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Year: 2015

Income – Deemed profit – Section 41(1) – A. Y. 2007-08 – Amounts shown for several years as due to sundry creditors – Amount not written off in relevant year – Genuineness of credits not doubted – Amount not assessable u/s. 41

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Principal CIT vs. Matruprasad C. Pandey; 377 ITR 363 (Guj):

For the A. Y. 2007-08, the Assessing Officer made an addition of Rs. 56,96,645/- u/s. 41(1), doubting certain sundry creditors amounting to Rs. 56,96,645 appearing in the balance sheet of the assessee for the past several years. The addition was deleted by the Tribunal.

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

“i) The addition u/s. 41(1) cannot be made unless and until it is found that there was remission or cessation of the liability that too during the previous year relevant to the assessment year in question.

ii) The sundry creditors mentioned in the balance-sheet of the assesee were shown as sundry creditors for several years before the relevant assessment year and at no point of time earlier had the Assessing Officer doubted the creditworthiness or identity of the creditors. There was no remission or cessation of the liability during the previous year relevant to the assessment year under consideration. The deletion of the addition was justified.”

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Presumptive income – Section 44BB – The servicetax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee is only collecting the service-tax for passing it on to the government. Thus, for the purpose of computing the presumptive income of the assessee u/s. 44BB, the service-tax collected by the assessee on the amount paid for rendering services is not to be included in the gross receipt in terms of section 44BB(2) rea<

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DIT vs. Mitchell Drilling International (P.) Ltd.: [2015] 62 taxmann.com 24 (Delhi):

The High Court of Delhi framed following question of law:

“Whether the amount of service-tax collected by assessee from its various clients should have been included in gross receipts while computing its income u/s. 44BB?”

The High Court held as under:

“(i) Section 44BB introduces the concept of presumptive income and states that 10% credit of the amounts paid or payable or deemed to be received by the assessee on account of “the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oil in India” shall be deemed to be the profits and gains chargeable to tax. The purpose of this provision is to tax what can be legitimately considered as income of the assessee earned from its business and profession.

(ii) The service-tax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee is only collecting the service-tax for passing it on to the government.

(iii) The position has been made explicit by the CBDT itself in two of its circulars. In Circular No. 4/2008 dated 28th April, 2008 it was clarified that “service tax paid by the tenant does not partake the nature of income of the landlord”. The landlord only acts as a collecting agency for Government for collection of service-tax. Therefore, it has been decided that TDS u/s. 194-I would be required to be made on the amount of rent paid/payable without including the service tax. In Circular No. 1/2014 dated 13th January, 2014, it has been clarified that service-tax is not to be included in the Fees for professional services or technical services and no TDS is required to be made on the service-tax component u/s. 194J.

(iv) Thus, for the purpose of computing the presumptive income of the assessee u/s. 44BB, the service-tax collected by the assessee on the amount paid for rendering services is not to be included in the gross receipt in terms of section 44BB(2) read with section 44BB(1).”

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Housing project – Deduction u/s. 80-IB(10) – A. Ys. 2002-03 to 2007-08 – Architect certifying completion of project, application made to municipal corporation for issuance of completion certificate and fees paid therefor within time specified – Delay by municipal corporation for issuance of certificate – Delay cannot be attributed to assessee – Assessee is entitled to deduction

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CIT vs. Hindustan Samuh Awas Ltd.; 377 ITR 150 (Bom):

The assessee was a builder and a developer which undertook a mega housing project on a layout covering an area of about 25 acres. The project was approved in February 2000. The assessee completed part of the project and obtained a completion certificate for that part of the project from the municipal corporation on October 10, 2008. The assessee sought exemption u/s. 80-IB(10) for the A. Ys. 2002-03 to 2007-08 in respect of the profit made in these years from the sale of flats. The claim was denied by the Assessing Officer on the ground that the completion certificate was not issued on or prior to 31st March, 2008. The Tribunal allowed the assessee’s claim and held that in view of the fact that the assessee had made an application seeking a completion certificate prior to 31st March, 2008, the date on which the completion certificate was issued was not material. The delay in issuing the completion certificate was not attributable to the assessee. The delay was beyond its control.

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

“i) The Explanation is quite clear and did not introduce any uncertainty. In other words. The date of completion of a project has to be the date of issuance of completion certificate by the municipal authority. The architect of the project had given a certificate prior to 31st March, 2008. The assessee submitted the application to the municipal authority along with such certificate well in time on 25th March, 2008. The municipal authorities directed the assessee to deposit certain amount for issuance of completion certificate on 27th March, 2008 and the amount was, accordingly deposited on 31st March, 2008.

ii) The delay could not be attributed to the assessee. Therefore, the project for which exemption was sought was completed prior to 31st March, 2008, and entitled to deduction u/s. 80-IB(10).”

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Business expenditure – Capital or revenue expenditure – Section 37 – A. Ys. 2007-08 and 2008-09 – Development charges on research and testing of components – Revenue expenditure

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CIT vs. JCB India Ltd.; 376 ITR 621 (Del):

For the A. Ys. 2007-08 and 2008-09, the assessee had claimed that development charges on research and testing components is revenue expenditure. The Assessing Officer rejected the claim. The Tribunal allowed the assessee’s claim on the ground that in several previous assessment years the plea of the assessee that it was revenue expenditure was accepted.

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

“i) The assessee incurred the development charges on research and testing of components. This did not result in a benefit to it of enduring nature so as to characterize the development charges as capital expenditure. Testing of products and components is essentially a continuous process which permeats different accounting years. It is an integral part of the routine manufacturing and monitoring activity. It can not obviously be a one-time event.

ii) The Revenue had not been able to persuade the Court that an error had been committed in any of the previous assessment years where the assessee’s explanation was accepted and the expenditure on development charges was treated as revenue expenditure.

iii) In the facts and circumstances of the case, the rule of consistency was adopted and the plea of the revenue to remand the matter to the Assessing Officer for a fresh determination was declined.”

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Income or capital receipt – A. Y. 2008-09 – An amount received by a prospective employee ‘as compensation for denial of employment’ was not in nature of profits in lieu of salary. It was a capital receipt that could not be taxed as income under any other head

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CIT vs. Pritam Das Narang; [2015] 61 taxmann.com 322 (Delhi)

In terms of employment agreement, the assessee was to be employed as CEO of M/s ACEE Enterprises (‘ACEE’). The ACEE was unable to take assessee on board due to sudden change in its business plan. The ACEE paid compensation of Rs. 1.95 crore to assessee as a “onetime payment for non-commencement of employment as proposed”. The assessee had not offered such compensation to tax. The Assessing Officer rejected the claim of assessee on the ground that u/s. 17(3)(iii) receipt by the assessee of any sum from any person prior to his joining with such person was taxable. The CIT(A) deleted the addition and held that section 17(3)(iii) had been brought in to account for taxing ‘joining bonus’ received from the prospective employer as profit in lieu of salary. The ITAT upheld the findings of CIT(A).

In appeal by the Revenue, the ld. Counsel of department urged that since the wording of section 17(3)(iii) was that “any amount received from any person”, it was not necessary that the amount had to be received only from an employer in order that such sum be brought to tax in the hands of an assessee under the head ‘profits in lieu of salary’. It was submitted that the expression any person could include a prospective employer in the present case.

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

“(i) The interpretation sought to be placed by revenue on plain language of section 17(3)(iii) could not be accepted. The words “from any person” occurring therein have to be read together with the following words in sub-clause (A): “before his joining any employment with that person”. In other words, section 17(3)(iii) pre-supposes the existence of the relationship of employee and employer between the assessee and the person who makes the payment of “any amount’ in terms of section 17(3)(iii).

(ii) Therefore the words in section 17(3)(iii) cannot be read disjunctively to overlook the essential facet of the provision, viz, the existence of ’employment’, i.e., a relationship of employer and employee between the person who makes the payment of the amount and the assessee.

(iii) The other plea of revenue that said amount should be taxed under some other head of income, including ‘income from other sources’, was also unsustainable. In case of CIT vs. Rani Shankar Mishra [2009] 178 Taxman 324 (Delhi), it was held that where an amount was received by a prospective employee ‘as compensation for denial of employment’, such amount was not in nature of profits in lieu of salary. Thus, it was a capital receipt that could not be taxed as income under any other head.”

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[2015] 61 taxmann.com 238 (Bombay) – Anurag Kashyap vs. UOI.

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High Court refused to interfere with adjudication proceeding which covered the period for which application was filed by the Petitioner under VCES. Held that, Petitioner can take all the arguments and contentions possible in law before adjudicating authority, including inviting his attention to relevant paragraphs in the said scheme.

Facts:
The petitioner filed declaration under Service Tax Voluntary Compliance Scheme (VCES) for the period July 2012 to December 2012. While the due date for filing of application was 31/12/2013, in August 2013, department issued order for attaching bank accounts of the petitioner and recovered certain amount from the petitioner under recovery proceedings u/s. 87(b). The petitioner filed a letter with the department for adjusting the amount so recovered against 50% of the amount declared under VCES. However no certificate of discharge (VCES-3) was issued to the petitioner. Subsequently, show cause notice was issued by the department in June 2014 for the period July 2012 to August 2013. The petitioner expressed apprehension in the course of hearing before the Court that since the proceedings under VCES are not closed by Designated Authority under the Scheme by issuing VCES-3 in terms of section 107(7) of the Scheme, the show cause notice which is issued and required to be adjudicated proceeds on a wrong and incorrect assumption and that adjudication (including for the period covered under VCES), will take place before a distinct adjudicating officer, who is not a designated authority under the Scheme. The petitioner also submitted that in absence of such a declaration as required under the scheme, the adjudicating authority will proceed to recover not only the duty amount but also interest and penalty in respect of period covered under the Scheme. The petitioner also clarified that the object of writ was not to interfere with the ongoing proceeding but prayed for issuing direction to the Designated Authority for issuing necessary VCES-3 in terms of section 107(7) of the Scheme.

Held:
The High Court observed that the basis of determination of service tax demand and the period and the liability declared by the petitioner under the VCES are clearly brought out in the show cause notice. Therefore, the Court disposed of the application expressing a view that the submissions made by the petitioner before the Court can also be made before the adjudicating authority in the course of adjudication and if VCES-3 has not been issued, it would be open for the petitioner to urge that failure on the part of the authority to issue such a declaration should not visit him with any tax demand including of interest and penalty. It further held that merely because the show cause notice is going to be adjudicated by a distinct authority does not mean that the petitioner is prevented from canvassing appropriate pleas and therefore, the petitioner can always raise such pleas as are permissible in law including by inviting the attention of the authority to the Scheme and its clauses or paragraphs and sub-paragraphs.

[Note: Readers may note that the issue whether the period covered under VCES can also be adjudicated by any authority other than Designated Authority under different show cause proceedings is left open by the Hon. Court.]

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[2015] 61 taxmann.com 423 (Madras High Court) – Southern Properties & Promoters vs. CCE.

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High Court refused to interfere with Tribunal’s order directing
pre-deposit in respect of flats constructed by developer for landowner
under a development agreement, adopting the valuation based on price
charged by assessee builder on flats sold to other flat owners – No view
as to appropriate valuation rule is expressed.

Facts:
The
Appellant entered into a joint venture agreement with a land owner for
construction of flats according to which the appellant owned 48 flats
and land owner owned 24 flats as his share equivalent to the land. The
appellant paid service tax only in respect of 48 flats. Department
contended that construction of flats allotted to landowner would also
attract service tax. The adjudicating authority held that the
construction of flats for landowner constitutes a taxable service under
the category of “construction of residential complex” u/s. 65(105)(zzh)
and liable to service tax.

Before the Tribunal, the Appellant
contended that the appellant had not received any consideration in the
form of money in respect of 24 flats handed over to the landowner and
therefore tax should be demanded on the basis of the cost of land.
However, the Tribunal directed pre-deposit relying upon Rule 3 of the
Service Tax (Determination of Value) Rules, 2006, holding that the value
of taxable service should be equivalent to the value of taxable service
rendered in relation to the flats sold to independent persons.
Aggrieved by the said order of predeposit, the Appellant filed appeal
before High Court.

Held:
The High Court observed that
the Appellant has made specific admission before adjudicating authority
that its services would fall under the category of “construction of
residential complex service”’. Even otherwise, a prima facie view was
taken that the nature of the services provided by the appellant is
construction of flat to the land owner and the transfer of land is only
for the purpose of providing such taxable service. It further held that
where there is no monetary consideration in the transaction; then
section 65 of the Finance Act, 1994 provides for various methods for
valuation and it is for the appellant to establish its plea before the
Tribunal as to why the cost of land is to be considered for the purpose
of valuation. The High Court categorically refused to express any view
as to whether the transaction would fall under Rule 2 or Rule 3 of
Valuation Rules and left the matter open for consideration by the
Tribunal. The Appeal was accordingly dismissed without interfering with
the order of Tribunal ordering pre-deposit.

[Note:
Readers may note that in this appeal, it appears that dispute is only
with respect to the adoption of taxable value and not as to whether
allotment of flats by developer to landowner constitutes a taxable
service or not. The issue of taxability of service has not been
considered either by the High Court or by Tribunal in the present case.
For analysis of the Tribunal’s judgment, readers may refer to BCAJ April
2015 issue.]

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CENVAT credit of construction services and lease rental service can be availed against payment of duty or manufacture of final product for period prior to amendment of definition of input service under Rule 2(l).

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34. 2015 (40) STR 41 (P & H) Commissioner of C. Ex. Delhi III vs. Bellsonica Auto Companies India Pvt Ltd

CENVAT credit of construction services and lease rental service can be availed against payment of duty or manufacture of final product for period prior to amendment of definition of input service under Rule 2(l).

Facts

The Respondent had taken land on lease on which it had constructed the factory for manufacturing metal components. Respondent accumulated the credit of service tax paid on lease rent for land as well as on erection, commissioning and installation engineer’s services. The department contended that credit of the said services cannot be availed as the words “directly or indirectly” and “in or in relation to” in the “input service” definition, should be interpreted strictly. It was also contended that the lease rental service has no nexus with manufacturing of metal components. The respondent’s contention is that it is covered under both ‘includes part’ and ‘means part’ of the definition of “input service” as defined under Rule 2(l) of CENVAT Credit Rules, 2004. The said rule specifically includes services in relation to setting up of factory. Further the amended input service definition (effective from April 01, 2011) specifically excluded the service related to construction and therefore prior to the said date, the same was eligible as the amendment was not retrospective in nature.

Held

The High Court held that service used for setting up immovable property is connected with manufacturing activity and therefore the CENVAT credit is allowed.

The adjudicating authority has to follow the order of Larger Bench unless the factual situation of the case calls for different interpretation of law.

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33. 2015 (40) STR 26 (Ker) Muthoot Finance Ltd. vs. Union of India.

The adjudicating authority has to follow the order of Larger Bench unless the factual situation of the case calls for different interpretation of law.

Facts

The Appellant is engaged in providing service on behalf of Western Union, a company having its operation outside India. A similar issue arose earlier, which was settled by Larger Bench of the Tribunal in case of Muthoot Finance Ltd vs. Commissioner of C. Ex, Chandigarh, 2013(29) STR (257) (Tri-Delhi) in Appellant’s favour. It was contended that the department should follow the order of the Tribunal before raising demand against them when the facts of the case were similar. However, no cognisance was taken of the said order and demand was confirmed.

Held

The High Court observed that no distinction on facts is made in the Order-In-Original. Therefore, it is held that the order already passed by the Larger Bench of the Tribunal is binding on adjudicating authority to follow unless the factual situation calls for different interpretation. Accordingly, quashing the demand, the department was directed to consider matter afresh.

Service tax is leviable on all lease rent whether of short tenure or of more than 90 years. The service provided by assesse is not sovereign service and no statutory fees are levied on the same, thus it is a taxable service.

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32. 2015 (40) STR 95 (All.) Greater Noida Industrial Dev. Authority vs. Comm. Of C., C. Ex.

Service tax is leviable on all lease rent whether of short tenure or of more than 90 years. The service provided by assesse is not sovereign service and no statutory fees are levied on the same, thus it is a taxable service.

Facts

The appellant took plots on long term lease for construction of commercial and business premises. The Tribunal held against the Appellant holding that the nature of lease, whether short term or perpetuity, did not make any difference to meaning of expression “leasing of immovable property” and also, the Act did not make any difference between a juristic person and an individual and therefore, the leasing of land was liable for service tax irrespective of the tenure. Aggrieved by the same, the present appeal is filed.

Held

The High Court upheld the Tribunal decision and confirmed that leasing of land for business/commercial purpose was taxable event and such amount charged was leviable under service tax under “leasing/renting of immovable property”.

VAT on Service Tax collected separately

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Under MVAT Act, 2002, the tax is payable on ‘sale price’. The term ‘sale price’ is defined in section 2(25) of the MVAT Act, 2002 as under;

“(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged.

Explanation I — The amount of duties levied or leviable on goods under the Central Excise Act, 1944 (1 of 1944) or the Customs Act, 1962 (52 of 1962) or the Bombay Prohibition Act, 1949 (Bom. 25 of 1949), shall be deemed to be part of the sale price of such goods, whether such duties are paid or payable by or on behalf of, the seller or the purchaser or any other person. Explanation IA: Sale price shall not include the amount of service tax levied or leviable under the Finance Act, 1994 and collected separately from the purchaser. (w.e.f.1.4.2015),

Explanation II — Sale price shall not include tax paid or payable to a 16[seller] in respect of such sale.

Explanation III — Sale price shall include the amount received by the seller by way of deposit, whether refundable or not, which has been received whether by way of a separate agreement or not, in connection with or incidental or ancillary to, the said sale of goods;

Thus, the amount received from the buyer is considered as sale price. In addition, the statutory levies like Excise etc. are also deemed to be part of sale price .

What is the amount received from buyer? It has numerous interpretations. In the present controversy, the issue is about Service Tax collected separately, wherever, it is applicable. For example, in case of works contract, there is composite contract for supply of goods and services. Under such circumstances, the dealer may be liable to pay VAT on the supply part and Service Tax on labour portion. On the applicable labour portion, the dealer may collect Service Tax as inclusive in price i.e. without showing Service Tax separately or, on other hand, the dealer may charge Service Tax separately in the invoice.

In case, Service Tax is charged as inclusive (subject to facts of each case) it can be said that there is not much debate about ‘sale price’ and the whole amount of sale price without exclusion of Service Tax will be considered as sale price for levy of VAT .

However, the controversy arises when the Service Tax is collected separately in the invoices.

A possible argument is that the Service Tax is a tax allowed or to be collected from the customers under the provisions of Service Tax and hence it is an amount collected for and on behalf and to be paid to the Central Government. Therefore, it can be argued that it does not form part of the money of the dealer, it is a separate collection.

Recent judgment and amendment

In fact, in case of Sujata Printers (VAT A.No.18 of 2013 dt. 9.3.2015), Hon’ble MSST (Maharashtra Tribunal) has already held that the Service Tax collected separately does not form part of sale price. Further, there is amendment dated 18.4.2015 in the definition of ‘sale price’ by which Service Tax collected separately is excluded from the amount of sale price, shown above by Explanation 1A.

After above judgment and above referred amendment, there is circular from the Commissioner of Sales Tax, bearing no. 6T of 2015 dated 14.5.2015 in which the implications of above judgment and amendment are explained. It is stated in the Circular that the judgment will remain operative from 1.4.2005 till 31.3.2015. From 1.4.2015 the situation will be covered by the amendment. The net effect is that on Service Tax collected separately, no VAT will be applicable.

Controversy regarding Service Tax in case of Composition Schemes

In the above circular, the learned Commissioner of Sales Tax has made distinction between the works contracts. The Commissioner of Sales Tax has stated that the above exclusion of Service Tax collected separately will apply in case where the liability on works contract or other transactions is discharged under regular method like, in case of works contract, if the liability is discharged under rule 58 of MVAT Rules. However, in relation to discharging of tax under composition schemes, it is specifically mentioned that the above exclusion will not apply. In other words, the circular interprets that in case the liability is discharged under composition scheme than even if Service Tax is collected separately, it will be considered as part of contract price and on such whole amount (including Service Tax), the composition will be payable. It appears that the Commissioner of Sales Tax has kept in mind that under composition schemes, the dealer has to forgo its legal claim and has to abide by the terms of the composition scheme. Therefore, the assessing authorities are levying VAT on Service Tax collected separately, where the contractors discharge their tax liability under works contract composition scheme.

Recent judgment of the Hon’ble Tribunal

However, now the legal position has become absolute clear. The issue has been resolved by the Hon’ble Tribunal vide its judgment in case of Technocraft Engineers (VAT SA No.237 of 2014 dt.3.11.2015). In this case, the issue was same. VAT was levied on the Service Tax collected separately on the works contract and the dealer was discharging liability under composition scheme. The Hon’ble Tribunal has referred to arguments from both the sides. There was also earlier judgment in the 0case of Nikhil Comforts (SA No.30 of 2010 dated 31.3.2012) in which a contrary view was taken.

However, in this judgment, the Hon’ble Tribunal has held that no VAT can be levied on Service Tax collected separately, even if the tax is discharged under composition scheme. The reasoning of learned Tribunal is noted as under; “(iii) In the impugned matter, assessment order for the year was passed on 26/12/2012, for the interior designing the appellant had received total amount of Rs.4,35,43,472/- on which 8% composition amount was charged and with interest u/s. 30(2) and 30(3) of the MVAT Act total demand was raised at Rs.27,10,949/- Appellant challenged the said order on the ground of incorrect determination of turnover, levy of tax on service tax and set-off claim and on interest. The First Appellate Authority confirmed the levy of tax on service tax amount saying that, it is part of contract price but he allowed other grounds. Hence, VAT payable amount is changed from Rs.27,10,949/- to Rs.2,24,831/- with part payment made in appeal, the appellant got refund of Rs.1,82,109/- on which no interest u/s. 52 of the MVAT Act was calculated. In total consideration, the service charges amount will become the part of total receipt by the Contractor but service tax amount on service charges will not become part of total receipt, because appellant contractor wants to pay the said amount to the Central Excise Department. Although, the definition of sale price is later on amended with effect from 01/04/2015, and the separate Explanation IA is added clarifying that, service tax levied and collected separately shall not be included in sale price. It is the revenue’s contention that, the said amendment is not retrospective, and it has effect from 01/04/2015. So, upto 31/03/2015 total receipt should be considered including service tax. However, we made it clear that, in the definition of sale price u/s. 2(25) service tax was not incorporated as deemed sale price. In the instant case, sale means a valuable consideration of the goods involved in the works contract, the consideration must be received by the contractor. Even though he had collected service tax separately he has to deposit it with the Central Government. Therefore, it will not become part of his receipt. The revenue had cited most of the case laws on agreement for composition.

Appellant is not denying that, he had not agreed for composition. He is ready to pay 8% tax on the valuable consideration received by him which he can utilise in his business, and the tax amount against service charges incurred by him, he cannot keep with him as consideration for receipt of works contract. In total contract receipt, the sale price of the goods, service charges shown etc. are includible. In Sub–clause (a) and (b) of sub–section (3) of section 42, the wording is used “equal to 5% , of total contract value of the works contract in case of construction contract and 8% of total contract value of work contract of any other case.” Here, the meaning of total contract value is to be determined appropriately. By way of allotment of any works if assesse is receiving some amount against the property transferred in the goods and against the labour charges utilised in the said work, it will become a contract value. The various taxes levied separately, and those are to be deposited with the Govt. authorities will not constitute the total receipt against the said contract value hence element of service tax will not be a part of sale prices before amendment also. One can understand total expenses required to be paid for any particular work in which amount of taxes are also to be in total turnover but when a turnover for levy of tax is to be taken into consideration, the element shown separately in sale invoice It may be against sales tax VAT tax and service tax which cannot be included.” Thus, the Hon’ble Tribunal has put to rest all controversy in this regard. Most of the dealers (contractors) have not collected VAT on Service Tax collected separately and hence the above judgment will be a big relief.

Conclusion

To avoid future litigation, it is expected that the department will bring out one more circular to accept the above judgment. The finality to the subject is important, so that dealers can predict their liability correctly and a controversy is avoided.

MANDATORY PRE-DEPOSIT UNDER SECtION 35F

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Background Section 35F of the Central Excise Act, 1944 (the Act) was amended by the Finance Act (No.2) 2014 with effect from 6th August, 2014 whereby prior to filing an appeal before Commissioner (Appeals) or Appellate Tribunal, an amount of 7.5% duty or penalty in dispute in case of first appeal and a further amount of 10% of the duty or penalty in dispute is required to be paid by way of mandatory pre-deposit. The amount of pre-deposit is restricted to an upper limit of Rs. 10 crore by way of a proviso in the said section. Further, by way of a second proviso, it is provided that the provision would not apply to pending stay applications and appeals filed before any appellate authority prior to 6th August, 2014. Therefore, post the said date of 6th August, 2014, various appeals filed with different jurisdictional Benches of Appellate Tribunals without payment of pre-deposit amount were either not accepted or rejected. Consequently, writ petitions were filed in various High Courts. As a result thereof, the Andhra Pradesh High Court in Rama Mohanrao & Co. 2015-TIOL- 511-HC-AP-CX in an interim order and the Kerala High Court in Muthoot Finance Ltd. vs. Union of India and Others 2015-TIOL-632-HC-Kerala-ST and a couple of other cases as well as the Madras High Court in Fifth Avenue Sourcing (P) Ltd. vs. Commissioner of Service Tax 2015-TIOL-1592- HC-MAD-ST decided that amended provisions relating to mandatory pre-deposit of 7.5% of duty or penalty was not applicable to the cases wherein the cause of action had already commenced prior to the date of amendment of 6th August, 2014 and that the amendment was prospective and therefore would not affect assessment proceedings initiated prior to the amendment date.

As against these decisions, a Division Bench of the Allahabad High Court on the very same issue in Ganesh Yadav vs. UOI and Others 2015-TIOL-1490-HC-ALL-ST distinguished the above decision in Muthoot Finance Ltd. (supra) and K. Rama Mohanrao (supra) and dismissing the petitions held that in terms of express language used in the amended provisions of section 35F(1) of the Act, the constitutional challenge was not vested and all appeals filed post the amendment would be governed by the requirement of pre-deposit. Amidst the controversy, recently the Hon. Karnataka High Court also in a learned Single Judge decision has made detailed analysis and observations on the subject matter and dismissed a bunch of petitions. The said decision is summarised below:

Karnataka High Court: 2015-TIOL- 2637-HC-KAR-CX

The Hon. Karnataka High Court in various writ petitions led by Hindustan Petroleum Corporation Ltd. vs. Union of India reported at 2015-TIOL-2637-HC-KAR-CX and others considered mainly the following two issues:

  • Whether section 35F of the Central Excise Act, 1944 (the Act) as amended is a piece of substantive or procedural law prescribing mandatory pre-deposit at the time of filing an appeal, is an unreasonable condition?
  • Whether amendment made to section 35F of the Act has a retrospective operation?

The petitioner in this case also on the same issue as involved in various earlier decisions, contended that the requirement of the pre-deposit is violative of Article 14, 19(1)(g) and 265 of the Constitution of India and therefore sought to declare the Circular 984/08/2014-CX and similar Circular F. No.15/ CESTAT /General/2013-14 dated 06/08/2014 issued by the CBEC as ultra vires the constitution and also sought directions to enable petitioners to file their appeals without monetary pre-deposit of 7.5% since lis or the cause of action in the case of petitioner commenced before 06/08/2014, the date of amendment.

Right to Appeal

The Hon. Bench examined section 35 and 35B of the Act providing for Appellate remedy before Commissioner (Appeals) and Appellate Tribunal respectively and also examined section 35F and the amendment made therein effected from 6th August, 2014 as regards mandatory monetary pre-deposit and noted and analysed the concept Right of Appeal as the petitioners claimed that it was adversely affected by the impugned amendment. For this, the Hon. Bench found it expedient to primarily distinguish between substantive law and procedural law and rulings of the Hon’ble Supreme Court in this regard while considering the principles of statutory interpretation. Relying heavily on the ratio of Hoosein Kasam Dada (India) Ltd. vs. State of Madhya Pradesh & Others 2002-TIOL-363-SC-CT, the petitioners claimed that the cause of action in their cases commenced prior to the date of amendment viz. 06/08/2014 and therefore their right to be heard before the Tribunal without the mandatory pre-deposit was not destroyed and denial of such right affected their vested right to file appeal. The Revenue contended that all that was done by the amendment was prescribing the conditions of pre-deposit to file the appeal. This had no nexus with the right to file the appeal as a mere condition of mandatory deposit is provided of 7.5% of the duty or penalty levied at the time of filing appeal and only the discretion vested in the Tribunal with regard to pre-deposit was taken away. The Court therefore decided to consider the applicability of the principles stated in Hoosein Kasam Dada (supra) in the present matter, however only after drawing distinction between substantive law and procedural law.

Substantive law and Procedural law

The petitioners contended that the right to appeal is a substantial right which is pre-vested in the parties on the date, the cause of action commenced. Thus, even when the conditions to file an appeal are altered, it would affect their right to file an appeal. The Court therefore examined meanings of these terms as per Black’s Law Dictionary as provided below:

“Substantive law (seb-sten-tiv). (18c) The part of the law that creates, defines, and regulates the rights, duties and powers of parties.

‘So far as the administration of justice is concerned with the application of remedies to violated rights, we may say that the substantive law defines the remedy and the right, while the law of procedure defines the modes and conditions of the application of the one to the other.” John Salmond, Jurisprudence 476 (Glanville L. Williams ed., 10th ed. 1947)’.

Procedural law:

The rules that prescribe the steps for having a right or duty judicially enforced, as opposed to the law that defines the specific rights or duties themselves.- Also termed adjective law.” Further, on going through the Supreme Court rulings in Hitendra Vishnu Thakur vs. State of Maharashtra [(1994) 4 SCC 602 and Shyam Sunder vs. Ramkumar [(2001)8 SCC 24, it was noted that if a piece of substantive law is amended, such a law would have prospective operation unless made retrospective operation by necessary intendment whereas in the case of amendment of a procedural law, the amendment is always retrospective in operation unless indicated otherwise. On noting the above, it was observed that the right to file an appeal is required to be distinguished from the procedure necessary to follow while exercising the said right to appeal. Section 35A, 35C and 35D of the Act deal with the procedures to be followed by Commissioner (Appeals) or the Appellate Tribunal while considering the appeal filed by an aggrieved party whereas the right to file an appeal before the Commissioner (Appeals) and the appellate authority is prescribed in section 35 ad 35B of the Act respectively. Therefore, the conditions to be followed for exercising the substantive right as prescribed in section 35F of the Act prescribing the pre-deposit to be made by the aggrieved party is a piece of procedural law. Further a litigant has a vested right in substantive law but no such right is available in procedural law. To support these observations, Hon. Court interalia, relied on The Anant Mills Co. Ltd. vs. State of Gujarat & Others 1975 (2) SCC 175, Sheth Nand Lal & Another vs. State of Haryana and Others 1980 (Supp) SCC 574, Vijay Prakash D. Mehta and Another vs. Collector of Customs (Preventive), Mumbai 2002-TIOL-427-SC-CUS, Laxmi Rathan Engineering Works Limited vs. CST [AIR 1968 SC 488], Ganga Bai vs. Vijay Kumar [(1974) 2 SCC 393], Narayan Chandra Ghosh vs. UCO Bank and Others [(2011) 4 SCC 548 and concluded that appeal is a creature of statute and there is no reason why the legislature while granting that right cannot impose conditions for exercising that right. Thus, what emerges from dicta in various cited decisions is that requirement regarding deposit of amount as condition precedent to entertainment of appeal is a means of regulating the exercise of the right of appeal and is not in the realm of right to file an appeal and thus not a piece of substantial law. The said requirement is not an onerous condition precedent for the filing of an appeal particularly when there is a cap on the pre-deposit amount where amount exceeds Rs.10 crore. Thus, the first issue is answered that the amended provisions of section 35F of the Act do not adversely affect the right of appeal before the Commissioner (Appeals) and the appellate authority of the aggrieved party.

Whether the Amendment has Retrospective Application

The Finance Act 2014, which amended section 35F of the Act repealed the existing provision by way of substitution and thus when an existing provision is substituted by a fresh enactment, it is a case of express repeal. In this context, interalia relying on the decision was Zile Singh vs. State of Haryana 2004 (8) SCC 1, it was observed: “13. It is a cardinal principle of construction that every statute is prima facie prospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations.”

However, in the matters of procedures, the Court cited Maxwell: “Interpretation of Statutes” 11th edition, page 216 that “No person has a vested right in any course of procedure. He has only the right of prosecution or defence in the manner prescribed for the time being by or for the Court in which the case is pending and if by an act of Parliament the mode of procedure is altered, he has no other right than to proceed according to the altered mode”.

In the backdrop of these principles, the claim of the petitioners that the amendment to section 35F of the Act was not retrospective was examined and in particular second proviso to the said section 35F was taken note of. The proviso provides that section 35F would not apply to stay applications and appeals pending before the appellate authority filed prior to the commencement of 2014 Act therefrom implying that appeals filed and pending as on 06/08/2014, the earlier provision would apply. While interpreting the said proviso, it was noted that the proviso could not be so construed or interpreted to make it otiose. By virtue of the second proviso, the intendment of the Parliament is clear and therefore to interpret otherwise than the intendment would be to render it redundant. In view thereof but for the circumstances mentioned in the proviso it was held that the main amended provision would apply. The proviso was meant to serve as a saving clause to prevent the pending stay applications from becoming infructuous on account of the amendment. Relying on a number of judicial precedents including in Ishverlal Thakorelal Almaula vs. Motibhai Nagjibhai (AIR 1966 SC 459), S. Sundaram Pillai etc. vs. R. Pattabiraman [AIR 1985 SC 582] which in turn among others relied on Govt. of West Bengal vs. Abani Maity [AIR 1979 SC 1029], conclusion was reached that the right to file an appeal granted u/s. 35 and 35B of the Act remained unaltered and therefore available to an aggrieved party even after the amendment to section 35F of the Act. Whereas these sections constitute substantive law not forming the realm of procedure, on the examination of section 35F it was found that this section is procedural in nature and the amendment of the same was found to be having a retrospective operation and particularly the second proviso. Since the real intention of the Parliament is discernible, it was held that the retrospective effect is provided in respect of pending applications before appellate authorities. However, if no appeal was filed prior to 06/08/2014, it was held that the amended section 35F would apply. The amendment thus has no bearing on the date on which the particular lis commenced. It was observed that the lis in each case would have commenced on a different date. In order to ensure the object of certainty and uniformity as to the applicability of the amendment, the Parliament enacted the second proviso. Considering the Hon. Supreme Court’s rulings on the fine distinction between substantive law and procedural law in decisions subsequent to Hoosein Kasam Dada (supra), wherein it was held that amendment made to procedural law can have retrospective operation, the decision in Hoosein Kasam Dada (supra) was distinguished. It was further noted that in the said decision, the fine distinction between substantive and procedural law and that amendment made in the procedural law could have retrospective operation did not come up for consideration in the manner decided in the later decisions and therefore observations made in Hoosein Kasam Dada (supra) were held as not applicable to the present bunch of petitions.

Lastly, the judgments referred above viz. of the Madras High Court in Deputy Commercial Tax Officer Tirupur vs. Cameo Experts [(2006)147 STC 218 (Mad)], Fifth Avenue Sourcing (P) Ltd. vs. Commissioner of Service Tax Chennai (supra), Kerala High Court in Muthoot Finance Ltd. vs. Union of India (supra) and Andhra Pradesh High Court in K. Rama Mohanrao & Co. vs. Union of India (interim order) (supra) were found as not applicable although they are rendered on section 35F or on similar provisions as those judgments followed the reasoning in Hoosein Kasam Dada (supra) which has been distinguished herein and held to be not applicable to the present cases. Writ Petitions were dismissed accordingly.

Conclusion

Although the applicability of the above may be for a limited time frame, it is to be noted that High Courts of the three States viz. Kerala, Andhra Pradesh and Madras have decided that the cases wherein the lis commenced prior to 06/08/2014, the amendment was not applicable and the Tribunal was bound to entertain such appeals without mandatory predeposit whereas Allahabad High Court in M/s. Ganesh Yadav (supra) and the present decision of Karnataka High Court have held that pre-deposit requirement cannot be dispensed with except in case of appeals and stay applications already filed prior to 6th August, 2014. Therefore, it remains to be seen whether the round of controversy ends with the ruling of Karnataka High Court or litigation continues on the issue before reaching finality.

Welcome GST – Part 3 GST in Singapore and Malaysia

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Singapore and Malaysia are considered as the two most important countries which have introduced fair GST law. While Singapore is under GST regime since 1994 and Malaysia has just introduced GST from 1st April 2015, there is striking similarity in the provisions.

GST in Singapore:

GST was implemented at a single rate of 3% on 1st April 1994, with an assurance that it would not be raised for at least five years. To cushion the impact of GST on Singaporean households, an offset package was also introduced. Simultaneously, corporate tax rate was cut by 3% to 27%, and the top marginal personal income tax rate was cut by 3%. The initial GST rate of 3% was among the lowest in the world. The GST rate was increased from 3% to 4% in 2003 and to 5% in 2004. Each increase was accompanied by an offset package that was designed to make the average Singaporean household overall better off. The rate was further increased to 7% with effect from 1st July 2007. At present, the rate of GST is 7% applicable to all taxable (standard rated) goods and services.

The threshold for registration is S$ 1million (one million Singapore dollars). Businesses having turnover of taxable supplies during a period of 12 months (four quarters) less than 1 million may opt for voluntary registration.

It may be noted that in Singapore, GST is a tax imposed on the importation of goods (collected by Singapore Customs) and the supplies of nearly all goods and services made in Singapore by a taxable person in the course or furtherance of any business carried on by him. The tax is administered by the Inland Revenue Authority of Singapore (IRAS). The Tax Department has issued GST guides for various industries which provide specific information on how GST affects each sector.

‘Taxable person’ is defined as a person who is registered or is required to be registered under the GST Act. The term ‘business’ includes any: (a) Trade (for example, manufacturing, wholesale, service, retail, mechanics, carpentry); (b) Profession (for example, doctors, lawyers, accountants with their own business practice); or (c) Vocation (for example, taxi drivers, hawkers, freelance fitness instructors, freelance book-keepers, insurance agents, multi-level marketing agents). In addition, the following activities are also deemed to constitute business: (a) The provision by a club, association, society, management corporation or organisation of the facilities or advantages available to its members or subsidiary proprietors, as the case may be; and (b) The admission, for a consideration, of persons to any premises.

Taxable Turnover, for the purposes of registration, refers to the total value (excluding GST) of all taxable supplies made in Singapore. It includes the value of all standardrated and zero-rated supplies but excludes exempt supplies, out-of-scope supplies and sale of capital assets.

Zero-rated supply: Zero-rated supply refers to an export of goods from Singapore by a taxable person to a country outside Singapore or a supply of international services. GST is charged at 0% for theses supplies. However full input tax credit is available to the supplier.

Exempt Supply: Exempt supply refers to the following three broad categories of supplies, where no GST is chargeable: (a) the sale and lease of residential properties; (b) the provision of financial services; and (c) the supply of investment precious metals. A supplier of exempt supplies is not eligible for input tax credit.

Out-of-scope Supply: An out-of-scope supply is a supply which is not made in Singapore and no GST needs to be charged. For example the sale of goods from China to India, where the goods do not enter Singapore.

A registered tax payer is required to e-file quarterly returns within one month from the end of each quarter. (Facility of monthly and six monthly returns is also available to certain classes of tax payers subject to approval from the Comptroller). Extension of due date, up to one month, is granted on application in genuine cases. The tax due, as per return, is required to be deposited within the same due date as for filing of returns. Payments can be made either online or through money orders or telegraphic transfers or through A/c payee cheques drawn in favour of “Comptroller of Goods & Services Tax”. Refund due, if any, as per periodic return is granted automatically within one month/three months/six months as the case may be (unless withheld for specified reasons).

GST in Malaysia: Malaysia has adopted GST from 1st April 2015. Before that there was a system of sales tax on sale of goods (introduced from 29th February 1972) and Service Tax on supply of services (introduced from 1st March 1975). It may be noted that Excise Duty, in Malaysia, is levied on certain luxury and sin products only such as automobiles, liquor, beer and tobacco products. Sales Tax was levied under the system of single point first stage taxation at four different rates of 5, 10. 20 and 25 %0, and, Service Tax was levied at a flat rate of 5% on certain specified services. The GST has replaced both these taxes i.e. Sales Tax and Service Tax. The rate of GST is 6% on all taxable (standard rated) goods and services.

GST, in Malaysia is administered by Royal Malaysian Customs Department (RMCD) – Goods and Services Tax Division. Persons having businesses with annual turnover of taxable supplies exceeding RM 5,00,000 (Five lakh Malaysian Ringgit) are liable to be registered under GST. ‘Persons’ include an individual, sole proprietor, partnership, company, trust, estate, society, union, club, association or any other organization including a government department or a local authority which is involved in the business of making taxable supplies in Malaysia. Application for registration has to be made in prescribed form within 30 days from the date of liability. There is a facility of voluntary registration for businesses having annual turnover less than the prescribed limit, and, there is also a facility of Group Registration whereby more than one business organisation, within the same group, can have one single registration.

Annual Turnover of ‘Taxable Supplies’, for the purposes of registration, includes all taxable supplies whether standard rated or zero rated. But excludes the value of (a) supplies outside the GST scope, (b) disposal of capital assets, (c) imported services, (d) disregarded supplies made in relation to Approved Toll Manufacturer Scheme, Warehousing Scheme and supplies made within or between the designated areas.

The GST registered person is liable to pay tax on all taxable supplies (standard rated) and can claim input tax credit of whatever amount of GST paid on the business inputs by offsetting against the output tax. Suppliers of zero rated goods and services are also entitled to claim full input tax credit. However, ITC (input Tax Credit) can be claimed only on the basis of ‘Tax Invoice’ issued by the supplier. The supplier has to issue Tax Invoice within 21 days of supply. There are provisions for Simplified Tax Iinvoice as well as self made Tax Invoice in certain circumstances.

GST returns are generally required to be filed quarterly by all GST registered persons within one month from the end of each quarter. However, there are provisions to grant permission to file returns on monthly or six monthly basis subject to certain conditions. The returns can be filed either online through internet or manual through paper returns.

Payment of taxes, as per return, has to be made within the same time limit as for filing return. Payment can be made either online or through money order or a/c payee cheques or bank drafts drawn in the name of specified authority.

Refunds, if any, as per periodic returns are granted automatically within 14 days from the date of submitting return (in case of electronic return) and within 28 days (in case of manual return).

Some Important Aspects:

There are few important aspects of GST that one needs to study, they include,

  • Transitional provisions: from existing indirect tax laws to one integrated tax without loss of input credits that is lying unutilised and also embedded in stock in trade or work – in – progress.
  • M eaning of ‘supply’ as a most important term replacing the terms, ‘sale of goods’ and ‘provision of service’.
  • Place of Supply Rules
  • Seamless flow of credit till the supply reaches to the destination
  • Point of Taxation
  • Uniform revenue neutral rate for different kind of goods and servicesExempt goods and services
  • Special kind of supplies
  • Procedural issues like registration, payment of tax, filing of returns, assessments, dispute resolution mechanism and robust network infrastructure 

In this article, attempt is made to evaluate the meaning of term supply, transitional provisions, time of supply and input tax credit mechanism in the context of Singapore and Malaysian GST law.

I. Meaning of term “Supply”:

Under Malaysian law:

  • ‘Supply’ means all forms of supply, sale, barter or exchange including import, for a consideration. Land and transfer of any right in land including tenancy rights and immovable properties are covered in GST as goods. Further, supply of goods includes any activity or transaction under hire purchase or finance lease agreement.
  • Anything which is not a supply of goods but is done for a consideration is a supply of services. “Services” mean anything done or to be done including the granting, assignment or surrender of any right or making available any facility or advantage for a consideration. This would include, license, rental, lease and right to use of the immovable properties and transfer of possession of goods without transferring the ownership.

However, the following are not regarded as supply:

  • Transfer of business undertaking as a going concern.
  • Supplies not in the course of furtherance of business.
  • Supply by any society or similar registered organisation to its members in conformity of the aims and objectives, without any payment other than subscription and where the value of supply is nominal.
  • Contribution to pension, provident or social security fund.
  • Supply of services between an insurer and insured
  • Supply of money or investment article

Under Singapore law:

‘Supply’ includes anything done for a consideration. The following shall be treated as ‘supply’ for the purposes of GST:

  • Possession transferred under an agreement
  • Treatment of process
  • Supply of utility
  • Grant assignment or surrender of any interest or right over land
  • Transfer or disposal of business assets.

The following shall not be treated as supply of goods:

  • Financial services including financial products like equity, debts equity, derivative, life insurance, annuities, commodity features, mutual fund units, exchange of currency
  • I mport of precious metal
  • Grant assignment or surrender of any interest or right over land, license to occupy such land, residential properties, land used for residential purpose or for condominium development, vacant land supplied for public or statutory authority of residential or condominium residence
  • Land or building or part thereof used principally for residential purpose.

II. Transitional provisions

A. In case of supply of goods under Malaysian/ Singapore law:

1. I f the dealer has supplied the goods (under Malaysian law) or removal of goods or made available to the purchaser (under Singapore law) before the effective date and invoice is issued or payment is received for that supply on or after effective date, the supply of goods would be covered under the existing law prior to implementation of GST and the invoice issued or payment received on or after the appointed day for those supplies shall be regarded as inclusive of Sales Tax. However, if the invoice is issued for the supply made after the appointed day, the dealer would not be required to charge GST to the extent the supply is covered by Sales Tax.

2. I f supplies are made before the appointed day and ends on or after the appointed day where the invoice is issued or the payment is received before the appointed day, the consideration for supply shall be deemed to be inclusive of GST, appointed day or effective date is the date when GST comes into force for the portion of supplies made on or after the appointed day.

3. For all goods held in stock on effective date, including the exempted goods or service, are liable to be taxed under the old law.

4. The dealer is required to file his return under the old law covering all the supplies prior to effective date and discharge the liability thereon.

5. I n a case where tax is required to be paid under GST on above supplies, refund can be claimed of the tax paid under existing law.

6. Credit notes issued for return of goods after the appointed day shall be dealt with under the existing law and refund of sales tax paid can be claimed.

7. T he person registered under the GST and in the old law will have no further liability under GST to account for tax on such goods in respect of which the last return under the old law is submitted.

8. A window of five years of zero rating is provided in case a non-taxable supply under the existing law when it becomes taxable under GST and the contract is not renewed to effectuate the tax element in the price. (This means that the existing contracts can be reworked to include GST in the price till five years and would be zero rated till such period, imposing no tax liability and still allowing imput tax credit. Really a very wholesome measure for long term infrastructure projects and government contracts which are normally of “all inclusive” nature.)

B. Exempt supplies under Singapore law –

GST would not be chargeable if the person making the supply, made after appointed day, receives a payment in respect of the supply of goods or services before the appointed day, and the supply of goods or services shall be treated as taking place before that date. However, if no such payment is received before the appointed day but the invoice for a taxable supply of goods or services is issued before that date, that supply made in post GST regime shall be treated as taking place after the appointed day and accordingly tax shall be chargeable on the supply.

C. In case of Services under Malaysian/ Singapore law:

In case of supply of services when the service is performed or payment received prior to introduction of GST, the provisions of old law would apply. In case supply is made on or after the appointed day, the service provider is not required to charge GST on supplies to the extent covered by the invoice before the appointed day or payment received.

D. In case of goods or services not subject to sales tax or service tax but subject to GST Malaysia:

In such a case, the GST liability would be as follows:

  • If such supplies are made before 1st April 2015 where the invoice is issued or payment is received on or after 1st April 2015, the consideration for the supplies is not subject to GST.
  • If such supplies are made before 1st April 2015 and ends on or after 1st April 2015 (spanning 1st April 2015) where the invoice is issued or payment is received on or after 1st April 2015, the portion of supplies made on or after 1st April 2015 is subject to GST.
  • If such supplies are made on or after 1st April 2015 where the invoice is issued or payment is made before 1st April 2015, the consideration for the supplies is deemed as inclusive of GST.
  • If such supplies are made before 1st April 2015 and ends on or after 1st April 2015 (spanning 1st April 2015) where the invoice is issued or payment is received before 1st April 2015, the consideration for the supplies is deemed as inclusive of GST for the portion of supplies made on or after 1st April 2015.

E. Transitional provision as regards to input tax credit Singapore:

In case of dealer having accumulated credit prior to GST regime, the same is allowed to be carried forward to the extent the credit attributable to the taxable supplies made in post GST regime. Special relief is granted to allow businesses to claim GST incurred before GST regime in first return form. This would also apply to a dealer who is partially exempt if he makes both exempt and taxable supplies. In case where input tax cannot be directly indentified with income in the making of either taxable or exempt supplies, the input tax known as residual input tax is required to be apportioned. Taxable supplies would include zero-rated supplies. In case of capital goods, the same is allowed subject to certain exceptions on period based proportions.

Malaysia: A registered person is entitled to a special refund of sales tax of taxable goods (subject to certain percentage of the value of goods) held on hand on (stock) appointed day for making a taxable supply provided the goods were taxable under the sales tax law and the sales tax has been charged and paid by the claimant dealer. A special refund shall not be granted when,

a) goods have been capitalised
b) have been used partially or incorporated into some other goods
c) held for hire d) good held for use other than in business
e) goods not held for sale or exchange
f) where a claim of drawback of sales tax paid is made on subsequent export after the appointed day
g) on such goods on which the claimant is allowed to claim the deduction of service tax under the relevant rules

Where the claim for special refund is made, the goods shall be deemed to have been given credit for the input tax the unpaid taxes be off-setted against the special refund.

(No such provision exists in Singapore)

III. I nput Tax Credit Mechanism :
A. Singapore/Malaysia (conditions for grant of input credit)

  • The business has to be GST registered
  • The goods or services must have been supplied or imported by the business which must be supported by import permits which show the business as importer of goods
  • For local purchase the input tax claim must be supported by tax invoices addressed to the business
  • The goods or services are used or will be used for the furtherance of the business within the country or export which would be regarded as taxable supplies if made in the exporting country
  • The input tax claim is not otherwise disallowable as per specific exclusions.

 It is not necessary to match the input tax claim with output tax charged in the same accounting period, meaning that input tax can be claimed even before supply of goods or service is actually made.

Supply of goods without consideration for a community project may be treated as a supply made in the course or furtherance of the business. Any asset acquired which is taxable may be treated as attributable to the business’s taxable supply and any input tax incurred for any supply made for a community project by the business is claimable. (Above provision exists only in Malaysia)

B. Input tax claim on tripartite arrangement

  • When a taxable person makes taxable supplies of goods or services to a recipient who is a registered person, the recipient is able to claim input tax for an acquisition he makes in the course of his business. However, in a tripartite arrangement, the recipient is not the person who makes the payment for the supply.
  • For a supply made to a third party, there must be a binding agreement or a link between the supplier and the person who makes payment for the supply. Any agreement which does not bind the parties does not amount to a supply unless there is a supply of goods or services between the parties. The person who has an agreement with a supplier for a supply is the recipient of that supply (even if that supply is provided to a third party). The documentation (terms of the contract) is the logical starting point in determining the supplies that have been made.
  • In this regard, the person who makes payment will be entitled to claim input tax on the acquisition of the goods since it is a taxable supply made by the supplier to the person who makes the payment of the supply. (Above provision exists only in Malaysia)

C. Time Limit to claim input tax credit

If input tax is not claimed in the taxable period in which he is supposed to claim, then such input tax can be claimed within six years after the date of the supply to or importation by the taxable person.

D. Refund of Input Tax

A refund will be made to the claimant if the amount of input tax is more than the amount of output tax. Any refund of input tax credit may be offset against unpaid GST, excise duty, import and export duties.

Time When Refund is Made

A registered person can claim refund of input tax in the GST return furnished to the concerned authority. If the amount of input tax exceeds the amount of output tax, the balance will be refunded. The refund of input tax will be made within 14 working days after the return to which the refund relates is received for online submission and 28 working days after the return to which the refund relates is received for manual submission. (Malaysia)

E. Bad Debt relief

Bad debt is amount owed that cannot be collected and all reasonable efforts to collect it have been done. A person is entitled for a bad debt relief subject to the following conditions:
(a) GST is already paid;
(b) The person has not received any payment or part payment within 6 months (12 months in case of Singapore GST) from date of supply or debtor has become insolvent (bankrupt, wound up or receivership) before that period has elapsed; and
(c) Sufficient efforts have been made to recover the debt.

If the person has not received any payment in respect of the taxable supply, he can make a deduction or claim for the whole of the tax paid. However, if he has received part of the payment he can deduct or claim on pro-rata basis of the receipt. In the event where the bad debt relief is granted but subsequently the payment is received by the claimant he is required to repay the amount.

