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Year: 2015

On Religious Tolerance – Dr. Rajan has displayed candour and courage rare in India’s public servants.

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In the current public discourse on religious tolerance, reserve Bank of India Governor
Raghuram Rajan’s convocation address to the students of the Indian Institute of Technology
( iit ) delhi on Saturday, delivered an unmistakable if nuanced critique of the ideological underpinnings of this government and their outward manifestation. d rawing on the work of nobel Laureates robert Solow and richard Feynman and using the example of india’s global it achievements to make his point, D R. Rajan linked the importance of ideas to a nation’s progress and highlighted the need to “foster competition in the marketplace for ideas” as a prerequisite for delivering economic growth. a chieving this, he argued, required “the right to question and challenge, the right to behave differently so long as it does not hurt others seriously”. When someone of d r. r ajan’s stature and authority adds his voice to the growing avalanche of criticism from a broad range of civil society, the importance of the message cannot be underestimated. It is especially impactful because he addressed precisely the age cohort that the current regime targets with its message of religious nationalism with all its deceptive certainties.

In leveraging the functional independence of his job as central bank governor to comment on issues that are, strictly, outside his official remit, Dr. Rajan has displayed candour and courage rare in i ndia’s public servants. h owever, there may be unintended repercussions to the institution he heads. To be sure, this is not the first time he has publicly expressed dissatisfaction with the government’s non-monetary policy actions and it is unlikely to be the last. i n this, he is perhaps following the precedents set by central bankers like Ben Bernanke and janet yellen of the u S Federal reserve and m ark Carney of the Bank of england. But they work within developed democracies where standards of debate are reasonably mature. d r. r ajan raised this point in his speech. ” t olerance means not being so insecure about one’s ideas that one cannot subject them to challenge – it implies a degree of detachment that is absolutely necessary for mature debate.” unfortunately, this is manifestly not the case in india, so it is unlikely that his remarks will be received in the spirit in which they were made.

Indeed, the manner in which senior ruling party functionaries are fiercely dismissing all criticism as politically motivated is a case in point – though President Pranab

Mukherjee’s repeated reference to intolerance in quick succession admittedly makes that point hard to refute. d r. r ajan’s criticism should also be set against the growing pressure – as much by the last regime as this one – to curtail the RBI governor’s room for independent action and the proclivity to establish unequivocal control over institutions. i t could encourage the government to take that short step towards appointing governors who may lack the expertise and understanding that consistently marked past appointees – and who is thus amenable to doing the government’s bidding. it is a dangerous prospect.

Co-operative Society – Special Deduction – Matter remanded to the Commissioner to decide as to whether the society is entitled to deduction u/s. 80P(2)(a)(iii) and whether benefit earned under Sampath Incentive Scheme, 1997 was a capital receipt

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DCIT vs. Budhewal Co-operative Sugar Mills Ltd. [2015] 373 ITR 35 (SC)

For the assessment year 1993-94, the appellant , a co-operative sugar mill engaged in the business of manufacturing sugar and allied products from the sugarcane supplied to it by its member farmers (sugarcane growers), claimed deduction of Rs.16,75,462 under the provisions of section 80P(2)(d) of the Act. During the pendency of the appeal before the Tribunal, the following two additional grounds were sought to be taken under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963:

“1. That the appellant was entitled to claim of deduction u/s. 80P(2)(a)(iii) of the Act being co-operative society engaged in marketing of agriculture produce of its members. Hence, its total income was not liable to be taxed.

2. That in the alternative, the appellant was entitled to be allowed claim for deduction amounting to Rs.1,74,64,478 representing benefit earned under the Sampath Incentive Scheme, 1997, being the capital receipt in contradistinction to revenue receipt as wrongly returned while computing the total income.”

The Hon’ble Tribunal, vide judgment dated 24th September, 2002, declined the request of the appellant to raise the abovementioned two additional grounds on the ground that the entire material was not before the subordinate authorities and detailed investigation of facts for want of facts would not be possible.

The High Court held that the appellant sugar-mill was engaged in the manufacturing of sugar products from the sugarcane supplied by members, who were admittedly sugarcane growers. Since the appellant sugar-mill was engaged in the marketing of agricultural produce of its members, therefore, it was entitled for the exemption as provided u/s. 80P(2)(a)(iii) of the Act.

The High Court drew support from its Full Bench judgment in the case of the Budhewal Co-operative Sugar Mills Ltd. vs. CIT [2009] 315 ITR 351 (P&H) [FB], wherein it was held that co-operative society engaged in the manufacturing and sale of sugar out of the sugarcane grown by its members is entitled for deduction u/s. 80P(2) (a)(iii) of the Act.

The High Court noted that the Hon’ble Apex Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) has held that keeping in mind the object behind the payment of the incentive subsidy, that the payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. According to the High Court in the present case also, the grant was not for the purpose of bringing into existence new assets but was for the purpose of making payment to the sugarcane growers, therefore, same should be treated as capital receipt.

On appeal by the Revenue, the Supreme Court remanded the matter to the file of the Commissioner of Income-tax (Appeals), in view of the order passed by it in Morinda Cooperative Sugar Mills Ltd. vs. CIT [2013] 354 ITR 230 (SC).

The Supreme Court however clarified that it had not expressed any opinion on the merits of the case and that the assessee was entitled to raise the contention before the Commissioner that in so far as the second issue was concerned, it was covered in its favour by the decision of the Supreme Court in CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC)].

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Appeal to the Supreme Court – No question of law arises from the finding of fact that the sale and lease back transactions was a sham

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Avasarala Technologies Ltd. vs. JCIT (2015) 373 ITR 34 (SC)

The assessee claimed depreciation on certain machinery allegedly purchased from Andhra Pradesh State Electricity Board (APSEB), vide sale deed dated 29-9-1995, which, as per the assessee, was given to the APSEB itself on lease. All the authorities found, as a fact, that there was no such purchase of machinery and the transaction in question was sham. On that basis, it was concluded that since the machinery was not purchased by the assessee, it never became the owner of the machinery and therefore could not claim any depreciation thereof. The Supreme Court held that these were pure findings of facts recorded by the authorities below and did not give rise to any question of law.

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Appeal to the High Court – Circular No. 3 of 2011 (which stipulates monetary limit for appeals by Department) should not be applied ipso facto, particularly, when the matter has cascading effect.

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CIT vs. Century Park (2015) 373 ITR 32 (SC)

The High Court dismissed the appeal filed by the Revenue as not maintainable without going into merits since the net tax effect in respect of the subject matter of the appeal was less than Rs.10,00,000 in view of the Circular No.3 of 2011. On appeal by the Revenue, the Supreme Court [vide order dated 1st April, 2015] granted liberty to the Department to move the High Court to point out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. The Supreme Court observed that there are cases under the Income-tax Act, 1961, in which common principle may be involved in subsequent group of matters or large number of matters. According to the Supreme Court, in such cases if the attention of the High Court is drawn, the High Court would not apply the Circular ipso facto.

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Depreciation – Once the assessee proves the ownership of the assets and its use for the business purpose, he is entitled to depreciation u/s. 32

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K. M. Sugar Mills Ltd. vs. CIT (2015) 373 ITR 42 (SC)

The appellant-assessee had set up its unit some time in September, 1985 to carry on the business of manufacturing and compressing oxygen, hydrogen, nitrogen amonis, carbonic acid, action (including dissolved) argon, cooking gas and other types of industrial gases or kind substances etc. For running the aforesaid plant, the assessee had also bought 1,250 gas cylinders. However, since the unit had not started functioning, these gas cylinders were leased out to M/s. Saraveshwari Gases (P) Limited, Ghaziabad and M/s. Malik Industries. In the return filed by the assessee, he claimed depreciation on those gas cylinders at the rate of 100 %, as provided under the rules on the aforesaid item.

The Assessing Officer, however, rejected the claim of depreciation on the ground that hiring business was not proved. The appeal filed by the assessee before the Commissioner of Income Tax (Appeals) was accepted on the ground that the income received from leasing the aforesaid equipments would be treated as business income and on that basis he allowed the depreciation.

The aforesaid order of the CIT(Appeals) was set aside by the Income Tax Appellate Tribunal, and the order of the Income Tax Appellate Tribunal was upheld by the High Court. The High Court has concurred with the opinion of the Tribunal on the ground that the cylinders were not purchased for leasing business and one of the parties to whom the cylinders were leased out is the manufacturer and seller of the cylinders. It was further stated that the cylinders were dispatched to the other party only a day before the closing of the accounting period.

On an appeal by the Appellant-assessee, the Supreme Court held that the aforesaid reasons given by the Income Tax Appellate Tribunal and the High Court in denying the depreciation did not appear to be valid reasons in law. Insofar as the purchase of gas cylinders by the assessee was concerned, this fact was not disputed. It was also not disputed that these gas cylinders were purchased for business purpose. In fact, the plea of the assessee that the manufacturing unit had not started functioning and this had necessitated the assessee to lease out these gas cylinders to the aforesaid two parties to enable it to earn some income, rather than keeping those cylinders idle, was also not in dispute. On the contrary, the income which was generated from leasing out those gas cylinders was treated as “business income”. Once the income from leasing those gas cylinders was accepted as the “business income”, which was taxed at the hands of the assessee as such, there was no reason how the depreciation on these gas cylinders could have been disallowed on the ground that the cylinders were not purchased for “leasing business”.

According to the Supreme Court, the aforesaid facts clearly demonstrated that the assessee had proved ownership of these gas cylinders and use of these gas cylinders for business purpose. Once these ingredients were proved, the assessee was entitled to depreciation u/s. 32 of the Income-tax Act. The Supreme Court, therefore, set aside the judgment of the High Court, and held that the assessee was entitled to depreciation as claimed for the assessment year in question.

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Order for Levy of Fees u/s. 234E and Intimation u/s. 200A

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Issue for Consideration
A person deducting tax at source is
required, u/s. 200(3), to prepare and furnish a statement in the
prescribed form (Form No.s 24 Q, 26B, 26Q,27A and 27Q) with
DGIT(Systems) or NSDL in accordance with Rule 31A within the prescribed
time. Likewise, section 206 C requires a person responsible for
collection of tax at source to prepare and furnish a statement in Form
27C in accordance with Rule 37C within the prescribed time.

Section
234E of the Income tax Act, with effect from 1st January, 2012, makes
an assessee liable to pay, by way of fee, a sum of Rs. 200 for every day
of default in filing a statement within the time prescribed in section
200(3) or section 206C(3). However, the fee shall not exceed the amount
of tax deductible or collectible. The amount of fee payable is required
to be paid before filing the statements. The constitutionality of that
levy of fees has been upheld by various high courts. A delay in
furnishing the statement is thus made liable to a fee u/s. 234E.

Section
200A inserted by the Finance (No.2) Act, 2009, w.e.f. 01.04.2010,
provides for the processing of a statement of TDS, furnished u/s 200(3),
to enable the processor to ascertain the correctness of TDS and in
doing so carry out permissible adjustments and levy interest for delay
in payment of the deducted tax. The processor is also required to
prepare and generate an intimation of the sum payable or refundable to
the deductor, and send the same to him. These provisions of the
processing and issue of intimation are modified w.e.f. 01.06.2015 to
provide for the computation of the fee payable u/s. 234E while issuing
an intimation. Simultaneously, section 206 CB is inserted by the Finance
Act, 2015 to provide for processing of the statement of TCS and issue
of intimation w.e.f. 01.06.2015, for the first time.

In recent
times, a number of intimations are issued by the processor u/s 200A,
inter alia levying the fee payable u/s. 234E of the Act and demanding
the same vide such intimations. An aspect common to such intimations is
that all of them are issued before 1st June, 2015.

The
intimations issued before 1st June, 2015, levying and demanding fee u/s
234E, are being challenged by the tax deductors on the ground that the
processor had no authority to demand, under an intimation, any fee prior
to 1st June, 2015 – as such authority is available only from 1st June,
2015. In addition, it is also contended that the processor and/or an AO
in any case had no authority to pass any orders for computing and
levying such fee u/s. 234E of the Act in as much as no power is vested
in them for doing so.

The Amritsar bench of the Income Tax
Appellate Tribunal, under the circumstances held that an intimation,
issued u/s. 200A, demanding the fees u/s 234E, was not valid in law
where it was issued on or before 1st June, 2015. The Chennai bench of
the Tribunal, while concurring with the view, held that the AO was
empowered to pass a separate order for levy of such fee outside the
intimation u/s. 200A of the Act.

Sibia Healthcare’s case
The
issue first arose in the case of the Sibia Healthcare Private Limited,
171 TTJ 145(Asr.). The AO in that case, had processed the statement of
TDS filed for the third quarter of the financial year 2012-13 by the
assessee and had in the process thereof levied the fees u/s. 234 E for
the default of delay in filing the statement. The assessee in the appeal
before the tribunal had called into question the correctness of the
order of the CIT(A) upholding levy of fees, u/s 234 E of the Income-tax
Act, 1961 and challenged such levy by way of intimation dated 11th
January 2014 issued u/s. 200A.

The Tribunal noted that it was a
case in which there was admittedly a delay in filing of the TDS returns,
and the AO(TDS), in the course of the processing of the TDS return, had
raised a demand under an intimation issued u/s. 200A of the Act, for
levy of fees u/s. 234 E for delayed filing of TDS statement. Aggrieved
by the levy of fees, the assessee carried the matter in appeal before
the CIT(A), but without any success. The assessee, not being satisfied,
filed a further appeal before the Tribunal. The Tribunal, on the above
facts, concerned itself with the question as to whether or not, for the
period prior to 1st June 2015, fees u/s. 234 E of the Act in respect of
defaults in furnishing TDS statements, could be levied in issuing
intimation u/s. 200A of the Act.

The Tribunal noted that there
was no enabling provision for raising a demand in respect of levy of
fees u/s. 234E prior to 1st June, 2015 . It noted that at the relevant
point of time, section 200A permitted computation of amount recoverable
from, or payable to, the tax deductor after making the adjustments on
account of “arithmetical errors” and “incorrect claims apparent from any
information in the statement ” and for “interest, if any, computed on
the basis of sums deductible as computed in the statement”. No other
adjustments in the amount refundable to, or recoverable from, the tax
deductor, were permissible in accordance with the law as it existed at
that point of time.

In the considered view of the Tribunal; the
adjustment in respect of levy of fees u/s. 234E was beyond the scope of
‘permissible adjustments’ contemplated u/s. 200A; as an intimation was
an ‘appealable order’ u/s. 246A(a), the CIT(A) ought to have examined
legality of the adjustment made under the said intimation in the light
of the scope of section 200A which the CIT(A) had not done and instead
he had justified the levy of fees on the basis of the provisions of
section 234E. The answer to the question whether such a levy could be
effected in the course of intimation u/s. 200A. was clearly in the
negative.

Importantly, the Tribunal noted that no other
provision enabling a demand in respect of the levy had been pointed out
to the Tribunal, and it was thus an admitted position that in the
absence of the enabling provision u/s. 200A, no such levy could be
effected. The Tribunal also held that the said intimation was issued
beyond the time permissible in law by noting that a demand u/s. 200A, in
the facts of the case, was to be issued latest by 31st March 2015 and
the defect of delay in issuing the intimation thus was not curable.
Bearing in mind the entirety of the case, the impugned levy of fees u/s.
234 E was found by the tribunal to be unsustainable in law. The
Tribunal therefore, upholding the grievance of the assessee, deleted the
levy of fee u/s. 234E of the Act.

G. Indhirani & Other cases
The
issue again came up before the Chennai bench of the Income tax
Appellate Tribunal in the case of G. Indhirani in ITA No. 1020
&1021/Mds./2015 and other cases. The appeals of the different
assessees directed against the respective orders of the CIT(A), Salem
were heard together and disposed of by a common order as the issue
involved was common. The only issue for consideration of the Tribunal
was with regard to the levy of fee u/s 234E of the Income-tax Act, while
processing the statement furnished by the assessees, u/s. 200A of the
Act.

On behalf of the assessees, it was submitted that the statement filed by the assessee has to be processed only in the manner in which it was laid down u/s. 200A of the Act; levy of fee u/s. 234E of the Act could not be a subject matter of processing the statement u/s. 200A of the Act; such an adjustment was permissible only vide an amendment made in section 200A by the Finance Act, 2015, with effect from 01.06.2015, whereby the parliament empowered the AO to levy fee u/s. 234E of the Act while processing a statement u/s. 200A of the Act; prior to 01.06.2015, the AO had no authority to levy fee, if any, u/s. 234E of the Act; the Amritsar Bench of the Tribunal in I.T.A. No. 90/Asr/2015 vide order dated 09.06.2015, held that prior to 01.06.2015, there was no enabling provision in section 200A for raising a demand in respect of levy of fee u/s. 234E of the Act. It was further contended that the fee levied u/s. 234E of the Act, while processing the statement filed u/s. 200A of the Act was not justified in as much as such a levy of fee, while processing the statement, was beyond the scope of section 200A of the Act.

Attention was invited to section 234E of the Act to highlight that when an assessee failed to deliver the statement within the prescribed time, he was liable to pay by way of fee a sum of Rs. 200/- for every day during the period of the failure. Referring to the words used in the section 234E “he shall be liable to pay”, it was pointed out that the assessee was liable to pay fee and the section did not empower the AO to levy the fee which was clear by reading of section 234E(3) of the Act that provided for payment of the fee before delivery of statement u/s. 200(3) of the Act. It was thus clear that the fee had to be paid by the assessee voluntarily before filing the statement u/s. 200(3) of the Act and the AO had no power to levy the fee before the amendment.

On the contrary,on behalf of the Income tax Department, it was submitted that section 234E of the Act provided for payment of fee in cases where the assessee failed to deliver the statement as prescribed in section 200(3) of the Act and therefore, the AO had every authority to levy fee either by a separate order or while processing the statement u/s. 200A of the Act.

On consideration of the rival submissions on either side and perusal of the relevant material on record, the Tribunal noted that section 200A of the Act provided for processing of the statement of tax deducted at source by making adjustment as provided therein; the AO could not make any adjustment other than the one prescribed in section 200A of the Act; it was obvious that prior to 01.06.2015, there was no enabling provision in section 200A of the Act for making adjustment in respect of the statement filed by the assessee with regard to tax deducted at source by levying fee u/s. 234E of the Act; the parliament for the first time enabled the AO to make adjustment by levying fee u/s. 234E of the Act with effect from 01.06.2015.

The Tribunal accordingly held that while processing the statement u/s. 200A of the Act, the AO could not make any adjustment by levying fee u/s. 234E prior to 01.06.2015 in the following words; “In the case before us, the Assessing Officer levied fee u/s. 234E of the Act while processing the statement of tax deducted at source u/s. 200A of the Act. Therefore, this Tribunal is of the considered opinion that the fee levied by the Assessing Officer u/s. 234E of the Act while processing the statement of tax deducted at source is beyond the scope of adjustment provided u/s. 200A of the Act. Therefore, such adjustment cannot stand in the eye of law.”

The assessee next contended that the AO had no authority to levy the fee u/s. 234E in view of the language of the said section 234E which provided that ‘the assessee’ “shall be liable to pay” ‘by way of fee’. The language in the assessee’s opinion clearly conveyed that the assessee had to voluntarily pay the fee and the AO had no authority to levy fee. This argument was found to be very attractive and fanciful by the Tribunal, but was also found to be devoid of any substance.

The Tribunal held that;

  •    the assessee shall pay the fee as provided u/s. 234E(1) of the Act before delivery of the statement u/s. 200(3) of the Act when section 234E clearly stated that the assessee was liable to pay fee for the delay in delivery of the statement with regard to tax deducted at source,

  •     if the assessee failed to pay the fee for the periods of delay, then the assessing authority had all the powers to levy fee while processing the statement u/s. 200A of the Act by making adjustment after 01.06.2015,
  •    prior to 01.06.2015, the AO had every authority to pass an order separately levying fee u/s. 234E of the Act,

  •    what was not permissible was levy of fee u/s. 234E of the Act while processing the statement of tax deducted at source and making adjustment before 01.06.2015, it did not mean that the AO could not pass a separate order u/s. 234E of the Act levying fee for the delay in filing the statement as required u/s. 200(3) of the Act.

The Tribunal proceeded to examine the contention of the assessee that the AO had no power to levy fee u/s. 234E in the light of the provisions of Indian Penal Code and in particular section 396 of the Code that provided for punishment for dacoity with murder as also for the liability to fine. It also examined section 408 of the said Code which provided for payment of fine in addition to the punishment in cases of criminal breach of trust by a clerk or servant. Similarly, the other provisions of the Code that provided for fine were referred to by the Tribunal to observe as follows; “The language used by the Parliament in Indian Penal Code is “shall also be liable to fine”. This means that the Magistrate or Sessions Judge, who tries the accused for an offence punishable under the provisions of Indian Penal Code, in addition to punishment of imprisonment, shall also levy fine. If the contention of the Ld. counsel for the assessees is accepted, then the Magistrate or Sessions Judge, as the case may be, who is trying the accused for the offence punishable under Indian Penal Code, may not have authority to levy fine. .. It is well known principle that the fine prescribed under the Indian Penal Code has to be levied by the concerned Magistrate or Sessions Judge who is trying the offence punishable under the Indian Penal Code. Therefore, the contention of the Ld. counsel that merely because the Parliament has used the language “he shall be liable to pay by way of fee”, the assessee has to pay the fee voluntarily and the Assessing Officer has no authority to levy fee could not be accepted. No one would come forward to pay the fee voluntarily unless there is a compulsion under the statutory provision. The Parliament welcomes the citizens to come forward and comply with the provisions of the Act by paying the prescribed fee before filing the statement u/s. 200(3) of the Act. However, if the assessee fails to pay the fee before filing the statement u/s. 200(3) of the Act, the assessing authority is well within his limit in passing a separate order levying such a fee in addition to processing the statement u/s. 200A of the Act. In other words, before 01.06.2015, the assessing authority could pass a separate order u/s. 234E levying fee for delay in filing the statement u/s. 200(3) of the Act. However, after 01.06.2015, the assessing authority is well within his limit to levy fee u/s. 234E of the Act even while processing the statement u/s. 200A and making adjustment.”

The Tribunal, in the facts of the case however, was of the considered opinion that the AO had exceeded his jurisdiction in levying fee u/s. 234E while processing the statement and making adjustment u/s. 200A of the Act and therefore, the impugned intimation of the lower authorities levying fee u/s. 234E of the Act could not be sustained in law. At the same time while holding so in the assessee’s favour, it was made clear by the Tribunal that it was open to the AO to pass a separate order u/s. 234E of the Act for levying fee provided the limitation for such a levy had not expired.

Observations

The constitutional validity of section 234E of the Act has been examined by the Bombay High Court in the case of and Rashmikant Kundalia (Bom.), 373 ITR 248 and is upheld by the court. However, in a series of the decisions of the court in the cases of Narath Mapila LP School, [WP (C)    31498/2013(J)](Ker.), Adithya Bizor P. Solutions(Karn.) [WP No. 6918-6938/2014(T-IT), Om Prakash Dhoot (Raj.) [WP No. 1981 of 2014], a stay has been granted on the recovery of the demands raised in respect of fees u/s. 234E.

The power of the AO, while processing the statement of TDS u/s. 200A, to levy fee u/s. 234E and demand the same vide an intimation issued on 1st June, 2015 or thereafter is not in dispute. Also not in dispute is the fact that such fee cannot be demanded under an intimation that is issued before that date. The amendment of section 200A by the Finance Act, 2015 has made up for the deficiency, if any, by enabling the levy of the fee while processing the statement of TDS and demanding the payment of such levy under an intimation. The dispute appears to be about the power of the AO to levy a fee u/s. 234E outside the intimation u/s. 200A of the Act. Can an income-tax authority levy and demand the fee prescribed u/s. 234E on the basis of provisions of section 234E alone? Can it pass an order outside the provisions of section 200A for demanding the levy of fee? Is it prevented from demanding such fee in view of specific language of section 234E that require an assessee to pay the fee and pay the same before filing the statement u/s. 200(3) of the Act? These are the questions that require Section 234E of the Act, was inserted by the Finance Act 2012 brought into effect from 1st July 2012 reads as under:

234E. Fee for defaults in furnishing Statements

(1)    Without prejudice to the provisions of the Act, where a person fails to deliver or cause to be delivered a statement within the time prescribed in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C, he shall be liable to pay, by way of fee, a sum of two hundred rupees for every day during which the failure continues.

(2)    The amount of fee referred to in s/s. (1) shall not exceed the amount of tax deductible or collectible, as the case may be.

(3)    The amount of fee referred to in s/s. (1) shall be paid before delivering or causing to be delivered a    statement    in    accordance    with    sub-section    (3) of section 200 or the proviso to sub-section (3) of section 206C.

(4)    The provisions of this section shall apply to a statement referred to in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C which is to be delivered or caused to be delivered for tax deducted at source or tax collected at source, as the case may be, on or after the 1st day of July, 2012

On a bare reading of the provisions of section 234E, one gathers that the liability to pay the fee is that of the assessee who had defaulted in filing the statement of TDS within the time prescribed u/s. 200(3). It is also clear that the fee is to be paid before the filing of the statement of TDS u/s. 200 by the assessee. It is further clear from a bare reading of the amended provisions of section 200A, in particular clauses (c) and (d), that with effect from 1st June 2015, the fee, if any, shall be computed in accordance with the provisions of section 234E while processing the statement of TDS and the sum payable by, or the amount of refund due to, the deductor shall be determined after adjustment of the amount computed under clause (b) and clause (c) against any amount paid u/s. 200 or section 201 or section 234E and any amount paid otherwise by way of tax or interest or fee and an intimation shall be prepared or generated and sent to the deductor specifying the sum determined to be payable by, or the amount of refund due to, him under clause (d) and the amount of refund due to the deductor in pursuance of the determination under clause (d) shall be granted to the deductor.

It is true that there was no express or specific provisions on or before 1st June, 2015 that empowered an authority to levy such fee and demand the payment of the same. However, such an interpretation would mean that the provisions of section 234E, though introduced w.e.f 1st July, 2012 has no teeth and are redundant till 31st May, 2015. Such an interpretation shall also render many provisions of the Act redundant where they provide for a levy or payment for an offence specified in the respective provision without express provision for levy and demand thereof. It also would mean that for each provision for any tax, interest, fee, levy, fine there should be an express and corresponding provision authorising an income-tax authority to effectively levy the same and demand the same from the assessee failing which the charge would remain ineffective.

The Chennai bench of the Tribunal in G. Indrihani’s case is right in holding that the AO or the authority is empowered to pass an appropriate order for levy of the fees u/s 234E and to demand the same under such an order. The effect of the amendment in section 200A is limited to authorising the AO or any other authority to levy the fee or ascertain the correctness of the fee paid while processing the statement of TDS and demand the same vide an intimation, a power which was not hitherto available till 31st May, 2015. An independent power to pass an order had always been vested in the AO or other authority once a liability to fee for the default was imposed under the Act.

Income Computation & Disclosure Standards – Some Issues

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The 10 Income Computation and Disclosure Standards (ICDS) which have been notified on 31st March 2015 u/s. 145(2) of the Income-tax Act, 1961 have significant implications on the computation of income for assessment years beginning from assessment year 2016-17.

Under the notification, these standards come into force from 1st April 2016, i.e. assessment year 2016-17, apply to all assessees following mercantile system of accounting, and are to be followed for the purposes of computation of income chargeable to income tax under the head “Profits and gains of business or profession” or “Income from other sources”. The notification also supercedes notification dated 25th January 1996 [which notified 2 Accounting Standards u/s 145(2) – Disclosure of Accounting Policies, and Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies], except as regards such things done or omitted to be done before such supersession.

Background
Section 145, which deals with method of accounting, was substituted by the Finance Act, 1995, with effect from assessment year 1997-98. Sub-section (2) to this section, after this amendment, provided that the Central Government may notify in the Official Gazette from time to time accounting standards (“AS”) to be followed by any class of assessees or in respect of any class of income.

The provisions of sub-section (1) were made subject to the provisions of sub-section (2), whereby the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” was to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee, subject to the provisions of subsection (2).

Sub-section (3) provided that where the assessing officer was not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or AS notified under sub-section (2) had not been regularly followed by the assessee, the assessing officer could make an assessment in the manner provided in section 144 (i.e. a best judgement assessment).

In 1996, AS notified by ICAI were not mandatory for companies, but were mandatory for auditors auditing general purpose financial statements. On 29th January 1996, two AS (“IT-AS”) were notified by the CBDT, Disclosure of Accounting Policies, and Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies.

In July 2002, the Government constituted a Committee for formulation of AS for notification u/s 145(2). In November 2003, this Committee recommended the notification of the AS issued by ICAI without any modification, since it would be impractical for a taxpayer to maintain two sets of books of account. It also recommended appropriate legislative amendments to the Act for preventing any revenue leakage due to the AS being notified by ICAI. These recommendations were not implemented.

With the imminent introduction of International Financial Reporting Standards (IFRS) in India in the form of Ind- AS, in December 2010, the Government constituted a Committee of Departmental Officers and professionals to suggest AS for notification u/s. 145(2). The terms of the Committee were as under:

i) to study the harmonisation of AS issued by the ICAI with the direct tax laws in India, and suggest AS which need to be adopted u/s. 145(2) of the Act along with the relevant modifications;

ii) to suggest method for determination of tax base (book profit) for the purpose of Minimum Alternate Tax (MAT) in case of companies migrating to IFRS (IND AS) in the initial year of adoption and thereafter; and

iii) to suggest appropriate amendments to the Act in view of transition to IFRS (IND AS) regime. This Committee submitted an interim report in August 2011. The recommendations of the Committee in such interim report were as under:

1. Separate AS should be notified u/s. 145(2), since the AS to be notified would have to be in harmony with the Act. The notified AS should provide specific rules, which would enable computation of income with certainty and clarity, and would also need elimination of alternatives, to the extent possible.

2. Since it would be burdensome for taxpayers to maintain 2 sets of books of account, the AS to be notified should apply only to computation of income, and books of account should not have to be maintained on the basis of such AS.

3. T o distinguish such AS from other AS, these AS should be called Tax Accounting Standards (“TAS ”).

4. S ince TAS were based on mercantile system of accounting, they should not apply to taxpayers following cash system of accounting.

5. S ince TAS are meant to be in harmony with the Act, in case of conflict, the provisions of the Act should prevail over TAS .

6. S ince the starting point for computation of taxable income was the profit as per the financial accounts, which are prepared on the basis of AS whose provisions may be different from TAS , a reconciliation between the income as per the financial statements and the income computed as per TAS should be presented.

In October 2011, drafts of 2 TAS – Construction Contracts and Government Grants – were released for public comment. In May 2012, drafts of another 6 TAS were released for public comment.

The Committee gave its final report in August 2012. It focused only on formulation of TAS harmonised with the provisions of the Act, since the position regarding the transition to Ind-AS was fluid and uncertain, and therefore even the impact of Ind-AS on book profits relevant for the purposes of MAT could not be ascertained.

It recommended that of the 31 AS issued by ICAI, 7 AS did not need to be examined, since they did not relate to computation of income. Of the remaining 24 AS, 10 related to disclosure requirements, were not yet mandatory or were not required for computation of income. The Committee therefore provided drafts of 14 TAS . The Committee also recommended that TAS in respect of certain other areas be considered for notification – Share based payment, Revenue recognition by real estate developers, Service concession arrangements (example, Build Operate Transfer agreements), and Exploration for and evaluation of mineral resources.

In January 2015, the CBDT released the draft of 12 TAS (renamed as ICDS) for public comment. These did not include 2 TAS recommended by the Committee – Contingencies and Events Occurring After the Balance Sheet Date and Net Profit or Loss for the Period, Prior Period Items and changes in Accounting Policies.

Section 145 was amended by the Finance (No. 2) Act, 2014 with effect from 1st April 2015 (assessment year 2015-16), by substituting the term “income computation and disclosure standards” for the term “accounting standards” in sub-section (2). Similarly, sub-section (3) was amended to substitute the “not regular following of accounting standards” with “non-computation of income in accordance with the notified ICDS”.

Finally, in March 2015, the CBDT notified 10 ICDS as under:

ICDS I – Accounting Policies
ICDS II – Valuation of Inventories
ICDS III – Construction Contracts
ICDS IV – Revenue Recognition
ICDS V – Tangible Fixed Assets
ICDS VI – Effects of Changes in Foreign Exchange Rates
ICDS VII – Government Grants
ICDS VIII – Securities
ICDS IX – Borrowing Costs
ICDS X – Provisions, Contingent Liabilities and Contingent Assets

The draft ICDS prepared by the Committee but not notified were those relating to Leases and Intangible Fixed Assets.

Applicability & Issues
The notified ICDS apply with effect from assessment year 2016-17, while section 145(2) was amended with effect from assessment year 2015-16. Therefore, for assessment year 2015-16, IT-AS would not apply, since the section provides for ICDS to be followed. Further, since ICDS were not notified till March 2015, ICDS were also not required to be followed for that year. Effectively, for assessment year 2015-16, neither IT-AS nor ICDS would apply. ICDS would apply only with effect from assessment year 2016-17.

ICDS would apply to all taxpayers following mercantile system of accounting, irrespective of the level of income. It would not apply to taxpayers following cash system of accounting. It would not apply only to taxpayers carrying on business, but even to other taxpayers, who may have income under the head “Income from Other Sources”. Effectively, since almost every taxpayer would have at least bank interest, which is taxable under the head “Income from Other Sources”, it would apply to most taxpayers. Further, most taxpayers choose to offer income for tax on an accrual basis, to facilitate matching of tax deducted at source (TDS) from their income with their claim for TDS credit as per their return of income.

Would it apply to taxpayers who do not maintain books of accounts? The provisions would certainly apply to all taxpayers who offer their income to tax under these 2 heads of income on a mercantile basis. Can a taxpayer choose to offer his income to tax on a cash basis, where books of account are not maintained, or is it to be presumed that his income has to be taxed on a mercantile or accrual basis in the absence of books of accounts?

In N. R. Sirker vs. CIT 111 ITR 281, the Gauhati High Court considered the issue and held as under:

“It can safely be assumed that ordinarily people keep accounts in cash system, that is to say, when certain sum is received, it is entered in his account and in the case of firms, etc., where regular method of accounting is adopted, sometimes accounts are kept in mercantile system. In the instant case it was not the case of the department that the assessee’s accounts were kept in mercantile system. On the other hand, the assessment orders showed that no proper accounts were kept. That being so it would not be justified to presume that the assessee kept his accounts in the mercantile system. Income-tax is normally paid on money actually received as income after deducting the allowable deductions. In the case of an assessee maintaining accounts in mercantile system, there was some variation, inasmuch as moneys receivable and payable were also shown as received and paid in the books. In order to apply this method, the proved or admitted position must be that the assessee keeps his accounts in mercantile system.”

Similarly, in Dr. N. K. Brahmachari vs. CIT 186 ITR 507, the Calcutta High Court held that unless and until it was found that the assessee maintained his accounts on accrual basis, income accrued but not received could not be taxed.

In CIT vs. Vimla D. Sonwane 212 ITR 489, the Bombay High Court considered a case where the assesse did not maintain regular books of accounts and did not follow mercantile system of accounting. The Bombay High Court held in that case:

“Option regarding adoption of system of accounting is with the assessee and not with the Income-tax Department. The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case. The department cannot compel the assessee to adopt the mercantile system of accounting. As a matter of fact, it was not adopted.”

In Whitworth Park Coal Co. Ltd. vs. IRC [1960] 40 ITR 517, the House of Lords laid down that where no method of accounting had been regularly employed, a non-trader cannot be assessed, (in the Indian context, u/s. 56 under the head ‘Income from other sources’) in respect of money which he has not received. The House of Lords observed:

“…The word ‘income’ appears to me to be the crucial word, and it is not easy to say what it means. The word is not defined in the Act and I do not think that it can be defined. There are two different currents of authority. It appears to me to be quite settled that in computing a trader’s income account must be taken of trading debts which have not yet been received by the trader. The price of goods sold or services rendered is included in the year’s profit and loss account although that price has not yet been paid. One reason may be that the price has already been earned and that it would give a false picture to put the cost of producing the goods or rendering the services into his accounts as an outgoing but to put nothing against that until the price has been paid. Good accounting practice may require some exceptions, I do not know, but the general principle has long been recognised. And if in the end the price is not paid it can be written off in a subsequent year as a bad debt.

But the position of an ordinary individual who has no trade or profession is quite different. He does not make up a profit and loss account. Sums paid to him are his income, perhaps subject to some deductions, and it would be a great hardship to require him to pay tax on sums owing to him but of which he cannot yet obtain payment. Moreover, for him there is nothing corresponding to a trader writing off bad debts in a subsequent year, except perhaps the right to get back tax which he has paid in error.” (p. 533)

“The case has often arisen of a trader being required to pay tax on something which he has not yet received and may never receive, but we were informed that there is no reported case where a non-trader has had to do this whereas there are at least three cases to the opposite effect—Lambe v. IRC [1934] 2 ITR 494, Dewar v. IRC 1935 5 Tax LR 536 and Grey v. Tiley [1932] 16 Tax Cas. 414, and I would also refer to what was said by Lord Wrenbury in St. Lucia Usines & Estates Co. Ltd. v. St. Lucia ( Colonial Treasurer) [1924] AC 508 (PC). I certainly think that it would be wrong to hold now for the first time that a non-trader to whom money is owing but who has not yet received it must bring it into his income-tax return and pay tax on it. And for this purpose I think that the company must be treated as a non-trader, because the Butterley’s case [1957] AC 32 makes it clear that these payments are not trading receipts.” (p. 533)

Therefore, for income falling under the head “Income from other sources”, it is clear that in the absence of books of accounts, and where the assessee has not exercised any option, the income would be taxable on a cash basis.

It is well settled that the method of accounting is vis-a-vis each source of income, since computation of income is first to be done for each source of income, and then aggregated under each head of income. An assessee can choose to follow one method of accounting for some sources of income, and another method of accounting for other sources of income. In J. K. Bankers vs. CIT 94 ITR

107    (All), the assessee was following mercantile system of accounting in respect of interest on loans in respect of its moneylending business, and offered lease rent earned by it to tax on a cash basis under the head “Income from Other Sources”. The Allahabad High Court held that an assessee could choose to follow a different method of accounting in respect of its moneylending business and in respect of lease rent. Similarly, in CIT vs. Smt. Vimla D. Sonwane 212 ITR 489, the Bombay High Court held that “The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case”.

Where an assessee follows cash method of accounting for certain sources of income and mercantile system of accounting for others, ICDS would apply only to those sources of income, where mercantile system of accounting is followed and would not apply to those sources of income, where cash method of accounting is followed. For instance, an assessee may have a manufacturing business, and a separate commission agency business. He may be following mercantile system of accounting for his manufacturing business, and a cash method of accounting for his commission agency business. ICDS would then apply only to the manufacturing business, and not to the commission agency business.

Can a taxpayer opt to change his method of accounting from mercantile to cash basis, in order to prevent the applicability of ICDS? Under paragraph 5 of ICDS I, an accounting policy shall not be changed without reasonable cause. Under AS 5, such a change was permissible only if the adoption of a different accounting policy was required by statute or for compliance with an accounting standard or if it was considered that the change would result in a more appropriate presentation of the financial statements of the enterprise. Would a change in law amount to reasonable cause? If such a change is made from assessment year 2016-17, the year from which ICDS comes into effect, an assessee would need to demonstrate that such change was actuated by other commercial considerations, and not merely to bypass the provisions of ICDS.

Do ICDS apply to a taxpayer who is offering his income to tax under a presumptive tax scheme, such as section 44AD? Under the presumptive tax scheme, books of account are not relevant, since the income is computed on the basis of the presumptive tax rate laid down under the Act. It therefore does not involve computation of income on the basis of the method of accounting, or on the basis of adjustments to the accounts. Therefore, though there is no specific exclusion under the notification for taxpayers following under presumptive tax schemes from the purview of ICDS, logically, ICDS should not apply to such taxpayers. However, where the presumptive tax scheme involves computation of tax on the basis of gross receipts, turnover, etc., it is possible that the tax authorities may take a view that the ICDS on revenue recognition would apply to compute the gross receipts or turnover in such cases.

Would ICDS apply to non-residents? The provisions of ICDS apply to all taxpayers, irrespective of the concept of residence. However, where a non-resident taxpayer falls under a presumptive tax scheme, such as section 115A, on the same logic as that of presumptive tax schemes applicable to residents, the provisions of ICDS should not apply. Further, where a non-resident claims the benefit of a double taxation avoidance agreement (DTAA), by virtue of section 90(2), the provisions of the DTAA would prevail over the provisions of the Income-tax Act, including section 145(2) and ICDS notified thereunder. In other cases of incomes of non-residents, which do not fall under presumptive tax schemes or DTAA, the provisions of ICDS would apply.

It has been stated in each ICDS that the ICDS would not apply for the purpose of maintenance of books of accounts. While theoretically this may be the position, the question arises as to whether it is practicable or even possible to compute the income under ICDS without maintaining a parallel set of books of account, given the substantial differences between AS being followed in the books of accounts and ICDS. Most taxpayers would end up at least preparing a parallel profit and loss account and balance sheet, to ensure that ICDS and its consequences have been properly taken care of while making the adjustments.

Further, the Committee had recommended that a tax auditor is required to certify that the computation of taxable income is made in accordance with the provisions of ICDS. Before certification, a tax auditor would invariably require such parallel profit and loss account and balance sheet to be prepared, to ensure that all adjustments required on account of ICDS have been considered. This will result in substantial work for most businesses, and may even result in the requirement of parallel MIS, one for the purposes of regular accounts, and the other for the purposes of ICDS. One wonders whether the Committee really wanted to avoid the requirement of maintenance of 2 sets of books of account, as stated by it, or has taken into account the practical difficulties, given the complex and myriad adjustments it has suggested through ICDS.

An interesting issue arises in this context. Can an assessee maintain 2 separate books of accounts – one under the Companies Act or other applicable law on a mercantile system, and a parallel set of books of accounts for income tax purposes on a cash basis? If one looks at the provisions of section 145(1), it provides that income chargeable under these 2 heads of income shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. What is the meaning of the term “regularly employed”? Normally, the system of accounting adopted by the assesse in his books for his dealings with the outside world would be adopted for the purposes of computing the profit or loss for tax purposes also. The accounts are those maintained in the regular course of business. It may therefore be difficult for an assessee to maintain separate books of account with different system of accounting only for income tax purposes.

It may be noted that even after the introduction of ICDS, the computation still has to be in accordance with the method of accounting regularly employed by the assessee. Compliance with ICDS is an additional requirement. Therefore, the computation in accordance with the method of accounting is merely modified by the requirements of ICDS, and not substituted entirely.

Since ICDS is not applicable for the purposes of maintenance of books of account, one wonders as to what is the purpose and ambit of ICDS I on Accounting Policies. Since the purpose of ICDS is not to lay down accounting policies which are to be followed in the maintenance of the books of account, ICDS I should be regarded as merely a disclosure standard and not a computation standard. There are however certain provisions in ICDS I which relate to computation.

For example, the provision that accounting policies adopted shall be such was to represent a true and fair view of the state of affairs and income of the business, profession or vocation, and that for this purpose, the treatment and presentation of transaction and events shall be governed by their substance and not merely by their legal form, and marked to market loss or an expected loss shall not be recognised, unless the recognition of such loss is in accordance with the provisions of any other ICDS, really relates to what accounting policies an assessee should follow in its books of account. This is inconsistent with the preamble to this ICDS, that it is not applicable for the purpose of maintenance of books of account. This is also ultra vires the powers available under the provisions of section 145(2), which provide for computation in accordance with notified ICDS, and no longer contain the power to notify accounting standards.

This anomaly possibly arose on account of the fact that the provisions of section 145(2) were modified only after the Committee provided the draft of the relevant ICDS. Possibly, such provisions of ICDS I may not be valid.

Each ICDS states that in the case of conflicts between the provisions of the Income-tax Act and the ICDS, the provisions of the Act would prevail to that extent. Such a provision is ostensibly to harmonise the provisions of the ICDS with the provisions of the Act. One wonders as to why the Committee did not take into account the various provisions of the Act while framing ICDS. While such a provision is helpful, it would lead to substantial litigation in cases where there is no express provision in the Act, but where courts have interpreted the provisions of the Act in a manner which is inconsistent with the provisions of the ICDS.

