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Year: 2017

3 Section 263 – Revision – two possible views – the issue is debatable –Revision is not permissible

CIT vs. Yes Bank Ltd. [ Income tax Appeal
no. 599 of 2015 dated : 01/08/2017 (Bombay High Court)].

 [Yes Bank Ltd. vs. CIT [A.Y-2007-08  Mum. ITAT ]

During the FY:2005-06, the assessee had
incurred an aggregate expenditure of Rs.16,39,10,000/- on Initial Public
Offering (“IPO”) of equity shares made. The Issue closed on June 12, 2005. It
has claimed a deduction u/s. 35D for Rs.3,27,82,000/- being one-fifth of the
total expenses incurred. This is the second year of claim for deduction.

The assessee submits that section 35D grants
a deduction / amortisation in respect of expenses incurred by a company in
connection with the issue, for public subscription, of shares or debentures of
a company over a period of five years. Since the foregoing expenses on IPO are
in connection with the issue of shares for public subscription, one fifth of
the total amount thereof is eligible for deduction u/s. 35D.

The A.O had made an inquiry while passing
the assessment order. In return of income, the assessee had made the following
note. Deduction of Rs.3,27,82,000/- claimed u/s. 35D of the Act.

The Assessee submits that the A.O had before
passing the assessment order, called for explanation from the assessee. The
explanation was given for claiming deduction u/s. 35D of the Act, in respect of
expenses incurred by the company in connection with the issue of public
subscription of the shares and debentures of the company for a period of 5
years.

According to the Revenue, the order passed
by the A.O granting benefit u/s. 35D of the Act was erroneous and the same was
prejudicial to the interest of the Revenue. As such, ingredients of section 263
of the Act were attracted.

The assessee submitted that it is an
industrial undertaking for the purpose of section 35D of the Act and relied
upon the judgement of this Court in a case of the CIT vs. Emirates
Commercial Bank Ltd. 262 ITR 55, wherein this Court has held that the
banks are industrial undertakings and eligible for deductions u/s. 32A.

Also in HSBC Securities and Capital
Markets (India) Pvt. Ltd. (1384/M/2000), where the Hon’ble Mumbai ITAT has
held that even a share broking entity is an “industrial undertaking” for the
purpose of section 35D.

Therefore, the claim of assessee for
deduction u/s. 35D is in accordance with law and is allowable. The Tribunal set
aside the order of the Commissioner passed u/s. 263 of the Act.

The Hon. High Court find that the Tribunal
has considered the decision of the Apex Court in the case of Malabar
Industrial Co. Ltd. (supra) and held that when two possible views are
available and the issue is debatable, then, initiation of revision is not
permissible u/s. 263 of the Act.

It appears that the A.O sought clarification
from the assessee about the correctness of the amount of one fifth of the total
expenses incurred u/s. 35D of the Act. The assessee under letter dated
26.10.2004, gave specific explanation on the issue raised by the A.O and
thereafter, the assessment order was passed. Only because the Commissioner
thought that other view is a better view, would not enable CIT to exercise
power u/s. 263 of the Act. In the light of the above, the appeal was dismissed.
_

2 Section 153A – Search and seizure – Assessment would be limited to the incriminating evidence found during the search

CIT vs. SKS Ispat & Power Limited.
[Income tax Appeal no. 1874 of 2014 dated: 12/07/2017 (Bombay High Court)].

[Affirmed SKS Ispat & Power Limited
vs. DCIT . [ITA No. 8746 & 8747/MUM/2010 ; Bench : E ; dated 07/05/2014 ;
A.Y-2002-03 & 2003-04.Mum. ITAT ]

The Assessee raised a legal issue before
ITAT relating to the sustainability of additions which are not supported by the
seized or incriminating material u/s. 153A of the Act.

There was a search and seizure action on the
assessee in the case of SKS Ispat Ltd. Group, which is engaged in the business
of manufacturing and trading of steel products. The assessee filed the return
of income as per the provisions of the section 139(1) of the Act and the
assessments were completed u/s. 143(3) r.w.s. 153A of the Act. Thus, the
assessments for the said AYs have reached finality. In all these four
assessments, AO made a common addition under the heads (i) unexplained sundry
creditors and (ii) share application money. Before the Tribunal, it is the
claim of the assessee that the said additions were made without the assistance
of any incriminating material gathered during the search and seizure operation.

In this regard, the Assessee submitted that
on para 7 of the assessment order and mentioned that the basis for the addition
is the financial statements annexed with the return of income. Otherwise, there
is no seized material in possession of the AO which is incriminating
information that suggests the necessity of making the said additions validly.
Similarly, para 8 of the said order of the AO, Assessee demonstrated that no
seized material is available in support of making the said additions.

The Tribunal observed that, undisputedly,
the impugned quantum additions are made merely based on the entries in the
accounted books and certainly not based on either the unaccounted books of
accounts of the assessee or books not produced to the AO earlier or the
incriminating material gathered by the investigation wing of the revenue.

The Tribunal held that the AO was not justified
in making the addition on account of unaccounted sundry creditors (purchases)
and unexplained share of the money u/s. 153A of the Act, as there was no
incriminating material discovered in the search.

Before the High Court the Revenue contented,
the judgements relied by the Tribunal while limiting the scope of inquiry u/s.
153A of the Act to the extent of discovery of incriminating material during
search only is improper. The said judgements were in respect of assessments
which had taken place u/s. 143(3) of the Act. In the present case, the
assessment has taken place u/s. 143(1) of the Act. The distinguishing feature
in sections 143(1) and 143(3) has not been considered by the Tribunal in an
assessment u/s. 143(3) of the Act a long drawn inquiry is contemplated. It
would also amount to examination of evidence. However, inquiry u/s. 143 (1) of
the Act is limited on the basis of return filed. In view of that, the
judgements  relied on would not be
applicable.

The Assessee submits that this Court has time
and again held that assessment u/s. 153A of the Act would be limited to the
extent of any incriminating articles, incriminating evidence found during the
search. Even in case of The Commissioner of Income Tax vs. Gurinder Singh
Bawa decided by this Court, the assessment was u/s. 143(1) of the Act.
The Assessee relied on the judgment of this Court in The Commissioner of
Income Tax vs. Gurinder Singh Bawa reported in [2016] 386 ITR 483
(Bom) and another Judgment of this Court in the case of The
Commissioner of Income Tax vs. Warehousing Corporation & Anr. reported
in [2016] 374 ITR 645 (Bom).

The Hon. High Court observed that on perusal
of Section 153A of the Act, it is manifest that it does not make any
distinction between assessment conducted u/s. 143(1) and 143(3). This Court had
occasion to consider the scope of section 153A of the Act in case of The
Commissioner of Income Tax vs. Gurinder Singh Bawa [2016] 386 ITR 483 (Bom) and
in the case of The Commissioner of Income Tax vs. Continental Warehousing
Corporation & Anr. reported in [2016] 374 ITR 645 (Bom). It
has been observed that section 153A cannot be a tool to have a second inning of
assessment either to the Revenue or the Assessee. Even in case of The
Commissioner of Income Tax vs. Gurinder Singh Bawa (referred to supra)
the assessment was u/s. 143(1) of the Act and the Court held that the scope of
assessment after search u/s. 153A would be limited to the incriminating
evidence found during the search and no further. In the said Judgment, the
Judgement of this Court in The Commissioner of Income Tax vs. Continental
Warehousing Corporation & Anr. (referred to supra) has been
followed. Considering the authoritative pronouncements of this Court in above
referred cases, one of which is also with regard to assessment u/s. 143(1), the
issue is no longer res integral and stands concluded in the above
referred Judgements. In the above view, the Appeals was dismissed.

1 Section 45 – Capital Gain – assessee not engaged in the business of dealing in land – the profit arising on its sale is assessable as Capital gain only

[Affirmed The Sonawala Company Pvt. Ltd.
vs. ACIT. [ITA No. 4004/MUM/2010 ; Bench : F ; dated 27/08/2014; A Y: 2007-
2008. Mum. ITAT]

CIT vs.The Sonawala Company Pvt. Ltd.
[Income tax Appeal no. 385 of 2015 dated : 11/07/2017 (Bombay High Court)].

The assessee had gross income received as
hoarding charges/compensation consisted of hoarding charges, lease rent,
parking charges etc.

The assessee had sold a plot located in Pune
for a consideration of Rs.2.23 crore. The assessee had acquired the lease hold
rights on it through an agreement dated 11.12.1941. The assessee declared the
profit arising on sale of above said plot as long term capital gain and claimed
deduction u/s. 54EC of the Act. The AO noticed that the assessee had proposed
to construct flat on the above said land about 20 years back and had also
obtained advances from the parties.

The assessee had also prepared plans for construction
of residential premises and also obtained sanction from Pune Municipal
Corporation. However, the project was abandoned and the advances received from
parties excepting a sum of Rs.73,200/- were returned back.

The AO took the view that the assessee had
converted the above said plot as “Business asset” and accordingly
assessed the gain arising on sale of land as business income. Consequently, he
rejected the claim for deduction u/s. 54EC of the Act.  

The Revenue submits that though the open
space was acquired in the year 1941 by the Assessee, it was only in the year
2004, the construction permission was obtained for developing the said flat and
the same was assigned along with construction rights. As such the same will
have to be constituted as business income and not long term capital gain.

The assessee submitted that even a solitary
transaction can amount to business transaction. The attending circumstances are
writ large to come to the conclusion that the sale of a flat along with
construction permission of the project is a business income. The Hon’ble Punjab
& Haryana High Court had considered an identical issue in the case of CIT
vs. Raj Bricks Industry (2010)(322 ITR 625).

The Tribunal observed that in the instant
case, the assessee has been holding the leasehold right in the land since 1941.
It has sold the same after holding it for about 65 years.

About 20 years back, the assessee had
attempted to develop the same, but it was prevented by the order of the Hon’ble
Bombay High Court. Hence, the assessee could not develop the same.
Subsequently, the assessee has obtained permission to construct a residential
premises. All these sequences would show that the assessee has continued to
hold the land as its capital asset. Under these circumstances, the Tribunal
held that the CIT(A) was justified in holding that the gain arising on sale of
land should be assessed as “Long term Capital gain” only.

Consequently it was held that the assessee
can claim deduction u/s. 54EC of the Act, subject to the fulfilment of
conditions prescribed in that section.

The Hon. High Court held that totality of
the facts as were discussed by the CIT (A) and the Tribunal would show that no
error has been committed in treating the income from the sale of land as long term
capital gain.

 In view of that, no substantial questions of
law arise. The appeal as such is dismissed.

 

18 TDS – Karta – HUF – A. Y. 2012-2013 – Erroneous of PAN of Karta – HUF is entitled to benefit of TDS – Revenue has discretion to grant benefit to family

Naresh Bhavani Shah (HUF) vs. CIT; 396 ITR
589 (Guj):

The assessee was a HUF regularly assessed to
tax under the provisions of Income-tax Act, 1961. The funds belonging to the
assessee were invested in RBI taxable bonds. This was, however, done in the
name of N, the karta of the family. Inadvertently, such investment was made in
his individual name and he was not described as the karta of the family. The
PAN given to the RBI also was that of N in his personal capacity and not that
of the family. Therefore, the RBI while deducting tax at source on the interest
income of such bonds issued certificates of tax deducted at source in the name
of N carrying his permanent account number. In the return of income for the A.
Y. 2012-13, the assessee included the interest from the said RBI bonds and also
claimed Rs. 5,42,800/- TDS on such interest. N, in his individual capacity, had
not included the said interest income and also had not claimed the TDS on the
same. The assessee wrote to the Assessing Officer and pointed out that the
amount of Rs. 5,42,800/- represented tax deducted at source on the income
offered by the assessee and that the benefit of such TDS should be granted to
the assessee, particularly when the karta had no claim on such benefit. The
Assessing Officer assessed the interest income, but refused to give credit of
the TDS. The assessee’s revision petition was rejected.

The Gujarat High Court allowed the writ
petition filed by the assessee and held as under:

“i)   There
was no dearth of power with the Department to grant credit of tax deducted at
source in a genuine case. In the present case, many years had passed since the
event. The facts were not seriously in dispute. The assessee had offered the
entire income to tax. The Depatrment had also accepted such declaration and
taxed the assessee.

ii)   In view of such special facts and circumstances,
the Department    had   to 
give  credit   of 
the  sum     of Rs. 5,42,800/- to the assessee, deducted
by way of tax at source, upon N filing an affidavit before the Department that
the sum invested by the RBI did not belong to him, the income was also not his
and that he had not claimed any credit of the tax deducted at source on such
income for the said assessment year.”

17 Section 245D – Settlement Commission – Settlement of cases – Section 245D – A. Y. 2000-01 to 2006-07 – Order of Settlement Commission after considering facts – Writ by Revenue – No evidence that conclusions of Settlement Commission were perverse – Order valid

CIT vs. Radico Khaitan Ltd.; 396 ITR 644
(Del):

The assessee company R was engaged in the
business of manufacturing and marketing of Indian made foreign liquor, country
liquor, etc. It also generated power for its manufacturing and bottling
plants. R was subjected to a search and seizure operation u/s. 132(1) of the
Income-tax Act, 1961, in its business premises. Search was resorted to also in
the residential premises of its directors, UPDA and at the residence of M,
Secretary General of UPDA. Also, a survey u/s. 133A was conducted at the
business premises of S, one of the core members of the “managing committee” of
UPDA. Many incriminating documents pertaining to the assessee were found and
seized from these premises. Statements of various persons including M were
recorded u/s. 132(4) and 133A of the Act. After collecting all material, the
Assessing Officer issued notices u/s. 153A for A. Ys. 2000-01 to 2006-07
requiring the assessee to file returns. R filed its returns on September 29,
2007 offering an amount of Rs. 4.5 crore for taxation. Thereafter, R filed an
application u/s. 245C of the Act before the Settlement Commission covering all
assessment years and declared additional income for the relevant period to the
extent of Rs. 23 crore. Revenue filed its report under rule 9 of the Income-tax
Settlement Commission Rules, 1987, alleging that concealment of income by the
assessee was Rs. 159,82,92,966/- under various heads. This figure was revised
to Rs. 177,84,16,966/- by a supplementary report dated February 13, 2008. After
hearing the parties and considering the material, the Commission settled the
concealed income of the assessee for all the block years at Rs. 30 crore.

Revenue filed a writ petition and challenged
the order of the Settlement Commission. The Delhi High Court dismissed the writ
petition and held as under:

“i)   The
main thrust of the Revenue’s grievance in these proceedings was with respect to
the amounts said to have been clandestinely given to UPDA as the assessee’s
contribution towards “slush fund” to be used as pay offs to politicians and
public officers in return for favourable treatment. The linkage between the
material seized from the assessee’s premises and those from UPDA’s premises as
well as the statement of M was not established through any objective material.

ii)   It
was now a settled law that block assessments were concerned with fresh material
and fresh documents, which emerged in the course of search and seizure
proceedings; the Revenue had no authority to delve into material that was
already before it and the regular assessments were made having the deposition.
That the assessee’s expenditure claim was bogus, or it had under-reported
income and that it resorted to over invoicing and diversion of funds into the
funds allegedly maintained by UPDA, was not established.

iii)   The
findings of the Commission therefore could not be faulted as contrary to law.
As far as suppression of profits for various financial years, alleged by the
Revenue, the Commission was of the opinion that the documents relied upon were
work estimates and projections that revealed tentative profitability in respect
of the assessee’s activities towards sale of country liquor i.e., that the documents
did not reflect the actual figures. The alleged bogus expenditure to the tune
of Rs. 9,11,41,457/- was claimed in the original assessments as payments made
to F and R. The Revenue alleged that F was involved in entry operations and
that the expenditure claimed by the assessee was bogus and entirely fictitious.
While the expenditure claimed by itself might be suspect, the Revenue had a
further obligation to investigate further having regard to the fact that the
agreement between the assessee and R was disclosed earlier.

The  mere statement  of 
one  employee  of  R
would not have discredited the agreement itself. The
lack of  any particulars to discredit the
services and expenditure claimed by the assessee, justified the
Commission’s   conclusion    that  
the   addition    of  Rs. 9.11 crore demanded by the Revenue or arguments on the basis that the
assessee did not disclose such amount, was not warranted.

iv)  The
Commission’s findings were not contrary to law or unreasonable. The order of the
Settlement Commission was valid.”

16 Section 9(1)(vii) and art 12 of DTAA between India and US – Non-resident – Income deemed to accrue and arise in India – A. Y. 2004-05 – (i) Agreement between resident and non-resident – Non-resident to procure designs and drawings from another non-resident – Designs and drawings supplied and payment received – Transaction one of sale – No royalty accrued to non-resident – tax not deductible at source; (ii) Indian company subsidiary of American company – Expenses incurred on behalf of Indian company by American company – Reimbursement of expenses – No payment for technical services – Amount not assessable u/s. 9 – Tax not deductible at source

CIT vs. Creative Infocity Ltd.; 397 ITR
165(Guj):

The assessee company, a subsidiary company
of C of the USA entered into joint venture undertaking with the Government of
Gujarat for developing and construction of an information technology park at
Gandhinagar, a project awarded to it by the Government of Gujarat. While
carrying out the construction of the project, the assessee entered into a
contract agreement with two non-resident companies, viz., N, and C, for
providing designs and drawings and for marketing and selling services
respectively. During the course of verification of the foreign remittances to
these entities, the Assessing Officer observed from the agreement entered into
between the assessee and N that the services provided by the non-resident
company were rendered towards providing of architectural, structural
engineering designs and drawings services, as mentioned in clause 9 of the
contract. As regards the payments made to C, the Assessing Officer observed
that the payments were made for providing services related to marketing and
selling, projects office administration expenses and promotional expenses and
to design charges which were paid to the employees of C, towards their salary,
travel expenses, etc. Therefore, the Assessing Officer was of the
opinion that since the payments made towards the services rendered by the
foreign companies were taxable as defined in section 9(1)(vii) of the
Income-tax Act, 1961, as well as article 12 of the DTAA between India and US,
the assessee was required to deduct tax at source u/s. 195 of the Act.
Therefore, since the assessee made the payment to the foreign companies without
deducting tax at source, the Assessing Officer passed an order u/s. 201(1) and
(1A) read with section 195 of the Act raising demands. The Commissioner
(Appeals) and the Tribunal deleted the additions/demands.

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

“i)   The
agreement with N was to procure the designs and drawings from architects. In
the agreement, only the assessee and N were the signatories and not the
architects. Thus, N first procured the plans and designs from the architects on
making payment of full consideration and thereafter supplied it to the assessee
as an outright sale. There were concurrent findings by both the Commissioner
(Appeals) as well as the Tribunal holding that (a) the assessee had purchased
drawings from N and not from the architects; (b) that the payment made by the
assessee towards supply of designs and drawings to N was for an outright
purchase and therefore, not taxable as royalty. The payment made towards supply
of designs and drawings to a non-resident was outright purchase and therefore,
not taxable as royalty u/s. 9(1) of the Act.

ii)   The
agreement was for reimbursement of expenses incurred by C for marketing. The
expenses incurred by C were fully supported by the vouchers and certified by
the certified public accountant of the USA as well as the chartered accountant
of India certifying that the expenses were in fact reimbursement. There were
concurrent findings by the Commissioner (Appeals) as well as the Tribunal that
the amount was reimbursed and could not be said to be any amount paid to C for
rendering any service to the assessee. The findings of fact recorded by both
the lower appellate authorities were on appreciation of facts and considering
the material on record, more particularly the agreement entered into between
the assessee and C. It was not alleged that the findings of fact recorded by
lower authorities were perverse or contrary to the evidence on record. C had no
business activity or permanent establishment in India. It was neither working
through any agent nor had any branch in India. Therefore, the provisions of
section 9(1)(vi)(vii) would not have any application as the amount paid was
neither royalty nor fees for technical services.“

15 Section 271(1)(c) – Penalty – Concealment of income – A. Y. 2006-07 – Notice for levy of penalty – Notice should state specific grounds for levy of penalty – Printed form not sufficient

Muninga Reddy vs. ACIT; 396 ITR 398
(Karn)

 For the A. Y. 2006-07, after completing the
assessment, the Assessing Officer imposed penalty of Rs. 1,78,35,511/- for
concealment of income u/s. 271(1)(c) of the Income-tax Act, 1961. The Tribunal
confirmed the penalty.

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

“i)   In
order to levy penalty, the notice would have to specifically state the ground
mentioned in section 271(1)(c) of the Income-tax Act, 1961, namely whether it
is for concealment of income or furnishing incorrect particulars of income that
the penalty proceedings are being initiated. Sending a printed form with the
grounds mentioned in section 271(1)(c) of the Act would not satisfy the
requirement of law. The assessee should know the ground which he has to meet
specifically, otherwise the principles of natural justice would be violated and
consequently, no penalty could be imposed on the assessee if there is no
specific ground mentioned in the notice.

ii)   There
was a printed notice and no specific ground was mentioned, which may show that
the penalty could be imposed on the particular ground for which the notice was
issued. Hence, the notice and the consequent levy of penalty were not valid.”

14 Sections 194A, 194H, 201(1A), 276B and 279(1), and section 482 of Cr PC 1973 – TDS – Failure to deposit – Assessee depositing tax with interest once mistake of its accountant revealed during audit – Reasonable cause – Prosecution initiated three years after such payment – Not permissible

Sonali Auto Pvt. Ltd. vs. State of Bihar
(Patna); 396 ITR 636 (Patna):

A prosecution u/s. 276B of the Income-tax
Act, 1961 was initiated against the assessee on the basis of a complaint filed
by the Deputy Commissioner in accordance with the sanction granted by the
Commissioner u/s. 279(1) of the Act, for failure to deposit the tax at source
for the financial year 2009-10. The complaint also stated that there was a
delay of 481 days without any reasonable cause. The Special Judge, Economic
Offences, took cognisance against the assessee company and its three directors
for the offence u/s. 276B.

The assessee filed writ petition u/s. 482 of
Cr PC 1973 and challenged the prosecution proceedings. The assessee submitted
that due to oversight on the part of its accountant, it could not deposit the
tax deducted at source within the specified time limit, that once the mistake
was found during the audit, the amount had been deposited along with the
interest due u/s. 201(1A) for the delayed payment of tax deducted at source and
that the complaint had been filed after a lapse of three years from the date of
payment of dues. The Patna High Court allowed the petition and held as under:

 “i)   Reasonable
cause would mean a cause which prevents a reasonable person of ordinary
prudence acting under normal circumstances, without negligence or inaction or
want of bonafides. The assessee had been able to prove reasonable cause for not
depositing the amount of tax deducted at source within the prescribed time
limit. Oversight on the part of the accountant, who was appointed to deal with
accounts and tax matters, could be presumed to be a reasonable cause for not
depositing the amount of tax deducted at source within the prescribed time
limit. The assessee immediately after noticing the defects by its auditors had
deposited the amount along with interest as required u/s. 201(1A) for the
delayed payment in 2010 itself.

ii)   Prosecution
had been launched against the assessee after a lapse of about three years from
the date of deposit of the due amount of tax deducted at source along with
interest and that was contrary to the instruction, F. No. 255/339/79-IT(Inv),
dated May 28, 1980 issued by CBDT in that regard. Moreover, according to the
provisions of section 278AA, no person for any failure referred to u/s. 278B
should be punished under the provisions if he had proved that there was a
reasonable cause for such failure.

iii)   Continuance
of criminal proceedings u/s. 276B of the Act, against the assessee was mere
harassment and abuse of process of court. Accordingly, the order passed by the
special judge, Economic Offences, taking cognisance of the offence u/s. 276B of
the Act, along with the entire criminal proceedings against the assessee were
quashed.”

13 Section 206C(1C) – A. Ys. 2005-06 to 2007-08 – Scope of section 206C(1C) – Collection of tax at source from agents who collect toll etc. – No obligation to collect tax at source from agent who collected octroi

CIT(TDS) vs. Commissioner, Akola
Municipal Corporation; 397 ITR 226 (Bom):

The respondent assessee is the Municipal
Corporation for the town Akola. For the A. Ys. 2005-06 to 2007-08, the
assesssee had entered into a contract called agency agreement, by virtue of
which the assessee appointed an agent to provide services of collecting octroi
on its behalf. This octroi was collected at the rates fixed by the assessee,
for which the necessary receipts are also issued in the name of the assessee.
The entire amount collected by the agent is remitted to the assessee and the
agent is entitled to a commission depending upon the quantum of octroi
collected during the year. The ITO(TCS) was of the view that that the assessee
was obliged to collect tax at source u/s. 206C(1C) of the Income-tax Act, 1961
in respect of octroi collection received from the agent. Since the assessee had
not collected and deposited such tax, the ITO(TCS) passed order u/s. 206C and
raised a demand of Rs. 1.09 crore for failure to collect tax at source and
interest of Rs. 15.96 lakh on the same. The Tribunal cancelled the demand.

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

“i)   It
is a settled position of law that fiscal statutes are strictly construed.
Section 206C(1C) of the Income-tax Act, 1961, provides that a person who grants
an agency or licence, or in any other manner transfers his right in respect of
a parking lot, toll plaza or a mine and quarry to another person, while
receiving the amount so collected from the agent or licensee (the transferee of
its right), should also collect tax at source. The above obligation is only
restricted to parking lots, toll plazas or mine or quarry. This obligation does
not extend to octroi.

 ii)   The
Seventh Schedule to the Constitution of India empowers the state to levy octroi
as found in entry 52 of List II thereof, while entry 59 of List II of the
Seventh Schedule to the Constitution empowers the State to collect tolls. Thus,
there is a basic constitutional difference between the two levies. A “toll” is
normally collected on account of use of the roads by animals and humans. As
against which, “octroi” is normally collected on account of goods entering the
corporation limits (area) for use, consumption or sale.

iii)   Section
206C(1C) cannot be extended to collection of octroi. The Legislature when it
brought in section 206C(1C) of the Act, has not authorised the collection of
tax at source in respect of octroi. It specifically restricted its obligation
to only three categories namely parking, toll plaza, mining and quarrying. No
fault can be found with the impugned order of the Tribunal.”

12 Section 41(1) – Business income – Deemed income – A. Y. 2000-01 – Remission or cessation of trading liability – Condition precedent for treating sum as deemed profits – Sum should have been claimed as allowance or deduction in earlier year – Advance received from parent company for business purposes to be adjusted against future supplies – Transfer of advances to capital reserve – Capital receipt not liable to tax

Transworld Garnet India Pvt. Ltd. vs.
CIT; 397 ITR 233 (Mad):

The shareholding in the assessee-company was
held to the extent of 74 percent, by a company T which in turn was wholly held
by W, Canada. The assessee was set up completely with the investment from the
parent company W.  Advances were also
received from W towards business needs and the advances were to be adjusted against
future supplies of garnet to W. Due to various logistic and administrative
reasons, the assessee incurred losses. The private sources that were approached
for their participation in the equity insisted upon equal investment to be made
by the foreign company W in order to dilute the losses incurred, as a
pre-condition to their investment. Accordingly, W directed the assessee to
convert the advances made by it into capital, which was complied with by the
assessee. It transferred the amount to general reserve.

The Assessing Officer was of the view that
the amount ought to have been taken to the profit and loss account instead of
the general reserve. He held that the provisions of section 41(1) of the
Income-tax Act, 1961 relating to cessation of liability were attracted and that
the amount was liable to be brought to tax. Accordingly, he passed an order
u/s. 143(3) r.w.s.147 assessing that as income. The Commissioner (Appeals)
accepted the assessee’s submission that the amount constituted a capital
receipt. He recorded a finding to the effect that the conversion of the
advances resulted in wiping out of the losses and paved the way for the entry
of the resident participant. He also held that the provisions of section 41(1)
were attracted only in a situation where the amount in question, in respect of
which liability had ceased, had been claimed as an allowance or a deduction in
any previous year, which fact had not been established in the assessee’s case.

He further held that there was no nexus
between the allowance/deduction in the previous years and the amount in
question to invoke section 41(1). The Appellate Tribunal held that the amounts
were originally received as advances against the supply of garnet and
subsequently, the claim over the amount partook of the character of a revenue
receipt. It further held that the subsequent transfer of the amounts to general
reserve constituted only an application, that would not change the nature of the taxability of the amounts at a stage anterior thereto.

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

“i)  In order for the
provisions of section 41(1) to be attracted, the benefit obtained by the
assessee in the relevant year should have a direct nexus with an allowance or
deduction for any previous year as a claim of loss, expenditure or trading
liability which has not been established in the assessee’s case.

ii)  The findings of the
Commissioner (Appeals) were based upon the financials as well as all the
relevant documents. He also found that there was nothing on record to lead to
the conclusion that the advances from W had been claimed as an allowance or
deduction in any previous year. The circumstances in which the infusion of
capital was made and the findings that related thereto were undisputed. The
amount though received as advances for the supply of garnet had remained static
without depletion of any sort.

iii)  The entire amount had
been converted to shareholding and consequently, benefit could be said to have
accrued to the assessee only in the capital field. The substantial questions of
law are answered in favour of the assessee and the appeal allowed.”

DeMo: The Incomplete Agenda

Demonetisation (DeMo), the overnight
invalidation of 86 percent of total value of currency, completes one year in
November 2017. After one year many remain unconvinced about the necessity
and efficacy of DeMo towards its principal stated objective: the annihilation
of black money. Although an assault was made on black money1,
the empirical data on its whereabouts, form and probable effect of such action,
is not reported formally. We can only hope that, what is forcefully lauded as a
goal and even an achievement is not measured through empirical means (even with
limitations). We all know that only what gets measured gets changed2.
This editorial seeks to present the impact of DeMo action on that lofty goal
from three different perspectives that are underplayed.

1. Role of Banks

Here is a real life situation I witnessed.
An income tax survey was carried out on an assessee. The tax officer sought day
wise cash deposit details and also sought direct certificates from assessee’s
bankers about those cash deposits. The certificate given by bankers was
disputed by the assessee as they showed large SBN deposits in second and third
week of the period. The assessee wrote to the higher ups in the bank and
banking regulatory system, giving evidence that SBN deposits as claimed by the
bank was not made by the assessee. The branch immediately issued a ‘corrected’
certificate to the tax office to show that such SBN deposits were not made by
the assessee.

A well reasoned reader can draw the meaning!
While fingers were pointed at a certain profession, there was hardly any
reference to the potential or even actual breach of banking system that could
have diluted the very purpose of DeMo. Reports and photographs of people
with loads of new currency notes (obtainable by few hundred man years of
standing in a line during those times), could be possible only through a breach
of the banking system. This aspect is played down instead of being investigated
at a systemic level.

2. Risk of selective approach to assessing deposits

The second question, rather a risk, is
what if those who have the information of bank deposit decide to selectively
turn a blind eye to some of them. For example, the
data of deposits could be selectively assessed to ignore some while punishing
others. I am unaware of legal and other precautions in place to ensure that
such ‘favourable assessments’ are not done to favour those who are high and
mighty, and friendly to the powerful. This could defeat the entire purpose
and actually be so counterproductive that it could result in legitimising
‘illicit’.

3. The Impending kept pending: Action against corruption

Corruption is pervasive, collusive and
multi-dimensional. Corruption and black money are connected by an umbilical
cord, except that we cannot tell who the mother is and who the child is.
The self proclaimed ‘super specialists’ in eradication of disease of corruption
and black money haven’t done the surgery to sever it. The roots of tree of
corruption are made of political economy, the substance that also influences
the strongest pillars of our constitutional system. Consider the sluggish pace
of war against black money and corruption when the big weapons are in the
garage while the war is supposedly on:

a)  Lokpal and Lokayukta Act, 2013: Was notified in January 2014 and is
gathering dust since then. Reason given to Supreme Court in November 2016 was
that Selection Committee for appointment of Lokpal could not be constituted
because of unavailability of leader of opposition in Lok Sabha and therefore
amending bill was pending in parliament. In war, can there be so much waiting?

b) The Whistleblower Protection Act: Passed in 2014, but not notified
for 3 years.

c) RTI and Political Parties: The biggest parties, who talk at high
decibels about transparency in politics, oppose applicability of RTI to them.
Here, ‘No comments’ should suffice as the best comment.

d) Enforcement capability: Poor legislative, administrative and
political will and mechanism to deal with corruption cases. India is yet to
live up to the obligations under the UN Convention Against Corruption.

e) Finance Act 2017: The Finance Bill 2017 / budget speech, under the guise
of ‘transparency in electoral funding’ proposed a change that was exactly
opposite. A layer of opaqueness was sought to be added by removal of cap on
political funding (presently 7.5 percent3) and removal of disclosure
requirements of the beneficiary.

f)  Electoral Bonds: Bond with the Best, goes an advertisement
tag line. While we all wish to bond with the best, if the minister has his way,
these electoral bonds could be out soon. The reason: donors to political
parties had expressed their reluctance to ‘contribute by cheque or other
transparent means as it would disclose their identity and entail adverse
consequence’. The present form of ‘electoral bonds’ could well be like
an IPO (Intimate Private Offering) for political parties – an easy way to
legitimise corruption. Why would the Finance Minister want to help the
‘few’ at the cost of transparency in political funding? Electoral Bonds
(which rather appear to be Political Bonds) representing underlying incognito
money should then be given to EC to improve elections. If these bonds come out
on the lines declared so far, could turn out to be BONDING of BIG BUSINESS with
BIG POLITICOS. I believe that Sunlight still remains the best
disinfectant4, and every citizen would rather seek sharper sunlight
on political funding over a veil of darkness!

g) Prevention of Corruption (Amendment) Bill 2013: Diluting the
existing spineless law and making it bedridden (if not dead). “The Bill has
deleted the provision that protects a bribe giver from prosecution, for any
statement made by him during a corruption trial. This may deter bribe givers
from appearing as witnesses in court.”5  There are other diluting provisions too.6  The key principals of bribery in private
sector and compensation for those affected by corruption are not even there. I
hope that, that is the reason why it is in cold storage and the anomaly will be
removed soon.

In conclusion,
an independent objective assessment of DeMo would be a welcome step instead of
another bash to celebrate 8th November. Before celebrating success,
it would be reasonable to empirically demonstrate the success to be so. While
rhetoric, promises and self praise are the visible #trends7; a
realistic and humble approach would evoke more trust and truly benefit the 1.3
Crore people who stood in lines (and some died too). All that we know so far is
that RBI took 9 months to count notes and gave the data but an emphatic
report to show the real effect of DeMo action on black money and corruption
remains wanting. That leaves Indians in the dark, the very shade of money DeMo
sought to eradicate. While one does not doubt the intent, intent without
execution means little. Sun Tzu points out in his Art of War: “Strategy without
tactics is the slowest route to victory. Tactics without strategy is the noise
before defeat.”

The government
deserves a special appreciation for one pointedly pursuing Ease of Doing
Business (EoDB). Considering that we remained in lower ranges since the
inception of EoDB index, jumping from 130th to the 100th rank
is indeed remarkable, although the stated aim was to be in top 50 by 2017. The
results are based on samples from Mumbai and Delhi, the effort in right
direction and at a good pace deserves acknowledgement. We should now aim to
reach in top 30 of Transparency International ranking on corruption. Then
investment will not have to be sought, it will come calling. Ram Rajya
will then come out of the manifesto and actually begin to manifest. While Acche
Din is a worthy aim, Acche Din would only be Acche for few if
they are not Sachhe Din. Jai Hind!

Raman Jokhakar

Editor

________________________________________________________________________

1 Black Money economy is estimated to be Rs. 93 Lakh crore ($1.4Trillion) or 62 percent of GDP as per Arun Kumar, author of The Black Economy in India
2 Quote attributed to legendary Peter Drucker
3 Section 182 of the Companies Act, 2013. Compare this to Managerial Remuneration which is limited to 11 percent on a comparable base of profit.
4 Quote by Louis D. Brandeis, an American SC Justice
5 PRS Legislative Research – Highlights of the Bill – http://www.prsindia.org/billtrack/the-prevention-of-corruption-amendment-bill-2013-2865/
6 Refer Report No. 254th of Law Commission by Justice A P Shah
7 # supplied on purpose

35. Charitable purpose – Exemption u/s. 11 – A. Ys. 2006-07 and 2009-10 – Education main activity of assessee – Publishing and printing books and selling them at subsidised rates or distributing them at free of cost – Profit earned thereby utilised for education – Denial of exemption erroneous-

Delhi Bureau of Text Books vs. DIT(Exemption); 394 ITR 387
(Del):

The assessee was registered as a charitable institution u/s.
12A(a) of the Act, 1961. It printed and published text books for Government
schools and sold them at subsidised rates with nominal profits. It also
distributed free books, reading material and school bags to needy students. Its
income was exempt from tax u/s. 11 of the Act, during the A. Ys. 1971-72 to
2005-06. It was denied the benefit of exemption for the A. Ys. 1975-76 and
1976-77, but the Commissioner (Appeals) restored the exemption and the same was
confirmed by the Tribunal. For the A. Ys. 2006-07 to 2009-10, the Assessing
Officer denied the exemption and the same was confirmed by the Appellate
Tribunal. The Tribunal held that the asessee’s activities were in the nature of
business, that compliance with the requirement of section 11 could be examined
in every assessment year, that in its earlier order for the A. Ys. 1975-76 and
1976-77, it had not considered the assessee’s income and expenditure statements
or other relevant evidence, that the assessee had not maintained separate books
of account for its activities of sale and purchase of books thereby violating
the provisions of section 11(4A), and that the assessee had made accumulation
in excess and ”without specifying any purpose” and “was not wholly for
charitable purposes”.

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

“i)  The preparation and distribution of text books
contribute to the process of training and development of the mind and the
character of students. There does not have to be a physical school for an
institution to be eligible for exemption. What is important is the activity. It
has to be intrinsically connected to “education”.

ii)  The Appellate Tribunal was incorrect in
denying exemption to the assessee u/ss 11 and 12 of the Act. It erred in
holding that the activities carried out by the assessee fell under the fourth
limb of section 2(15), “the advancement of any other object of general public
utility” and that its activities were not solely for the purpose of advancement
of education. It came to the erroneous conclusion merely because the assessee
had generated profits out of the activity of publishing and selling text books
that it had ceased to carry on the activity of “education”.

iii)  It failed to consider the issue in the
background of the setting up of the assessee, its control and management and
the sources of its income and the pattern of its expenditure and that its
surplus amount was again utilised in its main activity of “education”. The
assessee contributed to the training and development of the knowledge, skill,
mind and character of the students.

iv) The exemption had been granted to the assessee
u/s. 11 and 12 from the A. Ys. 1971-72 to 2005-06 consistently for 34 years.
For the A. Ys. 1975-76 and 1976-77, grant of exemption had been restored by the
Appellate Tribunal which was not contested by the Department. Apart from the
fact that the assessee had earned more profits from its essential activity of
education, there was no change in the circumstances concerning its activity of
publishing and selling books during the A. Ys. 2005-06 to 2009-10. There was no
justification to warrant a different approach. Appeals are allowed.”

34. Capital gains- Exemption u/s. 54F – A. Y. 2012-13 – Assessee getting more than one residential house in several blocks – All flats product of one development agreement on same piece of land – Flats located in same address – Assessee is entitled to benefit of exemption u/s. 54F

CIT vs. Gumanmal Jain; 394 ITR 666 (Mad):

The assessee and his two sons owned certain contiguous
extents of land. The assessee along with his two sons entered into a joint
development agreement with a builder to develop the land by constructing 16
flats therein with a total built up area of 56,945 sq. ft. The assessee and two
sons on the one hand and the builder on the other hand agreed to share in 70:30
ratio between them. The land was developed, 16 flats with separate kitchens and
37 car parks were put up. In lieu of the 70:30 ratio set out in the builder’s
agreement, the assessee got 9 flats and the sons got 3 flats each. For the A.
Y. 2012-13, the Assessing Officer rejected the assessee’s claim for exemption
u/s. 54F of the Act, 1961 on the ground that the assessee owned more than one
residential house and assessed the long term capital gain of Rs. 2,31,56,430 to
tax. The Commissioner (Appeals) allowed the assessee’s claim for exemption and
the same was upheld by the Tribunal.

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

“i)  The assessee having got flats along with his
two sons would not disentitle him from getting the benefit u/s. 54F of the Act
only on the ground that all the flats were not in the same block, particularly
in the light of the admitted factual position that all the flats were located
at the same address. As long as all the flats were in the same address, even if
they were located in separate blocks or towers it would not alter the position.

ii)  After all, all the flats were a product of one
development agreement of the same piece of land. Therefore, the assessee was
entitled to get the benefit of section 54F of the Act.”

33. Business expenditure – Exempt income- Disallowance u/s. 14A- A. Y. 2011-12 – If no exempt income is earned in the assessment year in question, there can be no disallowance of expenditure in terms of section 14A read with Rule 8D even if tax auditor has indicated in his tax audit report that there ought to be such a disallowance

Principal CIT vs. IL & FS Energy Development Company
Ltd.; [2017] 84 taxmann.com 186 (Delhi)

Assessee is a company engaged in provision of consultancy
services. On 26th September 2011, the Assessee filed its return at a
loss of Rs. 2,42,63,176/- for the A. Y. 2011-12. The Assessee had not earned
any exempt income in the relevant year. The assessee had not made any
disallowance u/s. 14A of the Act, 1961. The Assessing Officer computed the
disallowable amount u/r. 8D and made disallowance. The Tribunal held that since
the assessee had not earned any exempt income in the relevant year there can be
no disallowance u/s. 14A of the Act and allowed the assessee’s claim.

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

“i)  The key question in the present case is
whether the disallowance of the expenditure will be made even where the
investment has not resulted in any exempt income during the AY in question but
where potential exists for exempt income being earned in later AYs.

ii)  Section 14A does not particularly clarify
whether the disallowance of the expenditure would apply even where no exempt
income is earned in the AY in question from investments made, not in that AY,
but earlier AYs.

iii)  The words “in relation to income which
does not form part of the total income under the Act for such previous year”
in the above Rule 8D(1) indicates a correlation between the exempt income
earned in the AY and the expenditure incurred to earn it. In other words, the
expenditure as claimed by the Assessee has to be in relation to the income
earned in ‘such previous year‘.

iv) This
implies that if there is no exempt income earned in the AY in question, the
question of disallowance of the expenditure incurred to earn exempt income in
terms of section 14A read with Rule 8D would not arise.

v)  The mere fact that in the audit report for the
AY in question, the auditors may have suggested that there should be a
disallowance cannot be determinative of the legal position. That would not
preclude the assessee from taking a stand that no disallowance u/s. 14A of the
Act was called for in the AY in question because no exempt income was earned.”

32. ALP – Computation- Sections 92 and 92C – A. Y. 2011-12 – Determination of operating costs- Agreement between parties – Reimbursement of costs received from AEs – Finding that reimbursement of cost of infrastructure was without a mark up- Claim of assessee to exclude cost of infrastructure to be allowed

Principal CIT vs. CPA Global Services Pvt. Ltd.; 394 ITR
473 (Del):

The assessee is a wholly owned subsidiary of CPA Mauritius
Ltd., which in turn is a subsidiary of CPA Jersey. It offers a range of legal
support services to its associated enterprises (AEs) as well as to independent
third party customers. During the A. Y. 2011-12, the assessee received an
amount from its associated enterprises as “cost recharge on account of spare
capacity” which was not reflected in its profit and loss account. The Transfer
Pricing Officer (TPO) was of the view that the assessee had not produced any
evidence in support of its claim that the expenditure was towards maintenance
of spare capacity at the instance of the AEs.

The Dispute Resolution Panel (DRP) held that the arm’s length
price (ALP) of the receipts from the AEs included all the costs and that the
assessee did not give sufficient reasons to exclude certain costs for the
purposes of computing the ALP. While the application filed by the assessee u/s.
154 of the Income-tax Act, (hereinafter for the sake of brevity referred to as
the “Act”) 1961 was pending before the DRP, a draft assessment order
was passed by the Assessing Officer based on the decision of the DRP. Before
the Appellate Tribunal, the assessee referred to the agreement with its AEs and
submitted that the reimbursement towards the cost of service with a mark up had
been accounted for in working out the ALP in the transfer pricing study and the
other reimbursement it sought to exclude from the operating costs was towards
the cost of infrastructure on which there was no mark up. The Appellate
Tribunal held that the reimbursement cost should be excluded as they did not
involve any functions to be performed so as to consider it for profitability
purposes and directed the TPO to exclude the reimbursement costs while working
out the operating costs.

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

“i)  The Appellate Tribunal after examining the
agreement between the assessee, and its AEs had agreed with the assessee that
the reimbursement of the infrastructure cost had no mark up. Unless there was a
specific plea by the Department to the effect that such a factual finding was
perverse, on a general plea of perversity, the appeal could not be entertained.
Also, it should be accompanied by a reference to the relevant document which
formed part of the record of the case before the Appellate Tribunal.

ii)   No
substantial question of law arises from the order of the Tribunal. Appeal is
dismissed.”

Applicability of Section 14A – Interest To Partners

Issue for Consideration

Section 14A(1) of the Income-tax Act, 1961 provides that for
the purposes of computing the total income, under the chapter (Chapter IV –
Computation of Total Income), no deduction shall be allowed in respect of an
expenditure incurred by the assessee in relation to the income which does not
form part of the total income under the Act.

Under the scheme of taxation of partnership firms, a
partnership firm is entitled to deduction of interest paid to partners, and
such interest paid is taxable in the hands of the partners, under the head
‘profits and gains of business and profession, vide section 28(v) of the Act. The
deduction of such interest to partners, in the hands of the firm, is governed
by the restrictions contained in section 40(b)(iv), which section provides that
payment of interest to any partner, which is authorised by, and is in
accordance with, the terms of the partnership deed and relates to any period
falling after the date of such partnership deed in so far as such amount
exceeds the amount calculated at the rate of 12% simple interest per annum,
shall not be allowed as deduction.

A question has arisen before the Tribunal in various cases as
to whether interest paid to partners, which is allowable as a deduction to the
partnership firm, can be regarded as an ‘expenditure incurred’ by the assessee
firm, and can therefore form part of the disallowance u/s.14A, to the extent
that it has been incurred in relation to the income arising on investment made
out of the funds received from the partners and on which interest is paid by
the firm, which income does not form part of the total income of the partnership
firm.

While the Ahmedabad and Mumbai benches of the Income Tax
Appellate Tribunal have held that such interest, in the hands of the firm,
would be regarded as an expenditure subject to disallowance u/s. 14A, the Pune
bench of the Tribunal has taken a contrary view holding that interest paid by a
partnership firm on its partners’ capital cannot be regarded as an expenditure amenable to section 14A.

Shankar Chemical Works’ case

The issue first came up before the Ahmedabad bench of the
Tribunal in the case of Shankar Chemical Works vs. Dy CIT 47 SOT 121.

In this case, relating to assessment year 2004-05, the
assessee was a partnership firm carrying on the business of manufacturing of
chemicals. It had invested in various financial assets, such as debentures,
bonds, mutual funds and shares to the extent of Rs. 1.93 crore, the income from
some of which investments was exempt from tax to the extent of Rs. 43.48 lakh.
The assessing officer noted that the assessee had borrowings to the extent of
Rs. 15.57 lakh, on which an interest of Rs. 1.54 lakh had been paid. Besides,
the firm had paid interest on partners’ capital. The assessing officer
concluded that investments in all these mutual funds, shares and securities had
been made out of the funds of the firm, which were either out of the partners’
capital or from borrowings from others. The interest payment on these funds
were made either to partners or to the persons from whom borrowings were made.
He therefore disallowed an amount of Rs. 17.04 lakh out of the total interest expenses of Rs. 23.23 lakh u/s. 14A.

On appeal before the Commissioner(Appeals), the disallowance
of interest u/s. 14A was upheld. The Commissioner(Appeals) held that the
capital was employed for the purpose of investment in mutual funds, shares and
debentures and bonds, and not for the business of the assessee firm for which
the partnership was formed. He also held that the provisions of section 40(b)
were not applicable, and the funds were utilised for the purpose of investment
rather than the business. He upheld the working of the disallowance of interest
made by the assessing officer in proportion to the amount of investment and
total funds employed, and held that the partners of the firm were entitled to
relief under the explanation to section 10(2A) in respect of the that part of
interest of the firm which was not allowed as a deduction to the firm.

Before the Income Tax Appellate Tribunal, on behalf of the
assessee, it was argued that no nexus had been established between the interest
payment and the earning of the exempt income. It was further argued that as per
section 28(v), interest paid to a partner of a firm was chargeable to tax in
the hands of the firm. Therefore, disallowance of such interest u/s. 14A, in
the hands of the firm, would amount to a double taxation. It was further argued that the
firm and the partners were not different entities.

Reliance was placed on paragraph 48 of the CBDT Circular No.
636 dated 31st August 1992, where the provisions of the Finance act,
1992, regarding assessment of the firm were explained. In the circular, it was
stated that share of a partner in the profits of the firm would not be included
in computing, his total income u/s. 10(2A). However, interest, salary, bonus,
commission or any other remuneration paid by the firm to the partner would be
liable to tax as business income in the partner’s hands. An explanation has
been added to section 10(2A) to make it clear that the remuneration or
interest, which was disallowed in the hands of the firm, would not suffer
taxation in the hands of the partner. It was further pointed out that in the
case of the assessee, the partners to whom interest was paid were taxable at
the maximum rate.

It was further argued on behalf of the assessee that the
amendment to the scheme of assessment of a firm had been made to avoid double
taxation of the income. Interest paid to partners was distribution of profit
allocated to the partners in the form of interest and as such it could be taxed
once either in the hands of the firm or in the partners’ hands, but could not
be taxed in both places. Since the partners had paid tax on interest received
from the firm, and all the conditions laid down in section 40(b) had been
fulfilled, no portion of interest paid to partners could be disallowed, and if
it was disallowed it would amount to double taxation.

On behalf of the revenue, it was contended that no interest
free funds were available to the assessee, and therefore disallowance had
rightly been made. The investments were made from capital of the partners, on
which interest at the rate of 10.5% per annum was paid.

The Tribunal rejected the contention of the assessee that
there was no nexus between the exempt income and partners’ capital, since no
interest-free funds were available with the firm. Importantly, in respect of
the assessee’s argument that any disallowance of interest u/s. 14A would amount
to double disallowance, the Tribunal noted that as per the provisions contained
in section 14A(1), an expenditure incurred for earning exempt income was not to
be considered for computing total income under chapter IV. This implied that
such expenditure was to be allowed as deduction while working out the exempt
income under chapter III. In case of expenditure which was incurred for earning
exempt income, a specific treatment was to be given, that such expenses should
be disregarded for computing total income under chapter IV and should be
reduced from exempt income under chapter III. Hence, according to the Tribunal,
there was no double addition or double disallowance.

The Tribunal observed that partners had a share in all the
incomes of the firm. As per the above treatment in the hands of the firm,
regarding expenses incurred for earning exempt income, taxable income of the firm
would increase and exempt income of the firm would go down by the same amount,
total of both remaining the same. The total share of profit of the partner in
the income of the firm would also remain the same, but his share in income
which was exempt in the hands of the firm would be less, and his share in
income which Is taxable in the hands of the firm would be more. However, the
entire share of profit receivable by a partner from a firm was exempt, and
hence there was no impact in the hands of a partner. According to the Tribunal,
since there was no disallowance as such in the hands of the firm, but the
expenditure incurred for earning exempt income was not allowed to be reduced
from taxable income, and instead was to be reduced from exempt income, there
was no effective disallowance in the hands of the firm of the expenses incurred
for earning exempt income, and hence there was no question of any double
allowance or double disallowance.

It also noted that under the proviso to section 28(v), where
there was a disallowance of interest in the hands of the firm due to the
provisions of section 40(b), then and only then the income in the hands of the
partner had to be adjusted to the extent of the amount not so allowed to be
deducted in the hands of the firm. Hence, the proviso to section 28(v) would
come into play only if there was some disallowance in the hands of the firm
u/s. 40(b). According to the Tribunal, in the case before it, the disallowance
was u/s. 14A, and not u/s. 40(b), and therefore, the proviso to section 28(v)
was not applicable and therefore, the partner of the firm was not entitled to
any relief under the said proviso. In any case, since the appellant before the
Tribunal was the firm, and not the partners, the Tribunal did not give any direction
on this aspect of taxability of the partners.

Examining section 10(2A) and the explanation thereto, the
Tribunal rejected the assessee’s argument that if any interest was disallowed
in the hands of the firm, the same could not form part of the total income in
the hands of the partner. According to the Tribunal, the explanation to section
10(2A) did not support such a contention, as the total income of the firm, as
assessed, should alone be considered, and the share of the concerned partner in
such assessed income should be worked out as per the profit sharing ratio as
specified in the partnership deed, and it was such share of the relevant
partner, which only would be considered as exempt u/s. 10(2A).

The Tribunal next addressed the assessee’s argument that
interest paid to partners was distribution of profits allocated to the partners
in the form of interest and hence interest to partners could be taxed once,
either in the hands of the firm or in the hands of the partner, and could not
be taxed in both hands. It also considered the argument of the assessee that
since the partners had paid tax on interest received by them from the firm, no
portion of interest paid to partners could be disallowed, and if disallowed, it
would amount to double taxation. According to the tribunal, such arguments were
devoid of any merit, because interest paid to partners by the firm was not
distribution of profit by the firm, since interest was payable to the partners
as was prescribed in the partnership deed, even if there was no profits in the
hands of the firm. If a firm had a loss and paid interest to the partners, the
loss of the firm would increase to that extent, which would be allowed to be
carried forward in the hands of the firm. Therefore, according to the Tribunal,
interest, to partners was not a distribution of profits by the firm to the
partners and there was no double taxation.

Addressing the assessee’s argument that interest paid to
partners was not an expenditure at all, but was a special deduction allowed to
the firm u/s. 40(b), the tribunal observed that there was no deduction allowed
under section 40(b). According to the Tribunal, section 40(b) was a restricting
section for various deductions allowable under sections 30 to 38. Analysing the
provisions of section 40(b), the Tribunal was of the view that this section was
really restricting and regulating deduction allowable to the firm on account of
payment of interest to partners, and was not an allowing section. According to
the Tribunal, the section allowing the deduction of interest remained section
36(1)(iii), and therefore payment of the interest to partners was also an
expenditure, which was hit by the provisions of section 14A, if it was incurred
for earning exempt income.

The Tribunal accordingly rejected the assessee’s appeal, and
thereby upheld the disallowance of interest to partners u/s. 14A.

This decision of the Tribunal was followed by the Mumbai
bench of the Tribunal in the case of ACIT vs. Pahilajrai Jaikishin 157 ITD
1187, where the Tribunal held that such interest paid to partners on their
capital was an expenditure subject to disallowance u/s. 14A, if it was incurred
in relation to exempt income.

Quality Industries’ case

The issue again came up for consideration before the Pune
bench of the Tribunal in the case of Quality Industries vs. Jt CIT 161 ITD
217.

In this case, relating to assessment year 2010-11, the
assessee firm was engaged in the business of manufacture of chemicals, and had
earned tax-free income of Rs. 24.64 lakh from investment in mutual funds of Rs.
4.42 crore. The assessee had claimed deduction for interest of Rs. 75.64 lakh,
consisting of interest to partners of Rs. 74.88 lakh and interest on bank loans
of Rs. 0.76 lakh.

The assessing Officer, observing that investment in mutual
funds was made out of interest-bearing funds, which included interest-bearing
partners capital, was of the view that the assessee had incurred expenditure,
including interest expenses, which was attributable to earning income from
investment in mutual funds, which was exempt. He, therefore, disallowed
estimated expenditure incurred in relation to such income from mutual funds in
terms of the formula under rule 8D amounting to Rs. 29.25 lakh, including
interest of Rs. 27.85 lakh.

The Commissioner(Appeals) observed that the main source of
investment in mutual funds was partners’ capital, which bore interest at 12%
per annum. According to the Commissioner(Appeals), such interest was relatable
to income from mutual funds, which did not form part of the total income.
Therefore, the Commissioner(Appeals) upheld the disallowance made by the
assessing officer observing that the provisions of section 14A were attracted
to such expenditure.

Before the Tribunal, it was argued on behalf of the assesse,
that the assessee had fixed capital of Rs. 6.24 crore, received from the
partners, on which interest at the rate of 12% per annum had been charged to
the partnership firm. The firm also had current capital from partners that was
received from time to time, which amounted to Rs. 1.14 crore at the end of the
year, on which no interest was paid. It was argued that interest payable on
fixed capital from partners did not bear the characteristic of expenditure per
se as contemplated u/s. 14A. It was pointed out that as per the scheme of
taxation of firms, the payment to the credit of partners in the form of
interest and salary was chargeable to tax in the respective hands as business
income by operation of law.

Reliance was placed on behalf of the assessee on the decision
of the Supreme Court in the case of CIT vs. R M Chidambaram Pillai 106 ITR
292 for the proposition that payment of salary represented special share of
profits, and was therefore taxable as business income. On the same footing, it
was argued that interest on partners’ capital was a return of share of profit
by the firm to the partners. Both interest and salary to partners were not
subjected to TDS, and both fell for allowance under section 40. It was argued
that section 40(b) was not just a limiting section, notwithstanding the fact
that some fetters on the rate of interest had been put thereunder. Salary to
partners and interest paid on partners’ capital was made allowable in the hands
of the firm only from assessment year 1993-94, subject to limits and
restrictions placed u/s. 40(b), and was not allowable prior thereto and
supported the view that section 40(b) was not merely meant for limiting the
deduction, as had that been the case, interest would have been allowable in the
hands of the partnership firm since the birth of the income tax law.

It was further submitted that section 14A was applicable only
where an expenditure was incurred, and not in respect of any and every
deduction or allowance. It was argued that an expenditure was needed to be
incurred by the party, which was absent in view of the mutuality present in a
partnership firm between the firm and its partners. The firm had no separate
existence from its partners, and it was a separate assessable entity only for
the purposes of the Income-tax Act. The Partnership Act, 1932 did not recognise
the firm as a separate entity.

It was further argued on behalf of the assessee that any
disallowance of interest of capital would lead to double disallowance of the
same expenditure, as the partners were already subjected to tax on interest on
capital in their respective personal returns.

The Tribunal analysed the nuances of the scheme of taxation
of partnership firms. It noted that prior to assessment year 1993-94, the
interest charged on partners’ capital was not allowed in the hands of the partnership
firm, while it was simultaneously taxable in the hands of the respective
partners. The amendment by the Finance Act, 1992 by insertion of section 40(b)
was to enable the firm to claim deduction of interest outgo payable to partners
on the respective capital subject to some upper limits. Therefore, according to
the tribunal, as per the present scheme of taxation, the interest payment on
partners’ capital in a sense was not treated as an allowable business
expenditure, except for the deduction available u/s. 40(b).

The Tribunal noted that partnership firms, on complying with
the statutory requirements, were allowed deduction in respect of interest to
partners, subject to the limits and conditions specified in section 40(b), and
in turn those items would be taxed in the hands of the partners as business
income u/s. 28(v). Share of partners in the income of the firm was exempt from
tax u/s. 10(2A). Therefore, the share of income from a firm was on a different
footing from the interest income, which was taxable as business income.

The Tribunal also noted that interest and salary received by
the partners were treated on a different footing by the Act, from the ordinary
sense of the terms. Section 28(v) treated interest as also salary received by a
partner of the firm as a business receipt, unlike different treatment given to
similar receipts in the hands of entities other than partners. It also noted
that under the proviso to section 28(v), the disallowance of such interest was
only with reference to section 40(b), and not with reference to section 36 or
section 37. According to the tribunal, it gave a clue that deduction towards
interest to partners was regulated only u/s. 40(b), and that the deduction of
such interest was out of the purview of sections 36 or 37.

The Tribunal observed that there was no amendment to the
general law provided under the Partnership Act, 1932. The amendment to section
40(b) had only altered the mode of taxation. The partnership firm continued not
to be a separate legal entity under the Partnership Act, and it was not within
the purview of the Income-tax Act to change or alter the basic law governing
partnership. Therefore, interest or salary paid to partners remained the
distribution of business income. The tribunal referred to the decision of the
Supreme Court in the case of R. M. Chidambaram Pillai (supra) for this
proposition. The tribunal also referred to the decision of the Supreme Court in
the case of CIT vs. Ramniklal Kothari 74 ITR 57, for the proposition
that the business of the firm was business of the partners of the firm. Hence,
salary, interest and profits received by the partner from the firm was business
income, and therefore expenses incurred by the partner for the purpose of
earning this income from the firm was admissible as deduction from such share
of income from the form in which he was a partner. Thus, even for taxation
purposes, the partnership firm and partners have been seen collectively, and
the distinction between the two was blurred in the judicial precedents.

Since the firm and partners of the firm were not separate
persons under the Partnership Act, though they were a separate unit of
assessment for tax purposes, according to the Tribunal, there could not be a
relationship inferred between the partner and firm as that of lender of funds
(capital) and borrowal of capital from the partners. Therefore, section
36(1)(iii) was not applicable at all. According to the Tribunal, section 40(b)
was the only section governing deduction towards interest to partners. In view
of section 40(b), according to the Tribunal, the assessing officer had no
jurisdiction to apply the test laid down under section 36, to find out whether
the capital was borrowed for the purposes of business or not. Thus, the
question of allowability or otherwise of the deduction did not arise, except
for section 40(b).

According to the Tribunal, the interest paid to partners
simultaneously getting subjected to tax in the hands of the partners was merely
in the nature of contra items in the hands of the firm and partners.
Consequently, interest paid to partners could not be treated at par with the
other interest payable to outside parties. Thus, in substance, the revenue was
not adversely affected at all by the claim of interest on capital employed with
the firm by the partnership firm and partners put together. Capital diverted to
mutual funds to generate alleged tax-free income did not lead to any loss in
revenue due to the action of the assessee. In view of the inherent mutuality,
as per the Tribunal, when the partnership firm and its partners were seen
holistically and in a combined manner, with interests paid to partners
eliminated in contra, the investment in mutual funds, generating tax-free
income bore the characteristic of an expenditure that was attributable to its own capital, where no disallowance
u/s. 14A read with rule 8D was warranted.

The Tribunal therefore held that the provisions of section
14A read with rule 8D were not applicable to interest paid to partners, but
applied only to interest payable to parties other than partners.

Observations

The logic of the Pune bench of the Tribunal, that the amount
introduced by the partners into the partnership firm is not a borrowing of
capital by the partnership firm but is an introduction of capital by the
partners for constituting the partnership firm and carrying on its business,
does seem fairly attractive at first sight.

The scheme of taxation of the partnership firm and its
partners under tax laws is also relevant. It is only by an artificial provision
that the entire income of the partnership firm is divided into two components
for convenience of taxation – one component taxable in the hands of the firm,
and the second component taxable in the hands of the partners. Section 40(b) read
with the proviso to section 28(v) clearly brings out this intent that what is
taxable in the hands of the firm, is not taxable in the hands of the partners,
while what is taxable in the hands of the partners is not taxable in the hands
of the firm. Therefore, viewed from that perspective, the view of the Pune
Tribunal that the interest to partners was not an expenditure, but was a mere apportionment of the income of the firm, also seems attractive.

This view is also supported by the fact that though salaries
and interest are subjected to tax deduction at source, remuneration and
interest to partners are not so subject to the provisions of tax deduction at
source. In a sense, the tax laws now recognise the fact that such remuneration
and interest to partners stands on a different footing from the normal
expenditure of salaries and interest.

However, to a great extent, the answer to this question is to
be found in the decision of the Supreme Court in the case of Munjal Sales
Corpn vs. CIT 298 ITR 298. In this case, relating to assessment years
1993-94 to 1997-98, the Supreme Court was considering a situation where
interest free loans had been granted to sister concerns in August/September
1991, and interest paid had been disallowed u/s. 36(1)(iii) by the Assessing
Officer. The Tribunal had deleted the disallowance for assessment years 1992-93
and 1993-94, holding that interest free loans had been given out of the
assessee’s own funds. The disallowances for assessment years 1994-95 to 1996-97
were however upheld by the Tribunal.

Before the Supreme Court, the assessee contended that section
40(b) was a standalone section having no connection with the provisions of
section 36(1)(iii), and that section 36(1)(iii) did not apply, as it was a case
of payment of interest to a partner on his capital contribution, which could
not be equated to monies borrowed by the firm from third parties.

In this case, while holding that since the loans were
advanced for business purposes, the interest on such loans would not be subject
to any disallowance under section 36(1)(iii) read with section 40(b)(iv), the
Supreme Court observed as under:

“Prior to the Finance Act,
1992, payment of interest to the partner was an item of business disallowance.
However, after the Finance Act, 1992, the said section 40(b) puts limitations
on the deductions under sections 30 to 38 from which it follows that section 40
is not a stand-alone section. Section 40, before and after the Finance Act,
1992, has remained the same in the sense that it begins with a non obstante clause.
It starts with the words ‘Notwithstanding anything to the contrary in sections
30 to 38’ which shows that even if an expenditure or allowance comes within the
purview of sections 30 to 38, the assessee could lose the benefit of deduction
if the case falls under section 40. In other words, every assessee, including a
firm, has to establish, in the first instance, its right to claim deduction
under one of the sections between sections 30 to 38 and in the case of the
firm, if it claims special deduction, it has also to prove that it is not
disentitled to claim deduction by reason of applicability of section 40(b)(iv).
Therefore, in the instant case, the assessee was required to establish in the
first instance that it was entitled to claim deduction under section 36(1)(iii
), and that it was not disentitled to claim such deduction on account of
applicability of section 40(b)(iv). It is important to note that section 36(1)
refers to other deductions, whereas section 40 comes under the heading ‘Amounts
not deductible’. Therefore, sections 30 to 38 are other deductions, whereas
section 40 is a limitation on those deductions. Therefore, even if an assessee
is entitled to deduction under section 36(1)(iii), the assessee-firm will not
be entitled to claim deduction for interest payment exceeding 18/12 per cent
per se. This is because section 40(b)(iv) puts a limitation on the amount of
deduction under section 36(1)(iii). 

It was vehemently urged on
behalf of the assessee that the partner’s capital is not a loan or borrowing in
the hands of a firm. According to the assessee, section 40(b)(iv) applies to
partner’s capital, whereas section 36(1)(iii) applies to loan/borrowing.
Conceptually, the position may be correct, but in the instant case, the scheme
of Chapter IV-D was in question. After the enactment of the Finance Act, 1992,
section 40(b)(iv) was brought to the statute book not only to avoid double
taxation, but also to bring on par different assessees in the matter of
assessment. Therefore, the assessee-firm, in the instant case, was required to
prove that it was entitled to claim deduction for payment of interest on
capital borrowed under section 36(1)(iii), and that it was not disentitled
under section 40(b)(iv). There was one more way of answering the above contention.
Section 36(1)(iii) and section 40(b)(iv) both deal with payment of interest by
the firm for which deduction can be claimed. Therefore, keeping in mind the
scheme of Chapter IV-D, every assessee, who claims deduction under sections 30
to 38, is also required to establish that it is not disentitled under section
40. The object of section 40 is to put limitation on the amount of deduction which the assessee is entitled to under sections 30 to 38. Section 40
is a corollary to sections 30 to 38 and, therefore, section 40 is not a
stand-alone section.”

The Supreme Court has therefore held that
interest on partner’s capitals is primarily to be considered for allowance u/s.
36(1)(iii), and that section 40(b) puts a restriction on the quantum of interest
so allowable. That being the view taken by the Supreme Court, the view taken by
the Ahmedabad and Mumbai benches of the Tribunal seems to be the better view,
that interest on capitals to partners would be an expenditure, which would also
need to be considered for the purposes of disallowance u/s. 14A.

September 2017: Like-No-Other

September is a busy month for us.
But for September 2017, calling it ‘busy’ will be a ‘material misstatement’.
Every alternate day is a regulatory deadline under some law. While deadlines
have grown exponentially, September 2017 will be – like-no-other – a record of
sorts. Audit closure, tax returns, advance tax payments, AGMs, Tax Audits,
limited reviews, and GST dateline every 5 days all through the month makes this
a marathon month – like no other. While people will put pressure on your time
and attention, know when to insert a full stop, a comma or a semicolon.

A Chartered Accountant plays a
vital role in facilitating compliance for their clients. CA still evokes trust
which few handful professions carry today. It is another matter that some who
call themselves CAs would be better off showing their income under the head
business rather than profession. However, CAs still remain the first port of
call as trusted advisors to help clients tide over difficult times with
multiple timelines and complex issues. This is the hallmark of a professional:
to put client need above personal interest. For that very reason, Chartered
Accountants are not the ones who count, but those on whom clients can count on.  

Presumptive Punishment – If suspicion was evidence

Recently, it was reported that
MCA gave information about ‘shell companies’ to SEBI. While the words ‘shell’
company is not defined under the statute, let alone Companies Act, 2013, the
SEBI went ahead and issued an ‘administrative’ order to put a ban and have
stock exchanges initiate proceedings against the companies. Without going into
the validity of whether these companies have committed any default, the basis
on which SEBI went ahead and put strictures on ‘presumptive basis’ is alarming.
SEBI even challenged the jurisdiction of SAT to entertain an appeal against its
order, calling it ‘administrative’, even when the order had ‘serious civil
consequence’ and ‘prejudicially impaired the rights and obligations’ of the companies.
Such actions by MCA and SEBI, even if they contained substance, brings to fore
the approach based on ‘suspicion’, abruptness and disregard to natural justice.
The SAT rightly pointed out – “We are prima facie of the opinion that
the impugned communication issued by SEBI on the basis that the appellants are
‘suspected shell companies’ deserves to be stayed1”. While every
unlawful activity deserves right action, overstepping the boundaries and
violating the rights is more dangerous. Thomas Jefferson said this about
rightful liberty: “Rightful liberty is unobstructed action according to our
will within limits drawn around us by the equal rights of others. I do not add
‘within the limits of the law’ because law is often but the tyrant’s will, and
always so when it violates the rights of the individual.”

Amendments Galore: Notification, Clarification, Corrigendum

Recently, we have seen some
pieces of clarification, exemptions and relaxations which make the
process<purpose! Professionals often seek solace in the adage – better late
than never. Take the example of ICOFR, made applicable to all companies without
reasonable exceptions. The Companies Act, 2013 had a bias to address corporate
frauds, and so it brought out ‘one size fits all’ approach. Recent announcements
by the Ministry of Corporate Affairs have cleared impediments thrust upon
non-public interest entities. Specifically, the notification, corrigendum and
circular dated 13th June, 13th July and 25th
July respectively have eliminated the need to report on ICOFR by the auditors
in respect of certain companies.

A long pending proposal to amend
the Companies Act was passed by Lok Sabha on 27th July 2017 through
the Companies (Amendment) Bill, 2017. The changes are yet to be notified.
Auditor ratification (S. 139) has been done away with. S. 185 (on loans) is
replaced. The move to bring back layers of subsidiaries is still in limbo since
the proviso to S. 2 (87) remains to be notified. Let’s hope that finally the
layers are not brought back and vested interests do not succeed in creating
circular ownership loops. Declaration of dividend out of unrealized/notional/
revaluation gains due to fair value is specifically barred (S. 123). This is
especially relevant considering that many fair valuations have boosted annual
and Q1/2017 results of Ind-AS compliant companies. While garnishing of profit
and loss account through fair valuation makes the results look better, prudence
should hinder distribution of unrealized gains. Amendments made in Companies
Act, 2013 should strengthen the application of law in substance and we can hope
that there is better congruence amongst the family of laws applicable to
companies. 

Reporting under Tax Audit has
changed as well. While carrying out the audits u/s. 44AB of the Income Tax Act,
professionals will have to pay special attention to amended clause 13 relating
to ICDS and clause 31 in relation to sections 269SS and 269T. Special attention
must also be paid to cash balances in respect of non-corporate assessees. So
far as companies are concerned, there is a reporting about SBN in the financial
statements, however, in case of other assessees, one will have to be especially
cautious. As if this was not enough, few days ago Form 29B was changed to
address Ind AS companies under MAT. 

Paying a tribute

We celebrated 70 years of our
nationhood. A simple, silent yet an all pervasive achievement has been in the
area of payments. It sounds too familiar to be of any consequence. However, one
of the silent institutions of India, National Payments Corporation of India has
been at work to bring about game changing innovations. I recently was at a talk
by the former CEO of NPCI. He recollected how we issued cheques, the cheques
went for ‘collection’ and took up to 21 days when they were ‘outstation’
cheques. Cheques physically moved to a location for ‘clearing’. Millions of
cheques ‘cleared’ daily. Old men and women walked for miles to collect their
pension and other dues from designated banks! All this was not too long ago.
Today, we have come far from all that and financial inclusion has spread all
the way to grass roots level. RTGS, NEFT, IMPS, RuPay Card, BHIM, *99# have
largely replaced cheques, clearing, and passing. Payment technologies, such as
IMPS, were pioneered by India. 24X7 payments through IMPS is one such
innovation which allows one to pay and receive money on a real time basis. We
all have paid hefty bank charges for issuance of demand draft, while today many
banks charge Rs. 5 for transfer up to Rs. 1,00,000 and NIL up to Rs. 1,000.
That is certainly a big payout from financial technologies at work!  

Finally, I hope we all sail
through September as we have in the past! Despite the respite given by CBDT on
31st August, remember to take care of yourself. In the words of Jim
Rohn: Take care of your body. It’s the only place you have to live.

Raman
Jokhakar

Editor

Untitled

As I prepared to write
this piece, a flurry of thoughts were racing through my mind. In an attempt to
fish some of these thoughts and put them into words before they vanish into
oblivion, I popped open my word editor and launched a new document. The file
name on top displayed “Untitled”.

I struggled for a good 20
minutes in an attempt to assign a good title to this piece. I needed to know
how it would look like when I have finished writing it, and what will be the
exact picture? Alas, it was all in vain. I negotiated with myself to begin
writing, explore the work in progress and perhaps discover a title enroute.

Don’t we often fall into
the trap of assigning a title to our lives? When we breed the desire to begin a
new venture, we are flooded with thoughts such as – “where will I be years down
the line” or “will this end up well for me?” or “I still haven’t figured out
exactly how I will go about it!” Very often, these thoughts clutter us so
successfully, that we fail to even begin writing our story. How often do we
give ourselves the opportunity to start with something, explore the work in
progress and then assign a title to our story?

Daymond John, founder of
the apparel retail chain FUBU, waited tables at a restaurant when he had
a desire to create an apparel brand for young men. As he struggled to see how
far and fast his brand would grow, he was selling self-sewn hats for some extra
money. He got an order from America’s leading retailer for $400,000 worth of
products. However, there was a challenge – he had no inventory! Daymond
accepted the order and then began to explore exactly HOW he was going to fulfil
it. Today, FUBU has sold more than $6 Billion worth of products. What
would have happened if he had not begun at all because he did not have a final
picture or a goal or an exact plan in mind?

We often become
disillusioned by “begin with the EXACT goal in mind”. How often do we have an
exact goal before we begin something? How many of us are exactly where we
planned to be 10 years ago? Goals are not stagnant and firm, but like breathing
organisms which keep moving forward as we keep moving towards them. It is more
important to have a direction in which we wish to succeed and begin taking
action along that direction. We can begin to explore, discover a goal and form
the title of our story on the way.

There is a famous story
when a man was passing through a jungle where he found many arrows having hit
the bulls eye on trees. He looked around and found a boy with a bow and arrows.

He congratulated him, “You
are a great archer. All your arrows have hit the bulls eye. Can you show me how
you do it?” The boy blushed and said, “I hit the arrow first and make the
circle later.” Many great people have hit the arrow first, and figured out
their bulls eye later.

Are we struggling to start
something new because we are confused about a final goal? It is ok to flag off
without a map but just with a compass in hand. It is ok to be confused and
begin with nothing but a will to take action. It is ok to begin a new journey
while still being ‘untitled’.

Society News – II

GST Seminar at Ahmedabad
jointly with CA  Association of Ahmedabad
held on 23, June, 2017

BCAS held a one day seminar on GST jointly with Chartered
Accountants’ Association of Ahmedabad (CAA). The object of the conference was
to disseminate the views of eminent faculties who have carried out in depth
study of newly enacted law of GST together with their vide experience in
profession. CA Puloma Dalal, CA Chirag Mehta and CA Dushyant Bhatt, faculties
from our Society spoke on various areas of GST at length at the full day
seminar. The seminar was attended by 85 participants.  

CA. Puloma Dalal

CA. Chirag Mehta

CA. Dhushyant Bhatt
In the first session CA
Puloma Dalal gave the participants an overview of GST law including the concept
of Supply under GST and provisions relating to liability to pay Tax and Time
and Value of Supply

CA Chirag Mehta gave a
detailed presentation on provisions relating to return filing and took the
participants through the process of filing of returns. He also discussed the
statutory provisions relating to Input Tax Credit under the GST Law and the
concept of matching of ITC under the GST Law

CA Dushyant Bhatt
discussed the provisions relating to job work and dealt with various issues to
be addressed by the entity carrying out job work as well as by the entity
sending material for job work, payment of tax, TDS and E-Commerce provisions
including TCS.

A one and half hour long
interactive panel discussion was held where various questions of the
participants were taken up by the three speakers. Participants benefitted a lot
from the meeting.

GST Workshop with IMA Indore held on 24th June,
2017 at Indore

BCAS jointly with Indore Management Association (IMA)
organized Exclusive Workshop on Saturday, June 24, 2017 at Brilliant Convention
Centre, Indore titled “Fasten Your Seat Belt-GST ready for take off”.

Faculty for this workshop
representing BCAS comprised of CA. Rajat Talati, and CA. Deepak Thakkar. CA.
Santosh Muchhal, President, IMA welcomed the delegates and thanked BCAS for
this workshop. President (Elect) of BCAS CA. Narayan Pasari in his welcome
speech introduced BCAS to the gathering. He also mentioned that GST is a
win-win reform for everyone and will have lasting benefits for businessmen,
Government, consumers and professionals.

CA Rajat Talati started the first session by stating that GST
is an Integrated Tax Regime which will reduce Policy Paralysis in Indian
Economy. It will also avoid Double Taxation problem which of late is posed as a
major threat for the Indian Economy.

CA. Talati explained that
Goods and Service Tax (GST) is a destination based tax on consumption of goods
and services. It is proposed to be levied at all stages right from manufacture
up to final consumption with credit of taxes paid at previous stages available
as setoff. In a nutshell, only value addition will be taxed and applicable tax
is to be borne by the final consumer.

CA Deepak Thakkar took the
2nd Session and explained that Goods and Services Tax (GST) will be
levied at multiple rates ranging from 0 per cent to 28 per cent. GST Council
finalized a four-tier GST tax structure of 5%, 12%, 18% and 28%, with Zero to
lower rates for essential items and the highest for luxury and de-merit goods
that would also attract an additional cess. Goods and Service Tax on services
will go up from 15% to 18%. The services being taxed at lower rates, owing to
the provision of abatement, some services such as train tickets etc will fall
in the lower slabs.

It would be a dual GST with the Centre and States
simultaneously levying it on a common tax base. The GST to be levied by the
Centre on intra-State supply of goods and / or services would be called the
Central GST (CGST) and that to be levied by the States would be called the
State GST (SGST). Similarly Integrated GST (IGST) will be levied and
administered by Centre on every inter-state supply of goods and services. The
GST will be shared by the Centre and the respective State equally.

CA. Rajat Talati

CA. Deepak Thakker

He also mentioned that
there are many benefits available to small tax payers under the GST regime. The
two speakers answered the many questions raised by the participants at the end
of their sessions.

The joint workshop was a very enriching experience for the
140 participants.

Two days seminar on GST
for Trade, Industry and Professionals held on 24th& 25th
June 2017 at Ghatkopar

This two day seminar was held at
Zaverben Auditorium, Ghatkopar where 725 participants attended comprising of
chartered accountants and members of trade and industry.


CA. Sunil Gabhawalla


CA.Mandar Telang

 

CA. Shreyas Sangoi

 

CA. Ashit Shah
The Seminar covered almost
all aspects of Final GST law comprising of Integrated Goods and Service Tax
Act, Central Goods and Service Tax Act and State Goods and Service Tax Act
along with the rules enacted by the Government. The eminent Speakers explained
the salient features of the law including the concept of supply, classification
of goods and services, time and place thereof, value of supply, charging
provision, threshold exemption, transition provisions, composition scheme,
registration, maintenance of records, tax invoice, payment of GST including
under reverse charge, returns and other compliances, input tax credit including
Input Service Distribution Mechanism, export and import of goods and services
including SEZ, job work under GST, etc. The learned Speakers from BCAS included
CAs Sunil Gabhawalla, Samir Kapadia, Rajkamal Shah, Naresh Sheth, Jayesh Gogri,
Mandar Telang, Ashit Shah and Shreyas Sangoi. Advocate Shailesh Sheth also gave
his valuable inputs on GST at the Seminar. At the end of the seminar, there was
specific industry wise panel discussion covering, textile and garment
manufacturers, gem and jewellery, stock brokers, mutual fund and insurance
agents, transport and logistics, C & F agents, tour operators and travel
agents, builders & developers, works contractor, co-operative housing
societies, caterers, hotels & restaurants, SMEs, retailers, traders and
small scale manufacturers, leasing and right to use goods, job worker and
service providers. The overview of the new indirect tax law replacing plethora
of numerous laws and detailed discussion on each subject and dissemination of
latest knowledge alongwith industry specific panel discussion generated lot of
interest amongst the participants making the seminar interactive to a large
extent. All participants were fully enriched by the deliberations at the
Seminar.

CA. Naresh Sheth

CA. Rajkamal Shah

CA. Samir Kapadia

Lecture Meeting on GST
& CAs – Impact on Compliance & Practice held on 27th June,
2017

Indirect Taxation
Committee of BCAS organised a lecture meeting on “GST & CAs – Impact on
Compliance & Practice” on 27th June, 2017 at K. C. College Auditorium,
Churchgate which was addressed by CA. Sunil Gabhawalla.


CA. Sunil Gabhawalla

With GST becoming a reality,
there were many issues which were faced by the practising chartered accountants
like the impact on billing under the Service Tax law and receipt under the GST
regime, paying tax on procurements from unregistered vendors, concept of supply
and place of supply with respect to clients being located in other states, a
multi-locational firm etc. CA, Gabhawalla explained about the new GST Law, its
challenges and compliances and how it is going to impact practicing Chartered
Accountants. He also enlightened on the Composition Tax and monthly return
filing process under GST. 

The speaker explained in detail and in candid way the
challenges that a practising chartered accountant would face, He also answered
a few queries raised by the members.

The participants benefitted a lot from the meeting.

‘New Curriculum of CA
Course – Has the bar been raised? organised on 5th July, 2017 at
BCAS.

HDTI Committee had organised a talk on ‘New Curriculum of CA
Course – Has the bar been raised?’ by Member of Central Council of ICAI, CA
Nihar Jambusaria.

The talk was organised for students who are eligible to
appear for CA exams under new syllabus and having their doubts regarding the
same.

CA Nihar Jambusaria meticulously explained each and every
aspect of the new curriculum and also provided a comparative analysis between
the old and new curriculum. The talk was followed by an extensive ‘Q&A’
session wherein students sought clarifications for their doubts and the speaker
positively answered all their queries.

The talk received overwhelming response from the student
fraternity. Further, quite a lot of students also took the benefit of live
streaming of the seminar at their respective places or CA firms.

The talk provided valuable
guidance to all students and was widely appreciated. 

Study Circle Meeting on
Technology Trends: Impacts of Artificial intelligence, Machine learning,
Drones, Big Data held on 5th July, 2017 at BCAS Conference Hall.

At this study circle meeting, Mr. Nikunj Sanghvi, a Mobile /
Digital Professional from USA, shared his insights on the upcoming technology
trends and their probable impact on businesses going forward. He started by
explaining the trend of expectations towards new technologies – how they
initially reach a peak followed on by disillusionment as the technologies are
not as good as expected and later on get slowly accepted by public at large. He
covered many different innovations including drones, augmented reality, digital
twins, big data, artificial intelligence & machine learning, intelligent
apps, autonomous vehicles, speech recognition and voice interfaces, block chain
and crypto currencies.