F. Input Tax credit in relation to registration

Credit pertaining to pre-incorporation is not allowed. Input credit on services prior to registration is also not eligible. However, in case of capital goods, the registered person is entitled to claim input tax credit on the goods he holds at the time of registration. Input tax on any asset held on hand (stock) can be claimed on book value within 6 years from the date of registration irrespective of date when the asset is acquired. In case of land and building, input tax can be claimed in on open market value of the asset or the book value whichever is lower. Where a person registers on a date later than the date he becomes liable to be registered, he is entitled to claim input tax incurred on, a) goods held on hand at the time he is liable to be registered; and b) goods or services used in making taxable supplies during the period he became liable to be registered.

IV. Time of supply:

Malaysia:

For goods:
a) when the goods are removed; or
b) when the goods are made available to the person to whom the goods are supplied if the goods are not to be removed.
c) I n the case of supply of goods sent, taken on approval, sale or returned, the time of supply is when it becomes certain that a taxable supply has taken place or twelve months after the removal whichever is the earlier.

For Services:

For services, the time of supply is treated as taken place at the time when the services are performed.

Singapore

The time of supply is based on the earliest of the events:
a) Issuance of invoice
b) Receipt of payment
c) Removal of goods or making it available to the customer.

In case of services, the time of performance In any case, the business is required to issue a tax invoice within 30 days from the time of supply. If the supply is before GST registration date, GST cannot be charged to the customers.

Conclusion: It can be seen that the Malaysian GST, being the latest one, has been carefully crafted, as the law which is lucid with examples and appropriate guidance notes, leaves almost no room for ambiguity and litigation. It even has the provisions for refund of excess claim of input credit if not utilised within six years which is seamlessly granted within a short time of Fourteen days as provided in the law. The term ‘supply’ invokes the liability only in case of consideration. The transitional provisions ushering from exempt to taxable regime are also drafted in a fair manner. In case of exempt product or services becoming taxable under GST, a window of five years for re-working of contract is granted and zero rating is provided for intervening period allowing input tax credits. Provisions are made for allowance of tax credit when the supply results into a bad debt. Input credit is allowed in case of asset acquired for a community project which is regarded in the course of furtherance of business. Tax on import of goods and service is available as input tax credit. The Malaysian GST has more or less adopted the Singaporean model which is taxpayer friendly. The rate of tax in both the countries is minimum in the world, however still GST is blamed in Malaysia as inflationary. India should take a clue from the GST regime in both these countries in drafting its GST legislation.

Representation of cases before Authority for Advance Ruling- Instruction F.No.225/261/2015/ITA.II dated 28.10.2015 ( copy available on www.bcasonline.org)

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Representation of cases before Authority for Advance Ruling- Instruction F.No.225/261/2015/ITA.II dated 28.10.2015 ( copy available on www.bcasonline.org)

‘Tolerance Range’ For Transfer Pricing Cases For AY 2015-16

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Notification No. 86 /2015/F. No. 500/1/2014-APA-II dated 29.10.15

Where the variation between the arm’s length price determined u/s. 92C and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed one percent of the latter in respect of wholesale trading and three percent of the latter in all other cases, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm’s length price for Assessment Year 2015-2016.

The CBDT has instructed all CCITs to strictly follow the time limit of six months as specified in sec. 12AA(2) of the Act for passing an order granting or refusing registration and to take suitable administrative action against those officers not adhering to the time limit – Instruction No. 16 of 2015 dated 06.11.2015

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The CBDT has instructed all CCITs to strictly follow the time limit of six months as specified in sec. 12AA(2) of the Act for passing an order granting or refusing registration and to take suitable administrative action against those officers not adhering to the time limit – Instruction No. 16 of 2015 dated 06.11.2015 (copy available on www.bcasonline.org)

CBDT has issued an internal instruction to constitute local committees to deal with taxpayers grievances from high pitched scrutiny assessment – Instruction No. 17/2015 dated 9.11.15 ( copy available on www. bcasonline.org)

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CBDT has issued an internal instruction to constitute local committees to deal with taxpayers grievances from high pitched scrutiny assessment – Instruction No. 17/2015 dated 9.11.15 ( copy available on www. bcasonline.org)

The Consequences of Ultra Cheap Oil

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From $103 a barrel a year ago, the price of crude oil has crashed to $43, with no bottom in sight. What does this mean for geopolitics and its knock-on effects on India? Oil producing nations, such as Russia, Venezuela, Ecuador, Nigeria, Kuwait and Iraq — and even Saudi Arabia — are feeling the pinch. As oil revenues fall, these nations cut back on social security and government spending, leading to domestic unrest and lower demand for imports.

Two factors are responsible for the collapse of crude. First, production has outstripped demand by a wide margin. The US Energy Information Agency (EIA) reckons that global oil inventories grew by 2.5 million barrels per day during June-July, more than the 0.4 million barrels per day in the same period last year. Demand grew at a sluggish 1.1 million barrels per day, year on year. Iran will hike output from 2016, adding to supply. A slowdown in China and India could further depress demand and lower prices. Two, Saudi Arabia, with the lowest well-head cost of oil production in the world, is locked in a battle for energy supremacy with the US. The latter now needs no energy imports, thanks to shale oil and tar sands from Canada. Riyadh refuses to cut production to boost oil prices because it wants to drive high-cost domestic US oil out of business.

Energy importers like India, Japan and China ought to be happy: lower crude helps balance deficits and could temper inflation. A steady slide in the value of the rupee against the dollar erodes some of the gains from falling oil prices. India can do two things: one, pass on some of the gains from the oil price crash to consumers. Two, sign up long-term contracts with suppliers based on current low prices and the even lower rates projected for the future.

(Source: Editorial in the The Economic Times dated 28-08-2015.)

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Falling prices an opportunity for quick reforms in oil and gas

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Plunging crude oil prices aren’t just a boon for
corporate India and the consumer. They are an invaluable opportunity for
the government to push for faster reform of pricing and distribution
distortions in the oil and gassectors. The Indian basket of crude oil is
trading below $43 a barrel, a seven-month low and less than half the
price of July last year. At the start of the current financial year, the
Union government had prepared its oil economy budget after assuming the
crude oil price to be at $70 a barrel. So far the average price has
been $55 a barrel – and, with global prices slated to slip to $40 a
barrel, the savings for the rest of the year would be substantial.
Moreover, by all accounts the convergence of global factors that has
kept prices benign is likely to continue.

The beneficial effects
of recent reforms to fuel pricing are already visible. In June 2010,
petrol prices were deregulated. This was followed by an exercise to
convert the cooking gas subsidy to a direct benefit transfer scheme that
went all-India in January this year. And in October 2014, the diesel
prices were deregulated. The impact on the petroleum subsidy has been
significant: the budgetary outlay has more than halved in 2014-15. For
the state-controlled oil marketing companies, the savings on
under-recoveries – the difference between production costs and retail
price – have been dramatic too. Underrecoveries dropped from Rs 1,39,869
crore in 2013-14 to Rs 72,314 crore in 2014-15. The government should
now focus on the need to eliminate the remaining subsidies on petroleum
products. To begin with, the subsidy on kerosene should be discontinued.
Retaining subsidy on kerosene distributed through ration shops is
dangerously illogical; having deregulated open-market kerosene prices in
February this year, the temptation for arbitrage is high. The subsidy
on cooking gas, mostly used by the better off, should also end.

Apart
from the monetary gains, the elimination of subsidies has corrected the
imbalance between diesel and petrol consumption in the transport
sector, as is evident in lower sales of gas-guzzling sports utility
vehicles; and reduced the incidence of kerosene adulteration of diesel.
These advantages strengthen the case for the government to take reforms
one step further to gas pricing and distribution. In a country that
imports a third of its gas requirements outside the administered pricing
system and urgently needs to reduce its excessive dependence on coal, a
transparent and fair gas pricing regime is essential. Without it,
big-ticket foreign investment will stay out, and a host of power and
fertiliser plants will stay stalled. Cleaning up gas pricing might well
have a positive domino effect on power and fertiliser subsidies, with
which successive governments have struggled to cope. For an economy that
urgently needs to address the twin challenges of accelerating
investment and climate change, it makes little sense to continue with an
administrative regime that is distortionary in its impact, especially
when global and local factors converge to present a unique opportunity
to reform.

(Source: Editorial in the Business Standard dated 26-08- 2015.)

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Lessons to learn from the Land Bill fiasco – The Bulldozing does not work in a democracy

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The government has decided to let its Ordinance, which diluted clauses
of the UPA regime’s 2013 land acquisition Act, to lapse. The opposition
claims it as a victory over the government. The alliance fighting the
BJP in the upcoming Bihar elections touts it as a victory for every poor
farmer. The truth is more nuanced: state governments have primary
jurisdiction over land laws. After the Singur and Nandigram incidents in
Bengal where the state tried to forcefully snatch land from farmers for
industry, many states have adopted innovative methods to minimise
opposition to acquire land for development and other projects. Rather
than a one-time acquisition, they seek to make land sellers stakeholders
in future development. The Centre must allow states this flexibility
without discrimination.

Most recently, Andhra Pradesh has
acquired significant parcels by offering farmers a portion of land they
have given up, to develop residential and commercial projects once the
area is developed. This will increase their incomes hugely, possibly for
decades. Earlier, Uttar Pradesh under Mayawati and Haryana under
Bhupinder Singh Hooda had developed models that combined upfront
payments, annuities and return of a portion of the land to land sellers,
making them stakeholders in development. However, there are exceptional
cases, like developing dams or irrigation projects, where social gains
outweigh the losses of those affected directly by projects. In these
cases, states must have the flexibility to ease the terms of the consent
clause, or make returns far more generous to the few who give up land
for the benefit of many.

There is a political message for the
BJP here: the Modi regime must learn to talk to all parties, including
allies and the opposition, before undertaking major policy decisions. In
our parliamentary and federal system, one size never fits all:
unilateralism is not an option. Next time, say, while trying to roll out
the GST, the government must first listen, build consensus and stop
trying to use its majority in the Lok Sabha to bulldoze opponents.

(Source: Editorial in The Economic times dated 01-09-2015.)

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Government in Business – Misplaced priorities

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The Narendra Modi-led National Democratic Alliance came to power following a campaign during which several commentators, and many of the wider public, seized on to its catchy slogan of “minimum government, maximum governance”. Senior leaders of his administration continue to insist the phrase is one of the principles underlying current economic policy. However, if that is the case, then the administration’s decisions reflect misplaced priorities and a flawed understanding of the role and scope of government – and indeed its strengths and weaknesses. Unless those priorities are rectified, and soon, the thrust of current policy is likely to spend itself in futility and failure.

Economic history and economic theory both reveal that governments, including and especially in developing societies, do certain things well and do other things badly. What they do not do well is running enterprises. Being insulated from the discipline of the market means that state-run corporations fail especially in consumer-facing enterprises. They are also notable failures in sectors where lower-level decision-making is crucial, and any interference in such decisions – or even the absence of a focus on returns, a lack that characterises public enterprises – can lead to the build-up of costly errors. Yet the government continues to run a vast business empire, and Mr Modi seems to have no intention of letting this empire go. Air India, for example, seems to be a target for “revival” rather than sale even though it is bleeding passengers and pilots – 30 Dreamliner-trained pilots just quit and the once-dominant state-owned airline is now third in the sector, with a 16 per cent market share. The loss-making company has to borrow at the sort of premium that indicates what the financial sector thinks of its chances. Such examples are legion. The Union cabinet recently approved “financial incentives” for two state-owned telecom companies that are never likely to make money in a cut-throat sector. And the new revival plan for public-sector banks, announced with much fanfare, stopped short of the crucial measures that would allow for genuine independence from interference.

Meanwhile, there are indeed areas where more effective and expansive state participation is necessary. While private schools are often inexpensive and effective, without improving public education there is no hope of creating a better-educated society and a workforce with skills. Yet the government, including through the implementation of the Right to Education Act, seems to want to avoid the hard task of fixing the poor quality of state education. And then there is health. Nowhere in the world has private provision of health care with public financing worked – and in India it is a recipe for disaster. The new National Health Policy suggests that public spending will go up from one per cent of gross domestic product to 2.5 per cent soon. But how that is spent is crucial. Many within the government argue that private insurance and provision should be the bedrock of health policy. This also seems to underlie the recent push for expanding insurance. Here, at least, there seems to be sympathy for “minimum government”. But these are completely the wrong sectors for it; more effective government participation is needed. Instead, the government is focused on staying in business where there is no credible case for the public sector. “Minimum government, maximum governance” will only become real when the administration shows signs of understanding where and how it works.

(Source: Editorial in the Business Standard dated 04-09- 2015.)

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Global – Rising profits

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Global corporate profits have soared since 1980.

A new study by
McKinsey Global Institute (MGI) estimates that operating profits after
tax of the largest companies grew from $2 trillion to $7.2 trillion in
2013.

The reasons: corporate taxes were slashed across the
world, interest rates collapsed and labour costs stagnated after the
entry of millions of Chinese and Indian workers into the global economy.

MGI says large companies from emerging markets are driving
global revenue growth while profit rates are higher in developed
economies. The latter have more companies that create value from
intangibles like brands or technology while emerging markets still have
companies that make intensive use of their physical assets.

The
rise of emerging market corporate giants is one reason MGI expects
profits to fall as a proportion of the global economy in the coming
years.

(Source: Editorial in Quick Edit of Mint dated 10-09-2015.)

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End tax uncertainty – Govt must learn from the MAT controversy

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The Bharatiya Janata Party’s manifesto for the 2014 elections promised to end “tax terrorism”, and in his campaign speeches Narendra Modi likened the taxman’s role to the light touch of a honeybee harmlessly drawing nectar from a flower. More than a year later, however, the “flowers” are writhing in pain because of multiple taxationrelated stings, forcing the Modi government to spend an inordinate amount of time on damage control following a firestorm of protests from foreign investors. Consider the controversy over retrospective applicability of minimum alternate tax (MAT ) on foreign portfolio investors (FPIs). The Finance Bill 2015 amended the MAT provisions to exclude capital gains earned by FPIs from the ambit of MAT from April 1, 2015, but the tax department’s position has been that MAT applies to FPIs on all income (including capital gains) up to March 31, 2015 and to all income (other than capital gains) from April 1, 2015. Tax experts, however, say the noise over this absurd tax demand could have been easily avoided because as per the law, there cannot be provision for capital gains tax on FPIs which are resident in tax-treaty regimes where capital gains tax is not levied. Besides, MAT is supposed to apply to domestic companies which pay little or no tax because of the special incentives that the Income-Tax Act provides.

The controversy erupted when the tax department served notices on 68 foreign institutional investors (FII), demanding MAT dues. The notices were served after the Authority for Advance Rulings in 2012 had directed Mauritius-based investor Castleton to pay MAT on its book profits when the company transferred shares from a Mauritius entity to one in Singapore. What was surprising was that so much uncertainty over investments by FIIs was created even though the total value of the tax notices served eventually was just Rs 602 crore. The government got a committee headed by Law Commission Chairman A. P. Shah to look into this; but its report, submitted in July, was not made public because the Supreme Court was to hear a case that has a bearing on the matter filed by Castleton. As a result, uncertainty just increased. It is welcome that the government tried to make its intentions clear last week – especially as risk concerns return to global markets.

There is a lesson from all this. The government must douse such fires more swiftly. The tax department, meanwhile must be reined in. An overzealous pursuit of such cases is counterproductive to the larger cause of tax administration. It adds to the overall perception that India is arbitrary about taxes. The water has already been muddied by innumerable previous instances of conflict, notably those involving Vodafone and Cairn. In the MAT -FPI case, innumerable foreign investors had already got their prior tax returns audited by the tax department – without MAT ever being asserted. Investors have acquired and sold shares based upon share prices reflecting the understanding that the funds had no Indian tax exposure for portfolio securities sold after being held for the requisite long-term holding period. The harm to investor confidence – harm that is directly attributable to the sudden and unexpected MAT assertions – cannot be overstated.

(Source: Editorial in the Business Standard dated 24-08-2015)

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Nikesh Arora and Destructive Creation

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The dangers of too liberal startup funding

There is such a thing as too much of a good thing, asserts SoftBank president Nikesh Arora. Investors from around the world have ratcheted up valuations of Indian startups and this kills the discipline needed to run a sustainable business, says Arora. We agree. We would add that such open-fisted funding of startups has resulted in damaging brick-and-mortar businesses with which some of these web-based startups compete, often unfairly. Easy fortunes made on the basis of valuations that are yet to be validated by earnings create heroes and idols, attempting to imitate whom many aspiring entrepreneurs might shed their self-esteem and entrepreneurial energy, not because they fail to do business but because they do not see in the mirror the muscle-flexing, spandex-clad figure they adore and seek to become.

Of course, liberal startup funding has an upside. In a culture that bars society from taking on risk, save a few groups, forcing the majority to seek jobs rather than pur sue entrepreneurship, liberal funding prompts many more people to chase their dreams instead of chafing at their limiting roles in somebody else’s business. This is most welcome. But this cannot, by itself, offset the damage. Investors who give their investee companies the freedom to burn cash encourage organisational flab: Housing. com is preparing to sack 600. e-Commerce companies have created a huge delivery business, on the strength of orders prompted by steep discounts financed by liberal funders. Once the discounts dry up, as they have to, when investors in e-commerce start looking for returns, will the delivery business sustain with its present manpower? The longer the discounts continue, the greater the hurt to offline retailers who do not have investors who think in terms of `burn rates’ and valuation changes.

Joseph Schumpeter coined the term creative destruction, to describe capitalism’s inner dynamic that constantly revolutionises the production structure, destroying the old to create the new. Excess funding of startups probably deserves to be termed destructive creation.

(Source: Editorial in The Economic Times dated 11-08- 2015.)

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Phase Out, Not Ban, Participatory Notes

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As transparency norms rise, the supply will ebb. The Supreme
Court-appointed Special Investigation Team on black money has flagged
participatory notes (P-Notes) issued by foreign institutional investors
as a possible conduit for illegal funds in the capital market.
Transparency as to the identity of those investing in the market is
necessary. However, abrupt changes would be disruptive. The ideal
strategy is to lower the transaction cost of registering as an investor
in India, so as to encourage most investors to come in directly rather
than as part of a larger institutional investor, phase out most P-Notes
in a stipulated timeframe, while allowing a small category of entities
like university endowments, about whose credentials the regulator has
total comfort, to continue to invest via P-Notes.

Sebi, has
thoroughly revamped the disclosure requirements and eligibility
conditions for participation in the offshore derivative instruments, and
the rules now are far more stringent than before 2007, when Sebi, under
M. Damodaran, had banned them.

P-Notes returned, in the wake of
the financial crisis and capital flight, but with greater mandated
transparency. P-Notes can only be issued to entities from countries that
have signed a multilateral agreement to combat money laundering and for
exchange of information with the International Organisation of
Securities Commissions. Besides, the funds routed via P-Notes have
dropped substantially in recent years and now account for only about 11%
of the secondary market. So, there is no case for any abrupt regime
change.

However, for the sake of transparency, P-Notes are
entirely avoidable, and do need to be phased out in a timebound manner.
The new global rules in the making on transparency, complete with a
system of unique legal entity identifiers that would make beneficial
ownership visible at the end of even complex holding company chains,
would remove the virtue investors seek in P-Notes: anonymity. The supply
of P-Notes would come down, in other words. A time-bound plan to
phase-out P-Notes would make eminent sense.

(Source: Editorial in The Economic Times dated 29-07- 2015.)

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Disallowance u/s. 40(a)(ia) – Deduction of tax under Wrong Section

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Issue for Consideration
Section 40(a)(ia) of the Income-tax Act, 1961 provides for disallowance of 30% of any sum payable to a resident on which tax is deductible at source under chapter XVII-B, where such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in section 139(1). Till assessment year 2014-15, the whole of such sum payable was disallowable.

At times, a taxpayer deducts tax at source under a particular section of the Act, while the tax authorities take a view that tax ought to have been deducted under another section of the Act. For example, an assessee while deducting tax on payment deducts tax at 2% u/s. 194C, while the tax authorities take a view that the tax should have been deducted u/s. 194J as in their view the payment represented the payment of fees for the technical services. If the rate at which tax has been actually deducted is lower than the rate at which tax is deductible in the view of the tax authorities, it is usual for them to disallow the claim for deduction on the ground that the tax was not deducted at source leading to a violation of the provisions of section 40(a)(ia) of the Act. The question which arises for consideration, under the circumstances, is, whether the tax authorities can disallow the whole or part of the expenditure on the ground that tax has not been deducted at source on such expenditure ignoring altogether the fact that the tax was in fact deducted though under a different provision of the Act .

While the Calcutta High Court has taken the view that no disallowance u/s. 40(a)(ia) could be made in such cases, the Kerala High Court has taken a contrary view and has held that the provisions of section 40(a)(ia) would apply if tax was deducted under a wrong provision of law and the claim for deduction would be disallowed.

S. K. Tekriwal’s case:
The issue first arose for consideration before the Calcutta High Court in the case of CIT vs. S. K. Tekriwal, 361 ITR 432.

In this case, the assessee had deducted tax at source from payments made to a machinery contractor u/s. 194C as payment to a sub-contractor at the rate of 1%. The assessing officer took a view that the payments were in the nature of machinery hire charges, which amounted to rent under the provisions of section 194-I, and that tax therefore ought to have been deducted u/s. 194-I at the rate of 10%. The assessing officer therefore, disallowed proportionate payments (90%) by invoking section 40(a)(ia).

In the appeal, the Tribunal deleted the disallowance. The Tribunal noted that section 40(a)(ia) had 2 limbs – one requiring deduction of tax, and the second requiring payment of the tax into the government account. There was nothing in that section, treating the assessee as a defaulter where there was a shortfall in deduction. According to the Tribunal, it could not be assumed that on account of the shortfall, there was a default in the deduction. If there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee could be declared to be an assessee in default u/s. 201, and no disallowance could be made by invoking the provisions of section 40(a)(ia).

The Calcutta High Court, on an appeal by the Revenue, after noting the observations of the Tribunal, held that no substantial question of law was involved in the case before it, and therefore refused to admit the appeal.

PVS Memorial Hospital’s case:
The issue again came up before the Kerala High Court recently in the case of CIT vs. PVS Memorial Hospital Ltd, 60 taxmann.com 69. The 2 years involved in this appeal were assessment years 2005-06 and 2006-07.

In this case, the assessee was a hospital, which had entered into an agreement with another hospital, where that other hospital had undertaken to perform various professional services in the assessee’s hospital. The assessee, on payment to the other hospital for its services, deducted tax at source at 2% u/s. 194C by treating the payments as the payment for carrying out the work in pursuance of the contract.

The assessing officer took the view that the payment was in the nature of fees for technical services and the tax was deductible at 5% u/s. 194J, and therefore disallowed the entire payment u/s. 40(a)(ia) in both the years. For assessment year 2005-06, the Commissioner(Appeals) as well as the Tribunal confirmed the addition and rejected the appeals.

For assessment year 2006-07, the Tribunal allowed the appeal following the Calcutta High Court’s decision in S. K. Tekriwal’s case(supra). According to the Tribunal, the disallowance u/s. 40(a)(ia) could be made only if both the conditions were satisfied, i.e. tax was deductible at source and such tax had not been deducted. The Tribunal took the view that where tax was deducted by the assessee, even if it was under a wrong provision of law, the provisions of section 40(a)(ia) could not be invoked. The Kerala High Court, while examining the issue, noted that in the case before it, tax was deductible u/s. 194J and not u/s. 194C.

The Kerala High Court on examination of the provisions of section 40(a)(ia), expressed the view that the section was not a charging section but was a machinery section, and that such a provision should therefore be understood in such a manner that it was made workable. For this proposition, it relied on the Supreme Court observations in the case of Gurusahai Saigal vs. CIT 48 ITR 1, where the Supreme Court had observed that the provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that was to say, in accordance with the clear intention of the Legislature, which was to make effective a charge that was levied .

According to the Kerala High Court, if section 40(a)(ia) was to be understood in the manner as laid down by the Supreme Court, the expression “tax deductible at source under chapter XVII-B” had to be understood as a tax deductible at source under the appropriate provision of chapter XVII-B. Therefore, if tax was deductible u/s. 194J but was deducted u/s. 194C, according to the Kerala High Court, such a deduction did not satisfy the requirements of section 40(a)(ia). The latter part of the section that ‘such tax had not been deducted’, in the view of the Kerala High Court, again referred to the tax deducted under the appropriate provision of chapter XII-B.

The Kerala High Court held that a cumulative reading of the provision showed that deduction under a wrong provision of law would not save an assessee from the disallowance u/s. 40(a)(ia) expressly dissenting from the Calcutta High Court’s decision in S. K. Tekriwal’s case(supra), and confirmed the disallowance u/s. 40(a)(ia).

Observations
On a bare reading of the provisions of section 40(a)(ia), it is gathered
that the said provision requires a disallowance in a case where there
is a failure to deduct tax at source,where it was deductible, or after
deduction the same has not been paid on or before the due date specified
u/s. 139(1). It does not, at least expressly, cover a case of a partial
non-deduction on the lines similar to the one provided u/s. 201 which
provides for the consequences of the failure to deduct tax at source.
Section 201 by express language using the specific terms,“ wholly or
partly” seeks to rope in the cases of partial or a complete failure and
makes an assessee liable for the consequences. The legislature by not
including the above terms “ wholly or partly” in section 40(a)(ia) have
sought to cover the cases of the absolute failure to deduct tax and not
the case of the partial failure to deduct. Importantly section 201, as
it originally stood, did not provide for the cases of partial deduction
and hence did not seek to penalise an assessee in a case where there was
a short deduction of tax by him. Section 201 has since been amended to
rope in the cases of even a partial failure to pay the deducted taxes.

Further,
section 201 of the Income-tax Act clearly brings out that a failure in
whole or in part, would result in an assessee being treated as in
default. Similarly, section 271C clearly specifies that the penalty can
be levied for failure to deduct the whole or any part of the tax as
required by chapter XVII-B. Unlike both the sections, section 40(a)(ia)
uses the term “has not been deducted”, without specifying whether it
applies to deduction in whole or in part.

Secondly, even in
cases of acknowledged failure, the Andhra Pradesh High Court, followed
by many high courts, in the case of P. V. Rajagopal vs. Union of India
99 Taxman 475, held, in the context of the provisions of section 201 as
it then stood [the language of which was similar to the language used in
section 40(a)(ia)], that if there was any shortfall due to any
difference of opinion as to the taxability of any item, the employer
could not be declared to be an assessee in default. The Tribunal in the
cases of DCIT vs. Chandabhoy & Jassobhoy 49 SOT 448 (Bom), Apollo
Tyres vs. DCIT 60 SOT 1 (Coch) and Three Star Granites (P) Ltd vs. ACIT
32 ITR (Trib) 398, held that the provisions of section 40(a)(ia) would
be attracted only in the case of total failure to deduct tax at source,
and where tax had partly been deducted at source, it could not be said
that tax had not been deducted at source. In all these cases, the
tribunal noted the decision of the Andhra Pradesh High Court in the case
of P. V. Rajagopal vs. Union of India(supra) with approval.

The
enormous litigation on the subject of TDS clearly indicate that there
is a lack of clarity on the applicability of the appropriate provision
of chapter XVIIB for deducting tax at source on a particular payment,
which needs to be interpreted and settled by the courts alone. Over a
period of time, certain clarity has emerged on various types of
payments, but there are still various types of payments where the
position is still not so clear, some of which ultimately have to be
resolved by the Supreme Court.

In such a situation, where a tax
deductor has taken a bona fide view in respect of tax deductible from a
particular type of payment, adopting one of the two possible views on
the matter, should he be penalised by disallowance of the expenditure,
besides being asked to pay the tax short deducted, as well as interest
on such short deduction? Can a tax deductor be expected to have the same
legal competence in interpreting a legal provision as a High Court or a
Supreme Court?

In the context of penalty for concealment, the
Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd. 322
ITR 58 held that where a taxpayer based on a possible view of a matter,
claimed a deduction, a penalty for concealment could not be levied on
him even where his claim for deduction of such payment was disallowed in
assessment of his total income. The Supreme Court held that if the
contention of the revenue was accepted, then in case of every return
where the claim made was not accepted by the Assessing Officer for any
reason, the assessee would invite penalty u/s. 271(1)(c). That was
clearly not the intendment of the Legislature.

The disallowance
u/s. 40(a)(ia) is a form of penalty on a tax deductor for failing to
perform an onerous duty, and therefore where a taxpayer makes a genuine
mistake, taking a possible interpretation of the provision under which
tax should be deducted, he should not be penalised for it.

Undoubtedly,
the intention was to ensure that a deductor on payment did deduct tax
at source from payments on which tax was deductible at source and in
doing so he should tax at the rate applicable under a specific provision
which in his bona fide belief is the provision that is applicable to
such a payment. The intention of the Legislature certainly could not
have been to penalise actions taken under a bona fide belief of a
deductor, particularly when the view taken by him is a possible one.

The
better view therefore seems to be that taken by the Calcutta High
Court, that no disallowance can be made u/s. 40(a)(ia) where tax has
been deducted at source at a lower rate under a particular section,
though the rate of tax under the correct section under which tax is
deductible at source may be higher, particularly in cases where there is
a genuine dispute as to the appropriate section under which tax is
deductible at source. In our opinion, the mistake if any of deducting
under a wrong provisions of law, if based on a bona fide belief, is a
case of trivial mistake and should not even lead to holding the assessee
as in default as has been held by the apex court in the case of
Hindustan Steels Ltd., 83 ITR 26 (SC). The question of disallowance
should not arise at all.

Cancellation of registration upon violation of section 13(1) – section 12AA(4)

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1. Background

Section 12AA (3) of the Income-tax Act,
1961 (hereinafter referred to as “the Act”) deals with cancellation of
registration of a charitable institution in circumstances specified in
the said section. The Income-tax Appellate Tribunal [“Tribunal”] has
consistently held in a number of cases that registration of an
institution cannot be cancelled u/s. 12AA (3) merely because section
13(1) of the Act applies to it. [Krupanidhi Educational Trust vs. DIT,
(2012) 27 taxmann.com 11 (Bang); Cancer Aid and Research Foundation vs.
DIT, (2014) 34 ITR (Trib) 56 (Mum); Parkar Medical Foundation vs. DCIT,
(2014) 34 ITR (Trib) 286 (Pune), TS-469-ITAT -2014 (Pune)]. In order to
overcome this position in law, the Finance (No.2) Act, 2014 inserted
section 12AA (4) with effect from 1-10-2014 to provide for cancellation
of registration of a charitable institution upon operation of section
13(1). This article attempts to explain and analyse the provisions of
section 12AA(4).

2. Text

Section 12AA(4) reads as follows:

“(4)
Without prejudice to the provisions of sub-section (3), where a trust
or any institution has been granted registration under clause (b) of
sub-section (1) or has obtained registration at any time under section
12A [as it stood before its amendment by the Finance (No.2) Act, 1996]
and subsequently it is noticed that the activities of the trust or the
institution are being carried out in a manner that the provisions of
section 11 and 12 do not apply to exclude either whole or any part of
the income such trust or institution due to operation of sub-section (1)
of section 13, then, the Principal Commissioner or the Commissioner may
by an order in writing cancel the registration of such trust or
institution:

Provided that the registration shall not be
cancelled under this sub-section, if the trust or institution proves
that there was a reasonable cause for the activities to be carried out
in the said manner.”

3. Summary

Preconditions for applicability of section 12AA(4)

(a) A charitable institution been granted registration u/s. 12AA(1)(b) or section 12A.
(b) After the registration, it is noticed that
(i) section 13(1) applies to the charitable institution;
(ii)
the activities of the charitable institution are being carried out in a
manner that section 11/12 do not apply to whole or any part of the
income due to operation of section 13(1)
(c) The charitable
institution cannot prove that there was reasonable cause for the
activities to be carried out in the said manner.

Consequences of applicability of section 12AA94)

(a) The Principal Commissioner (“PCIT”) or the Commissioner (“CIT”) may cancel the registration of such charitable institution.
(b) Such cancellation shall be done by an order.
(c) Such cancellation order shall be in writing.

4. Rationale/Purpose

4.1 The relevant passage in Memorandum explaining the provisions of the Finance (No. 2) Bill, 2014 reads as follows:

“There
have been cases where trusts, particularly in the year in which they
have substantial income claimed to be exempt under other provisions of
the Act, deliberately violate provisions of section 13 by investing in
prohibited mode etc. Similarly, there have been cases where the income
is not properly applied for charitable purposes or has been diverted for
benefit of certain interested persons. Due to restrictive
interpretation of the powers of the Commissioner under section 12AA,
registration of such trusts or institutions continues to be in force and
these institutions continue to enjoy the beneficial regime of
exemption. …

Therefore, in order to rationalise the provisions
relating to cancellation of registration of a trust, it is proposed to
amend section 12AA of the Act to provide that where a trust or an
institution has been granted registration, and subsequently it is
noticed that its activities are being carried out in such a manner
that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Act);
(iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or
(iv)
its funds are invested in prohibited modes, then the Principal
Commissioner or the Commissioner may cancel the registration if such
trust or institution does not prove that there was a reasonable cause
for the activities to be carried out in the above manner.”

4.2 The relevant paragraphs in Circular explaining the provisions of the Finance (No.2) Act, 2014 read as follows:

“9.2
There have been cases where trusts, particularly in the year in which
they had substantial income claimed to be exempt under other provisions
of the Income-tax Act though they deliberately violated the provisions
of section 13 of the said Act by investing in prohibited modes other
that specified modes, etc. Similarly, there have been cases where the
income is not properly applied for charitable purposes or is diverted
for the benefit of certain interested persons. However, due to
restrictive interpretation of the powers of the Commissioner under the
said section 12AA, registration of such trusts or institutions continued
to be in force and these institutions continued to enjoy the beneficial
regime of exemption.
…

9.4 Therefore, in order to
rationalise the provisions relating to cancellation of registration of a
trust, section 12AA of the Income-tax Act has been amended to provide
that where a trust or an institution has been granted registration, and
subsequently it is noticed that its activities are being carried out in
such a manner that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Income-tax Act, 1961);
(iii)
any income or property of the trust is used or applied directly or
indirectly for benefit of specified persons like author of trust,
trustees etc.; or
(iv) its funds are not invested in specified modes,

then
the Principal Commissioner or the Commissioner may cancel the
registration, if such trust or institution does not prove that there was
a reasonable cause for the activities to be carried out in the above
manner.”

[CBDT Circular No. 1 / 2015, dated 21.01.2015]

5. Violation of section 13 cannot be used as a ground to deny registration

Courts/Tribunal have held that violation of section 13 is not a ground on which registration can be denied to a charitable institution [see CIT vs. Leuva Patel Seva Samaj Trust, (2014) 42 taxmann.com 181 (Guj), (2014) 221 Taxman 75 (Guj); Malik Hasmullah Islamic Educational and Welfare Society vs. CIT, (2012) 24 (taxmann.com 93 (Luck), (2012) 138 ITD 519 (Luck), (2013) 153 TTJ 635 (Luck); PIMS Medical & Education Charitable Society vs. CIT, (2013) 31 taxmann.com 371 (Chd)(Trib), (2013) 56 SOT 522 (Chad)(Trib), (2012) 150 TTJ 891 (Chd)(Trib); Chaudhary Bishambher Singh Education Society vs. CIT, (2014) 48 taxmann.com 152 (Del)(Trib); Kurni Daivachara Sangham vs. DIT, (2014) 50 taxmann.com 53 (Hyd)(Trib); Modern Defence Shikshan Sanstha vs. CIT, (2008) 26 SOT 21 (Joh)(URO); Ashoka Education Foundation vs. CIT, (2014) 42 CCH 0090 (Pune)(Trib)]. On a plain reading, there is no change in this position even after amendment. This is because section 12AA(4) provides that “where a trust or any institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [asit stood before its amendment by the Finance (No.2) Act, 1996] and subsequently it is noticed that …”. Thus, the section is triggered only subsequent to the registration.

6.    Is cancellation independent of assessment? Can CIT suo moto take cognisance of the violation of section 13(1) prior to assessment by AO?

The section states that “if it is noticed that the activities of the trust or the institution are being carried out in a manner …” It does not state that the violation of section 13(1) is noticed only upon assessment. If the CIT can independently come to a conclusion that there has been a default u/s. 13(1) and the provisions of section 11 and 12 do not apply as a result of the default, then, on a literal reading, he can suo moto take cognisance of the violation of section 13(1) prior to assessment by AO. Thus, the action u/s.er section 12AA(4)

     a. could precede the assessment; or

     b. be concurrent with the assessment; or

     c. succeed the assessment.

To illustrate :

Suppose, a search and seizure action u/s. 132 is taken against a charitable institution and during the proceedings, it is found that the Managing Trust has siphoned off certain funds of the institution. In that case, section 13(1)(c) could apply and the PCIT or CIT could initiate proceedings u/s. 12AA(4).

However, it appears that the ultimate outcome of cancellation would, inter alia, depend on the position taken or finally accepted in assessment proceedings vis-à-vis the operation of section 13(1). Hence, if the assessment order is reversed at the appellate stage, then the cancellation order cannot survive.

     7. Cancellation only in respect of operation of section 13(1)

7.1    The provision applies pursuant to operation of section 13(1). Thus, it does not apply pursuant to operation of the following sections :

     Section 13(7) – anonymous donations

     Section 13(8) – exemption not available on account of first proviso to section 2(15) becoming applicable to the institution.
7.2    The position vis-à-vis other sub-sections of sectio     13 is explained in the following paragraphs :

     Section 13(2)

The said sub-section provides for situations when the income or property of an institution is deemed to have been used or applied for the benefit of an interested party. This sub-section is an “extension of section 13(1)(c) / (d)” and hence a violation of section 13(2) could also trigger the proceedings for cancellation of registration u/s. 12AA(4).

     Section 13(4) and 13(6)

Section 13(4) provides that if the investment in a concern in which an interested person referred to in section 13(3) does not exceed 5% of the capital of that concern, then, subject to its provisions, the exemption u/s. 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment.

Section 13(6) provides that if a trust has provided educational or medical facilities to an interested person referred to in section 13(3), the exemption u/s. 11 or 12 shall not be denied in relation to any income other than the income referred to in section 12(2).

It appears that the above sections are not independent sections : both are in connection with violation u/s. 13(1)(c) or section 13(1)(d). They merely give a concession and relax the rigors of section 13(1)(c) and section 13(1)(d) apply. Income is not excluded from section 11 by reason of application of section 13(4) or (6), The breach would be only be on account of section 13(1)(c) or (d). Hence, it appears that, on a literal interpretation, the provision covers cases where section 13(4) and section 13(6) are applicable.

     8. General principles for interpretation of section 12AA(4)

Section 186 (1) of the Act, prior to its omission with effect from 01.04.1993, read as follows:
“(1) If, where a firm has been registered or is deemed to have been registered, or its registration has effect under sub-section (7) of section 184 for an assessment year, the Assessing Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard cancel the registration of the firm for that assessment year:”

It is noticed that both, section 186(1) and section 12AA(4), refer to cancellation of registration and both use the term ‘may’, that is, the Assessing Officer (in section 186) and the PCIT or CIT [in section 12AA(4)] may cancel the registration.

Hence, the principles laid down by Courts in section 186 could be applied for interpreting section 12AA(4), to the extent applicable. Now, in the context of section 186, it has been held that withdrawal of the benefit of registration in respect of an assessment year results in serious consequences; it is penal in nature in that the consequences are very serious to the assessee and that is why discretion is conferred on the authority by requiring him to give a second opportunity [CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP)]. Likewise, it is submitted that section 12AA(4) is also a penal provision and the principles applicable in interpretation of penal proceedings, including the following, could ordinarily apply in interpreting section 12AA(4):

    A penal provision must be interpreted strictly and in favour of the assessee [CIT vs. Sundaram Iyengar & Sons (P) Ltd. (TV), (1975) 101 ITR 764 (SC); Jain (NK) vs. Shah (CK), AIR 1991 SC 1289 and CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]

    If two views are possible, the benefit should go to the assessee. [CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) (in the context of section 271 of the Income-tax Act); CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]. In other words if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. A court is not competent to stretch the meaning of an expression used by the Legislature in order to carry out the intention of the Legislature. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742]
 

    9. Does a default u/s. 13 automatically lead to cancellation of registration?

For the following reasons, it appears that a mere default u/s. 13(1) would not automatically result in cancellation of registration:

    Section 12AA(4) provides that the PCIT/CIT may by an order in writing cancel the registration. The use of the word “may” shows that it is discretionary, and the PCIT/CIT has a discretion not to cancel registration even in spite of the default of the assessee. [see J. M. Sheth vs. CIT, (1965) 56 ITR 293 (Mad); CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (both in the context of section 186)].

    A similar term is used in section 271(1)(c), where the AO “may” levy penalty on an assessee upon the assessee furnishing inaccurate particulars of income or concealing income. Courts have held that in view of the word “may”, the penalty is not automatic [Dilip N. Shroff vs. JCIT, (2007) 161 Taxman 218 (SC), (2007) 191 ITR 519 (SC)]. Now, section 12AA(4) is also a penal provision. Hence, applying the same principle, the cancellation u/s. 12AA(4) is also not automatic.

    Section 12AA(3) provides that if the Commissioner is satisfied that the activities of trusts are not genuine, he shall pass an order in writing cancelling the registration. The use of the word “may” in section 12AA(4) as against “shall” in section 12AA(3) clearly shows that the power in section 12AA(4) is discretionary.

    The proviso to section 12AA(4) states that the registration shall not be cancelled if the charitable institution proves that there was a reasonable cause for the activities to be carried out in the manner provided in the section. Hence, a mere default does not trigger cancellation, if there is a reasonable cause for the default.

    The relevant passage in section 12AA(4) reads as follows:

“… it is noticed that the activities of the trust or the institution are being carried out in a manner that the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principle Commissioner or the Commissioner may by an order in writing cancel the registration …”

Suppose the expression “the activities of the trust or the institution are being carried out in a manner” (hereinafter referred to as “the relevant expression”) is removed from the language. In that case, the provision (hereinafter referred to as “modified provision”) would read as follows:

“It is noticed that … the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principal Commissioner or the Commissioner may by an order in writing cancel the registration.”

A plain reading of modified provision shows that if provisions of section 11 and 12 do not apply due to operation of section 13(1), then it could trigger cancellation of registration. Thus, if mere default in section 13(1) triggered cancellation, then the modified provision without the relevant expression would have been sufficient and the relevant expression would be superfluous!

It is now very well settled that redundancy should not be attributed to the legislature and no part of a statute should be read in a manner that it becomes superfluous. [CWT vs. Kripashankar Dayashanker Worah, (1971) 81 ITR 763 (SC)] If a mere default in section 13(1) could result in the CIT exercising his power, then the entire expression “the activities of the trust or the institution are being carried out in a manner ” would not have been required and it would have been sufficient if the section had been worded as “it is noticed that the provisions of section 11 and 12 …”. In view of this, some meaning has to be attributed to the relevant expression. The point for consideration is what meaning should be attributed to the said phrase? It is submitted as follows:

    i)“Activities”

The relevant expression refers to “activities”. Now ordinarily, section 13 of General Clauses Act, 1897, provides that singular includes plural and vice versa, unless the context otherwise requires. It could be argued that in this case, depending on facts, the expression “activities” in plural may not include singular “activity” especially because cancellation of registration is an onerous provision and a single default should not result in such harsh consequences.

    ii)“Are being carried out”

The relevant expression uses the phrase “are being carried out”. The terms ‘is’ (singular of ‘are’) and “being” have been judicially interpreted as follows:

    In F. S. Gandhi vs. CWT, (1990) 51 Taxman 15 (SC), (1990) 184 ITR 34 (SC), (1990) 84 CTR 35 (SC), the Supreme Court had to interpret the expression “any interest in property where the interest is available to an assesssee for a period not exceeding six years…” The Court observed as follows:

The word ‘available’ is preceded by the word ‘is’ and is followed by the words ‘for a period not exceeding six years’. The word ‘is’, although normally referring to the present often has a future meaning. It may also have a past signification as in the sense of ‘has been’ (See Black’s Law Dictionary, 5th edn., p. 745). We are of the view that in view of the words ‘for a period not exceeding six years’ which follow the word ‘available’ the word ‘is’ must be construed as referring to the present and the future. In that sense it would mean that the interest is presently available and is to be available in future for a period not exceeding six years.

    The term “being” has been interpreted as follows:

    “In Stroud’s Judicial Dictionary (fourth edition) the expression “being” is explained thus at page 267 of volume I:

“Being — ‘Being as used in a sense similar to that of the ablative absolute, has sometimes been translated as, ‘having been’; but it properly denotes a state or condition existent at the time when the conclusion of law or fact has to be ascertained.”

In other words, it is clear that the phrase “the business of such company is not being continued” must be interpreted to mean the company whose business is non-existent at a time when the requisite opinion contemplated by the section is formed by the Central Government and if at such time the business is not continued or has stopped, the case would fall within that phrase.”

[UOI vs. Seksaria Cotton Mills Ltd., (1975) 45 Comp. Cas 613 (Bom)] [for the purpose of: section 15A of the Industries (Development & Regulation) Act, 1951] In  Harbhajan  Singh  vs.  Press  Council  of India, AIR 2002 SC 135, the Supreme Court observed as follows :

“In Maradana Mosque (Board of Trustees) vs. Badi-ud-Din Mahmud and Anr.- (1966) 1 All ER 545, under the relevant Statute the Minister was empowered to declare that the school should cease to be an unaided school and that the Director should be the Manager of it, if the Minister was satisfied that an unaided school “is being administered” in contravention of any provisions of the Act. Their Lordships opined, “Before the Minister had jurisdiction to make the order he must be satisfied that ‘any school. is being so administered in contravention of any of the provisions of this Act’. The present tense is clear. It would have been easy to say ‘has been administered’ or ‘in the administration of the school any breach of any of the provisions of this Act has been committed’, if such was the intention of the legislature; but for reasons which common sense may easily supply, it was enacted that the Minister should concern himself with the present conduct of the school, not the past, when making the order.

This does not mean, of course, that a school may habitually misconduct itself and yet repeatedly save itself from any order of the Minister by correcting its faults as soon as they are called to its attention. Such behaviour might well bring it within the words ‘is being administered’ but in the present case no such situation arose. There was, therefore, no ground on which the Minister could be

‘satisfied’ at the time of making the order. As appears from the passages of his broadcast statement which are cited above, he failed to consider the right question. He considered
 

only whether a breach had been committed, and not whether the school was at the time of his order being carried on in contravention of any of the provisions of the Act. Thus he had no jurisdiction to make the order at the date on which he made it”.

On a combined reading of the term “are” as a plural of “is” and “being”, as interpreted above, it could be argued that the defaulting activities should continue to be carried out or at least they have been carried out in near past. The CIT cannot invoke the provision for a default committed before many years and especially in a re-assessment when the default u/s. 13 was completed much earlier and was not detected or was held as not being applicable in the original assessment.

    10. Proceedings before PCIT/CIT

10.1    Cancellation of the registration should only be after complying with the principles of natural justice, which necessarily implies that –

    if the PCIT/CIT is satisfied with the explanation offered by the assessee, he must drop the proposal to cancel the registration. [see CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 185)]

    a reasonable opportunity of being heard shall be given to the assessee;
    the PCIT/CIT shall not use any material without giving an opportunity to the assessee to rebut such material.

10.2    The PCIT/CIT should exercise his power not arbitrarily or capriciously but judicially in a manner consistent with judicial standards and after a consideration of all relevant circumstances. [see Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 11 (SC), (1972) 83 ITR 26 (SC); J.M Sheth vs. CIT, (1965) 56 ITR 293 (Mad) (in the context of section 186)].

10.3    For the purpose of section 271(1) it has been held that the regular assessment order is not the final word upon the pleas which can be taken at the penalty stage. The assessee is entitled to show-cause in penalty proceedings and to establish by the material and relevant facts which may go to affect his liability or the quantum of penalty. He cannot be debarred from taking appropriate pleas simply on the ground that such a plea was not taken in the regular assessment proceedings. [Jaidayal Pyarelal vs. CIT, (1973) Tax LR 880 (All)]

Applying the same principle an assessee cannot be debarred from taking appropriate pleas in the cancellation proceedings simply on the ground that such a plea was not taken in the regular assessment proceedings.

10.4    For the purpose of section 271 it has been held that the findings given in assessment proceedings, though relevant and admissible material in penalty proceedings, cannot operate as res judicata. [CIT vs. Gurudayalram Mukhlal, (1991) 95 CTR 198 (Gau), (1992) 60 Taxman 313 (Gau), (1991) 190 ITR 39 (Gau).] Similarly, the findings in respect of section 13(1) given in assessment proceedings cannot operate as res judicata.

10.5    It has been held that additional evidence is admissible in penalty proceedings and it is possible for the parties to bring on record additional material for determining if the penalty should be imposed. [CIT vs. Babu Ram Chander Bhan, (1973) 90 ITR 230 (All)]. Applying the same principle it appears that additional evidence is admissible in the cancellation proceedings.

    11. Order passed by CIT/PCIT

Section 12AA(4) requires the CIT/PCIT to pass an order ‘in writing’.

It is now well settled that a quasi-judicial order has to be a speaking order containing

    a) submissions of the assessee;

    b) detailed reasons why the submissions are not acceptable. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742; Travancore Rayons vs. UOI, AIR 1971 SC 862; Appropriate Authority  vs.  Hindumal  Balmukand  Investment Co. P. Ltd., (2001) 251 ITR 660 (SC)] or a mere statement that after hearing the assessee and perusing the record, he did not find any substance in the submissions is not enough [see Sanju Prasad Singh vs. Chotanagpur Regional Transport Authority, AIR 1970 Pat 288 explaining the meaning of “speaking order”].

    12. Reasonable cause

12.1    Registration cannot be cancelled if the assessee proves that there was reasonable cause for the activities to be carried out in a particular manner.

12.2    Institution to prove reasonable cause

The institution has to prove that a reasonable cause existed for the activities being carried out in the particular manner. The term “proved” is defined in section 3 of the Indian Evidence Act, 1872 as follows:

“A fact is said to be ‘proved’ when after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.”

In view of the above, the test of proof is that there is such a high degree of probability that a prudent man would act on the assumption that the thing is true. [Pyare Lal Bhargava vs. State of Rajasthan, AIR 1963 SC 1094, (1963) 1 SCR Supl. 689 (SC)]

12.3    Reasonable cause – meaning

Courts have explained the term “reasonable cause” as follows:

    ‘Reasonable cause’ as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow. [Woodward Governors India (P.) Ltd. vs. CIT, (2002) 253 ITR 745 (Del) (For the purpose of section 273B of the Income-tax Act, 1961)]

    In Oxford English Dictionary (first edn. published in 1933 and reprinted in 1961, Volume VIII), the expression ‘reasonable’ has been defined to mean ‘fair, not absurd, not irrational and not ridiculous’. Likewise, the expression ‘good’ has been defined in the said Dictionary in Volume IV to mean ‘adequate, reliable, sound’. Similarly, the expression ‘sufficient’ has been defined under the same very Dictionary in Volume X to mean ‘substantial, of a good standard’.

From the definitions referred to above, it would appear that reasonable cause or excuse is that which is fair, not absurd, not irrational and not ridiculous … if a reason is good and sufficient, the same would necessarily be a reasonable cause. [Banwarilal Satyanarain vs. State of Bihar, (1989) 46 TAXMAN 289 (Pat), (1989) 179 ITR 387 (Pat), (1989) 80 CTR 31 (Pat) (for the purpose of section 278AA of the Income-tax Act, 1961)]

    Reasonable cause, as correctly observed by the Administrative Tribunal, is a cause that a prudent man accepts as reasonable. The test to assess the reasonableness of the cause for default is, therefore, to find whether in the judgment of a common prudent man the cause is such that any normal man would, in the same or similar circumstances be also a defaulter. [Eknath Kira Akhadkar vs. Administrative Tribunal, AIR 1984 Bom 144 [for the purpose of section 22(2)(a) and section 32(4) of the Goa, Daman and Diu Buildings (Lease , Rent and Eviction) Control Act, 19968]]

The Bombay High Court has held that the expression ‘reasonable cause’ in section 273B for non-imposition of penalty u/s. 271E would have to be construed liberally depending upon the facts of each case. [CIT vs. Triumph International Finance (India) Ltd., (2012) 22 taxmann. com 138 (Bom), (2012) 208 TAXMAN 299 (Bom), (2012) 345 ITR 270 (Bom), (2012) 251 CTR 253 (Bom)]

12.4    Some illustrations/principles regarding reasonable cause

a)    Ignorance of law

It has been held that ignorance of law can constitute a reasonable cause [see ACIT vs. Vinman Finance & Leasing Ltd., (2008) 115 ITD 115 (Visk)(TM), para 13; Kaushal Diwan vs. ITO (1983) 3 ITD 432 (Del)(TM) (in the context of 285A of the Income-tax Act, 1961)]. Hence, in a given situation, the ignorance of the provisions of section 13(1) may constitute a reasonable cause.
 

    b) Bonafide belief

It has been held that penalty is not justified where the breach flows from a bonafide belief of the offender that he is not liable to act in the manner prescribed by the statute. [see

    Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC);
    DCIT vs. Dasari Narayana Rao, (2011) 15 taxmann.com 208 (Chennai Trib) (in the context of section 272A of the Income-tax Act, 1971);

    ACIT vs. Dargapandarinath Tuljayya & Co. (1977) 107 ITR 850 (AP) followed in Thomas Muthoot vs. ACIT, (2014) 52 taxmann.com 114 (Coch Trib) (in the context of section 271C of the Income-tax Act, 1961);

    IL & FS Maritime Infrastructure Co. Ltd. vs. ACIT, (2013) 37 taxmann.com 297 (Mum Trib), para 8 (in the context of section 271BA of the Income-tax Act, 1961)].