There have been 3 specific amendments made to the Income-tax Act by the Finance Act 2015, to ensure that the provisions of the Act are in line with the provisions of ICDS. These 3 provisions are as under:

1.    The definition of “income” u/s. 2(24) has been amended by insertion of clause (xviii) to include assistance in the form of a subsidy or grant or cash incentive or duty drawback or favour or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee, other than the subsidy or grant or reimbursement, which is taken into account for determination of the actual cost of the asset in accordance with the provisions of explanation 10 to clause (1) of section 43. This is to align it with the provisions of ICDS VII on Government Grants.

2.    The provisions of the proviso to section 36(1)(iii) have been modified to delete the words “for extension of existing business or profession”, after the words “in respect of capital borrowed for acquisition of an asset”, to bring the section in line with ICDS IX on Borrowing Costs, whereby interest in respect of borrowings for all assets acquired, from the date of borrowing till the date of first put to use of the asset, is to be capitalised.

3.    A second proviso has been inserted to section 36(1) (vii), to provide that where a debt has been taken into account in computing the income of an assessee for any year on the basis of ICDS without recording such debt in the books of accounts, then such debt would be deemed to have been written off in the year in which it becomes irrecoverable. This is to facilitate the claim for deduction of bad debts, where the debt has been recognised as income in accordance with ICDS, but has not been recognised in the books of accounts in accordance with AS.

Obviously, with the amendment of the Income-tax Act as well, the provisions of the ICDS in this regard read along with the amended Act, which may be contrary to earlier judicial rulings, would now apply.

There could be earlier judicial rulings which are based on the relevant provisions of the accounting standards, and where the court therefore interpreted the law on the basis of such accounting standards. These judicial rulings would now have to be considered as being subject to the requirements of ICDS, as the method of accounting is now subject to modification by the provisions of ICDS.

The third and last category of judicial rulings would be those where the courts have laid down certain basic principles while interpreting the tax law, in particular, the relevant provisions of the tax law. In such cases, such judicial rulings would override the provisions of ICDS, since such rulings have interpreted the provisions of the Act, which would prevail over ICDS.

For instance, various judicial rulings have propounded the real income theory. The Delhi High Court, in the case of CIT vs. Vashisht Chay Vyapar 330 ITR 440 has held, based on the real income theory, that interest accrued on non-performing assets of non-banking financial companies cannot be taxed until such time as such interest is actually received. Would the contrary provisions of ICDS IV on revenue recognition change the position? It would appear that the ruling will still continue to hold good even after the introduction of ICDS.

In case any of the provisions of ICDS is contrary to the Income Tax Rules, which one would prevail? The provisions of ICDS are silent in this regard. Given the fact that rules are a form of delegated legislation, while ICDS is in the form of a notification, which then becomes a part of the legislation, it would appear that the provisions of ICDS should prevail in such cases.

Since ICDS is not applicable for the purpose of maintenance of books of account, it is clear that the provisions of ICDS would not apply to the computation of “book profits” for the purposes of minimum alternate tax under section 115JB.

In fact, most of the ICDS provisions would increase the gap between the taxable income and the book profits, instead of narrowing down the gap. In this context, one wonders whether a recent Telangana & Andhra Pradesh High Court decision would be of assistance. In the case of Nagarjuna Fertilizers & Chemicals Limited 373 ITR 252, the High Court held that where an item of income was taxed in an earlier year but was recorded in the books of account of the current year, on the principle that the same income could not be taxed twice, such income had to be excluded from the book profits of the current year.

Can one use the provisions of AS for interpreting ICDS, where the provisions of both are identical? If one compares the ICDS with the corresponding AS, one notices that the bold portion of the AS has been picked up and modified, and issued as ICDS. Where the provisions of the AS and ICDS are identical, one should therefore be able to take resort to the explanatory paragraphs forming part of the AS, though they do not form part of the ICDS, in order to interpret the ICDS.

Impact & Conclusion

One thing is certain – the provisions of ICDS will create far greater litigation, then what one is now witnessing. That would defeat the very purpose of ICDS of bringing in tax certainty and reduction of litigation. Does reduction of litigation mean introduction of complicated provisions which are unfair to taxpayers? Is there at least one provision in the ICDS which decides a disputed issue in favour of taxpayers?

Does the CBDT believe that what is accepted worldwide as income (profit determined in accordance with IFRS), is not the real income when it comes to taxation? Are the Indian tax authorities an exception to the rest of the world? ICDS does not increase taxes – it merely results in advancement of taxability of income to an earlier year, and postponement of allowability of expenditure to a later year. Is the need for advancement of tax revenues so pressing, that taxpayer convenience and compliance costs are brushed aside?

Looking at the requirements of ICDS, one cannot but help wonder as to whether ICDS has been merely brought in to overcome the impact of adverse judicial rulings, and not really with a view to facilitate transition to IndAS. What ought to have been done by amendments to the law is being sought to be implemented through ICDS.

Assessees would now have to cope with not only frequent changes to the law, but also with frequent changes to ICDS, given the unfinished agenda of 4 draft ICDS yet to be notified, and the further 4 recommended for notification by the Committee. One understands that the Committee is in the process of drafting further ICDS for notification.

One also understands that the CBDT is likely to issue FAQs to clarify various aspects of ICDS. One only hopes that such FAQs will not create further confusion, but would help clear the confusion created by the ICDS.

One wonders as to how such ICDS fits in with the Prime Minister’s promise to improve the ease of doing business. The additional compliance costs in order to comply with ICDS would far outweigh the advantages gained by the tax department by recovering taxes at an earlier stage. Would business be keen to expand or would persons be willing to set up new businesses, given the significant compliance costs? The country would certainly take a significant hit in the “Ease of Doing Business Survey” once ICDS is implemented.

Tax auditors will now be in an extremely difficult situation, if the recommendation relating to requirement of certification of computation of income in accordance with ICDS is implemented. So far, they merely had to certify the true and fair view of the accounts, and the correctness of the information provided in Form 3CD. They did not have to certify the correctness of the claims for various deductions. If an auditor would now have to certify the correctness of the computation of income, this would give rise to various issues as to how such certification could be carried out, particularly in cases where the issue was debatable.

Instead of taxpayers, tax auditors may bear the brunt of the income tax department’s actions in respect of claims for deduction or exemption made which, in the view of the income tax department, is not allowable. Would assessees be willing to remunerate tax auditors for such additional high risks which they would bear in certifying the computation of income? If such a requirement of certification of the computation of income were introduced, it is possible that many chartered accountants may no longer be willing to carry out tax audits.

The biggest beneficiaries of ICDS may be tax lawyers and chartered accountants, who will have to handle the resultant additional litigation. The biggest losers will be the taxpayers, due to additional compliance and litigation costs, and the country, due to loss of productive manhours, and the loss of potential growth in business.

BLACK MONEY ACT: A MALEVOLENT LAW

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Black money is a cancer in our economic system, not yet terminal or life-threatening, and unquestionably deserves closer scrutiny by the government. However, the kind of action that has been taken on this front of late is difficult to understand. The replacement of the dreaded Foreign Exchange Regulation Act (FERA) was supposed to put an end to harassment by tax sleuths and enforcement officials. But, through various recent actions, the government has opened the door to such behaviour once again.

In this article, I have tried to capture various issues which have cropped up with the enactment of the Black Money law. Even after the CBDT has tried to address few issues by rolling out circular of frequently asked questions, still there is a lack of clarity in many areas on applicability of this dreadful law.

Constitutional Validity of Change in Date of Commencement of Act
To start with the list of issues, firstly, the move of the Finance Ministry to advance the date of operation of the black money law from April 1, 2016 to July 1, 2015 is highly questionable. Could the government have “amended” a law passed by the Parliament which had already received the assent of the President through an Executive Order? If the date from which the law would come into force was part of the Bill passed by both Houses of Parliament, then how anybody other than Parliament could have changed it. The government should have gone to the Parliament for amending it.

Section 86 (1) of the Act empowers the Central government to order to remove difficulties not inconsistent with the provisions of the main Act as a delegate of Parliament. But in the instant situation, the government has actually amended section 1(3) of the main Act by altering the date when the Act shall come into force from 1st April, 2016, to 1st July, 2015 in a notification issued by an officer of the rank of Under Secretary to remove any “difficulty” that comes in the way of giving effect to the provisions of the Act through an order. But the “difficulty” that the section refers to cannot apply to the date from which the law would come into force. Further, a delegated legislation cannot amend the parent legislation.

Duration of Compliance Window
It was expected that the government would provide a compliance window of 3 to 6 months, though the author’s view is that a period of 6 to 9 months would have to be provided for those, who may want to take this one time opportunity and to get the proper valuation of their assets done in terms of complicated Rules for valuation. The 3-month window will certainly be a practical difficulty faced by persons who are genuinely interested in making a disclosure of undisclosed foreign assets. Supposedly, a person having investments and assets in, let us say, 7 tax havens (Switzerland, Cayman Islands, Bermuda, Luxembourg, Jersey, Singapore and Mauritius) and wants to come clean by making declaration of undisclosed assets. Further, calculating the fair value of unlisted shares will be a pain and above that it will be a task to satisfy the tax authority that the disclosure made under the one-time compliance window is correct. An individual who holds shares in an unlisted firm will have to find out the fair value of all assets that firm holds which will be time-consuming. It will not be easy to complete the valuation exercise in three months time frame allotted (at the time of writing this article, approximately one month of the time frame has already elapsed) for one-time compliance window, but the downside of not declaring could be severe in view of the automatic exchange of information becoming effective soon. If this three-month compliance scheme is compared with the tax authority’s 2 year time frame to complete an assessment, such short compliance scheme may cause undue hardship and be a burden to declarants to satisfy the requirements prescribed under the scheme. If the information comes to the notice of the tax department post this window, the payout would be much more and there would be the risk of imprisonment and prosecution. More so if anyone, even by mistake, makes an incorrect declaration, then the entire declaration will be treated as null and void. The tax and penalty paid will not be refunded and the information given in the form will be used against the person for initiating proceedings by any demand raised against the declarant.

CONFUSION OVER NON-REFUNDABLE TAX AND PENAL TY UPON REJECTION OF THE DECLARA TION UNDER CO M-LIANCE WINDOW SCHEME

If the declaration is regarded as void under section 68 of the Act (Chapter VI – Compliance Window Scheme), then whether the tax and penalty paid would be refunded? This question requires clarification from the CBDT. However, having regard to the provisions of section 66 and section 68, such tax and penalty may not be refunded to the declarant and the declaration shall be deemed never to have been filed under Chapter VI of the Act. Now, since the declaration is deemed never to have been filed, the Assessing Officer may issue a notice under the normal provisions of this Act. Consequently, the declaration may be required to pay tax and penalty, as per the provisions of the Act. However, the declarant should be allowed to claim set-off of the amount of tax and penalty already paid under this chapter for the assets declared vide the declaration (which was regarded as void under section 68) and therefore only the remaining amount of tax and/or penalty should be required to be paid.

PROBLEM ON OBTAINING INFORMATION ON BANKS ACCOUN TS BY THE DECLARANT

Under Indian Income Tax Act, the tax department can go back up to 16 years whereas under the Black Money Act (which prescribes no time limit) the resident is expected to disclose, as per the circular issued, income or assets even for a period beyond 16 years also. This could be 20, 30 or even 40 years depending on when an account was opened or even sums inherited by a person or person from whom assets were inherited did not pay taxes on such assets. Some of the accountholders in the Liechtenstein bank LGT had opened accounts in the late 1960s and 1970s. Foreign banks do not have account details beyond 10 years. If a person cannot furnish all details, then he would not be able to comply and the tax department will reject the application which is made under the one-time compliance window. However, in a case where there are undisclosed assets other than bank accounts in the declaration, it is uncertain whether the entire declaration would be rejected or only the bank account declaration would stand reject on account of non-compliance of the details so prescribed by the Government.

In some countries like the UAE, there is no income tax and also no legal requirement to maintain books of accounts for tax purpose. In such cases, it will be difficult for individuals to get details of all transactions in the bank account.

Prior Information received by Govt under DTAA
Declarant under the compliance window has no means to know whether the Government has received any prior information under DTAA on or before 30 June 2015 about his undisclosed assets. Supposedly, where a declarant has disclosed the information under the compliance window scheme and is later on informed by the Government that they had information about these undisclosed assets, then that declarant would have to exclude such undisclosed assets from the declaration and will also lose immunity from prosecution under Income-tax Act, Wealth Tax Act, Customs Act, FEMA and Companies Act. But the question here arises, on what grounds that declarant should rely on Government’s statement of having prior information. So, declarants may contest the Government’s assertion by filing RTI application to disclose documentary evidence substantiating Government’s claim that information under DTAA was received on or before 30th June 2015.

Valuation of Immovable Properties acquired abroad

Properties acquired abroad will be taxed on the basis of a valuation report of a valuer recognised by the foreign government. Clarification is required regarding the evidence the declarant will have to produce to prove that the valuer is recognised by that particular foreign government and to get valuation done. In most of the foreign countries, there is no system of a registered valuers notified by the Government and valuation is generally carried out by private asset valuation companies. This becomes more difficult and time-consuming for a person to first conduct a search for finding a registered valuer otherwise the declaration made would be rejected and deemed to have never been made leading to more severe and harsh consequences like higher penalty and fear of prosecution.

Valuation of Any other assets

The rules prescribed by the Government provide for valuation of any other asset. Clarification is required regarding its definition. Whether that will include intangible assets as well. Further regarding its valuation the rules provide that FMV shall be higher of cost and the price that the asset would fetch if sold in the open market on the valuation date in an arm’s-length transaction. Whether a valuation report is required for this?

Indian Nationals returning to India after few years

Professionals who return to India after having worked abroad may have opened retirement pension accounts like 401K account in US. CBDT has clarified that assets acquired when the person was a non-resident do not fall under the definition of undisclosed assets and will not be taxed under the Black Money Act or Income-tax Act. However, a question arises whether the balance in the 401k accounts will have to be disclosed by a resident in the Income Tax Return under the Schedule for Foreign Assets? Since CBDT’s circular has stated that non-reporting of foreign assets in Income-tax return and makes the person liable for penalty of Rs 10 lakh under the Act. Further, the threshold limit of Rs. 5 lakh prescribed by the Government for which the penalty is not applicable is in respect of bank account only. So, such 401k balances does not represent as bank account and the threshold limit would also not be applicable in this regard. Clarification needs to be sought from CBDT on this issue since the penalty will be harsh for a mere non-disclosure even if there is no detriment to the Government as the asset was created out of income earned when the individual was a non-resident and which is not taxable in India.

Further, there is a practical difficulty of retrieving details of such balance for those who returned to India from abroad long back. It makes no sense in putting such people to hardship without any commensurate benefit to the Government. It would be better if CBDT instructs Assessing Officers not to impose penalty in cases where non-disclosure causes no loss to the Revenue.

Inheritance of property

The CBDT in the circular containing a list of frequently asked questions has stated that in case of inheritance of property from the father and which has been sold by the son in an earlier year, son can make the declaration in respect of such property as legal representative where source of investment in the property by the father was unexplained. What happens if son is not aware of the source? Can he be liable under this Act, in case he fails to make such disclosures? Similarly, there is conflict between the Act and the Circular issued by the CBDT, where in the Circular it appears as if the non-residents are also being covered by the Act, while section 3 of the Act provides the applicability of this act to ordinarily residents only.

Further, would it be correct to argue that non-disclosure would only attract penalty of Rs. 10 lakh u/s. 42? Tax and penalty of 120% would be attracted only on income accrued on such inherited property that is not disclosed post inheritance?

Threat of Abetment

The Act imposes liability for abetting or inducing another to wilfully attempt to evade tax or to make false statements/ declarations in relation to foreign income and assets. The objective of this provision is to target professional advisors such as private banks, accountants, lawyers and other consultants whose actions may potentially be covered under ‘abetment or inducement’. This move is intended to make the Act comprehensive in its scope. That said, it is bound to cause concern among practitioners as there is no clear guidance on what precautions or due diligence will be sufficient to indicate practitioners acted within their rights or that they did not beach their code of conduct. Imposition of such liability on professional advisors and intermediaries may adversely affect advising of Indian clients by practitioners may apprehend the risk of undue harassment at the hands of Revenue officials.

There is a dire need for the Government to step in and clear the air on many issues and by not just issuing a press release stating the views in the media reports are based on surmises and may not be factually accurate or correctly reflecting the legal position. Thus, until and unless the Government lends an ear to the problems faced and helps in resolving them, this dreadful Black Money Law will only be a tool of tax terrorism.

“Black Money”- do our laws really address the problem?

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The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 received the assent of the President on 26th May, 2015. Subsequent to its enactment, rules were notified, and the CBDT came out with certain clarifications. The first reactions from experts seem to suggest that the law is stringent, and despite the “clarifications” is unclear about a large number of issues. The Act imposes a maximum penalty of three times the tax, and a minimum of an amount equal to the tax, for those who avail of the onetime window available to declarants who make a declaration of undisclosed assets prior to September, 2015. Apart from this, the law prescribes, punitive action by way of prosecution. If the object of the law was to achieve a whopping tax collection, that may not be achieved. This issue contains an article by T.P. Ostwal, discussing some of the significant provisions of the Act.

Money of residents which is siphoned off after evading tax, certainly causes significant damage a to a country’s economy. I had said in an earlier editorial that bringing back such foreign funds should be one of the priorities of the government. This is because such money goes out of all channels of distribution “black or white“, and consequently slows down economic activity. Thus, while all black money creation is bad, such money stashed abroad is worse. In such a situation, though garnering tax revenue and penalising offenders is certainly one of the objectives, bringing back such money into the “white” economy should be another. Does legislation like the Black Money Act have such an objective?

It is nobody’s case that those committing infringement be treated leniently but, one wonders if the law provides a marginal incentive to those who introduce the money into normal banking channels, the objective that I mentioned in the earlier paragraph can be achieved. For example, if under the scheme, if a person invests the monies lying outside India in low interest bonds issued by the government, and in return is charged a lower penalty, it would augment the government’s resources and the money would enter the legal economy. This is not a new concept and some earlier schemes did contain such provisions. I am conscious of the fact that when the Voluntary Disclosure Scheme 1997 was under challenge, there was an assurance given to the Supreme Court that there would be no further amnesty schemes. However a way has to be found so that the objective is achieved without violating the assurance /undertaking given to the Supreme Court.

It appears that when a tax law is framed the only objective of those who draft the legislation is to garner maximum taxes for the government. Undoubtedly this is a laudable objective. What must be borne in mind is that there are other angles and nuances that must be appreciated. This is often not done.

Two examples quickly come to mind. They are in the form of two provisions in the Income tax Act, one which has been with us for a decade and a second which was legislated recently. It is well known that a real estate business is one of the largest sectors where the parallel economy prospers. Transactions in real estate take place at prices which are significantly different from those recorded in the documents. It is extremely difficult to tax such unrecorded consideration given the lack of evidence. To counter this a provision was brought in whereby the stamp duty valuation was treated as the full value of consideration received if this was more than the consideration stated in the document,. The provision contains reasonably sufficient safeguards to ensure that genuine cases did not suffer. The provision enabled the tax gatherer to tax the difference in the hands of the seller.

What is important is that the difference in the stamp value valuation and the prices recorded in the document is a definite indicator that the balance consideration received by the seller and paid by the purchaser has entered the parallel economy. No attempt seems to have been made to bring this into the official channel. . Similarly, the provision of adopting the stamp duty valuation is now extended to those carrying on business in real estate. Once again the tax gatherer is happy collecting tax while no effort seems to have been made to bring such money which is outside the system into the mainstream. What really happens is that such money which lies outside the economy does not lie idle. It is invested, reinvested or “turned over” in business cycles and grows. Therefore, the volume in the parallel economy doubles itself in 5 to 6 years.

What one really needs to attempt is the creation of an environment, either through incentives or otherwise to bring such money back into the recorded economy. It is only then that the problem of black money with all its attendant ills will be reduced. I do appreciate that this is easier said than done; but law makers, particularly in the tax field must keep this in mind. This may call for some innovative solutions but an attempt must be made.

When will this objective of reducing the black money volume be achieved? This will be achieved only when the concept of “ease of doing business” does not remain on paper but is brought into reality on the ground. Archaic laws must be repealed, unfair provisions in laws amended and existing laws administered fairly and in a humane manner. Then the volume of black money will be reduced.

As India celebrates its 68th Independence Day, will the law makers, politicians and bureaucrats take some action in this regard?

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Love

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“Love is to the Human Heart, what sun is to flowers”
–Swami Chinmayanandji

At a recent workshop on “Harmonising Personal & Professional Life for Effective Leadership” organised by Dharma Bharathi Mission and the BCAS Foundation, Swami Sachidananda Bharathi addressed the participant and said:

“In order to be harmonious, healthy, peaceful and happy persons, we need to know something about the deepest yearnings of the human heart. It is found that there are four deepest yearnings that are common to most human hearts:

1. Yearning for love
2. Yearning for acceptance
3. Yearning for dignity
4. Yearning of equality.”

Hereunder are a few thoughts on LOVE:

It is sad that in this world – we all are deprived of love. There is hardly a time in human history when there is no conflict – of race, of religion, for water, for territory and so on.

Love is inborn in human beings, yet it is not manifested much in reality.

Osho says:
“Love is a phenomenon, where the ego disappears and you are fully conscious.”

You need Power, only when you want to do
something Harmful, Otherwise Love is
Enough to get everything done.
–Charlie Chaplin

The best love is the kind that awakens that soul; that makes us reach for more, that plants the fire in our hearts and brings peace to our minds.

As Swamiji said:
“Without love, we cannot really grow and blossom to our full potentials. Without love, we also cannot be really happy and healthy. Love sustains us. Love nourishes us. It is the source of life and existence. That is why religions and spiritual masters refer to God as ‘Love Infinite’… The greatest hunger in the world today is not for food, but for love. Mother Teresa had pointed out that ‘the tragedy of the modern world is lack of love’. She also had said: “Where there is hatred you can sow love; where there is injury you can sow pardon! Spread love everywhere you go!”

Most of the individuals are narcissists – they love themselves (though many do not deserve it!). Many love others – family, citizen, even animals (especially dogs & cats), and plants. One of my friend’s wife tells me that she loves plants and she regularly talks to them and they blossom (smile!) in response.

There is selfish love. There is selfless love which is the best gift of God to many, e.g. Mother Teresa. To love another person is to see the face of God.

Happiest are the people who love and are loved.

Martin Luther King Jr. Wrote:
I have decided to stick to love. Hate is too great a burden to bear.

Let us all decide the same.

(August is the month of my birthday. So, it is a special month of love, and this is my ‘BHET’).

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Reducing vulnerabilities crucial for emerging economies: RBI Governor Rajan

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Emerging economies like India have to work towards reducing vulnerabilities in their economies, said Reserve Bank of India (RBI) Governor Raghuram Rajan.

Lower interest rates and tax incentives can boost investments, he said, but consumer demand holds the key for economic growth.

“Emerging economies have to work to reduce vulnerabilities in their economies, to get to the point where, like Australia or Canada, they can allow exchange rate flexibility to do much of the adjustment for them to capital inflows,” said Rajan in his speech to the Economic Club of New York.

However, it takes time to develop the required institutions. In the meantime, the difficulty for emerging markets in absorbing large amounts of capital quickly and in a stable way should be seen as a constraint, much like the zero lower bound, rather than something that can be altered quickly, said the RBI governor. Due to this, he said, even while resisting the temptation of absorbing flows, emerging markets will look for safety nets. In the past, India has been attracting large foreign flows in domestic markets.

“We also need better international safety nets. And each one of us has to work hard in our own countries to develop a consensus for free trade, open markets, and responsible global citizenry. If we can achieve all this even as the recent economic events make us more parochial and inward-looking, we will truly have set the stage for the strong sustainable growth we all desperately need,” Rajan said.

Rajan also nudged international organisations like the International Monetary Fund to re-examine the “rules of the game” for a responsible policy. “No matter what a central bank’s domestic mandate, international responsibilities should not be ignored. The IMF should analyse each new unconventional monetary policy (including sustained unidirectional exchange rate intervention), and based on their effects and the agreed rules of the game, declare them in- or out-of-bound,” he added.

According to Rajan, the current non-system in international monetary policy is a source of substantial risk, both to sustainable growth and to the financial sector. “It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. We are being pushed towards competitive monetary easing and musical crises.” There is a need for stronger well-capitalised multilateral institutions with widespread legitimacy, some of which can provide patient capital and others that can monitor new rules of the game, said Rajan. The governor said industrial countries should export to emerging markets as a way to bolster growth. This is because they have done so in the past, too.

(Source: Article by Mr. Raghuram Rajan, RBI Governor, in ‘Business Standard’ dated 19-05-2015.)

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Bad asset blues -Government cannot continue to ignore non-performing assets.

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Last week, Reserve Bank of India Governor Raghuram Rajan indicated that the non-performing asset (NPA) problems of the Indian banking system were far from over. While widely perceived to be the case, the governor’s acknowledgement of the problem brings it on to centre stage as a potential crisis. Even as the economy is showing some signs of recovery, the capacity of the banking system to support the process should raise serious questions. A recent report by CRISIL lays out the magnitude of the problem. It estimates that gross NPAs will rise by almost 20 per cent to Rs 4 lakh crore during the current fiscal year. As a ratio to total assets, they will increase by about 20 basis points to 4.5 per cent. The report also estimates that “weak” assets, which include NPAs as well as some proportion of restructured assets, will come in at Rs 5.3 lakh crore during the year, about six per cent of total assets. Overall, it presents a rather gloomy picture of the state of the country’s banking system, aggravated by the fact that these negative trends are expected to prevail in a generally improving macroeconomic environment. Within the sector, public sector banks are generally worse off than private sector ones.

There is little mystery about why the problem is so acute. The primary cause of bad assets is the massive burden of infrastructure projects that are stalled and, therefore, unable to service their due obligations to banks. While the government has expressed good intentions about improving conditions in the sector, it has yet to implement any meaningful strategy. Unless a concerted effort is made to revive activity in these projects, so that banks can look for exit opportunities, the problem is not likely to go away. While carrying the burden, banks are, quite logically, constrained from taking on any additional risk, which means that they are reluctant to lend to even their conventional customer segments. The steady deceleration in bank credit is a pointer to this constraint and, as indicated above, poses a significant risk to any revival in economic growth.

There are no easy solutions to this problem. Re-capitalising banks has been proposed and may be part of a composite approach, but by itself it really only means throwing good money after bad. More and more capital will be consumed by provisioning against bad assets rather than by credit expansion. The pressure is compounded by the mandate to achieve Basel-III capital adequacy benchmarks over the next four years. Not only will internal accruals be woefully inadequate, external investors will be extremely wary of providing funds to banks whose asset portfolio will remain fragile for some time to come. A strategic response to the problem needs to be in two phases. The first phase will involve the unloading of a significant chunk of the bad assets in infrastructure from the books of banks on to a special purpose vehicle – a “bad bank” as some call it. The second phase can then focus on re-capitalising public sector banks, with a combination of public and private funds. Given the government’s decision to be selective in channelling funds to banks based on financial health, this may also require consolidation. Time is of essence.

(Source: Editorial in the ‘Business Standard’ dated 18-05-2015).

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Technological disruption – How to ride out the apocalypse – IT services firms are facing fatal disruption. They need to be utterly committed to the shift.

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Kodak. Digital Equipment. Sun Microsystems. Nokia. Blackberry. These are but a small sample of once-great companies devastated by technological disruption. Even mighty Microsoft and Intel are struggling to reinvent themselves and stay relevant in a phone-first world. There are vital lessons in these stories for India’s vaunted IT services companies.

It is easy — and wrong — to assume that the companies that get disrupted were poorly managed. Disruptive changes are like big storms. They build up slowly and then break with terrifying ferocity.

So it’s quite easy to spot the brewing disruption. Take Kodak. Kodak developed the world’s first digital camera in 1975. It held all the most important patents pertaining to digital imaging. It realised the potential impact digital photography would have on its enormously lucrative film franchise. In 2005, Kodak was the leader in digital cameras. But they failed to ride the tiger and eventually failed.

The story is similar with Nokia, which launched one of the world’s first smartphones, the N Series Communicator in 1995, but understood too late that with the iPhone, the game shifted from devices to competition between ecosystems. These companies had market leadership, enormous resources, most of the technology and many smart managers. They saw the approaching disruption, yet failed to cross the chasm.

One factor why companies find it hard to navigate industry disruptions is complacence, even arrogance. When a company is sitting on billions of dollars of cash, fat margins and a good market share, it’s hard to create a sense of urgency in the organisation and with its shareholders.

Another factor is the ‘gravitational pull’ of the current or legacy business. The need to deliver quarterly earnings, serve existing customers, maintain profit margins, manage the many daily operational challenges, all consume the majority of resources and senior management attention. Too little focus goes towards embracing the brewing disruption.

A third reason is the fear of cannibalisation. The new model is, at least initially, much less profitable than the current business and so there is a big fear of margin dilution.

Microsoft’s cloud services, for instance, have nowhere near the profitability of its old Windows and Office businesses. However, some margin is much better than zero margin.

The new business model usually requires a very different mindset and new capabilities. In the IT services business, for example, success requires the ability to hold a proactive conversation with CEOs and CXOs about the digital transformation of their business, rather than simply responding to project requests for proposals (RFPs) issued by the IT department. Building these capabilities is nontrivial and time-consuming. Finally, there is governance. Though the boards of good companies are populated by accomplished leaders, few boards have independent directors with a visceral grasp of the magnitude of impending changes. It is all too easy then to remain focused on revenue growth and earnings per share until it’s too late.

One obvious sign of this is to look at how the CEO is compensated. All too often, it is based on the financial performance of the legacy business rather than the momentum of the future business model.

Until, of course, it is too late. India’s extraordinary IT services companies face just such a transition today. What can be done? First and foremost, strategic transformation must be the top priority of the boards of companies facing disruption. Strategy cannot simply be left to the CEO and management.

It has to be a collaborative endeavour. Second, make it clear that the CEO’s top priority is the strategic transformation, not merely delivering the quarter and align compensation accordingly.

Third, realise that there are two kinds of risk: the risk of omission, or doing nothing versus the risk of commission, or trying something different. The risk of commission is better than doing nothing and the urgency and consequences of failure are such that there should be no half-measures.

A significant reason why Kodak and others failed is because their responses to disruption were halfhearted or anaemic. This won’t work. To succeed, companies have to be ‘all-in’ or utterly committed to the shift.

This may mean making significant acquisitions, or bringing in very different talent, even though these moves have major risk and can blow up too. In nature, it is not the strongest species that survive, nor the most intelligent, but the ones most adaptable to change.

(Source: Article by Mr Ravi Venkatesan in ‘The Economic Times’ dated 19-05-2015. The writer is a member of the board of Infosys and former chairman, Microsoft India)

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Optimism – Choose: Mud or the stars?

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Optimism is not a deep, complicated philosophy or a school of thought. It is more a matter of our general attitude to life. We find that some people always look at the bright side of things while there are some others who always see the bad, dark side of things. To an optimist, every cloud has a silver lining. A pessimist, on the other hand, misses the silver lining and sees only the cloud.
Frederick Langbridge sums it up, “Two men look out through the same bars: one sees the mud, and one the stars”. One Sunday morning, when William Dean Howells and Mark Twain came out of the church, it started raining heavily. “Do you think it will stop?” asked Howells. “It always has,” replied Twain. An optimist hopes for the best. Optimism nurtures two things most: hope and cheerfulness. Alexander regarded hope as the greatest possession of mankind. He held that if you destroy ‘hope’, you destroy ‘future’. Hope strengthens will to survive calamities, so that we never give way to despair. It helps us count our blessings, and hope persistently goads us to ‘go on’. It is rightly said that “an optimist sees an opportunity in every calamity; a pessimist sees a calamity in every opportunity”.

An optimist reacts to situations differently. He thinks and acts in a positive manner. Urdu poet Asar Lakhnavi wrote, when I do not succeed in achieving my aim, I think of attaining it through a different approach, and so I try again.

(Source: Editorial by Niti Paul Mehta in ‘The Economic Times’ dated 22.05.2015).

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Gold Monetisation Scheme – Needs more polish

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On paper, the draft gold monetisation scheme has something for everyone. It also looks like being an improvement over the existing gold deposit scheme. For individuals, the entry barrier has been reduced to 30 grammes of gold instead of the existing 500 grammes. Also, banks are free to decide on the interest rate, which is good for competition as well as depositors. And like the earlier scheme, there may not be any income or capital gains tax. Banks, which did not see much return on investment and therefore only sporadically promoted the 1999 scheme, have been allowed numerous options this time round. They can sell gold to raise foreign currency that can be used to lend to exporters and importers, convert it into coins and sell it, or lend it to jewellers. And if the Reserve Bank of India agrees, banks can use gold as part of their cash reserve ratio and statutory liquidity ratio requirements.

Indian households and temple trusts may hold as much as 22,000 tonnes of gold. So, for the government, even if the scheme’s success rate is less than 1 per cent, or 100- 200 tonnes annually in the next few years, the import bill can go down by 10 to 20 per cent, according to Nomura. India imported 967 tonnes of gold in 2014-15 and the import bill was $34.4 billion.

If the scheme succeeds, it will address both domestic demand and investment demand. The main benefit for jewellers and consequently, to customers will be the fall in the price of gold as the recycling of domestic gold will be without any import duty – currently at 10 per cent. The government has been under pressure from industry for some time to bring down the import duty.

So far, so good. But several problems may arise. For one, despite reduction of the minimum limit, individuals would be worried that if they pledge a significant amount of gold with banks, the income-tax department may want to know the source of that gold. Experts feel that the government should clarify the amount that can be pledged without income-tax scrutiny and possible harassment. Another big hindrance will be the tax on conversion of physical gold into the gold deposit scheme. That is, if the gold was bought at Rs 1,000 per 10 gramme and converted into a gold deposit scheme at Rs 25,000 per 10 grammes, there will be a capital gains tax of 20 per cent with indexation. If the date of acquiring is not known, April 1, 1984 will be used as the base year. Experts believe that the tax should only be imposed when gold is being sold and not when it is being converted like it is done in case of other asset classes like property or debt. To attract domestic gold, the government will have to address some of these issues if it has to avoid the fate of the 1999 gold deposit scheme – which attracted only 15 tonnes in the past 16 years.

(Source: Editorial in ‘Business Standard’ dated 21-05- 2015).

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Win hearts and minds

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The art of persuading by winning hearts is about connecting people emotionally to your idea or position. In any persuasive dialogue, you need to connect with others to some degree. This approach is highly effective in circumstances such as introducing a new idea and trying to pique interest; gaining support for a decision already been made; raising the bar on performance or commitment; leading a team struggling with discord or conflict; aligning with creative colleagues, like those in design or marketing.

The best method of persuasion in these circumstances is to connect with people on a very personal level. This is often referred to as a ‘hook’. Use vivid descriptions and metaphors to draw others into your vision. Share personal stories and experiences to demonstrate that what you’re suggesting is the right choice. Make sure you highlight what’s in it for them personally if they adopt your perspective or make a change.

What fears can you address to build trust and cultivate a feeling of safety in supporting your position? What motivations can you tap into to create alignment? Where can you find common ground to unite viewpoints? You are at your most convincing when you first appeal to the perspective, fear or motivation of your audience. Your goal in winning hearts is to make whatever you have to say matter on a personal level.…

The science of persuasion lies in winning minds with logical, well-articulated positioning and analysis in favour of your idea. To win minds, you have to do your homework. You certainly need a logical argument to support your perspective. Start by describing a situation everyone can agree is worth discussing, including both what it is and why it warrants attention.

(Extracts from “Focus on Winning Either Hearts or Minds” by Ms Lisa Lai in The Economic Times dated 22-05- 2015.)

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Ethics in Media: A Depressing Scenario

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`We are the Establishment`
This is how Vineet Jain replied to a question in an interview. Vineet is one of the Jain brothers, who own Bennet Coleman & Company, which controls the Times of India Media Group comprising of Newspapers, TV Channels, FM Radio Stations, Websites etc. The question was asked to Vineet Jain by `The New Yorker’ a prestigious weekly magazine published from USA. The magazine had published a story titled `Citizen Jain` in which this interview appeared. The title was synonymous with a famous Hollywood movie of yesteryears called `Citizen Kane`. The movie was based on the life of William Randolph Hearst, a newspaper tycoon (in those times there was no MEDIA) whose influence and power spread across US polity, society & economy. Orson Welles depicted the role of Hearst and was acclaimed for this performance.

The `New Yorker` cover story was titled `Citizen Jain`, to indicate that Jain brothers are wielding similar influence in India. The reply of Vineet Jain to interviewer’s question showed that the Jain Brothers also realise the power that they have and their willingness to use it whenever they want and for whatever purpose they need to use it.

How enormous this POWER is and how the ESTABLISHMENT flaunts it and uses it to crystallise the public opinion in whichever way it wants, can just be gauged by taking a cursory look at the events of the past 3-4 years.

And thereby hangs the tale of ETHICS IN MEDIA
Let us just take the example of agitation of `India Against Corruption’ for setting up LOKPAL. The agitation was led by Anna Hazare in which the present Chief Minister of Delhi, Arvind Kejriwal, his present political rival and BJP candidate for Chief Minister’s post during Delhi election Kiran Bedi, Prashant Bhushan & Yogendra Yadav were leading participants. The fast by Anna Hazare on the Ramlila grounds in New Delhi and the agitation lasted for nearly eight days. The Media—particularly News Channels—gave a saturation coverage to this agitation. The economics of Media demands a certain percentage of advertisement per hour of telecast. This mandates that for any half hour slot of telecast, there should be at least 12-15 minutes of advertisements. In fact, this rule is so mandatory that many important news programmes are cut short for telecasting advertisements. In spite of this, we would find that during those days of Anna Hazare’s agitation, the News Channels deliberately gave up about 600 crores of advertisement revenue by giving coverage to Hazare’s agitation without a advertisement break. Most of the News Channels, barring one or two, are in complete financial mess. In such a dire financial situation, how could these channels afford to lose so much revenue? The answer is that the Media companies which telecast these channels were promised that their loss would be compensated. Who could have given such a promise? The parties who were thinking of getting political benefit from the agitation and were aware of the power of Media to influence public opinion. How could a political party muster such a huge financial resource is a question which would naturally arise. Again, the answer would be that ties–or to use the cliché ‘nexus’—that have bonded together the political parties and corporate as well as other financial lobbies over a period of the last few decades. Of course, all these details are in the realm of speculation as nobody would be ready to provide upfront details about Media groups’ real financial dealing other than the statutory requirements. Still the fact remains that during Anna Hazare’s agitation, all the News Channels gave a saturation coverage without advertisement breaks and willingly gave up revenue.

Immediately after this agitation there were a series of exposes by almost all News Channels, major Newspapers as well as News magazines about various scams and the focus of the coverage was generally one sided. It depicted the then UPA government as a villain and branded most of the prominent ministers in the government as mired in corruption and nepotism without being factually objective. That created a general impression across the society that the government is anti-people and is not really interested in protecting as well as furthering the interests of common people and national interests. This helped the opposition to crystallise the public opinion against the then government. The campaign during 2014 Lok Sabha elections showed the reliance of political parties on Media and their attempts of using the Media as a tool to influence the public opinion. The latest example is that of various scandals about ministers in Central and Maharashtra as well as some other state governments. All of a sudden in second half of June all these scams are getting surfaced in the Media. Why this is happening and how could this have happened are the questions and if we try to find out the answers of these questions by relating this present scenario with the events during UPA period, it will lead us to the conclusion that these SCAMS are coming under the Media glare due to a definite design. The designer who may have sketched the design seems to be a section of influential corporate lobby which perceives that the present political set up has not been really beneficial for them. The scenario before May 2014 was crafted by the corporate and other business and commercial interest coming together with a firm view that the then government was detrimental to their interests and should not be allowed to come again to power. These lobbies funded the Media campaign before and during the 2014 Lok Sabha elections.

The same process of using Media to corner the present political set up seems to have been initiated. Otherwise, the sudden spurt of scams being revealed does not have any logical explanation.

All the above examples indicate the POWER of the ESTABLISHMENT and how this ESTABLISHMENT can become a tool in the hands of moneybags to be used in whatever way they want to influence the public opinion or to tarnish any ones image and credibility. How this POWER of the ESTABLISHMENT can destroy the careers and reputations of prominent people was displayed when transcripts of Radia Tapes were published

In such a scenario, business interests have dominated the functioning of Media groups rather than any Ethical framework. In a classical definition, PRESS is the FOURTH PILLAR of Democracy. All other three pillars of Democracy do not have any connection with BUSINESS. Though the PRESS has been termed as a FOURTH PILLAR, it is primarily a business venture. This uniqueness of PRESS (and now MEDIA) bestows on it a huge responsibility to perform the ideal role assigned to it. This puts a burden on PRESS to perform its function ethically. As per these ideals, newspapers (and Media in contemporary times) should be a watchdog to protect people’s interests, rights and freedoms. It should act objectively without any fear and favour and should not show any bias or inclination towards any particular group, section or community. Objectivity and adherence to truth should be the only guiding factor for any journalist working in print, electronic or web Media. Of course, these ideals are easy to preach and very hard to observe.

Evolution of the press
This would become clear as we look back on the evolution of PRESS in India. The evolution of Indian Press had a background of Freedom Struggle. Most of the regional languages as well as English Newspapers (barring newspapers such as Times of India or Statesman, which were owned by British) of those times were the vehicles of nationalist propaganda and their main objective was to project nationalistic viewpoint. Therefore, they had less `NEWS` and more `VIEWS`. The Newspapers really began to evolve as an INDUSTRY after Independence. The competition increased. So revenue earning became much more important. This could happen only  with  more advertisement. If a product is to be advertised in a particular Newspaper, then the producer would obviously be interested in finding out the readership profile of the Newspaper to gauge whether that section of people would be in a position to buy his product. If the readership profile does not match with the profile of the product, then advertising in that particular newspaper will be of no use for the producer. As the competition increased, there was a scramble to corner the advertisement revenue. This tilted the balance in favour of advertiser. This was the point at which the editorial control over the Newspapers started loosening and Advertising and Marketing departments became much more dominant. The advertiser started dictating terms and initiating process to demand the change in readership profile so as to suit the needs of    a particular product. For example, if any Newspaper wanted an advertisement from FMCG company then it was asked to prove that the readership has a economic capacity to purchase such products. If the Newspaper had no compatible readership profile and still it asked for the advertisement, then the company started demanding that it should change the readership profile by publishing news items liked and usually read by the consumers who are likely to purchase those products. So step by step, the `CONTENTS` of the Newspapers started getting managed by the Advertisement & Marketing departments on the cue given by the advertising agencies. This slide back acquired much speed after the 1991 economic liberalisation an opening up of various sectors of economy. New technology came into the industry. The Newspaper and magazines became much more colourful, sleek and glitzy. Then, satellite TV made its entry. Later on followed by News Channels. Now PRESS became MEDIA. The leading Media group like the Times of India declared itself as an ENTERTAINMENT GROUP. MEDIA became much more a business than a FOURTH PILLAR of DEMOCRACY.

The Paid News controversy which rocked the Media world was inevitable in such a scenario. Since a long time, political parties used to influence reporters and other journalistic staff to get a favourable news coverage. In the race to garner more and more revenue—in short to make more money—the owners of Newspapers decided to strike a deal with political parties themselves. That is how the NEWS became PAID.

Ethical FPAMEWORK
And in such a situation, it is no surprise that the Ethical Framework in the functioning of any MEDIA GROUP has been put on back burner. This framework has not been demolished, but it is very rarely followed and only invoked when a gross indecent and sensational reportage is published or telecast. The readership and viewership numbers dominate the discourse about Media now a days. TRP reigns supreme in electronic Media and to increase TRP ratings day by day the News  Channels are becoming more and more sensational and predatory. Obviously it has become much more easier for Corporate and Financial moneybags to influence the Media discourse with a carrot of easy finance as well  as  increase  in TRP ratings.

Still there are a number of enterprising and intrepid journalists, in both print and electronic Media, who are inspired by the ideals and who adhere to the ethical framework.  Unfortunately  the  space  in  the  Media  for such journalists is shrinking day by day,  as  the work culture gets  degraded  by  unethical  influences of money and muscle power  and  the  reluctance  of the ESTABLISHMENT to step in to clean up. In fact many a times the ESTABLISHMENT itself encourages these influences and allows them a free rein. The recent events of attack on Journalists in Uttar Pradesh an  Madhya  Pradesh  are  indicators  of  this  trend.   Of course, it must not be overlooked that access potential of a journalist and disproportionate influence wielded by even a small district Newspaper or a Video Channel encourages many unwanted elements in this profession, whose main aim is earning money be using blackmailing technique.