Mr Sanghvi also explained these innovations and their impact
which are already seen in some business areas. For example, using drones,
auditors are doing a physical check of goods in large warehouses in a day which
otherwise would take them weeks! On giving such other examples, the immediate
query from the group was what will happen to many existing jobs. Mr Nikunj
mentioned that while there may be jobs which are lost as and when these
technologies become mainstream, he was positive that there will be many newer
jobs which people will be able to fill in. His point was that Man’s wants are
unlimited and even if a few wants are met by these new technologies, there will
be many more which will remain unfulfilled. Therefore, there may be no need to
worry unnecessarily for job losses.

The meeting ended on this positive note and participants
benefitted a lot.

69th
Foundation Day Lecture Meeting on “ENERGising India-Changing Paradigm for
Professionals” held on 6th July, 2017 at Garware Club House,
Churchgate, Mumbai

A lecture meeting on “ENERGising India-Changing Paradigm for
Professionals” was held on 6th July, 2017 on the occasion of 69th
Foundation Day of the Society which was addressed by our Hon’ble Union Minister
of State (IC) for Power & Renewable Energy CA. Piyush Goyal.  President CA. Chetan Shah briefly touched
upon the GST regime and also shared the profile of Mr Goyal while welcoming the
Chief Guest and then requested him to address the august audience.

CA. Piyush Goyal – Minister
of State for Power, Coal, New
and Renewable Energy and
Mines (Independent charge)

Mr Goyal started his oration with the past memories of his
BCAS membership and appreciated the caricature of the cover design of GST issue
of July Journal stating that the cover design is very well presented. He then
talked about the GST Bill and explained how GST Council has been empowered to
function without any interference from the Government. Mr Goyal also emphasized
that GST is a great testimony with the culmination of 17 taxes into one tax
“GST” where the Traders, Businessmen, Manufacturers and others will get the
Input Tax Credit when goods move from one place to another. This transformation
would help to curb inflation, bring transparency, eradicate the atmosphere of
uncertainties and corruption, eliminate black money etc. This revolutionary
step has been taken by the Government in the national as well as public
interest without any political opportunism. 

 

BCA Journal – GST Special Issue Release
L to R : CA. Sunil Gabhawalla, CA. Narayan Pasari, Shri Piyush Goyal (Speaker), CA.
Chetan Shah (President), CA. Manish Sampat, CA. Suhas Paranjpe, CA.Abhay Mehta.

On the topic of the Lecture Meeting “ENERGising
India-Changing Paradigm for Professionals”, he cited Mahatma Gandhi Quote
that we are the trustees of the Planet and it is our collective responsibility
to keep the environment clean, abolish pollution and adapt to healthy and
hygienic climate changes for better quality of life for 1.25 billion Indians.
Our inhabitants especially in the rural areas cannot afford to live without
electricity, shelter, transportation, medical facilities etc and Government has
taken strong steps to provide these amenities to majority of the villages and
would reach the zero defect in a phased manner. Mr Goyal also informed the
gathering that at present, India is energy surplus and self-sufficient in Power
Distribution. As per the world standards, we are contributing to clean energy
and reducing pollution levels. He also urged upon the citizens to use LED bulbs
to conserve the energy and contribute in Nation Building. Besides, Mr Goyal
also remembered our armed forces and assured to provide them with the most
modern equipment and technology to fight any internal and/or external threat.

 

Audit Checklist Publication Release
L to R : CA. Raman Jokhakar, CA. Sunil Gabhawalla, CA. Narayan Pasari, Shri
Piyush Goyal (Speaker), CA Chetan Shah (President), CA. Manish Sampat, CA.
Suhas Paranjpe, CA Abhay Mehta

He thereafter appealed to the Chartered Accountants
Fraternity to strengthen and upgrade the audit standards to curb the Tax
evasion/avoidance and further transform the future of India, because CAs are
the force to reckon with in the professional industry.

At the end, he expressed confidence that Chartered
Accountants can do a lot for the public good and make India again.

The audience got mesmerized with Mr Goyal’s presentation
skills and gained a lot from the insights straight from the heart and from his
spellbinding Speech.

Lecture Meeting on “Recent Developments in Taxation of
Capital Gains” held on 11th July, 2017.

Taxation Committee of BCAS organized a Lecture Meeting on
Recent Developments in Taxation of Capital Gains on 11th July, 2017
at IMC, Churchgate, Mumbai. The first meeting of the year at BCAS which
commences from the Founding Day, 6th July, was addressed by CA.
Pinakin Desai wherein he explained about the Notional Taxation w. r. t. Fair
Market Value (FMV) of unlisted equity shares under Sec 50CA, shift of base year
for indexation from 1981 to 2001 to compute the cost of bonus shares and
amendment to Sec 10 (38) with background and notification on 3rd proviso
to Sec 10(38). He also discussed about the Protocol to India – Mauritius Treaty
with emphasis on Mauritius and Multilateral Treaty (MLI) and protocol amending
India-Singapore Treaty. CA. Pinakin Desai further explained about the valuation
of shares under Normative Valuation with draft valuation rule notified u/s. 50
CA and issues under normative valuation. He also deliberated on Sec 195 –
withholding actual or notional consideration for Sec 50 CA. 



CA. Pinakin Desai

Mr Desai also explained the
above topics with case studies on (i) resolving normative valuation of shares
as per draft notification, (ii) valuation of unquoted equity shares, (iii)
acquisition in IPO, (iv) acquisition pursuant to merger, (v) gift of shares,
(vi) Inter-se promoter transfer, (vii) direct transfer vs. indirect transfer,
(viii) impact of dividend distribution and (ix) case study under
India-Mauritius Treaty.

The hall was packed with
the audience and it was a very fulfilling and enriching experience for the
participants to benefit immensely from the meeting.

GST Training Seminar Jointly with NACIN held from 13th
July to 15th July, 2017 at BCAS Hall

With the roll out of GST on
1st July, 2017, the 3rd batch of GST Training Seminar for
Trade, Industry & Profession was organised by Indirect Taxation Committee
of BCAS jointly with the National Academy of Customs, Indirect Tax and
Narcotics (NACIN), to make understand the intricacies and the importance of GST
laws & provisions.

CA. Mandar Telang

CA. Shreyas Sangoi

 

CA. Chirag Mehta

CA. Govind Goyal

The purpose of holding such training workshop
was dual – one to educate the trade and industry about the new legislation and
more importantly, partnering Government in disseminating information about this
landmark “One Nation One Tax”.

 The speakers at the Seminar were BCAS members
accredited by the NACIN as GST Trainers, and a few officials from the GST
department. The faculty from BCAS included CAs Chirag Mehta, Dushyant Bhatt,
Govind Goyal, Mandar Telang, Naresh Sheth, Rajkamal Shah, Shreyas Sangoi and Ms
Vishaka Borse, & Mr, Shrikant Shaligram from the GST Department.

CA. Naresh Sheth

CA. Dushyant Bhatt

 

CA. Shrikant Shaligram


CA. Rajkamal Shah

The participants immensely benefited from the training
programme.

Dharampur Noble Social Cause Visit – on 15th &
16th July, 2017

The visit to Dharampur was
organised for two days by the Human Development and Technology Initiative


Dharampur Noble Social Cause Visit

Committee of BCAS jointly
with BCAS Foundation, for Tree Plantation, Eye Camp project and visit to
various NGOs, at Dharampur. These NGOs are engaged in the various social
welfare activities for Holistic growth of Tribals located in the remote
interiors. A Team of 24 enthusiastic volunteers including students who were
willing to take active participation in this noble mission joined the trip.

Sarvoday Parivar Trust (SPT)

The SPT is a NGO, following
Gandhian philosophy and engaged in various tribal welfare activities in the
field of Education / Health / Agriculture / Water management / Environment,
etc. The BCAS Foundation committed for plantation of 3,000 trees to SPT. The
team also visited the Residential School run by the SPT which is home to more
than 350 children from nearby villages.. This residential school has encouraged
poor labourers and farmers in the tribal areas to send their children for
further studies. It has helped in reducing child labour, child marriage and
other social evils which takes place mainly due to illiteracy and poverty.
Members had good interactions and time with them. The School premises are old
and needs to be renovated and upgraded to provide better amenities to children.
BCAS Foundation has committed its full support for the redevelopment and
upgradation of school/ hostel.

Avalkhandi Kelavani Trust (AKT)

The AKT is an NGO which
carries out various activities in Education & Water Management in the
villages of the most backward forest of Dharampur, running a government School
where approximately 300 students are studying & has one Chhatralaya whereby
180 children are accommodated for stay from other villages who would have
otherwise been deprived of education. The BCAS Foundation committed for
plantation of 2,500 trees to AKT. On behalf of BCAS Foundation, team
distributed kits for outdoor games like cricket / Football/ Badminton  / Flying Dish etc  and many educational games at AKT for their
children. The BCAS Foundation contributed Rs. 30,000/- for setting up a library
in the Chhatralaya.

The team viewed the various
check dams created on mountains in the process of water management.

Dhanvantri Trust (DT)

The trust is founded and
managed by Dr. Kirtikumar Vaidya, from Mumbai who left Mumbai at a young age
& has dedicated his life for socio economic rural development of tribal
villages of South Gujarat. With divine blessings he started an Eye Hospital in
Vansda. Our team member had contributed Rs. 63 lakh for setting up Hospital
with latest Equipment & Technology for treating and curing all types of Eye
Surgeries.

BCAS Foundation sponsored 201 Eye Surgeries for poor Tribals & has
dedicated support for 50 more, thanks to contribution & support of Esteemed
Donors, amounting to Rs.2.01 lakh.

Dr. Vaidya proposed to set up a school in Vansda. BCAS Foundation has
committed their support for the same.

The   trip for Tree plantation
drive and the Eye Camp was truly enriching, enlightening and educational too
for the visiting members and students. The memories treasured from the trip,
would always encourage and motivate them to participate more in such events
which would be beneficial to the society at large.

Direct Tax Study Circle Meeting on ‘Income Computation
Disclosure Standards; ICDS V Tangible Fixed Assets, ICDS IX Borrowing Costs
& ICDS X Provisions, Contingent Liabilities & Contingent Assets’ on 15th
July 2017

The Chairman of the
Meeting, CA. Anil Sathe gave his opening remarks and raised some issues
relating to ICDS which could face litigation in the long run. The Group leader,
CA. Dhaval Desai drew attention to an extract from the Supreme Court decision
in Woodward Governor 312 ITR 254 wherein the Hon’ble Supreme Court observed
that for income tax purposes, profits are to be computed in accordance with the
ordinary principles of commercial accounting unless, such principles stand
superseded or modified by legislative enactments and this is where section
145(2) comes into play.

Thereafter, the group
leader briefly explained the provisions of ICDS IX ‘Borrowing Cost’-
recognition principle, definitions of borrowing cost and qualifying assets. He
explained the provisions of capitalisation in respect of specific borrowings
and general borrowings and the provisions relating to commencement and
cessation of the capitalisation. He mentioned that as per Accounting Standard
16, an asset qualifies to be a Qualifying Asset only if it takes substantial
period of time to get ready for its intended use or sale, however ICDS has done
away with the criteria of ‘substantial period of time’ (except for inventories)
and this would lead to a huge difference between the capitalisation of
borrowing costs as per books and capitalisation as per ICDS.

The group leader further
touched upon the provisions of ICDS X ‘Provisions, Contingent Liabilities and
Contingent Assets’. He mentioned the yardstick for recognition of a provision
‘probable’ as per Accounting Standard 29 has become stricter under ICDS wherein
the term ‘probable’ has been substituted with ‘reasonably certain’. Similarly,
in case of contingent assets, the term ‘virtual certainty’ used for recognition
as per AS 29 has been substituted with ‘reasonably certain’ under ICDS. He
commented that such provisions would certainly lead to preponement of income
and postponement of deduction of expenses. The group leader touched upon
transitional provisions contained in ICDS X.

Subsequently, CA. Dhaval
briefly explained the provisions of ICDS V ‘Tangible Fixed Assets’. He
highlighted one of the differences between existing AS and ICDS with regard to
treatment of expenditure between trial run and commercial production. In this
context, Revised AS 10 mandates such expenditure to be revenue in nature
whereas CBDT clarification on ICDS states that such expenditure should be
treated as capital expenditure.

The participants benefitted a lot from the
meeting.

Representation in Respect of Draft Rules 10DA & 10DB

16th
October, 2017

 Mr.
Sushil Chandra, Chairman

Central
Board of Direct Taxes,

North
Block,

New Delhi

 

 Representation
in respect of Draft Rules 10DA & 10DB

 

1. Deferment of the implementation of the Proposed Rules by 1 year

 

     There
are many tax jurisdictions (e.g. USA) which are yet to notify regulatory
provisions to compile the documents i.e. Master file, Country by Country Report
[CbCR] etc., as suggested in the BEPS Action Plan 13.

 

Suggestion:

In view of
this, it would be difficult to obtain required information and documents for
the Constituent Entity [CE] resident in India. Therefore, the implementation of
the rules 10DA and 10DB should be deferred by at least one year.

Alternatively, CEs resident
in India whose parent entity is situated in a jurisdiction where CbCR is
presently not applicable, be exempted from the onerous responsibility of
compiling and submitting global data pertaining to international group. In such
cases, the submission of the report may be restricted to only Indian
operations.

 

2. Applicability of the Rule 10DA and Form 3CEBA (Master File) only to
CE Resident in India

 

     Section
286(1) refers to ‘every constituent entity resident in India’, whereas draft
rule 10DA (1) refers to ‘every person being constituent entity of an
international group’. In the draft rule there is no reference to CE resident in
India. This is likely to create unwarranted and avoidable confusion and issues.

 

Suggestion:

It is
therefore suggested that it should be clearly provided in Rule 10DA that the
provisions relating to Master file are applicable only to resident CE in the
scheme of the notification.

 

3. Exclusion of the Capital Account Transactions

 

    For
the purposes applicability of the Master file, rule 10DA(1)(ii) provides that
‘the aggregate value of international transaction’ during the reporting year,
as per the books of accounts, exceeds fifty crore rupees, or in respect of
purchase, sale, transfer, lease or use of intangible property during the
reporting year, as per the books of accounts, exceeds ten crore rupees.

 

     For
the purpose of calculating the threshold of “aggregate value of international
transaction”, the notification does not exclude capital account transactions
(such as issue of shares, advances, trade receivables, etc.).

 

     It
is important to note that Rule 10DA(1)(i) as well as rule 10DB(6), both for the
purposes of calculation of threshold limits, consider consolidated group
revenue whereas the definition of the ‘international transaction’ in section
92B includes capital account transaction such as issue of shares, loans, trade
receivable etc. The intention of the BEPS Action Plan 13 seems to set the
threshold limit based on the gross revenue i.e. current account transactions
only (i.e. transactions which have impact on statement of profit and loss).

 

Suggestion:

It is
therefore suggested that the Capital Account Transactions should be excluded
while calculating the threshold of “aggregate value of international
transaction” for the purposes of applicability of master file provisions.

 

4. Threshold limit on the applicability of the master file provisions

 

Rule 10DA(1)(i) for the
purposes of master file provisions provides a limit of Rs. 500 crores of the
consolidated revenue of the international group. For the purposes of country by
country reporting, rule 10DB(6) provides threshold of total consolidated group
revenue of the international group of Rs. 5,500 crore.

Suggestion:

Considering
the onerous requirement for maintaining master file and other documents, the
threshold limit for the first five years should be kept at a higher level i.e.
say 50% of the threshold of CbC Reporting amounting to Rs. 2,750 crore. The
limit can further be reviewed and reduced, if necessary, based on the
experience gained.

 

Consequently,
the threshold prescribed in Rule 10DA(1)(ii) pertaining to the aggregate value
of international transactions (other than intangible properties) should be
increased to Rs. 500 crore from the proposed limit of Rs. 50 crore. The
threshold for transactions pertaining to intangible property should be
increased to 100 crore from the proposed limit of Rs. 10 crore.

 

5. Due date for furnishing CbC Report

The Form 3CEBC requires to
compile data from multiple tax jurisdictions in which the CEs of the MNEs are
operating. This would require considerable amount of time and efforts.

 

Suggestion:

Therefore,
it is suggested that the due date for furnishing CbC Report (Form 3CEBC) should
be extended from 30th November 2017 to 31st March 2018,
in line with due date for furnishing Master file.

 

6. Definition of MNE group

 

In the Indian Income-tax
Act, there is no definition of ‘MNE group’ as stated in Form 3CEBC and thus,
the same needs to be changed in line with the Act i.e. the definition of
‘international group’ provided in section 286(9).

 

7. Amendment in the headings of Forms 3CEBB and 3CEBE

 

The heading in both Forms
3CEBB and 3CEBE states the term “non-resident international group” which words
are absent in the Act, and thus, heading in both Forms requires to be amended.

 

8. Methodology to be adopted for preserving the sanctity and
confidentiality of the information

 

Both the Master File and
CbC Report and the relevant Forms mandates submission of many confidential data, information and documents which, if leaked, can create havoc with the
business operations of the relevant international group.

The notification is
completely silent on the methodology to be adopted for preserving the sanctity
and confidentiality of the information shared by the international group.

Suggestion:

Therefore, it is suggested
that in line with best international practices, proper systems and procedures
should be adopted by the CBDT and the responsibility for such practices should
be properly assigned (including strictest access control with higher
authorities with accountability) and penalty be prescribed for non-adherence to
the strict protocol of confidentiality.

 

9. Additional requirements for Master File

 

Action 13 report of the
OECD provides the requirements for Master File. While the Indian Government has
largely adopted the format provided by OECD, the draft Indian Rules contain
certain additional requirements as mentioned below:

 

–  List of all the operating entities of the
international group along with their addresses – This information does not
form part of Action 13 report.

 

–   The functions, assets and risks
analysis of the constituent entities of the international group that contribute
at least ten per cent of the revenues, assets and profits of the group; –
The Action 13 report requires a brief functional analysis describing the
principal contributions to value creation by individual entities within a
group.

    

 

–  List of all the entities of the
international group engaged in development of intangibles and in management of
intangibles along with their addresses. The Action 13 report requires a
general description of the location of principal research and development
facilities and location of management.

 

–  Detailed description of the financing
arrangements of the international group, including the names and addresses of
the top ten unrelated lenders. Action 13 report requires a general
description of the group financing activities.

 

– In a number of instances, the draft
rules require a “detailed description” instead of a “general description” as
mentioned in Action 13 report.

 

Suggestion:

Most countries have adopted
the format as provided by the OECD. It is requested that the format of Master
File be in sync with the format as provided by OECD. The additional
requirements will create certain inconsistencies for the MNC group since the
group will have to prepare different versions of the Master File for different
countries.

For Bombay Chartered Accountants’ Society,

                                                                               

Narayan R. Pasari                                                             Mayur Nayak                 

President                                                     Chairman,
International Taxation Committee

11 Section 37(1) – Business expenditure – Capital or revenue – A. Ys. 2008-09 and 2009-10 – Assessee obtaining mining lease from Government – Writ petitions to quash lease – Legal expenditure to defend and protect lease – Is revenue expenditure

Dy. CIT vs. B. Kumara Gowda; 396 ITR 386
(Karn):

The assessee was in the business of mining
iron ore in lands taken on lease from the State Government. In the year 2006,
the Department of Geology had leased out certain lands to the assessee for the
purpose of mining iron ore. The assessee was working on the lease as a lessee
of the State Government. The grant of lease to the assessee was challenged by
third parties in writ petitions. In the A. Ys. 2008-09 and 2009-10, the
assessee incurred expenditure by way of legal fees to defend and sustain the
lease. The assessee claimed deduction of the expenditure as revenue
expenditure. The Assessing Officer disallowed the claim. The Tribunal allowed
the assessee’s claim.

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

 “i)  The test to decide whether
a particular expenditure is capital or revenue in nature, is to see whether the
expenditure in question was incurred to create any new asset or was incurred
for maintaining the business of the company. If it is former, it is capital
expenditure; if it is later, it is revenue expenditure.

 ii)  The legal expenditure
incurred by the assessee to defend the writ petitions filed to quash the
Government notification and lease deed was not a capital expenditure and
deduction was allowable.”

Applicability of Section 68 to Cash Credits in Absence of Books of Account

Issue for Consideration

Section 68 of the Income-tax Act, 1961 deems
unexplained cash credits to be the income of the assessee under certain
circumstances. Section 68 reads as under:

 “Where any sum
is found credited in the books of assessee maintained for any previous year,
and the assessee offers no explanation about the nature and source thereof or
the explanation offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the sum so credited may be charged to income tax as the income of
the assessee of that previous year.”

The section, for its application, apparently
requires that a sum is found credited in the books of account of the assessee. An
issue has arisen before the courts as to whether unexplained receipts or
credits can be deemed to be the income of the assessee u/s. 68, even in a
situation where books of account are not maintained or the sum is not credited
in the books of account of the assessee. In an earlier decision, the Bombay
High Court (followed by the Gauhati High Court and the Madras High Court) has
taken the view that such amounts, not found credited in the books of account,
cannot be treated as cash credits taxable u/s. 68. Recently, the Bombay High
Court has however, taken a contrary view that such amounts can be taxed under
section 68.

Bhaichand N. Gandhi’s case

The issue first arose before the Bombay High
Court in the case of CIT vs. Bhaichand N. Gandhi 141 ITR 67.

In this case, pertaining to assessment year
1962-63, where the previous year was Samvat year 2017, the assessing officer was
not satisfied with the explanations offered by the assessee regarding the
genuineness of certain cash credits totalling to Rs. 30,000 found recorded in
certain books, which, according to the assessing officer, were the books of
account of the assessee. He, therefore, treated the amount of such credits as
income from undisclosed sources. The Appellate Assistant Commissioner confirmed
the addition of such credits as income of the assessee.

Before the Tribunal, an argument was put
forward on behalf of the assessee that in respect of one of the deposits of Rs.
10,000 included in the amount of Rs. 30,000, that it was not an amount credited
in the books of the assessee maintained by the assessee for the previous year,
but was only a deposit in the bank account of the assessee. It was contended
that the bank passbook was not a book maintained by the assessee, and that
therefore, even if such amount was treated as undisclosed income of the
assessee, it  could only be assessed in
the financial year of the deposit (as applicable to unexplained
investments/money u/s. 69/69A), and not in the previous year.

The Tribunal accepted the assessee’s
argument holding that the bank passbook could not be treated as a book of the
assessee, and that it was not a book maintained by the assessee for any
previous year as referred to in section 68.

On an appeal by the Revenue, the Bombay High
Court analysed the provisions of section 68. It took note of the decision of
the Supreme Court in the case of Baladin Ram vs. CIT 71 ITR 427, where
the court had held that it was only when an amount was found credited in the
books of an assessee that the new section would be attracted. It further
observed that it was well settled that the only possible way in which income
from an undisclosed source could be assessed or reassessed, was to make an
assessment during the ordinary financial year. The Supreme Court had noted that
even under the provisions embodied in section 68, it was only when any amount
was found credited in the books of the assessee for any previous year that the
section would apply, and the amount so credited might be charged to tax as the
income of that previous year, if the assessee offered no explanation or the
explanation offered by him was not satisfactory.

The Bombay High Court noted with approval
the observations of the Tribunal that it was fairly well settled that when
monies were deposited in a bank, the relationship that was constituted between
the bank and the customer was one of debtor and creditor and not of trustee and
beneficiary. Applying this principle, the passbook supplied by the bank to its
constituent was only a copy of the constituent’s account in the books
maintained by the bank. The passbook was not maintained by the bank as the
agent of the constituent, nor could it be said that the passbook was maintained
by the bank under the instructions of the constituent. The Bombay High
Court, therefore, held that the Tribunal was justified in holding that the
passbook supplied with the bank to the assessee could not be regarded as a book
of the assessee, i.e. a book maintained by the assessee or under his
instructions.

The Bombay High Court, therefore,
confirmed the conclusions of the Tribunal, holding that the provisions of
section 68 did not apply to the credit in the passbook, which was not recorded
in the books of account of the assessee.

In the case of Anand Ram Raitani vs. CIT
223 ITR 544, the Gauhati High Court took a view that existence of books of
account was a condition precedent for the invocation of power by the assessing
officer u/s. 68. Since a partnership firm was a separate entity, books of
account of a partnership could not be treated as those of individual partners.
Therefore, addition to an assessee’s income on account of unexplained cash
credit u/s. 68, on the basis of cash credit found in books of accounts of a
firm in which the assessee was a partner was not justified. The court in
deciding the case followed the decision in the case of Smt. Shanta Devi vs.
CIT, 171 ITR 532(P& H).

Similarly, in the case of CIT vs. Taj
Borewells 291 ITR 232, the Madras High Court, considered a case of the
first year of assessment of a partnership firm, where no books of account were
maintained, but accounts were presented in the form of profit and loss account
and balance sheet. The Madras High Court held that the profit and loss
account and balance sheet were not books of account as contemplated u/s. 68. It
held that since there were no books of account, there could be no credits in
such books, and therefore the provisions of section 68 could not be invoked to
tax capital contributions of partners in the hands of the firm.

Arunkumar J. Muchhala’s case

Recently, the issue again came up before the
Bombay High Court in the case of Arunkumar J. Muchhala vs CIT 85 taxmann.com
306.

In this case,
the assessee had income from rent, share of profit from a partnership firm,
salary income and income from other sources. The assessee had taken loans from
various parties totalling to Rs. 79.06 lakh. Since no loan confirmations were
provided in respect of these amounts, the assessing officer treated them as
unexplained cash credits and added them to the total income of the assessee.

In appeal before the Commissioner (Appeals),
explanations were given in respect of some of the loan amounts, for which
additions were deleted. However, no relief was given in respect of the other
amounts for which no further explanations or details were filed. The further
appeal of the assessee was dismissed by the tribunal.

Before the Bombay High Court, on behalf of
the assessee, it was argued that books of account had not been maintained by
the assessee, and therefore the provisions of section 68 would not apply. It
was claimed that though it was a fact that certain amounts had been taken by
the assessee from those persons, yet, when entries of these amounts were not
taken in the books of account, they could not be added to the income of the
assessee. These entries were only found by the assessing officer in the bank
statement, and no other document was considered by him while passing the
assessment order.

Reliance was placed on behalf of the
assessee on the decisions of the Supreme Court in the case of Baladin Ram
(supra), of the Bombay High Court in the case of Bhaichand H Gandhi
(supra), of the Gauhati High Court in the case of Anand Ram Raitani(supra)
and of the Delhi High Court in the case of CIT vs. Usha Jain 182 ITR 487. It
was argued that section 68 was a charging section and was also a deeming
provision. Further reliance was placed on the decision of the Madras High Court
in the case of Taj Borewells (supra). It was further argued that the
amounts were received by cheques, and that some of them were in respect of flat
bookings, which did not materialise, and therefore, cheques were returned and
there was no credit at the end of the year.

On behalf of the Revenue, it was argued that
many opportunities were given to the assessee to produce relevant documents in
order to substantiate and prove his version, but that the assessee had failed
to give the further details of the persons from whom the loans were allegedly
taken. It was argued that it was the bounden duty of the assessee to explain
the nature and source of cash deposits, and that it had therefore rightly been
held that the assessee could not take advantage of the fact that he had not
kept any books of account.

Reliance was placed on behalf of the Revenue
on the decision of the Punjab & Haryana High Court in the case of Sudhir
Kumar Sharma (HUF) vs. CIT 224 Taxman 178, the special leave petition
against which decision had been rejected by the Supreme Court.239 Taxman
264(SC).

The Bombay High Court observed that the
assessee had not denied that he had received the loan amounts/cash deposits
from those persons whose names had been given in the assessment order and that
those names had been taken from the bank account of the assessee. The High Court
observed that the assessee’s case was that since he had not maintained books of
account, those amounts could not be considered. The Bombay High Court observed
that when the assessee was doing business, it was incumbent on him to maintain
proper books of account. Such books could be in any form. According to the
Bombay High Court, if he had not maintained the books which he was required to,
then he could not be allowed to take advantage of his own wrong. The Bombay
High Court observed that the burden lay on the assessee to show from where he
had received the amounts, and what was their nature and the onus was on the
assessee to explain those facts.

The Bombay High Court noted that huge
amounts had been credited in the account of the assessee, and he had not
explained the nature of those credits. The fact of those amounts was discovered
by the assessing officer from the bank passbook. When the source and nature had
been held to have been explained, certain amounts had been deleted by the
appellate forums. In respect of the balance amounts of Rs. 58 lakh, no document
was produced in respect of those transactions, nor amounts had been confirmed
from those persons who were shown to have lent them. Therefore, according to
the Bombay High Court, the authorities below had rightly held that the nature
of the transaction had not been properly shown by the assessee.

According to the Bombay High Court, the
ratio of the decisions relied upon on behalf of the assessee were not
applicable to the case before it. In those cases, either the entries were
confirmed by the parties in whose name they were standing, or books of account
were showing the cash credits.

The court observed that in the case before
it, at no earlier point of time had a firm stand been taken by the assessee
that he had not maintained the books of account. Whenever a direction had been
given to produce the same in any form, the assessee had replied that he wanted
time to prepare. Many opportunities were given by the assessing officer for the
production of relevant documents, including books of account. However, such
documents were never produced. The assessee had raised the point of books of
accounts not being maintained for the first time before the Bombay High Court.
The Bombay High Court observed that non-production of documents was different
from non-maintenance of books of account. The Bombay High Court observed that
the facts in Sudhir Kumar Sharma’s case (supra) were almost similar, and
that case was, therefore, binding. It also noted that the special leave
petition of the assessee in that case to the Supreme court was dismissed by the
court.

The Bombay High Court, therefore, upheld the
addition made by the assessing officer of such amounts as unexplained cash
credits u/s. 68.

Observations

Section 68 while referring to the books
of account requires that (i) such books of account are ‘maintained’ (ii) by the
‘assessee’ and (iii) the assessee is ‘found’ (iv) to have ‘credited’ any sum
therein and (v) such finding, needless to say, is by the assessing officer.
Each of these requirements, are to be fulfilled for a valid charge u/s. 68. The terms referred to have their own meanings and their import
cannot be wished away in applying the provisions. The onus is heavy on the
assessing officer to establish strict compliance of each of the conditions
stated herein, before invoking and applying section 68 for an addition of the
deemed income. In a few cases, the courts have concurred that a pass book of a
bank cannot be construed to be maintained by the assessee and the bank cannot
be held to be an agent of the assessee.   

There has been a special significance
attached to the books of account in the Act and the requirement for recording a
transaction or a write off with reference to the books of account has been
subjected to the examination by the courts, which have held that a deduction
based on the condition of an entry in the books of account would be conferred
only where the assessee has recorded the entry in the books and not otherwise;
a debit in the profit and loss account without supporting books would
disentitle an assessee from claiming the deduction. Please see National
Syndicate, 41 ITr 225(SC), S. Rajagopala Vandayar, 184 ITR 450(Mad.) and P.
Appuvath Pillai,58 ITR 622(Mad.), as a few examples. 

Section 2(12) of the Income-tax Act defines
the term ‘books or books of account’ as including ledgers, day-books, cash
books, account-books and other books, whether kept in the written form or as
print-outs of data stored in a floppy, disc, tape or any other form of
electro-magnetic data storage device. Accordingly, a reference in section 68 to
books of account has to be given a meaning that is due to it keeping in mind
the definition of the term contained in the provisions of section 2(12)of the
Act. There is nothing in section 2(12) that indicates that a recording outside
the books would be construed to be the books of account.

The Bombay High Court in Bhaichand H.
Gandhi’s case, has said and confirmed what has been said above in so many words
and we do not think that there is any reason to differ from the ratio of the
said decision. Importantly, the court in Arunkumar J. Muchala’s case has
not expressly dissented from its earlier decision; it has rather chosen to
highlight the following distinguishing facts in the latter case;

u   The
assessee was a businessman and was required to maintain the books of account,

u   The
assessee had not maintained the books of account which he was required to
maintain,

u   The
assesee was claiming the benefit of his own action which was not permissible in
law,

u   The
assessee had at times pleaded that he was in the course of preparing the books
of account and would produce the same when ready, indicating that he was
otherwise required to maintain the books of account,

u   The
assessee had for the first time taken a fresh plea before the high court that
the provisions of section 68 were not applicable, as he was not maintaining the
books of account and as a result, the lower authorities were deprive of
examining the facts and the merits of a fresh plea.

In Arunkumar J. Muchhala’s case, the
Bombay High Court has not entertained or has ignored the contention raised by
the assessee that he had not maintained the books of account. The Bombay High
Court’s decision seems to have been based on its disbelief of the assessee’s
arguments as on this aspect, and there was no fact-finding by the lower
authorities.

The main basis of the decision of the Bombay
High Court in Arunkumar J. Muchhala’s case, was that an assessee had
committed a wrong by not maintaining the books when he was required by law and
hence, cannot take advantage of his own wrong. The Bombay High Court has
observed that it was incumbent on the assessee to maintain proper books of
account when he was doing business. From the facts as stated earlier, it
appears that the assessee was not carrying on business himself, but was a
partner of a partnership firm. In that event, there was no statutory obligation
for the assessee to maintain his books of account. That being the position, it
cannot be said that the assessee was wrong in not maintaining books of account.
This aspect could have been explained to the court by the assessee with a
little more precision.

The Bombay High Court, while rejecting the
cases cited in support of inapplicability of section 68 including its own
decision before it in Arunkumar J. Muchhala’s case, has observed that in
those cases, either the entries were confirmed by the parties in whose name
they were standing, or books of account were showing the cash credits. It is
very respectfully pointed out that in all those cases, when one reads the
facts, no books of account were maintained by the assessee, nor were
confirmations available, and therefore, those decisions were delivered purely
on the principle that, where, admittedly books of account were not maintained
by the assessee, the provisions of section 68 would not apply.

The Bombay High Court in Arunkumar J.
Muchhala’s case, has decided the issue largely based on the decision of the
Punjab & Haryana High Court in the case of Sudhir Kumar Sharma (HUF)
(supra). If one examines the facts of that case, it is gathered that it was
not the case where books of accounts were not maintained. In response to
various questions by the assessing officer, the assessee’s representative had
replied that records were as per books of account, that details would be
checked with the books of accounts and provided, etc. The assessing
officer had observed that books of account were not produced. According to the
Commissioner (Appeals), the answer by the assessee to these questions of
assessing officer clearly showed that the assessee had maintained books of
accounts. Though the assessing officer made the additions on the basis of
deposits in the bank account, the Commissioner (Appeals) had held that this
would be tantamount to additions made on the basis of entries in the books of
account, since such deposits/credits would also appear in the books of account
of the assessee, which were not produced before the assessing officer. Accordingly,
the provisions of section 68 were held to be applicable in that case, on a
clear cut finding by the authorities that the assessee had maintained the books
of account. In the circumstances, the exclusive reliance on a decision with
contrary facts by the court in Arun Muchala’s case seems to be a case of
misunderstanding of the facts which understanding of facts could have been
provided by the assessee with  a little
application in his own interest. 

It is therefore appropriate to hold that
the decision of the court in Arunkumar J. Muchala’s case, should be
considered as one of its kind, delivered on the facts of the case, and not
laying down the rule of law.

In Baladin Ram vs. CIT (supra), a case decided under the Income-tax Act, 1922, but delivered after
the Income-tax Act, 1961, was enacted, the Supreme Court in the context of
section 68 observed:

 “Even under the
provisions embodied under the new Act, it is only when any amount is found
credited in the books of an assessee that the section will apply. On the other
hand, if the undisclosed income was found to be from some unknown source or the
amount represents some concealed income which is not credited in his books, the
position would probably not be different from what was laid down in the various
cases decided when the Act was in force.”

In Taj Borewell’s case (supra), the
Madras High Court held as under:

“Unless the following circumstances
exist, the revenue cannot rely on section 68 of the Act:

(a) credit in the books of an
assessee maintained for the year;

(b) the assessee offers no
explanation or if the assessee offers explanation and if the assessing officer
is of the opinion that the same is not satisfactory, the sum so credited is
chargeable to tax as “Income from Other Sources”.

From these decisions as well as the language
of the section, it is clear that in the absence of books of account, section 68
would not apply.

The applicability of section 68 vis-à-vis
books of account was examined in the cases of Smt. Shanta Devi Jain, 171 ITR
532(P&H), Smt.Usha Jain,  182 ITR
487(Delhi) and Sundar Lal Jain, 117 ITR 316(All), in favour of
assessee besides the above referred and discussed cases. The Third Member of
the Tribunal in the case of Smt. Madhu Raitani, 45 SOT 23(Gau.) also
held that the provisions of section 68 were applicable in cases where the
assessee had maintained the books of account.

Therefore, the view appearing from the two
apparently conflicting decisions of the Bombay High Court is that in a case
where, admittedly, books of account are not maintained or the entry is not
appearing in the books of account, the provisions of section 68 would not
apply; however, in a case where the facts indicate that books of accounts are
maintained, but are not produced before the authorities, the provisions of
section 68 can be invoked on the assumption that entries in the bank statements
must have been recorded in the books of account.

Therefore, the principle laid down by the
Bombay High Court in Bhaichand H. Gandhi’s case would still continue to
be applicable. _

 

Public Trusts in Maharashtra : The Changing Legal landscape Recent Amendments to the Maharashtra Public Trusts Act, 1950

The Maharashtra Public Trusts Act, 1950 (‘MPT
Act’) was recently amended by the Maharashtra Public Trusts (Second
Amendment) Act, 2017 (‘Amendment Act’), which came into force on October
10, 2017. In this article, we discuss some of the key conceptual changes that
the Amendment Act has made to the MPT Act.

Background

The MPT Act was first enacted with the
objective of regulation and administration of public religious and charitable
trusts in, what was then, the State of Bombay. 1Originally called
the Bombay Public Trusts Act, 1950, its title was changed with retrospective
effect in 2012 to the Maharashtra Public Trusts Act, 1950. Today, the MPT Act
applies to the whole of Maharashtra and regulates more than eight lakh public
religious and charitable organisations registered under it2. There
are only a few states in India that have enacted legislation to regulate public
trusts, with Maharashtra being prominent on account of the MPT Act.

In recent years, the focus on regulating the
non-profit space in India has increased as governments are becoming
increasingly wary that non-governmental organisations (‘NGOs’) are being
misused for undesirable activities that range from tax evasion to funding of
terrorism. With a view to regulating such NGOs, the Central Government is even
considering (with some helpful prompting from the Supreme Court) the framing of
a central legislation for this purpose3.

It is in this environment that the
Maharashtra Government constituted a committee on January 13, 2016, under the
chairmanship of Mr. A. J. Dholakiya, former Charity Commissioner and comprising
Mr. S. B. Savle, the Charity Commissioner and other officers, to review the MPT
Act and propose amendments to it. The Dholakiya Committee’s report suggested
comprehensive amendments to the MPT Act, leading to the enactment of the
Amendment Act4.

_____________________________________________________

1   Preamble
to the MPT Act.

2   Statement
of Objects and Reasons in the Maharashtra Public Trusts (Second Amendment)
Bill, 2017.

 3 
Economic Times,  August 17, 2017: http://economictimes.indiatimes.com/articleshow/60100358.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

4   Statement
of Objects and Reasons in the Maharashtra Public Trusts (Second Amendment)
Bill, 2017.

 

Key Amendments

From a reading of the provisions of the
Amendment Act, it appears that the purpose of its enactment is mainly
three-fold: preventing misuse of the MPT Act, reducing delays in proceedings
which impact the functioning of NGOs, and streamlining processes to improve
effectiveness. The key conceptual changes which give effect to this purpose are
discussed below.

(i) Introduction of definition
of ‘beneficiary’

Background

The term ‘beneficiary’, although used in the
MPT Act, was not defined earlier. A definition has now been inserted in section
2 of the MPT Act, which is as follows: ““beneficiary” means any person
entitled to any of the benefit as per the objects of the trust explained in the
trust deed or the scheme made as per this Act and constitution of the trust and
no other person.”

The term ‘beneficiary’ acquires significance
because, in the case of a public charitable trust (not a society)5 ,
a beneficiary is regarded as a ‘person having interest’ in such trust (refer
section 2(10)). Consequently, a beneficiary can apply for certain significant
reliefs in respect of such trusts such as seeking institution of an inquiry,
applying for appropriate orders for protection of trust property, institution
of suits in relation to the public trust, and applying for framing of a scheme
for the trust. This definition is not relevant for a society because in the
case of a society, its members are regarded as ‘person having interest’.

The likely objective behind insertion of the
definition of ‘beneficiary’ appears to be to aid the Charity Commissioner’s
office in determination of whether the person seeking the above reliefs was
indeed a beneficiary/person having interest in the trust who had locus to make
the application. Unfortunately the definition may not serve the desired
purpose.

_____________________________________________________________________

5 Unless specified otherwise, the term ‘public
trust’ as used in this article includes a ‘society’ registered under the
Societies Registration Act, 1860 and the MPT Act

Analysis

The primary challenge in determining
beneficiaries of a public trust stems from the inherent limitation in identifying
and segregating them – as one of the essential characteristics of a public
trust (and which distinguishes it from a private trust) is that its
beneficiaries are the general public or a class thereof, and constitute a body
which is incapable of ascertainment (as observed by the Supreme Court in Deoki
Nandan vs. Murlidhar, AIR 1957 SC 133).

The second challenge is that the language of
the definition is ambiguous – although this can be said to be a consequence of
the inherent limitation discussed above. Any person who is ‘entitled’ to any of
the benefits as per the objects of the trust is regarded as a beneficiary. This
encompasses not only those who have received some benefits from the public
trust, but also those who are ‘entitled’ to them.

The term ‘entitle’ means to give a claim,
right, or title to; to give a right to demand or receive, to furnish with
grounds for claiming. The term ‘entitled to’ means ‘having a title to’ (both as
defined in The Law Lexicon, P. Ramanatha Aiyar, 3rd Edition).

Thus, it can be said that any person who has
a potential or theoretical ‘claim’ or‘right’ to any of the benefits as per the
objects of the trust is regarded as a beneficiary. However, this interpretation
is not without doubt:

–  Firstly,
can it be said that any person has the ‘claim’ or ‘right’ to receive any
benefit from a public trust – or conversely, the trust is duty bound to benefit
such person?

–   Even
if the response is in the affirmative, given that the definition uses the term
‘objects’ and not ‘activities’, can a person claim as of right that he is a
beneficiary of the trust even if the trust has not commenced activities in
relation to a particular object?

Therefore, although the language of the
definition presumes that the phrase ‘a person who is entitled to any of the
benefits as per the objects of the trust’ constitutes an objective and
limited criterion on the basis of which it can be determined with certainty
whether a person is or is not a beneficiary, in our view, this is not the case.

Example

The above difficulties can be explained with
the aid of an example. A public charitable trust set up with the objects of
‘medical relief for the poor’ and ‘promoting primary education’, operates a
hospital for treatment of the poor, without any restriction as to religion,
community, etc. Therefore, all poor persons in India are free to seek treatment
from this hospital.

The first difficulty arises in determining
whether such poor persons are ‘entitled’ to benefits as per the objects of the
trust. Can it be said that all poor persons have the ‘right’ to seek treatment
from this hospital –would it not be within the hospital’s right to refuse to
treat someone, for instance if there is no vacancy?

Assuming this view can be taken, an odd
situation arises wherein all poor persons in India could be regarded as
entitled to benefits as per the objects of the trust, and therefore, be
classified as beneficiaries of the trust – even though they may not actually
have sought treatment from the hospital.

Moreover, the trust may not have started any
primary school in furtherance of its object of ‘promoting primary education’.
Yet, it could be argued that all children in the country who are aged between 4
and 14 years would be persons who are entitled to benefits as per the ‘objects’
of the trust – thus, as noted above, entirely defeating the purpose for
insertion of the definition of ‘beneficiary’ in the MPT Act.

(ii)  Amendments to ‘change report’
provisions

 (a)  Extension
of time for filing change report

Background

Under section 22 of the MPT Act, any change
in the particulars (such as in respect of the trustees or the properties) of a
public trust as set out in the Register of Public Trusts under the MPT Act is
required to be reported by the trustees to the Deputy or Assistant Charity
Commissioner in charge of the Public Trusts Registration Office where such
register is kept. Such report is commonly known as the ‘change report’.

A change report is required to be filed
within 90 days from the date of the occurrence of the change required to be
reported. A trustee who fails to file a change report is, on conviction,
punishable with a fine of up to Rs. 10,000, u/s. 66 of the MPT Act.

Previously, the MPT Act did not expressly
provide for an extension of time for filing change report or condonation of
delay in filing it. Pursuant to the Amendment Act, a proviso has been inserted
in section 22(1) which empowers the Deputy or Assistant Charity Commissioner to
extend the period of 90 days for filing change report on being satisfied that
there was sufficient cause for delay in filing, subject to payment of costs by
the reporting trustee, which are to be credited to the Public Trust
Administration Fund.

Interestingly, even prior to insertion of
the proviso, trustees were known to apply for condonation of delay for late
filing of change report – in some cases after many years – to the relevant
Deputy or Assistant Charity Commissioner. In fact, the Bombay High Court had
validated the permissibility of such applications under the general provisions
of section 5 of the Limitation Act, 1963 (Rajkumar s/o Pundlikrao Zape &
Ors. vs. Shantaram Amrutrao Waghmare & Ors., 2008 (3) MhLJ 209).
Therefore, the benefits of insertion of the new proviso appear to be that it
might help eliminate wasteful litigation and the Deputy or Assistant Charity
Commissioner will be able to seek costs from errant trustees for late filing of
change reports.

Analysis

Similar to section 5 of the Limitation Act,
1963, the new proviso to section 22(1) permits extension of time if ‘sufficient
cause’ is shown. This scope and purport of this expression has been extensively
considered by the Courts which have laid down the following broad principles:

–  It
is not possible to lay down precisely what facts or matters would constitute
‘sufficient cause’ u/s. 5 of the Limitation Act, 1963;

 –   That said, delay in filing an appeal should not
have been for reasons which indicate the party’s negligence in not taking
necessary steps, which it could have or should have taken (State of West
Bengal vs. Administrator, Howrah Municipality, AIR 1972 SC 749);

–  The
words ‘sufficient cause’ should receive a liberal construction so as to advance
substantial justice (State of Karnataka vs. Y. Moideen Kunhi (dead) by Lrs.
and Ors.,AIR 2009 SC 2577);

–  Length
of delay is irrelevant and acceptability of the explanation is the only
criterion for extension of time (N. Balakrishnan vs. M. Krishnamurthy,
AIR 1998 SC 3222).

Thus, each application for extension of time
will have to be considered by the Deputy or Assistant Charity Commissioner on the facts and circumstances of the case.

There are also some other aspects relevant
for consideration in relation to this proviso. First, it does not set out a
formula or cap for computation of costs for late filing, which could lead to a
situation where determination of costs is at the discretion of each individual
Deputy or Assistant Charity Commissioner. Secondly, the costs are to be borne
‘by the reporting trustee’– this position differs from that set out in sections
79A and 79B under which certain costs, charges and expenses are payable out of
the ‘property or funds of the public trust’.

 (b)
Provisional acceptance of change reports

Background

Once a change report is filed, the Deputy or
Assistant Charity Commissioner may6 hold an inquiry in the
prescribed manner to verify whether the change which is reported has occurred.
After completion of the inquiry, he must record his findings as to whether or
not he is satisfied that the change has occurred. If he is satisfied and
records the same in the Register of Public Trusts, he is said to accept the
change report.

Although this process is useful as, in
theory, it helps ensure transparency and honesty in the functioning of public
trusts, in practice it is time consuming and results in a huge pendency of
matters. It is believed that there are some change reports which are pending
for several years, although efforts have been made recently to dispose of old
reports at the earliest.

Such delay could obstruct the functioning of
trusts – in particular where the change which has occurred pertains to the
constitution of trustees. In such cases, the Charity Commissioner’s office may
be wary to permit applications under other provisions of the MPT Act (such as
for alienation of trust property) by the new trustees whose report is pending.
Although the Bombay High Court has held that a change of trustees becomes
effective from the date when it was brought into effect in accordance with law,
and not from the date of acceptance of the change report (Chembur Trombay
Education Society vs. D.K. Marathe and Ors., 2002 (3) BomCR 161), in
practice, the Charity Commissioner’s office may be hesitant to permit
applications by such trustees regarding whose appointment change reports are
pending.

____________________________________________________

6   Although
section 22 uses the term ‘may’ for holding an inquiry, the Bombay High Court
has held that a change report, whether contested or not, has to be decided
after holding an inquiry – refer Rajabhau Damodar Raikar vs. The Assistant
Charity Commissioner and Ors. (2016(1)BomCR233).

The fact that the pendency in change report
cases is of concern, and has prompted the enactment of the Amendment Act, has
been recognised Statement of Objects and Reasons in the Bill pertaining to the
Amendment Act as under:

“The State Government is concerned with
the huge pendency of cases before the authorities under the Act, especially the
change reports, more particularly the uncontested change reports, to make
entries in the registers kept u/s. 17 of the said Act.

 … to promote swift disposal and arrest
the pendency of the change reports u/s. 22, certain provisos are proposed to be
added to s/s. (2) to mandate the decision on the change reports within the
stipulated period, and also provide for a mechanism for provisional acceptance
of change reports and attach finality to
the orders of provisional acceptance of change in uncontested matters.”

Summary

Thus, in order to facilitate the functioning
of public trusts, the Amendment Act has inserted three provisos to section
22(2) of the MPT Act, which introduce the concept of provisional acceptance of
change reports in case of change in the names or addresses of trustees and
managers or the mode of succession to their office. The process is summarised
as follows:

–  When
such a change report is filed, the Deputy or Assistant Charity Commissioner may
pass an order provisionally accepting the change within period of 15 working
days and issue a notice inviting objections to such change within 30 days from
the date of publication of such notice;

  – If no
objections are received within the said period of 30 days, the provisional
acceptance shall become final;

–   If
objections are received within the said period, then he may hold an inquiry and
record his findings within 3 months from the date of filing objections, as to
whether the changes have occurred or not;

–   If
he is satisfied that the changes have occurred, then he must make the
corresponding changes in the Register of Public Trusts.

 (iii)  Ex-post facto
sanction

 Background

Under section 36 of the MPT Act, sanction of
the Charity Commissioner is required for the sale, exchange or gift of any
immovable property of a public trust, as well as for a lease for a period
exceeding ten years in the case of agricultural land and for a period exceeding
three years in the case of non-agricultural land or a building.

Although the Charity Commissioner had, in
circular no. 169 dated February 1, 1973, indicated that ex-post facto sanction
could be granted u/s. 36, the Bombay High Court has taken the view that only
prior sanction could be granted u/s. 36 and post facto sanction of the
Charity Commissioner is not permitted (Central Hindu Military Social
Education Society vs. Joint Charity Commissioner and Anr., 2009 (2) BomCR
499).

This dichotomy has now been settled by the
Amendment Act which has introduced sub-section (5) to section 36 to permit ex-post
facto sanction of the Charity Commissioner. As per this provision, the
Charity Commissioner may grant ex-post facto sanction to the transfer of
the trust property by the trustees in exceptional and extraordinary situations
where the absence of previous sanction results in hardship to the trust, a
large body of persons or a bona fide purchaser for value, if he is
satisfied that the following conditions are met,—

(a) there was an emergent
situation which warranted such transfer,

(b) there was compelling
necessity for the said transfer,

(c) the transfer was necessary
in the interest of trust,

(d)  the property was
transferred for consideration which was not less than prevalent market value of
the property so transferred, to be certified by the expert,

(e) there was reasonable
effort on the part of trustees to secure the best price,

(f)   the trustees’ actions,
during the course of the entire transaction, were bonafide and they have
not derived any benefit, either pecuniary or otherwise, out of the said
transaction, and

(g) the transfer was effected
by executing a registered instrument, if a document is required to be
registered under the law for the time being in force.

The said
section has been further amended by the Maharashtra Public Trusts (Amendment)
Ordinance, 2017 (‘Ordinance’) promulgated on October 10, 2017, to
provide that ex-post facto sanction may only be granted in respect of
trust property transferred after the commencement of the Amendment Act (i.e.
October 10, 2017).

Analysis

The presence of the term ‘and’ after clause
(f) above indicates that the criteria are cumulative. Further, this power is
not to be exercised routinely but only in ‘exceptional and extraordinary
situations’. Very few transfers are, therefore, likely to satisfy the
requirements of this provision for granting ex-post facto sanction.
Moreover, as per the Ordinance, only those transfers which have been effected
on or after October 10, 2017 will be eligible for such sanction.

This provision may lead to a problematic
situation in cases where a transfer of trust property is effected by trustees
on the bona fide assumption that it is a fit case for grant of post
facto sanction, but the sanction is not thereafter granted by the Charity
Commissioner because he is not satisfied that the necessary criteria are met.
As no time limit has been specified for the Charity Commissioner to dispose of
an application for ex-post facto sanction, it may even take years for an
acceptance or rejection. Unwinding the transfer after a long period of time,
particularly if there has been construction on the property post the transfer,
will not only be practically difficult but could also lead to an anomalous
legal situation if the transfer was effected under a registered instrument.

Given these risks, this provision may be
reduced to a paper provision as every diligent buyer of property is likely to
insist on prior approval to eliminate threat to title.

Apart from section 36, the concept of ex-post
facto sanction has been introduced in section 36A which requires trustees
to obtain the sanction of the Charity Commissioner to borrow money (whether by
way of mortgage or otherwise) for the purpose of or on behalf of the trust.
Sub-section (3A) has been introduced in this section to permit the Charity
Commissioner to grant ex-post facto sanction to the trustees to borrow
money from any nationalised bank or scheduled bank, in exceptional and
extraordinary situations where the absence of previous sanction results in
hardship to the trust, beneficiary or bona fide third party.

(iv)  Streamlining
processes

 Background

The MPT Act, before the amendment, had
created a hierarchy of authorities and courts to hear various
applications/matters, with different processes for each application/matter. The
Amendment Act has sought to streamline some of these processes and also reduce
the number of appeals permitted so that cases may be disposed of more
efficiently.

The Statement of Objects and Reasons in the
Bill pertaining to the Amendment Act summarises the rationale for these changes
as under:

“It was further noticed that the said Act
has created a hierarchy of authorities and courts, with a series of appeals,
applications or revisions. Orders of the Charity Commissioner, for instance,
have been made subject to challenge before the District Court, the Maharashtra
Revenue Tribunal and Divisional Commissioner. This multiplicity of proceedings
and forums under the Act, when a substantial number of judicial officers of the
rank of District Judge, discharge the functions of Charity Commissioner and
Joint Charity Commissioner has been found to be unwarranted and even
anomalous.”

In this regard,
a number of amendments have been carried out in the MPT Act, some of which are
explained below:

 –  Under
erstwhile section 50A of the MPT Act, schemes were framed and modified by the
Charity Commissioner, against which order an application could be made to the
City Civil Court in Mumbai and District Court elsewhere in Maharashtra. Now,
the power to frame and modify schemes has been granted to the Deputy Charity
Commissioner and Assistant Charity Commissioner, and such order may be appealed
before the Charity Commissioner;

–   Under
section 51, if the Charity Commissioner refuses his consent to the institution of
a suit, then the appeal will lie before the High Court instead of the
Divisional Commissioner;

–   In
the Cy pres provisions under sections 55 and 56, the power conferred on
the court originally has now been conferred on the Charity Commissioner. Thus,
earlier if inter alia a trust had failed, the Charity Commissioner could
require the trustees to apply for directions to the court, and if they failed
to apply, he could himself apply. The court could then give necessary
directions to give effect to the original intention of the author of the public
trust or object for which the public trust was created – and if the same was
not expedient, practicable, desirable, necessary or proper in public interest,
then the court could direct the property or income of the trust to be applied cy
pres to any other charitable object.

Now, the power has been conferred on the
Assistant Charity Commissioner and Deputy Charity Commissioner to pass
appropriate orders after making an inquiry and to make a report to the Charity
Commissioner; the Charity Commissioner may suo motu or on the report of
Assistant or Deputy Charity Commissioner, give the necessary directions;

– The
High Court replaces the City Civil Court in Mumbai and District Court elsewhere
as the first appellate court under the MPT Act;

–   Accordingly,
the language of the definition of “Court” has been replaced by “High Court
of Judicature at Bombay” from “in the Greater Bombay, the City Civil Court and
elsewhere, the District Court”.

 Tabular
summary

The following table sets out the changes to
the processes in respect of key provisions:

 

Key:

D
or ACC = Deputy or Assistant Charity Commissioner

CC
= Charity Commissioner

District
Court = City Civil Court in Mumbai, District Court elsewhere in Maharashtra

HC
= High Court

District
Court / HC = Application to District Court from whose decision an appeal lies
before HC

 

 

Old

New

Section

Application

Authority/Court

Appellate authority

Authority/Court

Appellate authority

18-20

Registration
of public trust

D
or ACC

u CC

u Then District Court / HC

No
change

CC

22

Filing
change report / deregistration of trust

D
or ACC

u CC

u Then District Court / HC

No
change

CC

41

Order
of surcharge

CC

District
Court / HC

No
change

—

41D

Suspension,
removal and dismissal of trustees

CC

District
Court / HC

No
change

HC

41E

Order
for protection of charities

CC

District
Court

No
change

HC

50A

Power
to frame schemes

CC

District
Court / HC

D
or ACC

CC

51

Consent
for suit

CC

Divisional
Commissioner

No
change

HC

55,
56

Cypres

CC
directs that an application be made to District Court, or will make the
application himself. Thereafter, the said court will hear the application

HC
against order of District Court

D
or ACC will report to CC who will give directions

HC

79

Decision
of property as public trust property

D
or ACC

u CC

u Then District Court / HC

No
change

CC

 

Other amendments

The Amendment Act has also carried out a
number of other modifications to the MPT Act – some of these are briefly
summarised below:

(i)  Conditions on
alienation: As noted above, u/s. 36 of the MPT Act, sanction of the Charity
Commissioner is required for alienation of immovable property of the public
trust. Such sanction may be accorded subject to such condition as the Charity
Commissioner may think fit considering the interest, benefit or protection of
the trust.

Pursuant to the  Amendment 
Act, the Charity Commissioner has been empowered to modify the
conditions imposed by him prior to the transaction for which sanction is given
is completed. Further, although he can revoke a sanction in specified
circumstances, he cannot do so after the execution of the conveyance in respect
of the immovable property except on the ground that such sanction was obtained
by fraud before the grant of such sanction.

Further, the Charity Commissioner has been
prohibited from sanctioning any lease of immovable property of a public trust
for a period exceeding 30 years.

(ii) Fixed timelines: To
reduce delays by the Charity Commissioner in processing of applications such as
for (a) granting trustees permission for investing trust funds in any manner
other than that permitted under the MPT Act (section 35); and (b) issuing
directions for the proper administration of the trust (section 41A), the
Charity Commissioner has been enjoined to decide such application within three
months from the date of receipt of such application and if it is not
practicable to do so, to record the reasons for the same.

 (iii) Revised process for suspension of trustees etc.: The process for suspension, removal or dismissal
of trustees u/s. 41D of the MPT Act has been revised for the benefit of
incumbent trustees. Earlier, upon receipt of an application for this purpose,
the Charity Commissioner could frame charges and take appropriate action as set
out in the provision. Post the amendment, the Charity Commissioner must notify
such trustee and give him an opportunity to be heard before framing such
charges. Further, he can only issue such notice only when he finds that there is
‘prima facie material’ to proceed against the said person.

 (iv) Advice
or direction of the Court: The Amendment Act has deleted section 56A of the
MPT Act under which any trustee of a public trust could apply to the court for
the opinion, advice or direction of the Court on any question affecting the
management or administration of the trust property or income. However, deletion
of this section 56A will not preclude trustees or beneficiaries from applying
for the issue of an Originating Summons in the Bombay High Court for such
advice or direction, in accordance with Chapter XVII of the Bombay High Court
(Original Side) Rules.

In conclusion

In conclusion, the amendments to the MPT Act
are a positive development and are likely to assist the earnest efforts made by
the Charity Commissioner’s office recently to improve the implementation of the
MPT Act and reduce backlog of matters.

On a separate note, we find that NGOs in
India are increasing in scale and stature, and are exploring more sophisticated
structures and arrangements for their functioning, dealings and holding of
assets. They are also seeking to professionalise their operations by adopting
corporate best practices.

When the MPT Act is next reviewed, we
suggest that some amendments which assist with this evolution, but also
maintain adequate checks and balances, be considered. These include
introduction of stricter governance standards, express inclusion of section 8
companies within the ambit of the MPT Act, facilitation of appointment of professional
trustee companies, easing of mergers of public trusts with societies,
regulating related party transactions, permitting investments in safe market
securities, and so on. _

Artificial Intelligence Embracing Technology – New Age Audit Approach

With technology becoming a disruptor across
businesses, the issues facing the auditors in the current environment are:

Are we setting ourselves up for
redundancy with cognitive technology driving audits in future? 

                                   or         
          

Would the proliferation of technology
push the auditor to innovate and augment the value accreted through audit?

Cutting across the ‘black box’

Not so long ago, audits were performed
manually scouring reams of financial information. Data and records back then
were less complex, generated and maintained mostly in physical form, which
facilitated the traditional approach of vouching to deliver a robust audit.
Over time, growth of business operations both in terms of volume and across
geographies compelled organisations to embrace technology and automation as a
means to reduce cost and introduce operational efficiencies. The introduction
of ERP systems and straight through transaction processing application systems
ushered in a change in the way business was run, accounts were maintained and
audits were executed. The audit approach primarily entailed ‘audit around’
the proverbial ‘black box’. With the ever changing business dynamics,
steadily increasing operational complexities including the wave of centralised
operations and the consequential shift in the epicenter of audit from branches/
factories to ‘shared service centres’, the sheer expansiveness of data
generated and the rapid changes in the IT landscape, it has become
imperative for the auditor to execute an ever more scrupulous audit which is
only possible by auditing ‘through’ the proverbial ‘black box’.
Artificial intelligence based programmes aids in auditing through the black
box.

The changing regulatory and governance
landscape

It is pertinent to note that, much of the
above transition has happened against the backdrop of a continually changing
business and regulatory environment, where stakeholders have become more
empowered by stepped up laws and regulations and the heightened standards of
governance, resulting in increased expectations from auditors. As an example,
the Board of Directors, under the Companies Act, 2013, are responsible not only
for the preparation of financial statements that provide a true and fair view
of the financial position and performance of a Company, but also safeguarding
the assets of the company, implementing effective internal controls for
ensuring the propriety of business and looking after the interests of all
stakeholders. Audit committees, as a result, are far more involved in their
interaction and engagement with auditors. Moreover, the game changer, mandatory
auditor rotation, has increased the degree of competitiveness and left the
auditor with no choice but to deliver not only a highly effective and efficient
audit but also a value accretive audit. Auditors’ effectiveness is often
measured by the value they bring to the table, their ability to partner in the
progress of companies they audit, help management see around the bend, identify
risks and provide incisive business insights and do all of this whilst
upholding the highest ethical and professional standards. Further, with the
quarterly reporting and ever-crashing deadlines every quarter, the time at the
disposal of the auditor is ever-reducing.

Very little of the above may realistically
be achieved by merely deploying additional resources in an audit. The logical
and sustainable (and perhaps the only) solution is through increased
integration of technology into the audit approach. Embedding technology into
audit can help enhance productivity and reduce response time to clients.
Digital innovations in audit will help rebalance and redirect resources to more complex and higher risk areas e.g. areas
entailing judgement and use of management estimates.

Auditing with technology

Technology enables an auditor in:

–  Risk
assessment

–  Control
testing

–  Performance
of substantive analytical procedures;

–  Substantive
audit procedures;

And offer benefits as more fully explained
below:

Greater assurance- Moving away from
samples to testing the entire population

Under the traditional method, the auditor
would more often than not, select samples to test, based on a quantitative
materiality threshold, for example, vouching ‘top 20 instances’ of operating
expenditure incurred during the period under audit, representing a defined
coverage of the general ledger account or vouching all individual instances
above a specific threshold by value. Such samples were then tested as per
planned audit procedures and conclusions reached based upon these tested
samples. One of the potential areas of redundancy linked with increased use
of technology in audit is that of using a sample-based method in audit testing.

The new age technology tools subject
the entire population of the selected general ledger account to testing. These
tools are capable of analysing (literally scrubbing) the entire population and
highlighting outliers or exceptions e.g., a routine could highlight all
instances of breaks in a ‘three-way match’ (i.e. relationship between purchase
order, goods inward note and supplier’s invoice) in respect of purchases. With
a 100% test of the population, the level of assurance an auditor obtains is far
greater than that achieved through the traditional method of sample testing.

Deeper insights: There’s more to it than
meets the eye

Cognitive technology embedded in audit tools
and routines are capable of correlating data and in identifying patterns,
trends and outliers that may otherwise go unnoticed in a traditional auditing
technique (including those entailing 100% sample testing manually or through
vouching). For example, an unusual spike in orders from a particular geography
or during a particular time of the year, transactions recorded by seldom users
and/ or transactions recorded not in conformity with normal procedure, could
potentially raise a red flag for the auditor to investigate. Such insights may
often go undetected through implementation of traditional methods of vouching,
which primarily focus on agreeing the vouchers to the general ledger entries
and the underlying supporting documents.

The ability to correlate and analyse varied
data points within the population helps the auditor to have deeper insight into
business operations, which enables him to provide greater assurance to the
management and the audit committees. It also provides direction to the auditor
in terms of focus areas and indicates where effort should be focused.

Cognitive abilities in new age technology
tools enable assimilation of data and help provide value accretive insights to
management e.g., we as auditors examine ‘goods returned’ and ‘issue of credit
notes’ for return of goods or defects in a product. With technology, the
auditor could catalogue reasons for return of goods, which could be a useful
insight for management and form the basis for either an internal review or an
external specialist to be consulted so as to improve the product, reduce costs
or enhance employee productivity.

Efficient audits: Delivering more with
less

The auditor often faces a conundrum in
testing manual journal entries for the risk of override of controls. It
is almost impossible to scrutinise ?manual journal entities,’ recorded through
an audit period, due to inherent time and resource constraints. Technology
tools can instead slice and dice the population and highlight manual
journal entries which seem more vulnerable to fraud risk e.g., journal
entries posted on a public holiday or directly by the CXOs or by super users in
the IT department, or journal entries in an accounting caption where one would
normally expect only automated entries etc.

Further, with the expansive data available
at one’s fingertips and capable of being combed through cognitive technology
tools, the auditor could even reduce the frequency of branch or factory visits.

With technology tools doing much of the
‘heavy lifting’ of planned audit procedures, auditors may be able to redirect
their time and focus on areas that entail judgement, or contain high level of
management estimation and assumptions based on unobservable inputs.
Technology at times makes unobservable – observable.

All of the above, lends itself to a more
effective and efficient audit.

The ask

Auditing ‘with’ technology seems to be an
imperative and not an option. The transition needs to be meticulously planned
and seamlessly implemented through timely involvement of all constituents. What
will it take to embrace this change? The answer is:

u  Investment-
of both time and money;

u  Extensive
training and adapting new skillsets; and

u  Educating
all constituencies including regulators.

The cost of initial investment, including
the time taken for careful selection or development of relevant technology
tools and the continual availability of resources for upgradation of such tools
should not be overlooked.

The effectiveness of the output generated by
the technology tools is determined by the relevance and appropriateness of data
that is input into the tools and the management assertions that it helps
address. The old adage persists `garbage in – garbage out’. Hence, selection of
inputs is imperative.

The tools may have to be tailored to
auditee’s ERP systems, so as to render them capable of ‘talking to IT systems’
at the client. Developing a bespoke tool so as to efficiently extract data, on
a timely basis, from the client organisation could be an option.

The rising popularity of cyber currency and
block chain technology in consummating transactions and sharing information
amongst peers will leave auditors with no choice, but to embrace the change,
update their business understanding and risks associated with it. For example:
accepting the risk of cybercrime in designing audit procedures will be an
imperative and auditors will have to be more receptive towards accepting
contemporary basis of audit evidence. Auditors will need to upgrade their
skillsets through focused trainings. They would also need to develop the
ability to read, analyse and interpret the results produced by `technology
tools’. Similarly, regulators may need to be educated, so as to embrace audit
procedures driven by technology tools and routines as acceptable in reaching
audit conclusions.

Whilst the benefits of using technology in
an audit far outnumber the challenges associated with it, the pitfalls should
be identified and catalogued and not be overlooked.

Today’s students and the future professionals
are more tech-savvy than their predecessors. They take easily to a
technology-based audit. The audit fraternity needs to embrace technology also
to attract and retain talent. However, that said, over-dependency on
technology in an audit has its own perils. Whilst cognitive technology may
shore up an audit, its use should not lead to complacency and preclude an
auditor from applying his mind and questioning e.g., instead of relying
completely on the output from audit tests performed by automated routines, an intuitive
auditor would always question, for example, the existence of coffee
plantations in the State of Punjab! The auditor should always guard and not
become a victim of technology where we are susceptible to miss the ‘woods for
the trees’. Technology is a tool – it is not a substitute for human
intelligence.

Embracing technology as a proponent to
differentiate

The changing role of a CFO from someone who
whips out timely financial and regulatory reports, to someone who lends a
perspective and participates in active decision making in the Boardroom, casts
an increased expectation upon the auditor to remain in-step and transform into
a value accretive and trusted business advisor.

We’re witnessing CFOs convincing Boards to
embrace digitisation and use innovative technology in enhancing customer
experience and as a cost efficient means to propel business growth. It goes
without a doubt that this expectation of using more of technology to deliver
results, is also extended to all those constituents for whom the CFO is a
stakeholder. The key lies in how quickly the auditor accepts, adapts and
embraces technology to enhance the audit experience and leverage upon it as a
differentiator to deliver a value accretive audit.

technology enabled Audit: will there be a human touch, after all?

Machines can at best only mimic the human
mind, however, they cannot entirely replace it. What will not be taken away
by proliferation of technology tools in audit is the application of
professional skepticism and the use of professional judgment in areas such
as:

–  In
critically evaluating purchase price allocation in a business combination;

– In
reviewing underlying assumptions in respect of valuation of an unlisted
subsidiary and testing the same
for impairment;

– In
reviewing reasonableness of cash flows and assumptions while testing impairment
of Goodwill, etc.

In short, learnings from cumulative
experience, understanding varying perspectives and nuances, application of
rationale and reasoning whilst making decisions based qualitative, quantitative
and subjective determinants, the human mind, no doubt, is supported and
supplemented by the technology tool.

Technology tools will take away the
monotony from audit, facilitate efficiency and bring the focus onto
analytics by highlighting outliers such as:

 u  Debit
entries in revenue accounts such as interest income;

u  Credit/Negative
balances in expenditure accounts;

u  Entries
inconsistent with an organisation’s authority matrix, etc.

Undoubtedly, the future of audit seems much
different than what it is today as technology will become central to the
planning, execution and delivery of an effective audit. Those who try to
obviate technology and resist change may risk their relevance in the commercial
arena. In the future, an auditor will have to be a combination of an
Accountant, an investigator(forensic skills) and a Data Scientist!! _

Antim Namaskar

In the first week of January 2017, I came across a quotation:

“If this was the last year of your life what would you
be doing different”

It got me thinking. I realised deep within me that this was
perhaps the last year of my life. I wrote this quote down on the first page of
my BCAS Diary in early January 2017 and thus began a new journey of
introspection, expression, sharing, caring and doing.

I remembered that in Mahabharata there is an interesting
conversation between Yaksha and Yudhishthir, where Yaksha asks a series of
questions and each one is answered by Yudhishthir most eloquently. One of these
questions and answers that comes to my mind is:

Yaksha:        What is the greatest wonder?

Yudhishthir:
   Every man knows that death is
the ultimate truth of life. However, he wishes otherwise.”

I would add to this, that not only
most of us wish otherwise, but we also go on living our lives as if we are
going to live forever.

In early July 2017, I was diagnosed with a terminal illness –
an illness that left me no treatment options and a short remaining life span.
When my daughter, with a quivering voice, broke this news to me, it took me but
an instance to decide what I would do. I decided to accept my condition with
utmost grace. I resolved that I will continue to be happy and spread happiness.

This article for the “Namaskaar’ feature is likely to be my
last communication with my readers. Writing Namaskaar articles, sharing them
with people who are not BCAJ subscribers, receiving feedback, knowing that
something in the article has touched someone deeply and thinking of the next
topic and next article have been a very satisfying part of my life in the past
decade. It is this engagement with the ‘Namaskaar’ column that made me see good
in everything around me, made me understand what is important in life, and most
of all helped me communicate with a large number of readers on a regular basis.
As part of my last journey, I wish to express my gratitude to the readers of
‘Namaskaar’ articles and share my parting thoughts.

For several months, before I fell ill, I was trying to reach
my good friend Chandravadan Shah, but with no success. When I was admitted to
Bhatia Hospital, a common friend who came to meet me asked me “Pradeepbhai, do
you know Chandravadanbhai is admitted to this very hospital in the room right
across yours?” And instantly came a great realisation – that which we search
for far and wide, is always very close to us, often within us. The beautiful
lines of a song directed by Pankaj Mallick and sung by Dhananjay Bhattacharya
capture this ultimate truth:

I implore you to search within, and you will find answers to
the questions that have eluded you for years. Many of your quests that have
taken you on a wild goose chase may also end within you.

As I embark on my final journey,
several beautiful verses fill my entire being. The melodious song of Farida
Khanum has these beautiful lines:

In the day-to-day demands of your life, you will find a few
moments of freedom, a few moments that you can do what your heart truly wants.
Don’t suppress these moments, don’t let these moments fritter away. There will
always be deadlines and commitments, opportunities to be chased and lectures to
be delivered, new laws to be studied and bills to be raised…. amidst this,
don’t let the beautiful sunset escape your eyes and don’t let the opportunity
to lift someone’s spirit with your smile slip away. At the end of your journey
you will realise that these few moments of freedom were the most meaningful
part of your life’s journey.

At the end of our life, when
one becomes old and weak, one wonders, why did we tire ourselves? After all, we
had a simple journey to make – from the cradle to the grave. As beautifully
captured in this Gujarati couplet by poet ‘Befam’ Barkat Virani

 

As I lie on my hospital bed reflecting on my life and that of
many others, I am realising that a lot of our struggles are meaningless and not
necessary. There is so much beauty and goodness to experience, and life, in its
essence is effortless. We make it a struggle by our expectations, our greed,
our outer appearances, our inability to appreciate what we have and most of
all, believing that there will be time later to enjoy all that has to be
enjoyed.

Time is precious. Time is ticking away. And, one day there
will be no tomorrow.

Friends, I came across this beautiful quotation “If
this was the last year of your life what would you be doing different” on
what was to be the last year of my life. How I wish I had come across this
earlier and lived several years as if each of them was the last year of my
life.

I wish all of you a long life, but I also wish that you can
live each year of your remaining life as if it is your last one…. living it
fully, resolving conflicts, clearing misgivings, saying the unspoken words of
appreciation and gratitude, experiencing the joy of giving and loving with abundance.

As I bid farewell, I end with these lines from “Gitanjali” of
Rabindranath Tagore:

“I have got my leave.

Bid me farewell, my brothers!

I bow to you all and take my
departure.

Here I give back the keys of my door – and I give up all
claims to my house.

I only ask for last kind words
from you.

We were neighbours for long, but I have received more than
I could give.

Now the day has dawned and the lamp that lit my dark
corner is out.

A summons has come and I am ready for my journey.

At this time of parting, wish me good luck my friends!

The sky is flushed with the dawn and my path lies
beautiful.

Ask not what I Have with me to take there.

I start my journey with empty
hands and expectant heart.”

Editorial Note:

Late Shri Pradeep Shah contributed 57 Namaskaar
write-ups since its inception in 2003. The above piece was conceived by him
after he was suddenly diagnosed with a terminal illness. Although his body was
failing, he wanted to write for this monthly column, which he served with
unfailing dedication for fourteen years. We accept his Antim Namaskar
with folded hands.

Society News -I

Full day seminar on
“Income Computation and Disclosure Standards” held on 19th May, 2017

This seminar was held by
the Taxation Committee at Navinbhai Thakkar Hall at Vileparle (East). President
Chetan Shah gave the opening remarks followed by introduction from the Chairman
of the Taxation Committee, Mr. Ameet Patel. The event was attended by 235
participants. Topics taken up and Speakers were as under:

–    Overview of ICDS:- Mr. Pawan Kumar, CIT
(Jalandar)

–    ICDS III & VIII:- Constructions
Contracts & Government Grants :  CA.
Paresh Vakharia

–    ICDS I & ICDS X:- Accounting Policies
& Provisions, Contingent Liabilities & Contingent Assets: CA. Vishesh
Sangoi

–    ICDS IV & IX:- Revenue Recognition &
Borrowing Costs: CA. Vinita Krishnan

–    ICDS VI & VIII:- Foreign Exchange
Fluctuations & Securities: CA. Kushal Jain

–  ICDS II & V:- Valuation of Inventories
& Tangible Fixed Assets: CA. Nihar Jambusaria

Mr. Pawan Kumar, CA.
Vishesh Sangoi and CA. Kushal Jain spoke on the BCAS platform for the very
first time. 

Mr. Pawan Kumar gave an
overview of the ICDS. He also shared with the participants on why ICDS were
needed and how it came into existence. He being one of the members of Expert
Committee for drafting of ICDS shared his experiences with the participants
which was appreciated by all.

CA. Paresh Vakharia gave
his opening remarks on ICDS and explained the purpose of the said legislation.
He dealt with both the ICDS allotted to him in detail and explained nuances and
issues arising from them.

CA. Vishesh Sangoi started
his presentation by explaining the basic issues arising from ICDS I and X. He
explained various changes which would take place while undertaking Tax Audit in
post ICDS scenario compared to earlier ones with the help of various case
studies. He also touched upon disclosure requirements in Form 3CD for both
ICDS. He also responded to queries from various participants.

CA. Vinita Krishnan gave a
detailed presentation on ICDS IV & IX. She explained the basic
considerations arising out of them and also discussed the issues which one may
face while applying them. She discussed ICDS on revenue recognition with
respect to different type of incomes like dividend, royalties, interest etc.
She also answered queries from the participants.

CA. Kushal Jain explained
ICDS on securities with the help of case studies and also examples on how it
would be applied. He also explained various terms which are used in both the
ICDS. He also dealt with how the accounting entries would be affected in case
of ICDS on foreign exchange fluctuations.

CA. Nihar Jambusaria
explained the background and general principles of ICDS. He highlighted the
journey of evolution of ICDS. He also brought out the differences which will be
encountered between Ind AS and ICDS. He compared ICDS of Valuation of
Inventories with AS 2 and brought the changes between them. He also compared AS
10 with ICDS on Tangible Fixed Assets and explained the treatment under ICDS V.
He enlightened the participants with the disclosure requirements under both
ICDS and also addressed various questions from the participants. 

The sessions in the Seminar
were interactive and the speakers shared their insights on the subject and
guided the participants on how to approach the subject of ICDS while performing
a Tax Audit. The participants benefited immensely with the interactive sessions
and detailed analysis of each ICDS by the faculties.

Full day seminar on
“Practical issues in TDS” held on 20th May, 2017 at BCAS

The Full day seminar on
Practical issues in TDS was held by the Taxation Committee at BCAS Conference
Hall on 20th May, 2017. The event was attended by over 80 participants.
President Chetan Shah gave the opening remarks followed by introductory words
from the Chairman of the Taxation Committee, Mr. Ameet Patel.

Various topics were taken
up at the Seminar by the following Speakers:

–    Sections 194C, 194DA, 194EE, 194F and 194J :
CA. Saroj Maniar

–    Sections 195, 206AA, Rules 37BB and 37C :
CA. Ritu Shaktawat

–    Sections 192, 194H, 194LB, 194LBA, 194LBB,
194LBC : CA. Anita Basrur

–    Sections 194A, 194I, 194IA, 194IB, 194IC and
recent case laws on TDS : CA. Nitin Shingala

–    Issues in e-filing of TDS statements,
Sections 200A, 201 and 205 : CA. Avinash Rawani

CA. Ritu Shaktawat and CA.
Anita Basrur spoke on the BCAS platform for the first time.

CA. Saroj Maniar gave an overview of the various sections,
the case laws and circulars applicable and relevant in their context. The
speaker elaborated on the provisions of Sections 194C and 194J and covered some
industry specific issues as well as the interplay of these sections with other
sections of the Act.

CA. Ritu Shaktawat
explained the applicability of section 195. She highlighted the risk arising
out of non-compliance of applicable sections as well and provided insight on
issues surrounding Forms 15CA and 15CB. She also touched upon issues under
Section 206AA, Rules 37BB and 37C. The Speaker elaborated on contractual
remedies that one could pay attention to and should incorporate in the
agreements such as indemnity, representations and warranties, escrow,
insurance. She also explained the provisions and their application through case
studies.

CA. Anita Basrur started
her presentation by explaining the provisions of section 192 and 194H,
practical issues arising thereunder using relevant case laws and recent
circulars. This was followed by in depth discussion on sections governing TDS
on income received by securitisation trusts, business trusts and units of
Investment Funds.

CA. Nitin Shingala gave a
detailed presentation on various aspects governing sections 194A, 194I, 194IA,
194IB and 194IC. He explained the applicable provisions, issues under each of
them, supporting them by relevant case laws and circulars.  The Speaker touched upon a wide number of
judgments during the course of his talk on various sections pertaining to
deduction of tax at source.

CA. Avinash Rawani highlighted
the practical issues that arise in e-filing of various TDS statements such as
returns, correction statements, challan corrections, replies to be filed to
online communication from the TDSCPC amongst others. In addition to
highlighting the issues, the Speaker shared a lot of practical dos and don’ts
in relation to the filing of these statements.

 

CA. Saroj Maniar

 

CA. Ritu Shaktawat

 

CA. Anita Basrur

 

CA. Nitin Shingala

 

CA. Avinash Rawani

The sessions in the Seminar
were very interactive and the Speakers answered a lot of queries that were
received from the participants. The participants benefited immensely with the
interactive sessions and detailed discussions.

Half
day seminar on “Digital Transformation and GST – Opportunities and Challenges
in ERP environment” on 26th May, 2017 at BCAS

A half day seminar on
Digital Transformation and GST was organised by Human Development &
Technology Initiative Committee jointly with Indirect Tax Committee at BCAS
Conference Hall on 26th May 2017. CA. Nikunj Shah, Convenor, HDTI
Committee introduced the speakers to the participants.

The speakers – Mr. Richard
D’Souza (Vice President & Head Business Solutions-Corporate IT Mahindra
& Mahindra Group ) & Mr. Rakesh Pawaskar (General Manager Business
Solutions – Corporate IT Mahindra & Mahindra Group) made an excellent presentation
on the Technology transformation undertaken by them in their organisation. They
also explained and demonstrated through audio visual presentation, the nuances
of GST implementation, the GST implementation process at their group and how
the said group is supporting their vendors for GST implementation using state
of the art technology platform.

The seminar witnessed
excellent participation from members in practice as well as from Industry. The
objective of the seminar was to understand the innovation in technology leading
to change in accountants role from pure accounting to analytics and decision
making & to highlight how GST implementation could be achieved leveraging
technology.

 

Mr. Richard D’Souza

 Mr. Rakesh Pawaskar

The participants were
immensely benefitted from the Seminar.

GST Training for Trade,
Industry & Profession held on 29th, 30th & 31st
May 2017 & 19th, 20th & 21st June
2017 at BCAS

The Government’s decision
to roll out the GST Law on 1st July, 2017 made it all the more
important that BCAS organise more programs so as to educate and train as many
people on the intricacies and the importance of these laws.

BCAS organised two such
programs one in May from 29th to 31st and the other in
June from 19th to 21st at BCAS Conference Hall. The
purpose of holding such training workshops was dual – one to educate the trade
and industry about the new legislation and other, more importantly, being a
partner of the Government in disseminating the information about this One
Nation One Tax One Market.

These programs were conducted jointly with the National
Academy of Customs, Indirect Taxes and Narcotics (NACIN) and the sessions were
taken by members of BCAS who were accredited by the NACIN as GST Trainers and a
few officials from the Sales Tax department and NACIN also. The faculty from
BCAS included CAs Chirag Mehta, Dushyant Bhatt, Govind Goyal, Jayesh Gogri,
Mandar Telang, Naresh Sheth, Rakjamal Shah, Samir Kapadia, Shreyas Sangoi and
Sunil Gabhawalla. 