Applying the aforesaid principle, a mistaken bonafide belief that section 13(1) is not applicable can constitute a reasonable cause.

(c) Expert opinion

It has been held that if a particular action is bonafide taken on the basis of an opinion from a senior counsel, then, it constitutes a reasonable cause and merely because it turns out to be wrong, a penalty cannot be levied on the assessee. [CIT vs. Viswapriya Financial Services & Securities Ltd., (2008) 303 ITR 122 (Mad)] Applying the same principle, if a charitable institution has relied upon an expert opinion, then, merely because the expert had held a different view, it does not mean that there is no reasonable cause for the default.

(d) Bonafide mistake

It has been held that registration of an assessee firm cannot be cancelled upon a bonafide mistake which was not intentional.[see CIT vs. Pawan Sut Rice Mill, (2004) 136 Taxman 640 (Pat) (in the context of section 186 of the Act)]. Applying the principle, the registration may not be cancelled if there is unintentional, bonafide mistake as a result of which section 13(1) became applicable to an assessee.

    13. No penalty upon technical or venial breach

It has been held that the authority competent to impose the penalty will be justified in refusing to impose the penalty when there is a technical or venial breach of the provisions of the Act. [Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC)]. Applying the same principle, the registration may not be cancelled when there is technical or venial breach upon application of section 13(1).

    14. Whether registration can be cancelled in certain situations involving quantum assessment

For the purpose of section 271(1)(c), it has been held that penalty cannot be levied in the following situations :

    a. the assessee’s appeal against the quantum assessment has been admitted as substantial question of law (because this shows that the issue is debatable) [CIT vs. Liquid Investment and Trading Co., ITA No. 240/Del/2009, dated 05.10.2010].

    b. where two views are possible in respect of a particular addition in the quantum assessment and the issue is debatable.

    c. where the position adopted by the assessee is supported by a Tribunal or High Court judgment in another case.

Likewise, if the applicability of section 13(1) has been admitted by the High Court as a substantial question of law or if two views are possible regarding operation of section 13(1) or there is a case u/s. 13(1) supporting the view adopted by the assessee, it is a point for consideration as to whether the PCIT/CIT should not cancel the registration on the ground that the discretionary power u/s. 12AA(4) entails him to use the discretion in favour of the assessee in such matters and/or their exists a reasonable cause for the activity to be carried out by the assessee in the manner it has done.

    15. Wilful default

The registration can be cancelled if the default is a wilful default. [See CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (in the context of section 186)]
    
16. Cancellation – whether with retrospective effect?

16.2    There are two views on the issue :

    a. Registration cannot be cancelled retrospectively

    b. Registration can be cancelled retrospectively

16.3    Registration cannot be cancelled retrospectively

    For the purpose of section 35CC/CCA, Courts have held that an approval granted could not be withdrawn with retrospective effect.

[see B. P. Agarwalla & Sons Ltd. vs. CIT, (1993) 71 Taxman 361 (Cal), (1994) 208 ITR 863 (Cal)

CIT vs. Bachraj Dugar, (1998) 232 ITR 290 (Gau), (1999) 152 CTR 367 (Gau)

Jai Kumar Kankaria vs. CIT, (2002) 120 Taxman 810 (Cal)]

Applying the aforesaid principle, registration cannot be cancelled with retrospective effect.

    For the purpose of sales tax, it has been held that the registration certificate of a dealer could not be cancelled with retrospective effect. [M. C. Agarwal vs. STO, (1986) 11 TMI 372 (Ori), (1987) 64 STC 298 (Ori)]

    Section 12AA(4) does not refer to cancellation with retrospective effect. In the absence of such specific provision, registration cannot be cancelled with retrospective effect.

16.4    Registration can be cancelled retrospectively

    In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), the Tribunal held that registration of a charitable institution could be cancelled u/s. 12AA(3) with retrospective effect. Applying the same principle, registration could be cancelled u/s. 12AA(4) with retrospective effect.

    The judgments for section 35C/CCA and under sales tax are distinguishable since a retrospective cancellation in those cases prejudicially affected the counterparty. However, in retrospective cancellation of certificate u/s. 12AA(4), it is primarily the charitable institution which is affected.

16.5    Even if registration can be cancelled retrospectively it can not be before 1st October 2014

Even if registration could be cancelled with retrospective effect, it could not be retrospective before 1st October, 2014 being the date of insertion of section 12AA(4). This is supported by the following arguments:

    In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), it was held that the registration to a charitable institution could not be cancelled beyond 1st October, 2010, being the date on which the provision became applicable.

    It is now well settled that law that a person, who has complied with the law as it exists, cannot be penalised by reason of the amendment to the law effected subsequently, unless such intention is expressly stated and the imposition of such penalty is not contrary to any of the provisions of the Constitution.[CIT vs. Kumudam Endowments, (2001) 117 Taxman 716 (Mad)]

Again, it is now well settled that unless the terms of a statute expressly so provide or necessarily imply, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. [CED vs. Merchant (MA), (1989) 177 ITR 490 (SC); CWT vs. Hira Lal Mehra, (1994) 205 ITR 122 (P&H); A fiscal statute will not therefore be regarded as retrospective by implication, particularly a penal provision therein. [CWT vs. Ram Narain Agarwal, 1976 TLR 1074 (All); Thangalakshmi vs. ITO, (1994) 205 ITR 176 (Mad)]

16.6    Summary

The matter is not free from doubt. However, even if it is held that the registration can be cancelled with retrospective effect, the retrospectivity cannot be prior to 1.10.2014.

To illustrate, suppose an assessee commits a default in financial year 2013-14; the CIT notices the default in June 2015 and cancels the registration in July 2015. In this case, the cancellation can have effect from 1st October 2014, and not for the period prior to 1st October, 2014.
 


16.7    Impact of cancellation of registration upon past years if registration cannot be cancelled with retrospective effect. (view 1)

Suppose a charitable institution violates section 13(1) during financial year 2015-16 and its registration is cancelled in financial year 2018-19. If there is no default u/s. 13(1) in financial year 2016-17 and 2017-18, can it avail of the benefit of section 11 and 12 during these years?

Section 12A(1)(a)/(aa) provide that the provisions of section 11 and 12 shall not apply in relation to the income of a charitable institution unless such trust is registered u/s. 12AA. Thus, in order to avail of the benefit of exemption, an institution is required to be registered u/s. 12AA. It appears that if the registration is valid throughout the previous year and if it is cancelled after 31st March of the relevant previous year, then, so far as the said previous year is concerned, it ought to be regarded as registered u/s. 12AA for the purposes of aforesaid section 12A(1) (a)/(aa). Thus, in the aforesaid illustration, the institution should be regarded as registered for financial year 2016-17 and financial year 2017-18, that is, assessment years 2017-18 and 2018-19; the registration should be regarded as cancelled only from financial year 2018-19 onwards.

17    Writ

Like any other order, in an appropriate case, a writ under Article 226 of the Constitution would lie against the cancellation order before the jurisdictional High Court and the Court may stay the operation of the cancellation order; or quash the cancellation order; or set aside the order directing the PCIT/CIT to pass a fresh order after complying with the directions of the Court.

18    Appeal against the cancellation order

An assessee aggrieved by the order passed by PCIT or CIT, may appeal to the Appellate Tribunal against such order. [see section 253(1)(c)]

Dual appeal

An assessee whose registration has cancelled will now have to pursue two appeals, one against the assessment order with the CIT(A) and another against the cancellation order with the Tribunal.
    
19.On cancellation, whether the charitable institution is debarred from making fresh application for registration?

Suppose the registration is cancelled for a default which no longer exists. To illustrate, an institution made an investment contrary to the mode specified in section 11(5). It has liquidated the investment and there is no continuing default u/s. 11(5). In such circumstances, even if the CIT cancels the registration, it appears that the institution can immediately reapply for fresh registration and the CIT has to deal with such application in accordance with the provisions of section 12AA(1).

20. Impact on cancellation order upon deletion of operation of section 13(1) in merits

The Supreme Court has authoritatively laid down that where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled. [K. C. Builders vs. ACIT, (2004) 265 ITR 562 (SC)]

Likewise, if it is held in the appellate proceedings that there is no violation of section 13(1) then, the cancellation order cannot survive. Further, such reversal of the cancellation order should be regarded to have retrospective effect ab initio and all the actions taken on the basis of the cancellation order would no longer survive.

21    Implications under other sections

21.2    Section 56(2)(vii)

Section 56(2)(vii) provides that if an individual or HUF receives any sum of money or property without consideration, then, the sum of money so received or the value of property so received shall be regarded as income
of the individual. The proviso to the said section provides that the provision will not apply in respect of any sum of money or property received from a charitable institution registered u/s. 12AA. Hence, if the institution supports any individual after the cancellation of registration, then such donation or contribution/aid would be regarded as income of the individual and shall be taxable beyond the basic exemption of Rs.50,000.

21.3    Section 80G

Section 80G(5)(i) provides that an institution is eligible for approval u/s. 80G if its income is not liable to inclusion in its total income under the provisions of sections 11 and

    Now, if the registration is cancelled, the exemption u/s. 11 and 12 would not be available to the institution and the income would be liable to inclusion in total income. In such circumstances, the institution would not be eligible to obtain an approval u/s. 80G(5) or its existing approval would be liable for cancellation.

21.4    Exemption u/s. 10

Where an institution has been granted registration u/s. 12AA or 12A and the said registration is in force for any previous year, then the assessee is not eligible for exemption u/s. 10 except exemption in respect of agricultural income or u/s. 10(23C) [section 11(7)]. By implication once the registration is cancelled, the assessee would be entitled to claim exemption under section 10 e.g. dividend income u/s. 10(34) or long term gains u/s. 10(38).

22    Conclusion

Section 12AA(4) is another measure by the Government to tighten the law relating with charitable institutions. While the tax department may invoke it in many cases involving operation of section 13(1), it is felt that the ultimate cancellation of registration hinges on fulfilment of many conditions and restrictions and would lead to protracted litigation.

Need for professional institutions to become transparent

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Governance deficit has been a major stumbling block in India’s march to becoming an economic superpower. Transparency in the functioning of the government, its various organs and public institutions, will go a long way in ensuring good governance. However, the powers that be seem to be working in exactly the opposite direction. Two events, which have been reported in the RT I feature in this issue, have been the trigger for this editorial.

The first is the action of the National Green Tribunal (NGT) in refusing to entertain an application requesting for certain information, on the ground that instead of an Indian postal order of Rs.10, the applicant had attached court fee stamps of Rs.10. When the applicant filed an appeal, the administrative authorities of the NGT engaged an advocate paying him fees of Rs.31,000 to defend its order of refusal. It is tragic that a tribunal which is an institution for dispensing justice, should harbour such an attitude and refuse information. The second instance is the decision of the Maharashtra State Cabinet in June proposing an amendment to the Criminal Procedure Code, whereby a magistrate cannot take cognisance of a complaint against a public servant without the permission of the competent authorities in the government. If this is the attitude of those who are responsible for dispensing justice and governance, then the situation is indeed grim.

While this attitude is indeed a cause for worry, should the educated sections of the public, only voice their concern, criticise or can and should they do something more? I believe that in situations like this, the intelligentsia has a great responsibility to shoulder. Today, the opinion makers in the Society belong to different professions. These professions are regulated by professional bodies, which are by and large autonomous. To illustrate, we have the profession of lawyers regulated by the Bar Councils, the medical profession by the Indian Medical Association (IMA) and our very own profession by the Institute of Chartered Accountants of India (ICAI).

If one examines the track record of many such institutions in regard to transparency in the conduct of their own affairs, the results would not be very encouraging. Most of the time the impression in the mind of the common man is that these institutions protect and further only the interests of their members. The impression that the public has is; lawyers go on strike for their own demands obstructing dispensation of justice, doctors in hospitals hold patients to ransom for an increase in remuneration. As far as our own Alma mater is concerned, the impression that the public has, is that we do very little to bring the black sheep among our profession to book.

If we as citizens clamour for transparency from those in authority, then it is the duty of those who run these institutions to set an example by a transparent conduct. The stakeholders in these institutions are primarily three, the members who belong to that particular profession, the users of their service and the government which looks at these institutions for regulation of the profession as well as for proactive participation in regard to the developments in their respective fields.

These bodies are generally run by members elected from among those who belong to the profession. They therefore understand the nuances in various issues that arise in their field. For example, if the medical profession would put in the public domain the problems that are faced by their members while rendering services in public hospitals, the public would be sympathetic to their agitations. The support of the public would then help in putting pressure on the government to resolve those problems. Even if that does not happen, such transparency would increase the faith of the public in these institutions.

In regard to our own profession, there are a number of decisions that the ICAI takes which affect members. In such a situation, the gist of the deliberations that take place or the thought process behind those decisions should be made known to the members. Possibly even prior to this, when the issue is on the agenda of the Council, suggestions from members or interactions with them should be encouraged. This would help acceptance of the decision by those who are affected by them. I am conscious that one needs to tread with care, in this area, as the disclosure of such information would have various implications. But with the collective wisdom of our representatives, modalities can be worked out.

In regard to the interactions of the ICAI with the government authorities, when these authorities take some action by way of enactment of legislation or otherwise, it would be advisable for a summary of those interactions to be made known to all stakeholders. It is quite possible that despite the best efforts by our representatives in putting forth their point of view, the authorities may not react favourably, for they may have their own compulsions and limitations. But once this information is in the public domain, members will be confident that their alma mater has discharged its obligation.

Over the last decade or so, our profession has been facing criticism from the public that the regulatory body tends to unduly protect its members from any disciplinary action. In this aspect as well, the limitations under which the regulatory body acts, the principles of natural justice, and rules of evidence result in processes getting delayed. The regret is that while this is true, by not being transparent enough, the image of the institution is unnecessarily sullied. Transparency, to the extent possible, will mitigate this problem.

Finally, when information is sought from any professional body, it would be appropriate that the information is willingly and expeditiously provided, rather than making an attempt to hide behind technicalities. One fully understands that there would be possibly severe administrative limitations for furnishing this information. The machinery may be inadequate and there may be other hurdles. Every authority that was brought under the RT I had the same argument initially. But with the arsenal of technology at hand, it is not impossible, though difficult. As they say – where there is a will, there is a way.

Once professional institutions set an example of the transparency, it is natural that the government and bureaucracy will follow suit. It is then that democracy will flourish and Peter Finn’s words “A basic tenet of healthy democracy is open dialogue and transparency”, will ring true.

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The Real Maths

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“Who are you?”

“I am Jay Desai,“ said Jay.

“What is the
difference between you the Jay Desai and Jay Desai’s dead body? A dead
body is wearing the same clothes, have the same heart, lungs & liver
etc. But living Jay is able to do all activities including thinkingm
and dead Jay cannot do anything.”

Jay said, “The dead body has
no Soul and that is why it’s dead.” “So, there can be two types of Jay –
1) Living 2) Dead. Body + Soul = Living and Body – Soul is Dead.
Right?” Jay agreed.

“So these are two different separable things: Body & Soul.”

“Well,
Yes.” Jay said and added, “Soul separated from the body is death. So
yes, both are different & separable. Making sense.”

“Therefore, who is Jay? Dead body or a Living body?”

“Both” replied Jay.

“So you mean, (Body + Soul) = (Body – Soul) = (Jay), but just now you agreed, both body and Soul are separable and different.

Now
if the dead body is also Jay, then the living body is = Jay + Soul
& likewise, if the living body is Jay, then the dead body is = Jay –
Soul.

Jay – Soul = Dead body, cannot do anything.

Jay + Soul = Living body, can do all thinking, talking, walking, etc. Everything is put together as Activities.

This
equation proves, that the power of doing activities including talking,
walking, and thinking, rests with the Soul and not with the body.

Therefore, the answer to the first question – Who are you? Is Soul right?

Answer
giving capacity rests with the Soul and not with Jay’s body. So, the
talker is the Soul and not the body as both are different. “

Jay was speechless, but convinced about the difference. “So all of us are Souls with different bodies? Right?”

“Absolutely.”

“But on death, after the departure from one body, where does the Soul go?” Jay asked.

“There
are millions of living beings. Each of these bodies needs one Soul to
remain alive. The soul gets a new body after the death of the previous
body.

If we plant 100 seeds and offer equal growing conditions,
some will grow, some will not grow and some will grow but won’t offer
quality fruits. What could be the reason for these differences?

“Quality of seeds.” Jay was spot on.

“Yes.
The quality of seeds decides the outcome, likewise quality of Soul’s
Karma decides which next body it will get. Don’t we see beggars on the
streets or millionaires in apartments? Don’t we see pet dogs and dogs on
street facing stones? Why there is a difference in everyone’s financial
status or happiness quotient?”

“So you mean Karma, “I” i.e.
Soul does in this birth as a human being will have an impact on my
future bodies and happiness? “ Jay was in sync.

“Yes.”

“Therefore, today also, we are suffering or happy as the result of my past Karmas?” asked Jay.

“Yes, shouldn’t it be?”

“Hmm,
this theory of Karma is making sense, as we see everyone around us is
living a different life. There must be some science behind this.”

“Theory
of Karma applies to every Soul. But the problem is we don’t consider
self as a soul and act as if we are a body. There lies the problem. If
you agree on the above equation and act accordingly, quality of your
journey as a soul will improve.”

That means our belief will make
us decide the journey we are embarking upon.” Jay said and added,” |
Birth — Death | is the body approach and | — Lion–Human– Cat– Elephant–
Cow–| is the Soul approach.

“Absolutely right.”

“Oh. What
a fundamental change it can bring in approach. My bad act in the
present body for limited happiness can attract bad Karma to me, i.e.
Soul and results in misery and pain in my present as well as next body. “

“Yes, it can even influence the new body the Soul gets.”

“Suppose I do more good deeds then will it help me get happiness in future?” Jay asked.

“Yes it does, but your journey as a Soul will continue.”

“Then what should be the ultimate goal of the Soul.” Jay was curious.

“Do
you see anybody permanently happy anywhere? No. Therefore, ending the
cycle of the new body should be the objective of every Soul. All pains
and happiness are suffered by the Soul and not the body. Revisit the
above equation.”

“How is it possible to end the cycle?” Jay was inquisitive.

“By becoming a Karmaless Soul.”

“If
the Soul’s liberation from bodies is the way for permanent happiness
then knowing the laws of Karmas is essential for every Soul.” Jay was
realising the importance of the laws governing every Soul.

“Yes, but we as CAs prefer to know the laws of Income tax and Companies act and even International tax.“

“That is because we Souls have become engrossed with the body and bodily requirements.” Jay reasoned.

“I
am not stating not to know all these laws, but I am indicating about
the priority. The Death of this human body is certain and no one knows
when. It can be even today. All these bodily acts and deeds with one of
the other motives are the source of the dirt for the Soul.”

“Oh,
so I can make my clients happy by advising them about tax avoidance
practices and other ways to wrongfully escape the clutches of laws, but
by doing so I am as a Soul attracting more bad Karmas.” Jay was relating
it.

“Yes, just for the mere temporary benefit of the body and
praise from clients, the Soul is attracting new dirt i.e. Karma which
can make the Soul unhappy and prolong the pain potential for the Soul.”

He
decided to know how to make his Soul completely dirt-free i.e.
Karma-free and that was the first step of his spiritual journey.

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The Annual General Meeting

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The Annual General Meeting of the Society was held at the Walchand Hirachand Hall, Indian Merchant Chambers, Churchgate, Mumbai on Monday, 6th July 2015.

Mr. Nitin P. Shingala, President of the Society, took the Chair. Since the required quorum was present, he called the meeting in order. All business as per the agenda given in the notice were conducted, including adoption of accounts and appointment of auditors.

Mr. Narayan R. Pasari, Hon. Joint Secretary, announced the results of the election of the President, the Vice President, two Secretaries, the Treasurer and eight members of the Managing Committee for the year 2015-16. The names of members as elected unopposed for the year 2015-16 were announced.

The “Jal Erach Dastur Awards” for best feature and best article appearing in BCAS Journal during 2014-15 were announced. The winners were: C. N. Vaze, YogeshThar and Anjali Agrawal.

The Special Edition of the Journal dated July 2015 on “Ethics” was released at the hands of The Editor, Mr. Anil J. Sathe. He mentioned about the special issue articles on Ethics;Fundamental and Operational Ethics, Morality of a Lawyer’s Ethics, “Ethics” isn’t music for the entertainment world, “Ethics” in Architectural Professional Practice and Ethics in Media: A Depressing Scenario.

Thereafter, Ms. Purnima Sharma and Ms. Manju Joshi were felicitated with a plaque by Mr. Narayan Varma. Ms. Purnima Sharma was felicitated for her courage and outstanding efforts to become a Chartered Accountant and be an active citizen, inspite of having hearing and speaking challenges. Ms. Manju Joshi was felicitated for providing untiring assistance to Ms. Purnima Sharma and for motivating her to be an active citizen and helping her to become a Chartered Accountant.

New Publications were released at the Annual Day. Mr. Mihir Sheth spoke about the new book on “Thought Mailers- A Compendium” released in the hands of Mr. Narayan Varma.

“Namaskar Ki Bhet” was released in the hands of Mr. Pradeep Shah.

Three Lucky Winners of the Learn Share Grow, a contest conducted by Bombay Chartered Accountant Society were announced by Incoming President Mr. Raman Jokhakar.

Outgoing President Speech

Incoming President Raman, my colleagues – Mukesh, Narayan, Sunil, incoming VP Chetan, incoming Office bearer B. Manish, Respected Past Presidents, Seniors and Friends.

At the end of such a profound experience, I stand before you today with a mix of emotions:

  • gratitude for learning so much over the past many years that will stay with me forever
  • disappointment that some of the targeted accomplishments could not be achieved
  • sadness that the routine I have come to enjoy will now change
  • relief that the responsibilities come to an end.

I am humbled by the affection and honour bestowed upon me.

Let me begin by sharing my perspective of what’s happening around us. It is said that one cannot begin to comprehend the Future without understanding the Past. When it comes to dealing with the Present, we need to grasp the exponential rate of change that continues to accelerate. Rapid changes are sweeping not only the field of technology but also the areas of business, law and regulations and the human life itself.

Alvin Toffler, the celebrated author, in his book “Revolutionary Wealth” has given a magnificent metaphor for the rate of changes witnessed in various institutions in American society, in the chapter titled “Clash of Speeds”.

First at 100 mph, the fastest change agents are companies and business who drive many of the transformations of the rest of the society. They use technology to blast ahead and force suppliers and distributors to make parallel changes, all due to intense competition.

At 60 mph is the family that has morphed in the face of industrialisation where it shrank and abandoned the old values and inter-dependence.

Clocking at 30 mph is the labour movement slowed by the change of muscle work to mind work, from interchangeable skills to non-interchangeable skills and from blindly repetitional to innovational tasks.

Sputtering along in the slow lane are government bureaucracies and regulatory agencies running at 25 mph. Coming along at 10 mph are the school systems. Toffler bemoans the lack of competition and prevailing culture at the educational institutions that was designed to serve an outmoded factory-style industrial age.

At 3mph, Toffler tags political structures that are the American Congress, the White House and the political parties themselves.

Lastly, the tortoise speed of 1 mph is captured by the slowest changing institution, today’s legal system.

The above metaphor, I believe, would be equally applicable to the Indian landscape.

Toffler’s observations came about a decade ago. Today we find that even the laggard institutions are accelerating. Speaking last week, Mr. Mukesh Ambani commented that with Digital India, the government has moved faster, as an exception, than the industry. The Prime Minister’s vision of Digital India has the potential to transform fundamentally the lives of 1.2 billion Indians using the power of digital technology.

What do such external challenges arising from rapidly changing landscape mean for voluntary associations? I believe their importance will increase. Voluntary organisations will continue to act as a catalyst for intellectual synthesis, provide people to people connect and fill the void created by the technology. But it will require such organisations to innovate continuously to stay relevant and to adapt quickly.

I recall a discussion Raman and I had with Mr T. N. Manoharan during the ITF Conference in Chennai last year. He believes that to stay relevant and make an impact, we will require to build excellent research capabilities to bring value to the members and support recommendations and representations to the authorities with data and statistics.

Apart from external challenges, we also need to deal with the internal challenges which come from growing scale of operations as well as expectations. As I stated in my acceptance speech last year, the annual hours of education increased multi-fold over last two decades. We clocked 132,000 hours in 2013-14 as well as in 2014-15. At the same time, the volunteers, pressurised by professional and personal commitment,are unable to devote as much time as in the past.

To effectively face these challenges, we must transform the organisation radically by enhancing our infrastructure and services and by attracting and retaining quality staff.

I am glad to report that we have made some progress on these fronts. After several years of efforts, we have acquired additional office premises, under leave and licence, effectively from 1st July. I must express immense gratitude to Kishorbhai, Pranaybhai, Pradipbhai Kapasi, Shariq, Sanjeev and Naushad for guiding the OBs through this process. Now, Raman and team are working tirelessly to reorganise the two offices.

We have also brought on board new staff in key office management roles that will strengthen the administration. The process of evaluating their performance is being aligned to increase their quality and help reduce the burden on the volunteers.

Voice of Customer (VoC) has emerged as an important tool in the modern management. We have begun a process to seek structured feedback from our members and the participants through online surveys. I am sure this will provide valuable guidance to the office bearers, the staff and the organisers in improving our services.

The office admin management software – we call it OMS that was custom developed about 12 years ago is falling short of our growing needs. It was developed without any provision for imprest tracking and service tax and the numerous changes and patchworks have made it unstable. The work is already in progress to revamp or replace the outdated OMS.

On the academic front, we attempted several new programmes and innovative ideas. While the Annual Report and the Quarterly Core Group Newsletters provide these details, I am glad to report that our Committees continued to organise outstanding learning programmes and activities in keeping with our finest tradition. I thank all Chairmen, Co-Chairmen and Convenors for their tireless efforts. I must acknowledge the maiden work done by the newly set up Corporate and Securities Laws Committee. My thanks and compliments to Kanubhai for accepting my request to Chair this new Committee and giving us a strong opening in this field of growing importance.

Today is also the occasion to express my sincere gratitude and thanks to everyone for helping me sail through a satisfying year.

Our Past Presidents remain the pivots of our Society. I am grateful to each one of them for having guided me throughout,and gently nudging me back on track whenever I drifted.

The Managing Committee members have been a source of constant support and guidance. I am thankful to each one of them.

The Core Group has been and will always remain our heart. We opened an additional channel of communication on WhatsApp group for instant communication but of course we need to be disciplined in use of this channel. I am grateful to each and every Core Group Member for their dedication and sincerity.

My office bearer colleagues have supported me like solid rocks. Raman, Mukesh, Narayan and Sunil have worked round the clock and shared my burden in equal measure.

Ever young and zestful Raman with his forthright and quick action oriented approach moved shoulder to shoulder with me through the year. With the United Nations declaring India as having the world’s largest youth population, I am happy we have entrusted our leadership to an ever young leader.

My heartfelt thanks to everyone in our staff,including the office boys,for their hard work and wholehearted support! And also for coping up with the challenges brought by various changes during the year. During the year, Raman held several innovative sessions to coach them. We continued to push them to perform better. A major challenge for our staff remains in dealing with multiple bosses. I must compliment them for doing a super job and look forward to them keeping up the momentum.

We continued to receive excellent support from our sister organisations and organise various joint programmes. I am confident this tradition will continue and strengthen further. My sincere thanks the office bearers of the AIFTP, CTC,STPAM and WIRC of ICAI for their valuable co-operation.
My journey at the BCAS has enriched me tremendously:

  • made close friendship with my OB colleagues and other

    Core Group Members

  • acquired rich experience from leading many activities
  • learnt from the wisdom of the elders
  • learnt to remain objective and unbiased
  • found excellent motivation, guidance and support for upholding professional ethics and values
  • caught contagious passion and energy from Raman and various members of the youth group – including the  youngest member Narayanbhai.

One singular activity I relished the most throughout the year is writing the monthly column, “From the President’s Page”. It pushed me to research issues, stretch my thinking and articulate. I found this exercise greatly educative. In his keynote message to the advanced professional writing workshop, Bansibhai quoted a couplet from Manoj Khanderia’s poem. I find this stanza aptly expresses my sentiments. It reads:

The journey through the BCAS gives us opportunities tointeract, learn and get a feedback from a large body that includes seniors, peers and the youth. With mentoring and moulding from stalwarts, one grows from a member to an active volunteer, and finally rises as a leader. It is an amazingly enriching experience.

The challenge for us is to make such an awesome experience visible, specifically to the younger members. All of us have an obligation to encourage and push these younger members, to activey involve themselves and reap the tremendous benefits and contribute to the Society as well. I am sure Raman, Chetan and other successors will work ceaselessly to ensure that BCAS continues to fulfil this objective and thereby thrive to the eternity. Let me assure you Raman and Chetan, I will be around any time you need me. And don’t worry, I will not behave like a mother-in-law! My wife Trupti, daughter Parnasi, son Mohak and my parents have been the pillars of my strength. I could not have achieved this without their wholehearted support. It is not possible for me to express my gratitude to them in words.

At the end, I would like to quote Dr. Joseph Murray’s motto that is close to my heart. “Service to society is the rent we pay for living on this planet”. I see many stalwarts in our fraternity whose lives echo this motto. I hope to emulate their examples, at least to some degree.

Thank you.

Incoming President’s Speech

                
My story                
In  1998,  when  I  became  a member  of  the  BCAS  after passing the CA  examination, I never imagined that I will stand before you, at an AGM to carry on the torch of our Society as its 67th President.
                
As  a  proud  third  generation member of the Society, this is an important milestone for me and a moment of honour to carry on 66 years of legacy of LEARNING, SHARING and GROWING. When I passed my CA exams, the first instruction from my father, who is also a CA, was to become a BCAS life member. Since then, whenever I had to look for professional education, I turned to BCAS. So, I can say that I have GROWN UP in BCAS and therefore here I stand, humbled, grateful for your trust, and mindful of my responsibility!
                
The last year was an epic journey of learning and stepping up to serve the BCAS under Nitin’s leadership. He looked both outward for new initiatives and inward for strengthening the people, infrastructure and processes. We took decisions that had to be taken. As the VP works closely with the President, I was a witness to Nitin’s approach – quiet, firm, courageous and decisive. We shared a wonderful chemistry that I will relish for years to come.
                
BCAS credo                
BCAS is driven by its VOLUNTEERS – their spirit and generosity. Over the last several decades, so many people have GIVEN so freely – their time, knowledge, resources, connections, capabilities and much more. There are so many silent workers, behind the scenes volunteers, who matter to the Society. I cannot thank them enough, for all they have done and all they will do. BCAS Volunteers truly epitomises what Martin Luther King said: EVERYBODY CAN BE GREAT BECAUSE EVERYBODY CAN SERVE. I believe, that as a Society we just don’t print a Journal and Referencer, we don’t just create learning events, we help transform CAs to what they can be! We enable them to achieve their dreams through LEARNING, SHARING AND GROWING. We are not just an organisation from a legal – functional sense. We are a movement of partners, committed to the pursuit of knowledge that improves the profession, strives to make our laws and governance more humane and sensible, make our individuals shine with cutting edge knowledge and virtuosity and in that sense every BCAS volunteer makes our nation more wholesome.

Over the decades, the Society has set A STANDARD in professional education. When we went to Udaipur for the last RRC, members from outstation said – when BCAS says something, we derive a new meaning to what we already knew. People look up to our Exactitude and Care. This ecosystem of beliefs and actions is the soul of our existence and as volunteers we are delighted to live by it, in every possible way.

Another facet of the BCAS is – as CAs so many of us are competitors, yet we are sitting together, learning from one another, sharing our experience and knowledge and supporting one another! A number of lawyers who have come to our events have told me that, they do not have anything like this. Some are fascinated by the level of discussions at our events. One very eminent advocate, who spoke at one of the residential courses, shared that on his visits to Mumbai, he checks with BCAS to see if there is any event happening where he can participate and join the discussion. This spirit to LEARN, SHARE and GROW is precious and unique. This spirit had brought about the genesis of BCAS and is what we are committed to nurture.

The strength of the BCAS lies in its leadership, its committees which are decentralised DECISION CENTRES and the space it gives to individuals to express their creativity. This freedom results in a vibrant buzz that makes our events and initiatives so unique that many others emulate.

Lastly, a special mention is a must for the string of 66 Presidents, the enablers who made BCAS bigger than the sum of individual ambitions. I have seen and worked with a number of them. They are like Lighthouses – No matter what time it is, they have guided, supported and delivered always. I salute them all.

The challenge

Having said that, the landscape around us has changed and is changing faster than ever, since the early days of BCAS. – Professionals, whether participants to our events or faculty, have tremendous time pressures and other pressing exigencies. The freshly qualified have varying and different needs.

–    Add to that, the information overload. From numerous seminars, portals, organisations, study sessions, fast and frequent changes in laws and regulations and decisions. The quantum and complexity of all this is unprecedented.

Where does BCAS stand amidst all of this?

I have seen that BCAS continues to work with the same sense of purpose and passion it is known for. We just had the largest ever 9th Residential Study Course on Service Tax and VAT in June and we are looking at the largest ever International Tax and Finance Conference next month. Nearly 700 participants attend the 4 Flagship Residential Courses each year. In spite of challenges, the Committees have given their best.

How do we get to the next

Still, a great institution always faces greater challenges for it to become even greater. The most difficult part of success is that one is expected to succeed all the time. Also, once anything becomes large and notable, expectations rise.

WHERE DO WE GO FROM HERE?

HOW DO WE GET TO THE NEXT LEVEL?

As a Society, as the managing committee, as sub committees – we need to ponder on these questions!

I wish to share some of my thoughts and vision for BCAS:

1.    At a very fundamental level, we need to question all that we do. We will need to return to the WHY we continue to do what we do. Are we ALIGNED and RELEVANT to those who we seek to serve? Every committee will have to CHALLENGE THE STATUS QUO to see if there is another way? Do we stay the course or change the course?

Traditions have their place. Yet the traditions can also bind us, if not REFRESHED regularly. Let me tell you a story.

A Guru and his disciples meditated early morning in their ashram. The ashram cat started to come by and disturb them. The Guru said – “when you meditate, tie the cat to the pole”. So that’s what they did each morning. A few years later, the Guru passed away. Some years later the cat died too. Now, the disciples began to wonder, the Guru had told us “WHEN YOU MEDITATE, TIE THE CAT TO THE POLE”, so they went out and brought another cat and tied it to the pole for their morning meditations.

The story is symbolic. However, innovation is killed because of the cats like

“WE ALWAYS DO IT THIS WAY” “IT CAN’T BE DONE”

“WE DID IT LAST TIME AND IT DOESN’T WORK”.

As an organisation we will need to question

–    ARE WE REALLY DOING WHAT IS NEEDED?

–    ARE THERE OTHER WAYS TO DO WHAT WE NEED TO DO TO HAVE A BETTER OUTCOME?

–    ARE WE CHALLENGING THE STATUS QUO ENOUGH!
I have learnt this from my teacher, NO MATTER HOW GOOD IT GETS, IT CAN ALWAYS GET BETTER! ITS LIKE GOING FROM PEAK TO PEAK!

1.    GOING DIGITAL– we need to reach the members –“TO MAKE AVAILABLE” what we have to offer. We started E Learning when the CA profession did not know about it. We launched the E Journal with 12+ years of material available with search features, a WEB TV that enables members to look at our events at their convenience. We will have to reach where the member is more and more. We aim to create a DIGITAL repository of knowledge. I am sure the Committees will think this way for each of their events.

2.    Thought Leadership – on crucial laws we need to build thought leadership. Can we go a step beyond representations, and say this is how it ideally should be? Collaborative thought leadership of the best minds around will make all the difference. As GST is on the Drawing Board, the Indirect Taxation Committee has been putting together material to see how we can do this. We have high expectation from this group.

3.    Another area I feel we can change is the way the Representations are done – with more economics, statistics, data and quantification, giving ranking to our reasoning and also correlate them with larger public policies. We will need to find a way to close the chain of getting our recommendations; grievances and representations reach the decision-makers and ensure they are considered. The technical committees, I am sure, will consider this afresh.

4.    To carry out ADVANCE WORKSHOPS that lead to improved technical skills and eventual revenue generation for our members. Some of our long duration courses are in vogue and well acclaimed and yet we need the NEXT LEVEL, something of a higher order, beyond the preliminary, more issue based and utterly current.

5.    One area that we tested was to have customised trainings for corporate members. I did try this a year ago and with a barrage of new changes coming, we will have more opportunities to do this again this year with the support of the technical committees.

6.    Work with Students – we touch the future when we work with students. There is a lot that BCAS can offer to the Students. The Students Day event was greatly successful. The DREAM TEAM has started to plan for the next year immediately. They are filled with enthusiasm and aspiration to learn. Just the last week, they contacted the RBI and we are having an interactive session at the RBI in the next week.

7.    Build Publications Rack – we would like to have shorter, easy to read and easy to publish books out. They can be short, deal with a topic and not the whole SUBJECT. Often there are incredible issues that come up at study circles, if we can capture them and build upon them we can have a crisp, short, pithy and useful publication quickly. Certain publications are perennial ones, but we run out of them. Say a Mandatory Accounting Standards book or Exploring FEMA or a book on DTAAs or Service Tax that was released in June. Each sub-committee will need to rank their publications into two – ones that are perennial – and others that are CURRENT and having a shelf life. We need to build this strategy clearly and keep it in our focus. We are exploring ways where this can be done and we will see a number of publications from a few committees.

8.    Like Nitin mentioned, we are going for a makeover of the current premises into a LEARNING CENTRE where members – CAs and Students – can come and study, learn, collaborate, and contribute. We got qualified staff, but we needed a better infrastructure for them to perform, more space, better space.

9.    Data driven – we have started surveys since last 6 months. I have always wanted this since my early days in the Journal Committee, to find out what do people really want? To know the preferences and expectations, and interact with the audience, we are using technology to get some solid data.

In all this, we do remember that we will always keep the vision of the BCAS at the forefront. In the words of Thomas Jefferson “IN MATTERS OF STYLE, SWIM WITH THE CURRENT, IN MATTERS OF PRINCIPLE, STAND LIKE A ROCK”. This credo has and will keep BCAS relevant and useful in times to come.

The next 5-10 years will be most exciting and transforming for our country. The government is refreshing, wanting to do something, the demographics are favourable to our nation, technology and innovation are peaking. We have to play our part.

Over the years, the President is expected to be the Chief Innovation Officer. He must innovate, enable, collaborate, invigorate, be the chief products officer and support the committees to run with speed and precision, engaging all the talents of our people, irrespective of title. I will do my best and with the blessings of the seniors, and cooperation of my colleagues in the MC, the Core Group and the BCAS staff.

However, I believe, one year is too short. Looking at the tasks ahead, I am reminded of 2 quotes:

One, that I read recently – THE MATH OF TIME IS SIMPLE: YOU HAVE LESS THAN YOU THINK AND NEED MORE THAN YOU KNOW.

And the other, my choir teacher told us – YOU GOT TO DO WHAT YOU NEED TO DO IN THE TIME YOU HAVE GOT.

We will strive to converge these two divergent looking set of words as we start.

THANK YOU!

67th Founding Day Lecture Meeting by Shri S. Gurumurthy, Chartered Accountant on 6th July, 2015: Shri S. Gurumurthy on India Transformation-Challenges & Opportunities

The 67th Founding Day lecture meeting was held at the Walchand Hirachand Hall, Indian Merchant Chambers, Churchgate, Mumbai. Shri S. Gurumurthy, Chartered Accountant addressed the gathering on India’s Transformation – Opportunities and Challenges.

Mr. Nitin P. Shingala commenced the event remembering Late Mr. Shailesh G. Kapadia, informing the audience about the Memorial Fund under whose auspices the new book “Securities Law – Relevant for Chartered Accountants” was launched. The book is authored by CA.Jayant Thakur. The book was inaugurated by the speaker Shri S. Gurumurthy.

Mr. Nitin Shingala, outgoing President, introduced the speaker as having an immense knowledge on the subject and that the speaker is an economist, a lawyer, professor and a columnist of great renown, over and above a Chartered Accountant.

Mr. Raman Jokhakar, Incoming President felicitated the speaker with a memento on behalf of the Society.

The speaker appreciated that Bombay Chartered Accountants’ Society has kept the flame of ethical and moral values burning and is continuously working towards maintaining it.

He commenced his address with the words of Swami Vivekanand, stating how he won the hearts of so many Americans in Chicago at that time with just 470 words. Shri Gurumurthy moved the audience by stating his limitation in covering the vast subject in such a short time. He mentioned that accidents in life make a person and so is the case for him. In his discourse, he shared his journey of life and how various situations made him what he is today.


Brief synopsis of his speech:

India is very vast with diverse cultural aspects and unless we understand the various aspects of this culture, we will not be in a position to understand India and its economic diversity. We cannot compare India to countries like US and UK. India should be looked at, keeping aside our own personal opinions, qualifications and perceptions about this country.

In the pre-globalization era, Indians were told to go into retailing and not manufacturing. The policy makers at that time encouraged Indians to be avid consumers, and promoted retailing and advertisements to a larger extent. However, these policy makers could not bring about any change in the savings habits of the individuals in this country.

The speaker shared his experience of the visits to various different clusters in India. He gave glimpses of various parts of the country where he had travelled to places like Tirupur, Ludhiana, Morbi in Gujarat and various other different clusters that he visited. He observed that the Indian society is a family based society. This Society operates on becoming self-sufficient through its savings patterns.

Through these small stretches of these small states where the level of education is not that high, people are self-sufficient and also doing large businesses of export and manufacturing goods. Our policy makers, journalists and media are unaware of this reality.

Analysis of GDP and the SENSEX numbers suggest that only 20% of corporates contribute to India’s GDP of which listed Corporates are only 5%. Our opinions are formed by the movement of the SENSEX which only shows the picture of these 20% contributors to the GDP. Morbi in Gujarat has the highest per capita income which is nowhere linked to these corporates contributing to the SENSEX. Morbi is a manufacturing hub of wall clocks, tiles, ceramics and out of the 2 lakh population, 1.5 lakh is employed. With this wide disparity of thought, Shri Gurumurthy made the audience to think, what we perceive of this country and what is told to us by the newspapers, media and the policy makers is way too different than what it actually is.

The Speaker through various statistical data and information, mesmerised the audience and sought to change the image they carry about India. He articulated the savings based pattern in our country and added that irrespective of our economic structure forcing to spend, Indians still encourage the savings pattern. He compared the Indian economy to China, Japan, Germany and other Asian countries whose economies are similar to ours unlike that of the US, UK or the western parts of the world.

Shri Gurumurthy shared his study of various economies. He articulated the thin line distinguishing an intellectual from an intelligent person. He stated that the former thinks for the country while the latter thinks only for himself. An intellectual transcends his thoughts for the benefit of the country and not only for himself.

Lawyers in India led the freedom movement in India because they were great intellectuals. They could do this as they understood the law, the constitution and the state society relationship. Chartered Accountants did not do so, at that time, because they were hooked to their clients and the traditional ways of doing things. Today’s economy has enhanced the scope of Chartered Accountants and they deal with a lot more than just numbers. India obtained its Political Independence from the western forces which was led by lawyers. India will now get its Economic Independence from the western forces which will be led by Chartered Accountants.

Indias’ transformation – Opportunities and Challenges, means setting the role of India vis-à-vis the whole world. The Speaker questioned the audience whether India is going to be rule acceptor or rule setters.He stated that India is not a rule acceptor and this is because it has started to question the world on various laws and policies. It was only after the nuclear blast in 1998 that the world started accepting India as a super power and all doors of economic investments opened to a larger extent. Indians believe in non-violence and our Army and Navy are the largest in the world. This clarity of thought of the speaker and his immense knowledge held the audience spellbound.

Finally, Shri Gurumurthy left the audience with a duty, a sense of responsibility to bring about a transformation which we all wished for and wanted to see. His perspective about India changed the thinking of many. He bestowed the Bombay Chartered Accountants’ Society with a task to bring about a change in the financial and economic study in this country. A study which is much needed in today’s scenario to change the thought process and opinion making process in this country. Till we do not make this change in our views, we cannot make changes in the policies and policy makers’ views at Delhi.

The lecture meeting concluded with Mr. Chetan Shah, Incoming Vice President proposing a vote of thanks to such a thoughtful and knowledgeable speaker, which was appreciated and received a loud applause.

27th June 2015 To Shri Eknath Kadse Minister for Revenue Government of Maharashtra, Mantralaya Mumbai-400032 Respected Sir,

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27th June 2015

To

Shri Eknath Kadse
Minister for Revenue
Government of Maharashtra,
Mantralaya
Mumbai-400032

Respected Sir,

Subject: Representation for Stamp Duty

This representation is with reference to the increase in stamp duty by the Maharashtra Stamp Act, by virtue of which a Power of Attorney for representation before the Tax authorities needs to be executed on Rs.500 stamp paper.

This increase would cause undue hardship to professionals and the clients as there could be several proceedings pending before the authorities each of which warrant a separate POA execution. Attached is a copy of our representation listing the issues and some suggestions for your kind attention.

We hope that our representation will receive due consideration.

Thanking you.

Bombay Chartered Accountants’ Society

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Furnishing of Information for Payments to Non-Residents & Rule 37BB

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28th May 2015

To

The Chairperson,
Central Board of Direct Taxes,
Ministry of Finance,
North Block,
New Delhi 110001.

Furnishing of Information for Payments to Non-Residents & Rule 37BB

Prior to the amendments made vide Finance Act, 2015, Section 195(6) required that a person responsible for paying any sum chargeable to tax under the Income Tax Act, 1961, to a non-resident should furnish the information relating to such payment vide form 15CA and 15CB to the Central Board of Direct Taxes.

After the amendment made vide the Finance Act, 2015, with effect from 1st June, 2015, “a person responsible for paying to a non-resident, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information ….”.

Thus, with effect from 1st June, 2015, every payment to a non-resident, including items such as a simple import of a commodity, will be required to be supported by Form 15CA and 15CB.

Further, simultaneously with the amendment to Section 195(6), a new Section 271-I has been inserted, providing for penalty of Rs. 1 lakh for failure to furnish such information or furnishing inaccurate information.

These amendments will considerably increase the number of certificates that would be required to be issued across the country many fold. A large number of such certificates would not result in any additional tax / revenue generation.

Professionals and accountants across the country would get engaged in unproductive work of repetitive nature, and resources of companies in terms of time and money would get deployed in such unproductive work, thereby draining valuable resources of the nation. This would certainly act as a deterrent to the “Make in India” concept, as well as to the ease of doing business.

The penalty prescribed causes further hardship and compulsion on the assessee.

On behalf of the thousands of affected persons across the country, and on behalf of our members who represent and advise such affected persons, we request that the following remittances be excluded from the purview of the amended requirements. For this purpose, a suitable amendment may be made to Rule 37BB, by adding the following items to the list of exclusions contained in explanation 2 to rule 37BB:

  • Payments for import of goods or machinery
  • Payments under Liberalised Remittance Scheme (LRS)
  • Payments by residents for maintenance of relatives abroad
  • Remittance of balances in NRE & FCNR(B) Accounts
  • Payments by residents for education expenses of their relatives
  • Payments for participating in exhibitions, fairs & events overseas [since such income is in any case exempt under domestic tax law under explanation 2 to section 9(1)(i)]
  • Repayment of principal of loans from overseas
  • Payments by credit card by individuals for personal purposes
  • Remittances to self outside India
Since the amended provisions come into effect from 1st June, 2015, considering the urgency of the matter, we request you to bring about the abovementioned amendments immediately so that genuine personal and business transactions which do not give rise to income chargeable to tax in India, are not adversely impacted.

Thanking you.
For Bombay Chartered Accountants’ Society

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Greece – A Tragedy is Averted, But Heed its Lessons

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Jean Paul Getty, in the 1950s the wealthiest person on the planet, said, “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Shorn of jargon, that is the deal Europe made with Greece. Europe will pump in another €86 billion over time into Greece, in return for promises to reform. How exactly Greece will reform is unknown. It has a culture of high tax avoidance, low retirement age, lavish pensions and an oligarchy that controls much of its economy and media. It also has little or no industry and relies largely on tourism and farm exports to earn foreign exchange. Have you read a manufacturing label that says ‘Made in Greece’? Yet, for many reasons, it cannot be ejected from the eurozone. Greeks feel they have been dealt a bad hand by Europe and global capital. So they voted for a Left government led by Alexis Tsipras, who vowed an end of five years of ‘austerity’. Tsipras now has the tough task of selling ‘reform’ to his voters. Europe is hostage to Greece, whose economy is tiny but heritage is immense. Aristotle, Socrates and Plato taught it civilisation. Euclid is the father of geometry. Athens was the seat of culture; Sparta the nursery of warriors.

Yet, Greek culture cannot be a financial band-aid. The idea of a eurozone, where states have no monetary policy but only fiscal and other policy widgets, has been challenged. This time, Greece has stared down its bankers by Getty’s logic. The next time might be different. And policymakers in India, where the economy is slowing, consumption and investment lacklustre and banks are saddled with bad debt, should take note: Greek tragedies might overwhelm Kalidasa’s epic tales of love.

(Source: Editorial in The Economic Times dated 14-07-2015.)

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Black Money Law – I-T Professionals vs. IT Professionals – Software industry isn’t a laundering haven

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It appears that the taxman has turned his steely gaze towards Indian software professionals with retirement savings in the US. Stiff penalties under the ‘black money law’ are reportedly in the offing if investments are not disclosed. That is unfair. These professionals are not scheming cheats stashing their cash overseas. They pay taxes on their global income in India. Mobility is extremely high in India’s export-driven software industry. These professionals have foreign bank accounts, make social security contributions or contribute to US retirement savings such as the 401K plan, where the contribution is made out of pre-tax dollars and taxed only at the time of withdrawals. For this lot, to keep track of each and every deposit made in the bank account since it was opened is tough. Any inadvertent error in disclosure can lead to needless harassment. This will hold equally for those who have worked abroad on short stints.

True, government has now offered a voluntary compliance scheme that allows Indians with hidden assets overseas to come clean. However, once the compliance window is shut, anyone charged of wilful attempt to evade taxes will have to pay a stiff penalty and face prosecution. Should IT professionals also use the compliance window, especially since information on undisclosed assets of Indian taxpayers will be available later this year under the Foreign Account Tax Compliance Act? The US had passed the law in 2010 that requires US taxpayers and foreign financial institutions to report information on foreign accounts of US taxpayers. With the Indo-US accord, our tax authorities will secure details of financial accounts held by Indian taxpayers in the US. So, a clarification is in order.

Applying the draconian provisions of India’s black money law to Indian IT professionals is simply unjust. Instead, the government should go after the big fish who dodge the tax net. India certainly needs an IT-empowered, big data-crunching department that can tell a person how much tax she should have paid, instead of the taxpayer saying how much she earns.

(Source: Editorial in The Economic Times dated 14-07-2015.)

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Political Burden in the Banking System – Bad loans have their roots in rotten politics

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The Reserve Bank of India’s (RBI) financial stability report, released last Thursday, offers much scope for discomfort. It says, roughly, that bad bank loans — however or whatever you designate them — are growing and stateowned banks, with large exposures to lousy projects, are most vulnerable. Since the bulk of banking and project finance is done by state-owned banks, this is a grim picture.

Most private banks lend short-term, for working capital, leaving the public sector banks (PSBs) to do the heavy-lifting for large projects, including investment for infrastructure, which India sorely lacks. But here is a problem: key appointments at state-owned banks and their lending decisions tend to be stained by the illicit manner in which Indian politics funds itself — by the proceeds of corruption.