A statutory body like the Press Council of India or professional set up like Editors Guild have now become redundant institutions. They do not have any legal teeth and they can only admonish a recalcitrant Media group or an individual or a group of Journalists. Therefore, these institutions are not taken seriously. The electronic Media has set up an Ombudsman. But his observations and orders on complaints made are more than often overlooked. The associations or organisations of working journalists are prone to be more active on the issues of pecuniary and other benefits rather than about issues of ethical functioning.

Conclusion
Overall it  is  a  depressing  scenario  and  therein  lies  a danger to the freedom of Media. The sensational, predatory, unethical functioning is creating revulsion across the society against  the  Media.  This  has  started impinging on the credibility of the Media. This opens up a space for the powers that be to step and introduce some measures to curb the freedom in the name of putting an end to sensationalism of the Media. To guard against this danger, Media professionals must proactively initiate a process for internal discussion and debate to evolve a mechanism for enforcing ethical functioning. A collective action may be able to convince or at least force the ESTABLISHMENT to step in and help the professionals to rein in the predatory and sensational tendencies.

ETHICS IN ARCHITECTURAL PROFESSIONAL PRACTICE

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Preamble
We, the Indians, inherit various scriptures that
were transcended from generations, from father to son. We have naturally
cultivated our lifestyle conducive to the best practices required to
keep our body, mind and soul in a fit and fine mode. The philosophy we
adopted was in four Universal Brahma Sentences.

In every
profession, there are Rules and Regulations which each and every
professional is bound to abide by while performing his duties.
Architects are not taught, but are made aware of the subject. The idea
is that freedom of expression should not be stifled but should be given a
free hand. Each and every individual is encouraged to create his own
unique design which would really influence culture.

It is said
that Doctors’ mistakes are buried below the earth and Architects’
mistakes are for the world to see. The test of a good Architectural
design is that it needs to be functional and aesthetically appealing.

What is architecture?
As
architects, we are expected constantly to dwell upon the creative
aspect of design. Since architecture is not mathematics, designs cannot
be judged as right or wrong. What matters is the context, concept and
shape which then decides whether design is functional or wonderful or
awesome.

Architecture is basically the Art and Science of
designing spaces and providing services to multifunctional activities
for all human beings. This is the only discipline which encompasses the
major fields of human endeavour: Humanity, Science, Art, and Technology.

Architecture is the matrix of human civilisation, an authentic
measure of the social status and an evocative expression of ethos of an
era. When conserved it is a heritage and when ruined it becomes
archeology. Architecture has generated specialisation. City planning,
landscape and interior architecture, retro fitting of buildings,
architectural conservation, construction management have also lately
emerged as specialisation. Each of these compliments and supports each
other.

Architectural Design essentially is a product of an
individual mind but realised through association of experts from allied
fields who contribute in the process of construction with mutual respect
and understanding and work, assuring high quality of end product.

Regulation of the profession
The
practice of architectural profession is regulated by the Architects
Act, 1972 and Regulations framed there under. The Council of
Architecture has prescribed the conditions of engagement and scale of
charges under the Architects (Professional Conduct) Regulations, 1989.
The documents prescribed, stipulate the parameters within which the
architect is required to function. These define the responsibilities,
the scope of work and services and also prescribe the mandatory minimum
scale of professional charges with a view to make the client fully aware
of the architect. The professional services required by the client may
not be comprehensive in scope in all cases and accordingly, clear understanding between the two must be arrived at. The
Council of Architecture has prescribed the conditions of engagement
based on general practices to all registered architects and such
architects who have specialised in areas such as Structural Design,
Urban Design, City Planning, Landscape Architecture, Interior
Architecture and Architectural Conservation.

Scope of Services
Generally,
architects are required to provide following services, and these
services are called comprehensive services. However, client can also opt
for partial services as per mutual agreement.

a. Taking Client’s instructions and preparation of design in brief.
b. Site evaluation, analysis and impact of existing/or proposed development on its immediate environs.
c. Design and site development.
d. Structural design.
e. Sanitary, plumbing, drainage, water supply and sewerage design.
f. Electrical, electronics, communication systems and design.
g. Heating, ventilation and air conditioning design (HVAC) and other mechanical systems.
h. Elevators, escalators etc.
i. Fire detection, fire protection and security systems etc.
j. Periodic inspection and evaluation of construction work.

The
Architect shall, after taking instructions from the client, render the
following services as described below in various stages:

Stage 1: Concept Design
Take
instructions of client to ascertain the requirements and study the
environs. Prepare report, conceptual design and submit to the client for
approval.

Stage 2: Preliminary Design and Drawings
Modification of conceptual design.

Stage 3: Drawings for Clients and Obtaining Statutory Approvals
Prepare drawings for clients and obtaining statutory approvals from Competent Authorities, if required.

Stage 4: Working Drawings and Tender Documents
Prepare
working drawings and tender documents which cover the mode of
measurements, method of payments, quality control procedures on
materials and works and other conditions of contract.

Stage 5: Appointment of Contractors
Invite, receive and analyse tenders. Also advise the client on appointment of contractor.

Stage 6: Construction
Prepare and issue working drawings and details for proper execution of works during construction.

Approve samples of various elements and components.

Check and approve shop drawings submitted by contractor/ vendors.

Visit
site periodically at intervals agreed mutually, to inspect and evaluate
the construction works. Clarify decisions, interpret
drawings/specifications, attend meetings to ensure that the project
progresses generally in accordance with the conditions of contract and
also to keep the client informed and render advice on actions, if
required.

In order to ensure that the work at site progresses in
accordance with conditions of contract, the day to day supervision will
be carried out by a construction manager (clerk of works/site
supervisor/or construction management agency in case of large and
complex project), who shall work under guidance and direction of the
Architect and shall be appointed and paid by Client. Issue Certificate
of Virtual Completion.

Stage 7: Completion
Prepare
and submit completion reports and drawings for the project as required
and assist the client in obtaining “Completion/Occupation Certificate”
from Statutory authorities, wherever required.

Other aspects
include schedule of payment of professional fees based on stage-wise
completion of contract, documentation and communication charges and
reimbursable expenses.

Architects are supposed to work as per the conditions of engagement, scope of work as well as scale of charges.

Professional Conduct and selfregulation
Further, Council of Architecture in exercise of the powers conferred by the Architects Act, 1972 (Act No. 20 of 1972),read with clause (i) of sub
section (2) of section 45 with approval of the central government, made
the Architects (Professional Conduct) Regulation, 1989 to promote the
standard of professional conduct and self – discipline required of an
Architect, as detailed below:

(1) Every architect, either in
practice or employment, subject to the provisions of the Central Civil
Services (Conduct) Rules, 1964 or any other similar rules applicable to
an architect shall:

(i) Ensure that his professional activities
do not conflict with his general responsibility to contribute to the
quality of the environment and future welfare of society,

(ii)    Apply his skill to the creative, responsible and economic development of his country,

(iii)    Provide professional services of a high standard, to the best of his ability,

(iv)    If in private practice, inform his client of the conditions of engagement and scale of charges and  agree that these conditions shall be on the basis of the appointment,

(v)    Not   sub   –   commission   to   another   architect or architects the work for which he has been commissioned without prior agreement of his client,

(vi)    Not give or take discount, commissions, gift or other inducements for the introduction of clients or of work,

(vii)    Act with fairness and impartiality when administering a building contract.

(viii)    Maintain a high standard of integrity,

(ix)    Promote the advancement of Architecture, standards of Architectural education, research, training and practice,
(x)    Conduct himself in a manner which is not derogatory to his professional character, nor likely to lessen the confidence of the public in the profession, nor bring Architects into disrepute,

(xi)    Compete fairly with other Architects,

(xii)    Observe and uphold the Council’s conditions of engagement and scale of charges,
(xiii)    Not supplant or attempt to supplant another Architect,

(xiv)    Not to prepare designs in competition with other Architects for a client without payment or for reduced fee (except in a competition conducted in accordance with the Architectural competition guidelines approved by the Council),

(xv)    Not attempt to obtain, offer to undertake or accept a commission for which he knows another Architect has been selected or employed until he has evidence that the selection, employment or agreement has been terminated and he has given the previous Architect written notice that he is so doing, provided that in the preliminary stages of work, the Client may consult, in order to select the architect, as many architects as he wants, provided he makes payment of charges to each of the architects so consulted,

(xvi)    Comply with Council’s guidelines for architectural competitions and inform the Council of his appointment as assessor for an architectural competition,

(xvii)    When working in other countries, observe the requirements of codes of conduct applicable to the place where he is working,

(xviii)    Not have or take as partner in his firm any person who is disqualified for registration  by  reason  of  the fact that his name has been removed from the Register under section 29 or 30 of the Architects Act 1972,

(xix)    Provide their employees with suitable working environment, compensate them fairly and facilitate their professional development,
(xx)    Recognise and respect the professional contribution of his employees,

(xxi)    Provide their associates with suitable working environment, compensate them fairly and facilitate their professional development,

(xxii)    Recognise and respect the professional contribution of his associates,

(xxiii)    Recognise and respect the professional contribution of the consultants,

(xxiv)    Enter into agreement with them defining their scope of work, responsibilities, functions, fees and mode of payment,

(xxv)    Shall not advertise his professional services nor shall he allow his name to be included in advertisement or to be used for publicity purpose except for certain prescribed situations

(2)    In a partnership firm of architects, every partner shall ensure that such partnership firm complies with the provisions of sub–regulation (1).

In view of above, we are supposed to adopt best practices in architecture, based on guidelines prepared by the Council of Architecture.

Ethical values in our profession
In my practice of the profession, I have faced some ethical and moral challenges on a number of occasions. I am narrating some of those situations

1)    I was working with one of the leading Architectural Consulting firm during my tenure of service from 1993 to 2002. During the service, I was elevated from Assistant Architect to a very responsible post and was responsible for each & every aspect of decision-making with respect to approvals to occupation certificates.

I was handling almost 30 projects at a time. Of course that was peak time for us in real estate during 1995 – 1999.

It had so happened that in one of our projects some documents were missing, rather, with regard to certain assertions, there was a misrepresentation by the client himself. We were shocked to know that the client had made a blunder. My employer was about to tender his resignation as architect. I was of the opinion that we should not tender our resignation at this stage, and I insisted that the client disclose the correct facts. Not doing so would be shirking our social responsibility. He agreed with my views. We pursued the matter with our client and got him to place on record the valid correct document which was necessary and then proceeded with further work.

If we had ignored the misrepresentation, it would have benefitted the client. If we had taken the decision of resigning from the project, we would have lost trust of the officers of the corporation. We chose the ethical path.
2)    In one of the projects, I was appointed as an architect. Due to large size of land parcel, a layout was required to be approved. However, it was pointed out by the client that the same had already been submitted by another architect in the past. The client also provided the so called Xerox copy of his letter, which I did not believe to be a proper copy and therefore I did not certify the same.

The case came up for hearing in front of municipal officers and I was shocked to know that the previous Architect had not even given his resignation. On knowing that, despite the fact that my effort would go unrewarded I did not continue the project as an architect and was also saved because I had not certified that purported letter of resignation of the previous architect.

    Architect’s professional liability
Professionals are required to discharge their obligations and commitments diligently and befitting with quality and standards of service. The Council of  Architecture  being the regulator of Architectural Education and Profession throughout the country formulates guidelines on architect’s liability.

“Architects Professional Liability” has been approved by Council of Architecture at its 40th meeting.

  •     Professional Duties of Architect

1.    service:
The relationship between the architect and the client is that of a service provider and recipient. The professional services rendered by the architect are pursuant to the conditions of engagement and scale of charges entered into between the architect and the client.

  •     Competence: An architect being a professional shall possess the required knowledge and skill, proficiency and competence for discharging his professional duties and functions.

  •     Duty of Care: It means duty to exercise utmost skill and care.

  •    Duties: The duties that  are  required  to be performed  by an architect for various  types  of  projects  have been prescribed by Council of Architecture under the Conditions of Engagement and Scale of Charges for respective areas in the field of architecture.

2.    Professional Conduct:
An architect shall comply with the standards of professional conduct and etiquette and a Code of Ethics set out in clauses
(i)    To (xxv),read with exceptions covered by sub-clauses (a) to (h) of sub- regulation (1) of Regulation 2 of the Architects (Professional Conduct) Regulations, 1989. Violation of any of the provisions of sub-regulation (1) shall constitute a Professional misconduct.

3.    Duties and responsibilities of clients/ owners and occupants:

The client/owner shall discharge all his obligations connected with the project and engagement of the architect in accordance with the Conditions of Agreement as agreed upon. Further, the client (s)/owner (s) and Occupant(s), upon completion of the building shall maintain it properly to safeguard and preserve the longevity of the building.

4.    professional negligence:

4.1    Negligence: “Negligence” of an architect means failure to take reasonable degree of care in the course of his engagement for rendering professional services.

4.2    Deficient service:

4.2.1    “Deficiency”, as defined under section 2(1)(g) of the Consumer Protection Act, 1986 means any fault, imperfection, shortcoming or inadequacy in the quality, nature of performance which is required  to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service.

4.2.2    An Architect is required to observe and uphold the Council’s  Conditions  of  Engagement  and   Scale of Charges while rendering architectural service/ services that is/are necessary for discharge of his duties and functions for the project for which he has been engaged, amount to deficient service.

a)    Use of Building for the purpose other than for which it has been designed.

b)    Any changes/modifications to the building carried out by the owner(s)/occupant (s) without the consent or approval of the Architect who designed and/or supervised the construction of the building.

c)    Any changes / alterations / modifications carried out by consulting another architect without the knowledge and consent of erstwhile architect or without obtaining No Objection Certificate of the building.

d)    Illegal / unauthorised changes / alterations / renovations / modifications carried out by the owner
(s) / occupant (s).

e)    Any compromise with the safety norms by the owner(s)/occupants(s).

f)    Distress due to leakage from terrace, toilet, water logging within the vicinity of the building and that would affect the strength /stability of the structure or general wellbeing.

g)    Lack of periodical maintenance or inadequate maintenance by owner(s)/occupant(s).

h)    Damages caused due to any reasons arising out of specialised consultant’s deficient services with regard to design and supervision of the work entrusted to them, who were appointed /engaged in consultation with the client.

i)    Damages caused to the building for the reasons beyond the control of the architects.

5.    Professional Negligence and Deficiency in services -professional Misconduct

If any person is aggrieved by the professional negligence and/or deficiency in services provided by  the  architect,  the matter shall be referred to the Council of Architecture under Rule 35 of the Council of Architecture Rules,  1973 to adjudicate whether the architect is guilty of professional misconduct or not.

6.    Professional Liabilities

6.1    Indemnity Insurance: The architect is required to indemnify the client against losses and damages incurred by the client through the acts of the Architect and shall take out and maintain a Professional Indemnity Insurance Policy, as may be mutually agreed between the  architect  and  the  client,  with a Nationalized Insurance Company or any other recognized Insurance Company by paying the requisite premium.

Maintenance of record: The  architect  is  required to maintain all records related to the project for a minimum period of 4 years after the issuance of Certificate of Virtual Completion.
6.3    Duration: – The architect’s liability shall be limited to  a maximum period of three years after the building is handed over to / occupied by the owner, whichever is earlier.

7.    Nature of liability:
An architect is liable for the negligent act which he committed in the performance of his duties. The action against an architect can be initiated by the client on satisfying the following conditions:

(a)    There must exist a duty to take care, which is owed by an architect to his clients.
(b)    There must be failure on the part of an architect to attain that standard of care prescribed by law, thereby committed breach of such duty.
(c)    The client must have suffered damage due to such breach of duty.

Disciplinary Action under The Architect Act, 1972:
If an architect is found guilty of professional misconduct, he is liable for disciplinary action by the Council of Architecture under section 30 of the Architects Act, 1972, Civil and Criminal action in the Courts of Law.

The disciplinary action taken by the Council of Architect against the architect who has been found guilty of professional misconduct does not absolve him of his liabilities under the Code of Civil Procedure, 1908 and the Code of Criminal Procedure, 1973, if any.

Some of the relevant laws include The Law of Torts, The Consumer Protection Act, 1986 and The Indian Penal Code, 1860 etc.

Case Studies
Prof. Madhav Deobhakta in his book “Architectural Practice in India” illustrated some cases:

1)    Not taking action on their own about area of plot:
There were 13 complaints lodged by civic authorities against Architects in Mumbai. These related to certifying larger area of Land than the actual area. The disciplinary committee after investigations reported that 4 out of 13 be called before the Council. These 4 Architects admitted that they had not surveyed the lands in question; but relied upon the area certificates obtained by their clients. When questioned, they admitted that the area shown in the certificates was much more than the actual area. Further, these four Architects admitted that they did not take any steps to re-survey the plots from City Survey Office.

Council reprimanded these four architects for failure to take action on their own while discharging their professional duties.

2)    Wrong certification of condition of Building: The Architect was requested by one of the tenants to give a report on the condition of the building for a court matter. He reported that the condition of the building was sound. At the time of joint inspection under Court’s order, he admitted that the condition of the building was not sound. When questioned at the time of the appearance before the Bar of the Council, he said when he inspected the building at time of making report it was in sound condition; but the owner was responsible for its sudden deterioration.

Council after considering all facts came to the conclusion that the architect did not act in a responsible manner and decided to reprimand him for professional misconduct.

Conclusion:
The main purpose of the Architects Act, 1972 is to protect the general public from unqualified persons working as architects and to ensure the professional conduct of the practicing Architects.

There are cases of action taken against and for Architects. By and large, professional ethics are generally observed by Architects who work with integrity, responsibility and trust as they consider their profession as the first priority in life.

While regulations are indeed necessary, one has to be ethical in spirit and not only in letter. In life one has to set the ethical bar high enough. It is only then that one can lead life with the head held high!

Business expenditure – Accounting – Sections 37 and 145 – A. Ys. 1996-97 to 1999-00 – Accounting standards issued by ICAI not to be disregarded – Accounting standard employed by assessee, issued by ICAI but not notified by Central Government – Not a ground to discard – Lease equalisation charges – Deductible from lease rental income

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CIT vs. Pact Securities and Financial Services; 374 ITR 681 (T&AP):

For the A. Y. 1998-99, the assessee showed gross lease rental of Rs. 1,14,91,395/- as income. Out of this, a sum of Rs. 48,56,224/- was claimed as deduction of lease equalization charges from the lease rental income following the guidance note on accounting of leases, Issued by the ICAI. The Assessing Officer disallowed the lease equalisation charges. The Tribunal allowed the claim.

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

“(i) The Assessing Officer could not have disregarded the method of accounting followed by the assessee in respect of the lease rental as it was based on a guidance commended for adoption by a professional body such as the ICAI. The guidance note reflected the best practices adopted by accountants the world over. The fact that at the relevant point of time, it was not mandatory to adopt the methodology professed by the guidance note issued by the ICAI was irrelevant because as long as there was a disclosure of the change in the accounting policy in the accounts, which had the backing of a professional body such as the ICAI, it could not be discarded by the Assessing Officer.

(ii) Notwithstanding the fact that the opinion of ICAI was expressed in a guidance note which had not attained a mandatory status, would not provide a basis to the Assessing Officer to disregard the books of account of the assessee and in effect the method of accounting of leases followed by the assessee.

iii) Merely because the Central Government has not notified in the Official Gazette “accounting standards” to be followed by any class of assesses or in respect of any class of income, it could not be stated that the accounting standards prescribed by the ICAI or the accounting standards reflected in the “guidance note” cannot be adopted as an accounting method by an assessee.

iv) T he questions of law are answered in favour of the assessee and against the Revenue.”

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Appeal to High Court – Competency of appeal – Rule of consistency – Sections 92B and 260A – A. Y. 2007-08 – Decision of Tribunal on identical issues relating to section 92B – No appeals from decisions – Presumption that the decision has been accepted – Appeal on similar issue to High Court not maintainable

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CIT vs. Tata Autocomp Systems Ltd.; 374 ITR 516 (Bom):

The Revenue had filed an appeal before the High Court against the order of the Tribunal relating to section 92B. Appeal was not preferred against the decisions of the Tribunal on identical issue in other cases:

The Bombay High Court dismissed the appeal filed by the Revenue and held as under:

“i) T he order of the Tribunal, inter alia, had followed the decisions of the Bombay Bench of the Tribunal to reach the conclusion that the arm’s length price in the case of loans advanced to associate enterprises would be determined on the basis of the rate of interest being charged in the country where the loan is received/ consumed.

ii) T he Revenue had not preferred any appeal against those decisions of the Tribunal on the above issue. No reason had been shown as to why the Revenue sought to take a different view in the present case from that taken in those decisions of the Tribunal. The Revenue having not filed any appeal against those decisions, had in fact accepted the decisions of the Tribunal. The appeal was not maintainable.”

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Business Expenditure – Disallowance u/s. 40A(3) of payments in cash in excess of specified limit in an assessment made for a block period – Provisions to be applied as applicable for the assessment years in question

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M. G. Pictures (Madras) Ltd. vs. ACIT (2015) 373 ITR 39 (SC)

The appellant/assessee was engaged in production and distribution of motion pictures mainly in Tamil language. There was a search u/s. 132 of the Income-tax Act, at the business premises of the assessee during which certain book of accounts were seized. Consequent to the search, proposal was made for assessment for the block period of ten years 1.4.1986 to 31.3.1996 and thereafter, up to 13.9.1996.

The Assessing Officer disallowed the expenditure where the payments were made in cash in excess of Rs.10,000/- relying on section 40A(3) of the Act as it stood prior to 1.4.1996.The appellant filed appeal before the Income Tax Appellate Tribunal, Madras Bench (‘the Tribunal’). The Tribunal vide order dated 28.6.2000 partly allowed the appeal and remitted the matter to the Assessing Officer for considering the claim whether the income/loss from the film Thirumurthy was to be computed for the assessment year 1996-97 in accordance with Rule 9A of the Income Tax Rules. It was also directed that in making the computation, the Assessing Officer will consider the expenditure and make the disallowance under the provisions of section 40A(3) of the Act, as was applicable for the assessment year in question.

Feeling aggrieved by the order of the Appellate Tribunal, the appellant filed appeal before the High Court. The High Court did not accept the contentions of the appellant which were based on the amended section 158B(b) in Chapter XIVB of Finance Act, 2002 and dismissed the appeal.
Questioning the validity of the aforesaid judgment of the High Court, the appellant preferred an appeal with the leave of the Supreme Court.

The Supreme Court noted that in the year 1996, the provisions of section 40A(3) of the Act did not allow any expenditure if it was more than Rs.20,000/- and paid in cash. The only exception that was carved out in such cases was where the assessee could satisfactorily demonstrate to the Assessing Officer that it was not possible to make payment in cheque. Even in those cases, the expenditure was allowable up to Rs.10,000/- and all cash payments made in excess of Rs.10,000/- were to be disallowed as the expenditure. Provisions of section 40A(3) were amended with effect from 1.4.1996. With this amendment, in cases where the cash payment is made in excess of Rs.20,000/-, disallowance was limited to 20% of the expenditure.

The Supreme Court observed that since the date of the amendment fell within the aforesaid block period, the assessee wanted the benefit of this amendment for the entire block period of ten years, i.e., 1.4.1986 to 31.3.1996. According to the Supreme Court, such a plea was unacceptable on the face of it inasmuch as the amendment was substantive in nature, which was made clear in the explanatory notes of amendments as well.

The Supreme Court held that once the amendment was held to be substantive in nature, it could not be applied retrospectively. The only ground on which the assessee wanted benefit of this amendment from 1.4.1986 was that the assessment was of the block period of ten years. The Supreme Court noted that, however, on its pertinent query, learned counsel for the appellant was fair in conceding that there was no judgment or any principle which would help the appellant in supporting the aforesaid contention. According to the Supreme Court, the order of the High Court was perfectly justified.

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[2015-TIOL-1085-CESTAT-MUM] Commissioner of Service Tax, Mumbai-ii vs. Syntel Sterling Bestshores Solutions Pvt. Ltd

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Input services without which the quality and efficiency of output services exported cannot be achieved are eligible for refund.

Facts:
The
Respondent is a BPO rendering services to the clients based abroad. A
refund claim was filed in respect of service tax paid on rent-a-cab
service, telephone service and rent. Adjudicating authority denied the
claim. On appeal, the first appellate authority allowed the refund
claim, aggrieved by which revenue is in appeal.

Held:
The
Tribunal relied upon the CBEC’s Circular No. 120/01/2010-ST dated
19/01/2010 which specifically provides that essential services used by
Call Centres for provision of their output service would qualify as
input services eligible for taking CENVAT credit as well as refund. It
further held that the expression ‘used in’ in the CENVAT Credit Rules
should be interpreted in a harmonious manner and accordingly as the
input services disallowed were essential to provide quality output
services, the refund should be granted.

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2015 (38) STR 673 (Del.) Delhi Transport Corporation vs. CST

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A service provider is statutorily liable to pay service tax even
though based on contractual arrangement, service tax liability can be
recovered from the service receiver. Though liability can be transferred
to third party, revenue cannot be asked to recover the same from third
party or asked to wait till its recovery

Facts:
The
Appellants provided space to various contractors/ advertisers for
display of advertisement. The terms of contract clearly stated that the
contractors were responsible for paying tax to the concerned authorities
in addition to the license fees payable to them. The department issued
various letters followed by a Show Cause Notice to the Appellants for
discharge of service tax liability on such sale of space for
advertisement along with penalties. The Appellants argued that they were
autonomous body of Delhi Government and they had no intention to evade
service tax. Inadvertently, they did not obtain registration. As per
contractual arrangement, all the contractors paid service tax which was
duly deposited except 2 of the contractors. In spite of directions of
High Court u/s. 9 of Arbitration and Conciliation Act, 1996, these 2
contractors did not abide the contract. Accordingly, they were intending
to institute contempt proceedings. The department invoked extended
period of limitation on the grounds of suppression of facts. It was
argued that they were under a bonafide belief that liability was
transferred to contractors in view of the Agreements. However, the
argument of bonafide belief was rejected by CESTAT on the grounds that
the Appellants should have taken efforts to find out who was liable to
pay service tax and there was no ambiguity in provisions of service tax
law.

Held:
The Hon’ble High Court observed that
though service tax burden can be transferred by way of contractual
arrangement, statutorily service provider is required to discharge
service tax liability and the assessee cannot ask revenue to recover tax
dues from a third party or wait till recovery of such tax dues from a
third party. In view of the orders under Arbitration and Conciliation
Act, 1996, the Appellants can recover service tax paid. However, these
orders would not affect recovery by department from the Appellants.
Accordingly, service tax liability with interest and penalties were
confirmed. Though the Appellants took a stand to discharge service tax
liability only after receipt thereof from contractors, there were no
malafide intentions. Further, in absence of support of facts and also in
view of poor financial position, penalty u/s. 78 of the Finance Act,
1994 was waived vide section 80 of the Finance Act, 1994.

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2015 (38) STR 458 (All.)Daurala Sugar Works vs. UOI

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Department cannot take any action on the basis of an advisory notice merely asking the assessee to pay service tax to avoid penal consequences.

Facts:
Department issued an advisory notice, which stated that the petitioner should pay service tax to avoid penal consequences. The legality of such advisory notice was questioned in this Writ Petition. The revenue also stated that the notice was merely advisory and if authority wishes to take any action, they can issue a Show Cause Notice.

Held:
There was no need to make any observation since no Show Cause Notice was issued. Accordingly, the writ Petition was disposed off.

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2015] 57 taxmann.com 72 (Bom H C) – Commissioner of Central Excise, Goa vs. Hindustan Coca Cola Beverages (P) Ltd.

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CENVAT – Definition of “input service” post 01- 04-2011 – Service tax paid on mobile phones which are used by employees/staff of manufacturer are eligible as input service credit.

Facts:
The Assessee availed CENVAT credit of service tax paid on mobile phones used by its employees/ staff. Department relied upon CENVAT credit circular dated 20th June 2003 and denied the credit. Assessee argued that input services were not defined in Service Tax Credit Rules, 2002 and so circular not applicable under CENVAT Credit Rules, 2004.

Held:
The High Court held that ‘saving’ provision as per Rule 16 of CENVAT Credit Rules, 2004 provides that circulars prior to these rules shall be applicable only if they are consistent with it. Since, “input services” was not defined in Service Tax Credit Rules, 2002; it cannot be said that there is any corresponding Rule in Rules of 2004 which can be said to have been saved. The High Court further held that, as per definition of “Input Services” in Rule 2(l) of CCR, any expenditure incurred in manufacturing activity would be entitled for credit facility. It is undisputed that mobile phones are in connection with manufacturing process of the respondent. Thus CENVAT credit would be allowed thereby rejecting the appeal.

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[2015] 57 taxmann.com 402 (SC)-Coal Handlers (P) Ltd vs. Commissioner of Central Excise Range Kolkata-I

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Supervising and liaisoning with coal companies and railways for verification of material as per requirement of cement companies cannot be termed as a clearing and forwarding agent’s service as they are not connected with clearing and forwarding operations.

Facts:
The assessee is providing services to various cement companies under agency agreement for following up allotment of coal rakes by railways, expediting and supervising loading and labeling of rail wagons, drawing samples of coal loaded on wagons, paying freight to railways and dispatching rail receipts to cement companies. Department contended that the said services amount to Clearing and Forwarding Agent’s Service. The Tribunal decided against the assessee relying upon the decision of Prabhat Zarda Factory (India) Ltd [2002 taxmann.com 1307 (CEGAT – Kolkata)].

Held:
The Supreme Court observed that Prabhat Zarda’s case relied upon by the Tribunal has been overruled by the Larger Bench of the Tribunal in Larsen & Toubro Ltd.’s case 2006 (3) STR 321 (Tri- LB) and that, department has accepted the decision of Larger Bench and did not file appeal against the same. The Court also considered definition of “clearing and forwarding agent” under erstwhile section 65(25) of the Finance Act, 1994 and also dictionary meaning of the word forwarding agent and its characteristics and held that in order to qualify as a C&F Agent, such a person is to be found to be engaged in providing any service connected with “clearing and forwarding operations”. Of course, once it is found that such a person is providing the services which are connected with the “clearing and forwarding operations”, then whether such services are provided directly or indirectly would be of no significance and such a person would be covered by the definition.

As regards what constitutes “clearing and forwarding operations”, the Court held that, it would cover those activities which pertain to clearing of the goods and thereafter forwarding those goods to a particular destination, at the instance and on the directions of the principal. In the context of present appeals it would essentially include getting the coal cleared as an agent on behalf of the principal from the supplier of the coal (i.e. collieries) and thereafter dispatching/ forwarding the said coal to different destinations as per the instructions of the principal. In the process, it may include warehousing of the goods so cleared, receiving dispatch orders from the principal, arranging dispatch of the goods as per the instructions of the principal by engaging transport on his own or through the transporters of the principal, maintaining records of the receipt and dispatch of the goods and the stock available on the warehouses and preparing invoices on behalf of the principal.

Having explained the scope of clearing and forwarding operations, the Apex Court held that, that assessee did not play a role of getting coal cleared from collieries. Movement of coal is under contract of sale between coal company and cement companies. Even the coal is loaded on to the railway wagons by the coal company. There is no occasion for cement companies to instruct the appellant to dispatch/forward the goods to a particular destination which is already fixed as per the contract between the coal company and the cement companies. The railway rakes are placed by the coal company for the said destinations. The appellant does not even undertake any loading operation as the primary job, as per the contract, is of supervising and liasoning with the coal company as well as the railways to see that the material required by cement companies is loaded as per the schedule. At no stage the custody of the coal is taken by the appellant or transportation of the coal, as forwarders, is arranged by them. In these circumstances, Apex Court held that, the services would not qualify as C&F Agent within the meaning of section 65(25) of the Finance Act, 1994.

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Builders’ plight continues

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Introduction Whether builders and developers are works contractors, under sales tax/VAT laws, has chequered history. In the late 1980s when works contract was introduced, there were determination orders passed by the learned Commissioner of Sales Tax, determining that builders were not liable to sales tax (works contract) when they were selling premises to prospective buyers. After the judgment of the Hon’ble Supreme Court in case of K. Raheja (141 STC 168), the Sales Tax Department of Maharashtra took a view that builders were also ‘works contractors’ and liable to tax accordingly. The above position was challenged by preferring writ petitions in the Hon’ble Bombay The High Court. Hon’ble Bombay High Court decided the issue vide judgment in MCHI (51 VST 168) and held that in certain circumstances the builders were also works contractors. This decision was challenged before the Hon’ble Supreme Court. The Supreme Court, along with other matters, decided that the above issue, vide its judgment in case of Larsen & Toubro and others (65 VST 1). In above judgment, the Hon’ble Larger Bench of the Supreme Court confirmed the judgment of the Hon’ble Bombay High Court that builders and developers were works contractors. However, while deciding the issues before it, the Hon’ble Supreme Court also observed that the contract starts from the date of agreement with the prospective buyer and the completed portion prior to the date of such agreement would amount to sale of immovable property, thus such portion could be subjected to sales tax/VAT. Supreme Court also advised for necessary changes in the provisions. ? Amendments made in Rules vide notification dtd. 29.01.2014 To comply with the directions of the Hon’ble Supreme Court in above judgment, Government of Maharashtra amended the rules particularly rule 58(1A) was amended, and, further rules 58(1B) and 58(1C) were inserted. The sum and substance of above amendments was that if the dealer (builder/ developer) claimed deduction for cost of land, it should be allowed as per ready reckoner rate of the concerned land and if higher deduction is claimed, it should be supported by determination of value of land by Department of Town Planning & Valuation. Similarly, for deduction towards constructed portion prior to date of agreement, the rules 58(1B) & (1C) provided a table about stages for deduction and also cast an obligation to support the construction of the said portion by certificate from Local or Planning Authority. For sake of brevity the above rules are not discussed elaborately here.

Fresh Writ Petition challenging the validity of the above rules

Confederation of Real Estates Developers’ Association of India – Maharashtra & others filed writ petition in the Bombay High Court. The said writ petitions are decided vide Writ Petition no. 4520 of 2014 & others dated 30.4.2015. The challenges were to the above rules. The challenges as recorded by the Hon’ble Bombay High Court are reproduced below: –

“5. Grounds of challenge are that the impugned notification and the trade circulars are in express conflict with the observations of the Supreme Court in the case of “Larsen and Toubro Limited vs. State of Karnataka and Another” (2014) 1 SCC 708 and other pronouncements of this High Court and the Supreme Court. It is being submitted that amended Rule 58 fails to arrive at true and correct value of goods at the time of incorporation in the works contract and tends to indirectly tax immovable property and along with goods. Though Rule 58 (1A) makes allowance for deduction of cost of land, it compels determination in accordance with guidelines appended to Annual Statement of Rates, prepared under the provisions of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 (Hereinafter referred to as Bombay TMV Rules, 1995), as would be applicable on 1st January of calendar year in which agreement of sale is to be registered, and as such, profit relatable to transfer of land would not be deductible from the total contract value. The Amended Rule 58 (1A) of the MVAT Rules also does not give allowance to deductions on account of consideration for acquisition of FSI/TDR, payments towards eviction of tenants, clearance of encroachment on land. While Rule 58 (1) (h) permits deduction of profit relatable to supply of labour and service, amended rule does not provide for profit relatable to third element, namely, the land and the object of taxing of value of goods at the time of incorporation, as such, gets blurred. Trade Circular dated 21st February, 2014 restricts options to only one from the four methods given and no other option such as, ‘cost plus gross profit’ is admissible. Various other arguments have been advanced to contend that the Rule is deficient to provide for many things involved. Arguments are also advanced contending that Trade Circulars tend to be ambiguous and do not clarify many issues while they purport to answer the questions. According to the petitioners cost plus gross profit method is viable and practicable.

6. The petitioners further contend that Rule 58 (1B) of the MVAT Rules, seeks to enact a wide and arbitrary categorisation. Stage wise percentage provided under rule 58 (1B) has no basis, either for stage or for percentage of construction. According to them, percentage of material on which taxes are sought to be levied is on higher side and it is unfair and unconstitutional. The percentage prescribed is not in tune with ground realities and technical considerations. According to the petitioners, though prescription of table has been modelled on recommendations of Public Works Department, the same is insufficient and would not be applicable to the cases of developers. There is huge difference in the contracts with the Public Works Department and the nature of work of the developer, viz., Public Works Department contract provides for escalation, which is not the case with the developer. It is further contended that presumptions underlying the table under rule 58 (1B) that work is done on site as per stage given, yet it would not necessarily represent the way construction is carried out, in stages and in the sequences, for, it may be combination of various stages or activities may be simultaneous and as such, the table would not be able to give correct determination of value of work done at the time of entering into an agreement.”

There were elaborate arguments, which were considered by the Hon’ble Bombay High Court. Assuming that there may be some chances that valuation of goods may not be correct or some portion of immovable property may get taxed, the overall view of the Hon’ble High Court is that the rules are for uniformity and hence cannot be said to be invalid or unconstitutional. The Hon’ble High Court recorded its reasons, amongst others in following words:- “62. This Court is to consider validity of provisions valuing taxable goods for the purpose of charging duty. While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of MVAT is a levy on transfer of goods in a works contract, the value of goods must be limited to cost plus profit. The broader based standard may be adopted and would be within authority and power of legislation. A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.

63.    There is further consideration that the value shall be arrived at, assessed and ascertained  on the modality  as has been referred to under Rule 58 (1) (1A)and (1B) of the MVAT Rules. The value is a measure of tax and Rule 58 provides for determination of value of goods to be arrived at after deductions therefrom, referred under the rules/formulae. Values and items as referred to  under Rule 58 (1), 58 (1A) and 58 (1B) are criteria for computing value of subject of tax at various stages as have been referred to under the Rules. Table under Rule 58 (1B) specifies the stages and value at the stages. The computation of value is to be done in accordance with the terms of the same. It is intended to determine value of goods and provides basis for determining such value.

The value has to be ascertained and determined in such a manner as is prescribed and shall be value of the subject of tax for the purpose of charging MVAT. The legislature, while enacting amended rules, did not intend to create a scheme materially different from the one in the previous rule 58 (1A) of the MVAT Rules. The object and purpose remained the same and so did original principle at the core of the scheme, and has been made more flexible and wider.

64.    The first essential characteristic of MVAT is it is a tax on transfer of property in goods, secondly, uniformity of incidence is also a characteristic of the tax and thirdly the collection of tax. MVAT can be imposed on assessable value determined with reference to transfer of goods at the stage as referred to in the table. It is legislature’s power to legislate in respect of the basis for determining the measure of tax. The computation being made strictly in accordance with the express provisions under the rules, there is no warrant for confining the value as sought to be submitted by the assessee. It is open for the legislature to adopt any basis for determining the value of a taxable article. The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge. ……

67. The amended provisions define a measure of  charge and the standard adopted by the legislature for determining value which may require/press for broader base than that on which the charging proceeds. By now, it is well settled that stage of collection need not in point of time synchronise with the transfer of property in goods
for as is being a long standing position that in our country levy has status of constitutional concept while the point of collection is to be located where the statute declares it. Taking into account this, the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax. Rule 58 (1B) envisages a method of valuation of   tax at the stages as have been referred to under the Table for collection of the same. In order to overcome various difficulties, to have the value of taxable articles for the purpose of MVAT, the legislature or its delegate has prescribed table giving stages for the purpose of computation of value of subject of tax. This appears to have been provided in order to have uniformity and to avoid vagaries, disparity or inconvenience from case to case. The same has been incorporated after deliberation and consultation with concerned departments and would not be liable to be termed as arbitrary.”

Conclusion
Ultimately, the Hon’ble High Court has rejected the writ petitions. Therefore, the builders and developers will be required to follow the rules 58(1A), (1B) & (1C) as they are. There are chances that due to their inability to bring required certificates, there will be higher taxation. Though such taxation is on consonance with the above judgment, there would be certainly injustice to the builders and developers, who were otherwise also in the doldrums and also further burdened by way of interest, etc. The legislature should devising a practical/convenient procedure for certifying /supporting the deductions claimed. Till then, the plight of builders would continue.

Preimus Investment and Finance Ltd. vs. DCIT ITAT, Mum-C Bench Before I. P. Bansal (J. M.) & Rajendra (A. M.) ITA No 4879/Mum/2012 Assessment Year-2006-07. Decided on 13-05- 2015 Counsel for Assessee / Revenue: Dr. K. Shivaram, & Ajay R. Singh / Premanand J.

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Section 37(1) – Business expenditure – Merely because the application for registration as NBFC is rejected by RB I the business carried on does not become illegal and expenditure incurred is allowable as deduction.

Facts:
Assessee-company was engaged in the business of leasing, financing and trading. Its application for registration to Reserve Bank of India to register it as NBFC was rejected as its net owned funds were below the prescribed minimum level. According to the AO the assessee was not authorised to carry on business of financing and thus the business carried on by the assessee was prohibited under the law. Therefore, he held that the interest income earned by the assessee cannot be said to be arising from business activity and he taxed the same as income from other sources. Further, various expenditure claimed by the assessee was also disallowed on the ground that the RBI had not recognised the assessee as NBFC and the claim for set-off of brought forward losses and unabsorbed depreciation was also denied. The first appellate authority, on appeal upheld the order of the AO.

Held:
According to the Tribunal permission/denial by the RBI to register an assessee as NBFC does not decide the issue of carrying on of business or make the business illegal. If the assessee had violated any provisions of law under the RBI Act, it would be penalised by the appropriate authority. But that does not mean that the systematic organized activity carried on by the assessee for earning profit would not be treated as business. The Tribunal further noted that in the scrutiny assessment in the earlier years, the AO had assessed the interest income as business income and had allowed all the expenditure related with the business activity. According to the Tribunal, the rule of consistency demanded that for deviating from the stand taken from the earlier years, the AO should bring on record the distinguishing feature of that particular year. The Tribunal found that the AO or the first appellate authority in their orders had not mentioned as to how the facts of the case were different from the facts in the earlier or subsequent years. As regards disallowance of other expenditure like audit fee, professional fee, general expenses, etc., the tribunal, relying on the decision of the Allahabad High Court in the case of Rampur Timber & Turnery Co. Ltd. (129 ITR 58), held that since the assessee is a corporate entity, even if it is not carrying on any business activity it has to incur some expenditure to keep up its corporate entity. Therefore, the expenditure incurred by it has to be allowed. Accordingly, it was held that the interest income earned by the assessee has to be taxed under the head business income and all the expenses related with it have to be allowed.

As far as the disallowance of carry-forward of loss and depreciation was concerned, the Tribunal relied on the decision of the Delhi high court in the case of Lavish Apartment Pvt. Ltd. vs. ACIT (23 taxmann.com 414) and held that the assessee was entitled to claim set-off.

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[2015] 153 ITD 613 (Pune) ITO, Ward 1(3), Jalna vs. MSEB Employees Coop Credit Society Ltd. A.Y. 2008-09 Date of Order – July 18th , 2014

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Section 80P, read with section 154 – Where the assessee had not claimed a deduction in its return, which was rightfully available to him, the assessing officer is obliged, required to assist such an assessee by ensuring that only legitimate taxes are determined as collectible. Assessing officer cannot deny benefit of section 80P, even though the said claim is not made in the income tax return.

FACTS
The assessee, a Credit Co-operative Society, duly registered under Maharashtra Co-operative Societies Act, 1960, had filed its return of income without claiming deduction u/s. 80P(2)(a)(i). The return of income was processed u/s. 143(1) and accepted.

Subsequently, the assessee filed an application u/s. 154 requesting the Assessing Officer to allow deduction u/s. 80P(2)(a)(i). The Assessing officer rejected the application and denied the claim.

On appeal, the Commissioner (Appeals) on the point of rectification observed that due to technical difficulties in preparing the return in “Tax Base Software”, small clerical errors had led to incorrect filing of return. Further, due to errors in programming of the said software, although the deduction was not allowed in the e-return resulting into tax demand, the acknowledgement of e-return generated by the software resulted into Nil demand as the deduction was allowed. Therefore, the said mistake was rectifiable u/s. 154 by the Assessing Officer and while allowing the assessee’s claim, Commissioner (Appeals) held that even on merit, the assessee society was eligible for deduction u/s. 80P(2)(a)(i).

On departments appeal.

HELD
It is settled law that correct income of the assessee is to be assessed as per provisions of Income-tax Act, 1961, inspite of higher income incorrectly declared by the assessee in the return of income. If an assessee, under a mistaken belief, , misconception or on account of being not properly instructed returns higher income, the concerned authority is obliged, required to assist such an assessee by ensuring that only legitimate taxes are determined as collectible. If particular levy is not permissible, the tax cannot be collected. In view of above, the Commisioner (Appeals) was justified in holding that such a mistake is rectifiable u/s. 154 and the assessee society is eligible for deduction u/s. 80P(2)(a)(i) on merit as well.