CA. Rajkamal Shah

CA. Samir Kapadia

CA. Chirag Mehta

 

CA. Shreyas Sangoi

 

CA. Sunil
Gabhawalla

The participants immensely
benefited from both the programmes.

BEPS Study Circle Meeting
held at BCAS Conference Hall on 3rd June 2017

BEPS Action Plan 6 read
with Action Plan 15 (Multilateral Instrument i.e. ‘MLI’): Preventing the
Granting of Treaty Benefits in Inappropriate Circumstances was held on 3rd
June, 2017 at BCAS Conference Hall.

Discussion was led by CA. D
S Sharma, CA Monika Wadhani and CA. Rutvik Sanghvi

This was the third meeting
on Action Plan 6: The group leaders covered overview of Article 6 to 8 of the
MLI and detailed comparison of LOB clause.

In the meeting, the group
leaders had taken up detailed discussion on following Articles of MLI read with
Article X of Action Plan 6 and had concluded discussion with emphasis on the
following:

–  Article 8 of MLI  – Dividend transfer transaction intends
to introduce a minimum shareholding period of 365 days to be entitled to
beneficial rate of taxation on dividend.

–  Article 9 of MLI – Capital Gains from
alienation of shares or interests of entities deriving their value principally
from immovable property intends to give taxing rights to the Contracting State
where immovable property situated, if at any time during the 365 days preceding
the alienation of shares, such shares derived value principally from such
immovable property.

–  Article 7(1) of MLI – Principal Purpose
Test (‘PPT Clause’): It intends to introduce a minimum standard in form of PPT
clause to be adopted by the Contracting States. The group leaders discussed the
meaning and possible interpretations of various words contained in the PPT clause
(like meaning of “benefit”, “one of the principal purposes”, etc.) and
explained each and every example given in the commentary to Action plan 6. The
group leaders also highlighted the difference and the interplay between the
Indian GAAR provisions and the PPT clause. For example, under the Indian GAAR
provisions, requirement is “if main purpose is tax benefit”vis-à-vis the PPT
clause, requirement under the MLI being “one of the principal purposes is tax
benefit”, etc. It was also discussed that PPT clause will be relevant to
consider the applicability of a tax treaty and if PPT clause is invoked then
treaty benefits shall not be available and many transactions could get
impacted. It was also discussed whether GAAR provisions can be invoked where
transaction is covered by a tax treaty.

The meeting got
enthusiastic response and the participants benefitted a lot from the
discussions

10th Jal Erach
Dastur CA Students Annual Day held on 3rd June 2017

The Jal Erach Dastur CA
Students’ Annual Day this year reached a new scale as it celebrated its 10th
Edition captioned under tagline ‘Tarang 2K17 – Tarasho Apne Talent Ke Rang.’ at
Navinbhai Thakkar Auditorium, Vile Parle on 3rd June 2017.

 

Students lining up to witness the most
awaited event of the year

This event was organized by
the Human Development and Technology Initiatives Committee of the BCAS for the
CA students. The event was truly an event ‘OF CA students, FOR CA students and
BY CA students’. It showcased their mesmerizing talents and creativity on
variety of extra-curricular activities such as elocution, debate, sketch and
slogan, photography, short film making and other talents such as singing, music
etc.

Then Vice President CA. Narayan Pasari
felicitating the Chief Guest of Tarang –
Mr. Dhaval Bathia

President Chetan Shah, Vice President
Narayan Pasari along with members of
HDTI Committee witnessing the lighting
of auspicious lamp to commence the
event

The six finalists of the Chandanben Maganlal
Bhatt ‘Elocution Competition’ were the first to witness the stage. The topics
this time were both challenging as well as riveting. This enabled a level
playing field for all participants who gave their impressive performances on
their respective topics.

CA. Nitin Shingala & CA. Meena Shah
presenting the award to the winner of
Elocution Competition ‘Speak Up’ – Miral
Majmundar

Then BCAS President CA. Chetan Shah
presenting the award to the winner of
‘CA’s Got Talent’ – Deevesh Chudasama

Post Elocution, the
winners of Photography Competition ‘Khinch Le’ were announced. This being the
second year of the competition, received unprecedented response from students.
They were given themes on which they had to click creative photographs and
mention an innovative tagline based on the theme selected.

CA Ryan Fernandez moderating the
debate competition – ‘War of Words’

Students Committee performing the flash mob

Chief Guest Mr. Dhaval Bathia giving the
keynote address

As a part of continuous improvement and innovation, this
year, a new event ‘The Screenmasters – Short-film making competition’ was also
introduced. The competition received good response from the students with 9
entries in the very first year itself. The students had to a shoot a short-film
of not more than five minutes on the given theme. The entire audience was
amazed by the professionalism and meticulousness of CA students, even in the
arena of film-making.

Mesmerising display of talent – Spray
Painting

Audience enjoying light hearted games during the break time

BCAS Students Committee, Tarang
Volunteers along with members of HDTI Committee

The final round of the
Debate Competition ‘War of Words’ followed the Photography Competition. The debate
was moderated by CA. Ryan Fernandes with two teams of four students each. The
debate had the undivided attention of the audience as each finalist defended
their case with enthralling wit and vigour. Adding some spice to the event,
this year a fourth round was introduced wherein the teams had to interchange
their erstwhile position vis-à-vis the topic. The participants as well as the
audience enjoyed the debate to the core.

After this, the students presented a 3 minute “flash mob”
which was choreographed by CA Hrishikesh Joshi. This short stint kept the
audience alive and cheering.

After the flash mob, the charged up audience were enchanted
by the Keynote address of the Chief Guest Mr. Dhaval Bathia, a well-known
author and speaker as well as Guinness Record Holder. His speech was both
motivational and thought provoking as he used day-to-day anecdotes and examples
to convey his message. He emphasized on the need to think out-of-the-box and
‘go deep’ into the realm of your work to carve out definite success. He also
touched upon finer aspects of ‘Digital India’ and how it has revolutionized the
style of working, even for the CA fraternity.

Immediately after that,
the stage was set for the flagship and most awaited competition the ‘The Talent
Show’. To kick-start the event, a ‘Students Band’ comprising of Tej Bhatt,
Sridisha De, Aagam Jain and Jigar Jain rocked the stage. These students
volunteered for this special performance to strike the chord for the upcoming
competition.

Finally the guitars were
tuned, the keyboard was ready, the dancers were tapping their feet, and the
stage was then taken over by young and talented CA students who showcased their
talent ranging from dance, singing, instrumental, mimicry and spray painting.
All 9 finalists gave amazing performances and the audience were left spell
bound. The cheering of the crowd with claps and whistles increased with each
performance as the finalists kept on raising the bar. The judges who were
captivated by the charm of the performances had a Himalayan task in choosing
the winners.

With the clock-ticking,
the winners of the competition representing their firms were finally announced as under:

The entire evening was
hosted fabulously by Mr. Pushkar Adhikari, Ms. Tanvi Parekh, Ms. Miral Majumdar,
Ms. Aadhira Dinesh and Mr. Manthan Rawat with their astounding performances,
display of energy and loads of wit and humour. 

Mr. Prathamesh Mhatre
proposed the well-deserved vote of thanks to each and everyone involved in the
success of the event. A total number of 492 students registered for the 10th
Jal Erach Annual Day, setting an overwhelming benchmark.

Essay Writing Competition ‘Awaken the Writer Within’

Prize

Name of Student

Name of Firm

1st Prize Winner

Salonee Kabra

SRBC & Co LLP

2nd Prize Winner

Kanika Mangal

Dinesh & Agarwal

3rd Prize Winner

Anisha Talesara

Kailash Chand & Co

Rotating Trophy
went to Salonee Kabra

Elocution Competition ‘Speak Up’

1st Prize Winner

Miral Majumdar

CNK & Associates LLP

2nd Prize Winner

Tanvi Parekh

Sanjay & Snehal

3rd Prize Winner

Apurva Wani

Aneja & Associates

Rotating Trophy
went to Miral Majumdar

Talent Show ‘CA’s Got Talent’

1st Prize Winner

Deevesh Chudasama

Khandelwal Jain & Co

2nd Prize Winner

Tej Bhatt

CNK & Associates LLP

3rd Prize Winner

Vivek Rajpurohit

Sara & Associates

Rotating Trophy
went to Deevesh Chudasama

Debate Competition ‘War of Words’

Winning Team

Tanvi Parekh (Best Team Member )

Sanjay & Snehal

 

Hardik Adenwala (Best Team Member)

KNAV & Co

 

Sonal Agrawal (Best Team Member )

R M Ajgaonkar & Co

 

Salonee Kabra (Best Team Member )

SRBC & Co LLP

Best Debater

Tanvi Parekh

Sanjay & Snehal

Rotating Trophy
went to Tanvi Parekh.

Sketch & Slogan Competition ‘Leave your Mark’

1st Prize Winner

Chandrika Chaudhari

Khimji Kunverji 
& Co

2nd Prize Winner

Eashan Gokhale

Gokhale & Sathe

3rd Prize Winner

Vishishta Goyal

N P Shah & Associates LLP

Photography Competition ‘Khinch Le’

1st Prize Winner

Deevesh Chudasama

Khandelwal Jain & Co

2nd Prize Winner

 Neel Khimasia

GBCA & Associates.

3rd Prize Winner

Aurobindo Chatterjee

R R Muni & Co

Short Film Making Competition ‘The Screenmasters’

1st Prize Winner

Anirudh Parthasarathy

R T Jain & Co

Hearty Congratulations to all the
winners and their firms.

Judges for the Various
Competitions were as follows:

Competition

Elimination Round

Final Round

Essay Writing

CA Mukesh Trivedi
& CA Gracy Mendes

Elocution Competition

CA Meena Shah & CA Mihir Sheth

CA Mayur Nayak & CA Divya Jokhakar

Talent Show

Devansh Doshi & Kartik Srinivasan

Pallavi Choksi & Neetu Shah

Debate Competition

CA KK Jhunjhunwala & CA Ryan Fernandes

CA Narayan  Pasari
& CA. Shalin Divatia

Sketch & Slogan Competition

CA Chirag Doshi
& CA Divya Jokhakar

Photography Competition

CA Anand Kothari
& CA Nikunj Shah

Short Film Making Competition

CA.  Mihir Sheth & Mr Pratik Palan

The entire evening was
hosted fabulously by Mr. Pushkar Adhikari, Ms. Tanvi Parekh, Ms. Miral
Majumdar, Ms. Aadhira Dinesh and Mr. Manthan Rawat with their astounding
performances, display of energy and loads of wit and humour. 

Mr. Prathamesh Mhatre
proposed the well-deserved vote of thanks to each and everyone involved in the
success of the event. A total number of 492 students registered for the 10th
Jal Erach Annual Day, setting an overwhelming benchmark.

Study Circle Meeting on
“Build Brand U for Professional
Success” at BCAS on 13th June, 2017

Human Development and Technology Initiatives Committee of
BCAS conducted a Study Circle Meeting on “Build Brand U for Professional
Success” (Enhancing your Image as Professional) on June 13, 2017

The meeting was addressed by Mr Sunil Kini, Managing Director
& Principal Trainer; Gurukul Training & Consulting Pvt Ltd. Mr Kini in
his presentation on the subject in a very succinct but effective manner
explained that “Managing one’s image is the key to success in any walk of
life”. Your Image says a lot about you. A right Image can go a long way in your
life.

Each one of us presents an
image on the basis of which people form impressions about us. These impressions
pave the way in our professional growth path.

Whether as a self-employed professional or working with an
organization presenting ones best is an important ingredient for professional
accomplishments

The Workshop deliberated upon the following basic synopsis of
life:

–    Develop Self-Image for Superior Perception
Management

–    4 A model for Professional  Growth

–    Look the part

–    Appearance Management-Gateway to creating an
Impact

–    Importance of Professional Decorum and
Kinesics

–    Build Brand You.

–    Everyone needs image management, only the
intelligent realize in time.

The session ended with a quote: Do not underestimate the
Power of your Appearance, Build your Personal Brand for SUCCESS

The participants felt enriched with request for more such
programmes in future.

FEMA Study Circle Meeting held on 15th June, 2017
at BCAS

FEMA Study Circle Meeting was held on 15th June,
2017 on the topic “External Commercial Borrowing (ECB)”.

The group was led by CA Palav
Shah Parekh.

The depth of the
presentation was excellent with members’ interactions on various case studies
presented. The case studies were very engaging and informative. This gave
participants a 360 degree perspective of the subject.

The speaker covered updates
which were as recent as 8th June.

The participants also
benefited due to the practical exposure of the speaker who shared many insights
about Authorised Dealer’s interaction with the RBI on ECB matters.

Direct Tax Study Circle
Meeting on ‘Income Computation Disclosure Standards; ICDS VI “Effect of changes
in Foreign Exchange rates” on 20th June 2017 at BCAS Conference
Hall.

The group leader, CA.
Abhitan Mehta briefly explained the scope of ICDS VI ‘Effect of changes in
foreign exchange rates’ and the definitions of important terms mentioned in the
standard. He explained the concept of ‘foreign currency transaction’ and the
provisions pertaining to initial recognition of these transactions. The
Chairman of the session, CA Gautam Nayak commented upon the anomalies created
due to introduction of ICDS wherein the law makers have merely picked up the
language of the accounting standards and inserted them in the form of ICDS
without realising the difference between the recognition of items in books of
accounts and computation of income.

Thereafter, CA. Mehta
touched upon the provisions contained in Rule 115 of Income Tax Rules which
talks about the rate of exchange for conversion into rupees, of income
expressed in foreign currency. He also highlighted that in case of difference
between the provisions of ICDS and Income Tax Rules, the Income Tax Rules would
prevail.

CA. Mehta then explained
the difference between monetary and non-monetary items and highlighted a
practical issue which one may face when debentures / preference shares
(optionally convertible) need to be classified either as monetary or
non-monetary assets. Thereafter, he gave an overview of the year end valuation
rules for assets and liabilities and provisions of section 43A of the Income
Tax Act. 

The group leader also
discussed various SC and HC decisions such as Shell Company of China Ltd.
(22 ITR 1) (CA), CIT vs. Tata Locomotive And Engineering Co. Ltd (60 ITR 405
(SC), Sutlej Cotton Mills Ltd. vs. CIT (116 ITR 1)(SC), State Bank of India vs.
CIT, CIT vs. Jagatjit Industries Ltd. (337 ITR 21) (Delhi HC) and CIT
vs. PVP Ventures Ltd (211 Taxman 554) (Madras HC) whereby the Courts in the
context of allowability of foreign gain / loss as expenditure, have held that
nature of gain/loss – capital or revenue needs to be identified.

CA. Mehta also explained
the provisions relating to foreign operations and treatment of opening balance
of foreign currency translation reserve (FCTR) existing on 01.04.2016 as
clarified by CBDT in the FAQ’s. Lastly, he touched upon provisions regarding
forward exchange contract and the differential treatment for premium/discount
under Accounting Standards and ICDS.

The participants were
thoroughly enlightened by the presentation on the subject.

Yoga Day Celebrations held on 21st June, 2017 at
BCAS

Human Development and Technology Initiatives Committee had
organised a yoga session jointly with Indian Spiritual Healing (ISH) Foundation
on Wednesday 21st June 2017 at BCAS Conference Hall, to commemorate
the International Yoga Day.

Mr. Pradeep Thakkar, a Professional Yoga teacher and an
active member of the ISH Foundation guided the participants who attended this
programme.

He demonstrated and guided
participants to perform different asanas with ease and comfort for a healthy
body and mind relaxation.

Participants were also
taught various pranayama to cure diseases. The session ended with positive
affirmations, energy balancing and Omkar Sadhana. Many participants requested
for a regular/long duration yoga course. It was a good learning of Yogasana and
Pranayam for healthy body and peaceful mind.

68th Annual General Meeting on 6th July 2017

The 68th Annual General Meeting of the Society was held
at the Garware Club, Churchgate, Mumbai on Thursday,
6th July 2017.

CA. Chetan Shah, President of the Society, took the
Chair. Since the required quorum was present, he called
the meeting in order. All businesses as per the agenda
given in the notice were conducted, including adoption of
accounts and appointment of auditors.

Mr. Suhas Paranjpe, Treasurer announced the results
of the election of the President, Vice President, two
Secretaries, Treasurer and eight members of the
Managing Committee for the year 2017-18. The names
of members as elected unopposed for the year 2017-18
were announced. He also announced the names of the co-opted members for the year 2017-18.

Later, the “Jal Erach Dastur Awards” for best feature and
best article appearing in BCAS Journal during 2016-17
were announced. The winners were: Dr. Anup P. Shah for
the best feature, and CA. Gautam Nayak/ CA. Pradip N.
Kapasi for best article.

The Special GST issue of the Journal of July 2017
exclusively on “GST Features” and BCAS Publication
Audit Checklist- 7th Enlarged Edition-July, 2017 were
released at the hands of Hon’ble Minister of State (IC) for
Power & Renewable Energy Mr Piyush Goyal at the 69th
Foundation day of the Society celebrated after the Annual
General Meeting of the Society.

At the end, guests including Past Presidents of BCAS were
invited on the dais to share their views and experiences
about the Society.

Outgoing President’s Speech

My colleagues on the dais,
Past Presidents, Ladies and
Gentlemen,

Good Evening members!

This is Spencer West.

There aren’t many people in the world like him. At the age of five
he tragically lost both his legs. But
the Canadian-born 31-year-old
defied all the odds and climbed
Mt. Kilimanjaro! This is a story of
determination, courage, focus,
perseverance and hard work. A
story of months of intensive training to overcome extreme
physical pressure.

What caught my eye is the message on his T-Shirt –
“Redefine Possible.” At BCAS, as we gather here on
our Founding Day, I believe we too have lived this motto.
As a group of dedicated volunteers, driven by a vision,
have travelled a long way to reach this … Founding Day.
So many people here, including my colleagues on the
Dias, have overcome situations when we were up against
the wall and we persevered, when there were moments
of frustration and we showed temperance, things often
???????????????????????????????????????????????????????
stayed the course. So many have given their personal
and family time and made these years and particularly the
last one year fruitful for members. As I stand here on my
last day as the President I can say that as we surmount we now have the confidence to DREAM BIGGER!

Having said that I would like to walk you through “The
News this Year,” and to make it a little more interesting I am going to give it a sports flavor.

So, let’s start at the beginning of the 67th Annual
General Meeting in July last year…when I was handed
OVER the torch, I chose to adopt a theme which was
close to my heart to be our guiding light for the year
ahead. The theme was “Today’s Vision, Tomorrow’s
Reality.” The wisdom contained in these four words
where influence by the famous twentieth-century poet,
painter and philosopher Khalil Gibran. He said, “We
are not limited by our abilities, but by our vision.” And I
realized that we need to focus on developing a powerful,
telescopic vision at BCAS, rather than merely looking at
our combined abilities.

To best understand how we proceeded with the task
ahead, let us look at the athlete who throws the javelin.
After scanning the vast sky above and the distant horizon,
he throws the javelin with all his arm and body muscles
working seamlessly.

At BCAS, we embarked on the task of discovering where
we want to go…and identifying what route should we take
to get there. We met on many occasions in managing
committee, other core committees and with past torch
bearers to draw up a suitable game plan. In the process
of planning, we gauged several untapped potentials and
even pinpointed any possible pitfalls. Some of the key
points that emerged at this stage were:

• Harness technology to enhance access to BCAS

• Explore new opportunities for members to learn

• Consolidate presence on national front

• Organize programs at the doorsteps of outstation
members

• Engage with related bodies to multiply reach

• Encourage and Empower students to be future
leaders and

• Make crisp and effective representations to ensure
our voice is heard in the decision makers’ corridors.

With these findings, we moved to the next phase where
we gained insights from the world of basketball. We
needed to proceed ahead dodging several obstacles such
as other commitments and numerous time constraints.
We also practiced more teamwork as we ‘passed’ the
assignment at hand to other members who were also
better ‘positioned’ to take it ahead. At this stage, we
learned how to seize opportunities and move towards
implementation of the plans by getting logistics in place.

We were now perfectly poised to take the LEAP (high
jump) … SPRINT AHEAD (100 meters)…or take the
PLUNGE (swimming)! And that’s what we did, moving
swiftly from one program to another is quick succession
with high-quality deliverables. And as you will shortly
see they were all gold performances…and some
more golden!

Now let’s take a look at the winners in no
particular order!

Quantum Leap – Technology Edge

BCAS took a quantum leap akin to long jump into the digital
arena which was an enabler to provide easy access to all
members. Live streaming technology for live webcast and
posting of our programs on YouTube channel has been
a boon to our outstation and distant suburb members to
view at their convenience. Facebook and LinkedIn are
increasingly used as a face of the society for important
updates. Payments can be made online and our website
has been revamped. An e-learning portal will be launched
shortly to extend training beyond geographic and time
boundaries.

Hitting Bulls’ Eye – Experts Chat

The target questions by the moderators were pointed
as in the game of Archery. Experts Chat was a new
game at the Society but Panelists, were veterans in
their knowledge reservoir, which was evidenced in their
profound replies and it developed into an excellent
knowledge sharing platform. Six Experts Chat sessions
held this year command equal marks as they all drew
increasing attendance and viewership.

BCAS RRCs – Each RRC is like 20-20 Cricket
Tournament where you learn so many subjects in a
short span of time.

The T20 matches was played at various locations domestic
and international. The Seminar Committee played at
Jaipur where the fiftieth edition of the RRC, the flagship
program of the society was conducted. It drew a record
275 participants from across India. The International
Taxation committee played at Sri Lanka. The first time
at an international location was the ITF Conference. The
Indirect Tax committee played it at Pune with more than
330 participants. The Accounting and Auditing committee
played IndAS RSC at Silvassa. The MPR Committee
played the Youth RRC at Alibaug jointly with ICAI. Each game was individually very well played by all
committees

Union Budget Lecture – Marathon Run

The Marathon run this year too was led by Senior Advocate
Shri S.E. Dastur who continued to wow the crowds with his
powerful presentation. His detailed analysis of the “Direct
Tax Provisions of the Finance Bill, 2017” was a remarkable
run witnessed by 3,000 avid listeners at the auditorium,
while over 10,000 watched it live from across India.

Besides the RRC being played at various locations
we chose not to play football within BCAS but jointly
with various other related organisations. Many joint
programs were conducted with other organizations
to reach out to a larger audience in Mumbai. Forum
of Free Enterprise, Chamber of Tax Consultants,
AIFTP, Indo- American, ISME…were some of the
organizations we worked with on these programs. The
game brought in a lot of cohesiveness in the game of
the profession.

The reach of the Olympics was far and wide this year.
Members at various locations invited us to conduct programs for the benefit of local. To be more inclusive

BCAS reached out to its outstation members with
programs in Ahmedabad, Kanpur, Indore, Aurangabad
and Kolkata. Medals were in the form of increased
membership and enrolment for RRCs.

The novel concept of Inter Committee Cricket Tournament
was executed with thorough excitement and fun this year.

To improve skill sets of its members the society took up
new initiatives. These are akin to introducing new games
to the Olympics. CAMBA a dedicated CA-MBA Course
jointly with ISME was launched to sharpen management
skills and call the shots at par with MBAs in the Society.

A Coach acts as a guide for every sportsman (Virat
Kohli may be an exception), anyway in the true spirit
of sportsmanship we continued the Mentorship program.

As the Society succeeded in playing different games
and enhanced its reach, it created its visibility which
made Organisations to join as FRIENDS of BCAS.
A new concept where various benefits are extended to members.

Role in Governance

The interaction by profession with the government is like
a game of tennis. There is always a rally between the
players which is healthy for developing good governance

The society made 16 representations to various
authorities…some were made jointly with other
organizations. IDS, ICDS, Rotation of Audit Firms and
GST were some of the key issues the society took up with
the government.

Welcoming Students

Sprint run by the society was for the benefit of students.
The run involved in mentoring and motivating students
and felicitating newly qualified CAs. The final dash
was 10th Jal Erach Dastur Students Annual Day where
talent bloomed at its best and brought together over 250
students.

BCAS disseminated knowledge to students at the NM
College and HR college.

Useful Publications

BCAS brought out a record number of 17 publications
this year. Referencer was the bestseller with over 5,000
copies. But the blockbuster is the BCAJ July special
issue with a print run off over 16,000 copies which will be
released today. There are two e-publications in Flipbook
format that are free for the members.

Education at BCAS

BCAS imparted knowledge through 40 Lecture Meetings
with a total participation of 9,084 people, 58 Seminars/
Courses/Workshops with a total participation of 7,065
people and a record 110 study circle/study group
meetings with total participation of 2552. These figures
exclude thousands who have seen the videos online.
This enabled to add 943 new members and our social media presence augmented. More statistics are in the
Annual Report.

On attending many of these meetings was itself a learning
curve for me. But the Flip side is that by attending so many
meetings I have formed a habit of eating chocolates and
sweets sitting behind the desk.

BCAS Foundation

The BCAS Foundation is the philanthropic expression
of the society. Thank you, members, for your large
heartedness which enabled BCAS to collect more than Rs.
20 lakhs for the noble cause of improving pediatric cancer
care to Tata Memorial Hospital! With their generosity, we
could contribute to the wellbeing of 120 children suffering
from this dreaded disease. However, we cannot rest on the
past laurels, and there is a lot we can do for such cause.
I again exhort all my fellow professionals to come forward
and contribute each one’s might to such a noble cause.
I now pass the baton to Narayan Pasari, the new President of BCAS and the new core group members and office bearers. I will definitely continue to stand and cheer for
Team BCAS, in fact run along as we keep raising the bar
and setting new records.

It is time to say a big thank you to the entire team that
has worked so tirelessly and painstakingly to make this
year’s performance so eventful and if I might add…
successful too!

Let me begin this ode of gratitude by expressing my
sincere thanks to the Past Presidents a few of whom were
at the helm of our nine sub committees. Their invaluable
insights and vast reservoir of experience are what keeps
driving the committees to push the limits…and excel.
As Chairmen and Co Chairmen of the sub committees
they have been a beacon of inspiration, enabling the
committees to grapple with many challenges; and win!
Let us have a round of applause for our hardworking
though silent Chairmen and their amazing teams.

Next, I must thank you my managing committee and the Office
Bearers who have diligently shared vital expertise and
invested long hours in planning and facilitating the smooth
flow of programs and events of the society. With all my
heart, I thank ……

Narayan who has an eagle’s eye for details that
compliments his exemplary admin skills in ensuring our
numerous programs run flawlessly.

Sunil has demonstrated credentials in the sphere of
IT besides GST and has played a pivotal role in the
Society’s IT initiatives, particularly now he is engaged in
the launching of e-learning platform.

Suhas who as Joint Secretary willingly devoted his time
and eagerly participated with many innovative suggestions.
Manish who as treasurer, kept an eye on the numbers
and helped all of us to stay in balance and perspective.
Please join me in thanking them with a round of applause.

Then there is the incredible BCAS Team comprised
of Jyoti Malkani who was with us until April as GM;
Shreya, Javed, Upendra, Nikhil, Rathi, Kawaljeet,
Bilal, Reema, Sachin, Baboo, Harish, Prakash, Mamta,
Rajaram, yes, the entire team and not to forget my
office boys. A big thank you for your unfailing and
unstinted support in keeping the wheels of BCAS
turning smoothly.

Last but not the least, I would like to thank all my partners
and my firm for backing me in my journey especially
Abhay, whose abundant wisdom and good judgment
helped me to chart new routes in the face of obstacles.
And how I can forget to thank my wife for bearing my
early exit and late entry to our abode, but she was
adequately cautioned by the PPs…

And special thanks to all the conveners, coordinators,
contributors, speakers, our publishers Finesse and
Spenta, sister organisations and asociations and wellwishers
who have together made BCAS shine bright this
year too.

It would be most inappropriate for me to end this
speech by saying goodbye…because goodbye sounds
so final, almost like closing a door… or escaping to
some remote place never to see each other again.
Instead, I would like to say Fare Well, not as in one
word, but as two words – Fare Well! Because I believe
the road for BCAS stretches a long way ahead…Yes,
there will be bumps and curves to navigate, but more
importantly, there will be many milestones to cross and
many mountains to conquer. And so, to everyone at
BCAS, starting with President Narayan, the Chairmen
& the managing committees and members, I wish you
all a heartfelt Fare Well!

Thank You!

Incoming President’s Speech

My President Chetan, Vice
President Sunil, Joint
Secretaries Manish and Abhay,
Treasurer Suhas, Respected
Past Presidents present and
in absentia, Members of the
Managing Committee, Core
Group Members and my dear friends

Let me start my innings by remembering my father
Late CA. R. G. Pasari whom I lost 5 years ago. He
would have been a really happy man today as he
always pushed me into the BCAS activities. This was
because he had worked with the likes of S. P. Mehtaji,
B. L. Kabraji and others who always had the highest
respect for BCAS. He also read the BCA Journal
regularly till his demise.

I recognize the presence of my mother Smt. Parvati
Devi who is the source of my strength after my father
and also other members of my family.

To reach at this prestigious position, I also thank my
principal Late CA. Mangalbhai Vatsaraj under whom I
completed my articleship, CA Pravinbhai Dharia (our
auditor) and CA. B. L. Sardaji under whom I also took
training post my articles. Thanks is also due to the
frms and the partners with whom I worked during the
last 2 and half decades.

As far as BCAS is concerned, a small peep into my
journey so far would be in order today. I became a
LIFE MEMBER in 1990 and started participating in
the activities thanks to two of our Past Presidents
CA Harish Motiwalla and CA Pradip Thanawala. I was
inducted into the Core Group of the Society in 1994-
95 and became a Committee Member in the Seminar
Committee. I was appointed a Convenor of this
Committee in 1996-97 for the ?rst time and have been
an integral part of this Committee for a fairly long time
till I became a Of?ce Bearer under CA. Nitin Shingala.
I served CA. Raman Jokhakar and CA. Chetan Shah
also during their Presidentship.

Before I leap into the future with some of the many
plans I have chalked out, I would like to take time
out to thank Chetan for his sincere and dedicated
service as President during the past year. It has been
a tremendous learning experience for me as I learnt
not to get fettered or limited by a lack of experience or
ability. Instead Chetan always encouraged us all to think
beyond and allow vision to be the defining force in all
our endeavors. In supporting Chetan over the last many
months I got invaluable exposure to multi-tasking and
problem solving.

So once again, let me welcome and thank you all for
coming here in such large numbers, and giving me
this opportunity to serve you as the 69th President
of the BCAS.

We are living in exciting times with considerable change
happening both in India and in the global arena. And
these numerous changes provide an array of challenges
and incredible growth opportunities for all of us.

In analyzing the Indian population we find it is comprised
largely of young people who are getting more and
more literate and educated. They are also earning a lot
more than in earlier years and have greater disposable
incomes. Their buying power and consumption are
playing a vital role in stimulating the markets and growing
the economy.

The indian economy has defied many hurdles to cross growth of over 7%. Stock exchanges have registered
soaring indices and high volumes of trading activity.
Foreign Direct Investment is pouring in…in fact we
are the number one destination for FDI in the world,
beating both united state and china. Confidence in
India’s economy is surging, thanks to the numerous
programs and reforms undertaken by the NDA
Government with Prime Minister Narendra Modi as its
driving force.

Keeping pace with the phenomenal growth in the Indian
market are the vast array of services and products. And
to ensure a level pending field that fair and free, Indian
companies have several new laws and compliances to
meet translating into enhanced business for all of us.
Globalization too is another stepping stone for all Indian
companies keen on getting more lucrative returns and
a package of benefits. Here again as volumes and
diversity of exports grow, we have vast potential to
harness greater business.

As President, I have given myself the task and
responsibility of facilitating BCAS’ growth. I believe that
if all of us put an arm to the wheel, we can make BCAS a
society that’s will be far more recognized and respected
within our profession and in financial circles.

Keeping this in perspective, I have drawn up a plan that
focuses on “Building Bridges”.

A bridge is a structure that is built over an obstacle to
provide connectivity. And building bridges is the underlying
theme of how I plan, with all of you, to take BCAS ahead!
Bridges connect us and help us to understand each
others challenges… they also enable us to figure out how
we can help each other and show that we appreciate one
another. Building bridges also helps to prevent isolation.
Because isolation can breed prejudice, misunderstanding,
mistrust; and impede effectiveness of working together.
I propose four main bridges and hope you will help me
in building them and BCAS!

1. TRANSFORMATION

High on my list of priorities is task of increasing the
resources of BCAS and growing the membership list.
I believe the Society needs to be more visible in order
to attract more members. On the resources front too,
we have to look at all possibilities of capitalizing on
the reputation and goodwill we already have. There is
plenty of knowledge and expertise within, which I think
can be leveraged to enhance the image of BCAS. With
the shrinking of the world to a global village we need to
explore options to benefits from this trend.

Let’s move to a sincere wish I have!

2. YUVA SHAKTI

The youth! They are our future and they can be the catalyst
of evolution in our Society. I look forward to encouraging
new blood to take up key roles. And to ensure that happens
I would like to implement special incentive schemes to get
more youth to join BCAS. Having done that I would also
like to ensure they get more opportunities and platforms
to express their ideas and vision. Recently, I heard about
the concept of “Shadow Committees” and I would like to
set up Yuva Shadow Committees. These groups of young
minds will think aloud fresh ideas and approaches on the
same challenges faced by the managing committee…and
I hope it will lead to some positive change.

3. DIGITIZATION

Digitization is not a fad or a passing trend that
some companies or individuals flaunt. Digitization
is essential…it has become the need of the hour!
With digitization we will be better empowered to
manage our resources and conduct our business.
I look forward to digitizing as much as I can of
BCAS’ operations and resources. A good start has
already been made in this direction and I would
like to add momentum to the entire process. In
addition to being able to disseminate knowledge,
we would be able to translate information into action
more effectively.

Finally I would like to tackle a relatively ignored activity of
our Society…

4. NETWORKING

Networking is a mantra that is much advocated by
many of the management gurus. At BCAS, I feel we
should work harder in this area. Be it the government,
corporate or fraternity level, we need to step up our
efforts. I hope we will be able to take some giant strides
in this area by organizing some events to reflect the
“Start Up India and Digital India” initiatives undertaken
by the government. We could even re-look at some
of events and tweak the format to include moments
of interaction and networking. Using our digitized
resources and media, we could reach out to a wider
audience and serve the members better. BCAS
could provide more platforms in the form of events
for networking among accountings firms. Networking
Power Summit is one format which could be organized
more frequently and modified to pave the way for
greater networking.

These are just some of my ideas that I have put
together to set the ball rolling. While I and my
colleagues remain open to various suggestions and
infact welcome it, I would like to call upon each one
of you to join us in this process of transformation
of society to the needs of the present times by
mobilizing the power of yuva-shakti & digitization
to build bridges for expansion by creating robust
networks. I am sure I will continue to receive the
same love and affection from you in this very important
journey of life.

Thank You

Growing Your Practice – “Making Time To Think..”

Today professionals spend
their time on what is urgent, what seems necessary on immediate basis. This
includes client meetings, attending to assignments, amongst many others. Most
of the time is taken away by ‘pressing’ needs of such day to day activities.
Professionals generally complain that they don’t have time, especially time for
thinking about their own practices; leave alone, management of their practices.

How can one grow if one cannot think adequately about one’s
own practices? For this to happen, it is never going to be automatic. It will
always be by a concerted effort on part of the professional and with support
from the professional service firm.

Practice management is largely accomplished by setting aside
quality time to think about the firm’s strategic direction, focus of practice,
people and their motivation, clients and services to clients, processes and
systems, and above all, strategic alignment for the firm. This would mean
taking out a “chunk of time”. And taking out a chunk of time to do real
practice management implementation needs commitment and focus. And it also
needs certain techniques and strategies which can make it easier for the
professional service firm to execute and not have practice area/s suffer due to
lack of time.

Some of these strategies are time tested and it is important
that professionals learn to implement them. The theme of this article is about
‘Making time to think for growth’. This presupposes that most professionals are
otherwise not able to easily do that. Here are some best practices that have
worked across professional service firms:

1. Taking out time

One of the most effective
strategies used by Partners of successful professional service firms is taking
out a day in the week or taking out half-days twice a week or reserving a
Saturday exclusively for issues concerning practice management. This chunk of
time that is devoted would lead to wonderful results.

Taking out a mid-week day such as Wednesday normally turns
out to be very effective because the Professional has a Monday & Tuesday
before and a Thursday & Friday after to cover up on pending work. Also,
generally mid weeks are less pressured for engagement deliveries or from a
client expectation for exclusive time to talk or meet.

Some professionals find that an end of the week day like a Friday or
Saturday works much better as end of the week generally are clearing days.

Which day of the week
works is a personal decision; it is important for the Professional to be
committed to pick up any a slot that works the best. Again, there is no one
size that fits all. What may work for one, may not work for the other. And
therefore, each professional can choose a day or two half days based on his or
her preference and commitments.

2. Why is it important to dedicate a full day in a week?

This could be a typical question being asked by most
Professionals. Well, simply because in the day to day grind and never ending
client expectations, it is only dedicated time that works.

What normally happens is that unless a Professional is
mentally free to think i.e. he does not have to attend to client calls, emails
or meetings; nor does he need to interact with staff or fellow partners – which
generally never happens when one is in office, he will never be able to think
through the nuances and arrive at the much required set of propositions, ideas,
postulations, probable range of solutions and conclusions. It is not so easy
for a professional to get up one day and start this dedicated approach to
taking critical decisions for one’s own practice. And therefore, Professionals worldwide have
practiced this art over time and over a number of months to finally reach the
stage where they dedicate 1/7th of the week to thinking about growth.

3. Action orientation

A dedicated day out means
a lot of commitment and it leads the professional to action. One will not like
to idle around, as there would be others in the firm who would be burning the
oil; and morally, a professional would be compelled to justify his absence from
work, by showing some productive and constructive outcome beneficial to the
firm.

This
situation is normally quite challenging when it begins. The partner taking out
the time can face a situation where he is not sure of the outcome or its
effectiveness. Thus, expectations have to be clearly set by those tasked with
“governance” of the firm, so that there is action bias and lesser chance of
fatigue setting in. This day out could also mean meeting partners of other
professional service firms, meeting entrepreneurs and seeking their inputs
about growth, meeting regulators/bankers/colleagues from other
professions/professors and academia and catching up with friends who have been
there and done that. If well planned, it is found that most people would want
to meet up with professionals and exchange ideas and thoughts in the hope that
“He is a good guy to converse with and I will certainly learn something”.

4. Make a start

If one thinks of it, even
taking out 25-30 days in a year and increasing it over time to 35-40 days in the
52 weeks that all of us have to our disposal would be a good start.

Successful practitioners take out a good 40 days a year for practice
management. Research shows that it is these firms that are normally successful
in ensuring continuous alignment of each facet of one’s practice and are set on
a path to growth. Each partner in a professional service firm may not be able
to take out so much time. Some may be at 10-20% of this benchmark whereas
others would be at 25-35% of this benchmark. That’s low; but is better than not
spending any time. So, make a start!

5. Partner retreat

One other strategy that
always works in such cases is a policy of having annual partner retreats of 3-5
days and quarterly meetings of 1-2 days. These 10-12 days are themselves invaluable
to firms that grow and grow fast.

When the partners meet in an environment of uncluttered,
uninterrupted, strategic mind frame – wonderful outcomes are a foregone
conclusion.

Partner retreats are not meant for discussing operational
issues but the focus normally has to be on strategic issues concerning the firm
and firm growth. These would include looking at the strategic direction the
firm is taking, looking at innovation in the market place, breaking ice in
relaxed environments and just getting to know each other better.

How invaluable all of these
could be if done in a manner that is consistent, thought through, and
sustained? The best of firms have used partner retreats to keep the firm on a
high growth trajectory without having to worry about missed opportunities or
absence from work or offices. To the contrary, when partners are not around the
teams or in the offices andif the practices are still working smoothly, it is a
clear reflection of a well-oiled machinery in terms of maturity of processes
that a practice area has been able to develop. It’s also a lot to do with the
way partners think about succession and growth.

Firms after firms have reported that partners in professional
services firms, being the unique breed that they are, come into their own in a
relaxed retreat environment.

Here are some suggested agenda questions for a typical partner retreat:

1)   What are
the challenges facing your practice area?

2)   How can
the firm help you address those challenges?

3)   What are
the emerging areas that the firm may want to expand their practice into?

4)   What are
some of the issues that you are facing at a personal level impacting your work,
if any, that the firm can help resolve?

5)   What
ideas do you have for innovation in the firm?

6)   What are
the challenges that you see facing the firm and its growth?

7)   What are
the three big ideas you have for growing the firm and for growing your practice
area?

8)   How do
you assess systems and processes, policies and procedures in the firm? What can
be done better? What role can you play in any of them? What could we outsource
to team members – internally or externally?

9)   What are
clients telling you in your practice area? How can we be more relevant to our
clients?

10)  How can
we be a better firm for our team members?

11)  How
should the firm think about some strategic aspects for the future:

a)    Expansion
organically

i)   Branches,
new locations

ii)  New
practice areas

b)    Inorganic
expansion

i)   Networking
with like-minded firms

ii)  Joining
an international network

iii)  Starting
one’s own network

iv) Merging
other firms into ours

v)  Merging
our firm into another firm

6. Strategic outcomes

Writing on a new change in
the law, say, a tax development, comes naturally to a tax partner. The question
to ask is: What is the strategic outcome of this tax alert that is being
produced for the clients of the firm? Doing this repeatedly is time spent by
various people in the tax team. So, what are we achieving:

1)    Client
outreach?

2)    A
message going out to clients that “we exist”?

3)    We are
on top of our game in tax developments.

4)    We can
help you navigate the law.

5)    Come to
us with questions and get the best response possible.

6)    Does
this all add up to “development” of the tax practice? Technical development,
client awareness, new business development, knowledge repository enhancement,
developing a reputation in the market place that here is a firm that knows the
subject well.

Is this the desired
strategic outcome that the firm seeks? If it is, then well – you are doing
well. Keep building on it. If the firm has not thought through this, then its
important that before serious time is spent, the outcome is thought through
before embarking on any recurring project.

7. Partner alignment

Often taking out time to
think and execute strategies to grow the firm means that partners need to
interact more and more. It forces a convergence of thought process, even if it
is not there to start with. This turns into a process where partners start
ideating, giving creative inputs, debating alternatives and outcomes, and
finally coming into alignment.

Imagine, if no real time is taken out for meaningful
conversations about growing the practice, where would it leave the firm? The
routine continues, drudgery sets in and the best people leave. Human capital of
the firm is often taken for granted. Partners have to be in complete alignment
about the fact that team members need to be handled well at all levels. And
partners taking out time to think about growing the firm should devote a good
portion of time to thinking about their team’s development, career path and
roadmap for growth. In their success and upward mobility, lies the firm’s
growth and success.

All said and done:

Partners in alignment is
always a wonderful sign of a firm’s integrated level of working, measured
growth and consistent delivery across all practice areas. One of the most
sought after outcome for a firm is growth of reputation and goodwill. A visible
brand creates a perception which ultimately turns into a sterling reputation
for consistent and solid advice and delivery.

Thus, making time to think
across the partner group, can create strong ripples, leading to actionable
ideas and strategies, which can ultimately change the fortunes of the
professional service firm and lead it to a strong growth trajectory. Partners
should make the time to think. It is in their interest, the team’s interest and
the firm’s interest in the perennial quest for growth.

What Type Of SEBI Orders Are Appealable? Supreme Court Decides

The Supreme Court has laid to rest
a controversial and important issue. That is on the issue as to what orders
passed by the Securities and Exchange Board of India securities laws are
appealable. SEBI has both general and specific powers. SEBI passes orders on
several issues. SEBI also issues circulars, directions, etc. which have
significant impact on persons connected with market operations. Since it is an
expert body dealing with a field which is complex, courts give a lot of freedom
to SEBI. If one reads the powers of SEBI, SEBI has almost been given a carte
blanche on how it can deal with the operation of the securities markets.

SEBI has powers
:

–   to make rules and regulations, that too,
except for some administrative and parliament overseeing, are largely
self-determined.

–   to give directions to stock exchanges, listed
entities, intermediaries, etc.

–   to punish and levy penalties,

–   to disgorge wrongfully made profits,

–   to make parties buy shares or sell shares etc
and

–   to debar entities to approach the financial
markets for a specified period.

The question before the Supreme
Court was : whether all orders passed by SEBI are appealable or are there any
exceptions – that is – some orders are not appealable?

The right to appeal is important.
The first appeal is to the Securities Appellate Tribunal (“SAT”). SAT has a
great record of disposing appeals fast with not many of its rulings being
overturned by the Supreme Court (the next appellate body). SAT is an expert
body well versed with the functioning of the securities market and hence
aggrieved parties can expect a quick relief from an authority which has an
indepth grasp of finer issues of this complex field. The Supreme Court in the
case of Clariant (Clariant International Limited vs. SEBI (2004) 54 SCL 519
(SC)) has observed, “The Board is indisputably an expert body. But when it
exercises its quasi-judicial functions, its decisions are subject to appeal. The
Appellate Tribunal is also an expert Tribunal.” (emphasis supplied).

In the past, appeals have been
liberally admitted. Even letters of SEBI, if they affected rights of a party,
have been held to be appealable. However, when a Chartered Accountant appealed
to SAT on the ground that SEBI should not have referred his name to ICAI, it
was rejected since it was merely a reference.

However it was felt that clarity
was lacking as to what orders were appealable as the same was not clearly
defined. Another issue which required clarification was: whether circulars
which affected a group of parties adversely were appealable. The decision in
the case of NSDL vs. SEBI ((2017) 79 taxmann.com 247 (SC) deals with
such issues.

Facts of the case

The
facts of the case are fairly simple. SEBI had issued a circular to depositories
directing them to restrict their charges in the manner and to the extent
prescribed in the circular. Obviously, the depositories were aggrieved as the
circular directly affected their finances. NSDL, a depository, appealed against
the circular/direction to SAT. Preliminary issue raised before SAT was whether
such a circular/direction is appealable. SAT on merits, rejected the appeal and
held the circular/directions to be valid. In other words, circulars /
directions issued by SEBI were appealable. Both parties appealed against the
order of SAT to the Supreme Court. SEBI appealed against the part where SAT had
held that such a circular/direction was appealable. The depositories appealed
against the part where on merits its appeal was rejected.

The Supreme Court decided to deal
first with the part of the SAT order where it was held that such a circular was
appealable. Obviously, if the Court found that such a circular was not
appealable, then the part relating to merits would not require consideration.

Analysis of orders passed by SEBI
into categories

To decide whether the circular
issued by SEBI was appealable or not, the Supreme Court divided various types
of circulars, orders, directions, etc. that SEBI was empowered to issue into
three categories:-

1. Orders that are in
exercise of administrative functions

2. Orders that are in
exercise of its legislative functions

3. Orders that are in
exercise of its quasi-judicial functions.

The Supreme Court held that it was
only the third category, i.e. orders that are issued in exercise of its quasi-judicial
functions, were the ones that were appealable.

The Court then, firstly, gave
reasons why it held that only such category or orders were appealable.
Secondly, it explained meticulously how to determine whether an order falls
under which category. The decision even pointed out the provisions in the SEBI
Act that dealt with powers relating to each category of functions. On facts, it
held that the circular was issued in exercise of administrative functions and
hence it was not appealable. 

Why are only orders issued by
SEBI in exercise of quasi-judicial functions appealable under the SEBI Act?

The Court meticulously analysed
the provisions of the Act to show that the Act provided and intended to allow
appeal only against quasi-judicial orders.

Firstly, it highlighted the
constitution of SAT. It noted that the Presiding Officer has to be a retired
judge. That showed that only quasi-judicial orders were intended to be
appealable.

Secondly, it noted that in case of
appeals against orders passed by an adjudication order, appeal could be made by
an aggrieved party within 45 days of the day when such order is “received by
him”. The Court observed that “Generally administrative orders and legislative
regulations made by the Board are never received personally by ‘the person
aggrieved’”. Hence, once again, it was only quasi-judicial orders that were
intended to be appealed.

The Court then observed that, as
held in its earlier decision in Clariant’s case that the powers of SAT were
co-extensive with that of SEBI while reviewing in appeal SEBI’s orders. Hence,
once again, such orders can only be quasi-judicial in nature.

Even the procedure relating to
appeal pointed towards this. The order passed by SAT on appeal had to be sent
to the parties to the appeal (i.e. the aggrieved party) and the adjudicating
officer. Once again, this shows, the Court held, that the scheme of the Act was
to allow appeal only against quasi judicial orders.

The fact that appeals against
orders of SAT to the Supreme Court are allowed only on questions of law was
held to be yet another pointer in this direction.

Hence, the Court concluded that :

1.  appeals are allowable only
against quasi-judicial orders of SEBI. Appeals against orders in exercise of
legislative functions is obviously beyond the appellate function of SAT which
itself is a creature of the Act.

2.  Orders in exercise of
administrative functions too cannot be appealed against before SAT but petition
for judicial review may be filed in Court.

How to determine whether an
order is in exercise of administrative/legislative/quasi-judicial functions?

The above analysis brings us to
the important point of how to determine whether a particular order is in
exercise of quasi-judicial functions and thus appealable or whether it is in
exercise of administrative or legislative functions and hence not appealable.
Here again, the Court meticulously analysed the issue on first principles.

It cited the classic case of The
King vs. Electricity Commissioners [(1924) 1 KB 171] where Lord Justice
Atkin defined a quasi-judicial order as:-

“Whenever
any body of persons having legal authority to determine questions affecting
rights of subjects, and having the duty to act judicially, act in excess of
their legal authority, they are subject to the controlling jurisdiction of the
King’s Bench Division exercised in these writs.”

The
Court further observed that the above decision was applied in another decision,
and the following guidelines were given to decide whether an order of an
administrative body is a quasi-judicial one:-

“(i) There must be legal
authority; ?

(ii) This authority must
be to determine questions affecting the rights of subjects; and

(iii) There must be a
duty to act judicially.”

The Court further qualified and
explained the principle that a mere absence of a lis between the parties
does not make the order one that is not quasi-judicial. So long as the
aforesaid 3 conditions are satisfied, the order is a quasi judicial one. It
observed, “..the absence of a lis between the parties would not
necessarily lead to the conclusion that the power conferred on an
administrative body would not be quasi-judicial – so long as the aforesaid
three tests are followed, the power is quasi-judicial.”

What also matters is the nature of
the final order. Thus, if the order does not determine the rights of parties
and, for example, makes a report after giving the parties a hearing, the order
is not a quasi-judicial one.

What are the specific
provisions in the SEBI Act, orders under which can be appealed against?

To make its order even more
comprehensive and thus be helpful to be applied in specific provisions without
ambiguity, the Court then listed the various provisions of the SEBI Act under
which SEBI can pass orders. Of these, it then analysed which of such orders are
quasi-judicial and hence appealable. It also specified which of them provide
for administrative powers or legislative powers and hence not appealable to the
SAT. It observed as follows:-

“It may be stated that both Rules made u/s. 29 as
well as Regulations made u/s. 30 have to be placed before Parliament u/s. 31 of
the Act. It is clear on a conspectus of the
authorities that it is orders referable to sections 11(4), 11(b), 11(d), 12(3)
and 15-I of the Act, being quasi-judicial orders, and quasi judicial orders
made under the Rules and Regulations that are the subject matter of appeal u/s.
15T. Administrative orders such as circulars issued under the present case
referable to section 11(1) of the Act are obviously outside the appellate
jurisdiction of the Tribunal for the reasons given by us above.” (emphasis supplied).

Accordingly, the Court set aside the
order of SAT and held that the circular was issued in exercise of
administrative functions by SEBI and hence not appealable to SAT. It,
however, clarified that the parties were free to challenge the circular and
seek judicial review.

Conclusion

Thus, an important matter has been set to rest
and that too in a comprehensive way. It will help parties and SAT decipher
which orders are appealable. Further, parties will also know how to deal with
powers of SEBI that are classified as law making powers or administrative
powers. The decision aims to lend clarity, avoid litigation and ensure speedier
decisions.

RERA: An Overview

Introduction

On
1st May 2017, the Government of India, notified the operative
portion of the Real Estate (Regulation and Development) Act, 2016 (“the
Act”) as coming into effect.   This
Act is touted as a game changer for the real estate industry of India. For the
first time, the sector would have a regulator in each state which would address
all the infamous malpractices of the real estate sector. The Act introduces a Real
Estate Regulatory Authority (RERA) which would regulate, control and
promote planned and healthy development and construction, sale, transfer and
management of residential properties. It aims to protect the public interest vis-à-vis
real estate developers and also to facilitate the smooth and timely
construction and maintenance of residential properties. Thus, just as the
capital markets have a regulator in the form of SEBI, the banking industry has
RBI, the real estate sector now has an authority. Although this is a Central
Act, each State would have its own RERA and the same is empowered to come out
with its Rules. This Article aims to give a bird’s eye overview of the Act. The
next month’s column would cover some issues under the Act.    

RERA

A
Real Estate Regulatory Authority has been constituted for each State /
Union Territory under the Act. It will consist of a Chairman and minimum of two
whole-time Members. Accordingly, the Maharashtra State Government has
constituted the Maharashtra Real Estate Regulatory Authority. The RERA would
have various powers and rights. The Act also empowers the State Government to
constitute a Real Estate Appellate Tribunal to adjudicate any dispute
and hear and dispose of appeal against any direction, decision or order of the
RERA under the Act. The Tribunal will consist of a Chairman and minimum of two
whole time Members, one a Judicial Member and the other an Administrative /
Technical Member. 

Application of the Act

Section
3 of the Act requires every Promoter of a real estate
project to register the same with the RERA before he can advertise,
market, book, sell, offer for sale or invite persons to purchase any plot,
apartment or building in the real estate project. Ongoing projects in the State
of Maharashtra for which the Occupation Certificate has not been received on 1st
May 2017 are also required to be registered with the RERA. The time frame for
registering ongoing projects is by 31st July 2017.

Registration
is not required for the following type of projects:

(a)    Where land to be
developed is less than 500 square meters or the number of apartments to be
developed are 8 or lower.

(b)    Where only
renovation or repair or re-development is to be done which does not involve any
marketing, advertising, selling or new allotment under the real estate
project.   

The
term Promoter of a real estate project is very important since it
determines who is required to register under the Act and who would be subject
to the various obligations and liabilities. The Act defines a Promoter in an
exhaustive manner by giving a very far reaching definition. It covers a person
who constructs or causes to be constructed an independent building consisting
of apartments, or converts an existing building into apartments, for the
purpose of selling the apartments. It also covers a person who develops land
into a project, whether or not the person also constructs structures on any of
the plots, for the purpose of selling to other persons. Further, it covers any
person who acts himself as a builder, coloniser, contractor, developer, estate
developer or who claims to be acting as the holder of a power of attorney from
the owner of the land on which the building or apartment is constructed or plot
is developed for sale. The definition also states that where the person who
constructs or converts a building into apartments or develops a plot for sale
and the person who sells apartments or plots are different persons, both of
them are deemed to be the Promoters and both are jointly liable for the
functions and responsibilities specified, under the Act. 

The
term real estate project is also very relevant since what needs to be
registered is a real estate project. The Act defines it to mean the development
of a building or a building consisting of apartments, or converting an existing
building into apartments, or the development of land into plots or apartment,
for the purpose of selling all or some of the said apartments or plots or
building and includes the common areas, the development works, all improvements
and structures thereon, and all easement, rights belonging to the same. The
Maharashtra Rules even define the term phase of a real estate project since
even a phase-wise registration of the real estate project can be done instead
of registration for the entire project. It may consist of a building or a wing
of the building or defined number of floors of a multi-storeyed building /
wing. E.g., Wing A of a Project could be treated as a phase of a project and
only the same may be registered.

Registration of Project

The
Act requires a Promoter to register a real estate project with the RERA. It is
important to note that the registration is required qua a project and
not qua a developer. The FAQs issued by the Maharashtra RERA also state
that developers are not registered but projects are registered. Thus, one
developer would need to register each and every project to be undertaken by
him. Similarly, if there are multiple developers for one project then all of
them would be shown as promoters in the single registration of that one
project. For registration of a project, the Promoter needs to make an online
application on RERA’s website, in the prescribed form, submit a long list of
documents and pay the prescribed fees. One of the important documents to be
submitted is a copy of the approval and sanction from the Competent Authority,
obtained in accordance with the building regulations. This means that the
application can only be made after the developer receives the Intimation of
Disapproval/Commencement Certificate (IOD/CC) for the project and not before
that. Some of the other key documents to be submitted include the following:

a)     Proforma of the
allotment letter/Agreement For Sale /Conveyance Deed to be executed.

b)     Affidavit that the
Promoter has clear title to the land and the details of encumbrances, if any,
the time period he estimates for completion and most importantly, a declaration
that 70% of realisations would be deposited in a separate bank account and used
in the manner prescribed.

c)     3 years’ Annual
Accounts Reports of the Promoter.

d)     Copy of the
Development Agreement/Joint Development Agreement/Joint venture Agreement
executed in respect of the real estate project.

e)     Details of
FSI/TDR, proposed FSI, sanctioned FSI, number of buildings/wings/floors to be
constructed along with aggregate area of open spaces and parking spaces.

f)     One of the key
disclosures to be made is of the land cost, cost of construction and the
estimated total cost of the real estate project.

If
the RERA does not take any action on the application within 30 days, then it is
deemed to have granted its approval. In case the RERA refuses to grant
registration, then it must first give a hearing to the applicant.

Each
registration is valid for a period declared by the Promoter as the period
within which he undertakes to complete the project. The registration can be
renewed if the project completion time has been extended for force majeure reasons.
A total renewal of up to one year each can be granted. The Promoter is also
required to make an application for allotment of a password on the RERA’s
website. 

The
registration can be revoked by the RERA if the Promoter has defaulted in any of
his obligations under the Act or he violates the terms/conditions of the
approval by the RERA or is guilty of any unfair trade practices.

Promoter’s Role and Responsibilities

Like
the various State Flat Ownership Acts, e.g., the Maharashtra Ownership Flats
Act, 1963, the RERA casts various responsibilities upon the Promoter. The Act
specifies a host of functions and duties for a Promoter, and some of the
important duties include the following:

(1)    The Promoter must provide all details of
registration  with the RERA and update his inventory
position on a quarterly basis.

(2)    The advertisement
issued by the Promoter shall mention all particulars of registration with the
RERA.

(3)    The Promoter at
the time of the booking and issue of allotment letter shall be responsible to
make available to the allottee, all sanctioned plans / layout, the stage-wise
completion schedule, etc.

(4)    The Promoter shall
be responsible to obtain the completion certificate or the occupancy
certificate and to make it available to the allottees/co-operative society. He
shall be responsible to obtain the lease certificate, where the real estate
project is developed on a leasehold land, specifying the period of lease, and
certifying that all dues and charges in regard to the leasehold land have been
paid, and to make the lease certificate available to the association of
allottees.

(5)    The Promoter is
also responsible for providing and maintaining the essential services, on
reasonable charges, till the taking over of the maintenance of the project by a
co-operative society of the allottees.

(6)    The Promoter must execute a registered conveyance deed of the
building along with the proportionate title in the common areas to the
society/company/association of the allottees and pay all outgoings until he
transfers the physical possession of the real estate project to the society.
The Maharashtra Rules require that the application for forming a society/
entity for a single building should be submitted to the Registrar of
Co-operative Societies by the Promoter within 3 months from the date on which
51% of the total number of allottees in such a building or wing have booked
their apartments. In the absence of any local law, the Act specifies that the
conveyance deed in favour of the allottee or the association/society of the
allottees must be made within 3 months from date of issue of the occupancy
certificate or in Maharashtra within 1 month from the date on which the
Society/Company is registered, whichever is earlier.

(7)    Once an agreement
for sale is executed for any apartment, he cannot mortgage or create a charge
on the apartment/building and if he does create a mortgage/charge, then it
shall not affect the right and interest of the allottee who has taken or agreed
to take such apartment, plot or building.

(8)    The Promoter may
cancel the allotment only in terms of the agreement for sale. Thus, arbitrary
cancellation of allotment is no longer possible.

(9)    If any allottee suffers a damage due to any false information
contained in an advertisement issued by the Promoter, then he must be
compensated by the Promoter. He may also decide to withdraw from the project,
and he shall be returned his entire investment along with interest @ 2% over State
Bank of India’s highest Marginal Cost of Lending Rate (SBI’s MCLR).

(10)  The Promoter cannot
accept a sum more than 10% of the cost of the apartment as an advance payment
or an application fee without first executing a written and registered
Agreement For Sale with such person. The Agreement must be as per the Model
Prescribed Form specified under the Act.

(11)  Once the sanctioned plans as approved by the RERA are disclosed to
prospective allottees, the Promoter cannot make any additions and alterations
to the same without their previous consent. He may make such minor additions or
alterations as may be required by the allottee/as may be necessary due to
architectural and structural reasons certified by an Architect/Engineer and
that too after proper intimation to the allottee. In case any defect in
structure/workmanship/quality/provision of services /other obligations of the
Promoter is brought to his notice within a period of 5 years by the allottee
from the date of handing over the possession, then the Promoter must rectify
the defect without further charge, within 30 days. If he fails to do so, the
allottees would receive appropriate compensation.

(12)  The Promoter cannot
transfer or assign his majority rights and liabilities in the real estate project
to a 3rd party without prior written consent from 2/3rd
of the allottees and prior written approval of the RERA.

(13)  Promoter must
obtain title insurance of the land and building and separate insurance of the
construction of the real estate project.

(14)  If the Promoter
fails to complete or is unable to give possession of an apartment, plot or
building:

(a)    in accordance with
the Agreement for Sale; or

(b)    due to discontinuance of his business as a developer on account of
suspension or revocation of the registration under the Act or for any other
reason, then he must, if the allottee wishes to withdraw from the project,
without prejudice to any other remedy available, return the amount received by
him with interest at the rate of SBI’s MCLR plus 2%. However, if an allottee
does not intend to withdraw from the project, he shall be paid, by the
Promoter, interest for every month of delay, till the handing over of the
possession at SBI’s MCLR plus 2%.

(15)  He must comply with
the Act and Rules /Regulations /terms and conditions of approval granted by the
RERA.

(16)  The Promoter must
sell a flat only on carpet area pricing basis and must mention the carpet area
in the Agreement for sale. The Act defines carpet area to mean the net usable
floor area of an apartment, excluding the area covered by the external walls,
areas under services shafts, exclusive balcony or verandah area and exclusive
open terrace area, but includes the area covered by the internal partition
walls of the apartment. All walls which are constructed on the external face of
an apartment would be treated as external wall while those walls/ columns
constructed within an apartment would be internal walls. Walls would include
columns within or adjoining or attached to the wall. 

The Promoter must
also confirm the final carpet area allotted to the allottee once the OC has
been obtained. A variation of up to 3% of the carpet area is permissible. If
there is an upward variation then the allottee must pay for the same and if
there is a reduction then the Promoter must refund the excess money paid by the
allottee within 45 days with interest at SBI’s MCLR plus 2%.

(17)  The total price
quoted to the allottee must clearly mention the taxes and must be escalation
free except for increases due to development charges payable to the Municipal
and similar authorities.

(18)  If the promoter fails to complete or is unable to give possession
of an apartment, plot or building in accordance with the terms of the Agreement
For Sale, then the allottees may ask for refund of the sum paid with interest.
The time for refund of such amount payable by the Promoter to the allottees
with interest and compensation is within 30 days from the date on which the
same becomes due and payable. 

Designated bank Account to be
maintained

One of the most unique features of
the Act is that the Promoter must maintain a separate designated bank account.
70% of all realisations from flat allottees must be deposited in this account,
to cover the cost of construction and the land cost and must be utilised for
that purpose only. This provision has been enacted to curb the earlier practice
of developers withdrawing the proceeds of one project and using it to start
another project, thereby risking the completion schedule of the 1st project.
Now, the substantial proceeds of one project must be used for that project
alone. Only a leeway of 30% is available to the Promoter. When the Bill for
passing this Act was moved in the Lok Sabha, the Union Minister had stated that
Promoters can use the remaining 30% for other expenses incurred or for any
other business purposes. It would act as a little cushion. This 30% cushion
would enable the Promoter to purchase some other land by giving an advance for
the same. The limit of 30% is to ensure that the project’s funds were not
diverted and that the project was completed on time.

Even the withdrawal for the cost
of project must be in proportion to the percentage of completion of the
project. For this purpose, the withdrawals must be certified by three entities
– an architect, an engineer and a practicing CA. It is necessary that the CA
certifying must not be the auditor of the Promoter. Further, every Promoter
must get his accounts audited by 30th September in which his Auditor
must certify that during the year, the amounts collected qua a
particular project have been used for that purpose and that the withdrawal was
in compliance with percentage completion of the project. Other than the
certification from these 3 entities, there is no requirement of obtaining any
approval from the RERA for the withdrawal.

For
ongoing projects which have not received OC/CC before 1st May, 2017,
70% of the amount realised from flat allottees is required to be deposited in
the separate bank account. However, in this case, if the estimated receivables
of such ongoing project is less than the estimated cost of completion of the
project, then the 100% of the amount to be realised is required to be deposited
in the said account. For instance, a project costs Rs. 25 crore. It has been
completed up to a certain level and certain flats of this project have been
sold. The total realisations from the flats sold are Rs. 10 crore and the
balance receivable from these flats is Rs. 6 crore. The balance cost of
construction to be incurred for the project is Rs. 7 crore. In this case, the
estimated balance receivables of Rs. 6 crore are less than the estimated cost
of completion of Rs. 7 crore, and hence, the entire Rs. 6 crore (100%) would be
deposited in the separate bank account. Here, the 30% cushion would not be
available. This is quite a stringent provision for the Promoter, but in the
interest of the flat allottees.

(Part II on Issues under
the Act would be covered as a part of Next month’s Laws and Business)

Disclosures in Standalone Ind As Financial Statements For The Year Ended 31st March 2017 Regarding Current Tax And Reconciliation Of Tax Expense

TATA CONSULTANCY SERVICES LTD

The income tax expense consists of the following:

(Rs. crores)

 

2017

2016

Current tax:

 

 

Current
tax expense for current year

6,762

6,344

Current
tax expense/(benefit) pertaining to prior years

(119)

32

 

6,643

6,376

Deferred
tax benefit

(230)

(112)

Total income tax expense recognised in the current year

6,413

6,264

The reconciliation of estimated income tax
expense at statutory income tax rate to income tax expense reported in
statement of profit and loss is as follows:

 

Year ended March 31, 2017

Year ended March 31,
2016

Profit
before income taxes

30,066

29,339

Indian
statutory income tax rate

34.61%

34.61%

Expected
income tax expense

10,406

10,154

Tax effect of adjustments to reconcile expected income tax
expense to reported income tax expense:

 

 

Tax
holidays

(4,134)

(4,468)

Income
exempt from tax

(27)

(34)

Undistributed
earnings in branches and subsidiaries

(60)

90

Tax
on income at different rates

166

285

Tax
pertaining to prior years

(218)

32

Others
(net)

280

205

Total income tax expense

6,413

6,264

The Company benefits from the tax holiday available for units
set up under the Special Economic Zone Act, 2005. These tax holidays are
available for a period of fifteen years from the date of commencement of
operations. Under the SEZ scheme, the unit which begins providing services on
or after April 1, 2005 will be eligible for deductions of 100% of profits or
gains derived from export of services for the first five years, 50% of such
profits or gains for a further period of five years and 50% of such profits or
gains for the balance period of five years subject to fulfilment of certain
conditions. From April 1, 2011 units set up under SEZ scheme are subject to
Minimum Alternate Tax (MAT).

Significant components of net deferred tax assets and
liabilities for the year ended March 31, 2017 are as follows:

 

Opening
balance

Recognised /reversed through profit and loss

Recognised in/
reclassified from other comprehensive income

Closing
balance

Deferred tax assets / (liabilities) in relation to:

 

 

 

 

Property,
plant and equipment and Intangible assets

(22)

(62)

–

(84)

Provision
for employee benefits

238

58

–

296

Cash
flow hedges

(7)

–

(5)

(12)

Receivables,
loans and advances

183

22

–

205

MAT
credit entitlement

1,960

102

–

2,062

Branch
profit tax

(346)

60

–

(286)

Unrealised
gain/loss on securities carried at fair value through statement of profit and
loss/OCI

(27)

(2)

(256)

(285)

Others

185

52

–

237

Net deferred tax assets / (liabilities)

2,164

230

(261)

2,133

Gross deferred tax assets and liabilities are as follows:

 

(Rs. crores)

As at March 31, 2017

Assets

Liabilities

Net

Deferred tax assets/
(liabilities) in relation to:

 

 

 

Property,
plant and equipment and Intangible assets

(56)

(28)

(84)

Provision
for employee benefits

296

–

296

Cash
flow hedges

(12)

–

(12)

Receivables,
loans and advances

205

–

205

MAT
credit entitlement

2,062

–

2,062

Branch
profit tax

–

(286)

(286)

Unrealised
gain/loss on securities carried at fair value through statement of profit and
loss/OCI

(285)

–

(285)

Others

237

–

237

Net deferred tax assets/
(liabilities)

2,447

(314)

2,133

Significant components of net deferred tax assets and
liabilities for the year ended March 31, 2016 are as follows: (not
reproduced as similar to 31-3-2017)

Under
the Indian Income Tax Act, 1961, the Company is liable to pay Minimum Alternate
Tax in the tax holiday period. MAT paid can be carried forward for a period of
15 years and can be set off against the future tax liabilities. MAT is
recognised as a deferred tax asset only when the asset can be measured reliably
and it is probable that the future economic benefit associated with the asset
will be realised. Accordingly, the Company has recognised a deferred tax asset
of Rs. 2,062 crores and has not recognised a deferred tax asset of Rs. 1,108
crores as at March 31, 2017.

The
Company has ongoing disputes with Income Tax authorities relating to tax
treatment of certain items. These mainly include disallowed expenses, tax
treatment of certain expenses claimed by the Company as deductions, and
computation of, or eligibility of, certain tax incentives or allowances. As at
March 31, 2017, the Company has contingent liability in respect of demands from
direct tax authorities in India, which are being contested by the Company on
appeal amounting Rs. 2,688 crores. In respect of tax contingencies of Rs. 318
crores, not included above, the Company is entitled to an indemnification from
the seller of TCS e-Serve Limited.

The
Company periodically receives notices and inquiries from income tax authorities
related to the Company’s operations in the jurisdictions it operates in. The
Company has evaluated these notices and inquiries and has concluded that any
consequent income tax claims or demands by the income tax authorities will not
succeed on ultimate resolution.

The
number of years that are subject to tax assessments varies depending on tax
jurisdiction. The major tax jurisdictions of Tata Consultancy Services Limited
include India, United States of America and United Kingdom.  In India, tax filings from fiscal 2014 are
generally subject to examination by the tax authorities. In United States of
America, the federal statute of limitation applies to fiscals 2013 and earlier
and applicable state statutes of limitation vary by state. In United Kingdom,
the statute of limitation generally applies to fiscal 2014 and earlier.

RELIANCE INDUSTRIES LTD

The income tax expense consists of the following:

(Rs. crores)

 

Year Ended31st March, 2017

Year Ended 31st
March, 2016

TAXATION

 

 

Income tax recognised in Statement of Profit and Loss

 

 

Current
tax

8,333

7,801

Deferred
tax

1,019

831

Total income tax expenses recognised in the current year

9,352

8,632

 

The
income tax expenses for the year can be reconciled to the accounting profit
as follows:

Profit
before tax

40,777

36,016

Applicable
Tax Rate

34.608%

34.608%

Computed
Tax Expense

14,112

12,464

Tax
effect of :

 

 

Exempted
income

(2,707)

(5,306)

Expenses
disallowed

3,044

3,378

Additional
allowances net of MAT Credit

(6,116)

(2,735)

Current Tax Provision (A)

8,333

7,801

Incremental
Deferred Tax Liability on account of Tangible and Intangible Assets

1,229

824

Incremental
Deferred Tax Asset on account of Financial Assets and Other Items

(210)

7

Deferred tax Provision (B)

1,019

831

Tax Expenses recognised in Statement of Profit and Loss (A+B)

9,352

8,632

Effective
Tax Rate

22.93%

23.97%

STERLITE TECHNOLOGIES LTD

The major components of income tax expense for the years
ended 31 March 2017 and 31 March 2016 are:

 

31 March 2017

31 March 2016

(Rs. in crores)

(Rs. in crores)

Profit or loss section

 

 

Current Income Tax

 

 

Current income tax charge

51.55

52.77

Adjustment of tax relating to earlier
periods

3.22

(5.93)

Deferred Tax

 

 

Relating to origination and reversal of
temporary differences

2.47

19.35

Income tax expenses reported in the
statement of profit or loss

57.24

66.19

OCI Section

 

 

Deferred tax related to items recognised
in OCI during in the year:

 

 

Net (gain)/loss on revaluation of cash
flow hedges

0.29

(0.69)

Re-measurement loss defined benefit
plans

0.28

1.16

Income tax credit through OCI

0.57

0.47

Reconciliation of tax expense and the accounting profit
multiplied by India’s domestic tax rate for 31 March 2017 and 31 March 2016:

 

31 March 2017

31 March 2016

(Rs. in  crores)

(Rs. in crores)

Accounting profit before income tax

197.98

247.61

At India’s statutory income tax rate of
34.61% (31 March 2016: 34.61%)

68.52

85.70

Adjustments in respect of current income
tax of previous years

3.22

(5.93)

Tax benefits under various sections of
Income tax Act

(16.84)

(15.98)

Others

2.35

2.41

At the effective income tax rate of
28.91% (31 March 2016: 26.73%)

57.24

66.19

Income tax expense reported in the
statement of profit and loss

57.24

66.19

RAYMONDs LIMITED

Tax expense recognized in the Statement of Profit and Loss

(Rs. in lakhs)

Particulars

Year ended

31st March, 2017

Year ended

31st March, 2016

Current tax

 

 

Current Tax on taxable income for the
year

945.42

2,704.59

Total current tax expense

945.42

2,704.59

 

 

 

Deferred tax

 

 

Deferred tax charge/(credit)

(559.87)

3,121.19

MAT Credit (taken)/utilized

925.89

(1,961.21)

 

 

 

Total deferred income tax
expense/(benefit)

366.02

1,159.98

 

 

 

Tax in respect of earlier years

15.20

–

Total income tax expense

1,326.64

3,864.57

Reconciliation of the income tax expenses to the amount
computed by applying the statutory income tax rate to the profit before income
taxes is summarized below:

(Rs in lakhs)

Particulars

Year ended

31st March, 2017

Year ended

31st March, 2016

Enacted income tax rate in India
applicable to the Company

34.608%

34.608%

Profit before tax

4,709.47

11,239.84

Current
tax expenses on Profit before tax expenses at the enacted income tax rate in
India

1,629.85

3,889.88

 

 

 

Tax effect of the amounts which are not
deductible/(taxable) in calculating taxable income

 

 

Permanent Disallowances

167.85

363.38

Deduction under section 24 of the Income
Tax Act

(42.62)

(52.14)

Interest income from Joint Venture on
liability element of compound financial instrument

(233.06)

(210.00)

Tax in respect of earlier years

15.20

–

Income exempted from income taxes

(273.04)

(91.24)

Other items

62.46

(35.31)

Total income tax expense/(credit)

1,326.64

3,864.57

Consequent to reconciliation items shown above, the
effective tax rate is 28.17% (2015-16: 34.38%).

Significant Estimates: In calculation of tax expense
for the current year and earlier years, the group has disallowed certain
expenditure pertaining to exempt income based on previous tax assessments,
matter is pending before various tax authorities.

IDEA CELLULAR LTD

Tax Reconciliation

(a) Income Tax Expense

Rs.
Mn

Particulars

For the year

ended

March 31, 2017

For the year

ended

March 31, 2016

Current
Tax

 

 

Current
Tax on profits for the year

–

8,621.82

Total Current Tax Expense (A)

–

8,621.82

Deferred
Tax

 

 

Relating
to addition & reversal of temporary differences

(4,825.95)

5,623.81

Relating
to effect of previously unrecognised tax credits, no recorded

(1,053.33)

–

Total Deferred Tax Expense (B)

(5,879.28)

5,623.81

Income Tax Expense (A+B)

(5,879.28)

14,245.63

Income tax impact of re-measurement gains/losses on defined
benefit plans taken to other comprehensive income

(17.13)

(71.11)

(b) Reconciliation of average effective tax rate
and applicable tax rate

Rs. Mn

Particulars

For the year ended

March 31, 2017

For the year

ended

March 31, 2016

Profit
/ (Loss) from continuing operation before Income tax expense

(14,190.03)

40,708.51

Applicable Tax Rate

34.61%

34.61%

Increase
/ reduction in taxes on account of:

 

 

Effect
of unrecognised deductible temporary differences

–

0.25%

Effect
of previously unrecognised tax credits, now recorded

7.42%

–

Effects
of expenses that are not deductible in determining the taxable profits

(0.64)%

0.24%

Other
Items

0.04%

(0.11)%

Effective Tax Rate

41.43%

34.99%

(c) Deferred tax assets are recognised to the
extent that it is probable that taxable profit will be against which the
deductible temporary differences, carry forward of unabsorbed depreciation and
tax losses can be utilised.  Accordingly,
in view of uncertainty the Company has not recognized deferred tax assets in
respect of temporary differences arising out of effects of assessments and
unused tax losses/credits of Rs. 4,612.09 Mn, Rs. 3,738.82 Mn, and Rs. 3,442.47
Mn.  as of March 31, 2017, March 31, 2016
and April 1, 2015 respectively.

ASIAN PAINTS LTD

( Rs. in Crores)

NOTE
18: INCOME TAXES

Year 2016-17

Year 2015-16

A.

The
major components of income tax expense for the year are as under:

 

 

(i)

Income
tax recognised in the Statement of Profit and Loss

Current
tax

 

 

 

In
respect of current year

817.22

743.74

 

Adjustments
in respect of previous year

(3.60)

(3.33)

 

Deferred
tax:

 

 

 

In
respect of current year

41.33

39.88

 

Income
tax expense recognised in the Statement of Profit and Loss

854.95

780.29

(ii)

Income
tax expense recognised in OCI

 

 

 

Deferred
tax:

 

 

 

Deferred
tax benefit on fair value gain on investments in debt instruments through OCI

0.17

0.34

 

Deferred
tax expense on re-measurements of defined benefit plans

(2.84)

(0.91)

 

Income
tax expense recognised in OCI

(2.67)

(0.57)

B

Reconciliation
of tax expense and the accounting profit for the year is as under:

 

 

Profit
before tax

2,658.05

2,403.10

Income
tax expense calculated at 34.608%

919.90

831.67

Tax
effect on non-deductible expenses

22.62

38.81

Incentive
tax credits

(34.70)

(46.23)

Effect
of Income which is taxed at special rates

(19.70)

(14.12)

Effect
of Income that is exempted from tax

(26.66)

(24.26)

Others

(2.91)

(2.25)

Total

858.55

783.62

Adjustments
in respect of current income tax of previous year

(3.60)

(3.33)

Tax
expense as per
Statement of Profit and Loss

854.95

780.29

The Company has the following unused tax losses which arose
on incurrence of capital losses under the Income Tax Act, 1961, for which no
deferred tax asset has been recognized in the Balance Sheet.

(Rs.
in Crores)

Financial Year

As at 31.03.2017

Expiry Date

As at 31.03.2016

Expiry Date

2009-10

–

–

3.73

31st March, 2019

2011-12

1.07

31st March, 2021

9.93

31st March, 2021

2013-14

2.03

31st March, 2023

2.03

31st March, 2023

2014-15

8.64

31st March, 2024

8.64

31st March, 2024

TOTAL

11.74

 

24.33

 

Business Combinations of Entities under Common Control

Background

Appendix C, Business
Combinations of Entities under Common Control of Ind AS 103, Business
Combinations, deals with accounting of common control business
combinations. The assets and liabilities of the combining entities in a common
control business transaction are reflected at their carrying amounts. This is
commonly known as “The pooling of interest method”.  Paragraph 9 of Appendix C is reproduced
below.

“9 The pooling of interest method is considered to involve
the following:

(i) The assets and liabilities of the combining entities
are reflected at their carrying amounts.

(ii) No adjustments are made to reflect fair values, or
recognise any new assets or liabilities. The only adjustments that are made are
to harmonise accounting policies.

(iii) ………… “

Issue

An interesting question arises on
the application of the pooling of interest method. The question is whether
the carrying amount of assets and liabilities of the combining entities should
be reflected as per the books of the entities transferred/merged or the
ultimate parent. The standard requires reflecting the business combination
under common control at carrying value of the combining entities. However the
standard is silent about whether the carrying amounts should be those as
reflected in the standalone financial statements of the combining entities or
those as reflected in the consolidated financial statements (CFS) of the parent
or the ultimate parent.

Consider a basic fact pattern. A Ltd. is the parent company
of two subsidiaries, viz., B Ltd. & C Ltd. Consider the following two
Scenarios.

Scenario 1: B Ltd. merges with C Ltd.

Scenario 2: B Ltd. merges with A Ltd.

The question is raised from the perspective of how C Ltd. in
Scenario 1 and A Ltd in Scenario 2 will prepare their post combination
standalone financial statements. 

It
may be noted that as far as A Ltd / parent’s CFS is concerned; the merger will
have absolutely no effect. This is because all intra-group transactions should
be eliminated in preparing CFS in accordance with Ind AS 110. The legal merger
of a subsidiary with the parent or legal merger of fellow subsidiaries is an
intra-group transaction and accordingly, will have to be eliminated in the CFS
of the parent or the ultimate parent.

Response

A similar question was raised to
the Ind AS Transition Facilitation Group (ITFG). In responding to the query,
the ITFG made a distinction between Scenario 1 and Scenario 2. The ITFG’s view
is given below.

Scenario 1

Assets and liabilities of
the combining entities are reflected at their carrying amounts. Accordingly, in
the separate financial statements of C Ltd., the carrying values of the assets
and liabilities as appearing in the standalone financial statements of the
entities being combined i.e B Ltd. & C Ltd. shall be recognised.

Scenario 2

In this case, since B Ltd. is merging with A Ltd.
(i.e. parent) nothing has changed and the transaction only means that the
assets, liabilities and reserves of B Ltd. which were appearing in the CFS of
Group A immediately before the merger would now be a part of the separate
financial statements of A Ltd. Accordingly, it would be appropriate to
recognise the carrying value of the assets, liabilities and reserves pertaining
to B Ltd. as appearing in the CFS of A Ltd. Separate financial statements to
the extent of this common control transaction shall be considered as a
continuation of the consolidated group.

Author’s View

The
ITFG has made a distinction between Scenario 1 and Scenario 2. In Scenario 1,
since the parent is not a party to the combination, the standalone financial
statements of C will combine carrying value of assets and liabilities of B and
C as appearing in their standalone financial statements. In Scenario 2, since
the parent is a party to the combination, A Ltd./ the parent’s post combination
financial statements will combine carrying values of A and carrying value of B
as appearing in A’s CFS. In other words, in Scenario 2, the accounting for the
combination is accounted as if, A had acquired B, and merged it with itself
from the very inception.

The logic of two different
approaches for accounting common control business combination based on whether
the parent is a party to the business combination is not absolutely clear.
Further, the logic does not emanate from a reading of the standard. In both
Scenario’s, business under common control are merging. Since the standard is
not clear on which carrying values to be used, the author believes that in both
Scenarios, there should be a clear accounting policy choice of either using
standalone carrying values or those that are reflected in the CFS of the parent
or ultimate parent.

The continuation of the
consolidation group approach should be an accounting policy choice and should
not be made conditional to the parent being a party to the business
combination. Globally under IFRS too,
either methods are acceptable, irrespective of whether a parent is party to the
business combination. Giving up the shares for the underlying assets is
essentially a change in perspective of the parent of its investment, from a
‘direct equity interest’ to ‘the reported results and net assets.’ Hence, the
values recognised in the CFS becomes the cost of these assets for the parent.