Given the political-bureaucratic connections at play, PSBs lend heavily to politically favoured promoters for their inflated investment proposals, and when these turn sour, are more than willing to ‘restructure’ their borrowings by taking haircuts on the money lent. The power sector is crippled by the bad politics that deems power an ideal giveaway. The end result, as the RBI points out succinctly, is to double the amount of bad debt that the banking system carries: from under 5% of total lending to over 11% today. Yet, these warnings from the central bank cannot solve the bigger problem that eats away at the heart of the economy: the rot in political funding.

In India, this is opaque and driven by illicit cash, stashed away by companies and paid in return for political favours, including bank credit, for dodgy projects ranging from infrastructure to mining. Equity investors have burned their fingers and have become risk averse; the RBI can help by deepening and widening the market for corporate bonds. But the most important reform, that should start at the top, is to clean up political funding: once that system becomes clean and transparent, much of the chain of graft leading from parties to babus, crony capitalists, bank officials and bad loans, will be broken.

(Source: Editorial in The Economic Times dated 30-06-2015.)

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By converting Professional Relationships into ‘Family’ ties, we create Conflict of Interest at all levels of Society

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From Donald Trump to Richard Branson, from Vijay Mallya to Lalit Modi, buccaneering, system-gaming, high living billionaires are the stuff of urban legend. The righteous scream for Modi’s head and secret admiration combusts with shrill jealous moralism that Modi is brazenly rich, boasts about his many connections and is seen partying with Paris Hilton and Naomi Campbell.

While thousands of Indians live in almost similar glass houses, dream of gaming the system and well-networked mini Modis proliferate across India, we are content that a public stoning of Prime Time’s Public Enemy No 1 is going to solve the deep-rooted problem. We hypocritically cling to the adage that to be rich and create fantastically successful cricket tournaments are criminal acts, yet we conveniently overlook the fact that conflict of interest at all levels of society is hardwired into our cultural and institutional DNA.

Extraditing Modi or securing the resignations of Sushma Swaraj and Vasundhara Raje may make for a neat end to the TV drama but unless we understand the institutional nature of the problem, the malaise will only grow. And the malaise is that as a cultural trait we Indians convert professional relationships into family bonds and thus create conflict of interest at all levels of society. How many times have you heard the phrase: Mr. VIP is like my own brother?

Modi has the whacky chutzpah needed to create a massively successful private sector property like the IPL. All the moralistic handwringing about cheerleaders being anti-Indian culture and pure cricket being replaced by casino cricket has been buried under the tidal wave of public enthusiasm for the inter-city tournament.

There is hardly anything morally wrong about big money coming into cricket, provided of course that the money is clean. Modi had the audacity to thumb his nose at UPA when he shifted the IPL to South Africa in 2009. He also has the audacity to openly declare his close relations with various politicians.

And here is where the problem lies. In our culture we too quickly transform public relationships into private ones and professional relationships into family bonds. For us anyone with whom we should have a close professional relationship is instead a feudal attachment of either ‘didi’ or ‘dada’ or ‘tau’ or ‘chacha’. Seeking to make public institutional relationships into private family relationships is the bane of our social life. The dada-didi, chacha-tau syndrome means that loyalty is always to the ‘family’ relationship and not to institutions.

Prurient moralists scream that Swaraj and Modi’s dinner at a London hotel is a criminal act when it emphatically is not. Where the conflict of interest comes is that Swaraj clearly acted on the belief that her ‘family’ ties with Modi and her loyalty to an old close relationship over-rode her institutional public responsibility as minister.

The same goes for Vasundhara Raje. There again a close ‘family’ relationship was seen as more important than her public and institutional role. In fact the dada-didi, chachatau syndrome proliferates across our public life; it is so widespread that we don’t even recognise this serious conflict of interest which is so culturally ingrained. After all, aren’t VIPs duty bound to look after their families well?

Politicians have meddled in the BCCI down the decades, realising the enormous wealth and influence at its command and have sought to enter the IPL, attracted not only by the big money but also because of their so-called penchant for cricket. But do Republican and Democrat politicians in the US also hold important positions on baseball leagues or soccer clubs? Are Labour and Tory politicians office bearers of the MCC?

In India businessmen and politicians are united in a boys club of big money and big power, all of it legitimised in the name of cricket. And if it’s not cricket, it’s real estate, it’s educational institutes, coal allotments and telecom licences where largesse is handed out. In this dance of cronies, the state itself becomes a family enterprise, the Il Familia of Don Corleone, where only individuals matter, not institutions.

There is thus hardly any incentive to clean up the system, hardly any incentive to bring in professional managers or enforce regulations or ensure that black money pitfalls are cleaned up, because all deals are in any case done on a personal basis. Louis XIV’s declaration, ‘I am the state’, echoes eerily with Indian democracy of the 21st century where many Sun Kings and Sun Queens have converted the public realm into their private families.

The privatisation of the public realm means that institutions that belong to the people to ensure the public good simply become the family property of individual politicians or businessmen and the state itself is parcelled out between gangs of politician-tycoons. In an odd twist, in the economic sphere, while massive public sector white elephants urgently await privatisation, it is public life instead which is being busily privatised by the netas. Swaraj and Vasundhara Raje see nothing wrong in extending favours to Modi in their official capacity, because after all he may either be their bhatija or bhaiya or chacha.

As a society we’re trapped in creating honorary brothers, sisters, uncles and aunts instead of establishing modern relationships on the basis of professional responsibility and merit. In western societies, strangers on the street are hardly called chacha or dada. While this may be a heart-warming desi trait for some, it creates a feudal mindset by which private bonds must be honoured at the cost of professional duty. Until we find systemic ways to stop the privatisation of the public realm, a syndrome in which Modi, Swaraj and Raje are all participants, conflict of interest will constantly occur. The Great Indian Parivar is a blessing but also a curse.

(Source: Extracts from an Article by Ms. Sagarika Ghose in The Times OF India dated 24-06-2015.)

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Outotec GmbH vs. DDIT [2015] 58 taxmann.com 232 (Kolkata – Trib.) A.Ys.: 2010-11, 2011-12, Dated: June 16, 2015

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Article 5, 7, 12 India-Germany DTAA – when the title in an equipment is transferred outside India, the sale of equipment cannot be taxed in India merely because tests for the installation of equipment are carried out in India.

Facts:
The taxpayer was a German Company, engaged in the business of providing specialised solutions to customers in metals and minerals processing industry. During the relevant tax year, the taxpayer supplied equipment to several Indian companies. The equipment supplied by the taxpayer was to be a part of the overall plant to be installed by customers. Additionally, in relation to certain projects undertaken in India, the taxpayer constituted a supervisory permanent establishment (PE), unrelated to the supply contract. The equipment was designed outside India and was sourced by the taxpayer from vendors outside India. The taxpayer was not involved in the manufacturing of equipment.

The equipment was sold, and title ownership to the customers was transferred, outside India. In case of non- fulfilment of the performance guarantee, customer was entitled only to liquidated damages.

The taxpayer also sold basic engineering designs and drawings for installation of the equipment/plant.

The tax authority contended that since portion of purchase price was payable only upon successful completion of acceptance tests in India, part of the sale price was taxable in India. It further regarded payment towards basic engineering designs as royalty for use rejecting the contention of the taxpayer that it was a sale of copyrighted article.

Held:

  • Since all the activities relating to designing, fabrication and manufacturing as also sale of equipment took place outside India and since title/ownership in the equipment stood also transferred outside India; such offshore transaction was not taxable in India.
  • The acceptance tests are part of normal commercial arrangements and partake the character of trade warranties. The balance payment of contract price, to be received by the taxpayer upon completion of such tests is a deferred payment in the nature of warranty and cannot be equated with transfer of goods in India.
  • Breach of warranty could result in payment of damages and does not by itself mean that the property/title in the goods did not pass to buyer outside India. The clause of acceptance tests and liquidated damages were also in the nature of warranty provision.
  • The basic engineering packages sold by the taxpayer are largely designed on the basis of standard technologies available with it and modified based on customer’s requirement.
  • Since Indian customers were not using designs and drawings for any commercial exploitation, it involved use of copyrighted article rather than use of a copyright to be regarded as royalty.
  • In absence of any connection between the supervisory PE of the taxpayer in India and the offshore supply activity, the consideration for offshore supply cannot be regarded as attributable to the PE in India.
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Kreuz Subsea Pte. Ltd. vs. DDIT [2015] 58 taxmann.com 371 (Mumbai – Trib.) A.Ys.: 2010-11, Dated: June 12, 2015

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Article 5(3), (6), India-Singapore DTAA –purely installation and construction activity undertaken by Singapore company in respect of certain projects in India, would be covered under Article 5(3) and not 5(6).

Facts:
The taxpayer was tax resident of Singapore. It had undertaken installation and construction activity in respect of certain projects. The DRP held that the presence of taxpayer in India in excess of 90 days constituted PE in India under Article 5(6) of India-Singapore DTAA .

According to the taxpayer, it was purely into installation and construction activity, which would clearly fall within Article 5(3) of treaty. Consequently, its activities would not constitute PE due to its presence in India for less than 183 days under Article 5(3) of DTAA .

Held:

  • Article 5(3) is a specific provision dealing with ‘Service PE’, on account of construction, installation or assembly project. Under this Article, service PE would be constituted if project continues for a period of more than 183 days in any fiscal year.
  • Article 5(6) provides that, if an enterprise is “furnishing services” in the contracting State through its employees for a period of 90 days or more, then it is deemed to have Service PE.
  • The threshold period under Article 5(6) is 90 days. If such activities are carried out for a related enterprise, then threshold period is 30 days. Article 5(6) explicitly provides that it applies to “services” other than those covered by Articles 5(4) and 5(5). However, it is silent as regards its relationship with Article 5(3). Thus, Article 5(6) covers various services which are not covered by paras 4 and 5 of article 5 and technical services as defined in Article 12.
  • In contradistinction, Article 5(3) is a specific provision. Therefore, such specific activities cannot be read into Article 5(6). There cannot be overlapping of activities carried out within the ambit of Article 5(3) and furnishing of services as stated in Article 5(6).
  • Both the Articles should be read independent of each other, or else there would be no requirement of making separate provisions. If the activities related to construction or installation are specifically covered under Article 5(3), then one need not to go to Article 5(6). Hence, purely installation services should be covered under Article 5(3) only and not under Article 5(6).
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ITO vs. Nokia India (P.) Ltd. [2015] 59 taxmann.com 120 (Delhi – Trib.) A.Ys.: 2006-07, Dated: July 8, 2015

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Article 5, 7, 13 of India-Finland DTAA – payments made to a Finland company for services performed outside India were not taxable in India as the services did not ‘make available’ any technical knowledge, skill, etc.

Facts:
The taxpayer was an Indian company (“ICo”). ICo was a member-company of a Finland based company (“FinCo”). ICo was setting up a plant in India. To ensure that the plant complied with global manufacturing facility standards of FinCo, ICo engaged another Finland company to review plans prepared by Indian consultants in respect of HVAC, electrical and fire protection systems. The services were to be performed only outside India. However, employees of Finland company intermittently visited India only for attending meetings with the taxpayer. According to the taxpayer, the payments were not taxable under India- Finland DTAA . Hence, it did not deduct tax from the same.

Held:

  • The scope of services of Finland company was review of systems description, diagrams, cost estimates, building designs, preliminary system design and quality control, equipment list/selection criteria , layout proposals, conducting inspections etc; and meetings in India and Finland, in connection therewith.
  • These services were not for imparting any technical knowledge or experience that could be used by the taxpayer independently in its business and without recourse to Finland company. Thus, they did not ‘make available’ any technical knowledge, skill or experience nor did they consist of development and transfer of a technical plan or technical design to the taxpayer. Accordingly, the payments did not qualify as FTS under India-Finland DTAA .
  • Further, as per India-Finland DTAA , if the services do not qualify as FTS, the taxability should be examined as per Article 7 (read with Article 5) of the India-Finland DTAA .
  • In terms of Article 7(1), ‘Business Profits’ earned by a Finland company is taxable in India only if it carries on business in India through a PE in India. If a Finland company does not have a PE in India, no portion of the income from services provided to a customer in India are taxable in India.
  • In the instant case, Finland comapny did not have any office/place of business in India; the services were performed primarily from outside India; and its employees made intermittent visits to India only for the purpose of attending meetings with the taxpayer. Accordingly, it did not have a PE in India.
  • Therefore, payments received by Finland company were not taxable in India in terms of India-Finland DTAA .
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Lloyd’s Register Asia (India Branch Office) vs. ACIT [2015] 58 taxmann.com 58 (Mumbai – Trib.) A.Ys.: 2005-06, Dated: June 10, 2015

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S/s. 44C, the Act – the scope of head office expenses u/s 44C does not include “license fees” or the “management charges”

Facts:
The taxpayer was an Indian branch of a UK Company (“UKCo”). The holding company of UKCo was engaged in the business of survey and inspection of ships, industrial inspection activity and drawing appraisal. In 2003, holding company entered into a license agreement with all its subsidiaries and granted license to use its brand in consideration of payment of royalty and the license fees. Further, it entered into a separate “Management Services Agreement” for providing certain services.

According to the tax authority, license fees and management charges were in nature of head office expenses u/s. 44C of the Act. However, as per the taxpayer, these payments were merely routed through head office but were not really head office expenses as the said section is only applicable to general and administration expenditure as referred to in Explanation (iv) to section 44C-that too in the nature of executive and general administration expenditure enumerated in clause (a) to (d).

Held:
The payment of ‘license fee’ is purely for using of brand/ trademark and other business intangibles, which are in the nature of intellectual property.

These are neither in the nature of rent, rates, taxes, repairs, insurance, salary, wages, bonus, commission, etc., or travelling by any employee. Thus, the entire payment of license fees do not fall within the ambit of section 44C as illustrated in clauses (a) to (c) of the Explanation.

Clause (d) of the Explanation mentions “such other matters connected with executive and general administration as may be prescribed”. CBDT has not yet prescribed any such expenditure. “Management charges” are specialised services under various heads. None of these services are in the nature of head office expenditure as illustrated in sub clause (a) to (d).

As neither the “license fees” nor the “management charges” falls within the ambit and purview of section 44C, no adjustment to the total income for the purpose of disallowance was required.

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Issues in Claiming Foreign Tax Credit in India

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Getting credit in respect of tax deducted or paid in a Source Country
(Foreign Tax Credit) is one of the significant objectives of any tax
treaty as it relieves incidence of double taxation. Normally, tax credit
is given by the State of Residence which enjoys the comprehensive right
of taxation. Such credit is given in respect of taxes paid by the tax
payer in the State of Source. However, several issues arise while
claiming tax credits in the State of Residence as to timing difference,
evidence of payment, rate of conversion of foreign currency etc. This
article besides discussing some basic concepts of Tax Credits focuses on
such issues relating to claiming foreign tax credits in India.

1. Background on BEPS

Two
methods of granting foreign tax credits are in vogue, namely, (i) Full
Credit and (ii) Ordinary Credit. Indian tax treaties generally follow
the Ordinary Credit Method. Similarly, section 91 of the Income-tax Act,
1961 (“Act”) also prescribes ordinary tax credit method. Two methods of
tax credit are explained in brief herein below:

(i) Full Credit Method

Under
this method, total tax paid in the country of source is allowed as
credit against the tax payable in the country of residence.

(ii) Ordinary Credit Method

Taxes
paid in the country of source are allowed as credit by the country of
residence only to the extent of the incremental tax liability due to
inclusion of such income. If taxes paid in country of source are higher,
the tax payer would not get the refund of such taxes. However, if the
taxes paid in the country of source are lower than the incremental tax
liability in the country of residence then the tax payer need to pay the
balance amount of taxes.

Example:
A Ltd (Indian company)
has the following income:- Income from India – Rs. 200,000/- [Tax rate –
30%] Income from foreign country – Rs. 50,000/- [Tax rate – 40%]

Total Income Taxable (India) – Rs. 2,50,000/-

Besides
the above two methods, Indian tax treaties provide two more types of
tax credit methods, namely, (i) Tax Sparing and (ii) Underlying Tax
Credit. The same are explained as follows:

(i) Tax Sparing

State of residence allows credit for deemed tax paid on income which is otherwise exempt from tax in the state of source.

(ii) Underlying Tax Credit

This
is a method which helps in eliminating economic double taxation
(example: – Dividend income). Under this method, the country of
residence grants credit not only for taxes paid which are withheld from
dividend income but also for the taxes paid on the profits out of which
such dividend has been paid. The examples of Indian tax treaties which
allow underlying tax credit are: Australia, Mauritius, Singapore, USA
and UK. Now let us discuss some practical issues that may arise in
claiming foreign tax credit in India. For the sake of simplicity and
understanding, let us examine issues of claiming foreign tax credit
faced in various situations by an Indian Resident, namely, Mr. Darshan
Dholakia (an imaginary name for understanding various illustrations).

2. Timing issues on account of different tax years

2.1 It is a known fact that different countries follow different tax years and rules for
(i) Levy
(ii) Computation and
(iii) Collection of Tax

Therefore,
it becomes a challenging task for the taxpayer to claim the credit of
foreign taxes paid in his country of residence at the time of
discharging his tax liability in a cross border transaction where the
incidence of tax is in two States i.e. Country of Source and Country of
Residence.

2.1.1 Illustrations

a. India follows Financial Year (FY) from 1st April – 31st March as the tax year;
b. USA follows Calendar Year (i.e. 1st January – 31st December) as the tax year;

2.1. 2 Income from Salaries

Let
us consider a situation where Mr. Darshan Dholakia, an Indian resident
goes to US for employment on 31st December 2014. This is his first visit
abroad in his lifetime. Therefore, for the FY 2014-15 he remains
Resident and Ordinary Resident in India. He is required to pay taxes in
India on his worldwide income for the FY 2014-15 i.e. including his
salaries in US for the period from 1st January 2015 to 31st March 2015.
In US he would be taxed on a Calendar Year basis, i.e. CY 2015. Under
the circumstances, how does he compute his tax liability in India and US
and claim credit in India in respect of taxes paid in US, especially
for the overlapping period (from 1st January 2015 to 31st March 2015)
which falls in two different tax years in two jurisdictions?

2.1.3
In the above illustration, Mr. Darshan needs to include his income from
US for the period from 1st January 2015 to 31st March 2015 in his
Indian tax return for the FY 2014-15. He can claim the credit of
proportionate taxes paid to US Govt. (by way of deduction or otherwise)
on such income by producing necessary evidences to this effect.

2.1.4
At a later date, if there is any voluntary upward / downward revision
in computation of the taxable income of Mr. Darshan in US, then he shall
revise his Income-tax return in India u/s. 139(5). His claim for credit
of US taxes shall alter accordingly.

Further, if the assessment
of his income in India has been completed, then Mr. Darshan may not be
able to file the revised return of income in India and in such cases, he
shall inform the Income-tax department in writing and the AO shall
modify his tax liability.

2.1.5 Business Income

What
if Mr. Darshan is earning business income from his proprietary concern
in US which is taxable in India as he is a Resident and Ordinary
Resident of India? In such a situation how his US income which is
ascertained on a Calendar Year basis, will be considered for tax in
India where income is assessed based on the Financial Year?

a.
Whether Mr. Darshan needs to compute profits of his US business for the
period from January 2015 to March 2015 while filing his return for the
FY 2014-15? OR

b. Can he include US profits for the CY 2015 in FY 2015 -16?

In
situation (a) above, it is assumed that profits of the business accrue
on a day to day basis and therefore there is a need to compute US
Profits separately for the overlapping period. Even if it is assumed
that profits of the business accrue only at the year end, upon drawing
of profit and loss account, one is confronted with provisions of section
44AB which requires one to get one’s accounts audited if the turnover
or gross receipts from all businesses put together exceeds Rs. one crore
in a previous year. The Previous year is defined u/s. 3 of the Act as
the Financial Year i.e. from April to March. So applying this
interpretation Mr. Darshan has no choice but to maintain accounts of his
US business from April to March for the purpose of complying with
Indian tax regulations.

In the above scenario, many practical
difficulties could arise as to claiming of tax credit. It may so happen
that tax may be paid for the US business post 31st March 2015. If it is
so, how can Mr. Darshan claim credit as the provisions of India-US DTAA
provides for credit of “taxes paid” and not “payable”. Even assuming
taxes are paid whether Mr. Darshan needs to apportion the same based on
profits ascertained for the period from 15th January to 15th March? What
if he has incurred losses in the period from 15th April to 15th
December? There are no clear answers to these issues. Therefore, one may
consider following alternative interpretation (which covers situation
(b) above).

In the above scenario, many practical difficulties could arise as to claiming of tax credit. It may so happen that tax may be paid for the US business post 31st March 2015. If it is so, how can Mr. Darshan claim credit as the provisions of India-US DTAA provides for credit of “taxes paid” and not “payable”. Even assuming taxes are paid whether Mr. Darshan needs to apportion the same based on profits ascertained for the period from 15th January to 15th March? What if he has incurred losses in the period from 15th April to 15th December? There are no clear answers to these issues. Therefore, one may consider following alternative interpretation (which covers situation (b) above).

Profits or losses are determined only at the year-end or when accounts are made up as per statutory requirements. There is no doubt that profit or loss is embedded in every transaction, but its actual determination is done only when accounts are drawn up for a particular period as business exigencies depends on so many factors, such as season, demand and supply etc. and these factors are best captured over a period of time. This view has been supported by the Apex Court in case of Ashokbhai Chimanbhai [(1965) AIR 1343] wherein it was held as follows:

“In the gross receipts of a business day after day or from transaction to transaction lie embedded or dormant profit or loss. On such dormant profits or loss, undoubtedly, taxable profits, if any, of the business will be computed. But dormant profits cannot be equated with accrued profits charged to tax u/s. 3 and 4 of the Income-tax Act, 1922. The concept of accrual of profits of a business involves the determination by the method of accounting at the end of the accounting year or any shorter period determined by law; and unless a right to the profits comes into existence, there is no accrual of profits.”

One more principle propounded by the above ruling is “right to receive” profits, which gets crystallised only on determination of profits or losses in accordance with provisions of law. All though the above ruling is in the context of 1922 Act, principles laid down can be applied to the provisions of the Income-tax Act, 1961 as well.

Applying the above ruling Mr. Darshan may offer in India the profits/losses earned in US business for the CY 2015 along with profits/losses of FY 2015-16 as the CY 2015 falls within FY 2015-16. This has to be done on a consistent basis. Similarly, he has to club the turnover of the US Business for CY 2015 with the turnover of Indian Business for 2015-16. Here he can argue that for the purpose section 44AB the previous year for the US Business is Calendar Year and therefore, he has considered the turnover of CY 2015 for the AY 2016-17.

It is pertinent to note that the above discussion would also be applicable in case of an Indian enterprise having a branch office in USA.

3.    Tax credit in case of deductions under special provisions

Consider a situation where Mr. Darshan Dholakia, an Indian Tax Resident, has earned foreign sourced income which in India is entitled to deductions say 50% or enjoying tax holidays on account of some provisions of the Act, (for example Exemptions u/s. 10AA to a Unit in SEZs from Exports Profits). A question may arise in relation to the admissibility of foreign taxes paid outside India on the whole of such income as credit against the income-tax liability in India?

In such cases, it has been held by the undernoted Courts that proportionate credit must be granted:-

a. The Rajasthan High Court [1994] 209 ITR 394 (RAJ.) at the time of reversing the decision of the Tribunal in the case of Dr. K. L. Parikh vs. ITO, 1982 (14 TTJ 117), held that the Tribunal was not justified in holding that the assessee was entitled to credit for the entire amount of tax deducted at source in Iran u/s. 91(1) of the Act and not in proportion to the income included in the total income of the assessee after considering the provisions of section 80RRA of the Act and relief was granted proportionately up to 50% of FTC.

b.    A similar view was upheld by the Andhra Pradesh

High Court in the case of CIT vs.. M.A. Mois (1994) 210 ITR 284.

4.    Exchange rate implications while determining income and the tax liability thereon
4.1  Rule 115 of the Income-tax Rules, 1962 provides that “The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date.”

4.2 Clause 2 of Explanation to Rule 115(1) provides that specified date means-

a. In respect of
salaries

Last day of the month immediately

 

preceding
the month in which

 

the
salary is due, or is paid in

 

advance or in arrears

b. Interest on securities

Last day of the month immediately

 

preceding
the month in which the

 

income is due

c. House  property, 
business

Last day of the previous year

income, other sources
other

 

income by way of
dividends

 

and income on
securities

 

d. Income  from  business 
in

Last day of the month immediately

relation to shipping
business

preceding the month in which

 

such
income is deemed to accrue

 

or arise in India

e. Dividends

Last day of the month immediately

 

preceding
the month in which

 

dividend
is declared, distributed or

 

paid by company

f.  Capital gains

Last day of the month immediately

 

preceding
the month in which the

 

capital asset is transferred

Since the foreign income is to be converted into INR for the purpose of computation, it appears to be a fair proposition that the conversion rate provided on the specified date under rule 115 shall also apply to convert the tax paid in foreign country into its rupee equivalent for the purpose of computing the available foreign tax credit. However, some tax treaties provide for foreign tax credit only on payment basis. In such cases, credit may be availed only on payment of taxes, but the taxes paid in foreign currency should be converted at the same rate at which the underlying income is converted in Indian Rupees. This is necessary for avoiding any artificial tax benefit (or tax loss) on account of currency conversion.

5    Computation of relief where there is income from more than one foreign country (Income from one Country and loss in the other Country)
Under provisions of the Act, tax is levied on a resident on his global income and therefore, income from all sources whether in India or outside shall be taxable in India subject to DTAA provisions which may/may not tax the income in the country of source.

5.2 In a case where Mr. Darshan Dholakia is carrying on business in more than one country and he has suffered loss from a business outside India say in UK and has profit in Hong Kong, a question may arise as to how shall the relief be granted in order to discharge his tax liability in India.

5.3 In the context of section 91 of the Act (which deals with Unilateral Tax relief where India has no tax treaty), in the case of Bombay Burmah Trading – 259 ITR 423, the Bombay High Court has held as under:

“If one analyses S. 91(1) with the Explanation, it is clear that the scheme of the said section deals with granting of relief calculated on the income country wise and not on the basis of aggregation or amalgamation of income from all foreign countries. Basically u/s. 91(1), the expression ‘such doubly taxed income’ indicates that the phrase has reference to the tax which the foreign income bears when it is again subjected to tax by its inclusion in the computation of income under the Income-tax Act. Further S. 91(1) shows that in the case of double income-tax relief to the resident, the relief is allowed at the Indian rate of tax or at the rate of tax of the other country whichever is less. Therefore, the relief u/s.91 (1) is by way of reduction of tax by deducting the tax paid abroad on such doubly taxed income from tax payable in India. Under the circumstances, the scheme is clear. The relief can be worked out only if it is implemented country wise. If incomes from foreign countries were to be aggregated, it would be impossible to compare the rate of tax of the foreign country with the rate under the Indian Income-tax Act.”

5.4 Similarly, in cases where DTAA exists between India and the country of source, the said DTAAs being bilateral in nature, one may infer that tax relief shall be computed country wise and not after aggregating the foreign sourced income.
Thus, in the given example, Mr. Darshan will be able to claim relief of taxes paid in Hong Kong u/s. 91 of the Act, whereas the loss from UK will be available for set-off in India, provided his income from UK is otherwise taxable in India. In any case for his income/ loss from UK, provisions of the India-UK DTAA shall apply.

6    Claiming credit for tax paid in a country outside India with whom DTAA exists but the type of taxes paid are not covered

6.1 In this context, we have a direct decision in the case of TATA Sons Ltd. – 43 SOT 27, wherein, the assessee had paid State Income Taxes in USA and Canada. However, the India-USA and India-Canada DTAA covers only the Federal taxes paid and the assessee had sought to claim relief u/s. 91 of the Act in respect of the State Income taxes paid outside India.

6.1 The issue before the Tribunal was whether the assessee would be eligible for claiming credit u/s. 91 in light of provisions of section 90(2) of the Act?

6.2 It was held by the Hon. Tribunal that “State Income Taxes cannot be allowed as a deduction and also cannot be taken into account for giving credit is absurd and results in a contradiction. A tax payment which is not treated as admissible expenditure on the ground that it is payment of Income-tax has to be treated as eligible for tax credit. While section 91 of Act allows credit for Federal and State taxes, the DTAA allows credit only for Federal taxes. The result is that section 91 is more beneficial to the assessee and by virtue of section 90(2) of Act, provisions of section 91 must prevail over the DTAA even though this is a case where India has entered into a DTAA. Accordingly, even an assessee covered by the scope of the DTAA will be eligible for credit of State taxes u/s. 91 of Act despite the DTAA not providing for the same.”

6.3 It may be noted that the above case refers to the payment of State Income tax in the US and Canada. Assessee first claimed these taxes as expenditure u/s. 37(1) of the Act on the ground that the respective DTAA covers only Federal (Central) Taxes. This claim of the Assessee was rejected by the Tribunal vide its order dated 24th November 2010. However, the Assessee sought further clarifications and in a fresh order dated 23rd February 2011, the Hon. Tribunal held that the Assessee was eligible to claim credit for State Income tax paid in US and Canada u/s. 91 of the Act read with section 90(2), notwithstanding existence of DTAA with both these countries.


7    Claim for refund of tax in a case where more tax is paid in a foreign country compared to the tax payable in India on the same income

7.1 The answer to the above issue can be better explained with the help of an example.

A Ltd. (Domestic Company) – Foreign taxes paid:- INR 150/– Income-tax payable:- INR 100/– Credit allowed:- INR 100/-

–    Excess credit:- INR 50/- (150-100)

7.2 A question may arise as to whether the tax payer is eligible for a refund (if available) or he would be allowed to claim the excess tax paid as credit which may be carried forward and may be set off against the liability of the subsequent year?

No refund is allowed in respect of excess foreign taxes paid to any tax payer in India for the obvious reason that such tax is paid to the foreign government. In absence of any rules or provision allowing carry forward of unavailed/excess tax credit, the same cannot be carry forward to the next year. However, some countries do allow carry forward of excess tax credits. Canada, Japan, Singapore, UK and USA do allow carry forward of excess foreign tax credit for the period ranging from three years to an indefinite time period.

8    How shall tax relief be computed and granted in the case of a person being

i.    A Company whose tax liability is determined under the Minimum Alternate Tax (MAT) provisions?

ii.    A person other than a company whose tax liability is determined under the Alternate Minimum Tax (AMT) provisions?
Under the provisions of the Act, a company is subjected to tax either as per normal provisions of the Act or MAT whichever is higher. Similarly tax payers other than the company, are taxed as per normal provisions of the Act or AMT whichever is higher.

8.2 Therefore a question arises whether a tax payer who is subjected to tax in India either under MAT or AMT would be eligible to claim credit of foreign taxes paid on the same income?

8.3  Bombay High Court in the case of Bombay

Burmah Trading Corporation Limited (2003) 259 ITR 423 held that “basically u/s. 91(1), the expression ‘such doubly taxed income’ indicates that the phrase has reference to the tax which foreign income bears when it is again subjected to tax by its inclusion in the computation of income under the Indian Income-tax Act, 1961”.

8.4 In the light of the above decision, it would appear that wherever MAT or AMT is applicable to foreign income, it would amount to double taxation and the tax payer would be eligible to claim applicable tax credits in respect of foreign taxes paid abroad on the same income.

9    Can the taxes (based on turnover) paid to foreign government be allowed as deduction computing the total income of the assessee?

In this matter, there is a direct decision of the Bombay High Court in the case of K.E.C International Ltd (2000) 256 ITR 354 wherein the tax payer paid turnover tax in Thailand. Income-tax ideally should mean a tax which is levied on income, something which is directly linked to income of the tax payers and not indirect taxes such as Service tax, VAT or Sales Tax or Turnover Tax etc. Since the tax paid was indirect in nature and not Income-tax, it was held to be allowable as a business deduction. The Court held that in such a case, provisions of section 40(a)(ii) of the Act cannot be invoked for disallowance.

10    What if there is additional tax required to be paid on assessment in Foreign Countries? Will the same automatically increase income in India?

If the tax payer challenges various additions to his returned income in the foreign country at some higher forum, then there will not be any tax implications in India. However, if the tax payer does not challenge the additions made in the foreign country, then he is under obligation to revise his return of income in India. If the return is time barred, then necessary recourse provided under the Act will be applicable.

11    Difference in Characterisation of Income

It may be possible that business profits are offered for tax as fees for technical services (FTS) in India (say Country of Source) whereas, the Country of Residence (say, Singapore) thinks that the tax is wrongly paid as FTS and in absence of PE there was no tax liability in India. In such a scenario, Singapore may deny the tax credit and the tax payer may have to resort to Mutual Agreement Procedure.

12    Conclusion

Section 91 of the Act provides for unilateral tax relief. India has signed more than 80 comprehensive Double Tax Avoidance Agreements which also provide for tax credits. By and large Indian tax treaties provide for Ordinary Tax Credits. Prominent issues in claiming foreign tax credits are timing difference, evidences of payment and the rate of exchange for conversion of income and taxes in Indian currency.

Tax payers must remember that any income received from a foreign jurisdiction has to be computed under the Indian tax laws, by applying provisions of the Act. Rules of computation may differ in two different jurisdictions. Therefore, the credit of foreign taxes paid is always restricted to the additional tax liability in India on account of inclusion of foreign income.

The Finance Act, 2015 has amended section 295 and inserted clause (ha) to empower the CBDT to make Rules for the procedure for the granting of relief or deductions of foreign taxes against the income-tax payable in India. Many issues may get resolved once these Rules are notified by the CBDT.

Bombay High Court judgment in the case of Tata Sons Ltd., Writ Petition No. 2818 of 2012 decided on 20.1.2015

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Trade Circular 11T of 2015 dated 13.7.2015

In this Circular, the Sales Tax Commissioner has explained the judgement in case of Tata Sons Ltd., that VAT can be levied on transfer of right to use goods of intangible nature i.e. trade mark, technical knowhow ,copy right and other intangible goods even if transferred to multiple users.

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Online Grant of Registration under the Maharashtra Value Added Tax Act , 2002 and Central Sales Tax Act, 1956

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Trade Circular 10T of 2015 dated 7.7.2015

For online application under MVAT or CST Act, if officer finds all the documents are complete & correct TIN number will be allotted within a day of allocation of application.

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Providing E Payment facility for the Maharashtra Tax on Entry of Goods into Local Areas Act, 2002

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Trade Circular 9T of 2015 dated 1.7.2015

With effect from 1.7.2015 payment under the Maharashtra Tax on Entry of Goods into Local Area Act, 2002 can be made optionally electronically through GRAS. The detailed procedure has been explained in this Circular.

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M/s. Jinsasan Distributors vs. Commercial Tax Officer (CT), [2013] 59 VST 256(Mad)

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VA T-Input Tax Credit – Allowed in Assessment – Subsequent Cancellation of Registration Certificate of Selling Dealer – Can Not Affect Right of Purchasing Dealer – ITC cannot be Reversed, Section 19 of The Tamil Nadu Value Added Tax Act, 2006.

FACTS
The petitioners had claimed input tax credit of tax paid on purchase of goods from registered dealer u/s. 19 of The TNVAT Act. Subsequently, department took action against the selling dealers, who sold the goods to the petitioners for one or other reason and cancelled registration certificates of selling dealers from retrospective effect. Based on this, the VAT department issued notices in some cases calling upon petitioners to show cause as why input tax credit should not be reversed, in some cases passed revised assessment orders reversing input tax credit availed. All the affected petitioners filed writ petition before the Madras High Court challenging the notices, revised assessment orders and provisional assessment orders.

HELD
It was not is dispute that the registration certificates of the selling dealers were cancelled with retrospective effect and, therefore, to reverse the input tax credit on the plea that registration certificates have been cancelled with retrospective effect cannot be countenanced. Whatever benefits that accrued to the petitioners based on valid documents in the course of sale and purchase of goods, for which tax was paid cannot be declined. The transaction that took place when the registration certificates of selling dealers were in force cannot be denied to the petitioners on the above plea. Accordingly, the High Court allowed the writ petition filed by petitioners and all the notices revised assessment orders and the provisional assessment orders, in so far they sought to deny the benefit of the input tax credit on the above ground were set aside.

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Charitable and religious trust – Anonymous donations – Special rate of tax – Section 115BBC – A. Y. 2009-10 – Exception – Religious trust – Overall activities of trust to be seen – Charitable activity part of religious activity – Assessee is a public religious trust – Special rate not attracted

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CIT vs. Bhagwan Shree Laxmi Narayandham Trust; 378 ITR 222 (Del): 280 CTR 335 (Del):

The assessee was a public religious trust. For the A. Y. 2009-10 the assessee had received anonymus donations to the extent of Rs. 27,25,306/-. The Assessing Officer applied the provisions of section 115BBC of the Incometax Act, 1961 and levied tax at the special rate. The Tribunal held that the Revenue had incorrectly applied section 115BBC to the facts of the assessee’s case.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) T he question of receipt of anonymus donations could not be addressed within the narrow scope of the specific wordings of some of the clauses of the trust deed but in the overall context of the actual activities in which the trust was involved in including imparting spiritual education to persons of all casts and religions, organizing samagams, distribution of free medicine and cloths to the needy and destitute, provision of free ambulance service for needy and destitute patients and so on.

ii) What can constitute religious activity in the context of Hindu religion need not be confined to the activities incidental to a place of worship like a temple. A Hindu religious institution like the assessee is also engaged in charitable activities which were very much part of the religious activity. In carrying on charitable activities along with organizing of spiritual lectures, the assessee by no means ceased to be religious institution. The activities described by the assessee as having been undertaken by it during the assessment year in question could be included in the broad conspectus of Hindu religious activity when viewed in the context of objects of the trust and its activities in general.

iii) Thus, the Tribunal was justified in coming to the conclusion that for the purpose of section 115BBC(2)(a) anonymus donations received by the assessee would qualify for deduction and it can not be included in its assessable income.”

Capital gain – Short term capital gain or business income – A. Y. 2008-09 – Purchase and sale of shares – Entire investment in shares consistently treated as investment in shares and not stock-intrade – Transactions not of high volume – Own funds used for the purposes of investment in shares – Transactions delivery based – Income to be treated as short term capital gains and not business income

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CIT vs. Smt. Datta Mahendra Shah (Bom)

In the A. Y. 2008-09, the assessee claimed Rs. 9.25 crores as short term capital gain. The Assessing Officer held that it was business income. The Commissioner (Appeals) found that the assessee had been an investor in shares and had consistently treated her entire investment in shares as investment and not stock-intrade. The assessee was dealing in 35 scrips, involving 59 transactions for the entire year could not be considered for high volume so as to be classified as trading income. The assesee had not borrowed any funds but had used her own funds. He held the income to be treated as shortterm capital gains. The Tribunal upheld the decision of the Commissioner (Appeals).

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

“(i) T he Commissioner (Appeals) considered all the facts including the stand taken by the Revenue as found in the Assessing Officer’s order. On examination of all the facts he came to the conclusion that the activities carried out by the assesee could not be classified under the head “business income” but more appropriately as claimed by the assessee under the head “shortterm capital gains”. This was particularly so on application of the CBDT circular.

(ii) In view of the concurrent finding of fact arrived at by the Commissioner (Appeals) and the Tribunal no substantial question of law would arise.”

Business expenditure – Section 37(1) – A. Y. 2009- 10 – Payment made by the assessee law firm to the Indian branch of the International Fiscal Association towards the cost of constructing one of its meeting halls on the understanding that the hall would be named after the assessee firm was deductible as business expenditure

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CIT vs. Vaish Associates; 280 CTR 605 (Del): The assessee, a law firm, had agreed to contribute Rs. 50 lakh to the Indian branch of the International Fiscal Association (IFA) on progressive basis towards the cost of constructing one of its meeting halls on the understanding that the hall would be named after the asessee firm. In the relevant year, i.e. A. Y. 2009-10, the assessee had paid Rs. 19 lakh and the same was claimed as business expenditure. The Assessing Officer disallowed the claim. However, he allowed 50% deduction u/s. 80G of the Income-tax Act, 1961. The Tribunal allowed the full claim u/s. 37(1) of the Act.

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

“i) T he Tribunal has accepted the explanation of the assessee that the IFA is a professional body and a non-profit organization engaged in the study of international tax laws and policies. It, inter alia, undertakes research, holds conferences and publishes materials for the use of its members. Mr. Ajay Vora, one of the partners of the assessee firm, was also a member of the executive body of the IFA.

ii) T he contribution made by the assessee to the IFA was held to be for inter alia creating greater awareness of the assessee firm’s activities and therefore an expenditure incurred for the purposes of the profession of the assessee. It was accordingly held to be allowable as a deduction u/s. 37(1) of the Act.”

Business expenditure – Disallowance u/s. 14A – A. Y. 2007-08 – Disallowance u/s. 14A is not automatic upon claim to exemption – AO’s satisfaction that voluntary disallowance made by assessee unreasonable and unsatisfactory is necessary – In the absence of such satisfaction the disallowance cannot be justified

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CIT vs. I. P. Support Services India (P) Ltd.; 378 ITR 240 (Del):

In the A. Y. 2009-10, the assessee had earned dividend income which was exempt. The Assessing Officer asked the assessee to furnish an explanation why the expenses relevant to the earning of dividend should not be disallowed u/s. 14A. The assessee submitted that as no expenses had been incurred for earning dividend income, this was not a case for making any disallowance. The assessing Officer held that the invocation of section 14A is automatic and comes into operation, without any exception. He disallowed an amount of Rs. 33,35,986/- u/s. 14A read with rule 8D and added the amount to the total income. The Commissioner (Appeals) found that no interest expenditure was incurred and that the investments were done by using administrative machinery of PMS, who did not charge any fees. He deleted the addition. The Tribunal affirmed the order of the Commissioner (Appeals).

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

“i) The Assessing Officer had indeed proceeded on the erroneous premise that the invocation of section 14A is automatic and comes into operation as soon as the dividend income is claimed as exempt. The recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable or unsatisfactory, is a mandatory requirement of the law.

ii) N o substantial question of law arises. The appeal is dismissed.”

Business expenditure – Disallowance u/s. 14A – A. Y. 2007-08 – Higher disallowance under rule 8D agreed before AO – Assessee could not be bound by such offer – Tribunal justified in reducing the amount of disallowance

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CIT vs. Everest Kanto Cylinders Ltd.; 378 ITR 57 (Bom):

For the A. Y. 2007-08, the assessee and the Assessing Officer worked out the amount disallowable u/s. 14A read with rule 8D at Rs.20,27.896/- Before the Tribunal the assessee pointed out that the disallowance is on a higher side and claimed that a reasonable amount should be disallowed. The Tribunal restricted the disallowance to Rs. 1 lakh.

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

“The Tribunal had gone into the factual aspects in great detail and interpreted the law as it stood on the relevant date. Therefore, the order of the Tribunal restricting the disallowance to Rs. 1 lakh u/s. 14A was justified.”

Housing Project – Special Deduction – Law before 1st April, 2002 – There was no limit fixed in section 80-IB(10) regarding built-up area to be used for commercial purpose in a housing project and it could be constructed to the extent provided in local laws under which local authority gives sanction to the housing project.

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CIT vs. Veena Developers [SLP (c) No.22450 of 2011 dated 30-4-2015]

The assessees had undertaken construction projects which were approved by the municipal authorities/local authorities as housing projects. On that basis, they claimed deduction u/s. 80IB(10) of the Act.

However, the income tax authorities rejected the claim of deduction on the ground that the projects were not “housing project” inasmuch as some commercial activity was also undertaken in those projects. This contention of the Revenue was not accepted by the Income-tax Appellate Tribunal as well as the High Court. The High Court interpreted the expression “housing project” by giving grammatical meaning thereto as housing project is not defined under the Income-tax Act insofar as the aforesaid provision is concerned. The High Court held that since sub-section (10) of section 80-IB very categorically mentioned that such a project which is undertaken as housing project is approved by a local authority, once the project is approved by the local authority it is to be treated as the housing project. The High Court had made observations in the context of Development Control Regulations (hereinafter referred to as ‘DCRs’ in short) under which the local authority sanctions the housing projects and noted that in these DCRs itself, an element of commercial activity is provided but the total project is still treated as housing project. The Supreme Court noted that on the basis of this discussion, after modifying some of the directions given by the ITAT , the conclusions arrived at by the High Court were as follows:-

a) Upto 31/3/2005 (subject to fulfilled other conditions), deduction u/s. 80-IB(10) is allowable to housing projects approved by the local authority having residential units with commercial user to the extent permitted under DC Rules/Regulations framed by the respective local authority.

b) I n such a case, where the commercial user permitted by the local authority is within the limits prescribed under the DC Rules/Regulation, the deduction u/s. 80- IB(10) upto 31/3/2005 would be allowable irrespective of the fact that the project is approved as ‘housing project’ or ‘residential plus commercial’.

c) I n the absence of any provision under the Income-tax Act, the Tribunal was not justified in holding that upto 31/3/2015 deduction u/s. 80-IB(10) would be allowable to the projects approved by the local authority having residential building with commercial user upto 10% of the total built-up area of the plot.

d) Since deductions u/s. 80-IB(10) is on the profits derived from the housing projects approved by the local authority as a whole, the Tribunal was not justified in restricting section 80-IB(10) deduction only to a part of the project. However, in the present case, since the assessee has accepted the decision of the Tribunal in allowing section 80-IB(10) deduction to a part of the project, the findings of the Tribunal in that behalf were not disturbed.

e) Clause (d) inserted to section 80IB(10) with effect from 1/4/2005 was prospective and not retrospective and hence could not be applied for the period prior to 1/4/2005.

The Supreme Court agreed with the aforesaid answers given by the High Court to the various issues. The Supreme Court however, clarified that in so far as answer at para (a) was concerned, it would mean those projects which were approved by the local authorities as housing projects with commercial element therein.

There was much debate on the answer given in para (b) above before the Supreme Court. It was argued by learned senior counsel, for the Revenue that a project which was cleared as “residential plus commercial” project could not be treated as housing project and therefore, this direction was contrary to the provisions of section 80-IB(10) of the Act. However, according to the Supreme Court reading the direction in its entirety and particularlly the first sentence thereof, the commercial user which was permitted was in the residential units and that too, as per DCR.

The Supreme Court clarified that direction (b) was to be read in the context where the project was predominantly housing/residential project but the commercial activity in the residential units was permitted.

Housing Project – Special Deduction- Section 80IB(10) – Change of Law with effect from 1st April, 2005 – Cannot be applied to those projects which were sanctioned and commenced prior to 1st April, 2005 and completed by the stipulated date though such stipulated date is after 1st April, 2005.

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CIT vs. Sarkar Builders (2015) 375 ITR 392(SC)

The question of law that arose for consideration before the Supreme Court was formulated by it as under:

“Whether section 80-IB(10)(d) of the Income-tax Act, 1961, applies to a housing project approved before March 31, 2005, but completed on or after April 1, 2005”?

The Supreme Court observed that sub-section (10) of section 80IB stipulates certain conditions which are to be satisfied in order to avail of the benefit of the said provision. Further, the benefit is available to those undertakings which are developing and building “housing projects” approved by a local authority. Thus, this section is applicable in respect of housing projects and not commercial projects. At the same time, it is a fact that even in the housing projects, there would be some are for commercial purposes as certain shops and commercial establishments area needed even in a housing project.

That has been judicially recognised while interpreting the provision that existing before 1st April, 2005 in CIT vs. Veena Developers [SLP (c) No.22450/2011 dated 30-4- 2015], and there was no limit fixed in section 80-IB(10) regarding the built-up area to be used for commercial purpose in the said housing project. The extent to which such commercial area could be constructed was as per the local laws under which local authority gave the sanction to the housing project. However, vide clause (d), which was inserted by the aforesaid amendment and made effective from 1st April, 2005, it was stipulated that the built-up area of the shops and other commercial establishments in the housing projects would not exceed 5 % of the aggregate built-up area of the housing project or 2,000 square feet, whichever is less (there is a further amendment whereby 5 % is reduced to 3 % and instead of the words “2,000 square feet, whichever is less” the words “5,000 square feet, whichever is higher” have been substituted). According to the Supreme Court, the question, thus, that required for consideration was as to whether in respect of those housing projects which finished on or after 1st April, 2005, though sanctioned and started much earlier, the aforesaid stipulation contained to clause (d) also has to be satisfied. The Supreme Court noted that all the High Courts have held that since this amendment is prospective and has come into effect from 1st April, 2005, this condition would not apply to those housing projects which had been sanctioned and stared earlier even if they finished after 1st April, 2005.

The Supreme Court noted that with effect from 1st April, 2001, section 80-IB(10) stipulated that any housing project approved by the local authority before 31st March, 2001, was entitled to a deduction of 100 % of the profits derived in any previous year relevant to any assessment year from such housing project, provided—(i) the construction/ development of the said housing project commenced on after 1st October, 1998, and was completed before 31st March, 2003; (ii) the housing project was on a size of a plot of land which had a minimum area of one acre; and (iii) each individual residential unit had a maximum built-up area of 1,000 square feet, where such housing project was situated within the cities of Delhi or Mumbai or within 25 kms. from municipal limits of these cities, and a maximum built-up area of 1,500 square feet at any other place. Therefore, for the first time, a stipulation was added with reference to the date of approval, namely, that approval had to be accorded to the housing project by the local authority before 31st March, 2001. Before this amendment, there was no date prescribed for the approval being granted by the local authority to the housing project. Prior to this amendment, as long as the development/ construction commenced on or after 1st October, 1998, and was completed before 31st March, 2001, the assessee was entitled to the deduction. Also by this amendment, the date of completion was changed from 31st March, 2001, to 31st March, 2003. Everything else remained untouched.

Thereafter, by the Finance Act, 2003, further amendments were made to section 80-IB(10). The only changes that were brought about were that with effect from 1st April, 2002: (i) the housing project had to be approved before 31st March, 2005; and (ii) there was no time limit prescribed for completion of the said project. Though these changes were brought about by the Finance Act, 2003, the Legislature thought it fit tht these changes be deemed to have been brought into effect from 1st April, 2002. All the remaining provisions of section 80-IB(10) remained unchanged.

Thereafter, significant amendment, with which the Supreme Court was directly concerned, was carried out by the Finance (No.2) Act, 2004, with effect from 1st April, 2005. The Legislature made substantial changes in subsection (10). Several new conditions were incorporated for the first time, including the condition mentioned in clause (d). This condition/restriction was not on the statute book earlier when all these projects were sanctioned. Another important amendment was made by this Act to sub-section (14) of section 80-IB with effect from 1st April, 2005, and for the first time under clause (a) thereof the words “built-up area” were defined.

Prior to the insertion of section 80-IB(14)(a), in many of the rules and regulations of the local authority approving the housing project “built-up area” did not include projections and balconies. Probably, taking advantage of this fact, builders provided large balconies and projections making the residential units far bigger than as stipulated in section 80-IB(10), and yet claimed the deduction under the said provision. To plug this lacuna, clause (a) was inserted in section 80-IB(14) defining the words “built-up area” to mean the inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls but did not include the common areas shared with other residential units.

According to the Supreme Court, the only way to resolve the issue was to hold that clause (d) is to be treated as inextricably linked with the approval and construction of the housing project and an assessee cannot be called upon to comply with the said condition when it is not in contemplation either of the assessee or even the Legislature, when the housing project was accorded approval by the local authorities.

The Supreme Court held that by way of an amendment in the form of clause (d), an attempt is made to restrict the size of the said shops and/or commercial establishments. Therefore, by necessary implication, the said provision has to be read prospectively and not retrospectively. As is clear from the amendment, this provision came into effect only from the day the provision was substituted. Therefore, it cannot be applied to those projects which were sanctioned and commenced prior to 1st April, 2005, and completed by the stipulated date, though such stipulated date is after 1st April, 2005. According to the Supreme Court, these aspects were dealt with by various High Courts elaborately and convincingly in their judgments and had taken a correct view that the assesses were entitled to the benefit of section 80-IB(10). The Supreme Court dismissed the appeals filed by the Revenue.

Surtax – Exemption – Agreements with foreign companies for services or facilities for supply of ship, aircraft, machinery and plant to be used in connection with the prospecting or extraction or production of mineral oils – Chargeable profits are liable to tax under the Companies (Profits) Surtax Act, 1964 – Exemption vide Notification No.GSR 370(E) dated 31-3-1983 u/s. 24AA not available.

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Oil and Natural Gas Corporation Ltd. vs. CIT (2015) 377 ITR 117(SC)

Section 24AA of the Surtax Act, vests in the Central Government the power to make exemption, reduction in rate or other modification in respect of surtax in favour of any class of foreign companies which are specified in s/s. (2), in regard to the whole or any part of the chargeable profits liable to tax under the Surtax Act. Sub-section (2) of section 24AA refers to two categories of foreign companies. The first is foreign companies with whom the Central Government has entered into agreements for association or participation, including participation by any authorised person, in any business consisting of the prospecting or extraction or production of mineral oils. The second category of foreign companies mentioned in s/s. (2) is foreign companies that may be providing services or facilities or supplying any ship, aircraft, machinery or plant in connection with any business of prospecting or extraction or production of mineral oils carried on by the Central Government or any authorised person. Specifically the section states that mineral oils will include petroleum and natural gas.