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[2015] 152 ITD 181 (Chandigarh) DCIT vs. Vikas Sharma A.Y. 2006-07 and A.Y. 2010-11 Date of Order – 19th June 2014.

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Section 194C read with section 40(a)(ia) – The freight payments made by the assessee for hired tankers, which are to be supplied to different customers, are made in capacity of agent on behalf of the principal and hence assessee is not liable to deduct tax on such freight payments made.

FACTS
The assessee had entered into contract with different parties to supply tankers which were being hired from time to time, against which freight payments were made by the assessee.

The assessee’s case was that no TDS was required to be deducted from the freight expenses as all 15-I and 15-J forms regarding the same had been duly submitted to the department.

The AO found certain discrepancies in 15-I and 15-J forms and made addition for failure to deduct TDS under the provisions of section 194C and consequently, made disallowance as per section 40(a)(ia).

It was held by the CIT-(A) that the provisions of section 194C were not applicable to the instant case as the assessee had only hired the trucks from time to time and deleted the additions made u/s. 40(a)(ia).

On appeal by Revenue

HELD THAT
It may be noted that the said Form 15-I and 15-J are to be filed before the prescribed authority, i.e., the Commissioner and not the Assessing Officer. In the instant case, the said forms were filed before the prescribed authority and within the prescribed time and no defect was pointed out by the said authority. In the absence of the same, there is no merit in the observation of the Assessing Officer that there are discrepancies in Form 15-I and 15-J.

Further, the assessee had entered into contract with several parties on whose behalf it was arranging the truck from time to time and the expenditure was booked as freight payment against which freight income was received by the assessee. Hence the assessee is not liable for tax deduction at source u/s. 194C as the amounts paid by the assessee were on behalf of the principal on whose behalf it was arranging the said tankers.

The assessee was making payment for carriage of goods and there was admittedly no oral or written agreement between the assessee and transporters and in the absence of the same, there is no merit in the order of the Assessing Officer in holding that the provisions of section 194C had been violated. In the absence of the same no disallowance is warranted u/s. 40(a)(ia). The order of the CIT-(A) is upheld.

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Search and seizure – Block assessment – Sections 158BC and 158BD – B. P. 1/04/1988 to 03/05/1998 – Police recovering cash from possession of three persons – Persons stating cash belonging to assessee who in reply stated that cash belongs to firm – No search warrant or requisition in name of assessee or the firm – No asset requisitioned from assessee – No notice could be issued in the name of assessee – Block assessment against assessee not valid

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CIT vs. Anil Kumar Chada; 374 ITR 10 (All):

On 2nd May, 1998, the police recovered a sum of Rs. 17 lakh from the possession of three persons. On interrogation, they stated that the money belonged to the assessee who in reply to the query by the police stated that the cash belonged to the firm, C. When the matter was referred to the Income Tax Department, it issued a notice u/s. 158BC in the name of the assessee for the block period 1 st April, 1988, to 3rd May, 1998, and made an assessment of undisclosed income of Rs. 18,11,700/- in the hands of the assessee. The Tribunal cancelled the assessment holding that since no search warrant was issued u/s. 132 in the name of the assessee, no notice could be issued in the name of the assessee u/s. 158BC.

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

“i) There was no search warrant in the name of the assessee nor were assets requisitioned from the assessee. Therefore, the provisions of section 158BC were not applicable. Further, no warrant or requisition was issued either in the name of the firm or the assessee.

ii) The order of the Tribunal did not call for interference.”

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Refund – Self-assessment tax – Interest – Sections 140A, 244A(1)(a),(b) and 264 – A. Y. 1994-95 – Excess amount paid as tax on self-assessment – Interest payable from date of payment to date of refund of the amount

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Stock Holding Corporation of India Ltd vs. CIT; 373 ITR 282 (Bom):

For the A. Y. 1994-95, the Assessing Officer did not pay interest u/s. 244A in respect of the excess amount paid by the petitioner as self assessment tax. The petitioner’s application u/s. 264 of the Income-tax Act, 1961 was rejected by the Commissioner.

The Bombay High Court allowed the writ petition filed by the petitioner and held as under:

“i) The requirement to pay interest arises whenever an amount is refunded to the assessee as it is a kind of compensation for use and retention of money collected by the Revenue.

ii) Circular No. 549 dated 31/10/1989, makes it clear that if refund is out of any tax other than out of advance tax or tax deducted at source, interest shall be payable from the date of payment of tax till the date of grant of refund. The circular even remotely did not suggest that interest is not payable by the Department on self-assessment tax.

iii) The tax paid on self-assessment would fall u/s. 244A(1)(b). The provisions of section 244A(1)(b) very clearly mandate that the Revenue would pay interest on the amount refunded for the period commencing from the date payment of tax is made to the Revenue up to the date when refund is granted by the Revenue. Thus, the submission that the interest is payable not from the date of payment but from the date of demand notice u/s. 156 could not be accepted as otherwise the legislation would have so provided in section 244A(1)(b), rather than having provided from the date of payment of the tax. Therefore, the interest was payable u/s. 244A(1)(b) on the refund of excess amount paid as tax on self-assessment u/s. 140A.”

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Non-resident: Section 6(1)(a) – A. Ys. 2007-08 and 2008-09: Assessee will not lose non-resident status due to forced stay in India due to invalid impounding of passport

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CIT vs. Suresh Nanda; [2015] 57 taxmann.com 448 (Delhi):

In the relevant years, the assessee was forced to stay in India for more than 182 days in a previous year due to impounding of passport. Such impounding was found by courts to be wrongful. The assessee was fighting court cases to get his passport released so that he could travel outside India to maintain his NRI status. If such forced stay was excluded then the assessee’s stay in India was less than 182 days and his status would have been that of non-resident. The assessee claimed that such forced stay should be excluded and the asessee should be treated as non-resident. The Assessing Officer rejected the claim and treated the assessee as resident. The Tribunal held that the assessee continued to enjoy the status of nonresident and, thus, not amenable to be held accountable under the Income-tax Act for income not earned here.

In appeal by the Revenue, the following question was raised:

“Whether the ITAT was correct in taking the view that the period for which the assessee was in India involuntarily on account of his passport having been impounded is not to be counted for purposes of section 6(1)(a) of the Income -tax Act so as to hold him entitled to be a non-resident?”

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

“i) Where assessee was forced to stay in India for more than 182 days in a previous year due to impounding of passport found by courts to be wrongful and he was fighting court cases to get passport released so that he could travel outside India to maintain his NRI status, the period of such forced/unwilling stay in India cannot be counted for determining his residential status u/s 6. If assessee’s stay in India without counting such forced stay is for less than 182 days, he retains his NRI status for tax purposes.

ii) We must, however, add a caveat here. The conclusion reached by us on the facts and in the circumstances of the case at hand cannot be treated as a thumb rule to the effect that each period of involuntary stay must invariably be excluded from computation for purposes of Section 6(1)(a) of Income-tax Act. The view taken by us in the case of assessee here is in the peculiar facts and circumstances wherein he was inhibited from travelling out of India on account of such action of the law enforcement agencies as was found to be wholly unjustified. Here, it is important to notice that the passport impounding order was invalidated as without authority of law. The finding on whether in a given case an assessee’s claim to extended stay being involuntary, has to be fact dependent. For purposes of section 6(1)(a), each case will have to be examined on its own merits in the light of facts and circumstances leading to “involuntary” stay, if any, in India.”

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Housing project – Deduction u/s. 80-IB(10) – A. Y. 2007-08 – Condition precedent – Plot must have minimum area of one acre – Composite housing scheme consisting of six blocks in area exceeding one acre – Housing project approved under Development Control Rules – Separate plan permits were obtained for six blocks is not a ground for denial of deduction – Assessee entitled to deduction

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CIT vs. Voora Property Developers P. Ltd.; 373 ITR 317 (Mad):

For the A. Y. 2007-08, in the assessment order u/s. 143(3) of the Income-tax Act, 1961, the Assessing Officer had allowed the assessee’s claim for deduction u/s. 80-IB(10) in respect of the housing project consisting of six blocks in a area exceeding one acre. The Commissioner set aside the assessment order u/s. 263 for reconsidering the claim for deduction u/s. 80-IB(10) of the Act holding that the assessee had developed six separate projects in one single piece of land measuring 1.065 acres and the assessee did not fulfill the essential condition of the minimum area of one acre for a single project as laid down u/s. 80-IB(10). Accordingly, the Assessing Officer disallowed the claim for deduction u/s. 80-IB(10) of the Act. The Tribunal allowed the assessee’s claim.

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

“i) There was no dispute in the approval granted by the CMDA in respect of the composite housing scheme. When the Legislature introduced 100% deduction it was known that the local authorities could approve a housing project to the extent permitted under the Development Control Rules. When the project fulfilled the criteria for being approved as a housing project, the deduction could not be denied u/s. 80-IB(10) merely because the assessee had obtained a separate plan permit for six blocks.

ii) If the conditions specified u/s. 80-IB are satisfied, then deduction is allowable on the entire project. Since the project was approved in accordance with the Development Control Rules, the assessee would be entitled to 100% deduction on the entire project approved by the local authority.

iii) The assessee constructed six blocks in a land measuring one acre and 6.5 cents which admittedly exceeded the required area specified in clause (a) of section 80-IB(10), viz., one acre. Therefore, the assesee was entitled to the deduction.”

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Export profit – Supporting manufacturer – Deduction u/s. 80HHC – A. Y. 2003-04 – Condition precedent – Not necessary that exporter should have earned profit – Requisite certificate filed during assessment proceedings – Assessee, supporting manufacturer is entitled to deduction u/s. 80HHC

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80HHCCIT vs. Shamanur Kallappa & Sons; 373 ITR 373 (Karn)

The assessee exported rice to Cambodia through State Trading Corporation of India as a supporting manufacturer and claimed deduction u/s. 80HHC of the Income-tax Act, 1961. The Assessing Officer disallowed the claim on the ground that the State Trading Corporation had declared loss. The Tribunal allowed the asessee’s claim.

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

“i) In order to attract the provisions of section 80HHC(1A), the supporting manufacturer sells the goods or merchandise to the export house or trading house. The export house or trading house has to issue a certificate under the proviso to subsection (1) of section 80HHC of the Act. If these two conditions are fulfilled, the supporting manufacturer is entitled to the deduction as contemplated u/s. 80HHC of the Act to the extent as mentioned in section 80HHC(1A) of the Act. It is immaterial whether in the process, the export house or trading house sells the goods to any foreign country or earns profit or realises any foreign exchange.

ii) In order to attract section 80HHC(1A) of the Act, after purchase of goods or merchandise from the supporting manufacturer, the goods have to be exported out of India. Once such export is established, a certificate under the proviso to subsection (1) is issued by the export house or trading house and when they do not claim the benefit u/s. 80HHC, the assessee would be entitled to the benefit of deduction as prescribed u/s. 80HHC(1A).

iii) The assessee was entitled to deduction u/s. 80HHC. The Tribunal was justified in granting the relief to the assessee upon the certificate produced in the course of the proceedings.”

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Capital gain – Exemption u/s. 54 – A. Y. 2007-08 – Investment of net consideration in purchase of a residential house – Acquisition of plot and substantial domain over new house – Requirement for claiming exemption complied with – Assessee entitled to exemption –

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CIT vs. Smt. G. Venkata Laxmi; 373 ITR 572 (T&AP):

The assessee sold a property and sale proceeds were used for construction of a new building. The Tribunal found that the assessee invested the entire net consideration within the stipulated period and in fact had even constructed the major portion of the residential property except some finishing, making it fit for occupation. The Tribunal held that as the assessee had acquired substantial domain over the new house and had made substantial payment towards cost of land and construction, within the period specified u/s. 54 of the Income-tax Act, 1961 the assessee could be said to have complied with the requirements for claiming the exemption u/s. 54. Accordingly, the Tribunal allowed the assessee’s claim for exemption u/s. 54 of the Act.

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

“i) In order to get the benefit of section 54 of the Act, it does not appear that in case of purchase of property with sale proceeds it has to be reconed within three years, in case of construction of new building utilizing sale proceeds, the construction has to be completed within a period of three years of the sale. In this case, the question of registration of document does not arise and it is a question of investment in construction of the new building.

ii) When it was found on the facts that the construction was completed within three years of sale of the property, the benefit would automatically follow. Hence we dismiss the appeal.”

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“Ethics” isn’t music for the entertainment world

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Introduction
I have spent 20 years in the music industry.
People often envy me thinking that I am lucky to have my hobby as my
profession. In comparison, the field of Chartered Accountancy appears
rather bland. Hence,I was pleasantly surprised when the editor of the
BCA Journal asked me to write about Ethics in my profession. Chartered
Accountancy is a highly regulated profession with challenging entrance
tests and a grueling curriculum. In music, the classical art-forms
(dance & music) are very demanding with hours of training and riyaz
required to get perfection. However, entry into film-music is open to
any and every person who has basic music skills. Due to the explosion of
the electronic media, anything related to films has glamour attached to
it. Untrained wannabes come to Mumbai to try their luck in the music
world equipped with just a dream in their eyes. The stakes are high and
musicmaking is big business. There are often compromises with ethical
standards.The only regulator is one’s conscience and moral values. The
number of people who stand up for ethics is a minority. Being an
‘entertainment professional’, here’s my attempt to analyse the ethical
scenario prevailing in the field of Hindi film-music.

Hindi Film Music
The
Hindi mainstream film music industry has come of age over the last 70
years. It is now a professional set up. My mother tells me that in her
times, singing for films was looked down upon. Today, we have
enthusiastic parents sending their children to train in music as well as
to compete on television. Music training schools are today big
business. There are institutes training students in every field,vocal,
instrumental, Hindustani classical, Carnatic, Westernmusic, staff
notations, sound recording, playback recording techniques etc.
Technology has undergone a transformation and with the commercial stakes
very high, the pressures to succeed at any cost often lead to ethical
compromises. From Naushad to Rehman and Rafi to Sonu the parameters of
excellence have remained high. However the audience’s thoughtless
acceptance of anything that the media promotes, often results in ethical
compromises and a deterioration of standards.

There was Naushad
sahab who tirelessly advocated Indian classical music and would insist
on purity. Today, plagiarism is rampant. One finds popular foreign songs
being copied brazenly note to note. It is often the producers who force
the composers to do this. Certain highly successful music directors
have been exposed on the internet with the list of songs they have
copied along with their source.

Many talented singers these days
approach commercially successful composers with their demo songs. These
are often their own compositions. The singer is forced to release the
song under the composer’s credits.

An inspiring exception is A.
K. Rehman who has taken Hindi music to a world platform completely on
his terms and merit. Rehman is known to keep music rights with himself.
He makes sure his music is not misused by producers. If Rehman
collaborates with say Sukhwinder, the latter is given due credit. Other
talented composers like Shankar Mahadevan strive to make soulful songs.

Creation of monopolies and monopolistic situations
In
the yesteryears, one has heard stories of attempts by established
singers to monopolise the singing scene. Today, the market has opened up
with several singers aggressively marketing their skills. However there
are still instances of producers getting songs dubbed by established
singers even though they have been competently sung by lesser known
artistes.

Awareness of rights
In the era gone by,
artistes, and particularly singers were not aware of their rights. They
performed for the love of art, and were seldom concerned with commercial
aspects of their profession. The term intellectual property rights, was
unknown to them. Today, there is much awareness about royalties and
copyrights with artistes, composers, lyricists actively campaigning for
their rights, and zealously protecting them. Associations like the
Indian performing rights society regulate the use of their songs in
public places, radio, TV channels, live shows etc.

Falling standards in quality of lyrics
In
the 50s and 60s film music saw the poetic quality of lyrics scaling
great heights. There was Saahir who wrote sensitive, philosophical songs
like ‘yeh mehlon yeh takhton yeh taajon ki duniya’, ‘allah tero naam’,
‘aye meri zohrajabeen tu abhi tak hai haseen” and ‘laga chunri mein
daag’. Pt Narendra Sharma wrote chaste Hindi songs like ‘jyoti kalash
zhalke’, ‘satyam shivam sundaram’. Bharat Vyas wrote Nature poetry like
‘yeh koun chitrakar hai’ and kuhukuhu bole koyaliya. Kavi Pradeep penned
patriotic poetry like ‘aao bachhon tumhe sikhaye’,’aye mere vatan ke
logon’. Gulzar wrote aesthetic, songs with high literary value like ‘iss
mode se jaate hain’, ‘humko manki shakti dena’,’tujhse naraz nahin
zindagi’.

The new millennium saw the nation gyrating to
nonsensical lyrics and those with sexual innuendos. One could cite
several such examples but the content is so offensive that I would
rather not smudge the pages of a professional journal with such trash.
The point is that it is the ethical responsibility of producers and
lyricists not to stoop to such levels for commercial success.

People
believe that double meaning lyrics in the garb of ‘folk’, sex object
portrayal of women, and puerile nursery rhyme like songs fetch instant
success. So ethics and values are trashed. Once I was asked to sing a
‘laavni’ with double entendre. I fired the hell out of the guy and made
him change the lyrics.

I think lyrics are the fabric of any
song. They reflect an ideology and thought process. An ethical lyricist
is one who would uphold secular, humanist, socialist and feminist
values. I notice that earlier most films had atleast one spiritual song.
Now it is the norm to have atleast one ‘item’ song.

Commitment to quality and standing by what one believes in
As
far as I am concerned, I come from a classical music grooming and a
literary background at home. I am committed to singing meaningful lyrics
and intellectually stimulating melodies. In my live shows I select
songs that have meaningful poetry and raag based tunes that have scope
for gaayki.

I find that in mainstream songs, the requirement for
gaayki has waned. Tunes and lyrics are often juvenile. I feel committed
to writing and composing deeper, meaningful stuff. This too is a form
of ethics I feel.

I have composed about 50 tracks for the
YouTube devotional channel Rajshrisoul. Each composition displays a
commitment to the music I believe in. Hence both in my recordings and
live shows I standby what I believe is quality.

In my live shows
I am often under pressure to sing “fast”, “dancing numbers”. I do not
encourage this. As I believe I am not a DJ. Unless I stand up for my
beliefs, I will be made to dance to any tune.

Short and quick is not necessarily good / Technology cannot replace the original
Over the years, the ‘mehfil’ culture has eroded. Attention span of listeners has shortened. For the youth music is equal to something you dance to. Lyrics, gaayki, melody has no significance. This has led to monotonous tunes, repetitive lyrics, and same interlude music pieces. Today music is in the pubs and less in mehfils. The ‘gaayki’ in film music has been muted and the requirement for trained vocals is redundant. ‘Anyone’ including actors themselves sing songs. Added to this technical innovations enable voices to be tuned. The earlier face of film music had intricate gaayki, every stanza different tune etc. In my recordings I make it a point to retake my lines if not in perfect sur. I discourage enthusiastic recordists who say ’we will tune the notes using the Antares software’. I feel it is unethical to let technology modulate your performance. Your audiences pay to hear you perform and your rendition and not the skill of the software programmer or technician. I must give my best and not leave it to a machine.

Women   and   Their   Exploitation In live music shows, you often see background dancer girls. Unless it is a pure classical dance form, women are portrayed as subordinate,exploitative. Attention is to the body and not the soul. I find such actions totally unethical. Hence I am particular that the role of women in whatever I produce represents talent, soul  expression  rather  than body.

I have faced situations where I have refused to sing in live shows with loud noisy orchestration and where organisers are interested in suggesting what outfit I should wear.

I have often lost out on recordings due to the patriarchal equation. Even to this day most music directors are male. Being single and fairly attractive I often encountered men pursuing me for all the wrong reasons. The fixation with males is immense. Recently, while recording an aarti there was a line “baanjhan ko putra deyt nirdhan ko chhaya “.  I insisted on changing it to the earlier version, ”bannjhan ko garbh deyt” as I believe that it perpetuates the Indian patriarchial mentality that insists on the male child and kills the girl child. Once I gave a successful composer my demo audio. He kept calling me up asking to meet over a ‘cup of coffee’ for almost a month. When I finally did meet him, I was shocked to see that he had simply not listened to my recording even once. I was just a pretty woman  for him. Ever since then I politely refuse ‘coffee invites” for ethical reasons. Things have changed for the better now with singers having personal managers and talent management agencies to represent them. These shield mischief makers from the artist.

But these experiences got me thinking and I stumbled upon Meerabai.

When I started translating Meera, it dawned on me that she’s a big star! Her songs are sung a good 500 years after her time. We remember Meera like a fragrant flower. Not as a sexy body. I realised that every woman needs to assert her soul identity. If every woman who steps out for a career, especially in the glamour industry, sends out strong signals of “My talent is my sole identity’, this power game will become redundant. I yearn for the day women would be able to express themselves uninhibitedly and not be guilty for it.

Respect The Performers and give Them Their Due
The music industry all over the world has been plagued by piracy. Today music is available free on the internet. The days of cd sales are declining as cds can be instantly copied. Hardly any non-film music albums are made. Only film music (backed by massive publicity budgets) sells in the form of caller ringtones, number of hits and ads on YouTube.

I do know of some highly ethical people who will only buy original DVDsand recordingsoftware. But by and large people buy pirated Windows, Nuendo/Cubase/Protools recording software. Most rip music from youtube.

Let Children be Children, Do Not Corrupt Them With The ways of The Commercial World.
Television talent shows are the in thing today. TV channels rake in the big bucks by aggressive marketing techniques. Amongst these are sob stories, dramatic behind the scene stories, emotional appeals and children. Channels woo viewers with little champs, junior idols etc. I am the first ever winner of a talent show in the history of Indian TV, to have got a film playback break. I won the Hindi Saregama in 1995. I remember there was an immensely talented 7 year old Pushparani from Assam who sang Lata songs to perfection. She vanished. There was ten year old Prashant too. I remember Prashant’s mother doing the rounds of music directors for the big break. It never came. Prashant works in a bank in Mira Road today, bitter about fading into oblivion. Once someone introduced me to a flamboyantly dressed little boy from Marathi saregama. He was most offended because I did not know of him. I vividly remember children crying on camera when they lost out to competition. Viewers cried too. Channels sold their emotions and made money. Often there is manipulation in who is to win. Is this really what children should go through? Children are superb mimics. Hence they copy and replicate what they hear. That is what the channels cash in on. Two years down the line public memory fades and no one remembers these children and their two month fame. They go through the pain of rejection and dejection. The channels make further money through live shows with these children.

I feel children competing on TV must be stopped on ethical grounds as it amounts to child labour. Why don’t we have child nurses, doctors, CAs engineers? If they can sing, they can practice too. It is unethical to make children work. Children should take training in classical music, polish their skills, enjoy childhood and then get professional as adults.

Conclusion
I am aware that the above close circuit view of ethics in my profession can have counter views. Every person’s experience differs and nothing is black and white.  Where one sets the ethical bar is one’s own choice.        I would set it at just within practical reach though aiming to pitch higher.

Will – Execution Proof – Both attesting witnesses not alive – Evidence Act should receive a wider purposive interpretation: Evidence Act Section 68, 69.

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C. G. Raveendran & Ors. vs. C. G. Gopi & Ors. AIR 2015 Kerala 250

The plaintiffs and defendants were the children of late Govindan and Bhanumathi. Govindan died on 28/8/1994 and Bhanumathi on 18/5/2004. The plaint schedule properties belonged to Govindan. He had constructed a building therein and was residing there with his family till his death.

According to the plaintiffs, after the death of Govindan, the right to the properties have devolved on the plaintiffs and the defendants equally and they were entitled to inherit. However, the plaintiffs came to know about a registered Will allegedly executed by Govindan.

It was contended that the Will was a fabricated one and Govindan had no occasion to execute such a Will. During the period of execution of the Will, Govindan was mentally ill and was undergoing treatment for partial paralysis. He had not executed the Will and was allegedly executed under suspicious circumstances. Hence the suit was filed seeking a declaration that the Will was null and void and for a consequential partition of the properties.

The Court below on an evaluation of the oral testimony on the side of the plaintiffs and the oral evidence on the side of the defendants held that Will was validly executed by Govindan.

The Hon’ble Court observed that the above evidence had to be evaluated to decide the genuineness of Will. It is pertinent to note that Will is registered. In the absence of any serious challenge regarding registration, it must be presumed that the Will was registered after complying with all the statutory formalities. Registration of a Will is a piece of evidence confirming its genuineness and can confer it a higher degree of sanctity. There seems to be a consensus in the judicial pronouncements that, though there is no requirement that Will should be registered, but if registered, it adds to its authenticity.

Section 68 of the Indian Evidence Act, provides that if a document is required by law to be attested, it shall not be used as evidence until one attesting witness at least has been called for the purpose of proving its execution. In the present case, the attesting witnesses are Parameswaran and Padmanabhan Nair. Parameswaran himself was the scribe. There is no legal bar in scribe himself being an attesting witness, provided he has actually seen the executant signing or affixing his mark or has received a personal acknowledgment from the executant and has consciously affixed his signature as an attesting witness, as a token of having witnessed the executant signing or affixing his mark. Evidence should prove that the scribe, apart from being so, had signed for the purpose of testifying to the signature of the executant and had the animo attestandi.

It is on record that both the attesting witnesses are no more alive. Hence, section 68 of the Indian Evidence Act cannot apply. The provision that governs the field can only be the section 69 of the Indian Evidence Act. It deals with a situation wherein no attesting witnesses can be found. Though the Statute prescribes that section 69 applies when the witness is not found, in the absence of any other provision dealing with cases wherein the presence of 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.

Architect Services, Consulting Engineers Services, Management Consultancy Services etc. used for construction are eligible input services against the output service of Renting of Immovable Property.

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44. [2015-TIOL-2418-CESTAT-MUM] Maharashtra Cricket Association vs. Commissioner of Central Excise, Pune-III.

Architect Services, Consulting Engineers Services, Management Consultancy Services etc. used for construction are eligible input services against the output service of Renting of Immovable Property.

Facts

The assessee, an association, constructed a stadium and availed the services of Architect, Consulting Engineering and Management Consultancy and availed CENVAT credit of the service tax paid thereon. The department contended that vide Circular No. 98/01/2008-ST, the credit of service tax paid on commercial or industrial construction or works contract service used for construction of immovable property is not eligible to a person providing renting of immovable property service and accordingly the input services availed being in relation to construction are inadmissible for credit.

Held

The Tribunal observed that the definition of input service provided under Rule 2(l) of the CENVAT credit Rules, 2004 specifically includes services “in relation to setting up, premises of provider of output service or an office relating to such premises”. Accordingly, the services used for setting up the stadium are eligible input services. The Tribunal also noted that the circular being contrary to the definition of input service is not tenable. Further, relying on the decision of Navratna S.G. Highway Prop. Pvt. Ltd vs. Commr. of ST, Ahmedabad-2011-TIOL-1703- CESTAT-AHM, the appeal was allowed.

Co-operative society – Deduction u/s. 80P(2)(a) (i) – A. Ys. 2008-09, 2009-10 and 2011-12 – Byelaws of society not prohibiting other co-operative societies from being its members – Assessee is not a co-operative bank – Assessee entitled to deduction u/s. 80P(2)(a)(i)

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Quepem Urban Co-operative Credit Society Ltd. vs. ACIT; 377 ITR 272 (Bom):

For the A. Ys. 2008-09, 2009-10 and 2011-12, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80P(2)(a)(i), on the ground that the assessee was a primary co-operative bank. The Tribunal upheld the decision.

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

“i) There was no dispute between the parties that the assessee was a co-operative society as the society was registered under the Goa Co-operative Societies Act, 2001. Its transactions with non-members were insignificant or miniscule. On the above basis, it could not be concluded that the assessee’s principal business was of accepting deposits from the public and, therefore, it was in banking business. Besides, the qualifying condition 3 for being considered as a primary co-operative bank is that the bye-laws must not permit admission of any other co-operative society. This is a mandatory condition, i.e., the bye-laws must specifically prohibit the admission of any other cooperative society to its membership. The Revenue had not been able to show any such prohibition in the bye-laws of the assessee.

ii) The assessee could not be considered to be a cooperative bank for the purposes of section 80P(4) of the Act. Thus, the assessee was entitled to the benefit of deduction u/s. 80P(2)(a)(i) of the Act.

iii) The authorities should restrict the benefit of deduction u/s. 80P of the Act only to the extent that the income is earned by the assessee in carrying on its business of providing credit facilities to its members.”

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[2015-TIOL-375-CESTAT-MUM] Commissioner of Central Excise, Nagpur vs. Media World Enterprises.

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Kaldarshika is an Almanac, meaning a book, is excluded from the purview of taxable service of sale of space for advertisement being “print media”.

Facts:
The Assessee is engaged in printing and publishing calendar ‘KALDARSHIKA’ on which there are advertisements and department has sought levy of service tax under sale of space for advertisement. The first appellate authority allowed the appeal and the revenue has appealed before the Tribunal.

Held:
Kaldarshika gives the readers a host of information in respect of religions, cultural and historical events, as also the panchang and thus it cannot be considered as a calendar, business directory, yellow pages or a trade catalogue. It is a book excluded from the definition of “sale of space for advertisement”.

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[2015] 54 taxmann.com 153 (New Delhi – CESTAT) Commissioner of Central Excise vs. Sharp Menthol (India) Ltd.

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Pre-deposit – Prima Facie, the value of flats allotted to the land owner by the assesseebuilder to be determined based on the gross amount charged by the service provider to provide similar service to any other person – Rule 3 of Valuation Rules is applicable.

Facts:
The applicant provided taxable service under the category of “Construction of Residential Complex Service”. It entered into joint venture with land owner for construction of 72 flats out of which 48 flats belonged to assessee and service tax was paid on consideration received thereon and 24 flats belonged to land owner and no service tax was paid thereon. A show cause notice was issued proposing service tax on the 24 flats of the land owner’s share on the ground that they failed to pay service tax for the taxable service provided by them to the land owners for construction of 24 flats in consideration of land value. The applicant submitted that the consideration is the value of the land and hence it is liable to pay tax only on the land value and not on the value determined as per Rule 3(A) of (Determination of Value) Rules, 2006.

Held:
Tribunal held that it is undisputed that the consideration received for the service rendered to land owner in respect of 24 Flats is not wholly or partly consisting of money and therefore, Rule 3 of (Determination of Value) Rules, 2006, would be invoked. As per Rule 3(a), where consideration received is not wholly or partly consisting of money then the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person. Since the tax is assessed on the basis of the value of similar flats and therefore, prima facie, the tax was determined properly. Pre-deposit was ordered

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[2015] 54 taxmann.com 244 (New Delhi- CESTAT)-National Building Construction Corporation Ltd. vs. Commissioner of Central Excise & Service Tax, Raipur.

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Service Tax- Service portion in works contract –liable to service tax prior to 01-06-2007- abatement cannot be denied merely because value of free supplies are not included in the gross value of services.

Facts:
Assessee received work order for the work of Engineering Procurement & Construction of Civil Structural and Architectural Work of Main Power Plant wherein the steel required for construction was supplied to it free of cost by service receiver and remaining material such as cement, sand aggregates, bricks, etc. and equipment, tools, spares, etc. were procured by the assessee and used in the said construction work. Department demanded service tax on full value and denied abatement of 67 % on the ground that value of free supplies was not included in the value of services. The assessee contended that activities were not liable to tax prior to 01-06-2007 and that if services are taxable then, the benefit of abatement cannot be denied.

Held:
It was held that the classification of service has to be determined as per definition of the taxable service applicable for the relevant period and merely because the classification changes with the introduction of a taxable service under which an existing service gets more specifically covered, it no way means that the said service was not taxable during the period prior thereto. However, as regards entitlement of abatement, relying upon the law laid down by Bhayana Builders (P.) Ltd. vs. CST [2013] 38 taxmann.com 221 (New Delhi – CESTAT), it was held, the denial of abatement on the grounds of non-inclusion of free supplies in the gross amount is unsustainable in law.

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[2015] 54 taxmann.com 206 (Ahmedabad)- Arvind Ltd. vs. Commissioner of Central Excise, Ahmedabad-II.

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CENVAT Credit- supply of electricity to sister concern – merely a book adjustment is also a form of payment- assessee liable to reverse prorata CENVAT credit of inputs used in generation of electricity.

Facts:
The assessee manufacturer used Naphtha fuel for generation of electricity. A part of electricity so generated was captively consumed in manufacture of final product and remaining was supplied to its sister concern. Department denied pro-rata credit for electricity supplied to sister concern. Tribunal decided in favour of the assessee. On Revenue’s appeal, Supreme Court remanded the matter back to revenue to quantify denial of credit, considering electricity was wheeled out / cleared for a price to sister concern. Assessee argued that reversal was not warranted as it did not charge any price to sister concern and department erroneously proceeded only on the basis of book adjustment entries and interest could not be demanded as there was sufficient balance in the CENVAT credit account which remained unutilized to the extent of demand raised by the assessee.

Held:
Relying upon the decision of Collector of CE vs. Modern Food Industries (India) Ltd. 1988 taxmann.com 190 (CEGAT – New Delhi) (SB), Tribunal held that the transfer of amount by the sister unit by book adjustment would be treated as amount charged to the other unit. It was also observed that the adjudicating authority calculated the demand based on Chartered Engineer’s Certificate and therefore Tribunal upheld the adjudication order to the extent of recovery of CENVAT credit. As regards non-charging of interest, it was held that assessee had wrongly availed CENVAT credit but did not utilise the credit against any liability. However, in view of the fact that there are judgments in favour of both assessee as well as revenue in this regard, the matter was remanded back to the adjudicating authority to analyse whether assessee had factually utilised the CENVAT credit to decide the case afresh in the light of such decisions.

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[2015] 54 taxmann.com 275 (Bangalore)-Apotex Research (P.) Ltd. vs. Commissioner of Central Excise, Customs & Service Tax, Bangalore.

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CENVAT Credit- Two adjacent units with common service tax registration – CENVAT credit can be availed irrespective of invoice addressed to head office or to any of the adjacent units.

Facts:
Assessee had two adjacent units under a common service tax registration. They availed service tax credit without considering whether the invoice was addressed to the head office or to units. Department denied credit based on the grounds that Central Excise registrations were different and since there was another sister concern adjacent to the two units, there was also a possibility that input service could have been utilied by the said sister concern unit.

Held:
Tribunal allowing the appeal held that when the service tax registration is common and both the units are located adjacent to each other, insisting that the service tax also should be segregated may not be relevant.

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[2015] 37 STR 655 (Tri-Mumbai) Maharashtra State Seed Certification Agency vs. C.C. & C.E., Nagpur.

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Certification done under the Seeds Act, 1966 is not a mandatory and statutory function and therefore, chargeable to service tax.

Facts:
The appellant was an autonomous body registered under the Societies Registration Act, 1860, engaged in activities of technical inspection and certification of seeds produced by seed producers in Maharashtra State as per Seeds Act, 1966 and Seeds Rules, 1968. They charged fees for the said certification as prescribed under the said rules. Service tax applicability was challenged on the ground that they were doing certification work as envisaged under the Seeds Act, 1966 and the rules made thereunder which was a statutory function and therefore, no tax was leviable.

Held:
The Seeds Act, 1966 provides for regulating the quality of certain varieties of notified seeds for sale. Further, certification is required only if somebody intends to sell specified varieties of seeds through the intermediaries or in the market.

The appellant was a society registered under Societies Registration Act. The activities cannot be considered as mandatory and statutory function provided by a sovereign/ public authority and thus are chargeable to service tax under the Technical Inspection and Certification Services.

The demand within the normal period of limitation was only upheld and beyond the same was set aside. The penalties were also set aside.

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[2015] 37 STR 616 (Tri.-Chennai) K. G. Denim Ltd. vs. Commissioner Of Service Tax, Salem.

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Services in respect of business exhibitions conducted abroad and testing done abroad should be considered to be provision of services outside India.

Facts:
Whether there was any service tax liability on the appellant as a recipient of service in respect of business exhibitions conducted abroad and in respect of technical inspection & certification services done abroad for which payments are made to parties located abroad?

Held:
Both these services should be considered to be within India if service provider was located abroad and service was performed in India. Since these services were performed outside India, no service tax liability arose in the case.

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[2015] 37 STR 529 (Tri.-Del) IFB Industries Ltd. vs. Commissioner of Central Excise, Chandigarh.

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If one senior officer interpreted the law in a manner favourable to the assessee, the assessee cannot be said to have malafide intention for invoking the extended period of limitation.

Facts:
The appellant engaged in trading activities was also offering free warranty for limited period and thereafter, undertaking the job of maintenance and repair of products sold.

The services provided during warranty were exempt services and after warranty were taxable. Revenue entertained a view that the CENVAT Credit only to the extent of an amount not exceeding 20% of service tax was available.

The department held that 20% restriction on availment of CENVAT credit was not applicable in respect of sale of service as also for taxable services of maintenance and repair.

The order of additional commissioner was reviewed by the Commissioner and the 20% restriction was imposed.

Held:
Appeal can be disposed off as the Additional Commissioner had interpreted the provisions in favour of the assessee. When one senior officer of the department is dropping the demand by interpreting a particular provision of law, the assessee cannot be held guilty for adopting the same interpretation which is in his favour. In the absence of any other evidence that credit was availed with malafide intention, invocation of longer limitation period was not justified.

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[2015] 37 STR 597 (Tri.–Mumbai) Grey Worldwide Pvt. Ltd. vs. Commissioner of Service Tax.

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Discounts and incentives received by advertising agency are not towards provision of services and therefore, should not be levied to service tax.

Facts:
The appellant, an advertising agency, placed advertisements in print/electronic media on behalf of the advertisers and received agency commission. The demand was on account of volume discount/rate difference received from media, write back of the amounts in respect of payments not claimed by the media.

Held:
It was concluded that assessee was merely coordinating between media and advertiser. Service tax liability was discharged on agency commission received and there was no agreement or contract for promotion of media’s business activities or provision of any service. It was held that incentive received from media without any contractual obligation to render any service cannot be subjected to service tax under the category of “Business Auxiliary Services” as the amounts were discounts and incentives and not as charges for services. Further, in respect of the amounts written back, the same were payable to the media as and when the claim was lodged and therefore it cannot be construed as a consideration for service rendered.

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[2015] 37 STR 642 (Tri.–Mumbai) Wall Street Finance Ltd. vs. Commissioner of Service Tax, Mumbai.

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Indian agent, facilitating transfer of money from abroad to persons situated in India, provides services to service receiver outside India though the beneficiary of services is in India.

Facts:
The appellant was engaged by M/s. Western Union as agent for transfer of money from abroad to persons situated in India. The department was of the view that since services were rendered in India, service tax was payable on the commission received.

It was contended that the nature of services undertaken was transfer of money from abroad for the remitters situated abroad through Western Union who provided the money transfer service. As far as usage of service was concerned, services were provided to Western Union, who was situated abroad and therefore, services were used outside India. The consideration was also received in convertible foreign exchange. Hence, all conditions for classifying the said services as export of service were satisfied.

Held:
At the relevant time there were no specific rules to determine the place of provision of service under the Service Tax Law. Rule 3 provided that the place of provision of such service shall be the place of recipient of service. In the present case, since the recipient was M/s. Western Union who was located outside India, services were export services not taxable in India.

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[2015] 37 STR 631 (Tri.-Mumbai) Kedar Construction vs. Commissioner of Central Excise, Kolhapur.

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Services in relation to distribution or transmission of electricity were exempt from service tax vide Notification No. 45/2010-ST dated 20th July, 2010.

Facts:
The appellants rendered commercial or industrial construction services to Maharashtra State Electricity Transmission Co. Ltd. and others for construction of substations and claimed exemption under Notification No. 45/2010-ST dated 20th July, 2010 which provides for exemption in respect of services related to distribution and transmission of electricity. The appellants contended that the exemption pertained to services “in relation to” distribution and transmission of electricity, their activity of construction of sub-stations which was used for the distribution and transmission, was eligible for the exemption.

Held:
It was held that all taxable services rendered in relation to transmission/distribution of electricity were eligible for benefit of exemption under the said notification.

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Supplier’ Cred it – Whet her de bt or trade payable ?

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Arrangements with respect to payment to suppliers
could vary substantially and may not always be straight-forward. To ease
working capital pressure, companies enter into structured transactions
that involve the supplier and bank/s. These are commonly referred to as
supply-chain finance, supplier finance, reverse factoring and structured
payable transactions. Broadly, the arrangement allows a company to pay
its supplier invoices when due (under the extended terms negotiated with
a supplier) and gives the supplier the option to accelerate collection
through a factoring arrangement. Under the factoring arrangement, the
supplier sells its receivables (i.e., invoices) from the company to the
bank at a discount. The company is then legally obligated to pay the
bank in full (i.e., the amount specified in the original invoice) since
the bank is now the legal owner of the receivables. Such an arrangement
may better enable a supplier to monetize the receivable that has
extended payment terms.

Can a company (buyer of goods and services) continue
to classify the liability related to the supplier’s invoice as a trade
payable or whether it must reclassify the liability as bank debt?

In
evaluating a structured payable arrangement, companies should determine
the classification based on the substance and individual facts and
circumstances, including the following:

What are the roles, responsibilities and relationships of each party (i.e., the company, bank and supplier)?

Is
the company relieved of its original obligation to the supplier and is
now obligated to the bank? However, being obligated to a bank instead of
the supplier does not necessarily mean that the liability is a debt.
One needs to further assess whether the liability to the bank entails a
financing element or it is merely a payment of the liability to the bank
instead of to the supplier.

Have any discounts or rebates been
received by the company that would not have otherwise been received
without the bank’s involvement?

Has the bank extended the date on which payment is due from the company beyond the invoice’s original due date?

The
terms of the structured payable arrangement must be carefully
considered to determine whether the arrangement changes the roles,
responsibilities and relationships of the parties. To continue
classifying the liability as a trade payable, the company must remain
liable to the supplier under the original terms of the invoice, and the
bank must have assumed only the rights to the receivable it purchased.
If the terms of the company’s obligation change as a result of the
structured payable arrangement, that may be an indication that the
economic substance of the liability is more akin to a financing
arrangement.

Under normal circumstances, a factoring arrangement
between a company’s supplier and a bank does not benefit the company.
That’s why it is important to understand whether the company receives
any benefit as a result of the structured payable arrangement. For
example, a bank may purchase a supplier’s receivables in a factoring
arrangement at 95% of its face amount. However, rather than collect the
full amount payable from the company, the bank may require the company
to pay only 98% of that amount. In this case, the company has received a
benefit that it would not have received without the bank’s involvement,
indicating that the liability may be more akin to a financing
arrangement.

If a structured payable arrangement with a bank
allows a company to remit payment to the bank on a date later than the
original due date of the invoice, that may also indicate that the
company has received a benefit that it would not have received without
the bank’s involvement, suggesting the liability may more be more akin
to a financing arrangement.

The analysis should focus on whether
the terms of the payable change as a result of the involvement of the
bank. If the payment terms do not change (i.e., the company must pay the
bank on the original terms of the invoice) the characteristics of the
payable may not have changed and would not reflect a financing. If the
terms of the payable have changed as a result of the bank’s involvement,
the characteristics of the liability have changed and it may no longer
be appropriate to classify the liability as a trade payable.

Other factors that may be considered include:

Is
the supplier’s participation in the structured payable arrangement
optional? If not, the company should evaluate whether the substance of
the transaction is more reflective of a financing.

Do the terms
of the structured payable arrangement preclude the company from
negotiating returns of damaged goods to the supplier?

Is the
company obligated to maintain cash balances or are there credit
facilities or other borrowing arrangements with the bank outside of the
structured payable arrangement that the bank can draw upon in the event
of noncollection of the invoice from the company?

Some
structured payable arrangements require that, as a condition for the
bank to accept an invoice from a supplier (i.e., the receivable) for
factoring, a company must separately promise the bank that it will pay
the invoice regardless of any disputes that might arise over goods that
are damaged or don’t conform with agreed-upon specifications. In the
event of a dispute, a company that agrees to such a condition would need
to seek recourse through other means, such as adjustments on future
purchases. This provision is typical among structured payable
arrangements since it provides greater certainty of payment to the bank.
However, this provision may indicate that the economic substance of the
trade payable has been altered to reflect that of a financing. It is important to consider the substance of any such condition in the context of the company’s normal practices.
For a company that buys enough from a supplier to routinely apply
credits for returns against payments on future invoices, this condition
might not be viewed as a significant change to existing practice.

In
some factoring arrangements, the bank may require that the company
maintain collateral or other credit facilities with the bank. These
requirements aren’t typical in factoring arrangements and may indicate
that the economic substance of the liability has changed to be more akin
to a financing arrangement. For the liability to be considered a trade
payable, the bank generally can collect the amount owed by the company
only through its rights as owner of the receivable it purchased from the
supplier. As can be seen from the above discussion, whether supplychain
finance should be presented as debts or trade payable is a matter of
significant judgement and would depend on the facts and circumstances of
each case.