If the author’s approach is
considered, other relevant questions as detailed below, and not addressed by
ITFG, may not need any further clarification:

–   In Scenario 2, B Ltd does not merge with A
Ltd, but A Ltd. merges with B Ltd.

–   In Scenario 2, it is not absolutely clear
whether it is mandatory to use the carrying values of B Ltd as appearing in the
CFS of A or there is a choice to use the carrying values of B Ltd. as appearing
in the standalone financial statements of B Ltd.

The ITFG may provide appropriate clarification.

Insider Trading – A Recent Comprehensive Case

There are some provisions of
Securities Laws that need a regular refresh for the reason that they are found
to be frequently violated and entail penalties etc. Insider Trading is
one such provision which one can say is regularly violated. Senior management
and even professionals who ought to know better are found to be on the wrong
side of the law. A recent order of the Securities and Exchange Board of India
(SEBI) is worth considering. It reviews the law relating to Insider Trading.
The case deals with the law prior to amendment of 2015. However, the principles
remain the same even under the amended law. The case covers several types of
acts that are treated to be violative of the SEBI (Prohibition of Insider
Trading) Regulations 1992 (the 1992 Regulations were replaced by the 2015
Regulations). The case is in the matter of CR Rajesh Nair – Managing
Director of Sigrun Holdings Limited (Adjudication Order number AK/AO-14/2017
dated 16th June 2017).


Broad facts of the case

The facts of the case are
interesting and also contentious since SEBI had to arrive at findings that were
against what the party claimed the facts were. The facts and conclusions as
reported in the SEBI Order are summarised here.

 

The party against whom the order
was passed was Managing Director of Sigrun Holdings Limited, a listed company.
It was alleged that he carried out several acts in violation of the
Regulations. He sold shares during a time when there was unpublished price
sensitive information (“UPSI”) that he had access to. The Regulations
prohibit an insider having access to or in possession of UPSI to deal in the
shares of the company. The obvious reason for such prohibition is that a person
in possession of unpublished price sensitive information (UPSI) has an edge
over the shareholders/public generally and would unfairly profit from the same.
He is entrusted with such information in good faith and it will be a betrayal
of `good’ faith if he seeks to profit from it. Hence, he is banned from dealing
in the shares in such circumstances.

 

As proving insider trading is a
comparatively difficult task, the regulations have provided for a blanket ban
over making opposite trades by an insider during the next six months. In other
words if an insider makes a purchase or sale of shares of the company, he is
debarred from making a sale or purchase for the next six months. SEBI, through
detailed investigation including the questioning of the broker, established
that :

 

–  shares were sold within six months of purchase

–  shares were sold on the basis of UPSI

–  shares were sold just before the declaration
of operational results which exhibited substantial reduction resulting in
decline of share price

–  shares were sold during the period when
trading window was closed

–  shares were sold without obtaining
pre-clearance of the Compliance Officer.

 

Hence, there were multiple
violations of the regulations.

 

SEBI then computed in detail the
losses he avoided by selling shares earlier by comparing the sale price on the
date of sale with the sale price at the end of six months period.

 

Investigation, response of MD/broker and
confirmation of findings

SEBI pursued the MD and the broker
concerned to obtain detailed information regarding the trades. The defense put
forth in respect of certain sales was that the MD had not really sold the
shares voluntarily but sales were made by the broker to meet certain “mark to
market” losses incurred by him. Thus, the effective contention was that there
was no violation of the Regulations since this was not within the control of
the MD. However, SEBI examined the facts of the case, the need for margin
money, etc. and found that this contention was not correct and
underlying facts did not match with such contention. Hence, this submission was
rejected and a finding given that the MD had sold the shares within six months
in violation of the regulations.

 

Ascertainment of profiting from insider
trading

Insider Trading, by definition, is
an attempt to profit from UPSI that gives an edge to an insider. The profits
made are usually demonstrated by actual movement of the price on release of the
UPSI.

 

However, it has been accepted that
it is not necessary, to conclude that Insider Trading has taken place, that the
market price should have actually moved in the expected direction. Violation of
the Regulations takes place as soon as the insider deals whilst in possession
of the UPSI.

 

Having said that, the penalty for
insider trading is also related to the profits made – higher the profits made,
higher is the penalty. For this purpose, losses avoided are treated as profits
made. However, there is a stiff penalty of upto Rs. 25 crore where profits
cannot be computed directly.

 

In the present case, SEBI worked
out in detail the losses avoided. There were two types of trades. One set of
trades while there was sale when trading window was closed. The losses avoided
by sale of the shares by working out the price at which the shares were sold
and the price after release of the UPSI was calculated. The other set of trades
were sales made within six months of purchase. In this case, the sale price for
each lot sold within such six months period was compared with the sale price
immediately at the end of the six month period. The losses so avoided were
calculated.

 

As a side note, there is an
interesting aspect here. The rule that reverse trades shall not be carried out
for the following six months has an intention, it appears, of ensuring that
insiders do not quickly deal in the shares as this would help control Insider
Trading to some extent. An insider, thus, who buys 1,000 shares on 1st
January should not sell these shares till 1st July. The rule is
absolute. If one buys even 1 share, he cannot sell any number of shares till
six months. This is probably not wholly consistent with what appears to be the
intention. In the present case too, the MD had bought 1,00,000 shares on 5th
February 2010. However, in the following six months he sold 8,81,307 shares. In
the normal course, the ban should apply only to 1,00,000 shares that he
purchased and not to his entire shareholding. To put in other words, the ban
should apply only to the first 1,00,000 shares he sells and not to any further
sale of shares. However, the law, as literally read, applies to all of his
shareholding and hence any quantity of shares sold would attract this ban, and,
hence, the disgorgement of profits. Thus, profit on sale of all 8,81,307 shares have thus been ordered to be disgorged.

 

Levy of penalty

It is reiterated that the following
violations were held to have been made:-

1.  Dealing while in
possession of UPSI

2.  Sale of shares within six
months of purchase

3.  Sale of shares without
taking pre-clearance of the Compliance Officer.

 

The losses avoided through sale of
shares in violation of the Regulations were just about Rs. 2 crore.

 

SEBI noted that a Managing Director
has grave and higher responsibility of complying with such Regulations and
violation of it should deserve a higher penalty. It relied on the following
observation of the Securities Appellate Tribunal (in Harish K. Vaid vs.
SEBI, order dated 3rd October 2012):-

“It was then argued by the learned counsel for the appellants that
keeping in view the quantum of shares purchased, the penalty imposed by the
Board is excessive. The appellant has not derived any benefit as there was no
sale of shares based on UPSI. The adjudicating officer, while imposing the penalty,
although noted provisions of section 15J of the Act regarding factors to be
taken into account while adjudging the quantum of penalty, he has not applied
them correctly to the facts of the case. We have given our thoughtful
consideration to this aspect and are unable to accept the argument of the
learned counsel for the appellant. The evil of insider trading is well
recognized. The purpose of the insider trading regulations is to prohibit
trading to which an insider gets advantage by virtue of his access to price
sensitive information. The appellant is the Company Secretary and Compliance
Officer of the company who was involved in the finalization of quarterly
financial results and was fully aware of the regulatory framework and code of
conduct of the company. Under such circumstances, when there is a total
prohibition on an insider to deal in the shares of the company while in
possession of UPSI, the quantity of shares traded by him becomes immaterial.
Section 15G of the Act prescribes the penalty of twenty-five crore rupees or
three times the amount of profit made out of the insider trading, whichever is
higher. Section 15HB of the Act prescribes a penalty which may extend to one
crore rupees. However, the adjudicating officer has imposed a penalty of Rs. 10
lakh only on each of the violators. In the facts and circumstances of the case,
we are not inclined to interfere even with the quantum of penalty imposed.”

 

Accordingly,
penalties aggregating to Rs. 6.08 crore were levied on the Managing Director.

 

Conclusion

This Order is a good case study on
how meticulous investigation is made by SEBI particularly in the face of, no
response from the party and incorrect replies from the broker. The contentions
were systematically refuted and it was established that there were violations.
The actual calculation of the losses that were avoided was also made in detail.
The working adopted and principles applied, though simple and logical, are also
relevant and illustrate the methods and principles involved.

 

The intent of the Regulations which
deal with multiple ways of preventing and deeming acts of Insider Trading are
clarified in this order. As stated earlier, the ban on reverse trade within six
months, need for pre-clearance from Compliance officer and ban on trade when
trading window is closed, are examples of in-built checks and balances.

 

The case also demonstrates how the
UPSI benefit is to be determined in terms of worsening performance of a company
which was made public only after the sale of shares.

 

In
conclusion, the case also demonstrates levy of stiff and deterrent penalty
which sets an example for would-be violators.

RERA: Some Issues

Introduction

After an Overview of the Real Estate (Regulation and Development) Act, 2016 (“the Act”) in last month’s Feature, let us examine some critical issues under the same as applicable in the State of Maharashtra. It may be noted that the RERA is a State Regulator and hence, each State and each State’s RERA is empowered to issue their own Rules and Regulations respectively. This Article restricts itself to the State of Maharashtra.

At the outset, it must be confessed, that the Act is an evolving statute and at this stage, there may be more questions than answers. Having said that, the RERA in the State of Maharashtra (“MahaRERA”) is quite proactive and has been issuing clarifications on several issues.

Promoter: Land Owners also covered

The Act requires a Promoter to register a real estate project with the RERA. As on the deadline of 31st July, 2017, over 10,000 projects were registered with the MahaRERA.

The Act defines a Promoter in an exhaustive manner by giving a very far reaching definition. It covers any person who acts (himself) as a builder, coloniser, contractor, developer, estate developer or who claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale.

An interesting issue arises as to what would be the position of a land owner who enters into a joint development agreement with a developer for say, a share in the revenue from the sale of flats or a share in the area to be developed? For instance, a landowner executes a development rights agreement with a developer and in lieu of the same would receive a 40% share of the revenues ( to be)  received from the Project. Alternatively, he agrees to  receive 40% of the built-up area in the project. Would such a land owner also be treated as a Promoter? The answer to this is Yes! The MahaRERA in its Order has coined the definition of the term “Co-Promoter” and defined it to mean and includes any person(s) or organisation(s) who, under any agreement or arrangement with the Promoter of a Real Estate Project is allotted or entitled to a share of the total revenue generated from the sale of apartments or share of the total area developed in the real estate project. Thus, every land owner who receives an area / revenue share would be treated as a Promoter of the real estate project. It would be permissible for the liabilities of such Co-Promoters to be as per the joint development agreement with the developer. However, for withdrawal from the RERA Account, they shall be at par with the Promoter of the Real Estate Project. The land owner would be required to give an undertaking to the RERA, including an undertaking relating to the title to land and the date of completion of the project. Consequently and most vitally, the Order holds that the cost of land payable to land owners by the Promoter cannot be regarded as cost of Project and cannot be withdrawn from the RERA Account and that such land owners must open a separate bank account for deposit of 70% of the sale proceeds from the allottees! An intriguing part about this Order is its interplay with the Act. Section 4 of the Act mandates that 70% of the realisations from flat allottees shall be deposited in a separate designated account which would be used only to cover the cost of construction and the land cost. In a joint development agreement, the share payable to a land owner by a developer is the developer’s land cost. However, the MahaRERA’s Order expressly prohibits payment of this land cost from the separate designated account!

Recently, some land owners have approached the Bombay High Court challenging this Order of the MahaRERA. The final outcome of this case would be eagerly awaited by several land owners.

After the advanced capital gains tax liability on a land owner (started by the decision of the Bombay High Court in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom)) and indirect taxes (GST/VAT/service tax as on a works contract) for the portion constructed by the developer for the land owner, this would be the final straw which breaks the proverbial camel’s back! Of course, the newly introduced section 45(5A) of the Income-tax Act seeks to provide some solace to land owners who are individuals and HUFs by postponing the capital gains tax liability. However, for a great majority of land owners they would be staring at a scenario, where on the one hand, they are asked to pay capital gains tax on the execution of a development agreement once the conditions specified in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom) are triggered and on the other hand, they cannot withdraw the money received from the flat allottees!! It may be noted that this is a restriction imposed by the MahaRERA and hence, only applies in the State of Maharashtra and not in other States (unless the Authorities in other States also issue a similar Order). Further, this Order only applies when the consideration for the land owner is in the form of a revenue / area share. If the transaction is one of an outright sale / conveyance, then this restriction is not applicable and the developer can easily use the sale proceeds to pay off the land owner. Having said that, finding a developer, in the current real estate market, willing to buy a land on an outright basis is akin to finding a needle in several haystacks. Something which even google.com would find very difficult to search. If a land owner does find such a developer, then he kills 3 birds with one stone – he can pay tax (since he has the funds), there would not be any GST liability (since there is no works contract component) and he would not be classified as a Promoter under the RERA Order. Truly an Utopian scenario!

Promoters: Contractors
A question arises whether a building contractor is required to be registered as a Promoter? The definition includes a contractor or person by any name who acts as the holder of a power of attorney from the land owner on which the building / apartment is constructed. However, the overarching requirement for registration is that the Promoter must sell one or some of the apartments. Section 3 which mandates registration makes it clear that no Promoter shall sell or offer for sale any apartment or building without prior registration. Hence, if there is no sale or offer for sale, then there should not be any requirement for registration as a Promoter. Section 3 similarly provides that any renovation, repair or redevelopment which does not involve marketing, sale or new allotment of any apartments would not require registration. Hence, a building redevelopment which does not have any free sale component would be outside the purview of registration. The FAQs issued by the MahaRERA also support this view where the answer given states that if there are 16 apartments in a society redevelopment project, registration would be required provided there are some apartments which are for sale. Hence, it stands to reason that if there is no sale component, then there would not be any requirement for registration. 

Promoters: Financiers and Private Equity Funds
A similar predicament as that of the land owners may also be experienced by lenders / private equity funds who have contributed funds to the real estate project. In most cases, such financiers have step-in rights, i.e., in the event that the developer is unable to complete the project, then they would step-in to his shoes and complete the project.  In addition, financiers more often than not, have strong investor protection rights which enable them to participate in the control and management of the developer’s entity.  The definition of the term Promoter is extremely wide. Hence, it is a moot point whether such financiers may also be roped in within the definition of a Promoter / Co-Promoter? This may even hamper any exit to be provided by the developer to the financier since payments to Promoters do not fall within the permissible uses from a designated bank account. It may be possible to contend that mere presence of such rights may not make a lender to be treated as a Promoter till they are actually exercised.

This may force financiers to utilise secured debt structures in which only the project is mortgaged in their favour without any exotic rights. In such an event, the financier would not be treated as a Promoter and the designated bank account can be used to repay the lender. In any case, the obligations would be attracted once the mortgage is foreclosed and the financier proceeds with the incomplete tasks.

Designated Account to be maintained

The Act requires that the Promoter must maintain a separate designated bank account. 70% of all realisations from flat allottees must be deposited in this account to cover the cost of construction and the land cost and must be utilised for that purpose only. The balance 30% may be withdrawn without routing the same to the designated account. For making withdrawals from this account, 3 Certificates are required. The provisions applicable in the State of Maharashtra in this respect are spread over the Central Act, the Rules (framed by the Maharashtra State Government), the Regulations  (framed by the Maharashtra RERA), the Forms (issued by the Maharashtra RERA) and the Clarifications (issued by the Maharashtra RERA). All these diverse provisions have been harmonised and analysed below for the ease of ready reference:

(a)   Designated Bank Account – 70% of all amounts realised for the real estate project from the allottees, shall be deposited in a separate bank account to cover the cost of construction and the land cost and shall be used only for that purpose. These deposits may include advances received against allotment.

(b)   Procedure for Withdrawals – The Promoter is entitled to withdraw amounts from the designated bank account, to cover the cost of the project (land and construction and borrowing), in proportion to the percentage of completion of the project. Withdrawal is permissible only after it is backed by 3 certificates stating that the withdrawal is in proportion to % completion of the project. The Promoter is required to submit the following 3 certificates to the bank operating the designated account:

–   Firstly, a certificate in Form 1 from the project Architect certifying the % completion of construction work of each of the buildings/wings of the project;

–   Secondly, a certificate in Form 2 from the Engineer for the actual cost incurred on the construction work of each of the buildings/wings of the project; and

–   Thirdly, a certificate in Form 3 from a practicing Chartered Accountant, for the cost incurred on construction and the land . The practicing Chartered Accountant shall also certify the proportion of the cost incurred on construction and land to the total estimated cost of the project. The total estimated cost of the project multiplied by such proportion shall determine the maximum amount which can be withdrawn by the Promoter from the separate account.

The Promoter is required to follow the above at the time of every withdrawal from the separate account till Occupancy Certificate in respect of the project is obtained. On receipt of the Completion Certificate in respect of the project, the entire balance amount lying in the separate account can be withdrawn by the Promoter.

However, as a concession, MahaRERA has allowed a Promoter to do away with the practice of submitting 3 certificates for every withdrawal from the designated bank account. He may obtain the same and retain them on record and furnish them to the auditor at the time of the annual audit. The Promoter would have to submit a self-declaration to the bank once every quarter and this would suffice for the withdrawals.

(c)   Contents of CA’s Certificate: Form 3 requires the CA to certify the following:

–   Total Estimated Cost (Land Cost + Construction Cost) of the project based on the Form 2 issued by the engineer.

–   Total Cost Incurred (Land Cost + Construction Cost) of the Real Estate Project based on an actual verification of the books of account by the CA.

–   % completion of Construction Work (as per the Architect’s Certificate in Form 1). However, the MahaRERA has clarified that this need not be filled in by the CA for all ongoing certificates and should be filled in only in the final certificate issued after 100% of the construction work has been completed.

–   Proportion of the Cost incurred on Land Cost and Construction Cost to the Total Estimated Cost. (Total Cost Incurred / Total Estimated Cost).

–   Amount which can be withdrawn from the Designated Account (Total Estimated Cost * Total Cost Incurred / Total Estimated Cost)

     Less: Amount withdrawn till date of this certificate as per the Books of Accounts and Bank Statements

–   Resulting figure is the Net Amount which can be withdrawn from the Designated Bank Account

The CA certifying Form 3 should be different than the statutory auditor of the Promoter’s enterprise.

(d)   Components of Form 3:

(A)  Land Cost includes all costs incurred by the Promoter for acquisition of ownership and title of the land, including premium payment; Premium for TDR/ FSI; stamp duty, transfer charges, etc.

In cases, where the Promoter, due to inheritance, gift or otherwise, is not required to incur any cost for the land, then his cost is determined on the basis of the Stamp Duty Ready Reckoner value of the land prevailing on the date of registration of the real estate project with the MahaRERA.

In respect of the land cost, the MahaRERA has clarified that the fair market value of the acquisition cost shall be the indexed cost of acquisition of the land computed as per the Income-tax Act provisions. One wonders how should this indexation be applied while issuing a certificate because the term “fair market value of the indexed cost” is not to be found in Form 3. A suitable clarification on this would be appreciated.

Further, it has been clarified that interest specifically done for land acquisition should be added. Interest for construction of rehab component in a project is also treated as land cost. Costs incurred for slum rehab, relocation of tenants in a redevelopment project, etc., are all includible in land cost.

(B) The Cost of Construction includes all costs, incurred by the Promoter, towards the on-site and off-site expenditure for the development of the Real Estate project, including payment to any Authority and the Principal sum and interest, paid to certain lenders.

     In respect of the Cost of Construction, the MahaRERA has clarified that:

(i)  The term “incurred” means products or services received creating a debt in favour of the supplier or received against a payment made. It is a moot point whether payment of advances towards cost is permissible? A suitable clarification on this would be appreciated.

(ii) The development / construction cost should not include marketing, brokerage expenses incurred for the sale of flats. These, though part of the project cost, should not be met out of the designated account but should be met from the other accounts / funds of the Promoter.

(iii) While principal sum should be shown in brackets it must not be treated as a part of the construction cost.

(iv)Income-tax payable by the Promoter is not a part of the construction cost.

(v) Cancellation amounts paid to allottees who cancel their bookings can be treated as a part of the construction cost and can be withdrawn from the designated account.

(e)   Annual Audit; The Promoter must get his accounts audited by 30th September of every financial year and must produce a statement of accounts duly certified and signed by auditor to the MahaRERA. The Annual Report on statement of accounts must be in Form 5.

Form 5 requires the auditor to certify that the amounts collected for a particular project have been utilised for that project alone and that the withdrawal from the designated bank account has been in accordance with the proportion to the percentage of completion of the project. If not, then the Form must specify the amount withdrawn in excess of the eligible amount or any other exceptions. MahaRERA has clarified that auditor must certify that 70% of the realisations have been used for the project (the balance 30% could be used for any purpose).

(f)   Mismatch  in  Certificates and  Audit: The Regulations contain a very important provision. They state that  if the  Form 5 issued by the auditor reveals that any Certificate issued by the project architect (Form 1), engineer (Form 2) or the chartered accountant
(Form 3):

–   Has false or incorrect information and

–   the amounts collected for a particular project have not been utilised for the project and

–   the withdrawal has not been in compliance with the proportion to the percentage of completion of the project,

then the MahaRERA, in addition to taking penal actions as contemplated in the Act and the Rules, shall also take up the matter with the concerned regulatory body of the said professionals of the architect, engineer or chartered accountant, for necessary penal action against them, including dismemberment.

Thus, while % of completion of work needs to be mentioned in ongoing Form 3 issued by a CA (as per the relaxations given by the MahaRERA), the withdrawals must be in sync with the proportion to the percentage of completion of the project. In fact, the Auditor is required to specifically report on this issue and if it is found that this condition has been violated, then the RERA may even complain to the ICAI against the CA issuing Form 3. Thus, there is a unique scenario where the CA need not report on % completion but he must ensure withdrawal is in compliance with % completion. Hence, it would be in the interest of the CA to always ensure that his certificate clearly specifies whether the withdrawal is in proportion with the percentage of completion of the project.

The abovementioned rules will have to be followed by the co-promoter as well, to the extent applicable.

Conclusion

The Act is a major reform in India’s real estate sector and as is the case with any transformation, there are bound to be teething problems and unsolved queries. As the sector progresses on the learning curve, lessons will be learnt and issues may get resolved.
 
At this stage, it would be worthwhile to alert CAs issuing certificates under the Act, to remember Shakespeare’s quote “Discretion is the Better Part of Valour!” Thus, they should exercise due care and caution while certifying and in cases of doubt or ambiguity, consider asking the Promoter to obtain a legal opinion. Avoid acting in haste and repenting in leisure!!

Threats to RTI

Those who wish to proclaim the great impact of Right to
Information say that it is responsible for creating the culture of transparency
in the government. The widespread usage of RTI is proof of this. This claim is
reasonable and is obvious in the empowerment of citizens and the scams it has
exposed. There is a strong feeling that corruption is unacceptable and there is
a great resolve to curb it. This is in line with the declaration in the
preamble of the constitution.

However, accountability and transparency have not yet
become embedded in the DNA of those with power, and this is a change that is
being resisted. There are signs that we may have reached a point of
stagnation, which could lead to RTI’s regression. This cannot be good for the
citizens and democracy. Many techniques have been developed by the officers to
stall RTI queries. At times, absurdly high charges in tens of thousands are
sought as costs for gathering the information. Another way is to offer piles of
files for inspection without indexing and pagination. I once asked a government
department about a list of transfers of senior officers in violation of Act 21
of 2006; they sent it to over 30 different offices. One more technique is to
transfer the application multiple times. All these are against the letter and
spirit of the law.

First let us analyse the reasons for RTI’s success and wide
proliferation. The main reason was the fact that it was reasonably well crafted
because of active civil society intervention and participation. There were
people’s movements like Mazdoor Kisan Shakti Sangathan which had championed
this law. The teeth of the act were the penalty provisions which for the
first time provided for a financial penalty up to Rs. 25000 to be paid by a
public information officer, if he/she did not provide information without
reasonable cause. This for the first time recognized the sovereignty of the
individual citizen.

Civil society organizations and individuals very
enthusiastically took upon themselves the job of educating people. Citizens
took ownership of this law. Government officials feared the Information
Commissions and felt they would have a difficult time if the matters went to
courts in writs. Among the first few cases which went to courts, various high
courts acknowledged that this was a fundamental right of citizens which had
been earlier defined in various Supreme Court judgements, such as those in Raj
Narain case, R. Rajagopal, SP Gupta, ADR-PUCL and others.

However, after the first few years of this honeymoon, the resistance
to RTI began building up within the establishment. The establishment soon
realized that it had unleashed a genie, which curbs its powers for
arbitrariness and corruption. In less than a year, the government decided to
amend the act to dilute its effectiveness. There were intense protests across
the country by citizens and the government had to retract. After that there
were at least two more efforts to dilute the Act but these too failed. The last
time was when the Central Information Commission ruled that six major political
parties were ‘public authorities’ as defined by the law and hence would have to
give information in RTI. The parties ganged up together so that they could
carry on with their opaque operations with black money, undemocratic working
and in contravention of their constitutions. Citizen opposition managed to
again stop this. But political parties have jointly decided to defy the
orders of the Commission to display their pompous arrogance. They have refused
to appoint Public Information Officers or give any information in RTI. They are
disregarding the orders of the Commission without even a fig leaf of getting a
stay from a Court.

Most state and central governments are showing great
reluctance to follow the RTI Act. They have developed techniques to wear out
the applicant. The lackadaisical ways of the Information Commissions have
helped and emboldened them. It has been noticed that most Information
Commissions impose penalties in the rarest of cases, as if they are imposing a
death penalty. Governments often do not appoint Commissioners.

Amongst the few times that the former PM spoke he had
mentioned his distress at what he called ‘frivolous and vexatious’ RTI
applications and the time taken up in these. A RTI query about this revealed
that it was a casual observation based on his perception and irritation with
pestering RTI queries by the powerless citizen. There was no evidence. The
present PMO refused to even provide information about the visitors to the PM!
Why should this be so? The PM works round the clock in the service of people
and such reluctance appears suspicious. Will revealing those names reveal
some dark secrets?

The governments appear to be institutionalizing mechanisms
whereby citizens know only what the government wants them to know. It is
absurd that citizens who are mature enough to elect those who should govern the
nation are not considered mature enough to be trusted about information on
those who represent them. This claim is made by those who are in power, and who
do not understand and subscribe to democratic working. After getting power,
people’s mindset undergoes a transformation. It is a matter of deep distress
that even the present CM of Delhi Arvind Kejriwal, who became nationally famous
for his work in the RTI campaign, has not brought about any significant change
in his government towards transparency.

Information Commissioners are mainly selected as an act of
political patronage. Many of them have no predilection for transparency,
though they may pay lip service to it. The lack of effective working,
accountability and transparency at most of the commissions is heart wrenching.
Many commissioners do not understand the law, nor the basic rationale for
transparency or democracy.  Apart from
this the lazy way in which many work has built up mounting pendencies, and it
appears that they will be largely responsible for frustrating RTI.

It is unfortunate that the last few years have seen decisions
by most quasi-judicial and judicial bodies expanding the interpretations of the
exemptions and constricting the citizen’s right. Former Supreme Court judge,
Justice Markandey Katju has said “I therefore submit that an amendment be made
to the RTI Act by providing that an RTI query should be first examined
carefully by the RTI officer, and only if he is prima facie satisfied on
merits, for reasons to be recorded in writing that the query has some substance
that he should call upon the authority concerned to reply. Frivolous and
vexatious queries should be rejected forthwith and heavy costs should be
imposed on the person making them.” A former Chief Justice of India said in
April 2012, “The RTI Act is a good law but there has to be a limit to it.”
At this rate and logic, we may be asked to justify why we wish to speak or express
ourselves! A study of all the Supreme Court judgements by this writer
appears to show that the Right to Information is being constructed by gross
misinterpretation. Government departments get stays from Courts to many
progressive orders of the Information Commissions. Citizens do not have the
wherewithal to fight protracted legal battles. While parliament’s attempts to
dilute the RTI Act were thwarted by the sovereign citizens, its emasculation by
adjudicators is happening at a brisk pace. Many decisions are blunting the law
of its power to curb corruption.

 One of the most
problematic statements by the Supreme Court in a RTI case is quoted in many
places: “Indiscriminate and impractical demands or directions under RTI Act
for disclosure of all and sundry information (unrelated to transparency and
accountability in the functioning of public authorities and eradication of
corruption) would be counter-productive as it will adversely affect the
efficiency of the administration and result in the executive getting bogged
down with the non-productive work of collecting and furnishing information. The
Act should not be allowed to be misused or abused, to become a tool to obstruct
the national development and integration, or to destroy the peace, tranquillity
and harmony among its citizens. Nor should it be converted into a tool of
oppression or intimidation of honest officials striving to do their duty. The
nation does not want a scenario where 75% of the staff of public authorities
spends 75% of their time in collecting and furnishing information to applicants
instead of discharging their regular duties. “

This needs to be contested. The statement “should not be
allowed to be misused or abused, to become a tool to obstruct the national
development and integration, or to destroy the peace, tranquillity and harmony
among its citizens” would be appropriate for terrorists, not citizens using
their fundamental right to information. There is no evidence of RTI damaging
the nation. As for the accusation of RTI taking up 75% of time, I did the
following calculation: By all accounts, the total number of RTI applications in
India is less than 10 million annually. The total number of all government
employees is over 20 million. Assuming a 6-hour working day for all employees
for 250 working days, it would be seen that there are 30,000 million working
hours. Even if an average of 3 hours is spent per RTI application (the average
is likely to be less than two hours) 10 million applications would require 30
million hours, which is 0.1% of the total working hours. This means it would
require 3.2% staff working for 3.2% of their time in furnishing information to
citizens. This too could be reduced drastically if computerised working and
automatic updating of information was done as specified in section 4 of the RTI
Act. It is unfortunate that the apex court has not thought it fit to castigate
public authorities for their brazen flouting of their obligations u/s. 4, but
upbraided the sovereign citizens using their fundamental right.

I would submit that the powerful find RTI upsetting their
arrogance and hence try to discredit it by often talking about its misuse.
There are many eminent persons in the country, who berate RTI and say there
should be some limit to it. It is accepted widely that freedom of speech is
often used to abuse or defame people. It is also used by small papers to resort
to blackmail. The concept of paid news has been too well recorded. Despite all
these there is never a demand to constrict freedom of speech. But there is a
growing tendency from those with power to misinterpret the RTI Act almost to a
point where it does not really represent what the law says. There is widespread
acceptance of the idea that statements, books and works of literature and art
are covered by Article 19 (1) (a) of the constitution, and any attempt to curb
it meets with very stiff resistance. However, there is no murmur when users of
RTI are being labelled deprecatingly, though it is covered by the same article
of the constitution. Everyone with power appears to say: “I would risk my
life for your right to express your views, but damn you if you use RTI to seek
information which would expose my arbitrary or illegal actions.” An
information seeker can only seek information on records.


I would also submit that such frivolous attitude
towards our fundamental right is leading to an impression that RTI needs to be
curbed and its activists maybe deprecated, attacked or murdered. The citizen’s
fundamental right to information is now facing strong challenges, owing to its
great success and the fact that it has changed the discourse and paradigm of
power. Our democracy is at a crossroads. The next decade could result in
increasing the scope of transparency to result in a true democracy. However, if
the forces opposing transparency gain over the demos, a regression can
take place. If this happens, those in power must note that the citizen will not
stand for it. Citizen groups must take active measures to defend their right,
including demanding a transparent process of selecting commissioners and making
the political leadership aware that they will resist any dilution of the law. RTI
must be saved and allowed to flower. At this juncture as the nation celebrates
70 years of independence it must hold samvads (dialogues) across the nation to
restore RTI to its pristine glory. Parliament with citizen inputs made a law
which ranks amongst the top five in the world in terms of its provisions.
However, we rank at a poor 66 in terms of implementation. It is our duty to
create adequate public opinion to safeguard our Right to Information.

Insolvency and Bankruptcy Code 2016 – Challenges and Opportunities

The enactment of the ‘The Insolvency and Bankruptcy Code
2016’ (IBC) on May 26, 2016 is perhaps one of the biggest reforms along with
GST undertaken by India in recent times. The Code unifies and streamlines the
laws relating to recovery of debts and insolvency for both corporate and
non-corporate persons, including individuals.

The preamble to the Act introduces the Act as

–   An Act to consolidate and amend the laws
relating to reorganisation and insolvency resolution of corporate persons,
partnership firms and individuals

–   To fix time periods for execution of the law
in a time bound manner

–   To maximise the value of assets of interested
persons

–   To promote entrepreneurship

–   To increase availability of credit

–   Balance the interests of all stakeholders
including alteration in the order of priority of Government dues.

The vision of the new law is to encourage entrepreneurship
and innovation. Some business ventures will always fail but they will be
handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on
instead of being bogged down with decisions taken in the past.

The Code repeals or overrides around 11 laws and promises to
bring a sea change in how debt recovery and insolvency are handled in India,
drawing from the success of such law in other countries.

Insolvency, Bankruptcy and Liquidation

Bankruptcy and Liquidation share in common the concept of
‘Insolvency’. This means that it takes a person or a company becoming
‘Insolvent’ to trigger a Bankruptcy or Liquidation.

Having said that, not all Liquidation occurs as a result of
Insolvency (i.e., Members Voluntary Liquidations occurs when the shareholders
of a solvent company elect to liquidate the company, simply because that
company has achieved its purpose).

To address the question directly, Insolvency is the common
link to Bankruptcy and Liquidation. Let me unpack these concepts.

Applicability of the Code

The provisions of the Code shall apply for insolvency,
liquidation, voluntary liquidation or bankruptcy of the following entities:

1.  Any company incorporated under the Companies
Act 2013, or under any previous law

2.  Any other company governed by any special act
for the time being in force, except insofar as the said provision is
inconsistent with the provisions of such Special Act

3.  Any Limited Liability Partnership under the
LLP Act 2008

4.  Any other body incorporated under any law for
the time being in force, as the Central Government may by notification specify
in this behalf

5.  Partnership firms and individuals.

There is an exception to the applicability of the Code that
it shall not apply to corporate persons who are regulated financial service
providers like Banks, Financial Institutions and Insurance companies.

Institutional set up under
the code

With a view to improve Ease of doing business in India, the
code provides for a time bound process for speedy disposal and also the manner
for maximisation of value of assets. It will create a win-win situation not
only for the creditor and debtor companies, but it will also benefit the
overall economy.

The IBC provides an institutional set-up comprising of the
following five pillars:

I.   Insolvency Professionals (‘IP’) –To
conduct the corporate insolvency resolution process and includes an interim
resolution professional; the role of the IP encompasses a wide range of
functions, which includes adhering to procedure of the law, as well as accounting
and finance functions.

II.  Insolvency Professional Agencies (‘IPA’)
–To enroll and regulate insolvency professional as its member in accordance
with the Insolvency and Bankruptcy Code 2016 and read with regulations.

III.  Information Utilities – to collect,
collate and disseminate financial information to facilitate insolvency
resolution.

IV. Insolvency and Bankruptcy Board of India
(‘IBBI’) – A Regulator who will oversee these entities and to perform
legislative, executive and quasi-judicial functions with respect to the
Insolvency Professionals, Insolvency Professional Agencies and Information
Utilities.

V. Adjudicating Authority – The National
Company Law Tribunal (NCLT), established under the Companies Act, 2013 would
function as an adjudicator on insolvency matters under the Code.

The implementation of any system does not only depend on the
law, but also on the institutions involved in administration and execution of
the same. It depends on the effective functioning of all the institutions but
the Insolvency Professionals have a vital role to play in the insolvency and
bankruptcy resolution process.

Distinguishing Features of the IBC

The Code provides a comprehensive and time bound mechanism to
either put a distressed person on a firm revival path or timely liquidation of
assets. The interests of all stakeholders have been taken care of. Some of the
salient features of the code are as follows:-

1.    Dedicated Adjudicating and Appellant
Authority:

       The adjudicating authority for Corporates
shall be National Company Law Tribunal (NCLT) and for others shall be Debt
Recovery Tribunal (DRT).The first appeal shall lie with NCLAT and DRAT
respectively and the final appeal shall lie with the Supreme Court. No other
Court shall have any jurisdiction to grant any stay or injunction in respect of
matters within the domain of NCLT, DRT, NCLAT and DRAT. This would provide a
specialised mechanism to resolve stressed accounts problem.

       Further, a separate regulator i.e. the
IBBI is set up to regulate various matters under the Code.

2.    Time Bound Process: The Code provides that
the insolvency resolution shall have to be completed within 180 days (maximum
one extension of 90 days allowed) from the date of admission of application for
insolvency resolution. If no resolution is reached in the above time frame, the
Code provides for automatic liquidation. Hence, once default happens and
insolvency resolution application is filed by any stakeholder, financial
creditors would be forced to make intelligible choices so as to maximise
economic value of business or face liquidation. At the same time, promoters
should get sensitive about managing cash flows as default would straight lead
to loss of control over business. 

3.    Preserving Value of Business: Once the
application for insolvency resolution is admitted, there shall be complete
moratorium till completion of insolvency proceedings. Board of Directors shall
remain suspended and affairs of the company shall come under the control of the
Resolution Professional. Though the entity shall remain a going concern.
Creditors shall be precluded from taking any action against the Company
including enforcement of security under SARFAESI Act during this period. Even a
lessor cannot take possession of leased assets back during the moratorium
period. Thus it shall provide an opportunity for the creditors to discuss
sensible restructuring that can provide a better value than straight
liquidation even while business and its assets are preserved during this
period.

4.    Failure to Pay is the new Trigger: Existing
mechanisms under SICA and Companies Act are tuned to provide for interjection
when the borrower’s ability to pay is demonstrably impaired. Whereas under the
Code, a creditor can trigger insolvency resolution process just on default.
Thus a defaulter can be dragged into insolvency resolution process without
waiting for its net-worth to get eroded or for the account to be classified as
NPA. This would be a big deterrent for able debtors to arm-twist small
creditors.

     Therefore, the Code will have an effect
of early identification of distress. It will instill discipline among promoters
or else they will risk losing management control and also face liquidation.

5.    Professionalisation of Insolvency
Management:

       The Insolvency Professionals shall be
regulated and licensed professionals and will have a critical role in the
process. During the process of Insolvency Resolution, the management of the
borrower shall be taken over by the Insolvency Resolution Professional. This
will help preserve the value of business and assets of the debtor during the
insolvency resolution process. Lenders will no longer be worried about
mismanagement by promoters of distressed corporates. As of now, the only option
lenders had was to convert debt into equity and take over the management for
which they may not be having the requisite competency.

6.    New Priority Order of Payment: A welcome
change brought in by the Code is that the statutory dues are relegated to the 5th
position in the priority of payment from the current 1st
position. Herein, even unsecured financial creditors shall be paid before
clearance of dues of the Central and State Governments. This provision is
likely to boost corporate bond market as well as debt funding of SMEs and
startups.

7.    All Creditors empowered to trigger
Insolvency: All creditors whether domestic or foreign, whether secured or
unsecured and whether financial or operational can apply for insolvency
resolution. The defaulting debtor himself may also apply. Thus for the first
time, structured mechanism for redressal of defaults is being provided to
operational creditors such as suppliers, employees etc. Similarly, the
foreign lenders and unsecured lenders shall find a mechanism to enforce their
debts in a fair and transparent process. This no doubt will deepen the credit
markets in India.

8.    Enforcement of Personal Guarantees: If any
corporate debt is secured by means of personal guarantee, then the bankruptcy
of the personal guarantor shall be dealt with by same NCLT rather than DRT.
Thus, there will be a common forum for a creditor to enforce debt from both
borrower and guarantor.

9.    Information Utilities: There is an enabling
provision to facilitate creation of Information Utilities which will house
comprehensive credit data relating to debtors, their creditors and securities
created. This will improve transparency and better decision making at all
levels.

10.  Fresh Start: A non-corporate debtor on finding
himself unable to pay his debts may apply for a fresh start by discharge from
certain debts, provided he satisfies the following conditions:-

–   Gross annual income of the debtor is not
exceeding Rs 60,00/-

–   Aggregate value of debtor is not exceeding
Rs. 20,000/-

–   Aggregate value of debts is not exceeding Rs.
35,000/-

–   Debtor is not undercharged bankrupt

–   Debtor does not own a dwelling unit
(encumbered or not )

    No Fresh Start Order in the last 12 months
prior to the date of application.

Brief Overview of Corporates Insolvency Resolution Process

In the following flowchart, we can see an overview of the
Corporate Insolvency Resolution Process.

Who can become an Insolvency Professional?

Category I – Any Chartered Accountant, Company Secretary,
Cost Accountant and Advocate who has passed the Limited Insolvency Examination
and has 10 years of experience and enrolled as a member of the respective
Institute/Bar Council; or a Graduate who has passed the Limited Insolvency
Examination and has 15 years of experience in management, after he received a
Bachelor’s degree from a University established or recognised by law.

The IBBI has notified the syllabus for the Limited Insolvency
Examination. For syllabus, enrollment process for the examination, etc.,
kindly visit: http://www.ibbi.gov.in/limited-insolvency.html or www.iiipicai.in

The ICAI has also set up a section 8 company and its website
contains an interesting E Learning platform covering the entire gamut of IBC
including mock tests. (www.iiipicai.in)

Category II – Any other individual on passing the
National Insolvency Examination.

The IBBI is yet to notify the syllabus for the National
Insolvency Examination.

The IPs are regulated by the code set out by the IBBI.
Section 208 (2) sets out code that needs to be followed by every insolvency
professional.

Further, the duties of the IP are laid out in the Model Bye
Laws [IBBI – (Model Bye-Laws and Governing Board of Insolvency Professional
Agencies) Regulations 2016, Clause VII of Schedule – Regulation 13].

Opportunities for Chartered Accountants (CAs)

The passage of the Insolvency and Bankruptcy Code, 2016 has
thrown up a tremendous set of new opportunities for CAs.  On an analysis of the major responsibilities
of the IPs to the Debtors and Creditors, the IPs should be well versed with
aspects of Company Law, Taxation, Banking and Finance, Stakeholder Management,
Valuation/Sale of assets, Cash flow management and Commercial and business
acumen.

Considering the onerous responsibilities on the IP, it would
be very difficult for an individual to possess such multiple skills and hence
the IBC has brought in a concept of Insolvency Professional Entities (IPEs)
which can be registered as partnerships, limited liability partnerships and
corporate entities.

Such IPEs can be expected to have the capacity to offer the
diverse skill sets on a single platform to facilitate the Insolvency and
Bankruptcy practice.

IPE presents opportunities to CAs to team up their
counterparts, Company Secretaries, Cost Accountants and Lawyers and present a
complete solution to their clients. 

Based on precedents of the last 6 months, and a view of this
author, in case of insolvency cases filed by Financial creditors, IPs can earn
between Rs. 2 lakh to Rs. 4 lakh per month and in case of cases filed by
creditors or by the corporates, IPs can earn between Rs. 50,000 to Rs. 2 lakh
per month depending upon the size of business and complexity of each case.

With the recent push by the Reserve Bank of India (‘RBI’) to
the Banks to file for Insolvency on the top 500 defaulters/NPAs under the new
IBC, banks have moved fast and started the process in the right earnest and the
process is expected to pick up speed. Further, with large scale media coverage
on the IBC, the creditors have also filed numerous cases for Insolvency on
Debtors and have received favourable closures in a short span of time. Both
these would throw up numerous and multiple opportunities for Professionals in a
short span of time and the first mover advantage will always help in quickly
building up the credentials in this space.

As on date, approximately 800-1,000 IPs have been
registered with IBBI and there is an estimate of more than 1 lakh cases of
defaulters/NPA pending only with Banks at various stages. Hence, there exists a
significant gap between the potential demand of IPs expected in the near future
versus the supply of IPs.

Problem Areas under IBC

As the Indian corporate sector and business community get
more aware of the IBC due to push by the Government to the banks to file for
insolvency and widespread media coverage, financial creditors (primarily
unsecured lenders) and operational creditors are using the IBC as a pressure
tactic on the Corporate Debtor to pay their due sums. During the last few
months, there have been numerous cases filed by operational creditors with NCLT
under the IBC, however, many such cases filed by operational creditors have not
been admitted by NCLT due to various reasons. However, at the same time, under
the fear of IBC, many cases of operational creditors have been settled by the
Corporate Debtor to avoid being referred to NCLT under the IBC. Hence, as we
get more judicial precedence of cases not being admitted by NCLT, sense should
prevail and only genuine cases would be filed under IBC. Further, business
practices amongst the Indian corporate sector and business community especially
with respect to operational creditors should definitely see a significant
improvement in the years to come.

Conclusion

This Code is currently in early stages of
implementation and is focused on revival of business and putting idle resources
of the economy to use, this can bring a huge change in lives, livelihoods and
prospects of both creditors, debtors and professionals. It is one of the most
challenging and equally rewarding career options. In this era of major reforms
in uncharted territories, it throws up a big opportunity to work as an
Insolvency Professional and get an early mover advantage.

Ingredients for Crafting a Model Policy On Dealing With Related Party Transactions

Introduction

Related Party Transactions (RPTs) have been a contentious
issue since the advent of Companies. Separation of ownership and control
combined with diffused ownership in companies provides a fertile ground for the
unscrupulous elements to unjustly enrich themselves. More than 200 years ago,
Lord Cranworth in the landmark case of York Building Company vs. McKenzie
highlighted the reason for RPTs invoking distrust. In 1795, he noted

‘No man can serve two masters.
He that is entrusted with the interest of others, cannot be allowed to make the
business an object of interest to himself; because from the frailty of nature,
one who has the power, will be too readily seized with the inclination to use
the opportunity for serving his own interest at the expense of those for whom
he is entrusted.’

A critical strand in the history of corporate law is the
evolution of regulations dealing with RPT, for mal-governance often manifests
itself through RPTs. Despite its role in hampering good governance, RPTs are
not banned anywhere in the world, as this ‘cure’ is more harmful than the
‘disease’ itself.

Given the interdependence, a key element of good governance
is evidenced in the way in which RPTs are regulated. While legal compliance is
the minimum expected of any corporate citizen, good governance practices go
beyond the minimum and set higher standards to inspire shareholders’ and
stakeholders’ confidence in building a profitable and sustainable business.

Regulating RPTs has three critical parts, namely Formulating
a Policy for Dealing with RPTs, Implementing the Policy that is formulated, and
Disclosure of RPTs to their shareholders. This article attempts to provide
insights into crafting a model ‘Policy on Dealing with Related Party
Transactions’ by drawing on the history of regulating RPTs, analysing the
Indian statutes and learning from the practices of the Nifty 50 companies.

A Brief History of Regulating RPTs

One of the earliest recorded RPT disputes involves the East
India Company and Robert Clive. Following the Battle of Plassey, Robert Clive
privately negotiated for himself an annual income of £30,000 for installing Mir
Jaffar as the Nawab of Bengal. In 1765, Laurence Sulivan, the Chairman of East
India Company, who wanted to weed out corruption in the company, initiated the
move to cancel this annual payment as unjustified, resulting in a fight for the
control of East India Company. As it looks, this does not seem to be the first
disputed RPT as joint stock companies were in existence from the 16th century.
However, fighting for the control of the company seemed to be the only method
available to shareholders for redressing their grievances. As RPTs became
avenues for fraud, regulators had to move in to regulate them. Even in events
as recent as 2004, when the US-SEC initiated proceedings against Parmalat of
Italy on what it called ‘the largest financial fraud in history’, RPTs had a
role, revealing a close nexus between frauds and RPTs  

After 1844 AD, when companies could be registered under
specific laws, RPT regulations has evolved rapidly. A major factor prodding on
this evolution is the conflicting economic theories that viewed RPTs from
different perspective. While the Conflict of Interest Theory viewed it
negatively, the Efficient Transaction Theory viewed RPTs positively. Their
difference was in what they viewed as primary to the transaction. In the
Conflict Theory, relationship between Directors and Shareholders in creating
shareholder value was considered of paramount importance, however in the
Efficient Transaction Theory, the business and the business outcome was placed
in the centre stage.

Between the two extremes, corporate law has evolved to
regulate RPTs rather than ban them altogether. Occasionally, on the backdrop of
a large corporate scandal, given the damage they have inflicted on business
confidence, proposals to ban RPTs are mooted and debated at length. However, in
almost all cases, with the passage of time these proposals get diluted as the
ease of doing business assumes importance, resulting in higher disclosures and
more stringent approval processes mandated to prevent misuse of RPTs.

Table 1: Evolution of Regulations for Dealing with Related
Party Transactions

Stage

Year / Country

Status of RPT

Basis

Content

1

1845

UK

Directors disqualified on
entering into RPT but the Act silent on the
effect of  RPTs enforceability

Companies Clauses
Consolidation Act, 1845

As per Section 86, a
Director who held an office of profit or profited from any work done for the
company would cease from voting or acting as a Director.

2

1855

UK

RPTs void Ab-initio

Aberdeen Railway Co. vs.
Blaikie Bros.

‘The ground on which the
disability or disqualification rests, is no other than the principle which
dictates that a person can be both judge and party.’

3

1856

UK

RPT permitted if not
invalidated by the Articles of Association

The Companies Act, 1856

In this Act, a clause was
introduced in the model Articles of Association (which is optional for
companies to adopt) that made Directors with RPTs vacate their office. Many
companies which were incorporated during this period chose to delete this
clause thereby permitting RPTs.

4

1913

India

Board to approve RPT after
the Director declares their interest

The Companies Act, 1913

Section 91 A requires a
Director to provide disclosure of interest in any contract or arrangement
entered into by or on behalf of the company.

5

1936

India

Disinterested Board to
approve RPT with disclosure to shareholders

The Companies (Amendment)
Act, 1936

Section 91 B prohibited an
interested director from voting on any contract or arrangement in which he is
directly or indirectly concerned or interested.

6

1956

India

Central Government to
approve RPTs in certain companies

The Companies Act, 1956

Section 297 required
companies with share capital of Rs.1 crore and above to get Central
Government’s approval for RPTs.

7

2013

India

Disinterested shareholders
to approve RPT with disclosures to 
shareholders

The Companies Act, 2013

Section 188 of the Act,
introduced the concept of interested shareholders.

RPT Regulations in India

The Companies Act, 2013 regulates RPTs for all companies in India. Further
listed entities are also required to comply with the SEBI’s (Listing
Obligations and Disclosure Requirements) Regulations, 2015. Taken together, the
two regulations provide a comprehensive framework for dealing with RPTs.

The Companies Act, 2013 that defines a related party, which in addition
to relatives of Directors & Key Managerial Personnel and body corporates
controlled by them and their companies has a distinct category in clause (vii)
of section 2 (76). This clause includes ‘any person on whose advice, directions
or instructions a director or manager is accustomed to act’. Explanatory
statement to this clause specifically excludes professionals who advice the
directors or managers. Given this exclusion, the persons covered by this clause
can be colloquially categorized as ‘friends, philosophers and guides’. In
practice, this clause may come into effect in financial transactions with
former promoters, Chairman and Chief Executives who acting as unofficial
advisors and mentors could be wielding soft-power over the current decision
makers.

In line with the globally established practice of regulating RPTs and
not banning them, the Companies Act, 2013 too regulates RPTs through section
177 and section 188. Section 188 requires the Board of Directors to approve all
RPTs in both public and private companies. Contrary to the popular
perception, all provisions regulating RPTs specified in the Companies Act, 2013
apply to both the public and the private limited companies equally. The
only concession provided to the private company is vide a notification issued
on June 5, 2015, where the related party in a RPT is permitted to vote on their
transactions in both the Board and Shareholder meetings.

The Act for approving RPTs uses the lens of ‘Ordinary Course of
Business’ and ‘At arm’s length’ basis. As these two terms are not defined in
the Act or by SEBI, a working definition is attempted here. A transaction in
the ordinary course of business would have many other comparable transactions
with multiple unrelated parties thereby making RPTs comparable. Likewise, a
transaction at arm’s length is one in which all the economic benefits and
rewards are embedded in the transaction itself and thereby stand the test of
market place.

Given its comparability and market based pricing, a transaction that is
in the ordinary course of business and at arm’s length basis requires only the
audit committee’s prior approval (section 177). Extending this principle
further, the Audit committee can provide a blanket approval for repetitive
transactions that have a valid reason necessitating prior approval.

Where a transaction does not meet either one of the two
criteria-ordinary course of business or at arm’s length basis, approval of the
Board of Directors is required in a duly conveyed meeting. Hence, this approval
cannot be given by them passing a Circular Resolution. Further, where the
transaction size exceeds defined threshold levels, approval of the Shareholders
is required either in a physical meeting or through the postal ballot.  Rule 15 of the Company (Meeting of the Board
and its Powers) Rules 2014 details these thresholds, which is quite elaborate,
capturing different types of transactions like sales and purchase of goods,
availing or rendering services, buying, selling or leasing of property, with
specific absolute and relative limits for each one of them.

The provisions of the Companies Act, 2013 as detailed above are quite
technical and require considerable analysis to identify the approval process
required. Good governance requires transparency and clarity. Probably taking
this cue, Regulation 23 of the SEBI’s LODR Regulation 2015 provides for the
formulation of a Policy on Materiality of RPTs and on dealing with RPTs to help
decision makers interpret the law and provide operational guidelines for
implementing it. Further, Regulation 46 requires this policy to be displayed on
the Company’s website inviting public scrutiny. Considering its availability,
we have reviewed all the policies that were displayed in the month of May 2017
by Nifty 50 companies to arrive a model policy. 

Lessons from the Practices of Nifty 50 Companies in Drafting
their Policy for Dealing with RPTs

Our review of the Policies on dealing with RPTs of the Nifty 50
companies revealed five critical clauses that define the quality of their policy,
namely:

1.  Objective of the policy,

2.  Basis for giving Omnibus Approvals,

3.  Effect of RPTs not approved,

4.  Criteria for Granting Approvals to RPTs, and

5.  Disclosures required of RPTs.

For each of these clauses, we have picked out one of the exemplary
extracts from the Nifty 50 companies as possible role model for adoption.

I.       Objective of
the Policy

To effectively deal with RPTs, the policy objectives need to be clearly
articulated as illustrated in the example given by highlighting it in bold. 

Reliance Industries Limited.

“Reliance Industries Limited (the “Company” or “RIL”) recognises that
related party transactions can present potential or actual conflicts of
interest and may raise questions about whether such transactions are consistent
with the Company’s and its stakeholders’ best interests.”

II.      Omnibus
Approval

The clarity and specificity of conditions attached to granting omnibus
approval and its subsequent reporting should be unambiguous of what is expected
from the Audit Committee and the management team of the company as seen in the
example given here.

Bosch Ltd.

“In the case  of frequent /
regular / repetitive transactions which are in the normal course of business
of the Company, the Audit Committee may grant standing pre-approval / omnibus
approval. While granting the approval, the Audit Committee shall satisfy
itself of the need for the omnibus approval and that the same is in the
interest of the Company. The omnibus approval shall specify the following:

a.  Name of the related
party.

b.  Nature of the
transaction.

c.  Period of the
transaction.

d.  Maximum amount of the
transactions that can be entered into.

e.  Indicative base price
/ current contracted price and formula for variation in price, if any.

f.   Such other
conditions as the Audit Committee may deem fit.

Such transactions will be deemed to be pre-approved and may not
require any further approval of the Audit Committee for each specific
transaction. The thresholds and limitations set forth by the Committee would
have to be strictly complied with, and any variation thereto including to
the price, value or material terms of the contract or arrangement shall require
the prior approval of the Audit Committee.

Further, where the need of the related party transaction cannot be
foreseen and all prescribed details (as aforementioned) are not available, the
Audit Committee may grant omnibus approval subject to the value per transaction
not exceeding Rs.1,00,00,000/- (Rupees One Crore only). The details of such
transaction shall be reported at the next meeting of the Audit Committee for
ratification.

Further, the Audit Committee shall, on a quarterly basis, review and
assess such transactions including the limits to ensure that they are in
compliance with this Policy. The omnibus approval shall be valid for a
period of one year and fresh approval shall be obtained after the expiry of one
year.” 

III.     Effect of  RPT
not approved

The options available to the Audit Committee on dealing with a RPT needs
to be explicitly spelt out. This could include seeking the related parties to
pay compensation for loss suffered in addition to examining the reasons for this lapse in reporting and suggesting measures to rectify it.

Tata Motors Ltd., Tata Steel Ltd., Tata Power Ltd.

“In the event the Company becomes aware of a
transaction with a related party that has not been approved in accordance with
this Policy prior to its consummation, the matter shall be reviewed by the
Audit Committee. The Audit Committee shall consider all of the relevant
facts and circumstances regarding the related party transaction, and shall
evaluate all options available to the Company, including ratification, revision
or termination of the related party transaction. The Audit Committee shall also
examine the facts and circumstances pertaining to the failure of reporting such
related party transaction to the Audit Committee under this Policy and failure
of the internal control systems, and shall take any such action it deems
appropriate.

In any case, where the Audit Committee determines not to ratify a
related party transaction that has been commenced without approval, the
Audit Committee, as appropriate, may direct additional actions including, but
not limited to, discontinuation of the transaction or seeking the approval of
the shareholders, payment of compensation for the loss suffered by the related
party etc. In connection with any review/approval of a related party
transaction, the Audit Committee has authority to modify or waive any
procedural requirements of this Policy.”

IV.     Criteria for
approval

The criteria captured for approval here is a brief and succinct summary
of the complex legal provisions.   

Axis Bank

“All Material Related Party Transactions shall
require approval of the shareholders through ordinary resolution and the
Related Parties shall abstain from voting on such resolutions. The approval
policy framework is given below:

–  Audit Committee- All Related Party Transactions

–  Board Approval- All Related Party Transactions referred by
Audit Committee for approval of the Board to be considered and Related Part
Transactions as required by the statute

–  Shareholders’ Approval- Approval by Ordinary Resolution
for:

i.   Material Related
Party Transaction

ii.  Related Party
Transactions not in Ordinary Course of Business or not on Arm’s Length basis
and crosses threshold limit as prescribed under the statute.

Related Party
Transactions will be referred to the Audit Committee for review and prior
approval. Any member of the Committee who has a potential interest in any
Related Party Transaction will recuse himself or herself and abstain from
discussion and voting on the approval of the Related Party Transaction.

In determining whether to approve, ratify, disapprove or reject a
Related Party Transaction, the Audit Committee, shall take into account all the
factors it deems appropriate.

To review a Related Party Transaction, the Audit Committee is provided
with all relevant material information of the Related Party Transaction,
including the terms of the transaction, the business purpose of the
transaction, the benefits to the Bank and to the Related Party, and any
other relevant matters.”

V.      Disclosures

The scope and extent of disclosures of RPTs needs to be captured
comprehensively by including all employees concerned with implementation.

Aurobindo Pharma Ltd.

“The particulars of contracts or arrangement with Related Parties
referred to in section 188(1) shall be disclosed in the Board’s report for the
financial year commencing on or after April 1, 2014 in Form AOC-2
enclosed as Annexure-I and the form shall be signed by the persons who have
signed the Board’s report.

Further the particulars of contracts or arrangement with Related Parties
shall also be entered in the Register of Contracts as per the provisions
of section 189 of the Act and the Rules made there under.

All Material RPTs that are entered into with effect from October 1,
2014, shall be disclosed quarterly along with the compliance report on
corporate governance.

The Company shall disclose this Policy on its website and also a web
link thereto shall be provided in in its annual report. The Policy shall also
be communicated to all operational employees and other concerned persons of
the Company.”

Conclusion     

In today’s world, there is no company that can eliminate RPTs totally,
as they are an integral part of the commercial world. Given that all RPTs do
not dilute shareholder value or reflect mal-governance or fraud, it is
important to have a transparent and clear policy in dealing with them. While
compliance with law is the minimum that is expected of any corporate citizen,
good governance practices should go beyond the minimum and set new standards.
In the context of dealing with RPTs, this can begin with investing time and
effort in crafting a clear, comprehensive and concise policy that will enrich
shareholder value creation for the company in addition to significantly
enhancing its sustainability.

Goodwill In Common Control Transactions Under Ind AS ­ Whether Capital Reserve Can Be Negative?

Background

White
Goods Ltd. (WGL) and Electronic Items Ltd. (EIL) are companies under common
control. WGL is in phase 1 of Ind AS. Its transition date (TD) is 1st
April, 2015, comparative year is 2015-16, and first year of Ind AS is 2016-17.
The last statutory accounts under Indian GAAP was 2015-16; which will be a
comparative year under Ind AS.

In the last year of Indian GAAP
and comparative year of Ind-AS; i.e., 2015-16, WGL acquired through a slump
sale the business of EIL and paid a cash consideration. The acquisition was by
way of a slump sale and did not require any court approval.

WGL applied AS 10 Accounting
for Fixed Assets to record for the slump sale under Indian GAAP.
Consequently, the excess of consideration over the fair value of assets and
liabilities taken over was recorded as goodwill. For simplicity, let’s assume,
the fair value of the net assets was equal to the book value of the net assets
taken over.

For purposes of Ind AS, WGL
chooses to restate the business combination in accordance with Ind AS 103.
Appendix C, Business Combinations of Entities under Common Control of Ind AS
103, Business Combinations would apply. In accordance with the said
standard, this would be accounted as a business combination under common
control and consequently WGL would record the assets and liabilities at their
book values and will not record any goodwill.

Issue

Paragraph 12 of Appendix C
(referred to above), requires the following treatment to account for difference
between the consideration amount and the book value of the net assets taken
over.

“The
identity of the reserves shall be preserved and shall appear in the financial
statements of the transferee in the same form in which they appeared in the
financial statements of the transferor. Thus, for example, the General Reserve
of the transferor entity becomes the General Reserve of the transferee, the
Capital Reserve of the transferor becomes the Capital Reserve of the transferee
and the Revaluation Reserve of the transferor becomes the Revaluation Reserve
of the transferee. As a result of preserving the identity, reserves which are
available for distribution as dividend before the business combination would
also be available for distribution as dividend after the business combination.
The difference, if any, between the amounts recorded as share capital issued
plus any additional consideration in the form of cash or other assets and the
amount of share capital of the transferor shall be transferred to capital
reserve and should be presented separately from other capital reserves with
disclosure of its nature and purpose in the notes.”

In Ind AS financial statements,
can the goodwill recognised under Indian GAAP be adjusted against retained
earnings/other equity or whether the goodwill has to be presented as a negative
capital reserve?

The above question becomes very
important because of section 115JB (2C). In accordance with section 115JB (2C),
the book profits of the year of convergence and each of the following four
previous years, shall be further increased or decreased, as the case may be, by
one-fifth of the transition amount adjustments. Explanation (iii) defines
“transition amount” as the amount or the aggregate of the amounts adjusted in
the other equity (excluding capital reserve and securities premium reserve) on
the convergence date. Consequently, Ind AS transitional adjustments in retained
earnings/other equity are included in book profit for determining MAT liability
equally over 5 years beginning from the year of Ind AS adoption. Transitional
adjustments to capital reserve and securities premium are excluded from book
profit.

Author’s View

The following two assumptions
appear implicit in Paragraph 12 referred to above.

–   Paragraph 12
envisages a situation where two companies are merging, and in order to preserve
the identity of the reserves, the difference between the share capital issued
plus other consideration and the share capital of the transferor is recorded as
an adjustment to capital reserves.

–   Paragraph 12
envisages a situation where the consideration is lower than the book value of
the acquired assets and consequently it results in a capital reserve, which is
a positive amount.

In the fact pattern under
discussion, neither of the above two assumptions apply. Consequently the amount
recorded as goodwill under Indian GAAP, can only be eliminated as an adjustment
to retained earnings/other equity under Ind-AS, rather than presented as a
negative capital reserve amount. In the author ‘s view, any reserve under the
standards can only be a positive number. Therefore, it would be more
appropriate to eliminate the goodwill against retained earnings/other equity.

The above treatment will have a
positive income-tax implication. The goodwill debited to retained
earnings/other equity under Ind AS will provide a five year straight line
deduction for the determination of book profits for MAT purposes. This
deduction is not available if the goodwill was debited to capital reserves.
Further, since the goodwill was recorded under Indian GAAP statutory accounts,
the benefit of depreciation going forward would be available for purposes of
normal income tax computations, subject to fulfilment of other conditions.

If the Company had continued to be
in the Indian GAAP regime, it would have amortised goodwill and have lower book
profits for MAT purposes. The Company would also receive the benefit of normal
income tax deduction on account of goodwill depreciation.

Since the Ind AS outcome is the
same as would have been the case if the Company would have continued under
Indian GAAP, it does not provide any undue tax advantage to the Company.

Conclusion

Capital reserve cannot be a
negative number. Consequently, goodwill will be eliminated against retained
earnings/other equity. This could be an acceptable view and will ensure income
tax neutrality between Indian GAAP and Ind AS treatment of goodwill.

Proposed Amendment

The MAT Committee has recommended
an amendment to 115JB [2A]. If the section is amended, it will change the way
book profits are determined under Ind AS on a go forward basis (not
transitional amounts). As per this amendment, items debited or credited to
other equity will be included in determination of book profits barring certain
exceptions. One of the exceptions is capital reserve in respect of business
combination of entities under common control.

In the author’s opinion, capital reserve cannot
be a negative number. Therefore, in a slump sale if the consideration paid is
greater than net assets, the excess will be debited to retained earnings. Since
the amount is not debited to capital reserves, it will not be covered by the
above exception, and should be allowed as a deduction of book profits for the
purposes of MAT in that year.

Sections 9, 44BB of the Act; Article 5(5) of India-Singapore DTAA – Where drilling rig was brought into India for fabrication and upgradation to make it ready for drilling activities, the number of days for which such fabrication and upgradation was being carried out was to be included to determine whether aggregate days exceeded the threshold.

23.  [2017] 83
taxmann.com 174 (Mumbai – Trib.)

DCIT vs. Deep Drilling (1) Pte. Ltd.

A.Y.: 2011-12, Date of Order: 19th April, 2017

Facts

The Taxpayer was a non-resident company, incorporated in
Singapore. It was engaged in the business of providing jack-up drilling unit
and platform well operations services.

The Government of India had awarded an exploration contract
to an Indian company (“I Co”) for exploration in offshore areas of India.
During the year under consideration, the Taxpayer entered into an agreement
with an I Co for providing jack-up drilling unit and platform well operations
for exploration and earned income from the said agreement.

Under the agreement with
I Co, the Taxpayer was required to provide rig as per stipulated
specifications. The Taxpayer brought rig into India for necessary fabrication,
upgradation and positioning to meet requirements of I Co. Actual drilling
operations commenced after such modifications and were undertaken for 119 days.
The Taxpayer did not offer any income to tax in India on the ground that number
of days for which drilling operations were carried on in India were less than
the threshold period of 183 days for constitution of exploration PE in India
under India-Singapore DTAA and in absence of a PE in India, income from its
activities was not taxable in India.

However, the AO observed that the drilling rig was brought
into India in April 2010. Since the rig was in India for more than 183 days, it
constituted exploration PE of the Taxpayer under India-Singapore DTAA.
Therefore, income of the Taxpayer was taxable u/s. 44BB of the Act.

Aggrieved by the order of AO, Taxpayer appealed before
CIT(A). The CIT (A) decided the issue in favour of
The Taxpayer.

Held

–   Under article 5(5) of India-Singapore DTAA,
an enterprise shall be deemed to have an exploration PE in a contracting state,
if it provides services or facilities in that state for a period of more than
183 days in connection with exploration, exploitation or extraction of minerals
oils in that state.

–   The Taxpayer brought the drilling rig into
India on 26th April 2010. For rendering the services to I Co, the
rig was required to undergo necessary fabrication, upgradation and positioning
as per the requirements of I Co before commencing the drilling activity.

–   The operation on the rig to upgrade it, to
prepare it, and to enable it to perform the drilling activity cannot be
considered in isolation from the actual drilling activity for determining
whether the Taxpayer was having a PE in connection with exploration,
exploitation or extraction of mineral oil in India.

–  Thus, the Taxpayer had an
exploration PE in India from the day it commenced fabrication, etc. in
India to perform the drilling activity. Since the number of days for which the
rig was deployed (including those for fabrication, etc.) was more than
183 days, the Taxpayer had an exploration PE in India.

Section 92C, the Act – No royalty could be said to have accrued to the Taxpayer since there was no agreement between AEs and the Taxpayer to charge royalty during the year and since the Taxpayer had not provided any technical or other support to the AEs.

21.  [2017] 83
taxmann.com 305 (Delhi – Trib.)

Dabur India Ltd. vs. ACIT

A.Y.: 2006-07, Date of Order: 12th April, 2017

Facts       

The Taxpayer was engaged in manufacturing and trading of
health care, personal care, cosmetics and veterinary products. It entered into
the following arrangement with two of its subsidiaries based in UAE (“UAE Co”)
and Nepal
(“Nepal Co”).

–   UAE Co:     

     UAE Co had entered into an agreement with
the Taxpayer prior to becoming subsidiary of the Taxpayer for the use of the
technical know-how and R&D support of the Taxpayer in manufacturing
Ayurvedic products in UAE. The Taxpayer had permitted UAE Co to use its brand
name. In return, UAE Co had paid royalty @3% of FOB sale. Further, UAE Co also
manufactured other products without the technical know-how and R&D support
of the Taxpayer. In respect of such products UAE Co was allowed to use the
trademark of the Taxpayer for which a royalty of 1% of FOB sales was paid by
UAE Co to the Taxpayer.

     Subsequently, UAE Co found that Ayurvedic
products of the Taxpayer were not selling in UAE. Hence, it began to
manufacture and market FMCG products with its own technology and hence, paid
royalty @1% to the Taxpayer.

–   Nepal Co:   

     The Taxpayer had entered into agreement
with Nepal Co for payment of royalty @ 7.5% of FOB sale price and as per the
terms of the agreement, the Taxpayer was required to bear the cost of marketing
expenses. However, Nepal Co had to incur substantial expenditure to penetrate
the market and hence, the agreement was amended and the royalty was reduced to
3%. However, in the relevant assessment year, Nepal Co did not pay any royalty.
Further, the Taxpayer had contended that 80% of production of Nepal Co was
purchased by the Taxpayer. Hence, even if the Taxpayer charged royalty, it
would have increased the cost and the Taxpayer would have paid higher price.

     The TPO noted low/non-receipt of royalty
from AEs during the current year. Hence, he asked the Taxpayer to furnish the
reasons for the same.

     The Taxpayer submitted that there was no
agreement for payment of royalty during the year under consideration. Hence,
right to receive the royalty was absent. Further, UAE Co had also refused the
payment of royalty on the ground that it had incurred huge expenditure on
promotion of bands of the Taxpayer.

     The TPO observed that in the absence of
evidence of termination of agreement between the Taxpayer and its AE, as well
as in absence of corroborative evidence like non-use of brand name or non-use
of technical know-how by the AE, the Taxpayer had permitted UAE Co and Nepal Co
use of its intellectual property without any royalty payment and hence, he made
an adjustment in the hands of the Taxpayer considering royalty @ 4% of sales in
case of UAE Co and @ 7.5% of sales in case of Nepal Co.

     Aggrieved by the order of AO, Taxpayer made
appeal before CIT(A). CIT (A) held that international transaction of permitting
use of brand name by AEs was same in both cases. Therefore, there was no reason
to assign higher royalty in one case than the other. Accordingly, he held
royalty @ 2% of FOB sales as arm’s length price in both cases.

Held

Royalty from UAE Co

–   When the agreement was in existence, the
Taxpayer provided technical know-how and R&D support for manufacturing of
products to the Taxpayer. Further, UAE Co had paid royalty @ 1% in accordance
with the agreement even when no product was manufactured with the help and
support of the Taxpayer since it was using the trademark of the Taxpayer.

–   The agreement was not renewed on completion.
Therefore, it had ceased to exist with effect from financial year 2005-06.
Thus, for the year under consideration, no royalty was payable. Further, the
products manufactured, as well as raw material used, by UAE Co were totally
different from those in India. The AO had not brought anything on record to
substantiate that the Taxpayer had provided technical know-how and R&D
support for manufacture of such products.

–   UAE Co had incurred huge expenses on
marketing and advertising the brand of the Taxpayer. Moreover, the AO had also
not brought on record that:

•    the Taxpayer had incurred expenses for
marketing the products of UAE Co; or

•    the Taxpayer made any efforts or contributed
any money for establishing its name in UAE; or

•    the products manufactured by UAE Co were not
different from the products manufactured in India by the Taxpayer; or

•    the claim of the Taxpayer that the products
manufactured, and materials used, in UAE were totally different from those in
India had not been rebutted. 

–   Under section 92C of the Act, read with rules
10B and 10C of the Rules, ALP should be determined on the basis of similar
payments received by similarly situated and comparable independent entities. In
the present case, no comparable case was brought on record by the TPO or CIT
(A).

–   Since the Taxpayer is not providing any
support to UAE Co, it will be fair and reasonable to charge royalty @ 0.75%.

Royalty
from Nepal Co

–   For the year under consideration, Nepal Co
had not paid royalty to the Taxpayer since it had to incur market penetration
expenses.

–   The contention of the Taxpayer that 80% of
production of Nepal Co was purchased by the Taxpayer had not been rebutted. It
is undisputed that royalty was payable in earlier year on sales. Therefore, it
is unbelievable that the Taxpayer charged the royalty on the purchases made by
it from Nepal Co to increase the cost of its own purchases. Even if it is
presumed that the Taxpayer should have charged the royalty, the same amount
would have been added in the purchase price paid by the Taxpayer. Thus, it
would have been revenue neutral.

–   There was no agreement in existence between
the Taxpayer and Nepal Co. Also, nothing was brought on record to substantiate
that the Taxpayer incurred any expenditure which benefited Nepal Co in any
manner. Having regard to all the facts, charging of royalty was not justified
and addition made is deleted.

Section 92C, the Act – Location savings and advantages are very much relevant in cross-border transaction but only for limited purpose of examination and investigation of transaction and not as a basis for determination of ALP and consequential adjustment.

20.  [2017] 84
taxmann.com 15 (Bangalore – Trib.)

Parexel International Clinical Research (P.) Ltd. vs. DCIT

A.Ys.: 2011-12 & 2012-13,

Date of Order: 16th June, 2017

Facts

The Taxpayer was a subsidiary of a dutch company (“F Co”) and
was engaged in providing clinical research services in India. Certain AEs of
the Taxpayer had outsourced the work of clinical trial and research services to
The Taxpayer in India. For its services, the Taxpayer was paid cost plus 15%
markup.

To benchmark its international transactions, the Taxpayer
selected 17 comparable companies having average PLI of 18.05%. Since operating
profit margin of the Taxpayer was within the tolerance range of +/- 5%, it
claimed that its international transactions were at arm’s length.

The Transfer Pricing Officer (“TPO”) observed that compared
to developed countries, regulatory, compliance and investigatory costs were
significantly lower in India, Hence, conducting trial in India through the
Taxpayer had resulted in location saving for the AE. Since benchmarking against
local comparables did not take this into account. Accordingly, the TPO applied
the profit split on account of location saving. Consequently, the location
savings in relation to the total cost of conducting clinical trials was
allocated in the ratio of 50:50 between the Taxpayer and the AE.

Aggrieved by the order of TPO, the Taxpayer appealed before
the Dispute Resolution Panel (DRP). However, DRP concurred with the view of the
TPO. Aggrieved, the Taxpayer appealed before the Tribunal. 

Held

–   Location savings is one of the primary
factors of any cross-border trade. However, such location savings are available
to all parties irrespective of whether the transaction is between the related
party or unrelated party.

–   Location savings’ advantage is universally
accepted in cross-border trade so far as the transactions are not entered into
solely for the purpose of avoiding taxes. On the other hand, BEPS is relevant
only if the sole purpose of the transaction is to shift profit to no tax or low
tax jurisdiction and treaty shopping.

–  Transfer pricing provisions for
determination of ALP are inserted to deal with such transactions between
related parties. While location saving can be a relevant factor for conducting
a proper enquiry for determination of ALP, if the comparable uncontrolled price
is available, location saving cannot be the basis for determination of ALP and
consequential adjustment.

Foreign Tax Credit Rules

One of the pillars of the Double Tax Avoidance Agreement
(DTAA) is Article on “Methods for Elimination of Double Taxation”. Various
methods are prescribed for elimination of double taxation. However, elimination
of double taxation through a foreign tax credit route was fraught with several
issues such as at what rate of exchange credit for taxes are to be computed,
what documents are required to prove payment of overseas taxes, what about
mismatch of taxable years in the country of source and country of residence,
what about increase or decrease in taxes due to assessment in the foreign
country and so on. In order to address all these issues and some more, last
year CBDT had issued a Notification No. S.O.2213(E) dated 27th June
2016 providing Foreign Tax Credit Rules (FTCR), which came into effect from 1st
April 2017.
This article besides explaining various methods for elimination of double
taxation, deals with salient features of the FTCR.

1.0    Introduction

          The objective of a DTAA (also known as
“tax treaty”) is to distribute tax revenue between the two Contracting States
(CS). Articles 6 to 22 in a typical tax treaty contain distributive rules to
this effect. The methods for elimination of double taxation have been dealt
with by Article 23 of the UN Model Tax Convention (UNMC) and the OECD MC.
Article 24 provides for provisions of Mutual Agreement Procedure which can be
invoked by the tax payer, if the CS fails to eliminate double taxation or
apply/interpret the treaty provisions not in accordance with its intent and
purpose. 

          Usually, State of Residence (SR) taxes
global income of a tax payer including income from the State of Source (SS).
Therefore, SR will give credit for taxes paid in the SS.

          Double taxation is eliminated in two
ways, namely, Exemption of Income or Credit of taxes paid. Various methods for
elimination of double taxation can be summarised as follows:

 

          Before we dwell into foreign tax
credit rules, let us glance through the above methods for appreciating
applicability of FTCR in an Indian scenario.

2.0    Exemption Method

2.1     Full Exemption

          In this case, the income taxed in the
SS is fully exempt in the SR.

2.2     Exemption with Progression

          Under this method, SR considers the
income taxed in the SS only for the purpose of determining the effective tax
rate.

          Let us understand the above two
methods with the help of an example.

          Tax slabs and tax incidence in the SR
are as follows:

Income

Tax Rate

Tax on

Rs. 1500

Tax on

Rs. 1000

First Rs. 200 Exempt

 0

0

0

From Rs. 201 to Rs. 500

10%

30

30

From Rs. 501 to Rs. 1000

20%

100

100

Above Rs. 1000

30%

150

—-

Total Rs.

 

280

130

 

Sr. No.

Particulars

Amount INR

1

Income in the SR

1000

2

Income in the SS

500

3

Total income taxable in SR (1+2)

1500

4

Tax
liability in the SR without 
considering Exemption (Tax on a slab basis)

280

5

Total
Income considering full exemption in the SR (income of SS is ignored totally)

1000

6

Tax
liability based in the SR considering full exemption (On a slab basis only on
income from SR i.e. Rs.1000)

 

130

7

Effective
Tax Rate in SR considering income from SS (4/3)

18.6%

8

Tax
in SR considering Exemption

with
Progression (Tax on Rs.1000 @ 18.6%)

 

186

 

 

 

              

3.0    Credit Methods

          Under the credit method, SR will tax
income of its resident on a global basis and then grant credit of taxes paid in
the SS.

          In simple words, when any income of
the person is taxed on source basis in one country and on the basis of his
residence in other country, the country of residence shall compute tax on
overall global income of such person and while doing so, it shall grant to such
a person a credit of the taxes already paid by it on the income taxable at
source in such other country.

          There are two types of credit methods,
namely, Unilateral and Bilateral.

3.1
   Unilateral Tax Credit

          Section 91 of the Income tax Act deals
with the unilateral tax credit. Sub-section (1) of the section 91 provides that
“If any person who is resident in India in any previous year proves that, in
respect of his income which accrued or arose during that previous year outside
India (and which is not deemed to accrue or arise in India), he has paid in any
country with which there is no agreement under section 90 for the relief or
avoidance of double taxation, income-tax, by deduction or otherwise,
under the law in force in that country, he shall be entitled to the deduction
from the Indian income-tax payable by him of a sum calculated on such
doubly taxed income at the Indian rate of tax or the rate of tax of the said
country, whichever is the lower, or at the Indian rate of tax if both the rates
are equal”. (Emphasis supplied)

          From the above, it is clear that the
amount of credit in India will be restricted to the lower of the proportionate
tax in India on the foreign sourced income or taxes paid in the source country.

3.1.1 Issues

          A
question arose as to whether a tax payer can avail unilateral credit in respect
of income from a country with which India has signed a limited tax treaty?
India had a limited tax treaty with Kuwait till 2008 which covered only income
from International Air Transport. (With effect from 1st April 2008,
a new and comprehensive tax treaty with Kuwait has become operative in India).
In case of JCIT vs. Petroleum India International (26 SOT 105), the
Mumbai Tribunal granted benefit of the unilateral tax credit u/s. 91(1) when
only limited DTAA was in operation. Thus, one may conclude that unilateral tax
relief may be available to a tax payer in respect of income which is not
covered by the limited tax treaty.

3.1.2 Some other issues u/s. 91 addressed by the
Judiciary  are tabulated herein below:

Sr. No.

Issue

Decision

Case Law

1

What
if part of foreign income is taxable in India?

Proportionate
credit is available only in respect of income doubly taxed.

CIT
v. O.VR.SV.VR. Arunachalam Chettiar (49 ITR 574) and Manpreet Singh Gambhir
v. DCIT

(26
SOT 208)

 

2

Whether
relief u/s 91 is available against MAT liability u/s 115JB or 115JC of the
Act in India?

If
the foreign sourced income is included in computation of book profits in
India, then relief u/s. 91 is available against MAT liability.

Hindustan
Construction Co. Ltd. v. DCIT

(25
SOT 359)

Proviso
to section 115JAA and 115JD read with Rule 128(7)

 

3

Whether
the relief u/s. 91 is available qua each country of source or one needs to
aggregate income from all foreign sources, which may have an impact of
setting off loss from one country against income from the other.

Expl.
(iii) to Section 91 defines “rate of tax of the said country” to mean
income-tax paid in the other country as per its tax laws. Therefore, relief
u/s. 91 has to be granted in respect of each source country separately.

Bombay
Burmah Trading Corporation Ltd. (126 Taxman 403)

3.2    Bilateral Tax Credit Methods

          There are four bilateral tax credit
methods, namely, (i) Full Credit Method, (ii) Ordinary Credit Method, (iii)
Underlying Tax Credit Method and (iv) Tax Sparing. Let us understand each of
them with illustrations.

3.2.1 Full Credit Method

          Under this method, total tax paid by
the person on his income in the country of source is allowed as a credit
against his total tax liability in the country of residence. The credit is
irrespective of his tax liability in the country of residence. Thus, a person
may be able to get proportionately more credit than the incidence of tax on his
foreign sourced income in the country of residence. This is known as full
credit method. India does not allow full credit of foreign tax to its residents
except under India-Namibia DTAA, which grants full credit in India of taxes paid
in Namibia.

3.2.2 Ordinary Credit Method

          The credit available under this method
shall be lower of the proportionate tax payable on the foreign sourced income
in the country of residence or the actual tax paid in country of source. As a
result, in this case, if the tax on the foreign sourced income is higher in the
country of residence than in the country of source, the taxpayer shall be
liable to pay the balance amount. However, if it is the other way round, i.e.
if tax paid in the source country is higher than the residence country, then
excess shall not be refunded. As stated earlier, tax treaties are distribution
of taxing rights and sharing of revenue between two contracting states and
therefore, any excess tax paid in one country is usually not refunded by the
other country. However, some countries do provide for carry forward of such
excess credit. As far as India is concerned, such excess amount is ignored.

          Majority of Indian tax treaties follow
Ordinary Tax Credit Method, which is not detrimental to the interest of the
country of residence of the tax payer and at the same time, it eliminates
double taxation of income.

          Let
us understand both these methods with the help of a Case Study. Facts of the
case are same as described in paragraph 2.2 herein above with the only change
of assumption of 20% rate of tax in the SS. SR is assumed to be India and SS as
Canada.

Sr.

No.

Particulars

Without DTAA Relief
Rs.

Full Credit Method
Rs.

Ordinary Credit Method Rs.

A.

Taxable
Income in India (1000+500)

1500

1500

1500

B.

Taxable
Income in Canada

500

500

500

C.