The exemption notification bearing No. G. S. R. 307(E), dated 31st March, 1983, specifically grants exemption in respect of surtax in favour of foreign companies with whom the Central Government has entered into agreements for association or participation of that Government or any authorised person in the business of prospecting or extraction or production of mineral oils.

The ONGC had executed agreements with different foreign companies for services or facilities or for supply of ship, aircraft, machinery and plant, as may be, all of which were to be used in connection with the prospecting or extraction or production of mineral oils. Such agreements did not contemplate a direct association or participation of the ONGC in the prospecting or extraction or production of mineral oils but involved the taking of services and facilities or use of plant or machinery which is connected with the business of prospecting or extraction or production of mineral oils.

In the above situation, the primary authority took the view that the agreements executed by the ONGC with the foreign companies being for services to be rendered and such agreements not being for association or participation in the prospecting or extraction or production of mineral oils, would not be covered by the exemption notification in question which by its very language granted exemption only to foreign companies with whom there were agreements for participation by the Central Government or the person authorised in the business of prospecting, extraction or production of mineral oils. The agreements in question, according to assessing authority, were, therefore “service agreements” and, hence, covered by sub-section (2)(b) of section 24AA of the Surtax Act and were, accordingly, beyond the purview of the exemption modification.

The said view was reversed by the learned Appellate Commissioner and upheld by the learned Income-tax Appellate Tribunal. In the appeal u/s. 260A of the Act, the High Court of Uttarakhand overturned the view taken by the Appellate Commissioner and the learned Tribunal.

The Supreme Court held that section 24AA of the Surtax Act vests power in the Central Government, inter-alia, to grant exemption to foreign companies with whom agreements have been executed by the Central Government for association or participation in the prospecting or extraction or production of mineral oils and also to foreign companies who are providing support services or facilities or making available plant and machinery in connection with the business of prospecting or extraction or production of mineral oils in which the Central Government or an authorised person is associated. In other words, the power to grant exemption is two-fold and covers agreements directly associated with the prospecting or extraction or production of mineral oils or contracts facilitating or making available services in connection with such a business. There is nothing in the provisions of the Act which could have debarred the Central Government from granting exemptions to both categories of foreign companies mentioned above or to confine the grant of exemption to any one or a specified category of foreign companies. The Notification No. G. S. R. 307(E), dated 31st March, 1983, however grants exemption only to foreign companies with whom the Central Government had executed agreements for direct association or participation by the Central Government or the person authorised by it (ONGC) in the prospecting or extraction or production of mineral oils. In other words, the exemption notification confines or restricts the scope of the exemption to only one category of foreign companies which has been specifically enumerated in sub-section (2)(a) of section 24AA of the Surtax Act. The Second category of foreign companies that may be providing services as enumerated in sub-section (2)(b) of section 24AA is specifically omitted in the exemption notification. The power u/s. 24AA of the Surtax Act, is wide enough to include even this category of foreign companies. The omission of this particular category of foreign companies in the exemption notification, notwithstanding the wide amplitude and availability of the power u/s. 24AA, clearly reflects a conscious decision on the part of the Central Government to confine the scope of the exemption notification to only those foreign companies that are enumerated in and covered by sub-section 2(a) of section 24AA of the Surtax Act.

The Supreme Court affirmed the orders of the High Court and dismissed the appeals.

Non-Resident – Income deemed to accrue or arise in India – Prospecting, extraction or production of mineral oils – Presumptive Tax – If the works or services mentioned under a particular agreement was directly associated or inextricably connected with prospecting, extraction or production of mineral oils, payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of section 44BB and not section 44D of the Act.

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Oil and Natural Gas Corporation Ltd. vs. CIT (2015) 376 ITR 306 (SC)

The appellant – ONGC and a non-resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available supervisory staff and personnel having experience and expertise for operation and management of drilling rigs Sagar Jyoti and Sagar Pragati for the assessment year 1985-86 and the drilling rig Sagar Ratna for the assessment year 1986-87.

The appellant – ONGC has been assessed in a representative capacity on behalf of the foreign company with whom it had executed agreements for services to be rendered by such company in connection with prospecting extraction or production of mineral oils by ONGC. The primary/assessing authority took the view that the assessments should be made u/s. 44D of the Act and not section 44BB of the Act. The Appellate Commissioner and the Income-tax Appellate Tribunal disagreed with the views of the assessing authorities leading to the institution of appeal before the High Court of Uttarakhand. The High Court overturned the view taken by the Appellate Commissioner and the Tribunal and held the payments made to be liable for assessment u/s. 44D of the Act.

The High Court took the view that under the agreement, payment to M/s. Foramer France was required to be made at the rate of 3,450 $ per day and that the contract clearly contemplated rendering of technical services by personnel of the non-resident company as the contract did not mention that the personnel of the non-resident company were also carrying out the work of drilling of wells and as the company had received fees for rendering service, the payments made were liable to be taxed under the provisions of section 44D of the Act.

Aggrieved, the ONGC has filed appeal before the Supreme Court.

The Supreme Court held that a careful reading of the provisions of the Act goes to show that u/s. 44BB(1) in the case of a non-resident providing services or facilities in connection with or supplying plant and machinery used or to be used in prospecting, extraction or production of mineral oils the profit and gains from such business chargeable to tax is to be calculated at a sum equal to 10 per cent of the aggregate of the amounts paid or payable to such non-resident assessee as mentioned in s/s. (2). On the other hand, section 44D contemplates that if the income of a foreign company with which the Government or an Indian concern had an agreement executed before 1st April, 1976, or on any date thereafter but before April, 2003 the computation of income would be made as contemplated under the aforesaid section 44D. Explanation (a) to section 44D, however, specifies that “fees for technical services” as mentioned in section 44D would have the same meaning as in Explanation 2 to clause (vii) of section 9(1). The said Explanation, defines “fees for technical services” to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the Explanation excludes from consideration for the purposes of the expression, i.e., “fees for technical services” any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head “Salaries”. Fees for technical services, therefore, by virtue of the aforesaid Explanation would not include payments made in connection with a mining project.

The Supreme Court noted that the Income-tax Act does not define the expressions “mines” or “minerals”. The said expressions however were found defined and explained in the Mines Act, 1952, and the Oil Fields (Development and Regulations) Act, 1948. The Supreme Court having regard to the said definition and to the Seventh Schedule of the Constitution, held that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it was the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or a mining operation that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed u/s. 44BB or section 44D of the Act. The Supreme Court noted that the Central Board of Direct Taxes had accepted the said test and had in fact issued a Circular as far back as 22nd October, 1990, to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and, hence, payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of section 44BB and not section 44D of the Act.

According to the Supreme Court, it was not possible to take any other view if the works or services mentioned under a particular agreement was directly associated or inextricably connected with prospecting, extraction or production of mineral oils. Keeping in mind the above provisions and looking into each of the contracts involved in the group of cases before it, it found that the pith and substance of each of the contracts/agreements was inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement was for prospecting, extraction or production of mineral oils though there would be certain ancillary works contemplated thereunder. The Supreme Court therefore held that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts was more appropriately assessable under the provisions of section 44BB and not section 44D of the Act.

Capital Gains – Exemption u/s. 54G – Transfer of Unit from Urban Area to Non-Urban Area – Advances paid for the purpose of purchase and/or acquisition of the assets would certainly amount to utilisation by the assessee of the capital gains made by him for the purpose of purchasing and/ or acquiring the aforesaid assets.

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Fire Boards (P) Ltd. vs. CIT [2015] 376 ITR 596 (SC)

The assessee, a private limited company, had an industrial unit at Majiwada, Thane, which was notified urban area as per notification dated 22nd September, 1967 issued u/s. 280Y(d) for the purpose of Chapter XXII-B. With a view to shift its industrial undertaking from an urban area to a non-urban area at Kurukumbh Village, Pune District, Maharashtra, it sold its land, building and plant and machinery situated at Majiwada, Thane to Shree Vardhman Trust for a consideration of Rs.1,20,00,000, and after deducting an amount of Rs.11,62,956, had earned a capital gain of Rs.1,08,33,044. Since it intended to shift its industrial undertaking from an urban area to a non-urban area, out of the capital gain so earned, the appellant paid by way of advances, various amounts to different persons for purchase of land, plant and machinery, construction of factory building, etc. Such advances amounted to Rs.1,11,42,973 in the year 1991-92. The appellant claimed exemption u/s. 54G of the Income-tax Act on the entire capital gain earned from the sale proceeds of its erstwhile industrial undertaking situated in Thane in view of the advances so made being more than the capital gain made by it. Section 54G was introduced by the Finance Act, 1987 with effect from assessment year 1988-89.

The Assessing Officer imposed a tax on capital gains, refusing to grant exemption to the appellant u/s. 54G. According to the Assessing Officer, non-urban area had not been notified by the Central Government and therefore the plea of shifting the non-urban area could not be accepted. Further, it could not be said that giving advance to different concerns meant utilisation of money for acquiring the assets. Hence, failure to deposit the capital gain in the Capital Gains Deposit Account by the assessee the claim could not be allowed.

The Commissioner of Income-tax (Appeals) dismissed the appellant’s appeal. The Income-tax Appellate Tribunal however, allowed the assessee’s appeal stating that even an agreement to purchase is good enough and that the Explanation to section 54G being declaratory in nature would be retrospective.

The High Court reversed the judgment of the Incometax Appellate Tribunal and held that as the notification declaring Thane to be an urban area stood repealed with the repeal of the section under which it was made, the appellant did not satisfy the basic condition necessary to attract section 54G, namely, that a transfer had to be made from an urban area to a non-urban area. Further, the expression “purchase” in section 54G could not be equated with the expression “towards purchase” and, therefore, admittedly as land, plant and machinery had not been purchased in the assessment year in question, the exemption contained in section 54G had to be denied.

The Supreme Court held that on a conjoint reading of the Budget Speech, Notes on clauses and Memorandum Explaining the Finance Bill of 1987, it was clear that the idea of omitting section 280ZA and introducing on the same date section 54G was to do away with the tax credit certificate scheme together with the prior approval required by the Board and to substitute the repealed provision with the new scheme contained in section 54G. It was true that section 280Y(d) was only omitted by the Finance Act, 1990, and was not omitted together with section 280ZA. However, this would make no material difference inasmuch as section 280Y(d) was a definition section defining ‘urban area” for the purpose of section 280ZA only and for no other purposes. It was clear that once section 280ZA was omitted from the statute book, section 280Y(d) had no independent existence and would for all practical purposes also be “dead”. Quite apart from this, section 54G(1) by its Explanation introduced the very definition contained in section 280Y(d) in the same terms. Obviously, both provisions were not expected to be applied simultaneously and it was clear that the Explanation to section 54G(1) repealed by implication section 280Y(d). Further, from a reading of the Notes on Clauses and the Memorandum of the Finance Bill, 1990, it was clear that section 280Y(d) which was omitted with effect from 1st April 1, 1990, was so omitted because it had become “redundant”. It was redundant because it had no independent existence, apart from providing a definition of “urban area” for the purpose of section 280ZA which had been omitted with effect from the very date that section 54G was inserted, namely, 1st April, 1988.

The Supreme Court further held that the idea of section 24 of the General Clauses Act is, as its marginal note shows, to continue uninterrupted subordinate legislation that may be made under a Central Act that is repealed and re-enacted with or without modification. It being clear in the present case that section 280ZA which was repealed by omission and re-enacted with modification in section 54G, the notification declaring Thane to be an urban area dated 22nd September, 1967, would continue under and for the purposes of section 54G. It was clear, therefore, that the impugned judgment in not referring to section 24 of the General Clauses Act at all had thus fallen into error.

The Supreme Court for all the aforesaid reasons was therefore, of the view that on omission of section 280ZA and its re-enactment with modification in section 54G, section 24 of the General Clauses Act would apply, and the notification of 1967, declaring Thane to be an urban area, would be continued under and for the purposes of section 54G. The Supreme Court held that a reading of section 54G makes it clear that the assessee is given a window of three years after the date on which transfer has taken place to “purchase” new machinery or plant or “acquire” building or land. The High Court had completely missed the window of three years given to the assessee to purchase or acquire machinery and building or land. This is why the expression used in section 54G(2) is “which is not utilised by him for all or any of the purposes aforesaid.” According to the Supreme Court, it was clear that for the assessment year in question all that was required for the assessee to avail of the exemption contained in the section was to “utilize” the amount of capital gains for purchase and acquisition of new machinery or plant and building or land. It was undisputed that the entire amount claimed in the assessment year in question had been so “utilized” for purchase and/or acquisition of new machinery or plant and land or building. If the High Court was right, the assessee had to purchase and/or acquire machinery, plant, land and building within the same assessment year in which the transfer takes place. Further, the High Court missed the key words “not utilized” in sub-section (2) which would show that it was enough that the capital gain made by the assessee should only be “utilized” by him in the assessment year in question for all or any of the purposes aforesaid, that is towards purchase and acquisition of plant and machinery, and land and building. Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilisation by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets.

Power of High Court to Review – High Courts being courts of record under Article 215 of the Constitution of India, the power of review would inherent in them and section 260A(7) does not purport in any manner to curtail or restrict the application of the provisions of the Code of Civil Procedure.

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CIT vs. Meghalaya Steels Ltd. [2015] 377 ITR 112 (SC)

In the first judgment of the High Court dated 16th September, 2010, various points on the merits were gone into, inter alia, as to whether deductions to be made u/s. 80-IB of the Income-tax Act, 1961, were allowable on facts and whether transport subsidies were or were not available together with other incentive. Ultimately, the High Court after stating in paragraph 2 that two substantial questions of law arose u/s. 260A of the Income-tax Act went on to answer the two questions. The first question so framed was answered in the negative, that is in favour of the Revenue, and against the assessee. However, the second question was answered in the affirmative, in favour of the assessee, and against Revenue, and the appeal was disposed of in the aforesaid terms.

Against the aforesaid judgment dated 16th September, 2010, a Review Petition was filed by the assessee before the very Division Bench. In a long judgement dated 8th April, 2013, the Division Bench recalled its earlier order dated 16th September, 2010 for the reason that there was an omission to formulate the substantial questions of law. Before the Supreme Court Learned Senior Advocate appearing on behalf of the Revenue, assailed the aforesaid judgment dated 8th April, 2013, stating that it was factually incorrect that no substantial question of law have been framed and that such questions were to be found in the very beginning of the judgment dated 16th September, 2010, itself. He further argued, referring to section 260A(7), that only those provisions of the Civil Procedure Code could be looked into for the purposes of section 260A as were relevant to the disposal of appeals, and since the review provision contained in the Code of Civil Procedure were not so referred to, the High Court would have no jurisdiction u/s. 260A to review such judgment.

The Supreme Court noted that by the review order dated 8th April, 2013, the Division Bench felt that it should not have gone into the matter at all given the fact that on an earlier occasion, before 16th September, 2010, it had reserved the judgment on whether substantial questions of law in fact exist at all or not. This being the case, in a lengthy order the Division Bench has thought it fit to recall its own earlier judgment.

The Supreme Court in such circumstances was not inclined to interfere with the judgment in view of what had been recorded in the impugned judgment dated 8th April, 2013. The Supreme Court further held that High Courts being courts of record under article 215 of the Constitution of India, the power of review would in fact be inherent in them. Also on reading of section 260A(7), it was clear that the said section did not purport in any manner to curtail or restrict the application of the provisions of the Code of Civil Procedure. Section 260A(7) only states that all the provisions that would apply qua appeals in the Code of Civil Procedure would apply to appeals u/s. 260A. That does not in any manner suggest either that the other provisions of the Code of Civil Procedure are necessarily excluded or that the High Court’s inherent jurisdiction is in any manner affected.

TS-296-ITAT-2015 (Del) Mitsubishi Corporation India vs. DCIT. A.Y: 2010-11, Dated: 26.05.2015

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Section 40(a)(i), Article 9 and 24 of India-Japan Double Taxation Avoidance Agreement (DTAA) – Disallowance for failure to withhold tax at source being discriminatory, and independent of Transfer Pricing (TP) adjustment under Article 9, Taxpayer is entitled to invoke Article 24.

Facts
The Taxpayer, an Indian company, made purchases from its AEs in Japan. Taxpayer did not withhold taxes on payments made towards purchase of goods from the AE. The Taxpayer contended that it was entitled to the benefit of Non-discrimination clause in terms of Article 24(3) of the India – Japan DTAA due to which, for the purpose of computing the taxable profit of an Indian enterprise, the provisions of Act shall apply, as if it is a transaction with an Indian enterprise. This is because there is no provision for withholding tax at source on payments for purchases made from an Indian resident; whereas purchases from a Non-resident (NR) is liable for tax withholding under the Act, which leads to non-permissible discrimination.

Tax Authority had made certain transfer pricing (TP) adjustment, though unrelated to the purchase of goods. The Tax Authority contended that since TP adjustment was made, Article 9 was applicable. Hence, Taxpayer cannot avail of the benefits of non-discrimination clause enshrined in Article 24(3) of the DTAA.

Held:
The contention of the Tax Authority that application of Article 24(3) is not possible in view of operation of Article 9 is not correct. The overriding effect of Article 9 over Article 24(3) is limited to the extent provided in Article 9. It does not render Article 24(3) redundant in totality.

A conjoint reading of these two Articles brings out that if there is some discrimination in computing the taxable income as a result of TP adjustments, then, such discrimination will continue as such. The rest of the discriminations will be removed by Article 24(3) to the extent as provided.

In the instant case, Taxpayer had sought the benefit of article 24 qua the disallowance for non-withholding of taxes and not in respect of an unrelated TP adjustment. Thus, Taxpayer is entitled to rely on Article 24 of the DTAA and will not be liable to suffer disallowance in respect of value of purchases for failure to withhold taxes under provisions of the Act.

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OECD – Base Erosion and Profit Shifting Project [BEPS] – Part I

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There is a growing perception that governments lose substantial corporate tax revenue because of planning aimed at shifting profits in ways that erode the taxable base to locations where they are subject to a more favourable tax treatment. Recent news stories show increased attention mainstream media has been paying to corporate tax affairs. Civil society and non-governmental organisations (NGOs) have also been vocal in this respect, sometimes addressing very complex tax issues in a simplistic manner and pointing fingers at transfer pricing rules based on the arm’s length principle as the cause of these problems. In this article, an attempt has been made to explain the background of a very ambitious and important BEPS Project undertaken by OECD. In addition, brief description of the task and issues of all the 15 Action Plans alongwith the time line and present status has been given for an understanding of the same.

1. Background on BEPS
Base erosion and profit shifting (BEPS) is a global problem which requires global solution. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).

In an increasingly interconnected world, national tax laws have not always kept pace with tax planning by global corporations, fluid movement of capital, and the rise of the digital economy, leaving gaps that can be exploited to generate double non-taxation. This undermines the fairness and integrity of tax systems.

This increased attention and the inherent challenge of dealing comprehensively with such a complex subject has encouraged a perception that the domestic and international rules on the taxation of cross-border profits are now broken and that taxes are only paid by the naive. Multinational enterprises (MNEs) are being accused of dodging taxes worldwide, and in particular in developing countries, where tax revenue is critical to foster long term development.

Business leaders often argue that they have a responsibility towards their shareholders to legally reduce the taxes their companies pay. Some of them might consider most of the accusations unjustified, in some cases deeming governments responsible for incoherent tax policies and for designing tax systems that provide incentives for Base Erosion and Profit Shifting (BEPS). They also point out that MNEs are still sometimes faced with double taxation on their profits from cross-border activities, with mutual agreement procedures sometimes unable to resolve disputes among governments in a timely manner or at all.

The debate over BEPS has also reached the political level and has become an issue on the agenda of several OECD and non-OECD countries. The G20 leaders meeting in Mexico on 18-19 June 2012 explicitly referred to “the need to prevent base erosion and profit shifting” in their final Declaration. This message was reiterated at the G20 finance ministers meeting of 5-6 November 2012, in the final communiqué.

The European Commission presented an Action Plan on 17-06-2015 to fundamentally reform corporate taxation in the EU. The Action Plan sets out a series of initiatives to tackle tax avoidance, secure sustainable revenues and strengthen the Single Market for businesses. The measures to be developed complement the work carried out in the OECD/G20 BEPS Project, whose outputs are expected to be presented to the G20 in October 2015.

1.1 Legality and issues relating to BEPS
Corporate tax is levied at a domestic level. When MNEs undertake activities across borders, the interaction of domestic tax systems means that an item of income can be taxed by more than one jurisdiction, thus resulting in double taxation. The interaction can also leave gaps, which result in income not being taxed anywhere. BEPS strategies take advantage of these gaps between tax systems in order to achieve double non-taxation or very low taxation.

Although some schemes used are illegal, most are not. Largely they just take advantage of current rules that are still grounded in a bricks and mortar economic environment rather than today’s environment of global players which is characterised by the increasing importance of digital economy, e-commerce, intangibles and risk management.

A question arises for consideration: if the BEPS strategies/ schemes are considered to be legal, then why should anyone worry about BEPS. There are three important factors in this regard. First, because it distorts competition: businesses that operate cross-border may profit from BEPS opportunities, giving them a competitive advantage over enterprises that operate at the domestic level. Second, it may lead to inefficient allocation of resources by distorting investment decisions towards activities that have lower pre-tax rates of return, but higher after-tax returns. Finally, it is an issue of fairness: when taxpayers (including ordinary individuals) see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.

1.2 Importance of BEPS Project now and OECD’s role in addressing BEPS
The OECD has been providing solutions to tackle aggressive tax planning over the years. The debate and concern over BEPS has now reached the highest political levels in many OECD and non-OECD countries. The OECD does not see BEPS as a problem created by one or more specific companies. Apart from some cases of very bad and easily noticed abuses, the issue lies with the tax rules themselves. Business cannot be faulted for making use of the rules that governments have put in place. It is therefore governments’ responsibility to revise the rules or introduce new rules.

Many BEPS strategies take advantage of the interaction between the tax rules of different countries, which means that unilateral action by individual countries will not fully address the problem. In addition, unilateral and uncoordinated actions by governments responding in isolation could result in double – and possibly multiple – taxation for business. This would have a negative impact on flow of capital and technology, investment, growth and employment globally. There is therefore a need to provide an internationally coordinated approach which will facilitate and reinforce domestic actions to protect tax bases and provide comprehensive international solutions to respond to the issue. The BEPS Action Plan provides a consensus-based plan to address these issues and is part of the OECD’s ongoing efforts to ensure that the global tax architecture is equitable and fair.

1.3 BEPS Action Plans
It sets forth 15 actions to address BEPS in a comprehensive and coordinated way. These actions will result in fundamental changes to the international tax standards and are based on three core principles: coherence, substance, and transparency. The Action Plan also calls for further work to address the challenges posed by the digital economy. Looking toward innovative approaches to deliver change quickly, the Action Plan calls for a multilateral instrument that countries can use to implement the measures developed in the course of the work. While the OECD steps up its efforts to address double nontaxation, it will also continue work to eliminate double taxation, including through increased efficiency of mutual agreement procedures and arbitration provisions.

In July 2013, the Action Plan on Base Erosion and Profit Shifting directed the OECD to commence work on 15 actions designed to ensure the coherence of corporate income taxation at the international level. The first seven of these actions were presented to G20 Leaders at the Brisbane Summit in November 2014.

1.4    Actions plans being carried out in the context of BEPS
Domestic tax systems are coherent – tax deductible payments by one person results in income inclusions by the recipient. We need international coherence in corporate income taxation to complement the standards that prevent double taxation with a new set of standards designed to avoid double non-taxation. Four actions in the BEPS Action Plan (Actions 2, 3, 4, and 5) focus on establishing this coherence.

Current rules work well in many cases, but must be modified to prevent instances of BEPS. The involvement of third countries in the bilateral framework established by treaty partners puts a strain on the existing rules, in particular when done via shell companies that have little or no economic substance: e.g. office space, tangible assets, business operations and employees. In the area of transfer pricing, rather than replacing the current system,  the best course is to fix the flaws in it, in particular with respect to returns related to over-capitalisation, risk and intangible assets. Nevertheless, special rules, either within or beyond the arm’s length principle, may be required with respect to these flaws. Five actions in the BEPS Action Plan focus on aligning taxing rights with substance (Actions 6, 7, 8, 9, and 10).

Because preventing BEPS requires greater transparency at many levels, the Action Plan calls for: improved data collection and analysis regarding the impact of BEPS; taxpayers’ disclosure about their tax planning strategies; and less burdensome and more targeted transfer pricing documentation. Four actions in the BEPS Action Plan focus on improving transparency (actions 11, 12, 13, and 14).

The brief description, timeline and present status of the Action plans are given in para 2 below.

1.5    Implementation of the BEPS actions
The BEPS Action Plan calls for the development of tools that countries can use to shape fair, effective and efficient tax systems. Because BEPS strategies often rely on the interaction of countries’ different systems, these tools will have to address the gaps and frictions that arise from the interaction of these systems. Some actions, for example, work on the OECD Transfer Pricing Guidelines and the Commentary to the OECD Model Tax Convention, will result in changes that are directly effective.  Others will be implemented by countries through their domestic law, bilateral treaties, or a multilateral instrument.

1.6    Time frame for action plans
Addressing BEPS is critical for most countries and must be done in a timely manner so that concrete actions can be delivered quickly before the existing consensus-based framework unravels. At the same time, governments need time to complete the necessary technical work and achieve widespread consensus. Against this background, it is expected that the Action Plan will largely be completed within 2 years of its adoption. Indeed, the first set of measures and reports was released in September 2014, just 12 months after the launch of the BEPS project. Work on the reports to be delivered in 2015 has already started, and this work will continue at a fast pace to ensure the rapid development of concrete measures that countries can use to end double non-taxation and base erosion due to artificial shifting of profits.

1.7    Role of the G20 in BEPS project
Since its launch by the OECD, the work on BEPS received strong and consistent support by the G20 and it is a key item on the Finance Ministers’ and Leaders’ agendas.

Furthermore, all G20 countries have participated as equal partners in the development of the work. Their continued participation and endorsement at the highest levels of government have been critical to guarantee a level playing field and prevent inconsistent standards.

The delivery of the 2014 BEPS outputs is concrete evidence of how OECD and G20 members working together can achieve consensus on important tax reforms with a worldwide impact. Non-OECD G20 countries are Associates in the BEPS Project and participate on an equal footing in the decision making process, at the level of both the OECD Committee on Fiscal Affairs and of its subsidiary bodies carrying out the technical work. In addition, other countries and stakeholders have engaged in regular and fruitful dialogues throughout this process.

1.8    BEPS action plan and Tax competition Taxation is at the core of countries’ sovereignty, and each country is free to set up its corporate tax system as it chooses, including by charging the rate it chooses. The work is not aimed at restricting the sovereignty of countries over their own taxes; instead, it is aimed at restoring  and strengthening sovereign taxing rights by ensuring that countries can protect their tax bases. It does so by addressing regimes that apply to mobile activities and that unfairly erode the tax bases of other countries, potentially distorting the location of capital and services.

1.9    Risk of not addressing harmful Tax Practices
The dangers of not addressing harmful tax practices can be felt both by governments and business. Firstly, harmful tax competition can introduce distortions and an unlevel playing field between businesses operating at domestic level and those that operate globally and have access to preferential tax regimes. Secondly, countries have long recognised that a “race to the bottom” would ultimately drive applicable tax rates on certain sources of income to zero for all countries, whether or not this is the tax policy a country wishes to pursue.

1.10    BEPS action plan & “Tax Havens”
The BEPS Action Plan aims to end the use of shell companies used to stash profits offshore or unduly claim tax treaty protection and neutralise all schemes that artificially shift profits offshore. Though the BEPS Action Plan is not about dictating whether countries should have a specific corporate income tax rate, it will have an impact on regimes that seek to attract foreign investors without requiring any economic substance.

1.11    Is BEPS effectively a tax increase on multinationals?
The BEPS project is not about increasing corporate taxes. Non- or low-taxation is not itself the concern, but  it becomes so when it is achieved through practices that artificially separate taxable income from the activities that generate it. These strategies may increase tax disputes as countries fight against tax strategies that defy common sense. Implementation of the recommendations coming out of the BEPS project will reduce those disputes, giving business greater certainty, and reinforcing the fairness and consistency of international tax system.

1.12    Involvement of businesses and civil society in BEPS project
During the course of the work so far, stakeholders have been consulted at length. Discussion drafts released during the course of the work so far have generated more than 3,500 pages of comments, and have attracted a large number of participants at various public consultations. The OECD’s public webcasts of these consultations and updates on the project have attracted more than 10,000 viewers. This transparent and inclusive consultation process will continue throughout the course of the work.

1.13    BEPS action plan and offshore Tax Evasion
The work on BEPS focusses largely on legal tax planning techniques rather than offshore tax evasion, which is illegal. However, other work being carried out by the OECD and the OECD Global Forum on Transparency and the Exchange of Information is focused on combatting offshore tax evasion. More information about this work can be found on line at www.oecd.org/tax/exchange-of-tax¬information.

2.    Brief description, timeline and present status of the BEPS action plans

2.1    Action 1 – Address the tax challenge of the digital economy

a)    Anticipated result: Report identifying issues raised by the digital economy and possible actions to address them
b)    initial deadline: September 2014
c)    Present status: Final Report Issued.
d)    Description of tasks and issues:
Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation.

Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location relevant data through the use of digital products and services, the characterisation of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross- border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector.

2.2    Action 2 – Neutralise the effects of hybrid mismatch arrangements
a)    Anticipated result: Changes to the Model Tax Convention Recommendations regarding the design of domestic rules.
b)    initial deadline: September 2014
c)    Present status: Comments on discussion draft received and published.
d)    Description of tasks and issues:
Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long- term deferral) of hybrid instruments and entities.

This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payer; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on coordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be co-ordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping.

2.3    Action 3 –Strengthen CFC rules

a)    Anticipated result: Recommendations regarding the design of domestic rules.
b)    initial deadline: September 2015
c)    Present status: Comments on discussion draft received and published.
d)    Description of tasks and issues:
Develop recommendations regarding the design of controlled foreign company rules. This work will be coordinated with other work as necessary.

2.4    Action 4 – Limit base erosion via interest deductions and other financial payments

a)    Anticipated result: (i) Recommendations regarding the design of domestic rules.
(ii)    Changes to the Transfer Pricing Guidelines
b)    initial deadline: (i) September 2015 and (ii) December 2015, respectively.
c)    Present status: Comments on discussion draft received and published.
d)    Description of tasks and issues:
Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related- party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments.

The work will evaluate the effectiveness of different types of limitations. In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including  internal  derivatives  used in intra-bank dealings), and captive and other insurance arrangements. The work will be coordinated with the work on hybrids and CFC rules.

2.5    Action 5 – Counter harmful tax practices more effectively, taking into account transparency and substance

a)    Anticipated result: (i) Finalise review of member country regimes; (ii) Strategy to expand participation to non OECD members; and (iii) Revision of existing criteria.
b)    initial deadline: (i) September 2014; (ii) September 2015; and (iii) December 2015, respectively.
c)    Present status: Interim report issued; deadline for second output September 2015 (engaging with other non-OECD member countries on the basis of the existing framework).
d)    Description of tasks and issues:
Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context.  It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.

2.6    Action 6 – Prevent treaty abuse
a)    Anticipated result: (i) Changes to the Model Tax Convention; and (ii) Recommendations regarding the design of domestic rules.
b)    initial deadline: For both (i) & (ii) September 2014.
a) Present status: First Discussion draft released on 21-11-2014. Based on the Comments received, a new discussion draft released on 22- 5-2015, for Public Comments by 17-06- 2015. Comments on the revised discussion draft have been received and published on 18-06-2015.
c)    Description of tasks and issues:
Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be coordinated with the work on hybrids.

2.7    Action 7 – Prevent the artificial avoidance of PE status
b)    Anticipated result: Changes to the Model Tax Convention.
c)    initial deadline: September 2015
d)    Present status: First Discussion draft released on 31-10-2014. Based on the Comments received, a new discussion draft released on 15- 05-2015, for Public Comments by 12-06- 2015. Comments have been received and published on 15-06-2015.
e)    Description of tasks and issues:
Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions.
Work on these issues will also address related profit attribution issues.

2.8    Action 8 – Assure that transfer pricing outcomes are in line with value creation: intangibles

a)    Anticipated result: (i) Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention; and (ii) Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention.
b)    initial deadline: (i) September 2014; and (ii) September 2015, respectively.
c)    Present status: Discussion draft released. Comments received and published on discussion draft on Actions 8, 9 and 10. Detailed discussion draft on Cost Contribution Arrangements also released. Comments on discussion draft on Cost Contribution Arrangements have been received and published on 01-06-2015. Comments on discussion draft on Action 8 (Hard-to-value intangibles) have been received and published. Public consultation on discussion draft will be held on 6-7 July 2015.

d)    Description of tasks and issues:
Develop rules to prevent BEPS by moving intangibles among group members. Phase:
I.    (i) adopting a broad and clearly delineated definition of intangibles;
(ii) ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation;

II.    (iii) developing transfer pricing rules or special measures for transfers of hard-to-value intangibles; and
(iv) updating the guidance on cost contribution arrangements.

2.9    Action 9 – Assure that transfer pricing outcomes are in line with value creation: risks and capital
a)    Anticipated result: Changes to the Transfer Pricing Guideline and possibly to the Model Tax Convention.
b)    initial deadline: September 2015.
c)    Present status: Discussion draft released. Comments received and published on discussion draft on Actions 8, 9 and 10.
d)    Description of tasks and issues: Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation. This work will be coordinated with the work on interest expense deductions and other financial payments.

2.10    Action 10 – Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions
a)    Anticipated result: Changes to the Transfer Pricing Guideline and possibly to the Model Tax Convention.
b)    initial deadline: September 2015.
c)    Present status: Discussion drafts released. Comments received and published on discussion draft on Actions 8, 9 and 10. Comments also received and published on Action 10: low-value adding services, Cross-border commodity transactions and Use of profit Splits in the context of the global value chains.
d)    Description of tasks and issues:
Develop rules to prevent BEPS by engaging   in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to:
(i)    clarify the circumstances in which transactions can be recharacterised;
(ii)    clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains; and
(iii)    provide protection against common types of base eroding payments, such as management fees and head office expenses.

2.11    Action 11 – Establish methodologies to collect and analyse data on bEPS and the actions to address it
a)    Anticipated result: Recommendations regarding data to be collected and methodologies to analyse them.
b)    initial deadline: September 2015.
c)    Present status: Discussion draft released. Comments on discussion draft received and published.
d)    Description of tasks and issues:
Develop recommendations regarding indicators of the scale and economic impact of BEPS  and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it.
The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and micro- level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses.

2.12    Action 12 – require taxpayers to disclose their aggressive tax planning arrangements
a)    Anticipated result: Recommendations regarding the design of domestic rules
b)    initial deadline: September 2015
c)    Present status: Discussion draft released. Comments on discussion draft received and published.
d)    Description of tasks and issues:
Develop recommendations regarding the design of mandatory disclosure rules for aggressive  or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences  of  the increasing number of countries that have such rules. The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. One focus will be international tax schemes, where the work will explore using a wide definition of “tax benefit” in order to capture such transactions. The work will be coordinated with the work on co-operative compliance. It will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations.

2.13    Action 13 – Re-Examine transfer pricing documentation

a)    Anticipated result: Changes to Transfer Pricing Guidelines and recommendations regarding the design of domestic rules.
b)    initial deadline: September 2014
c)    Present status: Discussion draft released. Comments on discussion draft received and published. A Country-by-Country Reporting Implementation package developed under the OECD/G20 BEPS Project has been released on 08-06-2015.
d)    Description of tasks and issues:
Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.

2.14    Action 14 – Make Dispute resolution mechanisms more effective

a)    Anticipated Result: Changes to the Model Tax Convention
b)    Initial Deadline: September 2015
c)    Present Status: Discussion draft released. Comments on discussion draft received and published.
d)    Description of tasks and issues:
Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.

2.15    Action 15 – Develop a multilateral instrument

a)    Anticipated Result: (i) Report identifying relevant public international law and tax issues; and (ii) Develop a multilateral instrument.
b)    Initial Deadline: (i) September 2014; and (ii) December 2015, respectively.
c)    Present Status: (i) Final Report issued.
d)    Description of tasks and issues:

Analyse the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.

On the basis of this analysis, interested Parties will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution.

In the next part(s), we would discuss the various other aspects relating to BEPS Project including engagement with developing countries and impact on Non-G 20 or Non- OECD countries.

Amendment in Notification No. VAT 1509/CR 89/Taxation-1, dt. 5.11.2009 (Consulate general Notification) addition of Russian Federation

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VAT 1515/CR11/Taxation 1.dtd. 29 05 2015

Notification regarding refund to Diplomatic Authorities amended by adding “Russian Federation” under Other Organisations.

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Non Acceptance of correspondence and letters Trade Circular 8 of 2015 dated 16.6.2015

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Commissioner of Sales Tax has instructed all officers and authorities of department to accept the correspondence and letters marked and addressed to them and also instructed to accept application u/s 23(11) for cancellation of assessment orders be accepted and thereafter considering the facts & merits of the individual cases officer should decide whether the cancellation be effected or not. If any instances of refusal of correspondence arise then the matter may be brought to the notice of higher authority and simultaneously the complaints may be addressed to the Commissioner of Sales Tax at cst@mahavat.gov.in .

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Clarification on rate of service tax on restaurant service Circular No. 184/3/2015-St dated 03 06 2015

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The CBEC vide Circular No. 184/3/2015-ST dated June 3, 2015 has clarified that Pursuant to increase in rate of Service tax from 12.36% to 14% effective from June 1, 2015, effective rate of service tax on services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, having the facility of air-conditioning or central air-heating in any part of the establishment would be 5.6% (i.e. 40% of 14%) of total amount charged. It is further clarified that exemption from service tax still continues to services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, not having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year.

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M/S. Malbar Gold Pvt. Ltd vs. Commercial Tax Officer and Others, [2013] 58 VST 191 ( Ker)

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VAT- Franchisee Agreement for Use of Trade Mark –Is Transfer of Right to Use Goods- Deemed Sales- Liable to VAT, s/s. 2(xx),(xliii) of The Kerala Value Added Tax Act, 2003

Facts
The petitioner company engaged in marketing, trading, export and import of jewellery, diamond ornaments, platinum ornaments, watches, etc., was the sole proprietor of the trade mark, ‘Malabar Gold’. The company had entered into franchisee agreements with several companies, situated inside and outside the State of Kerala and also abroad, as per which, on mutually agreed terms and conditions, these companies were allowed to use the trade mark owned by the petitioner. Franchisee services, being an activity attracting service tax under the Finance Act, 1994, the petitioner had obtained registration under section 69 of the Finance Act. For the year 2008-09, the petitioner received royalty of Rs. 3,27,68,607 from its franchisee companies for use of its trademark and for sharing business know-how and on this amount, they paid service tax. While so, the assessing authority issued notice stating that transfer of right to use any goods is taxable u/s. 6(1) of the Act and that, royalty received by the petitioner from its franchisees for use of its trade mark would attract VAT under entry 68 of the Third Schedule to the Act. On receipt of the notice, the petitioner contended that the transaction in question attracted service tax and payments of service tax and VAT are mutually exclusive and hence VAT is not payable.

Thereafter, the assessing authority passed the assessment order confirming the demand for Rs. 13,10,744 along with interest of Rs. 2,78,009 and also imposed penalty by a separate order. The petitioner company filed writ petition before the Kerala High Court to quash the assessment order as well as penalty order.

Held
From the constitutional and statutory provisions, it is clear that a transfer of right to use any goods for any purpose, for cash, deferred payment or other valuable consideration is deemed to be a sale for the purposes of the Act. In the pleadings in the writ petition itself, the petitioner company admitted that by virtue of the agreements entered into with their franchisees, the franchisees were authorised to use their trade mark and that in consideration thereof, they were receiving the agreed royalty. In such circumstances, it can be concluded that the trade mark of the petitioner is transferred to the franchisees for their use and the consideration received is the royalty paid to the petitioner. Such a transaction is a “deemed sale” as defined in section 2(xliii) of the Act read with Explanation V thereof.

The High Court further observed that as far as the requirement that transfer of trade mark to the transferees should be to the exclusion of the transferor is concerned, if the petitioner had a case that the franchisee has no exclusive right within the territory allotted to it, it was for them to plead and prove this contention. There was no such plea before the High Court and copy of the agreements were not even been produced before the Court. Further, the specimen franchisee agreement, made available by the counsel for petitioners before the Court, showed that the franchisee had undertaken not to use the showroom for any purpose or activity other than that were provided in the agreement and to stock only products authorised by the petitioner. In such circumstances, the High Court held that even according to the petitioner, the trade mark had been transferred for the use of their franchisees for royalty paid on terms which are agreed between the parties. Therefore, the contention with respect to nonexclusive transfer of right was not accepted by the Court.

The High Court further held that royalty received is liable to be taxed under the Act and the court was not called upon to decide the legality of the levy of service tax on the royalty received by the petitioner. Therefore, if the petitioner had a case that levy of service tax is illegal for any reason; it is up to them to challenge the levy in appropriate proceedings. Accordingly, the High Court dismissed the writ petition filed by the petitioner company.

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Commercial Tax Officer vs. Whirlpool India Ltd [2013] 58 VST 177 (Raj)

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Sales Tax Act- Collection of Optional Warranty Charges- At The Time of Sale of Goods-Does not Form Part of Sale Price- Not Liable to Tax, The Rajasthan Sales Tax Act, 1994.

Facts
The department challenged the orders of Rajasthan Tax Board, passed on December 5, 2002 holding that optional service/warranty charges were not included in the price of the goods sold (refrigerators) as they do not constitute a part of the sale price. The Rajasthan Tax Board has held that such charges paid by a customer to a dealer would not be liable to attract levy of tax under the Rajasthan Sales Tax Act, 1994.

Held
The Tax Board has held that the charges levied on account of after sales service/warranty were optional. There was enough material before the Tax Board to hold that the charge levied by the assessee towards service/warranty charges at the time of the sale was not universal but optional. Following this finding the legal consequences would be inexorable and entail exclusion of such charges from the ambit of sale price of the goods being post sale. Accordingly, the High Court dismissed the petition filed by the department.

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M/S. National Mineral Development Corporation Ltd. vs. State of AP, [2013] 58 VST 136 (AP)

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Sales Tax- Surrender of Exim Scrip- Not a Sale – Not Liable to Tax, section 2(1)(n) of The Andhra Pradesh Sales Tax Act,1957.

Facts
The appellants had REP licences/ exim scrips which they surrendered to the Government and received 20 per cent premium as provided in circular No. 11/93 dated May 5, 1993. The assessing authorities took the view that the amounts received by them towards the premium/price on the surrender of the REP licences/exim scrips is liable to tax as they are “goods” within the meaning of section 2(h) of the Andhra Pradesh General Sales Tax Act,1957. The appellants however contended that they surrendered the REP licences/ exim scrips and received premium as incentive and therefore the surrender value of the scrips cannot be subjected to tax. The appellants filed petition before the AP High Court against the judgment of tribunal holding it as sale liable to tax.

Held
Admittedly, the policy and system under which REP licences/ exim scrips were issued was discontinued with effect from March 1, 1992 and the Director-General of Foreign Trade issued the circular No. 11/93 dated May 5, 1993 announcing that unutilised exim scrips could be surrendered and authorised the Joint Director-General of Foreign Trade to pay 20 per cent premium to the exporters through State Bank of India and its subsidiaries. After the expiry of the period of validity, these REP licences/ exim scrips became valueless and holders of such REP licences/ exim scrips could neither import goods duty-free nor sell them for value. Thus, they ceased to be items which could be freely traded in the open market and on their surrender to the Government of India, even the Government of India cannot use them for trading in the open market and they would stand cancelled and were valueless. By no stretch of imagination can it be said that such surrender by an exporter of REP licences/ exim scrips is in the course of trade or business. The premium paid by the Government to the exporters on the surrender of the REP licences/ exim scrips is only a solatium for the inability of the exporters to avail of the benefit of the incentives and cannot be treated as price or valuable consideration.

Therefore, the transaction of surrender of REP licences/ exim scrips is not a “sale” within the meaning of section 2(1)(n) of the Act and also would not constitute “turnover” within the meaning of section 2(1)(s) of the Act. Accordingly, the High Court allowed the petition filed by the appellants.

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[2015-TIOL-1184-CESTAT-MUM] Alfa Laval (India) Ltd. Employees Co-operative Consumers Society vs. Commissioner of Central Excise, Pune-I

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A cooperative society of members being employees of a company engaged in preparation and serving of food to the employees are a provider of catering service.

Facts:
Appellant is a co-operative society of employees of a company and is engaged in making food and serving the same to its members being the employees of the company. All the items required for preparation of food, utensils, space, water and electricity is provided by the company and the payments for the expenses incurred were received from the company. Revenue contended that the services qualify under the category of “Outdoor Catering services”

Held:
The Tribunal stated that it is undisputed that the Appellant is a separate entity in the eyes of law and is engaging persons for preparation and serving food though in the premises of their client being the company. Further, the agreement with the company specified rendering of specialized services for their employees. Hence, the contention that the services are provided by them to their own employees is not correct as they are under a contractual obligation to provide catering services to the company and accordingly the appeal is rejected.

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[2015-TIOL-1182-CESTAT-MUM] State Bank of India vs. Commissioner of Central Excise, Nashik

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Since Rule 5(1) of the valuation rule is already struck down, order placing reliance on the same is liable to be set aside.

Facts:
The Appellant collects from their customers the amounts paid by them towards postage charges, courier charges etc. The Revenue is of the opinion that these charges are collected in course of rendering “Banking and Financial Services”.

Held:
Relying on the decision in the case of Intercontinental Consultants & Technocrats P. Ltd. [2013] (29) STR 9 (Del) wherein Rule 5(1) of the Valuation Rule, 2006 had been struck down by the Hon’ble Delhi High Court. The Tribunal held that since the provisions on which reliance has been placed have been struck down, the order is unsustainable and is liable to be set aside.

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[2015-TIOL-1065-CESTAT-MUM] Mahindra & Mahindra Ltd vs. Commissioner of Central Excise

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Services relating to residential colony of
employees and the clubs are welfare activities having no nexus with the
business of manufacturing of final product.

Facts:
The
Appellant has a residential colony and club room attached to its
manufacturing unit. CENVAT Credit is availed on service tax paid on
security service provided at the colony, repairs of mixer used in the
canteen, civil work done at the colony, furniture/wooden partition for
VIP rooms and telephone lines installed at the residence of officer/club
rooms.

Held:
Relying on the decision in the case of
Manikgarh Cement [2010-TIOL-720-HC-MUM] and para 34 of the decision in
the case of Ultra Tech Cement Ltd. – 2010-TIOL-745- HC-MUM-ST, the
Tribunal held that services which are integrally connected with the
manufacture of final product are eligible input services. Residential
colony and club are welfare activities for the staff and have no nexus
with the business of manufacturing the final product and therefore are
not allowable. However, considering the disputes on the issue and the
different interpretations, penalty u/s. 11AC of the Central Excise Act,
1944 read with Rule 15(2) of CENVAT Credit Rules,2004 was set aside.

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[2015-TIOL-956-CESTAT-MUM] Sun-Area Real Estate Pvt. Ltd vs. Commissioner of Service Tax, Mumbai-i

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In view of the FEMA notifications issued by RB I, payment received in
Indian rupees is deemed to be convertible foreign exchange.

Facts:
The
Appellant received Indian rupees against export of services. The
Commissioner (Appeals) rejected the refund claims filed on the ground
that payment is not received in convertible foreign exchange. Further,
the second issue involved is whether the security and air travel
services can be considered as input service for providing output
service.

Held:
The Tribunal observed that when a
person receives in India payment in rupees from the account of a bank
situated in any country outside India maintained with an authorised
dealer, the payment in rupees shall be deemed to have repatriated the
realised foreign exchange in India as per Regulation 3 made u/s. 47 of
the Foreign Exchange Management Act, 1999. Further, FIRCs were produced
which are statutorily provided in the case of receipt or remittance of
foreign exchange specifically certifying that the payment is in
convertible foreign exchange. Further, relying on the decision of J.B.
Boda and Company Private Ltd., vs. Central Board of Direct Taxes AIR
1997SC 1543, the refund claims were sanctioned. In respect of input
services the Tribunal noted that they had direct nexus with the output
services and are considered eligible input services.

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[2015-TIOL-1093-CESTAT-MUM] Maneesh Export(eou), Satish J. Khalap, Vinay R. Sapte vs. Commissioner of Central Excise, Belapur

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Date of Show Cause Notice and period involved is not
relevant-substituted section 35F will be applicable to all the appeals
filed after the commencement of the Finance Act, 2014.

Facts:
The
Appellants did not deposit 7.5% of the duty confirmed as per amended
section 35F of the Central Excise Act, 1994 with effect from 06/08/2014.
The question before the Tribunal was relating to maintainability of the
appeals.

Held:
The Hon’ble Tribunal while dismissing
the case of the Appellants noted the decision of Hossein Kasam Dada
(India) Ltd. vs. State of Madhya Pradesh 1983 (13) ELT 1277 (SC) and
observed that the pre-existing right of appeal is not destroyed by the
amendment if the amendment is not made retrospective by express words or
necessary intendment. The said decision was distinguished to state that
the second proviso of section 35F of the Central Excise Act,1944 makes
it very clear that the amended provisions would not apply to the stay
applications and appeals pending before any appellate authority prior to
the commencement of the Finance (No.2) Act, 2014 which in turn would
imply that in respect of the stay applications and appeals filed before
any appellate authority after the commencement of the Finance (No. 2)
Act, 2014 the new provisions will apply irrespective of the date when
the order-in-original/order-in-appeal or the show Cause Notice was
issued or the period of dispute thus making the amendment retrospective
to which the principles laid down by Hossein Kasam Dada(supra) do not
apply as it dealt with an amendment that is prospective in nature.
Further the decision in the case of K. Rama Mohana Rao
[2015-TIOL-511-HC-AP-CX] was also disregarded by stating that the order
was an interim order and no final judgement has been taken by the
Hon’ble High Court and further the decision of the Kerala High Court in
the case of A.M. Motors [2015-TIOL-1069-HC-Kerala-ST] was also
disregarded. A similar decision as reported was also expressed in the
case of Shri Nand Kishore Sharma vs. CC [2015-TIOL-1190-CESTAT-MUM]

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Wealth Tax – Valuation of Asset – “Price that asset would fetch in market” – Valuation of vacant land in excess of ceiling limit could only be valued at the amount of maximum compensation under the Ceiling Act.

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S. N. Wadiyar (Decd. Through L. R.) vs. CWT [2015] 378 ITR 9 (SC)

The appellant was assessed to wealth-tax under the Act for the assessment years 1977-78 to 1986-87. The valuation of the property which was the subject matter of wealth-tax under the Act was the urban land appurtenant to the Bangalore Palace (hereinafter referred to as “the property”). The total extent of the property was 554 acres or 1837365.36 sq. mtrs. It comprised of residential units, non-residential units and land appurtenant thereto, roads and masonry structures along the contour and the vacant land. The vacant land measured 11,66,377.34 sq.mtrs. The aforesaid property was the private property of the late Sri Jaychamarajendra Wodeyar, the former ruler of the princely State of Mysore. He died on 23rd September, 1974. After the death of Sri Jaychamarajendra Wodeyar, his son Sri Srikantadatta Wodeyar, the assessee applied to the Settlement Commission to get the dispute settled with regard to valuation of property and lands appurtenant thereto for the assessment years 1967-68 to 1976-77.

The application of the assessee before the Settlement Commission for the assessment years 1967-68 to 1976- 77 was disposed of on 29th September, 1988 laying down norms for valuation of the property. The Wealthtax Officer adopted the value as per the Settlement Commission for the assessment years 1976-77, 1977- 78 and 1978-79 at Rs.13.18 crore (for both land and buildings). For the assessment year 1979-80, since there was no report of the Valuation Officer, the Commissioner of Income-tax (Appeals) worked out the value of the property at Rs.19.96 crore for the assessment year 1979- 80, which was adopted by the Wealth-tax Officer for the assessment year 1980-81 as well. For the assessment years 1981-82, 1982-83 and 1983-84, the Wealth-tax Officer fixed the value of land and building at Rs.18.78 crore, Rs.29.85 crore and Rs.29.85 crore, respectively. For the assessment year 1984-85, the Wealth-tax Officer took the value at Rs.31.22 crore on the basis of the order passed by the Commissioner (Appeals) for earlier years.