Below are four simple examples, and the author’s opinion on whether those result in debt or trade payable classification.

1.
The company issues a promissory note to the supplier, agreeing in
writing to pay the supplier a fixed sum at a fixed future date or on
demand by the bank (discounting bank).

2. The company accepts a
bill of exchange and its banker simultaneously issues a bank guarantee
in favour of the supplier, making the bank liable to pay the supplier if
the company fails to honour its commitment on the due date. The bank
guarantee is not invoked at the reporting date. No interest is charged
to the company, and there is no impact on its credit limits.

3. The company buys goods from a supplier and needs to pay for them immediately.  as it does not have the cash, it arranges for a 90 day LC in favour of the supplier.  the supplier discounts the LC and receives payment immediately. the discounting charges/interest for 90 days is borne by the company. the credit limit of the company is utilised.

4. The company has entered into a separate credit limit with the bank wherein the bank will make payment to selected suppliers on company’s behalf.  as per the arrangement, the supplier will invoice the company with a credit period between 180 to 240 days. This is not a normal credit period which is also appropriately reflected    in    the    pricing    of    the    product.        The    bank    will    make    payment to the supplier after deducting discounting charges. At the due date, the company will make the full payment to the bank. The bank has no recourse against the supplier.

It may be noted that to take a proper view more detailed facts will be required, including the exact arrangement terms and the legal requirements/interpretations. on the basis of the limited information and above discussion it appears that the first     two     examples     represent     traditional     factoring     arrangement,    the    arrangement    would    result    in    the    classification    as    “trade    payables.”        In    the    last    two    examples,    the    classification would be more likely a “debt”.

[2015] 53 taxmann.com 102 (Bangalore – Trib.) A. Mohiuddin vs. ADIT A.Ys.:2012-13, Dated: 14.11.2014

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Sections – 195, 201 of the Act – since at the time of payment, the taxpayer was aware about exemption of capital gain in the hands of the non-resident payee, he was not required to withhold tax from payment.

Facts:
During the relevant tax year the taxpayer purchased a house property from a non-resident family member. The non-resident represented to the taxpayer that she had purchased residential house property about four months ago (i.e., within one year as required u/s. 54 of the Act) prior to the date of sale deed and that the consideration paid for the purchase was fully eligible for exemption u/s. 54 of the Act. Therefore, the taxpayer did not withhold tax from the payment.

Accordingly to the taxpayer, it was required to withhold tax u/s. 195(1) of the Act only if income chargeable to tax was embedded in the payment made by him and since no such income was embedded in the payment, he did not deduct tax.

The AO observed that the taxpayer had not followed the mechanism provided in section 195(2) and (3) for withholding lower or nil rate of tax. Accordingly, the AO held taxpayer as ‘assessee in default’ u/s. 201 and raised demand on him.

Held:

The ultimate levy of taxes is dependent upon exemption, deduction, etc. The seller was family member who had represented to the taxpayer at the time of payment of consideration that no tax was payable by her because of exemption u/s. 54.

These facts should be seen in the context of CBDT’s Instruction No. 02/2014, dated 26.02.2014 and particularly paragraph 3 thereof, which indicates that the AO is required to determine the appropriate proportion of sum chargeable to tax u/s. 195 (1) to ascertain the tax in respect of which the deductor should be deemed to be an ‘assessee in default’ u/s. 201.

Since, at the time of payment, the taxpayer was aware of the payment being not subject to tax because of exemption, he was not required to withhold tax.

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[2015] 53 taxmann.com 138 (Mumbai – Trib.) FedEx Express Transportation & Supply Chain Services India (P.) Ltd. vs. DCIT A.Y. 2009-10, Dated: 10.12.2014

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S/s.- 92C of the Act – payments made to third
party on behalf of AE for services provided by third party, which were
fully reimbursed by AE, could not be included in total costs for
determining profit margin for benchmarking ALP.

Facts:
The
taxpayer was an Indian company (“ICo”) and a 100% subsidiary of a
Foreign company (“FCo”). Indian aviation regulatory authority had
granted approval to FCo to operate all cargo air services to and from
India. The taxpayer was engaged in providing customs clearance services
to FCo, which was its AE, relating to high value packages and low value
packages. However, since the taxpayer had license for custom clearing of
only low value packages, it outsourced custom clearance of high value
packages to a third party and coordinated with the third party to
provide services to FCo.

The TPO observed that the payments made
to the third party were not reflected in the profit and loss account
but were routed through the balance sheet. Further, though the taxpayer
had selected Profit Level Indicator based on cost, it had excluded the
payments made to the third party while applying markup on cost. On
examination of the agreement between the taxpayer and the third party,
the TPO deduced that the taxpayer had direct control and monitoring of
day to day activities of third party and according to the TPO, the
taxpayer had not given proper reason for excluding the payments made to
the third party from the cost base for applying markup. Accordingly, the
TPO made adjustment in respect of payments made to third party for
custom clearance of high value packages that were coordinated with third
party.

Held:

The taxpayer did not have license to
provide high value packages custom clearance services and it was merely
coordinating with third party for such services. It was not directly
rendering the services to the AE.

The role of the taxpayer was confined to making payment to the third party.

Mere
monitoring of activities of third party cannot per se lead to the
inference that the taxpayer is directly providing the services to AE.

The
net profit margin realized from the AE was to be computed only with
reference to the costs directly incurred by the taxpayer and it could
not be imputed on the cost incurred by third party which was reimbursed
by the AE because there was no direct cost of such services to the
taxpayer.

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[TS-775-ITAT-2014] [MUM-Trib] Morgan Stanley International Incorporated vs. DIT A.Y.: 2005-06, Dated: 18.12.2014

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Article 12 of India-US DTAA – employees deputed by American company to Indian company for providing support services constituted service PE; salary reimbursed to American company was business profit (and not FIS) from which salary costs were deductible.

Facts:
The taxpayer was a resident of USA and 100% subsidiary of another American company. The primary activity of taxpayer was to provide support services to group companies located in various countries including India. During the relevant tax year, the taxpayer entered into agreement with an Indian group company for providing support services. The taxpayer deputed five employees to its Indian subsidiaries. The employees were to work under the supervision and control of the board of Directors of that Indian companies, were to be accountable to Indian companies and their day-to-day responsibility was to be managed by Indian companies.

The taxpayer paid salaries of the deputed employees and also withheld tax from their salaries u/s. 192 of the Act. The Indian subsidiaries reimbursed the salaries to the taxpayer since the taxpayer had paid them on behalf of the Indian subsidiaries and only for administrative convenience of the Indian subsidiaries. As per the taxpayer, the amount reimbursed was purely salary costs, it did not have any income element and hence, it was not taxable in India. However, on conservative basis, the Indian companies withheld tax @15% under Article 12 of India-USA DTAA from the reimbursed amount.

The tax authority concluded that the taxpayer received consideration for the services provided by the deputed employees and hence, the consideration was taxable as FTS u/s. 9(1)(vii) of the Act and as FIS under Article 12 of India- USA DTAA . CIT(A) upheld the order of the tax authority.

Before the Tribunal, the taxpayer contended as follows.

Amount received from Indian companies was reimbursement of salary costs without any income element and hence, question of taxability whether as FTS or FIS did not arise.

The deputed employees were under direct supervision and control of the Indian subsidiaries and hence, the ‘make available’ condition under India-USA DTAA was not fulfilled.

Even if deputed employees were considered to constitute service PE of the taxpayer, FIS provision would not be applicable. Consequently, relying on decision of the Supreme Court in DIT(IT) vs. Morgan Stanley & Co [2007] 292 ITR 416 (SC), the salary costs would have been deductible from the income, resulting in ‘nil’ income.

The tax authority contended that the business of the taxpayer was to provide support services through deputed employees who were highly qualified personnel having technical skills and experience. Hence, payment qualified as FIS under India-USA DTAA.

Held:
Relying on decision of theDelhi High Court in Centrica India Offshore (P) Ltd vs. CIT, [2014] 364 ITR 336 (Del) and decision of the Supreme Court in DIT(IT) vs. Morgan Stanley & Co [2007] 292 ITR 416 (SC), the Tribunal proceeded on the premise that the deputed employees were ‘real’ employees of the taxpayer who had come to India to render services and therefore, they constituted service PE of the taxpayer.

Once a service PE is created, FIS article will have no application since it excludes profits in connection with PE from its ambit. Hence, income should be taxed as business profits under Article 7.

While in Centrica’s case, Delhi High Court considered Article 12(6) of India-Canada DTAA , which embodies a similar provision, the issue of specific exclusion of PE profits from FIS article was not considered by Delhi High Court and hence, that decision cannot be applied.

For computing the business profits under Article 7, the reimbursement made by Indian companies has to be treated as revenue receipts and salary of the deputed employees paid by the taxpayer has to be allowed as deduction.

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[2015] 53 taxmann.com 1 (Jabalpur – Trib.) Birla Corporation Ltd. vs. ACIT A.Ys.: 2010-11 & 2011-12, Dated: 24.12.2014

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India-Austria DTAA , India-Belgium DTAA , India-
China DTAA , India-Germany DTAA , India- Switzerland DTAA , India-UK
DTAA and India- US DTAA ; section 5(2)(b), 9(1)(vii) the Act – Payments
made to non-resident suppliers of plant for installation/commissioning
services do not create an installation permanent establishment (PE),
since the activities did not exceed the threshold provided in the DTAA
s; FTS being a general Article and PE being a specific Article,
taxability of consideration should be confined to specific PE Article

Facts:
The
taxpayer is an Indian company engaged in manufacture and sale of
cement. During the relevant tax year, the taxpayer made payments to
certain non-resident suppliers for import of plant and machinery. The
suppliers were located in Austria, Belgium, China, Germany, Switzerland
UK and US. The suppliers also provided installation and commissioning
services and their technicians visited India for that purpose. The
taxpayer did not withhold tax in India on the ground that since the
plant and machinery were supplied from outside India, the payments for
the same were not chargeable to tax under the Act. The taxpayer
separately paid installation and commissioning fee and withheld tax @
10% thereon under the Act.

The tax authority concluded that:

the
contract was a “composite contact” or “works contracts”; ? taxpayer
paid the suppliers for supply of plant as well as installation and
commissioning services;

the consideration for provision of
installation and commissioning services was not paid separately but was
embedded in payments for supply of plant;

the taxpayer was
required to approach the tax authority for determination of chargeable
income and withholding tax thereon and in absence of that, was required
to withhold tax on the total payment.

Therefore, the tax
authority treated the taxpayer as “assessee in default” u/s. 195 read
with section 201 of the Act and held that the taxpayer should have
withheld tax @ 42.25% of the gross remittance amounts.

Held:
(i) As regards I. T. Act

Part
of the consideration for purchase of plant that can be attributable to
installation commissioning or assembly of the plant and equipment or any
supervision activity in connection thereto accrues and arises in India.

Hence, it is taxable u/s. 5(2)(b) of the Act since the related
economic activity is performed in India. Because income accrues or
arises in India, one need not look at deeming fiction u/s. 9(1)(vii) of
the Act. It is for that reason that definition of FTS in Explanation 2
to section 9(1)(vii) specifically excludes “consideration for any
construction, assembly. Mining or like project”.

The expression
installation, commissioning or erection of plant and equipment belongs
to the same genus as expression ‘assembly’. Thus, ‘assembly’ is excluded
from the scope of section 9(1)(vii) of the Act.

As regards DTAA

India
has entered into DTAA s with all the seven tax jurisdictions where the
suppliers are located. All these DTAA s provide minimum time threshold
under installation PE clause and the installation and commissioning work
by any supplier did not exceed the minimum time threshold under any of
the DTAA s.

Further, India-Belgium and India-UK DTAA
additionally provide that even when threshold time limit is not
exceeded, installation PE is constituted if the installation/
commissioning charges exceed 10% of the sale value of the plant. This
condition too was not fulfilled.

Accordingly, no installation PE
was constituted and even if a part of the consideration can be
attributed to installation/commissioning activities, it will not be
taxable in terms of Article 7 read with Article 5 of the relevant DTAA .

(iii) As regards FTS/FIS

Installation/commissioning activities are de facto in the nature of technical services.

While
FTS/FI S article dealing with technical services is a general
provision, Article dealing with installation PE is a specific provision.
In Union of India vs. India Fisheries (P) Ltd. [57 ITR 331 (1965)], the
Supreme Court has held that if there is an apparent conflict between
two independent provisions, the special provision must prevail over the
general provision. If, even when PE was not constituted, the income is
considered taxable under FTS Article, it would not only render PE
provisions meaningless but would also be contrary to the spirit of the
commentary on UN Model Convention.

Hence, if there are services
which are covered under a specific PE clause and also under FTS/FIS
provision, the taxability of consideration for such services must be
confined to that specific PE clause.

In case of India-UK and
India-USA DTAA , even if FTS/ FIS article applies, as the ‘make
available’ condition was not satisfied, the payment was not FTS/FIS.
Installation/ commissioning did not involve transfer of technology and
hence, such activities did not satisfy ‘make available’ condition.

As India-Belgium DTAA includes MFN clause, same tax position as India-UK/US DTAA applies.

Article
12(5)(a) of India-Switzerland DTAA specifically excludes “amounts paid
for … … services that are ancillary and subsidiary, as well as
inextricably and essentially linked, to the sale of a property” (i.e.,
plant in this case) from the scope of FIS. Accordingly installation/ commissioning charges were not FIS under India- Switzerland DTAA .

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Digest of recent important foreign decisions on cross border taxation

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In this Article, some of the recent important foreign decisions on cross border taxation are covered.

1. France Participation exemption – Administrative Supreme Court clarifies 5% participation threshold criteria

In a decision (No. 370650) given on 5th November 2014, the Administrative Supreme Court (Conseil d’Etat) ruled that the 5% participation threshold provided for by the French participation exemption regime does not relate to both capital and voting rights of a subsidiary, but only to capital. A parent company which holds at least 5% of the capital, but less than 5% of the voting rights of its subsidiary may therefore benefit from the participation exemption on dividends derived from shares carrying a voting right.

a) Facts: In 2008 and 2009, Sofina, a company resident in Belgium, received dividends from the French company Eurazeo, which were subject to a 15% withholding tax. Sofina held shares representing 5% of the capital of Eurazeo, all of which carried a voting right. However, the shares held by Sofina represented only 3.63% of the voting rights of Eurazeo in 2008 and 4.29% of the voting rights of Eurazeo in 2009. Sofina claimed the repayment of the withholding tax on the basis of the French tax authorities’ guidelines which, following the European Court of Justice decision in Denkavit II (Case C-170/05), provide that where a EU non-resident parent company which fulfils the domestic 5% participation requirement finds it impossible to set off the French withholding tax on dividends derived from its French subsidiary, such dividends shall not be subject to a withholding tax.

b) Issue: Under article 145(1)(b) of the General Tax Code, a company must hold at least 5% of the capital of its subsidiary at the date of payment of the dividends to benefit from the participation exemption. Article 145(6) (b)(ter) provides that the participation exemption shall not apply to dividends derived from shares which do not carry a voting right, unless the parent company holds shares representing at least 5% of both capital and voting rights of its subsidiary. The tax authorities took the view that these provisions imply that, in order to benefit from the participation exemption, a parent company shall hold shares representing at least 5% of the capital and at least 5% of the voting rights of its subsidiary. The firstinstance tribunal (tribunal administratif) dismissed the claim of Sofina, but the Administrative Court of Appeals (cour administrative d’appel) later ruled in favour of the Belgian company. The Conseil d’Etat confirmed the decision of the Administrative Court of Appeals.

c) Decision. The Conseil d’Etat ruled that:

– article 145 of the General Tax Code does not require, for the 5% participation in capital condition to be met, that a voting right be attached to every share held by the parent company, nor that voting rights attached to the shares, if any, be strictly proportionate to the portion of capital such shares represent;

– the fact that, under article 145(6)(b)(ter) of the General Tax Code, dividends derived from shares which do not carry a voting right may not be exempted, unless the parent company holds shares representing at least 5% of both capital and voting rights of its subsidiary, does neither mean nor imply that the application of the participation exemption is limited to parent companies which hold shares representing at least 5% of the capital and 5% of the voting rights of a subsidiary.

Dividends derived from shares carrying a voting right received by a parent company which holds at least 5% of the capital of its subsidiary may therefore be exempted under the French participation exemption, notwithstanding the fact that the shares held by the parent company do not represent 5% of the voting rights of the subsidiary.

2) Canada
Tax Court of Canada holds foreign exchange gains not realised on conversions of convertible debentures

The Tax Court of Canada gave its decision, on 4th November 2014, in the case of Agnico-Eagle Mines Limited vs. The Queen (2014 TCC 324). The taxpayer, Agnico-Eagle Mines Limited (Agnico), a taxable Canadian corporation, issued US-denominated convertible debentures in 2002 at an aggregate price of $ 143,750,000. The issue in the appeal was whether or not Agnico realised foreign exchange gains when the convertible debentures were converted and redeemed for Agnico’s common shares. The tax authorities argued that foreign exchange gains were realised because the conversions and redemption resulted in a repayment of the debt equal to its US dollar principal amount, which had decreased when translated to Canadian dollars. Agnico argued instead that the principal amount of the debt became irrelevant once holders exercised their rights of conversion, as most of them did. It submits that a gain could not have been realised because it borrowed far less than it paid out in Canadian dollar terms (i.e., CAD 228,289,375 borrowed and CAD 280,987,312 paid out, measured by the value of common shares issued to holders).

a) Background: Agnico produces gold. Its shares (Common Shares) were listed on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX). In 2002, it issued convertible subordinated debentures (Convertible Debentures) at a price of $ 1,000 each, which traded on the TSX. Under the terms of an indenture, interest was payable at 4.5%, the principal amount was $ 1,000 and they were redeemable on or after 15th February 2006 for a redemption price (Redemption Price) equal to the principal amount plus accrued and unpaid interest. Agnico had the option of delivering Common Shares on redemption instead of cash. The holder had the option to convert the debentures for 71.429 Common Shares at any time prior to redemption or maturity. Most of the debentures were converted into Common Shares during 2005 and 2006. Most of the conversions took place after Agnico issued a notice of redemption late in 2005. Most investors availed themselves of the option to convert rather than being subject to the redemption because this yielded a higher number of Common Shares.

The tax authorities determined that Agnico realised deemed capital gains on the conversions and the redemption pursuant to section 39(2) of the Incometax Act. The amounts assessed are the same as if the principal amount had been repaid in cash. This resulted in assessments of deemed capital gains in the amounts of CAD 4,499,360 and CAD 57,676,430 for the 2005 and 2006 taxation years, respectively.

b) Court’s decision: The Court concluded that the consideration received for the issuance of the Common Shares was $ 14 per Common Share or US CAD 1,000 per Convertible Debenture. The Court then determined that the relevant amounts should be translated into Canadian dollars at the spot rates when the amounts “arose”. The date of translation relating to the issuance of the debentures was not in dispute, but the translation date for the amount paid out by Agnico on the conversions. The Court determined that the appropriate date was the date the debentures were issued, in which case there could be no gain. With respect to the redemption, however, the Court held that the terms of the indenture made it clear that the Common Shares issued on redemption are in satisfaction of the redemption price, which became due and payable on the date of redemption. As such, there was a foreign exchange gain on the date of redemption. In conclusion, no foreign exchange gains were realized on the conversions and the tax authorities’ determination of foreign exchange gain on the redemption was upheld.

3) European Union; United Kingdom

ECJ Advocate General’s opinion: Commission vs. United Kingdom (Case C-172/13) – Cross-border loss relief – details

Advocate General Kokott of the Court of Justice of the European Union (ECJ) gave her opinion in the case

Commission vs. United Kingdom of Great Britain and Northern Ireland (Case C-172/13). Details of the opinion are summarized below.

    Facts: Following the ECJ judgment in Marks & Spencer (Case C-446/03) on cross-border loss relief, the United Kingdom had introduced group relief in regard to foreign group members by amending the Corporate Tax Act with effect from 1st April 2006. In 2007, the Commission raised concern that the United Kingdom breaches freedom of establishment by imposing conditions on cross-border group relief that make it virtually impossible in practice to obtain such relief. After the United Kingdom had failed to comply with the Commission’s request to amend its legislation, the Commission brought an action before the Court.

    Advocate General’s Opinion: The AG opened her assessment by stating that it is necessary to examine whether legislation at hand breaches the freedom of establishment (article 49 of the Treaty on the Functioning of the EU (TFEU) and article 31 of the EEA Agreement). The AG continued by stating that contested legislation restrict the freedom of establishment because it imposes stricter requirements on claiming the advantages of group relief if a parent company establishes a subsidiary abroad than if it does so in its state of residence. According to the settled ECJ case law, such restriction is justified only if it relates to situations which are not objectively comparable or where there is an overriding reason in the public interest.

Regarding the objective comparability, the AG notes that although the objective comparability test should not be rejected, there is a significant and, to some extent, crucial difference in the situation of a parent company with a resident or a non-resident subsidiary. The AG concluded that difference must therefore be examined as a possible justification for unequal treatment, including a test of the proportionality of the national rules.

Going further, on overriding reason in the public interest, the AG refers to the ECJ decision in the Marks & Spencer case (C-446/03) by stating that this decision created the so-called “Marks & Spencer exception”. Based on that exemption, losses incurred by a non-resident subsidiary can be transferred to the parent company if those losses cannot be taken into account elsewhere, either for present, past or future accounting periods, in which connection the burden of proof lies with the taxpayer and the Member States are entitled to prevent abuse of that exception. The AG continued by noting that the regime created under this exception has proved to be impracticable and as such does not protect the interest of the internal market. According to the AG, its application also constitutes source of legal disputes because of four reasons:

– the possibility of loss relief elsewhere is in terms of fact really precluded only if the subsidiary has ceased to exist in law;

– the case in which the loss cannot by law be taken into account in the state in which the subsidiary is established, the “Marks & Spencer exception” comes into conflict with another line of case law;

the impossibility of loss relief elsewhere can be created arbitrarily by the taxpayer; and

– the parent company’s Member State is obliged, on the basis of the freedom of establishment, only to accord equal treatment which means that it is possible that a notional tax situation over a period of decades has to be investigated retrospectively.

In conclusion of the analysis of the “Marks & Spencer exception”, the AG stated that this exception should be abandoned because of numerous reasons. By abandoning the exception, the contradictions in the ECJ case law would be resolved and clear borders of the fiscal powers of the Member States would be established. As a second argument, the AG stated that this solution is in line with the requirement of legal certainty which provides for law to be clear and its application foreseeable. Finally, the AG concluded that the abandonment of the “Marks & Spencer exception” does not infringe the ability-to-pay principle as the Commission has claimed.

The AG finalised her assessment by stating that even the complete refusal of loss relief for a non-resident subsidiary satisfies the principle of proportionality. Any restriction on cross-border relief in respect of a subsidiary is thus justified by ensuring the cohesion of a tax system or the allocation of the power to impose taxes between Member States.

In the light of the above, the AG proposed that the ECJ should:

–  dismiss the action;

–  order the European Commission to pay the costs; and

– order the Federal Republic of Germany, the Kingdom of Spain, the Kingdom of the Netherlands and the Republic of Finland to bear their own respective costs.

4) France; United States

Treaty between France and United States – French Administrative Supreme Court rules that participation exemption does not apply to dividends received through a US partnership

In a decision given on 24th November 2014 (No. 363556), the French Administrative Supreme Court (Conseil d’Etat) ruled that dividends received by a French corporation from a US corporation held through a general partnership registered in Delaware may not benefit from the participation exemption, even though such a partnership is transparent for tax purposes under Delaware law. Details of the decision are summarised below.

    Facts: The French corporation Artémis SA held 98.82% of the capital of the general partnership Artemis America, registered in the state of Delaware. This partnership, which did not elect to be treated as a corporation, held more than 10% of the capital of the US corporation Roland. The French corporation Artémis SA received from the partnership Artemis America a EUR 4.7 million share of the dividends distributed by the US corporation Roland to the partnership. Considering that such dividends could benefit from the participation exemption, the French corporation Artémis SA deducted them from its taxable result for year 2002. The French tax authorities, however, contested the deduction of the dividends.

    Issue: Does domestic law, combined with the provision of the France – United States Income and Capital Tax Treaty (1994) (the Treaty) and in particular of article 7(4) of the Treaty, allow the application of the participation exemption on dividends received by a parent company where such dividends are derived from shares held through a transparent US partnership?

Article 7(4) of the Treaty provides that “a partner shall be considered to have realised income or incurred deductions to the extent of his share of the profits or losses of a partnership, as provided in the partnership agreement (…). For this purpose, the character (including source and attribution to a permanent establishment) of any item of income or deduction accruing to a partner shall be determined as if it were realised or incurred by the partner in the same manner as realised or incurred by the partnership.”

    Decision: In accordance with the well-established principle of subsidiarity of tax treaties, the French

Administrative Supreme Court first applied domestic law and then considered whether the Treaty provisions might have an impact on domestic rules.

Domestic law

The Court explained that where the tax treatment of a transaction involves a foreign legal person, one should first determine the type of French legal person to which such foreign legal person is the closest in regard of all the characteristics and of the law ruling the formation and functioning of the foreign legal person. The tax regime which is to be applied to the transaction shall then be determined according to French law.
 

The Court noted that the partnership Artemis America was not treated as a corporation in the US and that, under the law of Delaware, it had a legal personality which was distinct from the one of its partners. Therefore, such a partnership should be viewed as a French partnership (société de personnes) ruled by article 8 of the General Tax Code, even though the partnership Artemis America is transparent for tax purposes under the law of Delaware (while French partnerships are semi-transparent).

Article 145 of the General Tax Code provides that the participation exemption may only apply to companies subject to corporate income tax which hold shares fulfilling certain conditions. The Court ruled that these provisions mean that a French partnership (société de personnes) may not benefit from the participation exemption insofar as it is not subject to corporate income tax, even in the case where its partners are subject to corporate income tax. In addition, the Court ruled that a parent company must have a direct participation in the capital of its subsidiary to benefit from the participation exemption. Therefore, a parent company may not benefit from the participation exemption on dividends derived from shares held through a French partnership.

Insofar as the US partnership Artemis America, which is comparable to a French partnership, stands between the French corporation Artémis SA and the US corporation Roland, the parent corporation Artémis SA is not allowed under domestic law to benefit from the participation exemption on the dividends distributed by the US corporation Roland.

The Treaty

The Court ruled that the purpose of article 7 of the Treaty is to allocate the taxing rights over profits realised by enterprises resident in one of the two contracting states. The only purpose of article 7(4) is to allocate such taxing rights when profits are realised by a US partnership. Pursuant to articles 7 and 10 of the Treaty, dividends distributed by a US corporation to a US partnership, a partner of which is a French corporation, must therefore be seen as dividends distributed to the French partner, thus being taxable in France. However, it does not result from article 7 of the Treaty that such dividends should be seen as dividends directly distributed to the partner for the application of French tax law.

Hence, the Court concluded that the Treaty does not include any provision allowing the French corporation Artémis SA to deduct from its taxable result its share of the dividends distributed by the US corporation Roland to the US partnership Artemis America, and dismissed the taxpayer’s appeal.

5) Finland; Hungary

Supreme Administrative Court: Private pension based on work exercised abroad not income from Finnish sources The Supreme Administrative Court (Korkein hallinto-oikeus, KHO) gave its decision on 6th October 2014 in the case of KHO:2014:146. Details of the decision are summarised below.

    Facts: The taxpayer, A, has moved permanently to Hungary on 23 October 2005 and has been treated as a non-resident of Finland since 1st January 2009. In 2009, A received pension payments from a Finnish pension fund. The pension was based on work done for eight private employers between the years 1972 and 2002.

The first four employments were mainly exercised in Finland, whereas the four latter ones between 1988 and 2002 were exercised abroad.

The tax authorities taxed the pension payments fully whereas the Tax Appeal Board investigated the tax treatment based on each employment and ruled that the part which related to employment exercised abroad was not taxable in Finland. The tax authorities appealed against the ruling which was also upheld by the District Administrative Court of Helsinki.

    Legal background: Section 10 of the Income-tax Law (Tuloverolaki) includes a non-exhaustive list of items of income which are treated as derived from Finland. The list includes pension which is received from a pension insurance taken from Finland.

    Issue: The issue was whether or not the pension paid to the non-resident taxpayer is regarded as income from Finnish sources.

    Decision: The Court upheld the decisions of the Tax Appeal Board and the District Administrative Court and held that the pension income was not income from Finnish sources and not taxable in Finland as it related to work exercised abroad.

The Court acknowledged that it would be in accordance with the wording of the law to treat pension from a Finnish pension fund as income from Finnish sources. The Court, however, looked into the law proposal (HE 62/1991) (the Proposal) which added the pension insurance taken from Finland to the list of items of income which are treated as derived from Finland. The Proposal was explicitly referring only to pensions based on private pension insurances, whereas the tax practice about pensions based on obligatory pension insurances was that such pensions are taxable in Finland only if they were based on work exercised in Finland. This was also established in the unpublished decision of the Supreme Administrative Court (decision No. 3922 from 1990).

The Court emphasised that if the legislator wanted to change the existing practice, the Proposal should have explicitly stated this. Considering the Proposal and the tax practice, there were no grounds to change the interpretation so that pension insurance from Finland would cover obligatory pension insurance. The Court acknowledged that such interpretation may lead to double non-taxation of such pension due to the functioning of a tax treaty, which is likely not the intended effect of tax treaties. Despite this, there were no grounds to change the previous interpretation.

6) Finland; Switzerland

Treaty between Finland and Switzerland – Administrative Court of Helsinki: Licence fee for using group name and logo paid to a Swiss related party not deductible for Finnish company

The Administrative Court of Helsinki (Helsingin hallinto-oikeus) (the Court) gave its decision on 10th October 2014 in the case of 14/1103/4. Details of the decision are summarised below.

    Facts: A Finnish company (FI Co) has belonged to an international group since 1981. FI Co has been using the group’s logo since 1989 and the group’s name has been included in its name since 1995. In 2004, FI Co concluded a contract with a Swiss company (CH Co), which belongs to the same group and holds the rights to the group’s name and logo. Under the contract terms FI Co received the right to use the group’s name and logo in Finland and in return was charged a licence fee for the those rights. During the court proceedings, FI Co emphasised that the licence fee covered also other features of the brand, such as the mission and values of the group.

    Issue: The issue was whether or not the licence fee (royalty) FI Co paid to CH Co was a tax deductible business expense for FI Co.

    Decision: The Court held that the licence fee was not tax deductible for FI Co. The Court referred to section 31 of the Law on Tax Procedure which stipulates on transfer pricing adjustments between related parties and section 7 of the Business Income Tax Law under which all costs and expenses incurred for the purpose of earning, securing, or maintaining the taxpayer’s income are deductible for tax purposes. The Court emphasised that it is crucial whether an independent entity in similar circumstances would be willing to pay for such rights or were they simply benefits which FI Co accrued by belonging to a group.

As a starting point, the Court pointed out that the name and logo as well as the mission and values of the group are common for all entities belonging to the same group and indicate that the entity in question is part of a bigger entity. As such, those are benefits which accrue based on the group relationship without a fee. A fee can, however, be charged provided that the entity paying the fee can show that it has obtained commercial benefits from the contract.

The Court pointed out that FI Co has belonged to the group since 1981, used its logo since 1989 and attached the group name to its own name since 1995, whereas the licence fee was introduced only in 2004. Although these facts on their own are not decisive to deem the licence fee non-deductible, such facts have specific significance when no significant changes in the market position and circumstances have taken place. FI Co has not indicated that there has been a significant change in its market circumstances since 2000.

The Court held that FI Co had failed to show that the increase in its profits resulted from the contract. The benefits FI Co had accrued are benefits obtained based on the group relationship. As such, there were no grounds for CH Co to charge for such benefits and no business reasons for FI Co to pay for them.

Article 9 (associated enterprises) of the 1991 Finland-Switzerland tax treaty was mentioned as an additional legal basis for the decision although the Court did not elaborate more on the treaty aspects.

7) France; Germany

Treaty between France and Germany – French Administrative Supreme Court qualifies income derived from “jouissance” rights as dividend

In a decision (No. 356878) given on 10th October 2014, the French Administrative Supreme Court (Conseil d’Etat) ruled that the income derived from German “jouissance” rights (Genussscheine) within the meaning of German law is to be treated as dividend pursuant to paragraphs 6 and 9 of article 9 of the France – Germany Income and Capital Tax Treaty (1959) (as amended through 2001) (the Treaty).

    Facts: From 2004 to 2006, the French bank Caisse régionale du crédit agricole mutuel du Finistère received an income from securities issued by the German entity Landesbank Sachsen. These securities were denominated as “Genussscheine” in the issuance contract.

Under the contract, the annual income to be received by the French bank amounted to 6.6% of the nominal value of the securities, except:

– where and insofar as the payment of this amount would create or worsen a loss in the debtor’s accounts; or
– where, after a capital reduction resulting from debtor’s losses, the capital has not been built up to its former total nominal value.

The contract also provided that the amounts paid in relation to the “jouissance” rights (Genussscheine) were deductible from the profits of the securities’ issuer.

The income received by the French bank was subject to a 26.375% withholding tax corresponding to the corporate income tax and the solidarity tax due under the German tax legislation.

    Legal background: Article 9 (6) of the Treaty provides that the term “dividends” as used in this article means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being debt claims, participating in profits.

In turn, article 9(9) of the Treaty provides that income referred to in paragraph 6 arising from rights or shares participating in profits (including “jouissance” rights or “jouissance” shares) and, in the case of Germany, income from a sleeping partner (stiller Gesellschafter) from his participation as such, and income from loans participating in profits (partiarisches Darlehen), and income from profit-sharing loans (Gewinnobligationen)) that is deductible in determining the profits of the debtor may be taxed in the contracting state in which it arises, according to the laws of that state.

    Issue: The French bank considered that it was entitled to a French tax credit amounting to the German withholding tax, pursuant to article 20(2)(a)(bb) of the treaty referring to    income    arising    from    rights    participating    in    profits,    that is     deductible     in     determining     the     profits     of     the     debtor    (article 9(9) of the treaty).

However, the french tax authorities took the view that the income derived from “jouissance” rights constituted interest, which is taxable only in the state of which the recipient is a resident (article 10 of the treaty), and refused to grant the tax credit.  The french bank made a claim against this decision. On 5th december 2011, the french administrative Court of appeals (Cour administrative d’appel),    confirming the judgment given by the administrative tribunal (tribunal administratif) on 28th  january 2010, ruled that, in regard to the terms of the issuance contract and especially of its provision    which    defines    “jouissance” rights as debt claims, the income derived from these “jouissance” rights cannot be     qualified     as     dividend     under     article     9(6)     of     the     Treaty.    Consequently, the German withholding tax cannot give rise to a tax credit in france.

In the course of the subsequent proceedings, however, the Conseil d’Etat ruled in favour of the french bank.

d)  Decision: The Conseil d’Etat noted that the following facts were not disputed:
–   the income received by the french bank was derived from “Genussscheine” within the meaning of the German legislation;    and

–   the income derived from “Genussscheine” is expressly mentioned as a dividend in paragraphs 6 and 9 of article 9 of the treaty in its German-language version, which is equally authentic pursuant to the treaty.

The Conseil d’Etat, therefore, concluded that the income received    by    the    French    bank    qualified    as    a    dividend    under    article 9(6) of the treaty.

Note. The case has been referred back to the administrative Court of appeals.

TRANSFER PRICING DOCUMENTATION

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BACKGROUND
The Indian transfer pricing regulations require taxpayers to maintain, on an annual basis, a set of extensive information and documents relating to international transactions undertaken with associated enterprises (AEs) or specified domestic transactions undertaken with related parties. Given that the burden of demonstrating the arm’s length nature of transactions between associated enterprises/ related parties rests with the taxpayer, one of the pivotal constituents of transfer pricing is documentation of the economic and commercial realities of business, methodology used, assumptions, etc. that aided in arriving at the transfer price.

In a world where multinationals are seated across various locations around the globe, with centralised functions, varied operations and complex inter-company transactions, documentation assumes a crucial role for taxpayers. India, with regard to documentation has been no different. Indian revenue authorities, with regards to documentation, have always been stringent, leading to significant litigation for multinational organisations. Rule 10D of the Income Tax Rules, 1962 (the Rules) prescribes detailed information and documentation that has to be maintained by the taxpayer. While some of the requirements are general in nature, others are more specific to the relevant international transactions.

Further, in recent years, the Organisation for Economic Cooperation and Development (OECD) has been concerned with the effectiveness of current transfer pricing documentation guidance. As part of the several initiatives around Base Erosion and Profit Shifting (BEPS), the OECD has released its action plan on transfer pricing documentation. Action 13 of the BEPS Action Plan relates to re-examination of transfer pricing documentation seeking to enhance transparency to tax administrations, taking into consideration compliance costs for business. Action 13 of the BEPS Action Plan proposes a replacement to ‘Chapter V- Documentation” of the OECD transfer pricing guidelines providing a general guidance on documentation process from the perspective of both the taxpayer and the tax administration and consists of the following three parts:

i) Master file containing information relevant for all Multinational group members;

ii) Local File referring specifically to material transactions of the local taxpayer, and analysis of the same; and

iii) T emplate of country-by-Country report (CBC) illustrating global allocation of profits, taxes paid, and other indicators of economic activity.

REGULATORY FRAMEWORK
Section 92D of the Income-tax Act, 1962 (The Act) read with Rule 10D(1) of the Rules deal with maintenance of prescribed information and documentation by the taxpayer. The said requirement can be broadly segregated into two parts: I. The first part of the Rule lists out mandatory documents/ information that a taxpayer must maintain. The extensive list under this part can be further classified into the following three categories:

• Enterprise-wise documents (capturing the ownerships structure, group profile, business overview of the tax payer and the AEs etc.). These documents would typically cover requirements of Rule 10D(1)(a) to (c) of the Rules

• Transaction-Specific documents [capturing the nature and terms of contract description of the functions performed, assets employed and risks assumed (popularly known as ‘FAR ’ Analysis) of the each party to the transaction, economic and market analyses etc.] These documents would typically cover requirements of Rule 10D(1)(d) to (h) of the Rules; and

• Computation related documents (capturing the methods considered, actual working assumptions, adjustments made to transfer prices, and any other relevant information/data relied on for determining the arm’s length price etc.). These documents would typically cover requirements of Rule 10D(1) (i) to (m) of the Rules.

II. The second part of the Rule provides that adequate documentation be maintained such that it substantiates the information/analysis/studies documented under the first part of the Rule. Such informationcan include government publications, reports, studies, technical publications/ market research studies undertaken by reputable institutions, price publications, relevant agreements, contracts, and correspondence, etc.

While the transfer pricing regulations have laid down the requirement for maintenance of various types of documents, tax payers need to assess and ensure that the extensiveness of each of the above documents/ information should be in sync with the nature, type and complexity of the transaction under scrutiny.

Further, Rule 10D(4) of the Rules require that all the prescribed information and documents maintained by the tax payer to demonstrate the arm’s length nature of the transactions documents and information have to be contemporaneously maintained (to the extent possible) and must be in place by the due date of the tax return filing. E.g.,Companies to whom transfer pricing regulations are applicable are currently required to file their tax returns on or before 30th November following the close of the relevant tax year. The prescribed documents must be maintained for a period of nine years from the end of the relevant tax year, and must be updated annually on an ongoing basis.

As an exception to the above, the Proviso to Rule 10D(4) of the Rules provides that if a transaction continues to have effect over more than one previous year, fresh documentation need not be separately maintained in respect of each year, unless there is a change in nature and terms of the transaction, assumptions made and/ or any other factor that would have a bearing on the transfer price. Given this, it is extremely important for tax payers to scrutinise, on a yearly basis, whether any fresh documentation is required to be maintained for any of the continuing transactions.

Further, there is relaxation provided in case of the taxpayers having aggregate international transactions below the prescribed threshold of Rs. 1 crore and specified domestic transactions below the threshold of Rs. 5 crore from the requirement of maintaining the prescribed documentation. However, even in these cases, it is imperative that the documentation maintained should be adequate to substantiate the arm’s-length price of the international transactions or specified domestic transactions.

The above documentation requirements are also applicable to foreign companies deriving income liable to tax in India.

The regulations entail penal consequences in the event of non-compliance with documentation requirement. Failure to maintain the prescribed information/document/reporting covered transaction/ furnishing incorrect information or document attracts penalty @ 2% of transaction value.

MAINTENANCE OF INFORMATION AND DOCUMENTATION

Typically, taxpayers undertake transfer pricing exercise culminating in a Transfer Pricing Study Report, which can be said to be meeting the information and documentation required to be maintained under law. Further, such Report would also form the basis of obtaining and furnishing the required Accountants’ Certificate (Section 92E of the Act). Such exercise generally involves the following steps: Information gathering

General information

This would include structural, operational /functional set up of the tax payer and the related parties and the group to which they belong to,information in the form of global transfer pricing policy, if any, etc.

Industry details

This would include tax payers’ key competitors’ information, pricing factors, etc.

Financial

Budgets (including process followed and assumptions) and earlier years’ financial statements (including segmental information if available). Further, details of government policies, approvals, any tax exemptions availed and past assessment would be relevant to understand.

Transaction specific

List of transactions with associated enterprises alongwith related commercial parameters, pricing methodology followed details of similar product dealings with third parties (by tax payer and associated enterprises), availability of comparable prices in public domain, etc.

Functional, Asset and Risk Analysis

Typically referred to as the “FAR analysis”, this is the key element to any transfer pricing exercise. It involves identifying functions performed, assets deployed and risks assumed by the parties to the transaction. The exercise entails determining income attribution between entities basis functions performed, assets deployed and risks assumed by the entities to the transaction.

Further, the above analysis facilitates process of determination of the “Most Appropriate Method” (‘MAM’), identifyingthe “tested party” and ultimately leading to economic/comparability analysis [determination of the Arm’s Length Price (‘ALP’)].

Determination of the MAM and the computation of the ALP

These are concluding steps of the transfer pricing exercise with following key elements:

Determination of the MAM for each tested transaction basis prescribed factors.

Identifying the tested party ie. one of the party to the transaction, which is the one that is least complex (functionally), not owning/owning few intangibles and in respect of which data is more reliable.

Having identified the tested party, one needs to undertake the comparability analysis and compute the ALP.

While undertaking the comparability analysis, it is important that right comparables are used. Further, in this regard, wherever required it is necessary to carry out necessary adjustments so as to have more robust comparability analysis.

As    regards    computation    of    the  ALP,    an    important component for the same is use of appropriate “Profit Level Indicator” (‘PLI’). There are no specific guidelines on the choice of PLI under law; hence, giving taxpayers an option. Further, in the context of Resale Price Method or the Cost Plus Method, the PLI usually adopted is gross margin on operating revenue and gross margin (mark up) on operating cost respectively. Under the Transactional Net Margin Method, the PLI depends on the nature of the transaction (ie, revenue or expense) in the hands of the tested party.

The whole of the above process (step wise) would need to be documented in detail with back up information/ details. Such documentation is typically maintained in the form of a Transfer Pricing Study Report from compliance perspective. Taxpayers undertake such studies on a yearly basis as required under law.

    CONCLUSION

Documentation is the most important and essential element of transfer pricing. From taxpayers perspective, documentation is critical to demonstrate compliance/ meeting with the arm’s length principle. From tax department’s perspective, it has the right to call for the documentation for verifying the compliance with the arm’s length principle.

Further, as discussed earlier, documentation has time and again been a matter of discussion/debate across jurisdictions and has been continues evolving process. The recent development at OECD (BEPS initiative discussed earlier) which seeks to replace its earlier guidance on transfer pricing documentation and proposing information to be provided in the master file and the CBC report; it is believed that the tax administrations will have the resources and information required to conduct a detailed analysis and focused audit.

    JUDICIAL PRECEDENTS

There have not been many precedents per se in the context of adequacy of the prescribed information and documentation maintenance requirements.

    In case of Cargill India Pvt. Ltd, the Delhi Tribunal had adopted a practical interpretation of documentation requirements laid u/s. 92D(3) read with Rule 10D of the Rules. The Tribunal had observed as under:

“It is clear from the consideration of Rule 10D and its various sub-rules, that documents and information prescribed under the above rule is voluminous and it would only be in the rarest cases that all the clauses of sub-rules would be attracted.

….