Tax
payable in India (on a slab basis)

280

280

280

D.

Tax
Payable in Canada (B*20%)

100

100

100

E.

Effective
Tax Rate in India (C/A)

18.67%

18.67%

18.67%

F

Foreign Tax Credit

NIL

100

(Full Credit)

93

(18.67% of 500)

G

Tax Paid in India net of FTC (C-F)

280

180

187

H

Total
Tax Liability (G+D)

380

280

287

3.2.3 Underlying Tax Credit Method (UTC)

          Under this method, SR gives credit for
taxes paid on profits out of which dividend is declared by the company located
in the SS. This method attempts to eliminate/reduce economic double taxation as
dividend income is taxed twice, once by way of profits in the hands of the
company and secondly by way of dividends in the hands of the shareholders.

          A few Indian tax treaties which
contain UTC provisions are treaties with Australia, China, Ireland, Japan,
Malaysia, Mauritius, Mexico, Singapore, Spain, the UK, and the USA.

          However, it is interesting to note
that most of UTC provisions in Indian tax treaties are with respect to the
residents of treaty partner country and not Indian residents. Only treaties
with Mauritius and Singapore give benefit of UTC to Indian residents.
India-Singapore DTAA provides for minimum shareholding of 25 per cent in order
to avail UTC benefit. India-Mauritius DTAA provides for minimum shareholding of
10 per cent in order to avail UTC benefit.

          An UTC clause of India-Mauritius DTAA
reads as follows:

          “In the case of a dividend paid by
a company which is a resident of Mauritius to a company which is a resident of
India and which owns at least 10 per cent of the shares of the company paying
the dividend, the credit shall take into account [in addition to any Mauritius
tax for which credit may be allowed under the provisions of sub-paragraph (a)
of this paragraph] the Mauritius tax payable by the company in respect of the
profits out of which such dividend is paid.”

          Illustration of the Underlying Tax
Credit

–   Indian company holds 100% shareholding of a
Singapore Company

–   Profits before tax of the Singapore Company
is Rs. 1,00,000/-

–   Tax rates in Singapore:

     Business Income @ 20%

     Withholding Tax on Dividends 5%

–   Tax rate on foreign dividends in India 30%

–   Assume that 100 per cent of profits are
distributed as dividends

Sr.No.

Particulars

Amount in Rs.

A

PBT
in Singapore

1,00,000

B

Tax
on Business Profits @ 20%

20,000

C

Balance
Profits declared as Dividends

80,000

D

Withholding
tax on Dividends @5%

4,000

In the hands of the Indian Company

E

Dividend
Income

80,000

F

Tax
on Dividends @ 30%

24,000

G

Underlying
Tax Credit (@ 100% of B)

20,000

H

Foreign
Tax Credit for Dividends

(Full
credit available as tax rate

in
India is higher than Singapore)

4,000

I

Total
Tax incidence in India

NIL

3.2.4 Tax Sparing

          Under this method, credit is given by
the state of residence in respect of deemed tax paid in the state of source.
Many a times, developing countries give many tax based incentives to attract
capital and technology from the developed nations. (For e.g. section 10
exemptions in India). However, income which may be exempt in India if taxed in
the other country, then the tax spared by the Indian government would go to the
other government rather than the company/entity concerned. Therefore, the
concept of tax sparing has come into being. Usually, provisions concerning tax
sparing cover specific sections of the domestic tax laws.

          However, sometimes, a general
reference is made to apply tax sparing provisions in respect of incentives
offered by a country for the promotion of economic development. [E.g.
India-Japan DTAA]  

          To illustrate, section 10(15)(iv)(fa)
of the Act provides that interest payable by a scheduled bank to a non-resident
depositor on a deposit placed in foreign currency is exempt from tax in India.
If an NRI depositor from Japan earns interest income from India, which is
exempt under this section but taxable in Japan, then the Japanese Government
will give a credit of tax which he would have otherwise paid in India, but for
this exemption.

Illustration

Sr. No.

Particulars

Amount in Rs.

A

Interest
Income received by an

NRI
in Japan on deposit placed

with
SBI in Yen.

1,00,000

B

Tax
paid in Japan @ 30%

30,000

C

Tax
Payable as per India-Japan Tax Treaty @ 10% {Actual tax

paid
is NIL either under DTAA

 or under the Act –

[exempt
u/s. 10(15)(iv)(fa)]}

10,000

D

Tax
Sparing Credit in Japan

10,000

E

Actual
Tax payable in Japan (B-D)

20,000

4.0    Foreign Tax Credit
Rules

          India by and large, follows ordinary
credit method and therefore, a lot of issues were arising for claiming credit.
There was no guidance as to at what rate taxes paid in the foreign country has
to be converted for claiming credit in India, what documents to be submitted,
what about timing mismatch and so on. In order to address these and other
issues, CBDT notified FTCR on 27th June 2016 and were made
applicable w.e.f. 1st April 2017. Let us study these provisions in
detail.

          Income Tax Rule 128 deals with the
provisions of FTC which are summarised as follows:

Sub Rule No.

Particulars

1

Credit of foreign tax to be allowed in
India in the year in

which the corresponding income is
offered to tax or

assessed in India. If income is offered
in more than one

year, then the credit for foreign tax
shall be allowed

in the same proportion in which such
income is offered

to tax or assessed in India.

(This provision takes care of timing
mismatch. If an

Indian resident receives income from
USA, where it was

taxed on a calendar year basis, then he
can offer the

proportionate income in India on
financial year basis. The

rule now clearly provides proportionate
credit of taxes if the income is offered for tax in two financial years)

 2

Meaning of foreign tax

Tax
referred to in a DTAA or as referred to in clause (iv)

of
the Explanation to section 91.

(It
means credit for state taxes or any other tax other

than
specifically covered by a bilateral tax treaty will

not
be available)

3

It
is clarified that FTC will be available against the tax,

surcharge
and cess payable under the Act but not

against
interest, fee or penalty.

4

FTC
will not be available in respect of disputed amount

of
foreign tax. (See Note 1)

5

This sub rule provides certain important
provisions:

(i)
FTC shall be computed vis-a-vis each source of

income
arising in a particular country;

(ii)
The credit shall be lower of the tax payable under

the
Act on such income and the foreign tax paid on

such
income; (See Note 2)

(iii)
As the tax in foreign country would be paid or deducted in the currency of the
respective country, the same needs to be converted into equivalent Indian
rupees. The rule provides that foreign tax should be converted at the
Telegraphic Transfer (TT) Buying Rate of the State Bank of India (SBI) on the
last day of the month

immediately
preceding the month in which such tax has

been
paid or deducted. (See Note 3)

6

Provision
allowing credit of FTC against MAT liability

u/s
115JB or 115JC

7

Excess
of FTC compared to MAT liability u/s 115JB or 115JC to be ignored

8

Documents to be submitted for claiming
FTC

(i)  Form
No. 67 containing details of foreign income and

     Tax
paid/deducted thereon.

(ii) Certificate or statement specifying
the nature of income and the amount of
tax deducted there from or paid by the assessee,—

(a)  from
the tax authority of the country or the specified territory outside India; or

(b)  from
the person responsible for deduction of such tax; or

(c)   signed
by the assessee along with an acknowledgement of online payment or bank
counter foil or challan for payment of tax or proof of tax deducted at
source, as the case may be.

9

The
above form and documents referred to in rule 8

have
to be filed on or before the due date of furnishing

income
tax return u/s. 139 of the Act.

10

Requirement
for submission of Form No. 67 in a case where The carry backward of loss of
the current year results in refund of foreign tax for which credit has been
claimed in any earlier year or years.

 

(Many
countries allow losses to be carried backward and

set
off against profits of the earlier year/s. In such a

situation,
the taxes paid earlier may be refunded to the

tax
payer. In order to avoid unjust enrichment, the

rules
provide for reversal of the FTC in India in respect

of
taxes which are subsequently refunded in the

foreign
jurisdiction)

Note1:Proviso
to sub rule 4 provides that foreign tax credit shall be allowed for the year in
which such income is offered to tax or assessed to tax in India if the assessee
within six months from the end of the month in which the dispute is finally
settled, furnishes evidence of settlement of dispute and an evidence to the
effect that the liability for payment of such foreign tax has been discharged
by him and furnishes an undertaking that no refund in respect of such amount
has directly or indirectly been claimed or shall be claimed.

Note 2:Proviso to sub rule 5 (i) provides that
where the foreign tax paid exceeds the amount of tax payable in accordance with
the provisions of the agreement for relief or avoidance of double taxation,
such excess shall be ignored for the purposes of this clause.

Illustration:

          An Indian company is taxed @ 20% on
royalty income in a foreign country X as per its domestic tax laws. However,
the DTAA between India and country X provides for the tax rate of 10% on such
royalty income, then notwithstanding, actual payment of 20%, the FTC in India
will be restricted to 10% only.

Note 3:Illustration
on conversion of FTC in Indian currency

          Mr. Patel, a resident in India has
received professional fees of USD 10,000/- on 1st February 2017 from
his UK client. His UK client deducted tax @ 20% (i.e. GBP 2000) under the UK
tax laws and paid the same to the UK government on 7th February
2017. India-UK DTAA provides the rate on FTS as 10%.

          He also earned capital gains on sale
of shares on London Stock exchange on 15th March 2017 amounting to
GBP 5000/- on which he paid tax of GBP 500 in UK on 31st March 2017.

          Consider
following rate of exchange of UK Pound vis-a-vis Indian Rupee:

Sr. No.

Date

Rate of Exchange

1 GBP = INR

1

31st
January 2017

84

2

1st
February 2017

85

3

7th
February 2017

83

4

28th
February 2017

82

5

15th
March 2017

80

6

31st
March 2017

81

 

          Rule 115 of the Act provides for the
mechanism to apply the exchange rate for conversion of foreign income to Indian
rupees.

          In the above case, applying provisions
of Rule 115 and sub-rule 5 of Rule 128, foreign income and FTC in India would
be computed as follows:

          FTC for Fees For Technical Services

          Income 10,000 @ Rs. 81/- = Rs.
8,10,000/-

          [Exchange rate as on the last date of
the previous year i.e. as on 31st March 2017 as per Rule 115(2)(c)
of the Act]

          Indian income tax @ 30% = Rs. 2,43,000/-

          FTC on 1000 @ Rs. 84/- = Rs. 84,000/-

          [Exchange rate as on the last date of
the previous month i.e. as on 31st January 2017 as per Rule 128(5)]

[Notes:

(i)       FTC restricted to the tax rate prescribed
in the India-UK DTAA and not the actual payment of GBP 2000;

(ii)      FTC is given at the exchange rate prevalent
on the last date of the preceding month in which the tax has been paid]

          FTC for Capital Gains

          Capital gains of 5000 @ Rs. 82/-    = Rs. 4,10,000/-

          [Exchange rate as on the last date of
the previous month i.e. as on 28th February 2017 as per Rule 115(f)]

          Indian Income tax @ 20%              (assumed)                                =
Rs. 88,000/-

          FTC on 500 @ Rs. 82/-                                                     =
Rs. 41,000/-

          [Exchange rate as on the last date of
the previous month i.e. as on 28th February 2017 as per Rule 128(5)]

5.0    Summation

FTCR has resolved many issues such as the rate
of exchange of FTC, the timing mismatch of two jurisdictions, credit in respect
of disputed foreign tax, loss situation etc. This will help in better
administration, clarity in claiming FTC and reduction in litigation.

Construction Contract Vis-À-Vis Repair Contract

Introduction

Under Maharashtra Value Added Tax
Act, 2002 (MVAT Act), the Works Contracts were taxable by different methods.
There was one normal method by way of deduction u/r 58 of MVAT Rules and in
alternative there were certain composition schemes.

Under Composition Schemes there
were two alternatives, like 5% composition scheme for construction contracts
and 8% composition scheme for other contracts. 

The 5% composition was applicable
to only notified contracts. The Government has issued notification dated 30.11.2006,
notifying the said ‘construction contracts’. The notification is reproduced
below for ready reference.

“FINANCE DEPARTMENT

Mantralaya, Mumbai 400 032, dated the 30th November
2006 

NOTIFICATION – The Maharashtra Value Added Tax Act, 2002.

No. VAT.1506/CR-134/Taxation-1– In
exercise of the powers conferred by clause (i) of the Explanation to
sub-section (3) of section 42 of the Maharashtra Value Added Tax Act, 2002
[Mah. IX of 2005], the Government of Maharashtra hereby notifies the following
works contracts to be the ‘Construction Contracts’ for the purposes of the said
sub-section, namely:-

 

(A) Contracts for construction of,–

(1) Buildings,

(2) Roads,

(3) Runways,

(4) Bridges, Railway over
bridges,

(5) Dams,

(6)    Tunnels,

(7)    Canals,

(8)    Barrages,

(9)    Diversions,

(10)  Rail tracks,

(11)  Causeways, Subways,
Spillways,

(12)  Water supply schemes,

(13)  Sewerage works,

(14)  Drainage,

(15)  Swimming pools,

(16)  Water Purification
plants and

(17)  Jettys

 

(B) Any works
contract incidental or ancillary to the contracts mentioned in paragraph (A)
above, if such work contracts are awarded and executed before the completion of
the said contracts.

 By order and in the name of the Governor of
Maharashtra.”

Controversy

In relation to the above
notification, there was a controversy about the scope of the notified items.
Particularly, in relation to contracts for construction of building, there was
a dispute as to whether only new construction can be covered or repair of existing
building can also be covered. If the contract was for repair of the existing
building, then the view of the department was that it cannot be covered under
the above notification.

Bombay
High Court Ruling 

One of the matters, having such
dispute, went to the Hon. Bombay High Court by way of appeal under MVAT Act.
The matter is in case of Painterior (India) (Maharashtra VAT Appeal No. 22
of 2017 dated 25.7.2017)(Bom). 

The Hon. High Court has narrated
the facts as under:

“Background of the Appeal:

3. The Appellant is a
registered partnership firm registered under the MVAT Act. The Appellant is in
the business of repairs/reconstruction of buildings. Application dated 14th
June 2010, was filed by the Appellant before the Commissioner of Sales
Tax, Maharashtra State (for short, “The Commissioner”) u/s. 56 of the
MVAT Act, for determination of the rate of tax applicable to a contract for
repairs of a building, as the repairs/reconstruction contracts are covered by
the expression “construction contracts”, which is used in section 42(3)
of the MVAT Act read with Notification No.VAT.1506/CR134/Taxation/1 dated 30th
November 2006. The rate of tax applicable thereto, would be 5% as notified
under the Act. The Appellant had forwarded along with the Application to the
Commissioner such type of contract with the Sangam Bhavan Building.

 

4. The Appellant also prayed
for the direction that the determination of the Commissioner should not affect
the liability of the Appellant under the Act in respect of any sale affected
prior to the determination. The Commissioner by order dated 25th
July 2014, rejected the contention of the Appellant and made a determination
that the contract is not a “Construction Contract”, thus attracting the
rate of tax at 8%. Being aggrieved by the order passed by the Commissioner, the
Appellant approached the Maharashtra Sales Tax Tribunal (for short, “the
Tribunal”) in Appeal. The Tribunal by Judgment and order dated 15th December
2016, confirmed the order passed by the Commissioner. Hence, the Appeal.”

The Hon. High Court referred to the
provisions of the Act as well as earlier circulars under Works Contract Tax
Act. Under Works Contract Tax Act, for the amnesty scheme, the Commissioner of
Sales Tax has clarified that repair contracts are also Construction contracts.
Having this interpretation long back, the Hon. High Court held that there is no
reason to change the interpretation. The observations of the Hon. High Court
are as under:

“13. It is necessary to note that
under the WC Act, referring to section 6A(1) a similar notification dated 8
March 2000 was in existence, referring to the contract for construction of
“building”. Similar clause (B) of notification under MVAT Act dated 30th
November 2006 was in existence under Section 42(3) Explanation. The Trade
circular was in existence about the repair, reconstruction and maintenance to
buildings, dams, bridges, canals and barrages would be covered under the
expression of “Construction Contract”, though it was for the purpose of amnesty
scheme. This undisputed position on record shows the consistent stand and
interpretation even of the Department that the “Construction Contract” includes
the repair and reconstruction and maintenance of building. There is no contra
circular and/or material available placed on record in this regard. The
circulars and the practice so adopted by the Department, since long, ought not
to have been overruled while rejecting the case/claim of the Appellant.

14. Therefore, considering the
scheme and purpose of section 42(3)(i) and notification dated 30th
November 2006 under the MVAT Act, we are of the view that the ‘Works Contract’
in question, would be the ‘Construction Contract’. The contract for
construction of buildings includes the repairing, reconstruction and maintenance
of building etc. This is also for the reason that there is no
distinguishing feature and definitions and/or intention reflected in any
provisions about the nature of buildings, whether it is new building or old
building. The word “new” or “old” so observed in the impugned order as not
specifically defined or explained anywhere, cannot be added by giving such
restrictive interpretation to the provisions and the notification in question.
The term “Building” cannot be restricted only to the new building specifically
when, as per the practice and the explanation so given in similarly placed
provisions under the WC Act and the notification explaining the term so
referred above. In spite of the earlier provisions and the interpretation so
given, there is no reason to overlook the same specifically when, there is no
further clarification and/or provisions brought on record to supersede and/or
take away the clarification so issued by the Commissioner at the relevant time.
The repairing and/or reconstruction, if part of Construction Contract, which in
normal parlance and/or understanding cannot be read to mean that the
construction contract refers under these provisions only for the new building.
It is unacceptable and there is no rational and/or justification for want of
specific provisions of such interpretation.”

Conclusion     

Thus,
the Hon. High Court has decided on this highly disputed issue which will bring
the controversy to end. Further, it also becomes clear that the circular
interpretation remains binding even if it is in a different situation.
Consistency in interpretation is getting impliedly confirmed by the Hon. High
Court. We hope that such a trend will always be kept in mind by the revenue
authorities for simplification of law.

Is Schedule Ii To The Central GST Act, 2017 & Other State GST Acts Unconstitutional As Regards Certain Services?

Introduction

The Goods and Services Tax legislations have become a reality
now and are in operation. The start was through a Constitutional (101st)
Amendment Act, 2016 which came into effect from September 2016 itself. In that
Act, the Constitution was amended to insert, modify and delete several articles
to pave the way for introduction of GST. In doing so, however, Article 366(29a)
was left untouched. This article would analyse the effect of having this clause
remaining in the Constitution.

Goods and Services Tax

The term “goods” is defined in Article 366(12) to include all
materials, commodities and articles. As per Article 366(26A), “services” is
defined to mean anything other than goods. Article 366(12A) defines “goods and
services tax” to mean any tax on supply of goods or services or both except
taxes on the supply of the alcoholic liquor for human consumption.” Therefore,
it stands to reason that the goods and services tax is a tax on supply of goods
or services.

Tax on sale or purchase of goods

However, in Article 366(29a), which was inserted by
Constitution (46th Amendment) Act, 1982, the definition of tax on
the sale or purchase of goods was introduced. The reason for its introduction
was several transactions which could not be taxed by the States because of
interpretation placed by the Courts was sought to be overcome. Now let us take
a look at the said definition which is set out hereunder (emphasis supplied):

“[(29A) “tax on the sale or purchase of goods” includes –

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

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

(c)  a tax on the delivery of goods on
hire-purchase or any system of payment by instalments;

(d)  a tax on the transfer of the right to
use any goods for any purpose (whether or not for a specified period) for cash,
deferred payment or other valuable consideration;

(e)  a tax on the supply of goods by any
unincorporated association or body of persons to a member thereof for cash,
deferred payment or other valuable consideration;

(f)   a tax on the supply, by way of or as
part of any service or in any other manner whatsoever, of goods, being food or
any other article for human consumption or any drink (whether or not
intoxicating), where such supply or service, is for cash, deferred payment or
other valuable consideration,

and such transfer, delivery or supply of any goods
shall be deemed to be a sale of those goods by the person making the transfer,
delivery or supply and a purchase of those goods by the person to whom such
transfer, delivery or supply is made;”

In BSNL Ltd vs. UOI 2006 (2) STR 161, the Supreme
Court succinctly brought out reasons for its introduction which is set out
hereunder:

39. Clause (a) covers a situation where the
consensual element is lacking. This normally takes place in an involuntary
sale. Clause (b) covers cases relating to works contracts. This was the
particular fact situation which the Court was faced with in Gannon Dunkerley
and which the Court had held was not a sale. The effect in law of a transfer of
property in goods involved in the execution of the works contract was by this
amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley
was directly overcome. Clause (c) deals with hire purchase where the title to
the goods is not transferred. Yet by fiction of law, it is treated as a sale.
Similarly the title to the goods under Clause (d) remains with the transferor
who only transfers the right to use the goods to the purchaser. In other words,
contrary to A.V. Meiyappan’s decision a lease of a negative print of a picture
would be a sale. Clause (e) covers cases which in law may not have amounted to
sale because the member of an incorporated association would have in a sense
begun both the supplier and the recipient of the supply of goods. Now such
transactions are deemed sales. Clause (f) pertains to contracts which had been
held not to amount to sale in State of Punjab vs. M/s. Associated Hotels of India
Ltd. (supra). That decision has by this clause been effectively legislatively
invalidated.

40. All the clauses of Article 366(29A)
serve to bring transactions where one or more of the essential ingredients of a
sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of
purchase and sales for the purposes of levy of sales tax. To this extent only
is the principle enunciated in Gannon Dunkerly limited. The amendment
especially allows specific composite contracts viz. works contracts [Clause
(b)], hire purchase contracts [Clause (c)], catering contracts [Clause (e)] by
legal fiction to be divisible contracts where the sale element could be
isolated and be subjected to sales tax.

It is clear from the above definition and analysis, that the
following goals get achieved through the amendment:

i.   The definition talks of a tax on sale or
purchase of goods to include several things listed therein;

ii.  There are three clauses dealing with tax on
transfer (clauses a, b and d), one clause dealing with tax on delivery (clause
d) and two clauses dealing with tax on supply;

iii.  All the clauses deal with goods only;

iv. Further, the clause states that such transfer,
delivery and supply shall be deemed to be a sale or purchase of goods.

GST scenario

In the GST scenario, there are two principal legislations
dealing with tax on supply of goods or services – the Central GST Act, 2017 and
the State GST Act, 2017. It would be noted that the IGST Act, 2017 deals with
interstate supplies and imports. We take the CGST 2017 for analysis for the
sake of convenience and as this has been replicated by all states, it will hold
equally valid. Supply is defined in section 7 to include all forms of supply
of goods or services or both such as sale, transfer, barter, exchange, licence,
rental, lease or disposal made for a consideration in the course or furtherance
of business. Thus, the terminology supply includes sale of goods.

If we look further into section 7(1)(d), supply includes
activities to be treated as supply of goods or supply of services as referred
to in Schedule II. Schedule II attempts to classify what would be termed as
supply of goods and what is termed supply of services.

A close look at Schedule II would reveal the general theme
that transfer of title in goods will be classified as supply of goods and
transfer of other rights in goods would be classified as supply of services.
Further, transactions covered by clauses (b), (c), (d), and (f) of Article
366(29a) are classified as services while transactions covered by clause (e) is
covered as supply of goods. In effect therefore, works contract, hire
purchase transactions and transfer of right to use goods apart from goods
supplied in restaurant/hotels are classified now as supply of services and not
supply of goods.

Does this conflict with Article 366(29a)?

There are no two opinions about this that tax on works
contract, hire purchase and transfer of right to use goods apart from food
supplied in restaurants were and are treated as sale and purchase of goods by
virtue of the deeming fiction appearing in Article 366(29a) of the
Constitution. Therefore, to this extent the transactions being covered by
Schedule II are termed as services are seemingly in direct conflict with the
above constitutional provisions. Therefore, one has to find whether we can
harmonise Article 366(26A) which deals with tax on goods and services vis-a-vis
Article 366(29a) which deals with tax on sale or purchase of goods and deeming
certain transactions to be sale or purchase of goods.

Whether harmonising possible?

If we look at the constitutional provisions, there is no
definition of what is supply. But when we look at the statute, the term supply
is defined to have a wider meaning than the term sale as the latter is included
in the former. Therefore, sale is only a sub-sect of supply which includes
several other things. Can a statute be used to interpret the meaning of the
terms in the Constitution? Is such recourse possible? One argument is that the
term “sale” appearing in the Constitution was so interpreted by the Supreme
Court to be what was being used under a legislation. The summary of this
discussion is found in BSNL case supra which is reproduced hereunder:

To answer the questions formulated by us, it is necessary
to delve briefly into the legal history of Art. 366(29A). Prior to the 46th
Amendment, composite contracts such as works contracts, hire-purchase contacts
and catering contracts were not assessable as contracts for sale of goods. The
locus classicus holding the field was State of Madras vs. Gannon Dunkerley
& Co. – IX STC 353 (SC). There this Court held that the words “sale of
goods” in Entry 48 of List II, Schedule VII to the Government of India Act,
1935 did not cover the sale sought to be taxed by the State Government under
the Madras General Sales Tax Act, 1939. The classical concept of sale was held
to apply to the entry in the legislative list in that there had to be three
essential components to constitute a transaction of sale – namely, (i) an
agreement to transfer title, (ii) supported by consideration, and (iii) an
actual transfer of title in the goods. In the absence of any one of these
elements it was held that there was no sale. Therefore, a contract under which
a contractor agreed to set up a building would not be a contract for sale. It
was one contract, entire and indivisible and there was no separate agreement
for sale of goods justifying the levy of sales tax by the provincial
legislatures. “Under the law, therefore, there cannot be an agreement relating
to one kind of property and a sale as regards another”. Parties could have
provided for two independent agreements, one relating to the labour and work
involved in the execution of the work and erection of the building and the
second relating to the sale of the material used in the building in which case
the latter would be an agreement to sell and the supply of materials
thereunder, a sale. Where there was no such separation, the contract was a
composite one. It was not classifiable as a sale. The Court accepted the
submission of the assessee that the expression “sale of goods” was, at the time
when the Government of India Act, 1935 was enacted, a term of well recognized
legal import in the general law relating to sale of goods and must be
interpreted in Entry 48 in List II of Schedule VII of the 1935 Act as having
the same meaning as in the Sale of Goods Act, 1930. According to this decision
if the words “sale of goods” have to be interpreted in their legal sense, that
sense can only be what it has in the law relating to sale of goods. To use the
language of the Court :

“To sum up, the expression “sale of goods” in Entry 48 is
a nomen juris, its essential ingredients being an agreement to sell movables
for a price and property passing therein pursuant to that agreement. In a
building contract which is, as in the present case, one, entire and indivisible
– and that is its norm, there is no sale of goods, and it is not within the
competence of the Provincial Legislature under Entry 48 to impose a tax on the
supply of the materials used in such a contract treating it as a sale”.

34. Following the ratio in Gannon Dunkerley,
that “sale” in Entry 48 must be construed as having the same meaning which it
has in the Sale of Goods Act, 1930, this Court as well as the High Courts held
that several composite transactions in which there was an element of sale were
not liable to sales tax.

One could also view that actually the Gannon Dunkerly
decision to treat sale in the context of how the Government of India Act, 1935
had viewed it and as our Lists in VII Schedule were more or less reproductions,
it was to be interpreted keeping in mind what was the meaning in the earlier
legislation which was parallel to our constitutional provisions and therefore,
the Supreme Court has actually not subordinated the Constitution to the
statute. However, the BSNL’s case (supra) does not follow this argument
as also other Courts and have consistently interpreted the Gannon Dunkerly
judgement that the terms used in the constitution have been interpreted keeping
in mind the legislation present at that time.

If this argument be accepted, then clearly, the CGST Act 2017
can be used to refer to the meaning of the term supply which is conspicuous by
its absence in the Constitution. So read, sale is a sub-sect of supply as
supply will include other forms like transfer, barter, lease, rental, etc.
apart from sale. Therefore, Article 366(29a) is now a sub-sect of Article
366(26A) which seems to be plausible but flawed in one clear sense – the
sub-sect was introduced before the sect itself. But we assume here that the
makers wanted to so do as they were introducing a tax on a wider system of
supply than the narrow system of sale. If we do not treat the same as a sub
sect, then the two clauses are independent and the GST legislations will
clearly suffer from the vice of unconstitutionality in that respect.

Harmonising will still not save

Assuming for a moment that the clause is a sub-sect of
supply, still the challenge to the provisions contained in schedule II will
hold good because to the extent those clauses treat the transactions as supply
of services, they are still in conflict with the express provisions of Article 366(29a).

One other argument which can be thought of is that Article
366(29a) was retained in the Constitution for a specific reason that those
transactions which were entered into prior to 1.7.2017 when the GST
legislations were brought into force would still be protected for realisations
made after 1.7.2017. To put it simply, suppose you entered into a lease
transaction before 1.7.2017 which amounted to a transfer of right to use goods
and was treated as supply of goods earlier, the instalments that are realised
after 1.7.2017 could still be collected as the Constitutional mechanism is
still intact. However, this would lead us to a very paradoxical position. If
those transactions are covered still as tax on sale or purchase of goods, the
new levy of GST cannot be applied at all. In fact, that is clearly the
situation. For example, if I entered into a car lease on 1.4.2017, the
transaction would have been taxed as a sale of goods under the respective VAT
legislations and VAT has to be discharged every time the lease rentals are
invoiced. Similar would be cases of transfer of rights to use other goods like
machinery. Come 1.7.2017, the car lease rentals are described as services and
taxed at a rate of 43% or other transfers of right to use are now taxed under
GST as services. Can the recovery of instalments be taxed under GST where the
delivery or transfer of right to use is already complete prior to 1.7.2017 when
GST was introduced? The answer is a clear no and therefore, to charge GST on
such transactions may be beyond the statute itself, leave alone the
constitution. This is because, there is no supply under GST and the transfer of
right to use or delivery of goods has already occurred before the GST
legislation came into force. Even section 142(10) of the CGST Act, 2017 will
apply where in a continuing contract the supply is made after 1.7.2017.

That would mean that those collections have to be done under
the old VAT laws which now stand repealed. By virtue of section 174 of the CGST
Act, 2017 or section 173/174 of the Karnataka GST Act 2017 read with section 6
of the General Clauses Act, 1897 can it be said that the previous liability
will still continue under such Acts, in which case, till those transactions
conclude, the respective liability continues. However, it can be equally argued
that liability to pay tax occurs every month on lease rentals and unless the
legislation is in force, there is no liability to pay at all and my previous
liabilities are completely discharged.

Conclusion

Therefore, it appears that the provisions
relating to schedule II of the CGST Act, 2017 or the respective state
legislations trying to tax certain transactions as supply of services are in
direct conflict with the constitutional provisions. There seems to be a further
dilemma that certain completed transactions cannot be brought to tax under the
new GST regime. This is an area which is likely to be explored by the discerning
professionals.

Input Tax Credit – Some Emerging Issues

1.    Fundamentals and basic rules

1.1.    At the heart of an efficient indirect tax is a flawless Input Tax Credit (“ITC”) mechanism, that allows a business to claim offset of taxes paid on expenses at the time of discharging liability of taxes collected from customers. If the tax offset, also known as ITC is not allowed freely to the businesses, it results in tax inefficiencies in the form of tax on tax. In fact, one of the most important justifications for introduction of GST has been the seamless flow of credit.

1.2.    The GST law in general allows registered businesses to avail ITC of taxes paid on inputs / input services / capital goods which are used or intended to be used in the course or furtherance of business, subject to certain restrictions and conditions.

1.3.    This article primarily covers the aspect relating to ITC entitlement, conditions for claim of credit, conditions and restrictions imposed for claim of credit and some teething issues towards credit claim. Chapter V of the CGST Act, 2017 as well as Chapter V of the CGST Rules, 2017 deal with the provisions relating to ITC.

2.    ITC Entitlement – General Conditions

2.1.    Section 16 (1) of the CGST Act, 2017 provides that every registered person shall be entitled to take credit of input tax charged on supply of goods or services or both, which are used / intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. Section 16(2) stipulates further conditions which need to be satisfied for the claim of credit and the same are listed below:
–    The registered person should be in possession of tax invoice / debit note issued by registered supplier or other tax paying documents
–    The registered person should have received goods / services
–    The tax charged on the invoice should have been actually paid to the Government
–    The recipient should have furnished his return
–    The recipient should have paid the supplier of goods / services the amount due towards the supply received (including taxes) within 180 days
–    The credit should not be blocked under Section 17(5).

2.2.    As can be seen from above, there are various conditions prescribed under GST for claiming ITC, and they revolve around different pillars of compliances, from the view point of recipient (being a registered person, should have received the supply), compliances by both the parties (pre & post supply in the form of payment of taxes by the supplier, making correct disclosures relating to the supply by the supplier, filing the return by the recipient, intended use of the supply – business vs. non-business, etc.) and nature of supply (restricted credit vs. unrestricted credits).

2.3.    Each of the above aspects are discussed in the subsequent paras.

3.    Identifying Recipient of supply

3.1.    As discussed above, one of the important conditions for claiming the ITC is that the registered person should have received the goods or services. In many cases, the payment for a supply may be made by one person but the economic benefit of the supply can be received by another person. Take the case of a Customs House Agent (CHA) paying for the warehousing charges at the Container Freight Station (CFS). Can it be said that the CHA has received the service and is therefore entitled for input tax credit?

3.2.    In the above background, it becomes essential to define what is meant by the phrase “recipient of supply”. Section 2 (93) defines the term “recipient of supply” in the context of goods / services / both as:

    (93) “recipient” of supply of goods or services or both, means—
    (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
    (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and
    (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered,    and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;

3.3.    The CHA operates out of customs port and facilitates number of activities pertaining to import / export of goods, such as dealing with the shipping line, CFS, loading / unloading of goods in to the vessel, paying port charges, etc. The key to the entire analysis would be whether the CHA is liable to pay the consideration to the underlying vendor. The actual fact of paying the consideration may not be relevant. Therefore, it may be important to look at the contracts. In many cases, the contracts may be verbal or implied. In such a scenario, the invoice can be the best indicator of the contracting relationship.
 
3.4.    Practically, the vendors may enter into contracts/issue the invoices in the following manner:

a.    Contracts entered into with/ Invoices issued in the name of the Importer / Exporter. In such a scenario, the CHA merely acts as an agent. However, payment to the vendors is done by the CHA which is subsequently recovered from importer / exporter.

    In this scenario, the vendors have recognised the importer / exporter as the recipient of supply and hence they will have to be treated as the recipient and the credit can be claimed only by the importer / exporter and not by the CHA.

b.    Contracts entered into with / Invoices issued in the name of CHA. In this scenario, since the person liable to pay the consideration to the underlying vendor is the CHA, the +CHA can be considered as a recipient of supply. It may be important to note that the definition of recipient also includes an agent acting on behalf of the recipient. In this scenario, the vendors have treated the CHA as the person liable for payment of consideration, i.e., recipient of supply. The CHA can claim the credit of the taxes which have been posted into their Electronic Credit Ledger by the respective vendors. It is however, important to note that in such cases, the CHA will not be able to claim the amount as reimbursement of expenditure and he should treat the expenditure incurred by him as inward supplies for providing the outward supply to the importer / exporter.

c.    Issued in the name of CHA who claims the reimbursement of expenses from client as pure agent

    In the above scenario, if the CHA chooses to claim the benefit of reimbursement of expenses and consequent exclusion from valuation of taxable services, in view of the Mumbai High Court decision in the case of Ultratech Cement Limited 2010 (20) S.T.R. 577 (Bom.), the CHA will not be eligible for the claim of credit.

    In fact this will result in an incremental cost for the importer / exporter with no actual benefit flowing in to either the CHA / importer / exporter by way of tax credits.

4.    Denial of credit for non-possession of original tax invoices

–    Section 16 (2) (a) provides that the person claiming the ITC should be in possession of tax invoice / debit note issued by the supplier for claiming the credit.

–    The question that arises is whether the receiver should be in possession of the original tax invoice for claiming credit or photo-copy or scanned copy of the invoice shall also suffice.
–    In this context, it would be important to refer to the provisions of section 145 of the Act, wherein it has been provided that a micro film of a document or the reproduction of the image or images embodied in such micro film (whether enlarged or not); or a facsimile copy of a document; or a statement contained in a document and included in a printed material produced by a computer, subject to such conditions as may be prescribed; or any information stored electronically in any device or media, including any hard copies made of such information, shall be deemed to be a document for the purposes of this Act and the rules made thereunder and shall be admissible in any proceedings thereunder, without further proof or production of the original, as evidence of any contents of the original or of any fact stated therein of which direct evidence would be admissible.

5.    Failure to make payment to vendor for the supply received including taxes

–    Second proviso to section 16 (2) provides that in case where a receiver of supply fails to make the payment to the supplier for the value of supply (incl. GST charged) within 180 days of the date of invoice, he shall be liable to reverse the ITC claimed initially along with the interest thereon.

–    Similarly, the third proviso to section 16 (2) provides that when the receiver of supply makes payment to the vendor post reversal of credit in accordance with the provision of second proviso, he shall be entitled to re-claim the credit of the tax reversed in terms of second proviso.

–    One important issue that arises is whether credit reversal would be required in case of part payments made to suppliers, and if yes, whether to the extent of entire supply or only to the extent payment is not made? It is imperative to note that the proviso to section 16 (2) referred above is silent in this regard. The proviso only requires for reversal of ITC, but is silent as to what extent the reversal shall be necessitated?

–    While there is no clarification for these issue, either from the CBEC / State Authorities, under the erstwhile service tax regime, in the context of Rule 4 (7) of the CENVAT Credit Rules, 2004, (which is a similar provision as the proviso to section 16 (2)), the Board had clarified1 as under:
_____________________________________________________________
1 Circular No. 122/3/2010-S.T., dated 30-4-2010

    (b) In the cases where the receiver of service reduces the amount mentioned in the invoice/bill/challan and makes discounted payment, then it should be taken as final payment towards the provision of service. The mere fact that finally settled amount is less than the amount shown in the invoice does not alter the fact that service charges have been paid and thus the service receiver is entitled to take credit provided he has also paid the amount of service tax, (whether proportionately reduced or the original amount) to the service provider. The invoice would in fact stand amended to that extent. The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent refund or extra payment of service tax, the credit would also be altered accordingly.

–    Similar issue is also faced by the Infrastructure Sector, especially contractors / sub-contractors where there is a concept of retention money, i.e., amount reduced from invoices raised by the suppliers by terming them as “retention money” and subsequent payment as per contractual terms. It is obvious that the amount is contractually due after more than 180 days and hence the payment would actually be made after the period of more than 180 days. Will the requirement of reversal of credit trigger in such situations? It may be fruitful to reproduce the exact provision requiring the reversal of credit

    Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed

–    It is important to note that the provision obligating the reversal of credit gets triggered when the recipient fails to pay. The phrase “fails to pay” is a specific incident and gets triggered only in situations when there is an obligation to pay. Since the recipient is not obligated to pay the retention money within a period of 180 days, it cannot be said that he has failed to pay the retention money and hence the proviso is not triggered.

6.    Process for claiming Input Tax Credit

6.1.    Section 16 (1) provides that every registered person shall be entitled to take ITC of inward supplies received for use / intended use in the course or furtherance of business, the same comes with the caveat “subject to conditions and restrictions as may be prescribed”.

6.2.    Out of this pool of input tax credit, there are various restrictions imposed on the taxable persons from claiming the input tax credit. It may be important to note that even under the Service Tax / VAT regime, Rule 6 of the CENVAT Credit Rules (including Rule 2 (a), (k) & (l)) as well as Rule 53/ 54 of the Maharashtra Value Added Tax Rules provided for similar conditions / restrictions on the claim of input tax credit.

6.3.    Similar conditions and restrictions are contained under CGST Act, 2017 in the provisions of Section 17 read with Rule 43 of the CGST Rules, 2017. The ITC attributable to total inward supplies received by a registered person, on which ITC has been charged by the supplier as well as transactions where the ITC is applicable under reverse charge mechanism has been classified as “T” for the purpose of determining eligibility.

6.4.    The total ITC is subsequently segregated into multiple baskets, as is evident from the following chart and discussed in detail in subsequent paras:

6.5.    Credit pertaining exclusively to non-business / exempt activities

6.5.1.The first two baskets of segregation of “T” deals with situation wherein inputs / input services are used partly for the purpose of business and partly for other purposes OR partly for affecting taxable supplies and partly for exempt supplies and the amount of credit shall be restricted to so much of input tax as is attributable to business purpose OR is attributable to taxable supplies. To the extent the ITC is attributable to non-business purpose, the same is classified as T1 and to the extent the ITC is attributable to exempt supplies, the same is classified as T2.

6.6.    Restricted Credits

6.6.1.    In addition to above, section 17 (5) provides that ITC shall not be allowed in respect of various expenditure incurred. The inward supplies which are covered u/s. 17 (5) are classified as “T3”. A quick summary of such inward supplies where ITC is restricted include ITC in respect of:

–    Motor vehicles & other conveyances
–    Specified inward supplies, such as:

a.    Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
b.    membership of a club, health and fitness centre;

c.    rent-a-cab, life insurance and health insurance except where ––

    (A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
    (B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed
supply; and

d.    travel benefits extended to employees on vacation such as leave or home travel concession;

–    Works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
–    Goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
–    Goods or services or both on which tax has been paid u/s. 10, i.e., composition scheme.
–    Goods or services or both received by a non-resident taxable person except on goods imported by him;
–    Goods or services or both used for personal consumption;
–    Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
–    Any tax paid in accordance with the provisions of sections 74, 129 and 130.

6.7.    Identified Credits

6.7.1.    The fourth basket of segregation is pertaining to inward supplies, which are exclusively used for making taxable supplies, including zero rated supplies. Such ITC is tagged as “T4”. A supplier shall be eligible for full input tax credit to the extent the inward supply is tagged under this basket

6.8.    Common Credits

6.8.1.    The balance ITC is the quantum of common inward supplies which are used for making both, taxable as well as exempted supplies on which a ratio needs to be applied on a monthly basis. Such ITC is tagged as “C2”. From C2, the amount of ITC attributable towards exempt supplies (“D1”) is identified using the following ratio,

           Aggregate value of exempt
           supplies during the tax period (E)   
    ____________________________    *    C2   
           Total turnover of the state of the
           registered person during the tax period (F)   

6.8.2.    The term “exempt supplies” has been defined to mean supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax u/s. 11, or u/s. 6 of the Integrated Goods and Service Tax Act, and includes non-taxable supply (i.e., supply of goods or services or both which is not leviable to tax under this Act or under Integrated Goods and Service Tax Act).

6.8.3.    Value of Exempt Supply shall include the following:
–    Transaction Value of all the exempt supplies
–    Transaction Value of services on which tax is payable under RCM
–    Sale of Land/ Completed Buildings
–    Sale of Securities – 1% of sale value is presumed to be the value of exempted supply.

6.8.4.    A banking company or a financial institution including a non-banking financial company has been given an option to either comply with the ratio requirement or avail only 50% of the eligible ITC on inputs, capital goods and input services in that month. However, such companies shall be required to exercise the option every year and once the option is exercised, the same cannot be withdrawn during the remaining part of the financial year. Further, the 50% credit claim option is not applicable for internal supplies within the company on which tax is payable.

6.8.5.While under the erstwhile Service Tax Regime, the ratio for reversal of credit was to be determined as per the financials of the previous year, to be applied throughout the year and subsequently, requiring a final ratio to be determined based on the financials of the concluded year by the 30th June, the method has been changed to some extent under the GST regime. Under GST, the ratio shall be required to be determined & applied on a monthly basis and subsequently, at the end of the year, a final ratio shall be determined and applied on or before 30th September of the next financial year.

6.9.    Additional 5% adhoc reversal for common input tax credits

6.9.1.    Further, an additional reversal of 5% is proposed from C2 in cases where common inputs / input services are used for business as well as non-business purposes, and the same is denoted as D2 for the purpose of ITC calculations. It is important to note that the additional 5% reversal is required only in cases where a registered taxable person uses some inputs / input services for both, business as well as non-business purposes and not in cases where it is used for purely business purposes.

6.9.2.Therefore, the question that arises is whether this clause is meant to be applicable for all categories of taxable persons or only for specified categories? Perhaps, this entry is meant to cover situations of sole-proprietary / partnership firms / HUF where there is always an element of personal expenditure incurred by the sole proprietor / partners / members being claimed as expenditure. While in the case of a company, while such instances cannot be ruled out, it is important to note that the Statutory Auditors are required to compulsorily disclose the personal expenditure of specified persons booked in the books of the company? So, the question that arises is what shall be the basis for determining the amount for D2 purpose. Has it to be the Income Tax Assessment Order making disallowance u/s. 37 for personal expenditure or has it to be the report of statutory auditor making such disclosures or is it something that has to be at the mercy of GST officer?

6.10.    Credit in case of capital goods identified as being used for effecting taxable supplies is allowed immediately which is a departure from the earlier tax regime wherein credit of capital goods was to be claimed in two equal installments in the first two years. However, more complex provisions for reversal of ITC on capital goods have been prescribed. It has been provided that the claim of ITC on capital goods shall be distributed over a period of 60 months and credit should be availed every year basis the ratio determined on a monthly basis for a period of 60 months.

7.    Credit Claim – Some controversies

7.1.    Credit of ITC in respect of motor vehicles & conveyances

–    As stated earlier, section 17(5), inter alia, does not permit the claim of credit in respect of motor vehicles. In this context, a question which arises is whether taxes paid on repairs and insurance of motor vehicles are eligible for input credit. Is the denial of credit only for procurement of motor vehicles as such or does the denial extend to all goods and services surrounding the effective consumption of the motor vehicle?

–    In this context, it would be important to refer to the decision of the Hon’ble Supreme Court in the case of State of Madras vs. Swastik Tobacco Factory (1966) 3 SCR 79 (SC) wherein it was held that the expression “in respect of the goods” in r. 5(1)(i) means only on the goods, and cannot take in the raw material out of which the goods were made.

–    Taking cue from the said decision, a view can be taken that the restriction for claim of credit is only restricted to receipt of motor vehicles and not other goods or services surrounding the motor vehicles. Therefore, a view can be taken that motor car insurance and repairs shall be eligible for credit under the GST Regime.
7.2.    Distinction between rent-a-cab and leasing of vehicles and eligibility to claim credit thereof

–    While the term rent-a-cab has not been defined under GST, the term cab has generally been perceived as a vehicle used for hiring purposes and is accordingly registered with the Transport Authorities as well. But the same cannot be said for leasing transactions, where the motor car given on lease is actually not registered with the Transport Authorities as a commercial vehicle and hence, the leasing of such vehicles, which in itself might be a commercial activity, cannot be classified as rent-a-cab.

–    It may also be important to note that services of transportation of passengers attract GST at a rate of 5% / 18% while the leasing of goods attract the rate applicable on supply of such GST including the compensation cess thereof. The fact that there is a distinction of rate between the services of transportation of passengers in a cab, which is covered under rent-a-cab category and leasing of vehicles clearly reinforce the view that the credit of tax paid on leasing of vehicles can be claimed as the same is not equivalent to rent-a-cab.

7.3.    Employee reimbursements – Credit Eligibility

7.3.1.An employee, as an agent of the company, who apart from working for the company and making various supplies on behalf of the company, also receives various supplies on behalf of the company in the course of his employment. Such supplies received might be in the nature of supplies meant for personal consumption of the employee or for the business purposes.

7.3.2.For example, an engineer visits a site and purchases various consumable items for use in provision of service to the client. The question that arises is whether the company shall be entitled to claim credit of such taxes, that would have been paid to the vendors?

7.3.3.It is more than evident that such consumable items are procured by the engineer for the company. The immediate consumption and use of such items is by the company and not by the engineer. Therefore the credit should be available to the company. However, it would be important that the invoice be issued in the name of the company and the credit is uploaded by the vendor in the company’s electronic credit ledger.

8.    Conclusion:

8.1.    The industry would have hoped that the ITC provisions under the GST regime would be less complicated as compared to the provisions under the erstwhile tax regime. However, the expectations have not materialised and the above complex provisions, if not complied in an organised manner, might result in future litigation as well as probable loss of credit for businesses. Therefore, businesses will have to be very careful while filing their monthly compliances relating to inward supplies register, tagging the inward supplies as either T1-T4 and C2 as well as calculating the ratios.

Section 2 (22)(e) – Amount contributed by a company, in which assessee is substantially interested, towards capital contribution in a firm in which such company and the assessee is a partner, cannot be regarded as dividend in the hands of the assessee, though the capital contribution by the company was disproportionate to its profit sharing ratio.

17.  Lala Mohan
Ramchand vs. ITO (Mumbai)

Members : G. S. Pannu (AM) and Ravish Sood (JM)

ITA No. 5778/Mum/2012

A.Y.: 2006-07.                                                                    
Date of Order: 14th June, 2017.

Counsel for assessee / revenue: Hiro Rai / Durga Dutt

FACTS 

The assessee was holding 25.5% of share capital of M/s Elite
Housing Development Pvt. Ltd. (EHDPL) and was also a partner in M/s Elite
Corporation with 37.5% share in profits. EHDPL was also a partner in M/s Elite
Corporation (“the firm”) and was having 5% share in profits of the firm.

In the course of reassessment proceedings, the Assessing
Officer (AO) observed that EHDPL was having accumulated profit of Rs.
1,07,11,103 had made an investment of Rs. 73,75,221 in the firm, which
investment according to him was substantially excessive as compared to the
share of profits of EHDPL in the firm. Since the assessee had 37.5% share in
profits of the firm, the firm was characterised by the AO as an eligible
‘concern’ u/s. 2(22)(e) of the Act. The AO had a strong conviction that EHDPL
in the garb of `capital contribution’ had made available its accumulated
profits to the firm and he therefore called upon the assessee to show cause as
to why the investment of Rs. 73,75,221 made by EHDPL in the firm, of which
investment of Rs. 3,00,000 was made during the year under consideration, may
not be assessed as `deemed dividend’ in his hands. The assessee submitted that
EHDPL in its status as a partner of the said firm, had invested an amount of
Rs. 3 lakh on 1.4.2005 by way of its capital contribution and had neither given
any loan or advance to the firm nor the said amount was paid on behalf of the
individual benefit of the assessee, and therefore the provisions of section
2(22)(e) were not applicable. The AO rejected the submissions of the assessee
and assessed the sum of Rs. 3 lakh invested by EHDPL with the said firm as
deemed dividend in the hands of the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD 

The Tribunal observed that now when it is alleged by the
revenue that the `capital contribution’ by EHDPL as a partner with M/s Elite
Corporation is a farce, then it is for the revenue to establish on the basis of
irrebuttable material that what is apparent is not real and thus dislodge and
disprove the claim of the assessee by proving to the contrary.

The Tribunal concurred with the submissions made on behalf of
the assessee viz. that there is no provision in the Indian Partnership Act,
1932, which therein contemplates that the partners’ `capital contributions’ in
the firm is required to be in proportion of their profit sharing ratios. It
held that in the absence of any such embargo on the capital contributions by
the partners having been placed on the statute, it was not persuaded to
subscribe to the adverse inferences drawn by lower authorities, who the
Tribunal found had observed that the substantial contribution by EHDPL as a
partner in the said firm when pitted against the latter’s meagre 5% share in
profit of the said firm was not found to be justifiable. It found merit in the
reasons furnished on behalf of the assessee as to why the capital contribution
by the partners in the firm was mentioned in clause 6 of the partnership deed
at Rs. 25 lakh. It held that it would be absolutely illogical and rather
impossible to expect that EHDPL could have managed to freeze its capital in the
firm at Rs. 25 lakh or any other figure, even if it would have resolved not to
introduce any fresh capital in the firm or withdraw any part of the same. The
Tribunal held that `capital contribution’ by a partner in a firm is differently
placed as against a loan or an advance to the firm. Loans and advances given by
a partner to the firm are substantially different from their `capital
contributions’. It observed that a perusal of section 48 of the Indian
Partnership Act, 1932 which contemplates the mode of settlement of the accounts
of the partners in the case of dissolution of a firm, in itself categorises the
same under different clauses. The Tribunal held that in the backdrop of
substantial turnover and income offered for tax by the firm, viz. Elite
Corporation, it would be incorrect to hold that the same was a dummy concern
which had been brought into existence with the intent to bypass the deeming
provisions contemplated u/s. 2(22)(e) of the Act. It observed that the funds
introduced by EHDPL by way of its capital contribution were utilised by the
firm in the normal course of its business and were not utilised for the
personal benefit of the assessee. It held that this fact supplements and
supports its view that the capital introduced by EHDPL as a partner in the said
firm cannot be characterised as `deemed dividend’ in the hands of the assessee.
The Tribunal set aside the order of CIT(A).

The appeal filed by the assessee was allowed.

3 Section 50C – Non-compliance of provisions of section 50C(2) cannot be held valid and justified even if no request was made by the assessee before the authorities below to refer the matter to the DVO for valuation u/s. 50C(2) of the Act.

Smt. Y. Hameeda Banu vs. ACIT (Bangalore)

Member : A. K.
Garodia

ITA No.
1681/Bang./2016

A.Y.: 2008-09.           Date of Order: 24th
August, 2017.

Counsel for
assessee / revenue: K. Mallaharao / Padma Meenakshi

FACTS 

The
assessee, in her return of income, computed capital gains by adopting actual
consideration received / receivable to be the full value of consideration. The
stamp duty value of the property transferred was greater than the consideration
accrued / arising to the assessee. The assessee, in the course of assessment
proceedings, did not request for a reference to be made to DVO. The Assessing
Officer (AO) completed the assessment and computed capital gains by adopting
stamp duty value to be the full value of consideration.

Aggrieved,
the assessee preferred an appeal to the CIT(A) and in the course of appellate
proceedings filed an affidavit requesting a reference to be made to DVO. The
CIT(A) without considering the affidavit and without making a reference to DVO
decided the appeal against the assessee.

Aggrieved,
the assessee preferred an appeal to the Tribunal where, on behalf of the
assessee, it was submitted that in view of the ratio of the decision of Delhi
Bench of the Tribunal in the case of ITO vs. Aditya Narain Verma (HUF)
(ITA No. 4166/Del/2013 dated 7.6.2017), non-compliance of provisions of section
50C(2) cannot be held to be valid and justified. It was also mentioned that the
Delhi Bench of the Tribunal had followed the judgement of the Allahabad High
Court in the case of Dr. Shashi Kant Garg vs. CIT (285 ITR 158), wherein
it is held that it is well settled that if under the provisions of the Act, an
authority is required to exercise powers or to do an act in a particular
manner, then that power has to be exercised and the act has to be performed in
that manner alone and not in any other manner. It was submitted that the issue
should go back to the file of the AO for a fresh decision after obtaining
report from DVO as required u/s. 50C(2) of the Act.

HELD

The
Tribunal following the ratio of the Delhi Bench of Tribunal in the case of ITO
vs. Aditya Narain Verma (HUF) (supra) set aside the order of CIT(A) and
restored the matter back to the file of the AO for fresh decision with the
direction that he should obtain valuation report from DVO u/s. 50C(2) and then
decide the issue afresh after affording adequate opportunity of being heard to
the assessee.

The
appeal filed by the assessee was allowed.

11 Section 92B of the Act – Providing corporate guarantee in respect of loans taken by AE does not constitute international transaction; amendment to section 92B relating to international transaction of issuance of corporate guarantee applies prospectively from FY 2012-13. Transfer of funds with intention to make investment cannot be treated as international transaction especially where shares are allotted against such advances.

[2017] 86 taxmann.com 254 (Hyderabad Trib.)

Bartronics
India Ltd. vs. DCIT

A.Y: 2012-13                                                                      

Date of Order:
27th September, 2017

Section 92B of
the Act – Providing corporate guarantee in respect of loans taken by AE does
not constitute international transaction; amendment to section 92B relating to
international transaction of issuance of corporate guarantee applies
prospectively from FY 2012-13. Transfer of funds with intention to make
investment cannot be treated as international transaction especially where
shares are allotted against such advances.


FACTS

The Taxpayer,
an Indian company provided a corporate guarantee in respect of the borrowings
of one of its overseas associated enterprises (AEs) without charging any
guarantee fee. Further, the Taxpayer had provided certain interest free
advances to its AE. Such advances were recorded in the books of the Taxpayer as
loans.

The Taxpayer
contended that the furnishing of corporate guarantee is not an international
transaction for the reason that the amendment by Finance Act 2012 which
included corporate guarantee within the definition of “international
transaction” is prospective in nature and does not apply to the year under
consideration.

Further, the
advances were provided out of business expediency as an investment and/or as a
parental support to the AE from taxpayer’s surplus/owned funds; without
incurring any costs. Hence, they should not be treated as international
transaction. In any case, since AE had allotted shares against advances
provided by the Taxpayer in the subsequent assessment year, they could not be
treated as international transaction.

During the
course of assessment proceedings, Transfer Pricing Officer (TPO), imputed
corporate guarantee fee and interest on advances in the hands of the Taxpayer.
Aggrieved by the order of TPO, Taxpayer appealed before the DRP. DRP confirmed
the action of the TPO.

Aggrieved by
the order of DRP, Taxpayer appealed before the Tribunal.

HELD

–  Although
the definition of “international transaction” was amended by FA 2012, to
include corporate guarantee within its ambit with retrospective effect, such
amendment has to be treated as effective from FY 2012-13.

–   Although
different views have been taken by different Tribunals on the prospective
applicability of the FA 2012 amendment, Taxpayer can adopt a view which is
favourable to him until a contrary view is taken by a higher court. Reliance in
this regard was placed on the decision of Dr. Reddy Laboratories [2017] 81
taxmann.com 398 (Hyd. Trib). Thus, corporate guarantee granted by the Taxpayer
prior to FY 2012-13 did not qualify as an “international transaction”.

–   Though the
advances were classified in the books of the Taxpayer as “advances”, what is
relevant is to evaluate the intention of providing the advances. Mere
classification of transaction as loans and advances in the balance sheet did
not qualify them as loan.

–   Taxpayer
had transferred the funds with the intention of investing in its AE. In fact,
shares were allotted by the AE against such advances. Thus, granting of such
advances could not be treated as international transaction. Reliance was placed
on KAR Therapeutics & Estates (P.) Ltd. [IT Appeal No. 86 (Hyd.) of 2016].
Thus, ALP adjusted in this regard was also not warranted.

33. Export – 100% export oriented unit – Exemption u/s. 10A – A. Y. 2002-03- Electronic transmission of software developed in India branch to head office outside India at markup 15% over cost – Is export eligible for exemption u/s. 10A-

Dy DIT vs. Virage Logic International; 389
ITR 142 (Del):

The assessee was a 100% export oriented unit
which developed software and electronically transmitted to its head office
located abroad at a markup of 15% over the cost. For the A. Y. 2002-03 the
assessee’s claim for deduction u/s. 10A of the Act was rejected by the
Assessing Officer holding that the transfer of software by the assessee did not
amount to export. 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)   Mere omission of a
provision akin to section 80HHC(2), Explanation 2 or the omission to make a
provision of a similar kind that encompassed Explanation 2(iv) to section 10A
of the Income-tax Act, 1961 by itself did not rule out the possibility of
treatment of transfer or transmission of software from the branch office to the
head office as an export.

ii)   According to section
80IA(8) the transfer of any goods “for the purpose of eligible business” to
“any other business carried on by the assessee” was covered. The incorporation
in its entirety without any change in the provision of section 80IA(8) in
section 10A through sub-section (7) was for the purpose of ensuring that inter
branch transfers involving exports were treated as such, as long as the other
ingredients for a sale were satisfied.

iii)   The absence of a “deemed
export” provision in section 10A similar to the one in section 80HHC did not
logically undercut the amplitude of the expression “transfer of goods” u/s.
80IA(8) which was part of section 10A. Such an interpretation would defeat section
10A(7). The transfer of computer software by the Indian branch to the head
office was entitled to claim benefit of section 10A of the Act.”

32. Co-operative society – Deduction u/s. 80P – A. Ys. 2008-09, 2009-10 and 2011-12 – Effect of amendment w.e.f. 01/04/2007 – Deduction denied to co-operative banks – Difference between co-operative bank and primary agricultural credit society – Primary agricultural credit society is entitled to deduction u/s. 80P

CIT vs. Veerakeralam Primary Agricultural
Co-operative Credit Society; 388 ITR 492 (Mad):

Assessee is a primary agricultural
co-operative credit society. For the A. Ys. 2008-09, 2009-10 and 2011-12, the
Assessing Officer disallowed the assessee’s claim for deduction u/s. 80P on the
ground that assessee is a co-operative bank. The Tribunal allowed the assesee’s
claim.

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

“i)   The benefit of section
80P is excluded for co-operative banks, whereas the primary agricultural credit
societies are entitled to the deduction.

ii)   The primary object of the
assessee-society was to provide financial accommodation to its members to meet
all the agricultural requirements and to provide credit facilities to the
members, as per the bye-laws and as laid down in section 5(cciv) of Banking
Regulation Act, 1949.

iii)   The assessee society was
admittedly not a co-operative bank but a credit co-operative society. It was
entitled to deduction u/s. 80P.”

31. Charitable purpose – Computation of income- Depreciation – Sections 11 and 32 – A.Y. 2009 -10 – Asset whose cost allowed as application of income u/s. 11- Depreciation allowable – Section 11(6) denying depreciation on such assets inserted w.e.f. 01/04/2015 – Amendment not retrospective- Depreciation allowable for A. Y. 2009-10

CIT vs.
Karnataka Reddy Janasangha; 389 ITR 229 (Karn):

Dealing with the amendment inserting section
11(6) of the Income-tax Act, 1961 w.e.f. 01/04/2015, the Karnataka High Court
held as under:

“For assessment years prior to the
introduction of section 11(6) of the Income-tax Act, 1961. i.e. prior to April
1, 2015, depreciation is allowable on assets, where cost of such assets has
already been allowed as application of income in the year of
acquisition/purchase of asset.”

30. Charitable purpose – Computation of Income- Depreciation – Sections 11 and 32(1) – A. Y. 2004-05 – Assets whose cost allowed as application of income to charitable purposes in earlier years – Depreciation is allowable on such assets

CIT vs. Krishi Upaj Mandi Samiti; 388 ITR
605 (Raj):

The assessee was a charitable trust eligible
for exemption u/s. 11. The assessee had availed exemption u/s. 11 in respect of
an asset being building. In the A. Y. 2004-05, the Assessing Officer disallowed
the assessee’s claim for depreciation on the said building on the ground that
exemption has been availed u/s. 11 on investment in the said building. The
Tribunal allowed the assessee’s claim.  

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

“i)   In computing the income
of a charitable institution or trust depreciation of assets owned by such
institution is a necessary deduction in commercial principles, hence the amount
of depreciation has to be deducted to arrive at the income.

ii)   The Appellate Tribunal
rightly allowed depreciation claimed by the assessee on capital assets for
which capital expenditure was already allowed in the year under consideration.

iii)   The income of a
charitable trust derived from the depreciable heads was also liable to be
computed on commercial basis. The assessee was a charitable institution and its
income for tax purposes was required to be determined by considering the
provisions of section 11 of the Act, after extending normal depreciation and
deductions from its gross income.

iv)  In computing the income of
a charitable institution depreciation of assets owned by it was a necessary
deduction on commercial principles, hence, the amount of depreciation had to be
deducted to arrive at the income.”

29. Capital gain – Section 47 – Where no gain or profit arises at time of conversion of partnership firm into a company, in such a situation, notwithstanding non-compliance with clause (d) of proviso to section 47(xiii) by premature transfer of shares, transferee company is not liable to pay capital gains tax

CIT vs. Umicore Finance Luxemborg; [2016]
76 taxmann.com 32 (Bom):

The assessee was a non-resident company
incorporated under the laws of Luxembourg. It purchased entire shareholding of
an Indian company ‘A’. The company ‘A’ was incorporated as a private limited
company succeeding erstwhile firm ‘AZ’. On the date of the conversion, the
partners of the erstwhile firm continued as shareholders having shareholding
identical with profit sharing ratio of the partners. The assessee filed an
application before the AAR seeking a ruling on question as to whether
notwithstanding the non-compliance with clause (d) of proviso to
section 47(xiii), it was liable to pay capital gain tax. The AAR noted
that the assessee had clarified that whilst converting the partnership firm
into a company, there was no revaluation of the assets and the assets and
liabilities of the firm as also the partners, capital and current accounts were
taken at their book value in the accounts of the company. It was in such
circumstances the AAR ruled that notwithstanding premature transfer of shares
as specified in clause (d) of proviso to section 47(xiii),
the assessee-company was not liable to pay capital gain tax.

On a writ petition filed by the Department
challenging the said order of the AAR, the Bombay High Court held
as under:

“i)   The AAR noted that
section 47(xiii) specifically excludes different categories of transfers
from the purview of capital gains taxation but it is subject to fulfilling the
conditions laid down in clauses (a) to (d). The fact that
conditions (a) to (c) are satisfied, is not in dispute but,
however, the question is whether clause (d) requires to be satisfied.
The AAR has rightly pointed out that the first part of clause (d) has
been satisfied but, however, it is noted by the AAR the requirements of second
part of clause (d) i.e. the shareholding of 50 % or more should continue
to be as such for the period of five years from the date of succession, has not
been fulfilled in the instant case by reason of the transfer of shares by the
Indian Company to the assessee before the expiry of five years.

ii)   The AAR has also noted
that the consequences of violation of those conditions have been specifically
laid down in sub-section (3) of section 47A which was also introduced by the
same Finance Act. It is further pointed out that if no profit or gains arose
earlier when the conversion of the firm into a Company took place or if there was no transfer at all of the capital assets of the firm at
the point of time, the deeming provision u/s. 47A(3) cannot be inducted to levy
the capital gain tax.

iii)   The AAR further found
that the shares allotted to the partners of the existing firm consequent upon
the registration of the firm as a Company, did not give rise to any profit or
gains. It is further noted that by such reconstitution of the Company under
part IX of the Companies Act, the assets automatically gets vested in the newly
registered Company as per the statutory mandate contained u/s. 575 of the
Companies Act. It is further found that it cannot be said that the partners
have made any gains or received any profits assuming that there was a transfer
of capital assets. It was also noted that worth of the shares of the company
was not different from the interest of partners in the existing firm.

iv)  On perusal of the said
observations, it is opined that AAR in a very reasoned order, has taken a view
that no capital gains accrued or attracted at the time of conversion of the
partnership firm into a private limited company. In part IX of the Companies
Act, therefore, notwithstanding the non-compliance with clause (d) of
the proviso to section 47(xiii) by premature transfer of shares, the
said Company is not liable to pay capital gains tax. These findings have been
arrived at essentially looking into the fact that there was no revaluation of
assets at the time of conversion of the firm ‘AZ’.

v)   The said finding of fact
has not been disputed by the revenue and, as such, the finding of the AAR that
there was no capital gains in the transaction in question cannot be faulted. It
is also to be noted that even immediately after such conversion in question
from the partnership firm into a private limited company, the assessment with
regard to the income of the new company as well as of the respective partners
were carried out and there was no objection or grievances raised by the
Assessing Officer that any capital gains tax had to be paid on account of the
incorporation of the company in terms of the said provisions.

vi)  The transfer of shares in
favour of the assessee by the erstwhile partners who were shareholders of ‘A’
Ltd. and such partners/shareholders are liable to pay capital gains even if
acceptable, would not affect the decision passed by the AAR whilst coming to
the conclusion that there were no capital gains at the time of incorporation of
the new company by the said partnership firm.

vii)  The contention of the
revenue that in view of the violation of clause (d) of section 47(xiii),
the exemption from capital gains enjoyed by the assessing firm upon conversion
into a private limited company, ceases to be in force cannot be accepted. There
are no capital gains which have accrued on account of such incorporation. In
such circumstances, the said contention of the revenue that in view of the
transfer of the capital assets or intangible assets, there are capital gain tax
payable by the transferee company, cannot be accepted. As pointed out
hereinabove, there was no capital gains payable at the time of the
incorporation of the company from the erstwhile partnership firm.

viii) The next contention of
the revenue is that the application u/s. 245N of the assessee itself was not
maintainable. The main submission on that aspect is that the assessee not being
parties to the transaction, the question of seeking an advance ruling at the
instance of the assessee is not covered under clauses (i), (ii)
and (iii) of section 245N(a). Looking into the question as to whether
capital gains are liable to be paid or not in terms by the transferee company
being a non-resident company, the respondent herein, would be a matter which
would come within the scope of advance ruling.

ix   Considering the aforesaid
observations and taking note of the findings of the AAR, it is held that there
is no case made out for interference by the Court under article 226 of the
Constitution of India. As such, the petition stands rejected.”

Welcome 2017!

Welcome 2017! Wishing you a very happy new year from the
BCAJ! As Indians, we have the privilege to wish Happy New Year many times
throughout a 365 days period! Each new year is an opportunity to wish well to
people around us, to send blessings to so many we don’t even know, take time to
reflect on the days that went by, refresh our hopes and aspirations and renew
our resolve to realize our dreams. While we prefer to look at the past, as
‘what we know’ is embedded only in the past, we cannot benefit from that
completely until we look into the future. In the words of Micheal Chibenko “One
problem with gazing too frequently into the past is that we may turn around to
find the future has run out on us.”  So
best we combine reflecting on the past and look into how we want our future to
be!

Surge since Surgical Strike

The hangover of demonetization lingers on beyond 2016! This
is perhaps one of the longest lasting HOT TOPIC that has caught fascination of
one and all and doesn’t seem like it will die out anytime soon. The so called
surgical strike has caused a SURGE in so many things. In lighter vain, since 9th
November 2016, there has been a spike in lay people talking confidently like
economists on every aspect of demonetization. On a more serious note, I have never
seen such all encompassing SURGE in every facet of citizens’ lives, from
social, economic, political to psychological, covering everyone and everything.
Be it surge in queues, in cash flow of banks, in worries of the black money
hoarders, in the risks of downturn for several businesses, to a surge in blood
pressure of tax evaders and hoarders of illicit cash. There was a surge in
issuance and flip flops of government clarifications, in forwards and debates
on media and chat applications, in digital transactions, in uncertainty for
politicians who anticipated to use those notes to buy votes, in coffers of
local bodies and utility companies and so many areas that no one can list out.
Shall we call this move a bold ‘disruption’ in the sphere of ‘illicit’ economy? 

While the ‘demons’ got demonetized of their ill-gotten money,
the ‘commons’ had to go through pains of this sweeping change. The problem of
tainted money was so widespread that people began to believe it to be
legitimate. Sometimes pervasiveness becomes a cause for people to
wrongly believe it to be legitimate? This was a wakeup call, an alarm
and a siren to push people to make a change at a fundamental level. Let
2017 bring before us a strong and decisive follow through to ‘disrupt’ the
business of the corruption in India.  

Gazing into 2017

As I write we have the news of BHIM1  being unveiled. If I had one wish for the
year I would love to see ‘disruption’ through innovation in the sphere of
governance and law making. There are a thousand problems, but there can be
million solutions to deal with them. All we need is to find SIMPLE, FUNDAMENTAL
and DIRECT ways to deal with them. With power of technology and innovation, we
are no lesser gods, to turn around a massive problem on to our side.

The last three bastions that are embedded in the old mind set
and remain considerably untouched by innovation are organised religions,
politics and legal frameworks. As a professional in practice, I would expect
innovation at least in the Union Budget 2017 as this will be the last one to
make significant changes before the one that will precede the election year. In
the current context, one dream, and perhaps a bit far out, is to see changes in
Sections 13A and 13B.

_______________________________________________________

1   An App that will allow Digital transfers from
mobile handset other than smart phones

When churning takes place, it throws up both desirable and
undesirable. While we see billion commons queue up to get few thousands in new
currency, we also saw many others with new currency worth crores (equivalent to
lacs of people queuing up for months). It only showed how an ‘inside job’ was
still at it.  If the government is
serious, bold and willing to go to the end of the road of weeding out corruption,
a good start can be right in the backyard of its own class. A measure to ban
and regulate cash donations to political parties beyond a certain percentage of
total receipts, investigate cash ‘donations’, and prescribe stringent record
keeping, usage and audit is the need of the hour. A good beginning could be to
appoint a high powered committee with past or present CEC, SC judge/s, CAG
amongst others to suggest ‘surgical’ reform in this area with time bound
implementation.  Here is a big ‘break
point’2 , for the good in the government to ‘walk the talk’ on
corruption by starting from where it needs to start – from those who seek and
wield political power.

Let’s leave that topic aside for a while and look at many
other changes our world is seeing! A big change at a high level is that a
fossil fuel company has lost its top spot which is now taken over by a
technology giant. The top three most valuable companies are tech giants, and
that does tell us where things are headed. The solar power advocates are reaching
new heights and will lead to a new wave at how we look at energy. This could
also result in disruption of oil based middle-east geopolitics. . Electorates
in the west – particularly the US and UK have shown unpredictable and volatile
mood, and Germany and France will tell us what is next in store for EU. We can
look forward to fireworks from the Trump term starting this month. Media power,
fake news and propaganda are areas to watch out for. We will be challenged to
distinguish between misinformation and information; and differentiate and
depend on facts over pouring propaganda. We can look forward to more and more
of Artificial Intelligence (AI) surrounding and hounding us. A White House
report3  predicts massive job
losses in the US, between 9 – 47 percentages, which seems unprecedented and
unstoppable and will impact India too. Imagine all back office and routine
tasks taken over by AI! Winner-take-most will continue to dominate and
therefore competition might shrink more in many important areas, and result in
more wealth inequality.

___________________________________________________

2              In tennis lingo

3              Artificial
Intelligence, Automation, and the Economy, 
December 2016

In the end – Don’t postpone Joy!

Clouding human mind has never been such an important
business. Directing large numbers of people has never been so critical for
control – of their beliefs, habits, preferences and choices. With nearly 3
billion connected to internet the ‘market opportunity’ is humongous for every
selfish goal to find takers. Today we are surrounded, rather ambushed through
‘media’ that is incessantly seeking us.

In this maze, I wish to leave you with a short anecdote
attributed to John Lennon, “When I was five years old my mother always told
me that happiness was the key to life. When I went to school, they asked me
what I wanted to be when I grew up. I wrote down ‘happy’. They told me I didn’t
understand the assignment, and I told them they didn’t understand life.” I
guess that is why we wish a Happy New Year! For all we need is TO BE HAPPY! May
you find that all through 2017!

WEALTH WITHOUT WORK

I was reading Stephen Covey’s Book “Principle – Centered
Leadership.” The Chapter “Seven Deadly Sins” completely took me by surprise.
Stephen was writing about Seven Deadly Sins as listed by Mahatma Gandhi! I knew
nothing about this! My curiosity took me to Gandhi Book Centre from where I was
directed to ‘Mani Bhavan’ Library on Laburnum Road, Gamdevi. They helped me to
discover the original writing of Gandhiji which had appeared in “Young India”
in the year 1925 as under:

Seven Social Sins

The same fair friend wants readers of Young India to know, if
they do not already, the following social sins:

1. Wealth Without Work

2. Pleasure Without Conscience

3. Knowledge Without Character

4. Business (Commerce) Without Morality (Ethics)

5. Science Without Humanity

6. Religion Without Sacrifice

7. Politics Without Principles

Naturally, the friend does not want the readers to know these
things merely through intellect but to know them through the heart so as to
avoid them.

Mohandas Karamchand
Gandhi

(October 22, 1925, Page 360 Young India 1925)

As I look around, I find that of the seven, “Wealth Without
Work’ is the most deadly, most rampant and one which has a terrible impact on
the society today. For that matter, it is not only wealth without work, but
also income without work, position and power without work which has a
devastating effect on the human being.

These are the days of ‘Getting Rich Quickly’. People who have
done nothing, but held on to inherited wealth have made fortunes in
investments. People having immovable properties and particularly land, have
seen their wealth sky rocketing to unbelievable dizzy heights. Kids in their
teens spend at a pub or a club more money than what may be the take home pay of
a peon or a clerk. Experience teaches us that hard earned money gives a
different flavour to our lives, and makes us happier.  As someone has very aptly put it, “The
Greatest Waste in the World is the difference between what we are and what we
are capable of becoming.”

It is the duty of all us of to ensure that our future
generations are not crippled by excessive provision made for them and their
talents are not stifled. Let us all then see that we provide sufficiently for
our children’s needs, but at the same time ensure that they learn the value of
work.

“It is not enough to have lived. Be determined to live for
something.

It should be creating joy for
others, Working for the betterment of the society, Sharing what we have,
Bringing hope to the lost.  And giving
love to the loners.”

“William
Arthur Ward”

There are several wealthy persons like Azim Premji and Bill
& Melinda Gates who have either during their life time or by making their
wills have ensured that a substantial portion of the massive wealth is utilised
for philanthropic purposes, for the welfare of the poor and needy, and for
making our world a better place to live in. We can emulate their examples.

We must remember that there are two things that
which are certain. We are all going to die some day. Secondly whatever wealth
we have gathered in our lifetime, we will have to leave behind. Let us then
teach our children the concept of trusteeship. They should understand that
whatever they inherit in excess of their genuine needs, that they are getting
and holding as trustees, are for people who are poor and needy who are less
fortunate than them. If they adopt this principle of trusteeship, they will be
saved from the sin of “wealth without work.”

12. Penalty – Year of taxability of income – u/s.271 (1) (c)

The CIT, vs. M/s. Otis Elevator Co.(I) Ltd. [ Income tax
Appeal no 758 of 2014, dt : 15/11/2016 (Bombay High Court)].

[DCIT, vs. M/s. M/s. Otis Elevator Co.(I)
Ltd,. [ITA No. 4509/MUM/2012,; Bench : C ; dated 21/08/2013 ; 2007-2008 . Mum.
ITAT ]

The assessee is engaged in manufacturing and
sale of elevators / lifts. In the subject AY, the assessee had declared an
income of Rs.89.04 crore. The AO added a sum of Rs. 7.35 crore on account of
advances received on dormant contracts prior to 2004. Finally, the AO
determined the taxable income of the assessee at Rs.156.05 crore in his order in quantum proceedings and also initiated
penalty proceedings u/s. 271(1)(c) of the Act.

In the penalty proceedings, the assessee
explained that the amounts of Rs.7.35 crore shown as advances in respect of
dormant contracts were in fact offered to tax in the subsequent AYs 2008-09 and
2009-10. Consequently, the assessee contended that no penalty u/s. 271(1)(c) of
the Act is imposable. However, the AO did not accept the above contention and
imposed a penalty of Rs. 2.47 crore u/s. 271(1)(c) of the Act upon the assessee
for concealing income by filing inaccurate particulars.

Being aggrieved, the assessee preferred an
appeal to CIT(A). By order the CIT(A) held that the amounts received as
advances in respect of dormant contracts and shown as current liability were in
fact offered to tax during the subsequent AYs i.e. Assessment Years 2008-09 and
2009-10 even before the proceedings for assessment of the subject AY i.e. AY
2007-08 were initiated in November, 2010. The CIT(A) in his order records the
fact that the return of income for AY’s 2008-09 and 2009-10 were filed on 29th
September, 2008 and 30th September, 2009 that is much before
November, 2010. In these circumstances, the CIT(A) allowed the appeal of the
assessee and deleted the penalty of Rs.2.47 crore u/s. 271(1)(c) of the Act
imposed by the AO.

Being aggrieved, the Revenue carried the
issue of penalty in appeal to the Tribunal. On consideration of the facts, the
Tribunal held that the advances relating to the dormant contracts were offered
to tax in the subsequent assessment years even before any inquiry was initiated
by the AO to complete the assessment for the subject AY. Consequently, the
Tribunal held that it was not a case of concealment of income but rather the
dispute was only with regard to in which year the income was taxable. The
Tribunal dismissed the Revenue’s appeal.

In Revenue appeal, the High court note that
the basis for imposition of penalty is non payment of tax on the amount
received on dormant accounts in the subject assessment year. Both the CIT(A)
and the Tribunal have rendered a finding of fact that these amounts / advances
relating to dormant contracts have already been offered to tax for the
subsequent AY’s i.e. Assessment Years 2008-09 and 2009-10. In the present
facts, undisputedly the income has been declared in the subsequent assessment
years before the assessment proceedings for the subject AY 2007-08 was
initiated. Thus, the only issue which arises is about the year of taxability of
income and it is certainly not a question of concealment of income and / or
filing of inaccurate particulars of income by the assessee.

The above concurrent finding of facts as well as
the acceptance of the assessee’s explanation by CIT(A) and the Tribunal has not
been shown to be perverse. Therefore, the question as proposed does not give
rise to any substantial question of law. Thus, not entertained. Accordingly,
the appeal is dismissed.

11. TDS – ‘Work’ – include all work carried right from planning the schedule to post production processes, which would make the programme fit for telecasting – Thus, the payments made for dubbing as well as print processing were held to be fall within the ambit of section 194C.

The CIT, TDS vs. M/s. Sahara One Media
and Entertainment Ltd. [ Income tax Appeal no 894 of 2014, with 1031 of 2014 dt
: 23/10/2013 (Bombay High Court)].

[ACIT, TDS vs. M/s. Sahara One Media and
Entertainment Ltd,. [ITA No. 4548/MUM/2012, 4549/MUM/2012, 4550/MUM/2012 ;
Bench : E ; dated 23/10/2013 ; 2008-2009, 2009-2010 & 2010-11. Mum. ITAT ]

The assessee is engaged in the business of
production of cinematographic motion features and small screen programmes. In
the process of carrying on its business, the assessee made payments to others
on account of production, print processing fees and dubbing. At the time of
making these payments, the assessee deducted tax at source (TDS) u/s. 194C at
2% as the payment was made for carrying out work pursuant to a contract.

The AO was of the view that the print
processing fees and dubbing expenses paid were in the nature of fees of
technical services and tax had to be deducted u/s. 194J at 10%. Resultantly,
the DCIT (TDS) held that there was short deduction of tax in respect of the
dubbing expenses and fees paid for print processing. Consequently, the assessee
was deemed to be an assessee in default u/s. 201 (1) to the extent of short
deduction of tax.

In appeal, the ld. CIT(A), observed that it
was evident from the sample Agreement that the assessee used to hire the
producers (who first approach the assessee) for producing TV programmes for it,
on a commissioned work basis and pay consideration to such assigned producer
for producing the programmes. He further observed that under the provisions of
section 194C of the Act, it has been provided that expression ‘work’ shall
include, inter alia, broadcasting and telecasting including production
of programmes for such broadcasting and telecasting. Therefore, where the
payment was made for production of TV programmes, it was covered by provisions
of section 194C. He further observed that the principal purpose of entering
into the Agreements was to get the programmes produced through the assigned
producers on a commissioned work basis. The assessee was the exclusive owner of
the programmes to be produced by the producer. He therefore held that the
payment for carrying out the work of producing programmes on behalf of assessee
was in the nature of ‘work’ as defined in section 194C and the same could not
be treated as ‘fees for technical services’ or ‘royalty’ u/s. 194J of the Act.
While holding so he relied upon the judgement of the Hon’ble Delhi High Court
in the case of ‘CIT vs. Prasar Bharti Broadcasting Corpn. Of India’ [292
ITR 580]. In the said case, the assessee was a government
corporation engaged in controlling various TV channels of Doordarshan. It was
held that the payments made by it to various producers of programmes were
covered under Explanation III(b) to section 194C, as a contract for production
of programmes for broadcasting or telecasting and not as a fee for professional
services or royalty; hence the tax deduction at source was required to be made
@2% u/s 194C and section 194J was not applicable. He therefore accepted the
contention of the assessee that tax was deductable @2% u/s. 194 C of the act and
not @ 10% u/s.194 J.

Being aggrieved, the Revenue carried the
issue in appeal to the Tribunal. The Tribunal upheld the view taken by the
CIT(A) and observed that the definition of ‘work’ as provided u/s. 194C would
include all work carried right from planning the schedule to post production
processes, which would make the programme fit for telecasting. Thus, the
payments made for dubbing as well as print processing were held to be fall within the ambit of section 194C.

Being aggrieved, the Revenue filed a appeal
before High Court and contended that the payments made for dubbing and print
processing would be the payments in the nature of technical fees. Therefore,
tax would be deductible u/s. 194J and not as contract for work u/s.194C.