The orders of the Wealth-tax Officer passed under the Act fixing the value of the land for different assessment years for the purpose of the Act was challenged by the assessee before the Commissioner (Appeals). In these appeals, the contention of the assessee was that the value of the property was covered by the Ceiling Act for which maximum compensation that could be received by the assessee was only Rs.2 lakh. The appeals filed for the assessment years, namely, 1980-81, 1982-83 and 1983- 84 were disposed of by the Commissioner of Income-tax (Appeals) by a common order dated 9th January, 1990, in which he made slight modifications to value adopted for the assessment year 1981-82 and confirmed the valuation of the Wealth-tax Officer for the assessment years 1982-83 and 1983-84. However, in respect of appeals relating to the assessment years 1977-78 to 1980-81, the Commissioner (Appeals) passed the orders dated 31st July, 1990, accepting that the urban land appurtenant to the property be valued at Rs.2,00,000. Similar orders came to be passed by the Commissioner of Incometax (Appeals) for the assessment years 1984-85 and 1985-86 also. Against these orders of the Commissioner (Appeals), both the assessee as well as the Revenue/ Department went up in appeals before the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore.

The issue before the Income-tax Appellate Tribunal was only with regard to the valuation of vacant land attached to the property since the assessee had accepted the valuation in regard to residential and non-residential structures within the said property area and appurtenant land thereto.

The Income-tax Appellate Tribunal, Bangalore, passed the order directing the vacant land be valued at Rs.2 lakh for each year from the assessment years 1977-78 to 1985-86. Its reasoning was that the competent authority under the Ceiling Act had passed an order determining that the vacant land was in excess of the ceiling limit, and had ordered that action be taken to acquire the excess land under the Karnataka Town and Country Planning Act, 1901. And under the Land Ceiling Act, an embargo was placed on the assessee to sell the subject land and exercise full rights. The assessee was only eligible to maximum compensation of Rs.2 lakh under the Ceiling Act. Hence, given these facts and circumstances the subject land could only be valued at Rs.2 lakh for wealthtax purposes on the valuation date for the assessment years 1977-78 to 1985-86.

Against the order of the Tribunal, the Commissioner of Wealth-tax sought reference before the Karnataka High Court in respect of the assessment years, namely, 1977-78 to 1985-86 arising out of the consolidated order of the Tribunal.

The High Court, vide the impugned order dated 13th June, 2005 holding that although the prohibition and restriction contained in the Ceiling Act had the effect of decreasing the value of the property, still the value of the land cannot be the maximum compensation that is payable under the provision of the Ceiling Act. Thus, the question referred had been answered against the assessee.

The Supreme Court observed that the valuation of the asset in question has to be in the manner provided u/s. 7 of the Act. Such a valuation has to be on the valuation date which has reference to the last day of the previous year as defined u/s. 3 of the Income-tax Act, if an assessment was to be made under that Act for that year. In other words, it is 31st March, immediately preceding the assessment year. The valuation arrived at as on that date of the asset is the valuation on which wealth-tax is assessable. It is clear from the reading of section 7 of the Act that the Assessing Officers has to keep hypothetical situation in mind, namely, if the asset in question is to be sold in the open market, what price it would fetch. The Assessing Officer has to form an opinion about the estimation of such a price that is likely to be received if the property were to be sold. There is no actual sale and only a hypothetical situation of a sale is to be contemplated by the Assessing Officers. The tax officer has to form an opinion about the estimated price if the asset were to be sold in the assumed market and the estimated price would be the one which an assumed wiling purchaser would pay for it. On these reckoning, the asset has to be valued in the ordinary way.

The Supreme Court noted that the effect of the provisions of the Urban Land (Ceiling and Regulation) Act, 1976 in the context of instant appeals was that the vacant land in excess of the ceiling limit was not acquired by the State Government as notification u/s. 10(1) of the Ceiling Act had not been issued. However, the process had started as the assessee had filed statement in the prescribed form as per the provisions of section 6(1) of the Ceiling Act and the competent authority had also prepared a draft statement u/s. 8 which was duly served upon the assessee. The fact remained that so long as the Act was operative, by virtue of section 3 the assessee was not entitled to hold any vacant land in excess of the ceiling limit. Order was also passed to the effect that the maximum compensation payable was Rs.2 lakh.

The Supreme Court held that the Assessing Officer took into consideration the price which the property would have fetched on the valuation date, i.e., the market price, as if it was not under the rigours of the Ceiling Act. Such estimation of the price which the asset would have fetched if sold in the open market on the valuation date(s), would clearly be wrong even on the analogy/rationale given by the High Court as it accepted that restrictions and prohibitions under the Ceiling Act would have depressing effect on the value of the asset. Therefore, the valuation as done by the Assessing Officer could not have been accepted. The Supreme Court observed that it was not oblivious of those categories of buyers who may buy “disputed properties” by taking risks with the hope that legal proceedings may ultimately be decided in favour of the assessee and in such a eventuality they were going to get much higher value. However, as stated above, hypothetical presumptions of such sales are to be discarded as one has to keep in mind the conduct of a reasonable person and “ordinary way” of the presumptuous sale.

The Supreme Court held that when such a presumed buyer is not going to offer more than Rs.2 lakh, the obvious answer is that the estimated price which such asset would fetch if sold in the open market on the valuation date(s) would not be more than Rs.2 lakh. The Supreme Court having held so pointed out one aspect which was missed by the Commissioner (Appeals) and the Tribunal as well while deciding the case in favour of the assessee. The compensation of Rs.2 lakh was in respect of only the “excess land” which was covered by sections 3 and 4 of the Ceiling Act. The Supreme Court held that the total vacant land for the purpose of the Wealth-tax Act is not only excess land but other part of the land which would have remained with the assessee in any case. Therefore, the valuation of the excess land, which was the subject matter of the Ceiling Act, would be Rs.2 lakh. To that market value of the remaining land would have to be added for the purpose of arriving at the valuation for payment of wealth-tax. 

Appellate Tribunal – Difference of Opinion between Members of Bench on factual matters – Advice to Tribunal – Disagreement and dissent to be avoided by meaningful discussion and continuous dialogue.

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Commissioner of Customs (II) vs. Nitin Aminchand Shah 2015 (323) ELT 466 (Bom.)

In the initial order passed on 6-8-2013 by the CESTAT, there was difference of opinion between the Member (Judicial) and the Member (Technical). The Member (Judicial) was of the opinion that for the reasons indicated by him, the appeals of the assessee deserved to be allowed. Whereas the Member (Technical) passed a separate order upholding the Department’s stand, but yet remanded the case to the Commissioner for ascertaining the value of the impugned goods by constituting a Panel in accordance with the Departmental instructions.

On account of this difference of opinion, the matter was referred by the President, CESTAT to a Third Member. In the meanwhile, the importers filed rectification of mistake applications pointing out the alleged mistake in the initial order of the Tribunal dated 6-8-2013. As was expected, even when these applications for rectification were placed before the same Bench, the Members thereof differed. The applications were admitted by the Member (Judicial) whereas the Member (Technical) recorded a separate order. That separate order of the Member (Technical) did not conclude the applications for rectification of mistake. Thereafter, the rectification applications were finally decided on 8-12-2014 but recording a dissent and difference of opinion between the two Members.

Then, this difference of opinion was also marked and referred to the same Third Member who was to resolve the disagreement in the initial order dated 6-8-2013.

The Hon’ble Court observed that this was one more instance where the Members of the Bench have differed and recorded dissenting opinions. By consent of both sides, the appeals decided by the initial order dated 6-8-2013 were restored to the file of the CESTAT for being decided afresh in accordance with law. The Hon’ble Court further advised that the Tribunal should bear in mind the caution administered by the Court in case of the Starto Electro Equipments Pvt. Ltd. vs. UOI 2015 (318) ELT 55
(Bom) and all such decisions rendered prior thereto. Why should there be a difference of opinion on factual matters? By some meaningful discussion, continuous dialogue and by not demonstrating unnecessary haste, disagreements and dissents can be avoided.

Swachh Bharat cess exemplifies how the Indian tax payer is taken for granted – Roll it back

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These are taxing times. Finance minister Arun Jaitley’s fiscal policy
this year has been characterised by a combination of higher tax rates,
removal of tax exemptions and a new tax. So successful has j aitley’s
strategy of enhancing the tax burden been that indirect taxes this
financial year have grown almost twice as fast as his original target in
an economy with muted demand. j aitley often promises foreign investors
a stable and rational tax regime. h e should consider extending the
same courtesy to i ndian tax payers.

India has an annual budget intended to raise revenues for carrying out basic public welfare functions such as education, health and sanitation. i f these have to be funded through additional cesses and surcharges, that raises the question whether normal budgetary revenues are being frittered away on sops to vested interests – exemplifying maximum government, minimum governance. t here has been a constant increase in collections through different kinds of cess and surcharge. t heir collections exceeded r s. 1 trillion in 2013-14, or 13.14% of gross tax revenue. A cess today is levied on an extraordinarily wide range of activities, from salt to “cine workers”.

The rationale for every additional cess gets more and more unconvincing – we need to cease taxation by stealth. a mong the problems with the Swachh Bharat cess is that it runs counter to the spirit of cooperative federalism as revenue raised through a cess or surcharge is excluded from the pool that is split between Centre and states. C a G has pointed out that there is inadequate transparency and incomplete reporting in government accounts of the manner in which the money is spent. Jaitley’s fiscal policy is also an example of schizophrenia in i ndia’s economic policymaking. t he government constantly urges r B i to cut interest rates to stimulate demand but also follows a tax policy which limits demand.

Given that it imposes an additional burden, a levy should need a powerful reason. a clean energy cess imposed specifically on dirty fossil fuels and ploughed back specifically into clean energy projects makes sense, as it improves our environment. But a cess to carry out a basic function such as sanitation is an example of taking people for granted. i t must be rolled back.
Indians provide the lion’s share of India’s savings and investment. t hey deserve the same consideration as foreign investors.

[2015] 63 taxmann.com 43 (Bangalore – Trib.) Food World Supermarkets Ltd vs. DDIT A.Y.: 2008-09, Date of Order: 28-10-2015

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Section 9(1)(vii), the Act – reimbursement made for salaries of secondees was FTS since they were performing services based on their technical knowledge; matter remanded to examine the issue whether secondment constitutes service PE under the Act and consequently, is subject to section 44DA of the Act

Facts
The taxpayer was an Indian company engaged in the business of ownership and operation of supermarket chain in India. Taxpayer was in need of personnel to assist with its operations in India. For this purpose, it entered into a Secondment agreement with a Hong Kong based company (“HKCo”), which was engaged in identical business as that of the Taxpayer. Accordingly, HKCo deputed its five employees (“secondees”) to the taxpayer. As per the agreement, HKCo was to pay the salary to the secondees and the taxpayer was to reimburse the same to HKCo. The taxpayer withheld tax from the salary of the secondees u/s. 192 and paid the same to the Government. The taxpayer did not withhold tax from the reimbursement amount paid to HKCo.

According to the AO, the reimbursement amount was FTS and hence, the taxpayer was required to withhold tax therefrom. Concluding that there was no master-servant relationship between the taxpayer and the secondees, CIT upheld the order of the AO.

Held
Payment in nature of FTS u/s. 9(1)(vii) of the Act

It was evident from the agreement and the qualifications of the secondees that they were high level managers/ executives which showed that they were deputed for their expertise and managerial skills in the field.

The agreement was entered into between the taxpayer and HKCo and the secondees were not parties to the agreement. Further, secondees were assigned by HKCo and there was no contract of employment between the taxpayer and the secondees. Their deputation was for a short period and their employment with HKCo continued during the deputation period. Neither the taxpayer nor the secondees had any enforceable right or obligation against each other, including claim for salary. Thus, the secondees were performing their duties for and on behalf of HKCo.

Since the secondees were rendering managerial services requiring high expertise to the taxpayer as part of their duty to HKCo, the payment for such services was in the nature of FTS as defined in explanation 2 to section 9(1) (vii) of the Act.

In Centrica India Pvt. Ltd. vs. CIT 364 ITR 336 (Delhi)2, the High Court, considering an identical issue in the context of definition of FTS in Article 13(4) of India-UK DTAA which includes the expression “payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel)”, held that as the secondees were required to draw from their technical knowledge, their services fell within the scope of the term technical or consultancy services.

In case of section 9(1)(vii) of the Act, it is irrelevant whether the payment has any element or not. Accordingly, the gross payment is chargeable to tax.

Service PE
There is no tax treaty between India and Hong Kong. Also, there is no concept of a service PE under the Act.

While analysing the definition of PE u/s. 92F(iii) of the Act, in Morgan Stanley and Co Inc.3, the Supreme Court observed that the intention of the Parliament in adopting an inclusive definition of PE covers the service PE, agency PE, software PE, construction PE, etc.

Relying on the said decision, the taxpayer has raised alternative plea that deputation of secondees would constitute service PE and hence, the amount should be chargeable to tax as per the provision of section 44DA of the Act. Since this plea has been raised by the taxpayer for the first time before the Tribunal and since there is no tax treaty between India and Hong Kong, the concept of service PE requires proper examination of all the relevant facts and provisions on the point whether deputation of secondees constitutes service PE in India or not. Accordingly, the issue was remanded to the AO for adjudication.

[2015] 63 taxmann.com 11 (Ahmedabad – Trib.) ADIT vs. Adani Enterprise Ltd A.Y.: 2010-11, Date of Order: 2-9-2015

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Sections 5, 9, the Act – since funds raised by issue of FCCBs were utilised for investment in foreign subsidiary carrying on business outside India, interest paid to bond holders was covered under exclusion in section 9(1) (v)(b) of the Act

Facts
The taxpayer had raised funds from certain nonresident investors by issuing FCCBs to them. The funds were invested in a company which was incorporated outside and which was carrying on business outside India. The taxpayer remitted interest to the bond holders without withholding tax on the ground that interest was neither received by non-resident bond holders in India nor had it accrued in India. Even if it was deemed to have accrued in India, the same was eligible for source rule exclusion as the borrowed funds were utilised for the purpose of earning income from source outside India.

According to the AO, the interest accrued or arose to non-resident bond holders in India. Consequently, the income was primarily subject to section 5(2). Accordingly, resorting to section 9 was not permissible. Therefore, the AO held that the income was chargeable to tax under section 5(2) and exclusion u/s. 9(l)(v)(b) was not relevant.

Held
Identical issue was considered in case of the taxpayer in earlier year. The Tribunal had observed that funds raised by issue of FCCBs were invested in foreign subsidiary which was involved in financing of businesses abroad.

The term “business” is wide enough to include investment in subsidiaries or joint ventures which are further involved in business or commerce. Therefore, the AO’s observation that the taxpayer was not earning out of business carried on outside India was not correct. Exclusion clause will not have any purpose unless the income is covered within the provision to which exclusion clause applies. Hence, the presence of exclusion in section 9(1)(v)(b) proves that the income is falling within the ambit of deeming provision. Thus, it cannot be accepted that the same income can also fall within the ambit of income which has accrued and arisen in India.

Since nothing contrary was brought on record in the relevant tax year, following the order of the Tribunal in case of the taxpayer, interest earned by non-resident bond holders was not chargeable to tax in India.

[2015] 62 taxmann.com 319 (Rajkot – Trib.) ITO vs. MUR Shipping DMC Co., UAE A.Y.: 2009-10, Date of Order: 23-10-2015

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Articles 4, 8, 24, India-UAE DTAA – if a UAE company was managed and controlled wholly in UAE DTAA benefits could not be denied by invoking LOB clause even though entire share capital was owned by Swiss companies.

Facts
The taxpayer was a company incorporated in, and tax resident of, UAE. It was engaged in operation of ships in international traffic. Its entire share capital was held by two companies incorporated in Switzerland. The taxpayer had obtained a ship under a long-term time charter arrangement from a company incorporated in Marshall Islands. While the manager director of the taxpayer was residing in UAE, its two other directors also had permanent residential visa of UAE. The Board meetings and important decision were being taken at Dubai. The taxpayer had obtained tax residency certificate from UAE tax authority. The taxpayer claimed that having regard to the provisions of Article 8 of India-UAE DTAA, its profit from shipping activity was not taxable in India.

The AO concluded that the effective control and management of the taxpayer was not situated in UAE. Hence, it was not resident in UAE. Therefore, he invoked LOB provision in Article 29 on the ground that: (i) the ship was owned by an entity from a country with which India did not have DTAA ; and (ii) the taxpayer was owned by Swiss shareholders who would not have been entitled to DTAA benefit if they had directly carried on business. The AO held that the agent/freight beneficiary was not entitled to claim benefit under DTAA.

In appeal, the CIT held that the taxpayer was entitled to India-UAE DTAA benefit.

Held
In ADIT vs. Mediterranean Shipping Co. SA [(2013) 56 SOT 278 (Mum.)], it is held that effectively, the income from operations of ships in international traffic is not taxable in India, irrespective of whether it is earned by a Swiss tax resident or a UAE tax resident because Article 22(1) of India-Switzerland DTAA , and Article 8 of India- UAE DTAA respectively exempt the income from taxation in India.

As regards residential status under article 4(1), what is required is that it should be a “company which is incorporated in the UAE and which is managed and controlled wholly in UAE”. This was not disputed. The directors were resident in UAE. It is irrelevant that they were not UAE nationals.

The AO was not justified in invoking LOB clause in Article 29 and denying benefits under India-UAE DTAA because there was reasonable evidence to suggest that the affairs of the company were conducted from UAE, and further no material was brought on the record to establish that the company was not wholly controlled and managed in UAE.

India’s Double taxation Avoidance Ag reements [DTAAs] & Ag reements for Exchange of information [AEIs] – Recent Developments

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In the last 3 years since our last Article on the subject published in
the December, 2012 issue of BCAJ, India has signed DTAAs with 8
countries and has entered into revised DTAAs with 4 countries. India has
also amended few DTAAs by signing Protocols amending the existing
DTAAs. In this Article, our intention is to highlight the salient
features of such DTAAs or Protocols amending the DTAAs. The purpose is
not to deal with such DTAAs or Protocols extensively or exhaustively. It
will be seen that the recent treaties/protocols follow more or less a
similar pattern.

Further, the DTAAs with certain countries have
been modified primarily to include ‘Limitation of Benefits (LOB)
Clause’. Further, Articles on ‘Exchange of Information’ and ‘Assistance
in Collection of Taxes’ have been included or the scope of such existing
Articles has been extended.

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

Aadhar Card Scheme – Right to Privacy – Judicial Discipline – View expressed by smaller benches without explaining reasons for not following pronouncements of larger Benches – Matter referred to larger Bench – Constitution of India Article 141.

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Justice K. S. Puttaswamy & Anr. vs. UOI & Ors. AIR 2015 SC 3081

The collection by the Govt. of biometric data of residents under Aadhar Card Scheme challenged to be violative of the right to privacy.

The Court directed that the Union of India shall give wide publicity in the electronic and print media including radio and television networks that it is not mandatory for a citizen to obtain an Aadhar card. The production of an Aadhar card will not be a condition for obtaining any benefits otherwise due to a citizen. The Unique Identification Number or the Aadhar card will not be used by the Govt. for any purpose other than the PDS Scheme and in particular for the purpose of distribution of food grains, etc. and cooking fuel, such as kerosene. The Aadhar card may also be used for the purpose of the LPG Distribution Scheme. The information about an individual obtained by the Unique Identification Authority of India while issuing an Aadhar card shall not be used for any other purpose, save as above or as may be directed by a Court for the purpose of criminal investigation.

The Hon’ble Court was of the opinion that the cases on hand raise far reaching questions of importance involving interpretation of the Constitution. What is at stake is the amplitude of the fundamental rights including that precious and inalienable right under Article 21. If the observations made in M. P. Sharma (AIR 1954 SC 300) and Kharak Singh (AIR 1963 SC 1295) are to be read literally and accepted as the law of this country, the fundamental rights guaranteed under the Constitution of India and more particularly right to liberty under Article 21 would be denuded of vigour and vitality. The Hon’ble Court was also of the opinion that the institutional integrity and judicial discipline require that pronouncement made by larger Benches of the Court cannot be ignored by the smaller Benches without appropriately explaining the reasons for not following the pronouncements made by such larger Benches. The Hon’ble Court was of the opinion that there appeared to be certain amount of apparent unresolved contradiction in the law declared by the Court.

BEPS and the Likely Impact on Indian Tax Laws

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Introduction

The recent tax investigations by the British Parliamentary Committees, U. S. Senate and the Australian Senate Economics References Committee on the tax-avoidancedriven structures of multi-national corporations, such as Starbucks, Apple, Google and Microsoft among others, have shifted the focus from prevention of tax evasion to prevention of tax avoidance and aggressive tax planning. Today, countries, whilst trying to maintain a certain form of tax competitiveness, have realised the effect that the tax loss on account of the aggressive tax planning structures is having on the recovering economies, and are trying hard to crack down on aggressive tax planning structures, which result in the erosion of their sovereign tax base. Closer home, this shift is also reflected in the big-bang amendments to the Finance Bill, 2012 in the aftermath of the Vodafone judgement.

However, there was a growing consensus among the member countries of the G20 that there would need to be a common set of guidelines to be enacted by all the countries so as to effectively tackle such aggressive structures. Hence, the OECD on request by the leaders of the member countries of the G20, in 2013, formulated a 15 – point Action Plan under the Base Erosion and Profit Shifting (‘BEPS’) Project. On 5th October 2015, the OECD issued the final reports on the BEPS Project. During the 2 years, the OECD released discussion drafts for public comments under each of the Action Plans. The final reports were issued after taking into consideration the public comments received on the discussion drafts as well as on the basis of discussion with various other organisations such as the United Nations, African Tax Administration, Centre de recontre des administrations fiscales and the Centro Interamericano de Administraciones Tributarias, the International Monetary Fund and the World Bank.

This article attempts to briefly summarise all the Action Plans of the BEPS Project and the possible impact in India, due to likely amendments in the Income-tax Act, 1961 (‘Act’) in light of the BEPS Project. In this regard, it may be pointed out that it would be worthwhile for a practitioner in the field of international tax to understand all the Action Plans, irrespective of their effect in an Indian context, as international tax involves the interaction of the domestic tax laws of various countries. It may be possible that while not implemented in India, some of the Action Plans may have been implemented in various other countries, involved in future transactions with India, and would therefore impact such transactions.

Action 1: Addressing the Tax Challenges of the Digital Economy

While recognising that in today’s world of the digital economy, the international tax laws, many of which are nearly a century old, would need to be amended, the report on Action 1 states that it is difficult to ring fence the digital economy from the non–digital economy and therefore, in respect of direct taxes, the recommendations have been incorporated in the other Action Plans of the BEPS Project.

Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements

A hybrid financial instrument is generally treated as a debt instrument in the country of the payer, thus leading to a deduction of the interest, but as equity in the country of the recipient, thus leading to be considered eligible for a participation exemption. A hybrid entity on the other hand is one which varies in respect of it’s opacity from a tax perspective in different jurisdictions. One country treats such entity as transparent under its tax laws, whereas another country treats the same entity as opaque under its tax law.

The OECD recognises that hybrid mismatch arrangements can be used to achieve double non – taxation or long – term deferral by exploiting the differences in the tax treatment of instruments or entities under the laws of two or more tax jurisdictions. The Action Plan clearly defines the scope as covering only those mismatch arrangements which involve a hybrid element. Therefore, payments made to exempt entities have not been considered in this Action Plan. Hybrid mismatch arrangements generally involve the use of hybrid financial instruments or hybrid entities. The Action Plan states that the use of hybrid mismatch arrangements leads to lower tax by way of three outcomes, namely

(a) Deduction and Non – Inclusion of Income (D/NI Income): This generally refers to a deduction being claimed in one country for a particular payment with no corresponding income being considered in the country of the recipient.

(b) D ouble Deduction (DD): This generally refers to a single payment being claimed twice as a deduction in two different countries.

(c) Generation of multiple foreign tax credits for one amount of foreign tax paid.

One example of such a possible hybrid mismatch arrangement is provided in order to understand the term better. A partnership firm in India, ABC is treated as an entity, liable to tax in India (as it is a person defined in section 2(31) of the Act), whereas such a firm is treated as transparent in the UK, i.e. the partners are liable to tax on the income of the partnership in the UK. In case, ABC, which has its partners in the UK, makes a payment to a third party, the payment would be considered as a deduction in India while computing the income of ABC. Similarly, at the same time, the UK would disregard the existence of ABC and therefore, would grant the deduction of such payment to its partners, leading to a case of double deduction for the same payment in two different jurisdictions through the use of a hybrid entity, in this case, an Indian partnership.

The OECD has provided the following recommendations in respect of hybrid mismatch arrangements:

(a) I n the case of use of hybrid instruments or hybrid entities giving rise to a D/NI outcome, it is recommended that the payer jurisdiction deny the deduction in the hands of the payer. However, in case the payer jurisdiction does not deny the deduction in the hands of the payer, a secondary rule is recommended whereby the recipient jurisdiction is required to consider the payment as income in the hands of the recipient.

(b) I n the case of payment made to a reverse hybrid (an entity which is transparent under the tax laws of the country in which it is incorporated but opaque under the tax laws of other countries) giving rise to a D/NI outcome, it is recommended that the payer country deny the deduction.

(c) I n the case of payment made by a hybrid entity giving rise to a DD outcome, it is recommended that the jurisdiction of the parent deny the deduction. In case the jurisdiction of the parent is unable to deny the deduction, it is recommended that the jurisdiction of the payer deny the deduction.

(d) In the case of a payment made by a dual resident giving rise to a DD outcome, it is recommended that the jurisdiction of the residence deny the deduction.

 In this regard, it may be pointed out that the recommendations provided require amendments in the domestic tax laws of various countries.

Therefore, there is a possibility of the Act being amended to incorporate these recommendations, especially the primary rule of denying the deduction which gives rise to a D/NI outcome. Moreover, the use of primary and defensive or secondary rule may result in an additional compliance burden on the taxpayer as well as the tax administration, as information would be required as regards the taxation of the payments in the corresponding countries, in order to determine if there is a hybrid mismatch arrangement on a case-by-case basis. It is also believed that even in case there is no specific amendment in order to incorporate the recommendations in respect of the hybrid mismatch arrangements, the GAAR in the Act, which is currently proposed to be effective from AY 2018-19, can be used to tackle such structures.

Action 3: Designing Effective Controlled Foreign Company Rules

Action 3 of the BEPS Project provides recommendations regarding the design of CFC rules. It does so by breaking down the CFC rules into building blocks:

a. Definition of CFC

b. Threshold requirements

c. Definition of CFC income

d. Rules for computing income

e. Threshold for attribution of income

f. Rules to prevent or eliminate double taxation

The report states that the main objective of CFC rules is to prevent the income from being shifted either from the parent jurisdiction or the parent as well as other jurisdictions. This would need to be kept in mind while formulating a policy. In respect of the definition of a CFC, it is recommended to broadly define the entities covered under the CFC regime, in order to include even the permanent establishments and transparent entities. With regards to the definition of control for the purpose of determining as to whether an entity is a CFC or not, the report recommends that the CFC rules should provide a combination of both legal and economic control, and supplement that with a de facto test (decision making) or a test based on consolidation for accounting purposes. Further, the report also provides that control should be defined to include both direct as well as indirect control. The report also recommends inclusion of a modified hybrid mismatch rule, which requires an intragroup payment to a CFC to be taken into account for calculation of the income under the CFC rules. Under this modified hybrid mismatch rule, an intragroup payment may be taken into account if the payment is not included in the CFC income and if the payment would have been included in the CFC income if there was no hybrid mismatch. With regards to threshold limits, the report recommends that the CFC rules only apply in case of those foreign companies who are effectively taxed at a rate meaningfully lower than that applied in the parent jurisdiction.

With regards to the CFC income, the report recommends that the rules cover at least the following types of income:

a. Dividends;

b. Interest and other financing income;

c. Insurance income;

d. Sales and services income;

e. Royalties and other IP income.

In respect of computation of income, the report recommends that the rules of the jurisdiction of the parent company apply. It also recommends that the losses of a CFC should be offset against the profits of the same CFC or against the profit of another CFC from the same jurisdiction. Finally, in respect of the attribution of the CFC income to the appropriate shareholders of the CFC, the report recommends that the attribution should be tied to the minimum control threshold and the amount of income to be attributed to each shareholder should be determined in reference to their proportionate shareholding or influence. It may be worthwhile to point out that the proposed Direct Taxes Code Bill, 2010 included CFC rules. The Finance Minister, while presenting the Finance Bill, 2015, stated that the work on DTC would be abandoned as most of the proposed amendments have already been enacted in the Income-tax Act, 1961. However, the legislation in relation to CFC has not yet been enacted in the domestic tax law, and therefore, it is only a matter of time before the same is introduced in the Act.

Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments

Action 4 relating to limitation of interest deductions attempts to address three main risks:

(a) High level of debts being shifted to high tax countries thus leading to an overall lower tax burden for the group;

(b) Intragroup loans being used to generate interest deductions in excess of the group’s actual third party interest expense;

(c) Third party debt or intragroup financing being used to fund the generation of tax exempt income.

In order to address these risks, the report recommends a fixed ratio rule whereby the interest deduction available is linked as a percentage (recommended range of 10% to 30%) of the profits of the entity before taking into account the interest deduction, tax expenditure, depreciation and amortisation (EBITDA). Additionally, the report also recommends that in case the interest expense of an entity exceeds the fixed ratio rule, a country may still allow the deduction up to a limit of the ratio of the overall group’s net interest/EBITDA. In this regard, it may be pointed out that this limit on deduction of interest will apply to all interest expenditure and not just that involving related entities. The Act currently allows deduction of the interest only to the extent it qualifies for a business purpose. There are no rules in the Act specifically limiting the deduction of interest to a specified percentage of profits or earnings. Such a limitation, if introduced, would have a significant tax impact on many Indian companies, which are highly leveraged. Such an amendment may also make it difficult to monitor the overall group’s interest deductions and ratio, and therefore, may lead to an increase in the administrative as well as compliance burden of the taxpayer, as well as that of the tax authorities.

Action 5: Countering Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance

The report on Action 5 deals with preferential tax regimes, such as the IP Box regime, and the amendments required in such regimes, in order to ensure that there is a fair tax competition between the countries. One of the approaches recommended is the nexus approach, which provides that a taxpayer can avail the benefit of the preferential regimes (mainly IP regimes) only to the extent it incurred qualifying R&D expenditure, which gave rise to IP income. The report also recommends the exchange of information in relation to rulings where BEPS may be an issue between countries. Finally the report reviews the preferential regimes of a few countries to determine if they are amounting to harmful tax competition. In this regard, the report provides that the special tax regimes available to certain taxpayers in India such as those in the SEZ, for shipping companies, offshore banking units and life insurance business are not harmful. Therefore, no amendment is expected in respect of this recommendation.

Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

The Action Plan released in July 2013 by OECD on Action 6 read, “Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non – taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co – ordinated with the work on hybrids.” In order to combat treaty shopping, the report follows a three-pronged approach:

a. A mendment in Preamble to treaties;

b. LOB clause; and

c. PPT rule

The report recommends the introduction of the LOB clause in the tax treaties. There are two versions of the clause provided in the report – a simplified version and a detailed version, with the choice given to the Contracting States.

The detailed version, as the nomenclature suggests, provides specific conditions to be satisfied, instead of the more generic ones provided in the simplified version. The LOB clause is a refined residence concept, as it goes beyond the concept of residence for the purposes of claiming the benefit of the treaty. The LOB clause provides that only a qualified person would be entitled to the benefits of the treaty. A qualified person is a person who has satisfied certain ownership and business requirements to provide sufficient link between the person and the Contracting State, the benefit of whose treaty network is being utilised. In addition to the LOB clause, the draft also includes a PPT clause as provided below, “Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the benefit was one of the principle purposes of any arrangement or transactions that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention”.

Thus, the PPT clause makes it clear that no benefit shall be provided for an income if one of the purposes (and not necessarily the sole purpose) was to obtain the benefits of the treaty. Further, the report also attempts to tackle the abuse of the lower rate of tax in the country of source, in the case of dividends paid to parent companies exceeding a certain threshold of ownership under Article 10(2)(a) of the OECD Model Convention. The report provides that the required percentage of holding for obtaining the benefit of the lower rate of tax should also include a minimum period, for which such shareholding should be maintained, before the dividend is paid. Currently, Article 13(4) of the OECD Model Convention provides that gains derived by a company from the sale of shares, of which an immovable property constituted more than 50% of the value, is taxable in the country of source. The report recommends that this clause should be extended to include comparable interests in other forms of entities such as partnership. Additionally, the report also recommends that there should be a provision for considering a period for which the percentage of value of the immovable property must be considered, in order to tackle situations wherein assets are transferred from other entities in order to dilute the percentage of value of the immovable property to that of the shares or comparable interest being alienated. In the case of dual resident companies, Article 4(3) of the OECD Model Convention provides that for the purposes of the Convention, a dual resident company shall be deemed to be a resident of the Contracting State in which the place of effective management is situated. However, in order to combat tax avoidance through this area, the report recommends that the residence of a dual resident company for the purposes of a tax treaty be determined by competent authorities, and not where the place of effective management is situated. In respect of abuse of the domestic tax laws, the report recommends the enactment of the GAARs along with specific anti – abuse rules, such as thin capitalisation rules, in the domestic tax laws. Finally, the report recommends the change in the Preamble to the treaty to include non – creation of opportunities for non – taxation or reduced taxation through tax evasion or tax avoidance. This would enable the reader to understand the object of the treaty in accordance with Article 31(1) of the Vienna Convention on the Law of Treaties. From an Indian context, the Act has already provided for GAARs which would come into effect from Assessment Year 2018-19. Currently, India’s treaty with the US (the LOB clause was first introduced in the US Model Convention) has an LOB clause which prevents tax avoidance to a certain extent.

Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status

Currently, business carried on by a resident of a Contracting State through a commissionaire structure in the other Contracting State is not taxable in the latter State on account of the absence of a permanent establishment. Under Article 5 of the OECD Model Convention, an agent can said to constitute a PE for the principal if he habitually concludes contracts which are binding on the principal. This lead to many abusive transactions wherein the agent (commissionaire) negotiated the major terms of the contract but would be officially concluded only by the principal. In order to counter such abusive transactions, the report has recommended an amendment in Article 5(5) of the Model Convention to extend the definition of permanent establishment to these commissionaire structures as well, by providing that in case a person plays an important role in the conclusion of the contract which is concluded by the principal without any material modifications, such person or agent shall be deemed to be considered as the permanent establishment of the principal. Further, it has been recommended that the meaning of the term “independent agent” under Article 5(6) of the OECD Model be amended to exclude an agent, which satisfies certain ownership criteria in respect of the holding of the principal in the agent. Currently, Article 5(4) of the OECD Model provides a list of activities which do not constitute a fixed – place permanent establishment in a Contracting State. These activities included use of facilities and maintenance of stock of goods for storage, delivery or display of goods, maintenance of a fixed place of business for processing by another enterprise or for collecting information. These activities were considered to be excluded from the definition of the permanent establishment, irrespective of whether the activities were considered to be of a preparatory or auxiliary nature in respect of the business of a taxpayer. The report now has recommended that the aforementioned activities be excluded from being considered as a permanent establishment only if they are of a preparatory or auxiliary nature to the business of the taxpayer. In order to ensure that there is no abuse of the exclusion of the activities from the definition of a permanent establishment by splitting up the activities of the group, the report recommends that a new paragraph of anti – fragmentation be added to Article 5(4), which provides that in case the activities of the enterprise along with its related enterprise together do not constitute activities of a preparatory or auxiliary nature, the enterprise would not be eligible to claim the benefit of Article 5(4). As these recommendations refer to the OECD Model and the tax treaties, no amendment is expected in this regard in the Act.

Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation

The reports on Actions 8, 9 and 10 attempt to revise the OECD Transfer Pricing Guidelines (‘TPG’) in order to ensure that the transfer pricing outcomes are linked to value creation.

Some of the major amendments recommended in the TPG are as follows:

a. Contractual arrangements would need to be matched with actual conduct of the parties to the contract/ transaction. In case the contract and the conduct does not match, the contractual arrangements would need to be ignored for determining the arm’s length price;

b. An entity would not be entitled to higher returns if it undertakes risks which it does not control, or it does not have the financial capacity to control the risks.

 In other words, it is not just the undertaking of the risk, but also the control over the risk and ability to control the risk, that would entitle an entity to higher returns in the case of determination of the arm’s length price;

c. In the case of the synergistic benefits available for being a member of a group, the benefit of the synergies should be allocated only to those parties, which have contributed to such benefit being available;

d. In the case of funding without any additional economic activities, the entity funding would be only entitled to a risk – free return and no additional return is to be provided while determining the arm’s length price, specifically under the profit split method.

The report recommends the following steps for analysing the transactions involving intangibles:

a. Identifying the legal owner of the intangibles;

b. Identifying the parties performing the functions, using the assets and assuming risks relating to the development, enhancement, maintenance, protection and exploitation of the intangibles (‘DEMPE functions’);

c. Confirming the actual conduct of the parties in accordance with legal arrangements;

d. Identifying the controlled transactions related to the above activities;

e. Determining the arm’s length price in accordance with each party’s contributions to the functions, assets and risks.

The report further provides that the legal owner of the intangibles is entitled to all the anticipated returns from the exploitation of the intangible if it performs functions, provides assets and controls as well as bears the risks in relation to the development, enhancement, maintenance, protection and exploitation of the intangible. As the recommendations discussed above involve an amendment to the TPG, which is merely guidance in respect of determining the arm’s length price, no major amendment in the Act is expected in this regard. However, one may see an impact of this change in the future assessments in transfer pricing cases.

Action 11: Measuring and Monitoring BEPS

Understanding the effect that base erosion and profit shifting has on the economic activity of a country, Action 11 provides guidance and recommendations on how to measure and monitor BEPS.

The report provides the following indicators of BEPS behaviours and activity in a country:

 a. The profit rates of an MNE group is higher in a lowtax country as compared to the average worldwide profit rate;

b. T he effective tax rate of an MNE entity is substantially lower than similar enterprises having only domestic operations;

c. T he FDI is heavily concentrated;

d. The taxable profits of an entity are not higher where the intangible assets are situated in a commercial or economic sense;

e. T here is a high intragroup and third – party debt specifically in the high – tax countries

As this would require high co-ordination between the countries, the report recommends that the OECD work closely with the participating countries and provide corporate tax statistics. As this report merely refers to how BEPS can be monitored, major amendment is expected in this regard in the Act.

Action 12: Mandatory Disclosure Rules

The report on Action 12 provides a framework for formulation of mandatory disclosure rules of international tax schemes in order to enhance transparency, provide timely information and act as a deterrence. As the reports only provides the framework for such rules, they have not been analysed in this article.

Action 13: Transfer Pricing Documentation and Country-by-Country Reporting

In order to provide the necessary tools to the tax authorities in order to ensure that the profit attributed is linked to value creation, the report on Action 13 recommends certain changes in the transfer pricing documentation.

The three – tiered approach recommended in respect of the transfer pricing documentation is as follows:

a. A “master file” containing information of the global operations of the MNE group and the transfer pricing policies shall be made available to all the tax authorities in which the group does business;

b. A “local file” containing detailed information about the transactions and related parties in respect of each entity shall be made available to the tax authorities in which the entity is situated.

This local file is similar to the transfer pricing documentation that is available today; c. A “Country – by – Country Report (CBCR)” shall be made available to the tax authorities of the jurisdiction in which the parent company of the group is situated. The CBCR will contain information concerning business activity, profits before tax, income tax paid, number of employees, capital structure, retained earnings and tangible assets of each entity in the group irrespective of the jurisdiction in which it is situated. A number of countries have begun implementation of the CBCR. It is expected that India may also amend the transfer pricing regulations in order to ask for this information from the taxpayer. One of the major concerns in the introduction of the CBCR is that it enables the tax authorities to ascertain the transfer prices beyond the principle of the arm’s length price. However, the report clearly states that this information should not be used by tax authorities to conduct complementary audits.

Action 14: Making Dispute Resolution Mechanisms More Effective

The report on Action 14 recommends minimum standards for countries to adhere to in order to ensure that the Mutual Agreement Procedure provided in the tax treaties through Article 25 has been effectively implemented. The minimum standards recommended are:

a. Treaty obligations in respect of Mutual Agreement Procedures have been fully effected in a timely manner and with good faith;

b. Administrative issues in relation to treaty disputes should be resolved in a timely and effective manner;

c. Taxpayers should face minimum administrative and procedural burden to request for a MAP.

In order to ensure that corresponding adjustments in respect of transfer pricing adjustments do not face any hurdles, the report recommends that Article 9(2) of the OECD Model should be incorporated in all tax treaties. A group of countries (which notably does not include India) have agreed to incorporate a mandatory arbitration clause in the MAP Article in their tax treaties. No major amendment to the Act is expected in respect of this recommendation.

Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

The report on Action 15 recommends incorporating the recommendations discussed above in the existing tax treaties through a multilateral instrument. This will ensure that the lengthy procedure of negotiating each bilateral tax treaty is not required. India is one of the expected signatories to the multilateral instrument, which is expected to be open for signatures from December 2016. However, the major challenge in this multilateral instrument is that bilateral treaties in most countries, including India, come into effect after they have been approved by the Parliament. Therefore, the concern in signing a multilateral treaty to override the existing bilateral tax treaties without approval from the Parliament is genuine. In this regard, it is believed that the Income -tax Act, 1961 will be amended to allow the multilateral treaty to override the bilateral tax treaties signed by India without any approval of the Parliament. Moreover, in the case of a multilateral instrument, the wordings of the instrument would need to be carefully written in order to ensure that all the treaties, which may not necessarily have the same wordings, are appropriately modified. Similarly, it would be important to ensure that all the countries, which would be a signatory to the instrument, come to a consensus in respect of the wordings of the instrument as well as the recommendations itself. Additionally, all the countries in the world are not signatories to the multilateral instrument. Therefore, it would be interesting to see how the countries which are not signatories would react in respect of treaties with the countries which are signatory to the instrument.

Conclusion

To conclude, there is a question mark over the success of the BEPS Project, especially in respect of the implementation of the recommendations. However, that has not stopped countries from viewing tax avoidance very seriously. It is only a matter of time before countries start amending their tax laws to implement some, if not all, of the recommendations. India, being an active member in the BEPS Project, is almost certain to do so, and we may see quite a few amendments in the Finance Act, 2016 in respect of some of the recommendations. This will significantly alter the way multinational enterprises and we, as tax advisors will have to function. It will give rise to a new line of thought in the evolving world of tax planning wherein one would need to balance value creation and substance along with transparency with tax efficiency. _

VAT – Works Contract – Goods Involved in Execution of Works Contract – Rate of Tax Applicable to The Goods Deemed to be Sold, section 4(1)(c)of The Karnataka Value Added Tax Act, 2003

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10. M/S Durga Projects Inc vs. State of Karnataka and Another, [2013] 62 VSTs 482 (Karn)

VAT – Works Contract – Goods Involved in Execution of Works Contract – Rate of Tax Applicable to The Goods Deemed to be Sold, section 4(1)(c)of The Karnataka Value Added Tax Act, 2003

Facts
The appellant, a partnership firm, engaged in the business of civil works contract, purchased necessary building materials, hardware, etc., the goods falling under Schedule III, certain items of ‘declared goods’ falling u/s. 15 of the CST Act and other non-scheduled goods from within and outside the State as well as from unregistered dealers. The appellant made an application u/s. 60 of the KVAT Act before the Authority for Clarifications and Advance Rulings (ACAR for short) seeking for clarification in respect of: a) A pplicability of the rate of tax on execution of civil works contract under the Act; and b) Whether input tax credit can be availed out of output tax paid by the contractor. The ACAR, after examining the matter in detail, by its order dated 2-8-2006 came to the conclusion that there is no specific entry providing rate of tax on works contract under the KVAT Act, up to 31-3-2006 and therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract i.e. if the goods involved are taxable at the rate of 4%, then works contract rate would be at 4% and if the rate is 12.5%, the works contract rate would also be at 12.5%. With regard to the clarification of input tax credit is concerned, no finding was given. The appellant subsequently sought for rectification of the order dated 2-8-2006 before the ACAR. The ACAR further clarified on 7-12-2006 stating that iron and steel is one of the commodities specified u/s. 14 of the CST Act 1956, as goods of special importance and therefore, the iron and steel are to be subjected to works contract tax at 4%, when it was used in the same form and if they are used in manufacture or fabrication of product, it would no longer qualify as iron and steel and would have to be subjected to works contract tax at 12.5%.The Commissioner for Commercial Taxes after noticing the clarification order passed by the ACAR found that the order passed by the ACAR is erroneous and prejudice to the interest of the revenue and issued notice u/s. 64(2) of the Act on 25- 8-2010. The Commissioner for Commercial Taxes, after considering the objections filed by the appellant, by its order dated 12-10-2010 set aside the order passed by the ACAR in exercise of its suo-motu revisionary power and held that the goods used in the works contract cannot be treated on par with the normal sale of goods for the purpose of arriving at the rate for the period prior to 1-4- 2006. Further, the iron and steel or any other declared goods used for executing the works contract would be liable to be taxed as per the State Law. The appellant, being aggrieved by the order dated 12-10-2010 passed by the Commissioner of Commercial Taxes, filed appeal before the Karnataka High Court.

Held

Section 4(1)(c) was inserted by Act No.4 of 2006 w.e.f. 1-4-2006 thereby levying tax on the works contract by specifying the rate of tax under the Sixth Schedule. Prior to the amendment, the tax was being collected on the rate applicable to sale of each class of goods under Section 3(1) of the Act. Section 3(1) of the Act provides for levy of tax on sale of goods. Section 4 prescribes the rate of tax. Neither section 3 nor section 4 of the Act seeks or intend to levy or prescribe different rate of tax for the goods involved in the normal sale and for the goods involved in the deemed sale. Both normal sale as well as the deemed sale should be treated as one and the same with respect to levy of tax on sale of goods. Admittedly, prior to 1-4- 2006 insertion of clause (c) to section 4, the rate of tax was not prescribed in respect of transfer of the property in goods, (whether as goods or in any other form) involved in the execution of works contract. Hence, the tax has to be levied as per section 3(1) of the Act. The sale under the works contract is a deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence, the tax has to be levied on the price of the goods and material used in the works contract as if there was a sale of goods and materials. The property in the goods used in the work contract will be deemed to have been passed over to the buyer as soon as the goods or material used are incorporated to the moveable property by principle of accretion to the moveable property. For the period prior to 1-4-2006, tax has to be levied as per section 3(1) of the Act and for the period subsequent to 1-4-2006, tax has to be levied as per section 4(1)(c) of the Act. Accordingly, the High Court allowed the appeal filed by the firm. The order passed by the Commissioner was set aside and the order passed by the ACAR was restored.

Value Added Tax – Providing Passive Infrastructure Service and Related Operations and Maintenance Services – To Telecommunication Operators – on a Share Basis – Not a Transfer of Right to Use Goods – Not Taxable, Section 2(1)(2c) (vi) of The Delhi Value Added Tax Act, 2004.

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9. M/S. Indus Tower Ltd vs. Union of India, [2013] by VST 422 (Delhi)

Value Added Tax – Providing Passive Infrastructure Service and Related Operations and Maintenance Services – To Telecommunication Operators – on a Share Basis – Not a Transfer of Right to Use Goods – Not Taxable, Section 2(1)(2c) (vi) of The Delhi Value Added Tax Act, 2004.

Facts

Indus, the petitioner company, registered with the Department of Telecommunication for providing passive infrastructure services and related operations and maintenance services to various telecommunications operators in India on a sharing basis. It is the policy of the Government of India to encourage extensive infrastructure sharing and in pursuance with the policy, the telecom operators were required to create a high quality, rapid and wide coverage of mobile telecommunications network in India. The passive infrastructure facilities or services could be shared by several telecom operators so that it becomes cost effective.

Accordingly, it put up passive infrastructure facilities at several places. The arrangement worked this way. Indus would put up the towers and a shelter which is a construction in which the telecom operators are permitted to keep and maintain their base terminal stations (BTS), associated antenna, back-haul connectivity to the network of the sharing telecom operator and associated civil and electrical works required to provide telecom services. The telecom tower and shelter, both put up by the petitioner, is called “the passive infrastructure”. In addition to the tower and shelter, Indus also provided diesel generator sets, air-conditioners, electrical and civil works, DC power system, battery bank, etc. All these were known as passive infrastructure. The “active infrastructure” consists of the BTS, associated antenna, back-haul connectivity and other requisite equipment and associated civil and electrical works required to provide the telecommunication services by the telecom operator at a telecom and telecommunication site other than the passive infrastructure. The active infrastructure was owned and operated by the sharing telecom operator, passive infrastructure was owned by Indus. There could be several operators who may use the tower and shelter which are parts of the passive infrastructure by keeping their BTS, etc., therein and sharing the entire passive infrastructure on an agreed basis. The antennae belonging to the sharing telecom provider may be put up or installed at different heights in the tower as per the requirements of the sharing telecom operators. The working of the telecom network basically involves the process of receiving and transmitting the telecom signals. The active infrastructure which is owned and put up by the sharing telecom operators needs certain conditions for proper functioning and uninterrupted telecom network/ signals. These conditions are maintenance of a particular temperature, humidity level, safety, etc. These conditions are ensured by the passive infrastructure made available by the petitioner to the sharing telecom operators. The Indus Company filed application before the Commissioner of Vat u/s. 84 of the Delhi Value Added Tax Act, 2004 (DVAT ) and posed following question to be determined by him;- “Whether, in the facts and circumstances, the provision of passive infrastructure services by the applicant to sharing operators would tantamount to ‘Transfer of right to use goods’ as per section 2(1)(zc)(vi) of the DVAT Act, 2004 and therefore become liable to tax under the DVAT Act? If yes, then how should the sale price as per section 9(1) (zd) of the DVAT Act be determined for the purpose of discharging the liability under the DVAT Act ?” The Commissioner, on an examination of the agreement entered into between the petitioner and M/s. Sistema Shyam Tele Services Ltd., which was taken as representative of the agreements entered into by the petitioner with various telecom operators, held that the entire amount of consideration received from the sharing telecom operators for providing access to the passive infrastructure would amount to consideration for the “transfer of the right to use goods” as defined in section 2(1)(zc)(vi) of the DVAT Act and was exigible to tax under the said Act. He however held that since a separate bill was being raised for consumption of energy by each sharing operator as per actual consumption as detailed in the contract, the charges collected by the petitioner on this account shall be exempt from the levy of value added tax. The Company filed writ petition before the Delhi High Court against the impugned order of the Commissioner.

Held

The ‘right to use goods’ – in this case the right to use the passive infrastructure can be said to have been transferred by Indus to the sharing telecom operators only if the possession of the said infrastructure had been transferred to them. They would have the right to use the passive infrastructure if they were in lawful possession of it. There has to be, in that case, an act demonstrating the intention to part with the possession of the passive infrastructure. There is none in the present case. The passive infrastructure is an indispensable requirement for the proper functioning of the active infrastructure which is owned and operated by the sharing telecom operators. The passive infrastructure is shared by several telecom operators and that is why they are referred to as sharing telecom operators in the MSA. The MSA merely permits access to the sharing telecom operators to the passive infrastructure to the extent it is necessary for the proper functioning of the active infrastructure. It was the responsibility of Indus to ensure that the passive infrastructure functions to its full efficiency and potential, which in turn means that it had to be in possession of the passive infrastructure and cannot part with the same in favour of the sharing telecom operators. With several such restrictions and curtailment of the access made available to the sharing telecom operators to the passive infrastructure and with severe penalties prescribed for failure on the part of the Indus to ensure uninterrupted and high quality service provided by the passive infrastructure, it is difficult to imagine how Indus could have intended to part with the possession of part of the infrastructure. That would have been a major impediment in the discharge of its responsibilities assumed under the MSA. The limited access made available to the sharing telecom operators is inconsistent with the notion of a “right to use” the passive infrastructure in the fullest sense of the expression. At best it can only be termed as a permissive use of the passive infrastructure for very limited purposes with very limited and strictly regulated access. It is therefore difficult to see how the arrangement could be understood as a transfer of the right to use the passive infrastructure. When Indus has not transferred the possession of the passive infrastructure to the sharing telecom operators in the manner understood in law, the limited access provided to them can only be regarded as a permissive use or a limited license to use the same. The possession of the passive infrastructure always remained with Indus. The sharing telecom operators did not therefore, have any right to use the passive infrastructure. Accordingly, the High Court allowed the writ petition filed by the Indus and quashed the order passed by the Commissioner holding the Indus liable to pay vat.