It is, therefore, clear that one or more clauses of Sub-rule (1) are applicable and not all clauses of the Rule in a given case. It would all depend upon the facts and circumstances of the case more particularly the nature of international transaction carried or service involved.”

As it can be seen from the above, the Tribunal noted that all kinds of information mentioned in Rule 10D of the Rules need not be maintained in each and every case. The nature of information that is relevant would vary depending upon the facts and circumstances of each case. Further, the Tribunal also observed that since the penalty leviable for non-compliance with requirements u/s. 92D(3) of the Act is onerous, its conditions must be strictly met. The notice u/s. 92D(3) of the Act cannot be vague and must require only information prescribed under Rule 10D of the Rules. It must also specify on which particular points the information is required.

Having stated as above, on the other hand, there are various decisions dealing with the importance of documentation in the context of determination of the MAM, selection of tested party and PLI, aggregation of transactions, relevance of FAR analysis, comparability analysis, including manner of identification of comparables, economic and other adjustments carried out so as to undertake meaningful profitability analysis, etc. The underlying principle in each of these precedents has been the need to have adequate and robust documentation, which ultimately assists both, the tax department and the tax payer. Wherever the tax payer has been found to having maintained such information and documentation, it has been able to successfully defend the transfer pricing adopted.

Trade Circular 2T of 2015 – Extension of time for filing VAT Audit Report in Form 704 for year 2013-14 dated 14-01-2015

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Due date for uploading of VAT audit report in Form 704 for the year 2013-14 has been extended from 15-01-2015 to 30-01-2015, and due date to submit the physical copy of the acknowledgement and the statement of submission has been extended to10-02-2015.

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[2015] 54 taxmann.com 355 (Ahmedabad -CESTAT) –Tops Security Ltd vs. Commissioner of Central Excise and Service Tax.

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In absence of any evidence, excess payment made by one unit under its separate registration cannot be regarded as taxes paid for and on behalf of other unit having different registration.

Facts:
Appellant’s Mumbai unit paid excess service tax and Silvassa unit claimed that said excess payment was on behalf of Silvassa unit. The appellant argued that it cannot be made to pay tax twice. The Revenue argued that it cannot be ascertained that the excess service tax has been paid for the Silvassa unit from the representative challan.

Held:
It was held that in absence of any correlation that the payment has been made with respect to appellant’s Silvassa unit, it cannot be said that the service tax liability of Silvassa unit has been discharged. However, since the appellant was under a reasonable belief that the service tax is discharged by Mumbai Unit on its behalf and there is some indication from the Commissioner (Appeals)’s order that excess payment was effected by Mumbai Unit, it is possible to invoke section 80 of the Finance Act, 1994 to hold that penalties are not imposable under sections 76 and 78 of the Finance Act, 1994 even if extended period is applicable.

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[2015] 56 taxmann.com 381 (Karnataka) CCE & ST vs. Mukund Ltd.

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CENVAT credit on raw material cannot be denied to manufacturer of final product, even if such raw material is used in another factory belonging to another assessee, provided, the CENVAT able input is used for common share under alliance agreement between such manufacturer and assessee and is for a continuous process of manufacturing dutiable goods.

Facts:
The assessee and two other companies entered into a “strategic alliance agreement” for the production of steel through integrated steel plant (ISP). ISP was producing the envisaged product. A supplier having its plant next to ISP, supplied oxygen and nitrogen in pipelines which was used as a raw material in ISP. The assessee used the said items as raw material and availed full CENVAT credit based on duty paid invoices although a part thereof was used by one of the alliance parties to manufacture certain items. The revenue alleged that since a portion of gases was being diverted to alliance Partner who was using the same to manufacture the products in its company, assessee would lose the benefit of CENVAT credit to that extent.

Held:
The High Court observed that by the Strategic Alliance Agreement, the corporate entities had entered into a joint venture agreement to manufacture steel products. It was also observed from the records that whatever was manufactured by the other alliance partner in the ratio agreed to between the parties was finally made over to the assessee for manufacture of final product. Thus, though there are three separate units with separate registrations, the entire raw material is being converted into final dutiable product in continuous; inter connected and integrated process conforming to the definition of a single factory u/s. 2(f) of the Central Excise Act. Relying upon the decision of High Court in the case of Vikram Cements vs. CCE [2006] 3 STT 230, the Court reiterated that a manufacturing unit can have one or more units to manufacture intermediary raw materials to manufacture a final product and dismissing revenue’s appeal held that CENVAT cannot be denied on the ground that credit is being availed by one factory and material inputs are used by three factories, because the CENVAT able input is being used for common share and continuous purpose of manufacturing dutiable goods.

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[2015] 56 taxmann.com 383 (Andhra Pradesh) Star Enterprise vs. Jt. Commissioner, CCE&ST

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Where the appeals against the Order-in -Original are dismissed by First and Second Appellate Authorities as time-barred, the writ Courts cannot accept a challenge to the very same order, as it would unsettle a legally settled position.

Facts:
The petitioner filed an appeal before first and second appellate authority, but both the authorities refused to entertain the same as they were presented not only beyond the period of limitation prescribed therefor, but also beyond the condonable period. Therefore, a writ petition was filed before High Court asking for a writ of mandamus declaring the levy of service tax on the works undertaken by the petitioner as illegal, arbitrary, amounting to double taxation and consequently setting aside the original order.

Held:
Relying upon decision dated 29.01.2015 in the case of M/s. Resolute Electronics (P.) Ltd. vs. Union of India Writ Petition No. 1409 of 2015 and Supreme Court decision in the case of Singh Enterprises vs. CCE [2008] 12 STT 21, the High Court held that after availing remedy unsuccessfully before another Court, it is not legally permissible to accept challenge to the same order under writ jurisdiction as it would result in unsettling a legally settled position. It was further held that when appellate authority has already decided the matter against the petitioner, the writ Court is debarred from doing so particularly, when the appellate authorities’ orders are not challenged in the writ jurisdiction.

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2015 (38) STR 12 (Cal.) Solux Galfab Pvt. Ltd. vs. Commissioner of Service Tax.

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The ex-parte order can be set aside if sufficient cause for delay in filing the appeal is made out. Length of delay is immaterial, sufficient cause for delay is material.

Facts:
The petitioner filed an appeal along with application of condonation for delay of 21 days before the CESTAT . The Tribunal decided the application ex-parte and dismissed the appeal. After which a miscellaneous application was filed for restoration thereof and application for condonation of delay. The Tribunal misconstrued the application as a review application and recorded that sufficient cause for delay was not shown and dismissed the appeal. Therefore the present writ is filed.

Held:
The Hon’ble High Court held that the length of delay is immaterial, sufficient cause for such delay is of prime importance. Rather than finding fault with the application for condonation of delay, the Tribunal should encourage the litigation to be decided on merits and should not act harshly. The Tribunal invoked Rule 41 of the CESTAT (Procedure) Rules, 1982 for review as against Rule 20 of the said Rules which provides for setting aside ex parte order if sufficient cause is shown. The order was a set aside with a direction to fix up the date of hearing.

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Nature of Lease Transaction of Cranes

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Introduction
The identification of lease transaction is a vexed issue. The sale by “transfer of right to use goods” (Lease) is provided by a deeming clause in Article 366 (29A) of Constitution of India. However, there is no definition of the nature of lease transaction in constitution or in the respective sales tax laws. Therefore, its nature is required to be determined in light of decided cases. The controversy remains alive till the issue reaches the Supreme Court.

The decisions are also based on facts of each case.

BSNL case
One of the important judgments on the issue is of Supreme Court in case of Bharat Sanchar Nigam Limited (145 STC 91). In this judgment, the Hon’ble Supreme Court has specified criteria for deciding the nature of lease transaction. The said criteria can be reproduced below.

“98. To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes:

(a) There must be goods available for delivery;

(b) There must be a consensus ad idem as to the identity of the goods;

(c) The transferee should have a legal right to use the goods consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;

(d)For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute – viz., a “transfer of the right to use” and not merely a licence to use the goods;

(e) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

However, in spite of such clear criteria laid down by highest court, the litigation continues.

Case of crane
There are commercial transactions where work is carried out by parties, with use of cranes. It is but natural that the customer who employees the crane owner will request /direct the crane owner to operate the crane as he requires. However, such transactions are being attempted to be classified as lease transactions by the state sales tax authorities.

Recently, there is judgment of the Hon’ble Bombay High Court in relation to such controversy.

Commissioner of Sales Tax vs. General Cranes
This judgment is given by the Hon’ble Bombay High Court on 21st April 2015 in Sales Tax Reference No. 5 Of 2009 In Reference To Application No. 72 Of 2005.

The facts in this case, as noted by the Hon’ble Bombay High Court, are as under.

“The facts, in brief, giving rise to the present Reference are as under:

The respondent is registered under the Lease Act and is engaged in carrying on the business of hiring of cranes. The respondent had filed an application under section 8 of the Lease Act for determination of question as to whether he would fall under the term of “dealer” under the Maharashtra Sales Tax on the Transfer of Right to use any goods for any purpose Act, 1985 (hereinafter referred to as the ‘Lease Tax Act’) along with Section 52 of the Bombay Sales Tax Act, 1959. The Additional Commissioner while dealing with the said application held that the respondents would fall within the definition of a ‘dealer’ and as such, the transaction entered into by him with M/s. Offshore Hook-Up & Construction Services (I) Pvt. Ltd. would be governed by the provisions of the said Act and as such taxable. Being aggrieved thereby, an Appeal came to be preferred. The learned Tribunal reversed the finding of the learned Additional Commissioner and held that the transaction entered into between the respondent and M/s. Offshore Hook-Up & Construction Services (I) Pvt. Ltd. would not amount to sale as defined u/s. 2(10) of the Lease Act.”

In subsequent paras, the Hon’ble High Court has reproduced certain relevant portion from the agreement between the parties. Thereafter, the Hon’ble High Court has referred to the definition and provisions of the Lease Act.

More particularly, the Hon’ble High Court has relied upon the judgment in case of BSNL (cited supra) and Rashtriya Ispat Nigam Limited 126 STC 114 (SC).

After analysing facts and legal position, the Hon’ble High Court observed as under, about nature of transaction:

“As already discussed hereinabove, the learned Tribunal has extensively reproduced the terms of contract which are also been reproduced by us hereinabove. Perusal of the terms of contract would reveal that as per the contract, the driver, cleaner, diesel and oil was to be provided by the respondent. So also, transportation of accessories was to be done by the respondent. It can further be seen that there is no provision in the contract that the legal consequences such as permissions or licences were to be transferred to the transferee. The ultimate control over the crane retained with the respondent. We find that the learned Tribunal, applying the judgment of Apex Court, has rightly construed that the transaction which were entered into by the respondent with Offshore Hook Up & Construction Services (I) Pvt. Ltd. would not fall within the meaning of Lease Act and the respondent was not a dealer within the meaning of definition of section 2(4) of the Lease Act.”

Thus, the Hon’ble High Court decided that there is no transfer of right to use goods and the judgment given by the Hon’ble Tribunal is correct as per facts and law.

The concept of effective control is also discussed by Hon’ble High Court in above para. Though the judgment is in relation to cranes it can apply with equal force to other such vehicles like, buses, etc. Therefore, the above judgment will be a guiding judgment for similar transactions.

Conclusion:
It seems as though, that the dealers have to wage a long struggle to get the correct position of Law decided. And this is happening due to fact that there is no definition of the ‘nature of lease transaction’. The parameters considered by different courts further add to the controversy. Therefore, it will be useful if a statutory definition of relevant terms is provided in the Law itself. Hopefully, due care will be taken in the drafting of GST Law.

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OVERLAP OF CUSTOMS DUTY AND SERVICE TAX

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Background
In the context of indirect taxation, overlap of taxes is one of the major areas of concern inasmuch as it has a cascading effect and increases the transaction costs. While, overlap of service tax and VAT or service tax and excise duty is a subject of extensive deliberations and judicial considerations, less attention has been given to overlap of customs duty and service tax. However, actually this has a significant implication inasmuch as basic customs duty is not eligible for the benefit of CENVAT credit (only CVD equivalent to excise duty is entitled to CENVAT credit). Hence, the issue is analysed below.

Relevant Statutory Provisions

Service Tax – Reverse Charge Mechanism: effective from July 01, 2012

• Section 68 of the Finance Act, as amended (Act)

“Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

Notwithstanding anything contained in sub-section (1), in respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

• Notification No. 30/2012-ST dated 20/6/12.

In case of the following services notified as specified services, the service recipient is held as the person liable for payment of service tax to the Government.

“Taxable services provided or agreed to be provided by:

(i) to (x) ……………

(xi) Taxable service provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory.”

• Relevant extracts from Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 (‘CVR’) issued in terms of Customs Act, 1962 – Rule 10 – Cost and Services

“(1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, —

(a) the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:-

(i) commissions and brokerage except buying commissions;

(ii) the cost of containers which are treated as being one for customs purposes with the goods in question;

(iii) the cost of packing whether for labour or materials;

(b) The value apportioned as appropriate of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely:-

(i) materials, components, parts and similar items incorporated in the imported goods;

(ii) tools, dies, moulds and similar items used in the production of the imported goods;

(iii) materials consumed in the production of the imported goods;

(iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;

(c) royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued to the extent that such royalties and fees are not included in the price actually paid or payable;

(d) the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller;

(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

Explanation.- Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.

(2) For the purposes of sub-section (1) of section 14 of the Customs Act, 1962 (52 of 1962) and these rules, the value of the imported goods shall be the value of such goods, for delivery at the time and place of importation and shall include –

a) The cost of transport of the imported goods to the place of importation;

b) Loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation; and

c) The cost of insurance;

Provided that –

(i) Where the cost of transport referred to in clause (a) is not ascertainable, such cost shall be twenty per cent of the free on board value of the goods;

(ii) The charges referred to in clause (b) shall be one per cent of the free on board value of the goods plus the cost of transport referred to in clause (a) plus the cost of insurance referred to in clause (c);

(iii) Where the cost referred to in clause (c) is not ascertainable, such cost shall be 1.125% of free on board value of the goods;

…………….”

Double taxation of services and intangible rights related payments by importers of goods to foreign entities

As per CVR, the value of services and intangible rights is required to be added to the transaction value of imported goods, for the purpose of levy of customs duty. At the same time such payments (consideration) for services and intangible rights are also liable to service tax under reverse charge. Thus, there is an issue of double taxation.

In particular, as per Rule 10(1)(c) & (e) of CVR, the following is required to be added to the price actually paid or payable for the imported goods while determining the transaction value.

“Royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.

All other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

Explanation:- Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (a) and (b), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.
Issues pertaining to indian companies entering into business arrangements with foreign entities arise for consideration. Such arrangements are mainly done to use brand/reputation, intellectual property rights, product and business expertise etc. of foreign entities and sell products supplied/approved by them in indian market. Such arrangements are made in different legal forms like joint venture, franchise, license, distributor etc. under the said arrangements, indian companies are obliged to maintain prescribed standards of business, pay for value of goods being imported and are also required to make payments to foreign partner for services and intangible rights which are identified by various names like franchise/license fee, marketing/advertising fee, agents fee/commission, renewal fee, reimbursements of travel etc.

While Custom authorities relates all the above direct or indirect payments related to services and intangible rights like royalty, license fee etc. to supply of goods and hold them liable to Customs duty, service tax authorities treat such payments as consideration for services and hold indian companies liable to pay service tax under reverse Charge mechanism.

Thus,  indian  companies  are  exposed  to  the  burden of double taxation of Customs duty as well as service tax.   this   increases   the   transaction   costs   of   indian businesses substantially.

Government has in its wisdom, sought to address this issue in some specific cases. E.g.:

•    When transfer of right to use imported/locally pro- cured packaged software or canned software is passed on to the buyer, Government has exempted CVD/Central excise duty on consideration for such transfer of right to use, provided service tax is paid on the same (Ref: Notification No. 25/2011- Cus. dated 01.03.2011 and 14/2011-Ce dated 24.03.2011). Conversely, service tax was exempt- ed when CVD/Excise duty was paid (Ref: Notifica- tion no. 34/2012 – St, dated 20.06.2012).

•    IPR service providers were exempted from service tax equivalent to amount of cess payable on the transfer of technology under the provisions of the r & d Cess act, 1986 so as to avoid double taxa- tion of both service tax and r & d Cess (ref not no. 17/ 2004-St., dated 10.09.2004).

Mumbai CESTAT Ruling in united shippers lTD vs. csT (2015) 37 STR 1043 (Tri – Mumbai)

Issue before CESTAT

“Whether barge (shipping) charges collected towards transportation of the imported goods from the mother vessel anchored at Bombay floating Lights to dharmatar jetty where the goods were unloaded, which forms part of the transaction value of the imported goods can be once again levied to service tax under the category of cargo handling services?”

Contentions of the Appellants

•    The activity of transshipment of import and export cargo, from the mother vessels to the jetty and vice versa, is carried out by the barges (termed as daughter vessels) on account of the draft not permitting the mother vessels to travel until the jetty at  minor  ports. the  appellant  submitted  that  it  is a settled position in law that such transshipment of cargo from the mother vessel to the jetty is to be treated as a continuation of the journey of the goods in the import stream into india, as upheld in South India Corporation (Agencies) Ltd. vs. Collector of Customs and Ors. (1987) 30 E.L.T. 100 (Cal); Turner Morrison and Co. Ltd. vs. Asstt. Col- lector of Cus. for Exports (II) (1999) 110 E.L.T. 484 Cal.) and Collector of Customs, Ahmedabad vs. Shipping Corporation of India Ltd. (1987) 29 E.L.T. 182 (tribunal).

•    The freight amount charged to the customer for the barge transportation of goods from the mother vessel to the jetty forms a part of the assessable value of the imported goods, for the purpose of computation of Customs duty. the inclusion of the freight amount has been explicitly mandated by the amendments effected to section 14 of the Customs act, 1962 read with CVr these amendments were made in order to overcome the decision in Ispat In- dustries Ltd. vs. Commissioner of Customs, Mum- bai (2006) [202 E.L.T. 561 (S.C.)] and ensure the position in law which had always been intended by the Legislature, and accordingly the said po- sition would equally apply for the period prior to 2007. therefore, the value of the transportation by transshipment is treated as an intrinsic part of the value of a goods transaction and the said amount therefore, cannot attract the levy of service tax si- multaneously as being in the nature of consideration for provision of services. reference is made to the decision in Escotel Mobile Communications Ltd. vs. Union of India (2004) [177 E.L.T. 99 (Ker.)] wherein it was held that, based on the “aspect theory”, the same transaction could be exigible to different taxes in its different aspects – in that case, the issuance of a Sim card to a subscriber could be equally liable to sales tax and service tax at the same time. this view was challenged before the Hon’ble Supreme Court in BSNL vs. UOI (2006) [2S.T.R. 161 (SC)] in which the aforesaid finding of the high Court was overruled, and it was categorically held that the aspect theory would not apply to enable the value of the goods to be included in the rendition of services or vice versa. In the present case, the freight charged for the barge transpor- tation of the goods from the mother vessel to the jetty is includible in the assessable value on which customs duties are levied. Applying the rationale laid down in the aforesaid ruling of the Hon’ble Su- preme Court, once the freight has already rightly suffered customs duties as a part of the value of the goods being imported, a dual levy of service tax cannot also be imposed on the same freight amount, and the demand on this basis cannot sustain. Further, it was submitted that this activity of transportation of goods from the mother vessel to the jetty is earned out before the goods crosses the customs frontier of india and consequently, will be construed to be undertaken while the goods are still in the import stream and prior to the successful completion of the process of importation of the goods into india. [Garden Silk Mills vs. Union of India, (1999) 113 E.L.T. 358 (S.C.)] reliance was also placed on the decision of the Hon’ble Supreme Court in the case of Hotel Ashoka vs. Asst. Commr. of Commercial Taxes (2012) [276 E.L.T. 433 (S.C.)], wherein it held that an activity of sale of items in the duty free zone of an airport will not attract the levy of Vat, even though such sale is actually taking place within the physical territory of india, as such goods had not crossed the customs frontier of india to form a part of the mass of goods meant for consumption in india and had therefore not been imported into india. it was therefore, submitted that taxing the transshipment of the goods in the present case will tantamount to levying service tax on an activity of import of goods, which is impermissible in law.

Contentions of the Revenue

It appears that transport of cargo by barges from the mother vessels had taken place when the mother vessels  were  at  mumbai  floating  Light/inner anchorage  of mumbai Port trust, i.e. when the vessels were already in india. Therefore, there does not appear any legal bar to levy service tax on the services provided in relation to the cargo transported by the barges from the mother vessels to  the jetty.  It  would  also  not  be  correct  to  say  that it would amount to double taxation. The levy of cus- toms duty and service tax are under separate enact- ments. In the case of CST, Bangalore vs. Lincoln He- lios (India) Ltd. (2011) 23 STR 112 (Kar.), the hon’ble high Court has held that excise duty is levied on the aspect of manufacture and service tax is levied on the aspect of services rendered. Therefore, it will not amount to payment of tax twice.

In the said case, the facts were not in dispute. the as- sessee undertook not only manufacture and sale of its products, it also erected and commissioned the finished products.  The  customer  was  charged  for  the  services rendered as well as the value for manufactured products. admittedly, up to 20/06/2003 no service tax was leviable on erection and commission work. It was only subjected to tax from 01/07/2003.

The assessee paid the excise duty on the value of the product notwithstanding the services rendered. it is in that context, they were contending that there cannot be levy of tax under two parliamentary legislations. however, the excise duty was levied on the aspect of manufacture and service tax is levied on the aspect of services rendered. Therefore it will not amount to payment of tax twice. After contesting the matter before the tribunal, the assessee paid the service tax and interest thereon. Moreover, the commissioning installation and erection work was brought to service tax only from 01/07/2003. It was during the transitional period and the benefit of doubt existing in the mind of the assessee was given to him. Since it constitutes a reasonable cause for not paying the service tax in view of Section 80, the Court held that the tribunal was justified in interfering with the levy of penalty and in setting aside the same and there was no infirmity in the order passed by the tribunal.

 Observations of CESTAT
•    As regards the first issue, since the transaction in- volves a customs transaction and a service trans- action, it is necessary to decide where the customs transaction ends and the service transaction begins.  the  issue  as  to  what  constitutes  “imports” has been settled by the hon’ble apex Court in the case of Garden Silk mills Ltd. (supra), wherein the following was observed:

“Truly speaking, the imposition of import duty, by an large, results in a condition which must be ful- filled before the goods can be brought inside the customs barriers, i.e. before they form part of the mass of the goods within the country.

It would appear to us that the import of the goods into india would commence when the same cross into the territorial waters but continues when the goods become part of the mass of goods within the country; the taxable event being reached at the time when the goods reach the customs barriers and the bill of entry for home consumption is filed.”

Thus  when  the  goods  are  being  transported  by the barges from the mother vessel to the jetty on- shore, that activity is part of the import transaction of bringing the goods into india from a place outside india. the question of rendering any service in respect of such goods by way of cargo handling or otherwise can take place only after the customs transaction is completed. therefore, the question of levying to service tax on the transportation by barges from the question of levying to service tax the transportation by barges from the mother vessel to the jetty onshore, would not arise at all since the said activity is part of the import transaction leviable to import duty and we hold accordingly. [para 5.2]

•    This is also evident from the fact that Section 14 of the CVR were amended to specifically include barge charges and handling charges in the trans- action value  of the imported goods vide  finance act, 2007 to overcome the adverse decision in the case of ispat industries (supra). Section 14 was substituted “to specifically provide that transaction value of imported goods shall include, in addition to the price, any amount paid or payable for costs and services, including commissions, … cost of transportation to the place of importation, insurance, unloading and handling charges to the extent and in the manner specified in the rules made in this regard”.

These  amended  provisions  came  into  force  with effect from 10/10/07. CBEC has also clarified vide Circular 34/2009, dated 30-11-2009 that “the issue of ineligibility of barge charges in the value (of imported goods) will be governed by the provisions of Section 14 of the Customs act, 1962 read with CVR for the assessment arising in the period from 10/10/07 onwards.”

Thus  the  question  of  demand  of  service  tax  on barge charges and the handling charges connected therewith would not arise at all with effect from 10-10-2007 as they form an integral part of the transaction value for levy of customs duty. Even fo the period prior 10-10-2007, the same position would apply for the reason that the import trans- action is complete only when the goods reach the customs barriers and the bill of entry for home consumption is field. [Para 5.3]

•    As regards the observations of Karnataka High Court relied by the revenue, it was observed that in the Lincoln helio case, the only question of law considered by the hon’ble high Court was whether setting aside the penalty by the tribunal was correct when the demand of service tax and interest was upheld and the assessee did not contest the levy.  These  are  not  the  issues  before  us  nor  is there any remote connection with the facts of the case before us. It is a settled position in law as held by the hon’ble apex Court in al noori tobacco Products india Ltd. case [2004 (170) eLt 175 (SC)] that the ratio of a decision can be applied only if the facts are identical. A slight or a material change in the facts could lead to an entirely different conclusion. [Para 5.7]

Conclusion
In light of the foregoing, it is very clear that, there is      an exposure to overlap of customs duty & service tax, more particularly, in cases of payments made to foreign entities by indian importers. the mumbai CESTAT ruling discussed earlier does lay down a sound principle in the context of the facts of that case. However, exposure to litigation even in such cases continues. Further, mandatory pre-deposit provisions causes hardship to the assesses in such cases as well. the impact of overlap of customs duty and service tax assumes significance, again in the backdrop of the increased rate of service  tax to 14% (which could go up with 2% Swatch Bharat Cess) and imminent introduction of GST. hence, it is felt that this issue needs to be speedily addressed by the Government so as to ensure that transaction cost of indian importers is not unduly burdened rendering them globally uncompetitive.

IMPORTANT AMENDMENTS IN SERVICE TAX BY FINANCE AC T, 2015

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Introduction
The Finance Bill 2015 was enacted with effect from May 14, 2015. The amended service tax provisions are a mixed bag of provisions with a few new exemptions on one hand and amending the definition of service, withdrawal of exemptions and narrowing down the scope of the Negative List on the other with a view to widen the tax base. This is further complemented by enhancing the tax rate as well. From the modest estimate of Rs. 500 crore in the year of its introduction in 1994, service tax estimate for the current fiscal is augmented to Rs. 2.10,000 crore. Some of the significant amendments made by the Finance Act, 2015 are briefly discussed herein below:-

Rate of tax
Service tax rate increased from 12.36% to 14% subsuming Education Cess and Secondary & Higher Education Cess with effect from June 01,2015.

Swachh Bharat Cess @ 2% to be levied on all or any of the taxable services and its effective date is yet to be notified.

The following services which are taxed at a specified rate are revised as follows with effect from June 01,2015

• Booking of air tickets by air travel agent
A. Domestic bookings:- 0.7%
B. International bookings:- 1.4%

• Life insurance service
A. F irst year:- 3.5%
B. Subsequent year:- 1.75%

• Money changing service
A. gross amount of currency exchange :- 0.14% or for amount upto Rs 1,00,000/- minimum Rs.35

B. gross amount of currency exchange :- Rs 140 and 0.07% for amount exceeding Rs 1,00,000/- and upto Rs 10,00,000/-

C. gross amount of currency exchange :- Rs 770 and 0.014% for amount exceeding maximum Rs 7000/- Rs 10,00,000/-

• Service provided by lottery distributor and selling agent

A. R s. [8200] on every Rs.10 lakh (or part of Rs.10 lakh) of aggregate face value of lottery tickets printed by the organising State for a draw.
B. R s. [12800] on every Rs. 10 lakh (or part of Rs 10 lakh) of aggregate face value of lottery tickets printed by the organizing State for a draw

Amendment in Definition of ‘Service’
Explanation-2 to the definition of service is amended to exclude the following transactions from the expression transaction in money or actionable claim.

Activity by a lottery distributor or a selling agent in relation to promotion, marketing, selling, organising, or facilitating in organising lottery. Accordingly the terms lottery distributor and selling agent are suitably defined under clause 31A of section 65B(44) to mean “a person appointed or authorised by a State for the purposes of promoting, marketing, selling or facilitating in organising lottery of any kind, in any manner, organised by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998.” Consequently the entry in the negative list i.e. entry 66D(i) is also amended as discussed below:

Activity by a foreman of chit fund for conducting or organising a chit. This amendment is brought about to counter the effect of the decision of the Delhi High Court in the case of Delhi Chit Fund Association V. Union of India [2013] 32 taxmann.com 332(Delhi) holding that activity by a foreman in relation to the chit fund business being a service in relation to transaction in money is not liable for service tax. Further, the SLP filed by the department against the said decision was also dismissed by the Supreme Court. Thus this amendment explicitly states the desire of the legislature to treat such activities by a foreman of a chit fund as not a transaction in money.

Negative List
The Negative List is reviewed and pruned in order to widen the tax base as discussed below:

Effective from June 01,2015
• Any contract work or job work carried out in relation to manufacture or production of alcoholic liquor is now taxable. Accordingly, the expression “process amounting to manufacture” defined under section 65B(40) has been suitably amended to exclude any process amounting to manufacture of alcoholic liquor for human consumption from the definition. (The Seventh Schedule to the Constitution of India List-II, specifically authorizes the State Government to levy tax on the manufacture or production of alcoholic liquor and thus whether this levy is constitutionally valid may be a debatable issue in the future) [section 66D (f)].

• The expression betting, gambling or lottery has been revisited to exclude any service by way of promotion, marketing, organising, selling or facilitating the organizing of lottery by a lottery distributor or selling agent. Hence promotion, marketing, organising of lottery is now taxable. The term betting and gambling finds a place in entries 34 and 62 of the State list. The power to levy tax by the Central Government in relation to promotion, marketing, organising of games of chance including lottery was taxed under the erstwhile section 65(105)(zzzzn) and it was challenged in a writ petition filed by Future Gaming Solutions Pvt. Ltd 2015(37) STR 65 (Sikkim). The Hon’ble High Court while declaring the said section 65(105)(zzzzn) ultra vires held that it is the exclusive legislative domain of the State legislature to levy tax of any nature on lotteries by virtue of entry 62 of List II to the Seventh Schedule. It was also noted that, though Entry 40 of List 1 includes lotteries organised by Government of India or a Government of a State as a field of legislation, the power to regulate does not include power to tax. Therefore, though Parliament alone has enacted Lotteries (Regulation) Act,1998 under entry 40, taxing powers have been conferred on the State only as envisaged under entries 34 and 62 of List II to Seventh Schedule. Thus, in terms of the above decision, it appears that the Finance Act, 2015 has gone beyond its powers under the Constitution by excluding the promotion or marketing or organising of lottery from the negative list.

• Services by way of admission to entertainment events or access to amusement facilities are now taxable. Accordingly, admission to amusement parks, theme parks, water parks, etc. is liable for service tax. Also, entry into entertainment events like music concerts, non-recognised sporting events, award functions, pageants are also liable for service tax. Entertainment Tax is levied by the State Government on various amusement facilities and entertainment events. This levy may lead to double taxation and with the service tax rate of 14%, may result in making such activities exorbitantly priced. [Section 66D(j)]. It may be noted here however that when the amount charged for the entertainment events (not amusement events) is less than INR 500 then they shall continue to be exempted from service tax. Similarly, admission to exhibition of films, circus, dance or theatrical performances and recognized sporting events have also been exempted and this is without any limit under entry 47 of Mega Exemption Notification 25/2012-ST. In reference thereof, the term “recognised sporting event” is defined in clause (zab) of para 2 of the Mega Exemption Notification 25/2012-ST as “any sporting event where the participating team or individual represent any district, state, zone or country; covered under entry 11.

Government services: effective from a date to be notified

Presently, support services provided by the Government or Local authority to business entities are liable for service tax.   Service tax now applies   to all services provided by the Government or Local authority to business entities.  however,  the  liability is to be discharged by the business entities under reverse charge mechanism. however, the services provided by the Government or Local authorities to its citizens not being business entities continue to remain under the negative List and continue to be non-taxable. Further, with the increased involvement of the private sector in rendering services which were once in the exclusive domain of the Government, the change may provide a level playing field to both the private and the public players [section 66d(a)(iv)]. In this context, the term ‘Government’ is now defined in clause 26A of section 65B for the first time as follows:

“Government means the Departments of the Central Government, a State  Government  and  its Departments and a Union territory and its Departments, but shall not include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with article 150 of the Constitution or the rules made thereunder”

In terms of this provision therefore, all corporations formed under the Government statute or autonomous bodies or public sector undertakings incorporated under Companies act including boards or regulatory authorities do not qualify to be considered ‘Government’ whereas all Central Government ministries and departments working thereunder, [for instance   department   of   income   tax,   department of Company affairs etc.] various State Government and their departments, union territories and their departments are part of the expression Government. “Local authority” also is not covered by this expression, however, it is already defined under clause 31 of the said  section  65B.  further,  the  term  Governmental Authority is also defined under clause (s) of the Mega Exemption Notification 25/2012-ST which is relevant for interpreting the exemption, if any, available in this regard under the said notification.

(Note: it is expected that the Government may notify the list of services in this context).

Valuation:

Reimbursements:
Section 67 is amended to include any reimbursable expenditure or cost incurred by the service provider and charged in the course of providing or agreeing to provide a taxable service except in such circumstances, and subject to such conditions, as may be prescribed. the inclusion of reimbursable expenditure as a part of the gross value of taxable service under rule 5(1) of  the  Service  tax  (determination  of  value)  rules, 2006 (Valuation Rules) was always a subject matter of litigation and controversy. the Landmark judgment of delhi high Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. [2012-TIOL- 966-HC-DEL-ST] held that rule 5(1) of the Valuation rules is ultra vires section 67. to counter the effect of the judgment, the amendment to section 67 itself is made by including reimbursable expenditure as a part of the value of the taxable service, post may 14,  2015.  thus  litigation  process  will  be  kept  alive. nevertheless, double taxation is likely to arise in many cases unless appropriate conditions are prescribed.

Lottery distributor or selling agent:
Section 67 is also amended to include any amount retained by the lottery distributor or selling agent from the gross sale amount of the lottery tickets in addition to the fee or commission, or the discount received, which is the difference between the face value of the lottery ticket and the price at which the distributor or selling agent gets such ticket.

Exemptions

Withdrawal of Exemptions
•    Various exemptions for services provided to Government, Local authority or Governmental authority vide entry 12 are withdrawn and only selective services like construction, erection, commissioning, etc. of historical monument, archaeological sites, canals, dams, irrigation works, pipelines for water supply/treatment etc. remain exempt.

•    Exemption vide entry 13 for construction, erection, commissioning or installation of original works pertaining to airport and port also stands withdrawn.

•    Exemption in respect of transportation service available for food stuff in general by road, rail or vessel vide entry 20 and 21 has been suitably pruned to exempt only transportation of milk, salt and food grains, including flours, pulses and rice.

•    The exemption to services provided by mutual fund agents/distributor to asset management company vide entry 29 is now withdrawn and the activity is now taxable (as they used to be till 30th june, 2012) and the asset management companies are liable to  discharge  service  tax  under  reverse  Charge mechanism. It is pertinent to note that, since the tax is finally paid by the asset management companies or  the  mutual  funds,  exemption  ought  to  have been extended to the sub-distributors and sub- agents providing services to the main distributors and agents on the lines of exemption in respect of  sub-brokers  of  stock  brokers.  Further,  effect is felt by distributors on account of the amended definition of output service with effect from 01-07- 2012 whereby the service in respect of which the recipient is liable to pay entire service tax liability, such service is not  considered  output  service.  in such a scenario, service tax charged by sub- distributors on their commission cannot be taken credit of by the distributors. on account of this provision, therefore, services of sub-distributors are required to be exempted or else same service gets  taxed  twice.  this  may  be  unintended  and therefore needs to be taken care of.

•    Services by an artist in folk or classical music, dance or theatre, excluding services provided by the artist as a brand ambassador was exempt under entry 16. however where the consideration charged for such performances exceed rs. 1 lakh, the same is now taxable.
(Entry number refers to Notification 25/2012-ST)

?    New Exemptions
Certain specific services which were hitherto liable for service tax, are now exempted from service tax. the list consists of the following:-

Notification 6/2015-ST
•    Entry into museum, zoo, national park, wildlife sanctuary, tiger reserve or zoo.
•    Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail, packing, labelling of fruits and vegetables which do not alter its essential characteristics.
•    Services by operator of Common Effluent Treatment Plant by way of treatment of effluent.
•    Service provided by way of exhibition of movie by an exhibitor to the distributor or an association of persons consisting of the exhibitor as one of its members.
•    Services of life insurance business provided under ‘Varishtha Pension Bima Yojana’.

Notification 12/2015-ST
•    Exemption  is  provided  to  services  of  general insurance under the Pradhan mantri Suraksha Bima Yojna, services of life insurance under the Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Jan Dhan Yojana.
•    Services by way of collection of contribution under Atal Pension Yojana (APY).

Rationalisation of abatements

  •     Uniform abatement rate of 70% of the value of service in relation to transport of goods by rail, road and vessel are prescribed effective from 01-04-2015. Similarly, the conditions in respect of non-availability of CenVat credit on inputs, capital goods and input services is also now applicable to all, regardless of  the  mode  of  transport.  the  direct  impact  of  this amendment is already felt by the users of rail services for transportation of cargo. in order to be eligible for  the  CenVat  credit  of  inputs,  capital  goods  and input services, the railways have begun charging full rate of service tax and are foregoing the abatement option. the users in many cases are unable to take CenVat  credit  and  thus  the  cost  of  availing  the transport service of railways has suddenly shot up substantially and which is further impacted by the increased rate of 14%.

  • ?    The  transport  of  passengers  by  air  in  higher  class has become dearer since the abatement has been reduced from 60% to 40%.

  •     Abatement of 70% available for services provided in relation to chit has now been withdrawn.

Service Tax Rules: Aggregator Model

    One of the significant amendments carried out under the  finance act,  2015  is  the  levy  of  service  tax  on e-commerce transactions under aggregator model. The term ‘Aggregator’ is defined under the Service tax rules clause 2(aa) as “a person who owns and manages a web based software application and by means of the application and a communication device enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator”. the terms “brand name” and “trade name” are also defined under the Rules. The liability to discharge service tax is on the aggregator under reverse charge mechanism. thus, it is assumed that the aggregator is the service receiver. it is also provided that if the aggregator does not have presence in the taxable territory, the person representing the aggregator would discharge the liability or the aggregator would appoint a person for discharging tax liability.  the amendment clearly sets out intention of the legislature to levy service tax on certain formats in e-commerce space. accordingly, companies providing services by acting as an aggregator like travel portals, cab services, food portals etc. would be hit by this amendment irrespective of their establishments being in the non- taxable or taxable territory.

CENVAT Credit

Time  limit  for  availing  CENVAT  credit  is  extended from  six  months  to  one  year.  therefore,  the  issue faced by many assessees on account of amendment made by Finance (No.2) Act,2014 is to a significant extent resolved, as credit can be availed by the end of a period of one year from the date of invoice. for example, if credit was missed out to be availed on an input service of invoice dated may 15, 2014 and if this was noticed only in january,2015, the credit was not available in terms of proviso to rule 4(7) of CENVAT Credit  rules,  2004  (CCR,  2004).  However  in  terms of the amended provision, the said missed out credit would be available in the month of april, 2015.

CENVAT   credit  for  service  tax  paid  under  partial reverse charge is immediately available on payment of service tax to the Government. thus the condition in respect of allowing CenVat credit only after payment is made to the vendor, being a mere contractual arrangement is now done away with.

CENVAT   credit   wrongly   availed   and   utilised   or erroneously refunded is recoverable with interest as per  rule  14  of  the  CenVat  credit  rules,2004.the said rule 14 is amended from march 1, 2015 now to provide for recovery of CenVat credit wrongly availed or  erroneously  refunded  and  also  CenVat  credit wrongly availed and utilised or erroneously refunded with interest. additionally, sub rule (2) thereof provides for  the  “first  in  first  out”  method  for  computing  the amount of credit wrongly utilised on monthly basis. in the prescribed method, an assessee is required to first utilize the opening balance of a month. thereafter, one has to utilise the admissible credit availed for the said month and lastly the inadmissible credit availed is to be calculated for utilisation and thus arrive at an amount of  aggregate  credit  wrongly  utilised.  the  prescribed computation method thus determines credit to be treated as “availed and utilised” for levying interest thereon.

Penal provisions

In an attempt to encourage voluntary tax  compliance and reduce litigation, the Government has considerably reduced penalties under service tax and aligned them with Central excise law:-

    Section 76 providing for a levy of penalty in cases of short payment or non-payment of service tax, however not involving fraud, collusion or willful misstatement or suppression of facts or contravention of the provisions of the act is amended to provide as follows:-

•    Maximum penalty not exceeding 10% of the amount of service tax.
•    No penalty is leviable if service tax along with interest is paid within 30 days of service of show cause notice.
•    Reduced penalty of 25% of the penalty imposed has been prescribed when service tax is paid with interest and reduced penalty within 30 days of  the receipt of the adjudication order or within 30 days of the date of the appellate order in cases where the amount of service tax is increased at the appellate stage or court level. Thus, at appellate or court level, the time limit prescribed for payment of service tax with interest and/or penalty is now provided with reference to the date of order in place of communication of the order, thus reducing the time to such extent.

Section 78 providing for a levy of penalty for a wilful intent to evade service tax is amended to provide as follows:-
•    Penalty equals 100% of the service tax amount.
•    Reduced penalty of 15% is leviable if service tax along with  interest  and  such  reduced  penalty  is paid within 30 days of service of show cause notice.
•    Reduced penalty of 25% of the penalty imposed has been prescribed on payment of service tax, interest and reduced penalty within 30 days of the receipt of the adjudication order or within 30 days of the date of the appellate order in cases where the amount of service tax is increased/modified at the appellate stage or court level. thus, at appellate or court level, the time limit prescribed for payment of service tax with interest and/or penalty is now provided with reference to the date of the order in place of communication of the order, thus reducing the time to such extent.

Section 73(4A) triggered pursuant to any audit, investigation or verification providing for a reduced penalty in case where true and complete details of transactions are recorded in the books of account is now omitted. however, a saving clause is inserted under the said section 78, for the period between 08-04-2011 and 14-05-2015  [both  days  inclusive]  to prescribe a penalty @ 50% of the service tax determined, if the details of such transactions are recorded in the specified records.

Transitory Provisions
In order to provide benefit of reduced penalty to cases where a show cause notice has been issued u/s. 73(1) or under the proviso thereto, but no order has been passed under section 73(2) before 14-05-2015, section 78B is inserted to provide that the period of 30 days for closure of proceedings on the payment of service tax, interest and penalty is to be counted from 14-05-2015 i.e. the date of enactment of the finance act,2015.

Omission of Non-obstante Clause-Section 80
In a significant move, non-obstante clause of section 80 providing powers to condone penalty is omitted   at the end of twenty one years of the existence of service   tax.   Therefore,   penalty   is   now   invocable notwithstanding genuine cause or difficulty of the tax payers and no action will be considered bonafide.

Few Concerns

Threshold Limit
The  service  tax  rate  has  been  increased  to  14%  in order to prepare the trade and industry for GST-one of the biggest taxation reforms in india. However, commensurate increase has not been brought about in the threshold limit and the same has remained constant at Rs. 10 lakh which may affect small and marginal service providers.

CENVAT Credit
There  has  also  been  a  conscious  effort  made  to broaden the base of service tax by pruning the negative list and the exemption notification as a precursor to GST. However, one of the basic aims for the introduction of GST is to provide seamless credit across value chains, but the CENVAT credit provisions have not been accordingly expanded leading to increased cost pressures for trade and industry.

Balance in education Cess & Secondary and higher education Cess account

The service tax rate of 14% has subsumed the education cess and higher education cess. however, whether the balance of education cess and higher education cess paid on inputs, input services and capital goods lying unutilised on the date the new service tax rate is applicable will be available to the service providers for discharging service tax liability is a question which has remained unanswered. In case of Central Excise vide Notification No.12/2015 Central excise (n.t.), it is provided that credit of education Cess and Secondary and higher education Cess paid on inputs or capital goods received in factory on or after 01-03-2015 can be utilised for payment of duty of excise. Similarly, credit balance of 50% of these Cesses paid on capital goods received in the factory of manufacturer as  well  as  input  services  received  during  F.Y.  2014-15 also  can  be  utilised  for  payment  of  excise  duty.   Thus, the intent of the legislation is clear that balances in the Cess accounts of the earlier period are not allowed to be used for duty payment. Further, similar notification is not issued as yet for service providers. in the scenario, the issue of use of credit of cesses remains questionable until the issue of such notification.