The Hon. High
Court noted that definition of ‘work’ as provided in section 194C, which reads
as under :

“ Explanation – For the purposes of this
section – (i) …. (ii) …. (iii) …. “(iv) “work” shall include – (a) ….. (b)
Broadcasting and telecasting including production of programmes for such broadcasting
or telecasting; (c) ….. (d) …. (e) ….” (f) .

The definition of ‘work’ as provided in the
Explanation to section 194C of the Act is itself inclusive. It include all work
necessary for preparation / production of any programme so as to put it in a
state fit for broadcasting and / or telecasting. In view of the self evident
position in law, by virtue of the definition of “work” as provided in section
194C of the Act.

In view of the self-evident position in law,
no substantial question of law arises for consideration . Thus, the appeal was
dismissed. 

10. Business expenditure – Service tax – The Assessee was obliged under the law to pay service tax to the Government and paid when such payment is not forthcoming from the client/customer – Allowable : Section 37 of the Act

CIT vs. Prime Broking Company (I) Ltd. [
Income tax Appeal no 847 of 2014 dt : 14/10/2016 (Bombay High Court)].

[ACIT vs. Prime Broking Company (I) Ltd.
[ITA No. 5632/MUM/2012 ; Bench : C ; dated 31/10/2013 ; A Y: 2009- 2010. MUM.
ITAT ]

The Assessee is engaged in the business of
broking in Government and other securities. The Assessee raises an invoice on
its clients for the transaction done on its behalf in respect of its broking
services. The total amount of bill in the invoice is the aggregate of brokerage
and applicable service taxes thereon. During the subject assessment year, some
of the clients of the Assessee did not pay the service tax as required in terms
of the invoice for onward payment to the Government of India. In these
circumstances, the Assessee paid the service tax payable out of its own
resources and claimed the same as deduction u/s. 37(1).

The AO disallowed the claim for deduction
holding that the obligation to pay the service tax is on the customer /client
and the same cannot be shifted to the Assessee.

The CIT (A) allowed the Assessee’s appeal.
This is on the ground that in terms of section 68 of the Finance Act, 1994, the
obligation to pay the service tax into the treasury is of the service provider,
i.e. the Assessee. The failure of its client/customer to pay service tax to the
Assessee would not absolve the obligation of the Assessee to pay the same to
the Government of India. The CIT (A) held that the deduction of the service tax
paid to the Assessee was a business expenditure incurred on account of
commercial expediency and deductible u/s. 37(1).

Being aggrieved, the Revenue carried the
issue in appeal to the Tribunal. The Tribunal upheld the view of the CIT
(Appeals).

On further appeal, the High Court held that
the Assessee was obliged under the law to pay service tax to the Government
even when such payment is not forthcoming from the client/customer. Therefore,
it would be a deductible business expenditure u/s. 37(1). It is undisputed that
the obligation under the Finance Act, 1994 to pay the service tax is on the
Assessee being the service provider. This obligation has to be fulfilled by the
service provider whether or not it receives the service tax from its
clients/customers. Non-payment of such service tax into the treasury would
normally result in demand and penalty proceedings under the Finance Act, 1994.
Therefore, the payment is on account of expediency, exclusively and wholly
incurred for the purposes of business, therefore, deductible u/s. 37(1).

The High Court dismissed the above appeal on
the ground that the same did not give rise to any substantial question of law.
The appeal is dismissed.

36. Housing project – Deduction u/s. 80IB(10) – A. Y. 2006-07 – Ceiling on built up area – terrace in pent house is not part of built up area – Finding that assessee was developer and built up areas were within specified limits – Assessee entitled to deduction u/s. 80IB(10)

CIT vs. Amaltas Associates; 389 ITR 175
(Guj):

The assessee had developed a housing
project. In the A. Y. 2006-07, the assessee claimed deduction u/s. 80IB(10) in
respect of the profits from the said housing project. The Assessing Officer
disallowed the claim on two grounds. Firstly, he held that the assessee is not
a developer but a contractor. Secondly, he held that the condition for built up
area is not satisfactory. He included the terrace area into the built up area.
The Tribunal held that the assessee was a developer and that the terrace area
is not to be included into the built up area. The Tribunal accordingly held
that the condition of built up area is satisfactory. Accordingly, the Tribunal
allowed the claim for deduction u/s. 80IB(10) of the Act.

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

“i)   The Tribunal had found
that the assessee was a developer. The assessee had undertaken full
responsibility of constructing the residential units and had also been
responsible for the resultant profit or loss arising out of such venture. The
assessee, thus, had undertaken full risk.

ii)   The Tribunal had rightly held
that the open space attached to a pent house cannot be included in the term
“balcony”. The Tribunal was right in law and on facts in allowing deduction
claimed by the assessee u/s. 80IB(10) of the Act.”

Staying In Parents’ House – A Matter of Right?

Introduction

In the usual American/Western way
of life, a son stays with his parents till the age of 16 year and thereafter,
he goes to college in another State after which he lives in his own house.
Living with one’s parents in their home is very rare and unusual. However, in
India the matter is entirely opposite. An Indian son continues to live with his
parents in their home even after becoming a major and in several cases even
after starting a family of his own. Strange as it appears to several
Westerners, this is the usual way of life in India.  However, what happens when the parents want
to evict their adult son from their home? Can they do so or does the son have a
vested right to reside in their house?

The Delhi High Court had an
occasion to consider such an interesting issue in the case of Sachin vs.
Jhabbu Lal, RSA 136/2016.

Facts of the Case

A senior citizen couple were
residing on the ground floor of their two-storied home in Delhi. They had
allowed their married elder son and his wife to live on the 2nd floor
and their married younger son and his wife on the 1st floor.  They did so on account of their natural love
and affection for their sons.

The parents claimed that the
entire house was self-acquired by them out of their own funds. The property
documents, i.e., the General Power of Attorney, the Agreement to Sell, the
Receipt and their Will all were in favour of the father. The sons did not have
any documentary evidence to prove that they were the rightful owners or that
the sons contributed to the purchase of the home.

The parents and their sons could
not get along due to constant quarrels. Matters came to such a headway that the
parents filed police complaints against their sons’ families. They also issued
a public notice disowning their sons and evicting them from their self acquired
property. The parents approached Court for a decree directing them to vacate
the two floors in their possession and also to restrain them from creating any
third party interest in the property.

The sons denied the parents’ claim
that the property was self acquired and also denied their claims of being the
exclusive owners. Their contention was that they have also contributed to the
purchase of the property and construction costs and hence, they should be
regarded as co-owners. Accordingly, the suit for eviction failed.

The Delhi High Court’s Judgment

The Court observed that the sons
were not able to substantiate any evidence to prove that the parents were not
exclusive owners of their property. Further, they have not denied that the
property stands in their father’s name and have not been able to claim any
ownership rights separate from their parents. They could not prove that they
have contributed to the purchase of the property.

The Court held that where the
house is a self acquired house of the parents, a son whether married or
unmarried, has no legal right to live in that house and he can live in that
house only at the mercy of his parents upto such time as his parents allow.
Merely because the parents have allowed him to live in the house so long as his
relations with the parents were cordial, does not mean that the parents have to
bear his burden throughout their life. Since there was no evidence to prove the
sons’ right in the property and on the contrary, there was evidence to prove
that the property was the sole property of the parents, it was clear that the
sons could be evicted by their parents.

This is an important and correct
verdict given by the Delhi High Court. There have been many instances of
children forcing their parents to allow them to reside in homes belonging to
their parents. This decision would come as a shot in the arm for such parents.
However, it must be noted that in case the property is ancestral or cost of
which is contributed by the sons then this decision would have no application.
Of course, what is ancestral is a question of fact and would depend upon the
circumstances of each case. Generally, ancestral property refers to property
belonging to at least 3 generations, i.e., one’s parents and grandparents.
However, it may be noted that in case the parents gift the house to the son
during their lifetime then he becomes the rightful owner and claim right of
ownership over the same.  

Dwelling House

Another ancillary factor to be
borne in mind is the amendment by the Hindu Succession (Amendment) Act, 2005 to
the Hindu Succession Act, 1956 in respect to dwelling houses. The erstwhile
section 23 of the Hindu Succession Act, 1956 
provided that when a Hindu dies without a will, i.e., intestate, and he
has left behind Class I male and female heirs and his property includes a
dwelling house, then the female heirs could not claim a partition of such
dwelling house till such time as the male heirs chose to divide their
respective shares then. However, she was entitled to a right of residence
therein. The erstwhile section carved out an exception that if such female heir
was a daughter, then she was entitled to a right to residence in the
dwelling-house only if she was unmarried or had been deserted / separated from
her husband, or was a widow.  Hence, the
females were dependent on the males  to
claim their right of partition. This provision was intended to ensure that sons
living in their parents’ home were not rendered homeless by a claim for
partition by their sisters. The Supreme Court in Narasimha Murti vs.
Susheelbai, AIR 1996 SC 1826 has defined the expression `dwelling
house’by stating that it is referable to the dwelling house in which the
intestate Hindu was living at the time of his/her death; he/she intended that
his/her children would continue to normally occupy and enjoy it; The intestate
Hindu regarded it as his permanent abode. It further held that section 23 (as
it stood before its deletion in 2005), limited 
the right of the Class-I female heirs of a Hindu who died intestate
while both male and female heirs were entitled to a share in the property left
by the Hindu owner including the dwelling house. It was an exception to the
general partition. So long as the male heir(s) chose not to partition the
dwelling house, the female class-I heir had been denied the right to claim its
partition subject to a further exception, namely, the right to residence
therein by the female class-I heir under specified circumstances. In other
words, the dwelling house remained indivisible. 
But the moment the male heir chose to let out the dwelling house to a
stranger/third party, as a tenant or a licensee, the dwelling house became
partible. Here, the conduct of the male heir was the cause and the entitlement
of the female Class-I heir was the effect and the latter’s claim for partition
got ripened into right as they were to sue for partition of the dwelling house,
whether or not the proviso came into play.

This section has been deleted
altogether with effect from 9th September 2005. Now, a female heir
can ask for a partition of the house property where the coparceners are
residing. Thus, this is another scenario where the sons could be rendered
homeless.

Conclusion

While it was apparent that a son can claim no
vested right in his parents’ self acquired property, this clear cut verdict
helps to clarify matters. Irrespective of his marital status, an adult son
cannot claim that he has a legal right to stay in his parents’ home.

35. Salary – Voluntary retirement – Exemption u/s. 10(10C) – Where assessee who had opted for voluntary retirement under Early Retirement Option Scheme on coming to know and on being advised that pursuant to a decision of Supreme Court would be entitled to exemption u/s. 10(10C) filed a revised return claiming deduction u/s. 10(10C), he would be entitled to exemption even though revised return had been filed beyond period stipulated u/s. 139(5) as default in complying with requirement being due to circumstances beyond control of assessee, Board would be entitled to relax requirement contained in Chapter IV or Chapter VI

S. Sevugan Chettiar vs. Princ. CCIT;
[2016] 76 taxmann.com 156 (Mad):

The petitioner is a retired employee of the
ICICI Bank and was aged 68 years. He was constrained to approach this Court in
terms of the proceedings dated 04/08/2016 issued by the third respondent. The
petitioner, upon retirement, filed his return of income for the relevant year
and the assessment was finalized. Subsequently, the petitioner came to know
that the Hon’ble Supreme Court, in the case of S. Palaniappan vs. I.T.O.
[Civil Appeal No. 4411 of 2010 dated 28/09/2015] held that a person, who has
opted for voluntary retirement under the Early Retirement Option Scheme shall
be entitled to exemption u/s. 10(10C). Following the said decision, the CBDT
issued a circular dated 13/04/2016 stating that the judgment of the Hon’ble
Supreme Court be brought to the notice of all officials in the respective
jurisdiction so that relief may be granted to such retirees of the ICICI Bank
under Early Retirement Option Scheme, 2003. The petitioner, on coming to know
of the same, filed a revised return by referring to the said decision and
stating that only after the said decision came to his notice, he had been
advised to file the revised return. However, this has been rejected vide
the impugned proceedings dated 04/08/2016 by the third respondent by referring
to section 139(5) of the Act. In other words, the revised return was refused to
be accepted as it is beyond the time stipulated u/s. 139(5). Assailing the
correctness of the order of the third respondent, the petitioner writ petition
before the Madras High Court. 

The Madras High Court allowed the writ
petition and held as under:

“i)   After hearing the learned
counsel for the parties and perusing the materials placed on record, this Court
is of the view that the technicality should not stand in the way while giving
effect to the order passed by the Hon’ble Supreme Court. The Board also issued
a circular on 13/04/2016 with a view to grant relief to the retirees of the
ICICI Bank under the Early Retirement Option Scheme. Several persons, who had
filed writ petitions before the Madurai Bench of this Court, have been granted
the relief. In fact, in those orders, the Court took into consideration the
decision of the Hon’ble Supreme Court and granted the relief.

ii)   The circular issued by
CBDT is in exercise of the powers conferred u/s. 119 of the Act. The said
provision deals with instructions to Subordinate Authorities. Sub-section (1)
of section 119 of the Act states that the Board may, from time to time, issue
such orders, instructions and directions to other Income Tax Authorities, as it
may deem fit, for the proper administration of the provisions of the Act and
such Authorities and all other persons employed in the execution of this Act
shall observe and follow such orders, instructions and directions of the Board.
The Proviso carves out certain exceptions, under which circumstances, the Board
will not issue instructions.

iii)   Admittedly, the case,
which was considered by the Hon’ble Supreme Court related to an individual
employee namely S. Palaniappan, who was also a similarly placed person as that
of the petitioner. Thus, the Board, in its wisdom, while implementing the judgement
in the case of S. Palaniappan, took a decision that such a benefit
should be extended to the similarly placed persons treating them as class of
cases. Therefore, the Board observed that the order should be communicated to
all the Commissioners, so that relief can be granted to such retirees of the
ICICI Bank. Thus, the petitioner cannot be non-suited solely on the ground that
he had filed a revised return well beyond the period stipulated u/s. 139(5) of
the Act.

iv)  It is relevant to point
out that Clause (c) to sub- section (2) of section 119 of the Act states that
the Board may, if it considers it desirable or expedient so to do for avoiding
genuine hardship in any case or class of cases, by general or special order,
relax any requirement contained in any of the provisions contained in Chapter
IV or Chapter VI-A of the Act, which deal with computation of total income and
deductions to be made in computing the total income and such power is
exercisable where the petitioner failed to comply with any requirement
specified in such provision for claiming deduction thereunder, subject to the
conditions that (i) the default is due to circumstances beyond the control of
the assessee and (ii) the assessee has complied with the requirement before the
assessment in relation to previous year, in which, such deduction is claimed.

v)   Thus, if the default in
complying with the requirement was due to circumstances beyond the control of
the assessee, the Board is entitled to exercise its power and relax the
requirement contained in Chapter IV or Chapter VI-A. If such a power is
conferred upon the Board, this Court, while exercising jurisdiction under
Article 226 of The Constitution of India, would also be entitled to consider as
to whether the petitioner’s case would fall within one of the conditions
stipulated u/s. 119(2)(c).

vi)  Considering the hard
facts, the petitioner, being a senior citizen, cannot be denied of the benefit
of exemption u/s. 10(10C) of the Act and the financial benefit that had accrued
to the petitioner, which would be more than a lakh of rupees. Therefore, this
Court is of the view that the third respondent should grant the benefit of
exemption to the petitioner.

vii)  Accordingly, the writ
petition is partly allowed, the impugned order is set aside and the third
respondent is directed to grant the benefit of exemption u/s. 10(10C) of the
Act and refund the appropriate amount to the petitioner, within a period of
three months from the date of receipt of a copy of this order. Considering the
facts and circumstances of the case, the prayer for interest is rejected.”

Reduction in Sale Price Due To Discount Given By Issue of Credit Notes Subsequent To the Invoice

INTRODUCTION
Under Sales Tax Laws, tax is payable on the ‘sale price’ of goods. Sale price is normally defined in respective State Acts. For example, under MVAT Act, term “sale price” is defined in section 2(25) as under.  
 
“2(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged….”

There is a separate mention about discount given from the original sale price.

Discounts are generally given in the invoice itself. There may not be much difficulty in claiming reduction for such discount amount from the sale price.  

However, discount can also be given after the invoices are issued. There may be discount schemes like turnover discount, early payment discount, where discount will be eligible on happening of a given event. In such cases, invoices would be at original price. The subsequent discount will be required to be given by issue of credit note.

In some of the States, there are provisions providing that discount mentioned in the invoices will be eligible
for reduction.

The issue that arises is whether such type of provisions requires strict interpretation or can be interpreted liberally so as also to include discounts given by credit note/s issued separately after the issue of invoice/s.  

Recent judgment of Hon. Supreme Court in case of Southern Motors vs. State of Karnataka (Civil Appeal Nos.10955-10971 of 2016 dt.18.1.2017)

In this case, the issue before the Hon. Supreme Court was from Karnataka VAT Act, 2003. The facts leading to the litigation, as mentioned in the judgment, can be noted as under:

“3. The foundational facts, albeit not in dispute present the required preface. The appellant is a dealer in the motor vehicles and registered under the Act. Its version is that during the years in question i.e. 2007-2008 and
2008-2009, it raised tax invoices on the purchasers as per the policy of manufacturers of vehicles to maintain uniformity in the price thereof. After the sales were completed, credit notes were issued to the customers granting discounts, in order to meet the competition in the market and for allied reasons.

Consequentially, it received/retained only the net amount that is the amount shown in the invoice less the sum of discount disclosed in the credit note. Accordingly, the net amount, so received was reflected in his books of account and returns were filed …..”

The assessing authority took a view that as per the Karnataka VAT Rules, 2003, only such discount which is mentioned in the invoices is allowable. Since the discount was given post issue of invoices, it was held that it is not deductible from the sale price. Karnataka High Court upheld the claim of State Government. Before Hon. Supreme Court the main argument of the dealer was as under:

“7. The emphatic insistence on behalf of the appellant is that the combined reading of section 30 and Rule 31 demonstrates in clear terms that the assesses are entitled to claim deduction of the discount allowed to their customers by credit notes, from the total turnover to quantify their taxable turnover. The learned counsel have urged that as some discounts, especially those linked to targets to be achieved in a particular period are not comprehend able at the time of sale, these logically cannot be reflected in the tax invoices.

They have maintained that such discounts actualise through credit notes at the end of the prescribed period for which the target is fixed and are thus governed by section 30 of the Act and Rule 31 of the Rules. They have asserted that in no view of the matter, Rule 3(2)(c)can be conceded a primacy to curtail or abrogate Section 30 or Rule 31 of the Rules, lest the latter provisions are rendered otiose. Such an explication would also be extinctive of the concept of the well ingrained concept of turnover/trade discount which is indefensible.”

The department stuck to the stand that rule is to be applied strictly. The arguments of the sales tax department are noted as under:

“9. In refutation, the learned counsel for the respondents, has argued that a discount to qualify for deduction to compute the total and eventual taxable turnover, as contemplated in Rule 3(2)(c) of the Rules has to be essentially reflected in the tax invoice or the bill of sale issued in respect of the sales.

According to them, section 30 and Rule 31 deal with a situation where after a tax invoice is issued, it transpires that the tax charged has either exceeded or has fallen short of the tax payable for which a credit/debit note, as the case may be, would be issued. As these two provisions do not regulate the computation of a taxable turnover, there is no correlation thereof with Rule 3(2)(c) of the Rules which has been assigned an independent role to determine the tax liability. In absence of any specific provision in the parent statute granting tax exemption based on deduction founded on post sale trade discount, section 30 and Rule 31 are of no avail to the assesses, he urged. It is maintained that in any view of the matter, a taxing statute has to be construed strictly and any exemption is permissible only if the legislation permits the same. Reliance in buttress of the above has been placed on the decisions of this Court in A.V. Fernandez vs. The State of Kerala 1957 SCR 837, IFB Industries Ltd. vs. State of Kerala (2012) 4 SCC 618 and Jayam & Co. vs. Assistant Commissioner and Another (2016) 8 SCALE 70.”

The Supreme Court referred to a number of precedents on the issue. Ultimately, the Supreme Court came to conclusion that the sale price means what is actually received by the vendor. Therefore, the Supreme Court observed that rules cannot be interpreted to disallow reduction where actual discount is passed on and the amount is not receivable to the dealer. The pertinent observations of the Supreme Court are as under:

“37. On an overall review of the scheme of the Act and the Rules and the underlying objectives in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, we are of the considered opinion that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid.

The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. The contrary interpretation accorded by the High Court being in defiance of logic and the established axioms of interpretation of statutes is thus unacceptable and is negated.”  

CONCLUSION
Thus, the Hon’ble Supreme Court has decided a very important issue. The discounts are part and parcel of business activity. It will not be just to levy tax on an amount, which is neither received nor receivable as per the understanding of the parties. Therefore, the above judgment of the Hon. Supreme Court will be guiding judgment including in the forthcoming GST era.

Pre-Deposit At First Stage Appeal – Whether Adjustable At The Second Stage?

BACKGROUND:
As announced by Hon. Finance Minister, Goods and Services Tax is likely to be effective from July 01, 2017. Indirect tax litigation is yet to become a story of the past considering pendency of the matters before various Benches of CESTAT and first appellate authorities, which is further topped up by enthusiasm demonstrated by officers of the department of service tax in particular of initiating proceedings for all and sundry, decided or undecided issues. Since service tax law underwent an ‘overhaul’ on account of introduction of “negative list” based taxation from 01/07/2012, various issues closed under the earlier regime are routinely initiated for the legal testing under the “negative list” based period as well, even though those issues do not remain open on account of the new law having taken care of the shortcomings in interpretation of the earlier provisions of service tax law.

ISSUE OF PRE-DEPOSIT OF DUTY OR TAX IN TWO-STAGE APPEAL
In the scenario, pre-deposit of duty or tax payable while filing appeals is quite a concern of many assessees under service tax considering huge demands initiated and routinely confirmed by adjudicating authorities at all levels and especially in vexatious cases. In a recent decision, Ahmedabad Tribunal in ASR Multimetals Pvt. Ltd. 2017 (345) ELT 294 (Tri.-Ahmd) had an occasion to examine whether pre-deposit made while filing the first appeal can be adjusted against the quantum of deposit required to be made while filing the appeal before the Tribunal.

Section 35F of the Central Excise Act, 1944 laying down provisions in this regard (as amended with effect from August 06, 2014) also applicable to service tax vide section 83 of the Finance Act, 1994 is reproduced below:

“35F. Deposit of certain percentage of duty demanded or penalty imposed before filing appeal.- The Tribunal or the Commissioner (Appeals), as the case may be shall not entertain any appeal,-
(i)     under sub-section (1) of section 35, unless the appellant has deposited seven and a half per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty where such penalty is in dispute, in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise

(ii)     against the decision or order referred to in clause (a) of sub-section (1) of section 35B, unless the appellant has deposited seven and a half per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against;

(iii) against the decision or order referred to in clause (b) of sub-section (1) of section 35B, unless the appellant has deposited ten per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against.

Provided that the amount required to be deposited under this section shall not exceed rupees ten crores.

Provided further that the provisions of this section shall not apply to the stay applications and appeals pending before any appellate authority prior to the commencement of the Finance (No.2) Act, 2014.

Explanation.- For the purposes of this section “duty demanded” shall include.-

(i)     amount determined under section 11D
(ii)    amount of erroneous CENVAT credit taken;
(iii)    amount payable under Rule 6 of the CENVAT Credit Rules, 2001 or the CENVAT Credit Rules, 2002 or the CENVAT Credit Rules, 2004.”
[emphasis supplied]

In three cases under appeal before the Tribunal, the Appellants paid 7.5% duty at first appellate stage before Commissioner (Appeals). Against the orders passed by Commissioner (Appeals), when the appeals were filed before the Tribunal, they deposited 2.5% in terms of clause (iii) of the above section 35F / section 129A of the Customs Act, 1962*).

(*Since the provisions of the Customs Act in this regard are identical, they are not reproduced here for the sake of brevity).

They adjusted thus the amount paid at the first appellate stage and considered that the requirement of 10% payment towards pre-deposit thus stood fulfilled. The Revenue objected to this as according to them, such interpretation was incorrect and thus additional 10% was required to be paid in place of 2.5% to comply with the provisions laid down in applicable clause (iii) of the above section 35F for the appeal to be entertained by
the Tribunal.

The Tribunal found that the provisions were in no way ambiguous to interpret that the amount paid under clause (ii) at the time of filing appeal before Commissioner (Appeals) was adjustable/considered paid for the purpose of clause (iii) as well.

The Tribunal in this context relied on the ratio of decision in the case of Greatship (India) Pvt. Ltd. vs. Commissioner of Service Tax, Mumbai-I 2015 (39) STR 754 (Bom) wherein principles of interpretation of taxing statutes were discussed at significant length, at the end of which, the following conclusion was drawn at para 34 relied upon by the Tribunal in the present case.

“34. It would thus appear that it is settled position of law that in taxing statute, the Courts have to adhere to literal interpretation. At first instance, the Court is required to examine the language of the statute and make an attempt to derive its natural meaning. The Court interpreting the statute should not proceed to add the words which are not found in the statute. It is equally settled that if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of law the case might otherwise appear to be. It is further settled that an equitable construction, is not admissible in a taxing statute, where the Courts can simply adhere to the words of the statute. It is equally settled that a taxing statute is required to be strictly construed. Common sense approach, equity, logic, ethics and morality have no role to play while interpreting the taxing statute. It is equally settled that nothing is to be read in, nothing is to be implied and one is required to look fairly at the language used and nothing more and nothing less. No doubt, there are certain judgments of the Apex Court which also holds that resort to purposive construction would be permissible in certain situation. However, it has been held that the same can be done in the limited type of cases where the Court finds that the language used is so obscure which would give two different meanings, one leading to the workability of the Act and another to absurdity.”
[emphasis supplied].

In view of the above, the Tribunal upheld the Revenue’s contention that the interpretation by the appellants would not be possible without inserting the words not present therein and therefore it was incorrect to interpret that the amount paid at the first stage-appeal could be adjusted. In effect, the pre-deposit amount required for two-stage appeals would be 7.5% in the first instance and 10% of the confirmed duty/tax at the time of filing the Tribunal appeal.

Having had unambiguous decision/interpretation as above, the fact that monetary limits for adjudication of Show Cause Notice have been revised vide Circular No.1049/37/2016-CX dated 29/09/2016, all cases adjudicated after this date where the amount of duty/service tax/penalty confirmed is below two crore rupees involve two-stage appeals and aggregate amount of 17.5% has to be provided towards mandatory pre-deposit. Indeed this was also clear otherwise on reading of the provisions. Further, TRU letter 10th July, 2014 in Annexure-IV also provided clarification on identical lines both in respect of section 129E of the Customs Act and section 35F of the Central Excise Act. Nevertheless, it must be noted here that vide its Circular No.984/08/2014-CX dated 16/09/2014, CBEC has clarified that payment made during investigation or audit, prior to filing the appeal can be considered to the extent of 7.5% or 10% subject to the limit of Rs.10 crore as deposit towards fulfillment of requirement u/s. 35F of Central Excise Act or section 129E of the Customs Act, 1962.

Welcome GST – Input Tax Credit Provisions under the Model GST Act (Revised Nov 2016)

1.    Introduction

“Goods and Services Tax” popularly known as ‘GST’ will soon be a new face of indirect tax legislation in India. It is a concept which will subsume various indirect taxes that are currently being imposed on goods and services under various Central and State laws and will lead to imposition of a single levy namely “goods and service tax” on all goods and services purchased or consumed anywhere in India. The idea is to convert the whole of India into one single uniform market, by eliminating differential tax treatments under different laws and different States. The concept of Value Added Tax is an inherent feature of GST. Whenever a commodity changes hand, there is a value addition. GST will be imposed in respect of every value addition made to goods and services from its origination till its final consumption.Needless to say, being an indirect tax, the ultimate burden of taxes on the entire value of the commodity/service will be transferred onto the final consumer of such commodity/service. To illustrate, if ‘A’ sells goods worth Rs.100 to ‘B’, A will pay tax of say 10% i.e. Rs.10 to Government and recover the same from ‘B’ by loading the same onto value of that commodity. ‘B’ will therefore pay Rs.110 to ‘A’. When ‘B’ further sells the commodity to ‘C’ by adding his profit margin of Rs.40, then he will pay tax @10% on the said value addition of Rs.40 say Rs.4 to Government and recover the entire amount from ‘C’ i.e. 110 paid by him to ‘A’ and Rs.44 being his value addition and taxes paid by him to Government on his value addition. In short he will recover Rs.154 from ‘C’ which comprises of Rs.140 as total value and Rs.14 as taxes. The bill issued by ‘B’ to ‘C’ will also clearly show Rs.140 as the value of commodity and Rs.14 as the taxes. Therefore, in a transparent value added system, the customer knows how much amount he has paid for a commodity as its economic value and how much by way of taxes.

The example looks very simple, when Rs.10 paid by ‘A’ and Rs.4 paid by ‘B’ are taxes under the same statute and are paid to same Government. However, the economics of commodity pricing will change, if these taxes are paid under different statutes and to different governments. To illustrate, let’s assume that in the above example Rs.100 is value addition by ‘A’ for sale of goods and Rs.40 is value addition by ‘B’ in the nature of service. In other words supply made by ‘A’ to ‘B’ is in the nature of ‘sale of goods’ and supply made by ‘B’ to ‘C’ is in the nature of provision of service. In this case, A will pay Rs.10 to State Government as VAT. Although value addition made by ‘B’ is only Rs.40, since the Authority recovering the taxes from ‘B’ is a Central Government, it will recover service tax on entire Rs.140 by taxing the entire value once again under different statute (‘double taxation’). Not only that, but it will also levy tax on Rs.10 which is in fact a tax paid to State Government (‘tax on tax’). The final outcome would be that, an economic supply having aggregate value addition of Rs.140 will be loaded with VAT of Rs.10 (Rs.100 x 10%), Service Tax of Rs.14 (Rs.140 x 10%) and a tax on tax (recovered as service tax) Rs.1 (VAT of Rs.10 x 10%), thereby making total price of the commodity Rs.165. (Rs.140 as Value addition and Rs.25 as taxes) as against Rs.154 computed earlier. Another most disturbing factor in this scenario would be that, ‘B’ will raise a bill on ‘C’ showing Rs.150 as the value addition and Rs.15 as service tax. The customer will therefore be under the impression that, he has paid only Rs.15 as taxes whereas in reality he pays Rs.25 towards taxes.

GST thus endeavours to reduce cascading effect of taxes i.e. eliminating double taxation (saving of Rs.10) and tax on tax (i.e. Rs.1). It also encourages transparency by separating economic value of a commodity from taxes. The concept of “value addition based taxation” is enshrined in provisions governing Input Tax Credit(‘ITC’). This article deals with the said provisions contained in Revised Model GST law (November 2016). The provisions dealing with eligibility of CENVAT credits or tax credits under the earlier laws in GST regime (i.e. transitory provisions) are not explained in this article.

2.    Definitions:

As per section 2(52), ‘inputs’ means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(19) “capital goods” means goods, the value of which is capitalised in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.

As per section 2(53) “Input service” means any service used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(55) “input tax” in relation to a taxable person, means the Integrated Goods and Service Tax (IGST), including that on import of goods, Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) charged on any supply of goods or services to him and includes the tax payable under sub-section (3) of section 8 [i.e. tax payable under reverse charge], but does not include the tax paid under section 9 [i.e. tax payable under composition scheme].

As per section 2(71) “output tax” in relation to a taxable person, means the CGST/SGST chargeable under this Act on taxable supply of goods and/or services made by him or by his agent and excludes tax payable by him on reverse charge basis

As per section 2(54) “Input Service Distributor” means an office of the supplier of goods and / or services which receives tax invoices issued u/s. 28 towards receipt of input services and issues a prescribed document for the purposes of distributing the credit of CGST (SGST in State Acts) and / or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above.

3.    Principal Eligibility Test:

The concept of ITC, presupposes that the preceding supply (i.e. inwards supply) as well as the subsequent supply (i.e. outward supply’) both are charged with GST. If inward supply is not charged with GST, the question of ITC does not arise. Similarly, if outward supply is not charged with GST (Nil rated or fully exempted supply, non-taxable supplies), the ITC gets accumulated and eventually becomes a part of the cost. However in certain cases, due to policy reasons, refund of ITC is permissible. Under GST, there are only two cases where refund of ITC is permissible viz. exports including zero rated supplies and cases involving inverted duty structure i.e. where the credit is accumulated on account of rate of tax on inward supplies being higher than the rate of tax on outward supplies (other than Nil/ fully exempted supplies). Except for the said two cases, if the outward supply does not attract levy of GST, then ITC of corresponding inward supply cannot be allowed and therefore necessarily forms the part of cost. This may be taken as principal eligibility test under GST.

For instance, the outward supply of goods and services which is not made by a supplier in the course of his business or commerce, is not treated as ‘supply’ for the purpose of levy of GST. There is thus no GST on such ‘non-business outward supplies’. A supplier may have been charged GST on goods and services procured and used by him for the purpose of making a ‘non-business outward supply’. However, ITC in respect of such goods/services is not allowed. What is ‘non-business outward supply’ is therefore important for the purpose of determining eligibility of ITC of corresponding goods/ services. Definition of ‘business’ is contained in section 2(17) of the GST Act. A ‘non-business’ outward supply is therefore to be interpreted accordingly.

Section 16(1) provides that, entitlement of ITC is subject to certain conditions relating to restrictions, time and manner. These conditions, restrictions and the manner, to the extent they are contained in section 16 and section 44 of the GST Act are mentioned below. In addition thereto certain additional conditions may be contained in rules which are yet to be prescribed.

4.    ITC Eligibility Conditions:

As per section 16(1) of the Model GST Act, the ITC can be taken only by a registered taxable person. In other words, registration under GST is a pre-condition for availing ITC.

As per section 16(2) of the Model GST Act, the ITC shall not be allowed if the fulfillment of following conditions is in question.

–    possession by claimant dealer of a tax invoice or debit note or such other prescribed taxpaying document(s) issued by a supplier registered
under this Act, against inward supply made by claimant dealer.

–    The supplier issuing such documents has actually paid to the account of appropriate government, tax charged in respect of such supply, either in cash or through utilisation of ITC availed by such supplier. 
–    receipt of goods and/or services by claimant dealer. [The purpose of this clause is to prevent misuse of ITC provision by indulging into practices like issuing ‘accommodation bills’].
–    the claimant dealer has furnished the returns u/s. 34.

Considering the provisions of ‘time of supply’ a question may arise that whether a claimant dealer would be eligible for ITC on advance payments made by him for inward supply. In this respect, it may be noted that the conditions mentioned in section 16(2) are anti-avoidance provisions. Hence as long as a supply (past or future) underlying any tax paid document (tax invoice, debit note etc.) is not doubted, ITC cannot be denied. Besides, as per Explanation 1 to Section 12 (2) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment. It’s also worthwhile to note that, provisions of section 16(2) are subject to provisions of section 36 of the GST Act. As per section 36(1) credit shall be allowed to the registered taxable person on provisional basis as self-assessed in his return. It may further be noted that, Table 11 of the GSTR-1 (statement of outward supply) requires supplier to disclose the cases where tax is paid on advance basis and identifying such tax payment qua a person from whom the advance is received. However, the identification of such advance qua invoices given in Table 12 of GSTR-1 may happen in the subsequent tax period. Till the time such invoice identification takes place, it is doubtful whether ITC will be available in GSTR-2 of the receiver.

Another issue which may arise as regards receipt of goods/services will be, whether ‘actual receipt’ of goods is essential or ‘constructive delivery’ can be said to be enough as a fulfillment of aforesaid condition. For example, ‘A’ located in Maharashtra directs ‘B’ located in Gujarat to supply goods to ‘C’ located in Delhi. In such case, although there is a single movement of goods from ‘B’ to ‘C’ and goods are never actually received by ‘A’,explanation to section 16(2) provides that, ‘A’ shall be deemed to have received goods.
Similarly, in case of job work transactions, section 20 provides that, the “principal” shall be entitled to take credit of input tax on inputs and capital goods even if the inputs/capital goods are directly sent to a job worker for job-work without their being first brought to his place of business.

In case of input service distributor (ISD) also, section 16(2)(b) may not be applicable, for such ISD is not a receiver of service, but only a distributor of credit. Conditions of section 16(2) are therefore required to be fulfilled by the respective units under the same PAN at which such credit is distributed.
   
5.    Reduction in ITC Set off
In following cases, ITC is not allowed fully, but is reduced to certain extent.

–    Where the goods and/or services are used by the registered taxable person partly for the purpose of any business and partly for other purposes. [As discussed above, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business only] – section 17(1). The manner of computation is yet to be prescribed.
–    Where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies and partly for effecting exempt supplies. In such case, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies- section 17(2). In this case, ‘zero rated’ supplies are treated as taxable supplies and supply on which recipient is liable to pay tax on reverse charge are regarded as exempt supply. For Example: ‘A’ supplies commodity X which is taxable at 5% (Turnover = Rs.50 Lakh), commodity ‘Y’ which is exempt from tax (Turnover = Rs.20 Lakh), Commodity ‘X’ and ‘Y’ are supplied to SEZ unit (Turnover = Rs.15 Lakh) and supply of commodity ‘Z’ on which the receiver is liable to pay tax under RCM (Turnover = Rs.10 Lakh). In this case, for the purpose of section 17(2) Taxable supply and Exempt supply shall be computed as under:

Taxable Supply = Rs.50 Lakh + Rs.15 Lakh = Rs.65 Lakh
Exempt Supply = Rs.20 Lakh + Rs.10 Lakh = Rs.30 Lakh.

If there is any inward supply in the hands of ‘A’ on which he is liable to pay tax under reverse charge, then such inward supply shall not be considered for the purpose of aforesaid calculation. The manner of computation u/s. 17(2) is yet to be prescribed.

–    A banking company, or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of section 17(2), or avail of, every month, an amount equal to 50% of the eligible ITC on inputs, capital goods and input services in that month.

6.    Ineligible / Negative List Items
In respect of inward supply of following goods/ services specified in section 17(4), the ITC shall not be allowed.

Sr

No

Negative List Goods/Services

Exceptions,
if any

1

motor vehicles and other conveyances

Motor vehicles
and conveyances used for making following taxable supplies

–   Further supply of vehicles and conveyances.

–   Transportation of passengers

–   imparting training on driving, flying,
navigating such vehicles or conveyances

–   Transportation of goods.

2

supply of food and
beverages, outdoor catering, beauty treatment, health services, cosmetic and
plastic surgery

Where such inward
supply of goods or services of a particular category is used by a registered
taxable person for making an outward taxable supply of the same category of
goods or services

3

membership of a
club, health and fitness centre

NA

4

rent-a-cab, life
insurance, health insurance

Where it’s
obligatory for an employer to provide these services to its employees as
Government notified services under any law for the time being in force

5

travel benefits
extended to employees on vacation such as leave or home travel concession

NA

6

works contract
services when supplied for construction of immovable property,

However, works
contract services availed for construction of plant and machinery is allowed.

 

For these
purposes, the word “construction” includes re construction, renovation,
additions or alterations or repairs, to
the extent of capitalization, to the said immovable property.

 

‘Plant and
Machinery’ means apparatus, equipment, machinery, pipelines,
telecommunication tower fixed to earth by foundation or structural
support  that are used for making
outward supply and includes such foundation and structural supports but
excludes land, building or any other civil structures

Sr

No

Negative List
Goods/Services

Exceptions, if
any

7

goods or services
received by a taxable person for construction of an immovable property on his
own account, even when used in course or furtherance of business

The goods or
services received by a taxable person for construction of plant and machinery
as defined above, is allowed.

8

goods and/or
services on which tax has been paid under composition scheme

NA

9

goods and/or
services used for personal consumption

NA

10

goods lost,
stolen, destroyed, written off or disposed of by way of gift or free samples

NA

As regards the aforesaid goods and services, following observations may be noted:-

–    There is a need to expand the relaxation given against services mentioned in Sr. No.4 above, to all government notified services. Presently, supply of food and beverages, outdoor catering and health services (Sr. No.2) would not be eligible for ITC, even if it’s obligatory for an employer to provide these services to its employees as Government notified services under any law for the time being in force.
–    Presently, ITC of membership of a club, health and fitness centre, will also be denied to film and media industry, actors, sportsman, agencies providing personal security services etc., for whom inward supply of such services is a business necessity.
–    The term ‘construction’ includes capitalised expenditure, even though expenditure is incurred on renovation, additions or alterations or repairs. A business man may have to face a situation, where after the year end, at the time of audit the auditor may require him to capitalise certain expenses, which have been earlier debited to revenue accounts. In such case, he may be required to reverse the ITC availed earlier.

In addition to aforesaid cases, the ITC is also not available in following cases:

–    Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income- tax Act, 1961(43 of 1961), the ITC shall not be allowed on the said tax component.

–    Where any tax is paid in terms of section 67, 89 or 90, such tax shall not be regarded as eligible ITC. Section 67 of the Act deals with payment of taxes as a result of determination by the tax authorities, in cases involving non-payment/ short payment by reason of fraud or any wilful misstatement or suppression of facts to evade tax. Section 89 deals with payment of taxes by any person who transports any goods or stores any goods while they are in transit in contravention of the provisions of this Act. Section 90 deals with payment of taxes in circumstances leading to confiscation of goods/ conveyance.

7.    Timing for the purpose of Taking ITC

–    As mentioned above, as per section 36, the ITC can be claimed by the assessee (‘Tax Payer’) in his tax returns on provisional basis and can be used for payment of self-assessed output tax liability. Section 37 deals with provisions relating to Matching, reversal and reclaim of ITC. The matching takes place, by comparing the details of inward supplies and tax credit furnished by assessee (as a receiver of supply) with the details furnished by his supplier in his return. The claim of ITC that match with the details of corresponding supplier’s returns are finally accepted and communicated to the assessee. Where the ITC claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy is communicated to both such persons. Similarly, duplicate claims of ITC are also communicated to receiver. The amount in respect of which any discrepancy is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, in his return for the month succeeding the month in which the discrepancy is communicated. However, as regards duplicate claims, the excess ITC claimed shall be added to the output tax liability of the recipient in his return for the month in which the duplication is communicated.

    For Example: A return for the month of July 2017 is filed on 20th August 2017. The discrepancies are communicated in August 2017. Such discrepancy will be required to be rectified in return pertaining to month of August 2017, which will be filed on 20th September 2017. If discrepancy is not rectified, then demand pertaining to excess ITC claimed will be added in the tax liability for the month of September 2017. However, if this was a case of duplicate claim, then such demand will be added in the tax liability for the month of August 2017 itself.

    It is important to note that, recipient shall be entitled to reclaim the credit only if the discrepancies communicated to suppliers are subsequently rectified by him in his valid returns within the time limit specified in section 34(9) i.e. earlier of due date for furnishing of return for the month of September following the end of the financial year or the actual date of furnishing of relevant annual return.

–    As per section 16(4), A taxable person shall not be entitled to take ITC in respect of any invoice or debit note for supply of goods or services after furnishing of the return u/s. 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit notepertains or furnishing of the relevant annual return, whichever is earlier. In other words, if debit note pertaining to invoice is issued by the supplier after the aforesaid period, the benefit of ITC pertaining to such debit note may not be available to the receiver.
–    Where the goods against an invoice are received in lots or instalments, the entire credit becomes eligible only upon receipt of the last lot or installment.
–    Where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services along with tax payable thereon within a period of three months from the date of issue of invoice by the supplier, an amount equal to the ITC availed by the recipient shall be added to his output tax liability, along with interest thereon. This condition is applicable only in respect of inward supply of services and not in respect of goods.
–    The credit of input tax in respect of pipelines and telecommunication tower fixed to earth by foundation or structural support including foundation and structural support thereto is allowed in staggered manner over a period of not less than 3 years. The claim in the first year not to exceed 1/3rd of the total credit and claim in second year not to exceed 2/3rd of the total credit.

8.    Availability of ITC in special circumstances – Section 18.

In following cases, a registered taxable person shall be allowed to take credit subject to certain prescribed conditions and provided that the ITC is claimed within the expiry of one year from the date of issue of tax invoice relating to such supply.

–    If a person applies for registration under the Act within 30 days from the date on which he becomes liable to registration, after registration, he shall be entitled to take credit of ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act. For Example: if threshold turnover exceeds Rs.20 Lakh on 2nd October 2017. The person applies for registration on 17th October 2017 and is granted registration on 24th October 2017, then he shall be entitled to take ITC in respect of inputs held as on 1st October 2017. The provision does not cover the ITC in respect of capital goods held in stock.
–    If a person applies for voluntary registration, he shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration. For Example: if a person applies for voluntary registration on 17th October 2017 and is granted registration on 24th October 2017, then he shall be entitled to take ITC in respect of inputs held as on 23rd October 2017. The provision also does not cover the ITC in respect of capital goods held in stock.
–    Where any registered taxable person ceases to pay tax under composition scheme, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under normal levy. This provision covers the credit ITC in respect of capital goods held in stock reduced by such percentage as may be prescribed.
–    Where an exempt supply of goods or services by a registered taxable person becomes a taxable supply, such person shall be entitled to take ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable. The credit of such capital goods is allowed on percentage reduction method.

9.    Transfer of ITC in certain situations.

Section 18(6) provides for transfer of ITC, where there is a change in the constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provision for transfer of liabilities. In such case, the said registered taxable person shall be allowed to transfer the ITC that remains unutilised in its books of accounts to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed. It is however surprising to note that, there are no similar provisions for transfer of credit, when business is succeeded as a going concern by legal heir or representative of a deceased taxable person.

10.    Payment of amount of ITC in respect of goods held in stock, or payment of higher amounts in certain cases:

–    Cancellation of Registration: As per section 26(7), every registered taxable person whose registration is cancelled shall pay an amount, equivalent to the ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher. In case of capital goods, an amount equal to the ITC taken on the said capital goods reduced by the percentage points as may be prescribed in this behalf or the tax on the transaction value of such capital goods, whichever is higher shall be paid.
–    Supply of capital goods: As per section 18(10), in case of supply of capital goods or plant and machinery, (other than refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap) on which ITC has been taken, the registered taxable person shall pay an amount equal to the ITC taken on the said capital goods or plant and machinery reduced by the percentage points as may be specified in this behalf or the tax on the transaction value of such capital goods or plant and machinery, whichever is higher.
–    From Normal Levy to Composition Scheme or From Taxable to Exempt Supply: As per section 18(7), where any registered taxable person, who has availed ITC, switches over as a taxable person for paying tax under composition scheme or, where the goods and / or services supplied by him become exempt absolutely u/s.11, he shall pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of such switch over or, as the case may be, the date of such exemption.

11.    Lapse of ITC in certain situations

If after making such payment u/s. 18(7) above, any amount remains in the electronic credit ledger, then such balance amount shall lapse.

12.    Input Service Distributor (ISD)

The concept of ISD is applicable only in case of inward supply of services and not in case of goods. The ISD is not an actual supplier, but he is merely a distributor of credit. For instance, A has administrative office in Maharashtra and factories at Maharashtra, Gujarat and Tamil Nadu. In such case, it may happen that all the input services are paid from administrative offices at Maharashtra and bill for such services will be raised by the supplier of services in the name of Administrative office, although the actual services are performed at Gujarat, or that the benefit of service is received at factories located at Maharashtra, Gujarat as well as Tamil Nadu. In such case, administrative office will work as ISD, and distribute all the ITC to all the beneficiary units in a prescribed manner. The manner in which ISD can distribute the credit is given in section 21 of the Act. Where the ISD and units to which the ITC is to be distributed are located in the same State, then credit of CGST shall be distributed as CGST and Credit of SGST shall be distributed as SGST. The credit of IGST shall be distributed as CGST as well as SGST, in a manner prescribed. If the ISD and units to which the ITC is to be distributed are located in the different States, then the credit of CGST shall be distributed as IGST or CGST and the credit of SGST shall be distributed as IGST or SGST. (However, it is not clear as to how the credit of CGST/SGST of one State shall be distributed to unit located at other State as CGST/SGST of that State).

As per Explanation 2 to section 21, recipient of credit means the supplier of goods and / or services having the same PAN as that of Input Service Distributor. Therefore, unless the job worker’s premises is registered as additional place of business of the Principal, the distribution of ISD to a job-worker seems difficult.

13.    Payment of Tax using ITC

–    As per section 44 of the Act, the ITC as self-assessed in the return of a taxable person shall be credited to his electronic credit ledger on provisional basis. The amount available in the electronic credit ledger may be used for making any payment towards output tax payable in such manner and subject to such conditions and within such time as may be prescribed. It, therefore, appears that, there may be rules for utilisation of ITC within a specific time period. Under the current tax regime, there is no limit of utilsation of Cenvat Credit under Central Excise/Service Tax laws. However, in State laws, there is time limit for carry/forward of tax credits subject to provisions for refund of unutilised credits.
–    The amount of IGST-ITC shall first be utilised towards payment of IGST and the amount remaining, if any, may be utilised towards the payment of CGST and SGST, in that order. The amount of CGST-ITC shall first be utilised towards payment of CGST and the amount remaining, if any, may be utilised towards the payment of IGST. Similarly, the amount of SGST-ITC shall first be utilised towards payment of SGST and the amount remaining, if any, may be utilised towards the payment of IGST. The ITC on account of CGST shall not be utilised towards payment of SGSTand vice versa.
–    The amount in electronic credit ledger shall not be used for the purposes of making payment of interest, penalty, fees, or any other amount. Similarly, such amount shall not be used for making payment of liability under reverse charge or composition tax.
–    It may be noted that, in case of excess claim due to mismatch of ITC, taxable person shall be liable to pay interest on such excess claim at the prescribed rate for the prescribed period. In cases mentioned in section 37(8), interest shall be payable, from the date of availing of credit till the corresponding additions are made. If however, any excess claim of ITC added earlier is later on found to be correct due to acceptance of additional liability by the supplier of such goods/services, then such interest paid by the assessee shall be refunded to him to the extent it does not exceed the amount of interest paid by the said supplier.
 
14.     Conclusion:

    ITC and its eligibility are the key constituents of Value Addition Based Taxation Regime on which the concept of GST is designed. It is desirable that there should not be any undue restrictions on its eligibility and admissibility. The seamless flow of ITC credit will result in lower commodity price and  the prices so arrived at will be better indicators of economic value of a particular commodity. The ‘matching concept’ demands highly sophisticated and very responsive Information Technology software tools and facilities. With a tax base of around 70-80 Lakh tax payers, there will be hundreds of crores of invoices which will be required to be processed every month by the GST network. Although ‘failure of matching concept’, faulty place of supply rules, composition taxes, restricted or negative list goods and services, reverse charge etc are some of the hindering factors, the Revised Model GST law has made an attempt to facilitate better credit flow as compared to the existing tax laws. But, finally, it is the implementation which will  determine whether the effect of cascading of taxes on price will be minimised and reduction in prices will be achieved or not. Let us hope for the best.

5. [2017] 79 taxmann.com 199 (Bangalore – Trib.) Flughafen Zurich AG vs. DDIT A.Ys.: 2007-08 to 2009-10 and 2011-12 Date of Order: 10th March, 2017

Article 12, India-Switzerland DTAA; Section 9(1)(vii), the Act  – Where foreign company seconding highly qualified skilled managerial personnel to Indian company was obligated to pay them remuneration outside India, and the purpose was to avail managerial services, the amount received from Indian company was FTS under DTAA as well as the Act.

FACTS
The Taxpayer was a company incorporated in, and tax resident of, Switzerland. It was engaged in providing operations and management services to airports. It had, inter alia, entered into Expatriate Remuneration Reimbursement Agreement (“the Agreement”) with an Indian airport operator company (“I Co”) for secondment of skill personnel.

The Taxpayer claimed that since I Co had the right to issue directions to the seconded employees, they had worked under the direct control and supervision of I Co. Thus, they satisfied employee-employer relationship test. Consequently, payment of salary to them, even though routed through the Taxpayer, could not be considered as Fees for Technical Services (‘FTS’).

The AO held that the payment received by the Taxpayer from I Co was chargeable to tax as FTS under section 9(1)(vii) as well as India-Switzerland DTAA.

Before the Tribunal, the Taxpayer contended that:
–    the purpose of secondment was to assign the employees to exclusively work full time for I Co;

–    therefore there was employer-employee relationship between I Co and the seconded employees;

–    the parties had understood and agreed that by assignment of assignees the Taxpayer shall not be considered to have rendered any services whatsoever to I Co;

–    the Taxpayer shall not be held responsible for any act or omission of the assignees during the assignment with I Co;

–    the parties had also understood and agreed that in addition to remuneration paid to the assignees directly by the I Co in India, the assignees would be entitled to remuneration payable by the Taxpayer outside India;

–    documents between the Taxpayer and assignee and between I Co and assignees showed that the assignees too had accepted the terms of the Agreement; and

–    hence, the payment by I Co was merely reimbursement of salary paid by the Taxpayer to the assignees in foreign currency outside India.

The Taxpayer further contended that in Centrica India Offshore Pvt. Ltd. vs. DCIT [364 ITR 336 (Del)]11, seconded employees came to India on deputation for a short period whereas in its case the term of assignment varies from one year to several years and hence, its facts were distinguishable from the said decision.

The tax authority contended that the fact that despite the secondment the Taxpayer was under obligated to pay the assignees outside India showed that employee-employer relationship between assignees and the Taxpayer had not ceased and employee-employer relationship between assignees and I Co did not exist.

HELD
–    Secondees were under the employment with the Taxpayer. Therefore, it was not employment or recruitment by I Co.

–    Secondment was as per the requirement of I Co and in respect of the existing employees of the Taxpayer.

–    All the assignees/secondees were holding high managerial position such as CEO and CCO showing that they had expertise. Therefore, the purpose was to avail the services of highly qualified experts.  

–    In Intel Corporation vs. DDIT [IT(TP)A No.1486/Bang/2013], the Tribunal had considered identical issue. There was no material variation in the terms and conditions of the secondment in the case of the Taxpayer and those in the cases considered by the Tribunal in the said decision and in Food World Supermarkets Ltd. vs. DDIT [174 TTJ 859].

–    Further, there is no significant difference between the definition and the language in Explanation 2 to section 9(1)(vii) and that of FTS in Article 12(4) of India-Switzerland DTAA. Once a payment is for managerial service then it is irrelevant to examine the aspect of provision of service by technical or other personnel. Accordingly, there are no distinguishing facts or circumstances which warrant taking a different view.

4. [2017] 77 taxmann.com 267 (Mumbai – Trib) Qad Europe B V vs. DDIT A.Ys.: 1998-99 & 1999-2000, Date of Order: 21st December, 2016

Article 12, India-Netherlands DTAA; Section 9, the Act  – Since software license issued by Dutch company to Indian customer did not permit ‘adaptation’ as defined in Copyright Act, 1957, payment made by Indian customer was not towards ‘use’ of copyright; hence, it was not ‘royalty’ under DTAA.  

FACTS
The Taxpayer was a company incorporated in Netherlands. It was also a tax resident of Netherlands. The Taxpayer entered into software license agreement with an Indian company (“I Co”). The principal terms and conditions of the said agreement were as follows.

–    The Taxpayer had granted non-exclusive, non-transferable, license for perpetual use on one hardware system which may include up to four servers.

–    I Co did not acquire any copyright in the product.

–    The software was for exclusive use of I Co for the purpose of its own business. I Co was not permitted to exploit it commercially or to assign, transfer or sublicense it.

–    While I Co was permitted to modify source code, it was not permitted to modify object code10.
–    Only the Taxpayer had modification rights of software.

In light of the aforementioned terms and conditions, the Taxpayer treated income arising from the said transaction as its business income. Since it did not have any PE in India, it did not offer the income to tax in India.

According to the AO, the payment received by the Taxpayer on account of sale of software to I Co was ‘Royalty’ and, therefore, it was taxable in India in the hands of the Taxpayer u/s. 9(1)(vi) of the Act.

HELD
–    The Taxpayer had enabled I Co to change source code so as to make the product compatible to the local laws and regulations. The said change in the source code could not be operational till the object code was modified by the Taxpayer. Hence, the limited right of modification qua the source code granted to I Co cannot be viewed adversely.

–    The computer program was governed by The Copyright Act, 1957. I Co was not permitted to do any act referred to in section 14 of the Copyright Act, 1957. Thus, the Taxpayer had not granted any copyright to I Co.

–    Analysis and comparison of various provisions of the Copyright Act with the relevant clauses of the said agreement showed that the said agreement did not permit I Co to carry out any alteration or conversion of any nature, so as to fall within the definition of ‘adaptation’ as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of I Co in India and no right was given to I Co for commercial exploitation of the same.

–    It is also noted that the terms of the agreement did not allow or authorise I Co to do any of the acts covered by the definition of ‘copyright’. Hence, the payment made by I Co could not be construed as payment made towards ‘use’ of copyright as contemplated under the provisions of the Act and DTAA when read together with the provisions of the Copyright Act, 1957.

–    DTAAs of certain countries (such as, Malaysia, Romania, Kazakhstan and Morocco) specifically include software payment within the definition of ‘Royalty’. However India-Netherlands DTAA does not include software payment while defining ‘Royalty’. Hence, payment received by the Taxpayer on account of sale of software, could not be characterised
as ‘Royalty’.

–    I Co had made payment for use of the software and not the ‘process’ involved in it. Since the definition in article 12(4) of India-Netherlands DTAA did not include consideration for the use or right to use ‘computer programme’ or ‘software’, the same could not be imported into it. Perusal of clauses of the Master Agreement showed that the customer had paid consideration for ‘use of computer software’ and not for ‘copyright of the computer software’. India-Netherlands DTAA treats consideration for the use of copyright of a laboratory or artistic work, etc. as ‘Royalty’. Hence, there is no question of including consideration for use of a laboratory or artistic work, etc. within the ambit of ‘Royalty’ as defined in article 12(4) of the DTAA.

–    Consideration for sale of software should be covered in Explanation 4 to section 9(1)(vi) and accordingly taxable as such. However, since no corresponding amendment is made to India-Netherlands DTAA, the Taxpayer can choose more beneficial provision, i.e., DTAA.

–    Since the payment received by the Taxpayer is in the nature of business profits, it is assessable under Article 7 of India-Netherlands DTAA and not under article 12.

3. [2017] 78 taxmann.com 109 (Mumbai – Trib.) Valentine Maritime (Gulf) LLC vs. ADIT A.Y.: 2007-08, Date of Order: 18th January, 2017

Section 44BB, the Act – Since section 44BB of the Act does not envisage only direct use of the plant and machinery in the prospecting for or extraction or production of mineral oils, hire charges for hiring of barge used for offshore accommodation were also subject to taxation u/s. 44BB.

FACTS    
The taxpayer was a foreign company incorporated in UAE. It was engaged in oil and gas construction industry. During the relevant year, the taxpayer earned income from hiring of two tug boats to Indian companies and earned hire charges from them. The tug boats were used by the hirer in Bombay High offshore field for oil platform related work. The barge was used by the hirer for offshore accommodation/construction activities and was not directly involved in connection with prospecting of oil. In its return of income the taxpayer claimed that the hire charges of two tug boats and the barge were exempt in terms of Article 7 read with Article 5 of India-UAE DTAA.
The AO concluded that in terms of Article 1, read with Article 4, of India-UAE DTAA the Taxpayer was not a resident of UAE. Therefore, it did not qualify for benefit under India-UAE DTAA.

As an alternate contention, the Taxpayer claimed that hire charges should be subject to taxation in accordance with section 44BB of the Act. The AO rejected the alternate contention on the ground that the Taxpayer had not proved that the vessels were used for the purpose of prospecting of or extraction or production of mineral oils. Accordingly, the AO held that the earnings were in the nature of royalty in terms of section 9(1)(vi) of the Act and levied taxed accordingly.

In appeal, the CIT(A) held that the tugs were actually used by the hirer in connection with prospecting for or extraction or production of mineral oils. He further held that the barge was used for offshore accommodation/construction activities and was not directly involved in connection with prospecting of mineral oil. Accordingly, he held that the income from hiring of barge was in the nature of royalty.

HELD
–    Insofar as the tug boats are concerned, they have been used in connection with prospecting for or extraction or production of mineral oils.
–    In Lloyd Helicopters International Pty Ltd. vs. CIT [2001] 249 ITR 162 (AAR), AAR has held that even the income derived from providing of helicopter services to facilitate operation of extraction and production of mineral oil was taxable in accordance with section 44BB of the Act.

–    Following the ruling of AAR, and the phraseology of section 44BB, even the earnings from hiring of barge were eligible for taxation u/s. 44BB.

2. [2017] 78 taxmann.com 240 (Mumbai – Trib.) APL Co. Pte Ltd. vs. ADIT A.Y.: 2008-09, Date of Order:16th February, 2017

Article 8, 24, India – Singapore DTAA – As both the conditions for invoking of Article 24 were not fulfilled, benefit of Article 8 of India-Singapore DTAA in respect of shipping income derived from India could not be denied.

FACTS
The Taxpayer was a company incorporated in, and tax resident of, Singapore. It was engaged in operation of ships in international waters, mainly for transportation of cargo and containers globally. Inter alia, the Taxpayer also carried cargo to and from India. The Taxpayer had a wholly owned subsidiary in India which was acting as its shipping agent in India. The Taxpayer claimed that in term of Article 8 of India-Singapore DTAA, its gross freight earning in India were not chargeable to tax in India.

The AO called for certain documents to verify the claim of the Taxpayer. Out of 136 ships, the Taxpayer could not provide documents in respect of 8 ships. Hence, the AO denied treaty benefits in respect of income from 8 ships. In appeal, invoking limitation of benefits (LOB) provision in Article 24 of India-Singapore DTAA, CIT (A) denied treaty benefits on entire income on the ground that there was no nexus between remittance from India of freight collected in India and the amount that was finally remitted into Singapore, and further that the income was not taxable in Singapore.

HELD
–    Two conditions should be fulfilled to invoke Article 24. Firstly, income should be exempt or taxed at lower rate in source state. Secondly, only the income received in residence state should be taxable.

–    Under Singapore tax law, shipping enterprises are required to furnish statement of income derived from operations of foreign ships in Singapore. The income from shipping operations is treated as ‘accruing in or derived from Singapore’ and taxed on accrual basis. This is also confirmed in the certificate issued by Singapore revenue authority.

–    Use of the term “only” in Article 8 of India-Singapore DTAA shows that shipping income of a Singapore tax resident enterprise is taxable only in Singapore and not in India. Therefore, question of any kind of exemption or reduced rate of taxation in source state does not arise.

–    Accordingly, the condition precedent for invoking Article 24, namely, income should be exempt or taxed at lower rate in source state was not fulfilled. Therefore, Article 24 could not be invoked.

1. [2017] 79 taxmann.com 128 (Delhi – Trib.) Cairn U. K. Holdings Ltd vs. DCIT A.Y. 2007-08, Date of Order: 9th March, 2017

Section 9(1)(i), the Act – Transfer of shares of Jersey company holding shares in Indian company by UK company to another group company was indirect transfer of asset; capital gain arising from such transfer was subject to tax in India

FACTS
The Taxpayer was a tax resident of UK. The Holding Company (Hold Co) of the Taxpayer was acquiring oil and gas assets in India through its subsidiaries. Following is the diagrammatic presentation of the original holding structure.

With a view to simplify the group structure, for better and effective local management and to access capital market, the group effectuated internal reorganisation in a series of transactions in which the Taxpayer was a party.
Briefly, the reorganisation comprised the following transactions.

–    Hold Co entered into share exchange agreement with the Taxpayer and transferred its entire shareholding in nine wholly owned Indian subsidiary companies to the Taxpayer in exchange of issue of shares by the Taxpayer to Hold Co. No capital gain tax was paid on this transaction1.

–    The Taxpayer setup a subsidiary in Jersey (Jersey Co). The Taxpayer entered into share exchange agreement with Jersey Co and transferred its entire shareholding in nine wholly owned Indian subsidiary companies to Jersey Co in exchange of issue of shares by Jersey Co. Jersey Co derived substantial value from assets located in India.

–    Subsequently, the Taxpayer formed another subsidiary in India (I Co). The Taxpayer infused purchased certain shares if I Co for cash consideration. Thereafter, the Taxpayer transferred its entire shareholding in Jersey Co to I Co. I Co paid the consideration partly in cash and partly by issue of shares of I Co. I Co recorded the excess amount over the book value of shares of Jersey Co as goodwill.

–    Subsequently, I Co issued shares by way of IPO of its shares. Post-IPO, the shareholding in I Co was: UK Co ~69% (including ~20% subscribed in cash and ~49% received in exchange of shares of Jersey Co) and public ~31%.

Following is the diagrammatic presentation of the post-reorganisation holding structure.

The AO treated transfer of shares of Jersey Co by the Taxpayer to I Co as indirect transfer of assets in India u/s. 9(1)(i) of the Act and accordingly, assessed capital gains tax in the hands of the Taxpayer.
In appeal before the Tribunal2, the Taxpayer contended as follows.

–    The taxability of the transaction under the indirect transfer provisions should be denied, as the said retroactive amendment is bad in law and ultra vires.

–    The Transactions undertaken by the Taxpayer were for internal reorganisation with a view to consolidate Indian business operations. Such internal reorganisation did not result in any change in controlling interest. Hence, such transaction was non-taxable.

–    The Taxpayer relied on Calcutta HC decision in the case of Kusum products Limited3 to suggest that: post-internal reorganisation no real income accrued to the Taxpayer as all Indian assets were available in different form; and mere accounting entry cannot be regarded as income, unless real income was actually earned.

–    For the purpose of computing capital gain, the cost of acquisition should be stepped up to the fair value of the shares of Jersey Co on the date of acquisition. Further, there was no timing difference between the acquisition and disposal of shares by the Taxpayer, and accordingly the full value of consideration and the cost of acquisition were same.

–    The Taxpayer also relied on Delhi HC decision in New Skies Satellite and contended that the provisions of the Act as were in existence on the date of notification of India-UK DTAA were to be considered and retroactive amendment in relation to indirect transfer provisions was to be ignored.

HELD

On transfer of shares of Jersey Co to I Co

–    Validity of retrospective amendment
    On the contention of non-applicability of indirect transfer provisions, due to the same being retrospective in nature and ultra vires, the Tribunal concluded that it  is not the right forum to challenge validity of provisions of the Act.

–    No change in controlling interest due to internal reorganisation
    The steps undertaken were not mere business reorganisation. It was a fact that the series of transactions culminated into the IPO of I Co from which the funds were used to pay part consideration to the Taxpayer for acquisition of shares of Jersey Co.

–    Property being situated in India
    The Indian WOS, which controls the oil and gas sector in India, will be regarded as the property in which the shareholders have the right to manage and control the business in India. Therefore, any income arising through or from‘ any property in India shall be chargeable to tax as income deemed to accrue or arise in India in terms of the indirect transfer provisions of the Act.

–    No real income accruing in the hands of Taxpayer  
    The audited financial statements of the Taxpayer discussed about disposal of part of the company’s investment and resultant exceptional gains earned upon disposal of shares. Hence, the Taxpayer was not justified in arguing that no real income had accrued.

–    While computing capital gains, cost of acquisition should be stepped up to fair value of Jersey Co.
    Perusal of the provisions of the Act show that the property held by the Taxpayer (i.e., shares of Jersey Co) and its mode of acquisition did not fall under any of the clauses of the Act which required substitution of cost of acquisition in the hands of the previous owner4.
 
    The Tribunal also denied the Taxpayer’s contention on transaction being in the nature of swap and leading to resultant step up in cost of acquisition by stating that in the present case, the price of the shares in each of the agreement is identified and the amount of acquisition recorded in the books of account represents cost of acquisition of share which cannot be substituted by
fair value.

–    Whether ITL provisions  at the time when India-UK DTAA was signed is to be considered
 
    The Tribunal disregarded the argument of the taxpayer and held that:

•    As per the India-UK DTAA, capital gains are taxable as per the domestic law of respective countries. Hence, the provisions in DTAA cannot make the domestic law static when both states have left it to domestic law for taxation of any particular income.

•    Where exemption is provided with retroactive effect under domestic law, non-resident cannot be denied exemption by citing that such law was not in existence at the time DTAA was entered into.

•    DTAA is a mechanism of avoiding multiplicity of taxation globally. If taxes are chargeable in residence state (i.e. UK), the taxpayer should not suffer tax in the source state. The facts indicated that capital gains were not taxable in the residence state. Accordingly, there was no multiplicity of tax being levied.

•    Distinguished the Taxpayer’s reliance on Delhi HC ruling in the case of New Skies Satellite5 which held that amendments made under domestic law cannot be applied to relevant DTAAs.

•    Where the provisions of DTAA simply provide that particular income would be chargeable to tax in accordance with the provisions of domestic laws, such article in DTAA cannot limit the boundaries of domestic tax laws.

On levy of interest

The Tribunal relied upon various judicial precedents6  and agreed with the Taxpayer’s claim that it could not have visualised its liability for payment of advance tax in the year of transaction. Consequently, interest on tax liability arising out of retrospective amendment cannot be levied7. The Taxpayer was also subject to withholding tax. However, based on the SC ruling in the case of Ian Peter Morris vs. ACIT8  and Delhi HC ruling the case of DIT vs. GE Packaged Power Incorporation9, which held that a non-resident cannot be burdened with interest for default of withholding compliance and the fact that liability arises out of a retrospective amendment which could not be foreseen, the Tribunal ruled in favour of the Taxpayer.

2. Quick Flight Limited vs. ITO (Ahmedabad) Members: R.P. Tolani (J. M.) & Manish Borad (A. M.) ITA No.: 1204/Ahd/2014 A.Y.: 2011-12. Date of Order: 4th January, 2017

Counsel for Assessee / Revenue:  Urvashi Shodhan / Rakesh Jha

Section 206AA – Payments to a non-resident in terms of section 115A(1)(b) can be made after deducting tax at source @ 10% plus surcharge and cess even where the deductee has no PAN.
 
FACTS
The assessee was engaged in the business of chartering, hiring and leasing aircraft. During the year payment was made to a non-resident not having PAN. Tax was deducted at source @ 10% + surcharge and education cess on the payment of fees for technical services as per provisions of section 115A.  However, the Assessing Officer was of the view that tax was required to be deducted @ 20% in view of the provisions of section 206AA, as the payee was not having PAN and accordingly raised demand of Rs.30,250/- towards short deduction and Rs.5750/- towards interest on short deduction. Being aggrieved, the assessee went in appeal before the CIT(A) and contended that the payment made towards fees for technical services was u/s. 115A and the assessee has rightly deducted TDS @ 11.33% and provisions of section 206AA of the Act cannot be applied to the assessee. However, according to the CIT(A), the rates prescribed in section 115A apply when the agreement pertains to a matter included in Industrial Policy. However, since no such evidence had been produced to show that agreement with the payee falls under the Industrial policy, he confirmed the order of the Assessing Officer.
HELD
The Tribunal noted that the assessee was able to show that the agreement pertains to a matter included in Industrial Policy.  Further, relying on the decision of the Ahmedabad tribunal in the case of Alembic Ltd. vs. ITO (ITA No.1202/Ahd/2014), the Tribunal held that the provisions of section 206AA cannot be invoked by the Assessing Officer and he cannot insist to deduct tax @ 20% for non-availability of PAN.

1.Kumari Kumar Advani vs. Asstt. CIT (Mum) Members: G.S.Pannu (A. M.) and Ram Lal Negi (J. M.) ITA No.: 7661 /MUM/2013 A.Y.: 2012-13.

Counsel for Assessee / Revenue:  Ajay R. Singh / A. K. Kardam Section 234C – Shortfall in payment of advance tax on account of impossibility to estimate income – Assessee not liable to pay interest.

FACTS
The assessee, an individual, had filed her return of declaring income of Rs. 13.91 crore.  While processing such return u/s. 143(1), interest u/s. 234C of the Act was levied on account of shortfall in payment of advance tax on first and second installments, due on 15/09/2011 and 15/12/2011, in respect of gift of Rs.10.00 crores claimed to have been received on 17/12/2011. On such deferment in payment of instalments, interest of Rs.7.66 lakh was charged. On appeal, the levy was confirmed by the CIT(A).  

Before the Tribunal, the assessee argued that the income in question, namely gift of Rs.10.00 crore received on 17/12/2011 was in the nature of a windfall gain and, therefore, it was not possible for the assessee to estimate its accrual or receipt at any time when the payment for first and second installments of advance tax were due.  However, the revenue justified the orders of the lower authorities on the ground that the charging of interest u/s. 234C of the Act was mandatory in nature and relied on the judgment of the Delhi High Court in the case of Bill and Peggy Marketing India Pvt. Ltd. vs. ACIT (350 ITR 465).

HELD
The Tribunal noted that section 209 provides the computational mechanism of calculating advance tax to be paid. According to it, section 209 envisages calculation of advance tax based on the ‘estimate of current income’. A reading of section 209 would reveal that in order to calculate the amount of advance tax payable, an assessee is liable to estimate his income. Considered in this light, the facts of the present case clearly show that the gift of Rs. 10 crore, which has been received by the assessee on 17/12/2011 could not have been foreseen by the assessee so as to enable him to estimate such income for the purpose of payment of advance tax on an anterior date viz., 15/09/2011 or 15/12/2011. In such a situation, according to the Tribunal, the decision of the Hyderabad Bench of the Tribunal in the case of ACIT vs. Jindal Irrigation Systems Ltd. (56 ITD 164) relied upon by the assessee clearly militates against charging of interest u/s. 234C. As per the Hyderabad Bench of the Tribunal, an assessee could not be defaulted for a duty, which was impossible to be performed. To the similar effect is the decision of the Chennai Bench of the Tribunal in the case of Express Newspaper Ltd (103 TTJ 122). Therefore, the Tribunal held that the levy of interest u/s. 234C was untenable.  

As regards the plea of the Revenue that charging of interest u/s. 234C is mandatory in nature, the Tribunal observed that the same cannot be allowed to lead to a situation where levy of interest can be fastened even in situations, where there is impossibility of performance by the assessee. Charging of interest would be mandatory, only if, the liability to pay advance tax arises upon fulfilment of the parameters, which in the present case is not fulfilled on account of the peculiar fact-situation. Thus, according to the Tribunal such plea of the Revenue was untenable. According to it, the judgment of the Delhi High Court in the case Peggy Marketing India Pvt. Ltd., relied on by the revenue, stands on its own facts and is not attracted to the facts of the present case.

4. [2017] 79 taxmann.com 170 (Pune – Trib.) Asara Sales & Investments (P.) Ltd. v. ITO ITA No. 1345 (Pune) of 2014 A.Y.: 2009-10 Date of Order: 8th March, 2017

Section 10(38) – Long term loss arising on sale of equity shares of a listed company, in an off market transaction, can be set off against long term capital gain arising on sale of unquoted shares since 10(38) does not apply to sale of listed shares in an off market transaction as STT is not required to be paid on such a sale.

FACTS  
For the assessment year under consideration, the assessee company filed its return of income declaring therein a business loss of Rs. 13,54,362 and long term capital gain of Rs. (-) 3,85,58,664.  

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had, during the year under consideration, shown long term capital gain of Rs. 4,53,98,376 on sale of shares of unlisted group companies and a long term capital loss of Rs. 8,39,57,040 on sale of shares of listed company i.e. G. G. Dandekar Machine Works Ltd. (GGDL). The assessee had set off the long term capital gains of Rs. 4.53 crore against long term capital loss of Rs. 8.39 crore.  Thus, the long term capital loss in the return of income was Rs. 3.85 crore which was carried forward to subsequent assessment years.

The AO was of the view that since the shares of GGDL were acquired through a stock exchange after payment of STT, the long term capital gain arising on their sale, after holding them for a period of more than one year, would be exempt u/s. 10(38) of the Act.  According to the AO, the fact that the shares were sold in off market transaction without paying any STT would not take away or change the nature of shares, because the shares were listed on Stock Exchange and were otherwise eligible for levy of STT. He also held that the sale of shares of GGDL after 12 months to a 100% subsidiary in an off market transaction without payment of STT was a colorable device to enable the assessee to set off loss on sale of listed shares against profit on sale of unlisted shares. He also noted that the sale was on 18.3.2009 at a loss of Rs. 48 per share whereas the book value on the same date was Rs. 59.60 and on the same date unlisted shares of KSL have been sold @ Rs. 225 per share whereas the book value was only Rs. 134 per share which resulted in long term capital gain.  Both the transactions were made on the same date and with the same entity i.e. BVHPL which is again a 100% subsidiary of the assessee. The AO held that the long term capital loss of Rs. 8.39 crore on sale of shares of listed companies would not be set off in the current year against the long term capital gains of sale of listed shares nor it would be allowed to be carried forward to be set off in future and the long term capital gains of Rs. 4.53 crore on sale of shares of unlisted group company would be chargeable to tax in the year itself as long term capital gain @ 20%.

Further, since the shares of GGDL were sold for a price which was lower than their book value whereas the sale of shares of other unlisted companies was for a price higher than their book value, the AO held that the amount of loss to the extent of Rs. 2.75 crore (to the extent it was lower than the book value of the shares sold) would be ignored while setting it off against other income, if any, in the current year or for carry forward and set off in subsequent years.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the order of the AO and also treated the transaction to be a colorable device where the transaction was made on the same day in respect of  listed shares and sale of shares of unlisted group companies. He also rejected the contention with regard to off market transaction between the group companies.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD   
Applying the rule of literal interpretation to the provisions of the Act i.e. section 10(38) of the Act and section 88 of the Finance (No. 2) Act, 2004, it is clear that STT is to be paid on such transaction which are entered into through recognised Stock Exchange. The section does not provide that each transaction of sale of listed shares is to be routed through Stock Exchange. Applying the said principle, to the facts of the case, where the shares of a group entity which was a listed company i.e. GGDL were sold in off market transaction, then no STT is to be paid and the provisions of section 10(38) of the Act are not to be applied and consequently, set off of loss arising on sale of GGDL against the income from long term capital gains arising on sale of unquoted shares cannot be denied.

The Tribunal noted that while selling the shares of listed company GGDL, the assessee opted to transact on off market trade since the said shares were of Kirloskar group concern and the group did not want the shares to be picked up by any stranger, if traded on Stock Exchange.  Such business decision, according to the Tribunal, taken by the assessee cannot be doubted and called as colorable device to set off profits arising on sale of unquoted shares.

As regards the contention of the AO that the transaction was a colorable device since the shares were sold at Rs. 48 per share to another group concern whereas the book value of shares as on 31.3.2008 was Rs. 59.61 per share and these shares were acquired by the assessee in December 2006 @ Rs. 74.25 per share, the Tribunal held that the shares have not been sold to a subsidiary of the assessee but to a concern from whom the assessee has raised a loan to the extent of Rs. 18 crore and the decision was taken to sell the shares in an off market transaction to repay the loan and arrest the payment of interest on such loans. It also noted that the assessee had sold the shares at a market price prevailing on the date of the sale. It held that no fault can be found with such transactions undertaken by the assessee.  Accordingly, the total loss arising on the said transaction can be adjusted and set off against any other gain arising in the subsequent year.

The appeal filed by the assessee was allowed.

3. [2017] 79 taxmann.com 67 (Mumbai – Trib.) Anita D. Kanjani vs. ACIT ITA No.: 2291 (Mum) of 2015 A.Y.: 2011-12Date of Order: 13th February, 2017

Section 2(42A) – Holding period of an office premises commences from the date of letter of allotment since that is the point of time from which it can be said that assessee started holding the asset on a de facto basis.  

FACTS  
In the return of income for AY 2011-12, the assessee included in the total income long term capital gain arising on transfer of her office unit. The chronology of relevant events, with respect to the office unit sold during the previous year, were as under –

1    Date of allotment of office unit to the assessee    11.04.2005
2    Date of signing of the agreement to sell        28.12.2007
3    Date of registration with the Registrar        24.04.2008
4    Date of sale                    11.03.2011

The Assessing Officer (AO) computed the holding period with reference to date of registration of the agreement and held that the office unit was held for a period of less than 36 months before the date of transfer and was therefore, a short term capital asset. He rejected the contention of the assessee that the holding period should be computed from the date of letter of allotment of office.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where relying on various decision it was contended that the period of holding should be computed from the date of allotment of the property as per section 2(42A).  It was alternatively contended that in case holding period is to be computed from the transfer of the property, in that case, ‘date of execution’ of the sale agreement should be taken as date of transfer of the property because the document registered on a subsequent date operates from the ‘date of execution’ and not from the ‘date of registration’ in view of clear provisions of section 47 of the Registration Act, 1908.  If holding period was computed from the date of execution of the agreement, then, the impugned property shall be ‘long term capital asset’ in the hands of the assessee.

HELD  
The Tribunal observed that Karnataka High Court has in the case of CIT vs. A. Suresh Rao [2014] 223 Taxman 228 (Kar.) dealt with similar issue wherein the significance of the expression ‘held’ used by the legislature has been analysed and explained at length.  From the said judgment it is clear that for the purpose of holding an asset, it is not necessary that the assessee should be the owner of the asset based upon a registration of conveyance conferring title on him.  

It also noted that the ratio of the decisions of Punjab & Haryana High Court in the case of Madhu Kaul vs. CIT [2014] 363 ITR 54 (Punj. & Har.) and Vinod Kumar Jain vs. CIT [2014] 344 ITR 501 (Punj. & Har.) and of Delhi High Court in the case of CIT vs. K. Ramakrishnan [2014] 363 ITR 59 (Delhi) and of Madras High Court in the case of CIT vs. S. R. Jeyashankar [2015] 373 ITR 120 (Mad.).  

The Tribunal, following various decisions of the High Courts, held that the holding period should be computed from the date of issue of allotment letter. Upon doing so, the property sold by the assessee would be long term capital asset and the gain on sale of the same would be taxable as long term capital gains.  

This appeal filed by the assessee was allowed by the Tribunal.

2. [2017] 78 taxmann.com 242 (Delhi – Trib.) EIH Ltd. vs. ITO ITA Nos.: 2642 to 2645 (Delhi) of 2015 A.Ys.: 2004-05 to 2007-08 Date of Order: 14th February, 2017

Sections 15 r.w.s. 17, 192 – U/s. 192 there is no liability on the assessee to deduct tax at source on ‘TIPS’ recovered by the assessee from guests and paid to employees.

FACTS  
The assessee company was engaged in the business of a chain of hotels (The Oberoi Group). A survey u/s. 133A was carried out at the business premises of the assessee company at Hotel – The Oberoi, New Delhi. In the course of the survey proceedings, it was noticed that the assessee company was in receipt of extra amount known as “TIPS” paid by the guests in cash or through credit cards at the time of settlement of bills in appreciation of good services provided by the service staff. On disbursal of this amount, by the assessee to the employees, no tax was deducted.

The Assessing Officer (AO) was of the view that since TIPS are paid to the employees in lieu of rendering prompt services for their employer, hence these accrued to the employees for services rendered as employees for their employer. He, accordingly, held that the assessee has failed to deduct tax and passed separate orders holding the assessee to be an assessee in default and passed orders u/s. 201(1) / 201(1A) for each of the assessment years.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  
The Tribunal noted that the Apex Court in the case of ITC Ltd. vs. CIT (TDS) [2016] 384 ITR 14 (SC) has on analysis of section 15 has held that for the said section to apply, there should be a vested right in an employee to claim any salary from an employer or former employer. It held that since TIPS were received from the customers and not from the employer these would be chargeable in the hands of the employee as income from other sources and section 192 would not get attracted on the facts of the case. The Tribunal observed that the facts as considered by the Apex Court in the case of ITC Ltd.’s case (supra) would fully apply to the present case.  It also noted that the cognisance of the judicial precedence has already been taken by the co-ordinate “SMC” Bench in its order dated 12.7.2016 in the case of the assessee itself.

The Tribunal held that the assessee cannot be said to be in default of the provisions of section 192 of the Act as there was no liability of the assessee to deduct TDS under the said provision on TIPS recovered from hotel guests. Therefore, it cannot be held to be an assessee in default. Since interest u/s. 201(1A) can only be levied on a person who is declared as an assessee in default the question of interest does not arise. The Tribunal quashed the orders of the AO u/s. 201(1) / 201(1A) for the respective years.

The appeals filed by the assessee were allowed.