Sales Tax – Pulp based Drink – Known as “Slice” – Predominantly Contained Water – Not a Food Article Within the Meaning of Entry 47 of Schedule I, Section – 4(1)(a)(d) and Entry 47 of Schedule I of The Delhi Sales Tax Act, 1975

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8. M/S. Varun Beverages Ltd vs. Commissioner of Vat, [2003] 62 VST 388 (Delhi)

Sales Tax – Pulp based Drink – Known as “Slice” – Predominantly Contained Water – Not a Food Article Within the Meaning of Entry 47 of Schedule I, Section – 4(1)(a)(d) and Entry 47 of Schedule I of The Delhi Sales Tax Act, 1975

FACTS

The appellant trades in aerated drinks, mineral water and fruit pulp based drink known as “slice”. It sought to deposit sales tax at 8% under residual entry on the basis that “slice” is not a preserved food article thus not covered by entry 47 of Schedule I of the Act. The department on the other hand treated it as food article and levied tax @12% under entry 47 of Schedule I of the Act. The appellant filed appeal up to Tribunal without any success. The appellant thereafter filed appeal before The Delhi High Court against the decision of the Tribunal rejecting the appeal filed by it.

HELD

There is no reference under the Delhi Sales Tax Act imposing definition contained in The Prevention of Food Adulteration Act and reliance by the Tribunal on it was misplaced. The predominant content of the Mango Pulp Drink is water i.e. 70 % and the Mango Pulp content is 17%. This product does not claimed to be a fruit juice and therefore the revenue cannot urge that it has even a minimum modicum of nutritive properties. Arguably, if the product was entirely milk based, the consideration might have been different. However, the mango pulp based drink, at best an instant energy giver and in all cases a thirst quencher; by no stretch of imagination can it be called a “food article” at least not within the contemplation of the statute, by an application of the common parlance test. Accordingly, the High Court allowed the appeal filed by the company and held that the impugned product is not covered by entry 47 of Schedule I of the Act as “preserved food article” and taxable at 8% under residual entry.

VAT – Levy of VAT on MRP – Not Permissible, Section 4(5) of The Karnataka Value Added Tax Act, 2004.

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7. M/S. ITC Limited vs. State of Karnataka and Others, [ 2013] 62 VST 320 (Karn)

VAT – Levy of VAT on MRP – Not Permissible, Section 4(5) of The Karnataka Value Added Tax Act, 2004.

FACTS

The Petitioner filed a Writ Petition before the Karnataka High Court challenging the constitutional validity of section 4(5) of the Act, inserted by Karnataka Value Added Tax (Amendment) Act, 2004 for levy of tax on sale of Cigars, Gutkha and other manufactured tobacco, on the maximum retail price (MRP) indicated on the label of the container or packing thereof.

HELD

The Supreme Court, in Rajasthan Chemist Association [2006] 147 STC 542, while considering the validity of a provision similar to the one impugned herein had upheld view of the Rajasthan High Court that it is not permissible for the legislature of a State to levy tax on sale of goods by adopting a notional price as a measure of tax; such a legislative measure has to be outside the ambit of entry 54 of List II of the Seventh Schedule to the Constitution of India. The same reasoning applies to the provision impugned herein as both are similar. Accordingly, the High Court allowed the writ petition filed by the company and sub-section (5) of section 4 of the Act providing levy of tax on sale of cigars, tobacco etc. on the MRP as unconstitutional on the ground that such a taxing provision is beyond the legislative competence of the State under entry 54 of List II of the seventh Schedule to the Constitution of India.

Contribution to expenses cannot by any stretch be deemed to be a consideration for any identified service rendered to members by access to the facilities or advantage by a club or association. However, if the payments are specifically attributable to such facility, advantage or service, the subscription will be taxable.

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45. [2015] 62 taxmann.com 2 (Mumbai – CESTAT) Cricket Club of India Ltd vs. Commissioner of Service Tax

Contribution to expenses cannot by any stretch be deemed to be a consideration for any identified service rendered to members by access to the facilities or advantage by a club or association. However, if the payments are specifically attributable to such facility, advantage or service, the subscription will be taxable.

Facts

The Assessee is a members’ club providing various facilities to its members. Service tax was paid on the entrance fees under protest under Club or Association service. A refund was sought of the amount paid on account of principle of mutuality and on the ground that entrance fees is not a consideration for any service. The department denied refund and the same was upheld by the Commissioner (Appeals), accordingly the present appeal is filed.

Held

The Tribunal noted that Clubs or Associations need funds to exist. Wages of employees, energy charges, maintenance and repairs etc. are necessary expenses for sustenance. Implicit in membership of clubs and associations is the obligation to share in such expenses for maintaining the assets of the club and the contributing members are not the direct beneficiaries of such services. Contribution to expenses cannot, by any stretch, be deemed to be consideration for any identified service rendered to individual members by access to the facilities or advantage that is within the wherewithal of the “club or association”. However, to the extent that it is possible to identify the facilities, advantage or services without further payments specifically attributable to such facility, advantage or service, the subscription will be taxable. It was also observed that without an identified recipient who compensates the identified provider with appropriate consideration for an identified service, a service cannot be held to have been provided. Further, relying on the decision of the Sports Club of Gujarat [2013] 40 STT 486/35 taxmann.com 557 (Guj.), the principle of mutuality was upheld and the appeal was allowed.

Reassessment beyond Reasons

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Issue for Consideration
Quite often, one comes across orders of reassessment wherein additions are made in respect of items that are not listed in the reasons recorded for reopening at the time of issue of notice u/s. 147, for reopening an assessment.

In many a case, no additions are made for the issues that formed part of the reasons for reopening, while passing an order of reassessment, and instead, additions are made on altogether new issues that are not part of the reasons recorded.

There has been an ongoing conflict concerning the scope of reassessment. Should the scope extend to cover issues not recorded in the reasons and, if yes, should such extension be denied, at least in cases where the reasons for which the reopening was made, have been found to be invalid on final reassessment. An additional issue that arises is whether a fresh notice u/s. 148 is required to be issued for covering the new issue in reassessment.

The issue about including new issues where additions are also made in respect of the recorded reasons is settled in favour of sustenance of addition on account of a new or additional issues. What appears however, to be open is the issue where addition is made on account of an issue that has not been found in the reasons recorded and where no addition is made for the reasons recorded. Conflicting decisions are delivered on the subject by High Courts with some upholding the right of the Assessing Officer, and some dismissing it.

N. Govindaraju’s case
The issue recently came up for consideration of the Karnataka High court in the case of N. Govindaraju vs. ITO, 60 taxmann.com 333 (Karnataka).In that case, the assessee, an individual, had income from house property, transport business, capital gains and other sources, and had filed the return of income, which was processed u/s. 143(1) and accepted. A notice u/s. 148 was issued for reopening the assessment for the purpose of assessing the income from the sale of property u/s. 45(2) and also for denying the benefit of indexation. The reassessment was completed on total income of Rs.29.91 lakh. No addition was made u/s. 45(2), nor was indexation denied to him in reassessment. Additions were however made for reasons other than the one recorded in the notice.

On appeal, the Commissioner (Appeals) confirmed the reassessment and the Tribunal held that the reopening of assessment was justified in law.

On appeal to the High Court, the assessee raised the following questions for consideration of the court; “Whether the Tribunal was correct in upholding reassessment proceedings, when the reason recorded for re-opening of assessment u/s.147 of Act itself does not survive. Whether the Tribunal was correct in upholding levy of tax on a different issue, which was not a subject matter for re-opening the assessment and moreover the reason recorded for the re-opening of the assessment itself does not survive.”

On behalf of the assessee, it was submitted that the order u/s. 147 of the Act had to be in consonance with the reasons given for which notice u/s. 148 had been issued, and once it was found that no tax could be levied for the reasons given in the notice for reopening the assessment, independent assessment or reassessment on other issues would not be permissible, even if subsequently, in the course of such proceedings some other income chargeable to tax was found to have escaped assessment; the reason for which notice was given had to survive, and it was only thereafter that ‘any other income’ which was found to have escaped assessment could be assessed or reassessed in such proceedings; the reopening of assessment should first be valid (which could be only when reason for reopening survived) and once the reopening was valid, then u/s. 147 of the Act, the entire case could be reassessed on all grounds or issues; if reopening was valid and reassessment could be made for such reason, then only the AO could proceed further and not doing so, without even the reason for reopening surviving, it could lead to fishing and roving enquiry and would give unfettered powers to the AO.

The Revenue submitted that under the old section 147 (as it stood prior to 1989), grounds or items for which no reasons had been recorded could not be opened, and because of conflicting decisions of the High Courts, the provisions of the said section had now been clarified to include or cover any other income chargeable to tax which might have escaped assessment and for which reasons might not have been recorded before giving the notice; that the said section 147 was in two parts, which had to be read independently, and the phrase “such income”, in the first part, was with regard to which reasons had been recorded and the phrase “any other income” in the second part was with regard to where no reasons were recorded in the notice and had come to notice of the AO during the course of the proceedings. Both being independent, once the satisfaction in the notice was found sufficient, addition could be made on all grounds, i.e., for which reason had been recorded and also for which no reason had been recorded. All that was necessary was that during the course of the proceedings u/s. 147, income chargeable to tax must be found to have escaped assessment. Strong reliance was placed by the Revenue on the insertion of Explanation 3 in support of its contentions.

The court, on hearing the contentions of the parties, held that once the notice for reopening of a previously closed assessment was held to be valid, the assessment proceedings as well as the assessment order already passed would be deemed to have been set aside and the AO would then have the power to pass fresh assessment order with regard to the entire income which escaped assessment and to levy tax thereon. and doing so was his duty .

The court observed that the issue was whether the latter part of the section relating to ‘any other income’ was to be read in conjunction with the first part (relating to ‘such income’) or not; if it was to be read in conjunction, then without there being any addition made with regard to ‘such income’ (for which reason had been given in the notice for reopening the assessment), the second part could not be invoked; however, if it was not to be so read in conjunction, the second part could be invoked independently even without the reason for the first part surviving.

In the opinion of the court, from a plain reading of section 147, it was clear that its latter part provided that ‘any other income’ chargeable to tax which had escaped assessment and which had come to the notice of the AO subsequently in the course of the proceedings, could also be taxed. It further noted that the sole purpose of Chapter XIV of the Act was to bring to tax the entire taxable income of the assessee and, in doing so, where the AO had reason to believe that some income chargeable to tax had escaped assessment, he might assess or reassess such income. In doing so, it would be open to him to also independently assess or reassess any other income which did not form the subject matter of notice.

The court took note of the conflicting decisions of the high courts on the subject, noting that some had held that the second part of section 147 was to be read in conjunction with the first part, and some had held that the second part was to be read independently.

It held that the insertion of Explanation 3 could not be but for the benefit of the revenue, and not the assessee. In that view of the matter, on reading section 147, it was clear that the phrase ‘and also’ joined the first and second parts of the section; the phrase ‘and’ was conjunctive which was to join the first part with the second part, but ‘also’ was for the second part and was disjunctive; it segregated the first part from the second. Upon reading the full section, the phrase ‘and also’ could not be said to be conjunctive. It was thus clear to the court that once satisfaction of reasons for the notice was found sufficient, i.e., if the notice u/s. 148(2) was found to be valid, then addition could be made on all grounds or issues (with regard to ‘any other income’ also) which might come to the notice of the AO subsequently during the course of proceedings u/s. 147, even though reason for notice for ‘such income’ which might have escaped assessment, did not survive.

Importantly, the court held that Explanation 3 was inserted to address the ambiguity in the main provision of the enactment that had arisen because of the different interpretation of different High Courts about the issue whether the second part of the section was independent of the first part, or not. To clarify the same, Explanation 3 was inserted, by which it had been clarified that the AO could assess the income in respect of any issue which had escaped assessment and also ‘any other income’ (of the second part of section 147) which came to his notice subsequently during the course of the proceedings under the section. After the insertion of Explanation 3 to section 147, it was clear that the use of the phrase ‘and also’ between the first and the second parts of the section was not conjunctive and assessment of ‘any other income’ (of the second part) can be made independent of the first part (relating to ‘such income’ for which reasons were given in notice u/s. 148), notwithstanding that the reasons for such issue (‘any other income’) had not been given in the reasons recorded u/s. 148(2).

Considering the provision of section 147 as well as its Explanation 3, and also keeping in view that section 147 was for the benefit of the revenue and not the assessee, and was aimed at garnering the escaped income of the assessee, and also keeping in view that it was the constitutional obligation of every assessee to disclose his total income on which it was to pay tax, it was held by the court that the two parts of section 147 (one relating to ‘such income’and the other to ‘any other income’) were to be read independently. In doing so, it observed that the phrase ‘such income’ used in the first part of section 147 was with regard to which reasons had been recorded u/s. 148(2), and the phrase ‘any other income’ used in the second part of the section was with regard to a case where no reasons had been recorded before issuing notice and a reason had come to the notice of the AO subsequently during the course of the proceedings, which could be assessed independent of the first part, even when no addition could be made with regard to ‘such income’, once the notice on the basis of which proceedings had commenced, was found to be valid.

The Karnataka High Court took note of the decisions in the cases of CIT vs. Jet Airways (I) Ltd. 331 ITR 236( Bom.) Ranbaxy Laboratories Ltd. vs. CIT, 336 ITR 136(Dl.) and CIT vs. Adhunik Niryat Ispat Ltd.(Del.) and CIT vs. Mohmed Juned Dadani, 355 ITR 172 (Del.). and noted that, with due respect to the view taken in the aforesaid cases, it was unable to persuade itself to follow the same.

The court concurred with the decision of the Punjab & Haryana High Court in the case of Majinder Singh Kang vs. CIT, 344 ITR 358 which was delivered after noticing that the earlier judgments in the cases of CIT vs. Atlas Cycle Industries 180 ITR 319 and CIT vs. Shri Ram Singh 306 ITR 343 were rendered prior to the insertion of Explanation 3 to section 147 of the Act, wherein it was held that “a plain reading of Explanation 3 to section147 clearly depicts that the Assessing Officer has power to make additions even on the ground that reassessment notice might not have been issued in the case during the reassessment proceedings, if he arrives at a conclusion that some other income has escaped assessment which comes to his notice during the course of proceedings for reassessment u/s.148 of the Act. The provision nowhere postulates or contemplates that it is only when there is some addition on the ground on which reassessment had been initiated, that the Assessing Officer can make additions on any other grounds on which the income has escaped assessment”.

The court further noted that the same view was reiterated by the Punjab & Haryana High Court in the case of CIT vs. Mehak Finvest (P.) Ltd,.367 ITR 769 wherein it was also noticed that the Special Leave Petition filed against the judgment in the case of Majinder Singh (supra ) had been dismissed by the Supreme Court.

Mohmed Juned Dadani’s case
The issue had arisen in the case of CIT-II vs. Mohmed Juned Dadani, 30 taxmann.com 1 (Gujarat). In this case, the assessment was completed allowing assessee’s claim for deduction u/s. 80HHC. Subsequently, the Assessing Officer initiated reassessment proceedings taking a view that if two export incentives, i.e., DEPB licence income and excise duty refund were excluded from the income of the assessee, there would be a loss from export business and, consequently, assessee would not be entitled to deduction u/s. 80HHC. In the reassessment, the AO made additions of cash credit u/s. 68 and on account of some unverifiable purchases. However, the AO did not disturb the deduction u/s. 80HHC, previously claimed by the assessee.

The assessee carried such order in appeal before the Commissioner (Appeals) where he contended that the AO had no jurisdiction to travel beyond the reasons for reopening the assessment, which appeal however, was rejected by the Commissioner (Appeals). The Tribunal, finding that in the reassessment proceedings, no disallowance had been made towards assessee’s claim for deduction u/s. 80HHC, which was the reason on the basis of which notice for reopening of the assessment was issued, held that the order of reassessment was without jurisdiction and bad in law.

On revenue’s appeal to the Gujarat High Court, the court addressed the following substantial question of law. “Whether the Income-tax Appellate Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment is based, no additions are made by the Assessing Officer in the order of assessment, he cannot make additions on some other grounds which did not form part of the reasons recorded by him.” .

On behalf of the revenue, it was submitted that the Tribunal committed a grave error in interpreting the provisions contained in section 147 of the Act ; the section as amended w.e.f. 01.04.1989, gave ample authority to an AO to assess or reassess any income chargeable to tax which had escaped assessment, as long as the requirements of a valid reopening of the assessment were satisfied; once an assessment was reopened, by virtue of valid exercise of powers u/s. 147 of the Act, thereafter, there would be no further limitation on the AO framing assessment on all or any of the grounds mentioned in the reasons recorded or even on the grounds not so mentioned; that the position was clear even before Explanation 3 to section 147 of the Act was added with retrospective effect from 01.04.1989; in any case, by virtue of such Explanation being introduced in section 147, the issue had been put beyond any pale of controversy. The decision of the Punjab and Haryana High Court in case of Majinder Singh Kang vs. CIT 344 ITR 358 was relied upon by the revenue.

On the other hand, the assessee drew attention to the statutory provisions contained in section 147 of the Act, as amended w.e.f. 01.04.1989, and the explanatory memorandum clarifying the background in which Explanation 3 to section 147 of the Act was enacted. It was submitted that section 147 of the Act, prior to introduction of Explanation 3, permitted the AO to assess or reassess any income chargeable to tax which had escaped assessment and also any other income which had escaped assessment and which came to the notice of the AO subsequently in the course of the proceedings for reassessment; that the words “and also any other income” must be understood as to be referring to such income which had escaped assessment but the ground for which had not been mentioned in the reasons recorded, in addition to income which had escaped assessment and for which mention had been made in the reasons recorded; that Explanation 3 to section 147 of the Act did not change the basic proposition, nor it was meant to do so, as would be clear from the explanatory memorandum explaining the reasons for introduction of the said explanation; that power to reopen the assessment which had been previously closed was peculiar in nature and was available to the AO under the Income-tax Act which was not normally available to an officer exercising judicial or quasi judicial powers; such powers, therefore, must be strictly construed, authorising an AO to assess income under any head even if the same was not part of the reasons recorded for reopening of the assessment, would give wide powers which were possible of arbitrary exercise; that for an AO to assess income on any ground not mentioned in the reasons recorded, it was essential that there was a valid reopening of assessment; if the grounds, on which the reopening of the assessment failed, there would thereafter be no longer a valid reopening of an assessment in which the AO could make any additions on some other grounds.

The Gujarat High Court held that the Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment was based, no additions were made by the AO in the order of assessment, he could not make additions on some other grounds which did not form part of reasons recorded by him. It was not in dispute that once an assessment was reopened by a valid exercise of jurisdiction u/s. 147, it was open for the AO to assess or reassess any income which had escaped assessment which came to his light during the course of his assessment proceedings which was not mentioned in the reason for issuing notice u/s. 148, provided the ground on which the notice was issued for reopening survived.

Significantly, the court supplied an interesting dimension by noting that in a notice for reassessment which had been issued beyond a period of four years from the end of relevant assessment year, the condition that income chargeable to tax had escaped assessment for the reason of the failure on the part of the assessee to disclose truly and fully all material facts for the purpose of assessment must also be established. If in such a situation, the stand of the revenue was accepted, a very incongruent situation would come about, if ultimately the AO were to drop the ground on which notice for reopening had been issued, but to chase some other grounds not so mentioned for issuance of the notice. In such a situation, even if a case where notice for reopening had been issued beyond a period of four years, the assessment would continue even though on all the grounds on which the additions were being made, there was no failure on the part of the assessee to disclose true and full material facts. In such a situation, an important requirement of failure on part of the assessee to disclose truly and fully all material facts would be totally circumvented. Thus, it was apparent that Explanation 3 to section 147 does not change the situation insofar as the present controversy was concerned.

In deciding the case, the High court approved the decision relied upon by the assessee in the case of CIT vs. Jet Airways (I) Ltd. 331 ITR 236 in which the Bombay High Court considering an identical situation, interpreting the provisions contained in section 147 of the Act, held that the situation would not be different by virtue of introduction of Explanation 3 to the said section. The High Court, placing heavy reliance on the explanatory memorandum, held that if upon issuance of a notice u/s. 148 of the Act, the AO did not assess the income which he had reason to believe had escaped assessment and which formed the basis of a notice u/s.148, it was not open to him to assess independently any other income which did not form the subject matter of the notice.

In addition, the Gujarat High Court approved the decisions in the case of Ranbaxy Laboratories Ltd. vs. CIT , 336 ITR 136 (Delhi) wherein the court besides approving the ratio of the decision of the Bombay High Court in the case of Jet Airways, held that sub-section (2) of section 148 mandated reasons for issuance of notice by the AO and s/s. (1) thereof mandated service of notice to the assessee before the AO proceeded to assess, reassess or recompute the escaped income and those conditions were required to be fulfilled to assess or reassess the escaped income chargeable to tax. The Gujarat High court also approved the observations of the Delhi High Court to the effect that the Legislature could not be presumed to have intended to give blanket powers to the AO such that on assuming jurisdiction u/s. 147 regarding assessment or reassessment of the escaped income, he could keep on making roving inquiry, and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction, and also the finding of the Delhi High Court, that for every new issue coming before the AO during the course of proceedings of assessment or reassessment of escaped income, and which he intended to take into account, he would be required to issue a fresh notice u/s. 148. The ratio of the decision in the case of Asstt. CIT vs. Major Deepak Mehta, 344 ITR 641 (Chhattisgarh) was also approved by the court.

The Gujarat High Court, relying on the Memorandum explaining the provisions of Explanation 3, held that it was meant to be clarificatory in nature and to put the issue beyond any legal controversy; when the Legislature found that in face of the provisions contained in section 147 of the Act post 01.04.1989, some of the courts had taken a view that the AO was restricted to the reassessment proceedings only on issues in respect of which the reasons were recorded for reopening the assessment, such explanation was introduced in the statute; thus, the explanation was meant to be merely clarificatory in nature and was introduced with the purpose of putting at rest the legal controversy regarding the true interpretation of section 147 of the Act which had arisen on account of certain judicial pronouncements especially in the cases of CIT vs. Atlas Cycle Industries, 180 ITR 319 (P&H), Travancore Cements Ltd. vs. Asstt. CIT 305 ITR 170 (Kerala).

The Gujarat High Court did not agree with the decision of the Punjab and Haryana High Court in case of Majinder Singh Kang (supra) by noting that all other courts had uniformly taken a view that Explanation 3 to section 147 of the Act did not change the situation insofar as the present controversy was concerned, and for the reason that the explanatory memorandum to Explanation 3 to section of the Act was not brought to the notice of the High Court in the said case.

Observations
On a bare reading of the main provision, it is gathered that section 147, as is substituted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 01.04.1989, enables inclusion of any other income that has escaped assessment and which comes to the notice subsequently in the course of proceedings. Accordingly, it should be possible for an AO to also include any new item while making reassessment, though such item was not included in recorded reasons. This main provision was found to be deficient, in the past by the courts, on the following two counts;

The substituted provision while permitting the AO to rope in a new issue in the scope of reassessment, did not override the specific provisions of section148(2), which required an AO to record reasons before issue of a notice u/s. 148 for doing so.

The substituted provision permitted the AO to rope in a new issue in the scope of reassessment only where the original issue on which the reassessment was reopened has been found to be valid.

One of the above referred deficiencies has been expressly cured by insertion of Explanation 3 w.e.f 01.04.1989 by the Finance (No.2) Act, 2009, whereunder the requirement of the new issue being recorded in reasons for reopening as per section 148(2), before a notice is issued, has been dispensed with. As regards the other deficiency concerning the need for survival of the recorded issue, some courts recently have found that the AO is empowered to expand the scope of reassessment either by virtue of Explanation 3 or independent of it, while a few other courts have found that the deficiency continued in spite of Explanation 3.

The issue that has attracted conflicting views therefore is narrowed down to whether the word ‘and also’ used in the main proviso are conjunctive and cumulative or they are disjunctive and detach the latter part of the provision from the earlier part. In the alternative, whether, with insertion of Explanation 3, the AO is authorised to rope in a new issue, even where no addition is made in respect of the issue recorded in reasons for reopening.

The question is that when the reason recorded for reopening the assessment u/s. 147 itself does not survive, can tax be levied for a totally different reason or issue, which was not the subject matter of reopening the assessment. In other words, if reasons for reopening are (a) and (b) and during reassessment proceedings , income is found to have escaped from assessment for some other reason say, (c) and (d), then, if reasons (a) and (b) do not survive, and no addition can be made for such reasons, can additions be made on the basis of reasons or grounds (c) and (d) that did not find place in the reasons recorded. The related questions are whether the main provision permits such an assessment and whether the insertion of the Explanation 3 has made such an assessment possible.

Section 147 of the Act, even without the aid of Explanation 3, enabled the AO while framing an assessment section 147 of the Act, to assess or reassess such income for which he had recorded his reasons to believe had escaped assessment and also any other income which escaped assessment which came to his notice subsequently in the course of the assessment proceedings.

Insertion of Explanation in a section of an Act is for a different purpose than insertion of a ‘Proviso’. Explanation gives a reason or justification and explains the contents of the main section, whereas ‘Proviso’ puts a condition on the contents of the main section or qualifies the same. ‘Proviso’ is generally intended to restrain the enacting clause, whereas Explanation explains or clarifies the main section. ‘Proviso’ limits the scope of the enactment as it puts a condition, whereas Explanation clarifies the enactment as it explains and is useful for settling a matter or controversy. In the instant case, insertion of Explanation 3 to section 147 does not in any manner override the main section and has been added with no other purpose than to explain or clarify the main section so as to also bring in ‘any other income’ (of the second part of section 147) within the ambit of tax, which may have escaped assessment, and comes to the notice of the AO subsequently during the course of the proceedings.

Circular 5 of 2010 issued by the CBDT also makes this position clear. There is no conflict between the main section 147 and its Explanation 3. This Explanation has been inserted only to clarify the main section and not to curtail its scope, even though it is for the benefit of the revenue and not the assessee.

Explanation 3 thus does not, in any manner, even purport to expand the powers of the AO u/s. 147 of the Act. In any case, an explanation cannot expand the scope and sweep of the main body of the statutory provision. In case of S. Sundaram Pillai vs. V. R. Pattabiraman AIR 1985 (SC) 582 the Supreme Court observed that, an explanation added to a statutory provision is not a substantive provision, but as the plain meaning of the word itself shows, it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision.

An explanation cannot override the scope of the main provision nor can it extend the scope. An explanation can only explain the scope of the main provision by eliminating the ambiguity.

The Rajasthan High Court in Shri Ram Singh 306 ITR 343 and the Punjab & Haryana High Court in CIT vs. Atlas Cycle Industries, 180 ITR 319 had interpreted the words ‘and also’, used in the main section itself, in a cumulative and conjunctive sense and held that to read these words as being in the alternative, would be to rewrite the language used by the Parliament. The said decision was delivered before insertion of Explanation 3.

Parliament must be regarded as being aware of the interpretation that was placed on the words “and also”. Parliament however has not taken away the basis of that decision while it was open to the Parliament, having regard to the plenitude of its legislative powers, to do so. It could have clearly provided in Explanation 3 that power to deal with a new issue would be irrespective of survival of the old issues for which reasons were recorded. It was not so done, and in view of that, the provisions of section 147 as they stood after the amendment of 1st April, 1989, continue to hold the field.

The fluid state of law on the issue prevailing up to 31.03.1988, was sought to be addressed by insertion of substituted provision w.e.f. 01.04.1989. This insertion was found inadequate by the courts for addressing the issue under consideration and to meet the concerns of the courts, Explanation 3 is claimed to have been inserted witnesses cannot be procured for various other reasons, like death of both attesting witness, out of jurisdiction, physical incapacity, insanity etc. Section 69 should apply and can be extended to such cases. Hence, the word “not found” occurring in section 69 of Evidence Act should receive a wider purposive interpretation than its literal meaning and should take in situation where the presence of the attesting witness cannot be procured. This view gets its support from Venkataramayya vs. Kamisetti Gattayya (AIR 1927 Madras 662) and Ponnuswami Goundan vs. Kalyanasundara Ayyar (AIR 1930 Madras 770).

It is settled that mode of proving a Will does not ordinarily differ from that of proving any other document except as to the special requirement of attestation prescribed by section 63 of Indian Succession Act. Section 69 imposes a twin fold duty on the propounder. It provides that if no such attesting witness can be found, it must be proved that attestation of one attesting witness at least is in his handwriting and also that the signature of the person executing the document is in the handwriting of that person. Hence, to rely on a Will propounded in a case covered by section 69 the propounder should prove i) that the attestation is in the handwriting of the attesting witness and ii) that the document was signed by the executant. Both the limbs will have to be cumulatively proved by the propounder. Evidently, the section demands proof of execution in addition to attestation and does not permit execution to be inferred from proof of attestation. However, section 69 presumes that once the handwriting of attesting witness is proved he has witnessed the execution of the document. The twin requirement of proving the signature and handwriting has to be in accordance with section 67 of the Indian Evidence Act.

Transfer of immovable property – TDS under section 194-IA: Analysis and Issues

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Introduction
Section 194-IA has been introduced by the Finance Act, 2013 (FA, 2013) with effect from 1st June, 2013. Section 194-IA provides for deduction of tax at source in respect of payment, by any person, being a transferee, to a resident transferor, of any sum by way of consideration for transfer of any immovable property. The Explanation to the section defines the terms `agricultural land’ and `immovable property’.

Object of introducing section 194-IA
In case the language of the provision is capable of two interpretations then the one which advances the object of introducing the provision will have to adopted. The Memorandum explaining the salient features of the Finance Bill, 2013 classified this provision under the caption `Widening of Tax Base and Anti Tax Avoidance Measures’. The Heydon’s Mischief Rule of Interpretation states that while interpreting a provision that interpretation has to be adopted which removes the mischief which was prevalent before the introduction of the provision. The Object of introducing the provision and the Mischief which the Legislature sought to remove can be better understood from the following extracts from the Explanatory Memorandum to the Finance Bill:

“E. WIDENING OF TAX BASE AND ANTI TAX AVOI DANCE MEASURES
Tax Deduction at Source (TDS) on transfer of certain immovable properties (other than agricultural land)

…………. However, the information furnished to the department in Annual Information Returns by the Registrar or Sub-Registrar indicate that a majority of the purchasers or sellers of immovable properties, valued at Rs. 30 lakh or more, during the financial year 2011-12 did not quote or quoted invalid PAN in the documents relating to transfer of the property.

……… In order to have a reporting mechanism of transactions in the real estate sector and also to collect tax at the earliest point of time, it is proposed to insert a new section 194-IA to provide that every transferee, at the time of making payment or ………”

A perusal of the above, clearly indicates that the difficulty faced was that the Annual Information Return, furnished to the Department, by the Registrar or Sub-Registrar, in a majority of the cases, did not have a PAN or had an invalid PAN in the documents relating to transfer of property. This is what is sought to be curbed by introducing the provisions of section 194-IA.

The two objects of introducing the provisions of section 194-IA are:-

(i) to have a reporting mechanism of transactions in the real estate sector; and
(ii) to collect tax at the earliest point of time.

These objectives will have to be kept in mind while interpreting some of the provisions, the language whereof is capable of two interpretations.

Text of Section 194-IA:
For the sake of convenience, the provisions of section194- IA are reproduced hereunder:

“194-IA. (1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax thereon.

(2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.

(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

Explanation.–– For the purposes of this section,––

(a) “agricultural land” means agricultural land in India, not being a land situated in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2;

(b) “immovable property” means any land (other than agricultural land) or any building or part of a building.”

Analysis of Section 194-IA:
Conditions for applicability of the section:
(i) there is a transferee;
(ii) there is a transferor;
(iii) the transferor is a resident;
(iv) there is a transfer of an immovable property, as defined, from the transferor to the transferee;
(v) the transferee is responsible for paying any sum;
(vi) such sum is by way of consideration for transfer of any immovable property;
(vii) the amount of consideration is Rs. 50 lakh or more;
(viii) the transferee is not a person referred to in section 194LA;
(ix) the transferee either :
(a) credits such sum referred to in (vi), or
(b) makes a payment of such sum;
(x) the payment referred to in (ix)(b) is made either by

(a) cash, or
(b) by issue of cheque, or
(c) by issue of draft, or
(d) by any other mode.

Consequences if the above conditions apply:
(i) The transferee becomes liable to deduct tax at source;
(ii) such deduction shall be of an amount;
(iii) the amount of deduction shall be equal to 1% of the sum referred to in (vi) above;
(iv) such a liability arises upon credit of such sum or at the time of making the payment, whichever is earlier;
(v) provisions of section 203A shall not apply to the transferee.

Exceptions: This section would not apply if –
(i) The transferee is a person covered by section 194LA; or
(ii) the transferor is a non-resident; or
(iii) consideration for transfer of immovable property is less than Rs. 50 lakh; or
(iv) the immovable property transferred is an agricultural land as explained subsequently.

Analysis of certain terms used in section 194-IA:
Immovable Property has been defined in Explanation (a) to section 194-IA to mean:
• any land [including land described in section 2(14) (iiia) and 2(14)(iiib) i.e. land which is commonly known as urban agricultural land];
• any building; and
• any part of a building;
• but does not include `agricultural land’.

Agricultural land has been defined in Explanation (b) to section 194-IA – Agricultural land situated in India not being land referred to in section 2(14)(iiia) and 2(14)(iiib). Transferee: The obligation to deduct tax is on the transferee of any immovable property, as defined. The transferee may be any person. He may be an individual, Hindu undivided family, firm, LLP, company, AOP, BOI, cooperative society. He could even be a builder / developer. However, where Government is the purchaser, the section may not apply since Government is not a person (CIT vs. Dredging Corporation of India) (174 ITR 682) (AP). Residential status of the transferee is immaterial. The section applies even to a non-resident buyer or even to a buyer who is an agriculturist. Other conditions being satisfied, the section will apply even when the purchaser / transferee is a family member / relative of the seller / transferor. However, the purchaser / transferee should not be a person referred to in section 194LA. If the purchaser / transferee is a person referred to in section 194LA, such a person is not required to deduct tax under this section. Joint transferee: In case of joint transferee each coowner will be liable for compliance with this section. Transferor: The transferor / seller may be any person. The transferor should be a resident. He may even be Resident but Not Ordinarily Resident. If the transferor / seller happens to be a non-resident the provisions of section 195 may apply but certainly not the provisions of this section.

Any sum: The section states that the purchaser / transferee should be responsible for paying to the seller / transferor any sum by way of consideration for transfer of immovable property. The term `sum’ has not been defined in the Act.

The expression “any sum paid” has been interpreted by the Hon’ble Supreme Court in the case of H.H. Sri Rama Verma vs. CIT (187 ITR 308) (SC) to mean only amount of money given as donations and not to donations in kind.

In the context of section 194-IA an issue would arise as to whether the section applies when the consideration is in kind e.g. in cases of exchange. This issue has been dealt with, in detail, subsequently under the caption `Issues’.

Consideration: The term `consideration’ has not been defined in the Act. The term is also not defined in the Transfer of Property Act. The Patna High Court in Rai Bahadur H.P. Banerjee vs. CIT ([1941] 9 ITR 137)(Pat) held that the word ‘consideration’ is not defined in the Transfer of Property Act and must be given a meaning similar to the meaning which it has in the Indian Contract Act. Similar view has been taken by the Kerala High Court in the case of CGT vs. Smt. C K Nirmala (215 ITR 156)(Ker) and by the Bombay High Court in the case of Keshub Mahindra vs. CGT (70 ITR 1)(Bom). Section 2(b), of the Indian Contract Act defines `consideration’ as under:

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

An issue which arises for consideration is whether the amount of service tax, VAT payable by the transferee to the transferor constitutes part of consideration and therefore tax is required to be deducted even on these amounts. By virtue of Circular No. 1/2014 dated 13.1.2014, tax is not required to be deducted at source on the amount of service tax. The question of deduction of tax at source, therefore, survives only in respect of VAT . Looked at it from a common man’s perspective the amount of service tax and VAT agreed to be paid by the transferee to the transferor would certainly form part of consideration for transfer of immovable property. The liability to pay these amounts under the respective statutes is of the transferor. Accordingly, it appears that VAT amount constitutes consideration and tax will have to be deducted even on the amount of VAT . In addition, these amounts may also attract stamp duty under the stamp law of a State. However, in cases where the transferee is faced with a show cause notice for failure to deduct tax at source on the amount of VAT , the transferee may contend that the analagoy of excluding service tax would apply equally to VAT as well.

Immovable Property: This term is defined exhaustively to mean land (other than agricultural land) or any building or a part of a building. Agricultural land is not immovable property. Agricultural land is defined for this purpose. Urban agricultural land is immovable property. Immovable property could be land, agricultural land outside India, urban agricultural land, office, flat, shop, godown, theatre, hotel, hospital, etc. Immovable property could be stock-intrade of the developer. Immovable property could be held as either stock-in-trade or as capital asset.

Meaning of ‘transfer’: The section applies to consideration for transfer. The question which arises is whether the term `transfer’ would mean only transfer by way of conveyance under general law through a registered instrument or it would even cover the transactions / agreements referred to in section 2(47)(v) and (vi) i.e. in cases where possession is given in part performance of the contract u/s. 53A of the Transfer of Property Act or a transaction of becoming a member of a co-operative society, company, etc. Also, would the provisions be applicable to part payments made but not in the year of transfer (conditions of 2(47)(v) not being satisfied)?

Immovable Property located outside India: The section does not mention that the immovable property should be situated in India. Therefore, a literal interpretation would be that the immovable property could be situated any where may be in India or may be outside India. Further, the term `agricultural land’ has been defined to mean agricultural land situated in India. The fact that agricultural land in India is excluded from immovable property could be understood in two ways – one that from the immovable property in India exclusion is to be made of agricultural land in India and the other could be that from the immovable property wherever situated only the agricultural land in India is excluded. Thus, two interpretations are possible. However, if a view is taken that the section applies even in respect of immovable property situated outside India then the position will be that a buyer who is outside India and who is neither a citizen of India nor a resident of India who is buying immovable property located outside India from a resident of India, will be required to deduct income-tax under the provisions of the Act. Therefore, it would mean that it is expected of every person dealing with a resident of India to be aware of the provisions of the Indian laws. Assuming that such a buyer is aware of these provisions and decides to comply with the provisions of this section, he will have to obtain a PAN so as to be able to make payment of the amount of TDS. A question would arise as to whether the Government of India can cast an obligation on a non-resident to deduct tax from payments made by him for purchase of a property which is situated outside India. The only nexus which such a transferor has with India being that he is buying immovable property from a person who is a resident of India. In case of default in complying with the provisions of this section, the buyer would be regarded as an assessee-in-default and would be liable to pay interest and penalty as well. Such an interpretation may not be upheld by Courts. Therefore, it appears that the section would apply to only immovable property situated in India.

Threshold for non-deduction: Sub-section (1) of section 194-IA casts an obligation on the transferee to deduct tax at source. S/s. (1) does not have a threshold limit. S/s. (2) provides that no deduction under subsection (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees. The issue for consideration is whether the limit of fifty lakh rupees is qua the immovable property or is it qua the transferee. This issue is dealt with, in detail, subsequently under the caption `Issues’.

Quantum of tax to be deducted: Deduction is to be of an amount equal to one per cent of such sum as incometax. Surcharge and cess on this amount are not to be deducted. If the transferor / seller does not provide PAN, technically, the rate of tax could be 20% by virtue of provisions of section 206AA. However, the challan for payment of tax deducted u/s. 194-IA requires PAN as a compulsory field and it does not proceed without PAN having been filled in. Challan No. 281 which is applicable for payment of TDS other than TDS u/s. 194-IA, does not have a field to make payment of TDS u/s. 194-IA, though the same may have been deducted at the rate mentioned in section 206AA. It seems that the procedure has been so designed so as to further the objective stated in the Memorandum explaining the salient features of the provisions of the Finance Bill, 2013 viz. to overcome the difficulty which was being faced viz. the PAN Nos. not being quoted or invalid PAN Nos. being quoted in the AIR.

At this stage, it would be relevant to note the Karnataka High Court in the case of A. Kowsalya Bai vs. UOI (346 ITR 156)(Kar) has read down the provisions of section 206AA and has held it to be inapplicable to persons whose income is less than the taxable limit.

The deduction is with reference to consideration and not with reference to valuation as done by stamp valuation authorities though in the case of transferor / seller section 50C / section 43CA may be attracted.

No deduction / Deduction at lower rate: There is no provision of either the transferor giving a declaration to the transferee asking him not to deduct tax at source or to deduct tax at lower rate. Transferor cannot even obtain an order from the Assessing Officer authorizing the transferee / buyer not to deduct tax or to deduct it at a lower rate. Thus, tax is deductible at source even in cases where the transferor is entitled to exemption u/s. 54, 54EC, 54F. Similar is the position where the transferor is to suffer a loss as a result of transfer or has brought forward losses which are available for set off against gain on transfer of immovable property.

Consequences of non-deduction: Failure to deduct tax under this section may result in the person i.e. the transferee being deemed to be an assessee in default. Failure to deduct tax will attract interest and penalty. Also, provisions of section 40(a)(ia) will be attracted with effect from assessment year 2015-16.

No requirement to obtain TAN / file quarterly returns: The transferee is not required to obtain TAN if he does not have one. Also, he is not required to file quarterly returns / statements.

Obligation to pay tax so deducted and issue certificate: The tax deducted by the transferee has to be paid to the credit of the Central Government within 7 days from the end of the month in which the deduction is made. TDS payment shall be accompanied by a challancum- statement in Form 26QB. Payment is to be made by remitting it electronically to RBI or SBI or any authorised bank or by paying it physically in any authorised bank. Payer / Transferee is required to issue TDS certificate in Form 16B, to be generated online from the web portal. The TDS certificate is to be issued within 15 days from the due date for furnishing challan-cum-statement in Form 26QB.

Issues: Various issues arise in day to day practice on the applicability of the provisions of section 194-IA of the Act. The author does not necessarily have an answer to all the issues which may arise. Some of the important and more common issues are as under: –

(a) Amounts paid before the provision coming into effect – Provisions of section 194-IA have been introduced in the Income-tax Act, 1961 with effect from 1.6.2013. The obligation to deduct tax under this section arises at the time of payment or at the time of credit of the amount to the account of the transferor, which ever is earlier. Therefore, in a case where either the payment or the credit has been made before 1.6.2013, the question of deduction of tax at source under this section should not arise. While this position may appear to be quite obvious interpretation of the provision, if an authority is required for this proposition a reference can be made to the order dated 3rd June, 2015 of the Karnataka High Court while deciding the Writ Petition in the case of Shubhankar Estates Private Limited vs. The Senior Sub-Registrar, The Union Bank of India and the Chief Commissioner of Income-tax (Writ Petition No. 57385/2013). The Karnataka High Court in this case directed the Registrar to complete the registration without insisting on the deduction of tax at source and to release the document to the petitioner. The Court has, in para 5 of the order, held as under –

“5. In that light, if the provision contained in Section 194-IA as extracted above is noticed, the obligation on the transferee to deduct 1% of the sale consideration towards TDS had come into effect only on 1.6.2013. If that be the position, as on 2.3.2012 when the petitioner in the instant case as the transferee had paid the amount to the transferor, there was no obligation in law on the petitioner to deduct the said amount. If this aspect of the matter is kept in view, even though the provision had come into force as on the date of presentation of the sale certificate for registration, the petitioner having parted with the sale consideration much earlier, was not expected to deduct the amount and produce proof in that regard to the Sub-Registrar. It is no doubt true that in respect of the said amount the third respondent would have the right to recover the taxes due. But, in the instant case, the communication as addressed from the third respondent to the first respondent could not have been held against the petitioner in the circumstances stated above. In the peculiar circumstances of the instant case, where the petitioner being an auction purchaser had paid the entire sale consideration much earlier to the provision coming into force, the endorsement dated 4.12.2013 requiring the petitioner to deduct the income-tax and indicating that the registration would be made thereafter cannot be sustained.”

(b) Applicability of section 206AA – Section 194-IA requires deduction of tax at source at the rate of one per cent. In a case where the transferor does not provide the payer with his PAN, technically, the provisions of section 206AA would be attracted and the deduction would have to be made at the rate of 20%. However, such a situation seems to be quite unlikely since the challan by which the tax is required to be paid by the deductor, transferee, requires the PAN of the transferor as a compulsory field. Hence, in the event that the deduction has to be made, it will have to be made at the rate mentioned in section 194- IA i.e. one per cent.

(c) Applicability to composite transactions where both land and building are subject matter of transfer – Under provisions of section 194-IA tax is required to be deducted, subject to satisfaction of other conditions mentioned in the section, on the amount of consideration for transfer of immovable property. The term `immovable property’ is defined in Explanation (a) to the section as meaning any land or any building or part of a building. Provisions of sections 43CA, 50C and 56(2)(vii) use the term land or building or both. The word `both’ is absent in section 194-IA. Therefore, in cases where tax has not been deducted (not deliberately as a planning measure) on amount of consideration for transfer of a composite transfer comprising of land and building both, one may contend that the Legislature has consciously used a different language in section 194-IA and has left out composite transactions of both land and building e.g. purchase of a bungalow comprising of building and also the land beneath it.

(d) Payment of consideration by a Bank / Housing Finance Institution to a transferor on behalf of the transferee – In a case where the transferee has taken a loan for discharge of consideration to the transferor, the bank / housing finance institution disburses the loan by issuing a cheque / pay order to the transferor towards consideration due to him from the transferee. In such a case, a question arises as to how does a transferee comply with his obligation to deduct tax at source under this section. The banks / financial institutions in such a case issue a cheque / pay order in favour of the transferor of the net amount and the amount equivalent to tax deductible at source under this section is given to the transferee upon his producing a challan evidencing the amount deposited by him towards tax deducted at source. The alternative to this could be that the transferee requests and authorises the bank / financial institution, in writing, to disburse the net amount to the transferor and to deposit the amount required to be deducted at source under this section to the credit of the Central Government on behalf of the transferee i.e. in such a case, the bank / financial institution will deposit tax at source as an agent of the transferee and the challan will contain the PAN and other particulars of the transferee. In actual practice, it is understood that, the first option is what the banks / financial institutions have been following.

(e) Limit of Rs. 50 lakh – whether it is qua an immovable property or qua the transferee / transferor – Threshold for non-deduction: Sub-section (1) of section 194-IA casts an obligation on the transferee to deduct tax at source. S/s. (1) does not have a threshold limit. S/s. (2) provides that no deduction under subsection (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees. The issue for consideration is whether the limit of fifty lakh rupees is qua the immovable property or is it qua the transferee. The following paragraphs attempt to address this issue :-

(i) The Memorandum explaining the salient provisions of Finance Bill, 2013 says the Annual Information Returns filed by sub-registrars often indicate that in majority of the cases purchaser or sellers of immovable property did not quote or quoted an invalid PAN in the documents relating to transfer of immovable property. The Sub-Registrar in terms of Rule 114E read with section 285BA is required to report each transaction involving purchase or sale of an immovable property valued at Rs. 30 lakh or more in the Annual Information Return.

(ii) Thus it is clear that the purpose of the newlyinserted section 194-IA is to augment what is already being reported by the Sub-Registrar.

(iii) It may be noted that the Sub-Registrar has got to report a transaction even if the share of each buyer, in case of joint ownership, is below Rs. 30 lakh.

(iv) Following the purpose for which the section 194-IA was inserted, one may conclude that the threshold limit of Rs. 50 lakh for applicability of Section 194-IA is to be determined property-wise and not transferee-wise. This is so because the buyers of immovable properties can’t be allowed to do what the sub-registrar couldn’t do i.e. split up the sale consideration buyer-wise and claim immunity from deduction of TDS since consideration attributable to each buyer is below Rs. 50 lakh.

(v) Thus, the provisions of section 194-IA will apply to a property transaction involving more than one buyer though the share of each buyer in the property is less than Rs. 50 lakh, but the consideration for transfer of the immovable property, in aggregate, is more than Rs. 50 lakh. In such case, tax will be deducted and deposited by each buyer in respect of their respective share in the immovable property.

(vi) Similarly, in case of a transaction involving more than one seller, tax will be deducted in respect of amount paid to each seller and their respective PAN will be quoted in Form 26QB while making payment.

(vii) Judicial pronouncements under Chapter XX-C of the Income-tax Act, 1961 (hereinafter referred to as Chapter XX-C) propose a similar philosophy that immovable property which is the subject matter of the transfer has to be seen in real light and provisions of Chapter XX-C shall apply when by a single agreement of transfer, co-owners of a property agreed to sell the property to the respondent which was above the limit prescribed for application of 269C.

(viii) Chapter XX-C dealt with purchase by Central Government of immovable properties in certain cases of transfer and provided for pre-emptive right of purchase of immovable property by the Government in a case where the apparent consideration for transfer of such property exceeded the specified limit mentioned under Section 269UC.

(ix) Section – 269-UC (1) read as follows:

“Notwithstanding anything contained in the Transfer of Property Act, 1882 (4 of 1882), or in any other law for the time being in force, no transfer of any immovable property in such area and of such value exceeding five lakh rupees, as may be prescribed, shall be effected except after an agreement for transfer is entered into between the person who intends transferring the immovable property (hereinafter referred to as the transferor) and the person to whom it is proposed to be transferred (hereinafter referred to as the transferee) in accordance with the provisions of s/s. (2) at least four months before the intended date of transfer.”

(x) The Bombay High Court in the case of Jodharam Daulat Ram Arora vs. M. B Kodnanai (120 CTR 166)(Bom) wherein there was one vendor and three purchasers, held as under:

‘The agreement in question before it was a composite agreement in respect of the flat and there was nothing in the agreement which indicate that the purchasers had agreed to buy individually an undivided 1/3rd share of the flat from the vendor. All the concerned parties had filed Form No.37-I and therefore it was not open to them to contend that section 269UD had no application and the appropriate authority had no jurisdiction.’

(xi) However, the Madras High Court took a contrary view in the case of K. V. Kishore vs. Appropriate Authority (189 ITR 264)(Mad). The Court held that –

‘What is sold, is the individual undivided share in the property and the value of each such share in the said immovable property was less than Rs. 25 lakh. The transferors were co-owners and each coowner was getting an apparent consideration that was less than the limit prescribed i.e less than Rs. 25 lakh. The provisions of Chapter XX-C was not attracted even though the amount that all the coowners received exceeded Rs. 25 lakh.’

(xii) Other High Courts in various judgments also upheld the above stated view of the Madras High Court.

(xiii) However, in Appropriate Authority vs. Smt. Varshaben Bharatbhai Shah (248 ITR 342)(SC), where two co-owners entered into an agreement to transfer immovable property, situated in Ahmedabad, to a seller for a sum of Rs. 47 lakh which was above the limit prescribed for application to appropriate authority u/s. 269UC of the Act, the Supreme Court reversing the decision of Gujarat High Court in Varshaben Bharatbhai Shah vs. Appropriate Authority (221 ITR 819)(Guj) and various judgments of other High Courts held that :

‘What, in our opinion, has to be seen for the purposes of attracting Chapter XX-C is: what is the property which is the subject-matter for such transfer and what is the apparent consideration for such transfer. This has to be seen in a real light with due regard to the object of the Chapter and not in an artificial or technical manner. Looked at realistically, it was the immovable property which was the subject matter of transfer. If the apparent consideration for the transfer is more than the limit prescribed for the relevant area under Rule 48K, what has then to be seen is whether the apparent consideration for the property is less than the market value thereof by 15 % or more. If so, the notice for pre-emptive purchase can be issued and it is then for the parties to the transaction to satisfy the appropriate authority that the apparent consideration is the real consideration for the transfer.’

‘In the present case the said agreement is for the sale of the immovable property and that the equal shares of the Respondent Nos. 2 and 3 therein were to be transferred to Respondent No. 1 is a necessary incident of such sale. The parties had also in Form 37-I correctly stated that what was being sold was the property and not the onehalf shares of the transferors and that the total apparent consideration for the transfer was Rs. 47 lakh. It was of no consequence that Respondents owned the property as tenants-in-common or that that was how they had shown their ownership in their income-tax returns. The provisions of Chapter XX-C applied.’

(xiv) The Supreme Court further added that: ‘Even if the agreement had been so drawn so as to show the transfer of the equal shares of the second and third respondents in the said immovable property, our conclusion would have been the same for, looked at realistically, it was the said immovable property which was the subject of transfer.’

‘We are of the opinion that the judgments of the Madras, Karnataka, Delhi and Calcutta High Courts referred to above are based on a wrong approach and are erroneous. We approve of the view taken by the Bombay High Court in Jodharam Daulatram Arora’s Case [1996]’

(xv) From the above judgment of the Apex Court, it is the law of the land that even if the property is owned by more than one persons and the apparent consideration in relation to the interest of each co-owner in the property is less than the ‘specified limit’, the provisions of Chapter XXC would be applicable if such property is transferred under a single agreement and the apparent consideration for the property as a whole exceeds the ‘specified limit’.

(xvi) Therefore, u/s. 194-IA also, if the consideration for the purchase of an immovable property shoots beyond 49,99,999/-, one has to withhold tax @ 1 per cent. The number of buyers signing up the agreement for transfer will not make a difference nor would the number of sellers make any difference either.