(note:  reference  to  sections  made  in  the  article  refer  to  the provisions of the Finance Act,1994 unless otherwise specified)

Some of the aspects included above may require detailed analysis. Such discussion will be covered under regular service tax feature of BCAJ from time to time hereafter.

Prema G. Sanghvi vs. ITO ITAT Mumbai `C’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 2109 /M/2011 Assessment Year: 2007-08. Decided on: 13th February, 2015. Counsel for assessee/revenue: Chetan Karia/ Premanand J.

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Section 56(2)(vi) – Payment of alimony amount by the ex-husband to his wife is nothing more than a gift and is exempt under the proviso to section 56(2)(vi).

Facts:
The assessee was a legally wedded wife of Mr. Zaun. The said marriage was performed as per the Hindu customary rights. The said marriage was dissolved on 20.06.1978 as per the provisions of Hindu Marriage Act. During the year under consideration the assessee received Rs. 73,60,787 from her ex-husband Mr. Siguar Erich Zaun, a German citizen. The assessee claimed the said amount to have been received as alimony on divorce with her husband and the same was claimed as exempt. The Assessing Officer (AO) however, held the said amount as taxable under the head `Income from Other Sources’.

Aggrieved, the assessee preferred an appeal to the CIT(A) who observed that the divorce granted by the City Civil Court is recognised by German law. Mr. Zuan had applied to German Court for approval of divorce already granted by City Civil Court. German court granted divorce on 17.07.2001. There was no evidence of any claim before the German court regarding alimony at the time of recognition of her divorce with her husband. The order of the German court did not have any reference of payment of alimony. Alimony was paid after a gap of five years. Since on the date of receiving the amount there was no relationship between assessee and Mr. Zaun, he held that the amount received by the assessee from Mr. Zaun was chargeable to tax u/s. 56(2)(vi) of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
Under the Hindu Law, a wife has a pre-existing right of maintenance and alimony. The said right exists even after divorce from the husband. So far the granting of divorce under the German Law is concerned, the CIT(A) has discussed at length about the German Law relating to marriage and divorces and thereafter has concluded that even under the German Law, the maintenance can be claimed, if any of the spouse is unable to maintain himself/herself. He has further held that under the German Law spouses are free to arrange for the financial consequences only in case of an eventual divorce possibly by way of prenatal agreement. However, the CIT(A) has not discussed, if there is any bar in paying alimony by the husband to his wife in lieu of her maintenance for the whole life.

In the proviso to section 56(2)(vi) any sum received from a relative is exempt from tax. In the definition of relative, the receipt from whom is exempt under the Act, inter alia not only the spouse but the brother and sister of the spouse have also been included. As we have observed above that the maintenance or alimony is paid by the husband to his wife in recognition of her pre-existing right, whether marriage relationship is still continuing or has been dissolved, does not bar the payment of alimony by the ex-husband, to the divorced wife. Under such type of circumstances, in our view, in the definition of spouse, exspouse is also included except where there is an evidence that the payment is not made as a gift or an alimony but for some other consideration or by virtue of some other transaction. In the absence of any such evidence, the payment of alimony amount by the ex-husband to his wife is nothing more than a gift and is exempt under proviso to section 56(2)(vi) of the Act.

The appeal filed by assessee was allowed.

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Paramount Health Services (TPA) Pvt. Ltd. vs. DCIT ITAT Mumbai `C’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 5400/M/2013& 5269/M/2013 Assessment Year: 2010-11. Decided on: 13th February, 2015. Counsel for assessee / revenue: Rajesh S. Shah & Nalin Gandhi / Narendra Kumar Chand

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Section 40(a)(ia) – Disallowance u/s. 40(a)(ia) is not attracted if the payment on which tax has not been deducted at source has not been claimed as an item of deductible expenditure.

Facts:
The Assessing Officer (AO) while assessing the total income of the assessee disallowed a sum of Rs. 85,05,05,515, being payments by the assessee to various hospitals without deduction of tax at source u/s. 194J of the Act, by invoking the provisions of s. 40(a)(ia) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who restricted the addition to Rs. 10,65,669 and deleted the remaining addition of Rs. 84,94,39,847 on the basis of certificates submitted by the payee hospitals u/s. 197 of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal and contended that the assessee had not claimed these payments as expenditure, hence there was no question of disallowance of any expenditure. Once an expenditure has not been claimed, no question of disallowance of the same can arise.

Held:
The Tribunal noted that in the assessee’s own case for assessment year 2009-10 vide ITA No. 2188/M/2013 dated 25.07.2014 the Tribunal, after detailed discussion, has observed as under –

“7. Though the assessee is under the obligation to deduct tax at source u/s. 194J however, the consequential liability is only u/s. 201 and 201(1A) and the disallowance u/s. 40(a)(ia) cannot be automatic when the assessee has not claimed this payment as expenditure against the income. The assessee has shown the income, only the service charges receivable from insurance companies for rendering services as 3rd party administrator and not having any margin or profit element in the payment received from the insurers for the purpose of remitting to the hospitals to settle medical claim of the insured. Therefore, when the said payment has not been claimed as expenditure incurred for earning the income by the assessee then the provisions of section 40(a)(ia) is not attracted for non deduction of tax at source in respect of the said payment. Following the decisions of the Tribunal as relied upon by the assessee and discussion above we hold that no disallowance can be made under section 40(a)(ia) in respect of the payment in question. Accordingly the ground raised in assessee’s appeal is allowed and ground raised in the revenue’s appeal is dismissed.”

The Tribunal, following the above stated observations, decided the issue in favor of the assessee and directed the lower authorities to delete the disallowance.

The appeal filed by assessee was allowed.

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Trade Circular 1T of 2015 – Revised Instructions regarding stay in appeals dated 07-01-2015

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In the Trade Circular, the Commissioner has explained that if an appellant receives some forms after the assessment order is passed then the appellant should produce the list in given format at the time of filing an appeal. The appellate authority will check the declarations as per the list and accordingly fix part payment. Declarations received up to the date of filing appeal will be considered to decide part payment and for granting stay.
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M/S. Cheema Paper Ltd. vs. Commissioner Trade Tax, (2012) 55 VST 473

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Entry Tax- Rate of Tax- Duplex Board- Ordinarily Used As Packing Material-Made out of Paper- Not Covered by Entry “Paper of All Kinds”, section 4 of The Uttar Pradesh Tax on Entry of Goods into Local Areas Act, 2007

Facts
The dealer company engaged in the manufacture of craft paper and duplex board. The Commercial Tax Tribunal confirmed levy of entry tax on duplex board holding it to be covered by entry relating to “paper of all kind”. The company filed revision petition before the Allahabad High Court against the impugned order of the Commercial Tax Tribunal.

Held
The definition of paper is of wide import which may include anything which is macerated in to pulp, dried and pressed and is used for writing, printing, drawing, decorating, covering wall or for packing purpose. But board whether card board or duplex board are different meant for packing purpose only and not for use as paper, as is understood in common parlance. The duplex board which undoubtedly is a product of paper and is used as packing material would not be paper covered by the entry of “paper of all kind” as contained in notification and liable for entry tax. Accordingly the court allowed the revision petition.

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M/S.Sanjos Paritosh Hospital V. Commercial Tax Officer, Thrissur and Others, (2012) 55 VST 208 (Ker)

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VAT- Dealer- Business- Private Hospitals Selling Medicines and Consumables to Patientsare Dealers and Liable to Pay VAT, S. 2(ix), (xv), (xx), (xliii) and (lii) of The Kerala Value Added Tax Act, 2003

Facts
The Kerala Private Hospital’s Associations, State Committee filed writ petition before the Kerala High Court disputing their liability under the Kerala Value Added tax Act (KVAT ).

Held
A comparative analysis of the provisions contained in the KGST Act which were considered by the court in case of P.R.S. Hospital [2004] 135 STC (ker) and the corresponding provisions of the KVAT Act show that statutory provisions remain the same although the KGST Act is replaced by the KVAT Act. Therefore following earlier judgment of division bench of Kerala High Court in P.R.S. Hospital the court held that the hospitals are carrying on a business and are dealers liable to pay vat on sale of medicines and consumable to patients. The court also upheld the constitutional validity of charging section 6 of the act. Accordingly the writ petition was dismissed.

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2014 (36) STR 1120 (Tri.-Del.) DCM Shriram Consolidated Ltd vs. Commissioner of C. Ex., Jaipur-I

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CENVAT Credit of service tax paid on input services in respect of outdoor catering services for providing canteen facilities to the workers; maintenance of lawns and gardens within the factory as per the requirement of Pollution Control Board; maintenance of cycle stand located in the factory premises; and maintenance of guest house located adjacent to the factory premises is available?

Facts:
The appellants, manufacturer of fertilisers and chemicals availed CENVAT Credit on the following services which was disallowed:
• Outdoor catering services availed for providing canteen facilities to the workers;
• Maintenance of lawns and gardens within the factory as per the requirement of Pollution Control Board;
• Maintenance of cycle stand located in the factory premises; and
• Maintenance of guest house located adjacent to the factory premises.

The Appellants pleaded that canteen services were provided to the workers in view of the requirement under the Factories Act. Similarly, maintenance of lawns and gardens was mandatory requirement under the Pollution Control Board subject to which the permission for running the factory has been granted, maintenance of cycle stand was necessary requirement for the factory workers and the guest house was used by the guests of the company and hence, service tax paid on all these services should be allowed as CENVAT Credit.

Held:
CENVAT Credit in respect of outdoor catering service was admissible in view of the Hon’ble Bombay High Court’s decision in case of CCE, Nagpur vs. Ultratech Cement Ltd. (supra) 2010 (20) S.T.R. 577 as the number of workers in the appellant’s factory was more than 250 and it was mandatory to provide canteen facilities to the factory workers. Maintenance of lawns and gardens was a condition imposed by the Rajasthan Pollution Control Board which was necessary under relevant Acts. Hence, service tax credit in respect of the same was held admissible. Maintenance of cycle stand was necessary requirement and hence, It was also a cenvatable service. Maintenance of guest house, adjacent to the factory premises, was a necessary business requirement as the factory was located outside the City boundaries. Thus, in view of various decisions, maintenance of residential premises was associated with business activities and CENVAT Credit availed by the appellants was held as eligible.

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2014 (36) STR 1089 (Tri.-Del.) Delphi Automotive System P. Ltd. vs. Commissioner Of Cus. & S. T., Noida

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CENVAT credit of service tax paid on management service with respect to honouring, rewarding and entertaining employees and exemployees is allowed.

Facts:
The appellants were manufacturers of motor vehicle parts and AC parts. They took CENVAT Credit in respect of housekeeping and dry cleaning service, event management service for annual function for honouring, rewarding and entertaining employees and ex-employees and legal service. The appellants contended that since CENVAT Credit in respect of taxies for carrying their employees for the event was allowed, CENVAT Credit of service tax in respect of event management service engaged for the same function should be allowed. The appellants relied on Endurance Technologies vs. C.C.E Aurangabad-2013 (32) S.T.R. 95 (Tri.-Mum.) wherein credit in respect of mandap keeper for the annual day function was allowed. Also, the appellants cited the case of Toyata Kirloskar Motor Ltd. vs. CCE, LTU, Bangalore 2011(24) S.T.R. 645 (Kar) where it was held that organising a function cannot be separated from the business of manufacture. The Adjudicating Authority held that these services were not eligible for CENVAT Credit as their products can be manufactured without these services. The Adjudicating Authority also held them guilty of suppression of facts and therefore, imposed penalty and interest.

Held:
Relying on various pronouncements cited by the appellants, it was held that denial of CENVAT credit for cleaning services, legal services and management service was not sustainable. Adjudicating authority erred in holding that mens rea was not an essential factor for imposition of penalty under Rule 15 of the CENAT Credit Rules, 2004 read with section 11AC of Central Excise Act, 1994. With respect to penalty under section 11AC of the Central Excise Act, 1944, suppression has to be brought out which involves mens rea. Since order-in-original did not bring out as to how the appellants were guilty of willful misstatement or suppression of facts, extended period of limitation was not justifiable and mandatory penalty could not be imposed.

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2014 (36) STR 1052 (Tri.-Mum.) Ashish Construction vs. Commissioner of Central Excise, Nagpur

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Payment, after issuance of Show Cause Notice, specifically after a recorded statement of the assessee that he was not liable to pay service tax, should be treated as payment of service tax under protest or compulsion.

Facts:
The appellants availed small scale service provider’s exemption and after number crunching exercise, discharged service tax liability for F. Yrs. 2005-2006 to 2007-2008. The appellants deposited service tax under compulsion against issuance of Show Cause Notice. The appellants put forth various arguments to contend that the appellants were neither liable to pay service tax nor interest and penalties. The respondents alleged that the appellants were ineligible for the small scale service provider’s exemption since the appellants had opted for payment of service Tax.

Held:
Having considered the rival contentions, it was found that as per the statement recorded prior to issuance of Show Cause Notice, the appellants had mentioned that they were not liable to pay service tax. The appellants had paid service tax suo moto only after crossing the threshold exemption limit. Further, the appellants had paid service tax after issue of Show Cause Notice which was not a suo moto payment and the same needs to be treated as paid under protest or compulsion. In view of facts of the case, it was held that the appellants would be entitled to get refund of service tax paid under protest.

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2014 (36) STR 1050 (Tri.–Del.) Commissioner of Central Excise, Ludhiana vs. Bishamber Lal Arora.

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Packing/unpacking by automatic/mechanized process is not covered under cargo handling services.

Proceedings initiated without following classification and valuation discipline, are liable to be set aside.

Facts:
Department issued Show Cause Notice to the Respondent assessee alleging non/short payment of service tax under coal handling and loading, manpower recruitment or supply agency and cleaning services.

The respondents contended that service tax was demanded without specifying categories and taxable values separately. Further, the respondents were merely collecting urea in bags from bagging plants and thereafter, these bags were stacked on the conveyor. The conveyor system then carried the bags to railway wagons or trucks. Accordingly, the services were not in the nature of cargo handling services. The respondents further argued that since the labourers were employed for removal of stones from coal through conveyor systems, these activities did not fall within the ambit of manpower recruitment or supply agency services. The respondents were only cleaning the conveyer belts and the conveyor system for efficient conveyance of goods and therefore, these activities cannot be considered to be cleaning services, leviable to service tax.

Learned Appellate Commissioner held that the respondents were not liable to service tax under following grounds:

The respondents were only engaged in packing and unpacking of bags by automatic/mechanized process and therefore, the services were not covered under cargo handling services.

Cleaning of conveyor system for transport of bags was not covered under cleaning services.

Since the employees were employed by the respondents and they were not the employees of the customer, the services were not manpower recruitment or supply agency services.

Held:
Agreeing to the decision delivered by the learned Appellate Commissioner and having regard to the fact that Show Cause Notice was defective and the proceedings were initiated without applying classification discipline, the appeal was dismissed.

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2015-TIOL-142-CESTAT-MUM Bombay Paints Ltd vs. Commissioner of Central Excise, Mumbai- II

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Full credit availed on capital goods in the first year itself instead of 50%, at the most liable for interest, seeking reversal of credit and imposition of penalty is not warranted.

Facts:
The Appellant took 100% credit on capital goods used in manufacture. CENVAT Credit was denied to the extent of 50% and interest and penalty was also imposed.

Held:
Although, CENVAT Credit entitled was 50% in the first year instead of 100%, however the remaining credit of 50% is available in the subsequent year therefore at the most interest for the intervening period can be demanded and demand for duty and penalty was set aside.

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[2015-TIOL-108-CESTAT-MUM] – Matunga Gymkhana, Tahnee Heights Co-op . Hou. Soc. Ltd, Mittal Tower Premises Co-operative Society vs. Commissioner of Service Tax, Mumbai

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Services to members of club/co-operative housing society is not a service by one to another and is not liable for service tax.

Facts:
The demand of service tax in all these cases is based on the premise that the Appellants are providing “Club & Association” service.

Held:
Relying on the judgments of Ranchi Club vs. Chief Commr. Of C. Ex. & ST, Ranchi 2012 (26) STR 401(Jhar), Sports Club of Gujarat vs. Union of India-2013-TIOL-528- HC-AHM-ST and M/s. Federation of Indian Chambers of Commerce & Industry vs. Commissioner of Service Tax, Delhi-2014-TIOL-701-CESTAT-DEL701-CESTAT-DEL, where it was held that in view of mutuality and activities of the club there is no service by one to another and thus the levy of service tax is ultra vires, the appeals were allowed.

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[2014]-TIOL-2388-CESTAT-AHM Venketeshwar Filaments Pvt. Ltd. vs. CCE & ST, Vapi.

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Any stay order passed by the CESTAT, if it is in force beyond 07-08-2014 it would continue till the disposal of the appeal

Facts:
The Initial stay order passed by the Bench expires on 20- 08-2014

Held:
With the omission of the 1st, 2nd and 3rd proviso in section 35C(2A) vide section 103 of the Finance (2) Act,2014, there is no provision for making any further applications for extension of stay nor has the Tribunal have powers for hearing and disposing the applications from 07-08-2014. However, the initial stay order in force after 07-08-2014 does not lapse.

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[2014]-TIOL-2460-CESTAT-MUM M/s Hindustan Coca Cola Beverages P. Ltd vs. CCE, Nashik

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The outdoor catering service used in relation to business activities and not ‘PRIMARI LY’ meant for personal use or consumption of the employee, is a valid input service.

Facts:
The Appellant has availed CENVAT Credit on outdoor catering services provided to its employees post 01/04/2011 i.e. after the insertion of the clause in the definition of input service excluding services ‘primarily’ for personal use of the employees.

Held:
The word PRIMARILY used by the legislature should be given the due effect. The outdoor catering service is used in relation to business activities for all employees in general and forms a part of cost in relation to manufacture of the final product. It was also observed that since the expenditure did not form part of the salary of the employee as a cost to the company it was not meant for personal use, the credit cannot be denied.

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MindaSai Limited vs. Income Tax Officer ITAT Delhi ‘E’ Bench Before Pramod Kumar AM and A. T. Varkey JM I.T.A. No.: 2974/Del/13 Assessment year: 2009-10. Decided on 09.01.2015 Counsel for Assessee/Revenue: AshwaniTaneja / J P Chandrakar

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(I ) Section 32(2) – Unabsorbed depreciationpertaining to assessment year 2002-03 or before can be set-off after a period of eight years.
(ii) Section 115JB – In the absence of exempt income addition to book profit applying provisions of section 14A cannot be made.

Facts:
Following issues amongst others were raised before the tribunal:

i). Whether the unabsorbed depreciation of Rs 4.39 crore which pertained to the assessment years 1999-2000 and 2000-01, can be set off against business income during the current assessment year;

ii) I n the absence of exempt income whether disallowance u/s. 115JB on the ground that the amount pertained to disallowance u/s.14A, can be made.

The assessee’s claim for set-off against business income of unabsorbed depreciation brought from the assessment year 1999-2000 and 2000-01, aggregating to Rs. 4.39 crore, was rejected by the AO as according to him the unabsorbed depreciation pertaining to the assessment years prior to the assessment year 2002-03 could only be carried forward for eight subsequent assessment years. For the purpose, he relied on a Special Bench decision of the Delhi Tribunal in thecase of DCIT vs. Times Guaranty Limited [(2010) 4 ITR (Trib) 210 MumbaiSB]. On appeal, the CIT(A) upheld the decision of the AO.

Applying the provisions of Clause (f) of Explanation to section 115JB(2) the AO disallowed expense of Rs. 2 lakh u/s. 14A. On appeal, the CIT(A) confirmed the order. Before the Tribunal, the assessee contended that since it has not earned any exempt income during the year, the disallowance u/s. 115JB was not called for. While the revenue relied on the orders of the lower authorities and contended that once the assessee has on its own accepted this disallowance, the adjustment u/s. 115JB in respect thereof was only a natural corollary thereto.

Held:
i) Re: Depreciation: The Tribunal referred to the decision of the Gujarat high court in the case of General Motors India Pvt. Ltd. vs. DCIT [(2013) 354 ITR 244(Guj)] and noted its “considered opinion” to the effect that “any unabsorbed depreciation available to an assessee on 1st day of April 2002 will be dealt with in accordance with the provisions of section 32(2) asamended by Finance Act, 2001”. Accordingly, it observed that the legal position is that the restriction of eightyears, which was in force till the law was amended by the Finance Act 2001 w.e.f. 2002-03, does not come into play. Further, relying on the decisions in the cases of Tej International Pvt.Ltd.vs. DCIT[(2000) 69 TTJ 650] and ACIT vs. Aurangabad Holiday Resorts Pvt. Ltd. [(2007) 118 ITD 1], the Tribunal accepted the plea of the assessee.

ii) Re: Disallowance u/s 14A: Relying on the Delhi High Court’s decision in the case of CIT vs. Holcim India Pvt. Ltd. [2014 TIOL 1586 HC DEL IT] wherein it is held that unless there is an exempt income, disallowance u/s. 14 A cannot be invoked, the Tribunal accepted the assessee’s pleas and held that adjustment under Clause (f) of Explanation to section 115JB (2) cannot be made.

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66 SOT 266 (Mumbai – Trib) Tupur Chatterji vs. ACIT Assessment Year : 2018-09. Date of Order: 16.9.2014

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Sections 23(2), 24 –The restriction of Rs 1.50 lakh described in second proviso to section 24 is with reference of the property which is referred to in sub-section (2) of section 23. Restriction of Rs. 1.50 lakh does not apply to a property which is not let out and annual value whereof is not taken as nil nor is it a cumulative amount to be allowed as a deduction.

Facts :
The assessee was the owner of two properties, one of which was a flat in Marble Arch and the other was a flat in Nestle. The flat in Marble Arch was considered as self occupied property and the flat in Nestle was vacant throughout the previous year. The book value of the flat in Nestle was Rs. 57,22,000. This property was acquired by taking loan from bank. Interest of Rs. 3,50,641 was paid.

In respect of this property, the Assessing Officer (AO) considered Rs 4,00,540 (7% of book value of this property i.e. 7% of Rs. 57,22,000) to be its annual value. He restricted the claim for deduction of interest to Rs. 1,40,193 on the ground that the assesse could not be allowed a cumulative deduction more than Rs. 1,50,000 as per second proviso to section 24 of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
According to section 24(b), where the property is acquired, constructed, repaired or renewed or constructed with the borrowed capital than any interest payable on such borrowed capital would be an allowable deduction. The restriction of Rs. 1,50,000 described in second proviso is with reference to the property which is referred to in sub-section (2) of section 23. Section 23(2) would be applicable to a house or part of the house which either is in the occupation of the owner for the purpose of his residence or the same is not actually occupied by the owner for the reason that owing to his employment, business or profession carried on at any other place and he is to reside at that other place in a building not belonging to him and ALV of such property would be taken as nil. Undisputedly, the flat at Bandra falls under the category of property mentioned in section 23(2) fo the Act as AO did not assess the ALV of the said property as income of the assessee. Therefore, provisions of second proviso to section 24 would not be applicable and the case of the assesse would fall within clause (b) of section 24 in which there is no limit for allowability of the interest and the condition is that the said property should inter alia be acquired out of borrowed capital. In respect of the Nestle property the assessee has paid interest of Rs. 3,50,641. Interest deductible from ALV of Nestle property could not be restricted to any amount less than the interest paid by the assesse. The Tribunal directed the AO to give full deduction of interest paid of Rs. 3,50,641.

This ground of appeal filed by the assessee was allowed by the Tribunal.

Compiler’s Note:
It appears that the assessee had interest of Rs. 9,807 in respect of borrowing for flat in Marble Arch and that is why the AO restricted interest on loan for Nestle property to Rs. 1,40,193 (Rs. 1,50,000 – 9,807).

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166 TTJ 627 (Cochin) ITO vs. Beacon Projects (P.) Ltd. Assessment Years: 2012-13 & 2013-14. Date of Order: 8.8.2014

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Sections 2(28A), 194A – Amount paid to intending buyer of flat in excess of amount paid by him is in the nature of interest u/s. 2(28A) liable for TDS u/s. 194A. The fact that the nomenclature of the amount debited to P & L Account was “Excess payment refund” does not change the character of the payment which is in the nature of interest.

Facts :
In the course of survey u/s. 133A, it was found that the assesse has debited in P & L Account of financial year 2011- 12, a sum of Rs. 31,37,341 and a sum of Rs. 43,21,593 in the P & L Account of financial year 2012-13 towards “Excess Payment Refund’’. The nature of this amount was as under –

The assesse received certain payments from customers who initially booked flats by making advance payments plus 1 or 2 installments. Due to various reasons, these customers could not fulfill the payment schedule and requested for a refund. After certain period, the assessee identified new customers and flats were sold at a higher rate than the previous price. After the sale, the assessee returned the payments received from previous customers with a margin, in order to maintain good business relationship. The excess amount paid was debited to ‘Excess Payment Refund’. No tax was deducted at source from such excess payment made.

The Assessing Officer (AO) held that the excess amount paid to customers was interest u/s. 2(28A) and the payment thereof required deduction of tax at source u/s. 194A of the Act. He, accordingly, regarded the assessee as an assessee-in-default.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that the provisions of section 194A are not applicable to the transactions undertaken by the assessee. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The excess payment made to the customers was in the nature of interest paid in respect of amount lying with the assessee. Mere nomenclature in the books of account will not change the character of actual payment which was precisely in the nature of interest as defined u/s. 2(28A) of the Act. Having reproduced the provisions of section 2(28A), the Tribunal observed that it is crystal clear from the plain reading of section 2(28A) of the Act, that money paid in respect of amount borrowed or debt incurred, is interest payable in any manner. The statutory definition given u/s. 2(28A) of the Act regards amounts which may not otherwise be regarded as interest, as interest for the statute. The definition of interest has been carried to the extent that even the amounts payable in transactions where money has not been borrowed and debt has not been incurred, are brought within the scope of its definition, as in the case of service fees paid in respect of a credit facility which has not been utilised.

In the instant case, the amounts were paid in respect of an obligation in respect of purchase of flat through agreement, therefore, no fault can be found on the part of the AO for treating these charges as interest and liable for TDS u/s. 194A of the Act. The mere fact that the assessee did not choose to characterise such payment as interest will not take such payment out of the ambit of definition of ïnterest’’, in so far as payment made by the assessee was in respect of an obligation incurred with earlier flat holder. The assessee has essentially incurred an expenditure and the amount of charges paid was with respect to the amount incurred by the flat agreement-holder and the period for which the money was so utilised by the assessee. The Tribunal reversed the order of CIT(A) and restored that of the AO on this issue.

This ground of appeal of the revenue was decided in favour of the revenue.

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(2014) 112 DTR 265 (Del) Thyssenkrupp Elevators (India) (P) Ltd. vs. ACIT A.Y.: 2003-04 Date of order: 29.08.2014

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Section 32: Maintenance Portfolio (Annual Maintenance Contracts) acquired on slump basis and goodwill represented by excess of consideration over net value of all assets acquired are intangible assets eligible for depreciation u/s. 32(1)(ii)

Facts:
The assessee acquired the running business in terms of ‘undertaking sale agreement’ of the “Elevator Division” of M/s. ECE Industries Ltd. on a slump basis for a value of Rs. 20,32,10,000. Apart from acquiring various other assets of the said business, the assessee has acquired maintenance contracts of 3,578 elevators which was the main source of revenue for the assessee and also maintenance contracts for 1,001 elevators which were under the warranty period and which would start yielding revenue once the warranty period expires. This portfolio of various maintenance contracts was valued at Rs.18,34,74,000 and depreciation u/s. 32 was claimed on it by treating it as an intangible asset. The learned AO while disallowing the claim of assessee for depreciation on ‘maintenance portfolio’ observed that the assessee was following a ‘complete contract method’ and hence, was not eligible to claim depreciation, as there was no income from the said contracts offered to taxation. Aggrieved by the disallowance the assessee preferred an appeal before the CIT (A). The learned CIT (A) observed that , the consideration can be equated to an amount paid to acquire income yielding apparatus which is nothing but capital in nature and cannot be inferred to result into a depreciable intangible assets.
Further, the excess of consideration over the net value of assets amounting to Rs. 1,85,44,612 was separately shown in the balance sheet and was treated to be ‘goodwill’ pertaining to the business. It was this value of goodwill that was claimed by the assessee as eligible for depreciation for the first time directly before the Tribunal based on the apex Court judgement in the case of CIT vs. SMIFS Securities Ltd. (2012) 75 DTR (SC) 417.

Held:
It was held that the aforesaid maintenance contracts were the very backbone of the business of the assessee. The fact that after the specified intangible assets referred to u/s. 32 (1)(ii) the words “business or commercial rights of similar nature” have been additionally used clearly demonstrates that the legislature did not intend to provide for depreciation only in respect of specified intangible assets but also other categories of intangible assets which were neither feasible nor possible to exhaustively enumerate. These annual maintenance contracts which constituted the whole and sole of the “maintenance division” business of the transferor and which was hitherto being carried out by the transferor, without any interruption were transferred under the said undertaking and sale agreement. The aforesaid intangible assets are, therefore, comparable to a licence to carry out the existing business of the transferor. In absence of the aforesaid intangible assets, the assessee would have to commence the business from scratch and go through the gestation period whereas by creating new/fresh business right, the assessee got an up and running business. It would be prudent to note that these AMC’s in terms of value only come next to the value of fixed assets. Thus, it is unambiguously clear from the various clauses of the agreement and documents available on record that the present agreement represents a bundle of rights in the form of commercial rights. Thus, by applying the principle of ejusdem generis, it was held that such AMCs should get covered within the expression “business or commercial rights of similar nature” specified u/s. 32(1)(ii) of the Act and accordingly eligible for depreciation.

Regarding the issue of depreciation on the goodwill, the Honourable ITAT relied upon the decision of CIT vs. SMIFS Securities Ltd. (supra) wherein it was held that excess consideration paid by the assessee over the value of net assets should be considered as goodwill of business. Accordingly, the depreciation on the same was also allowed u/s. 32(1)(ii) by considering it as falling within the expression “business or commercial rights of similar nature”.

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DCIT vs. Godrej Oil Palm Ltd. (now merged with Godrej Agrovet Ltd.) ITAT Mumbai `G’ Bench Before Vijay Pal Rao (JM) and B. R. KBaskaran (AM) ITA No. 5098 /Mum/2013 Assessment Year: 2011-12. Decided on: 14th January, 2015. Counsel for revenue / assessee: R. N. D’Souza / Akram Khan, Taher Khokhawala

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Section 115JAA – MAT credit has to be given against gross tax payable exclusive of surcharge/cess and only after the MAT credit tax liability, the surcharge and cess has to be calculated.

Facts:
The Assessing Officer (AO) computed the gross tax liability by granting MAT credit against tax liability inclusive of surcharge and cess.

Aggrieved, the assessee preferred an appeal before CIT(A) and contended that MAT credit has to be given against gross tax payable exclusive of surcharge and cess. The CIT(A) allowed the appeal preferred by the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal observed that an identical issue has been considered by the co-ordinate Bench in the case of Wyeth Limited vs. ACIT (ITA No. 6682/Mum/2011 vide order dated 09.01.2015). The Tribunal had, in the case of Wyeth Limited (supra), following the decision of the Allahabad High Court in the case of CIT vs. Vacment India (394 ITR 304)(All), directed the AO to allow the MAT credit against the tax liability payable before surcharge and education cess or alternatively the amount of MAT credit should be inclusive of surcharge and education cess and then allow the credit against the tax payable inclusive of surcharge and education cess.

Following the earlier order of co-ordinate Bench in the case of Wyeth Limited (supra), the Tribunal upheld the order of CIT(A).

The appeal filed by revenue was dismissed.

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Mutuality Income: A. Y. 2005-06- Transfer fees received by Co-operative Housing Societies from incoming & outgoing members (even in excess of limits) is exempt on the ground of mutuality

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CIT vs. Darbhanga Mansion CHS Ltd (Bom): ITA No. 1474 of 2012 dated 18/12/2014: www.itatonline.org:

The
assessee, a Co-operative Housing Society, received a sum of Rs.
39,68,000 on account of transfer of flat and garage and credited it to
‘general amenities fund’ as well as ‘repair fund’. The assessee claimed
that the said receipt is exempted from tax on the ground of mutuality.
However, the Assessing Officer held that the principles of mutuality
will not apply. However, the CIT(A) and Tribunal allowed the assessee’s
claim by relying on Sind Co-operative Housing Society vs. ITO; 317 ITR
47 (Bom).

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

i)
The very issue and the very question was raised repeatedly in the case
of the assessee society. Repeatedly, the Revenue has failed in
convincing the Tribunal that Sind Co-operative Housing Society will not
cover the Society’s case. The contribution is made to the repair fund or
to the general fund and credited as such. While it may be true that it
is occasioned by transfer of a flat and garage, yet, we do not see how
merely because there was cap or restriction placed on the transfer fees
or the quantum thereof, in this case the principle of mutuality cannot
be applied.

ii) The underlying principle and of a co-operative
movement has been completely overlooked by the Revenue. The Revenue
seems to be of the view that a Co-operative Housing Society makes
profit, if it receives something beyond this amount of Rs. 25,000. There
has to be material brought and which will have a definite bearing on
this issue. If the amount is received on account of transfer of a flat
and which is not restricted to Rs. 25,000/- but much more, then
different consideration may apply. However, in the present case, what
has been argued and vehemently is the amount was received by the Society
when the flat and the garage were transferred. Therefore, it must be
presumed to be nothing but transfer fees. It may have been credited to
the fund and with a view to demonstrate that it is nothing but a
voluntary contribution or donation to the Society, but still it
constitutes its income. However, for rendering such a conclusive finding
there has to be material brought by the Revenue on record. Beyond
urging that it has been received at the time of a transfer of the flat
and credited to such a fund will not be enough to displace the principle
laid down in the decision of Sind Cooperative Housing Society.

iii)
The attempt of the Revenue therefore is nothing but overcoming the
binding judgment of this Court. In the present case, the Commissioner
and the Tribunal both have held that the receipt may have been
occasioned by the transfer but the principle of mutuality will still
apply.

iv) It is a typical relationship between the member of
the Co-operative Society and particularly a Housing Society and the
Society which is a body Corporate and a legal entity by itself that is
forming the basis of the principle laid down by the Division Bench.
Co-operative movement is a socio economic and a moral movement. It has
now been recognised by Article 43A of the Constitution of India. It is
to foster and encourage the spirit of brotherhood and co-operation that
the Government encourages formation of Co-operative Societies. The
members may be owning individually the flats or immovable properties but
enjoying, in common, the amenities, advantages and benefits. The
Society as a legal entity owns the building but the amenities are
provided and that is how the terms “flat” and the “housing society” are
defined in the statute in question. We do not therefore find any reason
to deviate from the principle laid down in Sind Co-operative Housing
Society’s case and which followed a Supreme Court judgment.”

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Charitable Trust – Registration – Section 12AA(2) – Period of six months provided in section 12AA(2) for disposal of application is not mandatory – Non disposal of application before expiry of six months does not result in deemed grant of registration –

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CIT vs. Muzafar Nagar Development Authority; 372 ITR 209(All)(FB)

The following question of law was raised in an appeal by the Revenue:

“Whether the non-disposal of an application for registration, by granting or refusing registration, before the expiry of six months as provided u/s. 12AA(2) of the Income-tax Act, 1961, would result in deemed grant of registration?”

The Full Bench of the Allahabad High Court held as under:

“Parliament has carefully and advisedly not provided for a deeming fiction to the effect that an application for registration would be deemed to have granted, if it is not disposed of within six months. Therefore, nondisposal of an application for registration before the expiry of six months as provided u/s. 12AA(2) would not result in a deemed grant of registration.”

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Charitable Institution-Exemption u/s. 10 & 11- In computing the income of charitable institutions exempt u/s. 11, income exempt u/s. 10 has to be excluded. The requirement in section 11 with regard to application of income for charitable purposes does not apply to income exempt u/s. 10 –

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DIT (E) vs. Jasubhai Foundation; www.itatonline.org

The Bombay High Court had to consider whether an assessee enjoying exemption u/s. 11 could claim that the income exempt u/s. 10(33) and 10(38) had to be excluded while computing the application of income for charitable or religious purpose.

The High Court held as under:

“There is nothing in the language of sections 10 or 11 which says that what is provided by section 10 or dealt with is not to be taken into consideration or omitted from the purview of section 11. If we accept the argument of the Revenue, the same would amount to reading into the provisions something which is expressly not there. In such circumstances, the Tribunal was right in its conclusion that the income which in this case the assessee trust has not included by virtue of section 10, then, that cannot be considered u/s. 11.”

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Capital gains – Computation – Section 50C – Valuation by DVO – Sale of land – Stamp duty assigning higher value to the land – Matter should be referred to DVO –

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Sunil Kumar Agarwal vs.CIT; 372 ITR 83 (Cal):

The assessee sold piece of land for Rs. 10,00,000/-. The stamp duty value of the same was Rs. 35,00,000/-. The Assessing Officer adopted the stamp duty value u/s. 50C of the Income-tax Act, 1961 and computed the capital gain on that basis. The Tribunal upheld the same.

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

“i) T he case of the assessee was that the price offered by the buyer was the highest prevailing price in the market. If this were his case then it is difficult to accept the proposition that the assessee had accepted that the price fixed for stamp duty was the fair market value of the property. No such inference could be made as against the assessee because he had nothing to do in the matter.

ii) Stamp duty was payable by the purchaser. It was for the purchaser to either accept it or dispute it. The assessee could not have done anything. In the case of this nature the Assessing Officer should, in fairness, have given an option to the assessee to have the valuation made by the DVO contemplated u/s. 50C.”

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Capital gains – Section 45(4) – A. Y. 1993-94: Conversion of firm into company – Transfer of assets means a physical transfer or intangible transfer of rights to property – Conversion of shares of partners to shares in company – No transfer within meaning of section 45(4) – No capital gain:

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CIT vs. United Fish Nets; 372 ITR 67 (T&AP):

In the A. Y. 1993-94, the assessee firm was converted into a private limited company. The entire assets and liabilities of the firm were made over to the company. The respective partners were issued shares by the company corresponding to the value of their share in the firm. The Assessing Officer took the view that there was transfer of assets from the firm to the private limited company and thereby the capital gains tax u/s. 45 became payable. The Tribunal held that section 45 was not applicable and deleted the addition.

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

“i) From a perusal of section 45(4) of the Incometax Act, 1961, it becomes clear that two aspects become important, viz., the dissolution of the firm and the distribution of the assets as a consequence thereof. The distribution must result in some tangible act of physical transfer of properties or tangible act of conferring exclusive rights vis-à-vis an item of property on the erstwhile shareholder. Unless these other legal correlatives take place, it cannot be inferred that there was any distribution of assets.

ii) The shares of the respective shareholders in the assessee company were defined under the partnership deed. The only change that had taken place on the assessee being transformed into the company was that the shares of the partners were reflected in the form of share certificates. Beyond that, there was no physical distribution of the assets in the form of dividing them into parts, or allocation of the assets to the respective partners or even distribution the monetary value thereof. Section 45 was not applicable.”

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Business expenditure – Bogus purchases – A. Y. 2001-02 – No rejection of books of account – Substantial amount of sales to Government Department – Confirmation letters filed by suppliers, copies of invoices of purchases as well as copies of bank statements indicating purchases were made – Non-appearance of suppliers before authorities is not a ground to hold purchases bogus – No addition could be made –

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CIT vs. Nikunj Eximp Enterprises Pvt. Ltd.; 372 ITR 619 (Bom):

For the A. Y. 2001-02, the assessee declared a total income of Rs. 42.08 lakh. The Assessing Officer disallowed an expenditure of Rs. 1.33 crore on account of purchases from seven parties on the ground that they were not genuine. The Tribunal found that the assessee had filed the letters of confirmation of suppliers, copies of bank statements showing entries of payment through account payee cheques to the suppliers, copies of invoices for purchases and stock statement, i.e. stock reconciliation statement and no fault was found with regard to it. Books of account of the assessee had not been rejected. The Tribunal deleted the disallowance holding that the purchases were not bogus.

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

“i) The Tribunal had deleted the additions made on account of bogus purchases not only on the basis of stock statement, i.e. reconciliation statement but also in view of other facts. The Tribunal recorded that the books of account of the assessee had not been rejected. Similarly, the sales had not been doubted and it was an admitted position that a substantial amount of sales had been made to the Government Department.

ii) Further, there were confirmation letters filed by the suppliers, copies of invoices of purchases as well as copies of bank statements all of which would indicate that the purchases were in fact made.

iii) Merely because the suppliers had not appeared before the Assessing Officer or the Commissioner (Appeals), one could not conclude the purchases were not made by the assessee. The order of the Tribunal was well reasoned order taking into account all the facts before concluding that the purchases of Rs. 1.33 crore were not bogus. No fault could be found with the order of the Tribunal.”

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Business expenditure – Section 37(1) – A. Y. 2000-01 to 2002-03 – Where assessee, engaged in manufacturing and selling of motorcycles, made payment of royalty to a foreign company for merely acquiring right to use technical know how whereas ownership and intellectual property rights in know how remained with foreign company, payment in question was to be allowed as business expenditure –

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CIT vs. Hero Honda Motors Ltd.; [2015] 55 taxmann.com 230 (Delhi)

The assessee was a joint venture between the Hero Group and Honda, Japan, for manufacture and sale of motorcycle using technology licensed by Honda. The assessee and Honda thereupon entered into an agreement called ‘licence and technical assistance agreement’ in terms of which assessee paid royalty to the Honda. The assessee claimed deduction of said payment u/s. 37(1). The Assessing Officer rejected assessee’s claim holding that it was in the nature of capital expenditure. The Tribunal allowed the assessee’s claim.

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

“i) In the facts of the present case, one has to consider whether the expenditure incurred on acquisition of right to technical information and know-how would satisfy the enduring benefit test in the capital field, or the right acquired had enabled the assessee’s trading and business apparatus, in practical and commercial sense.

ii) Technical information and know-how are intangible and have unique characteristics as distinct from tangible assets. These are acquired by a person over a period of time or acquired from a third person, who may transfer ownership or grant a licence in the form of right to use, i.e., grant limited rights, while retaining ownership rights. In the latter case technical information or know-how even when parted with, the proprietorship is retained by the original holder and in that sense what is granted to the user would be a mere right to use and not transfer absolute or complete ownership.

iii) In the instant case, from perusal of terms and conditions and applying the tests expounded, it has to be held that the payments in question were for right to use or rather for access to technical know how and information. The ownership and the intellectual property rights in the know how or technical information were never transferred or became an asset of the assessee. The ownership rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to assessee for day to day running and operation, i.e., to carry on business. In fact, the business was not exactly new. Manufacture and sales had already commenced under the agreement dated 24-1-1984. After expiry of the first agreement, the second agreement dated 2-6-1995, ensured continuity in manufacture, development, production and sale.

iv) In view of the aforesaid, it is held that the Tribunal was right in holding that the payment made to ‘Honda’ Japan under the ‘know-how’ agreement is revenue expense and not partly or wholly capital expense.”

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PAN AND NON RESIDENT – Section 206AA

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Issue for Consideration
A person
entitled to receive any sum or income or amount, on which the is
deductible under chapter XVIIB, is required to furnish his Permanent
Account Number(PAN) to the payer as per section 206AA of the Income tax
Act, w.e.f. 01.04.2010. Failure to furnish PAN requires the payer to
deduct tax at the higher of the following rates;

(i) rate specified in the Act,
(ii) rate in force, or
(iii) rate of 20%.

Section 206AA also provides that a person cannot furnish a valid declaration u/s 197A without furnishing his PAN.

Section
195 requires a payer to deduct tax at source, at the rates in force, on
payments to a non-resident or a foreign company of any interest or any
other sum chargeable to tax under the Act. Section 2(37A) defines ‘rate
or rates in force’. One of the clauses of this section provides that for
the purposes of deduction of tax u/s. 195, the rate at which tax to be
deducted is the rate of income tax specified by the Finance Act of the
relevant year or the rate or rates specified in the relevant DTAA.
Section 2 of the Finance (No.2) Act, 2014, vide various sub-sections,
provides for payment of surcharge, education cess and secondary and
higher education cess on taxes, including on tax deduction at source, on
payments to a non-resident or a foreign company.

Issues have arisen, in the context of abovementioned provisions, which are listed as under;

are provisions of section 206AA applicable to cases of payees who are non resident or foreign companies,

are they applicable in cases where the tax is payable as per the provisions of DTAA ,

is
there a liability to deduct and pay surcharge and education cess in
cases where tax is deducted at 20% as per section 206AA, on payments to
non-resident or foreign company, and

what shall be the amount of tax that is to be grossed up for the payment of section 195A in cases where tax is paid by payer.