1. [2017] 78 taxmann.com 188 (Mumbai – Trib.) Bharat Serum & Vaccines Ltd. vs. ACIT ITA Nos.: 3091 & 3375 (Mum) of 2012 A.Y.: 2008-09 Date of Order: 15th February, 2017

Section 55 – Amount received for assignment of patent is taxable as capital gains u/s. 55(2)(a) and its cost of acquisition has to be taken as Nil.

FACTS  
The assessee company was engaged in the business of research development, manufacturing, wholesale trading and licensing of bio-pharmaceuticals, bio-technology products serums and process related technology. During the year under consideration, the assessee transferred a patent for Rs. 1.50 crore. The entire receipt on assignment of patent was regarded to be not taxable on the ground that the patent was a capital asset and no expenditure was incurred for acquiring the patent.

The Assessing Officer (AO) took the view that it was not possible to develop a process / patent without input from specialised/skilled personnel in a state-of-art research facility, that process of developing a patent was a part of the business of the assessee and that it had claimed all the expenses for skilled personnel and research facility in its P & L  Account.  

The claim made by the assessee that it had not incurred any cost for developing a patent was not accepted by the AO.  He held the amount received to be a revenue receipt.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that the facts of the present case were squarely covered by the provisions of section 55 of the Act and that the receipt had to be taxed as capital gains.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  
The Tribunal, at the outset, discussed the concept of patent and the history of patents. It mentioned that it is necessary to make a distinction between cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or copyrighted product or material. In cases where the payment is made to acquire patented or copyrighted products, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. It pointed out the distinction between a patent and a trademark. The Tribunal then discussed about the patented medicine ‘Profofal’ which was marketed by the assessee as Diprivan among others and was discovered in 1977. It observed that the medical patents require clinical tests and administering drugs to patients. Clinical tests have to be performed under controlled conditions. For understanding the effective mass and the side-effects of the medicine, large sample survey spread over a reasonable time span is a must.    

The Tribunal held that before getting a patent of medicine like the item under consideration, the assessee has to carry out a lot of research analysis and experimentation. Naturally, it would require incurring of expenditure for both the activities. Such a tedious and cumbersome process was adopted by the assessee to have a right to manufacture / produce / process ‘Profofal’.

Considering the recitals of the agreement for assignment of patent, the Tribunal held that the patent was for the purpose to have right to manufacture/produce/process some article/thing. The patent was registered for commercial exploitation of the same in India as well as in the international market. It was transferred to the assignee for exploiting it commercially. Section 55(2)(a) talks of right to manufacture, produce or process any article or thing. Therefore, as per the amended provisions, the right to manufacture/produce/process would be taxable under the head capital gains and cost has to be taken at Rs. Nil. It upheld the order of the CIT(A).

This ground of appeal filed by the assessee was dismissed.

34. Housing project – Deduction – Sections 40(a)(ia) and 80IB – A. Y. 2006-07 – Disallowance u/s. 40(a)(ia) cannot be treated separately but is to be added to gross total income eligible for deduction u/s. 80IB(10)

CIT vs. Sunil Vishwambharnath Tiwari; 388
ITR 630 (Bom):

The Assessee was eligible for deduction u/s.
80IB(10) and the same was allowed. In the A. Y. 2006-07, the Assessing Officer
made certain disallowances u/s. 40(a)(ia) of the Act, on account of non
deduction of tax at source and also did not allow deduction u/s. 80IB(10) in
respect of the increased income of the project. The Commissioner (Appeals) and
the Tribunal allowed the assessee’s full claim.

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

“i)   In view of the scheme of
section 40 deduction of tax at source was not effected by the assessee and
payment to contractors could not be deducted as the expenditure became
inadmissible. The expenditures were added back to the income being eligible
income. This income eligible for deduction in terms of section 80IB(10) only
increased by the figure of disallowed expenditure.

ii)   The Commissioner(Appeals)
had rightly pointed out that the deduction allowable u/s. 80IB(10) of the Act,
was with reference to assessee’s gross total income. Hence disallowance u/s.
40(a)(ia) cannot be treated separately and it got added back to the gross total
income of the asessee.

iii)   Section 40 pointed out
that due to error of the assessee, such expenditure could not be deducted while
computing the income chargeable under the head ”Profit and gains of business or
profession”. That was the only limited effect of the lapse on the part of the
assessee. The Appellate Tribunal had considered these facts and upheld them. No
substantial question of law arose for consideration.”

Section 92B of the Act – Accretion to brand value, resulting from use of brand name of foreign AE under technology use agreement; since that agreement was accepted as an arrangement at an arm’s length price, an aspect covered by that agreement did not result in a separate international transaction requiring benchmarking.

13. [2017] 81 taxmann.com 5 (Chennai – Trib)

Hyundai Motor India Ltd vs. DCIT

A.Ys.: 2009-10 to 2011-12,

Date of Order: 27th April, 2017

Facts

The Taxpayer was a fully owned subsidiary of a South Korean
automobile company (“FCo”). It was engaged in the business of manufacturing
cars in India. The Taxpayer and FCo had entered into agreement for use of
technology (“the agreement”). Under the agreement, the Taxpayer was mandated to
use the trademark owned by FCo (“the trademark”) on every vehicle manufactured
by it.

According to the TPO, by using the trademark, the Taxpayer
had significantly contributed to its development in Indian market and thereby
FCo had ‘benefited due to brand promotion activity carried out by the
Taxpayer’. Hence, The TPO opined that FCo should have compensated the Taxpayer
with arm’s length amount for the benefit acquired at the cost of the Taxpayer
which was deprived of developing its own brand name and logo.

The TPO took a view that the increase in brand value each
year could be attributed to every vehicle manufactured by all the group
companies. Since sales of the Taxpayer was 18.07 % of the global sales of FCo
group, 18.07% of the global appreciation in the brand value should be
attributed to the Taxpayer. This amount was quantified at Rs. 198.66 crore and
added to ALP of the Taxpayer.

The DRP confirmed the addition.

Held

Whether increase in brand value constitutes ‘international
transaction’? 

–   The TPO has emphasised on the benefit
accruing to FCo from increased brand valuation as a result of the Taxpayer selling
cars in India, and not as a result of conscious brand promotion by the Taxpayer
such as, incurring of advertising, marketing and sales promotion expenses.

–  According to the TPO, the trigger for the
impugned ALP adjustment is not the expense incurred by the Taxpayer, or any
efforts made by the Taxpayer, for brand building for FCo, but the mere fact of
the sale of cars made by the Taxpayer. Though the Taxpayer had not rendered any
services, it should be compensated for the increase in brand valuation, proportionate
to sale of cars by the Taxpayer vis-à-vis the global sale of cars of
that brand, as the increase in the brand valuation is, to that extent, due to
sale of cars by the Taxpayer.

–  The difference is that while AMP is a
conscious effort, brand building by sales simplictor is a subliminal exercise
and by-product of the economic activity of selling the cars in India.

     Whether use of brand name was privilege or
obligation of the Taxpayer?

–   FCo owns a valuable brand name which has
respect and credibility globally including in India. Hence, the use of brand
name owned by FCo is a privilege, a marketing compulsion and of direct and
substantial benefit to the Taxpayer.

Whether mere
use of brand name results in AEs?

–   U/s. 92A(2)(g) of the Act, two enterprises
are deemed to be AEs if “the manufacture or processing of goods or
articles or business carried out by one enterprise is wholly dependent on the
use of know-how, patents, copyrights, trade-marks, licences, franchises or any
other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention,
model, design, secret formula or process, of which the other enterprise is the
owner or in respect of which the other enterprise has exclusive rights”.

–   Hence, there can never be a comparable
controlled price for the kind of transaction between the Taxpayer and FCo
because, the moment use of an intangible like brand name is involved, the
entities entering into the transactions will become AEs.

     Whether incidental benefit to AE could be
‘international transaction’?

–   It is a fact that the use of brand name,
owned by FCo, in vehicles manufactured by the Taxpayer does amount to
incidental benefit to the AE of the Taxpayer since increased visibility to the
brand name does contribute to increase in its valuation.

–   In terms of section 92B of the Act, an
international transaction includes a mutual agreement or arrangement between
two or more AEs for the allocation or apportionment of, or any contribution to,
any cost or expense incurred or to be incurred in connection with a benefit,
service or facility provided or to be provided to anyone or more of such
enterprises.

–   This is not a case of allocation of,
apportionment of, or contribution to, any costs or expenses in connection with
a benefit, service or facility. There is no dealing in money in the present
case. Therefore, this limb of the definition is not relevant.

–   In respect of intangible property, only
purchase, sale or lease of intangible property is covered within ‘international
transaction’. However, in this case there is no purchase, sale or lease of
intangibles.

–  Even extended definition in Explanation
(i)(b) to section 92B(2), does not cover accretion to the value of intangibles.
Further, the TPO has also not raised the issue that the consideration paid for
the transactions under this agreement is not an arm’s length consideration.

–     Accretion in brand value due to use in
products of the Taxpayer cannot be treated as service either. A service should
be a conscious activity. A passive exercise cannot be a service. What is
benchmarked is not the accrual of ‘benefit’ but rendition of ‘service’. The
expressions ‘benefit’ and ‘service’ have different connotations, and what is
relevant, is ‘service’ and not the ‘benefit’. In this case, there is no
rendition of service.

–   For determination of arm’s length price, mere
rendition of service is not sufficient; it should be intended to result in such
benefit for which an independent enterprise would pay. Thus, two aspects need
to be present – first, rendition of service and second, benefit accruing from
such service. In the present case, since the first condition is not satisfied,
there is no question of benchmarking the benefit.

–   Unless a transaction affects profits, losses,
income or assets of both the enterprises, it cannot be an ‘international
transaction’. If the assets of one of the enterprises increase unilaterally,
without any active contribution by the other enterprise, such increase in
assets cannot amount to an ‘international transaction’.

–  The Taxpayer has not incurred costs, nor has
it made conscious efforts, for accretion in value of brand owned by FCo. Such
accretion also does not have any impact on profit, losses, income or alteration
in assets of the Taxpayer. Therefore, it cannot result in an ‘international
transaction’ qua the Taxpayer.

– It is not the case of the revenue
that there was any sale, purchase or lease of intangibles. Accretion to brand
value was a result of use of the brand name of foreign AE under the technology
use agreement which permitted as well as bound the Taxpayer to use the brand
name of FCo on the products manufactured by the Taxpayer. Since that agreement
had been accepted to be an arrangement at an arm’s length price, an aspect
covered by that agreement could not be subject matter of yet another
benchmarking exercise. Therefore, such accretion did not result in a separate
international transaction requiring benchmarking.

Sections 9, 172 of the Act; Article 9 of India-Denmark DTAA – since; director of shipping company was resident of Denmark; had been operating business wholly from Denmark; all important decisions were taken in Denmark; tax residency certificate issued by Denmark authorities showed shipping company as resident of Denmark, place of effective management and control of shipping company was in Denmark and accordingly, profits arising from operations of ships in international traffic were not taxable in India.

12. [2017] 80 taxmann.com 217 (Rajkot – Trib)

Pearl Logistics & Ex-IM Corporation vs. ITO

A.Ys. 2010-11 TO 2013-14,

Date of Order: 20th March, 2017

Facts

The Taxpayer was an agent of a Denmark based ship broker
(“DenCo”). DenCo was ‘disponent owner’ and another company (“FCo”) was
charterer of ship which carried cement to ports in India. Freight was payable
by FCo to DenCo.

The Taxpayer filed return of income under section 172(8) and
claimed that since DenCo was beneficiary of freight, it was entitled to benefit
of India- Denmark DTAA. Hence, DenCo was not liable to pay tax on fright in
India.

Held

–   According to section 172, income of owner or
charterer which receives freight is chargeable to tax. In this case, freight is
received by DenCo which has also earned the freight. Hence, income of DenCo is
chargeable to tax in India.

–   As per the tax residency certificate issued
by Danish tax authority, DenCo is resident of Denmark. Hence, DenCo can avail
of the benefit of India-Denmark DTAA.

–   As per article 9 of India-Denmark DTAA,
profits derived from operation of ships in international traffic shall be
taxable only in the State where the ‘place of effective management’ of the
enterprise is situated.

–   The Taxpayer has furnished several documents
showing that: the Director of DenCo was resident of Denmark; he was operating
business wholly from Denmark; all the important decisions were taken in the
meeting in Denmark. Therefore, the place of effective management and control of
DenCo was in Denmark.

–     DenCo was resident of Denmark and its ‘POEM’
was in Denmark. Therefore ‘head and brain’ of DenCo was situated in Denmark.
Accordingly, in terms of article 9 of India-Denmark DTAA, the profits derived
from operation of ship were not taxable in India.

Section 9 of the Act; Article 12 of India-USA DTAA – since professional fee paid to a US company for global biopharmaceutical strategic counselling and advisory services was for rendition of services and not for right to use information concerning industrial, commercial or scientific experience, it was not covered within definition of ‘royalty’ under article 12(3)(a) notwithstanding that in process of availing these services Taxpayer benefited from rich experience of service provider.

11.
[2017] 80 taxmann.com 275 (Ahmedabad – Trib)

Marck Biosciences Ltd. vs. ITO

A.Y.: 2009-10, Date of Order: 28th March, 2017

Facts

The Taxpayer was an Indian company. It paid professional fee
to a US company (“USCo”) for global biopharmaceutical strategic counselling and
advisory services, which comprised (a) business promotion; (b) marketing; (c)
publicity; and (d) financial advisory. In the agreement, the services were
termed as ‘Strategic and Financial Counselling Services”. According to the
Taxpayer, income embedded in professional fee paid for the said services was
not taxable in India in terms of India-USA DTAA. Hence, it did not withhold tax
from the said payment.

According to the AO, however, the rendition of services by
USCo constituted parting with the “information concerning industrial,
commercial and scientific experience”. Hence, the services rendered by
USCo were covered within the definition of “royalty” under Explanation 2 to
section 9(1)(vi) as also under article 12(3)(a) of India-USA DTAA.

Held

–   The payments made by the Taxpayer were for
rendition of the services, which comprised (a) business promotion; (b)
marketing; (c) publicity; and (d) financial advisory. The payments were not for
use of any information concerning industrial, commercial or scientific
information’.

–   The nature of payment should be characterized
from the activity in consideration of which the payment was made. The payment
was made for rendition of services and not for right to use any information
concerning industrial, commercial or scientific experience that was in
possession of the service provider.

–   The fact that in the process of availing
these services, the Taxpayer benefits from rich experience of the service
provider is wholly irrelevant. Accordingly, the impugned payment was not
covered within the definition of “royalty” under article 12(3)(a) of India-USA
DTAA.

Sections 9, 115A of the Act; Article 12 of India-Italy DTAA – on facts, since the new agreement executed by Indian company with foreign company had different terms from the earlier agreement, it could not be regarded as extension of old agreement; hence, royalty was taxable in terms of section 115A @10.5 per cent.

10. [2017] 80 taxmann.com 100 (Pune – Trib)

Piaggio & CSpA vs. DCIT

A.Ys.: 2010-11 and 2011-12,

Date of Order: 21st March, 2017

Facts

The Taxpayer was a company based in Italy. It was
manufacturing motorised two, three and four wheelers. It had a subsidiary in
India (“ICo”). The Taxpayer entered into agreement with ICo on 31-10-2003 for
grant of license of technology to manufacture three wheelers for goods
transportation in consideration for payment of royalty (“the old agreement”).
In terms of India-Italy DTAA, royalty was taxed @20 %.

Subsequently, on 1-8-2008, the Taxpayer and ICo entered into
another agreement (“the new agreement”). The Taxpayer offered the royalty
received in terms thereof for taxation @10.55 % as per section 115A of the Act.

According to the AO, the new agreement was merely an
extension of the old agreement. He, therefore, concluded that even in terms of
new agreement, royalty was chargeable to tax @20 %.

Held

–   Comparison of the terms in the old agreement
and the new agreement showed one main material difference. While the old
agreement mentioned two specific models, the new agreement mentioned class of
vehicles. Pursuant to the new agreement, ICo launched different models which
became possible because of the new agreement.

–  Another difference was that the old agreement
granted license only for sale in India, whereas the new agreement granted
license also for sale to any other country as may be agreed between the
Taxpayer and ICo.

– On the expiry of the old agreement, the
Taxpayer and ICo had renegotiated certain terms which culminated into the new
agreement. Accordingly, the new agreement was not an extension of the old
agreement but an independent legally enforceable agreement.

–  Therefore, the applicable tax rate on the
royalty income as per section 115A was 10 %.

Investment Opportunities in Cambodia: India’s Advantages Tax & Legal

1.      Introduction

1.1.    Cambodia’s economy grew with a GDP of 7.1%
in 2016 and expects growth of 7.3% for FY 2017-18. The expected growth in GDP
resulted rapid in development in various sectors, namely retail, technology,
e-commerce, infrastructure projects etc. Cambodia’s strategic location
in the heart of ASEAN between Vietnam, Thailand, Laos along with coastline
having an easy regional accessibility makes it an attractive investments
destination. By treating foreign investors and local investors equally it gives
an access to ASEAN’s 600-million-strong consumer market. The present foreign
policy allows a foreign investor to incorporate or establish with 100 % foreign
ownership an entity any kind. The only restrictions are in respect of land
ownership. Further, there are no restrictions on repatriation of money. 

2.      Structuring of entity

2.1     For establishing a business in Cambodia, a
Private Limited Company (“PLC”) is always advisable and to process the
incorporation, the Ministry of Commerce (“MoC”) is the regulatory authority and
it takes approximately 7 days, after the necessary documents are submitted for
incorporation. After obtaining the approval from MoC within 15 days, the
documents along with the certificate of incorporation must be submitted to
General Department of Taxation (“GDT”) to obtain Value Added Tax Certificate
(“VAT”) and Patent Tax Certificate (PTC) which can be obtained within 30 days
from the date of submission of documents. The Patent Tax Certificate is issued
for a specific business activities only and need to be renewed on an annual
basis.

3.      Taxation in Cambodia

3.1     The Law on Taxation (“LoT”) in Cambodia is
very simple. The only chargeable tax is the withholding tax and value added
tax, while there is no capital gain tax but tax on profits are applicable.

4.      Structure of entities

4.1     The following are the entities recommended
for doing business in Cambodia

a)  Private Limited Company

     The number of shareholders in the private
limited company ranges between 2 to 30 shareholders. The shares or securities
cannot be offered to the public but can only be offered to the shareholders,
family members and managers.

b)  Public Limited Company

     Unlike Private limited companies, it can
have more than 30 shareholders and the shares or securities can be offered to
the public. In Cambodia, only Public Limited Companies can conduct banking
business, insurance business or be a financial institution.

c)  Representative Office:

     An eligible foreign investor may establish
a Representative Office to facilitate the sourcing of local goods and services
and to collect information for its parent company.

d)  Branch Office:

     A Branch Office is an office opened by a
company for conducting a commercial activity. All activities of the Branch
office are like that of Representative office but in addition, it may purchase,
sell or conduct regular professional services or other operations engaged in
production or construction in the country.

e)  Subsidiary Company: 

     A subsidiary is a company that is
incorporated with either 100% or at least 51% percent of its capital being held
by a foreign company.

5.      Tax System in Cambodia:

5.1     Previously, the Cambodian tax system was
divided into three regimes: real regime, simplified regime and estimated
regime. Recently, all the three regimes have been merged into one regime called
the “Real Regime” and divided into three categories (a) Small Taxpayers (b)
Medium Taxpayers and (c) Large Taxpayers.

5.2     The following are the categories that are
sub categories under which an individual or an entity can be taxed.

–   Tax on Salary

          An individual resident in Cambodia is
liable for tax on salary on both foreign as well as Cambodian source, while a
non-resident person is liable to the tax on salary only on Cambodian source.

–   Withholding Tax (“WHT”)

          The general withholding tax shall be
determined as follows:

          Any resident taxpayer carrying on
business makes any payment to a resident taxpayer shall withhold 15% on
management, consulting, and similar services and royalties for intangibles and
interest in minerals, Income from movable and immovable 10%. Interest paid by a
domestic bank or saving institutions for fixed term 6% and non-fixed term 4%.

          Any
resident taxpayer to a non-resident taxpayer shall withhold, 14 % on interest,
royalties, rent, and other income connected with the use of property;
compensation for management or technical services and dividends.

6.      Fringe Benefits Tax(“FBT”)

          The employer is required to withhold
and pay tax at the rate of 20% of the total value of FB given to all the
employees.

7.      Value Added Tax (“VAT”)

7.1     VAT is only a charge on taxable supply i.e.
supplies of good for tangible property and supply of services for something of
value other than goods, land or money.

7.2     The rates of VAT are as follows:

i)   0% for any goods exported from the Kingdom of
Cambodia and services consumed outside Cambodia

ii)  10% is the standard rate which applies to all
supplies other than exports and non-taxable supplies.

8.      DTAA Singapore – Cambodia (yet to be
ratified):

8.1     On May 20, 2016, an agreement was entered
into between Government of Republic of Singapore and the Royal Government of
Cambodia for prevention of evasion of taxes on income and to avoid any resident
being taxed twice on the income earned. This agreement applies to taxation of a
resident of Cambodia, in respect to taxes on profit including Tax on Salary,
Withholding Tax, Additional Profit Tax on Dividend Distribution and Capital
Gains Tax, while in terms of Singapore applies to the Income Tax.

8.2    Resident (Art. 4)

          Under Article 4 of the DTAA,
“resident” means any person or individual or entity liable to pay tax based on
their domicile, place of incorporation, place of management, principal place of
business or any other activities of similar nature but
also includes State and any local authority or statutory body.

          The article further defines the term
“resident”, by prescribing the following conditions:

a)  only of the state where he has a permanent
home available; or

b)  If there is a permanent home in both the contracting
states, then it is to be determined based on personal and economic relations
are closer i.e. centre of vital interest; or

c)  In the absence of centre of vital interest,
then the place where he has a habitat abode; or

d)  If habitat abode of both the states, then to
be determined based on nationality; or

e)  If otherwise, then the competent authorities
of the contracting states shall settle by agreement mutually.

8.3    Permanent Establishment (Art. 5)

          The term Permanent Establishment “PE”
is defined under Article 5 includes place of management; branch; an office;
factory; workshop; warehouse; mine, an oil or gas well, a quarry or any other
place of extraction of natural resources; and (h) farm or plantation.

          The terms have been further elaborated
by including:

(a) Any activities that last for more than 6 months
in terms of a building site, a construction, assembly or installation project,
or supervisory activities in connection;

(b) Any activities that last for more than 183 days
within any period of twelve months about any furnishing of services, including
consultancy services, by an enterprise of a Contracting State through employees
or other personnel engaged by the enterprise for such purpose, but only if
activities for same or connected project within the other Contracting State;

(c) The carrying on of activities (including the
operation of substantial equipment) for more than 90 days in any twelve months’
period in the other Contracting State for the exploration or for exploitation
of natural resources.

          The Law on Taxation in Cambodia
defines PE under Article 3 (4).

8.4    Immovable Property (Art. 6)

          The term “immovable property”,
shall be defined under the law of the Contracting State in which the property i
is situated. But also, includes property accessory to immovable property,
livestock and equipment used in agriculture and forestry, but not include
ships, boats and aircrafts.

          In addition, any income earned by a
resident from immovable property including agriculture or forestry and applies
to income from the direct use, letting, or use in any other form of immovable
property situated in the other Contracting State may be taxed in that other
State.

          There is no specific provision under
the Law on Taxation for immovable property.

8.6    Dividends (Art. 10)

          The terms as defined under this
agreement means income from shares, mining shares, founders’ shares or other
rights, but does not include debt claims, participating in profits, as well as
income from other corporate rights and be taxed to a resident of other
contracting state. .

          If beneficial owner of the dividend is
a resident of other contracting state, then tax on dividend not to exceed 10%
of the gross amount.

          Under Cambodian law, there is Tax on
Profit and Article 3 (8) defines the term dividends. Recently a new regulation
with respect to dividend distribution from a resident taxpayer in Cambodia to
their non-resident shareholders.

8.7    Capital Gains (Art. 14)

          Any gains derived by the resident of
the Contracting State to be taxable:

a)  Alienation of Immovable property in other
contracting state taxable in other state unless it is related to the Permanent
Establishment of the enterprise situated or any independent personal service to
be taxed in other state.

b)  Alienation of ships or aircrafts or movable
property pertaining to such operation of ships or aircraft shall be taxable in
the state where it is alienated.

c)  Alienation of Shares of more than 50 % of
their value directly or indirectly from immovable property situated in other
state, to be taxable in the other state.

d)  Alienation of any other property other than
above, to be taxable in the contracting state of which the alienator is a
resident.

          Under Cambodian Law on Taxation, no
specific provisions but 0.1 % tax is to be paid on transfer of shares.

8.8    Associated Enterprise (Art. 9)

          The term “associated” means an
enterprise that participates directly or indirectly in the management, control
or capital of other enterprise or a person or individual directly or indirectly
in the management, control or capital of an enterprise of a Contracting State
and an enterprise of the other Contracting State,

          The term associated enterprise has not
been defined but the “related person” under Article 3(10) which includes
families or any enterprise which controls or is controlled or is under the
common ‘control’. The term control means ownership of 51% or more in value or
voting rights. Article 18 of the Law on Taxation (“LoT”) provides, subject to
certain conditions, a wide power to the General Department of Taxation (“GDT”)
in Cambodia to adjust the allocation of income and expenses between related
enterprises. According to the applicable law, two or more enterprises are under
common ownership, if a person owns 20% or more of the equity interests of each
enterprise. In the event, a parent company provides either services, a loan or
any other transaction that will result in remuneration from the owned company,
the GDT will usually verify that the so-called transactions are real.

8.9    Royalties (Art.12)

          The term ‘royalties’ means payments of
any kind received as a consideration for the use of, or the right to use, any
copyright of literary, artistic or scientific work including cinematograph
films, or films or tapes used for radio or television broadcasting, any patent,
trade mark, design or model, plan, secret formula or process, or for the use
of, or the right to use, industrial, commercial, or scientific equipment, or
for information concerning industrial, commercial or scientific experience.

          Any income arising in a Contracting
State, paid to a resident of the other Contracting State may be taxed in that
other State and be taxed in the contracting state as per the local laws, if the
beneficial owner is a resident of the other then the tax not to exceed 10% of
the gross amount.

          Otherwise, if the beneficial owner of
the royalties carries a business through a permanent establishment or has a
fixed place of business in the other contracting state in which the royalties
arise, the same is to be treated as an income earned from the connected PE or
fixed place.

          In case the amount of royalties
exceeds the amount that was agreed by the payer or beneficial owner, the amount
of tax shall not exceed 10 % of the gross amount. Any excess amount is to be
taxed as per the local laws in which the income accrued.

          There is no specific provision about
royalties, but as defined in the Intellectual Property Laws.

9.         DTAA
India – Singapore (1994) 209 ITR 1 (St)

9.1     Immovable properties (Art. 6)

          The term “immovable
property” shall mean the term as defined under the law of the contracting
state and shall also include property accessory to immovable property,
livestock and equipment used in agriculture and forestry, rights to which the provisions
of general law respecting landed property apply usufruct of immovable property
and rights to variable or fixed payments as consideration for the working of,
or the right to work, mineral deposits, sources and other natural resources.
Ships and aircraft shall not be regarded as immovable property. Income from the
direct use of or letting or any other form of use of immovable property is
taxed in the country where the property is located, including real-estate
enterprises.

9.2    Dividends (Art. 10)

          The term “dividends” means
income from shares or other rights not being debt-claims, participating in
profits, as well as income from other corporate rights of which the company
making the distribution is a resident. Any dividends paid to a recipient’s
country of residence from the other country to be taxed in the country
received. The dividend taxed in the source country is as follows:

a)       15% of the gross amount of the dividends
only while the tax rate reduced to 10 % of the gross amount the 25% of the
shares are owned by the recipient’s company.

b)       No dividend tax to be paid by Indian
resident shareholders who derive any profit from the Singapore or Malaysian
resident company in Singapore.

          The dividend income article does not
apply if the company paying is a resident or performs independent personal
services from a fixed base situated in the country and will be treated as
income of the permanent establishment.

Case Laws Referred:

1] Roop Rasyan Industries (P.) Ltd. vs. ACIT [2014] 150
ITD 193 (Mum.) (Trib.).

Dividend was not taxable in Singapore of which company paying
dividend was resident and, therefore, para 2 of article 10 of DTAA was not at
all relevant. Moreover, in terms of Article 10 of DTAA, dividend received by an
Indian company from a Singapore based company was subjected to tax at normal
rate of 30 %.

9.3    Capital gains (Art. 13)

          A resident of one contracting state
from the alienation of immovable property situated in other contracting state
to be taxed in that state. A resident with PE or fixed base in other
contracting state to be taxed for any gains derived from alienation of movable
property. Recently India and Singapore signed the third protocol on December
30, 2016 to amend the DTAA and the amendment is along the lines of India and
Mauritius DTAA that was also recently entered. The Protocol amends the
prevailing residence based tax regime under the Singapore Treaty and gives
India a source based right to tax capital gains which arise from the alienation
of shares of an Indian resident company owned by a Singapore tax resident.

(i) Taxation
of capital gains on shares

Under 2005 Protocol any capital gains derived by a Singapore
resident from alienation of share of Indian resident company to be taxable only
in Singapore after complying with limitation of benefit “LOB” clause. However,
the Protocol marks a shift from residence-based taxation to source-based
taxation. Consequently, capital gains arising on or after April 01, 2017 from
alienation of shares of a company resident in India shall be subject to tax in
India. The change is subject to the following qualifications: –

(a) Grandfathering Clause

Any capital gains arising from sale of shares of an Indian
Company acquired before April 01, 2017 shall not be affected by the Protocol
and would enjoy the treatment available under the Treaty.

(b) Transition
period

The Protocol provides for a relaxation of capital gains
arising to Singapore residents from alienation of shares acquired after April
1, 2017 but alienated before March 31, 2019 (“Transition Period”). The tax rate
on any such gains shall not exceed 50% of the domestic tax rate in India (“Reduced
Tax Rate”).

(c) Limitation of benefits

The Protocol provides that grandfathered investments i.e.
shares acquired on or before 1 April 2017 which are not subject to the
provisions of the Protocol will still be subject to Revised LOB to avail of the
capital gains tax benefit under the Singapore Treaty, which provides that:

–   The benefit will not be available if the
affairs of the Singapore resident entity were arranged with the primary purpose
to take advantage of such benefit;

–   The benefit will not be available to a shell
or conduit company, being a legal entity with negligible or nil business
operations or with no real and continuous business activities.

Case Laws: 

1] Praful
Chandaria vs. ADDIT [2016] 161 ITD 153 (Mum.) (Trib.)

Capital gain could not be held to be taxable in India in
terms of para 6 of article 13 of India-Singapore DTAA under which taxing right
has been given to resident State, that is, State of alienator, which in this
case was Singapore.

2]  Credit Suisse (Singapore) Ltd. vs. Asstt
DIT. [2012] 53 SOT 306 (Mum.)(Trib.)

Gain earned on cancellation of foreign exchange forward
contracts is a capital receipt and must be treated as capital gains.

The Indian companies/ enterprise can look forward for
investment in emerging sectors like Information Technology & Ecommerce,
Infrastructure, venture capital, health care for supply of medical equipment’s,
tourism, education, technology transfer etc. 

11.    Conclusion

          To encourage India’s Act East Policy,
India and Cambodia signed a Bilateral Investment Treaties (BIT) to promote and
protect investments. In the absence of any such bilateral agreements or DTAA,
by incorporating company in Singapore. Indian entities could make an entry into
ASEAN Market or Cambodia and would be able to obtain the reliefs available
under the DTAA between Singapore – Cambodia DTAA using either of the countries as
a PE. In addition, the Cambodia grants tax holiday up to nine (9) years and
also 100 % exemption on export.

22. TS-40-ITAT-2017(Del) Net app B.V vs. DDIT A.Ys.: 2008-09 and 2010-11, Date of Order: 16th October, 2016

Article 5 of India-Netherlands DTAA – Indian subsidiary
rendering certain services to its parent, carries on subsidiary’s own business
in India and does not result in PE trigger for parent in India. Mere fact that
subsidiary and parent have common directors does not result in exercise of control
by the parent on the subsidiary

Facts

Taxpayer, a Netherlands Company (FCo), was engaged in the
business of –

–  Sale of storage system equipment and products
including embedded software

–  Sale of subscriptions

–  Installation, warranty and professional
services with respect to data migration, data integration and disaster recovery
services.

FCo sold goods and services in India through third party
distributors who were appointed on non-exclusive basis. Further, FCo had a
subsidiary in India (ICo), which rendered certain services to the FCo pursuant
to a “commission agent agreement (CAA)”. In terms of CAA, services rendered by
ICo included, marketing and sales support services, assistance in organising
trade shows and pre sales marketing, etc.

Assessing Officer (AO) contended that (a) FCo had a business
connection in India and hence its income in India was chargeable to tax under
the Act; (b) marketing activities being the core business activities of FCo
were carried on by ICo in India. Without such activities of ICo supply/services
by FCo was not possible in India; (c) ICo acted as sales office in India and
hence created a Permanent Establishment (PE) for FCo in India under
India-Netherlands DTAA; (d) Alternatively, ICo had the power to conclude
contracts on behalf of FCo in India as both the entities have common directors
and hence created a dependent Agent PE (DAPE) in India.

FCo contended that the sales in India were carried on by it
through independent distributors. Further, ICo did not have an authority to
conclude contracts on behalf of FCo in India nor did it maintain any stock of
goods on behalf of FCo. ICo derived income from other activities in its own
rights such as IT and ITEs services and hence was not economically dependent on
FCo. Merely because FCo and ICo have common directors does not result in DAPE
in India.

FCo also contended that ICo was merely a service provider and
its employees were working under ICo’s own control and instruction. ICo did not
result in a fixed place PE or Agency PE of FCo in India. Without prejudice, the
activities carried on by ICo are preparatory and auxiliary and hence does not
result in tax presence in India.

Held

–  Services rendered by ICo to FCo, results in a
business connection for FCo in India and thus income of FCo is subject to tax
in India under the Act. One will have to thus evaluate taxability under the
DTAA.

–  A subsidiary company by itself does not
constitute a PE. None of the employees of the FCo are present in India nor are
the personnel or employees of FCo visit India. ICo is a separate legal entity
and has its own board of directors, premises, employees, contract, etc. and the
employees work under the control and supervision of ICo in India and not the
FCo. No evidence has been furnished to show that ICo carries on business of FCo
in India.

–  In terms of the CAA, ICo is required to
merely inform FCo if any orders are placed by the customer in India. It would
then be the sole discretion of FCo to accept or reject it. Further,  ICo has no authority to bind FCo in relation
to any orders received by it.

–   ICo is merely a service provider to FCo and
carries on its own business. It cannot be considered as carrying on the
business of FCo in India.

–  Common directors of FCo and ICo are not
engaged in the day to day activities, negotiation of contracts, marketing
function in India on behalf of the FCo. Nothing has been brought on record to
show that ICo was subject to detailed instruction and control of FCo. Merely
the fact that the directors are common does not result in exercise in control
by FCo over ICo.

–   The revenue streams of ICo also clearly
suggests that it does not derive its income wholly or substantially from FCo,
but from other group entities as well. Thus ICo does not qualify as a dependent
agent of FCo.

21. TS-701-ITAT-2016(Chny) Sical Logisticts Ltd. vs. ACIT(IT) A.Ys.: 2002-03 to 2005-06, Date of Order: 14th December, 2016

Article 12 of DTAA, Section 9(1)(vi) and 172 of the Act –
Payment made for hiring of vessel on time charter basis does not involve
control and possession of the vessel and does not amount to “equipment
royalty”. Hire charges are covered by section 172 and not subject to withholding
u/s. 195

Facts

The Taxpayer, an Indian company, was engaged in carrying on
the business of transporting coal. Taxpayer had hired the vessels owned by
Foreign Shipping Companies (FCo) for transporting the cargo on a time charter
basis and paid hire charges to FCo without withholding taxes thereon.

The Captain/Master of the vessel, crew and other staff of the
ship were controlled by the ship owner, i.e FCo. The repairs and maintenance as
well as the insurance of the vessel was taken care of by FCo. Taxpayer merely
intimated FCo about the availability of the cargo and from where to where the
cargo had to be moved.

Taxpayer argued that payments made to FCo was for
transportation of goods and hence covered u/s. 172 of the Act, which is a
complete code in itself and hence there is no requirement to withhold taxes
u/s. 195 of the Act.

AO contended that the charges paid by the Taxpayer were on
account of the use and hire of the ship and hence, it amounts to royalty within
the meaning of section 9(1)(vi) of the Act and Article 12 of DTAA and hence
subject to withholding u/s. 195 of the Act. Accordingly, AO disallowed the hire
charges paid to FCo for failure to withhold taxes by holding that section 172
is not applicable in respect of hire charges paid to FCo.

Aggrieved by the order of AO, the Taxpayer appealed before
CIT(A), who upheld the order of AO, Taxpayer thus appealed before the Tribunal

Held

–   In the case of Asia Satellite
Telecommunication Co. Ltd. vs. DCIT (332 ITR 340), it was held that for
payment to qualify as equipment royalty’, possession and control are over the
equipment is essential. In the present case, the Taxpayer has neither control
nor possession over the vessel. As noted, the captain/master and the crew were
instructed, directed and were under control of FCo and not the Taxpayer.

–  One needs to differentiate between ‘letting
the asset’ and ‘use of asset’ by the owner for providing services. In the
present case, hire charges paid to FCo was for services of moving the goods by
a fully manned ship. It was not for letting the vessel, Taxpayer only had the
right to utilise the space in the vessel and was not authorised to operate or
exercise control over the vessel.

–   In the present case, FCo did not enjoy any dedicated
berthing facility. Further, the vessel was in Indian waters only for a short
duration and hence does not result in a PE in India. Reliance of AO on Madras
HC ruling in the case of Poompuhar Shipping Corporation (360 ITR 257) is
wrongly placed as Madras HC was concerned with a case where the Taxpayer had a
facility of berthing at an Indian port guaranteed for foreign ship chartered
leading to creation of Permanent Establishment (PE) for the Taxpayer.

–  Thus payment of hire charges does
not amount to royalty under the Act as well as DTAA. The hire charges paid to FCo is covered by section 172 of the Act.

20. TS-7-ITAT-2017(Ahd)-TP ACIT vs. Veer Gems A.Y: 2008-09, Date of Order: 3rd January, 2017

Section 92A of the Act – Reference to “management, control
and capital’ in section 92A(1) is to be understood based on the illustrations
provided u/s. 92A(2) alone – A partnership firm is not controlled by an
individual and hence Clause (j) of section 92A(2) dealing with control by
common individuals and those relatives, does not apply to the facts of the
present case

Facts

Taxpayer, an Indian partnership firm and tax resident of
India, was engaged in the business of manufacture and sale, of polished diamonds
both in India and outside India. The partners of the Taxpayer firm were three
brothers (along with their wives and sons).

During the year under consideration, the Taxpayer firm had
entered into certain international transactions with a Belgian entity (FCo).
FCo was owned and controlled by fourth brother (along with his wife and son) of
the partners of Taxpayer firm.

Assessing Officer (AO) contended that since FCo is controlled
by another brother of the partners, it is to be treated as Associated Enterprises
(AE) in terms of section 92A(2) of the Act and, accordingly, made a reference
to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP)
of the transactions entered by Taxpayer with FCo . Thereby, the TPO made an ALP
adjustment u/s. 92CA(3) of the Act.

Aggrieved by the order of the TPO, the Taxpayer appealed to
Commissioner of Income-tax (Appeals) i.e. CIT(A).CIT(A) without discussing the
primary issue of the existence of an AE relationship in terms of section 92A of
the Act, proceeded to examine the correctness of the ALP and deleted the
impugned adjustment.

Aggrieved by the order of CIT(A), revenue appealed before the
Tribunal. Additionally, Taxpayer also appealed before the Tribunal.

Held

Section 92A(1) of the Act provides that an enterprise, in
relation to the other enterprise, would be regarded as AE if, the enterprise
participates, directly or indirectly, in the management or control or capital
of the other enterprise or if the persons who participate in management, control
or capital of both the enterprises are common.

Section
92A(2) of the Act only provides illustrations of the cases in
which an enterprise participates in management, capital or
control of another enterprise.

–   The terms ‘participation’, ‘management’, and
‘control’ are not defined under the Act. One has to thus take recourse to
sub-section (2) to section 92A of the Act which gives practical illustrations,
to understand the meaning of ‘participation in management or capital or
control’. These illustrations are exhaustive and not illustrative.

–   Section 92A(2) governs the operation of
section 92A(1) by controlling the definition of participation in management or
capital or control by one of the enterprises in the other enterprise. If a form
of participation in management, capital or control is not recognised by section
92A(2), it does not result in enterprises being treated as AEs.

–   Even if one enterprise ends up having a de
facto or even de jure participation in the management, capital, or control of
the other enterprises, the two enterprises cannot be said to be AEs, unless
such participation in management, capital or control is covered by section
92A(2). Tribunal relied on Orchid Pharma Ltd vs. DCIT [(2016) 76 taxmann.com
63 (Chennai)] and Page Industries Ltd vs. DCIT [(2016) 159 ITD 680
(Bang)]

–   Clause (j) of section 92A(2) which is
relevant in the present fact pattern provides that two enterprises are to be
treated as AE if one enterprise is controlled by an individual and the other
enterprise is also controlled by such individual or his relative or jointly by
such individual and relative of such individual. In the present case, since the
Taxpayer is a partnership concern, it cannot be said to be controlled by an ‘individual’
and consequentially clause (j) cannot be invoked in the present case.

–   Even though a certain degree of control may
actually be exercised by these enterprises over each other due to relationships
of the persons owning the enterprises, that itself is not sufficient to hold
the two enterprises as AEs.

–   Taxpayer and FCo are thus not to be treated
as AEs.

Sale In The Course Of Import Vis-À-Vis Works Contract

Introduction

Under Sales Tax Laws, sales effected in the course of import
are exempt. The protection is given by Article 286 of the Constitution of
India. The nature of sale in the course of import is defined in section 5(2) of
the CST Act, 1956 which is as under;

“(2) A sale or purchase of goods
shall be deemed to take place in the course of the import of the goods into the
territory of India only if the sale or purchase either occasions such import or
is effected by a transfer of documents of title to the goods before the goods
have crossed the customs frontiers of India.”

It can be seen that there are two limbs in above
section.   The first limb covers the sale
which occasions the import.  The second
limb covers sales which are effected by transfer of documents of title to goods
before the goods cross Customs Frontiers of India.

In relation to first limb, there are a number of precedents.
There are cases, where importer has committed sale of goods to be imported, to
its buyer and the actual import is made after such commitment. The first sale
by foreign seller to importer is occasioning the import and hence covered by
first limb. However, it is also possible that the sale made by importer to the
local buyer after import can be covered by the said first limb. However, the
issue is debatable and depends upon facts of each case.

After the 46th amendment to the Constitution, the
works contract sales are also brought in taxable net under sales tax laws.
Issue arises as to whether the theory of sale in the course of import, more
particularly sale to local buyer, after import, can be covered within first
limb of section 5(2) of the CST Act.

Inextricable link

For claiming sale to local buyer after import, as covered by
first limb as sale in the course of import, it is necessary that there is
inextricable link between import and local sale. In other words, it is required
to be seen whether the import and local sale after import are interlinked.
There are number of criteria to decide inextricable link.

Judgment of Supreme Court

Recently, the Hon’ble Supreme Court had an occasion to decide
such an issue. The judgment is in case of Commissioner, Delhi Value Added
Tax vs. ABB Ltd. (91 VST 188). The short facts of the case noted by the
Hon’ble Supreme Court are as under;

“3. Before adverting to the main issue as to whether the High
Court judgment is correct in law as well as in facts or not, it would be
appropriate to notice some of the relevant facts. The respondent is a Public
Limited Company engaged, inter alia, in manufacture and sale of
engineering goods including power distribution system and SCADA system. It
appears to be a market leader in power and automation technologies. It is a
subsidiary of ABB Ltd., Zurich Switzerland which has operational presence in
over 100 countries and employs around 1,30,000 personnel. On 15.05.2003 DMRC
invited tenders for supply, installation, testing and commissioning of traction
electrification, power supply, power distribution and SCADA system for Line 3
Barakhamba Road-Connaught Place-Dwarka Section of the DMRC. Respondent
responded.

4. DMRC short listed the respondent and then executed
the contract under which the respondent had to provide transformers,
switch-gears, High Voltage Cables, SCADA system and also complete electrical solution,
including control room for operation of metro trains on the concerned Section.
The Bid Document contained detailed bill of goods, quantities and
specifications for the goods, sources (i.e, name of the manufacturer/brand),
detailed terms and conditions requiring approval of sub-contractors/ suppliers
and testing. The goods as also the components of works required certification
as well as acceptance. The NIT required both, Technical Bid and Financial Bid.
Besides the quotation of lumpsum price for the entire scope of work the Bid
Document required individual breakup of price of goods and other details. Bid
submitted by the respondent finally culminated into a contract on 04.08.2004.
The contract document comprised of Special Conditions of Contract, General
Conditions of Contract etc.”

The Delhi sales tax authorities held that there was no link
between the import and contract between DMRC (contractee) and supplier of goods
i.e. ABB Ltd (importer). In other words the claim of sale, in the course
import, by ABB Ltd to DMRC under works contract was disallowed.

Hon’ble Delhi High Court, after going through the contract
allowed the transaction as sale in the course of import and accordingly held it
exempt. Before the Supreme Court, similar arguments were repeated. In
particular, sales tax department relied upon judgment in case of M/s Binani
Brothers Pvt Ltd (1974)1 SC 459. The Hon’ble High Court has allowed the
claim based on judgment in case of K. G. Khosla & Co AIR 1966 SC 1216.
The Hon’ble Supreme Court dealt with this argument elaborately with
reference to above judgments. The observation of the Hon’ble Supreme Court are
as under :-  

“12. For analysing the main contention advanced on
behalf of the appellant that the present case is identical to that of the
assessee in the case of Binani Bros. (supra), we have examined
the facts of Binani Bros. (supra) with meticulous care. In para
13 of that judgment the most peculiar and conspicuous aspect of K.G. Khosla
case (supra) was noticed and highlighted that “under the contract of
sale the goods were liable to be rejected after a further inspection by the
buyer in India.” In the same paragraph it was further highlighted with the help
of a quotation from K.G. Khosla case (supra) that movement of
goods imported to India was in pursuance of the conditions of the contract
between the assessee and the Director General of Supplies. There was no
possibility of such goods being used by the assessee for any other purpose. In
the next paragraph of the Report the peculiar facts of Binani Bros. (supra)
were highlighted in the following words, “….. the sale by the petitioner to the
DGS&D did not occasion the import. It was purchase made by the petitioner
from the foreign sellers which occasioned the import of the goods”. In paragraph
16 it was further pointed out that there was no obligation on the DGS&D to
procure import licences for the petitioner.

13. There is no difficulty in holding that Binani
Bros. (supra) did not differ with the earlier judgment of a
Constitution Bench in the case of K.G. Khosla (supra). A careful
analysis of the facts in Binani Bros. (supra) leads to a
conclusion that the case of West Bengal Sales Tax authorities in that matter
that there were two sales involved in the transactions in question, one by the
foreign seller to the assessee and the second by the assessee to the DGS&D,
because there was no privity of contract between the DGS&D and the foreign
sellers, was accepted mainly because the assessee was found entitled to supply
the goods to any person, even other than DGS&D because there was no
specification of the goods in such a way as to render it useable only by the
DGS&D. This was coupled with the fact that the latter had imposed no
obligation on the assessee to supply the goods only to itself. Further, there
were no obligations of testing and approving the goods during the course of
manufacture or for that matter, even at a later stage with a right of
rejection. Such a right of rejecting the specific goods in the present case is
identical to the similar right in respect of goods in K.G. Khosla case (supra).
Hence we are unable to accept the main contention of the appellant that this
case is similar to that of Binani Bros (supra). To the contrary, we
agree with the reasonings of the High Court for coming to the view that the
present case is fit to be governed by the ratio laid down in K.G. Khosla’s
case (supra).

14. The legal principles enunciated in K.G. Khosla (supra)
have been reiterated in State of Maharashtra vs. Embee Corporation, Bombay
and stand supported by the judgment in the case of Deputy Commissioner of
Agricultural Income Tax and Sales Tax, Ernakulam vs. Indian Explosives Ltd.,
as well as in Indure Ltd. and Anr. vs. CTO & Ors. In these cases,
sale in course of imports was accepted without requiring privity of contract
between the foreign supplier and the ultimate consumer in India.”

Conclusion

Thus, the Hon’ble Supreme Court allowed the
claim. From the above judgment it becomes clear that the transactions falling
under ‘works contract’ are also eligible for exempted sale as Sale in the
course of import. The judgment will be useful for future guidance on the issue.

Transfer of Cenvat Credit in Merger & Amalgamation – Recent Amendment

Transfer of CENVAT Credit – Existing Provisions under Rule 10
of CENVAT Credit Rules, 2004 (‘CCR’)

If a manufacturer of the final products shifts his factory to
another site or the factory is transferred on account of change in ownership or
on account of sale, merger, amalgamation, lease or transfer of the factory to a
joint venture with the specific provision for transfer of liabilities of such
factory then, the manufacturer shall be allowed to transfer the CENVAT credit
lying unutilised in his account to such transferred, sold, merged, leased or
amalgamated factory.

If a provider of output service shifts or transfers his
business on account of change in ownership or on account of sale, merger,
amalgamation, lease or transfer of the business to a joint venture with the
specific provision for transfer of liabilities of such business then, the
provider of output service shall be allowed to transfer the CENVAT credit lying
unutilised in his account to such transferred, sold, merged, leased or
amalgamated business.

The transfer of the CENVAT credit under sub–rules (1) and (2)
shall be allowed only if the stock of inputs as such or in process, or the
capital goods is also transferred along with the factory or business premises
to the new site or ownership and the inputs, or capital goods, on which credit
has been availed of are duly accounted for to the satisfaction of the Deputy
Commissioner of Central Excise or as the case may be, the Assistant
Commissioner of Central Excise

Amendment in Rule 10 of CCR vide Notification No. 4/2017 –
CE(NT) dated 02/02/2017

In Rule 10 of the said rules, after sub-rule (3), the
following sub-rule shall be inserted, namely :-

(4) “Subject to the provisions contained in sub-rule
(3), the transfer of the CENVAT credit shall be allowed within a period of
three months from the date of receipt of application by the Deputy Commissioner
of Central Excise or Assistant Commissioner of Central Excise, as the case may
be:

Provided that the period specified in this sub-rule may, on
sufficient cause being shown and reasons to be recorded in writing, be extended
by the Principal Commissioner of Central Excise or Commissioner of Central
Excise, as the case may be, for a further period not exceeding six months.”

Brief Analysis of the amendment

Rule 10 of CCR contains specific provisions for transfer of
unutilised CENVAT credit, in cases where, a manufacturer or a service provider
shifts his factory/premises to another site or transfers his business, on
account of sale, merger, amalgamation, lease etc. The transfer of credit
in such cases is allowed on the condition that the stocks of inputs and capital
goods are transferred as well. Further, the said inputs or capital goods, on
which credit has been availed, need to be duly accounted for to the
satisfaction of the concerned authorities.

Based on practical experience of central excise and service
tax administration, it is noticed that invariably attempts are made by Central
Excise department to raise frivolous objections and deny transfer of unutilized
CENVAT credit in case of business restructuring generally resulting in hardship
and avoidable litigation.

In particular, provisions under Rule 10 of CCR have led to
several disputes. The departmental authorities insist that prior permission is
required for transfer of unutilised CENVAT credit, while the tax payers take a
position that mere intimation was sufficient to transfer the unutilised credit.

Some relevant judicial considerations are given hereafter for
reference:

In Hewlett Packard (I) Sales vs. CC (2008) 6 STR 155; 211
ELT 263 (CESTAT), it has been held that prior permission of AC / DC is not
required for transfer of credit relying on Solaris Biochemicals vs. CCE
(2005) 179 ELT 216 (CESTAT) – followed in Kiran Pondy Chems vs. CCE
(2009) 239 ELT 192 (CESTAT SMB); Flex Art Foil P Ltd. vs. CCE (2010) 260 ELT
261 (CESTAT) [view upheld in CC vs. Hewlett Packard India Sales Ltd.
(2012) 279 ELT 203 (Karn HC DB).]

In CCE vs. Amar Traders (2008) 222 ELT 400 (CESTAT SMB),
assessee had taken CENVAT credit after intimating about merger and stock
(without seeking any permission). It was held that assessee is eligible for
CENVAT credit of duty paid on stock.

Rulings which have held that permission is not required to
transfer the balance credit – [CCE vs. Tata Auto Components Systems (2011)
33 STT 294; 277 ELT 318 (Karn HC DB); Om Glass Works vs. CCE (2012) 279 ELT 313
(CESTAT SMB).]

In CCE vs. Nagarjuna Agrichem (2008) 222 ELT 232 (CESTAT
SMB), it was observed that Rule 10 does not lay down any condition for
seeking permission from authorities.

In most of the judicial cases, relating to transfer of
unutilized CENVAT credit in case of business structuring, the matter has been
decided in favour of tax payers.

Under this backdrop, a new sub-rule 4 has been inserted with
effect from 02/02/2017 in Rule 10 of CCR, to provide that transfer of
unutilised CENVAT credit shall be allowed by the jurisdictional authorities
within 3 months (to be further extended by 6 months on sufficient cause being
shown) from the date of receipt of application by the manufacturer or service
provider.

The wordings of this newly introduced clause, indicates that
the unutilised CENVAT credit cannot be utilised by the new entity/unit unless
express written approval is received from the concerned authorities.

Some Practical Issues from the amendment

a) It is likely to increase the compliance
procedures for tax payers who have multiple premises/factories and consequently
multiple registrations under central excise and service tax. This could also
lead to an overall delay in the entire process, with the various jurisdictional
authorities disposing off applications at different times.

b) Pending
approval from the concerned authorities or in a case where the application is
rejected by the authorities, there could be situations where the new
entity/unit has to discharge the output tax liability of both the current
operations as well as new operations which may have to be paid in cash without
being able to utilise CENVAT credit of the transferor entity/ factory. This
could pose severe working capital constraints.

c) There could be a scenario where the authorities
do not issue the formal approval within the prescribed time. In such a case,
the amendment is silent as to whether or not, transfer of unutilised CENVAT
credit would automatically stand permitted after the expiry of the prescribed
time period.

Conclusion

Mergers and amalgamations are a very common phenomenon in the
fast changing business environment globally as well as in India. Hence, it is
essential that in order to promote the cause of “ease of doing business”, the
relevant tax laws are business friendly so as to encourage smooth & easy
business restructuring. The amendment made in Rule 10 of CCR with effect from
02/02/2017, could result in long drawn litigations and create uncertainty as
regards entitlement to the benefit of unutilised CENVAT credit at the end of
transferor company or entity, by the transferee company or entity. 

In light of the foregoing, the following is recommended:

Appropriate clarifications need to be issued by
CBEC to address practical issues arising from the amendment so as to avoid
hardships to tax payers, in case of business restructuring. In order to encourage
mergers and amalgamations and business restructuring generally and also to
promote the cause of “ease of doing business”, transfer of unutilised CENVAT
credit may be permitted provisionally, pending disposal of application for
transfer of credit based on an undertaking that can be given by the transferor
company or entity to safeguard interest of revenue. While finalising GST
legislation, it should be ensured that these concerns are appropriately addressed.

Welcome GST Indian GST: Goods and Services Tax – Overview & Framework


  1.        Introduction

1.1.      Goods and Services Tax (“GST”) is a
landmark indirect tax reform knocking at our doors. The framework for the
proposed GST Law is provided through the Constitution (101st) Amendment Act,
2016. Section 12 of the said Act dealing with the constitution of the GST
Council was notified on 12.09.2016 and the balance sections of the said Act
have been notified with effect from 16.09.2016 vide Notification No. F. No.
31011/07/2014-SO (ST). In view of sections 17 and 19 of the said Amendment Act,
many of the existing indirect taxes can continue only up to a period of one
year from the above notified date i.e. Existing levies like central excise
duty, value added tax, central sales tax, etc. cannot continue after
16.09.2017. The Union Finance Minister has therefore reiterated the commitment
to introduce GST w.e.f. 01.07.2017.

1.2.     In June 2016, the Empowered Committee of
the State Finance Ministers released a draft of the proposed GST Law for public
comments. Based on the public comments received, the GST Council Secretariat
released a revised draft of the proposed GST Law for education of the trade.
The revised draft of the proposed GST Law is the basis of this article.

2.        Dual Model of GST

2.1.     GST is proposed to be a comprehensive
indirect tax levy on manufacture, sale and consumption of goods as well as on
the services at a national level. In an utopian situation, the tax has to be a
singular tax on all supplies with a uniform rate and seamless credits for taxes
paid at the earlier stage. The current distinction between goods and services
and between concepts of manufacture, sale, deemed sales, etc. should be
subsumed in such a utopian GST.

2.2.      However, considering the federal structure
of India, the Empowered Committee of State Finance Ministers have worked out a
dual GST model for India. In this model, both the Central and the State
Governments would levy Central GST (“CGST”) and State GST (“SGST”) respectively
on the same comprehensive base of all supplies, thus eliminating the
distinction between goods and services for the purpose of levy of tax.

3.        Destination Based Consumption Tax

3.1.     Since the State Governments would also
have jurisdiction to levy tax on supplies, the need for addressing issues
related to interstate supplies arises. GST is designed to be a destination
based consumption tax and therefore in case of interstate supplies, the tax on
the interstate supply must accrue to the destination State. This would also
enable seamless flow of credit in case of interstate supplies for business
purposes.

3.2.      Extending the principle of destination
based consumption tax, supplies imported into the country would attract GST
whereas supplies exported from the country need to be zero rated (i.e. not
liable for payment of GST with unfettered input credit).

3.3.    To enable a smooth implementation of the
above propositions, the interstate supplies, imports and exports are governed
by an Integrated GST(“IGST”). The IGST rate is proposed to be determined by
considering the CGST and SGST Rates. Effectively, in IGST, there would be two
components i.e. CGST and SGST, out of which, the portion of CGST will be held
by the Central Government and the portion of SGST will be transferred to the
destination State Government. Thus, for IGST, the Central Government will work
as a clearing house for the states where consumption takes place. IGST will
also enable smooth flow of credits between the origin and the destination
States.

3.4.   In order to ensure smooth flow of credit
and reduce the documentation requirements, IGST is proposed not only on
interstate sales but also on interstate supplies including branch transfers.

4.        Salient Features of Constitution
Amendment Act

4.1.     The term ‘GST’ is defined in Article
366(12A) of the Constitution of India to mean “any tax on supply of goods or
services or both except taxes on supply of the alcoholic liquor for human
consumption”.

4.2.    Article 366(26A) of the Constitution of
India provides that “services means anything other than goods”.

4.3.     Various Central and State taxes will be
subsumed in GST. All goods and services, except alcoholic liquor for human
consumption, will be brought under the purview of GST. Petroleum and petroleum
products (Crude Petroleum, Petrol, Diesel, and ATF) have also been brought
under GST. However, it has also been specifically provided that petroleum and
petroleum products shall not be subject to the levy of GST till a date to be
notified. Till such time Petroleum products will continue to attract excise
duty.

4.4.    Article 246A of the Constitution is
inserted in the main body of the Indian Constitution after Article 246 to
empower both the Centre and State to legislate on a common matter i.e. Goods
and Service Tax. The power to make laws on Inter-state transactions has been
kept exclusively with the Central Government.

4.5.     Article 279A of the Constitution has been
introduced for creation of Goods and Service Tax Council, a constitutional body
which will be a joint forum of the Central and the State Governments. This
Council will make recommendations to both the Central and State Government on
important issues like tax rates, exemptions, threshold limits, disputes
resolution for GST. The GST Council is envisaged as a recommendatory body with
the Union Finance Minister as Chairperson, Minister in charge of Finance or
Taxation or any other Minister nominated by the each State Government as
members and Union Minister of the State in charge of Revenue as Member of the
GST Council.

5.        Legislation – Draft GST Laws

5.1.      The dual GST model would be implemented
through multiple statutes:

–   An enactment by the Centre to govern the
collection and administration of CGST

–   An enactment by each of the States to govern
the collection and administration of SGST

–  An enactment by the Centre to govern the
collection and administration of IGST

–   An enactment by the Centre to govern the
collection and administration of Cess earmarked for grant of compensation to the
States for revenue loss on account of implementation of GST.

5.2.    While there would be multiple statutes for
collection and administration of different variations/components of the GST, it
is expected that the basic features of law such as chargeability, definition of
taxable event and taxable person, measure of levy including valuation
provisions, basis of classification etc. would be uniform across these
statutes. For the said purpose, the GST Council will recommend a draft
legislation for adoption by the State Governments. The GST Council is likely to
finalise the said draft GST Law very soon. However, full autonomy would be
available to the respective State Governments to deviate from the suggested
draft legislations, if there is a need for the same.

6.        Provisions relating to Levy and
Collection

6.1.    The
levy of tax on intrastate supply of goods and/or services is governed by the
CGST/ SGST Act whereas the levy of tax on inter-state supply of goods and/or
services is governed by the IGST Act. 

6.2.     Therefore,
the classification of a supply as intrastate supply or interstate supply
becomes paramount to determine the applicable taxes. This classification is
based on the combination of “location of supplier” and the “place of supply”
and is provided under the IGST Act. The provisions are tabulated below for
ready reference:

Nature of supply

Interstate

Intra state

Goods

Location of the supplier and
the place of supply are in different state

Location of the supplier and
the place of supply are in the same state

Services

Location of supplier and
place of supply in different state

Location of supplier and
place of supply in same state

6.3.      It may be noted that the above
classification is subject to certain exceptions provided under the IGST Act.

7.        Supply

7.1.      The term “supply” is defined u/s. 3 of the
CGST/SGST Act. The said definition also applies to the IGST Law. The said
supply can be either taxable supply or an exempted supply.

7.2.     All forms of supply like sale, transfer,
barter, exchange, license, rental, lease or disposal and importation of
services are made liable for GST. However, it is important that such supplies
should be for a consideration and that the supplies should be in the course of
or furtherance of business or commerce.

7.3.    In addition to supplies for consideration,
Section 3(1) also includes supplies mentioned in Schedule-I without a
consideration. Notable inclusions in Schedule-I are as under:

–  Permanent transfer/disposal of business
assets, in cases where input tax credit has been availed

–  Supply of goods and/or services between
branches or between related persons

–   Supply of goods by principal to agent and vice-versa

–  Importation of services from overseas
branches

8.  Valuation & Rate/s of Tax 

8.1.      In general, GST would be payable on the
value of supply. While the general provision u/s. 15 states that the value of
supply shall be the transaction value, the same is subject to the following
conditions:

      –     Supplier and recipient of supply not
related

          –      Price is the sole consideration.

 

8.2.      The proposed GST Rate would be determined
based on the principle of Revenue Neutral Rates (RNR). ‘Revenue Neutral Rates’
(RNR) in layman terms, is the rate that allows the Central and States to
sustain the current revenue from tax collections.

8.3.      Based on the announcements made by the GST
Council, the following broad classifications of rates are proposed in upcoming
regime of GST:

–  Nil Rate for essential goods and services

–  Merit Rate for essential goods – 5%

–  Lower Standard Rate for goods and services –
12%

–  Standard Rate (RNR) for goods and services in
general – 18%

–   Demerit Rate for goods – 28%

–  Special rate for precious metals – yet to be
decided.

8.4.     In addition to the above, certain goods
classified under the 28% rate may also bear a cess which will enable the
compensation to be paid by the Centre to the Revenue loosing States.

9.        Exemptions & Composition Scheme

9.1.      Most of the exemptions currently available
will be phased out. However, section 11 of the Act permits the Government to
grant exemptions through the issuance of notifications. Further, certain goods
and supplies may be covered under the NIL rate under the Schedule

9.2.      A 
basic threshold exemption limit of Rs. 20 lakh has been provided.
Further, in order to facilitate small tax payers, an optional composition
scheme has been prescribed for persons having aggregate turnover of up to Rs.
50 lakh. The composition option is not available to the following persons:

–         Service Providers

–         Persons making inter-state supplies

9.3.     The Composition scheme is subject to
various conditions. The supplier is not eligible to claim the credit nor is he
entitled to collect the tax from the customer. Further, the customer is not
eligible for any credits of the composition amount.

9.4.   The following table explains the minimum
amount of tax payable under composition scheme:

Type of
suppliers

Minimum CGST

Minimum SGST

Total

Manufacturers

2.5%

2.5%

5%

Traders

1%

1%

2%

Service Providers

Not eligible

10.      Time of Supply

10.1.    The liability to pay tax arises at the time
of supply. The following provisions are relevant in this regard.

Section

Provisions

12

Time of supply of goods

13

Time of supply of services

14

Change in rate of tax for
goods and services

10.2.    In general, the liability to pay GST arises
on the raising of invoice or receipt of payment whichever is earlier. However,
it is also provided that in case where the invoice is not issued within the
prescribed time, the date on which the invoice is required to be issued will
trigger the GST Liability.

11.      Place of Supply for Goods

11.1.    Section 7 of the IGST Act defines the place
of supply of goods other than imported and exported goods. The said provisions
are fundamentally different from the current provisions since they are based on
the destination principle rather than the origin principle.

11.2.    The following table summarises the place of
supply of goods as defined under the GST Act and under the IGST Act:

Situation

Place of Supply as per
Section 7 of IGST Act

Supply involving movement of
goods

Location of termination of
movement for delivery

Supply by way of transfer of
documents of title

Principal place of business
of the buyer

Supply not  involving movement of goods

Location of goods

Goods assembled or installed
at site

Place of installation or
assembly

Goods supplied on board of
conveyance

Location at which goods are
taken on board

11.3.    Similarly, the place of supply for imported
/ exported goods is provided u/s. 8 of the IGST Act. The provisions are simple
and are therefore tabulated below for ready reference :

Nature of Goods     

Place of Supply

Imported Goods

Location of Importer

Exported Goods

Location outside India

12.      Place of Supply for Services

12.1.  The concept of IGST serves multiple
objectives. Since the services are essentially intangible in nature, the place
of supply rules for services are drafted considering these objectives in
mind.  Further to the above objectives,
the place of supply rules under IGST also need to deal with situations of
supplies amongst two or more States, where also the guiding principle is
ensuring a seamless flow of credits amongst businesses and transfer of tax to
the correct State of Consumption.

12.2.    The following table summarises the
provisions in regard to the place of supply of services. It may be noted that
if the location of service recipient is not available on records, the location
of supplier will be considered in cases where the place of supply is the
location of recipient of service.

Nature of Supply of Service

Supplier- recipient in
India (R2R)

Either of
supplier or recipient is outside India

Business to Business
Cases  (B2B)

Business to Customer Cases
(B2C)

General Rule

Location of Service
recipient

Location of Service
Recipient

Location of Service
Recipient

Immovable property

Location of Immoveable
Property

Location of Immoveable
Property

Location of Immoveable
Property

Performance based service

Location of

Service Recipient

Location of

Service

Recipient

Place of Performance of
Service

Training and performance

Location of

Service Recipient

Place of Performance

Place of

Performance

Admission to an event or
park

Location of the Event

Location of the Event

Location  of the Event

Organization of events etc.

Location of service
recipient

Place where event is
actually held

Place where the event is
held

Transportation of goods

Location of service
recipient

Place where goods are handed
over their

transportation

Destination of Goods

Transportation of passengers

Location of service
recipient

Place where passenger
embarks on the conveyance for a continuous journey

Place where passenger
embarks on the conveyance for a continuous journey

Services on board a
conveyance

First Scheduled Point of
Departure

First

Scheduled Point of Departure

First Scheduled Point of
Departure

Telecommunication services

Various situations to
determine the location of subscriber

Various

situations to determine the
location of subscriber

Location of Recipient

Banking & Financial
Services including stock broking

Location of service
recipient on the records of service provider

Location of service
recipient on the records of service provider

 

 

Location of Supplier for
account related services.

Location of Recipient in
other cases

 

Insurance

Location of service
recipient

Location of

service recipient

Location of service
recipient

Advertisement services to
Government etc.

Not Applicable

•   Meant for identifiable state- POS would be that state

•   Multiple States- POS all such states and value to be attributed
to each of them

Not Applicable

Intermediary

Location of Recipient

Location of Recipient

Location of Supplier

Hiring of means of transport

Location of Recipient

Location of Recipient

Location of Supplier

Online information and
database access or retrieval service

Location of Recipient

Location of Recipient

Location of Recipient

13.      Input Tax Credit

13.1.    Input Tax Credit mechanism is the core of
the GST Regime. The provisions of input tax credit are contained in section 16
of the Act. The salient features thereof are as under:

–   Input Tax credit will be allowed only to
registered persons

–  On registration, credit would also be
available for inputs and finished goods lying in stock on the date of
registration.

–   Credit to be calculated based on generally
accepted accounting principles as may be prescribed.

–   Proportionate credit in case certain goods
are used for business as well as non-business purposes

–  Certain cases of ineligible input tax credit
are also prescribed.

13.2.    Some examples of ineligible credits are
provided below for ready reference

– Motor vehicles unless used for transportation
of goods

–  Food and Beverages unless the same is used
for the purposes of further business in F&B

–  Employee related goods/ services

– Goods/ services resulting in construction of
immovable property for self-consumption

–  GST paid under the composition scheme

–  Goods for personal consumption

–   Goods lost, destroyed, stolen, written off or
disposed off by way of gifts or free samples

13.3.    Fungibility of credit: The rules relating to
fungibility of credits and priority of adjustment are as under

13.3.1. The input tax credit on account of IGST during
a tax period shall first be utilised towards payment of IGST; the amount
remaining, if any, shall be utilised towards the payment of CGST and SGST, in
that order.

13.3.2. The input tax credit on account of CGST during
a tax period shall first be utilised towards payment of CGST; the amount
remaining, if any, shall be utilised towards the payment of IGST.

13.3.3. The input tax credit on account of SGST during
a tax period shall first be utilised towards payment of SGST; the amount
remaining, if any, shall be utilised towards the payment of IGST.

13.3.4. No input tax credit on account of CGST shall be
utilised towards payment of SGST.

13.3.5. No input tax credit on account of SGST shall be
utilised towards payment of CGST.

13.4.    Section 16(2) of the Act also prescribes for
certain documentation before the credit can be claimed, such as possession of
tax invoice, goods/ service should have been received, tax has been actually
paid by the supplier and return has been furnished under the applicable
section. Similarly, it is also stated that the payment of tax by cash or credit
by the supplier is necessary to claim credit. Similarly, it is important that
the payment is made to the service provider within a period of 3 months.

14.      Procedural Aspects

14.1.    Under the GST Law, credits will be available
on the basis of online matching of credits. Towards that goal in mind, a
detailed procedure has been prescribed for periodic filing of statements,
online matching and submission of returns. The following chart explains the
process as a bird’s eye view.

14.2.    Elaborate rules are also prescribed for
payment of taxes, grant of refunds, assessment, audits, demands and
enforcement. Further, penal provisions are also prescribed for various offences
listed under the proposed Act.

15.      Transitional Provisions

15.1.    The model GST Law contains various
provisions dealing with transition related issues. The said provisions deal
with migration of registrations of existing taxpayers into the GST Regime and
thereafter deal with issues relating to credits, payment of taxes and certain
procedures.

16.      Anti Profiteering Measure

16.1.    Sensing the risk of GST resulting in
widespread inflation, the Government has introduced an anti profiteering
provision under the Model GST Law. Accordingly, it is proposed that an
authority shall be set up to investigate such cases and impose penalties as
deemed fit.

17.      Conclusion 

17.1.  The
proposed GST Law presents a unique opportunity to professionals to provide
quality services to clients. The BCAJ proposes to carry detailed articles analysing
each of the sections of the proposed GST Law. This article is a precursor to
such a detailed in depth analysis which will be carried in subsequent issues.

46. Appellate Tribunal – Power to enhance – Tribunal has no power to enhance assessment

Fidelity Shares and Securities Ltd. vs. Dy. CIT; 390 ITR
267 (Guj):

Dealing with the scope of the power of the Tribunal under the
Income-tax Act, 1961 the Gujarat High Couirt held as under:

“The Tribunal has no power under
the Income-tax Act, 1961 to enhance assessment.”

Depreciation on Non-Compete Fees

Issue for Consideration

Depreciation is allowable u/s. 32(1) on buildings, machinery,
plant or furniture, being tangible assets, and on know-how, patents,
copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets acquired on or
after 1st April 1998. At times, under an agreement for acquisition
of shares or acquisition of a business or on cessation of employment of an
employee, the seller, its promoters or the employee may be paid a non-compete
consideration, in addition to the sale consideration. The agreement for such
non-compete would generally provide that the payee shall refrain from carrying
on a competing business for a certain number of years.

The issue has arisen before the High Courts as to whether such
non-compete fee constitutes an intangible asset of the payer, which is eligible
for depreciation u/s. 32(1). While the Delhi High Court has held that such
non-compete fee is not an intangible asset eligible for depreciation, the
Karnataka and the Madras High Courts have held that the rights acquired on
payment of a non-compete fee are intangible assets eligible for depreciation.

Sharp Business System’s case

The issue had come up before the Delhi High Court in the case
of Sharp Business System vs. CIT 211 Taxman 576.

In this case, the assessee was a joint-venture between Sharp
Corporation and L & T. It used to import, market and sell electronic office
products and equipments in India. During the relevant year, it paid Rs. 3 crore
to L & T as consideration for the latter not setting up or undertaking or
assisting in setting up or undertaking any business in India of selling,
marketing and trade of electronic office products for a period of 7 years. In
the accounts of the assessee, this amount was treated as a deferred revenue
expenditure and written off over the period of 7 years. In the return of
income, the entire sum paid was claimed as a revenue expenditure, on the ground
that the payment facilitated its business and did not enhance or alter the fixed
capital.

The assessing officer disallowed the deduction on account of
non-compete fee, on the ground that it conferred a capital advantage of
enduring value. The Commissioner(Appeals) rejected the assessee’s appeal, and
also rejected the alternative contention of the assessee for allowance of the
depreciation on such payment.

On further appeal, the Tribunal also rejected the contention
that the non-compete fee constituted revenue expenditure, holding that the
payment made by the assessee was not to increase the profitability, but to
establish itself in the market and acquire market share, as the period of 7
years was quite long, during which any new company could establish its
reputation and acquire a reasonable market share. It held that by keeping L &
T away from the same business, the assessee hoped to acquire a good market
share. The Tribunal also rejected the assessee’s claim for depreciation on
intangible asset.

Before the High Court, on
behalf of the assessee, besides arguing that the expenditure was of a revenue
nature, it was argued that the Tribunal was wrong in concluding that the right
to trade freely in the market was not an asset, and did not qualify for
depreciation u/s. 32. Reliance was placed on section 32(1)(ii) for the
proposition that intangible assets used for the business were eligible for
depreciation. It was argued that once it was held that the assessee had
acquired an advantage in the capital field, denial of depreciation amounted to
an inconsistent approach.

Reliance was also placed on behalf of the assessee on the
decision of the Supreme Court in the case of Techno Shares and Stocks Ltd
vs. CIT 327 ITR 323, where the Supreme Court had held that holding of a
membership card of the stock exchange amounted to acquisition of an intangible
asset, which qualified for depreciation u/s. 32(1)(ii). On a similar reasoning,
it was argued that the right acquired by the assessee for itself after payment
of the non-compete fee was akin to a license or other similar rights, on which
depreciation had to be given. Reliance was also placed on the decision of the
Delhi High Court in the case of CIT vs. Hindustan Coca-Cola Beverages (P)
Ltd 331 ITR 192, where it was held that intangible advantages all assets in
the form of know-how, trade style, goodwill, etc. were depreciable
assets.

On behalf of the revenue, it was argued that the question of
allowability of depreciation did not arise at all, because the business or
commercial rights of similar nature could not be said to arise overnight on
account of payment of non-compete fee. Besides, the payment did not result in
any intangible asset akin to a patent or intellectual property right.
Therefore, it was claimed that the non-compete agreement did not create an
asset of intangible nature or kind which qualified for depreciation.

While holding that the payment amounted to a capital
expenditure, given the fact that the arrangement was to endure for a
substantial period of 7 years, the Delhi High Court considered whether an
expenditure conferring a capital advantage was necessarily depreciable. It
observed that as was evident from section 32(1)(ii), depreciation could be
allowed in respect of intangible assets. Parliament had spelt out the nature of
such assets by explicit reference to know-how, patents, copyrights, trademarks,
licences and franchises. It noted that so far as patents, copyrights,
trademarks, licences and franchises are concerned, though they were intangible
assets, the law recognised through various enactments that specific
intellectual property rights flowed from them.

According to the Delhi High Court, licences were derivatives
and often were the means of conferring such intellectual property rights. The
enjoyment of such intellectual property right implied exclusion of others, who
did not own or have license to such rights, from using them in any manner
whatsoever. Similarly, in the matter of franchises and know-how, the primary
brand or intellectual process owner owns the exclusive right to produce, retail
and distribute the products and the advantages flowing from such brand or
intellectual process owner, but for the grant of such know-how rights or
franchises. In other words, the species of intellectual property like rights or
advantages led to the definitive assertion of a right in rem.

Referring to the Supreme Court decision in the case of Techno
Shares and Stocks(supra), the Delhi High Court was of the view that the
Supreme Court had clearly limited its scope while holding that the right to
membership of the stock exchange was in the nature of any other business or
commercial right, which was an intangible asset, by clarifying that the
judgement of the court was strictly confined to the right to membership
conferred upon the member under the BSE membership card during the relevant
assessment years. According to the Delhi High Court, that ruling was therefore
concerned with an extremely limited controversy, i.e. depreciability of stock
exchange membership. In the view of the Delhi High Court, the membership rights
of a stock exchange was held to be akin to a license, because it enabled the
member to access the stock exchange for the duration of the membership, and
therefore it conferred a business advantage, which was an asset and clearly an intangible asset.

While analysing the question of whether the non-compete right
of the kind acquired by the assessee against L&T for 7 years amounted to a
depreciable intangible asset, the Delhi High Court observed that each of the
species of rights spelt out in section 32(1)(ii), i.e. know-how, patent,
copyright, trademark, license of franchise or any other right of a similar kind
conferred a business or commercial right, which amounted to an intangible
asset. The nature of these rights clearly spelt out an element of exclusivity,
which enured to the assessee as a sequel to the ownership. In other words, if
it was not for the ownership of the intellectual property or know-how or
license or franchise, it would be unable to either access the advantage or
assert the right and the nature of the right mentioned spelt out in the
provision as against the world at large, in legal parlance, in rem.

According to the Delhi High Court, in the case of a
non-compete agreement or covenant, the advantage was a restricted one in point
of time. It did not necessarily, and in the facts of the case before the Delhi
High Court, according to the court, did not confer any exclusive right to carry
on the primary business activity. The right could be asserted in the present
case only against L&T, and was therefore a right in personam.

The Delhi High Court further observed that another way of
looking at the issue was whether such rights could be treated or transferred, a
proposition fully supported by the controlling object clause, i.e. intangible
asset. Every species of rights spelt out expressly by the statute, i.e. of the
intellectual property right and other advantages such as know-how, franchise,
license, et cetera and even those considered by the courts, such as
goodwill, could be said to be transferable. Such was not the case with an
agreement not to compete, which was purely personal.

The Delhi High Court therefore held that the words “similar
business or commercial rights” had to necessarily result in an intangible asset
against the entire world, which could be asserted as such, to qualify for
depreciation u/s. 32(1)(ii). Accordingly, it was held that the non-compete
payment made by the assessee did not result in an intangible asset eligible for
depreciation.

Ingersoll Rand International Ind Ltd.’s case

The issue came up again before the Karnataka High Court in
the case of CIT vs. Ingersoll Rand International Ind. Ltd. 227 Taxman 176
(Mag).

In this case, the assessee was engaged in the business of
security and access control systems integration. During the relevant year, it
entered into a business purchase agreement with another company, Dolphin,
whereby it purchased the business of Dolphin for a consideration of Rs. 11.71
crore. The purchase consideration included a sum of Rs. 54.43 lakh paid to the
promoter as non-compete fees, and a sum of Rs. 43.55 lakh paid to him for
purchase of patents. The promoter was also appointed as the Vice President and
Company Head of the assessee through a contract of employment.

Out of the total consideration of Rs. 11.71 crore,
non-compete fees and patents were shown as assets in the books of account of
the assessee, and the balance amount was shown as goodwill. The payment of
non-compete fee was treated as a revenue expenditure in the computation of
total income, though capitalised in the books of account. The assessee also
claimed depreciation on the patents in the computation of its income, though it
did not claim depreciation on goodwill.

The assessing officer held that the non-compete fee was
capital in nature and disallowed it. The Commissioner(Appeals), while holding
that the non-compete fee was in the nature of capital expenditure, also held
that it was not eligible for depreciation. The Tribunal, while upholding the
view that the non-compete fee was in the nature of capital expenditure, held
that it was in the nature of a business or commercial right, and that depreciation
was allowable on such an asset.

Before the Karnataka High Court, on behalf of the revenue, it
was argued that non-compete fee did not constitute a commercial or a business
right for allowing depreciation u/s. 32(1)(ii). It was argued that in order to
claim depreciation, the assessee should own and use the asset in the business,
and that this user test was not satisfied in this case. It was therefore argued
that non-compete fee could not be classified as an asset, and now depreciation
could be allowed thereon.

On behalf of the assessee, it was argued that by virtue of
payment of the non-compete fee, the assessee could carry on business without
any competition for the limited period, which in turn resulted in an advantage
to the business, and as that advantage conferred on it a commercial and
business right, once it was held to be of the nature of capital expenditure,
the assessee was entitled to depreciation u/s. 32(1)(ii).

The Karnataka High Court referred to the decisions of the
Delhi High Court in the case of Hindustan Coca-Cola Beverages (P) Ltd.
(supra) and Areva T & D India Ltd.vs. Dy CIT 345 ITR 421 to
understand the meaning of the term “any other business or commercial rights of
a similar nature”. It further referred to the decision of the Madras High Court
in the case of Pentasoft Technologies Ltd vs. Dy CIT 222 Taxman 209,
where the Madras High Court had held that a non-compete fee amounted to an
intangible asset eligible for depreciation, and the decision of the Delhi High
Court in the case of Sharp Business System (supra).

The Karnataka High Court, while analysing the provisions of
section 32(1)(ii), noted that in the definition of intangible assets, any  other business or commercial rights of
similar nature were included. Therefore, such rights need not answer the
description of know-how, patents, copyrights, trademarks, licenses, or
franchises, but must be of similar nature as those assets, namely know-how, etc.
According to the Karnataka High Court, the fact that after the specified intangible
assets, the words “business or commercial rights of similar nature” had been
additionally used, clearly demonstrated that the legislature did not intend to
provide for depreciation only in respect of specified intangible assets, but
also to other categories of intangible assets, which were neither feasible nor
possible to exhaustively enumerate.

The Karnataka High Court noted that the words “similar
nature” carried a significant expression. The Supreme Court, in the case of Nat
Steel Equipment (P) Ltd vs. Collector of Central Excise AIR 1988 SC 631,
had held that the word similar did not mean identical, but meant corresponding
to resembling to in many respects, somewhat like or having a general likeness.
According to the Karnataka High Court, therefore, what was to be seen was what
the nature of intangible assets was, which would constitute business or
commercial rights to be eligible for depreciation.

The Karnataka High Court noted that the intangible assets
enumerated in section 32(1)(ii) effectively conferred a right upon an assessee
for carrying on of business more efficiently, by utilising an available
knowledge or by carrying on a business to the exclusion of another assessee. A
non-compete right represented a right, under which one person was prohibited
from competing in business with another for a stipulated period. It would be
the right of the person to carry on the business in competition, but for such
agreement of non-compete. The right acquired under a non-compete agreement was
a right for which a valuable consideration was paid. The right was acquired to
ensure that the recipient of the non-compete fee did not compete in any manner
with the business with which he was earlier associated.