(f) Applicability of the section to a transaction of transfer by way of an exchange / where the consideration is in kind – The section requires deduction of tax at source by the transferee to a resident transferor out of any sum paid by way of consideration for the transfer of any immovable property (other than agricultural land). Questions do arise as to whether the provisions of this section are to be complied with, in cases, where the consideration is in kind eg., transactions of exchange or cases where the agreement is for joint development of the land belonging to the transferor by the transferee and the transferor is entitled to receive from the transferee a portion of the developed area i.e. a certain percentage of flats. There is no monetary consideration involved in such transactions. Assuming that the other conditions of the section are satisfied, the question being examined in this paragraph is whether the section contemplates the deduction only in cases where the consideration is in monetary terms or even in cases where the consideration is in kind. This controversy arises because of the words `any other mode’ used in sub-section (1) of section 194-IA.

The following arguments can be considered to support the proposition that the provisions of section 194-IA would apply only when the consideration is fixed in monetary terms:-

As has been stated earlier, the expression “any sum paid” has been interpreted by the Hon’ble Supreme Court in the case of H. H. Sri Rama Verma vs. CIT (187 ITR 308) (SC) to mean only amount of money given as donations and not to donations in kind.

The provision contemplates `deduction’ – in cases where consideration is paid in kind ‘deduction’ is not possible.

Section 194B which deals with deduction from payment of any income by way of winnings from any lottery or cross word puzzle or card game or other game of any sort. This section has a specific proviso which was inserted by the Finance Act, 1997, w.e.f. 01.06.1997 which specifically deals with winnings wholly in kind or partly in cash and partly in kind, but the part in cash not being sufficient to meet liability of tax. Prior to the insertion of the proviso the CBDT had in Circular No. 428 dated 8.8.1985 stated that the section does not apply where the prize is given only in kind. The relevant portion of the circular is reproduced hereunder –

Circular : No. 428 [F. No. 275/30/85-IT(B)], dated 8-8-1985.

“3. The substance of the main provisions in the law insofar as they relate to deduction of income-tax at source from winnings from lotteries and crossword puzzles, is given hereunder :

(1) No tax will be deducted at source where the income by way of winnings from lottery or crossword puzzle is Rs. 1,000 or less.

(2) Where a prize is given partly in cash and partly in kind, income-tax will be deductible from each prize with reference to the aggregate amount of the cash prize and the value of the prize in kind. Where, however, the prize is given only in kind, no income-tax will be required to be deducted. ………..” U/s. 194B deduction is out of specified income.

U/s. 194-IA deduction is out of consideration for transfer of immovable property. Like consideration, income could be in cash or in kind. Following the above mentioned circular it can be safely argued that tax is not deductible when consideration is in kind. Recently, the Karnataka High Court in the case of CIT vs. Chief Accounts Officer, Bruhat Bangalore Mahanagar Palike (BBMP) (ITA NO. 94 of 2015 and ITA No. 466 of 2015; order dated 29th September, 2015), was dealing with a case where BBMP had taken over certain lands which were reserved and in lieu thereof it had allotted CDR (Certificate of Development Rights) to the persons who were the owners of the land so taken over. The owners of land were allotted CDR rights in the form of additional floor area, which shall be equal to one and a half times of area of land surrendered. The AO treated the BBMP as an assessee in default for not having deducted TDS u/s. 194LA. The language of section 194LA is materially similar to the language of section 194-IA. The Court has in para 9 held that where there is neither any quantification of the sum payable in terms of money nor any actual payment is made in monetary terms, it would not be fair to burden a person with the obligation of deducting tax at source and exposing him to the consequences of such default.

Thus, for the reasons stated above, it appears that the tax will be required to be deducted at source only in those cases where consideration is fixed in monetary terms. The consideration having been fixed by the parties in monetary terms the same may be discharged in kind. In cases, where the consideration is fixed in monetary terms but is discharged in kind, it is possible to argue that the provisions of the section may apply. In cases where consideration is fixed in kind (e.g. exchange transactions or cases of development agreement where the land owner is entitled to a share in the developed area and no monetary consideration), the better view appears to be that tax will not be required to be deducted at source. (f) Applicability of the section to rights in land or buildings or to reversionary rights -The section applies to consideration for transfer of immovable property (other than agricultural land). Immovable property has been defined to mean land or building or part of a building. Questions do arise as to whether tax is required to be deducted at source when the subject matter of transfer is not land or building or part of a building but rights in land or rights in building e.g. transfer of tenancy rights, grant of lease, etc. In the context of section 50C which applies to cases of transfer of land or building or both, the Tribunals have in the following cases taken a view that the provisions of section 50C do not apply to cases of transfer of rights in land or building but applies only when there is a transfer of land or building:
Kishori Sharad Gaitonde (ITA No. 1561/M/2009) (Mum SMC)(URO)
DCIT vs. Tejinder Singh [2012] 50 SOT 391 (Kol.)(Trib.)
Atul G. Puranik vs. ITO [2011] 58 DTR 208 (Mum.)(Trib.)
ITO vs. Yasin Moosa Godil [2012] 18 ITR 253 (Ahd.)(Trib.)

Following the ratio of the above decisions, it is possible to take a view that the provisions of section 194-IA do not apply to transfer of rights in land or building.

However, when reversionary rights are transferred by the landlord, the consideration paid for acquiring reversionary rights would be subject to deduction of tax at source in accordance with the provisions of this section.

(g) Applicability of the section to introduction of an immovable property by a partner of a firm into a firm – When a partner of a firm introduces land or building into a partnership firm where he is a partner, question arises whether tax is required to be deducted at source. If yes, who will deduct tax at source and on what amount? In a case where a partner of a firm introduces immovable property into a firm as his capital contribution, there is undoubtedly a transfer. Supreme Court has in the case of Sunil Siddharthbhai vs. CIT (1985) (156 ITR 509) (SC) held that what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into a shared interest with the other partners in that asset. Qua that asset, there is a shared interest. For the purposes of computing capital gains, the amount credited to the capital account of the partner is deemed to be full value of consideration by virtue of the deeming fiction created by section 45. The deeming fiction had to be introduced to overcome the observations of the Supreme Court in the case of Sunil Siddharthbhai (supra) where the SC held that the interest of a partner in the partnership firm is an interest which cannot be evaluated immediately. It is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner’s interest takes place only when there is a dissolution of the firm or upon his retirement from it. While it may be an arguable proposition, to contend that the deeming fiction is only for the purposes of computation of capital gain and cannot be extended to provisions of section 194-IA of the Act, it would certainly be safer for the partnership firm to deduct tax at source u/s. 194-IA by considering the amount credited to the partner’s capital account as the amount of consideration.

Conclusion:
The above are some of the issues which arise in connection with the applicability of the provisions of section 194-IA. There are several other issues which are not covered here e.g. Applicability to cases of slump sale, amalgamation, amount paid by builder to a co-operative housing society/member thereof on redevelopment of property, applicability to acquisition of shares with occupancy rights attached to them, assignment of booking rights, etc. It would now be worthwhile to remind the reader of the golden rule applicable while interpreting the provisions of TDS i.e. when in doubt – Deduct. The arguments stated above can be resorted to in the event of any inadvertent slip in complying with the provisions.

Expectations from our new leaders

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When this issue reaches you, the voting for the Regional Councils and the Central Council of the Institute of Chartered Accountants of India (ICAI), will have been completed. The fate of the candidates, either seeking reelection or desiring to enter the council for the first time would have been sealed in the ballot boxes. The counting will take place and the election results will be known before the end of the year.

What is then that the ordinary members of the ICAI expect of our new leaders? First and foremost, our leaders should set an example for the members of the profession to follow. It is said that we get the leaders we deserve. However, it is equally true that when leaders show the path, followers follow. Members of the Council, whether it be Central or Regional, should set an example of ethical, disciplined, proactive and transparent behaviour. In the recent past, our profession has been continuously facing flak for declining ethical standards. If our leaders set high standards of morality and ethics, the general membership will look up to them. Further, they will then have the courage to represent to the government and other authorities when erroneous decisions, unfair to the members are being taken. I am deeply conscious that it is not easy to meet this expectation, but my suggestion to our new leaders is that they should make a beginning in that direction.

I have, in earlier editorials, expressed the view that the deliberations of our leaders both in councils and in various committees should be communicated to the general membership. This will achieve two objectives; the first is that, if discussions are regarding certain proposed amendments to legislation or regulations, both the concerned authorities and the members will be aware that the Council of a regulatory body is seized of the issues. The second is that the stakeholders would be able to communicate to the council their views, so that a decision after considering their thoughts can be taken. Transparency in governance is the buzzword today, and it is appropriate that a premier institution like the ICAI should set an example.

Another expectation is in regard to communication. Many times the government and the regulators take decisions which affect the interests of the members, their clients or both. While it is true that in regard to decisions affecting trade and industry it is the responsibility of the respective associations to take up the matter, it is equally true that the profession should be catalysts in that process. Therefore, if our leaders, through various committees or individually, have made various representations or have not made them for certain specific reasons, both should be placed in the public domain. The government may not necessarily accept the representation, but the fact that the leadership is taking action will boost the confidence of professional colleagues. Secondly, if an additional responsibility has been cast on the profession, and in discharging that responsibility the profession expects some specific action from the service recipient, that expectation should be communicated. If there are inherent limitations/difficulties in carrying out the new tasks, those also should be intimated. This will ensure that the service providers and service recipients work together rather than criticising each other. It is not as if today our leaders do not communicate. The need is that our leaders should not only speak, they should also listen, and the fact that they are listening should be made known to all.

At times professional colleagues may have expectations from our Institution, which may be totally unreasonable. In such a situation, the newly elected council members should be firm and explain patiently to the profession as to why the expectations are unwarranted. We elect leaders not for taking popular decisions but taking right decisions even if some of us find them difficult to digest. The true test of leadership is not in doing what the public wants but in doing what is right and in convincing people that what is being done is in their interest.

Lastly, significant attention needs to be given to students. These are members of the future. One often finds that, during the period of articleship, and even after passing the final examination and becoming Chartered Accountants students do not have any sense of belonging towards their alma mater. There is, in fact, a sense of alienation. This does not augur well for an institution which is into its seventh decade of existence and is really destined to play an important role in the life of a fast-growing nation. There is a feeling among new entrants that the ICAI does not do enough for them. It is a grudge that they harbour from their student days. Their grievances may not necessarily be correct, but this feeling needs to be addressed. It is only if younger members take interest in the affairs of an institution can it become vibrant. It is true that this is not a problem unique only to ICAI but is affecting other institutions as well. I hope our new leaders will take note.

I have tried to put together a few thoughts for the members of the new councils, Central and Regional. On behalf of all readers and the BCAS, I wish them well and hope all their dreams come true. When I communicate with you again the New Year would have already begun. I take this opportunity to wish all readers and their families a very happy and prosperous New Year!

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Namaskar

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‘Because I love life, I know I shall love death as well’
Gurudev Tagore

1.
We mortals live in the fear of death. We do not realise that `death’ is
a reliever of pain and `death’ also is a leveller, for it is said :
sceptre and crown in dust be equal made. The greatest wonder is that
whilst we see others die we don’t believe that we are also going to die.
We little realise that death is a certainty. There is a saying in Guru
Granth Saheb that implies death is a certainty. ‘Jo UPJIO so bins hai karo aaj ke kaaj’. Translated it means : Everything that is born must die – don’t greave, do today’s work.

2. The question is : what is death? Philosophers say : birth and death are two sides of the same coin – and are the threads which weave life. Death also gives birth when bible propounds the concept that ‘unless a seed dies it can produce no grain. A seed has to cease to be itself in order to be a source of life to others’.
I believe that ‘death’ is a friend who is born with me, walks with me,
laughs with me and weeps with me – the only thing I don’t know when he
is going to ask me to walk with him. This uncertainty brings in the fear
of the unknown. To face this uncertainty we have to accept death as
reality and be ready for it and do what Leonardo da Vinci said ‘while I
thought that I was learning how to live, I have been learning how to
die’. Let us learn how to die. Death is not to be feared.

3. The next question is : what does death do!
Death converts a person into a thought – memory. It makes us realise
that the physical body of ours comes with an expiry date and death is a
painful truth – nay – just truth. It at times impels us to think ‘life
is an illusion’. It also teaches us to reflect on our actions – in other
words – check our actions on the touchstone of morality.

4. Have we noticed that persons belonging to a particular sect apply Bhasma on their forehead! They probably believe that bhasma reminds them and prepares them to meet ‘death’ as ultimately body turns into Bhasma – ash. What a wonderful way to live with death.

5.
There is another way of viewing death. For those of us who believe in
the concept of re-incarnation – there is no death – because death is
only a comma and not a full stop. Hal Borland has put this concept
beautifully in words when he says ‘your end is neither an end nor a beginning but a going on, with all the wisdom that experience can instil in us’.
Every birth is an experience gatherer. Our philosophy of karma also
propounds the concept that we take birth again and again to live the
result of our good and bad actions.

6. Have we ever observed our
reactions at someone’s death. Death at 25 is shocking, at 50 it causes
anguish and at or after 70 death is accepted as a norm. We say either he
lived well or he is relieved of his pain and suffering.

7.
Swami Sukhabodhananda says: ‘Death is the most critical defining feature
of life. When you die, you are making the ultimate desirable assertion
that you have been alive. In fact, death is a precondition to life’.

8.
We have to realise that there should be no fear of an event that is
certain – death. We need to live life – live it and enjoy it because
life is worth living as it is a gift from God. Whilst enjoying life, the
one death we should seek is the death of ego.

9. I would conclude by quoting Osho :

‘It is not whether life exists after death. The real question is :Whether you are alive before death?

NB:
The author attempts every morning to ask himself the question : How
will I live this day if it was my last day – so should we all. The
answer, friends, would reflect the answer to the question asked by OSHO.

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$3 trillion excess debt

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The IMF debt estimate can become a ticking bomb given the downturn in economic growth combined with the prospect of higher interest rates in US

Companies from emerging markets have been on a borrowing spree in recent years. Now the International Monetary Fund (IMF) has estimated that these companies have over-borrowed around $3 trillion, which can become a ticking bomb given the downturn in economic growth combined with the prospect of higher interest rates in the US. It is not usual for a top official at the multilateral lender to speak about the prospect of a “a vicious cycle of fire sales and volatility”.

Such chaos is definitely not inevitable, but the next year could yet see massive swings in asset prices—in case the most dire possibility becomes a reality. A sharp increase in risk premiums could push many over-leveraged companies from emerging markets over the edge. Indian policymakers will also have to figure out a way to manage the triad of risks that IMF has talked about in its new Global Financial Stability Report.

The upshot: there could be trouble round the corner. (Source: Quick Edit in Mint dated 09-10-2015.)

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Reduce Sulphur in diesel, First of All – Without clean fuel, vehicles cannot cut pollution

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Delhi must stop beating about the bush on air pollution and, instead, speedily reduce sulphur content in diesel to proactively improve environmental standards. Slapping an environmental cess on trucks entering Delhi might actually worsen pollution levels, with traffic choked at toll gates.

The Centre, in announcing last week India’s intended nationally determined contributions (INDCs) for climate action, said it aims to improve fuel standards “in the near future”.

India is not obliged to set out its actual target dates in a negotiating document. Yet, as the expert committee, headed by Saumitra Chaudhuri, then member, Planning Commission, noted last year, in the business-as-usual scenario, the deadline to improve fuel quality is 2025 “or even beyond”.

The panel stressed that reducing sulphur levels in diesel is essential to reduce tailpipe emissions, particulate matter and oxides of nitrogen. The government needs to speedily improve fuel quality nationally.

As the expert panel noted, Bharat Stage-III diesel, with sulphur in the range of 350-500 particles per million (ppm) is still supplied in much of the country. BS-IV (sulphur levels at 50 ppm) is now increasingly available in the major towns, but vehicles on long-distance routes are more likely to run on BS-III fuel. The expert report emphasised that BS-IV diesel is a must for pollution abatement devices like catalytic converters to function. It added that when sulphur content reduces to 10 ppm (BS-V), the efficiency and durability of the onboard pollution control devices improve. However, to move to ultra-low sulphur fuel requires capital investment of the order of Rs 80,000 crore in oil refineries. The report called for a 75 paise sulphur cess per litre of automotive fuel to reach BS-V by 2020, and BS-VI by 2024.

The report was submitted last May, before the slide in oil prices. The government needs to address the root cause of urban air pollution and, given the far softer oil prices, levy an appropriate charge on auto fuel sales to revamp refineries.

We must in the near future move to BS-V fuel norms and not wait to do so only by 2020.

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

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Sahitya storm – Writers must stand up for intel – lectual freedom, returning awards may not be the best way

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A rising tide of writers are returning their Sahitya a kademi awards in protest against growing intolerance and restricted space for freedom of choice in the country, since nda governments came to power at the Centre in 2014 and subsequently in many states. Culture is an early warning sign, and BJP-led governments must take note of growing signs of disquiet. e ven as people are lynched on suspicion of consuming beef, three rationalists have been murdered in succession in m aharashtra and Karnataka – extremely un- i ndian acts that are being laid at the door of h indu extremists. they are usually followed by a stream of statements from high-ranking BJP leaders, which appear to condone heinous crimes and create a culture of impunity around them by trotting out the time-worn cliché of ‘hurt sentiments’.

If writers and intellectuals were to secede, it would seriously diminish i ndian soft power. But more importantly, they broach broader concerns. Poor people in the countryside are dependent on the cattle trade. Curtailing this due to the hysteria over beef will see a drop in their living standards at a time when the agricultural sector is already in crisis. moreover, youth have grown aspirational and will not take kindly to an atmosphere of restricted political and social freedoms. a ll this will hurt B j P in elections and make Prime minister Narendra Modi’s modernising agenda seem hollow.

At the same time, writers also need to reflect on the perhaps unintended irony of returning their Sahitya a kademi awards as a protest against the government. t his implicitly concedes that Sahitya a kademi is a government body, and thereby raises the question why they were content with government patronage and did not fight for an autonomous body that truly represents writers.

A related concern is whether writers have been as vocal about muslim fundamentalism, or of left-wing crackdowns on dissent, as they have been on hindu fundamentalism. Few writers protested, for example, when the Left stifled intellectual life in Bengal or when Taslima nasrin was drummed out of that state. a solution would be to have a robust, autonomous body of writers that is willing to speak out on assaults on freedom of expression, no matter what quarter the attack is coming from. the government, on its part, must note that leftwing intolerance does not justify right-wing intolerance; both will lead to the same sorry results. India can flourish only in a liberal atmosphere, which gives citizens the right to choose.

A new international tax regime – Govt must con – sult industry and implement BEPS project

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The recent unveiling of the final reports on 15 action plans by the Organisation for
Economic Cooperation and Development, or OECD , under its Base Erosion and Profit Sharing (BEPS) project will undoubtedly mean new and formidable challenges for many companies operating in india and abroad. No less formidable will be the challenge the BEPS project will pose for the Indian tax authorities, as they have to conform to a new regime of cross-border taxation even as they undertake fresh tax policy reforms at home. The BEPS measures, according to one estimate, will affect just under 200 large indian companies. to begin with, these companies will have to adhere to the country-by-country reporting standards for their operations in different tax jurisdictions. Globally, an estimated 9,000 companies will be impacted by the new measures, and each of them will have to reckon with the tax policies in vogue in different countries where they have business operations. t he numbers may not look too large at present. But there is no doubt that the manner in which the indian authorities ensure tax compliance by companies operating in india under the BEPS regime will determine to a great extent india’s reputation in providing the ease of doing business, and hence its attractiveness as a destination for new investments.

The BEPS project, led by the OECD and the Group of 20 (G20) countries, is a response to the 2008 global financial crisis, and is meant to lay the foundations of sustainable and long-term economic growth by avoiding policies that promote growth at the expense of other countries. it has been estimated that multinational businesses have often used a complex transaction structure to artificially reduce their outgo on corporate taxes by shifting to jurisdictions with lower taxation. according to OECD estimates, such tax avoidance has led to a global revenue loss of $100- 240 billion every year – as significantly large as four to 10 per cent of global corporate income-tax revenues. the 15 action plans approved under the BEPS project will help improve transparency for both businesses and governments by introducing commonly agreed minimum standards for tax administration across countries. they are focused on a large number of diverse and important issues including those pertaining to alignment of taxation with the location of economic activity and value creation, application of transfer pricing guidelines and taxation of digital enterprises like those engaged in e-commerce. of particular importance is the BEPS regime’s focus on reinforcing the limitation of benefits to companies to prevent what is commonly referred to as treaty-shopping, where a company uses a location of business with the sole purpose of taking advantage of a tax benefit available under a bilateral tax agreement.

The challenges for both Indian tax policy makers and the companies are, therefore, huge. Indian companies expected to come under the purview of BEPS will have to increase their awareness of the new regime and start preparing to comply with the new regulations that are likely to be in place from 2017. Without losing much time, they have to bring their accounting systems up to date, improve their compliance mechanisms, particularly with regard to country-by-country reporting standards and transfer pricing rules, and upgrade the manner in which they report data. of some concern will be the way the BEPS regime will bring digital economy enterprises like start-ups and e-commerce ventures under the tax net. For the Indian tax authorities, the tasks are even more onerous. they have to start a process of consulting industry players on the BEPS regime and how they intend to bring their taxation system in line with the mandated international standards. this cannot be allowed to be a new source of irritation for industry or a cause for rising cost of compliance. there has to be a healthy balance between ensuring compliance without adversely affecting India Inc’s competitiveness.

New SEBI Listing Regulations – revised requirements of corporate governance, disclosures, etc.

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Background

SEBI has recently notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the Listing Regulations”). They will primarily replace the Listing Agreement and certain related provisions. On the face of it, it may appear that the notification is old wine in a new bottle. A superficial review may even create an impression that the Listing Regulations make merely cosmetic/ aesthetic changes in that they organise into categories/ chapters the myriad of clauses that were messily placed in the Listing Agreement, being the result of random additions/deletions and endless amendments. However, a closer analysis reveals that there are several structural changes and new requirements/modifications. Primarily, the status of the provisions has been substantially elevated from a set of provisions that had a dubious legal status to a proper law with, as we will discuss later, severe consequences. The rights and obligations of various parties that were unclear and uncertain under the Listing Agreement are now clearer, well-defined and attributed directly and specifically. More important is the fact that the obligations of various persons such as the company, its directors, the Chief Financial Officer, Company Secretary, etc. and even the auditors and the Audit Committee have increased. The life of the already overburdened and underpaid independent directors will worsen further.

The new regulations are fairly lengthy, though this is also on account of the fact that they seek to cover the listing obligations of not just equity shares but also other types of securities. Still, the 111 page long regulations would need a deep study to understand their implications. In this article, some highlights are briefly discussed.

Nature of the Regulations

The Regulations largely compile, rewrite and re-organise at several places, the familiar Listing Agreement and certain related provisions, in the form of Regulations. The Listing Agreement primarily provide for certain obligations of companies whose securities have been listed on recognised stock exchanges. The requirements include disclosures of important developments in such companies, of periodic accounts, etc. The Listing Agreement is also the place where Clause 49 that covers the requirements relating to corporate governance are placed. There are several other requirements contained in other provisions. These are now gathered at one place in an organised manner in the new Listing Regulations. Thus, while the SEBI ICDR   Regulations pave the road to listing of securities of a company, the Listing Regulations
now provide for requirements of their continued listing.

A formal and very short Listing Agreement of course continues (which listed companies are required to execute) but the substantive provisions are now in the Listing Regulations. Further, the Listing Regulations provide for separate chapters for requirements in case of different type of listed securities.

Date when the regulations shall come into effect

The bulk of the regulations shall come into effect from 1st December 2015 (except, however, as will be seen later, for two sets of provisions that have come into effect immediately, i.e. from 2nd September 2015). This has given time for companies and others concerned to absorb the contents, changes and implications of the new
provisions.

More severe punishment for violations

The primary structural change is that, instead of the provisions being in the form of a listing agreement, which, at least conceptually, had a dubious legal status and hence implications, the Listing Regulations have a well recognised and well defined status and implications.

The Listing Agreement was of course not a mere private agreement where only the signing parties could act against each other. For example, section 23E of the Securities Contracts (Regulation) Act, 1956, provided for a stiff penalty for violation of listing conditions. The stock exchanges too ensured discipline and enforcement to considerable extent. Further, SEBI had direct control over the provisions. Nevertheless, the element of uncertainty remained. Moreover, the final recourse of contraventions of the Listing Agreement could, in theory, only be of terminating the Listing Agreement. This would mean delisting the shares in the present case which would obviously be counter productive as this would harm the shareholders for no fault of theirs. SEBI has of course been using its generic and wide powers to take action and pass fairly stringent orders. It has debarred directors, executives, etc. and generally taken penal action in various forms. However, this is not a happy situation. For one, such action is taken only in extreme cases. Further, the role and liability of various parties remains unclear.

Now that the provisions are in the form of regulations, there are clear penalties and other actions under the SEBI Act and the Listing Regulations. Parties such as directors, compliance officers, Auditors, Independent Directors, etc. are clearer on what their role is now.

Penalties are now specific and well defined. Penalties would be levied on specified parties, of defined amounts and as per specified transparent due legal process. It is clearer what the roles of the company (which is primary and generally comprehensive), the compliance officer (there are some provisions made for them directly), and the audit committee are.

Generally, as seen later, corporate governance provisions too have been elevated to status of law and the roles of individual parties or groups are now directly  defined.

Regulation 98 also provides specifically for various actions by the stock exchanges in case of contraventions of the Listing Regulations. These actions include levy  of fine, suspension of trading, etc. These actions are in addition to the penal and other actions under the SEBI Act. In many cases, there may be further action under the Companies Act, 2013 too.

Corporate governance now a law

Clause 49, as a legal term, is now history. Earlier, as a clause bearing that number, it was part of the Listing Agreement and thus had implications only as much as of the Listing Agreement. Now it is a specific component of the Listing Regulations.

While the requirements remain largely unchanged, considering that each requirement lays down what each person, committee, board, etc., has to do, the liability of parties is now specific and defined. These parties would now know what are the requirements statutorily expected of them and what are the consequences of non-compliance.

Chartered accountants and other professionals including auditors who are associated with listed companies in various ways will particularly need to pay heed to and understand the new provisions well.

Related party transactions

The requirements for approval, disclosure, etc. of related party transactions are largely carried over from Clause 49. The requirement of obtaining prior approval of the Audit Committee for all related party transactions continues. The relaxation for giving prior omnibus approval for certain types of recurring transactions as also for transactions up to a specified value under certain conditions also continues.

As earlier, material (as defined) related party transactions require approval of shareholders by way of a special resolution where related parties shall not vote. Two changes were expected. One was that the resolution required would be ordinary and not special. This change has been made and with immediate effect. Thus, now, only an ordinary resolution is required for  approval of material related party transactions. The other was that only the bar on voting on such resolutions should be on only those parties that are related for the purposes of the proposed transactions. This change has not materialised. All related parties are barred from voting at such resolution. The definition of related party transactions remains broader. To these and certain other extent, the requirements under the Regulations are different from the corresponding requirements under the Companies Act, 2013.

Disclosures of material developments

The new Regulations provide for substantially revised provisions for disclosures by companies. Investors and markets generally expect suo motu and prompt disclosure of developments by the company. However, there was uncertainty on what to report, when to report, who to report and how to report. Balance is required between sending a deluge of information where a few important things get hidden in a pile of information, and reporting arbitrarily selective aspects only at the last possible date. Balance is also required in reporting things too early and too late when rumours and leaks have already caused havoc to the markets.

The Regulations now provide for completely re-written requirements for disclosures of  material developments. They are divided broadly into two categories – disclosures of developments that are material as per certain specified guidelines and developments that are deemed to be material and hence to be reported. The stage at which the developments are to be disclosed has also been defined, and once that stage is reached, the requirement also is for prompt disclosure.

Of particular note are the deemed material items. For example, certain types of frauds are  deemed to be material developments irrespective of the amounts involved.

Obligations of the Board

The regulations now specify and define, even if largely general terms, the obligations and duties of the Board of Directors of a listed company. This is of course largely carried over from clause 49. However, again, considering that the requirements are now in the form of  regulations, they will have greater implications. They will need closer attention.

Accounts and financial Disclosures

The requirements of making periodic disclosure of results continue largely as earlier. This aspect would require greater study and analysis particularly by CFOs and Auditors.

Cessation of a person/group from the Promoter Group

Though relatively an infrequent happening, persons seeking to be excluded from the Promoter Group present not just a sensitive issue, but also remains uncertain in terms of legal provisions. For example, an individual or even a family/group may desire to be excluded from the Promoter Group. This may be because they no more hold partly or wholly any control or they wish to relinquish control. Being in control, even if it is joint, results in certain obligations which they wish to relinquish too, along with the control. At the same time, allowing such exclusion may result in persons having control or even a material connection being excluded from obligations. The Listing Regulations now contain fairly comprehensive and transparent requirements for permitting such exclusion. These requirements have come into effect from 2nd September 2015.

Conclusion

The lengthy Regulations provide for many things with far ranging implications that cannot be even highlighted in a short article. However, it is clear that the job of the board, director,  committees, compliance officer, etc. has increased substantially. While in the short term, the transition from the Listing Agreement to the isting Regulations may be smooth, in the longer term perhaps, as companies and others are regularly hauled up and penalised in various forms, the implications of the changes will be realised. It is becoming more and more difficult to exist as a listed company and to be associated with a listed company. In the longer term the question that will confront us is, whether and to whom it is financially and otherwise rewarding to be so?

Jaitley’s Gambit – Piecemeal tax reforms only act as a palliative, it’s time to revive direct tax code

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Finance minister Arun Jaitley has constituted a committee of experts to suggest changes to income tax law with the aim of simplifying it, providing a stable environment and reducing the incidence of litigation through removal of ambiguities. The aims are unexceptionable but the approach is puzzling. during his budget speech, Jaitley said he saw no merit in pursuing a new direct tax law. But controversies since then over the law’s interpretation forced him to engage in firefighting, which has now culminated in the expert committee. i ndia needs a new direct tax code underpinned by an integrated approach to reform, rather than piecemeal change.

The last six years have seen three finance ministers struggle to reform the direct tax code. The first draft in 2009 was the most comprehensive attempt to change the code, but it wasn’t fully implemented. i n the interim, problems multiplied as the law was not in sync with structural changes in the economy. Litigation has grown. a t the end of 2013-14, Rs.2.59 trillion of direct taxes claimed was under dispute. Problems aren’t going away as the recent controversy over MAT on foreign portfolio investors showed.

Jaitley should restart the exercise of a comprehensive new direct tax code. experience suggests that piecemeal reform merely works as apalliative. Not long after an effort at piecemeal reform, a controversy erupts and the fallout spills over to other areas of the economy. t he only way for Jaitley to avoid frequent bouts of crisis management is to completely overhaul the existing law. Blueprints of earlier attempts make it easier to get started and exclusive central control of direct tax means that the legislative process for a new law will be easier.

MAT on FPIs – Fickle Tax Laws hurt Foreign In – vestors

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It is absurd that foreign portfolio investors (FPIs) are facing fresh income-tax queries after the government granted them a retrospective exemption from the minimum alternate tax ( mat ), based on the recommendations of the justice A . P. Shah panel. however, FPIs will now reportedly have to convince tax authorities that they do not have a permanent establishment
 (PE) here to escape the tax.

Foreign institutional investors, now FPIs, have been in relentless fear that tax authorities could construe their domestic custodian as a PE in India, making them liable to pay tax. The government must come out with a clear communiqué on what constitutes a P E , and not leave it to interpretation. Waffling on the promise to scrap MAT on FPIs could create mayhem on the markets, needlessly. do servers, for example, create a permanent presence?
In the OECD’s view, a server i fixed, automated equipment that can perform important and essential business functions – may be sufficient to create a PE at the equipment location without the presence of human beings. Conflicting rulings by the authority of advance rulings have only added to uncertainty in this area of taxation. t he government should clear the air to mitigate investor concerns.

In this case, FPIs have approached the Dispute r esolution m echanism ( DR. P). t he need is to ensure its robust functioning – the DR. P has a pool of dedicated tax officers. India has slipped in the World Bank’s latest ease of doing business index in terms of paying taxes, and mounting disputes could be a major reason. t he country’s tax regime must be reformed to minimise disputes. o ur tax officers should be better trained to deal with complex transactions as India globalises. Predictability of tax conduct is on par with simplicity of the law.

Moody’s is right to warn that belligerent com – munal rhetoric could ruin India’s economic pros – pects

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Prime Minister Narendra Modi has gone all out to pitch i ndia as a global business destination. But the research arm of international ratings agency Moody’s has injected a timely note of warning on domestic actions that might scupper this bid. in a report titled ‘ India outlook: Searching for Potential’, moody’s a nalytics has said unequivocally that unless m odi reins in BJP members making controversial statements, i ndia runs the risk of losing domestic and global credibility.

President Pranab Mukherjee, addressing the Delhi high court on its golden jubilee, pitched yet again for pluralism and tolerance. and RBI governor Raghuram Rajan devoted a good part of his IIT Delhi convocation speech to explicating why tolerance is essential for i ndia’s economic progress. While tolerance allows the best ideas to come forward and compete, in an intolerant regime the worst ideas can’t be questioned. in place of the false opposition between tolerance and nationalism that hyper-nationalists within BJP presume tolerance, as r ajan proposes, should be deemed a patriotic service.

As the Moody’s report points out, there are two interrelated ways that religious majoritarianism and the spreading culture of bans and intolerance can hold up economic progress. First, rising ethnic tensions will discourage investors who have a host of international destinations to choose from. Second, the political debate in the country will turn away from development to more divisive issues, creating stiffer opposition to the government in Parliament and holding up the passage of reform measures key to turning around a sagging economy – such as GST, relaxed labour laws and land acquisition norms. Modi needs to lay down the ‘ sabka saath sabka vikas ’ line more firmly within his own party and government by telling his hardline colleagues they can’t have the cake and eat it too: it’s either economic progress or the religious agenda.

Ease of doing business in India – From 130 to 50 – Long road to genuinely improving business en – vironment

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The World Bank’s Doing Business 2016 report, which evaluates the ease of doing business across the world, has said that i ndia is the 130th toughest nation in the world in which to do business. t his is four ranks higher than it was in 2015, in which its rank has been recalculated to be 134 instead of 142. t he n arendra m odi-led government’s stated aim, to drag i ndia into the top 50 before its term is over, at present, looks distant. e ven this improvement underlines, in fact, how deep and wide-ranging reform will have to be just to improve on paper, let alone in fact and in the eyes of entrepreneurs and investors. t he improvement in the national ranking comes from, essentially, a few procedural changes in how d elhi’s power distribution company BS e S gets new connections to customers in south, east and west d elhi. t he number of inspectors has been reduced from two to one and the number of steps to the process reduced. a nd, the reason why i ndia has jumped many steps in the new method of evaluating ranks is because “reliability” of power supply is now a criterion, which it wasn’t in the old method used till 2015. o f course, power supply in d elhi and m umbai, the only locations the World Bank considers, is reliable – but, in the rest of the country, that is not always the case. Far deeper and broader reform will be needed, and it would be risky to be content with such improvements. Coincidentally, the government has also announced a committee, led by a retired judge, to look into how to redraft the income-tax law. t his is a valuable effort; by making the language clearer and less ambiguous, the number of disputes between the taxman and companies or individuals could theoretically be reduced. t he number of tax cases has gone up in the past decade, and several thousands of complex legal cases block up i ndia’s courts. o f course a well-drafted law might conceivably help settle cases quicker. But without a better-administered income- tax department, one that is not incentivised to chase down targets, a well-drafted law will make only a limited impact in tackling the current problems. n or will a better-drafted law help settle outstanding or frivolous cases quicker in the absence of judicial capacity at every level.

Finally, the quality of drafting of the tax law is not its only constraint on the ease of doing business – India ranked 157th in the world in terms of the ease of paying taxes. according to the report, 243 hours a year are devoted by business to paying taxes, which they have to do as many as 33 times, at an effective tax rate of close to 60 per cent of profits. In other words, the tax system needs to be overhauled not just in terms of legal but also economic effectiveness. And this is not a difficult task either. The finance ministry has in its possession a series of reports on taxation reforms, which have outlined a detailed action plan on how to make India’s tax system less adversarial, more friendly to the tax-payer and less prone to litigation. i t is time the ministry took a closer look at those recommendations for overhauling the tax system. a shallow effort will not work.

[Comment: Without a change in the mindset of the Bureaucracy, Revenue officials & the Regulators, it would be an impossible aspiration !]

Keeping abreast – Judiciary needs to keep up with economic knowledge

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Do senior judges and regulators who have to increasingly deliver pronouncements and findings on complex technical and economic issues have a chance to keep abreast with the rapid changes taking place to knowledge? r ecently the Bombay h igh Court delivered a verdict on taxation issues relating to Vodafone, a telecom service provider, and the Competition Commission of i ndia pronounced on the conduct of sugar mills. i n such instances the judicial or quasi-judicial authority needs to have a knowledge of not just the law but also have some grounding in the imperatives governing market-driven economies and ground realities in particular industries. t he latter keep changing rapidly with technological developments altering the rules of the game even as the number of regulators with specific economic jurisdictions keeps going up.

There is already some institutional support in this endeavour. t he National Judicial a cademy, a training institute for judicial officers, has established the “national judicial education strategy” which holds programmes for high court judges and district judges. But the training usually pertains to matters like correct legal procedure and evaluating evidence. t his does not sufficiently help a judge when dealing with scientific evidence in judging, say, an intellectual property dispute in pharmaceuticals or information technology software. Consider the differences with senior i ndian civil servants who can, for instance under the Colombo Plan, attend courses in internationally reputable institutions to acquaint themselves with the latest developments in economic thinking and public administration.

Given the increasing calls being made upon the judiciary to freely and fairly determine contentious issues which are grounded in the latest technology and economic principles, senior judges and regulators would benefit from refreshing their knowledge beyond the domain of law. t here is a need, therefore to formalise a system whereby senior judges and regulators can expand their knowledge base in keeping with the changing needs of society. the cost of even the best such training has been substantially reduced by the rapidly expanding fields of e-learning and e-tutoring. modules can be prepared keeping the needs of judges in mind and they can pursue them interactively, with guidance from remotely placed experts. the process can be topped up with a course or residential seminar at a reputed institution. a ll professionals – not just civil servants or doctors – need to keep abreast with the new knowledge of the day and there is an urgent need to set in place a system to deliver this to judges.

Arbitration Law Amendments – Cuts Both Ways!

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Introduction

The Arbitration and Conciliation Act, 1996 (“the Act”) was enacted in 1996 to repeal and replace the Arbitration Act, 1940 and other ancillary Acts. It was considered a pathbreaking Act since, to a great extent, it institutionalised the forum of Arbitration in India and introduced various sweeping changes based on the UNCITRAL Model Law on International Commercial Arbitration and the UNCITRAL Conciliation Rules adopted by the United Nations Commission on International Trade Law (UNCITRAL). Arbitration was considered to be the saviour to a judiciary creaking from an alarming number of cases. It was considered to be a fast-track route to dispute resolution. However, the reality has been quite contrary.

Almost 20 years later, the Government felt that the Act requires urgent changes and since Parliament was not in session, it promulgated an Ordinance titled, The Arbitration and Conciliation (Amendment) Ordinance, 2015. This Ordinance was promulgated by the President on 23rd October, 2015 and is in force from that date. The Ordinance has  introduced several changes to the Act, which are intended to speed up the process and improve the quality of arbitration. Under the Constitution of India, an Ordinance must be laid before both the Houses of Parliament and shall cease to operate as an Ordinance after six weeks from the reassembly of Parliament. Thus, the Government must come out with an Amendment Act within this time or another Ordinance.

As is the case with several enactments, there is often a slip between the cup and the lip and the best of intent is set to naught! The Ordinance contains a few good amendments and a few not so good ones. Let us examine some crucial changes introduced by this Ordinance and how some of these could actually derail the process of arbitration!

Arbitrators’ Fees Capped

An extremely innovative concept introduced by the Ordinance is that of fixing the fees of the arbitrators. The High Court is empowered to frame Rules for the fees of the arbitrators after considering the rates specified in the Schedule to the Ordinance. The Schedule lays down model fees on an ad valorem basis with a cap on the maximum fees which can be charged. The sliding scale provides for a minimum fee of Rs.45,000 for a dispute in which the sum involved is up to Rs.5 lakh. The maximum slab is in case of a dispute in which the sum  involved is above Rs.20 crore, in which case the fees are Rs.19.87 lakh + 0.5% of the claim above Rs.20 crore. However, the maximum fees cannot exceed Rs.30 lakh. This is probably one of the few instances of a Central Enactment laying down fees. While the lawyers and other consultants appearing before the arbitrators can charge any amount of fees, the arbitrators are constrained by the Ordinance! Moreover, what happens if the arbitrators actually spend more time and effort in hearings, gathering evidences, etc., than the fees prescribed by the Ordinance? Would this in fact not reduce the supply of good arbitrators? Fees are a matter of demand and supply and commercial negotiation between the parties to the dispute and the arbitrators. One wonders where is the need for legislative intervention in this? Would this not disincentivise good arbitrators?

The Ordinance provides an escape route by stating that the limit on fees would not apply to international commercial arbitrations and those arbitrations which are as per the rules of an  arbitral institution. Thus, for instance, if parties to the dispute agree to hold the arbitration as per the Rules of the Indian Council of Arbitration, then the fee schedule prescribed by the Council would not apply.

No more Recusing oneself afterwards

The Ordinance seeks to lay down under what scenarios an arbitrator would be considered as having a conflict of interest scenario with the parties to the dispute. Thus, instead of allegations of conflict cropping up later on and the arbitrator recusing himself, the law upfront states what is a conflict.

Where there is existence of a direct or indirect past or present relationship of the arbitrator either with any of the parties to the dispute or in relation to the subject matter of the dispute, then he must disclose such interest, in writing, before accepting appointment. The interest could be financial, business, professional or any other kind which is likely to give rise to justifiable doubts as to his independence or impartiality.

While a good part of this was already contained in the Act, the Ordinance seeks to provide the grounds which shall guide in determining whether or not circumstances exist which give rise to justifiable doubts as to his independence or impartiality. A long list of 34 such circumstances has been given, classified under the following grounds:

  • Arbitrator’s relationship with the parties to the dispute or their counsel
  • Arbitrator’s relationship to the dispute
  • Arbitrator’s direct or indirect interest in the dispute
  • Previous services for one of the parties or other involvement in the case
  • Relationship between an arbitrator and another arbitrator
  • Relationship between an arbitrator and counsel
  • Relationship between an arbitrator and parties to the dispute or their affiliates
  • Other circumstances.

This specific list of circumstances would remove any ambiguity as to whether or not there is any conflict of interest in a given case. If the arbitrator is of the view that there exist  circumstances of the type specified in the Ordinance, then the format in which the disclosure is to be made has also been laid down.

Magical Time limit for completion

Just as in the fairy tale, Cinderella had a time limit of getting home by 12 midnight, an  arbitration award must now be made within a period of 12 months from the date of reference to the arbitral Tribunal! The date of reference is the date on which all the arbitrators have received written notice of their appointment. Thus, there is a maximum period of 12 months to dispose of the arbitration. If the parties consent, the 12 months period can be extended by a maximum further period of 6 months. Any extension beyond 6 months cannot be granted by the parties.

After this extended period of 18 months, only the Court would have powers to extend the period or else the mandate of the arbitrators would terminate. While the intent is to speed up the process, this may actually retard the process. Lobbing the ball back to the Court would be a step backwards.

While granting the extension, the Court may substitute one or all of the arbitrators and if such a substitution does take place, then the substituted arbitrators would be deemed to have been  appointed from inception and the proceedings would continue from the stage where they  ended before the earlier panel of arbitrators. Further, the new arbitrators would have deemed to have received the evidence and material already on record. Is this not an extremely strange position? What if all the arbitrators are replaced and all evidence / witnesses / submissions  were already heard by the earlier panel? The new panel would be expected to pronounce its award without examining the witnesses, without hearing the submissions once again, etc. They would have to rely solely on the papers before them. All the best to the new arbitrators for jumping on to a running train.

Carrot and Stick approach for Arbitrators

Another novel concept introduced is the success fee and penalty clause for arbitrators. If the arbitrators complete an arbitration within 6 months from the date of reference (instead of the available 12 months), then they shall be entitled to such additional fees as the parties decide. Thus, there is an incentive for completing the job earlier. The law also presents a stick to the arbitrators. If the Court extends the arbitration beyond 18 months but while doing so finds that the delay is attributable to the arbitrator’s fault, then it may reduce the arbitrator’s fees by a maximum of 5% for each month of delay. Thus, if the Court is of the view that  the entire delay over 12 months was due to the fault of the arbitrator, then it may deduct 5% * 6 = 30% of the fees! Who wants to be an arbitrator is going to be the name of the new game!

Fast Track Procedure

One good concept is that of a fast track arbitration. If the parties agree then they can opt for this instead of the regular procedure. In this case, there may be a sole arbitrator who shall only admit written submissions. There would not be any oral hearings unless all the parties so  request or unless the arbitrator considers it necessary for certain clarifications. Technical formalities may also be disposed of by the arbitrator. However, the award must be made  within a period of 6 months from the date of reference. The model fees and maximum fees would not apply in the case of a fast track procedure.

Award against Public Policy

One of the grounds for setting aside an arbitration award by a Court is, if it finds that the  award is in conflict with the public policy of India. The Act provided that this was a general phrase which could have several grounds. It only stated that an award made by fraud or induced by corruption would be one of them. This gave an open field to the parties to challenge the award, thereby delaying the dispute resolution process.

The Ordinance has come out with an exhaustive and restrictive meaning of the term ‘conflict with the public policy of India’ as a ground for challenging an award. Only where making of the award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian Law or is in conflict with the most basic notions of morality or justice, the award shall be treated as against the Public Policy of India.

Conclusion

Internationally, an arbitration is usually completed within a year (even though it may not be a legal binding to do so). In India, arbitrations are nefarious for lingering on. In this scenario, when the time limit is set by law, is it helpful? While the idea behind the Ordinance is a noble one, that of speeding up and improving the quality of arbitration so as to lessen the load of the judiciary, one wonders whether the pill may in fact be worse than the ill!

Is this a knee-jerk reaction to improving India’s ease of doing business ranking or is it a well-thought out longterm strategy is something which time will tell. Has the Government unwittingly unleashed a double-edged sword, one which would speed up the arbitration process but may also reduce the number of arbitrators? It would be worthwhile to remember that those who live by the sword, often perish by it!!

Aadhaar – Govt should now bring forth an effec – tive privacy law

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The Supreme Court’s modification of its order on Aadhaar, expanding the use of the unique identification system to four additional welfare schemes – provident funds and pensions, the
Mahatma Gandhi National Rural Employment Guarantee Scheme and Jan Dhan Yojana – is a welcome step. t he court’s earlier decision this summer limiting Aadhaar to the public food distribution system and fuel subsidies had thrown authorities like the Ministry of Rural
Development and the Election Commission into confusion. t hey were reported to be pulling back from using the biometric system as it was feared they would be seen to be in contempt of court. t he earlier order ruled that Aadhaar could be used for food and fuel subsidies but not for other purposes, limiting the use of this potent tool to contain subsidies leakage. Aadhaar is best understood as a technology foundation upon which i ndia can build a better, more-targeted and less-leaky subsidies system – food and fuel subsidies have been grossly misdirected over the past several decades. It can also help achieve radically higher rates of financial inclusion. In Bengaluru, efforts by a non-governmental organisation has seen construction labourers, among others, open bank accounts late at night at small grocery stores and remit money to their families in rural India. By being able to do so without paying onerous commissions of as much as Rs. 100 for a remittance of Rs.1,000 has made them eager adopters of a financial inclusion effort that uses Aadhaar as a backbone. Aadhaar thus enjoys support at both ends of the policy spectrum: the poor without bank accounts, who are delighted to have access to services that are often elusive, and policymakers, who see larger goals such as reducing the fiscal deficit and wasteful expenditure. n ot surprisingly, the judgment last week was welcomed by both the central bank governor and the finance minister. Chief Justice H L Dattu put forward an elemental question: if Aadhaar was to be used for the public distribution system and cooking gas supplies, “why not extend it to other activities?

The thorny question of whether Aadhaar is a threat to privacy and indeed whether privacy is a fundamental right has again been referred to a larger bench to adjudicate. m any observers have criticised the government for muddling the issue of using Aadhaar by arguing that there was no fundamental right to privacy. indeed, the government might not have had to embark on this long and tortuous road of protracted legal challenges to a adhaar if it had legislated adequate laws to protect privacy. Aadhaar has been something of a case study in enrolment – some 920 million indians have an Aadhaar identity – but its safeguards and benefits are poorly understood by many in the middle class. t he use of it for a “know your customer”, for instance, stays within the banking system. When an authentication is done, the system does not know the purpose for which it was done. n o system this large is immune from, say, a hacker, but what it replaces was riddled with abuse. But that is no excuse for not putting in place a privacy law to prevent anybody from misusing individual data. t he court’s decision allowing a wider use of Aadhaar should ensure improved governance that is both more humane and pragmatic in dispensing welfare benefits. The government should now urgently get down to the task of framing an effective privacy law to address all doubts and concerns over data security.

Whose India is it? – Today’s intolerant hordes would do well to read the Constitution, plus Vi – vekananda

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Clouds are gathering over the idea of India, threatening to shut out the sun of liberal democracy. t he light of liberalism opens minds. It shines on debate and diversity. It radiates tolerance. t hat is how the founding fathers of the nation saw it. So, they wanted India to be liberal and tolerant. t hey wrote a Constitution proclaiming ‘liberty of thought, expression, belief, faith and worship’ as a founding principle of this republic. today, there’s a growing anxiety in the air, an anxiety about the life of that principle. People in India, as well as in other parts of the world, have begun to wonder: i s India tolerant? i s it safe to live or travel in those swathes of the country where the beast of intolerance prowls? is it safe to dine in public if you eat meat and fish? i s it a safe home for a Christian or a Muslim or a Buddhist or an atheist or even a Hindu of any shade different from the one declared as exclusively authentic by the marauding mobs of Hindutva? Will it turn into a Pakistan, where if you don’t surrender to an exclusive brand of Islam as defined by the radicals, being a Muslim by faith is no longer enough to ensure safety? ask a Shia or an Ahmadiyya or a liberal. Jinnah himself won’t qualify to be Islamic in today’s Pakistan.

Just as Gandhi and Tagore and, yes, even Vivekananda would blink in disbelief at the kind of India demanded by today’s intolerant hordes. i t won’t be possible to enter into a detailed discussion in this space but here are two thoughts for consideration: one, India is not a Hindu nation, not even a ‘ Hindu-Majority’ country in constitutional terms. two, Hinduism can be seen as a way of life or a portmanteau term to describe a civilisation. it’s not a single-faith dogma.

On Point one, the framers of the secular Constitution were careful to avoid any reference to Hinduism as a requirement for citizenship. article 25 assures citizens ‘freedom of conscience and free profession, practice and propagation of religion’, which means any religion. Sub-clause 2(b) mentions hindu religious institutions only in the context of the state’s ability to provide ‘for social welfare and reform’ and explains ‘ Hindus’ here to mean also Sikhs, Jains and Buddhists.

Clearly, the founding fathers were determined to ensure that india would not be a Pakistan, which had been created solely as a home for Muslims. India would be a democratic, secular entity in which people of any faith or no faith would be able to pursue their preferred way of life or religion. Unless there is any highly unlikely move to throw out the Constitution and rewrite its basic tenets, it would remain totally unconstitutional to call India a Hindu nation.

Although the census might say that India contains a majority of persons who describe themselves as hindu, it remains a constitutionally secular republic which does not officially recognise any religious identity as a defining characteristic of an Indian. in fact, among those who say they are hindu by faith or custom there exists such a range of belief and practice that, in a sense, every single religious sect, caste and ethnic group can be considered a ‘minority’ in a secular India which does not recognise any section of its diverse population as dominant. the Jains and the Sikhs saw this as a door to get minority status. others, like dalits, can as well.

Point two. Indians have just two secular faiths in which all communities, castes and ethnic groups believe: Bollywood and cricket. the religious picture, especially of Hinduism, reflects myriad realities. Even Diwali, assumed to be the quintessentially hindu festival, is an occasion when Bengalis and eastern i ndians worship a blood- drunk Kali, not sweet Lakshmi. Navratri in Gujarat has little connection with Dussehra in north India even as they happen at the same time.

And, vegetarianism is not, repeat not, a required h indu practice. Going by available surveys, a minority of i ndians are vegetarian, including a minority of h indus. not even Hindu Brahmins are all Vegetarian. Kashmiri and eastern Indian brahmins eat meat and fish. And ancient Hindus merrily ate beef after sacrificing bulls way back then.

If you don’t believe me, read the literature. For spiritual endorsement, read Vivekananda.