, the society would collect 50% of the excess or
premium. The fund so collected would be appropriated in the common fund
of the society to be utilised according to the bye-laws which envisaged
development of common facilities and expenditure for common amenities. A
part of the surplus would be diverted to the reserve fund of the
society. The surplus could also be utilised for waiver of the lease
amount or for the health, education and social activities of the
members. The Assessing Officer held that the assessee was not a
co-operative society but an association of persons engaged in business
and, accordingly, made an addition to the income of the assessee on
account of the premium received for transfer of plots. The Commissioner
(Appeals) held that the assessee was governed by the principles of
mutuality, and such amount was not taxable in the hands of the assessee
society. The Tribunal confirmed the order of the Commissioner (Appeals).

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

“i)
Contributions made by the members to the general fund of a co-operative
society in various forms would be governed by the principle of
mutuality. Particularly, in the case of premium collected by the society
from its outgoing member from out of a portion of his profit, the
principle of mutuality would apply and the receipt would not be taxable
as income of the society.

ii) There was total identity of
contributors of the fund and recipients from the fund. The contribution
came from the outgoing member in the form of a portion of the premium
and it was utilised for the common facilities and amenities for the
members of the society. Different modes of application of the funds made
it clear that the funds would be expended for common amenities or for
general benefit of the members or be distributed amongst the members in
the form of dividend or lease rents waiver.

iii) Creation of the
society was primarily for the convenience of the members to create a
housing society where individual members could construct their
residential units and common facilities and amenities could be provided
by the society. It was essential thus that a combined activity be
carried on by a group of persons who would be the members in the
co-operative society.

iv) Merely because upon the winding up of
the society, the surplus fund would be utilised by the Registrar as
provided under the Gujarat Co-operative Societies Act, 1961, and would
not be returned to the members, that would not break down the
relationship of mutuality since even in the eventuality of winding up,
there was no scope of profiteering by the members. Therefore, the
premium received by the assesses for transfer of plots was exempt from
tax.”

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