Bosch Ltd .’s case.
The
issue first came up for consideration of the Bangalore tribunal in the
case of Bosch Ltd., 28 taxmann.com 228 (Bangalore – Trib.) for
Assessment Year 2011-12. In that case, the assessee, a manufacturing
company with both imported and indigenous plant and machinery, entrusted
Annual Maintenance Contracts as well as repairs contracts to foreign
suppliers of machinery and equipments. The suppliers were residents of
Germany. The assessee made payments towards the AMCs and RCs without
deduction of tax at source on the understanding that the payments
represented business receipts of non-resident companies, who did not
have any PE in India, and as such, the payments were not chargeable to
tax in India. The AO as well as the Commissioner (Appeals) held that the
payments made by the assessee to the non-residents towards AMC and RC
were not their business profits, but were ‘fees for technical services’,
and the assessee was liable to withhold tax at the rate of 20 %. They
further held that since non-resident recipients did not furnish their
PANs to assessee-deductor, tax was required to be deducted at source at
higher rate u/s. 206AA.

In the appeal to the Tribunal, as
regards the applicability of the rate of 20% u/s. 206AA, the assessee
submitted that, the non-residents are not required to apply and obtain a
PAN u/s. 139A as per section 139A(8)(d) r.w.rule 114c(b); the reliance
of the CIT(A) on the press note dated 20.01.2010 was misplaced, as a
press note could not override the provisions of law; the provisions of
section 206AA were applicable only where the recipients were required
under the law to obtain the PAN and not otherwise. In support of the
contention, reliance was placed upon the judgment of the Karnataka High
Court in the case of Smt. A. Kowsalya Bai, 346 ITR 156.

On the
other hand, the Income tax Department supported the orders of the CIT(A)
and submitted that as per the form 15CB furnished by the assessee, the
payments for repairs had been treated as ‘FTS’ and the rate of tax was
mentioned as 20%; that the certificate issued by the assessee’s own
auditors was binding on the assessee and the assessee had rightly
deducted tax @ 20%, though out of caution, as provided u/s. 206AA of the
Act; that the CBDT in its press note dated 20.01.2010 had clearly
stated that the procedure of obtaining PAN was easy and inexpensive and
that even non-residents were required to obtain the same; s. 206AA had
overriding effect over all other provisions of the Act and, therefore,
whenever there was taxable income, the non-residents were required to
furnish their PANs to the deductor, failing which the rate specified u/s
206AA had to be applied; the decision of the Karnataka High Court, in
the case of Smt. A. Kowsalya Bai (supra), relied upon by the assessee,
was distinguishable on facts in as much as in that case, the assessees’
therein, whose income was below the taxable limit were residents, while
in the case before the tribunal, the recipients of the remittances were
non-residents having income above the taxable limit; and the income
being taxable in India as FTS, the recipients were required to obtain
PAN, failing which the rate u/s 206AA was applicable.

In
rejoinder, the assessee submitted that the Form 15CB prepared by the C.A
of the assessee company only reflected the opinion or a view of the C.A
and could not be considered as the admission of the assesse, and the
assessee had the right to deny its liability to deduct tax at source and
the issue had to be decided in accordance with law, and not on the
basis of the opinion of the C.A of the assessee.

The tribunal
first dealt with the issue of Form No.15CB and its binding nature on the
assessee. It held that the argument of the Department that the assessee
by furnishing Form No.15CB had admitted that the payment was ‘fees for
technical services’ could not be accepted, because Form No.15CB was a
certificate issued by an accountant (other than an employee) and,
therefore, it was the opinion or view of the accountant and could not be
said to be binding on the assessee; every transaction between the
assessee and the non-residents had to be considered in its own right,
and its nature was to be decided in accordance with the intention of the
parties and in accordance with law; even where it was to be considered
as an admission by the assessee, the same could not be accepted to be
the gospel truth and had to be verified by the AO; and the assessee had
every right to challenge the opinion given by its own C.A and it was for
the Revenue authorities to decide the issue in accordance with law and,
therefore, Form No.15CB alone would not determine the nature of the
transaction.

On applicability of section 206AA the tribunal
observed that the provisions of section 206AA clearly override the other
provisions of the Act and therefore, a nonresident whose income was
chargeable to tax in India had to obtain PAN and provide the same to the
assessee deductor; the only exemption given was that non-resident whose
income was not chargeable to tax, in India was not required to apply
for and obtain a PAN; however, where the income was chargeable to tax
irrespective of the residential status of the recipients, every assessee
was required to obtain a PAN and this provision was brought to ensure
that there was no evasion of tax by foreign entities.

The assessee’s contention that the assesse, being a non resident, was not required to apply for and obtain a Pan by virtue of rule 114(C)(b) of income-tax rules read with section 139a(8)(d) of the income-tax act was negatived by the tribunal as, in its view, the provisions of section 206aa clearly override the other provisions of the act. therefore, a non-recipient whose income was chargeable to tax in india had to obtain a Pan and provide the same to the assessee deductor. the assessee’s reliance upon the decision of the Karnataka high Court in the case of Smt. A. Kowsalya Bai (supra), was found to be misplaced and distinguishable on facts from the facts of the case as, in the case of Smt. A. Kowsalya Bai (supra), the recipients of the interest were residents of india and their total income was less than the taxable limit prescribed by  the  relevant  finance  act.  it  was  in  such  facts  and circumstances that the high Court had held that where the recipients of the ‘interest income’ were not having income exceeding taxable limits, it was not required to obtain a Pan. it held that in the instant case, the recipients were non-residents and admittedly the income exceeded the taxable  limit  prescribed  by  the  relevant  finance act.  In the circumstances, the recipients were bound and were under an obligation to obtain a Pan and furnish the same to the assessee; for failure to do so, the assessee was liable to withhold tax at the higher of rates prescribed u/s. 206aa i.e. 20 % and the Commissioner (appeals) had rightly held that the provision of section 206aa were applicable to the assessee.

   Serum Institute of India LTD.’s case
The issue again came up for consideration of the Pune tribunal in the case of Serum institute of india Ltd., ita no.s 1601 to 1604/Pn/2014. in that case, the assessee, a company incorporated under the Companies act, 1956 was engaged in the business of manufacture and sale of vaccines, and was a major exporter of the vaccines. in the course of its business activities, the assessee made payments to non-residents on account of interest, royalty and fees for technical services during the financial year 2010-11, relevant to the assessment year under  consideration.  These  payments  were  subjected to withholding tax u/s 195 of the act and the assessee deducted tax at source on such payment in accordance with   the   tax   rates   provided   in   the   double  taxation avoidance agreements (dtaas) with the respective countries.  The  tax  rate  so  provided  in  the  dtaas  was lower than the rate prescribed under the act and therefore, in terms of the provisions of section 90(2) of the act, the tax was deducted at source by applying the beneficial rates prescribed under the relevant dtaas.

The ao found that in cases of some of the non-residents, the recipients did not have Permanent account numbers (PANs). As a consequence of such finding, he treated such payments, as cases of ‘short deduction’ of tax in terms of the provisions of section 206aa of the act. as    a consequence, demands were raised on the assessee for the short deduction of tax and also for interest u/s. 201(1a)  of  the  act.  The  aforesaid  dispute  was  carried by the assessee in appeal before the Commissioner (appeals), who allowed the appeals of the assessee.

Aggrieved by the orders of the Commissioner (appeals), the revenue raised common Grounds of appeal as under :-

“1) The CIT(A) erred in law in concluding that sec 206AA is not applicable in case of non-residents as the DTAA overrides the Act as per section 90(2).

2)    The decision of the CIT(A) is not according to the law and erred in ignoring the memorandum explaining the provisions of the Finance (No.2) Bill, 2009 which clearly states that the sec. 206AA applies to non-residents and also Press Release of CBDT No.402/92/2006-MC (04 of 2010) dated 20.01.2010 which reiterates  that  sec.  206AA  will also apply to all non-residents in respect of payments/remittances liable to TDS.

3)    The CIT(A) erred in ignoring the decision of  the ITAT Bangalore in the case of Bosch Ltd. vs ITO, ITA No.552 to 558 (Bang.) of 2011 dated 11.10.2012, in which it was held that if the recipient has not furnished the PAN to the deductor, the deductor is liable to withhold tax at the higher rates prescribed u/s. 206AA.”

The assessee   contested the claims of the department and reiterated the contentions raised before the Commissioner(appeals) by submitting that the provisions of section 206aa were not applicable to payments made to non-residents; that the provisions of section139a(8) of the act r.w. rule 114C(1) of the income tax rules, 1962 prescribed that non-residents were not required to apply for Pan; that section 206aa of the act  prescribed  that the recipient should furnish Pan and such furnishing would be possible only where the recipient was required to obtain Pan under the relevant provisions; that where the non-residents were not obliged to obtain a Pan, the requirement of furnishing the same in terms of section 206aa of the act did not arise; that the tax rate applicable in terms of section 206aa of the act could not prevail over the tax rate prescribed in the relevant dtaas, as the rates prescribed in the DTAAs were beneficial.

The assessee relied on the provisions of section 90(2) of the act, which prescribed that provisions of the act were applicable to the extent that they were more beneficial to the assessee, and since section 206aa of the act prescribed higher rate of withholding tax, it would not be beneficial to the assessee vis-à-vis the rates prescribed in the dtaas.

On consideration of the rival submissions, the tribunal observed and held as under;

  •     There cannot be any doubt in view of section 90(2), that the tax liability in india of a non-resident was to be determined in accordance with the more beneficial provisions of the act or the dtaa,

  •     The CIT(a), relying on the decision of the Supreme Court in the case of azadi Bachao andolan and others, (2003) 263 itr 706 (SC), had correctly held that the provisions of the DTAAs would prevail over the general provisions contained in the act to the extent they were beneficial to the assessee,

  •     The dtaas entered into between india and the other relevant countries in the present context, provided for scope of taxation and/or a rate of taxation which was different from the scope/rate prescribed under the act, and for the said reason, the assessee deducted the tax at source having regard to the provisions of the respective DTAAs which provided for a beneficial rate of taxation,

  •     Even the charging section 4 as well as section 5 of the act, which dealt with the principle of ascertainment of total income under the act, were subordinated to the principle enshrined in section 90(2) as was held by the Supreme Court in the case of azadi Bachao andolan and others (supra), and

  •     In so far as the applicability of the scope/rate of taxation with respect to the impugned payments made to the non-residents was concerned, no fault could be found with the rate of taxation invoked by the assessee based on the DTAAs, which prescribed for a beneficial rate of taxation.

  •     In our considered opinion, it would be quite incorrect to say that though the charging section 4 of the act and section 5 of the act dealing with ascertainment of total income are subordinate to the principle enshrined in section 90(2) of the act but the provisions of Chapter XVii-B governing tax deduction at source were not subordinate to section 90(2) of the act.

  •    Notably, section 206aa of the act was not a charging section but was a part of procedural provisions dealing with  collection  and  deduction  of  tax  at  source.  The provisions of section 195 of the act, which cast a duty on the assessee to deduct tax at source on payments to a non-resident, could not be looked upon as a charging provision. in-fact, in the context of section 195 of the act also, the hon’ble Supreme Court in the case of eli Lily & Co., 312 itr 225 (SC) observed that the provisions of tax withholding i.e. section 195 of the act would apply only to sums which were otherwise chargeable to tax under the act. the  Supreme Court in the case of Ge india technology Centre Pvt. Ltd., 327 itr 456 (SC) held that the provisions of dtaas along with the sections 4, 5, 9, 90 & 91 of the act were relevant while applying the provisions of tax deduction at source, and

In view of the schematic interpretation of the act, section 206AA of the act could not be understood to override the charging sections 4 and 5 of the act.

The provisions of section 90(2) of the act had the effect of overriding domestic law, including the charging sections 4 and 5 of the act, and in turn, section 206aa of the act.

The Pune tribunal accordingly held that   where the tax had been deducted on the strength of the beneficial provisions of dtaas, the provisions of section 206AA of the act could not be invoked by the ao to insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the act. The Tribunal affirmed the ultimate conclusion of the CIT(A) in deleting the tax demand relatable to difference between 20% and the actual tax rate on which tax was deducted by the assessee in terms of the relevant dtaas.

Observations
Section 90(2) provides for application of the provisions of the DTAA over the provisions of the income-tax act. The rate of tax provided for in dtaa apply in preference to the rate provided in the Act where beneficial. The internationally acclaimed position that the provisions of dtaa override the provisions of the domestic law is now also enshrined in the income tax act vide section 90(2) of the act. Please see azadi Bachao aandolan, 263 ITR 706, wherein the Supreme court clearly confirms that the provisions of section 90(2) override the provisions of the act as also the provisions of sections 4 and 5 thereof.

Section 206 aa provides for the rate at which tax is to be deducted at source in cases where the payee does not furnish his Pan. the provisions of section 206aa contain non-obstante clause that override the application of other provisions of the act. Section 90(2) also overrides the provisions of the act including the provisions of sections 4 and 5 of the act, in the manner noted above. in the circumstances, the issue that requires to be considered is which provision shall prevail over the other. apparently, both are special provisions and override the general provisions.

The  operation  of  section  206aa  however  is  limited  to the provisions of chapter XVii-B of the act while the application of the dtaa r.w.s.90(2) is sweeping and travels to cover even the charging provisions. A combined reading of these provisions reveal that in deciding the tax that is ultimately payable by the payee, the tax that is determined by applying the dtaa rates, will alone be relevant and the amount of TDS if found higher will be  refunded.  There  does  not  prevail  any  doubt  on  this position in law. There is therefore an agreement that the ultimate charge is based on the rate provided by section 90(2) read with the provisions of the DTAA and not by section 206 AA.

Section 195 read with the rules and the prescribed forms, clearly permit a deductor to deduct tax at such rate that has been provided under the DTAA. On a combined reading of these provisions, it is clear that the tax is to be deducted at the rate provided in DTAA in as much it is the rate at which the income of a non-resident will be ultimately taxable. There is also no disagreement that no tax is deductible where income is otherwise not taxable even where Pan is not furnished.

The two overriding provisions of the act operate in different fields. One for determining the rate at which the tax is deductible, and the other for determining the rate at which the income will ultimately be taxed. the usual approach in situations, where such conflicting special provisions exist, is to apply both of them to the extent possible. Accordingly, one view of resolving the issue on hand is to deduct tax at 20% while making payment to a non-resident who does not furnish Pan, and eventually tax his income at the rate prescribed under the dtaa and grant refund to him. The other view is to shorten this exercise by deducting only such tax as is ultimately payable by a non-resident which, in the absence of section 206AA, is otherwise the correct approach and meets the due compliance of sections 195, 4, 5, 90 and the provisions of the DTAA; an approach which has the benefit of avoiding the round tripping for refund.  The second view is otherwise also supported by acceptance of the position in law by both the parties that provisions of section 206aa are not applicable where no tax is otherwise required to be deducted at source, on the ground that the income of the non-resident is not liable to tax at all.

It is also worthwhile to note that section 206aa is not a charging section and perhaps is also not a provision that creates an obligation to deduct tax at source. A primary obligation to deduct tax at source is under different provisions of chapter XViiB and is not  u/s.  206AA,  which section has a limited scope of redefining the rate at which tax, otherwise deductible, is to be deducted. In the absence of a preliminary obligation to deduct tax at source, provision of section 206aa fails.

An important consideration that has to be kept in mind is that there is no leakage of revenue in adopting the second view. The  tax  that  is  deducted  as  per  the  provisions  of section 195 r.w.s 2(37a) and section 90 and the provisions of the dtaa, is the only tax that is otherwise payable on the income of the non-resident. The tax is deducted in full not leaving claim for payment of balance tax. as against that, not applying the provisions of section 206aa in cases of residents, may result into leakage of some
 
Revenue where the payee without PAN, chooses not to file a return of income.

We are of the considered view that in the following cases, the provisions of section 206aa should not be applied;

•    where the income of the non-resident is not taxable under the income-tax act either on account of the provisions of the income-tax act or on account of the provisions of the dtaa,
•    where the income of the non-resident is taxable at the fixed rate as specified in the Income-tax Act or in the dtaa and the tax deductible u/s. 195 matches such rate.

Logically, in most of the cases of payment to non- residents, the provisions of section 206aa should have no application for the simple reason that the tax that is required to be deducted by the payer u/s. 195, is the same that has to be paid on his total income. nothing less, nothing more, and nothing is gained by asking for  a higher deduction for non-furnishing of the Pan and thereafter refunding the higher tax so deducted.

It is for this reason, perhaps, that the provisions of section 139A(8)  of  the act  r.w.  rule  114C(1)  of  the  income tax rules,   1962   prescribed   that   non-residents   were   not required to apply for Pan.

Having said that, we need to take notice of sub- section(7) of section 206aa which grants exemption, from application of the provisions of section 206aa, in respect of payment of interest on long-term bonds referred to in section  194LC  to  a  non-resident.  This  means  that  the tax is such a case is to be deducted at the specified rate of 5%, even where the non-resident does not furnish Pan. This provision in our opinion should be considered to have been inserted out of abundant precaution, and should not be construed to mean that in all other cases of payments to non-residents, provisions of section 206aa should apply.

There does not seem to be any apparent need for reading down the provisions of section 206AA, in our considered view, to exclude its applicability to the cases of non- residents, in as much as it is possible to exclude such application on the basis of the reasonable interpretation of the two special provisions of the act. However, it may be read down if it is so required in the interest of the administration of law.

The  view  expressed  here  can  be  further  tested  by answering the question as to what shall be the ao’s prescription of the rate at which tax is to be deducted,  on a payment to a non-resident,  where an application   is made to him u/s 195(2) or 195(3). Can an ao order that the tax should be deducted at 20%, disregarding  the provisions of dtaa and the act, simply because the non-resident has not furnished Pan? We do not think so.

The Press note dated 20.01.2010 has no legal force and, in any case, its scope should be restricted to the very limited cases of payments to non-residents, where the tax deducted at source u/s. 195 does not represent the tax that is finally payable by them.

Section 206aa therefore cannot be applied in isolation simply because it contains a non-obstante clause. in applying the provisions, it is necessary to read the provisions of the act and in particularly the provisions    of sections 2(37a), 4, 5, 90 and 195 and the dtaa as also some of the provisions of the act that provide for  the rate at which income of a non-resident is required to be taxed. The   Supreme Court in the case of Ge india technology Centre Pvt. Ltd., 327 ITR 456 (SC) held that the provisions of dtaas along with the sections 4, 5, 9, 90 & 91 of the act would have a role to play while applying the provisions of tax deduction at source contained in chapter XVii B of the act.

In view of the observations, the surcharge and education cess in cases of payments to a non-resident, where applicable, shall be payable   on the basis of the rate    of tax determined in accordance with the provisions of section 195. However, section 206aa shall not apply, as discussed here.

It is also interesting to note that even the Bangalore tribunal in Bosch’s case, while upholding the revenue’s stand that the tax was required to be deducted at 20% in cases of non furnishing of Pan, held that for the purposes of grossing up in terms of section 195A, the rate that has to adopted is the rate in force and not 20% as prescribed by section 206AA.

Foreign Account Tax Compliance Act – the Indian side of regulations

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FATCA reporting
In a country which has
entered into an Inter-Governmental Agreement (IGA) Model 1 agreement,
the Foreign Financial Institutions (FFIs) are not required to report
financial information directly to the US IRS. Instead, the FFIs have to
report such financial information to the Government of the country where
they are operating. This addresses a major hurdle in FAT CA
implementation viz., the issue of data privacy. Once the laws of an IGA
Model 1 country provide for the FFIs to provide data to the Government
of the country in which they are operating, it is difficult for the FFI
or the clients of the FFI to challenge such requirements under data
privacy laws operating in most countries.

In India, the term FFI,
would generally include banks, nonbank finance companies, housing
finance companies, depository participants (custodians), insurance
companies and similar institutions. In order to make FAT CA reporting
possible in the IGA Model 1 framework, the Government of India needed to
have a policy decision that India would participate in the information
exchange programme, a legal framework to authorise collection of such
financial information, an agency to administer the exchange of
information requirements. Work on some of these areas started in 2013
and significant steps have been taken till end of March 2015. Additional
steps are being taken to strengthen the information exchange programme.

India – policy decision
One of the first decision
points was whether India would participate in the FAT CA initiative
launched by the US. After examining possible consequences for the Indian
financial sector if India remains away and in light of India’s
commitment to global financial transparency, the Government of India
decided that it would enter into an IGA. As negotiation of tax treaties
and exchange of information was generally handled by the Ministry of
Finance (MoF), it was decided that the MoF would be the nodal agency for
FATCA and other similar financial information exchange initiatives.
From the second half of 2013 to early 2014, the MoF officials worked
with regulators in the Indian financial sector to determine what should
be the broad agreement with the US IRS. The principal regulators
involved in the consultation were the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI) and the Insurance
Regulatory & Development Authority (IRDA). Based on this
consultation, an agreement ‘in substance’ was entered into in April
2014. One crucial administrative detail that remained was the formal
approval by the Union Cabinet supporting the signing of the final IGA.
This was scheduled for March 2014 but ultimately was obtained in March
2015.

Regulations
Before the IGA in substance was
entered into, one of the key questions before the Indian Government, the
regulators and before the FFIs was whether there was any regulatory
support for FFIs to send financial information in respect of their
clients to the US IRS directly. One school of thought was that Article
28(1) and 28(2) of the India-US Double Tax Avoidance (DTAA ) allowed the
exchange of information subject to the limitations under Article 28(3) –
for ease of reference, all three are reproduced below – at Government
to Government level but FFIs could not directly report to the US IRS.

1.
The competent authorities of the Contracting State shall exchange such
information (including documents) as is necessary for carrying out the
provisions of this Convention or of the domestic laws of the Contracting
States concerning taxes covered by the Convention insofar as the
taxation thereunder is not contrary to the Convention, in particular,
for the prevention of fraud or evasion, of such taxes. The exchange of
information is not restricted by Article 1 (General Scope). Any
information received by a Contracting State shall be treated as secret
in the same manner as information obtained under the domestic laws of
that State. However, if the information is originally regarded as secret
in the transmitting State, it shall be disclosed only to persons or
authorities (including Courts and administrative bodies) involved in the
assessment, collection, or administration of, the enforcement or
prosecution in respect of or the determination of appeals in relation
to, the taxes which are the subject of the Convention. Such persons or
authorities shall use the information only for such purposes, but may
disclose the information in public Court proceedings or in judicial
decisions. The competent authorities shall, through consultation,
develop appropriate conditions, methods and techniques concerning the
matters in respect of which such exchange of information shall be made,
including, where appropriate, exchange of information regarding tax
avoidance.

2. The exchange of information or documents shall be
either on a routine basis or on request with reference to particular
cases, or otherwise. The competent authorities of the Contracting States
shall agree from time to time on the list of information or documents
which shall be furnished on a routine basis.

3. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation :

(a)
to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
(b)
to supply information which is not obtainable under the laws or in the
normal course of the administration of that or of the other Contracting
State;
(c) to supply information which would disclose any trade,
business, industrial, commercial, or professional secret or trade
process, or information the disclosure of which would be country to
public policy (ordre public).

The regulators, however, believed
that the statutes did not generally empower them to ask for financial
information of the type envisaged under FAT CA and that an amendment of
the statute was necessary. The Finance (No. 2) Act, 2015 amended the
Income-tax Act, 1961 by substituting new section 285BA for the earlier
section with effect from 1st April, 2015. This amendment also provides
for registration with the Government of India, of any reporting
institution, a provision that was absent in the old section 285BA.

Registration
Although
an FFI may be operating in an IGA Model 1 country like India and will
report through its host country Government, it is still required to
obtain the Global Intermediary Identification Number (GIIN) as an FFI.
Although India entered into an IGA in substance in early April 2014,
Indian regulators did not give the green signal to apply for GIIN in
April 2015 i.e. the cut-off date for getting the GIIN by June before the
FAT CA implementation date of 1st July, 2014. FFIs having multi-country
operations e.g. State Bank of India, however, applied for and obtained
GIIN in the first list. FFIs operating in India were treated as being
FAT CA compliant till 31st December, 2014 in terms of the IGA in
substance. On 30th December, 2014, both RBI and SEBI directed FFIs to
apply for and obtain GIIN by 1st January, 2015. The IRDA issued similar
instructions a little later. The stage was set for FFIs in India to
obtain GIIN.

Regulations

While section 285BA has been substituted with effect from  1st  april,  2015,  the  rules  and  the  data  structure were not notified. It is India’s intention to have a common data structure and simplified framework to implement not only FATCA under the IGA model 1 requirements but also to accommodate the reporting requirements under the  OECD’s Common reporting Standards (CRS).   india is one of the early implementation countries for CRS and is expecting to implement CRS from 1st january, 2016 to cover persons of other nationalities besides uS persons who are covered for reporting under FATCA.

In  late  2014,  the  mof  circulated  to  a  limited  group, the  draft  version  3  of  the  proposed  rules  for  CRS  and fatCa for comments by stakeholders. in early 2015, the draft version 5 was similarly circulated for comments. the suggestions that have come in are currently under evaluation  on  the  MOF  side.  It  is  understood  that  a reporting entity will obtain, apart from the 20-character GIIN   under   FATCA,   a   16-character   indian   reporting entity identification number. This will be in addition to any Permanent account number (PAN) that the entity may have but will capture the PAN (or TAN) as part of the 16-characters. this requirement is broadly similar to that in the UK, where FATCA implementation under model 1 IGA has progressed further. The FFI will have to file separate reports in respect of different activities e.g. a bank maintaining bank accounts and also providing demat accounts will report the information for bank accounts separately from that relating to custody accounts. the nature of the reporting requirements and complications will also necessitate issuance of detailed guidance by the MOF.

Meanings of specific terms
Certain   terms   have   been   defined   under   the  draft regulations.  Some  of  the  important  ones  are  briefly discussed here.

A financial institution (hereinafter referred to as ‘fi’) is defined to mean a custodial institution, a depository institution, an investment entity or a specified insurance company.  the terms ‘custodial institution’ and ‘depository institution’ are not directly defined. We have to derive  the meaning indirectly from usage in the definition of ‘financial account’.

A ‘financial account’ means an account (other than an excluded account) maintained by an FI and includes (i) a depository account; (ii) a custodial account (iii) in the case of an investment entity, any equity or debt interest in the FI; (iv) any equity or debit interest in an FI if such interest in the institution is set up to avoid reporting under (iii); and
(v) cash value insurance contract or an annuity contract (subject to certain exceptions).

For  this  purpose,  a  ‘depository  account’  includes  any commercial, savings, time or thrift account or an account that is evidenced by certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness or other similar instrument maintained by a FI in the ordinary course of banking or similar business. It also includes an account maintained by an insurance company pursuant to a guaranteed investment contract. In ordinary parlance, a ‘depository account’ relates to a normal bank account plus certificates of deposit (CDs), recurring deposits, etc. A ‘custodial account’ means an account, other than an insurance contract or an annuity contract, or the benefit of another person that holds one or more financial assets. In normal parlance, this would largely refer to demat accounts.  The national Securities depository Ltd. (NSDL) statement showing all of their investments listed at one place will give the readership an idea of what a ‘custodial account’ entails. These definitions are at slight variance with the commonly understood meaning of these terms in india.

the term ‘equity interest’ in an FI means,
(a)    in the case of a partnership, share in the capital or share in the profits of the partnership; and
(b)    in the case of a trust, any interest held by
–    Any person treated as a settlor or beneficiary of all or any portion of the trust; and
–    any other natural person exercising effective control over the trust.

For this purpose, it is immaterial whether the beneficiary has the direct or the indirect right to receive under a mandatory distribution or a discretionary distribution from the trust.

An ‘insurance contract’ means a  contract,  other  than an annuity contract, under which the issuer of the insurance contract agrees to pay an amount on the occurrence of a specified contingency involving mortality, morbidity, accident, liability or property. an insurance contract, therefore, includes both assurance contracts and insurance contracts. an ‘annuity contract’ means a contract under which the issuer of the contract agrees   to make a periodic payment where such is either wholly or in part linked to the life expectancy of one or more individuals. a ‘cash value insurance contract’ means an insurance contract that has a cash value but does not include indemnity reinsurance contracts entered into between two insurance companies. in this context, the cash value of an insurance contract means

(a)    Surrender value or the termination value of the contract without deducting any surrender or termination charges and before deduction of any outstanding loan against the policy; or
(b)    The amount that the policy holder can borrow against the policy

whichever is less.   the cash value will not include any amount payable on death of the life assured, refund of excess premiums, refund of premium (except in case    of annuity contracts), payment on account of injury or sickness in the case of insurance (as opposed to life assurance) contracts

An ‘excluded account’ means
(i)    A retirement or pension account where
•    The account is subject to regulation as a personal retirement account;
•    The account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;
•    Information reporting is required to the income-tax authorities with respect to such account;
•    Withdrawals are conditional upon reaching a specified retirement age, disability, death or penalties are applicable for withdrawals before such events;
•    The contributions to the account are limited to either $ 50,000 per annum or to $ one million through lifetime.

(ii)    An account which satisfies the following requirements viz.
•    The account is subject to regulations as a savings vehicle for purposes other than retirement or the account (other than a uS reportable account) is subject to regulations as an investment vehicle for purposes other than for retirement and is regularly traded on an established securities market;
•    The account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;
•    Withdrawals are conditional upon specific criteria (educational or medical benefits)  or  penalties  are applicable for withdrawals before such criteria are met;
•    The contributions to the account are limited to either $ 50,000 per annum or to $ one million through lifetime.

(iii)    An account under the Senior Citizens Savings Scheme 2004;

(iv)    A life insurance contract that will end before the insured reaches the age of 90 years (subject to certain conditions to be satisfied);

(v)    An account held by the estate of a deceased, if the documentation for the account includes a copy of the will of the deceased or a copy of the deceased’s death certificate;

(vi)    An account established in connection with any of the following

•    A court order or judgment;
•    A sale, exchange or lease of real or personal property, if the account is for the extent of down payment, earnest money, deposit to secure the obligation under the transaction, etc.
•        An FI’s obligation towards current or future taxes in respect of real property offered to secure any loan granted by the FI;

(vii)    In the case of an account other than a US reportable account, the account exists solely because a customer overpays on a credit card or other revolving credit facility and the overpayment is not immediately returned to the customer. Up to 31st december, 2015, there is a cap of $ 50,000 applicable for such overpayment.

Before any analysis of these definitions can be done in the India context, it is important  to note  the definition  of ‘non-reporting financial institution’. A ‘non-reporting financial institution’ means any FI that is, –

(a)    A Government entity, an international organisation or a central bank except where the fi has depository, custodial, specified insurance as part of its commercial activity;
(b)    Retirement funds of the Government, international organisation, central bank at (a) above;
(c)    A non-public fund of the armed forces, an employee state insurance fund, a gratuity fund or a provident fund;
(d)    An entity which is indian fi solely because of its direct equity or debt interest in the (a) to (c) above;
(e)    A qualified credit card issuer;
(f)    A FI that renders investment advice, manages portfolios for and acts on behalf or executes trades on behalf a customer for such purposes in the name of the customer with a fi other than a non- participating fi;
(g)    An exempt collective investment vehicle;
(h)    A trust set up under indian law to the extent that the trustee is a reporting fi and reports all information required to be reported in respect of financial accounts under the trust;
(i)    An FI with a local client base or with low value accounts or a local bank;
(j)    In case of any US reportable account, a controlled foreign corporation or sponsored investment entity or sponsored closely held investment vehicle.

An FI with a local client base is one that does not have  a place of business outside india and which also does not solicit customers or account holders outside india. It should not operate a website that indicates its offer of services to uS persons or to persons resident outside india. The test of residency to be applied here is that of tax residency.  The term ‘local bank’ will include cooperative credit societies. In this case also offering of account to US persons or to persons resident outside india, will be treated as a bar to being characterised as a local bank.

Due Diligence
The draft regulations provide for three categories of due diligence exercise in respect of client documentation under  FATCA for accounts of US persons viz.

(i)    new account due diligence (NADD);
(ii)    Pre-existing account due diligence (PADD)

•    For high value accounts i.e. where the balance is in excess of $ one million as at 30th june, 2014 or as at 31st december of any subsequent year;

•    For low value accounts i.e. where the balance is in excess of $ 50,000 but does not exceed US$ one  million  as  at  30th  june,  2014  or  as  at  31st december of any subsequent year.

The  methodology  of  the  due  diligence  differs  for  these although the documentation requirements are broadly similar. For NADD, the residency certificate issued by the authorities overseas forms the primary evidence of tax residency. For Padd, the address on record should be treated as being the indicator of the tax residency. If the FI does not rely on current mailing address, it must do an electronic search of its records for identification   of tax residency outside india, or a place of birth in the US, or a current mailing or residence address (including post office box) outside India, or one or more telephone numbers outside india and no telephone number in india, or standing instructions to transfer funds to an account maintained in a jurisdiction outside india, or power of attorney given to a person outside india, or ‘hold mail’ or ‘care of’ address outside india. all of these indicia may be overridden by specific declarations from the customer. The FI will not be entitled to rely on the customer’s self- declaration, if the fi knows or has reason to know that the self-certification or documentation is incorrect. An example of this is where an account holder who is ostensibly a resident of india informs the fi’s representative that he (the account holder) is uS ‘green card’ holder and has to  visit  the  US  to  retain  his  green  card   this  is  a  case where the fi has to ignore the local address in india and treat the account holder s being a US person. For high value accounts, enhanced due diligence is required to be done through the relationship manager meeting with the customer. Where any indicia show the account holder to be resident of more than one jurisdiction, the FI should treat the customer as being resident of each of the jurisdictions i.e. the FI shall not apply tie breaker tests.   The  Padd  exercise  must  be  completed  by  30th june, 2015 for US reportable accounts and by 30th jun, 2016 for other accounts.  For US reportable accounts, an FI is not required to do Padd (but may elect to do so) in respect of accounts where the depository account or the cash value of the insurance contract is up to $ 50,000 as at 31st december, 2014.  For entity accounts (as opposed to individual accounts), the threshold cut off is $ 250,000 but the measurement date is 30th june, 20141.  Once an account is identified as a US reportable account, it shall be continued to be treated in such a manner unless the indicia are appropriately cured at a later stage.

Reporting Deadlines
The draft regulations provide for reporting deadline of 31st july, 2015 for reporting to be done in respect for 2014 and as 31st may in later years.  This reporting is, in terms of the model 1 IGA, to be done through the MOF.

Next Steps and Conclusion
The  next  steps,  from  the  side  of  the  Government,  are signing of the IGA, issuance of the final regulations, notifying the data structure and setting up the infrastructure for receiving the reports. For the industry, the work has already begun with nadd and Padd. interim work on development of reporting systems is in progress but the UAT stages are held up for want of the final data structure from the Government side. Over the next few years, the fis will invest a lot of time and capital in the preparedness for financial transparency in respect of customer accounts in line with the expectations of the G20 nations, as we move beyond FATCA to the OECD’s Common reporting Standards (CRS).

The CA Course – Need for a relook

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Every new legislation, passed in this country in recent years, lays emphasis on the role of Chartered Accountants in the business world, and the responsibilities which Society expects of them to discharge. An example of this thinking of the lawmakers is the Companies Act, 2013, where the auditor is required to act as an expert, authenticating the correctness of the financial statements, a watchdog guarding the interests of the stakeholders and a whistleblower intimating the concerned authorities of a fraud. With all these onerous responsibilities, is a person who passes the final exam conducted by the Institute of Chartered Accountants of India (ICAI) equipped to deliver what Society expects of him? I understand that an overhaul/modification of the syllabus of the CA course is being contemplated by the ICAI. There would be a number of academicians who would be more competent to deal with this revision, yet I thought it necessary to bring to the fore some of the inadequacies that have crept into the course over a period of time.

Following the principle of “catch them young”, a student is able to harbour ambitions of joining this premier course immediately after clearing the 12th standard. At the time that he passes the higher secondary education examination a student is barely 18, and is therefore as mature as one can be at that age. He can then appear for the entrance examination and having cleared it, commence articleship to become a chartered accountant. Statistics will show that the entry point to the course is reasonably easy. Either on account of the entrance course content, or students having perfected the technique in that regard, students find it easy to pass this examination, but find the final examination significantly harder. Thus for this course, the entry point seems to be easier, while the exit is difficult. This unnecessarily permits entry to a large number of students, who then flounder when they reach the final frontier. We therefore hear a number of stories of students being frustrated, with the qualification eluding them.

Further, if after passing an examination of a particular standard which is the IPCC, a student is entitled to undertake articleship, one does not understand the logic of permitting one to start the course having cleared only one group. Once this happens, a student who is pursuing the graduate course as well as the CA course, falls between two stools creating unnecessary pressure in his career.

The initial concept of the course was that the course content would be supplemented by the on hands training that the student received while undergoing articleship. This was very true nearly 3 decades ago. Over a period of time the complexities of legislation, the variety of services that professional renders, and the consequent specialisation have limited the benefit that the training imparts. Undoubtedly it is of extreme significance, but in view of the fact that a Chartered Accountant will practice or work only in certain areas, there are gaps in the training that need to be filled in. Coaching classes are certainly not a substitute. Undoubtedly, they may assist the student being able to pass the examination easily, but they are not able to aid acquisition of knowledge. Given the fact that students from all state of society pursue this course, some degree of classroom support will have to be thought of by the Institute.

Coming to the course content itself, it appears that even the course requires significant modification. Firstly, considering the era of specialisation, students should be able to select some specific subjects. Further, some new subjects areas need to be looked at. Over the last two decades in the financial world, there have been significant advances and new products in the category of derivatives have been developed. To understand these models, quantitative analysis has to be factored into the course. Very rarely would one find a fund manager who is a Chartered Accountant. There are opportunities but our students need to be equipped with the requisite knowledge to exploit them. A significant population of professions practice in the Direct tax and Indirect tax field. Even those who join industry require this knowledge. One finds that in this regard, while the subjects of taxation undoubtedly form part of the course, the principles of interpretation are not given adequate importance. That is precisely why, most of our professional colleagues tend to interpret tax laws and regulatory laws in the same manner. The advice that they tender on the basis of such interpretation is often likely to lead the clients into a problem and consequently diminish confidence in the profession.

The profession has grown from being a backroom profession, to one where Chartered Accountants have to present themselves effectively. Communication skills were never the strength of our profession. This problem has been addressed to some extent by creating modules which the student has to undergo during his period of article training. However, there is still a long way to go in this aspect as well.

Finally, in regard to manner of testing the ability there needs to be a change. One finds that increasingly the test that the student undertakes is a memory test. Application of mind and interpretation skills are not tested to the extent necessary. I would believe that at least in regard to the core subjects, the manner of examination needs to change. In that light, in certain subjects one may even look at an open book examination.

I am deeply conscious that, those engaged in designing the curriculum at the ICAI would be well equipped to deal with some of the issues that are raised for they are wellknown. One also appreciates that one is dealing with an examination which is an all India examination and therefore to design a curriculum to suit all requirements is definitely a challenge. However, if one is considering a change, one should bear in mind all these aspects.

There is no denying the fact that the profession has a significantly important role to play. Those who pass the examination and thereafter enrol themselves as members of this august institution, deserve their place in the sun. It is necessary that the course they undertake equips them fully to meet the challenges that they would face.

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LEARN TO SLOW DOWN

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“I have no time to be in a hurry”
– Thoreau

It was the summer of 1978. We were on a trek in the Kishtwar region of Kashmir, a truly beautiful area with its magnificent scenery of sky reaching Snow Mountains, lush green majestic tall trees, lovely green meadows, and icy cold mountain streams fed by the melting snows. It was heavenly. My friend, R, and I, along with our daughters, had joined a government-organised trekking programme. The remaining participants were around the age of our daughters. The unhurried time we spent walking on those treks was one of the finest in my 80 years. The trek lasted about a fortnight. On one of the days the scenery was different. We were walking through a dry, desert-like terrain. The streams, instead of carrying crystal clear cool waters, were muddy and smelled of sulphur. The reason was not far to seek. The mountain, whose base we were crossing, was a volcano – a live one smoking at the top. We were crossing the path where lava must be flowing. It was one of those very unusual natural phenomenons we experienced.

The next day was a rest day. The next batch of trekkers arrived passing through the volcanic area. They arrived in record time. When we asked them whether they saw the smoke coming out from the volcano, they had a strange look. “What volcano?” “What smoke?” They did not see a thing.

The point is when in haste, we miss our surroundings. It is better to slow down and enjoy this journey of life, than to speed through being blind to the beauty around. That is why R.L. Stevenson said:

“It is better to travel than to arrive”

Enjoy the life while there is still time. Tomorrow may not arrive!

But first, we have to understand what we mean by slowing down. It is not becoming lazy, sleeping for 12 hours a day, not being on time at your office or not completing the work allotted to you. It means cutting down on needless activity, saving on time wasted by excessive hurry, improving on the quality of one’s work, and enjoying the work instead of considering it a drudgery. It is not being burnt out at an early age.

The question we have constantly to ask ourselves is ‘Why am I in a hurry! Is it a matter of life and death?’

I am reminded of a story of an American and a Chinese travelling in a car. The American guy is at the wheel. He manages to cross a unmanned railway crossing. An express train missed hitting them by a few seconds. On crossing, the American says to his Chinese friend, “Great, we have saved two minutes!” The Chinese, with all his eastern wisdom, asks, “My friend now tell me what we shall do with these two minutes?”

Most of us are no different from the American, risking our lives, speeding recklessly just to save two minutes, which we do not know what to do with. This is how we waste our lives, ruining our health and peace of mind rushing through life at break neck speed to make more money, get more fame, which in the end mean nothing. Whether you amass a million or 10 million, when you go, you leave behind everything. Perhaps leaving behind 10 million would be more painful! Let us remember that even Emperor Alexander left the world empty-handed.

I will ask a question. You need an operation. You are recommended two surgeons: one who is fast and performs the surgery in a short time but his success rate is not good, and another who is slow but his success rate is better. The question is what does one want from a surgeon: speed or safety? The choice is obvious and clear – safety over speed. If this be so, then this should apply to all our actions.

It is for us professionals to learn to have a work life balance take on only that much work that we can handle efficiently without hurrying our work, avoiding situations which bring stress in our lives which we also transmit to our families. We must have time to do something more meaningful, and leave our footprints on the sands of time. Let us learn to slow down. Let us not rush through life. Let us once in a while stop to smell the flowers of the way side. Let us remember those beautiful lines:

So let us all learn the art of “how to hasten slowly”.

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Press Note No. 3 (2015 Series) dated March 2, 2015

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Review of Foreign Direct Investment (FDI ) Policy on Insurance Sector – amendment to ‘Consolidated FDI Policy Circular of 2014’

With immediate effect, Paragraph 6.2.17.7 of the Consolidated FDI Policy Circular of 2014 dated April 17, 2014 has been amended as follows: –



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DIPP, Ministry of Commerce & Industry, Government of India

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Clarification of Press Note No. 10 of 2014

DIPP has issued the following clarifications, in FAQ form, with regards to Press Note No. 10 of 2014 pertaining to FDI in construction & development projects. The clarifications are as under: –


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A. P. (DIR Series) Circular No. 83 dated March 11, 2015

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Notification No. FEMA.335/2015-RB dated February 4, 2015

Acquisition/transfer of immovable property – Prohibition on citizens of certain countries

Presently, citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan are not permitted acquire or transfer immovable property in India, other than lease not exceeding five years, without the prior permission of RBI.

This circular has expanded the list by including therein, from February 25, 2015, citizens of Hong Kong & Macau since they are Special Administrative Regions of China.

Hence, now citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau are not permitted acquire or transfer immovable property in India, other than lease not exceeding five years, without the prior permission of RBI.

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A. P. (DIR Series) Circular No. 81 dated March 3, 2015

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Trade Credits for Imports into India – Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till March 31, 2015: –

The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.

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[2015-TIOL-632-HC-KERALA-ST] Muthoot Finance Ltd. vs. Union of India, Commissioner of Central Excise Customs and Service Tax.

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The right of appeal that is vested is to be governed by the law prevailing on the date of institution of the suit or proceeding and not by the law that prevailed on the date of its decision or on the date of filing of the appeal.

Facts:
The demand of service tax was confirmed against the petitioner who could prefer an appeal before the CESTAT ; however a pre-deposit of 7.5% of the tax amount is required to be made in view of the amended provisions effective from 06-08-2014.

Held:
The suit commenced in 2012 therefore the appeal to be filed would be governed by the statutory provisions as they stood prior to 06-08-2014. The Appellate Tribunal shall consider the application for waiver of pre-deposit, stay of recovery and thereafter proceed to hear the application in due course.

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