According to the Karnataka High Court, the object of
acquiring a know-how, patent, copyright, trademark, license, or franchise was
to carry on business against rivals in the same business in a more efficient manner,
or in the best possible manner. The object of entering into a non-compete
agreement was also the same, i.e., to carry on business in a more efficient
manner by avoiding competition, at least for a limited period of time. On
payment of non-compete, the payer acquired a bundle of rights, such as
restricting the receiver directly or indirectly from participating in the
business, which was similar to the business being acquired, from directly or
indirectly suggesting or influencing clients or customers of the existing
business or any other person either not to do business with the person to whom
he has paid the non-compete fee, or the person receiving the non-compete fee is
prohibited from doing business with the person who was directly or indirectly in competition with the business, which was
being acquired. The right was acquired for carrying on the business, and
therefore it was a business right.

The right by way of non-compete was acquired essentially for
trade and commerce, and therefore qualified as a commercial right. Such a right
could be transferred to any other person, in the sense that the acquirer got
the right to enforce the performance of the terms of agreement under which a
person was restrained from competing. When a businessman paid money to another
businessman for restraining the other businessman from competing with the
assessee, he got a vested right, which would be enforced under law, and without
that, other businessmen could compete with the first businessman. By payment of
non-compete fee, the businessman got a right which was a kind of monopoly to
run his business without bothering about the competition.

The Karnataka High Court noted that the non-compete fee was
paid for a definite period. The idea behind this was that, by that time, the
business would stand firmly on its own footing, and could sustain later on.
This clearly showed that a commercial right came into existence, whenever the
assessee made a payment of non-compete fee. Therefore, according to the
Karnataka High Court, the right which the assessee acquired on payment of
non-compete fee conferred in him a commercial or business right, which was
similar in nature to know-how, patents, copyrights, trademarks, licenses and
franchises, which unambiguously fell within the category of an intangible
asset. The right to carry on business without competition had an economic
interest and a money value.

In the view of the Karnataka High Court, the doctrine of ejusdem
generis would come into operation. The non-compete fee vested right in the
assessee to carry on business without competition, which in turn conferred a
commercial right to carry on a business smoothly. Once such expenditure was
held to be capital in nature, consequently, the assessee was entitled to the
depreciation provided u/s. 32(1)(ii). The Karnataka High Court therefore held
that the assessee was entitled to depreciation on the non-compete fee.

A similar view was taken earlier by the Madras High Court in Pentasoft
Technologies’ case (supra), though in that case the non-compete payment was
for restraint on use of trade mark, copyright, etc.

Observations

One makes a payment, in the course of business either for
meeting an expenditure or for acquiring an asset or a right. An expenditure can
be either in the revenue field or in the field of capital. Where a revenue
expenditure is incurred, no asset can be said to have been acquired and hence
no depreciation is allowable. When a capital expenditure results in acquisition
of an asset that is eligible for depreciation, the payer will be entitled to
depreciation. Besides, being an owner of the asset, it is essential that the
owner uses the asset and such user is for the purposes of business. On
satisfaction of these tests, a valid claim for depreciation is made that cannot
be frustrated for ambiguous reasons.

Any payment made, in the course of business, not resulting in
acquisition of a tangible asset generally should be for acquiring some right or
removing some disability and when seen to be resulting in to a business or commercial
right should, without hesitation, be classified as an intangible asset, in view
of the two landmark decisions of the apex court in the case of Techno Shares
and Smifs Securites. It is inconceivable that a businessman would make a
payment that does not endow him with business rights or, in the alternative,
saves him from some disability that facilitates the conduct of his business
efficiently.  Looked at from this angle,
any non revenue payment results in acquiring a business right, provided it does
not result in acquisition of a tangible asset.

The principle of user of an asset, in the context of an
intangible asset, will have to be viewed differently. In the context, it will
also include a case of preventing another person from using it against the
assessee and therefore a non-user by the others, on payment, should be viewed
as the user by the assessee. The authorities or the courts should appreciate
this aspect or the character of the intangible asset while dealing with the
concept of user.

A business or commercial right of a similar nature is vast
enough to cover a good number of cases, where the payer, on payment, is seen to
be facilitating the efficient conduct of business, by use or by non-user by the
payee. A know-how, license, franchise, etc. are cases where the payer is
enabled to carry on business with the protection of law or of the payee.
Similarly, on payment of non-compete consideration, the payer acquires a
protection from the payee for carrying on his business without competition. 

Both the Delhi and Karnataka High Courts seem to have adopted
the principle of ejusdem generis, to arrive at diametrically opposite views.
While the Delhi High Court was of the view that a right obtained under a
non-compete agreement was not akin to trademarks, copyrights, licences, etc.,
the Karnataka High Court was of the view that such right is similar in nature,
as both facilitate carrying on of business more smoothly.

The distinction between the right in rem and in personam
perhaps is not relevant or conclusive in deciding the issue whether an
asset is depreciable or not. Neither the law nor the courts require that a
right in an asset should be against the world before a valid depreciation is
allowed. In the case of Techno Shares & Stocks (supra), while the
Bombay High Court had earlier held that the membership rights of the Bombay
Stock Exchange was not an intangible asset eligible for depreciation, not being
similar to other rights specified in section 32(1)(ii), the Supreme Court took
a contrary view on the same principle of ejusdem generis, holding that such
membership right was similar to a licence, since it permitted a member to carry
on trading on the exchange. This was notwithstanding the fact that such right
was a personal permission granted to the member under the bye-laws of the
exchange, and therefore not transferable. In a similar manner, a right of
non-compete, though not strictly transferable, can still be an intangible
asset.

Therefore, though the Supreme Court may have observed that the
ratio of its decision applied only to a case of membership rights of the Bombay
Stock Exchange, the principles on the basis of which the case was decided,
would apply equally for other payments under which a right to carry on a
business is acquired, though non transferable. Interestingly, the Karnataka
High Court has found such rights to be transferable by the payer for a
consideration and has noted that the transferee should be in a position to
enforce such rights against the payee.

Similarly, in the case of CIT vs. Smifs Securities Ltd 348
ITR 302 (SC), the Supreme Court held that goodwill arising on amalgamation
of companies was an intangible asset eligible for depreciation. This was
notwithstanding the fact that such a goodwill arose only to the amalgamated
company, and was not on account of any transferable asset which can be put to
any specific use.

From the two decisions of the Supreme Court on the subject of
depreciable intangible assets, it is therefore clear that the Supreme Court has
taken a broader view of the term, by permitting depreciation on business and
commercial rights, in cases where the payment 
permitted smoother functioning of the business, holding that such rights
were similar to the specified rights, such as trademarks, copyrights, licences,
etc.

Therefore, the better view seems to be that
rights acquired under a non-compete agreement are intangible assets, eligible
for depreciation u/s. 32(1(ii).

Second Income Disclosure Scheme – 2016


      I.  Background

1.1 On 8th
November, 2016, the Central Government demonetised Rs. 500/1000 Currency Notes
(Old Notes).  New Currency Notes of Rs.
500/2000 have been issued to replace the old Currency Notes. Old Currency Notes
of Rs. 500/1000 could be deposited in the bank account of the person holding
such old notes between 10th November to 30th December,
2016. Once the old notes are deposited in the Bank Account of the person he
will have to explain the source of such deposit to the Income tax Authorities
.  The Government has stated in its
public announcements that an Individual or HUF may be holding some such old
notes out of their savings and kept them for household needs. Therefore, a
public assurance has been given that the Income tax Department will not inquire
about the source of such deposits if the total deposit during the above period
is less than Rs.2.5 lakh.

1.2   The
government felt that if large cash in the form of Old Notes was kept by some
persons out of their unaccounted income then they should pay tax at higher
rates and should also pay penalty when they deposit such cash in their Bank
Accounts. To achieve this objective the parliament enacted “The Taxation
(Second Amendment) Act 2016”. The Amendment Act amends some of the provisions
of the Income tax Act and the Finance Act, 2016. The above amendments provide
the Second Income Disclosure Scheme in the form of “Taxation and Investment
Regime for Pradhan Mantri Garib Kalyan Yojna, 2016”.  In this Article some of the important
amendments by this Act and the Second Income Disclosure Scheme are discussed.

2.    The Second Disclosure Scheme:

2.1  First Disclosure Scheme:

The Finance Act, 2016 enacted on 14/5/2016, contained “The
Income Declaration Scheme, 2016”. This Scheme allowed any person to declare his
undisclosed income (Indian assets, including cash) of earlier years during the
period 1/6/2016 to 30/09/2016. Under this Scheme the declarant was required to
file declaration about valuation of undisclosed Indian assets and pay tax of
45% (including surcharge and penalty) in instalments. It is stated that assets
worth about Rs.67000 crore were disclosed under this scheme before 30/09/2016.

2.2   Second Income Disclosure Scheme:

In order to give one more
opportunity to persons holding old currency notes the present scheme is
introduced. Sections 199A to 199R are inserted in the Finance Act, 2016. These
sections provide for a new Scheme called “Taxation and Investment Regime for
Pradhan Mantri Garib Kalyan Yojna, 2016”. The provisions of this Scheme are on
the same lines as the earlier Income Declaration Scheme, 2016, which ended on
30/09/2016. The Scheme has come into force on 17th December, 2016
and will come to an end on 31st March, 2017. Some of the important
provisions of the Scheme are discussed below:-

2.3   Declaration under the Scheme:

(i)  U/s. 199C any person may make a declaration in
the prescribed Form No.1 during the period 17-12-2016 to 31-3-2017 as notified
by Notifications dated 16.12.2016. This declaration is to be made for any
undisclosed income held in the form of cash or deposit in any account
maintained with a specified entity. Thus the benefit of this Scheme can be
taken by an Individual, HUF, Firm, AOP, Company or any person whether Resident
or Non-Resident.

(ii) The
income chargeable to tax under the Income tax can be declared under the Scheme
if it relates to F.Y:2016-17 and earlier years. The above declaration can be
made in respect of the above undisclosed income which is held in cash or
deposit in a specified entity as under –

(a) Reserve Bank of India

(b) Any Scheduled Bank (including Co-operative
Bank)

(c) Any Post Office

(d) Any other Entity notified by the Central
Government.

No deduction will be allowed for any expenditure, allowance,
loss etc. from such income.

(iii) The amount of Undisclosed Income declared in
accordance with the Scheme shall not be included in the income of the declarant
for any assessment year. In other words, immunity is given under the Income-tax
Act and the Wealth Tax Act. In the Press Note issued by the Government on
16.12.2016 it is clarified that the above declaration shall not be admissible
as evidence in any proceedings under the Income tax Act, Wealth tax Act,
Central Excise Act, Companies Act, etc. However, no immunity will be
available under any criminal proceedings under the Indian Penal Code,
Prevention of Corruption Act, prohibition of Benami Property Transactions Act etc.,
as mentioned in section 199.0 of the Finance Act, 2016. 

2.4   Tax Payable on such Income:

Sections 199D and 199E provide for payment of tax, cess,
penalty etc. It is provided that the person making the Declaration u/s.
199C shall have to pay tax, cess and penalty that is an aggregate of 49.90% of
the income declared under the Scheme as under:

(i)     30% of Undisclosed income by way of tax

(ii)    33% of above tax (i.e. 9.9%) by way of
Pradhan Mantri Garib Kalyan Cess.

(iii)   10% of undisclosed income by way of Penalty

2.5   Interest Free Deposit:

The declarant under the Scheme has also to deposit 25% of the
undisclosed income in the “Pradhan Mantri Garib Kalyan Deposit Scheme, 2016” as
provided in section 199F. This deposit will be for 4 years and no interest
shall be paid to the declarant on this deposit.

2.6   Time for payment of Tax and Deposit (Section 199H)

The above Tax, Cess and Penalty is to be paid before filing
the Declaration u/s. 199C. Similarly, the above Interest Free Deposit is to be
made before filing the Declaration u/s. 199C. The Declaration along with proof
of payment of tax etc. and proof of deposit is to be filed before 31st
March, 2017. Any amount of tax, cess or penalty paid under the scheme is
not refundable.

 

2.7   By a Notification dated 16.12.2016, the
CBDT has notified the “Taxation and Investment Regime for Pradhan Mantri Garib
Kalyan Yojana Rules, 2016”. These Rules have come into force on 16.12.2016.
Briefly stated, these Rules provide as under:

(i)  The declaration of undisclosed income for F.Y.
2016-17 and earlier years held in the form of cash or deposit with the
specified entity stated in Para 2.3 above can be made in Form No.1 during the
period. 17.12.2016 to 31.3.2017.

(ii) It may be noted that in Form No.1 the declarant
has to give particulars of Name, Address, PAN, Income declared, the details of
such income held in cash or deposit with specified entity, Tax, cess and
penalty payable, date of such payment, details of Interest free Deposit of 25%
of declared income made u/s. 199 F etc.

(iii) The above tax, cess and penalty is to be paid
and Interest Free Deposit is to be made before filing the declaration in Form No.1.

(iv) The Declaration is to be furnished to the
designated Principal CIT or CIT electronically or in print form physically

(v) If the declarant finds any mistake in the
declaration filed earlier, there is a provision to file a revised declaration
on or before 31.3.2017.

(vi) The Principal CIT or CIT will have to issue a
certificate in Form No.2 within 30 days from the end of the month in which
valid declaration is filed.

2.8  From the above, it
is evident that under this scheme a person can make declaration about the
undisclosed income held in cash or deposits with specified entities. The
declaration cannot be made if the declarant is holding such income in any other
form such as jewellery, ornaments, or immovable properties etc. This
undisclosed income may be relating to any year i.e. F.Y. 2016-17 or earlier
years. Therefore, the Scheme does not refer to only cash in the form of Rs.
500/- and Rs. 1000/- notes deposited in the Bank Account between the period
10.11.2016 to 30.12.2016. Such income may have been deposited in the bank or
with other specified entity prior to 10.11.2016 or even between 31.12.2016 to
31.03.2017. Hence, if a person has earned income in F.Y. 2015-16 or any earlier
year, which has been held in cash or deposited in the bank, but not disclosed
in the Income tax Return, he can make a declaration under this Second Income
Disclosure Scheme on or before 31.3.2017. He will have to pay 49.90% by way of
tax, Cess and penalty and make interest free deposit of 25% of such income for
4 years.

2.9      By another
Notification dated 16.12.2016, the Central Government has issued the “Pradhan
Mantri Garib Kalyan Deposit Scheme, 2016”. This scheme has come into force on
17.12.2016 and is valid upto 31.3.2017. Briefly stated, this scheme provides as
under:

(i)     The Scheme applies to persons making
declaration of undisclosed income under the Second Income Disclosure Scheme.
Under this Scheme 25% of undisclosed income is required to be deposited in the
interest free deposit for 4 years.

(ii)    This deposit is to be made with the
Authorised Bank in Form No.II giving particulars of Name, Address, PAN, etc.
in cash, cheque or by electronic transfer drawn in favour of Authorised Bank.
The amount is to be deposited in multiples of Rs.100/-.

(iii)   The above deposit is to be made before the
declaration of undisclosed income u/s. 199C of the Finance Act, 2016 is filed.

(iv)   The certificate of holding of Deposit will be
issued to the declarant in Form No.1 as holder of Bond Ledger Account with
R.B.I.

(v)    Bond Holder can appoint one or more Nominees
to receive the refund in the event of his death in Form No.III. Such nomination
can be cancelled in Form No.IV and another nominee can be appointed.

(vi)   No interest is payable on the above deposit.
The Bond issued by the RBI for the above Deposit is not transferable and cannot
be traded in the market. In view of this the declarant may not be able to take
a loan against the mortgage of this Bond.

(vii)  The amount of the deposit under the scheme
will be refunded by RBI after 4 years on the date of maturity. 

2.10   Persons who cannot make a Declaration under the Scheme:

Section 199-O provides that the following persons cannot make
the Declaration under the above Scheme.

(i)  Any person in respect of whom an order of detention
has been made under the conservation of Foreign Exchange and Prevention of
Smuggling Activities Act, 1974. Certain exceptions are provided in section
199-O (a).

(ii) Any person in respect of whom prosecution for
an offence punishable under Chapter IX or Chapter XVII of the Indian Penal
Code, the Narcotic Drugs and Psychotropic Substances Act, 1988, the Prohibition
of Benami Property Transactions Act, 1988 and the Prevention of Money
Laundering Act, 2002 has been launched.

(iii) Any person notified u/s. 3 of the Special Court
(Trial of Offence Relating to Transactions in Securities) Act, 1992.

(iv) The Scheme is not applicable to any undisclosed
foreign income and asset which is chargeable to tax under the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

2.11   Other Procedural Provisions:

Sections 199G, 199J, 199L, 199M, 199N, 199P to 199R deal with
certain procedural matters as under:-

(i)  Person who can sign the declaration (section
199G)

(ii) Undisclosed Income declared under the Scheme
not to affect any concluded assessments (section 199J)

(iii) Declaration not admissible as evidence in other
proceedings (section 199L)

(iv) Declaration will be treated as void if it is
made by misrepresentation of facts (section 199M)

(v) Provisions of Chapter XV, sections 119, 138 and
189 of the Income-tax Act to apply to proceedings under the Scheme (section
199N).

(vi) Benefit, concession, immunity etc. under
the Scheme available to declarant only (section 199P).

(vii)  Central Government will have power to remove
difficulties under the Scheme within 2 years (section 199Q).

(viii) Power to make Rules for administration of the
Scheme given to Central Government (section 199R).

3.  Some Clarifications by CBDT:

By a circular dated 18.1.2017, CBDT has issued some
clarifications about the above Scheme. Some of the important clarifications are
as under:

(i)  Where a notice u/s. 142(1), 143(2), 148, 153A
or 153C of the Income-tax Act is issued by the ITO for any year, the assessee can
make a declaration under the scheme for that year.

(ii) A person against whom a search or survey
operation is initiated will be eligible to file a declaration under the Scheme
in respect of undisclosed income represented in the form of cash or deposits
with Banks, Post Office etc.

(iii) Undisclosed income utilised for repayment of an
overdraft, cash credit or loan account maintained with a bank can be declared
under this scheme.

(iv) Cash sized in any search and seizure action by
the department can be adjusted against payment of tax, surcharge and penalty
(i.e. 49.9%) payable under the scheme. For this purpose the person from whom
cash in seized will have to make application to the department. However, this
seized amount of cash cannot be adjusted against the Deposit of 25% to be made
under the Pradhan Mantri Garib Kalyan Deposit Scheme.

(v) If Mr. “A” has given advance in cash out of
undisclosed income for purchase of goods (other than immovable property) or
services to Mr. B, who has deposited the money in his Bank Account, and later
on “B” has returned the money as goods are not supplied or services are not
rendered, Mr. “A” can declare the undisclosed income under the scheme.

4.  To Sum up

4.1  We should
congratulate the Government for the bold step taken to demonetise old high
value currency notes. This is a right step to deal with the problem of black
money, corruption, fake currency in circulation etc. .

4.2  The Government
recognised that the existing Income tax Act did not permit tax authorities to
levy any penalty on persons who would convert large amount of black money
through banking channel. Therefore, the Taxation (second amendment) Act 2016
was passed and section 115BBE was amended and section 271 AAC for levy of
penalty was introduced.

However, small income earners who had some high value notes
kept at home out of their savings to meet expenditure in emergency cannot be
considered as holding their unaccounted income. The Government had promised
that if such persons deposit in their Bank Account amount upto Rs. 2.50 lakh no
enquiry will be made by the tax Department. This promise has not been honoured
while passing this Amendment Act. It is, therefore, necessary that the CBDT
issues a Circular to the officers not to raise any doubt if an assessee gives
an explanation that amount upto Rs. 2.5 lakh is deposited out of household
savings.

4.3  The Second Income
Disclosure Scheme is welcome. Persons holding unaccounted money in cash will
take advantage of this scheme as the tax rate is 49.9%, and 25% of the amount
is blocked for 4 years in Interest Free Bonds. However, persons who decide to
offer such amount in their Return of Income for the current year will be at a
disadvantage as they will have to pay tax, surcharge and education cess u/s. 115BBE
at 77.25% of such income.

4.4 It may be noted that under the First Income Disclosure
Scheme announced in May, 2016, immunity was granted from proceedings under the
provisions of (i) Benami Transactions (Prohibition) Act, 1988, (ii) Foreign
Exchange Management Act, (iii) Money Laundering Act, (iv) Indian Penal Code etc.

There was also an assurance that the secrecy will be
maintained about the contents of the Declaration under the Scheme. It is
unfortunate that the present Scheme does not provide for such immunity or
secrecy. Therefore, the assessees will have to be very careful while making the
Declaration under the Scheme.

4.5 It appears that the Second Income Disclosure Scheme as
announced by the Government is with all good intentions. It is advisable for
the persons who hold unaccounted money in cash to come forward and take
advantage of the Scheme and buy peace. Let us hope that this Scheme gets the
desired response.

4.6 The amendment in section 115BBE punishes
those assessees in whose cases additions are made for cash credits, unexplained
investments, unexplained expenses etc. Tax rate is now increased from
30% to 60%. Further, there will be additional burden of 15% surcharge and 6%
penalty. Such cases have no relationship with demonetisation of high value
currency. It is difficult to understand the reason for which such additional
burden is put on such assessees.

An Incremental Budget

When the Finance Minister
presented the Finance Bill 2017, expectations ran high. The country had just
started recovering from the after-shocks of a momentous demonetisation decision
taken by the government. There is an on-going heated debate as to the benefits
of demonetisation and the problems caused by it. However, there was a virtual
unanimity among professionals that there would be provisions in the Finance
Bill which would, apply some smoothing balm to tax payers and attempt to
relieve the pain caused by demonetisation. Some felt that the budget would take
the battle against black money forward.

In this backdrop the budget
presented by Finance Minister could at the best be described as an `incremental
budget’. There were no big bang announcements. The tax rate has been marginally
lowered both for individuals and small corporates. Some of the controversies
and problems arising on account of interpretations of provisions in regard to
the real estate sector have been sought to be addressed. Two amendments, one
exempting notional income in respect of unsold flats for one year and the other
legislating a scheme for taxing capital gains arising out of joint development
or similar agreements are welcome provisions. However, the provision for
limiting the set-off of interest in regard to funds borrowed for acquisition of
premises is rather surprising. On the one hand the government continuously
states that it wants to give a fillip to the beleaguered real estate industry,
it is sought to legislate a provision which would act as a disincentive. There
are two reasons why I consider the provision to be retrograde. Firstly, if
interest paid by the borrower is permitted to be set off against other income
and is therefore a cost for the government, this interest constitutes income in
the hands of a lender who would normally be a bank or a financial institution.
This interest would suffer tax in the hands of the recipient. Therefore the denial
does not seem to be justified particularly in cases where the premises are let.
Secondly, this is incongruous with the reduction in the holding period in
respect of land and building from 36 months to 24 months for terming the asset
as a long-term asset. Therefore on the one hand, the government wants to
promote the sale of real estate and on the other, it seeks to deny set-off
during the period that the taxpayer holds this asset as an investment.

The government’s intent of
disciplining and regulating charitable trusts continues. Henceforth those
trusts which do not file their returns of income in time will be denied the
benefit of exemption. Further, if one charitable trust makes a corpus donation
to another, then such donation will not be treated as application of income in
the hands of the donor trust. This restriction already applies to
expenditure/donations out of accumulated income, it will now apply to all
donations by a charitable trust. While the disciplining of charitable trusts is
welcome, the attempt to regulate political parties and their funding is rather
half-hearted. While the threshold of cash donations has been reduced to
Rs.2000, one wonders whether it will be really effective given the way
political parties fund their expenditure. As far as the electoral bond concept
is concerned, the system remains opaque. It is true that donors do not want to
be identified with political parties. The fact is if they are so identified
they may receive benefits or be harassed depending on their affiliation is the
real cause of concern. The only plus point of the electoral bond scheme is that
the acquisition will be from accounted money. Let us hope that this is only a
beginning and these provisions are tweaked in future to make political funding
more transparent. The only solace is that like all other taxpayers, even
political parties would be required to file their returns by the due date
failing which they will also stand to lose their exemption.

There are two provisions for
which one would give negative marks to the Finance Minister. The first is the
deletion of the provision which requires the reasons recorded by an officer
before initiating a search to be disclosed to a judicial forum. The reason for
such deletion (which is with retrospective effect from 1st April,
1962) is that when disclosed, such reasons give 
public the name of whistle-blowers whose security is then under some
threat. Firstly, there could have been some mechanism built-in to avoid
disclosing the name of the informant to the public, while making the reason
available. Secondly, the fact that such disclosure results in a threat to the
person concerned, is a reflection of the position of rule of law in this
country. If reasons are not disclosed, it may result in wrongful use of power to
search and survey which are an invasion of the privacy of a taxpayer and if
unjustified are an unnecessary harassment for him. One hopes that the Finance
Minister takes a serious re-look at these provisions. Secondly, the provision
for seeking to penalise an authorised representative for “incorrect
information” is also uncalled for. There are enough provisions in the Act to
punish a person who deliberately attempts to mislead the Department. One feels
that given the way the bureaucracy functions on the ground, this provision may
be misused to harass professionals. In any case these representatives normally
belong to professions who already have an established disciplinary mechanism.

The Finance Bill contains steps
to ensure that the intent of the government to make the economy cashless is
taken forward. There are disincentives by way of disallowance for cash
expenditure with the limits being lowered in most cases. The most significant
amendment is however the restriction of any transaction beyond the threshold
limit of Rupees three lakh in cash. An infringement of this provision attracts
a penalty equivalent to the amount of the transaction. This is a very important
provision and one really needs to wait and watch as to what effect it has.

In all, the budget presented did
not have very many surprises. Possibly, once the effects of demonetisation are
fully known, and the quantum of tax at the government is able to garner on
account of the drive against black money is established, the Finance Minister
would have more leeway in the next budget which would be the penultimate for
this government. Till then let us keep our fingers crossed!

Desire: The Motivator – The Destroyer

‘Conquer this
formidable enemy called desire’.

        Gita.

1.1     There isn’t a living human being who does
not `desire’. `Desire’ is a great motivator. It spurs us to action. Desire to
leave imprints on sands of time brought Alexander the Great to India. Desire to
conquer and rule Europe took Napoleon to Russia. `Desire’ to achieve
independence made an average person like Mohandas Karamchand Gandhi attain the
status of Mahatma and Father of the Nation. Desire to succeed is the basis of
all success. Without desire, there would be no innovation / progress in
society. `Desire’ creates a leader and there has never been a leader without
desire – nay – burning desire.

          Napolean Hill says: `the starting
point of all achievement is desire’.

1.2     Desire is a great motivator.
However, desire for power also blinds and leads to destruction. Hence, where
desire builds, it also destroys. Desire at times is invincible and consumes the
individual.  For example – desire for
one’s beloved makes an individual blind to consequences – for instance – Romeo
and Juliet, Heer Ranja, and others sacrificed their lives and embraced death
over life. Above all the desire to seek God within and without is elevating and
causes communion between the created and the Creator.

1.3     R.B. Athreya says :

       `I cannot desire something about which
I have no idea. I cannot work for something for which I have no desire’. Hence,
knowledge – nay – awareness is necessary of what one desires.

2.1     As normal mortals, in addition to the
desire to succeed at work we have several desires, some of these are: desire to
be a good family person, child, spouse, parent and friend. We also desire to be
constructive contributors to Society. Whereas desire to accumulate is
self-serving desire to serve in self-sharing. Above all, we have `desire’ to
love and be loved.

2.2     The fact of life is that one cannot and
does not live without `desire’ till one’s last breath. Mind is always in the
state of `desire’. Hence, the problem is `desire’ and we seek freedom from
desire.

          J. Krishnamurti states, for freedom
from desire – `it is essential to understand the problem for the answer is in
the problem’.

3.       Desire is equally a destroyer if the
means are not correct. Hitler had the desire of uniting Europe – a desire and
dream which was realised by the creation of EU – but his means were not
correct. It led to the world war, which devasted Europe, impacted five
continents, led to death of thousands and Hitler himself. Desire to learn the
truth about weapons of mass destruction led to atrocities of Abu Ghraib in Iraq
which tarnished the image of the ‘liberator’ U.S.A. Again, desire for Monica
scarred Clinton’s presidency and nearly destroyed his family life. Duryodhan’s
desire to deprive Pandvas of what was their’s led to Mahabharat and destroyed a
lineage. On the other hand, Arjun’s desire to understand human behaviour gave
the world knowledge of all times – Gita.

3.1     Desire makes or mars a man. Desire is like
breath – it is neither good nor bad – but its character depends on our thoughts
as our actions are based on our thoughts. Hence, change the character of desire
from revenge to forgiveness, from hate to love and from accumulation to sharing
from me and mine to us.

3.2     ‘Desire’ for peace led to the establishment
of ‘United Nations’. UNO provides a platform for leaders of nations to voice
their views, avoid war and discuss and resolve issues. Though strife continues,
nations play cold war but UNO has one achievement to its credit: there has been
no war between the acknowledged powers of the world.

3.3     Desire dominates and imprisons us. The
irony is that we accept it consciously or unconsciously. Desire makes us live
in the past or future. Thus we forget and forgo pleasures of the present
without realising that present is all we have. Desire creates a veil
between man and God. Unfulfilled desire leads to despair and desperation. We
are consumed by desires. Hence the issue is: Is ‘desire’ bad! The answer
is No because nothing good or bad happens without desire’. All
actions are motivated by desire.

          Emerson advises : ‘Be aware of what
you want for you will get it’.

3.4     Sadhu Vaswani says ‘dance of desires is the
dance of death’. He is right because when man, men or nations harbour the
desire to dominate others it leads to conflict. When we seek revenge, are
jealous or envious, our actions are based on self-aggrandisement. However, the
desire to serve, to love, to convert strife into harmony, to educate and uplift
others are ‘desires’ which elevate a human being into a saint and brings him
close to God. These desires backed by action will bring peace and harmony in
family and society. The author reiterates that ‘desire’ per se is not
bad but it is the nature of desire we harbor that matters. It is the intent
from which desire emanates and the action based thereon that is relevant to
living a happy life and happiness is all we seek – so let us convert our ‘self
– centered’ desires into desires to serve and share. I am fully conscious
of the good old metaphor that ‘charity begins at home’– so let us start with
sharing in the family and convert sharing with kutambh into ‘vasudev
kutambh’.

4.1     According to ‘Gita’: desire is the basis of
attachment, anger, infatuation, loss of reason and destruction. It is only by
giving up desire one    achieves
salvation.

5.1     The sage in Ashtavakra Gita says :

          ‘One who desires worldly pleasures and
the one who desires to renounce them stand on the same footing, for they both
nurture desire’.                                                   

5.2     What a contradiction – a paradox and an
enigma – because desire for salvation – nirvana – is also a desire. In other
words, even desire not to have desire is desire. However, Rousseau advises :

           ‘that man is truly free who desires what he is able to perform, and does what he
desires.’

6.1     The issue is : can desires be
satisfied.

          Desire creates longings for
possessions and can never be satisfied. Desires make beggars of ‘man’. There is
always longing for more. But it can be managed – and by His grace
eliminated.

6.2     The question which arises is :

          Can
desire for good also be given up !

7.1     The answer is yes – because
according to our scriptures even desire for Nirvana binds – and that is why
Gita calls desire a great enemy because      ultimate
freedom  comes from a mind free from
‘desires’.

7.2     I would conclude by quoting Steve Allen’s
answer  to the question –

          ‘If you were given a
wish fulfilling well, what would you wish for !

          ‘To stop wishing’

Author’s note :

The issues are: Does the author believe that a stage of no desire
can be achieved and has he achieved it. The answer is that he believes that the
stage of no desire can be achieved. He has not attained it but the effort is on
because he is still caught in the web of `desire for no desire is also
desire.

13. TS-921-ITAT-2016(Ahd)-TP Shell Global Solutions International BV vs. DDIT A.Y.s:2007-08 to 2010-11, Date of Order:17th November 2016

Article 9 of India – Netherlands DTAA – No
bar in Article 9 to address juridical double taxation – Not confined to ALP
adjustment only in hands of domestic entities – Non-availability of relief
under article 9(2) does not negate application of article 9(1)

Facts

The Taxpayer is a company incorporated in
and tax resident of the Netherlands. During the year under consideration,
Taxpayer rendered certain technical services to its associated enterprises
(AEs) in India.The consideration received by the Taxpayer for rendering the
aforesaid services was treated as Fees for technical services (FTS) under
Article 12 of India Netherlands Double Taxation Avoidance Agreement (DTAA) and
thereby, taxed @ 10% on gross basis. During the course of assessment
proceedings, arm’s length price (ALP) in respect of FTS was determined at a
higher level and adjustments under the transfer pricing regulations
wereproposed by the Assessing Officer (AO).

Without disputing mechanics and
quantification of the ALP adjustments, Taxpayer argued that the adjustment was
not justified as additional fees would have been taxed in India in the hands of
Taxpayer @ 10%, whereas the AE in India would have obtained tax shied @ 33.99%
and net effect of adjustment was base erosion of Indian tax. Taxpayer,
therefore,contended that such adjustments are contrary to the scheme of section
92(3) of the Act read with CBDT Circular No. 14 of 2001.

The Taxpayer filed objection before Dispute
resolution panel (DRP). The DRP rejected the objections.

Aggrieved, Taxpayer appealed before the
Tribunal, where theTaxpayer put forth additional claim of treaty protection and
contended that considering the language of Article 9 of India-Netherlands DTAA,
ALP adjustment can only be made in case of juridical double taxation and only
in the hands of domestic enterprise. The Taxpayer further contended that ALP
adjustment was not permissible in its hands under Article 9 of
India-Netherlands DTAA.

Held

(i)   In Instrumentarium
Corporation Ltd. Finland vs. ADIT [(2016) 71 taxmann.com 193 (SB)], the
Special Bench (SB) narrowed the scope of application of the “base erosion
theory” in transfer pricing matters. The Taxpayer was an ‘intervener’ in the
said decision and the argument of the Taxpayer on the base erosion was rejected
by SB.

(ii)  As per the wording of
Article 9, there is no bar to address juridical double taxation. As long as the
conditions precedent in Article 9 are attracted, the application of arm’s
length standards come into play.

(iii)  While Article 9(1) is an
enabling provision, TP mechanism under the domestic law is the machinery
provision. Once it is not in dispute that the arm’s length standards are to be
applied as per Article 9, it is only axiomatic that the manner in which arm’s
length standards provided under the domestic law need to be applied.

(iv) The provisions of Article
9(1) are clear and unambiguous and permit ALP adjustment in all situations in
which the arm’s length standards require higher profits in the hands of any
“one of the enterprises, but by reason of those conditions, have not so
accrued” to be “included in the profits of that enterprise and taxed
accordingly”. The AO has no discretion to read this provision as confined to
enabling ALP adjustment in respect of only domestic entities.

(v)  The non-availability of
corresponding adjustment relief under Article 9(2) does not deter application
of Article 9(1). Therefore, the ALP adjustment cannot be negated onthe ground
that no relief against such taxation is granted by the residence state. An
element of double taxation is inherent in respect of taxation of FTS, which is
taxed in both countries under the treaty. However, in such cases also, the
taxation in source country is not dependent on the relief granted by residence
country. Thus, mere increase in quantum of such taxable income in the source
jurisdiction, due to application of arm’s length principle, need not always be
visited with corresponding adjustment under article 9(2) in the residence
jurisdiction.

(vi) It may not be correct to
suggest that there is conflict between Article 9 and domestic transfer pricing
legislation. There is a school of thought that domestic arm’s length principle
goes much beyond tax treaty’s normal rule making scope since this arm’s length
principle governs taxation of an enterprise in general and the tax treaties do
not restrict domestic law in this respect. The profit adjustment mechanism
envisaged in tax treaties do not deal with supra national income determination.
Therefore, the provisions of tax treaties cannot be seen as restricting, or
overriding, domestic law mechanism on transfer pricing aspects.

(vii) The transfer pricing
legislation is an anti-avoidance provision. It cannot be rendered ineffective
on the basis of the limitations in the provisions of Article 9. Section 90(2)
of the Act gives somewhat unqualified superiority to the treaty provisions over
the provisions of the Income Tax Act which contain transfer pricing legislation
as well. It will infringe the neutrality of an anti-abuse law– notwithstanding
whether it is a specific anti-abuse regulation (SAAR) or a general anti-abuse
regulation (GAAR)– if it is considered to apply only to a non-treaty situation
but not to a treaty situation.

New India-Cyprus DTAA, 2016 – An Overview

A)  Background

(i)  India and Cyprus have recently signed a new Double Taxation Avoidance Agreement (New DTAA). The New DTAA replaces the earlier India-Cyprus DTAA signed in 1994 (Old DTAA), which has been a subject matter of renegotiation between the Government of India (GoI) and the Government of the Republic of Cyprus (GoC) for some time now. The New DTAA was signed on 18th November 2016 and both the Governments had previously issued press releases announcing the same. The text of the New DTAA was recently published in the Gazette of the GoC. However, the GoI is yet to make an official publication of the New DTAA. The New DTAA is the outcome of prolonged and extensive negotiations between both the countries.

(ii)  Significant provisions of the New DTAA include source country taxation rights on capital gains from shares, subject to grandfathering of shares acquired before 1st April 2017, insertion of Service Permanent Establishment (PE), expanded scope of Dependent Agent PE, revised Article on Fees for Technical Services (FTS) etc. The New DTAA limits source country taxation of Other Income. It also reduces taxation of royalty/FTS at the rate of 10% (as compared to the earlier rate of 15%). Furthermore, a modified version of the exchange of information (EOI) provision has been incorporated, which is in line with existing international standards. An additional Article on “assistance in collection of taxes” has also been introduced in the New DTAA.

(iii) The New DTAA will enter into force once the requisite procedures are completed in both the countries. The old DTAA shall stand terminated upon the New DTAA coming into force.

(iv) The GoI has rescinded the classification of Cyprus as a “Notified Jurisdictional Area” (NJA), retrospectively as from 1st November 2013.

B)  Highlights / Salient Features of the New DTAA

1.  Expanded scope of PE (Article 5)

The New DTAA expands the scope of ‘permanent establishment’, introducing the concept of a ‘service’ permanent establishment. The New DTAA has also specifically includes (i) sales outlets, (ii) warehouses (in relation to a person providing storage facilities for others) and (iii) farms, plantations or other places where agricultural, forestry, plantation or related activities are carried on, within the inclusive definition of ‘permanent establishment’. Further, the New DTAA provides for the creation of a construction permanent establishment if activities carry on for more than 6 months, instead of the earlier requirement that the activities be carried on for more than 12 months.

Insertion of a Service PE: A new Service PE clause has been introduced whereby furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) within the country for a period or periods aggregating more than 90 days within any 12 month period shall constitute a PE. The above service PE rule is in line with the UN Model Convention 2011 (2011 UN MC), except that the time threshold is lower at 90 days as compared to 183 days in the 2011 UN MC.

The criteria for the constitution of an agency PE has been amended. Accordingly, the person other than an agent of independent status shall constitute an agency PE if:

–   He is acting on behalf of an enterprise and has, and habitually exercises, in a contracting state an authority to conclude contracts in the name of the enterprise;

–   Has no such authority, but habitually maintains in the first-mentioned state a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise;

–   Habitually secures orders in the first mentioned state, wholly or almost wholly for the enterprise itself.

The above provisions are consistent with most of the Indian DTAAs.

There are a number of other changes in the PE definition which include, inter alia:

a) Lowered threshold for triggering construction/installation/supervisory PE to 6 months from the existing limit of 12 months.

b)  Inclusion of sales outlet, warehouse as fixed PE.

c)  Removal of “delivery” function from the scope of exempted activities.

2.   Profit Attribution / Business Profits (Article 7)

The New DTAA has removed the ‘force of attraction’ rule. Accordingly, the business profits of an enterprise may be taxed in the other state but only so much of them as is attributable to that PE.

No deduction shall be allowed in respect of amounts paid by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of banking enterprises, if any, paid (other than reimbursement of actual expenses) by the PE to the head office or any of its other offices, by way of interest on money lent to the PE.

Similarly, no account shall be taken, in the determination of the profits of a PE, of amounts charged by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of banking enterprises (other than reimbursement of actual expenses) by the PE to the head office or any of its other offices, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.

This provision is comparable to Article 7(3) of the 2011 UN MC and has been adopted lately by India in most of its DTAAs.

3.   Shipping and Air Transport (Article 8)

The criteria of ‘registration’ and ‘headquarters’ have been removed. Accordingly, profits derived by an enterprise of a contracting state from the operation of ships or aircraft in international traffic shall be taxable only in that state

The term profits for the purpose of shipping and air transport has been amended. Accordingly, profits from the operation of ships or aircraft in international traffic shall include profits derived from the rental of ships or aircraft on a full time (time or voyage basis) or bareboat basis.

Exception is provided for the taxability of profits from the use, maintenance, or rental of containers for the transport of goods or merchandise solely between places within the other contracting state.

The New DTAA provides that interest on funds connected directly with the operation of ships or aircraft in international traffic, shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 (interest) shall not apply in relation to such interest.

    by the enterprise are covered under ‘capital gains’. It shall be taxable only in the contracting state in which the alienator is a resident.

4.   Associated Enterprises (AEs) (Article 9)

The New DTAA aligns with the OECD Model Convention (OECD MC) in relation to the provisions related to AEs. Article 9(2) of the old DTAA has been removed, which provided powers to the competent authority to apply domestic laws which allow to use discretion/estimates for computing liability under Article 9(1) in cases where it is not possible, from the available information, to determine profits attributable to the concerned enterprise.

5.   Dividends (Article 10)

The rate of dividend in source state shall not exceed 10%. The rate of 15% has been removed.

6.   Interest (Article 11)

Tax rate of interest in source state shall not exceed 10% if the beneficial owner of the interest is a resident of the other contracting state.

Following entities are additionally exempt from tax:

– Export-Import Bank of India

–  National Housing Bank

– Any other institution as may be agreed upon from time to time between the competent authorities of the contracting states through the exchange of letters.

7.   Royalties and FTS (Article 12)

Under the New DTAA, royalties and FTS will attract tax withholding at the rate of 10%, as against the rate of 15% provided in existing DTAA. However, the scope of source taxation has been modified as follows:

–  The term FIS has been replaced by the term FTS.

–   The tax rate of royalties and FTS in the source state is reduced to 10% from 15 %.

–  The term royalty has been amended to include payment only.

–  The definition of the term ‘royalty’ has been amended as follows:

‘The term ‘royalties’ means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term ‘royalties’ will not include income for the use of, or the right to use aircrafts and ships.’

–   The term ‘FTS’ has been amended as follows:
‘FTS’ means payments of any kind as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel.

Further, the ‘make available’ clause has been removed from the term FTS.

Additionally, Article 12(5) provides that where royalties or FTS do not arise in one of the contracting states, and the royalties relate to the use of, or the right to use, the right or property, or the FTS relate to services performed in one of the contracting states, the royalties or FTS shall be deemed to arise in that contracting state.

8.   Source based taxation of capital gains from shares (Article 13)

Capital gains arising from the transfer of shares are taxable solely in the Resident State of the alienator under the old DTAA. The New DTAA provides taxation rights to the State of residence of the company whose shares are alienated (i.e., Source State).

Additionally, taxation of indirect transfer whereby capital gains from sale of shares of a company, the assets of which consist, directly or indirectly, principally of immovable property in a Contracting State (Source State), would be taxable in the Source State.

However, shares acquired up to 31st March 2017 have been grandfathered from both the above rules on source taxation. The exemption will apply irrespective of the date of subsequent transfer of such shares.

Therefore, the source based taxation under the New DTAA shall only be applicable to capital gains arising from the transfer of investments made on or after 1st April, 2017, and capital gains arising from the transfer of investments made prior to 1st April, 2017 should continue to be taxed only in the jurisdiction in which the taxpayer is a resident.

The aforesaid provisions on direct transfer of shares are similar to the recent amendment under the India-Mauritius DTAA. The India-Mauritius DTAA additionally provides for a transitional relief of 50%, subject to fulfilment of Limitation of Benefit (LOB). Such a provision does not feature in the New DTAA with Cyprus.

The clause relating to alienation of ship and aircraft amended to provide that gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the contracting state of which the alienator is a resident.

A new clause has been inserted to provide that gains from the alienation of shares of the capital stock of a company, the property of which consists directly or indirectly principally of immovable property situated in a contracting state, may be taxed in that state.

9.   Independent Personal Services (Article 14)

The New DTAA has introduced the rolling period concept i.e. for a period or periods amounting to or exceeding in the aggregate 183 days in any 12 month period commencing or ending in the fiscal year concerned.

10. Dependent Personal Services (Article 15)

The New DTAA has introduced the rolling period concept i.e. the remuneration derived in respect of an employment exercised in the other contracting state shall be taxable in source state only if the recipient is present in the other state for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned.

In case the remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise, the New DTAA has removed the place of effective management criteria. Therefore, the remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a contracting state, shall be taxed in that state.

11. Limited source taxation of “Other Income” (Article 22)

Under the old DTAA, any income not expressly covered by other Articles of the DTAA and arising in a Source State could be taxed in that Source State also. The said provision has been removed in the New DTAA.

The New DTAA listed certain specified income for taxability in source state. Accordingly, if a resident of a contracting state derives income from sources within the other contracting state in the form of lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any nature whatsoever, such income may be taxed in the other contracting state.

12. Methods for elimination of double taxation (Article 23)

Benefits relating to tax sparing and deemed foreign tax credit (FTC) in respect of dividend, interest, royalty and FTS under the old DTAA have been removed.

13. Non Discrimination (Article 24)

The New DTAA has amended the non-discrimination clause. It provides that nationals of a contracting state shall not be subjected in the other contracting state to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other state in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall also apply to persons who are not residents of one or both of the contracting states.

Interest, royalties and other disbursements paid by an enterprise of a contracting state to a resident of the other contracting state shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned state. Similarly, any debts of an enterprise of a contracting state to a resident of the other contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State.

14. Tie-breaker rule for determining residency of non-individuals through Mutual Agreement Procedure (MAP) (Article 25)

In cases of persons other than individuals who are residents of both India and Cyprus, place of effective management (POEM) rule is applied to determine residency. The New DTAA additionally provides that if POEM cannot be determined then the competent authorities of the Contracting States shall settle the question by mutual agreement within 2 years from the date of invocation of MAP under Article 25.

15. Exchange of Information (Article 26)

The scope of the EOI Article in the New DTAA has been enhanced to align with international standards on transparency and the provision in the OECD MC. The EOI Article extends to information relating to taxes of every kind and description imposed by a State or its political subdivisions or local authorities, to the extent that the same is not contrary to the taxation as per the New DTAA. Furthermore, the information can be used for purposes other than tax, with the prior approval of the authority providing such information.

EOI would also be possible in respect of persons who are not residents of the Contracting State, as long as the information requested is in possession of the concerned State. Specifically, information held by banks or financial institutions can be exchanged under the EOI Article.

16. Assistance in Collection of Taxes (Article 27)

The New DTAA includes an Article on “assistance in collection of taxes” largely in line with the OECD MC. Broadly, this Article enables the revenue claims of one State to be collected through the assistance of the other Contracting State, subject to fulfilment of certain conditions and requirements. Assistance would also involve undertaking measures of conservancy by freezing assets located in the requested State, subject to the laws therein.

Clause 4 of the Protocol clarifies that for the purpose of this Article, a State is not obliged to take measures inconsistent with its laws and policies in respect of collection of its own taxes.

C)  India rescinds notification treating Cyprus as “Notified Jurisdictional Area”

The Government of India (GoI) vide Notification No. 114 of 2016 dated 14th December 2016 (Recent Notification) has rescinded its earlier Notification No. 86 of 2013 dated 1st November 2013 which had notified Cyprus as a Notified Jurisdictional Area (NJA) u/s. 94A of the Income-tax Act, 1961 (Act).

On 1st November 2013, the Central Board of Direct Taxes (CBDT) invoked the provisions of Section 94A of the Act and notified Cyprus as an NJA owing to inadequate exchange of information by Cyprus tax authorities. On 1st July 2016, GoI issued a press release that negotiation on the revision of India-Cyprus tax treaty (Cyprus Treaty) between both the countries has been completed with –

–   Rights to source based taxation of capital gains and grandfathering of investments made prior to 1st April 2017.

–   India considering the removal of Cyprus from the list of NJAs under the Act retrospectively and initiating necessary procedures.

On 18th November, 2016, GoI issued a press release announcing the signing of the New Cyprus Treaty. Subsequent to this notification, Government of Cyprus released the text of the New Cyrus Treaty. GoI vide its recent notification has rescinded the earlier notification resulting in Cyprus not being a NJA under the Act. The recent notification also states that things done or omitted to be done before such rescission shall be an exception. On 16th December 2016, GoI has issued another press release confirming completion of internal procedures to amend the Cyprus Treaty. In this press release, GoI has also stated that Cyprus’s status as an NJA u/s. 94A of the Act has been rescinded with effect from 1st November 2013.

Impact of the Recent Notification

–   Deeming fiction provided in section 94A to deem Cyprus tax residents or a person located in Cyprus as an associated enterprise and any transactions with them as an international transaction will no longer be applicable.

–   Claim for deduction of any expenditure / allowance arising on account of transactions with Cypriot tax resident or a person located in Cyprus would now be allowable under general provisions of the Act without documentation requirements as per Rule 21AB of the Income-tax Rules, 1962 read with Form 10FC prescribed u/s. 94A of the Act.

–   Consequent to the Recent Notification, any taxable income accruing / arising to a Cypriot tax resident or a person located in Cyprus would now be subject to the withholding tax rates prescribed under the Act or the New DTAA (as and when India notifies the same), whichever is beneficial to the tax payer.

To illustrate, payments made to Cyprus tax residents or persons located in Cyprus would be subject to withholding tax as follows:

–   Royalties / Fees for Technical Services, earlier liable to withholding u/s. 94A at the rate of 30%, would now be liable to withholding at 10% under the Act.

–   Interest income, earlier liable to withholding u/s. 94A at the rate of 30%, would now be liable to withholding at 10% under the Cyprus Treaty or at an applicable lower rate under the Act, whichever is beneficial.

This is a long awaited and significant development between India and Cyprus and resets the tax position for various transactions on par with other jurisdictions.

D)  Impact and Analysis of New India-Cyprus DTAA

1.  Shift towards source based taxation.

By and large, India’s network of 94 tax treaties provide for source and residence based taxation of capital gains arising from the transfer of shares of a company. However some exceptions exist, for example, India’s tax treaties with Singapore, Jordan (provided the transferor is subject to tax in the state of residence), Philippines, Portugal, and Zambia provide for taxation of gains arising from the transfer of shares of a company only in the state of residence of the transferor.

Over the last few years, India has undertaken a concerted effort to revise its tax treaties and has successfully revised its treaties with Indonesia, Thailand, Mauritius and most recently Korea, to provide for source based taxation of capital gains arising from the transfer of shares of a company. The revision of the treaty with Mauritius (one of India’s largest sources of foreign investment) showed the determination of the Indian government to move towards a source based taxation of capital gains regime. The Indian Government is reportedly also in the process of amending its treaty with Singapore along similar lines. The New DTAA with Cyprus marks yet another milestone in this process.

For the time being, residence based taxation of gains arising from the transfer of investments in instruments other than shares e.g., debentures continues. Under India’s tax treaties, with the exception of gains arising from the transfer of (i) immoveable property, (ii) movable property forming part of a permanent establishment and, (iii) ships and aircraft, gains arising from the transfer of any other property are usually taxable only in the state of residence of the transferor. India’s tax treaties with China, USA, UK, Canada and Australia are some notable exceptions, with gains from any transfer of other property being taxable in both the state of source and the state of residence. Conversely, India’s tax treaties with Fiji, Greece and Egypt, provide for taxation of gains from the transfer any other property only in the country of source. The recently amended tax treaties with Mauritius, Korea and Thailand continue to provide for residence based taxation of gains arising from the transfer of “other property”.

Further, in the absence of an enabling treaty provision along the lines of that in the tax treaty with South Africa (Article 13(5) of the India-South Africa tax treaty provides that “Gains derived by a resident of a Contracting State from the sale, exchange or other disposition, directly or indirectly, of shares or similar rights in a company, other than those mentioned in paragraph 4, which is a resident of the other Contracting State, may be taxed in that other State.” ) gains arising from the indirect transfer of Indian shares should continue to be taxable only in the state of residence of the transferor (Article 13(6) of the New DTAA provides that “Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5, shall be taxable only in the Contracting State of which the alienator is a resident). Based on the ruling of the Andhra Pradesh HC in Sanofi Pasteur Holding SA vs. Dept. of Revenue [2013] 30 taxmann.com 222 (AP) gains arising from the transfer of shares of a Cypriot company whose value is derived substantially from shares of an Indian company should fall within the scope of Article 13(6) and therefore be taxable only in Cyprus.). However, other view is also possible in this regard.

2.  Cyprus as a tax efficient jurisdiction for investing into India

While Mauritius negotiated a better interest withholding rate (7.5%) than the New DTAA currently contains (10%), and, unlike the India-Mauritius tax treaty, the New DTAA does not provide for a transition period [Under the recently notified Protocol amending the India-Mauritius Tax Treaty (set to come into effect from April 1, 2017), gains from the sale of investments made after April 1, 2017 but before March 31, 2019 are subject to taxation in the source country at only 50% of the applicable domestic tax rate. Gains from the sale of investments made prior to March 31, 2017 remain taxable only in Mauritius, but gains from investments made after March 31, 2019 will be taxable in Mauritius and India.] of taxation at reduced rates, the continuation of residence based taxation for gains arising on transfer of instruments other than shares, and Cyprus’ membership of the European Union should serve to return some of the country’s lustre as an efficient jurisdiction for investment into India. De-notification of Cyprus as an NJA may even encourage fresh investments through Cyprus prior to April 1, 2017.

3.  Limitation of Benefits Clause

Interestingly, the New DTAA does not contain a Limitation of Benefits clause (“LOB”). This is contrary to the trend that has arisen in recent years, with India amending / revising many of its tax treaties to include an LOB clause. India has incorporated variations of a LOB clause in its tax treaties with the USA (1990), Singapore (1994 / 2005), Namibia (1999), Armenia (2004), UAE (2007), Iceland (2008), Kuwait (2008), Syria (2009), Luxembourg (2010), Myanmar (2010), Tajikistan (2010), Finland (2011), Mexico (2011), Mozambique (2011), Georgia (2012), Lithuania (2012), Norway (2012), Tanzania (2012), Taiwan (2012), Uzbekistan (2012), Ethiopia (2013), Jordan (2013), Malaysia (2013), Nepal (2013), Romania (2013), UK (2013), Albania (2014), Bhutan (2014), Columbia (2014), Fiji (2014), Latvia (2014), Sri Lanka (2014), Uruguay (2014), Macedonia (2015), Malta (2015), Thailand (2015), Poland (2015), Indonesia (2016), Korea (2016) and Mauritius (2016). In the times to come, it will be exciting to see the interplay between the General Anti-Avoidance Rules (“GAAR”) which are slated to come into effect from April 1, 2017 and the re-negotiated tax treaties (especially the LOB clauses) and the impact on structures and investments. Notably, the Shome Committee report had recommended that where anti-avoidance rules are provided for in a treaty, the GAAR provisions should not apply to override the provisions of the treaty. Interestingly, the LOB clause in the amended Mauritius tax treaty requires a company desirous of claiming benefits to either (i) be listed on a stock exchange in Mauritius or (ii) incur expenditure on operations in its state of residence to a tune of Rs. 2.7 million in the 12 months immediately preceding the date on which the gains arise. This is similar to the language of the LOB clause in the Singapore tax treaty. However, the Singapore LOB clause will cease to be in effect on April 1, 2017, unless the Singapore treaty is amended prior to that date.

E)  Concluding Remarks

The New Cyprus DTAA is similar to the recently amended India-Mauritius DTAA in terms of inclusion of Service PE and source taxation of capital gains, as well as grandfathering relief. However, as compared to the amended India-Mauritius DTAA, there is no transitory concessional relief available (subject to LOB) in respect of gains made on shares acquired post 1st April 2017 but transferred before 31st March 2019.

Some other provisions on PE, FTS, EOI are also consistent with the recent trends in Indian DTAAs. Interestingly, the New DTAA does not contain an LOB provision, contrary to the trend in Indian DTAAs being signed/amended lately.

After Mauritius and Cyprus, renegotiation of the India-Singapore DTAA and the India-Netherlands DTAA is expected to be completed.

Taxpayers will need to evaluate the impact of the New DTAA based on the facts of their specific cases. One may also need to watch how the New DTAA will get impacted by the Multilateral Instrument released by the OECD recently.
The above article provides only an overview of the salient features of the New India-Cyprus DTAA. The reader is advised to go through the detailed provisions of the Treaty minutely.

13. Manish Ajmera vs. ITO ITAT ‘B’ Bench, Mumbai Before Shailendra Kumar Yadav (J. M.) and Rajesh Kumar (A. M.) ITA No.5700/Mum/2013 A.Y.:2010-11. Date of Order: 26th August, 2016 Counsel for Assessee / Revenue: Jayesh Dadia / Chandra Vijay

Section 14 – Income from transfer of shares
and securities taxed under the head short term capital gains based on the Board
circular.

FACTS

The assessee had filed return of income
declaring total income of Rs. 0.68 lakh. The AO in his order passed u/s. 143(3)
assessed at Rs. 83.04 lakh and taxed Rs. 82.36 lakh as business income instead
of as short term capital gains as claimed by the assessee. On appeal, the CIT
(A) confirmed the AO’s order.

HELD

The Tribunal referred to a clarificatory
Circular no. 6/2016 dated 29th February, 2016 wherein the Board had
clarified that where the assessee himself, irrespective of the period of
holding the listed shares and securities, opts to treat them as stock-in-trade,
the income arising from transfer of such shares would be treated as his
business income. Relying on the same, the Tribunal directed  the AO to treat the income in question as short term capital gain instead of as
business income as assessed  by the AO.

12. Y.V. Ramana vs. CIT ITAT Visakhapatnam Bench, Visakhapatnam Before V. Durga Rao (J. M.) and G. Manjunatha (A. M.) I.T.A.No.: 177/Vizag/2015 A.Y.: 2010-11. Date of Order: 9th December 2016 Counsel for Assessee / Revenue: C. Kameswara Rao / G. Guruswamy

Section 2(47) – Mere agreement for transfer
of shares does not cause effective transfer of shares unless it is accompanied
with delivery of share certificate and duly signed and stamped share transfer
form.

FACTS

During the year under appeal, the assessee
had sold 1,33,420 equity shares in Vijay Nirman Company Private Limited (VCPL)
for a consideration of Rs. 199.98 lakh. The transfer was in pursuant to an
investments agreement dated 12-08-2009 between transferee of the shares, VCPL
and its shareholders. The said investment agreement had prescribed certain
terms and conditions of share transfer and completion of statutory formalities
by filing necessary forms under the Companies Act, 1956 with concerned
authorities. As per the said agreement, the assessee received sales
consideration on 10-09-2009 from the transferee of the shares. The assessee
completed share transfer formality on 24-11-2009 by filing valid instrument of
transfer in form no. 7B duly stamped and signed by transferor and transferee
and presented to the company along with share certificates which was endorsed
by the company on 24-11-2009. The assessee invested part of sale consideration
of Rs. 50 lakh in NHAI bonds on 4-5-2010 and claimed exemption u/s 54EC. The
assessee also deposited sum of Rs. 150 lakh on 24-07-2010 in a scheduled bank
under Capital Gain Deposit Scheme (‘the Scheme’) before due date of filing
return of income and proof of which was furnished along with return of income,
and claimed exemption u/s. 54F of the Act. The assessee purchased a house
property on 31-10-2011 out of the amount deposited under the Scheme. The
assessment was completed u/s. 143(3) on 16-01-2013, determining total income as
returned by the assessee.

According to the CIT to claim exemption u/s.
54EC and 54F, the assessee ought to have invested sale consideration within six
months/2 years from the date of receipt of money and not the date of transfer
of shares by signing share transfer form. 
If the period of limitation is computed from the date of receipt of
money, then investments in 54EC and 54F was beyond the time limit specified under
the provisions, accordingly, the assessee was not eligible for exemption.
Accordingly, he held that the order of the AO was erroneous in so far as it is
prejudicial to the interest of the revenue.

According to the assessee, the A.O. had
examined the issue of computation of capital gain towards sale of shares and
exemption claimed u/s. 54EC and 54F of the Act, by specific questionnaire dated
13-12-2012 and 28-12-2012. The assessee had furnished complete details of
shares transfer and proof of investment in 54EC and 54F of the Act. The A.O. having
satisfied with details furnished by the assessee, had chosen to accept
computation of capital gain and hence, the assessment order cannot be termed as
erroneous within the meaning of section 263 of the Act.

According to the revenue, as per the investments
agreement dated 12-08-2009, the transfer got crystallised on the date of
payment of consideration towards transfer of shares by the purchaser to the
seller and subsequent execution of share transfer form and filing such form
with company is only a statutory requirement which is nothing to do with
transfer. It also referred to section 19 of sale of Goods Act, 1930 and
submitted that where there is a contract for the sale of specific or
ascertained goods the property in them is transferred to the buyer at such time
as the parties to the contract intended it to be transferred. The revenue also
referred to CBDT. Circular No. 704, dated 28-04-1995 and argued that in the
case the transactions take place directly between the parties and not through
stock exchanges, the date of contract of sale as declared by the parties shall
be treated as the date of transfer provided it is followed up by actual
delivery of shares and the transfer deeds.

HELD

According to the Tribunal, once, the A.O.
had called for details of the issue which is subject matter of revision
proceedings and the assessee furnished details called for, it is the general
presumption that the A.O. has examined the issue with necessary evidences,
applied his mind and took a possible view of the matter before completion of
assessment. The CIT cannot assume jurisdiction to review the assessment order
by holding the A.O. has conducted inadequate enquiry and also not applied his
mind. Thus, it held that that the assessment order passed by the A.O. is not erroneous
within the meaning of section 263 of the Act.

To examine whether the assessment order is
prejudicial to the interest of revenue – the Tribunal noted that the only
dispute is with regard to date of transfer. The assessee contends that transfer
had taken place on 24-11-2009, when valid instrument of share transfer in form
no. 7B is duly stamped and signed by the both the parties and presented to the
company along with original share certificates. According to the CIT, the
effective transfer took place on 10-09-2009 when sale consideration is passed
on to the seller.

According to the Tribunal, share transfer is
governed by section 108 of the Companies Act, 1956. As per section 108
registration of transfer of shares is possible only if a proper transfer deed
in form no. 7B duly stamped and signed by or on behalf of the transferor and by
or on behalf of the transferee and specifying the name, address and occupation,
if any of the transferee, has been delivered to the company along with share
certificates and endorsed by the Company. In the case of shares of listed
companies, effective transfer would take place when title to share is
transferred from one person to another through demat account in recognised
stock exchange. In the case of shares of unlisted companies, transfer would
take place, only when valid share transfer form in form no. 7B is delivered to
the company and endorsed by the company. Therefore, for effective transfer of
shares, a mere agreement for transfer of shares is not sufficient, unless it is
physically transferred by delivery of share certificate along with duly signed
and stamped share transfer form. The agreement to transfer share can give
enforceable right to the parties, but it cannot be a valid transfer unless it
is followed up by actual delivery of shares. Thus, in the case of the assessee,
the transfer as defined u/s. 2(47) took place on 24.11.2009 and not on the date
of receipt of money from the buyer to the seller, i.e. 0n 10-09-2009. In view
of the same, investments in NHAI bonds on 4-5-2010 and purchase of house
property on 31-10-2011 is well within the period of six months and 2 years from
the date of transfer as specified u/s. 54EC and 54F of the Act, and
accordingly, the assessee is eligible for exemption and thus, there no
prejudice is caused to the revenue from the order of the A.O. within the
meaning of section 263 of the Act. Therefore, it was held that the assessment
order passed by the A.O. u/s. 143(3) is not erroneous in so far as it is
prejudicial to the interest of the revenue.

15. [2016] 75 taxmann.com 270 (Visakhapatnam – Trib.) DCIT vs. Dr. Chalasani Mallikarjuna Rao A.Y.: 2007-08 Date of Order: 21st October, 2016

Section 50C – Provisions of section 50C are
applicable to sale by a registered un-possessory sale-cum-GPA.  

FACTS 

The assessee, a
doctor by profession, filed his return of income for the assessment year 2007-08.
The assessment was completed u/s. 143(3) of the Act. Subsequently, the
assessment was re-opened, after recording reasons, u/s. 148 of the Act. In the
course of re-assessment proceedings, the Assessing Officer (AO) noticed that
the assessee has sold a residential house property at Dr.No.32-7- 3A, P.S.
Nagar, Vijayawada for a consideration of Rs. 60 lakh by way of registered
un-possessory sale-cum-GPA vide document no.52/2007. As per the said
document, the market value of the property for the purpose of payment of stamp
duty has been fixed at Rs. 82,04,000/-. However, since the assessee had
computed capital gains by adopting sale consideration of Rs. 60 lakh and
claimed exemption u/s. 54 of the Act towards construction of another
residential house property, the AO asked the assessee to show cause why
provisions of section 50C should not be applied and capital gain computed with
reference to value determined by Stamp Valuation Authorities. In response, the
assessee submitted that the provisions of section 50C of the Act are not
applicable since the assessee has transferred property by way of registered
un-possessory sale-cum-GPA. According to the assessee, the provisions of
section 50C of the Act apply where the property has been transferred by way of
registered sale deed. The AO rejected the contentions of the assessee and
computed capital gains by applying the provisions of section 50C of the Act.

Aggrieved, the
assessee preferred an appeal to CIT(A) who held that the provisions of section
50C of the Act have no application when the property has been transferred by
way of un-possessory sale-cum-GPA. He further held that the provisions of
section 50C of the Act are applicable when the property has been transferred
for a consideration which is less than that of the guidelines value payable as
per SRO, then the value as per the SRO has to be adopted on which stamp duty is
payable by the transferor. Since, the impugned property was not registered,
value as per SRO is not applicable. He allowed the appeal

Aggrieved, the
revenue preferred an appeal to the Tribunal.

HELD

It is an
admitted fact that the assessee has transferred property by way of registered
sale-cum-GPA has transferred property by way of registered sale-cum-GPA and
that the sale-cum-GPA is registered in the office of the SRO. The stamp duty
authority has determined the market value of the property at Rs. 82,04,000/-
and has collected ad hoc stamp duty of Rs. 50,000/-. The assessee has computed
long-term capital gain by adopting sale consideration of Rs. 60 lakh shown in
the sale deed. The only dispute is that whether the provisions of section 50C
are applicable or not when the property is transferred by sale-cum-GPA. The
Tribunal observed that in this case, the assessee himself has admitted
long-term capital gain on transfer of asset. This clearly shows that the
transfer took place within the meaning of section 2(47)(v) of the Act. The
moment transfer took place within the meaning of section 2(47)(v) the deeming
fiction provided u/s. 50C is applicable, when the sale consideration shown in
the sale deed is less than the market value determined by the stamp duty
authority for the purpose of payment of stamp duty. Since, there is a
difference between consideration shown in the sale deed and the value
determined by the SRO, the deeming provisions of section 50C are clearly
applicable. It observed that it is illogical and improper on the part of the
assessee to say that the transfer within the meaning of section 2(47)(v) takes
place, but the provisions of section 50C are not applicable when the property
has been transferred by way of un-possessory sale-cum-GPA. 

The Tribunal
allowed this ground of appeal filed by the revenue.

14. [2016] 75 taxmann.com 136 (Visakhapatnam – Trib.) B. Subba Rao vs. ACIT A.Ys. : 2004-05 to 2006-07 Date of Order: 8th November, 2016

Sections 139,
153A, 154, 234A – Where a return of income is filed for the first time in response to notice u/s. 153A then interest will be levied u/s. 234A(1)(a) from
the due  date of filing return of income mentioned in section 139 of the Act and not
from the due date of filing return of income mentioned in section 153A of the
Act.

In a case
where interest was leviable u/s. 234A(1) but the AO levied interest u/s.
234A(3), it amounts to non-application of a particular provision of the Act and
is undisputedly a mistake apparent from record, which needs to be rectified
u/s. 154 of the Act.

FACTS 

The assessee,
an individual, derived income from pension and other sources. In connection
with the search of a group of cases of `S’ Limited, search was initiated
against the assessee as well. The Assessing Officer (AO) issued a notice u/s.
153A calling the assessee to file return of income. The assessee, filed his
return of income, for the first time, in response to notice issued u/s.153A.

The AO
completed the assessment u/s. 143(3) r.w.s. 153A and levied interest u/s. 234B
of the Act with effect from the due date of filing return of income mentioned
in notice u/s.153A of the Act till the date of filing of the return of income
by the assessee.

Subsequently,
the AO issued a notice to the assessee proposing to rectify the mistake in the
order and proposed to levy interest u/s. 234B of the Act from the from due date
of filing return of income u/s. 139 of the Act till the date of filing of
return of income by the assessee instead of from due date of filing return of
income mentioned in notice u/s. 153A of the Act. The assessee submitted that
the levy of interest is a debatable issue which involves prolonged discussion
and cannot be rectified u/s. 154 of the Act. The AO rejected the contentions of
the assessee and passed an order u/s.154 rectifying the mistake.

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

Aggrieved, the
assessee preferred an appeal to the Tribunal where relying upon the decision of
ITAT, Chennai ‘B’ bench in the case of Dr. V. Jayakumar vs. Asstt. CIT
[2011] 46 SOT 68 (URO)/10 taxmann.com 141, it was argued that where a
notice is issued u/s 153A to the assessee, requiring filing return of income
specifying the due date in the notice, because of the word used in the section
“the provisions of this Act shall, so far as may be, apply accordingly as
if such return was a return required to be filed u/s. 139”, the due date
referred to in section139 of the Act gets shifted to the date prescribed in the
notice u/s. 153A of the Act.

HELD 

As regards the
legal contention of the assessee viz. that the mistake under consideration
could not be rectified by invoking the provisions of section 154, the Tribunal
held that since the method of computation of interest u/s. 234A is specifically
provided in the Act, there is no ambiguity in the provisions in as much it is
very clear in terms of section 234A(1) and 234A(3). Section 234A(1) deals with
a situation where return is not filed u/s. 139(1) or 139(4) and 234A(3) deals
with a situation where return is filed after determination of income u/s.
143(1) or computation of income u/s. 143(3) or 147. It noted that the AO
applied the provisions of section 234A(3), which is not applicable to this
case. It held that non-application of a particular provision is undisputedly a
mistake apparent from record, which needs to be rectified u/s. 154 of the Act.
It held that the AO has rightly invoked provisions of section 154, to rectify
the levy of interest u/s. 234A.

Once return is
filed in response to notice u/s. 153A, the provisions of section 139
automatically steps in, accordingly, the due date specified in the said section
comes into operation. If the contention of the assessee is accepted, it would
amount to encouraging the non-filing of returns by the taxpayers, who would
take the chance and file returns as and when notice u/s. 148/153A is issued, so
that they can save interest amount on tax payable to the Govt. exchequer for a
period of four or six years as the case may be.

The method of
computation of interest u/s. 234A is specifically provided. There is no
ambiguity in the provisions. Section 234A(1) deals with a situation where
return of income is filed belatedly and also where no return is filed u/s.
139(1) or 139(4) and section 234A(3) deals with a situation where return is
filed u/s. 148/153A after determination of income u/s. 143(1) or computation of
income u/s. 143(3) or 147 of the Act.

The Tribunal
held that when a return is filed for the first time, the provisions of section
234A(1)(a) are applicable and interest is chargeable for the period commencing
on the date immediately following the due date referred u/s. 139 and ending on
the date of furnishing of the return. Since, the assessee has filed return for
the first time u/s. 153A of the Act, the AO rightly charged interest u/s. 234A
from the due date referred in section 139(1) to the date of filing return u/s.
153A of the Act. The Tribunal upheld the order of the CIT(A).

As regards the
reliance by the assessee upon the decision of ITAT, Chennai ‘B’ bench in the
case of Dr. V Jayakumar (supra) it observed that the bench has upheld
the arguments of the assessee without considering the provisions of sections
153A & 234A of the Act in a right perspective.

The Tribunal
dismissed the appeal filed by the assessee.

13. [2016] 161 ITD 217 (Pune Trib.) Quality Industries vs. JCIT A.Y.: 2010-11 Date of Order: 9th September, 2016.

Section 14A – When an assessee, a
partnership firm, earns tax free income and disallowance u/s. 14A (r.w. Rule
8D) is to be computed then interest paid, towards the use of partner’s capital,
by the assessee to the partners is not amenable to section 14A in the hands of
partnership firm.

FACTS

The assessee, a partnership firm, engaged in
the business of manufacturing of chemicals etc., had during the relevant
assessment year earned tax free dividend income from investment in mutual funds
which was claimed as exempt income u/s. 10(35) of the Act.

The AO next observed that investment in
mutual funds was made out of interest bearing funds which included interest
bearing partner’s capital also.

The interest so paid to the partners was
claimed as deduction by the assessee against taxable income.

The AO was thus of the view that assessee
had incurred interest expenses which were attributable to earning aforesaid tax
free dividend income. Thus, he invoked provisions of section 14A of the Act
r.w. Rule 8D and proceeded to disallow estimated interest expenditure incurred
in relation to dividend income so earned.

It was the assessee’s contention that while
computing disallowance u/s.14A, disallowance of proportionate interest
attributable to interest bearing partners’ capital is not permissible. It was
submitted that section 14A covers amount in the nature of ‘expenditure’ and not
all statutory allowances and that interest on partner’s capital is not an
‘expenditure’ per se but is in the nature of a deduction u/s. 40(b) just
as depreciation on business capital asset is an allowance and not expenditure.

The AO, however, discarded the various pleas
of the assessee.

The CIT(A) took
note of the contents of the Balance Sheet of the assessee firm for relevant
assessment year and noted that main source of investment in mutual funds have
come from partner’s capital. The partners had introduced capital in the
partnership firm which bears interest @12% per annum. This being so, the
provisions of section 14A are attracted and expenses incurred in relation to
income which does not form part of total income requires to be disallowed.

He accordingly confirmed the action of the
AO and his working of disallowance under Rule 8D.

Aggrieved by the order of the CIT(A), the
assessee filed appeal before the Tribunal.

HELD

The predominant question that arises is
whether, for the purposes of section 14A of the Act, payment of interest to the
partners by the partnership firm towards use of partner’s capital is in the
nature of ‘expenditure’ or not and consequently, whether interest on partners capital is amenable to
section 14A or not in the hands of partnership firm.

In order to adjudicate this legal issue, we
need to appreciate the nuances of the scheme of the taxation. We note that
prior to amendment of taxation laws from AY 1993-94, the interest charged on
partners capital was not allowed in the hands of partnership firm while it was
simultaneously taxable in the hands of respective partners. An amendment was inter
alia brought in by the Finance Act 1992 in section 40(b) to enable the firm
to claim deduction of interest outgo payable to partners on their respective
capital subject to some upper limits.

Hence, as per the present scheme of
taxation, partnership firms complying with the statutory requirements and
assessed as such are allowed deduction in respect of interest to partners
subject to the limits and conditions specified in section 40(b) of the Act. In
turn, these items will be taxed in the hands of the partners as business income
u/s. 28(v).

Share of partners in the income of the firm
is exempt from tax u/s. 10(2A). Thus, the share of income from firm is on a
different footing than the interest income which is taxable under the business
income.

The section
28(v) treats the passive income accrued by way of interest as also salary
received by a partner of the firm as a ‘business receipt’ unlike different
treatments given to similar receipts in the hands of entities other than
partners. In this context, we also note that under proviso to section
28(v), the disallowance of such interest is only in reference to section 40(b)
and not section 36 or section 37. Notably, there has been no amendment in the
general law provided under Partnership Act 1932. The amendment to section 40(b)
as referred hereinabove has only altered the mode of taxation. Needless to say,
the Partnership firm is not a separate legal entity under the Partnership Act.
It is not within the purview of the Income-tax Act to change or alter the basic
law governing partnership. Interest or salary paid to partners remains
distribution of business income.

Section 4 of the Indian Partnership Act 1932
defines the terms partnership, partner, firm and firm name as under :

“Partnership” is the relation
between persons, who have agreed to share the profits of a business, carried on
by all or any of the partners acting for all. Persons who have entered into
partnership with one another are called individually ‘Partners’ and
collectively a ‘firm’ and the name under which their business is carried on is
called the ‘firm name.”

Thus, it is clear that firm and partners of
the firm are not separate person under Partnership Act although they are
separate unit of assessment for tax purposes.

It is relevant here to refer to decision in
the case of CIT vs. R.M. Chidambaram Pillai (1977-106 ITR 292) wherein
Hon’ble Supreme Court has held that:

“A firm
is not a legal person, even though it has some attributes of personality. In
Income-tax law, a firm is a unit of assessment, by special provisions, but it
is not a full person. Since a contract of employment requires two distinct
persons, viz., the employer and the employee, there cannot be a contract of
service, in strict law, between a firm and one of its partners. Payment of
salary to a partner represents a special share of the profits. Salary paid to a
partner retains the same character of the income of the firm. Accordingly, the
salary paid to a partner by a firm which grows and sells tea, is exempt from
tax, under rule 24 of the Indian Income-tax Rules, 1922, to the extent of 60
per cent thereof, representing agricultural income and is liable to tax only to
the extent of 40 per cent.”

The Hon’ble
Supreme Court has also held in the case of CIT vs. Ramniklal Kothari (1969
-74 ITR 57) that the business of the firm is business of the partners of
the firm and, hence, salary, interest and profits received by the partner from
the firm is business income and, therefore, expenses incurred by the partners
for the purpose of earning this income from the firm are admissible as
deduction from such share income from the firm in which he is partner.

Thus, the ‘partnership firm’ and partners
have been collectively seen and the distinction between the two has been
blurred in the judicial precedents even for taxation purposes.

Therefore, the relationship between partner
and firm cannot be inferred as that of lender of funds (capital) and borrower
of capital from the partners, and hence, section 36(1)(iii) is not applicable
at all. Section 40(b) is the only section governing deduction towards interest
to partners. To put it differently, in view of section 40(b) of the Act, the
Assessing Officer purportedly has no jurisdiction to apply the test laid down
u/s. 36 of the Act to find out whether the capital was borrowed for the
purposes of business or not.

As per the
scheme of the Act, the interest paid by the firm and claimed as deduction is
simultaneously susceptible to tax in the hands of its respective partners. The
interest paid to partners and simultaneously getting subjected to tax in the
hands of its partners is merely in the nature of contra items in the hands of
the firms and partners. Consequently interest paid to its partners cannot be
treated at par with the other interest payable to outside parties. Thus, in
substance, the revenue is not adversely affected at all by the claim of
interest on capital employed with the firm by the partnership firm and partners
put together. Thus, capital diverted in the mutual funds to generate alleged
tax free income does not lead to any loss in revenue by this action of the
assessee. In view of the inherent mutuality, when the partnership firm and its
partners are seen holistically and in a combined manner with costs towards
interest eliminated in contra, the investment in mutual funds generating  tax free income bears the characteristic of and attributable to its own capital
where no disallowance u/s. 14A read with Rule 8D is warranted. Consequently,
the  plea of the assessee is merited in so far as interest attributable to partners.
However, the interest payable to parties other than partners, would be
subjected to provisions of Rule 8D. 

Accounting For Loss of Control in Subsidiary

Issue

Consider the following example.
Parent (P) sells wholly owned Subsidiary (S) to Associate (A).  The structure before and after sale is given
below.

In P’s CFS, the carrying amount of
the net assets of S at the date of the sale is INR 10,000.  For simplicity, assume S has no accumulated
balance of OCI. The fair value of S and the selling price is INR 18,000, which
is the consideration received by P in cash. P recognises a profit of INR 8,000
on the sale of S in CFS.

The next step is to determine how
much of this profit of INR 8,000 is required to be eliminated on
consolidation.  Essentially, there are
two approaches, which are explained below.

Ind AS 110 Approach

Paragraph 25 of Ind AS 110 –
Consolidated Financial Statements states as follows: 

If a parent loses control of a
subsidiary, the parent:

a)  Derecognises the assets and
liabilities of the former subsidiary from the consolidated balance sheet.

b)  Recognises any investment
retained in the former subsidiary at its fair value when control is lost and
subsequently accounts for it and for any amounts owed by or to the former
subsidiary in accordance with relevant Ind ASs. That fair value shall be
regarded as the fair value on initial recognition of a financial asset in
accordance with Ind AS 109 or, when appropriate, the cost on initial
recognition of an investment in an associate or joint venture.

c)  Recognises the gain or loss associated
with the loss of control attributable to the former controlling interest.

If P applies the Ind AS 110
approach, then it recognizes the full profit on the sale of S. The amount
included in the carrying amount of A for the sale of S in P’s CFS is INR 4,500
(18,000 x 25%)

Ind AS 28 Approach

Paragraph 28 of Ind AS 28 – Investments
in Associates and Joint Ventures states as follows:

Gains and losses resulting from
‘upstream’ and ‘downstream’ transactions between an entity (including its
consolidated subsidiaries) and its associate or joint venture are recognised in
the entity’s financial statements only to the extent of unrelated investors’
interests in the associate or joint venture. ‘Upstream’ transactions are, for
example, sales of assets from an associate or a joint venture to the investor.
‘Downstream’ transactions are, for example, sales or contributions of assets
from the investor to its associate or its joint venture. The investor’s share
in the associate’s or joint venture’s gains or losses resulting from these
transactions is eliminated.

If P applies the Ind AS 28
approach, then it eliminates 25% of the profit recognised on the sale of S
against the carrying amount of the investment in A. The amount included in the
carrying amount of A for the sale of S in P’s CFS is INR 2,500 [(18,000 x 25%)
– (8000 x 25%)]

P records the following entries in
its CFS for the transaction and the subsequent elimination

 

Debit

Credit

Cash

Net assets of S

Gain on sale ( P & L)

(To recognise sale of S)

18,000

 

10,000

8,000

Gain on sale (P & L) 8000 x 25%

Investment in associate

(To recognise elimination of 25% of profit on sale of $

2,000

 

2,000

The
amount included in the carrying amount of A for the net assets of S in P’s
consolidated financial statements, after elimination. is INR 2,500 (18,000 x
25% – 2,000). This equals to the carrying amount of the net assets of S in P’s
CFS before the sale, which was INR 2,500 (10,000 x 25%).

Author’s view

Both approaches discussed above
are acceptable, as both are supported by the respective standards. 

In September 2014, the IASB issued
amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an
Investor and its Associate or Joint Venture. The amendments address the
conflict between the requirements of IAS 28 and IFRS 10 Consolidated
Financial Statements regarding non-monetary contributions in exchange for
an interest in an equity-method investee.

The September 2014 amendments are
designed to address this conflict and eliminate the inconsistency; by requiring
different treatments for the sale or contribution of assets that constitute a
business and of those that do not.

When a non-monetary asset that
does not constitute a business as defined in IFRS 3 Business Combinations,
is contributed to an associate or a joint venture in exchange for an equity
interest in that associate or joint venture:

–  The
transaction should be accounted for in accordance with IAS28.28, except when
the contribution lacks commercial substance; and

–   Unrealised
gains and losses should be eliminated against the investment accounted for
using the equity method and should not be presented as deferred gains or losses
in the entity’s CFS in which investments are accounted for using the equity
method.

The gain or loss resulting from a
downstream transaction involving assets that constitute a business, as defined
in IFRS 3, between an entity and its associate or joint venture is recognised
in full in the investor’s CFS.

However, the IASB identified
several practical challenges with the implementation of the amendments.  Consequently, the IASB has issued a proposal
to defer the effective date of the September 2014 amendments pending
finalisation of a larger research project on the equity method of accounting.

Conclusion

Till such time the IASB takes a final decision,
and is followed up by appropriate amendments in Ind AS’s, both approaches
discussed above with respect to elimination of profits on sale of subsidiary to
the associate are acceptable under Ind AS.